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Toward Higher Coherence in Shareholder Claims for Reflective Losses

  • Benny WuenschmannEmail author
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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.

Keywords

Investor-state arbitration Shareholder claims Reflective losses Determination of damage Admissibility 

Introduction

Foreign shareholders’ claims for reflective losses, i.e., damage arising from a host state’s adverse action against a company operating in this state which reflectively diminishes the value of the company’s shares accordingly,1 are widely accepted in international investment treaty arbitration (“IITA”).2 As such, IITA jurisprudence allows foreign shareholders to claim for indirect (i.e., merely reflective) losses with recovery to the claiming shareholders.

The eligibility of these claims to be admitted3 in IITA is based on a broad investment definition of the international investment treaty (“IIT”) in question as an independent source of law. Typical investment definitions comprise shares as protected investments. Despite the mere enumeration as a protected investment, investment definitions in IITs, however, usually do not provide further insight into the material content of such protection.

IITA commonly considers the admission of shareholder claims solely as a jurisdictional matter. More interestingly, IITA typically also grants shareholders legal standing regardless of whether a claim is filed by a majority or a minority shareholder and regardless of whether the related shares are held directly or indirectly, including those held through a chain of several intermediaries.

This view in IITA departs significantly from the situation concerning shareholders’ legal standing regarding claims for reflective losses in customary international law and under most national corporate legislations. These legal spectra commonly do not allow shareholders to claim for such losses. As a result, the approach adopted in IITA triggers numerous yet unresolved procedural issues and substantive law matters. They include, for example, the challenge of parallel or multiple proceedings, including the risk of treaty shopping and the associated issue of double recovery.4

But above all, the approach adopted in IITA broadly ignores widely accepted corporate law and corporate governance principles that arise from the distinction drawn between a company and its shareholders as separate legal persons.5 This distinction typically reflects a differentiated and reconciled system of various claims, persons, legal entities, and fields of law. Therefore, the theoretical basis of the approach adopted in IITA is often criticized as not being sufficiently sound. Against this background, it is remarkable that the admission of shareholder claims for reflective losses remains well-established and rarely questioned in IITA. Recently, however, proposals and initiatives on reforming shareholder claims for reflective losses in IITA have increased (again).6

The following analysis seeks to contribute to this re-emerging discussion by addressing the criticism against the approach adopted in IITA with a novel solution. It will show that particular aspects of treaty-based investment protection do exist that might justify a deviating approach to shareholder claims in IITA as opposed to common corporate law principles. However, these particularities do not exist in all situations. As a consequence, this article proposes a flexible concept that sufficiently acknowledges the particularities of treaty-based investment protection and that aims to reconcile them with widely accepted corporate law principles under municipal law.

This analysis first presents an overview of shareholders’ legal standing and the main thoughts on shareholder claims for reflective losses being barred under customary international and most national laws. It goes on to describe shareholdings as protected investments and shareholder claims in IITA jurisprudence, including how they differ from related claims and the main criticism of the approach adopted in IITA. Then, it examines to what extent the admission of shareholder claims in IITA is legally sound and where the approach shows weaknesses. The analysis culminates in the description of how necessary investment protection for shareholdings can be reconciled with broadly accepted corporate law principles before an evaluation and final conclusions will be made.

Shareholders’ Legal Standing in Context

Shareholders’ Legal Standing Under National and International Law

National Law

As a common principle in both common and civil law countries, shareholders are generally barred from claiming damages for reflective losses resulting from adverse action against their company.7 The right to claim is allocated to the company as the entity directly harmed. In contrast, shareholders can usually only claim for direct losses relating to their shares that do not simultaneously constitute a damage to the company.8

Municipal laws apply this “no reflective loss principle” with remarkable uniformity. It is based on various policy considerations and doctrinal reasons for consistency and coherence that mainly stem from the recognition of a company as a separate legal person.9 Although these reasons take various shapes and forms, they constitute a mirror image of those underlying the objections to the approach adopted in IITA. Exceptions to the no reflective loss principle are rarely recognized.10 Notably, these restrictions are commonly based on the assumption that a company has or had the power to recover the loss by itself and/or that it has recourse through a derivative claim by a minority shareholder on its behalf.11

Customary International Law

Under customary international (public) law – beyond the authority of the European Court of Human Rights (“ECHR”) – the rights of shareholders as foreign investors are shielded indirectly by diplomatic protection. The International Court of Justice (“ICJ”) as the competent judicial authority is also reluctant to intervene in the protection of shareholders suffering reflective losses.

The leading cases12 Barcelona Traction13 and Diallo14 emphasize the need to recognize principles of national law(s) where international law lacks the relevant principles, specifically as is the case with corporate law. The ICJ distinguishes between shareholders’ rights and mere interests in the company. As such, the ICJ follows the approach adopted under most national corporate laws that typically determine the separation of shareholders and company as different legal persons. Consequently, it allows shareholders’ protection for reflective losses only as an exception where a company ceased to exist or (arguably) the company’s state of residence is unable to act.15

Similar to the ICJ’s approach in Barcelona Traction and Diallo, the ECHR generally applies the no reflective loss principle. Thus, the ECHR is also reluctant to adopt a broad interpretation of shareholder rights under the European Convention on Human Rights.16

Remarkably, however, the ICJ referred to either investor-state agreements or IITs that might specifically stipulate further shareholder protection.17 In this light, it is worth noting that in ELSI18 – which arose in an IIT context in the period between Barcelona Traction and Diallo – the ICJ allowed diplomatic protection based on a dispute in which shareholders sought remedy for reflective losses. The judgment is occasionally seen as evidence of a changing view on the issue at hand.19 Arguably, it implies at least the possibility of adopting a deviating approach to shareholder protection for mere reflective losses in IITA.

Shareholder Claims in IITA

Foreign Shareholdings as Protected Investments

Shareholders claiming under IITs must satisfy the investment and (foreign) investor/nationality definitions set forth in the IIT they invoke. The latter often poses minor problems.20 Even though more complex at first glance,21 the same usually applies to the investment criterion. This is because IITs commonly define investments very broadly as every type of asset owned or controlled by foreign investors. Such a definition is often followed by a list that typically includes shares and other types of (economic) interests in companies.22 In most cases, protection is provided, regardless of whether shares are held directly or indirectly and commonly without any restriction on majority or controlling shareholdings or the exclusion of minority shareholdings or portfolio investments.23

Overview of Case Law

Following broad investment definitions in IITs, shareholder claims have been admitted in IITA in virtually all types of corporate structures,24 even though most IITs do not explicitly address the extent of shareholder rights.25

Shareholder claims in IITA do not only include those made by foreign majority or controlling shareholders directly investing26 in a company registered in the host state, which was exposed to an adverse measure allegedly taken by the host state. They can also be filed by minority27 and indirect shareholders28 holding their shares through a third company or even a chain of intermediaries. This second category of shareholder claims is widely accepted in IITA regardless of whether a given IIT explicitly mentions the protection of indirect investments.29

Likewise, the debate among scholars regarding ICSID cases as to whether Art. 25 ICSID Convention stipulates autonomous investment criteria that complement the IIT requirements under the Salini test30 has not yet become crucial to shareholder claims. This is not least because tribunals in IITA tend to broadly apply the Salini criteria.31 Another likely reason is that the initiation and implementation of ICSID arbitration proceedings entail probable costs of at least USD 1.3 million.32 This typically means that the mere cost-benefit calculation of a shareholder claim automatically prevents most of the investors who fail to meet the Salini criteria from filing a claim.33 However, those criteria may become decisive for minority shareholders in exceptional circumstances or for portfolio investors.

Furthermore, tribunals usually do not restrict the admission of shareholder claims in their relationship to (potential) actions initiated by local companies that are deemed as foreign investors under the relevant IIT in conjunction with Art. 25(2)(b) ICSID Convention.34 In these situations, shareholder claims are admitted even though the relevant locally incorporated company exceptionally enjoys the protection of an IIT and, therefore, is entitled to claim under Art. 25(2)(b) ICSID Convention in conjunction with the relevant IIT provided that the relevant local company is controlled by a foreign investor and the IIT explicitly grants such a right.35

A similar approach was adopted to shareholder claims (of minority shareholders) despite the explicit option of derivative claims (in favor of controlling shareholders)36 in a given IIT.37 However, this interpretation cannot yet be regarded as well-established in IITA.38

In all cases, the admission of shareholder claims is primarily understood as a matter of jurisdiction.39 The shareholders’ right to claim is commonly seen as the shareholders’ own/direct right. In this regard, occasionally, it is explicitly held that this right cannot be considered as an indirect or a derivative one because IITs are seen as the independent legal basis of a shareholder’s own right to claim.40

As an additional consequence of the tendency to derive shareholders’ rights to claim for reflective losses from the mere coverage of shares as protected investments under common IITs, tribunals have consistently held that the principles regarding shareholders’ rights that evolved in customary international law – represented by Barcelona Traction and Diallo – are not directly relevant. Tribunals typically argue that these principles were derived from the specific context of diplomatic protection and that IIT law prevails over customary international law as lex specialis.41

Criticism

The broad admission of shareholder claims for reflective losses in IITA has sparked a growing debate. Numerous scholars sharply criticize the approach adopted in IITA,42 while others even take the approach in IITA jurisprudence on shareholder claims as a reason to reconsider the restrictive approach under domestic corporate and international law.43

The criticism mainly derives from the principles which have consistently evolved in international public law and national laws. Two aspects seem to be central in this regard: Firstly, it is often mentioned that IITA jurisprudence fails to distinguish between the general protection of shares under IITs and the substantive scope these protections provide; IITs generally do not address the latter. Secondly, opponents criticize tribunals overemphasizing IIT law as a distinct and independent source of law, hence, not sufficiently considering widely accepted doctrinal and policy aspects of restricting shareholder claims under municipal and customary international law.44

Selected Response to Criticism in IITA

Tribunals occasionally seek to address some issues raised by critics.45 Some tribunals propose to recognize the need for a cut-off point beyond which the connection to an investment is too remote.46 Others, conversely, consider the need for a look-through approach to the ultimate owner in terms of foreign control under Art. 25(2)(b) ICSID Convention.47 Still others argue for a narrower interpretation of protected investments.48 These ideas are supplemented by the proposal to require a sufficiently close connection to the damage occurred as part of the assessment of the merits.49

Legal Basis for Shareholder Claims in IITA

Evaluating IITA jurisprudence on shareholder claims is challenging. The opposing approaches in IITA in contrast to customary international and most national corporate laws seem to be irreconcilable. At the same time, however, both approaches show broad uniformity within their legal spectra.

Virtually all kinds of foreign shareholdings formally fall within the scope of IIT protection. Further protection might be provided by the right to claim damages based on the concept set forth in Art. 25(2)(b) ICSID Convention or explicit IIT provisions providing derivative claims. Despite such additional protections, tribunals in IITA typically grant full protection of shares regardless of whether the state’s adverse action has only a reflective diminishing effect on the shares’ value or whether it refers directly to the position as a shareholder.

This conclusion can be challenged if it would automatically entail the full coverage of the damage (actually) incurred by the company in the first place. The virtually unrestricted inclusion of all types of shareholdings as protected investments does not necessarily say anything about the substance of the protection itself. More favorably it seems that, in the first instance, it refers to the right of action but does not necessarily answer the question of substance.

Thus, one may argue that tribunals in IITA partly fail to provide sufficiently detailed doctrinal reasoning for allowing shareholders to claim for mere reflective losses. This is particularly significant given that hardly any other legal issue is, in principle, resolved uniformly in all legal systems (and other parts of international law), as is the case with shareholder claims. Similarly, the criticism deserves support in that IITA has not sufficiently addressed the doctrinal reasons and policy considerations underlying the restriction of shareholder claims under municipal and customary international law.

However, this does not necessarily mean that the result in IITA must be wrong. But to the extent it deserves support, the approach adopted in IITA requires a deeper analysis and description of the reasons that justify a deviation from widely accepted corporate law principles under municipal law. Therefore, in the following part, it will be scrutinized as to whether specifics arising from the IIT context require broader protection for shareholders and whether common investment definitions in IITs provide a sufficient legal basis for this.

Need for Admission of Shareholder Claims in IIT Law?

To begin with the essentials of international investment law, many IITs were based on two fundamental assumptions: first, foreign investments tend to stimulate the economic development of the host and home state and, second, a predictable legal environment that provides fundamental legal protection tends to encourage and promote foreign investments.50 The second aspect assumes that the fundamental legal protection of foreign investments can be achieved only by international standards that are independent of municipal law. This is why compliance with domestic law generally does not excuse a breach of international investment law.51

Even though economic analyses show that economic expectations are more likely to be met by foreign direct investments (“FDIs”) rather than by mere portfolio investments, IITs usually do not limit their scope of protection to FDIs.52 This seems to reflect the idea that investments can take multiple forms and structures that are influenced by various factors. Accordingly, home and host states tend to encourage all forms of investments and to not restrict the creativity of markets.53

To name just three aspects, it might be advisable to establish a local company to gain better access to market opportunities such as participation in (public) tender procedures or due to tax considerations and/or risk diversification. The corporate finance structure of investments is another factor to consider.54 In practice, foreign investments are typically structured as indirect investments.

Additionally, some states require the establishment of a local company as a precondition of foreign investment which – beyond Art. 25(2)(b) ICSID Convention in conjunction with a corresponding treaty provision – is not protected as foreign investment.55

In light of the broad approach to defining investments, it might be held that the effective legal protection of all these kinds of investments is a matter of consistency. The fact that many IITs explicitly mention shares and various other types of (economic) interests in companies such as loans or bonds, as well as indirect investments, might leave a significant lack of protection if shareholders and indirect investors could only invoke IITs in the event of direct harm by the host state to their investments. In reality, foreign investors are typically affected indirectly. Simultaneously, IITs imply that the availability of company recourse through municipal means of redress is insufficient to provide effective protection of foreign investments due to their dependence on the host state’s judiciary.56

As stated above, one essential of international investment law is to provide a legal basis that is independent of national laws. Furthermore, it was pointed out that the ability of companies to seek remedy for a state’s or third parties’ harm by themselves is one of the main reasons why shareholders are typically barred from claiming for reflective losses. This assumption underlying the no reflective loss principle in most national corporate laws can be adversely affected in the context of international investments. This is particularly the case where the investment is structured as co-investment in a local company directly or indirectly controlled by the host state or similar types of investments with the participation of the host state (i.e., joint ventures, public-private partnerships). Thus, a broad interpretation of treaty protections appears to be preferable, at least at the jurisdictional stage.

Accordingly, it seems rational to provide treaty protection regardless of whether the claimant is the majority shareholder or a minority one. At first glance, this appears to contradict consistency considerations arising from the well-established majority rule as a formative corporate law principle in many countries. Upon a closer look, however, the broad inclusion of shares as protected investments without further limitations reflects the policy of encouraging all types of foreign investments. International investment consortia, public-private partnerships with foreign investors as minority shareholders, or various forms of joint ventures would face severe disadvantages if this were not the case. This particularly applies to investments that are made with the direct or indirect participation of the host state.

The importance of a broad interpretation of treaty protections can be illustrated by the example of a joint venture between a state-owned company (the majority shareholder) and a privately held company (the minority shareholder). Given the initial economic purpose underlying IITs, it can scarcely be assumed that the investment by the minority shareholder should not enjoy the same protection as it would if the same investor/company were the majority shareholder. IITs are designed to provide an independent legal framework for foreign investments. Thus, it can be assumed that they also intend to fully consider and reflect the economic varieties of investments.

Against this background, it is understandable that tribunals in IITA tend to take a pro-investor stance. It deserves support that they usually grant legal standing for shareholder claims by deriving the right to claim from the IIT itself rather than referring to domestic corporate law principles, regardless of whether the shareholding purportedly affected is held by a minority or majority shareholder and whether it is held directly or indirectly.

Treaties as a Sufficient Source of Law

Assuming this broader scope of protection is justified, however, it should further be examined whether the approach in IITA provides a legally sound solution. As noted above, the departure in IITA from common municipal corporate law principles and customary international law is mainly derived from two basic thoughts: First, the explicit inclusion of shares in a typical investment definition of a given IIT does also refer to the substantive rights such protection includes. Second, these rights arise from IITs as lex specialis, i.e., as a legal source independent of municipal and other international law.57

Conversely, despite the inadequate recognition of policy and doctrinal considerations underlying the general bar of shareholder claims under municipal law, opponents mainly allege that the approach in IITA is not sufficiently legally sound because the protection of certain assets as investments must be distinguished from the rights they include. Thus, IITA tribunals should respect and refer to municipal law wherever IITs do not provide a further explanation of rights.58 This includes, in particular, the distinction between rights and mere economic interests in a company.59

Principles of Treaty Interpretation

The debate can be primarily described as a matter of treaty interpretation. For this reason, and because IITs provide an independent source of law, it is helpful at this point to examine well-accepted criteria in this area in more detail.

Most tribunals in IITA correctly invoke the Vienna Convention on the Law of Treaties (“VCLT”), which in Art. 31 ff. provides binding standards for state parties on interpreting IIT provisions.60 Following the canon of interpretation set forth in Art. 31 VCLT, this involves focusing on the true meaning of the text in good faith that takes into account further aspects such as context, objective, purpose, and state practice – and, where ambiguity remains, further recourse to supplementary means, including preparatory work of the IIT and the circumstances of its conclusion, Art. 32 VCLT.61

The inclusion of shares as protected investments leaves ambiguity as to whether the substance of rights resulting from that inclusion is to be derived from municipal law or separately from the spirit of the IIT. Recourse to the preparatory work of the treaty and the circumstances of its conclusion is often futile since the negotiating history of IITs is typically not, or only poorly, documented.62

Nevertheless, the better reasons argue for the latter approach, even though the broad consistency of barring shareholder claims for reflective losses under municipal law might point in the opposite direction. Considering the presumptive intention linked with the common broad investment definition,63 it can be assumed that the parties intended to grant effective protection for these assets as well. This applies in particular if the definition explicitly comprises the protection of mere interests in companies and indirect investments64 and if the recourse to municipal law might be insufficient in the international context. The conceivable need for a different view of shareholder (and indirect investor) claims for indirect damage in IIT law as opposed to municipal law has already been shown.65

This view is espoused by the fact that the restrictive approach regarding a shareholder’s standing in customary international law was adopted with additional reference to possible further protection in IITs.66 In line with this, some scholars deserve support in pointing out that the broad investment definitions in IITs must be seen as an explicit response to avoid the limitations of diplomatic protection of shareholders under customary international law.67

Development in Treaty Drafting

The fact that treaty language has rarely changed over the years in this regard also affirms the approach to shareholders’ standing adopted in IITA.68 This applies in particular since state practice can serve as an interpretative aid as described above. The fact that the well-established no reflective loss principle in municipal corporate law is based primarily on case law69 does not necessarily contradict this assumption. However, such interpretation admittedly is not compelling.

The Protection of Shareholdings in Context

However, for IITs extending the scope of investment protection under Art. 25(2)(b), it is open to question whether the unrestricted admission of shareholder claims indirectly bypasses and contradicts the purpose of this provision.70

In cases of doubt and as a matter of consistency, it seems more favorable to apply the preceding approach here as well. Otherwise, significant protection gaps would again arise for minority and noncontrolling shareholders71 as well as for certain forms of indirect investment structures. The latter might arguably concern situations of indirect foreign control.72 Besides, a company’s recourse as a deemed foreign company might be prevented in non-ICSID cases since IITs often allow those claims merely by reference to Art. 25(2)(b) ICSID Convention.73 It is not persuasive to make substantial treaty provisions dependent on which arbitral forum (ICSID or non-ICSID) is chosen. Finally, treaty protections through claims by a deemed foreign company might be ineffective since the host state’s misconduct can neutralize the company’s ability to claim.74 Significant protection gaps remain conceivable.

Consequently, to grant effective treaty protection to all foreign shareholding investments as indicated in the relevant investment definition, consent contained in IITs must be understood as an additional option for challenging the host state’s adverse action rather than as an implied limitation of shareholder claims. More favorable seems to be that the latter provides “downstream” protection and the admission of shareholder claims ensures “upstream” protection.

A similar line of thought applies to the relationship between shareholder claims and derivative claims. At first glance, the existence of derivative claims seems to argue for a denial of shareholder claims. However, treaty-based derivative claims – unlike derivative claims under many municipal corporate laws – are typically granted as majority rights. This might entail agency problems and protection gaps for minority shareholders.75 Those protection gaps are severe since the general bar on shareholder claims in municipal law is, at least partly, to be understood against the background that minority shareholders can protect their investment by way of derivative claims with recovery to the company under certain circumstances.76

Assuming that IITs can be interpreted as a legal framework that seeks to provide effective protection for all foreign investments, as shown above, shareholder claims do not necessarily appear to be precluded if the possibility of derivative claims is granted in IITs. Yet, as a matter of substance, it ought to be emphasized that this interpretation still does not fully clarify to what extent actual compensation to the claiming shareholder is justified.

Interim Result

As far as it concerns the jurisdictional stage, the preceding analysis shows that the broad inclusion of shares in typical investment definitions provides a sufficient legal basis to generally derive shareholders’ standing in IITA to claim for reflective losses. This view is supported by the fact that IITs provide an independent source of law. As such, IITs shall provide an independent legal regime that effectively secures protection standards of international investments.

In light of this, it deserves support that the shareholders’ right to claim for reflective losses is to be regarded as its own and treaty-based original right of action. It also seems more favorable to derive the substance of treaty-based rights from the relevant IIT rather than from national corporate laws.

Remaining Ambiguity Concerning the Substance of Treaty-Based Shareholder Rights

However, the analysis above still does not clarify the actual substance of treaty-based shareholder rights. In particular, it remains open to question whether and to what extent shareholders’ reflective losses necessarily have to be remedied through direct compensation to a claiming shareholder. It also remains open to question based on which criteria the substance of rights ought to be derived from a given IIT. In this regard, it particularly remains conceivable that IITA ought to consider matters of consistency and coherence that arise from the external legal framework in which the investment is embedded.

Due to the remaining ambiguity regarding the substance of the rights to claim, at least, it does not seem persuasive only to refer to the argument that the text of the IIT ought to be deemed to be the authentic expression of contracting state parties’ intentions.77 Rather, there are good reasons that issues of consistency and coherence still need to be addressed. Although in line with the common approach in IITA, they cannot be ignored. This particularly applies if consistency and coherence matters can be taken into account to achieve more sound solutions that do not affect the presumptive intention of IITs to provide effective investment protection.

The need to do so is shown not only by the criticism IITA has attracted in this matter but also by occasional attempts to constrain the admission of shareholder claims in IITA jurisprudence.78 Furthermore, it is hard to believe that states intended to implicitly waive fundamental and widely accepted corporate law principles in the international context without an explicit explanation for doing so. In this regard, the fact that the widely accepted no reflective loss principle in national corporate laws is primarily case law-based can also be seen as an argument to merely leave this issue to the tribunals in IITA as well.

Thus, the preliminary result regarding the jurisdictional stage requires further elaboration concerning the actual extent or substance of the treaty-based rights of action.

Existing decisions in IITA that attempt to constrain the admission of shareholder claims lack a common doctrinal concept and a sufficient legal foundation. This applies at least when it comes to establishing a cut-off point. This is primarily because policy considerations and matters of coherence are not reflected as part of an overall concept of shareholders’ standing for reflective losses in the first place.

The analysis thus concludes by examining the extent to which policy considerations barring shareholder claims under municipal law can be recognized and reconciled with the general admission of shareholder claims in IITA.

Toward a Coherent System

Need for Higher Coherence

The list of insufficiently resolved procedural and substantive law issues arising from the admission of shareholder claims is long. As indicated above, the key procedural challenges concern (i) the problem of parallel and multiple proceedings, including the risk of inconsistent and divergent decisions on basically the same dispute, complemented by (ii) a virtually endless chain of potential claimants plus (iii) the controversial issue of treaty and/or forum shopping, linked with (iv) the question of a possible abuse of process.

Substantive law matters under particular debate range from (i) the risk of double recovery resulting from the multiplication of claims or, vice versa, the risk of double jeopardy for the liable state and (ii) the extent of liability and the determination of damage to (iii) various issues about consistency with widely accepted municipal corporate law and corporate governance principles that arise mainly out of the distinction between a company and its shareholders as separate legal persons as well as (iv) related coherence matters arising from other fields of law such as insolvency law and tax law. The latter two aspects include the protection of other shareholders and stakeholders (especially creditors) in the company by safeguarding the ranking of claims on corporate assets as a necessary response to the prevalence of companies with limited liability.

Even though this broader context is important for creating coherent and legally sound solutions, not all of the issues and concerns mentioned above can be comprehensively analyzed in this article. Likewise, not all of them refer solely to the admission of shareholder claims or are – or seem to be – equally relevant in practice. However, their potential relevance can scarcely be denied.

This applies in particular to the reconciliation of claims initiated by both shareholders and the local company based on the same set of facts and multiple claims of shareholders of the same corporate group.79 One of the major substantive law issues is the risk of double recovery arising from the admission of shareholder claims and closely related issues such as the designation of the actual compensation for damages.

A recent supplementary issue is whether, or to what extent, settlements agreed between the harmed local company and the host state might affect the right of shareholders (minority ones, in most cases) to seek further compensation in IITA. Diverging views on this have already been adopted in IITA.80 However, it can be tentatively presumed that the prevailing view81 will be that a settlement agreement does not affect the shareholder’s treaty-based right to claim and the admissibility of the claim. This view was adopted in Hochtief v Argentina82 and Sempra v Argentina.83

The issues around the risk of double recovery are representative of various coherence and consistency concerns that relate to and immediately arise out of the legal distinction between shareholder and company as separate legal persons. The following section examines how the general admission of shareholder claims in IITA can be sufficiently reconciled with those concerns.

Key Features on the Path to Greater Coherence

On the path to a more coherent solution for shareholder claims, two aspects seem worth pointing out. First, the debate has not yet sufficiently considered the difference between jurisdiction and admissibility. Contrary to the common approach in IITA, the general admission of shareholders’ standing as a matter of jurisdiction does not necessarily have a prejudicial effect on the merits. It is contested whether the issue at hand is a matter of admissibility and, therefore, can be assessed as part of the merits or (only) as a matter of jurisdiction.84

Rather, it can be presumed to be both, i.e., an issue with double relevance.85 Consequently, from a doctrinal point of view, it is conceivable that substantive law issues such as the risk of double recovery and coherence matters arising from the piercing of the corporate veil can be at least partly recognized as part of the assessment of the merits. This applies even though it deserves support that the substance of international investment protection is to be developed in the light of the specific IIT.

Second, as IITs generally grant legal standing for shareholders to claim for reflective losses, the question remains as to how such losses ought to be remedied. As a consequence, IITs do not necessarily preclude the consideration of coherence and consistency aspects as long as they do not undermine the purpose of treaty-based investment protection.

Although treaty-based international investment protection constitutes a legal spectrum which is – and essentially ought to be – independent of municipal law, it cannot be ignored that shareholdings as investments are inseparably linked with municipal corporate law which, in turn, is embedded and reconciled in a complex system of other interest holders and other fields of law. Such integral legal connections are matters of coherence and consistency that essentially do not affect matters of international investment protection. They might implicitly favor international investments to a greater or lesser extent. Conversely, immediate adverse action of the host state in this regard can also trigger treaty-based investment claims.

However, if sovereign measures contested under IITs do not directly concern the exterior legal system in which an investment is embedded and structured, there are no fundamental concerns against considering broadly accepted corporate law principles and policy issues or matters of coherence related thereto. On the contrary, since IITs are commonly silent on the extent and substance of rights granted in IITs, tribunals in IITA should take these matters into account. This applies provided that the consideration of these principles does not essentially undermine the function of treaty-based international investment protection as an independent regime.

It is beyond the purpose of treaty-based investment protection to overrule any constraints arising from the structure of the investment in the first place. If sovereign measures do not directly intervene in such a system, restrictions arising from the embedding of the international investment are normally not affected. How foreign investments are structured reflects a complex investment decision comprising a detailed consideration of various matters such as corporate governance, liability, and tax. IITA ought to respect and reflect the outcome of these considerations. Thus, the legal consequences of treaty-based investment protection must not distort the system of advantages and disadvantages linked to the consideration of these aspects. The general admission of shareholder claims with immediate compensation being awarded to shareholders for damage that affects their company might at least potentially undermine such a system. This problem cannot sufficiently be addressed by the mere quantification of losses. Thus, any compensation for damage to shareholders themselves might provide advantages beyond the purpose of treaty-based investment protection.

The following simplified example of tax consequences illustrates the problem where damages for reflective losses are paid to a company’s shareholder. The damage affects the company in general and reduces its income tax. In turn, the payment of damages to the shareholders widely ignores several levels of taxation, including related matters of municipal and international taxation. This might provide unjustified tax benefits which are difficult to reconcile in an international context. Any consideration as part of the quantification of losses can hardly be able to reconcile the problem that for tax reasons damage and damages, in fact, refer to the same level. A second example is settlement agreements between a local company and the host state regarding the same detrimental conduct, i.e., materially the same facts underlying a shareholder’s reflective loss as an (indirect) pro rata reflection of the immediate damage to the company. This is discussed further below.

In light of the risk of double recovery linked to the admission of shareholder claims with recovery to the claiming shareholder(s), the following section describes how the elements above can be placed in a more coherent and consistent framework that respects both the independence of treaty-based international investment protection and common corporate law principles.

Reconciling the Risk of Double Recovery

Insufficient Approaches in IITA

According to the prevailing opinion, the admission of shareholder claims with (proportionate) recovery to the shareholder should not ultimately amount to doubled compensation. Various solutions appear possible to address the risk of double recovery.86 One might be to impute awards granting damages within a chain of claiming shareholders and/or to take into account any indirect compensation arising from a previous settlement agreement, as the case may be.87

This approach is at least not persuasive as a general approach. The method shows weaknesses in downstream situations, i.e., where indirect shareholders receive an award for reflective losses and then direct shareholders initiate a separate claim. If settlement agreements have not been reached in advance, the same applies if a company seeks remedy following a shareholder’s claim for reflective losses. Furthermore, the imputation approach does not sufficiently reconcile the issue of coherence, as indicated by the tax consequences outlined above.

Another weakness of the imputation approach is that it materially affects and fundamentally questions the possibility of settlement agreements between the local company as the harmed entity and the host state. The same applies to any related alternative dispute resolutions. As IITA jurisprudence also grants legal standing to indirect shareholders holding their shares through another company or a chain of intermediaries, it ultimately precludes host states and directly affected local companies from evaluating and agreeing on out-of-court settlements.

The key reason for this is that such arrangements are no longer able to achieve their primary objective: a definite and comprehensive dispute resolution that, at best, restores confidence at an early stage, which, in turn, simultaneously might best protect the initial investment of all shareholders. An adversely affected company, of course, is not entitled to dispose of shareholder rights including those existing under IITs.88 Conversely, the nationality requirements under Art. 25(2) ICSID Convention often effectively prevent shareholders from assigning their treaty-based rights to a local company89 even if they wanted to.

Thus, consent of all shareholders to a negotiated settlement agreement and/or a waiver of claims of all shareholders would be necessary to preclude treaty-based shareholder actions following a settlement agreement between an affected company and the host state. From the state’s point of view, it would even require also involving all indirect shareholders to achieve a definite settlement of the dispute. It is obvious that this cannot be deemed practical. The fact that any indirect compensation of a reflective loss due to a settlement agreement with the company is to (or ought to) be taken into account in an IITA proceeding is not sufficient in this regard.

Private Ordering Solution?

A more recent opinion argues that private ordering, or self-regulation, might offer a superior solution to restoring the corporate governance dynamics affected by shareholder claims in IITA. Based on the contractual theory point of view understanding a corporation as a “nexus of contracts,” it suggests that the company/corporation generally ought to be entitled to bring claims in IITA.90 The issue of shareholder claims in IITA can be addressed by tailored provisions in the corporate documents.91 In this regard, for example, a waiver system concerning the shareholders’ right to claim under an IIT might be agreed, or provisions might be included, stipulating that damages resulting from a host state’s adverse action shall be only awarded to the company.92

The proposal deserves support in its concern to consider the corporate governance structure in which an investment is embedded. However, it is not persuasive to address the IITA-related issue of shareholder claims for reflective losses in private agreements because it is an issue which cannot be left to the discretion of the company and its shareholders.

The extent of investment protection is subject to an agreement by the states of a respective IIT. The proposed approach would distort the prerequisites on foreign investors set forth in the IIT. In ICSID proceedings, for example, it would undermine the states’ agreement in the IIT on whether a local company shall be deemed as foreign one under Art. 25(2)(b) ICSID Convention.

More importantly, resolving frictions arising from disregarding widely accepted corporate law and corporate governance principles in IITA including the common distinction between the company and its shareholders as separate legal persons must not be at the discretion of the shareholders and their company. Such approach does not sufficiently consider that these principles do not refer to the internal organization of the company only. Rather, they are strongly linked to legislative and policy considerations which refer to the company’s external relationships including overall aspects regarding creditors and other stakeholders as well as the reconciliation of various legal principles and fields of law such as insolvency and tax law.

Therefore, the IITA-specific issue of shareholder claims needs to be addressed and resolved by an approach that is independent from any agreement between the company and its shareholders. Rather, a resolving approach of this issue needs to be embedded in the logic of IITA and the contractual framework of IITs. As such, it seems to be persuasive to seek for an approach that can be adopted in any IITA proceeding.

Reconciliation by Assessing the Extent of Treaty-Based Rights

In this regard, it is crucial to correctly determine the extent of treaty-based rights. In line with the aforementioned general considerations, it seems more favorable to acknowledge the corporate structure in which a given investment is embedded in assessing the admissibility of a shareholder’s right to claim under the relevant IIT.

As long as the local company’s decision to enter into a settlement agreement reflects an independent decision of its management and/or its majority shareholders without any political interference or pressure from the host state, there are no grounds for believing that a formally existing treaty-based right to claim should not respect inherent legal constraints that result from the corporate or corporate governance structure. Disadvantages arising from a shareholder’s lack of influence or power in a company to prevent its management from agreeing an out-of-court settlement typically go beyond the purpose of treaty-based investment protection and, thus, ought to be respected in general. Like any other management decision, this limitation originates from the corporate or corporate governance structure in which the shareholder’s initial investment is embedded.

On a more abstract level, this proposal reflects the conclusion that the admission of shareholder claims is not only a matter of jurisdiction but also a matter of the admissibility assessment in the merits. Thus, as a general rule, it appears justified to reinterpret the extent of shareholders’ rights to claim for reflective losses as part of the admissibility assessment.

In this regard, tribunals are asked to consider and balance well-established corporate law principles and the purposes of treaty-based international investment protection. This can be done as a two-stage examination. It allows tribunals to first consider and recourse on well-established corporate law principles and then to evaluate whether the outcome requires an alteration to provide effective investment protection that is guaranteed by a given IIT. As a result, the proposed reinterpretation of the extent of treaty-based shareholder rights can take different forms. In some cases, the balancing process will factually effect a limitation of rights compared to the current system. In other cases, even higher damages are conceivable even though payments are to be made to the company.

In the context of shareholder claims following a settlement agreement on materially the same set of facts, the admissibility of treaty-based shareholder claims ought generally to be rejected.

As a general rule (at least from a doctrinal point of view), the extent of a shareholder’s right to claim ought also to be limited in the absence of any settlement agreement made between the host state and the harmed local company. However, in this regard, the proposed limitation shall not preclude the admission of a shareholder’s action. It shall mean that the relevant shareholder is entitled to claim for damages to be paid to the company.

This limitation appears justified due to similar thoughts that were made in the context of priorly concluded settlement agreements: if direct compensation to the relevant shareholder is not required to provide effective treaty-based investment protection, the shareholder may generally seek damages only with recovery to the company. The main reason for this is that – in economic terms – shareholder claims are de facto actions on behalf of the company because they seek compensation for the damage that occurred at the level of the company.93 Any exception (i.e., immediate payment of damages to the claiming shareholder) requires further examination and ought to be derived from the specific purposes of the relevant IIT.

The proposed reinterpretation of the extent of treaty-based shareholder rights as part of the admissibility assessment thus reflects the other side of the coin for granting legal standing to shareholders for substantially the same damage caused to the company by the host state’s adverse action. Consequently, as is the case with derivative claims, recovery is allocated to where the actual damage occurred, which heals the reflective loss arising from the damage accordingly.94 This approach respects and satisfies the individual need and treaty-based right of shareholders to protect their investment independently of other shareholders and the company in the absence of any majority decision at the company level. It also eliminates the risk of double recovery or, conversely, the risk of double jeopardy for the liable state. The damage occurred once, and, as a general rule, compensation ought to be awarded only once to the company based on the shareholder’s action.

However, the proposed conceptual shift regarding shareholder claims is eligible to contradict the purposes of IITs. It might lead to the consequence that effective treaty-based protection cannot be achieved in certain circumstances. The admissibility assessment allows taking these particularities into account. It is not justified to limit the shareholders’ rights based on the deference of well-established corporate law principles and the corporate structure in which the investment is embedded if the host states (indirectly) exploit any constraints regarding shareholder rights arising therefrom to violate or to perpetuate the violation of international investment standards guaranteed in a given IIT. This needs to be addressed as part of a balancing process at the second stage of the admissibility assessment.

Therefore, in the context of shareholder claims following a settlement agreement on materially the same set of facts, treaty-based shareholder claims ought to be admitted in cases in which the settlement agreement does not reflect a normal business decision of the majority shareholder or the competent body in a company. This is particularly the case if the majority shareholder or the competent body is controlled by the state that caused the damage.

Similar applies to the proposal that the payment of damages ought to be made to the company. In certain circumstances, tribunals ought to be entitled to grant direct recovery of damages to the claiming shareholder (pro rata). However, these exceptions ought to be made upon further examination only. They ought to be derived from the specific purposes of the relevant IIT and/or from generally accepted principles that evolved in international law.

In the aforementioned context of shareholder claims following a settlement agreement that does not reflect an independent decision of its management and/or its majority shareholders without any political interference or pressure from the host state, effective investment protection of course requires not only the admission of treaty-based shareholder claims but also direct compensation of the (remaining) damage to the shareholder.

In all other cases, exceptions can be made based on the following thoughts: taking up widely accepted principles adopted by the ICJ regarding diplomatic protection of shareholders in cases of reflective losses,95 immediate recovery to the shareholders might be an option in situations in which the company, as the party harmed by a state’s adverse action, ceased to exist and the efficiency of treaty-based investment protection would otherwise be adversely affected.

Another exception is conceivable where the payment of damages to a company would contradict the purpose of treaty-based investment protection. One example could be where the investment is made with a state-owned or state-controlled company as a (majority) shareholder, as a public-private partnership, or as a joint venture. In these or similar situations, any restriction formally arising from the corporate (governance) structure is potentially influenced by the state as the injuring party. Therefore, the limitation of shareholder claims as mentioned is not or might not be justified. Given the purpose of IITs, in these situations, it seems justified to grant shareholders standing to seek remedy for reflective losses with immediate recovery to the claiming shareholder(s).

Some frictions between IIT law and common corporate law principles have to be accepted to secure treaty-based international investment protection as an independent legal spectrum. Any exceptions ought to be accepted only after careful consideration of the implications arising from insolvency law and associated principles such as the priority ranking. Tribunals ought to examine whether it is justified to depart from the general rule admitting shareholder claims with recovery to the company. This allows independent criteria in IITA to evolve which, in turn, affirms IIT law as an independent source of law. One aspect to examine might be whether municipal insolvency proceedings in any way consider the fact that shareholders intend to claim against the host state’s adverse action, making recovery to the company possible at all. Another might be the host state’s actual influence on and independence of municipal insolvency proceedings.

The novel aspect of the proposed two-stage examination as part of the admissibility assessment lies in its flexibility arising from a careful consideration of sufficient investment protection and common corporate law principles, as well as those of other related fields of law. Such flexibility is likely to entail more complexity. However, that added complexity seems necessary to achieve more coherent and sound solutions regarding shareholder claims in IITA. The greater coherence will, in turn, strengthen the overall system of IITA as a unique form of international dispute resolution between states and investors. After all, it is conceivable that “exceptional” compensation to the claiming shareholder is more often necessary to grant effective investment protection in practice than it seems to be from the doctrinal perspective described before.

Extent of Damages

Assuming a shareholder’s action is to be admitted as a claim for damages to be paid to the company only (i.e., no exception occurs that justifies a direct compensation to the claiming shareholder), it is difficult to answer to which extent the shareholder is entitled to claim damages to be compensated to the company.

One potential view is that the compensation cannot be calculated in proportion to the claiming shareholder’s stake in the company – as is common in IITA jurisprudence – which allows immediate recovery to the shareholder. The proposed conceptual shift to (generally) compensate reflective losses by paying damages to the company seems to require that shareholders are granted treaty-based standing for the full damage. Otherwise, the payment of damages would be diluted due to its allocation to the company, provided that the company is not wholly owned by the claiming shareholder. As a consequence, the payment would only partly remedy the reflective loss of the claiming shareholder.

However, it appears more favorable to apply a differentiated approach here again. The starting point ought to be to grant shareholders standing to claim for reflective losses with recovery to the company in proportion to their relative equity interest in the company (i.e., pro rata). In line with the general considerations above on prior settlement agreements, an associated dilution does not necessarily result from a state’s adverse action. Instead, it is often a direct consequence of being embedded in a particular corporate structure, including the decision of other shareholders not to claim. This limitation ought particularly to be made if an IIT allows derivative claims to be initiated by the majority/controlling shareholder and the majority/controlling shareholder refrains from arbitral proceedings. The same should apply if other shareholders refrain from treaty-based arbitral proceedings even though they are entitled too.

Consequently, in these cases, reflective losses can only be remedied in full if all shareholders are entitled to claim under a given IIT and if all shareholders decide to claim for such losses with recovery to their company.

However, it remains open to question as to whether an exception to this general “pro rata principle” can be made in situations in which non-claiming shareholders in the company are not entitled to initiate arbitral actions for reflective losses. This might be the case due to a lack of treaty-based investment protection. In these cases, it does not seem precluded to grant the payment of full damages as an adequate consequence of the state’s detrimental action. This does not necessarily undermine the lack of investment protection or lower standards of investment protection regarding all other shareholders. Rather, host states are obliged to abstain from measures violating any IIT in the first place. Thus, in these situations, the proposed concept ought to result in the entitlement of shareholders to claim even for higher damages than under the current approach in IITA.

Doctrinal Aspects

The proposed approach does not contradict the assumption that shareholders can claim damages based on their own (treaty-based) right since the extent of this right is derived independently from the relevant IIT based on the objectives and obvious intention of the parties. As shown, facilitating access to substantive IIT protection, especially for minority and noncontrolling shareholders, does not automatically mean that states intended to waive unanimous principles of corporate law.

Neither does the proposed approach distort the distinction between shareholder claims and derivative claims. Practical outcomes can indeed be similar for both types in certain situations,96 even though the underlying concepts are different. Claims for the same harm compete where the company’s preliminary status as the directly affected entity must be reconciled with the shareholders’ own right to claim for reflective losses.

As shown, the better reasons argue for generally allowing shareholder claims with recovery to the company limited to the relative (reflective) proportion of the damage. However, recovery to the company in full as well as immediate recovery (pro rata) to the claiming shareholder remains conceivable by way of exception. These exceptions, however, require further examination. It is likely that these exceptions from a doctrinal point of view might even constitute the typical outcome in practice. As a result, the proposed concept is eligible not only to achieve more coherent and sound solutions but also to provide a higher level of international investment protection.

Overall Evaluation

Granting shareholders standing for reflective losses upon a two-stage examination and balancing process as part of the admissibility assessment effectively considers the criticism that IITA has attracted in the context of shareholder claims without undermining the overall effectiveness of treaty-based international investment protection as an independent legal spectrum. This applies at least for substantive law matters.

The proposed conceptual shift is eligible to provide legally sound and coherent solutions. As shown, understanding shareholders’ standing in claims for reflective losses not only as a matter of jurisdiction but also as a matter of the admissibility assessment makes it possible to sufficiently reconcile IIT protection as an independent source of law with common corporate law principles and related policy considerations, including reconciliation with other fields of law. The fact that IITs are typically silent on the substance of treaty protections means that substance can be derived not only in line with the purpose of IITs but also in consideration of unanimous corporate law principles and associated policy considerations. The proposed approach enables a detailed consideration of separate but linked legal spectra. As such, it creates an appropriate balance without overemphasizing one spectrum or the other.

Provided that effective treaty-based investment protection is not materially affected, the shareholders’ right to claim ought to be limited to the extent that compensation is to be paid to the company and not to the shareholder. Simultaneously, it is conceivable that the shareholder is not limited to claim damages only pro rata to its share in the company.

This conceptual shift not only broadly eliminates the risk of double recovery while securing the efficiency of foreign investment protection. It also best reflects the typical implied intention of an IIT’s contracting states. Moreover, it recognizes the distinction drawn between the company and its shareholders as separate legal persons and acknowledges that the shareholders’ loss is only reflective or indirect. The proposed approach also reflects that the actual assets constituting the shares’ values are vested in the company and that shareholders have only indirect access to these assets through their shareholder rights. Finally, it recognizes the balanced corporate governance system as well as the differentiated system of stakeholder interest reconciliation set forth in municipal corporate law and, consequently, respects the fundamental principles underlying the company’s limited liability and liability shielding in favor of its shareholders if municipal corporate law so provides. This includes fundamental insolvency and taxation matters in general and enshrines the equal treatment of shareholders as well as the positions and interests of the company’s lenders and other creditors.

Conversely, the proposed approach allows a departure from such principles (i.e., the admission of shareholder claims with direct payment of damages to the claiming shareholder) where effective treaty-based investment protection requires it. However, these exceptions ought to be made upon further examination only. In these situations, some contradictions to fundamental municipal corporate governance principles might remain non-reconcilable. However, they are an expression of IIT law as a source of international law that is both independent of domestic law and balanced with other legal spectra. As such, the broader admission of shareholder claims under IITs, as opposed to municipal corporate law, must be understood as a prevailing policy consideration in the IIT context to effectively protect all kinds of foreign shareholders.

Shareholder claims are closely related to a vast number of procedural issues. It can tentatively be stated that the existing legal instruments cannot provide sufficient options to resolve these issues. This applies in particular to the problem of parallel or multiple claims linked with favored forum/treaty shopping and the risk of inconsistent decisions on substantially the same matter. It is often not possible to rely on res judicata and lis pendens or similar principles,97 unless they are interpreted with broad flexibility. Likewise, the availability of facilitative options such as consolidation and joinder of parties is limited.98

Given the complexity of multiple treaties, parties, and forums that might be involved, a comprehensive resolution can only be achieved de lege ferenda. For example, this might be made as an appropriate state response in the treaty language or as part of the EU initiative to establish a permanent multilateral investment court for IIT disputes.

However, these remaining procedural challenges do not seem to call the foregoing solution on shareholder claims fundamentally into question. The proposed approach is primarily based on the interpretation of rights conferred by IITs. Hence, it must be evaluated separately from other procedural challenges often associated with shareholder claims. While these challenges can arise in shareholder claims, they are not inseparably linked with them. Thus, for example, the risk of multiple proceedings also arises where different shareholders bring parallel actions under different treaties or different arbitral rules that challenge adverse actions directly affecting their position as shareholders.

Conclusion

The foregoing analysis revealed that IITs generally provide a sufficient legal basis for admitting shareholder claims for reflective losses. Simultaneously, it can hardly be assumed that states intended to implicitly waive all policy considerations underlying the general bar of those shareholder claims resulting from the recognition of companies and their shareholders as distinct legal persons. Since the issue at hand in IITA is usually only addressed as a jurisdictional matter, IITA (partly) fails to evaluate and reconcile this ambiguous finding emerging from typical IITs. The gap regarding substantive law issues can be closed by the admission of shareholder claims with recovery to the company. However, this is only justified provided that such compensation at the company level can be seen as effective investment protection (i.e., the payment of damages to the company indirectly compensates reflective losses of the shareholder). If not, immediate recovery on a pro rata basis to the claiming shareholder ought to be accepted where the purpose of treaty-based international investment protection (i.e., effective investment protection) requires this. Remaining procedural challenges need to be resolved primarily de lege ferenda.

Cross-References

Footnotes

  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

Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.Dispute Resolution and Corporate/M&A/VC, Flick Gocke SchaumburgBerlinGermany

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