Laura Yvonne Zielinski
Noerr, Frankfurt
laura.zielinski@noerr.com

Foreign direct investment in the space sector is increasing

The space economy is growing quickly, and cross-border investments are multiplying. Space companies are, for example, establishing subsidiaries to build satellites or rockets abroad; they are signing launch contracts to launch their satellites from foreign spaceports; they are establishing foreign subsidiaries to obtain access to foreign markets; launch providers obtain licences to operate from foreign spaceports; satellites are being registered and obtain frequencies rights and landing rights from foreign countries; and companies obtain operating licences in space from states other than their home states.

Foreign investments in the space sector are vulnerable to political risk

The space industry is booming and public and private investments in the space sector attract increasing interest from start-ups and established actors alike, even from other industries, such as the defence sector. The opportunities are great but so are the risks. Investments in the space sector require significant up-front capital invested and are usually invested over a long duration, thereby rendering them vulnerable to political changes. As the space industry is taking a central role in geopolitical considerations, and governments increasingly view the space sector as part of their critical infrastructure central to national security concerns, the political risk for investments in the space sector will grow. Governments might be tempted, for example, to annul licences awarded to companies of competing powers or amend investment conditions to favour domestic players. Export control restrictions can also disrupt business plans, including those for launching companies hoping to launch foreign satellites.

International investment agreements can offer substantive protection

International investment agreements can serve to mitigate political risk, including for investors in the space sector. International investment agreements are legal instruments entered into by one or more states to protect foreign investors possessing the nationality of one of the states, and their investments made in the territory of the other state (the ‘host state’). While the scope varies from one agreement to another, usually, these international investment agreements protect direct shareholders in the underlying investment, indirect shareholders, ultimate beneficial owners, and sometimes lenders, against the unlawful expropriation of their investments and against arbitrary treatment by the host state. They often also guarantee fair and equitable, and non-discriminatory, treatment by the host state.

International investment agreements can offer access to a neutral dispute settlement mechanism

Crucially, international investment agreements usually offer procedural protection in the form of access to international arbitration, which allows protected investors to arbitrate disputes with the host state before a private tribunal instead of the host state’s court system. This is often argued to mitigate concerns over the language of the proceedings, potential bias and other disadvantages, for example over differences in the legal culture. In international arbitration, the parties can choose the arbitrators – usually, for a three-member tribunal, each party chooses one, and the two co-arbitrators choose the presiding arbitrator – and the parties can also choose the language of the tribunal, the procedural calendar and the place of hearings. These characteristics are appreciated in international disputes generally but are of particular relevance in disputes with a government. What is also important is that in international investment arbitration, arbitrators apply international law and analyse whether the host state has breached its international legal obligations. International investment agreements thus allow to extract a dispute out of the host state’s national legal system onto the plane of international treaty obligations.

Foreign investors can actively seek protection under international investment agreements

To ensure international investment protection coverage, investors can (re)structure their investments through a jurisdiction that has a bilateral or multilateral investment treaty in place with the host state of their investment, for example, through a special purpose vehicle incorporated in the jurisdiction in question, albeit always taking into account tax and other consequences. Some states have many international investment agreements in place, while also offering tax and other incentives, and thus serve as attractive jurisdictions through which investments can be structured. Importantly, corporate (re)structuring for investment protection purposes is allowed only before a dispute with the host state crystallises and should therefore be done at the outset of an investment.

There have already been claims by foreign investors in the space sector against host states

Injured investors already regularly bring claims against the host states of their investments, including in the space sector. In the past, investors from Mauritius and from Germany have brought claims against the Government of India over the revocation of leasing rights for the use of S-band frequencies.^[1] A French investor initiated international investment arbitration proceedings against the Government of Mexico in relation with the conditions for the use of geostationary positions.^[2] And most recently, a British investor brought a claim against the Russian Federation over Russia’s cancellation of a launch authorisation for the British company’s satellites in the wake of Russia’s full-scale invasion of Ukraine.^[3]

There are doubts about the application of international investment agreements in outer space

Nonetheless, the application of international investment agreements to the space sector is not without controversy and might be limited in some circumstances. Many international investment agreements require an investment to be made within the territory of the respective host state. In the case of an investment destined to be exclusively in outer space, such as a commercial space station, some argue that this territorial requirement would not be satisfied, as outer space cannot be appropriated by any country. However, as every space object must be authorised and supervised by a state under international law, arguably this restriction could be circumvented through the identification of a clear link that would exist between a state and an investment, even if that investment were physically located outside of the host state’s territory. In the cases mentioned in the previous section, no jurisdictional objection regarding the territorial requirement has been raised.^[4]

Foreign investors in the space sector have an advantage over foreign investors in other industries

If the host state of an investment can be determined through a link that exists between an investment and a state, this means that investors in the space sector have more flexibility in choosing the host state for their investments than investors in other industries, as they have power over the links they create between their investment and one or several states. Possible links can include the registration of a space object, a launch or operating licence, a frequency licence, an orbital position, or the state of the space object’s operational control. By making a strategic decision on where to register a space object, where to apply for a licence, from where to launch a space object, where to establish ground control, or through which subsidiary to contract a launch with international investment agreements in mind, investors in the space sector can significantly increase their investment protection coverage.

Contract-based investment protections can serve as a supplement or an alternative

When no treaty-based international investment protection is available or if doubts can arise over its applicability, contracts can also provide useful protection in addition or as an alternative to international investment treaties. Agreements concluded with host states or state entities, such as concession agreements, investment contracts or public-private partnership agreements can ensure access to a neutral and efficient dispute settlement mechanism, and can also protect against political risk through individually negotiated provisions such as force majeure and stabilisation clauses, or even standards of protection traditionally associated with international investment treaties such as fair and equitable treatment or a guarantee against arbitrary treatment.