Introduction

3

Legal Framework

INTRODUCTION

The legal framework of a strategic investment fund (SIF) is the set of rules that govern the SIF’s conduct of business and investment activities (OECD 2015, 28). The legal framework of the SIF consists primarily of the laws used to establish the SIF and its legal structure, as well as the fund’s domicile. The SIF is also subject to a set of private agreements, formed under applicable contract law, that legally bind the fund and its counterparties during the operations of the SIF. In addition, the SIF may be disciplined by public laws in the domestic and foreign jurisdictions in which it operates.

A well-constructed legal framework can empower the SIF to successfully execute its mandate. In contrast, a poorly conceived legal framework can diminish the SIF’s efficacy. At the level of the fund, such a framework will provide the contractual and governance mechanisms, including independent oversight, disclosure obligations, investment policies, conflict of interest policies, and standards of conduct, that promote discipline, transparency, and accountability (Awadzi 2015). Critically, the legal framework helps provide a robust governance system1 that allows the SIF to formulate and implement its objectives and investment policies.2 In doing so, the legal framework minimizes risks; maintains the confidence of domestic constituencies (such as the general public), host country regulators, and co-investors; and supplies efficient dispute resolution mechanisms in the event of conflict among SIF stakeholders.3 Conversely, a poorly structured legal framework exposes SIFs to both domestic and international governance and political risks4 that may jeopardize the effective execution of a fund’s mandate (Rose 2019). In turn this can sap managerial time and attention, create significant liabilities, increase transactions costs, and reduce returns.

No single legal framework or legal structure is appropriate for all SIFs, which are formed in a heterogeneity of environments. Like sovereign wealth funds (SWFs), SIFs operate in a range of regulatory traditions and political environments, which cause variance in the availability and choice of legal frameworks and structures. In addition, legal frameworks and structures also differ because of dissimilarities in fund mandates, the need (or lack of need) to attract