Introduction
One major fear of every foreign investor is the stability of government and the security of investments in the investment destination . Many times, investors have suffered losses due to national policies that seek to take away their investment.
Expropriation refers to the act of a government taking privately owned property to be used for the benefit of the public. In the context of foreign investments, expropriation can be a significant concern for investors, as it involves the risk of losing their investments without adequate compensation.
Expropriation or “wealth deprivation” could take different forms: it could be direct where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright physical seizure. Expropriation or deprivation of property could also occur through interference by a state in the use of that property or with the enjoyment of the benefits even where the property is not seized and the legal title to the property is not affected.
As part of the efforts to provide an enabling environment that is conducive to the growth and development of industries; inflow of foreign direct investment (FDI); shield existing investments from unfair competition, and stimulate the expansion of domestic production capacity; the federal government of Nigeria developed a package of incentives for various sectors of the economy. These incentives aim to revive the economy, accelerate growth and reduce poverty within the Country.
This article explores the legal framework governing expropriation of foreign investments in Nigeria, the protections available to investors, and the implications for the investment climate.
Nigeria has established a robust legal framework to protect foreign investments and mitigate the risks associated with expropriation. Key legislations include:
- Nigerian Investment Promotion Commission (NIPC) Act: This Act is the cornerstone of investment protection in Nigeria. It explicitly prohibits the nationalization or expropriation of foreign investments except for cases where it is in the national interest or for a public purpose. Section 25of the Nigerian Investment Promotion Act guarantees against expropriation of foreign investments, it provides that:
- Subject to subsections (2) and (3) of this section-
(a) No enterprise shall be nationalized or expropriated by any Government of the Federation; and;
(b) No person who owns, whether wholly or in part, the capital of any enterprise shall be compelled by law to surrender his interest in the capital to any other person.
(2) There shall be no acquisition of an enterprise to which this Act applies by the Federal Government, unless the acquisition is in the national interest or for a public purpose and under a law which makes provision for-
(a) Payment of fair and adequate compensation; and
(b) A right of access to the courts for the determination of the investor’s interest or right and the amount of compensation to which he is entitled.
(3) Any compensation payable under this section shall be paid without undue delay, and authorisation for its repatriation in convertible currency shall where applicable, be issued.
- Bilateral Investment Treaties (BITs): Nigeria has entered into several BITs with other countries, which provide additional protections for foreign investors. These treaties typically include provisions against unlawful expropriation and outline mechanisms for dispute resolution.
Criteria for determining indirect expropriation
- i)The degree of interference with the property right;
There is broad support for the proposition that the interference has to be substantial in order to constitute expropriation, i.e. when it deprives the foreign investor of fundamental rights of ownership, or when it interferes with the investment for a significant period of time. Several international tribunals have found that a regulation may constitute expropriation when it substantially impairs the investor’s economic rights, i.e. ownership, use, enjoyment or management of the business, by rendering them useless.
- ii)the character of governmental measures, i.e. the purpose and the context of the governmental measure,
A very significant factor in characterizing a government measure as falling within the expropriation sphere or not, is whether the measure refers to the State’s right to promote a recognised “social purpose” or the “general welfare” by regulation. “The existence of generally recognised considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no ‘taking’”. “Non-discriminatory measures related to anti-trust, consumer protection, securities, environmental protection, land planning are non-compensable takings since they are regarded as essential to the functioning of the state”.
iii) the interference of the measure with reasonable and investment-backed expectations.
Another criterion identified is whether the governmental measure affects the investor’s reasonable expectations. In these cases the investor has to prove that his/her investment was based on a state of affairs that did not include the challenged regulatory regime. The claim must be objectively reasonable and not based entirely upon the investor’s subjective expectations.
However, international law also sets circumstances for the legitimacy of expropriation of foreign investors ‘assets. Essentially, it would appear that under international law, foreign investors should only be deprived of their property rights for a public purpose, in a non-discriminatory way, on the condition that there is payment of compensation and upon the basis of due process.
Expropriation of foreign investments is a critical issue that requires a delicate balance between the sovereign rights of the state and the protection of investor interests. Nigeria’s legal framework, including the NIPC Act, ISA, and BITs, provides robust protections for foreign investors, ensuring fair compensation and legal redress in cases of expropriation. These protections not only enhance investor confidence but also contribute to the overall economic growth and development of the country.
By maintaining a transparent and accountable regulatory environment, Nigeria can continue to attract and retain foreign investments, fostering a thriving and dynamic economy. If you have any questions regarding expropriation of foreign investment, please do not hesitate to contact us via info@aocsolicitors.com.ng
Note: This article is for educational purposes only and does not serve as legal advice.