A shield and a sword: the increasing importance of investment protection for technology companies

Recent years have seen a trend of increased government scrutiny of the operations of technology, media and telecommunications (TMT) companies globally, and a proliferation of regulations in the areas of data protection, cybersecurity, consumer protection and fair competition, among others.

Given domestic recourse against government regulation may be limited, investment treaties and their investor-state dispute settlement provisions are becoming increasingly relevant for TMT companies as a way to protect their investments and resist real or perceived regulatory mistreatment.

Multinational TMT companies face mounting pressures in the form of regulatory intervention that challenges their business models. Regulatory scrutiny of TMT companies, often driven by public interest imperatives, has taken the form of:

• forced data localisation requirements;
  
  
• restrictions on data processing and sharing;
  
  
• monitoring and censorship of content;
  
  
• disproportionate digital taxation measures and fines;
  
  
• compulsory transfers of proprietary information, including source code;
  
  
• increased cybersecurity measures;
  
  
• competition or consumer protection action; and
  
  
• outright nationalisation of TMT assets and/or operations.

Australia is no exception to this, whether by requiring TMT companies to pay local media for publishing content, investigating the algorithms used by social media platforms, or investigating the risk of foreign interference. These developments have heightened the operational risks for TMT companies operating across multiple jurisdictions.

A recent report by Chatham House and Global Partners Digital, Towards a global approach to digital platform regulation, identified a number of common concerns with regulatory regimes targeting TMT companies. These included an absence of independent regulatory enforcement authorities, untailored and undifferentiated regulations, vague definitions of noncompliant behaviour or content, the prevalence of large fines, restrictions and bans for noncompliance, and a risk of harsh punishments for individual employees.

In other words, the implementation of regulations in the TMT sector may be arbitrary, unfair and/or discriminatory. In these circumstances, TMT companies may be protected by rights granted to investors in international investment treaties which provide protection against unfair regulation or other mistreatment by all organs of government performing legislative, regulatory or judicial acts, be it at federal, state or municipal levels.

Investment treaty protection

Investment treaties are multilateral or bilateral agreements between States which protect qualifying investors domiciled in one contracting State when investing in another contracting State (i.e. the host State). For example, the Australia-Singapore investment treaties protect Singapore-domiciled investors in Australia.

Investment treaties impose various legal obligations on host States with respect to the protection of investments made in the State’s territory. They prohibit direct or indirect expropriation of foreign investors’ assets without prompt, adequate and effective compensation. They also require host States afford ‘fair and equitable treatment’ to foreign investors and their investments, which typically entails the prohibition of unfair, arbitrary or discriminatory treatment. This includes the introduction of regulatory measures contrary to prior commitments made by the host State at the time of the investment with respect to the basis for, and treatment of, investments.

Additionally, investment treaties commonly prohibit discriminatory or less favourable treatment of foreign investors compared to domestic or other third State investors in like circumstances. Some require the host State to observe contractual undertakings and other obligations or commitments it has assumed towards foreign investors or their investments, which may in some circumstances effectively elevate a host State’s duty to comply with contractual obligations to a foreign investor to a duty arising under the investment treaty.

When considering whether assets typically owned by TMT companies are protected investments, it is relevant to note that most investment treaties define investments broadly to include every kind of asset, including intangible assets such as contractual rights, intellectual property, shares in locally incorporated companies, debts and government permits. A TMT company’s foreign investment will often involve precisely these types of assets and can therefore benefit from investment treaty protections.

Importantly, investment treaties typically allow investors to enforce their rights by commencing arbitration proceedings against the host State and claiming damages for present and future economic loss flowing from conduct that violates the protections in the treaty. In this way, treaty protections operate extra-contractually and independently of the State’s domestic legal systems.

Even if there is no investment treaty between the host State and the foreign investor’s ultimate home State, an investor can still obtain protection by structuring its investment through a corporate vehicle incorporated in a third State that does have an investment treaty with the host State – provided this is done at the time of making the investment, or at a later stage but before a dispute is foreseeable. Taking Australia as an example, so long as an investment into Australia came via an entity in the corporate chain which is incorporated in a jurisdiction with which Australia has concluded an investment treaty with arbitration provisions – such as Singapore – the company will benefit from investment treaty protections.

Investment treaty use by technology companies on the rise

Investment treaty planning and protection is an area of untapped potential for TMT companies as they expand their operations internationally because it can be a very efficient tool to resist unfair, discriminatory or otherwise unjust treatment. This is illustrated by a number of high-profile investment treaty claims that have been brought in response to restrictive government regulation, including:

• Uber and Colombia – In 2019, following a nationwide ban of Uber’s ridesharing app in Colombia (imposed by the Colombian competition authority following a complaint brought by a local taxi company accusing Uber of failing to meet the requirements to operate in the jurisdiction), Uber issued Colombia with a Notice of Dispute under the US-Columbia Trade Promotion Agreement. An investment treaty arbitration was never formally commenced because Colombia overturned the ban shortly after Uber notified it of the dispute.
  
  
• Huawei and Sweden – In 2022, Huawei commenced arbitration under the Sweden-China Bilateral Investment Treaty claiming that Sweden breached the Treaty (and must compensate Huawei) by effectively banning Huawei’s 5G network (by disallowing companies bidding to be the network operator for the State’s 5G network from using Huawei equipment). Sweden defended its decision on national security concerns. The case is pending.

It is expected that TMT companies will continue to consider investment treaty protections as an opportunity to recover against instances of discriminatory or arbitrary intervention by authorities of the host States in which they operate – be it the national competition authority, telco authorities or any other regulatory body whose conduct is attributable to the host State.

Advantages of investment treaty protection

Access to investment treaty protection provides numerous potential advantages. Because investment treaty protections operate extra-contractually and independently of the domestic law of a host State, they supplement a company’s existing legal rights and the availability of relief under domestic laws in the event of unfair regulatory action.

Further, any dispute is resolved by arbitration before neutral party-appointed decision-makers who are independent of national courts and politics. Also, the ability to commence arbitration proceedings against the host State may operate as a powerful negotiating tool. The potential of an investment arbitration carries significant risks for the host State, including a perception of rising sovereign risk, what is often a very public nature of proceedings and an adverse damages award for which the host State’s decision-makers will be answerable to their constituents. It is more likely that the host State will be willing to negotiate with a foreign investor when this avoids the alternative of having to defend a potentially substantial claim under the scrutiny of international and domestic media.

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Investment treaties can be a useful shield and sword to protect TMT companies expanding or operating internationally. In the absence of domestic recourse, they provide important protections against abrupt and discriminatory changes to government regulation which companies can enforce by international arbitration before a neutral forum. They can also often be leveraged to reach a negotiated settlement with the host State government before progressing any claims by arbitration.