NATIONALS AS SHAREHOLDERS

[§ 279

States", or of some other government, as the case may be. In other words, the corporation is recognized as having, for purposes of diplomatic protection, the citizenship of the country in which it is created.1

There appears to be no disposition on the part of the Department of State to question the soundness of the foregoing statement, or to act on a different principle. Nevertheless, as a matter of domestic policy, the United States may be unwilling to protect the interests of an American corporation of which all of the shareholders are aliens and nationals of the State in opposition to which protection is sought, and in whose territory the corporation carries on its principal operations.3

(b)

§ 279. Interposition in Behalf of Shareholders or Bond

holders.

The solution of the question whether a State may reasonably interpose to protect the interests of its nationals who are shareholders or bondholders of a corporation incorporated in a foreign State appears, according to American opinion, not to be necessarily tested by any single theory respecting the nationality of a

1 Statement in Moore, Dig., VI, 641. See, also, Mr. Olney, Secy. of State, to Mr. Sleeper, Minister to Colombia, Feb. 24, 1897, For. Rel. 1899, 228, Moore, Dig., VI, 642. Also, 794-796; National Character in Relation to Property at Sea in Time of War, Corporations, infra, §§ 795-796.

2 See, for example, Mr. Knox, Secy. of State, to Mr. Arnold, American Consul, No. 80, April 25, 1910, For. Rel. 1910, 197. Also Section 5 of Claims Circular of 1919.

3 Mr. Adee (for Mr. Knox, Secy. of State), to Mr. Bergholz, American Consul General, No. 191, Oct. 12, 1909, For. Rel. 1909, 67, with respect to a missionary society incorporated in California in 1908. A majority of the incorporators were described in the articles of incorporation as residents and citizens of California. All, however, were of the Chinese race. The society had appointed as agents in China, five Chinese persons, no one of whom was an American citizen. It had acquired land in China and desired protection as an American missionary society. Mr. Adee (referring to a previous instruction of the Department) declared: "The Department is of the opinion that the. Society, as it represents itself in China, does not seem to represent sufficient American interests to entitle it to the protection of this Government, nor does it seem to fall within the spirit of the provisions of the treaties with regard to the privileges of American missionary societies. The Department deems it advisable, therefore, to require more convincing proof of the citizenship of the incorporators of the society and of the persons at present holding the controlling interest therein. And further, in view of the actual situation in China, it is deemed desirable to require the American missionary societies to employ American citizens (not necessarily Caucasians) as their principal and responsible agents in China if they wish to obtain American protection."

corporation. The conflict of opinion between the publicists of America and England on the one side, and those of continental Europe on the other, as to the correct basis of nationality,' although persistent and doubtless illuminating, has not served to convince statesmen that any technical rule should deter them from looking behind the corporate entity when the bona fide and substantial interests of their countrymen in foreign territory have required protection or governmental representation.

The Department of State has not infrequently been confronted with the general problem. Mr. Seward, as Secretary of State in 1866, in respect to the case of the Antioquia, seemed to deny the propriety of interposition in behalf of American shareholders in a foreign corporation.2 In 1884, Mr. Frelinghuysen, Secretary of State, appeared to share his view.3 Later opinions of the Department of State, manifested in the case of the Delagoa Bay Railway, and in that of the Salvador Commercial Company, were, however, to the effect that certain circumstances might arise where interposition became justifiable.

The case of the Delagoa Bay Railway related to a railway be longing to a Portuguese corporation of which practically the entire stock and bonds had been owned by one MacMurdo, an American concessionaire, who had assigned the same to an English corporation, receiving in exchange its entire issue of stock and an undertaking to pay him a lump sum. The English company thereupon issued bonds in order to pay that sum, as well as to build the railway concerned. Following a controversy as to the extension of the line, the Portuguese Government in 1899 seized the railway and canceled the concession. Both the United States and Great Britain protested. Notwithstanding the contention of Portugal that it could only recognize the Portuguese company which had the power of appealing for protection to the law of Portugal, that State finally agreed, in 1891, to refer to arbitration the amount of compensation due to the American and British claimants as a

1 Attention is called to the thorough discussion of the nationality of corporations and the diversity of the opinions still prevailing, contained in E. M. Borchard, Diplomatic Protection, §§ 277–282.

2 See communication to Mr. Burton, Minister to Colombia, April 27, 1866, Dip. Cor. 1866, III, 522, Moore, Dig., VI, 644. It should be noted that it appeared from this despatch that there was abundant reason why interposition should be withheld apart from the circumstance that the corporation was a foreign one, even though some of its stockholders were American citi

zens.

3 Communication to Mr. Phelps, Minister to Peru, Dec. 6, 1884, MS. Inst. Peru, XVII, 101, Moore, Dig., VI, 646. See, also, dictum of Bertinatti, Umpire, in the Accessory Transit Co. Case, United States-Costa Rican Commission, Convention of July 2, 1860, Moore, Arbitrations, II, 1562.

CASE OF SALVADOR COMMERCIAL CO. [§ 279

consequence of the rescission of the concession of the railway and the taking possession of its property. There was an award of damages. In one sense the agreement to arbitrate was more important than the decision of the tribunal. The former was a yielding to the assertion by the United States and Great Britain of a right to interpose in behalf of their nationals interested in a Portuguese corporation. The latter was a determination of the extent of the harm done to those nationals through the wrongful conduct of the territorial sovereign. The decision itself is, therefore, without value as a judicial precedent respecting the propriety of interposition.

In the claim of the Salvador Commercial Company against Salvador, it appeared that that corporation, incorporated in California, together with certain American citizens were the principal owners of a Salvadorean corporation styled “El Triunfo Company." The practical destruction or cancellation of the franchise of the latter by arbitrary and illegal action on the part of the Salvadorean Government resulted in interposition by the United States. According to the terms of a protocol of an agreement to arbitrate, of December 19, 1901, the issue presented was whether any liability rested upon the respondent State with respect to the Salvador Commercial Company or to any American citizens.2 Two arbitrators, constituting a majority of the court, concluded that the action of Salvador illegally directed against a domestic corporation served to paralyze the efforts of American shareholders to save it, and also to despoil them of their interests in the enterprise. These arbitrators purposely refrained from discussing in their opinion the right of the United States to make reclamation for the American shareholders for the reason, they declared, "that the question of such right is fully settled by the conclusions reached in the frequently cited and wellunderstood Delagoa Bay Railway Arbitration."3 As that question was not presented to the tribunal in the case relied upon, it is believed that the foregoing language weakens the value of

1 Concerning the case of the Delagoa Bay Railway, see Moore, Arbitrations, 1865-1899; Moore, Dig., VI, 647-649; For. Rel. 1900, 845-849, 903904. Decision and final award of March 29, 1900. Cf., also, Ralston, Arbitral Law, 97-98.

2 For. Rel. 1902, 857. Concerning the Salvadorean case generally, see For Rel. 1902, 838-873, embracing opinion of W. L. Penfield, Solicitor of the Dept. of State, Award of the Arbitrators of May 8, 1902, and separate opinion of same date of Sir Henry Strong and Hon. Don M. Dickinson, constituting a majority of the tribunal; also Moore, Dig., VI, 649-651.

3 For. Rel. 1902, 859, 873, Moore, Dig., VI, 651.

the opinion of the arbitrators in the Salvadorean case, as to the right of interposition.1

$280. The Same.

It is believed that the Department of State would not be reluctant to interpose in behalf of American shareholders or bondholders, should the foreign State of incorporation irreparably injure their interests through illegal conduct, and should there be offered no reasonable means of obtaining redress through domestic channels. The decision as to interposition might, however, in the particular case, depend upon the extent of the American interest involved. Thus it might be regarded as essential that, as measured by the number of individuals concerned, or the amount of capital invested, that interest should represent a substantial proportion of the stock of the corporation or of its bonded indebtedness.2

In the event of arbitration before an international claims commission, the problem arises not whether a claimant State may with reason espouse the cause of its nationals who are owners of stock or bonds of a foreign corporation (possibly incorporated under the laws of the respondent State), but whether the convention providing for the arbitration fairly embraces the claims of such individuals.3 Possibly such claims may be fairly said to fall within the scope of an agreement providing for the arbitration of "all claims owned by citizens" of one of the contracting

1 Compare opinion of Plumley, Umpire, in the Baasch & Römer Case, Netherlands-Venezuelan Commission, 1903, Ralston's Report, 906, 909910, where it was declared that the Commission had no jurisdiction over the claim of the liquidators of a firm, three quarters of whose members were Dutch, which held stock to the amount of 26,800 bolivars in a Venezuelan corporation of which the paid-up capital was 240,000 bolivars. The claim was based upon the destruction of the plant of the latter by troops in command of General Freites. The learned Umpire cited P. Arminjon, "Nationalité des personnes morales", in Rev. Droit. Int., 2 ser., IV, 381-440. See, also, Opinion of Paúl, Commissioner, Kunhardt & Co. Case, AmericanVenezuelan Commission, 1903, Ralston's Report, 63, 70; Andor Jacobi, "La condition juridique des sociétés anonymes étrangères", Int. Law Association, 27th Conference, Proceedings, 368, 379.

2 There is no intimation in the General Instructions for Claimants of 1919, Revision of Jan. 30, 1920, that the Department of State would take a different stand. The obvious design of the Questionnaire appended thereto is to enable the Department to ascertain with precision the extent of the essentially American interest in foreign corporate property concerned.

3 The problem of interpretation has been a troublesome one for arbitrators generally. See, for example, William E. Fuller, Special Report on work of Spanish Treaty Claims Commission, Dept. of Justice, 1907, 28-30, respecting Art. VII of the treaty of peace between the United States and Spain of Dec. 10, 1898. Also discussion in E. M. Borchard, Diplomatic Protection, §§ 281282.

DENIAL OF JUSTICE

[§ 281 parties. It is believed, however, that the terms of the agreement should specify with greater precision than has heretofore been manifest, the nature and extent of the corporate interests to be adjudicated. In a word, what corporations, what shareholders, and what bondholders are to be deemed to be entitled to the benefits of the adjudication should be definitely established by the provisions of the convention.

e

Grounds of Interposition

(1)

§ 281. Denial of Justice. Exhaustion of Local Remedies. Before a State prefers a claim in behalf of an aggrieved citizen it should appear that the foreign territorial sovereign upon which the demand for redress is made has itself been guilty of a denial of justice. A denial of justice, in a broad sense, occurs whenever a State, through any department or agency, fails to observe, with respect to an alien, any duty imposed by international law or by treaty with his country. Such delinquency may, for example, be manifest in arbitrary or capricious action on the part of the courts, or in legislative enactments destroying the exercise of a privilege conferred by treaty, or in the action of the executive department in ordering the seizure of property without due process of law. The conduct of the State may either be the direct source of complaint, or it may supplement and aggravate the conse

In the case of Kunhardt & Co., American-Venezuelan Commission, 1903, Bainbridge, Commissioner, declared in the course of his opinion that "While the property of a corporation in esse belongs not to the stockholders individuually or collectively, but to the corporation itself, it is a principle of law universally recognized that, upon dissolution, the interests of the several stockholders become equitable rights to proportionate shares of the corporate property after the payment of the debts. The rights of the creditors and shareholders to the real and personal property of the corporation, as well as to its rights of contract and choses in action, are not destroyed by dissolution or liquidation. Messrs. Kunhardt & Co., as citizens of the United States and the equitable owners of their proportionate share in the property of the dissolved corporation, have a standing before this Commission to make claim for indemnity for such losses as they may prove they have sustained by reason of the wrongful annulment of the concession. The value of the

corporate shares and the extent of a shareholder's interest in the corporate property are absolutely dependent upon the relation which the assets of the corporation bear to its liabilities." Ralston's Report, 63, 67, and 68.

See excellent statement by Eugene Wambaugh, Proceedings, Am. Soc. Int. L. (1910), IV, 126, 128-129; Mr. Bayard, Secy. of State, to Mr. McLane, Minister to France, No. 134, June 23, 1886, MS. Inst. France, XXI, 330, Moore, Dig., VI, 266.