The Role of Investment Treaties in Cross-Border M&A Deals

By Charles B. Rosenberg Attorney, White & Case LLP | December 03, 2017

In recent years, there has been a significant uptick in consolidations in the hotel industry. Seen by many as the fast track to growth, consolidation has the added benefit of economies of scale to trim costs, better weather changes in the economy, and improve bargaining position with online travel agents. Another value of consolidations is scale, as recently emphasized by Hilton Worldwide CEO Christopher Nassetta : "I think about scale, for us, as creating a network effect, which means we can serve any customer for any need they have, anywhere in the world they want to be. When we have the ability to do that we drive unbelievable loyalty." Similarly, following the announcement of Marriott International's acquisition of Starwood Hotels & Resorts Worldwide, Marriott CEO Arne Sorenson succinctly put it: "[B]eing bigger we can have more dollars to spend effectively on technology, marketing, loyalty and so on."

Many of the recent Merger & Acquisition deals in the hotel industry have been cross-border transactions. For example:

  • In May 2017, U.S.-based Best Western Hotels & Resorts announced that it would acquire Sweden Hotels and its portfolio of 59 properties in Sweden.
  • In December 2016, U.S.-based Wyndham Hotel Group announced that it had acquired Argentina-based Fën Hotels.
  • In April 2016, China's Homeinns Hotel Group merged with Hong Kong's BTG Hotels Group.
  • In March 2015, China-based Jin Jiang purchased French company Louvre Hotels Group.
  • In January 2015, U.K.-based InterContinental Hotels Group acquired U.S.-based Kimpton Hotels & Restaurants.

Before "leaping" into the cross-border M&A frenzy, however, hotel companies should consider investment treaty protection as part of their due diligence. Investment treaties protect international investors from political risk and even counterparty risk, provide valuable leverage in negotiations with government officials, and allow an investor direct recourse to international arbitration to resolve disputes. By carefully structuring investments at an early stage in the Merger & Acquisition process, hotel companies can often improve their negotiating position and secure important protections from harmful governmental interferences.

What is an Investment Treaty?

An investment treaty is an international agreement between two or more countries that protects international investments by creating substantive rights for foreign investors.

Investment treaties typically protect "investments" by "investors" of one country that are made in another country. Most treaties broadly define "investments" as "every kind of asset," including shares, concessions, licenses, permits, leases, management contracts, and land, and an "investor" as a corporation incorporated in one of the countries that is party to the treaty. Generally "investors" also include non-majority shareholders and indirect corporate parents.

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Eco-Friendly Practices: Corporate Social Responsibility

The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.