FOREIGN CAPITAL

September, 1918

The Difference between Aims and Acts--Should Foreign Capital beallowed in British Industry?--The Supremacy of London and NationalTrade--No Need to fear German Capital--We shall need all we canget--Foreign Shares in British Companies--Can and should theDisclosure of Foreign Ownership be forced?--The Difficulties ofthe Problem--Aliens and British Shipping--The Position of "Key"Industries--Freedom to Import and Export Capital our Best Policy.

Many things that are now happening must be tickling the sardonichumour of the Muse of History. The majority of the civilised Powersare banded together to overthrow a menace to civilisation, carryingon a war which, it is hoped, is to produce a state of things in whichmankind, purged of the evil spirits of militarism and aggression, isto start on a new order of co-operation. At the same time, whilewe are engaged in fighting under banners with these noble idealsinscribed on them, a large number of citizens of this country areairing proposals aimed at restrictions upon our intercourse with othernations, especially in the economic sphere. In last month's issue ofthis Journal a very interesting article, signed "Veritas," discussedthe question as to how far it was in the power of the Allies to makeuse of the economic weapon against their enemies after the war. Thatsuch a question should even be mooted as an end to a war undertakenwith these objects, shows what a number of queer cross-currents areat work in the minds of many of us to-day. But some people go muchfurther than that, and are advocating policies by which we shouldeven restrict our commercial and economic intercourse with ourbrothers-in-arms. If the clamour for Imperial preference is to haveany practical result, it can only tend to cultivate trade within theBritish Empire, protected by an economic ring-fence at the expenseof the trade which, before the war, we carried on with our presentAllies. And a large number of people who, under the cover of Imperialpreference, are agitating also for Protection for this country, wouldendeavour to make the British Isles as far as possible self-sufficientat the expense of their trade, not only with all their present Allies,but even with their brethren overseas.

It is fortunately probable that the very muddle-headed reasoning whichis producing such curious results as these, at a time when the worldis preparing to enter on a period of closer co-operation and improvedand extended relations between one country and another, is confined,in fact, to a few noisy people who possess in a high degree thefaculty of successful self-advertisement. I do not believe that thecountry as a whole is prepared to relinquish the economic policy whichgave it such an enormous increase in material resources during thepast century, and has enabled it to stand forward as the industrialand financial champion of the Allied cause during the difficult earlyyears of the war. Our rulers seem to be sitting very carefully on thetop of the fence, waiting to see which way the cat is going tojump. They have made brave statements about abrogating all treatiesinvolving the most-favoured nation clause and about adopting theprinciple of Imperial preference; but when their eager followers pressthem to do something besides talking about what they are going to do,they then have a tendency to return to the domain of common-sense andto point out that it is above all desirable that our economic policyshould be in unison with that of the United States.

Whatever may happen in the realm of trade and commercial policy, itwould seem to be self-evident that with regard to capital it would bestill more difficult and undesirable to impose restrictions than withregard to the entry of goods; and above all, it seems to be obviousthat at any rate the free entry of capital into this country is amatter which should be specially encouraged when the war is over. Atthat difficult period we have to secure, if possible, that Britishindustry shall be entirely unhampered in its endeavours to carry outthe very puzzling operations involved by transferring its energiesfrom war activities to peace production. However well the thing maybe managed, it will be an exceedingly difficult and complicated operation. In certain industries, especially in shipbuilding andengineering, the building trade and all the allied enterprises, thosewho are responsible for their efficient management ought to be able tocount upon a keen and widely-spread demand for their products. But inmany industries there will necessarily be a good deal of doubt as tothe kind of article which the consuming public at home and abroad islikely to want. There will be the great difficulty of sorting out theright kind of labour, of obtaining the necessary raw materials, and ofgetting the necessary credit and capital.

That this huge problem can be solved, and solved so well that thecountry can go ahead to a great period of increased productivity andprosperity, I fully believe; but this can only be done if it is ableto command the most efficient co-operation of all the various factorsin production--if employers put their best brains and if workers puttheir best energy into the business, and if everything is done to makethe whole machinery work with the utmost possible smoothness. Oneelement in the machinery, and a highly important one, is the questionof capital. During the war the citizens of this country have beentrained to save and to put their money at the disposal of theGovernment with a success which could hardly have been expectedwhen the war began. Whether they will continue to exercise the sameself-denial when the war is over Is a very open question. At any rate,there can be no doubt that there will be a tendency among a very largenumber of people who have answered the appeal to save money for thewar to listen with considerable indifference to any appeals thatmay be made to them to save money in order to provide industry withcapital. All the capital that industry can get, it will certainlywant. If, besides what it can get at home, it can also get aconsiderable amount from foreign countries, then its ability to resumework on a prosperous and profitable basis when the war is over will bevery greatly helped. This would seem to be so obvious that one mighthave thought that even a Government which is believed to be flirtingwith what is called Tariff Reform would think twice before it imposedany restrictions on the free flow of foreign capital into Britishindustry. In so far as foreigners lend to us we shall be able toimport raw materials, to be worked up to the profit of Britishindustry, in return for promises to pay--very timely convenience at acritical moment.

Nevertheless, it would appear that obviousness of the desirability offoreign capital, from whatever source it comes, is by no means evidentto those who are now in charge of the nation's destinies. At any rate,the Company Law Amendment Committee, which was appointed last February"to inquire what amendments are expedient in the Companies Acts, 1908to 1917, particularly having regard to circumstances arising out ofthe war and of the developments likely to arise on its conclusion,"seems to have thought it necessary to provide the Government withschemes by which alien capital could, if the Government thoughtnecessary, be kept out of the country. It was a powerful andrepresentative Committee, and it is very satisfactory to note that itsown view concerning the policy to be pursued was strongly in favour offreedom. It points out in its Report that the question which lay inthe forefront of its investigations was that of the employment offoreign capital in British industries. On the preliminary questionof whether it was desirable that foreign capital should be freelyattracted to this country, there was little, if any, difference ofopinion. For this very sensible conclusion the Committee gives rathera curious reason. It states that the maintenance of London as thefinancial centre of the world is of the first importance for thewell-being of the Empire, and that anything which could impede orrestrict the free flow of capital to the United Kingdom would, initself, be prejudicial to Imperial interests.
Now, of course, if is entirely true that the maintenance of Londonas a financial centre is very important, but I venture to think thatthose who are most jealous concerning the prestige of London and theimportance of its financial operations would say that it ranks onlysecond to the industrial efficiency of the country as a whole andcannot, in fact, be long maintained unless there is that industrialefficiency behind it, providing a surplus out of which London may beable to finance the world and so, incidentally, and as a side issue,be to a great extent helped by foreign capital to do so. It is surelyevident that a financial supremacy which was based merely on a jobbingbusiness, gathering in capital from one nation and lending it toanother, would be an extremely precarious and artificial structure,the continuance of which could not be relied on for many decades.Finance can only flourish healthily and wholesomely in a country whichproduces a considerable surplus of goods and services which itis prepared to place at the disposal of the world. Owing to thepossession of this surplus it becomes a market in capital, and so getsa considerable jobbing business, but the backbone and foundation ofits position must be, in the end, industrial activity in the widestsense of the word. It therefore seems that the Committee's argumentthat the free flow of capital is essential to the maintenance ofLondon's finance might have been reinforced by the very much strongerone that it is essential to the recuperative power of British industry, which will need every assistance it can get in order tore-establish itself after the war.

The Committee points out that "any legislation which would tendto impede or restrict the free flow of capital here by imposingrestrictions or creating impediments ought to be jealously watched,lest in the endeavour to prevent what has come to be called 'peacefulpenetration' the normal course of commercial development should bearrested," and it goes on to observe that at the end of the war, "ifit should be concluded upon such terms as we hope and anticipate,"it is not likely that our present enemies will be in possession ofcapital looking for employment abroad. This is certainly very true. Bythe time the Germans have made the reparations, which will involve somuch rebuilding in Belgium and in the parts of France that theyhave overrun and swept clean of industrial plant, and have in otherrespects made good the damage which their ruthless and uncivilisedmethods of warfare have inflicted, not only on their enemies, but onneutrals, it does not seem likely that they will have much to sparefor capital expansion in foreign countries, especially when weconsider how many problems of reconstruction they will themselves haveto face at home. "To impose restrictions upon the influx of capital,"the Report continues, "aimed at our present enemies, with the resultof deterring the flow of capital from (say) America, would be a policyhighly injurious to the economic recovery and renewed prosperity ofthis country after the war. For these reasons we are of opinionthat in all amendments of the law falling within the scope of ourreference, the expediency of the attraction of foreign capital shouldbe steadily borne in mind." The Committee thus seems to have thoughtit necessary to administer comfort to anybody who might fear that theunrestricted flow of capital from abroad might involve this country inthe terrible danger of being assisted in its industrial recovery bycapital from Germany.

If there were, in fact, any possibility of this assistance beinggiven, it would seem to be extremely short-sighted not to allowBritish industry to make use of it. In the matter of "peacefulpenetration," we have ourselves in the past done perhaps as much asall the rest of the countries of the world put together, with theresult that we have greatly stimulated the development of economicprosperity all over the world; in fact, it may be argued that thegreat progress made in the last century in man's power over the forcesof Nature has been to a great extent due to the freedom with which weinvested capital abroad and opened a free market to the productsof all other countries. At a time when, owing to exceptionalcircumstances, we ourselves happen to be in need of capital, it wouldappear to be an extremely short-sighted policy to refuse to admit it,wherever it came from. We have excellent reason to known that, whencapital is once invested in a foreign country, it is largely in thepower of the inhabitants and Government of that country to control itsworking. Any foreigner, even an enemy, who set up a factory in Englandafter the war would be doing just the very thing which we most ofall want to be done, namely, setting the wheels of industry going,relieving the labour market from a possible glut after demobilisation,and helping that difficult stage of transition from war work to peacework.

The Committee, however, considers that "at the root of the wholematter lies a question which is not one of Company Law amendment atall, but one of high political and economic policy." It does not fallwithin its province "to inquire whether the traditional policy ofthis country to admit and welcome all who seek our shores and submitthemselves loyally to our laws ought, in the case of some and whataliens, to be revised"; or whether discrimination ought to be madebetween an alien of one nationality and an alien of another. "Asregards aliens who are now our enemies, it may be that the BritishEmpire may adopt the policy that a special stigma ought to be attachedto the German, and that neither as an individual nor as a firm, noras a corporation, ought he, for a time at any rate, to be admitted tocommercial fellowship or to any fellowship with the civilised nationsof the world." It need not be said that any attempt to apply thisstigma in practice would be extremely difficult to carry out, wouldinvolve all kinds of difficulties and complications in trade and infinance, and that the threat of it is more likely than anything elseto stiffen the resistance of the Germans and to force them to rely ontheir militarist leaders as their only hope of salvation. However,the Committee points out that recent legislation shows a desire toascertain and record the extent to which aliens are active incommerce here, and thinks it necessary to make provision to meet therequirements of the Government in case our rulers should decide toimpose the restrictions which its own common-sense shows it are soundesirable.
If, it says, foreign capital is to be attracted here, it must berepresented either by shares or by debentures. "The question,therefore, is whether restrictions ought to be imposed upon the extentto which the control of the company shall be allowed to reside inaliens, either by reason of their holding a majority of the shares, orof the debentures, or by reason of their obtaining a majority uponthe Board of Directors; and, if so, how disclosure of their aliencharacter is to be enforced." It goes on to point out the greatdifficulties which present themselves in the way of securingdisclosure of nationality and ensuring that aliens shall not commandthe control. "The law of trusts," it says, "is firmly established inthis country. If A, be the registered holder of a share, he is notnecessarily the beneficial owner. He may be a trustee for B. To enactthat the registered holder must be a British subject effects nothing,for B. may be an alien and an enemy. Suppose, however, that you enactthat A., when his share is allotted or transferred to him, shall makea declaration that he holds in his own right, or that he holds intrust for B., and that both A. and B. are British subjects. There isnothing to prevent the creation of a new trust the next day, underwhich C., an alien enemy, will be the person beneficially entitled.Further, at the earlier date (the date of allotment or transfer) thefacts may be that A. (a British subject) is trustee for B. (a Britishsubject), but that B. (unknown to A.) is a trustee for C., an alienenemy. The fact that B. is trustee for C. would be purposely withheldfrom A., and A.'s declaration that he was simply trustee for B. wouldbe perfectly true. To require that A. should make a declaration atshort intervals (say once a month), or that A., B., C., and so on,should all make declarations would be, of course, so harassing and sodetrimental as to be, as a matter of business, impossible. The onlyeffectual way of dealing with the matter would be by a provision thatthe share might be forfeited, or might be sold and the proceeds paidto the owner, if an alien should be, or become beneficially entitledto or interested in the share. Such a provision does not in thegeneral case commend itself to us as practical or desirable." Anyendeavour to control the nationality of the Board of Directorsproduces similar difficulties. It is easy to ensure that they shall beall, or a majority of them, British subjects, but there is no means ofensuring that their actions shall not be controlled by aliens whosenationality is not disclosed.

Having pointed out these difficulties, which seem in effect to reducethe whole question to the domain of farce, the Committee goes on toinquire whether it is desirable to legislate in the direction offorbidding the employment of foreign capital here in Joint StockCompanies, unless:--

(1) There is disclosure of the alien character of the foreign owner; (2) Not more than a certain proportion of the Company's shares are held by aliens; (3) The Board, or a certain proportion of the Board, shall not be alien;

and, further, whether it is desirable to discriminate between onealien and another, and to legislate in that direction in the case ofcertain aliens and not of others.

In answering these questions, the Committee decided that it wasnecessary to discriminate between certain classes of companies--ClassA being companies in general, Class B being companies owning Britishshipping, and Class C companies engaged in "key" industries.
Withregard to companies in Class A, they recommend that no restrictionsat all be imposed, but, nevertheless, they elaborate a scheme ofenforcing disclosure of alien ownership if that policy seems tothe legislature to be right. This scheme, the Committee admits, isnecessarily detailed and laborious; it puts difficulties in the way ofinvestment in English securities, whether by British subject or alien.It would supply, no doubt, to the Board of Trade useful informationas to the extent of foreign investment in English industries, but theprice paid for this advantage would, in the Committee's opinion, betoo great. If adopted, the scheme could be evaded. And, with regard tocompanies in general, the Committee's recommendations go the lengthof allowing complete freedom as to the nationality both of thecorporators and of the Board. They would allow, for instance, Americancapitalists to come here and establish themselves as a British corporation in which all the corporators and all the directors wereAmerican, and so with every other nationality. They would make nodiscrimination between aliens of different nationality, for, ifthere is to be such discrimination, there must be the machinery ofdisclosure, involving a deterrent effect and acting prejudiciallyin the case of all investors. But, if any such discrimination wereadopted, the Committee thinks that at any rate it should be limited tosome short period, say, three or five years after the end of the war.

If, however, the legislature should decide upon the necessity ofdisclosure of alien ownership, the Committee draws up the followingscheme for securing it in Paragraph 15 of its Report:

15. For reasons already given, it is not possible efficiently to ensure full disclosure, but the following suggestions would, in the absence of deliberate and intentional evasion (which would be quite possible), meet the point and in the large majority of cases would disclose the extent of alien interests and control:--

(a) Every allottee of shares upon allotment and every transferee upon transfer should be required to make a declaration disclosing his nationality and whether he is the beneficial owner of the shares, and, if not, for whom he is trustee, and what is the nationality of the beneficial owner, and should undertake within a limited time, after any change in the beneficial ownership, to communicate the new facts to the company. In default of compliance with the above, the shares should, at the option of the company, either (1) be liable to sale by the company and the holder be entitled only to the proceeds; or (2) be liable to forfeiture and the holder be entitled to receive payment from the company of 10 per cent. less than the market value of the share, or if there be no market value, then 10 per cent. less than the value at which the share would be taken for _ad valorem_ stamp duty if it were the subject of transfer. In case the company made default in exercising its power, the Board of Trade should be authorised to require the above sale to be made.

(b) Every director, upon coming into office, should be required to make a declaration disclosing his nationality and stating whether in his office he is wholly free from the control or influence of any alien, and if he is not so free, stating by whose directions or under whose control or influence he is to act and what is the nationality of that person, and should undertake within a limited time after any change in that state of things to communicate the facts to the Board and procure a statement of the facts to be entered in the Board minutes. Any breach of these obligations to be visited with a penalty which should be severe.

(c) The company should be required to enter in the register of members, against the name of every registered member, his nationality as disclosed by the declaration. In the case where the registered member is not the beneficial owner, the company should be required to record, not in the register, but in another book, the nationality of the beneficial owner as disclosed by the declaration, and, as regards the latter book, to record the nationality of any new beneficial owner when and as disclosed by the registered member. These particulars should be required to be included in the annual list under Section 26 of the Act of 1908. That list would thus become not a list of members only, but a list of members with the addition of beneficial owners. The company should, further, be required to add to the annual list a summary of the result as regards nationality showing (1) as regards registered members, how many are British subjects and how many shares they hold, and how many are aliens and how many shares they hold, subdividing the number of the aliens and their holdings under their respective nationalities; and (2) as regards the registered members who are British subjects; (a) how many of them are the beneficial owners and how many shares they hold, and (b) as regards the rest, what are the nationalities and holdings of the beneficial owners.

With regard to companies owning British shipping, the Committee issatisfied that the total exclusion of aliens from ownership of Britishships is not essential for national safety and is not expedient. Ittherefore considers that in these companies it will be sufficient toensure that not more than 20 per cent. of the power of control shouldbe in alien hands. It thinks that there should be this, limit of 20per cent., that not more than 20 per cent. of the share capital shouldbe held by aliens, and that those shares should carry no more than 20per cent. of the voting power. Alternatively, it considers that thealien holdings should carry no vote at all, but that is a point ofdetail deserving further consideration. It follows that in thisclass there must, in the opinion of the Committee, be disclosure ofnationality, which should be enforced in the manner detailed above,which, on its own admission, is not proof against deliberate evasion.

With regard to companies carrying on "key" industries, a verycomplicated system is recommended. In the first place, the questionwhether a company is one to carry on a "key" industry would seldom ornever arise at the time of its registration. The modern Memorandum ofAssociation includes so many things that a "key" industry might bewithin the powers of almost any company. The question would thus arisewhen the company has got to work. And so the Committee thinks thatthe Board of Trade should be empowered at any time to make an inquirywhether any company is carrying on a "key" industry and, if it findsthat it is, then the company shall, at the direction of the Board of Trade, require every registered member to make a declaration such as,under the disclosure procedure already described, he would have hadto make if he were at the date of the notice about to receive anallotment or become a transferee. Further, the holders of sharewarrants to bearer would be required to surrender their warrants forcancellation and have their names entered in the register, andall subsequent allottees and transferees would be subject to theobligation of disclosure, as already described, and the limits of 20per cent. recommended in the case of merchant shipping would then bemade applicable. Under the system of disclosure it follows that bearershares are impossible, but, if disclosure be negatived, the opinion ofthe Committee is in favour of the maintenance of the bearer share.

It should be mentioned that one member of the Committee produced areservation strongly combating even the very moderate views expressedby the Committee on the subject of British shipping and "key"industries. It should be noted, however, that he attended very fewmeetings of the Committee. He points out that, with regard to theregistration of ships as British when they are owned by a companywhich has alien shareholders, "it is not usually a question ofpermitting a ship which would in any case be British to be under thecontrol of aliens; the question is whether, if a number of persons,some or all of whom are aliens, own a ship, they should be permittedto register it as a British ship by forming themselves into a Britishcompany and establishing an office in the British Dominions. If," heobserves, "they were not allowed to do so they would still own theship, but register it as a foreign ship in some other country. Itappears that a number of ships were registered here before the war bycompanies with alien shareholders (some even with enemy shareholders).They were managed in this country; the profits earned by themwere subject to our taxation; they were obliged to conform to theregulations of our Merchant Shipping Acts; they carried officers and men who were members of the Royal Naval Reserve; on the outbreak ofwar our Government was able to requisition the ships owing to theirBritish registration and without regard to the nationality of theshareholders in the companies owning them." It appears to thisrecalcitrant member--and there is much to be said for his view--thatall these consequences have been highly advantageous to this country.On the subject of "key" industries he is equally unconvinced. Itappears to him that "the important thing is to get the industriesestablished in this country, and that the question of their ownershipis of secondary consequence."

It is very satisfactory to note, in view of wild talk that has latelybeen current with regard to restrictions on our power to exportcapital, that the Committee has not a word to say for any continuance,after the war, of the supervision now exercised over new issues. Therestrictions which it did recommend, while admitting their futility,on imports of capital into our shipping and "key" industries wereevidently based on fears of possible war in future. The moral is thatthis war has to be brought to such an end that war and its barbarismsshall be "spurlos versenkt," and that humanity shall be able togo about its business unimpeded by all the stupid bothers andcomplications that arise from its possibility.