Czech Mate - Review of Finance (2008) 12: 221251 doi:...

Review of Finance (2008) 12: 221–251
doi: 10.1093/rof/rfl005
Advance Access publication: 31 January 2007
Czech Mate: Expropriation and Investor Protec-
tion in a Converging World
∗
MIHIR A. DESAI
1
and ALBERTO MOEL
2
1
Harvard University and NBER;
2
Monitor Group
Abstract. This paper examines the expropriation of a foreign investor by a local partner and
the subsequent resolution of the case through international arbitration in favor of the investor.
Despite the investor’s 99% interest in the joint venture, the local partner managed to divert the
entire value of the underlying entity for his personal benefit. This clinical examination of an
expropriation and its aftermath illustrates the interaction of property and contract rights in a
global setting, how corporate control is shaped by geography, and how multinational firms may
be advantaged by availing themselves of stronger investor protections than local firms.
JEL Classification : F21, F23, F36, F42, G15
1. Introduction
Analyses of the role of institutions typically consider local laws to be the
primary measure of legal protections for investors. Similarly, these analyses
do not discriminate between types of investors, other than on the basis of their
ownership shares or control rights. In contrast to these emphases, multinational
firms constitute large fractions of investment in most economies, particularly
in developing and transition economies, and these firms have legal means
available to them beyond local laws as well as unique control problems.
Studying the experience of multinational firms and their legal protections
through a clinical examination promises to illuminate the unique aspects
*
Kathleen Luchs, Stephen Marks and Hardy Tey provided excellent research assistance. The
authors thank Sasha Greenawalt and Michael Ostrove of Debevoise & Plimpton, Petr Panek of
White & Case, and Milan Smid of Charles University for help in understanding the Czech legal
and regulatory environment; and Dan Bergstresser, John Coffee, Tom Copeland, Benjamin
Esty, Josh Lerner, Kathleen Luchs, John Owen, James Zeitler, various seminar and conference
participants, the editor (Colin Mayer) and an anonymous referee for very helpful comments on
earlier drafts. Desai thanks the Division of Research at Harvard Business School for financial
support.
 The Author 2007. Published by Oxford University Press on behalf of the European Finance Association.
All rights reserved. For Permissions, please email: [email protected]
at York University Libraries on March 8, 2012
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MIHIR A. DESAI AND ALBERTO MOEL
of their control problems, the transnational protections they can access
and the interactions between different types of institutional protections in
institutionally fragile settings.