Senate Bill Would Deprive State-Owned Enterprises of Immunity Defense
State-owned enterprises (SOEs) have in recent years become more active in cross-border investment and other commercial activity. The raised visibility has attracted public and official scrutiny of SOEs’ corporate structures and governance, as well as the implications of SOE-involved transactions for antitrust/competition, national security, and consumer affairs.
More recently, some lawmakers and private sector actors have turned their attention to the issue of whether SOEs should be permitted to assert sovereign immunity as a litigation tactic. Under established U.S. law—the Foreign Sovereign Immunities Act of 1976 (FSIA)—foreign states and their “agencies and instrumentalities” generally enjoy immunity, but they are not immune from the jurisdiction of U.S. courts in cases based on certain commercial activities. Nevertheless, the commercial activity exception to the FSIA’s general rule of sovereign immunity does not preclude an SOE (or a foreign state) from asserting sovereign immunity, and thereby forcing opposing litigants to sort through sometimes complex corporate ownership structures to identify a specific state-owned enterprise to which relevant commercial activity can be attributed.
To deprive SOEs of the tactical advantage of asserting sovereign immunity in U.S. courts, Senator Chuck Grassley (R-IA) introduced on September 14 the State-Owned Entity Transparency and Accountability Reform (STAR) Act of 2016, “a bill to improve the Foreign Sovereign Immunities Act of 1976, and for other purposes.” Specifically, the STAR Act would remove a level of specificity required to link a specific legal entity to commercial activity by amending the FSIA to make “commercial activity . . . attributable to any corporate affiliate of the agency or instrumentality that (A) directly or indirectly owns a majority of shares . . . and (B) is also an agency or instrumentality of a foreign state.” (emphasis added)
The STAR Act’s proposed amendment of the FSIA is significant as a matter of both sovereign immunity law and corporate law, as the STAR Act would appear to allow the separate legal identity of one SOE that directly or indirectly owns a majority or more of a second SOE to be disregarded. The “directly or indirectly” language would potentially expose state-owned enterprises at the top or near-top of an ownership chain to the jurisdiction of U.S. courts, regardless of the number of intermediate entities in the ownership structure.