Inadequate parent company guarantees

Governments can no longer take it for granted, as they might have done 20 years ago, that a major resource development company or transnational company will always stand behind a wholly-owned subsidiary which has been held liable for damages in an environmental catastrophe or large lawsuit. The financial consequences of such events as Bophal and the Exxon Valdez can have a very damaging impact on the balance sheet of even the largest and strongest corporations. With the increasing emphasis on environmental concerns, governments see the need for parent company guarantees and increasingly companies are declining to accept open-ended commitments which could, on a worst-case assumption, run into billions of dollars. There is a weakness in the present guidance for direct foreign investors in developing countries as to how governments can secure guarantees for project-specific companies or transnational subsidiaries.