1
Title: Shareholder claims on reflective loss, in
investment law. Research on the admissibility and
possible reasons of objection to them
Name: Ioannis Sidiropoulos
Name of supervisor: Hege Elisabeth Kjos
2
1. INTRODUCTION
It is understood that as capital-importing, host, states may harm a foreign investor through wrongful acts. This may happen for various reasons. The state may have a policy of nationalization. Or the entrepreneurial culture in the country may be hostile towards new investments for political, ideological reasons. The investor will try to get an indemnity for the damage he or she suffered and this can explain the advent of the modern Investor State Dispute Settlement (ISDS) framework. This effort is justified; nobody is willing to undergo losses that are believed to be unfair and certainly not agreed with the commercial counterpart, which in our case is the state. However this effort can become quite complex when it comes to the people and the companies behind the corporations that directly engage in an investment. As Professor Schreuer has observed, frequently investment is achieved through layers of holding companies. Such structures are not limited to companies incorporated under the law of the host State in order to comply with local rules, but often include layers of holding companies incorporated in various jurisdictions outside the host State.
The extent to which shareholders can present a claim against the host State of the investment and how justified this is, are, therefore critical questions in the area of international investment law.1 In cases that the host state adopts measures directly affecting shareholders' rights, such as the right to receive any declared dividend or to participate in shareholders meetings, there is no doubt, that under international law either the shareholder, or its home state, through diplomatic protection, will have the right to claim against the measures. However, there is an issue when the measure affects only the rights of the company as, in any case, it will, mostly, also affect the economic interests of its shareholders. A claim for reflective loss, is a claim in which a shareholder requests compensation for damages resulting from a measure that was directed exclusively against the rights of the company in which it holds shares2.
Trying to approach the issues at an initial stage, we cannot but notice that lack of solutions for shareholders who are harmed by wrongful acts would be, arguably, against the protective provisions of the European Convention of Human Rights and its
1 Abby Cohen Smutny, Claims of shareholders in international investment law, International
Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer Christina Binder, Ursula
Kriebaum, August Reinisch, and Stephan Wittich, at 363
2 Gabriel Bottini, Indirect claims under the ICSID Convention, University of Palermo Journal of
3 protocols. It is easily understood that the shareholder either as an individual or as a company has property rights that need to be respected. At this point, the distinction between the notions of direct and reflective loss is useful. There can be arguments in favor of the idea that protection of human rights is satisfied when the loss is direct and that there is no such need when it is reflective. National and international law barring shareholder claims for reflective loss is often explicitly driven by policy considerations relating to consistency, predictability, avoidance of double recovery and judicial economy. Limiting recovery to the company is seen as both more efficient and fairer to all interested parties. In contrast, ISDS tribunals and commentators have generally given limited consideration to the policy consequences of allowing shareholder claims for reflective loss.
Historically the first stage of the foreign shareholder protection was that of diplomatic protection as it was analyzed in the famous case of Barcelona Traction.3 Things evolved in a significant way with the introduction of modern investment regimes. In art 25 of the ICSID (International Centre for Settlement of Investment Disputes) Convention, we can see that there are some prerequisites for the protective application of the provisions ICSID jurisdiction. As far as the nationality is concerned the company engaged should not be a national of the respondent State. However there can be an exception4 when foreign control of the said company is proved by the claimant and accepted through consent by the Respondent state.
At this point, it is necessary to distinguish the ‘derivative actions/suits’ from ‘claims for reflective loss’. ‘Derivative actions/suits’ are legal actions brought by shareholders for seeking relief on behalf of the company. In this case, compensation is paid to the company and not to the shareholders. In ‘shareholder claims for reflective loss’, however, shareholders seek relief on behalf of themselves due to a reflective loss that they suffer due to a breach of the company’s rights. A claim for reflective loss is thus by definition a direct action, as opposed to a derivative action. These terms should not be used interchangeably. The focus of this essay is reflective loss claims.
3 Belgium v Spain - Barcelona Traction, Light and Power Company, Limited (New Application: 1962)
- Judgment of 5 February 1970 - Second Phase - Judgments [1970] ICJ 1; ICJ Reports 1970, p 3; [1970] ICJ Rep 3 (5 February 1970)
4 This is not an effort to attribute deep sociological meaning to the whole research context which means that the human rights factor will not be analyzed. Rather, there will be an extended analysis of the diplomatic protection aspect which means that the relevant case law will be utilized. For example, Barcelona Traction is going to be set against the modern ISDS in terms of allowing shareholders to access protection. There is no aspiration here to clarify what exactly shareholders are entitled to in terms of claims content. The basic aim is to show how case law has evolved in a more lenient direction as far as shareholders’ treatment is concerned. The main question that arises in this context concerns the limitations to this treatment, including relevant exceptions.
As far as the structure of this essay is concerned, first there will be a presentation of the basic ideas of the corporate organizational forms. Furthermore, there will be an analysis of the first efforts made to address the issue of shareholder claims for reflective loss. Cases like Barcelona Traction and Diallo are important in this context. After that there will be an analysis of the modern investment regimes aspect. It will be shown that customary law does not fall within this specific framework. Additionally, there is going to be an analysis of the ISDS treatment of shareholder claims through a case by case presentation. An important part of the paper will be the reference to reasons why we should be cautious towards the lack of restraints on the regime and, finally, a section of proposals of compromise will be presented.
2. Defining recognized organizational forms possessing key attributes
A major function of corporate law is to provide business enterprises with dependable legal forms that have key attributes. This issue is important because a robust and undeniably valid corporate personality can make shareholder claims on jus standi for reflective loss particularly difficult. Company law statutes in national law typically define a series of possible forms with different characteristics5. Probably, the main function of corporate law is to define the property rights over which the participants in a firm can enter into contracts6. Henry Hansmann and Rainier Kraakman7 explained
5 David Gaukrodger, Investment Treaties and Shareholder Claims for Reflective Loss: Insights from
Advanced Systems of Corporate Law, OECD Working Papers on International Investment, 2014/02, OECD Publishing, at 10
6 DR. Yaraslau Kryvoi, Piercing the Corporate veil in international arbitration, Global business law
5 that “the essential role of . . . organizational law is to provide for the creation of a pattern of creditors’ rights – a form of ‘asset partitioning’–that could not be practically established otherwise.”8 Corporate law academics split the characteristics of corporate limited liability into three groups – separation of assets, improved monitoring, and ease of coordination with creditors. Ronald Coase was the first to explain corporate form by the need for the reduction of transaction costs of market coordination with third parties9. Limited liability makes easier the transfer of ownership by letting owners separate corporate liabilities from their own10.
There are two major theories concerning corporate personality – the theory of legal fiction, and the entity theory. According to the legal fiction theory, a corporation is “a nexus of contracts”, an easier way of structuring relationships with third parties, thus limiting the liability of the participants11. The entity theory relates to the idea that the state created the corporation by granting it a charter, and, in this way, it has a separate personality12. The legal fiction supporters use the argument that the property might be given special qualities by the state or by contract, but remains property all the same13. Hence, the existence of a corporation which is to be deemed independent of its owners is a fiction: “the rights and duties of an incorporated association are in reality the rights and duties of the persons who compose it, and not of an imaginary being.”14 The entity theory school regards a corporation as an autonomous institutional actor separable from those with an interest in it15. It is understood that if a shareholder wants to claim, he will have to argue on the legal fiction theory.
The strong preference of market participants for the business corporation over other available forms may suggest that it is viewed as efficient:
7 Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J.
387, 440 (2000).
8 Ibid, at 390
9 See R.H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937). 10 Hansmann & Kraakman, supra note 7, at 426
11 See, e.g. Michael C. Jensen &
William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305, 311 (1976).
12 See, e.g., Mark Hager, Bodies Politic: The Progressive History of Organizational ‘Real Entity’
Theory, 50 U. PITT. L. REV. 575, 575-77 (1989).
13 See Victor Morawetz, A treatise on the law of private corporations 2, 2d ed. 1886. 14 Ibid, at 3
6 “a given jurisdiction can provide for a menu of different standard form legal entities from which parties may choose in structuring an organization. Formation as a business corporation, for example, signals simply and clearly -- to all who deal with the firm, whether by purchasing shares or simply by contract -- that the firm is characterized by a variety of familiar governance provisions, and that it will continue to have those characteristics unless and until it changes statutory form.”16
Limited liability protects the owners (shareholders) of the company by shielding their personal assets from the claims of the firm’s creditors. Use of the corporate form means that, if the parties do not contract otherwise, creditors of the company are restrained to making claims against assets owned by the company.
Separate legal personality
As noted above, the first characteristic of the business corporation is its separate legal personality. Separate legal personality refers to a number of key attributes of the corporation that allow it to serve as an efficient contracting party. These include (i) “entity shielding” and (ii) the ability of the company to sue and be sued in its own name17. Entity shielding is the most important aspect of separate legal personality. It protects the firm’s assets from shareholders and their personal creditors. The notion of entity shielding has been derived from the civil law notion of a separate patrimony18.
The ability to sue and be sued in its own name is equally important. While entity shielding ensures that the company’s contractual commitments are supported by assets, the ability to sue and be sued has to do with procedural issues. Rules in this area clarify the procedures by which the firm can sue, including on its contracts, and those by which it can be sued19. The company as a whole can be sued by, for example, providing it with a single notice to a specified recipient. There is no need to identify or serve notice on shareholders. Similarly, the company has the power to bring suit in its own name without reference to the owners of its equity20.
16 John Armour, Henry Hansmann & Reinier Kraakman, What is Corporate Law? [hereinafter Armour
et al.], ch. 1 in Kraakman 2009, at 22-23
17 Gaukrodger, ibid, at 13 18 ibid
19 ibid 20 ibid
7 In my opinion it had been particularly important to present the basis of the corporate organization impact on commercial relations. Now it is understood that shareholders, in their effort to claim for any possible reflective loss, may be confronted with the argument of the other side, based on separate legal personality.
3. SHAREHOLDER CLAIMS ON REFLECTIVE LOSS UNDER THE PRISM OF CUSTOMARY LAW
3.1 BARCELONA TRACTION AND DIALLO AS THE DOCTRINAL FOUNDATIONS: EXPLORING DIPLOMATIC PROTECTION
Before the dramatic change that modern investment concepts brought about, the only possible way for individuals to protect their investments had been the effort to engage the states as factors of diplomatic protection. The concept of a state diplomatically protecting its nationals has its origins in the notion that only states are subjects of international law21. Those origins are combined with the “fiction”22 that an international injury to a national of a state is an injury to the state itself23. The result is that one state can take action against another state if the latter state has acted towards a national of the first state in a way recognized by international law to be wrongful. In the Diallo Preliminary Objections Decision,24 the International Court of Justice (ICJ) acknowledged that the content of customary international law is reflected in article 1 of the ILC’s Draft Articles on Diplomatic Protection. This provision provides:
“diplomatic protection consists of the invocation by a State, through diplomatic action or other means of peaceful settlement, of the responsibility of another State for an injury caused by an internationally wrongful act of that
21 Ben Juratovich, Diplomatic protection of shareholders, The British Yearbook of International Law,
2011, Oxford University Press, at 283
22 International Law Commission, Draft Articles on Diplomatic Protection with commentaries (2006)
UN Doc A/61/10, 25; A Vermeer-Kunzli, ‘As If: The Legal Fiction in Diplomatic Protection’ (2007) 18 EJIL 37.
23 Mavrommatis Palestine Concessions [1924] PCIJ Series A No 2, 12; Barcelona Traction, para 44; W
E Beckett ‘Diplomatic Claims in Respect of Injuries to Companies’ (1931) Proceedings of the Grotius Society 175, 176–177; cf International Law Commission, Draft Articles on Diplomatic Protection with commentaries (2006) 25
8 State to a natural or legal person that is a national of the former State with a view to the implementation of such responsibility”.25
For a state to have the right to take such action, two conditions must be satisfied. First, the person that has suffered the wrongful act must have previously tried to use the domestic remedies available in the state responsible for that wrong26. This allows the respondent state every opportunity to take corrective measures itself27. Second, the person who has suffered the wrongful act, has to be a national of the state trying to protect that person. This ensures that the state seeking to protect a harmed person has a rightful interest in such protection28. Or, to be more exact, it ensures that the state taking action has itself been wronged29.
The Judgment of the International Court of Justice in the Barcelona Traction case30,
was rather not expected, concerning both the outcome and the near unanimity of the result. While the Court disposed of the case on a narrow ground - Belgium's lack of
jus standi to present the claim of Belgian shareholders in Barcelona Traction, a
Canadian corporation allegedly put out of business by acts attributable to Spain - its Judgment brings about some complex issues31.
The Court, first, emphasized the distinction between shareholders and company, which were ‘separated . . . by numerous barriers’, including the ‘separation of property rights’32. This approach was indeed accepted in many domestic legal systems. The Court, accepting a renvoi, held that international law would be ‘called upon to recognize’ the domestic distinction between corporation and shareholder, as ‘international law had not established its own rules’33. Secondly, controlled by municipal law, international law had to respect the sharp distinction between
25 International Law Commission, Draft Articles on Diplomatic Protection with commentaries (2006)
24
26 Juratowich, ibid n. 21, p. 284
27 Interhandel Case (Switzerland v United States of America), Judgment, [1959] ICJ Rep 6, 27 28 See the Panevezys-Saldutiskis Railway Case, [1939] PCIJ Series A/B No 76, 16.
29 Juratowich, ibid
30 Case Concerning the Barcelona Traction, Light and Power Co. Ltd (New Application: 1962)
(Belgium v. Spain) (Second Phase), [1970] ICJ Rep. 3
31 Editorial comment, Two perspectives on the Barcelona traction case, The rigidity of Barcelona, 65
Am. J. Int'l L. 522 1971
32 Barcelona Traction, supra note 29, at 34, para. 41 33 Ibid, at 33–4, para. 38.
9 shareholders and company34. Third, the Court was clear that shareholder rights could not be set at the same level with rights of the company. In its opinion, the shareholders’ state could exercise diplomatic protection for the company only in exceptional circumstances35:(a) if special treaty rules so provided (which is actually the lex specialis that will be analyzed in the process of this paper); (b) in special cases concerning the treatment of enemy property and nationalizations; (c) if the company had ceased to exist; and (d) perhaps if claims were raised against the state of incorporation (‘protection by substitution’)36. The municipal law of corporations thus became the basis for the Court's perception of its international law rule governing shareholder claims37.
There has been much criticism on the Court's Judgment. As Judge Koo remarked when the case was first before the Court in 1964, there was ample of international practice existing on sanctioning shareholder claims.38 By disregarding such practice, the Court thereby "debars itself from playing a constructive part in the progressive crystallization of custom into law."39 The general critique of the Court's performance in this area, made by a commentator some years ago, is particularly applicable to its Judgment here:
“It may be that the Court's conclusions were reached after a contextual analysis on the lines similar to those suggested here; but its opinions do not articulate in any perceptible manner that this has been so.... The unique position of the Court in the general scheme of institutional decision-making enjoins it to take every available opportunity to clarify the significance of each particular feature in the process of customary prescription, with appropriate
34 Christian J. Tams and Antonios Tzanakopoulos, Barcelona Traction at 40: The ICJ as an Agent of
Legal Development, Leiden Journal of International Law, 23 (2010), pp. 781–800, at 787
35 Barcelona Traction, 39 ff. and 41 ff., paras. 59 ff. and 69 ff 36 Tams, Tzanakopoulos, ibid
37 "Consequently, in view of the relevance to the present case of the rights of the corporate entity and
its shareholders under municipal law, the Court must devote attention to the nature and interrelation of those rights. "Barcelona Traction. at 34
38 Barcelona Traction, Light & Power Co., Ltd. case (Preliminary Objections), [1964] I. C. J. Rep. 6,
63 (separate opinion of Judge Koo)
10 emphasis on the overriding policies of the community governing the requirements for determining a prescription of customary international law”.40
It is relatively easy to recognize that the Court in Barcelona not only failed to clarify its approach to ascertaining customary international law41, but also that the way it handled the issue of the sources to which it could turn in its search for an applicable rule was too restrictive42.
Rejecting as irrelevant all this traditional international practice governing shareholder claims, the Court also characterizes as lex specialis, and thus rather not worthy of discussion, the approximately 80 lump-sum settlement agreements that had been concluded in the past 25 years in relation to compensation for the nationalization of foreign property, agreements that authorize, in a uniform way, or have been structured to authorize shareholder claims43 and which, in the opinion of Dr. White, "constitute a valuable potential source of customary international law”44.
The strong point of the present criticism, however, is not that the Court drew the wrong conclusion from lump-sum settlements, which it did, but that it handled its judicial function in a wrong way by refusing even to consider their effect upon the customary norms governing the eligibility of claimants who are shareholders45. Judge Gros, in separate opinion, citing "numerous agreements" which indemnified
40 Raman, "The Role of the International Court of Justice in the Development of International
Customary Law," 1965 Proceedings, Am. Soc. Int. Law 169, 177
41 Ibid, n 31, Two perspectives on the Barcelona traction case, at 525
42 McDougal, discussing the law of the sea, adopts an approach “readily transferable” to the law of
state responsibility: "From the perspective of realistic description, the international law of [state responsibility] is not a mere static body of rules but is rather a whole decision-making process, a public order which includes a structure of authorized decision-makers as well as a body of highly flexible, inherited prescriptions. It is, in other words, a process of continuous interaction, of continuous demand and response, in which the decision-makers of particular nation states unilaterally put forward claims of the most diverse and conflicting character . ... and in which other decision-makers, external to the demanding state and including both national and international officials, weigh and appraise these competing claims in terms of the interests of the world community and of the rival claimants, and ultimately accept or reject them. As such a process, it is a living, growing law, grounded in the practices and sanctioning expectations of nation-state officials, and changing as their demands and expectations are changed by the exigencies of new interests . . . and by other continually evolving conditions in the world arena." McDougal, "The Hydrogen Bomb Tests and the International Law of the Sea," 49 A. J. I. L. 356, 356-357 (1955).
43 Two perspectives on the Barcelona traction case, ibid, at 526 44 G. White, Nationalization of Foreign Property 183, 1981 45 Two perspectives, ibid, 528
11 shareholders, several of which even granted compensation to the holders of single shares, found it
“impossible to dismiss these agreements with a stroke of the pen, in particular those of Switzerland, which are not peace settlements imposed by a victorious State; it is not the habit of States to make each other free gifts, and the number of agreements for the compensation of shareholders considered apart from the limited company does imply the recognition of an obligation.”46
In the Case Concerning Ahmadou Sadio Diallo47 the International Court of Justice had the chance to revisit the scope of customary international law protections available to shareholders when the company has suffered an injury. That case involved claims presented by Guinea on behalf of its national, Ahmadou Sadio Diallo. Mr Diallo was the manager and sole shareholder of two companies, both incorporated in the Democratic Republic of Congo (DRC), Africom-Zaire and Africontainers-Zaire. Guinea claimed that the DRC, formerly Zaire, took actions that harmed the companies as well as Mr Diallo individually and as shareholder of the companies. Referring to its previous decision in Barcelona Traction, the Court reaffirmed that international law recognizes the legally separate personality of the corporation as it exists under the relevant domestic law and the basic rule that, as a result, only the State of incorporation can present a claim, on the international plane, on the company's behalf.4849
In Diallo the Court expressed the more constrained opinion that state practice and the decisions of international courts and tribunals ‘do not reveal—at least at the present time—an exception in customary international law allowing for protection by substitution’50. The ‘substitution’ in concern was not substitution of the shareholders’ state for the state of the company’s nationality, so that the state of the shareholders
46 [1970] I.C.J. Rep. at 277-278.
47 Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of Congo),
Judgment (Preliminary Objections), 24 May 2007
48 Abby Cohen Smutny, Claims of shareholders in international investment law, International
Investment Law for the 21st Century, International Investment Law for the 21st Century: Essays in
Honour of Christoph Schreuer, Christina Binder, Ursula Kriebaum, August Reinisch, and Stephan Wittich, at 367
49 Diallo, Ibid, para 61
12 could then protect the company and so, incidentally, the shareholders51. That kind of substitution would involve a state protecting an entity which is not actually its national. The Court, did not address the ‘separate question’52 whether there is ‘a more limited rule of protection by substitution’53 where, in case incorporation in a state is ‘required’54 by that state ‘as a precondition for doing business there’55, the state of nationality of a shareholder can, exceptionally, protect the shareholder ‘in the case of an injury to the corporation’56.
The Court had the opinion that the existence of numerous investment treaties adopting different rules from those set forth in Barcelona Traction revealed that custom had not changed57. Similarly, the Court held that cases that were based on special agreements between states, which recognized that the state of the shareholders could claim for harm suffered by those shareholders as a result of violation of the rights of the company in which they held shares, were not to be viewed as contributing to customary international law58.
It is not disputed that the general rule in international law should reflect the general rule in domestic law. However, when particular circumstances have the meaning that the doctrinal basis for that rule—that the company will act in the interests of the shareholders and, thus, the shareholders do not have the need for direct protection— does not exist, then customary international law should recognize exceptions to the general rule, just as is done in municipal legal systems59.
As customary international law as declared by the Court currently stands, international law has been subordinated to the Court’s view of relevant rules of
51 Juratowich, ibid n. 21, p. 287 52 Diallo, ibid, para 91
53 Ibid
54 International Law Commission, Draft Articles on Diplomatic Protection with commentaries (2006)
58, art 11
55 Ibid 56 Ibid
57 Diallo Preliminary Objections Decision, para 90 58 Ibid, paras 89–90.
13 domestic law60 concerning both the denial of standing to the state of shareholders to claim on behalf of those shareholders when they have been harmed through harm caused to the company in which the shares are held, and with respect to the identification of the direct rights of shareholders that can be espoused by their state of nationality. The Court observed in Diallo that the protection of companies and shareholders in contemporary international law is governed, to a large extent by international treaties relating to the protection of foreign investments.61 Diplomatic protection claims on behalf of shareholders and companies are to be considered exceptional rather than usual. What the Court did not uphold is that one reason for the growth of such treaties in importance is that protection of shareholders under customary international law was thought to be not enough when it came to international investment coverage.62
3.2 A REBUTTAL TO THE PROPOSITION THAT ANY CUSTOMARY RULE HAS DEVELOPED
On the other hand, in the process of time and as IIAs became more prevalent, there have been also voices clearly objecting the idea that customary law can be used to support the jus standi of shareholders’ reflective loss claims, contrary to the above-mentioned criticism. In other words there are opinions stating that custom cannot be utilized so as to cover the requirements of treaties concerning the jus standi issue (ie definitions of investor/investment). The main weakness of the proposition that any such “rule” has emerged is that it does not meet the definition of customary international law. Custom has two constitutive elements: practice of States in their international relations and the belief that such practice is required by law (opinio
juris).63. This above mentioned double requirement is one of the most well-established principles of international law. It is constantly applied by tribunals in the context of investor-State arbitration. These two requirements will now be examined in turn.
60 Barcelona Traction, Separate Opinion of Judge Gros, para 9; C De Visscher, ‘La notion de reference
(renvoi) au droit interne dans la protection diplomatique des actionnaires de societes anonymes’ (1971) Revue Belge de Droit International 1, 2.
61 Diallo Preliminary Objections Decision, para. 88 62 Juratowich, ibid, at 323
14 Thus, the first basic requirement of custom is to prove consistent State practice. Modern investment treaties typically define the term “investment” quite broadly, so as to include shares in corporations. The term “investor” is also usually defined in broad terms. There are still, some important inconsistencies between BITs concerning how they define “investor” and the nationality of corporations64. This is important because nationality is the way to legal protection under an investment treaty. As mentioned above, the scope of the definition of what is considered an “investor” under a BIT is crucial to establish whether a corporation and its shareholders receive any protection under that treaty.65.
A recent study of BITs entered into by countries of the Americas highlights the great inconsistency in the definitions of corporate nationality. Out of forty BITs examined, the author found five different definitions of “investor”: five treaties defined nationality of a corporation solely based on incorporation; fifteen required incorporation plus the seat of management; nine required incorporation, seat of management, and effective economic activities; ten allowed claims based on incorporation plus the seat of management or economic activities; and finally, only one treaty required incorporation and control.66 In other words, what an “investor” under these BITs is, really depends on the exact wording of each treaty. Clearly, no general standard exists in the Americas.
The same is also the case for the rest of the world. Some treaties require that a corporation has the place of incorporation in a party State, but that its effective management (such as its headquarters) should also be located there67. Other treaties further require that the corporation is controlled by nationals of the State of incorporation or have substantial business activities in that State.68 These are clear
64 Patrick Dumberry, The legal standing of shareholders before arbitral tribunals: has any rule of
customary international law crystallized?, Michigan State Journal of International Law, Vol. 18:3, at 366
65 Ibid
66 See Lawrence Jahoon Lee, Barcelona Traction in the 21st Century: Revisiting its Customary and
Policy Underpinnings 35 Years Later, 42 STAN. J. INT’L L. 237 (2006), at 272-273
67 Anthony C. Sinclair, The Substance of Nationality Requirements in Investment Treaty Arbitration,
20 ICSID REV. FOREIGN INV. L.J. 357 (2005), at 374 (discussing examples and referring specifically to the U.K.-Philippines BIT and the Italy-Libya BIT).
68 See, e.g., the United States Model Bilateral Investment Treaty (2004) [hereinafter U.S. Model BIT];
Canadian Model Foreign Investment Protection and Promotion Agreement (2004) [hereinafter Canada Model BIT].
15 examples of State practice not consistent enough to form the basis of any customary rule69.
The second requirement for custom is opinio juris. As explained by Schachter, “the repetition of common clauses in bilateral treaties does not create or support an inference that those clauses express customary law” because “[t]o sustain such a claim of custom one would have to show that apart from the treaty itself, the rules in the clauses are considered obligatory.”70 As the UPS Tribunal stated, “while [BITs] are large in number their coverage is limited; and . . . in terms of opinio juris there is no indication that they reflect a general sense of obligation.”71 In fact, the evidence shows that States sign BITs solely having in their mind only their economic interest72.
As explained, “a BIT between a developed and a developing country is founded on a grand bargain: a promise of protection of capital in return for the prospect of more capital in the future.”73 Guzman supports the opinion that it is “simply not possible to explain the paradoxical behavior of [less developed countries] toward foreign investment based on a view that BITs reflect opinio juris” as these BITs “do not reflect a sense of legal obligation but are rather the result of countries using the international tools at their disposal to pursue their economic interests.”74
4. THE PRACTICE UNDER MODERN INVESTMENT TREATIES
So what we can see is that, due to all these inconsistencies and doctrinal reluctance, the customary law is not actually a dependable means for shareholders, so as to utilize it in their favor. In recent years, there has been a great increase in the number of international arbitration cases involving disputes between foreign investors and States. Only during the 2003-2008 period, an average of 40 new investment treaty arbitration
69 Patrick Dumberry, ibid. n 64
70 Oscar Schachter, Compensation for Expropriation, 78 AM. J. INT’L L. 121, 126, 1984 71 United Parcel Serv. of Am. v. Gov’t. of Canada, at 84, UNCITRAL, Nov. 2002, para. 97. 72 Dumberry, ibid, at 368
73 J.W. Salacuse, The Treatification of International Investment Law?, 3 L. & BUS. REV. AM. 155,
159 (2007) (emphasis added); see also J.W. Salacuse & N.P. Sullivan, Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 HARV. INT’L L.J. 67 (2005).
74 Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of
16 cases had been filed each year75. In 2011, there had been some 390 known investor-State arbitration cases pending76. These are dramatic figures considering that, in the first 30 years of the existence of ICSID, only one to two cases were registered each year77.
In the case of ICSID arbitrations initiated on the basis of a BIT, the opinion has been voiced that shareholders are not exercising indirect claims, since they invoke rights directly granted to them. In fact, BITs in general grant to investors in shares certain direct rights such as the right not to be expropriated except for a public purpose and against adequate compensation, to be treated in a fair and equitable way, to receive full protection and security, and to be free from discriminatory or arbitrary treatment.78 When the claim refers to measures affecting typical shareholder rights and invokes standards of protection which are common in BITs, for example fair and equitable treatment, it cannot be contested that the shareholder is exercising a direct claim, and thus, ICSID has jurisdiction (assuming others conditions satisfied). As we have already understood, the problem arises when the shareholders do not attempt to claim on their individual rights, but rather the shareholders' claim is made in connection to measures affecting rights of the company79.
Vandevelde underlines that the significance of that language related to the protection of shareholders who used corporate vehicles for their investments and, thus, in effect, to avoid the limitations reflected in the Barcelona Traction case. These limitation have to do with the rights of a shareholder to present a claim for injuries suffered by the company80.
As he mentions:
“Article I(c) [of the 1983 US Draft BIT] specifies that investment includes investment ‘owned or controlled directly or indirectly […]’ Thus, for example, if a United States company had a subsidiary incorporated under French law which invested in the territory of a BIT party, that investment would be covered by the BIT's
75 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor no. 1, at 1, 2008 76 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Issues Note no. 1, at 2,
2011
77 ICSID Caseload – Statistics, Iss. 2011–1 (2011), http://icsid.worldbank.org. 78 Bottini, ibid, supra 2, at 571
79 ibid
17 definition of investment. Article I(c), in other words, makes clear that the BITs do not distinguish between investment owned and controlled directly and that owned or controlled through corporate tiers”.
This definition of investment was in part a response to the decision of the International Court of Justice in Barcelona Traction, Light and Power Co., Ltd. In that case, the Court held that a company incorporated in Canada but owned principally by Belgians could not be protected by Belgium in an action before the Court.
The rationale was that, under customary international law, a company may be protected only by its state of incorporation, not the state of its ownership. The BIT definition of own or control thus renders the Barcelona Traction decision inapplicable to covered investment. Investment owned and controlled by United States nationals is covered, regardless of whether it is owned or controlled through a company incorporated under the laws of another state.
The reference to direct or indirect ownership or control also makes explicit one very important element of BITs. It protects investment of a party's nationals or companies no matter how many corporate layers exist between the national or company and the investment, as long as the national or company can be said to own or control the investment”81.
4.1 The particular issue of NAFTA
NAFTA distinguishes between claims of investors on their own behalf (Art 1116) and claims of investors on behalf of an enterprise (Art. 1117). NAFTA tribunals are divided on whether NAFTA bars shareholder claims82. The US and Mexico supported the opinion that Art 1116 bars claims on reflective losses83. Since we are principally
81 K.J. Vandevelde, United States Investment Treaties Policy and Practice ,1992, at 45–6
82 Mondev International LTD v United States, Award, ICSID case No ARB(AF)/99/2, 11 October
2002, at 84-6; Contra Pope & Talbot v Canada, Award in Respect of damages, 31 May 2002, at paras 75-6; GAMI v Mexico Award 15 November 2004, at paras 120-1
83 GAMI Investment Inc v United Mexican States, submission of the United States (non disputing
18 interested in reflective and not in derivative loss, we have to be careful concerning issues of doctrinal distinctions.
We can see that the relevant NAFTA case law is rather uncertain. In Mondev v.
United States, the tribunal referred to the creditor, respondent and tax interests
protected by art. 1117 and that tribunals should ensure that in cases where those interests are at issue, damages should be recovered by the company:
“[The] United States argued that Mondev should have brought the action on behalf of the enterprise, LPA, under Article 1117. It pointed to the importance of the distinction between claims brought by an investor of a Party on its own behalf under Article 1116 and claims brought by an investor of a Party on behalf of an enterprise under Article 1117. The principal difference relates to the treatment of any damages recovered. If the claim is brought under Article 1117, these must be paid to the enterprise, not to the investor (see Article 1135(2)). This would enable third parties with, for example, security interests or other rights against the enterprise to seek to satisfy these out of the damages paid. It could also make a difference in terms of the tax treatment of those damages.”84
Other NAFTA tribunals, however, have rejected the argument that reflective loss claims are restrained by the limits of Art. 1117. Pope & Talbot v. Canada related to a claim by a foreign 100% shareholder for reflective loss incurred due to the treatment of its subsidiary. Over Canada's objection, the tribunal decided that reflective loss could be recovered under Art 1116. The tribunal based its judgment on the waiver provision in Article 1121(1)(b), which refers to an Article 1116 claim which relates to “loss or damage to an interest in an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly”. The tribunal reached the conclusion that NAFTA permits an Article 1116 claim arising from loss or damage to an investor's interest in the relevant enterprise. It noted, however, that the
19 investor would still have to prove “that the loss or damage was caused to its interest, and that it was causally connected to the breach complained of”. 85
4.2 Case by case
In my opinion, it is important to proceed to a case by case analysis of arbitral practice, so as to provide the reader with the answer to the question whether shareholder claims for reflective loss are actually permitted in the modern ISDS regime and if there are differences relevant to the kind of the shareholder (i.e. minority, majority).
4.2.1 Claims by Parent Corporations
The right of parent corporations to submit claims for damages inflicted on their wholly-owned subsidiaries which are incorporated in the host State of the investment is recognized by arbitral tribunals86. One classic illustration is the case of Amco v.
Indonesia where the foreign parent corporation, Amco Asia Corporation (a U.S.
corporation), carried out its investment in Indonesia through a locally incorporated subsidiary (P.T. Amco). In that case, the arbitral Tribunal held that both the parent corporation and the locally incorporated corporation could file claims87.
4.2.2 Claims by Majority Shareholders: issues of investment definition and rights relevant to the locally incorporated company
Modern BITs typically contain a rather wide definition of the term “investment”, which includes shares or other forms of participation in corporations within its scope. In such cases, tribunals accepted that participation by a corporation in a locally incorporated corporation is an investment and it is protected under the treaty88. For instance, the arbitral Tribunal in the ICSID case of Goetz v. Burundi recognized the
85 Pope & Talbot v. Canada, Award in Respect of Damages, at 75–76, 31 May 2002
86 Martin J. Valasek, Patrick Dumberry, Developments in the Legal Standing of Shareholders and
Holding Corporations in Investor-State Disputes, at 43
87 Amco Asia Corp. and others v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction,
para. 24 (Sept. 25, 1983), 1 ICSID Rep. 389 (1993), 23 I.L.M. 351 (1984)
20 right of a foreign national who owns share in a locally incorporated corporation to submit its own claim under the ICSID Convention89.
Another illustration of this recognition is the case of Gas Natural v. Argentina90. In 1992, Gas Natural SDG S.A. (“Gas Natural”), a Spanish corporation, participated in a tender organized by the government of Argentina as part of the gas sector privatization. Gas Natural participated in a consortium that bought 70% of the shares of Gas Natural BAN, S.A., an Argentine corporation, and created another Argentine corporation, Invergas S.A. The Spanish corporation was thus a majority shareholder in the investment vehicle (an Argentine corporation). Gas Natural filed an arbitration claim under the Spain–Argentina BIT. Argentina objected to the jurisdiction of the Tribunal based, inter alia, on the ground that the Claimant did not qualify as an investor under the BIT, as it was just a shareholder of the Argentine corporation that had suffered damage91.
In its Decision, the Tribunal found that the Claimant came within the definition of an investor under the BIT. In support of its Decision, the Tribunal made the following observation about the modern mode of foreign investment and the legal standing of corporations under BITs:
“[T]he standard mode of foreign direct investment, followed in the present case and in the vast majority of transnational transfers of private capital, is that a corporation is established pursuant to the laws of the host country and the shares of that corporation are purchased by the foreign investor, or alternatively, that the shares of an existing corporation established pursuant to the laws of the host country are acquired by the foreign investor. The scheme of both the ICSID Convention and the bilateral investment treaties is that in this circumstance, the foreign investor acquires rights under the Convention
89 Antoine Goetz and others v. Republic of Burundi, ICSID Case No. ARB/95/3, Award, para. 89 (Feb.
10, 1999).
90 Gas Natural SDG S.A. v. Argentina, ICSID Case No. ARB/03/10, Decision on Jurisdiction (June 17,
2005) “Gas Natural Decision on Jurisdiction”
21 and Treaty, including in particular the standing to initiate international arbitration”92
Following a review of decisions of other ICSID tribunals, the Tribunal concluded:
“[T]he assertion that a claimant under a Bilateral Investment Treaty lacked standing because it was only an indirect investor in the enterprise that had a contract with or a franchise from the state party to the BIT, has been made numerous times, never, so far as the Tribunal has been made aware, with success”93
The Tribunal therefore decided that it had jurisdiction over the dispute.
It is also recognized in ICSID decisions that the right of a majority shareholder to bring a claim does not depend on that of the locally incorporated corporation. An example is the case of Suez v. Argentina94. The French corporation Suez and the Spanish corporation, AGBAR, had joined together with three Argentine companies95 to create a consortium to bid for the concession to operate water distribution and waste water systems in the Argentine Province of Santa Fe. The consortium was awarded the concession and it formed another Argentine corporation (Aguas Provinciales de Santa Fe S.A. or “APSF”) to hold and operate the concession. The investment was affected by the Argentine financial crisis. At the time the request for arbitration was filed, the French and Spanish corporations were majority shareholders in the Argentine corporation, APSF96.
Argentina used the argument that the Claimants, as mere shareholders of APSF, did not have standing to bring claims for alleged injury to that corporation. The Tribunal first acknowledged that the Claimants’ participation in APSF qualified as an “investment” under both the France–Argentina BIT and Spain–Argentina BIT and
92 Gas Natural Decision on Jurisdiction, supra note 90, para. 34 93 Ibid, para. 50
94 Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua
S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Jurisdiction (May 16, 2006) [“Suez Decision on Jurisdiction”].
95 Banco de Galicia y Buenos Aires S.A., Sociedad Comercial del Plata S.A., and Meller S.A. 96 Valasek, Dumberry, ibid, 46
22 that, thus, the Claimants had standing to bring their claims. Moreover, the Tribunal held that APSF’s withdrawal of its own claim did not affect the ability of the foreign shareholders of APSF to bring their own independent claims for damages under international law97. The Tribunal therefore had the opinion that it had jurisdiction over the dispute.
4.2.3 Claims by Minority Shareholders
ICSID decisions show that there is no decisive distinction between majority and minority shareholders for jurisdictional issues. Thus, a shareholder having a minority participation in a locally incorporated corporation can submit claim before an ICSID arbitral tribunal.
In the Lanco case98, Lanco held 18 per cent of shares in a corporation that had obtained a concession from Argentina. Argentina used the argument that due to the fact that the nature of Lanco’s position was of plain shareholder equity status, it did not have locus standi; it was not a party to the concession contract. In the BIT, however, the definition of investment included shareholder equity99. There was no requirement on the shareholder to have a majority shareholding or some other controlling share in the administration or management100. The ICSID tribunal found that the 18 per cent shareholding was enough to satisfy the definition of an investor for the purposes of the BIT, for Lanco.
“[The] Argentina-U.S. Treaty says nothing indicating that the investor in the capital stock has to have control over the administration of the company, or a majority share, thus the fact that LANCO holds an equity share of 18.3% in the capital stock of the Grantee allows one to conclude that it is an investor in the meaning of Article I [of the Treaty]” 101
97 Suez Decision on Jurisdiction, supra note 94, para. 51
98 Lanco v Argentina, ICSID Case No. Arb/97/6, Decision on Jurisdiction, 8 December 1998, 40 ILM
457 (2001).
99 Engela C Schlemmer, Chapter 2 Investment, Investor, Nationality, and Shareholders, in The Oxford
Handbook of International Investment Law Edited By: Peter T Muchlinski, Federico Ortino, Christoph Schreuer, 2008, at 84
100 Lanco, ibid, para 10 101 Ibid
23 On this basis and given the fact that it was also found that Lanco was a party to the contract with Argentina, jurisdiction was found to exist102.
In CMS Gas Transmission Company v The Republic of Argentina103, CMS was a shareholder in TGN, and the fact that it was a minority shareholder, did not affect the jurisdiction of the Tribunal. The definition of investment in the BIT did not limit protected investments to majority shares104. The tribunal investigated the rights of shareholders in general international law by referring to the Barcelona Traction decision and the Elettronica Sicula SpA (ELSI) decision. In both these cases, there was a substantial change concerning the use of concepts of municipal law in an international law context and state practice105. The tribunal concluded that such was the evolution of international law that there was no restrain for a shareholder to bring a claim independently from the corporation concerned, notwithstanding its being a minority or majority shareholder106. The tribunal concluded that it had jurisdiction over the matter since CMS had a direct right arising from the BIT and it was of no significance whether there was a license agreement or something of a similar kind107. The fact that CMS was a minority shareholder did not detract from this fact. This is quite a confirmation of the judgment in Lanco.
4.2.4 Claims by Indirect Shareholders
Sometimes, the person who claims is not the immediate shareholder of the company which is affected. Can he claim for damage done to the company in which he owns shares only indirectly through the intermediary of another company? To put it clearly, if investor A owns shares in company B and company B owns shares in company C, can investor A pursue a claim for the damage that company C suffered by the host state108? There are many relevant factors in this situation. The first is the issue of majority ownership and control. Minority and non-controlling shareholders are able to
102 Ibid, Para. 10-19
103 CMS Gas Transmission Co v Argentina, ICSID Case No. ARB/01/8, Decision of the Tribunal on
Objections to Jurisdiction of 17 July, 2003, 42 ILM 788 (2003);
104 Art I(1) of the US-Argentina BIT 105 Schlemmer, ibid, at 85
106 CMS, above n 103 at para 48. 107 Ibid at para 65.
24 pursue claims due to damage on the company. Another variable is the country of the seat or place of incorporation of the intermediate shareholder. The cases discussed below are organized according to this latter criterion109.
Siemens v Argentina110 is a typical case of shareholding through an intermediary in the investor’s home state. In this case Argentina had objections to the Tribunal’s jurisdiction using the argument that the shares in SITS, the corporate vehicle incorporated in Argentina in order to carry out the investment, were not held by Siemens but by SNI, another German company. According to Argentina, this had the meaning that Siemens and the investment had no direct relationship. Siemens argued that wholly owned SNI and, also, that the latter was integrated into Siemens111. The Tribunal rejected the argument of Argentina, as the Argentina-Germany BIT did not contain any explicit reference to direct/indirect investment. The Tribunal concluded that:
“The plain meaning of this provision is that shares held by a German shareholder are protected under the Treaty. The Treaty does not require that there be no interposed companies between the investment and the ultimate owner of the company. Therefore, a literal reading of the Treaty does not support the allegation that the definition of investment excludes indirect investments”.112
Enron v Argentina113 is a case of shareholding through an intermediary in the host state. It arose under the Argentina-US BIT on alleged excessive tax assessments imposed by some country provinces in relation to a gas transportation company. The Tribunal described the indirect shareholding of Enron in the affected Argentinean registered company TGS as follows:
“Claimants’ participation concerns the privatization of Transportadora de Gas del Sur (“TGS”), one of the major networks for the transportation and
109 ibid
110 Siemens A.G v Argentine Republic, Decision on Jurisdiction, 3 August 2004, 44 ILM 2005, p. 138 111 Ibid, Paras 123-134
112 Ibid, Para 137
25 distribution of gas produced in the provinces of the South of Argentina. The Claimants own 50% of the shares of CIESA, an Argentine incorporated company that controls TGS by owning 55.30% of its shares; the Claimants’ participation in CIESA is held by two wholly-owned companies, EPCA and EACH. The Claimants, through EPCA, EACH and ECIL, another corporation controlled by the Claimants, also own 75.93% of EDIDESCA, another Argentine corporation that owns 10% of the shares of TGS; and they also have acquired an additional 0.02% of TGS through EPCA. The investment as a whole, it is explained, amounts to 35.263% of TGS”114
It is evident that the claimant’s shareholding in TGS involved some other locally registered companies and many layers of ownership. The court looked at the definition of investment in the BIT and underlined that it does not exclude claims by minority shareholders115:
“The reasoning supporting the above holdings will not be repeated for the sake of brevity. It is sufficient for the purpose of the present case to emphasize that there is nothing contrary to international law or the ICSID Convention in upholding the concept that shareholders may claim independently from the corporation concerned, even if those shareholders are not in the majority or in control of the company”.116
The Tribunal further held that “claims made by investors that are not in the majority or in the control of the affected corporation when claiming for violations of their rights under such treaty are admissible”.117
4.3 A basic argument in favor of Shareholder claims
The view that shareholder recourse is autonomous seems rather connected to a tendency of some ISDS tribunals and commentators to think that domestic remedies (in this case, for the company) are not so useful or relevant. Many ISDS shareholder
114 Ibid, Para 21 115 Ibid, Para 44 116 Ibid, Para 39 117 Ibid, Para 49
26 cases involve claims by shareholders of domestic law companies which can access the domestic courts but without access to ISDS. It should be mentioned that a number of ISDS tribunals have characterized treaty requirements for “time-limited recourse to domestic courts” (as a pre-condition to ISDS arbitration) as "nonsensical".118 If the assumption is that domestic recourse by the company is useless, a proposal which gives less credit to the need to consider the company capacity, may be more likely to be seen as appropriate.119
5. OBJECTIONS TO SHAREHOLDER CLAIMS
Even though arbitral practice is rather in favor of providing ground for jus standi for shareholders’ claims, we have to be skeptical on a broad interpretation of such “generosity”. It seems that there are drawbacks in such a perception on shareholders claims on reflective loss.
5.1 Parties and tribunals have taken varying approaches to consideration of shareholder claims for reflective loss in ISDS
There has been some uncertainty over the concepts of the nature and treatment of objections to these claims in ISDS. Efforts to dismiss them in preliminary decisions have been subject to different procedural approaches. Some efforts to obtain early tribunal attention to shareholder claims have been refused. In Mondev v. United
States, the US argued against the tribunal's competence concerning a claim by a
shareholder on losses inflicted upon its wholly-owned US subsidiary. The US asked for preliminary resolution of its challenge120. The tribunal rejected the request for early consideration of the shareholder claim issues and postponed them until the determination of the merits.121 The US defined its objection as one relating to the
118 Plama Consortium Limited v. the Republic of Bulgaria, ICSID, Decision on Jurisdiction (8 February
2005) (allowing investor to circumvent "curious" 18-month requirement using an MFN clause; finding it appropriate "to neutralize ... a provision that is nonsensical from a practical point of view”); Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. The Argentine Republic, ICSID Case No. ARB/03/19; AWG Group Ltd. v. The Argentine Republic, UNCITRAL (joined cases), Decision on Jurisdiction § 67 (citing Plama's "nonsense" theory in allowing application of MFN to avoid 18-month requirement); ISDS Scoping Paper, p. 27 & n.59.
119 Gaukrodger, D. (2013), “Investment Treaties as Corporate Law: Shareholder Claims and Issues of
Consistency”, OECD Working Papers on International Investment, 2013/03, at 28
120 Mondev International Ltd. v. United States, Award, ICSID (2002) para 17 121 Ibid., para 26.
27 competence of the tribunal122. The tribunal did not analyze the issue of the characterization of the objection.123 It underlined the interests covered by the derivative action system124 and concluded “that tribunals should ensure that recovery goes to the company where the company has incurred the loss”125.
The uncertainty about the procedural treatment of challenges has been hidden by the significant uniformity of outcomes in relation to most typical BITs in terms of allowing claims. Tribunals have generally approved claims under typical BITs, notwithstanding different views to resolving the issue126. They have rejected objections to the availability of recovery, whether framed as jurisdictional, admissibility, standing, improper plaintiff (claimant) or as related to the merits. The reasons have also been the same to a great extent (the inclusion of shares in the definition of investment and arbitral precedent).127
These concerns may not be so important for governments that allow these claims generally in their treaties. For governments that wish to exclude or limit them, however, uncertainty about the procedural treatment may lead to unnecessary costs. Some governments may want to consider whether respondent governments can require the tribunal to address in a preliminary decision the issue of the treaty limits on SRL and whether a claim is for (excluded) reflective loss and thus barred.128
5.2 Particular objections to shareholder claims
The issues in this section are likely to be interesting, also, for those governments that have excluded or may be interested in excluding or limiting shareholder claims on reflective loss. The consistency costs related to shareholders’ claims may be greatly lowered if, where it has been decided to exclude them, they (the claims) can be denied by the tribunal early in the case. So, there will be no need to litigate all the issues
122 See ibid. para 45 123 Ibid. para 46 124 Ibid. paras 84-85 125 Ibid. para 86
126 Gaukrodger, D. (2014), “Investment Treaties and Shareholder Claims: Analysis of Treaty Practice”,
OECD Working Papers on International Investment, 2014/03, at 46
127 Ibid 128 Ibid
28 raised to the conclusion of the case before it is dismissed. It may also reduce the likelihood of multiple shareholder claims arising out of the same injury129, as it will be discussed later.
The corporate nationality is generally considered expensive and difficult for a company to change.130 This allows governments to ascertain the law, including the investment treaty, applicable to claims by the company. In contrast, it can be difficult to identify the shareholders and particularly the indirect shareholders of a company. This may be particularly the case for special purpose vehicles with direct or indirect shareholders located in jurisdictions in which transparency is not actually the greatest virtue of them. The identity of shareholders also frequently changes; this can involve both intra-group transactions and share transactions with third parties131. So it becomes understood that the whole concept of shareholder claims can be quite unstable and obscure. This unpredictability can induce costs and discourage investments.
A regime that facilitates treaty shopping can also create uncertainty for governments: "where investors can engage in treaty shopping, States parties to investment treaties cannot be sure of the exact scope of their commitments under these treaties; this increases the legal uncertainties countries face in relation to these treaties."132 Treaty shopping becomes feasible if shareholder claims for reflective loss are generally admissible. Shareholder ownership structures are often easy to change. For example, intermediate holding company subsidiaries can be set up in different jurisdictions between the beneficial owner and the operating company, with each having the potential to be ISDS claimant under a different treaty if the operating company undergoes loss133. Ownership of an operating company can also be transferred from one part of a corporate group to another. Simple incorporation of a company in a state has been deemed sufficient to qualify as a national of that State under many BITs. Companies frequently try to structure their business in a way to benefit from
129 Gaukrodger, D. (2014), ibid, at 44
130 Gaukrodger, D. (2013), “Investment Treaties as Corporate Law: Shareholder Claims and Issues of
Consistency”, OECD Working Papers on International Investment, 2013/03, at 32
131 Ibid
132 Summary of discussion of FOI Roundtable 16 (March 2012), p.20; ISDS Scoping Paper, p. 55 133 Gaukrodger, supra 133, at 33
