Expropriation

What Is Expropriation?

Expropriation is the act of a government taking privately owned property, or the rights attached to it, and bringing it under public control. The taking is usually made for a public purpose, such as building a road, a power plant or a public facility. In many legal systems, the owner is entitled to compensation intended to reflect the value of what was taken. When a state takes assets without paying compensation, or in a way the owner considers unfair or discriminatory, the action is often described as confiscation.

Expropriation can apply to land, buildings, equipment, bank accounts or ownership stakes in a company. For investors, the most significant form is the taking of a business or its assets. When an entire industry is moved into state hands, this is sometimes called nationalization.

How It Works

Expropriation is commonly divided into two types. Direct expropriation happens when a government formally transfers ownership to itself through a decree, law or administrative order. Indirect or "creeping" expropriation happens when government measures, such as heavy regulation, new taxes or the cancellation of licenses, strip an owner of the practical value of an investment without formally taking legal title.

Many countries limit expropriation through their constitutions and laws. In the United States, for example, the Fifth Amendment requires "just compensation" when private property is taken for public use. Countries also agree on limits through investment treaty provisions, which often require compensation for the expropriation of foreign investments and set standards for how it must be carried out.

Why It Matters to Investors

Expropriation is one form of political risk. An investor who holds shares in a company operating abroad may find that the company's assets are taken, that the shares lose most of their value, or that the payment offered is far below expectations. Investors often examine how stable a country's legal system is and how it has treated foreign direct investment in the past. Some businesses buy political risk insurance, which can cover certain losses from expropriation, although the terms of coverage vary widely.