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Toward Higher Coherence in Shareholder Claims for Reflective Losses

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Abstract

Shareholder claims for reflective losses are widely discussed in international investment treaty arbitration. The debate arises because tribunals in international investment arbitration commonly grant legal standing for shareholders to claim for reflective losses, whereas national corporate laws typically bar such claims. This article seeks to provide a legally sound solution that reconciles the opposing opinions by a flexible concept. Unlike the common approach in international investment treaty arbitration, this article regards shareholder claims for reflective losses not only as a matter of arbitral court jurisdiction but also as a part of the admissibility assessment (hereinafter referred to as “jurisdiction”). As a consequence, it should be scrutinized whether, and to what extent, immediate compensation of reflective losses to claiming shareholders is required or justified as appropriate treaty-based investment protection. This article shows that immediate payment to shareholders for reflective losses ought to be limited to cases where the payment of damages to the company is not eligible to provide effective investment protection (i.e., to effectively repair the shareholders’ reflective losses). In all other cases, the extent of the shareholder’s right ought to be limited to the entitlement to claim for damages with recovery to the company as the actually harmed entity.

The author would like to express his gratitude to Dr. Jonathan Bonnitcha (University of New South Wales, Sydney) for his support and for reviewing an earlier draft of this article as well as for his suggestions and comments.

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Notes

  1. 1.

    Hereinafter referred to as “shareholder claims” unless stated otherwise. In contrast, shareholders’ standing in IITA and their protection through diplomatic intervention is undisputed for claims for direct losses( cf. Bottini G (2008) Indirect Claims under the ICSID Convention. Univ Pa J Int Law 29 (3):563, 564f). These claims concern measures relating to the position as shareholders and are not a subject of this article.

  2. 2.

    Gaukrodger D (2013) Investment treaties as corporate law: shareholder claims and issues of consistency. OECD working papers on international investment 3/2013, 7[en] https://doi.org/10.1787/5k3w9t44mt0v-en; Bottini G (2016) Chapter 15: Indirect shareholder claims. In: Kinnear and others (eds) Building international investment law: the first 50 years of ICSID. Kluwer Law International, Alphen aan den Rijn, p 203

  3. 3.

    Hereinafter referred to as “the admission of shareholder claims” or “the admission of these claims”

  4. 4.

    Cf. OECD (2013) Roundtable on Freedom of Investment 18, Summary of Roundtable Discussions by the OECD Secretariat, 5. http://www.oecd.org/daf/inv/investment-policy/18thFOIRoundtableSummary.pdf

  5. 5.

    Similar at the starting point Korzun V (2018) Shareholder claims for reflective loss: how International Investment Law changes corporate law and governance. Univ Pa J Int Law 40(1): 189ff

  6. 6.

    Cf., e.g., Arato and others (2019) Reforming Shareholder Claims in ISDS. Academic Forum on ISDS (concept paper), 9/2019, 2. https://www.jus.uio.no/pluricourts/english/projects/leginvest/academic-forum/papers/papers/arato-reforming-shareholder-claims-isds-af-9-2019.pdf; Korzun (n 7)

  7. 7.

    Gaukrodger D (2014) Investment treaties and shareholder claims for reflective loss: insights from advanced systems of corporate law. OECD working papers on international investment, 7. http://www.oecd.org/investment/investment-policy/WP-2014_02.pdf; OECD (n 6)

  8. 8.

    OECD (n 6); Gaukrodger (n 4) 13

  9. 9.

    OECD (2013) Roundtable on freedom of investment 19, Summary of roundtable discussions by the OECD Secretariat, 12f. http://www.oecd.org/daf/inv/investment-policy/19thFOIroundtableSummary.pdf; Chaisse J, Zhuoyue Li L (2016) Shareholder protection reloaded: redesigning the matrix of shareholder claims for reflective loss (Winter 2016), Stanf J Int Law 52(1):51, 55ff

  10. 10.

    de Jong BJ (2013) Shareholders’ claims for reflective loss: A comparative legal analysis. Eur Bus Org Law Rev 14(1):97, 102ff; Gaukrodger (n 9) 18ff

  11. 11.

    Gaukrodger (n 4) 19

  12. 12.

    For a detailed summary cf. Sasson M (2010) Chapter 5: Substantive law in investment treaty arbitration: the unsettled relationship between international law and municipal law. Kluwer Law International, Alphen aan den Rijn, 112ff

  13. 13.

    Barcelona Traction, Light and Power Company, Limited (Belgium v Spain) (Judgment) [5 February 1970], ICJ 3

  14. 14.

    Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) (Judgment on Preliminary Objections) [24 May 2007] ICJ 582

  15. 15.

    Sasson (n 14) 113

  16. 16.

    Cf. OECD (n 6) 5; OECD (n 11) 15; Tishler SCC (2015) A new approach to shareholder standing before the European Court of Human Rights. Duke J Comp Int Law 259ff

  17. 17.

    Sasson (n 14) 114, 118f

  18. 18.

    Elettronica Sicula S.p.A. (ELSI) (United States of America v Italy), Judgment [20 July 1989], ICJ 15

  19. 19.

    For an apparent shift, Tishler (n 18) 275f, against, e.g., Sasson (n 14), 116

  20. 20.

    While for individuals reference is usually made to municipal law, corporate nationality is typically determined by specific IIT definitions which commonly refer to the place of incorporation and/or the main seat of the business, cf. Dolzer R, Schreuer C (2012) Principles of international investment law, 2nd edn. Oxford University Press, 45ff

  21. 21.

    For an overview of case law on the investment requirement cf. ibid. 65ff; Gaillard E, Banifatemi Y (2016) Chapter: 8 The Long March Towards a Jurisprudence Constante. In: Kinnear and others (eds), Building international investment law: The first 50 years of ICSID. Kluwer Law International, Alphen aan den Rijn. 97, 105ff

  22. 22.

    Gelovani I (2014) Shareholders’ claims in international investment arbitration. Lat Am J Int Arbitr 2(2): 652, 656; Bonnitcha J, Skovgaard Poulsen LN, Waibel M (2017) Chapter 2 The political economy of the investment treaty regime. Oxford University Press, 2f

  23. 23.

    Ibid.

  24. 24.

    For a summary of cases cf. Chaisse and Li (n 11) 69ff; Gelovani (n 24) 659ff

  25. 25.

    For details of contemporary treaty practice cf. Gaukrodger D (2014) Investment treaties and shareholder claims: analysis of treaty practice. OECD working papers on international investment, 23ff. http://www.oecd.org/daf/inv/investment-policy/WP-2014-3.pdf.

  26. 26.

    E.g., cf. Suez, Sociedad General de Aguas de Barcelona S.A. and InterAguas Servicios Integrales del Agua S.A. v The Argentine Republic, ICSID Case No ARB/03/17, Decision on Jurisdiction (16 May 2006) para 46.

  27. 27.

    E.g., cf. Hochtief AG v The Argentine Republic, ICSID Case No ARB/07/31, Decision on Liability (29 December 2014) 171 f

  28. 28.

    Cf. several references in Gelovani (n 24) 663ff; Schreuer (2005) Shareholder protection in international investment law, 11ff. http://www.univie.ac.at/intlaw/pdf/csunpublpaper_2.pdf

  29. 29.

    E.g., cf. Siemens AG v The Argentine Republic, ICSID Case No ARB/02/8, Decision on Jurisdiction (3 August 2004) para 140

  30. 30.

    Derived from Salini Costruttori S.p.A and Italstrade S.p.A v Kingdom of Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction (23 July 2001). For details cf. Gaillard and Banifatemi (n 23) 114ff

  31. 31.

    Cf. Dolzer and Schreuer (n 22) 76; Bonnitcha, Skovgaard Poulsen, and Waibel (n 24)

  32. 32.

    Cf. Aceris Law (2017) The cost of investment arbitration: UNCITRAL, ICSID proceedings and third-party funding. https://www.acerislaw.com/cost-investment-arbitration-uncitral-icsid- proceedings-third-party-funding/

  33. 33.

    With respect to the criteria of a material contribution, for example, in SGS Société Générale de Surveillance S.A. v Islamic Republic of Pakistan, ICSID Case No ARB/01/13, Decision on Objections to Jurisdiction (6 August 2003) para 136, it was held that even a contribution of USD 1.5 million might be sufficient to constitute an investment.

  34. 34.

    E.g., cf. Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment (3 July 2002) para 50

  35. 35.

    Gelovani (n 24) 657f.; Demirkol EC (2015) Admissibility of claims for reflective loss raised by the shareholders in local companies in investment treaty arbitration. ICSID Rev 30(2):391, 392

  36. 36.

    A small but growing number of IITs permit shareholders to file derivative claims based on losses incurred by their company due to a purported breach of treaty protections. Unlike shareholder claims, derivative claims are actions on behalf of the company with recovery to the company level. This possibility, if granted at all, is typically limited to the controlling shareholder. Cf Gaukrodger (n 27) 16ff

  37. 37.

    E.g., cf. Gami Investments, Inc. v The Government of the United Mexican States, ICC 109 (2004), Ad hoc tribunal (UNCITRAL), Final Award (15 November 2004) 12ff, 14, 15, 18

  38. 38.

    Cf. Gaukrodger (n 27) 25

  39. 39.

    Cf. several references in Chaisse and Li (n 11) 64f; Demirkol (37) 394 following a critical analysis and references to the opposite view in IITA jurisprudence

  40. 40.

    E.g., Total S.A. v Argentine Republic, ICSID Case No ARB/04/01, Decision on Objections to Jurisdiction (25 August 2006) para 81

  41. 41.

    CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No ARB/01/8, Decision on Objections to Jurisdiction (17 July 2003) para 42ff

  42. 42.

    E.g., Sasson (n 14) 125ff.; Arato (n 8) 4ff.; Korzun (n 7) 189ff

  43. 43.

    E.g., Chaisse and Li (n 11) 82ff (municipal law); Tishler (n 18) 274ff (ECHR proceedings)

  44. 44.

    E.g., Sasson (n 14) 130ff

  45. 45.

    For a brief overview cf. Arato (n 8) 10ff

  46. 46.

    Enron Corporation and Ponderosa Assets, L.P. v Argentine Republic, ICSID Case No ARB/01/3, Decision on Jurisdiction (14 January 2004) para 39ff

  47. 47.

    Cf. TSA Spectrum de Argentina S.A. v Argentine Republic, ICSID Case No ARB/05/5, Award (19 December 2008) 147ff

  48. 48.

    Standard Chartered Bank v United Republic of Tanzania, ICSID Case No ARB/10/12, Award (2 November 2012) para 230, where the tribunal required an active influence as opposed to mere ownership based on the specific treaty language which referred to an investment made.

  49. 49.

    Cf. references in Smutny AC (2009) Chapter 20: Claims of shareholders in international investment law. In: Binder and others (eds), International investment law for the twenty-first century: essays in honour of Christoph Schreuer. Oxford University Press, p 363, 375

  50. 50.

    Legum B (2006) Defining investment and investor: who is entitled to claim?” (2006) Arbitr Int 22(4):521, 522

  51. 51.

    Bonnitcha, Skovgaard Poulsen, and Waibel (n 24) ch 1, 9

  52. 52.

    Ibid. ch 2, 21

  53. 53.

    Legum (n 52) 522ff

  54. 54.

    E.g., thin capitalization rules and accounting law might influence the design of corporate finance.

  55. 55.

    Schreuer (n 30) 5; Demirkol (37) 391

  56. 56.

    This even might apply for IITs which allow treaty-based company claims as deemed foreign companies by reference to Art. 25(2)(b) ICSID Convention, cf. below under “The protection of shareholdings in context.”

  57. 57.

    Smutny (n 51) 363

  58. 58.

    Sasson (n 14) 119, 130ff

  59. 59.

    Ibid. 99 f

  60. 60.

    Dolzer and Schreuer (n 22) 28ff

  61. 61.

    Boisson de Chazournes L (2016) Chapter 1: Rules of interpretation and investment arbitration. In: Kinnear and others (eds), Building international investment law: the first 50 years of ICSID. Kluwer Law International, Alphen aan den Rijn, 13ff

  62. 62.

    Dolzer and Schreuer (n 22) 31

  63. 63.

    Cf. above under “Need for Admission of Shareholder Claims in IIT Law”

  64. 64.

    Considering the typical broad scope of IIT’s protection, it seems persuasive to include indirect investments as being protected unless it is explicitly precluded.

  65. 65.

    Cf. above under “Need for Admission of Shareholder Claims in IIT Law”

  66. 66.

    Cf. above under “Customary International Law”

  67. 67.

    Smutny (n 51) 372 (regarding the US Model BIT)

  68. 68.

    Until recently only the China-Mexico IIT 2008 appeared to explicitly clarify the treatment of (minority) shareholder claims for reflective loss, cf. Gaukrodger (n 27) 16 and 26.

  69. 69.

    Cf. Gaukrodger (n 27) 16

  70. 70.

    For argumentum e contrario Bottini (n 3), 570; similar Demirkol (n 37), 405 (but different at 396)

  71. 71.

    Cf. Dolzer and Schreuer (n 22) 57; Demirkol (n 37) 395

  72. 72.

    Cf. the debate on whether Art. 25(2)(b) ICSID Convention includes indirect foreign control, Schreuer CH (2001) The ICSID convention: a commentary. Cambridge University Press, Art. 25, para 558ff

  73. 73.

    Gaukrodger (n 27) 20ff

  74. 74.

    Ibid.

  75. 75.

    Ibid. 24ff

  76. 76.

    Ibid. 23

  77. 77.

    Cf. occasional practice in IITA Dolzer and Schreuer (n 22) 31

  78. 78.

    Cf. above under “Selected Response to Criticism in IITA”

  79. 79.

    For different examples cf. Bentolila D (2010) Shareholders’ action to claim for indirect damages in ICSID arbitration. Trade Law Dev 2(1):87, 128ff

  80. 80.

    Cf. Sempra Energy International v The Argentine Republic, ICSID Case No ARB/02/16, Award (28 September 2007) and Hochtief AG v The Argentine Republic, ICSID Case No ARB/07/31, Decision on Liability (29 December 2014) on the one hand and SA UR International S.A. v Republic of Argentina, ICSID Case No ARB/04/4, Decision on Jurisdiction and Liability (6 June 2012) on the other

  81. 81.

    Cf. proponing scholars, e.g., Paez-Salgado D (2017) Settlements in investor-state arbitration: are minority shareholders precluded from having its treaty claims adjudicated? J Int Disput Settl 8(1):107, 113ff; Vial G (2016) Effects of settlement between a local company and a host state in a bilateral treaty claim of foreign shareholders arising from the same conduct. Chic-Kent J Int Comp Law 16(2):98, 104ff

  82. 82.

    Hochtief (n 82) 175ff

  83. 83.

    Sempra (n 82) para 227

  84. 84.

    For a detailed analysis cf. Waibel M (2014) Investment arbitration: jurisdiction and admissibility. University of Cambridge Faculty of Law Research Paper 9/2014. https://ssrn.com/abstract=2391789

  85. 85.

    Similar, Demirkol (n 37) 395ff

  86. 86.

    For an overview of discussed ideas cf. Pâez-Salgado (n 83) 117ff

  87. 87.

    Cf. Hochtief (n 82) para 180; Sempra (n 82) para 228

  88. 88.

    In this regard correctly Sempra (n 82) 227

  89. 89.

    Discussed in Hochtief (n 82) 165ff. This approach seems feasible only in situations in which the local company is deemed as foreign under Art. 25(2)(b) ICSID Convention in connection with a respective treaty provision

  90. 90.

    Korzun (n 7) 249

  91. 91.

    Ibid.

  92. 92.

    Ibid.

  93. 93.

    Sasson (n 14) 132

  94. 94.

    This at least applies in situations in which the claiming shareholder directly or indirectly holds all shares in the local company as the harmed entity.

  95. 95.

    See above “Customary International Law.”

  96. 96.

    In the case of wholly owned subsidiaries, the outcome is practically the same, provided that no exception allowing immediate recovery to the claiming shareholder applies.

  97. 97.

    For detailed analyses cf. Hansen RF (2010) Parallel proceedings in investor-state treaty arbitration: responses for treaty-drafters, arbitrators and parties. Mod Law Rev 73(4):523, 537ff; Wehland H (2016) The regulation of parallel proceedings in investor-state disputes ICSID Rev 31(3):576, 585f; Korzun (n 7) 244ff

  98. 98.

    Hansen (n 99) 537ff

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  1. Dispute Resolution and Corporate/M&A/VC, Flick Gocke Schaumburg, Germany, Berlin

    Benny Wuenschmann

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  1. School of Law, City University of Hong Kong, Kowloon, Hong Kong

    Julien Chaisse

  2. School of Business and Law, University of Portsmouth, Portsmouth, UK

    Leïla Choukroune

  3. Institute of Malaysia and International Studies, National University of Malaysia, Bangi, Selangor, Malaysia

    Sufian Jusoh

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Wuenschmann, B. (2020). Toward Higher Coherence in Shareholder Claims for Reflective Losses. In: Chaisse, J., Choukroune, L., Jusoh, S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-5744-2_117-1

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