Nationality of Corporate Investors at the Crossroads:
Pierce the Veil or Go Formalistic
Have investment tribunals chosen a dangerous path?
LL.M. Thesis
in partial fulfilment of the LL.M. program
International and European Law: International Trade and Investment Law
By
Claudia Mihalcea claudiamihalcea7@gmail.com
12603058
under the supervision of
Dr. Vid Prislan
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Abstract
This thesis explores the application of the corporate veil piercing doctrine in international investment arbitration, with a focus on the manner in which this judicial mechanism has been deployed in claims involving complex corporate structures. An overview of the current jurisprudence, particularly under ICSID, reveals certain inconsistencies in addressing the issue of corporate nationality, with tribunals generally relying on one of the two competing tests: the formal nationality approach; or the effective nationality approach.
As arbitral tribunals are often reluctant to pierce the veil of investors, the aim of this thesis is to analyze in the first part the circumstances in which they were ready to apply this doctrine, as opposed to the circumstances in which they refused to do so, as well as to assess the argumentative techniques used therein.
The second part of the thesis examines the impact of the overly formalistic approach embraced by arbitrators and evaluates possible options to redress the pitfalls of this approach which appears to be prevalent in case-law.
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Table of Contents
i Abstract ...2
ii Table of Contents ...3
iii List of abbreviations ...5
Introduction ...6
Part I. A Case-Law Analysis of the Issue of Piercing the Corporate Veil ...9
1. Tribunals in Favor of Piercing the Veil ...9
1.1 Locally Incorporated Entities ...9
1.1.1 Control Under the Second Clause of Article 25(2)(b) ICSID ... 10
1.1.2 Piercing the Veil to Establish Foreign Control ... 12
1.1.3 Piercing Beyond the First Layer of Ownership ... 14
1.2 Preliminary Remarks ... 19
2. Tribunals Refusing to Pierce the Veil ... 19
2.1. Nationals of the Home State as the ‘Real’ Controllers or ‘Round-Tripping’ ... 19
2.2. Third country nationals as the ‘real’ investors ... 23
2.3. Preliminary Remarks ... 25
3. Interim Conclusion on the Current State of Jurisprudence ... 26
Part II. Challenges of the Formalistic Approach and Possible Trajectories ... 28
1. Challenges of the Formalistic Approach ... 28
1.1 Double Standard for Piercing the Veil? ... 28
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1.3 Dealing with round-tripping ... 31
2. Possible Trajectories ... 32
2.1. Effectiveness of the ‘denial of benefits’ clause ... 32
2.2. Incentives for a multilateral approach ... 35
3. Interim conclusion ... 37
Conclusions ... 38
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List of abbreviations
BITs CETA ECT EU FDI ICSID ICDS IIAs NAFTA UAE UNCITRAL UNCTAD US VCLTBilateral Investment Treaties
Comprehensive and Economic Trade Agreement Energy Charter Treaty
European Union
Foreign Direct Investment
International Centre for Settlement of Investment Disputes Investor-State Dispute Settlement
International Investment Agreements North American Free Trade Agreement United Arab Emirates
United Nations Commission on International Trade Law United Nations Conference on Trade and Development United States of America
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Introduction
Multi-jurisdictional spanning legal fiction enables a corporate entity to be envisaged as a juridical person with an autonomous existence, resulting from its own legal status, distinct from that of its shareholders.1 As nearly all domestic legislations recognize that incorporation gives effective legal personality to corporate bodies, the concept of the separateness of a legal entity from its members is described as ‘veil of incorporation’.2 However, there are certain limitations to this fundamental principle of corporate law that have ultimately generated an exception with a strong reputation: the doctrine of piercing the corporate veil, with its legal roots in the common law system,3 but having its more profound, cultural roots probably reaching the myth of the veiled goddess Isis.4 In corporate law, piercing the veil is generally recognized as a tool for restraining the opportunism of shareholders to misuse the corporate form and thus, to hold them liable for abusing the legal personality of the company.5 Therefore, the doctrine is linked to other general principles of law, such as justice, fairness or good sense.6 The practice of lifting the veil has been a contentious issue in every jurisdiction and still remains one of the most controversial subjects in corporate law.7
Equally, the challenges imposed by the concept of ‘veil-piercing’ have made their way in international investment arbitration, where one of the pillars of arbitral jurisdiction is the concept of ‘investor’ and where personal jurisdiction (ratione personae) is acquired based on the nationality of the investor.8 The criteria offered by International Investment Agreements
1 David Kershaw, Company Law in Context (2nd edn, OUP 2012) 45.
2 ibid, 47; Ann Ridley, Key Facts Company Law (4th edn, Routledge 2011) 20.
3 Endalew Lijalem Enyew, ‘The doctrine of piercing the corporate veil: Its legal and judicial recognition in Ethiopia’ (2012) 6(1) Mizan Law Review 77-114, 85.
4 See Pierre Hadot, The Veil of Isis: An Essay on the History of the Idea of Nature (Michael Chase tr, Harvard University Press 2006), who explores the allegorical figure of the veiled goddess Isis, the Egyptian divinity famously personified by the statue of a feminine figure covered by a mantle, symbolizing a mysterious and transcendental world concealing its secrets. Hence, the lifting of the veil has always been reserved to the initiated few, representing an act of courage and epistemic advancement, as well as an act of desacralization.
5 Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (2nd edn, OUP 2009) 139-140.
6 Ben Pettet, Company Law (2nd edn, Longman Law Series 2005) 25-26.
7 Jose Maria Lezcano, Piercing the Corporate Veil in Latin American Jurisprudence: A comparison with the Anglo-American method (Routledge 2014) 103. See also D. Gordon Smith and Cynthia A. Williams, Business Organizations: Cases, Problems, and Case Studies (4th edn, Wolters Kluwer International 2019) 218.
8 Yves Derains and Josefa Sicard-Mirabal, Introduction to Investor-State Arbitration (Wolters Kluwer International 2018) 19.
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(‘IIAs’) to define corporate nationality are as follows: place of incorporation, the main seat of business (siège social), control, or a combination of these factors.9 Among these criteria, the place of incorporation is the predominant theory of nationality and the least difficult to apply.10
In today’s context, international investment activities are very dynamic. A company incorporated in one jurisdiction, may have the siège social in another jurisdiction, and at the same time be controlled by other entities, that are in turn owned or controlled by natural or legal persons of different nationalities.11 The intricacies arising from claims involving a corporate structuring have been at the heart of many legal issues in arbitral proceedings.12 Foreign investment projects commonly involve ‘multiple cross-border interdependencies and overlaps’.13 It follows that corporate nationality is a highly convoluted subject in investment arbitration.14 Against this background, the doctrine of piercing the corporate veil plays a key role in assessing the corporate nationality of investors in arbitral proceedings.
The aim of this thesis is to explore the application of this doctrine in the realm of international investment arbitration. A brief glimpse of the current jurisprudence reveals a certain resistance to apply this mechanism. Instead, a formalistic attitude towards corporate nationality is frequently preferred in investor-State dispute settlement (‘ISDS’). Naturally, the actors immediately affected by this approach are the respondent States facing arbitral proceedings. Nevertheless, this thesis strives to highlight whether there are other practical implications of this approach. Consequently, the main research question around which this thesis is structures is the following:
‘Have investment tribunals chosen a clear path for applying the doctrine of piercing the corporate veil, and has this path created far-reaching consequences?’
9 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 47-49. 10 Michael Waibel and others (eds), The Backlash Against Investment Arbitration: Perceptions and Reality (Kluwer Law International 2010) 6-7.
11 Waibel [2010] 43.
12 Apart from the issue of personal jurisdiction, this thesis will not address other jurisdictional challenges in relation to claims involving a corporate structuring, such as time-sensitive restructurings. The latter is at the core issue of jurisdiction ratione temporis. See eg Jorun Baumgartner, ‘The Significance of the Notion of Dispute and Its Foreseeability in an Investment Claim Involving a Corporate Restructuring’ (2017) 18(2) The Journal of World Investment & Trade 201–231.
13 Waibel [2010] 43.
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To answer this question, Part I of this thesis proceeds with an in-depth analysis on the circumstances in which the arbitral tribunals were ready to pierce the veil in order to determine whether the requisite nationality of corporate investors is satisfied under the applicable treaty, and the circumstances in which they refused to do so. The analysis focuses on the argumentative techniques used therein and differentiates between important factual circumstances. Part II examines the challenges imposed by these cases and evaluates possible options to redress the pitfalls of what appears to be prevalent approach in case-law.
This thesis supports the view that the current approach employed in investment arbitration confirms the necessity for a new modus operandi, particularly in the present context of the ongoing debate on the ISDS reform.
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Part I
A Case-Law Analysis of the Issue of Piercing the Corporate Veil
Piercing the veil or the alter ego doctrine has been the core issue in many arbitral proceedings, where the concept of ‘veil-piercing’ is akin to that under domestic law, that is disregarding the separate personality of a legal entity to reach behind its corporate form.15 Yet, they differ substantially in emphasis. In investment arbitration, the respondent State will most likely invoke the doctrine as part of its objection to the jurisdiction ratione personae, the purpose being to deny treaty protection for the investor. However, international investment law does not offer any specific criteria in order to determine when, where, or how to pierce the corporate veil.16 Thus, the primary source of research on this topic remains the arbitral practice, particularly under the ICSID Convention.
This part of the thesis examines in turn cases where arbitral tribunals decided to pierce the veil, and ultimately declined personal jurisdiction over the claim, and cases where tribunals upheld jurisdiction over the claim and refused to lift the veil. The main variable used to distinguish between important factual circumstances of these cases is the claiming entity (depending on its place of incorporation or the nationality of its effective controller).
1. Tribunals in Favor of Piercing the Veil
1.1 Locally Incorporated Entities
The instances where arbitral tribunals pierced the veil of investors to determine whether they had personal jurisdiction to settle the dispute are quite limited to cases where the claiming entity was a locally incorporated company, falling under the jurisdictional requirements set forth in the second clause of Article 25(2)(b) of the ICSID Convention discussed below.
15 Juan Marcos Otazu, ‘The Law Applicable to Veil Piercing in International Arbitration’ (2018) 5(2) McGill Journal of Dispute Resolution 30-59, 37.
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1.1.1 Control Under the Second Clause of Article 25(2)(b) ICSID
ICSID tribunals are competent to decide legal disputes between a Contracting State and a national of another Contracting State.17 Although domestic companies would not generally qualify as foreign investors, the second clause of Article 25(2)(b) of the ICSID Convention provides that ‘national of another Contracting State’ means:
‘any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention’.
Considering that States frequently require for investments to be made through a domestic vehicle, this exception is valuable, for it extends the jurisdiction of ICSID tribunals to locally incorporated investors under foreign control.18
The Convention does not stipulate what is the meaning of ‘investor’ or ‘control’. The leading author of the ICSID Convention, Aaron Broches, explained that the drafters purposely omitted to define the notions of ‘nationality’ and ‘investment’ in the Convention, so that the autonomy to determine who qualifies as an investor and what shall be deemed an investment is left in the hands of the ICSID Member States.19 However, disputing parties attach different weight to the phrase ‘because of foreign control’, which ultimately leaves the question in the hands of the tribunal to decide.20
Article 25 is commonly referred to as the ‘outer limit’ of the Convention,21 although this term was not interpreted in a consistent manner by tribunals. The diverging views on the significance of ‘foreign control’ have resulted in two competing tests: effective control, and
17 Article 25(1) ICSID Convention reads: ‘The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State […] and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre’.
18 Dolzer and Schreuer [2012] 50.
19 Yulia Andreeva, ‘Is there a limit to the outer limits of ICSID jurisdiction?’ (Kluwer Arbitration Blog, 5 August 2009) <http://arbitrationblog.kluwerarbitration.com/2009/08/05/is-there-a-limit-to-the-outer-limits-of-icsid-jurisdiction/?doing_wp_cron=1596251949.8513729572296142578125> accessed 22 July 2020.
20 Christoph Schreuer, The ICSID Convention: A Commentary (CUP 2001) 361. 21 ibid, 234.
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legal control. Tribunals ‘unmasking the corporate structure’ have followed the effective or de facto control-test to reach or the ultimate controller of the company.22
Conversely, the tribunal in Autopista v Venezuela23 rejected Venezuela’s argument that foreign control means ‘effective control’ under the second clause of the ICSID Convention, and instead observed that the parties had the liberty to define the ‘control’ as they wish, as long as the definition is ‘reasonable’ and ‘the purposes of the ICSID Convention have not been abused’.24 Similarly, in a more recent case, the Caratube v Kazakhstan25 tribunal held that the second limb of Article 25(2)(b)‘does not expressly require actual, effective control, rather than legal control’.26
At any rate, the ICSID Convention is an international treaty subject to the general rules of interpretation under Article 31 of the Vienna Convention on the Law of Treaties,27 which is usually considered by arbitrators the starting point of the analysis of the case.28 An interpretation according to the ordinary meaning of the text is not conclusive for establishing the nature of ‘control’ in Article 25(2)(b). Nevertheless, Schreuer notes that the phrase ‘because of foreign control’ suggests a causal nexus between the ‘foreign control’ and the parties’ agreement to treat a domestic entity as a foreign investor.29
Furthermore, an interpretation of the provision in light of the object and purpose of the ICSID Convention, also known as the teleological method, would consider the aim of the Convention to settle ‘international controversies’.30 As such, investors falling outside the scope
22 Jorun Baumgartner, Treaty Shopping in International Investment Law (OUP 2016), para 8.2.3.3.
23 Autopista Concesionada de Venezuela, C.A. v Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction (27 September 2001), para 1 (‘Autopista v Venezuela’).
24 ibid, para 116.
25 Caratube International Oil Company LLP and Devincci Salah Hourani v Republic of Kazakhstan, ICSID Case No. ARB/13/13, Award (27 September 2017) (‘Caratube v Kazakhstan’).
26 ibid, para 615.
27 Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980) 8 ILM 679 (‘VCLT’).
28 See eg Siemens A.G. v The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (3 August 2004), para 80.
29 Schreuer [2001] 312.
30 Serena Forlati and Alessandra Annoni, The Changing Role of Nationality in International Law (Routledge 2013) 158 (emphasis added).
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of this article should not receive protection under the ICSID forum, no matter how broadly defined are the terms of the Bilateral Investment Treaties (‘BITs’).31
The cases examined below will review how arbitrators are addressing the thorny issue of piercing the corporate veil under the second clause of Article 25(2)(b).
1.1.2 Piercing the Veil to Establish Foreign Control
Dating from 1994, the earliest ICSID case to dismiss a claim for lack of jurisdiction ratione personae is Vacuum Salt v Ghana,32 where the foreign control test under Article 25(2)(b) of the ICSID Convention was scrutinized for the first time by an arbitral tribunal. Unlike some of the cases discussed further on, the claim, based on a lease agreement, did not entail a complicated corporate structure, though it remains referential for later cases adopting a similar flexible ‘foreign control test’ in relation to the percentage of share ownership.33
In this case, a Greek national held 20 per cent of shares in Vacuum Salt, a company organized under the laws of Ghana, with the remaining shares owned by Ghanaian state banks and private nationals.34 The claimant premised its personal jurisdiction on the parties alleged agreement to treat the locally incorporated Vacuum Salt as a foreign investor because it was controlled by the Greek national, while the Respondent argued that such requirement was not satisfied under Article 25(2)(b) of the ICSID Convention.35 In the tribunal’s view, the personal jurisdiction issue entailed a two-fold analysis: first, whether there was indeed an agreement between the parties to treat Vacuum Salt as a foreign national; and second, whether ‘such agreement was ‘because of foreign control’ within the meaning of the second clause of Article 25(2)(b)’.36 With regard to the latter, the tribunal held that it had to assess whether the ‘foreign control’ requirement ‘existed as a matter of fact on the date of consent’, stating that it ‘necessarily sets an objective Convention limit beyond which ICSID jurisdiction cannot exist
31 Julien Fouret and others (eds), The ICSID Convention, Regulations and Rules: A Practical Commentary (Edward Elgar Publishing 2019) 184.
32 Vacuum Salt Products Ltd. v Republic of Ghana, ICSID Case No. ARB/92/1, Award (16 February 1994) (‘Vacuum Salt v Ghana’).
33 See eg United Utilities Tallinn v Estonia, ICSID Case No. ARB/14/24, Award (21 June 2019), para 366 (‘UUT v Estonia’).
34 Vacuum Salt v Ghana [1994] para 41. 35 ibid, paras 2, 13.
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and parties therefore lack power to invoke same no matter how devoutly they may have desired to do so’.37
Before referring to the specific circumstances of the case, the tribunal also gave due consideration to the object and purpose of the ICSID Convention, which is primarily to stimulate a ‘larger flow of private international investment’ and to offer a mechanism for ‘settlement of disputes between States and foreign investors’.38
As to the foreign shareholding in Vacuum Salt, the tribunal noted that while no precise level of ownership is required under the second clause of Article 25(2)(b) of the ICSID Convention, it admitted that the smaller the percentage, the higher the demand for other factors to be considered in order to establish the foreign control of the company, such as management control or voting rights.39 As such, the arbitrators concluded that the Greek national was not ‘materially influential in a truly managerial’ manner, hence accepting jurisdiction over the domestic entity would have enabled the parties to use the ICSID Convention ‘for purposes for which it was clearly not intended’.40
Vacuum Salt v Ghana remains a prominent case of an ICSID tribunal declining jurisdiction over a locally incorporated claimant for lack of evidence proving an actual foreign control of the locally incorporated company.41 In reaching this decision, the tribunal reasoned that the second clause of Article 25(2)(b) of the ICSID Convention established not only a subjective test, but also an objective one, stressing that ‘the words "because of foreign control" have to be given some meaning and effect’.42 Scholarly commentaries supporting this reasoning agree that the ordinary meaning of Article 25(2)(b) definitely sets out two separate requirements that have to be complied with in order to qualify a domestic entity as a ‘national of another State’ because of its foreign control.43
37 ibid, paras 35, 36.
38 ibid, para 39 (emphasis added). 39 ibid, paras 43, 44.
40 ibid, paras 53, 54.
41 Damien Charlotin, ‘Looking Back: in Vacuum Salt Products Limited v. Ghana, Tribunal Sees No Evidence of Foreign Control and Declines Jurisdiction Over Ghanaian Claimant’, IAReporter (13 November 2019) <https://www.iareporter.com/articles/looking-back-in-vacuum-salt-products-limited-v-ghana-tribunal-sees-no-evidence-of-foreign-control-and-declines-jurisdiction-over-ghanaian-claimant/> accessed 25 June 2020. 42 Vacuum Salt v Ghana [1994] para 38.
43 Giuliana Ziccardi Capaldo, The Global Community Yearbook of International Law and Jurisprudence 2015 (OUP 2016) 845-846.
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1.1.3 Piercing Beyond the First Layer of Ownership
TSA Spectrum v Argentina44 is another ICSID where the application of the two-prong test under the second clause of Article 25(2)(b), and following the approach in Vacuum Salt v Ghana in attaching considerable weight on the objective limitations prescribed by the ICSID Convention, resulted in the majority of the tribunal denying jurisdiction over claims brought by a domestic entity. Here, the claim was brought under the Netherlands-Argentina BIT by the locally incorporated claimant, TSA, a wholly owned subsidiary of TSI, a company registered in the Netherlands.45 On the facts of the case, it was clear that the company was at all times controlled by Mr. Jorge Justo Neuss, an Argentinian national, initially holding a 51 percentage of the shares in TSI, percentage which had subsequently increased.46
In the Netherlands-Argentina BIT, the term ‘investor’ encompassed any ‘legal persons, wherever located, controlled, directly or indirectly, by nationals of that Contracting Party’.47 Moreover, a protocol to the BIT, referring to this particular definition of ‘investor’, provided that certain facts ‘shall be accepted as evidence of the control’, such as being an affiliate of a legal person of the other contracting state, and holding more than 49 per cent of the share capital or a majority of corporate votes. The BIT contained another provision that was highly relevant to the case:
‘[A] legal person which is incorporated or constituted under the law in force in the territory of one Contracting Party and which, before a dispute arises, is controlled by nationals of the other Contracting Party shall, in accordance with article 25(2)(b) of the Convention be treated for the purposes of the Convention as a national of the other Contracting Party’.48 The Claimant relied on all these articles to argue that TSA was under the foreign control of the Dutch company, TSI, in accordance with the ‘control’ stipulations from the Protocol to the BIT, and there was no other requirement under the applicable treaty to determine the nationality of the ‘ultimate controller’.49 On the other hand, the respondent State asked the
44 TSA Spectrum de Argentina S.A. v Argentine Republic, ICSID Case No. ARB/05/5, Award (19 December 2008) (‘TSA Spectrum v Argentina’).
45 TSA Spectrum v Argentina [2008] paras 1, 21. 46 ibid, para 159.
47 ibid, para 21. 48 ibid.
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tribunal to pierce the corporate veil of the Dutch company because it was just a ‘mere vehicle’ without any actual control over the Argentinian TSA. One of the key issues in this case was centered on the conflict between the primacy of the place of incorporation and the effective control approach, as not only the disputing parties, but also the arbitrators differed as to how to interpret the ‘foreign control’ requirement set forth in the ICSID Convention, and ultimately split on this issue.50
On the objection to the personal jurisdiction of TSA, the majority of the tribunal opined that it should first analyze the limitations imposed by the second clause of Article 25(2)(b) of the ICSID Convention, as well as their nature, given that the jurisdictional requirements of the ICSID Convention ‘cannot be extended or derogated from even by agreement of the Parties’.51 Along the lines of the Vacuum Salt v Ghana case, two of the three arbitrators laid particular emphasis on the object and purpose of the ICSID Convention, holding that the ratio legis of the second clause in Article 25(2)(b) is specifically given by the phrase ‘because of foreign control’, which sets an objective limit ‘beyond which ICSID jurisdiction cannot exist’.52 In the tribunal’s view, a ‘strict literal interpretation’ of Article 25(2)(b) would support the formal nationality approach, but it would also contradict ‘common sense (…) when the formal nationality covers a corporate entity controlled directly or indirectly by persons of the same nationality as the host State’.53 Furthermore, the majority of the tribunal found textual support for the lifting of the veil in the second clause of Article 25(2)(b) of the ICSID Convention and considered that piercing the corporate veil was essential to determine ‘whether or not the domestic company was objectively under foreign control’.54
Notwithstanding the fact that the locally incorporated claimant would have met the necessary requirements to qualify as an ‘investor’ under the applicable provisions of the BIT, the majority ultimately held that:
‘[W]hatever interpretation is given to the BIT (…) including the Protocol (…) TSA cannot be treated, for the purposes of Article 25(2)(b) of the ICSID Convention, as a national of
50 Luke Eric Peterson, ‘Divided ICSID Tribunal Rules That Corporate Veil Must Be Pierced So as to Determine If a Foreigner Is in Control’, IAReporter (13 January 2009) <https://www.iareporter.com/articles/divided-icsid-tribunal-rules-that-corporate-veil-must-be-pierced-so-as-to-determine-if-a-foreigner-is-in-control/> accessed 20 July 2020.
51 TSA Spectrum v Argentina [2008] paras 133, 134. 52 ibid, para 139.
53 ibid, para 145. 54 ibid, para 160.
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the Netherlands because of absence of “foreign control” (…) Tribunal therefore lacks jurisdiction to examine TSA’s claims’.55
On the question of how many layers of the ownership should be pierced in order to establish foreign control of the claimant, the members of the tribunal had strongly departed. While the majority of the arbitrators agreed that in an effort to objectively identify the foreign control ‘up to its real source’, lifting beyond the second layer of corporate ownership is justifiable,56 the claimant’s nominee to the tribunal, Mr. Aldonas, had firmly disagreed with such justification in his dissenting opinion.57 In his view, the ICSID Convention did not offer any support to investigate beyond the second layer of ownership, namely beyond the surface of the Dutch ownership over the domestic TSA, whereas the ordinary meaning of Article 25(2)(b) clearly suggested a direct link between the foreign control and the terms agreed upon by the parties in the BIT.58 In addition, Mr. Aldonas drew attention to the generous language of the BIT and considered the tribunal’s finding to simply overlook the plain meaning of both the second clause of Article 25(2)(b) of the ICSID Convention and the BIT, when the arbitrators should ‘vindicate, rather than ignore, the agreements reached by two states’.59
On the other hand, Prof. Abi-Saab disapproved of the interpretation taken by Mr. Aldonas and strengthened the conclusion reached by the majority in a concurring opinion.60 In short, the arbitrator dwelled on the following points: first, the objective outer limits of the ICSID’s jurisdiction cannot be waived by the parties’ agreement; second, the language in the protocol to the BIT did not exclude other forms of evidence that would establish ‘control’ of the investment; and third, it was necessary to acknowledge the object and purpose of the ICSID Convention ‘as a whole’, which is not to settle disputes between a State and its own nationals.61 As such, the tribunal should not be barred from lifting the second layer of ownership where probative evidence resulting from piercing the corporate veil contradicts other indicators of what constitutes control provided for in a protocol to the BIT or in the BIT itself.62
55 ibid, para 162. 56 Ibid, para 147.
57 TSA Spectrum v Argentina [2008] Dissenting Opinion of Arbitrator Grant D. Aldonas. 58 ibid, paras 4, 10.
59 ibid, para 15; Peterson [2009].
60 TSA Spectrum v Argentina [2008] Concurring Opinion of Arbitrator Georges Abi-Saab. 61 ibid, paras 11, 15, 18.
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Similar to the case discussed above, the ICSID tribunal in National Gas v Egypt63 had also applied the two-fold approach to assess the existence of foreign control, and as a result, declined its jurisdiction over the claims brought under the UAE-Egypt BIT. National Gas, a locally incorporated entity, had 90 per cent of its shares owned by a company incorporated in the UAE, which was in turn wholly owned by another company also incorporated in the UAE, which was in the end wholly owned by Mr. Ginena, a dual Egyptian-Canadian national.64 On the subject of dual nationals, the arbitral panel endorsed the reasoning in Burimi v Albania, where the tribunal, facing the same issue of domestic entities ultimately controlled by dual nationals of the host State, condoned that Article 25(2)(a) of the ICSID Convention expressly excludes them from establishing jurisdiction if one of their nationality is that of the host state.65
Once again, the underlying point of contention between the disputing parties related to the interpretation of the words ‘because of foreign control, the parties have agreed …’ in Article 25(2)(b). The panel proceeded with the double examination of both the ‘subjective’ and ‘objective’ test already confirmed by previous tribunals.66 The arbitrators deemed that the subjective test arising from the words ‘parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention’ was met by the claimant,67 as the relevant BIT provision stipulated that:
‘[I]n case of the existence of a juridical person that has been registered or established in (…) a Contracting State (…) and an investor from the other Contracting State owns the majority of the shares of that juridical person before the dispute arises, then such a juridical person shall, for the purposes of the Convention, be treated as an investor of the other Contracting State, in accordance with Article 25(2)(B) of the Convention’.68
However, the tribunal noted that the objective test prescribed by the second clause of Article 25(2)(b) was not fulfilled, as the claimant was ultimately under Egyptian control, and not under foreign control.69 The arbitrators scrutinized the entire share of ownership and found
63 National Gas S.A.E. v Arab Republic of Egypt, ICSID Case No. ARB/11/7, Award (3 April 2014) (‘National Gas v Egypt’).
64 ibid, para 7.
65 See eg Burimi SRL and Eagle Games SHA v Republic of Albania, ICSID Case No. ARB/11/18, Award (29 May 2013), paras 118-120 (‘Burimi v Albania’).
66 National Gas v Egypt [2014] paras 124, 131. See also Autopista v Venezuela [2001] para 104. 67 ibid, para 132.
68 ibid, para 67. 69 ibid, para 137.
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factual evidence showing that the two UAE companies interposed between the claimant (National Gas) and Mr. Ginena, the dual Egyptian-Canadian national, were shell companies that simply had an existence ‘in juridical theory, but not in practice’.70 What seemed to be the decisive factor in reaching the final conclusion to decline jurisdiction over the claim was the difference between control exercised by a national of the host state, as opposed to control exercised by a national of another contracting state, a distinction which the tribunal considered to be highly relevant for the case at hand.71 On that account, whilst the latter situation would not be incompatible with the text of the ICSID Convention or any principle of international law, with respect to the former one, the tribunal held that:
‘[i]t would permit the use of the ICSID Convention for a purpose for which it was clearly not intended and it would breach its outer limits. As already noted above, Article 25(2)(b) operates only as a qualified exception to the general limitation to ICSID jurisdiction in Article 25: a sardine cannot swallow a whale’.72
On a different note, it is worth mentioning that the tribunal suggested in the award that Mr. Ginena, who was not a party in the present case, could still bring a claim in his own name against Egypt under the Egypt–Canada BIT.73 Although the dual Egyptian-Canadian nationality would preclude him from advancing such a claim in front of the ICSID forum, a commentary on this case points out that an alternative venue was in fact available under the Canada’s investment treaty with Egypt, which offers investors the possibility to submit a dispute to arbitration under the UNCITRAL Arbitration Rules.74 This just goes to show that investors generally benefit from multiple options offered under the ISDS mechanisms to the detriment of states, which remain eligible to be sued several times for the same measure that allegedly constitutes a breach of their treaty obligations.
70 ibid, para 144. 71 ibid, para 136. 72 ibid.
73 ibid, para 156.
74 Luke Eric Peterson, ‘As Tribunal Declines Jurisdiction Due to Lack of Foreign Control of ICSID Claimant, Dispute Over Underlying Cairo Arbitral Award Is Not Over’, IAReporter (9 April 2014)
<https://www.iareporter.com/articles/as-tribunal-declines-jurisdiction-due-to-lack-of-foreign-control-of-icsid-claimant-dispute-over-underlying-cairo-arbitral-award-is-not-over/> accessed 1 July 2020> accessed 20 July 2020.
19 1.2 Preliminary Remarks
When addressing the personal jurisdiction of locally incorporated companies, arbitrators find textual basis in the second clause of Article 25(2)(b) of the ICSID Convention to pierce the veil and identify the ultimate controller of the domestic entity. Moreover, in all cases examined above, the arbitrators stressed the significance of the main object and purpose of the Convention, which is to encourage international investments.
In this regard, ownership of shares in a company did not suffice to establish foreign control. Both TSA Spectrum v Argentina and National Gas v Egypt is leading cases of ICSID tribunal which instead of lifting only the first layer of the ownership chain, went on to scrutinize the whole string of investments to determine who controls the locally incorporated entity ‘in commercial reality’.75 In the end, these legal reasoning in these awards was based on multiple instruments, general policy considerations, such as ‘common sense’.76
It seems that the Vacuum Salt v Ghana case advanced a foreign control assessment that stood the test of time and has also met the approval by legal scholars.77
2. Tribunals Refusing to Pierce the Veil
Outside the ambit of the second limb of Article 25(2)(b) of the ICSID Convention, arbitrators have been rather antagonistic to the idea of piercing the corporate veil of the claimant, and rather endorsed the formalistic approach to establish corporate nationality. This section distinguishes between cases where the ‘real’ control of the claimants was exercised by nationals of the host State, and those where such control was exercised by a national of a State non-party to the investment treaty.
2.1. Nationals of the Home State as the ‘Real’ Controllers or ‘Round-Tripping’
75 ibid.
76 Baumgartner [2016] 4.3.4.2.2
77 Emmanuel Gaillard, ‘Chronique des sentences arbitrales’ (1995) Journal du droit international 181; VV Veeder and Andrew Legg, The Meaning of “Foreign Control” under Article 25(2)(B) of the ICSID Convention (Meg Kinnear and others (eds), Building International Investment Law: The First 50 Years of ICSID (Kluwer Law International 2015) 202.
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The practice of ‘round-tripping’ enables investors to bring an international investment claim against their own State of nationality, typically by inserting a foreign element into the local investment, such as transferring funds to another State that has already concluded an investment treaty with their State of nationality, and then redirecting the capital back into the home State.78 Simply stated, some investors resort to this technique to secure their investments from possible interference by their home State.79
Tokios Tokelés v Ukraine80 is considered the prime example of round-tripping.81 The claimant, an entity established under the laws of Lithuania, had 99 per cent of its outstanding shares owned by Ukrainian nationals, who also exercised effective management over the company.82 The case was so controversial that it prompted the President of the Tribunal to resign from the panel as a result of the other arbitrators’ decision to grant the claimant access to ICSID.83 The majority relied on the broad wording of the Article 1(2)(b) of the Ukraine-Lithuania BIT, which defined ‘investor’ as ‘any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations’.84 Although on the facts of the case, the claimant was without any doubt owned and controlled by nationals of the host State, the arbitrators refused to pierce the veil in the absence of any evidence suggesting that the claimant misused its legal status in a fraudulent or abusive manner.85 Instead, the majority found support in the language of the BIT and opined that the parties had the liberty to draft the provisions of the BIT, but did not choose to include for instance, a ‘denial of benefits’ clause.86
The respondent asserted that accepting jurisdiction in this case would be inconsistent with the object and purpose of both the ICSID Convention and the Ukraine-Lithuania BIT to provide a forum for settlement of disputes that are international in their nature.87 In response to this argument, the tribunal took the view that while the ‘control-test’ finds support in the second
78 Chin Leng Lim and others, International Investment Law and Arbitration: Commentary, Awards and other Materials (CUP 2018) 236-237.
79 M. Sornarajah, The International Law on Foreign Investment (3rd edn, CUP 2010) 328.
80 Tokios Tokelés v Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction (29 April 2004) (‘Tokios Tokelés v Ukraine’).
81 Sornarajah [2010] 328.
82 Tokios Tokelés v Ukraine [2004] para 1.
83 Yaraslau Kryvoi, ‘Piercing the Corporate Veil in International Arbitration’ (2011) Global Business Law Review 169-186, 180.
84 Tokios Tokelés v Ukraine [2004] para 28. 85 ibid, para 55.
86 Ibid, para 38. 87 ibid, para 23.
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clause of Article 25(2)(b), addressing the issue of claimants as domestic entities under foreign control, applying the this test to define nationality in circumstances which fall under the first clause of the provision would be inconsistent with the object and purpose of the ICSID Convention, because it would ‘restrict the jurisdiction of the Centre’.88
Some scholars share this view, that the method of interpretation based on the object and purpose is inferior to the one based on the ordinary meaning of the text, and that a BIT should in any way be interpreted in accordance with its own object and purpose, and not in light of the object and purpose of the ICSID Convention.89
Much ink has been spilt on this case, as other subsequent decisions followed a similar pattern in favor of formal nationality.
For example, in Rompetrol Group v Romania,90 a case featuring a convoluted background of corporate restructuring, the tribunal decided that it had jurisdiction over the claim brought under the Netherlands-Romania BIT. When the proceedings commenced, the claimant (‘Rompetrol Group’), a Netherlands-incorporated company, was wholly owned by a Swiss company, that had 80 per cent of the shares owned by a Romanian citizen, and the remaining 20 per cent owned by an US citizen.91 The respondent State objected to the jurisdiction ratione personae of the tribunal, on the grounds that the claimant was not a foreign investor, but merely a shell company controlled by a Romanian national.92 In opposition, the claimant argued that it complied with the jurisdictional requirements under the applicable BIT, which included in the definition of the term ‘investor’ any ‘legal persons constituted under the law of the Contracting Party’.93 In a similar fashion to the tribunal in Tokios Tokelés v Ukraine, the claimant insisted that Romania could have integrated a higher threshold in the text of the treaty, such as ‘substantial activity’ in the host State, but failed to do so.94
The arbitrators embraced this view and did not assess whether a Romanian national had indeed control over the claimant. Instead, they relied on terms of the BIT, broadly drafted by the contracting States, whereas the parties to an investment treaty have ‘wide latitude to agree
88 ibid, paras 45-46.
89 Baumgartner [2016] para 4.3.1.3.
90 The Rompetrol Group N.V. v Romania, ICSID Case No. ARB/06/3, Decision on Jurisdiction and Admissibility (18 April 2008) (‘Rompetrol Group v Romania’).
91 ibid, paras 43, 44. 92 ibid, paras 50, 51. 93 ibid, para 61. 94 ibid, para 62.
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on the criteria by which nationality would be determined’.95 In addition, the tribunal stated that there was no general rule in international law to apply the ‘real and effective nationality’ approach in determining the status of a corporation.96
A key aspect of this reasoning is the tribunal’s view on the relevancy of the object and purpose of the ICSID Convention. Given the fact that investment treaties commonly have dispute settlement clauses that encompass other venues for arbitration besides the ICSID forum, the tribunal reckoned that the ICSID Convention cannot override the interpretation of the BIT, because having the same definition from a BIT interpreted in a certain manner within the framework of an ICSID arbitration, but implying a different meaning in another dispute venue ‘would be impossible to conceive’.97
The arbitrators further displayed clear disapproval of the idea that economic reality should overcome formal nationality, reasoning that it would equate to a denial of the agreement reached within the BIT and a disregard of the basic rules of interpretation in Article 31 of the VCLT.98 In spite of the factual evidence that Romanian nationals controlled the Rompetrol Group, the tribunal refused to pierce the veil.
Another illustration of this approach is H&H Enterprises v Egypt,99 where the ICSID tribunal gave primacy to the place of incorporation as a criterion to determine corporate nationality. The claimant, incorporated in California, filed the ICSID proceedings under the US-Egypt BIT. While the respondent rightly argued that Mr. Alashmawy, a dual US-Egypt national, exercised effective control over the claimant and asked the tribunal to pierce the veil, the claimant asserted that such endeavor ‘would be unprecedented’ under the first clause of Article 25(2)(b) of the ICSID Convention.100 In the end, the tribunal sided with the latter and held that as long as the respondent did not provide any evidence or legal grounds to justify the application of the effective control test, the requirements under both Article 25(2)(b) of the ICSID and the BIT were satisfied.101
95 ibid, para 80. 96 ibid, para 88. 97 ibid, para 107. 98 ibid, para 85.
99 H&H Enterprises Investments, Inc. v Arab Republic of Egypt, ICSID Case No. ARB 09/15, Decision on Respondent’s Objections to Jurisdiction (5 June 2012) (‘H&H Enterprise v Egypt’).
100 ibid, paras 61, 65. 101 ibid, para 68.
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The path followed by these decisions has received criticism for ignoring the object and purpose of the ICSID Convention (which was prominently referred to in the cases discussed in the previous section), and has been perceived as reflecting ‘symptoms of an over-formalistic interpretation of international law’.102
2.2. Third country nationals as the ‘real’ investors
The likelihood of arbitrators piercing the corporate veil decreases even more when it comes to cases where the Claimant has the requisite nationality according to the incorporation theory, but the effective control is exercised by a national of a third country, who would not have otherwise a standing in the proceedings initiated under the convenient BIT. A World Investment Report shows that, according to UNCTAD statistics, roughly one-third of claims ISDS are filed by companies that are ‘ultimately owned by a parent in a third country not party to the treaty on which the claim was based’.103
For instance, the ICSID tribunal refused to lift the veil in ADC v Hungary.104 In this case, the two Cyprus-incorporated claimants were ultimately owned and controlled by Canadian nationals.105 The claim was brought under the Hungary-Cyprus BIT, which defined the term ‘investor’ as ‘legal person constituted or incorporated in compliance with the law [of Cyprus]’.106 The respondent argued that the claimants were shell companies and neither of them qualified as ‘national of another Contracting State’ under Article 25(1) of the ICSID Convention, invoking multiple grounds in support of this objection, including the principle of piercing the veil (though as an alternative to the arguments).107
The tribunal dismissed the jurisdictional objection and held that piercing the corporate veil ‘only applies to situations where the real beneficiary of the business misused corporate formalities in order to disguise its true identity and therefore to avoid liability’, and the doctrine
102 Crina Baltag (ed), ICSID Convention after 50 Years: Unsettled Issues: Unsettled Issues (Kluwer Law International 2017) 69.
103 Derains and Sicard-Mirabal [2018] 34.
104 ADC Affiliate Limited and ADC & ADMC Management Limited v The Republic of Hungary, ICSID Case No. ARB/03/16, Award (2 October 2006) (‘ADC v Hungary’).
105 ibid, para 84. 106 ibid, para 295. 107 ibid, paras 335-339.
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is inapplicable to the present case because the respondent was ‘fully aware of the use of Cypriot entities and manifestly approved it’.108
This view was upheld in Rumeli Telekom v Kazakhstan109 where the ICSID panel cited the ADC v Hungary tribunal on the applicability of piercing the corporate veil,110 and followed the same to establish jurisdiction over the two Turkey-incorporated claimants, entities. 111 On the Respondent’s assertion that the two companies were only ‘shell’ vehicles, the ICSID tribunal held that even if that was the case, there is no bar within the ICSID Convention or the BIT to include that would deny a ‘shell’ company protection under ICSID:
‘[A]ccordingly, the BIT adopts the State of incorporation and the State of the seat as criteria for determining the nationality of a claimant. It does not exclude shell companies from its scope of application nor requires a search beyond the designated claimant whenever it is a shell company.’112
Similarly, in Saluka v Czech Republic,113 the tribunal constituted this time under the UNCITRAL Rules, refused to pierce the corporate veil and that the place of incorporation, in accordance with the BIT between the Netherlands and the Czech Republic, was the predominant factor in establishing nationality. Registered in the Netherlands, the claimant was a subsidiary of a major financial holding, Nomura, which was owned by Japanese investors.114 As in the previous cases, the language of the BIT was broad enough to qualify as ‘investors’ any ‘legal persons constituted under the laws of [The Netherlands]’.115 The intriguing part is that the panel did acknowledge that the claimant was only a shell company of Nomura, with no real connection to the host state, and even had ‘some sympathy’ for the view expressed by the Respondent that such instances could potentially entail abuse of rights or ‘treaty-shopping’.116 However, in the tribunal’s view, piercing the veil could not be applied when ‘fraud and
108 ibid, para 358 (emphasis added).
109 Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award (29 July 2008) (‘Rumeli Telekom v Kazakhstan’).
110 ibid, para 328. 111 ibid, para 328. 112 ibid, para 389.
113 Saluka Investments B.V. v The Czech Republic, UNCITRAL, Partial Award (17 March 2007) (‘Saluka v Czech Republic’).
114 ibid, para 1. 115 ibid, para 197. 116 ibid, para 240.
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malfeasance have been insufficiently made out to justify recourse to a remedy which, being equitable, is discretionary’.117
2.3. Preliminary Remarks
In all the cases discussed under this section, tribunals refused to pierce the veil in the absence of a legal base in the BIT or other evidence that would have justified the application of the ‘effective’ control-test, adopting a legalistic attuite towards corporate nationality.118 Crucially, arbitrators referred to the holding of the International Court of Justice in Barcelona Traction concerning the diplomatic protection of shareholders to assess whether the doctrine of piercing the corporate veil should be applied to the circumstances of the case. For instance, in Rumeli Telekom v Kazakhstan, the tribunal mentioned that:
‘in Barcelona Traction, the International Court Justice held that piercing the corporate veil might be justified to prevent the misuse of the relevant company’s legal personality in the case of fraud or malfeasance, to protect creditors or purchasers, or to prevent the evasion of legal requirements or obligations. However, none of these conditions is present here’.119
Consequently, the arbitrators’ understanding of the doctrine is that the investors have to commit an abuse of rights in connection to the corporate form in order to pierce the veil. The issue with importing this viewpoint into investment arbitration is that the very rationale behind piercing the veil in public international law is to determine the nationality of shareholders for their benefit, to give them a standing ‘which they already have’.120 International tribunals are dismissive of piercing the veil to the benefit of creditors having an internal corporate interest, and thus, aiming to hold the shareholders liable for their actions.121 In arbitral proceedings, the respondents invoke this doctrine with the purpose of identifying the true controlling shareholders that would not have any legal standing under the BIT, and certainly not for the
117 ibid, para 230.
118 See eg Caratube v Kazakhstan [2017] para 615, where the tribunal held that ‘foreign control’ under the second clause of Article 25(2)(b) ICSID means ‘legal’ control, ie ownership is enough to satisfy the jurisdictional requirement, provided that the respondent cannot prove ‘effective’ control.
119 Rumeli Telekom v Kazakhstan [2008] para 203.
120 Protection of Shareholder Interests in Foreign Corporations - Barcelona Traction Revisited, (1972) 41(2) Fordham Law Review 394-422, 413.
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benefit of the investors. Additionally, the general prohibition to abuse the rights does not have a base in the treaty language. Therefore, at least for purposes of establishing corporate nationality of investors, arbitral tribunals relying on this interpretation of ‘veil-piercing’ restricted only to cases of shareholders’ abusive misuse of the corporate form is questionable. It has been observed that there are no such cases in which tribunals have decided to pierce the veil on equitable grounds, including the abuse of rights doctrine.122
3. Interim Conclusion on the Current State of Jurisprudence
Certainly, there has been willingness to pierce the veil in cases concerning a locally incorporated claimant having to comply with the foreign control requirement under the second clause of Article 25(2)(b) of the ICSID Convention. Although the investors met the requisite nationality under the applicable BITs, the tribunals applied a two-pronged test: subjective control under the parties’ agreement; and objective control as a matter of ‘actual’ control. Arbitrators placed great emphasis on the international element laid down in the Preamble of the ICSID Convention
Conversely, tribunals refused to pierce the veil when the claimant was not a locally incorporated entity. Instead, they turned to the ordinary meaning of the BITs, where there was no explicit language permitting to reach for the ‘effective’ controller of claimants. Arbitrators have also justified their reluctance by holding that there was no proof of abusive practices by the investor, and incorporating a company in a certain country is not viewed by tribunals as an abuse.123
There is a clear tendency of over-reliance on the BIT text, and thus, apply the place of incorporation as a stand-alone benchmark for establishing the personal jurisdiction, irrespective of whether the claimant was in reality controlled by nationals of the host State (the ‘round-tripping’ situations), or whether it was ultimately controlled by a third-country national.
Not surprisingly, the legal commentaries addressing this issue display diverging views on the formal nationality approach. Some argue that by piercing the corporate veil, arbitrators would go against Article 31 of the VCLT, because it would neglect the ordinary meaning of the BIT
122 Waibel [2010] 14.
123 Csongor Nagy (ed), Investment Arbitration in Central and Eastern Europe: Law and Practice (Edward Elgar Publishing 2019) para 3.0.3.2.
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allowing for the place of incorporation to be the determinative factor for the investor’s corporate nationality.124
Other commentaries strongly disagree with such direction because it ignores any teleological survey of the norms, and even imply that tribunals following the formalistic approach laid down in the Tokios Tokelés v Ukraine case have unduly exploited the notion of consent of the parties to legitimize their jurisdiction, and ‘consent was turned against itself’.125 One could find such critique to be reasonable, given that the general rules of interpretation set forth in Article 31 of the VCLT provide that no matter how considerably the methods of interpretation might vary in emphasis, they all attempt to clarify the meaning of a treaty provision, and ‘no method excludes the others entirely’.126 In addition, the Preambles in most BITs generally speak of ‘transboundary’ investments.127
The awards in favor of piercing the veil show a more comprehensive use of the available tools in determining corporate nationality. The application of this doctrine is indispensable for establishing the economic reality.
On the other side of the spectrum, a strict textual interpretation of the BITs allows not only for ‘shell’ companies, but most importantly, for nationals of the host State to receive treaty protection. While in the cases where the ultimate controller is a national of a third country there is at least, some ‘transboundary’ investment, in the latter, where the ultimate beneficiary of the investment is a national of the host State, there is no international investment in the ‘commercial reality’. It appears that there is a duality within the ICSID system in employing the doctrine of piercing the corporate veil in ‘round-tripping’ situations, depending on whether the second clause of Article 25(2)(b) is applicable or not.
An overly formalistic approach is prevalent in the current jurisprudence. This path casts doubt on multiple aspects in ISDS and raises important questions. These considerations will be addressed in the next part of this thesis.
124 Wang [2015] 103. 125 ibid.
126 Gleider Hernández, International Law (OUP 2019) 180. 127 Forlati and Annoni [2013] 158.
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Part II
Challenges of the Formalistic Approach and Possible Trajectories
This part of the thesis explores the practical implications imposed by the current jurisprudence on the issue of piercing the veil. The first section attempts to offer a contextualization of some of the deficiencies engendered by the overly formalistic attitude of arbitral tribunals establishing corporate nationality. The second section evaluates possible options to avoid the problematic scenarios depicted in Part I.
1. Challenges of the Formalistic Approach
1.1 Double Standard for Piercing the Veil?
Under some jurisdictions, the notion of ‘jurisdictional veil-piercing’ refers to situations where piercing of the veil is invoked to give the shareholder or the parent company of an affiliated company a standing in front of the court.128 In a similar manner, ICSID tribunals are ready to pierce the veil when this is for the benefit of the investors. In such cases, the piercing relates to jurisdiction ratione materiae, as the corporation in question is seen as an ‘investment’, and not necessarily the ‘investor’.129 Essentially, when the applicable IIA includes shareholding in a corporate entity under the definition of ‘investment’, shareholders will have a legal standing to bring a claim for reflective loss, namely for the damages suffered by the shareholder resulting from injuries done to the company.130
The main difference between the instant situation and the cases where arbitral tribunals refuse to pierce the veil to establish the corporate nationality of investors is that the company qualifies as an ‘investor’ in the latter, but the controlling shareholder is a national of the host
128 Otazu [2018] 40. 129 Kryvoi [2010] 183.
130 Vera Korzun, ‘Shareholder Claims for Reflective Loss: How International Investment Law Changes Corporate Law and Governance’ [2018] SSRN 189-254, 193.
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State or a non-signatory, whereas in the first case, the affected company is not even required to be an ‘investor’ under the IIA, because the shareholding qualifies as a protected ‘investment’.131
To exemplify, in CMS v Argentina,132 the claimant, an US-incorporated company, owned roughly 30 per cent of shares in TGN, an Argentinian entity.133 Although he was a minority shareholder, the tribunal concluded that under the Argentina-US BIT, which allowed for any form of ‘investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party’, shareholders have a direct right of action under the treaty, concluding that the claimant had a standing in front of the arbitral tribunal.134 A review of this decision observes the potential drawback following from this reasoning to mandate parallel proceedings against the same host State on the basis of the same alleged damages incurred by the same entity.135 There is an overwhelming amount of cases employing the same interpretation to shareholders having jus standi in arbitration for holding an indirect investment in a company,136 regardless of the alarming consequences that the State of incorporation is exposed to if all shareholders from the chain of investments have standing to bring separate and potentially competing claims.137
Therefore, provided that indirect investments are protected under the relevant treaty, the corporate veil is disregarded in order to establish jurisdiction. The legal basis for tribunals lifting the veil is grounded in the definition of ‘investment’.
In conclusion, reluctancy turns into willingness when piercing the veil serves the investor. The question would then be whether this ‘double standard’ is triggered by a general aggressiveness of arbitral tribunals in establishing jurisdiction, or whether it is just a result of the inadequacies of the language used in BITs.
131 Dolzer and Schreuer [2012] 59.
132 CMS Gas Transmission Co. v Republic of Argentina, ICSID Case No. ARB/01/8, Decision on jurisdiction of the Tribunal on Objections to Jurisdiction (17 July 2003) (‘CMS v Argentina’).
133 ibid, paras 1, 19. 134 ibid, paras 57, 65.
135 Fiona Marshall, ‘CMS Gas Transmission Co. v. Republic of Argentina’ in Nathalie Bernasconi-Osterwalder and Lise Johnson (eds) International Investment Law and Sustainable Development. Key cases from 2000–2010 (International Institute for Sustainable Development 2011) 46.
136 See eg Noble Energy, Inc. and Machalapower Cia. Ltda. v The Republic of Ecuador and Consejo Nacional de Electricidad, ICSID Case No. ARB/05/12, Decision on Jurisdiction (5 March 2008), paras 70-83 (‘Noble Energy v Ecuador’); Phoenix Action, Ltd. v The Czech Republic, ICSID Case No. ARB/06/5, Award (15 April 2009), paras 121-123 (‘Phoenix v Czech Republic’); Enron Corporation and Ponderosa Assets, L.P. v Argentine Republic, ICSID Case No. ARB/01/3, Decision on annulment (30 July 2010), paras 115-127 (‘Enron v Argentina’).
30 1.2 A Simple Defect in the Design of the BITs?
It is not by accident that in a fair number of cases (some of which are examined in Part I), the investments are structured in such a way so as to include an entity incorporated in the Netherlands, hence making the BITs concluded between the Netherlands and other countries readily available for the investors.138 A report assessing the legitimacy of the investor-state dispute settlement system notes that the investors are vigorously encouraged by lawyers with notable expertise in investment arbitration to channel their investments through Dutch vehicles, turning the Netherlands into a ‘popular gateway for treaty shopping’.139 With roughly 100 of BITs in force,140 the country has indeed an impressive network of treaties that also contain a very lax language.141 Several countries have expressed particular concerns about the extensiveness of the notions ‘investor’ and ‘national’ defined in the Netherlands BITs, permitting for instance, any shell company to access treaty protection.142
This state of affairs has prompted some countries, such as Venezuela, South Africa and Indonesia, to withdraw from their BITs with the Netherlands, with the practice of treaty shopping precisely voiced as one of the grounds for the BIT termination.143 It is worth noting that the respondent States trapped in these situations are mostly the capital-importing countries. At times, arbitral tribunals refusing to pierce the veil indicated as part of their legal reasoning that other BITs concluded by the respondent State were not as generous with the protection offered to investors.144
It follows that a problematic issue might be the very conclusion of the IIAs, in particular the influence that capital-exporting countries have over capital-importing countries. In his
well-138 See eg; Saluka v Czech Republic [2007]; Rompetrol Group v Romania [2008]; TSA Spectrum v Argentina [2008]. 139 Pia Eberhardt and Cecilia Olivet, ‘Profiting from injustice. How law firms, arbitrators and financiers are fuelling an investment arbitration boom’ (Corporate Europe Observatory and the Transnational Institute, 2012) 26, <https://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf>.
140 UNCTAD, Investment Policy Hub <http://investmentpolicyhub.unctad.org/IIA/CountryBits/148> accessed 20 July 2020.
141 Dilek Aykut and others, ‘What to Do When Foreign Direct Investment Is Not Direct or Foreign. FDI Round Tripping’ (World Bank Group, 2017) 10
<https://openknowledge.worldbank.org/bitstream/handle/10986/26498/WPS8046.pdf?sequence=1&isAllowe d=y> accessed 23 July 2020>.
142 David Price, Indonesia’s Bold Strategy on Bilateral Investment Treaties: Seeking an Equitable Climate for Investment? (2017) 7(1) Asian Journal of International Law 124-151.
143 Rachel L Wellhausen, ‘Recent Trends in Investor–State Dispute Settlement’ (2016) 7(1) Journal of International Dispute Settlement 117–135.
