11
Admissibility: Shareholder claims
Rule 47: A claim founded upon an investment treaty obligation
which seeks a remedy for the interference by the host state contracting
party with the rights attaching to a shareholding in a
company having the nationality of the host state is admissible.
Rule 48: A claim founded upon an investment treaty obligation
which seeks a remedy for the breach by the host state contracting
party of undertakings or representations made to the shareholder
but not to the company, or such a claim for other types
of loss that are separate and distinct from the company’s loss, is
admissible.
Rule 49: A claim founded upon an investment treaty obligation
which seeks a remedy for the diminution of value of a shareholding
in a limited liability company having the nationality of the host
contracting state party is admissible if the claimant can establish a
prima facie case that: (i) the assets of the company have been
expropriated by the host contracting state party so that the shareholding
has been rendered worthless; or (ii) the company is without
or has been deprived of a remedy to redress the injury it has
suffered; or (iii) the company is without or has been deprived
of the capacity to sue either under the lex societatis or de facto;
or (iv) the company has been subjected to a denial of justice in the
pursuit of a remedy in the system for the administration of justice
of the host contracting state party.
Rule 50: For a claim to be admissible pursuant to Rule 49, the
tribunal should satisfy itself that the shareholder’s claim will not:
(i) unfairly expose the host state or the company to a multiplicity of
actions; (ii) materially prejudice the interests of the creditors of the
company; or, (iii) interfere with a fair distribution of the recovery
among all interested parties.
397
A . I N T R O D U C T I O N T O T H E P R I N C I P L E
O F A D M I S S I B I L I T Y F O R S H A R E H O L D E R C L A I M S
743. Perhaps the single greatest misconception that has plagued the investment
treaty jurisprudence to date concerns the problem of claims by shareholders.
The root of this misconception is the incorrect characterisation of the
problem as one of jurisdiction rather than admissibility. There is no difficulty
in confirming the tribunal’s jurisdiction ratione personae over a shareholder
with the requisite nationality. There is also no difficulty in confirming a
tribunal’s jurisdiction ratione materiae over claims by that shareholder in
relation to its investment in shares in a company incorporated in the host state.
A shareholding is a ubiquitous inclusion in the list of assets entitled to
investment protection in the first article of investment treaties. But is that
the end of the analysis?
744. If a claimant with the requisite nationality seeks compensation for the
expropriation of land situated in the host state, the jurisdiction of the tribunal
may be uncontroversial. There may, however, be a substantive issue that
requires determination as a preliminary matter. Suppose the claimant’s rights
over the land in question were in the nature of a leasehold, and, following the
expropriation, the host state simply substituted itself for the previous lessor and
performed the obligations of the lessor in accordance with the terms of the lease
so that the rights of the lessee (the claimant) over the land were completely
unaffected. Should the tribunal proceed to hear the merits of the claimant’s
claim for an expropriation? The answer is no; not because the tribunal lacks
jurisdiction, but because the claim belongs to the original owner of the land.
In other words, the claim advanced by the claimant/lessee is inadmissible. It is
inadmissible because, as a matter of law, the claimant does not have the requisite
legal interest in the investment property in question (the land) to prosecute an
investment treaty claim of this character.1
745. With these distinctions in mind we revert to the problem of shareholder
claims.
746. Suppose it transpired that a major foreign oil company relinquished a
controlling interest in an oil and gas project in the host state to a state-owned
company at below market price under duress from the host state’s government.
The oil company’s board of directors ratified this transaction, which was
memorialised in a new shareholders’ agreement with the state-owned company.
Assume also that, as a result of this transaction, the share price of the oil company
1
Thus, for instance, the Iran/US Claims Tribunal dismissed an expropriation claim brought by the
bailee of property rather than by the owner: Petrolane v Iran (Case AWD 518-131-2, 14 August
1991) 27 Iran-US CTR 64, 92.
398 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
deteriorated. As is typical among the major oil companies, there are thousands
of shareholders affected thereby in varying degrees. A majority of those shareholders
are nationals of states with bilateral investment treaties with the host
state. Would an investment treaty claim by each individual shareholder of the oil
company be admissible?
747. From a functional perspective, if the answer were to be affirmative then the
investment treaty regime would be doomed as a sustainable system of investment
protection. The purpose of this extreme and improbable scenario is merely
to illustrate the point that there must be a limiting principle of admissibility for
shareholder claims. It cannot be right that any shareholder may bring any type
of claim in respect of any prejudice caused to the company by the host state
resulting in any diminution of the value of the shareholding. A remarkable and
disturbing feature of a canon of investment treaty precedents is that, if their basis
for decision were to be generalised, this would be the position. Indeed this
possibility was accepted as an inevitable feature of the investment treaty regime
in Camuzzi v Argentina:2
The argument made by the Argentine Republic and which is also reflected
in Methanex, to the effect that if the right of shareholders to claim when
only their interests are affected is recognized it could lead to an unlimited
chain of claims, is theoretically correct. However, in practice any claim for
derivative damages will be limited by the arbitration clause.3
748. The ‘arbitration clause’ in the investment treaty might restrict the class of
claimants that can resort to arbitration under that treaty, but it can hardly be
claimed that this is the panacea for dealing with the problem of admissibility.4
749. Every legal system that recognises a limited liability company as an
independent legal entity insists upon a distinction between the company and
its shareholders.5
A shareholder cannot, for instance, seize a physical asset of
the company in return for relinquishing its share with an equivalent value. That
would amount to conversion or theft, because the shareholder has no rights in
rem over the assets of the company. The company, as a legal entity separate from
its shareholders, holds the assets for its own account and in its own name.
A company does not hold assets as an agent or trustee of its shareholders.
Likewise, if a third party seizes an asset of the company unlawfully, then it is not
the shareholder who is the victim of conversion or a theft; it is the company.
2
Camuzzi v Argentina (Preliminary Objections).
3
Ibid. para. 65.
4
See also: Sempra v Argentina (Preliminary Objections) para. 77.
5
In Deutsche Amerikanische Petroleum Gesellschaft Oil Tankers 2 RIAA 777 (1926), an attempt to
discard this principle as a technicality of municipal law was rejected by an international tribunal:
‘most doctrine and nearly all jurisprudence in all countries accord to the legal entity known as a
company a personality and a patrimony entirely distinct from those of its shareholders’.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 399
These observations are trite, and yet the fundamental distinction between a
company and its shareholders appears to have been ignored or diluted to the
point of extinction in many investment treaty awards.
750. Whether a shareholder is bringing a claim in tort, for a breach of the fair
and equitable standard of treatment, or pursuant to Article 1 Protocol 1 of the
European Convention of Human Rights, the object of the claim is the same – a
shareholding in a limited liability company. In other words, the nature of the
legal institution known as a shareholding is invariable, regardless of the legal
source of the obligation that is sued upon to vindicate rights attaching to the
shareholding.
751. An investment treaty does not create a new type of shareholding by listing
it among the categories of assets that may constitute investments any more than
it creates a new type of land by the same device. Neither general international
law, nor investment treaties, purport to alter fundamentally a shareholding as a
legal institution known to most if not all municipal legal systems. It follows that
where a shareholding is the object of an investment treaty claim, the basic
contours of the rights attaching to that form of investment must be derived from
the municipal legal order. An investment treaty tribunal cannot, for instance,
wholly discard the basic distinction between the shareholder’s property and the
company’s property merely because the cause of action arises in international
law. De Visscher stated the obvious almost half a century ago: ‘L’actionnaire qui
profite de la distinction des patrimoines et des personnalités doit en accepter les
inconvénients comme les avantages.’6
This axiomatic principle has been largely
ignored in the jurisprudence on investment treaties. In Total v Argentina,7
for
instance, the tribunal justified its decision to uphold the admissibility of shareholder
claims as follows:
The protection that BITs afford to such investors is accordingly not limited
to the free enjoyment of the shares but extends to the respect of the treaty
standards as to the substance of their investments.8
752. This statement appears to imply that the ‘substance’ of the investments of
shareholders is the property of the company they invested in.
753. At this juncture it is necessary to refer briefly to the Barcelona Traction
case. One finds a ubiquitous statement in a great number of investment
treaty awards to the effect that the judgments of the International Court of
Justice in Barcelona Traction9
are entirely irrelevant to the investment treaty
6
P. De Visscher, ‘La Protection Diplomatique des Personnes Morales’ (1961-I) 102 Hague Recueil
395, 465.
7
(Preliminary Objections).
8
Ibid. para. 74.
9
(Belgium v Spain) 1970 ICJ Rep 4.
400 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
regime.10
In an important respect, this statement is correct. To the extent that
the Court was preoccupied with defining the nationality of the claim in
relation to the injury caused to the Barcelona Traction Company by Spain,
then its judgments are not on point for investment treaty arbitration.
Investment treaties have their own nationality requirements and there is no
justification for importing the rules of diplomatic protection into the investment
treaty regime. It is for this reason that Loewen v USA11
was wrongly
decided: not because the tribunal applied the continuous nationality rule of
diplomatic protection incorrectly, but because the tribunal had no reason to
apply it in the first place. To the extent, however, that the International Court
was concerned with the manner in which the legal institution of a shareholding
should be transposed onto the international plane, its judgments
demand very careful consideration, because that is precisely the issue that
confronts the investment treaty regime as well. The truth is that the learning
revealed in the hundreds of pages of the report on the preliminary objections
and second phase of the proceedings in Barcelona Traction, which includes
opinions from some of the great international jurists of our time, cannot be
categorically dismissed as besides the point.
754. The International Court posed the following question in Barcelona Traction:
It can be asked whether international law recognizes for the shareholders
in a company a separate and independent right or interest in respect of
damage done to the company by a foreign government; and if so to what
extent and in what circumstances.12
755. That question, which was addressed by the Court and by several of the
Judges individually, is entirely distinct from the problem of attributing nationality
to a claim for the purposes of diplomatic protection. That question must be
confronted by every supranational regime concerned with the protection of
property rights.
756. A survey of investment treaty precedents permits one of two conclusions
on the answer of this supranational regime for the protection of property rights
to the question posed by the International Court. The charitable conclusion
would be that investment treaty tribunals have failed to grapple with the problem
directly and instead have proceeded in an incremental fashion by upholding the
admissibility of shareholder claims in each specific context without articulating
10
Siemens v Argentina (Preliminary Objections) 12 ICSID Rep 174, 207/141; LG&E v Argentina
(Preliminary Objections) 11 ICSID Rep 414, 424/52; Camuzzi v Argentina (Preliminary
Objections) para. 139; Continental Casualty v Argentina (Preliminary Objections) para. 82;
Suez v Argentina (Preliminary Objections) para. 50.
11
(Merits) 7 ICSID Rep 442.
12
Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) 1964 ICJ Rep 6, 44
(Preliminary Objections).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 401
a general principle. The less charitable and more realistic conclusion would be
that investment treaty tribunals have indeed answered the International Court’s
question in the following terms:
The investment treaty regime recognises for the shareholders in the
company a separate and independent right or interest in respect of damage
done to the company by a foreign government to any extent and in all
circumstances.
757. If that is an accurate summary of the current position, which has indeed
been endorsed by numerous tribunals,13
then the sustainability of the investment
treaty regime cannot be assured.
758. This chapter provides a full assessment of the Barcelona Traction case
insofar as it is relevant to the investment treaty regime. The proposed principles
of admissibility for shareholder claims in the investment treaty context in Rule
47 to Rule 50 are then introduced and analysed by reference to the relevant
investment treaty precedents, other international cases and municipal court
decisions. The focus of the chapter then shifts to other supranational regimes
for the protection of property rights such as the Iran/US Claims Tribunal and the
European Court of Human Rights before moving to an account of the specific
provisions in investment treaties that deal with derivative claims by shareholders,
such as Article 1117 of NAFTA and Article 25(2)(b) of the ICSID Convention.
759. In this chapter, shareholder actions for ‘direct injury’ and ‘reflective loss’
are distinguished. An action for a ‘direct injury’ is premised upon the third party
having breached an obligation owed directly to the shareholder rather than just
to the company, whereas in an action for ‘reflective loss’ the shareholder is
suing for the diminution of the value of its shares caused by acts of the third
party directed to the company itself. Reflective loss can be defined as:
[T]he diminution of the value of the shares … the loss of dividends … and
all other payments which the shareholder might have obtained from the
company if it had not been deprived of its funds.14
760. The third party in investment treaty arbitration is of course the host state or
one of its emanations.
13
AES v Argentina (Preliminary Objections) 12 ICSID Rep 312, 328/85–9; CMS v Argentina
(Preliminary Objections) 7 ICSID Rep 494, 508–9/68; Siemens v Argentina (Preliminary
Objections) 12 ICSID Rep 174, 207–8/141–2; National Grid v Argentina (Preliminary
Objections) para. 169; LG&E v Argentina (Preliminary Objections) 11 ICSID Rep 414, 426/63;
Gas Natural v Argentina (Preliminary Objections) paras. 34–5; Continental Casualty v Argentina
(Preliminary Objections) paras. 79, 87; Pan American Energy v Argentina (Preliminary Objections)
para. 218; Suez v Argentina (Preliminary Objections) para. 51; Total v Argentina (Preliminary
Objections) para. 74; Noble v Ecuador (Preliminary Objections) para. 77.
14
Johnson v Gore Wood & Co. [2001] 1 All ER 481, 532.
402 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
B . T H E B A R C E L O N A T R A C T I O N C A S E
761. Great care must attend the deployment of judicial reasoning discovered
outside the investment treaty context to resolve contentious issues within it. But
even greater care must be taken before dismissing the valuable insights gained
from the rich experience of other judicial fora by simplistic appeals to the sui
generis nature of investment treaty arbitration. This applies with equal force to
the relevant experience of international and municipal courts.
762. It is often proclaimed that the Barcelona Traction case can be safely
ignored for investment treaty arbitration because it was concerned with defining
the nationality of the claim in respect of an injury caused to the Barcelona
Traction Company for the purposes of the general international law of diplomatic
protection.15
It is certainly true that the nationality of claim rules of
diplomatic protection should not be superimposed upon the nationality requirements
in investment treaties, and this is the essence of Rule 38. The
International Court was careful, however, to distinguish between questions of
capacity and substance.16
The question of substance was to identify the rights of
shareholders that are entitled to international protection as distinct from the
rights of the company. The question of capacity was to identify the state that had
standing to bring a diplomatic protection claim on behalf of the shareholders if
the question of substance were to be resolved in favour of the recognition of
their rights on the international plane. Thus, in its Decision on Preliminary
Objections, the International Court stated:
In short, the question of the jus standi of a government to protect the
interests of the shareholders as such, is itself merely a reflection, or consequence,
of the antecedent question of what is the juridical situation in
respect of the shareholding interests, as recognized by international law.17
763. This distinction informed the separate opinions of Judges Morelli, Fitzmaurice
and Gros in the Second Phase of the Proceedings. According to Judge Morelli:
To say that there is no rule which authorises diplomatic protection of
shareholders on account of measures taken in respect of the company is
to exclude the existence of any obligation of Spain in this connection,
15
In CMS v Argentina (Preliminary Objections) 7 ICSID Rep 492, 502–3/43, it was stated by the
tribunal that Barcelona Traction was not ‘directly relevant to the present dispute’ because it was
‘concerned only with the exercise of diplomatic protection’. The same comment was made in
Enron v Argentina (Preliminary Objections) 11 ICSID Rep 273, 280–1/38. See also: GAMI v
Mexico (Merits) para. 30.
16
An analysis of these two distinct issues is provided in: C. Staker, ‘Diplomatic Protection of
Private Business Companies: Determining Corporate Personality for International Law
Purposes’ (1990) 61 BYBIL 155, 155–8.
17
(Belgium v Spain) 1964 ICJ Rep 5, 45.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 403
vis-a-vis any other States. Belgium’s right is thereby denied, not because
such a right might hypothetically belong to a State other than Belgium (in
other words, not for lack of capacity on the part of Belgium), but rather
because no such right can be invoked by any State, since no rule exists
from which it could derive.18
764. The question of substance logically preceded the question of capacity, as
the Court itself recognised. In essence, it was necessary to identify the rights of
the shareholders that formed the object of the diplomatic protection claim and
determine whether or not those rights attracted the protection of international
law. The Court formulated the question as follows:
It can be asked whether international law recognizes for the shareholders
in a company a separate and independent right or interest in respect of
damage done to the company by a foreign government; and if so to what
extent and in what circumstances.19
765. This question was resolved by a renvoi to municipal law:
If the Court were to decide the case in disregard of the relevant institutions
of municipal law it would, without justification, invite serious legal
difficulties. It would lose touch with reality, for there are no corresponding
institutions of international law to which the Court could resort. Thus the
Court has, as indicated, not only to take cognizance of municipal law but
also to refer to it. It is to rules generally accepted by municipal legal
systems which recognise the limited company whose capital is represented
by shares, and not to the municipal law of a particular state, that international
law refers. In referring to such rules, the Court cannot modify, still
less deform them.20
18
(Belgium v Spain) 1970 ICJ Rep 4, 228 (Morelli J). Fitzmaurice J agreed with Morelli J’s
approach: ibid. 65 at note 2. Gros J stated that: ‘[T]he right of diplomatic protection, so far as
it materializes in a legal action, is to be distinguished from the substantive right which the
applicant State claims to have re-established.’ Ibid. 287.
19
Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) 1964 ICJ Rep 6, 44
(Preliminary Objections).
20
Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) 1970 ICJ Rep 3, 37. See
also: ibid. 33–4. See also: Separate Opinion of Fitzmaurice J, ibid. 66–8 (‘Since the limited
liability company with share capital is exclusively a creation of private law, international law is
obviously bound in principle to deal with companies as they are – that is to say by recognizing
and giving effect to their basic structure as it exists according to the applicable private law
conceptions. Fundamental to the structure of the company is the ascription to it, qua corporate
entity, of a separate personality over and above that of its component parts, viz. the shareholders,
with resulting carefully drawn distinct distinctions between the sphere, functions and rights of the
company as such, acting through its management or board, and those of the shareholder. These
distinctions must obviously be maintained at the international level: indeed to do otherwise
would be completely to travesty the notion of the company as a corporate entity. Thus it is that,
just as in domestic courts no shareholder could take proceedings in respect of a tort or breach of
contract committed in respect of the company, but only the latter could do so, through the action
of its management with whom the decision would lie – a decision which, broadly speaking, the
404 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
766. Judge Fitzmaurice made the same point in his Separate Opinion with
characteristic lucidity:
[I]f it is not right that international law should distort the structure of the
company (an essentially private law concept) by failing to give all due
effect to the logic of its separate personality, distinct from that of the
shareholders, it is no less wrong, and an equal distortion, if international
law fails to give due effect to the limitations on this principle recognised by
the very system which, mutatis mutandis, it is sought to apply on the
international plane.21
767. On what basis can an investment treaty tribunal approach this substantive
question differently or, indeed, ignore it altogether?
768. The misconception that meanders through the corpus of investment treaty
precedents is that the recognition by investment treaties of a shareholding as a
covered investment somehow disposes of the question relating to the rights of the
shareholder that can form the object of an investment treaty claim. These are
entirely distinct issues. A shareholder is entitled to resort to international arbitration
against the host state because it has satisfied its side of the quid pro quo by
making a covered investment in the territory of the host state. In other words, the
recognition of a shareholding as a covered investment in the investment treaty
settles the question of the capacity of the investor to prosecute a claim against
the host state. But this does not mean that the question of substance has been
resolved in favour of the admissibility of any and every claim advanced by the
shareholder. The ad hoc committee in CMS v Argentina22
clearly had this
distinction in mind:
CMS must be considered an investor within the meaning of the BIT. It
asserted causes of action under the BIT in connection with that protected
investment. Its claims for violation of its rights under the BIT were accordingly
within the jurisdiction of the Tribunal. This is without prejudice to
shareholder must accept – so also if an illicit act injurious to the company or infringing its rights
takes place on the international plane, it is not the government of the shareholder but, in principle,
that of the company alone, which can make an international claim or bring international
proceedings’). In contrast, Tanaka J preferred to bypass the municipal law conception of a
company altogether: ‘The concept of juridical personality mainly governs private law relationships.
It cannot be made an obstacle to diplomatic protection of shareholders. Concerning
diplomatic protection, international law looks into the substance of matters instead of the legal
form or technique; it pays more consideration to ascertaining where real interest exists, disregarding
legal concepts.’ Ibid. 127.
21
Separate Opinion of Fitzmaurice J, ibid. 71. See also the ICJ’s judgment: ibid. 39–40. See also:
Separate Opinion of Morelli J: ‘[T]here is on the one hand a set of rights conferred by the
municipal order of the company and, on the other hand, within the same legal order, another,
quite distinct set of rights conferred on the members. Each set of rights is entitled to its own,
distinct international protection.’ Ibid. 235.
22
CMS v Argentina (Annulment).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 405
the determination of the extent of those rights, a question to which the
Committee will return.23
769. The ad hoc committee annulled the tribunal’s decision on the umbrella
clause because it had assumed, without analysis, that CMS as the shareholder of
TGN could enforce the obligations as between TGN and Argentina under the
licence to transport gas.24
770. From the very outset, international law might have taken the view that
the company as an artificial person should not be recognised at all on the
international plane so that any injury to the corporation ultimately would be
reducible to the prejudice caused to the natural persons standing behind the
corporation. This approach has been emphatically rejected by international law
and by investment treaties.
771. In the Case Concerning Ahmadou Sadio Diallo,25
the International Court
confirmed the basic principles governing the approach of international law to
the limited liability company as were articulated in Barcelona Traction.
According to the Court, the important threshold question is whether or not
the artificial person in question has ‘a legal personality independent of [its]
members’ – and in ‘determining whether a company possesses independent and
distinct legal personality, international law looks to the rules of the relevant
domestic law’.26
An axiomatic principle of municipal legal systems recognising
the institution of a limited liability company is that ‘conferring independent
corporate personality on a company implies granting it rights over its own
property, rights which it alone is capable of protecting’27
so that ‘as long as the
company is in existence the shareholder has no right to the corporate assets’.28
772. An investment treaty does not purport to create a new international legal
institution of a limited liability company any more than general international
law does. An investment treaty tribunal is thus bound to follow the same
approach to the problem of shareholder claims as the International Court by
carefully examining ‘the rules generally accepted by municipal legal systems
which recognise the limited liability company whose capital is represented by
shares’.29
The consideration of such rules in the modern context might yield
different conclusions to those of the International Court in Barcelona Traction,
but this does not detract from the validity of the Court’s analytical approach,
23
Ibid. para. 75.
24
Ibid. para. 97. The ad hoc committee set out several reasons why the shareholder’s reliance upon
obligations entered into by the company is inadmissible (ibid. para. 95).
25
(Guinea v Congo) Preliminary Objections, 24 May 2007.
26
Ibid. para. 61.
27
Ibid.
28
Ibid. para. 63.
29
Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) 1970 ICJ Rep 3, 37.
406 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
endorsed as it was by fifteen of its judges and reaffirmed in the Case
Concerning Ahmadou Sadio Diallo.
Rule 47. A claim founded upon an investment treaty obligation which
seeks a remedy for the interference by the host state contracting
party with the rights attaching to a shareholding in a
company having the nationality of the host state is admissible.
A . ‘ R I G H T S AT TA C H I N G T O A S H A R E H O L D I N G ’
(i) General rights
773. A share is an aggregate of rights and responsibilities. The principal rights
attaching to a share include:30
The right to dividends and to share in the proceeds of liquidation. This
right can be characterised as a right in rem.
The right to participate in the functioning and administration of the company.
The right to exercise control and in particular the right to participate in
shareholder meetings.
774. In addition, there are several subsidiary rights that are necessary for the
proper enjoyment of the aforementioned primary rights attaching to shares:31
The right to the timely notice of shareholder meetings.
The right to receive certain corporate documents, including the articles of
incorporation and financial statements.
The right to receive information about the company and inspect its business
records.
775. The extent to which a shareholder can exercise the property and participatory
rights attaching to its shares generally depends upon the size of its
contribution to the share capital of the company.32
776. The International Court in Barcelona Traction had little difficultly in
recognising the possibility of an international claim for interference in what it
perceived to be a limited category of the direct rights of shareholders.
According to the Court, such rights included the right to any dividend declared
by the company, the right to attend and vote at general meetings and the right
30
International Encyclopedia of Comparative Law, Vol. XIII Business and Private Organizations,
Ch. 2 ‘Limited Liability Companies and Private Companies’ (1998, by M. Lutter) 75.
31
Ibid.
32
Ibid.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 407
to share in the residual assets of the company upon liquidation.33
In the Case
Concerning Ahmadou Sadio Diallo,34
the International Court clarified the law
applicable to determine the scope and extent of such direct rights:
[W]hat amounts to the internationally wrongful act, in the case of associés
or shareholders, is the violation by the respondent State of their direct
rights in relation to a legal person, direct rights that are defined by the
domestic law of that State.35
777. Perhaps the best illustration of the distinction between shareholder claims
for a direct injury and claims for reflective loss is the judgment of the Chamber
of the International Court of Justice in ELSI.
777C. Case Concerning Elettronica Sicula SpA (ELSI)36
The ELSI case arose out of a Treaty of Friendship, Commerce and
Navigation37
(the ‘FCN Treaty’) rather than a modern investment treaty,
and hence the claim was prosecuted by the United States as an instance of
diplomatic protection rather than directly by the American investors. The
two American corporate investors, Raytheon and Machlett,38
owned all the
shares in the Italian manufacturing company ELSI.39
ELSI was established
in Palermo, Sicily, where it had a plant producing electronic components.
Before the events alleged by the United States to have violated the FCN
Treaty, ELSI was in a precarious financial state. By 1964, its accumulated
losses had exceeded one-third of the company’s share capital, thereby
requiring a reduction in its equity in accordance with Italian law.40
The
same was required of the company in March 1967.41
Between February
1967 and March 1968, representatives of ELSI and Raytheon negotiated
with Italian Government officials to find an Italian partner for ELSI and to
explore the possibilities of State support, but these negotiations proved
to be unsuccessful.42
In June 1967, ELSI resolved to dismiss some 300
employees, resulting eventually in a strike at the plant on 4 March 1968.43
33
Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) 1970 ICJ Rep 3, 36. See
also: Separate Opinion of Fitzmaurice J, ibid. 67–8 at note 6 (if the shareholder’s right to dispose
freely of its shares were to be interfered with or resolutions duly passed at the general meetings of
shareholders were to be declared null and void).
34
(Guinea v Congo) Preliminary Objections, 24 May 2007, General List No. 103.
35
Ibid. para. 64.
36
(USA v Italy) 1989 ICJ Rep 15.
37
Signed by the USA and Italy on 2 February 1948. Ibid. 23.
38
The full company names were, respectively, Raytheon Company and Machlett Laboratories
Incorporated (ibid. 23).
39
‘ELSI’ refers to the company Electtronica Sicula S.p.A., which changed its name to RaytheonElsi
S.p.A. in 1963 (ibid.).
40
Ibid. 24.
41
Ibid.
42
Ibid. 24–5.
43
Ibid. 25.
408 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
From late 1967, Raytheon and Machlett commenced preparations for the
cessation of ELSI’s operations and its liquidation.44
The minutes of a meeting
on 21 February 1968 with ELSI, Raytheon and the President of the
Sicilian Region recorded that ‘the date of March 8 was stressed repeatedly
as the absolute limit for the shut-down due to a total financial crisis’.45
On
7 March 1968, Raytheon formally notified ELSI that, notwithstanding
ELSI’s need for further capital, Raytheon would not subscribe to any
further shares or guarantee any further loans.46
Nonetheless, it was contended
by the United States that Raytheon was prepared at the relevant
time to give the financial support to ELSI necessary to ensure an orderly
liquidation to proceed.47
On 16 March 1968, the Board of Directors of ELSI
resolved to discontinue production immediately and terminate commercial
activities and employment contracts on 29 March 1968.48
The United States did not advance a claim with respect to any acts attributable
to Italy covering the time period just described.49
The first act to be
impleaded as a breach of the FCN Treaty occurred on 1 April 1968 when
the Mayor of Palermo issued an order requisitioning ELSI’s plant for six
months.50
On 25 April 1968, the Board of Directors of ELSI resolved to file
a voluntary petition in bankruptcy and such a petition was filed the next
day. The petition referred to the impossibility of ELSI meeting its payment
obligations due to the requisition order, which prevented ELSI from availing
itself of its only immediate source of liquid funds.51
A decree in bankruptcy
was issued by the Tribunale di Palermo on 16 May 1968 and a trustee
in bankruptcy was thereby appointed.52
ELSI had appealed against the Mayor’s requisition order on 19 April 1968
and on 22 August 1969 the Prefect of Palermo quashed the requisition
order on the ground that it had no ‘juridical cause’ under Italian law
insofar as the intended purpose of the requisition (the continuation of
ELSI’s activities) had been impossible to achieve due to the plight of the
company.53
The trustee in bankruptcy had also brought proceedings before the courts
in Palermo to seek compensation for damages resulting from the requisition.
Although unsuccessful at first instance, the Court of Appeal of Palermo
ruled that the trustee was entitled to compensation for the loss of use and
possession of ELSI’s plant and assets during the six-month requisition
44
Ibid.
45
Ibid. 30.
46
Ibid. 26.
47
Ibid. 29.
48
Ibid. 30.
49
Ibid. 48.
50
Ibid. 32.
51
Ibid. 35–6.
52
Ibid. 36.
53
Ibid. 38–9, 74–5.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 409
period.54
The compensation was distributed to ELSI’s creditors pursuant to
the Italian bankruptcy procedure.55
In the bankruptcy proceedings, the secured creditors were paid in full, the
unsecured creditors received less than one per cent of their claims and,
accordingly, there remained no surplus for distribution to the shareholders
Raytheon and Machlett.56
The first and most important claim advanced by the United States on behalf
of Raytheon and Machlett was based on Article III(2) of the FCN Treaty
which, in relevant part, read:
The nationals, corporations and associations of either High Contracting
Party shall be permitted, in conformity with the applicable laws and
regulations within the territories of the other High Contracting Party,
to organize, control and manage corporations of such other High
Contracting Party…
The essence of the claim was that Raytheon and Machlett were deprived of
their right to manage the liquidation of ELSI in an orderly fashion. It is
critical to observe that this is a right vested directly in shareholders of a
company but it is a right obviously contingent upon satisfaction of the
conditions for a voluntary liquidation as derived from the general principles
of municipal legal systems. In this respect Judge Oda’s critique of the
Chamber’s judgment in his Separate Opinion is unfounded. Judge Oda
complained that the Chamber of the International Court had overlooked
the problem of the jus standi of the United States to bring claims on behalf of
Raytheon and Machlett that were in essence claims regarding an injury to
ELSI and thus contradicted the Court’s judgment in the Barcelona Traction
case.57
But the United States’ primary claim under consideration was concerned
with the direct rights of the American shareholders in ELSI and thus
was plainly admissible, even if the reasoning in Barcelona Traction were to be
adopted wholesale.
Hence this claim is capable of being classified as an admissible shareholder
action for a direct injury pursuant to Rule 47 and an investment treaty
tribunal would be required to determine the claim on the merits. (It is not
difficult to envisage how the claim might be formulated as a violation of an
investment treaty obligation to accord fair and equitable treatment.)
Article III(2) of the FCN Treaty was invoked to protect the alleged right of
Raytheon and Machlett to manage the liquidation of ELSI in an orderly
fashion. But Article III(2) does not operate to create a right to ‘control and
manage’ a corporation where no such right can be derived from the general
54
Ibid. 39.
55
Ibid. 40.
56
Ibid.
57
Ibid. 83–7.
410 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
principles of corporate insolvency. The FCN Treaty, like modern investment
treaties, does not rewrite the general principles of insolvency law. In
the particular circumstances of the ELSI case, Article III(2) could not
operate to vest Raytheon and Machlett with a right to conduct an orderly
liquidation of ELSI if ELSI was in fact insolvent. The general principle of
insolvency law derived from municipal legal systems is that the right of
the shareholders of a company to manage the liquidation procedure is
conditional upon the company being solvent. This is a principle strictly
enforced: in some municipal legal systems the directors of the company are
liable for criminal sanctions in the event that they endorse a voluntary
liquidation where the company is unable to pay its debts in full. The
relevant provisions of the Italian Civil Code and bankruptcy law reflected
this general principle.58
Judge Oda’s observations pertaining to Article III(2) can thus be endorsed
up to a point:
Raytheon and Machlett certainly could, in Italy, ‘organize, control
and manage’ corporations in which they held 100 per cent of the
shares – as in the case of ELSI – but this cannot be taken to mean that
those United States corporations, as shareholders of ELSI, can lay
claim to any rights other than those rights of shareholders guaranteed
to them under Italian law as well as under the general principles
of law concerning companies. The rights of Raytheon and Machlett
as shareholders of ELSI remained the same and were not augmented
by the FCN Treaty.59
This statement is perfectly consistent with the approach taken by the
Chamber of the Court. The divergence with the Chamber’s approach
commences with the next line of Judge Oda’s Separate Opinion:
Those rights which Raytheon and Machlett could have enjoyed under
the FCN Treaty were not breached by the requisition order, because
that order did not affect the ‘direct rights’ of those United States
corporations, as shareholders of an Italian company, but was directed
at the Italian company of which they remained shareholders.60
Although the Chamber did not directly consider this particular point, for
the reasons previously articulated it cannot be accepted insofar as the
‘direct rights’ of Raytheon and Machlett were capable of being prejudiced
by the requisition order. That would settle any objection to the
admissibility of this claim. Whether or not those alleged direct rights
were vested in Raytheon and Machlett at the critical time was a question
for the merits.
58
Ibid. 29, 53, 58.
59
Ibid. 87–8.
60
Ibid. 88.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 411
Hence proceeding now to the merits, to determine whether or not
Raytheon and Machlett had the right to conduct an orderly liquidation of
ELSI it was necessary for the Chamber to make a finding of fact as to
whether ELSI was solvent prior to the act complained of: viz. the Mayor
of Palermo’s requisition order on 1 April 1968.61
The Chamber’s ruling was
to the effect that ELSI was insolvent on or before 1 April 1968 and thus
Raytheon and Machlett did not have a right to pursue a voluntary liquidation
of ELSI’s assets capable of attracting the protection of Article III(2) of
the FCN Treaty.62
We have concluded that the claim alleging an interference with the
American investors’ right to manage and control its investment in ELSI
was admissible for the purposes of the FCN Treaty and that this conclusion
would be no different in the investment treaty context. The admissibility of
the other claims formulated by the United States, including those for
reflective loss, is now analysed by reference to the principles in Rule 49
and Rule 50.63
The United States maintained that the obligation in Article V(1) of the FCN
Treaty to accord ‘most constant protection and security’ to US nationals and
corporations both ‘for their persons and property’ was violated by Italy
when it ‘allowed ELSI workers to occupy the plant’.64
Italy objected to this
claim because the property in question was ELSI’s plant in Palermo. The
property of Raytheon and Machlett consisted of their shares in ELSI and
the occupation of ELSI’s plant in no way interfered with any rights in rem
over the shares. Italy’s objection was justified. Before dismissing the claim
on the merits, the Chamber merely noted that:
[T]here may be doubts whether the word ‘property’ in Article V,
paragraph 1, extends, in the case of shareholders, beyond the shares
themselves, to the company or its assets.65
Rather than dismissing the claim on the merits, the Chamber should have
properly investigated those ‘doubts’ and found that it was inadmissible and
hence Judge Oda’s general point about the lack of jus standi of the United
States was well taken in relation to this claim. In the investment treaty
context, the same approach would be required with respect to a claim of
this type based on an obligation to accord full protection and security in
accordance with Rule 49.
61
According to the Chamber of the Court: ‘The crucial question is whether Raytheon, on the event
of the requisition, and after the closure of the plant and the dismissal, on 29 March 1968, of the
majority of its employees, was in a position to carry out its orderly liquidation plan, even apart
from its alleged frustration by the requisition’ (ibid. 55).
62
Ibid. 52–62. Schwebel J dissented with respect to this finding of fact but not from the Court’s
approach to this question (ibid. 100–8).
63
See paras. 785 et seq. and paras. 853 et seq. below.
64
Ibid. 63–4.
65
Ibid. 64.
412 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
The position in relation to the expropriation claim advanced by the United
States is more complicated. In accordance with Rule 49, a claim by a shareholder
alleging the expropriation of the assets of the company is prima facie
admissible subject to the discretionary principle set out in Rule 50. The
three aspects of the discretionary principle would be resolved in favour of
the American investors in this case because the municipal liquidation procedure
had been concluded and hence there was no risk of prejudice to
ELSI’s creditors or parallel proceedings in different fora with the same
object of restoring the property alleged to have been expropriated to the
company. The claim would thus be admissible in accordance with Rule 49 to
Rule 50. In the event, the Chamber of the International Court dismissed
the expropriation claim, founded upon the requisition order and subsequent
acts of the Italian authorities, on account of ELSI’s precarious financial
state at the relevant time. This determination is controversial: so long as
there was something to be expropriated at the date of the requisition order,
and the Chamber did not deny that there was, the financial state of ELSI
provides no answer to the international legality of the alleged taking. It was
incumbent upon the Chamber to adjudge the international legality of the
requisition order and the subsequent acts complained of, and this it failed to
do. The financial state of ELSI was of course relevant; but it was relevant to
the issue of causation and this was not adequately addressed by the Chamber.
778. The Iran/US Claims Tribunal considered the admissibility of a claim for a
direct injury in Foremost-McKesson HBOC Inc v Iran.66
A US company held
shares in a dairy company incorporated in Iran. It was alleged that the Iranian
company had withheld dividends from the US shareholder over a period of
several years while continuing to pay dividends to its Iranian shareholders. This
type of claim falls squarely within Rule 47. The Tribunal ultimately found that
the claim was not within its ratione tempore jurisdiction.
779. Outside the field of investment treaty arbitration, a recent example of an
admissible shareholder claim in relation to prejudice to rights attaching to shares
is the award in Reineccius et al v Bank for International Settlements.67
The
constituent documents of the Bank for International Settlements (‘BIS’), established
in 1930, allowed the central banks that had subscribed for shares in BIS to
issue those shares to the public. The Central Banks of the USA, France and
Belgium took advantage of this option and approximately 13 per cent of BIS’s
shares came to be held by private shareholders. In 2001, the Board of Directors
called an Extraordinary General Meeting to amend the constituent documents
so as to exclude private shareholders against payment of compensation fixed at
66
(Case 220-37/231-1, 10 April 1986) 10 Iran-US CTR 228.
67
Dr Horst Reineccius, First Eagle SoGen Funds, Inc and Mr Pierre Mathieu and La Société de
Concours hippique de La Châtre v Bank for International Settlements (Partial Award on the
Lawfulness of the Recall of the Privately Held Shares on 8 January 2001 and the Applicable
Standards for Valuation of those Shares, 22 November 2002) PCA.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 413
CHF 16,000 per share. Three shareholders brought claims against BIS to challenge
the validity of its recall of privately held shares and the level of compensation
and invoked the jurisdiction of the Arbitral Tribunal established pursuant
to Article XV of the Agreement regarding the Complete and Final Settlement
of the Question of Reparations of 20 January 1930. These claims were clearly
directed at vindicating the shareholders’ personal rights and hence claims of that
nature would no doubt be admissible under Rule 47.
Rule 48. A claim founded upon an investment treaty obligation which
seeks a remedy for the breach by the host state contracting
party of undertakings or representations made to the shareholder
but not to the company, or such a claim for other types
of loss that are separate and distinct from the company’s loss,
is admissible.
A . U N D E RTA K I N G S O R R E P R E S E N TAT I O N S M A D E
T O S H A R E H O L D E R S
780. In municipal systems of law it is generally accepted that if the defendant
has breached a duty to the shareholder and owes no corresponding duty to the
company, then a shareholder is entitled to pursue a claim for the resulting loss.68
For instance, in the English case of George Fischer (Great Britain) Ltd v Multi
Construction Ltd,69
the defendant construction company entered into a contract
with the claimant holding company for the design and construction of a warehouse
for the use of one of the claimant’s subsidiaries as a distribution depot
for products manufactured by its other subsidiaries (the subsidiaries were not
parties to the contract). The warehouse was defective in certain respects and the
claimant holding company succeeded in its breach of contract claim in recovering
reflective loss that it suffered as a result of its subsidiaries’ lost sales and
increased operating costs.
781. In the investment treaty context it should follow that where the host state
has given the claimant/shareholder specific undertakings with respect to its
investment in a company, it should be permitted to sue for a breach of such
undertakings. The claim would normally be for breach of contract if the undertakings
were formalised, subject to the scope of the tribunal’s ratione materiae
jurisdiction. In these circumstances, the company itself would have no cause of
68
In England: Lee v Sheard [1956] 1 QB 192, 195–6; George Fischer (Great Britain) Ltd v Multi
Construction Ltd [1995] 1 BCLC 260; Gerber Garment Technology Inc v Lectra Systems Ltd
[1997] RPC 443; Johnson v Gore Wood & Co. [2001] 1 All ER 481, 503 (Lord Bingham), 528
(Lord Millett).
69
[1997] RPC 443.
414 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
action and thus there is no risk of multiplicity of actions, double recovery or
prejudice to creditors.
B . S H A R E H O L D E R C L A I M S F O R T Y P E S
O F L O S S T H AT A R E S E PA R AT E A N D D I S T I N C T
F R O M T H E C O M PA N Y ’ S L O S S
782. A shareholder may suffer a direct loss upon an injury to the company if it
has entered into loan agreements to fund the activities of the company. The
elements of the damage might include bank or mortgage interest and charges
and tax liabilities associated with the loan capital.70
783. In Maffezini v Spain,71
Maffezini alleged that funds from his personal bank
account were transferred to his local investment company in Spain ‘EASMA’72
without his consent by a representative of a Spanish state enterprise,
‘SODIGA’,73
which had a shareholding in EASMA.74
The tribunal concluded
that SODIGA’s representative had used public authority to procure the transfer
and that this action constituted a breach of the Argentina/Spain BIT.75
This claim
was akin to a personal action by a shareholder rather than a derivative action for
prejudice caused to the company itself. It was thus clearly admissible.76
784. Similarly, in Lanco v Argentina,77
Lanco was not only a shareholder in the
company to which the concession was granted by Argentina, but also a party to
the concession agreement in its own right. Hence the tribunal was correct to
surmise that Lanco had ‘certain rights and obligations as a foreign investor’.78
Rule 49. A claim founded upon an investment treaty obligation which
seeks a remedy for the diminution of value of a shareholding
in a limited liability company having the nationality of the
host contracting state party is admissible if the claimant can
establish a prima facie case that: (i) the assets of the company
have been expropriated by the host contracting state party
70
Johnson v Gore Wood & Co. [2001] 1 All ER 481, 503–4 (Lord Bingham).
71
(Merits) 5 ICSID Rep 419.
72
Emilio A. Maffezini SA (ibid. 426/39).
73
Sociedad para el Desarrollo Industrial de Galicia (ibid).
74
Ibid. 433–4/72–3.
75
Ibid. 435–6/83.
76
Argentina had objected to Maffezini’s standing to ‘to seek to lift the corporate veil and sue in his
personal capacity for damages sustained by the company’. This objection was rejected by the
tribunal at the jurisdictional phase of the proceedings: Maffezini v Spain (Preliminary Objections)
5 ICSID Rep 396, 409/65, 410/69–70.
77
Lanco v Argentina (Preliminary Objections) 5 ICSID Rep 367.
78
Ibid. 373/11.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 415
so that the shareholding has been rendered worthless; or
(ii) the company is without or has been deprived of a remedy
to redress the injury it has suffered; or (iii) the company is
without or has been deprived of the capacity to sue either
under the lex societatis or de facto; or (iv) the company has
been subjected to a denial of justice in the pursuit of a
remedy in the system for the administration of justice of
the host contracting state party.
A . I N T R O D U C T I O N
(i) Shareholder claims for reflective loss in municipal law
785. There is no consensus among municipal legal systems as to the circumstances
in which a shareholder should be entitled to bring a claim against third
parties for damage inflicted upon the company.79
It is not difficult to understand
why the problem is intractable: once the door is open for such actions there is a
distinct possibility of multiple proceedings in different fora with respect to the
same loss (i.e. by other shareholders and the company itself) and thus double
recovery against the third party. Moreover, the position of creditors of the
company might be prejudiced if the shareholders recover in preference to the
company.80
786. Corporate personality in municipal legal systems entails the company’s
capacity to own property in its own right so that it is not merely agent or trustee
for its shareholders. Likewise, the debts of the company must be recovered from
the company itself rather than the shareholders and the contracts entered into by
the company do not bind the shareholders for they are not privy to the contractual
relationship. The general position with respect to civil wrongs committed
against the company is that the cause of action vests in the company rather
than in the shareholders so that any redress must be sought by proceedings in the
name of the company. Thus, according to the English Court of Appeal:
The company acquires causes of action for breaches of contract and for
torts which damage the company. No cause of action vests in the shareholder.
When the shareholder acquires a share he accepts the fact that the
79
It is generally accepted that the right of a shareholder to bring a derivative action in respect
of wrongs done to the company is a matter of substance and not procedure and is governed by
the law of the place of incorporation. See, in England: Konamaneni v Rolls-Royce Industrial
Power (India) Ltd [2002] 1 WLR 1269; Base Metal Trading Ltd v Shamurin [2004] EWCA Civ
1316, [2005] 1 WLR 1157; Dicey, Morris and Collins on the Conflict of Laws (2006, 14th edn by
L. Collins et al.) 1348–9.
80
These problems are articulated in several US decisions including: Green v Victor Talking
Machines Co 24 F 2d 378, 380 (1928); Massachusetts v Davis 320 US 310 (1942).
416 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
value of his investment follows the fortunes of the company and that he
can only exercise his influence over the fortunes of the company by the
exercise of his voting rights in general meeting ... If it is right that the law
has conferred or should in certain restricted circumstances confer further
rights on the shareholder the scope and consequences of such further rights
require careful consideration.81
787. Whilst it is generally the case that the cause of action to recover damages
for an injury to the company vests in the company itself rather than in its
shareholders, in some exceptional circumstances it is possible to characterise
the injury as one to the shareholders as well based on a diminution in value of
their property and thus giving rise to a personal cause of action with respect to
those losses. If a shareholder has nothing more than a contractual right to
participate in the company on the terms of the articles of association then a
blanket rule barring claims by shareholders against third parties and the company
itself would command the force of logic. So long as this right to participate,
including the right to collect dividends, remain unaffected by the actions
causing loss to the company, there is no scope for the shareholders to pursue
a claim in their own name. But this is by no means an adequate description of
the rights attaching to shares. A shareholder’s relationship to the company has
proprietary elements and shares as an item of property have a marketable value
distinct from the assets of the company.82
If damage is caused to that property
by a third party, then the shareholder has in this sense suffered a personal loss.
788. In short, there is no absolute doctrinal imperative to characterise the cause
of action as vesting in the company and the company alone,83
but the ‘scope and
consequences’ of any right vesting in the shareholders must be carefully
assessed due to the problems previously enumerated; namely the potential for
multiplicity of actions and double recovery and prejudice to the creditors of the
company.
789. A comparative analysis of derivative claims by shareholders in municipal
legal systems suggests that common law countries recognise a wider range of
derivative claims than civilian countries.84
In France, for instance, the principal
circumstances in which a shareholder can act on behalf of the company are
restricted to: (i) a request for the annulment of a collective decision that
81
Prudential Assurance Co v Newman Industries [1982] Ch 204, 224.
82
See: P. Davies, Gower’s Principles of Modern Company Law (1997, 6th edn) 302.
83
Even the ICJ in Barcelona Traction noted that ‘the law has recognized that the independent
existence of the legal entity cannot be treated as an absolute’: 1970 ICJ Rep 4, 39.
84
The USA appears to be the most liberal in this respect: Bernhard Grossfield, International
Encyclopedia of Comparative Law (Vol. 13) 107. See generally: A. Pinto and G. Visentini,
The Legal Basis of Corporate Governance in Publicly Held Corporations: A Comparative
Approach (1998); Xiaoning Li, A Comparative Study of Shareholders’ Derivative Actions
(2007). In relation to Germany: The German Act Regarding Integrity of Companies and
Modernization of Stock Corporation Law (UMAG), Arts. 147 and 148.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 417
constitutes an ‘abus de droit’;85
(ii) the enforcement of the liability of a company
officer;86
(iii) a request for the dissolution of the company;87
and (iv) a request for
the nomination of an administrator.88
790. In this chapter, the principles of admissibility are inspired by a comparative
analysis of municipal laws and the experience of international courts and
tribunals. As these principles regulate the admissibility of international claims
a simple renvoi to the company law of the host respondent state is inappropriate.
First, it could make the admissibility of an international claim entirely dependant
upon the acts of the host state. Second, it would not give sufficient weight to
the particular vulnerabilities of foreign shareholders in companies incorporated
in the host state.
(ii) Shareholder claims for reflective loss in investment treaty arbitration
791. We have considered the general position in municipal legal systems. It must
also be the general position with respect to investment treaty regimes because
precisely the same problems emerge where shareholders are permitted to claim
for reflective loss against the host state. Investment treaty arbitration is not
spared the complexities arising in municipal law merely because the shareholder’s
cause of action is founded upon an international obligation in a treaty
rather than upon a tort or contract in municipal law. Indeed, the complexities
are only augmented because the tribunal does not have the same procedural
powers to ensure the fair distribution of damages among the interested parties
by joining all such parties to the arbitration proceedings or appointing a receiver
if the company itself is incapacitated.
792. The starting point in considering claims for reflective loss in investment
treaty arbitration must be the general distinction between an injury to the
company and a loss to the shareholder in municipal law. In this sense the
International Court’s differentiation of ‘rights’ and ‘interests’ of shareholders
in Barcelona Traction is important. According to the Court’s rationalisation,
only the ‘rights’ of shareholders attract international legal protection:
[W]henever a shareholder’s interests are harmed by an act done to the
company, it is to the latter that he must look to institute appropriate action;
for although two separate entities may have suffered from the same wrong,
it is only one entity whose rights have been infringed.89
85
Civil Code, Art. 1833. An example is where the majority shareholders adopt a resolution that
furthers their own interests to the detriment to the ‘intérêt social’ of the company.
86
Civil Code, Art. 1843–5.
87
Decision of the Court of Cassation, Cass Com, 21 October 1997, No. 2182; Decision of the Court
of Cassation, Cass Civ 1ère, 18 July 1995, No. 1609.
88
Decision of the Court of Cassation, Cass Civ 3ème, 21 November 2000, No. 1542.
89
1970 ICJ Rep 4, 35. See also: Separate Opinion of Morelli J, ibid. 236–7.
418 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
…[A]n act directed against and infringing only the company’s rights
does not involve responsibility towards the shareholders, even if their
interests are affected … The situation is different if the act complained
of is aimed at the direct rights of the shareholder as such. It is well
known that there are rights which municipal law confers upon the latter
distinct from those of the company, including the right to any declared
dividend, the right to attend and vote at general meetings, the right to
share in the residual assets of the company on liquidation. Whenever
one of his direct rights is infringed, the shareholder has an independent
right of action.90
793. Merely to recognise this distinction between the company’s rights and
the shareholder’s interests is not to resolve the problem of demarcation. At the
point of departure for undertaking this task is the imperative of faithfully
transposing the concept of a shareholding in municipal law to the international
plane. It follows that a shareholder should be able to claim for reflective loss
in situations analogous to those permitted in municipal legal systems. This point
of departure is, however, no more than that. It is for investment treaty tribunals
to develop a coherent and balanced set of principles to deal with the admissibility
of shareholder actions for reflective loss and, as the English Court of
Appeal counselled, consider the ‘scope and consequences’ of any extension in
favour of the shareholder in each and every case.
794. Before the advent of investment treaty arbitration, international tribunals
were very much alive to the consequences of admitting claims for reflective
loss by shareholders. In Delagoa Bay Railway Company,91
the Portuguese
government had granted a concession to build and operate a railroad to a
Portuguese company, whose shares were owned by an English company. The
principal shareholder of the English company was a US citizen. A tripartite
arbitration agreement was entered into between Portugal, Britain and the USA
in relation to the claims arising out of the Portuguese government’s violation
of the concession. The resulting award is often cited as authority for the
admissibility of shareholder claims for reflective loss. In fact the award
records that:
[T]he only person who, in accordance with strict law, would have standing
to appear as claimant vis-à-vis the Portuguese government would have
been the (Portuguese) company which had received the concession to
build and operate the railroad, since it is the only one which entered into
a contractual relationship with the respondent State and the one dispossessed
by the cancellation. However, the respondent government having
90
Ibid. 36.
91
B. Moore, History and Digest of the International Arbitrations to which the United States has
been a Party (1893) 1865.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 419
itself declared that it will not oppose any objection to the fact that the
person with a real legitimacy to act is not a party of the present litigation,
the arbitral tribunal must record the fact that the parties have by common
agreement decided to replace such person by the (English) Delagoa Bay
Company.92
795. But even more importantly, the arbitral tribunal recognised that an award of
damages to the English company would have to take into account the rights of
creditors to the Portuguese company:
[T]he amount allowed by the present award cannot be attributed to the
English company except on the condition that this company effects such
amount to the payment of its creditors, debenture holders and others which
may exist, in accordance with their respective privileges … Since such
creditors have not been directly represented in the proceedings and having
lacked therefore the opportunity to formulate its cases and conclusions, the
Tribunal cannot by itself effect such distribution.93
796. A similar sensitivity to the distinction between corporate rights and shareholder
rights and to the problems of quantifying reflective losses is revealed in
several awards of the various Mixed Claims Commissions hearing claims
against Venezuela.94
797. The four categories of admissible claims for reflective loss in Rule 49
have been formulated to achieve a balance between the objectives of reducing
the sovereign risk attaching to investments in shares and preserving the
integrity of the host state’s system for the administration of justice; to ensure
that the protection of the claimant’s rights over its shares in the company is
not at the expense of the rights of the third party creditors of the company;
and to safeguard against the destructive force of opening the floodgates to an
infinite number of derivative claims by minority shareholders in a large
company.
798. Although not purporting to offer a solution to the problem of derivative
claims in the investment treaty context, the award in GAMI v Mexico95
is of
singular importance as a guide through the potential traps and pitfalls that must
be negotiated by a tribunal in dealing with a derivative claim.
92
Ibid.
93
Ibid.
94
See: Kunhardt Co. (USA v Venezuela) 9 RIAA 171 (1903) (‘the shareholders of a corporation are
not co-owners of the property of the corporation during its existence; they only have in their
possession a certificate which entitles them to participate in the profits and to become owners of
proportional parts of the property of the corporation when the latter is by final adjudication
dissolved or liquidated’); Brewer, Moller and Co.10 RIAA 433–5; Baasch & Romer
(Netherlands v Venezuela) 10 RIAA 723; Aslop (Chile v USA) 11 RIAA 349.
95
(Final Award, 15 November 2004) UNCITRAL.
420 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
798C. GAMI Investments, Inc v Government of the United Mexican
States96
GAMI, a US company, owned 14.18 per cent of the shares in a Mexican
holding company named GAM,97
which in turn owned five sugar mills in
Mexico.98
GAMI advanced claims alleging breaches of Mexico’s obligations
under NAFTA on the basis of Mexico’s failure to fulfil its regulatory functions
under the legislative regime established for the sugar industry. GAMI
alleged that this blend of misfeasance and nonfeasance resulted in a crisis in
the industry beginning in 1999.99
Mexico’s response to the crisis was to
expropriate 22 of the 56 private sugar mills in operation in Mexico, including
all five of the mills owned by GAM, on 3 September 2001.100
GAM challenged the legality of the expropriation of its sugar mills before the
Mexican courts.101
On 20 February 2004, some months before the hearing
on the merits of GAMI’s NAFTA claims, a Mexican court upheld that challenge
and annulled the expropriation of GAM’s mills.102
This decision
(referred to as the ‘Sentencia’ in the Award) was not subject to further appeal
and the procedure for determining the indemnity for the expropriation was
confirmed by Mexico to be in progress.103
GAMI’s claims were brought under Article 1116 of NAFTA, and, insofar as
it did not own or control GAM, no waiver on behalf of GAM was required by
Article 1121. GAM was thus entitled to prosecute its amparo proceedings in
the Mexican courts to their successful conclusion.
In the opening paragraph dealing with GAMI’s claims, the tribunal identified
their ‘derivative’ nature:
A fundamental feature of GAMI’s claims is that they are derivative.
GAMI does not claim that Mexican governmental measures were
directed against its shareholding in GAM. Its grievance is that the
value of its shareholding was adversely affected by measures which
caused GAM’s business to suffer. Another fundamental aspect of the
case is that GAMI cannot invoke contractual commitments by Mexico.
Neither GAM nor GAMI had contracts with the Government. GAMI
therefore cannot say that its investment decision was predicated on
contractual promises to establish or maintain a certain regime for its
investment.104
96
(Merits).
97
Grupo Azucarero México SA de CV.
98
Ibid. paras. 1, 12.
99
Ibid. para. 16.
100
Ibid. para. 17.
101
Ibid. para. 18.
102
Ibid. para. 8.
103
Ibid. GAM had not pursued its challenge to the expropriation of two of its five mills before the
Mexican courts, apparently because they were loss making enterprises (ibid. para. 18).
104
Ibid. para. 23.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 421
From the foregoing description of GAMI’s claims, one must conclude that
Rule 47, dealing with admissible claims based upon the infringement of a
shareholder’s direct rights, and the second to the fourth limbs of Rule 49
are not applicable in these circumstances. That leaves the first limb of
Rule 49, which would permit GAMI to plead a claim alleging the expropriation
of its shares in GAM resulting from the total destruction of their value by
acts attributable to Mexico.
The tribunal upheld the admissibility of GAMI’s expropriation claim
under Article 1110 of NAFTA and this is consistent with Rule 49. But
the intervening judgment of the Mexican court, which ‘neutralised’105
the effect of Mexico’s expropriation of GAM’s mills, rendered GAMI’s
expropriation claim for reflective loss based upon the total destruction of
the value of its shareholding untenable. GAMI sought to overcome this
obstacle by agreeing to relinquish the value of its shares in GAM in the
event its expropriation claim was upheld.106
The tribunal rejected this
device, for ‘[it] cannot be indifferent to the true effect on the value of the
investment of the allegedly wrongful act’.107
The expropriation claim
was therefore dismissed.
Contrary to Rule 49, the tribunal also upheld the admissibility of GAMI’s
fair and equitable treatment claim for reflective loss to its shareholding in
GAM under Article 1105 of NAFTA.108
It is useful to trace the tribunal’s
reasoning on the merits of this claim in order to expose the consequences of
its admissibility. The tribunal formulated the question concerning the
admissibility of GAMI’s claims under Article 1116 as follows:
The issue is whether a breach of NAFTA leads with sufficient directness
to loss or damage in respect of a given investment.109
As a general statement of principle this is unimpeachable and it underlines
the delineation of admissible and inadmissible claims in Rule 49. The
question is whether a breach of the fair and equitable standard of treatment
by measures of the host state affecting a company is capable of leading to
‘sufficient directness to loss or damage in respect of a given investment’ in
shares of the company. For the purposes of admissibility, the tribunal
assumed that it was. Such a finding, however, produces insurmountable
difficulties with respect to the quantification of any loss to the investor/
shareholder. The tribunal in GAMI faced up to these difficulties squarely
in the opening paragraph of its consideration of the Article 1105 claim:
105
Ibid. para. 35.
106
Ibid. para. 133.
107
Ibid.
108
The tribunal also upheld the admissibility of GAMI’s claim for a breach of the national treatment
standard in Article 1102 of NAFTA. The tribunal devotes far more attention to GAMI’s Article
1105 claim in its Award and thus it is this latter claim that is the focus of the ensuing analysis.
109
Ibid. para. 33.
422 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
One cannot fail to observe that GAMI’s complaint of alleged unfair
and inequitable treatment is not connected with a demonstration of
specific and quantifiable prejudice. Mexico’s alleged wrongdoing
would doubtless have resulted in some short-term decline in the
value of its shares in GAM. (There would have been no loss of
dividends: GAM’s business strategy has never been to distribute
earnings to shareholders.) The ultimate duration of this unspecified
decline in value is uncertain. It was bound to be reserved to some
degree by the return of the… wrongfully expropriated mills ... [The
tribunal then listed all the factors pointing towards GAM’s positive
commercial prospects for the future.]
GAM’s approach seems to be all or nothing. But no credible causeand-effect
analysis can lay the totality of GAMI’s disappointments as
an investor at the feet of the Mexican Government ... GAMI can assert
only the maladministration of the Sugar Program caused it some
prejudice ... Absent a complete destruction of its investment GAMI
has not identified a particular point in time when a metaphorical
snapshot of its prejudice should be taken. It may be that such demonstration
is impossible in this case. At any rate the tribunal would
have been in no position to award damages even if it had found a
violation of Article 1105.110
The tribunal in GAMI also gave a lucid account of the difficulties that attend
the tribunal’s mission if due consideration is given to the rights of the
creditors of the company and the possibility of disparate proceedings in
multiple judicial fora in relation to the same events leading to the same
injury.111
A consequence of GAMI’s independent right of action under NAFTA
may be illustrated by a hypothetical example. The notional compensation
of GAM by Mexico in an amount representing M$100 per
share would not in principle disentitle GAMI from asking the
NAFTA Tribunal for an additional amount representing an additional
M$50 per share. But the theory gives rise to a number of
practical difficulties. One might imagine a perfect world in which a
national court of last recourse sits down with a NAFTA tribunal
incapable of reviewable error to discharge their respective responsibilities.
This could be done quite logically. The Mexican court could
order payment to GAM based on an evaluation of the five expropriated
mills. As a matter of mathematics that evaluation might represent
M$100 per share of all shares of GAM. At the same time the
NAFTA tribunal might find that a higher level of compensation was
mandated and thus order a top-up to GAMI of M$50 per share
proportionate to its 14.18% shareholding. This would be a graphic
110
Ibid. paras. 83–5.
111
Ibid. paras. 36–42, 116–22.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 423
illustration of the value to GAMI of its entitlement to a direct international
remedy beyond its indirect benefit from the national remedy
obtained by GAM. A state cannot avoid international responsibility by
arguing that the foreigner must content himself with whatever compensation
has been decreed by national authorities.
This scenario is of course a fantasy. It is factually implausible. It lacks
legal foundation. The Tribunal is aware of no procedural basis on
which such coordination could take place. And the Sentencia itself
plausibly rejects the right of shareholders to challenge the expropriation
on the substantive ground that the protected interest is that of
the corporate owner of the expropriated assets.
The scenario also lacks commercial credibility. On what basis could
one rationally conclude that the payment to GAMI should be
reduced to account for the payment to GAM? It is an acknowledged
fact that GAM has never paid a dividend to its shareholders. Why
should GAMI’s recovery be debited on account of a payment to GAM
which is perhaps utterly unlikely to find its way to the pockets of its
shareholders?
The overwhelming implausibility of a simultaneous resolution of the
problem by national and international jurisdictions impels consideration
of the practically certain scenario of unsynchronised resolution.
It is sufficient to consider the hypothesis that a NAFTA tribunal were to
order payment to GAMI before the Mexican courts render their final
decision. One might adapt the hypothetical example given… above.
GAMI would thus have received M$150 per share. (There would have
been no prior offsetting Mexican recovery.) What effect should the
Mexican courts now give to the NAFTA award? How could GAM’s
recovery be reduced because of the payment to GAMI? GAM is the
owner of the expropriated assets. It has never paid dividends. It would
have been most unlikely to distribute revenues in the amount recovered
by GAMI. At any rate such a decision would have required due
deliberation of GAM’s corporate organs. Creditors would come first.
And other shareholders would have an equal right to the distribution.
GAM would obviously say that it is the expropriated owner and that its
compensatable loss under Mexican law could not be diminished by the
amount paid to one of its shareholders.
These difficulties are attributable to the derivative nature of GAMI’s
claim.112
799. The tribunal in GAMI was ultimately spared the task of fashioning
a decision that might overcome the problems relating to quantification of loss,
112
Ibid. paras. 116–21.
424 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
multiplicity of actions by disparate interested parties, the rights of creditors, and
so on, because GAMI’s claims were dismissed on the merits. The question must
be asked as to whether GAMI’s Article 1105 claim in particular was destined to
fail from the moment it wriggled through the net cast by Article 1116. That is
certainly the impression that is left by the tribunal’s careful analysis of the
spectrum of issues arising from this type of claim for reflective loss. If that
impression is accurate then it suggests that such a claim is inherently misconceived
as a matter of law and must properly be deemed to be inadmissible under
Article 1116 of NAFTA. This means that the claim should have been brought
under Article 1117 if the controlling shareholder of GAMI qualified for NAFTA
protection. Unfortunately subsequent tribunals have relied upon GAMI to
uphold the admissibility of derivative shareholder claims without considering
the tribunal’s extensive discussion of the problems inherent in such claims in the
section of the award dealing with the merits.113
B . F I R S T L I M B O F R U L E 4 9 : E X P R O P R I AT I O N
O F T H E A S S E T S O F T H E C O M PA N Y
800. International and municipal legal precedents recognise the possibility of
an admissible claim by a shareholder in circumstances where there has been a
total destruction of the value of the company’s assets.114
The El Triunfo
claim115
is perhaps the best example of the first limb of Rule 49. A concession
for the monopoly over steam navigation at the port of El Triunfo was
granted by the Government of El Salvador and subsequently acquired by the
El Salvadoranean company ‘El Triunfo Company Ltd’, of which the principal
shareholder was the American company ‘Salvador Commercial Company’.
The local management of El Triunfo Company convened an illegal meeting
of the board of directors in order to ratify a petition for bankruptcy, which
was filed at the court of first instance at Santiago de Maria. The court made a
declaration of bankruptcy and appointed a receiver. Salvador Commercial
Company called for a meeting of the shareholders of El Triunfo Company in
order to annul the court’s decision and to recover control of the El Triunfo
Company. The next day, the President of El Salvador issued a decree by
which he cancelled the concession and awarded it to a group of citizens of El
Salvador.
113
E.g. BG v Argentina (Merits) paras. 196–200.
114
For instance, in England the Court of Appeal ruled that a claimant could pursue a claim where
his shares had become valueless because of the harm occasioned to the company: Giles v Rhind
[2003] Ch 618.
115
Rosa Gelbtrunk and the ‘Salvador Commercial Company’ (El Salvador & USA) 15 RIAA 459
(1902).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 425
801. The two arbitrators distinguished between the actions of the local conspirators
and the presidential decree. Redress for any prejudice caused by the
former had to be sought in the name of El Triunfo Company itself in the courts
of Salvador. As soon as the President intervened on the side of the local
conspirators, however, ‘the only thing of value worth retrieving through the
courts’116
had been destroyed. It was this executive act that vested the American
shareholder with an admissible claim in relation to its interest in El Triunfo
Company.117
802. Shareholder claims for the expropriation of the company’s assets are
admissible because such prejudice affects the shareholder’s rights rather than
merely its interests. The shareholder’s right to the enjoyment of its property in
its shares is devoid of content if those shares are in an empty corporate shell. The
taking or destruction of the company’s assets entails that it is impotent to
generate value for the shares in the future and hence the consequences for the
shareholder are not ephemeral but permanent. For this reason, the direct expropriation
of the company’s assets is capable of constituting the indirect expropriation
of the shareholding as well. All other types of prejudice caused to the
company do not vest admissible investment claims in its shareholders because
such prejudice only affects the interests of the shareholders and not its rights.
It is the company that must seek a remedy and the prejudice to the shareholders’
interests might be rectified over time by success in the company’s pursuit of that
remedy, or by shareholder value generated in the usual pursuit of the company’s
activities.
803. The USA’s position as a NAFTA Party is consistent with the first limb of
Rule 49. It has differentiated between the admissibility of an expropriation
claim by a shareholder under Article 1116 of NAFTA and other claims that
would be inadmissible as vesting exclusively in the company. Such other
claims, according to the USA, would have to be brought in the name of the
company under Article 1117 of NAFTA.118
804. One particular category of cases that might be deemed to be admissible by
investment treaty tribunals is where the company has settled its claims against
116
Ibid. 476.
117
The arbitrators usefully reflected upon the hypothetical situation whereby the Republic of
Salvador had asserted a just cause to terminate the concession by reference to the conduct of
the El Triunfo Company: ‘if the Republic of Salvador, a party to the contract which involved the
franchise to El Triunfo Company, had just grounds for complaint that under its organic law
the grantees had, by misuser or nonuser of the franchise granted, brought upon themselves the
penalty of forfeiture of their rights under it, then the course of that Government should have been
to have itself appealed to the courts against the company and there, by the due process of judicial
proceedings, involving notice, full opportunity to be heard, consideration, and solemn judgment,
have invoked and secured the remedy sought’ (ibid. 478).
118
USA, Article 1128 Submission on Jurisdiction in GAMI v Mexico, 30 June 2003, available at:
http://naftaclaims.com/Disputes/Mexico/GAMI/GAMIus1128Jurisdiction.pdf.
426 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
the host state for undervalue. There is no consensus in common law countries as
to whether a shareholder should be able to claim reflective loss in this situation.
In New Zealand it is permissible,119
whereas in England it is not.120
No doubt a
treaty tribunal would have to tread very carefully where the settlement has been
reached by the receiver of a company in liquidation so as to avoid a conflict
between the interests of the shareholders and the creditors. There is authority for
this exception in the investment treaty context in GAMI v Mexico:121
‘Clearly
GAMI [an American minority shareholder in the Mexican company GAM]
would not lose its rights if the outcome had been that the local courts upheld the
expropriation and fixed a derisory amount of compensation.’122
C . S E C O N D L I M B O F R U L E 4 9 : D E P R I VAT I O N
O F A R E M E D Y F O R T H E C O M PA N Y
805. If no remedy is available to the company to redress the injury caused by the
host state pursuant to its law (or another lex causae determined by the conflicts
of law rules of the host state) then the shareholder’s claim in investment treaty
arbitration must be admissible.123
806. In BG v Argentina,124
the tribunal found that the executive branch of
the host state had interfered with the normal operation of the courts so that, if
the admissibility of the claimant shareholder’s claims were to be denied, the
respondent would be permitted to:
(a) restrict the effectiveness of domestic judicial remedies as a means to achieve
the full implementation of the Emergency Law and its regulations;
(b) insist that claimant go to domestic courts to challenge the very same
measures; and
(c) exclude from the renegotiation process any licensee that does bring its
grievance to local courts.125
119
Christensen v Scott [1996] 1 NZLR 273 (NZ CA).
120
The majority of the House of Lords in Johnson v Gore Wood & Co. [2001] 1 All ER 481 refused
to follow the New Zealand Court of Appeal’s decision in Christensen v Scott, ibid.: 503 (Lord
Bingham), 522 (Lord Hutton), 531–2 (Lord Millett). Only Lord Cooke was prepared to defend
the result in Christensen v Scott: ibid. 510–15. The English Court of Appeal’s decision in
Barings plc (in administration) v Coopers & Lybrand (a firm) [1997] 1 BCLC 427 favoured the
approach in Christensen v Scott, but this authority must now be in doubt after the House of Lords
decision in Johnson v Gore Wood & Co. [2001] 1 All ER 481, 520 (Lord Hutton).
121
(Merits).
122
Ibid. para. 38(A).
123
This appears to have been the basis for upholding the admissibility of claims before several
Mixed Claims Commissions: Baasch & Romer (Netherlands v Venezuela) 10 RIAA 723.
124
(Merits).
125
Ibid. 156.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 427
807. This approach to admissibility appears to be consistent with the second
limb of Rule 49.
808. Some municipal systems of law do recognise a right of the shareholder to
sue for reflective loss in circumstances where the company suffers a loss but has
no cause of action.126
D . T H I R D L I M B O F R U L E 4 9 : D E P R I VAT I O N O F T H E
C O M PA N Y ’ S C A PA C I T Y T O S U E
809. The company may be deprived of its legal capacity to sue ab initio by
virtue of the particular rules relating to standing pursuant to the lex societatis of
the company (the law of the host state) or ex post facto if those rules have been
modified or manipulated by the host state in connection with the particular
dispute. Rule 49 also refers to de facto incapacity, which might arise where the
theoretical existence of standing to sue as a matter of law is emptied of practical
utility.
810. This third limb of Rule 49 relating to the incapacity of the company is
wider than the equivalent exception in the context of diplomatic protection. The
International Court in Barcelona Traction held that a right vests in a shareholder
(here in the shareholder’s government) to pursue an international claim for
reflective loss caused by an injury to the company only where the company
ceases to exist de jure. Notwithstanding the Court’s observation that ‘from the
economic viewpoint the company has been entirely paralyzed’,127
so long as the
Barcelona Traction Corporation remained in receivership, it continued to exist
in law and hence no international claim could be advanced on behalf of the
shareholders.128
811. The individual opinions rendered by several of the judges in Barcelona
Traction reveal a greater concern with substance than form and, even if the
Court’s narrow formulation might have accurately reflected the general position
in municipal legal systems at that time, that position should no longer hold today.
812. Judge Fitzmaurice stated the exception as applying where: (i) the
company has the same nationality as the host state; (ii) the host state is
responsible for the very acts or damage complained of; and, (iii) as a result
the company is incapable de facto of protecting its interests and hence those
126
In England: Johnson v Gore Wood & Co. [2001] 1 All ER 481, 503 (Lord Bingham) citing Lee v
Sheard [1955] 3 All ER 777, 778; Fischer (George) GB Ltd v Multi-Construction Ltd [1995]
1 BCLC 260; Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443.
127
(Belgium v Spain) 1970 ICJ 3, 40.
128
According to the ICJ: ‘Only in the event of the legal demise of the company are the shareholders
deprived of the possibility of a remedy available through the company’ (ibid. 41).
428 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
of the shareholders.129
In this situation, ‘the very authority to which the
company should be able to look for support or protection is itself the author
of the damage’.130
Judges Jessup and Gros endorsed the same exception in
similar terms and all three judges rejected the requirement that the company
must have ceased to exist de jure.131
In contrast, Judge Padilla Nervo insisted
upon the ‘legal death’ of the corporation before the shareholders would
acquire a right of action,132
as did Judge Ammoun.133
813. In Deutsche Amerikanische Petroleum Gesellschaft Oil Tankers,134
the US
Reparation Commission referred to the awards in Delagoa Bay and El Triunfo
and commented that:
[I]t was clearly specified that the shareholders and debenture-holders were
admitted, in view of the circumstances, to be exercising, not their own
rights, but the rights which the company, wrongfully dissolved or despoiled,
was unable thenceforth to enforce; and they were therefore seeking to
enforce not direct and personal rights, but indirect and substituted rights.
814. There are some authorities in common law jurisdictions for the proposition
that where the company is unable to pursue its own action because it is
procedurally incapacitated due to the actions of the defendant, then the shareholder
is entitled to recover for reflective loss. For instance, the English Court of
Appeal in Giles v Rhind135
allowed the shareholder to pursue a claim for
reflective loss where the defendant’s actions had brought the company into
insolvency.136
129
Ibid. 72. If the Barcelona Traction Company had been a Spanish company, then Judge
Fitzmaurice would have found that a cause of action on behalf of the Belgium shareholders
was admissible (ibid. at 75).
130
Ibid. 72. According to Fitzmaurice J, in such a situation, ‘[the corporate entity’s] personality is
no longer anything but a fiction void of all meaning, in which there can now be seen nothing but
a bundle of individual rights’ (ibid. 73).
131
Ibid. 191–3 (Jessup J). Like Fitzmaurice J, Jessup J does not insist upon the demise of the
company de jure: ‘The doctrine in question generally does not insist that the life of the
corporation must have been extinguished so that it could be said the shareholders had acquired
a direct right to the assets’ (ibid. 193). ‘[S]urely no economic, social or political advantage
would be gained if in a situation like that in the instant case, the life of the Barcelona Traction
Company had to be officially ended in Canada so that the principal shareholders, who are the
real parties in interest, could be protected diplomatically.’ Ibid. 220. Likewise, Gros J said that:
‘In the present case the company has been entirely deprived of the means for pursuing its
corporate objects and, from the point of view of the shareholders, this produces the same effects
as a disappearance of the company. The shade of difference is therefore a matter of form or rather
of formality. As from 1952 the corporate objects of the Barcelona Traction group have been void
of meaning.’ Ibid. 276.
132
Ibid. 256.
133
Ibid. 318–20.
134
2 RIAA 777 (1926).
135
[2003] Ch 618.
136
In Singapore: Hengwell Development Pte Ltd v Thing Chiang Ching [2002] 4 SLR 902
(Singapore High Court).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 429
E . F O U RT H L I M B O F R U L E 4 9 : D E N I A L
O F J U S T I C E I N T H E P U R S U I T O F A R E M E D Y
B Y T H E C O M PA N Y
815. If the company suffers a denial of justice in the pursuit of a remedy
within the host state’s system for the administration of justice,137
then a
shareholder’s claim for reflective loss should in principle be admissible,
subject to Rule 50.
816. A serious flaw in the International Court’s judgment in Barcelona Traction
is that it failed to take into account the substantive complaint of the Belgium
shareholders; namely, that Barcelona Traction Corporation had suffered a denial
of justice in the Spanish courts. This omission perhaps entered into the Court’s
reasoning because too much attention was devoted to the status of the company,
both de jure and de facto, rather than the status of the remedies available to the
company to repair the confiscation of its assets. The reality was that any further
appeal to the Spanish judicial organs for relief would have been completely
futile and hence an exception to the general rule prohibiting a shareholder action
should have come into play. But even if a remedy was available to the Barcelona
Traction Corporation in the Spanish courts, it could still have been found to
have been frustrated because of the acts attributable to the Spanish authorities.
By stripping the company of its assets and means to seek redress, the legal
remedies, even if theoretical available, had been put beyond the company’s
reach. In this situation, the shareholders should have been able to avail themselves
of an exception based upon the expropriation of the company’s assets or a
denial of justice suffered by the company.
F. I N A D M I S S I B L E S H A R E H O L D E R C L A I M S
F O R R E F L E C T I V E L O S S
(i) The enforcement of a contractual obligation or other undertaking
owed to the company but not to the shareholder by means of an
investment treaty claim
817. A shareholder cannot enforce rights under a contract between its company
and the host state by prosecuting an investment treaty claim. The shareholder
has no cognisable legal interest in the contract and hence it cannot be the object
of an investment treaty claim: it is inadmissible.
137
This assumes that the company has exhausted local remedies as a substantive requirement for
the delict of denial of justice. See generally: J. Paulsson, Denial of Justice in International Law
(2005) Ch 5.
430 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
818. In BG v Argentina,138
BG was attempting to enforce rights under a licence
for the distribution of natural gas, which was granted by the Argentine President
to MetroGAS, an Argentine company in which BG (an English company) had a
minority shareholding interest. Consistent with Rule 49, the tribunal found that:
‘BG does not have standing to seize this Tribunal with “claims to money” and
“claims to performance”, or to assert other rights, which it is not entitled to
exercise directly.’139
819. The most striking illustration of a failure to recognise this principle, and the
consequential difficulties encountered on the merits, is the award in CMS v
Argentina.
819C. CMS Gas Transmission Company v Argentine Republic140
The award in CMS, which followed soon after the award in GAMI, was
among the first to uphold a claim for fair and equitable treatment by a
minority shareholder.
In 1995, CMS, an American company, acquired 29.42 per cent of the shares
in an Argentine company TGN,141
a company created for gas transportation
following the privatisation of public utilities in the late 1980s.142
At the
time of CMS’s investment, the legal regime for the gas transportation
activities was regulated by the licence granted to TGN by the Government
in conjunction with several legislative acts and decrees. That regime provided
for (i) the calculation of gas tariffs in US dollars to be converted into
pesos at the time of billing and (ii) the adjustment of tariffs every six months
in accordance with the US Producer Price Index (US PPI).143
A serious economic crisis began to unfold in Argentina towards the end of
the 1990s and the Argentine Government requested the gas companies,
including TGN, to agree to the temporary suspension of the US PPI adjustment
of the gas tariffs from 1 January 2000.144
The suspension was agreed
but subject to the gas companies’ right to recoup the costs of the deferral at a
later time.145
Further deferrals were then negotiated with the gas companies
as the economic crisis deepened, but no adjustments were made by the
Government as originally promised to enable the gas companies to recover
their resulting lost income.146
CMS, as a shareholder of TGN, instituted
ICSID proceedings on 12 July 2001.
138
(Merits).
139
Ibid. para. 214.
140
(Preliminary Objections) 7 ICSID Rep 492; (Merits).
141
Transportadora de Gas del Norte.
142
(Merits) paras. 53–8.
143
Ibid. paras. 54–7.
144
Ibid. paras. 59–60.
145
Ibid. para. 60.
146
Ibid. paras. 61–3.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 431
In late 2001, the peso collapsed and there was a massive run on deposits
held in Argentine banks. On 7 December 2001, the Argentine Government
announced that it could no longer service its foreign debt repayments,
leading to the largest default on foreign debt in history. Following the
resignation of a succession of Presidents and several Ministers in the
midst of rioting and nationwide strikes, the interim President and
Argentine Congress passed an Emergency Law on 6 January 2002, by
which a public emergency was declared until 10 December 2003.147
The
Emergency Law abolished the right of licensees of public utilities to calculate
the tariffs in US dollars and adjust tariffs according to the US PPI.148
Moreover, the tariffs were redenominated in pesos at the rate of one peso to
the dollar, as were all private contracts denominated in dollars or other
foreign currencies.149
CMS supplemented its claim in the ICSID proceedings
to include a claim for damages based on the effects of the Emergency
Law upon the value of its shareholding in TGN.150
Argentina objected to the admissibility of CMS’s claims on the ground that
the substantive rights that formed the basis of such claims belonged to TGN
and not to CMS as a shareholder.151
In ruling upon this objection, the tribunal conflated the questions of jurisdiction
and admissibility and, perhaps for this reason, fell into serious
error.152
There could be no question of the tribunal’s jurisdiction ratione
personae over CMS. CMS, a legal entity incorporated in the United States,
had made an investment in shares that satisfied the definition of an investment
both in Article 25(1) of the ICSID Convention and Article I(1) of the
Argentina/USA BIT. There could also be no question of the tribunal’s
jurisdiction ratione materiae over the dispute between CMS and Argentina
insofar as it was a ‘legal dispute arising directly out of an investment’
pursuant to Article 25(1) of the ICSID Convention and an ‘investment
dispute’ pursuant to Article VII of the BIT. The contentious issue related
to the admissibility of the claims advanced by CMS.
The essence of Argentina’s objection to the substantive admissibility of
CMS’s specific claims was that the rights invoked to substantiate those
claims did not belong to CMS but to TGN. Considering the nature of the
objection, it is at once surprising and disturbing that there is no analysis
(or even articulation) of the specific claims advanced by CMS in the tribunal’s
decision. This omission suggests that the tribunal mistakenly assumed
that, by upholding its jurisdiction, the admissibility of the claims must
147
Ibid. para. 64.
148
Ibid. para. 65.
149
Ibid.
150
(Preliminary Objections) 7 ICSID Rep 492, 518–9/116–120.
151
Ibid. 501/36.
152
See also: Azurix v Argentina (Preliminary Objections) para. 67.
432 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
automatically follow.153
Indeed the tribunal, in its consideration of the
position under the ICSID Convention and the BIT, answered Argentina’s
objection to admissibility by expressly affirming its jurisdiction on each
occasion;154
in other words, the tribunal merely affirmed the capacity of
CMS to bring its investment dispute to an ICSID tribunal in accordance with
the BIT and the ICSID Convention. But with respect to the admissibility of
the specific claims advanced by CMS, the only finding of the tribunal is the
following statement that is too general to throw any light on the problem:
The tribunal therefore finds no bar in current international law to the
concept of allowing claims by shareholders independently from those
of the corporation concerned, not even if those shareholders are
minority or non-controlling shareholders.155
It is certainly true that there is no comprehensive bar to shareholder actions, as
is reflected in Rule 49; but the converse must also be true – there cannot be a
comprehensive eligibility either, for otherwise a host state might be exposed to
an almost infinite number of claims by minority shareholders in a single large
multinational corporation in respect of a single injury. Unfortunately, there is
no further elaboration upon the tribunal’s statement in the appropriately titled
‘Decision on Objections to Jurisdiction’. So we must go to the tribunal’s final
award to extract more information about the rights invoked by CMS to substantiate
its claims in order to determine whether they are admissible. In the
section entitled ‘CMS’s Legal Justification of its Claims’ it is noted:
The claimant is of the view that the measures adopted by the
Argentine Government are in violation of the commitments that the
Government made to foreign investors in the offering memoranda,
relevant laws and regulations and the License itself.156
The essence of CMS’s treaty claims were thus the violation of commitments
alleged to have been made to CMS by the Argentine Government. Put differently,
CMS was seeking the international protection of these commitments by
reference to the minimum standards of treatment set out in the BIT. For those
claims to have been admissible, the rights arising from such commitments must
have belonged to CMS and not to TGN. If that were the case, then it would be a
permissible shareholder action in accordance with Rule 48.157
It is, therefore,
necessary to examine each alleged source of right that is alleged to vest in CMS
as a shareholder rather than in TGN as a company.
153
This impression is confirmed by the tribunal’s statement that: ‘The distinction between admissibility
and jurisdiction does not appear quite appropriate in the context of ICSID as the
Convention deals only with jurisdiction and competence.’ (Preliminary Objections) 7 ICSID
Rep 492, 502/41.
154
Ibid. 506/56, 508/65. Argentina’s objection to admissibility was clearly noted by the tribunal in
this part of its reasoning (ibid. 506–7/59).
155
Ibid. 504/48.
156
(Merits) paras. 84–5.
157
There was, moreover, no allegation of a denial of justice in respect of the proceedings involving
TGN before the Argentine courts.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 433
The most obvious source of such a right was the offering memorandum
which enticed CMS to make its investment in TGN. If the Argentine
Government made commitments of the type relied upon by CMS in this
memorandum, then any subsequent breach of such commitments would be
actionable by reference to the fair and equitable treatment standard. Such a
claim is clearly admissible pursuant to Rule 48.
Next we must consider the Licence. The parties to the Licence were TGN
and Argentine Government. CMS was therefore not privy to this relationship
as a shareholder of TGN and could not, therefore, derive rights from
the Licence that were capable of attracting international protection. In the
same way, Argentina could not insist that CMS was bound by TGN’s
obligations under the Licence, including, for instance, the obligation to
submit any disputes to the federal courts of Buenos Aires.158
The only precedent cited by the tribunal in support of its general statement
on admissibility was the ELSI case, where it was found by the Chamber of
the International Court that Raytheon and Machlett, the US shareholders
in ELSI, had no right to an orderly liquidation deserving the protection of
international law because ELSI was insolvent at the relevant time. The
general principles of municipal legal systems do not confer an exclusive
right upon the shareholders to control and manage the liquidation of the
company where it is insolvent. Nor do municipal legal systems vest shareholders
with the rights under contracts and licences entered into or granted
to the company. CMS cannot have a legitimate expectation or acquired
right based on a theory of shareholders’ rights that does not exist in any
jurisdiction of the world. A claim by CMS asserting rights based on the
Licence is therefore inadmissible.
In the event, the tribunal upheld the admissibility of all CMS’s claims and
determined on the merits that Argentina had violated the fair and equitable
standard of treatment and the umbrella clause in the BIT and assessed the
damages owing to CMS by using the discounted cash flow method. The
consequences of the tribunal’s approach to admissibility can now be usefully
examined.
The standard of fair and equitable treatment was said to have been violated
because Argentina had failed to respect its ‘solemn legal and contractual
commitments’ concerning the ‘stability and predictability of the business
environment’159
that had induced CMS to make its investment in TGN.
The possible sources for these ‘solemn’ commitments have been touched
upon earlier. They were the offering memoranda and the Licence. The
tribunal found that the offering memoranda were not legally binding and
were prepared by private consultants rather than the Argentine
Government. That left the tribunal with the Licence and the stabilisation
158
As was found by the tribunal: (Preliminary Objections) 7 ICSID Rep 492, 510/76.
159
(Merits) para. 284.
434 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
clauses contained therein which obliged the Argentine Government (i) not
to freeze the tariff regime or subject it to price controls or (ii) not to alter the
basic rules governing the Licence without TGN’s written consent.160
The
tribunal found that these commitments had been breached, thereby attracting
Argentina’s international responsibility under the fair and equitable
treatment standard and the umbrella clause.161
Investment treaty obligations do not protect expectations that are wholly
unsubstantiated by reference to the municipal law of the host state or general
principles of municipal legal systems. Just as a minority shareholder cannot
rely upon an investment treaty obligation to cast a majority vote at the annual
meeting of shareholders, neither can a shareholder invoke an investment
treaty obligation to assert the rights of the company, thereby bypassing the
principles relating to privity of contract and corporate personality.
Suppose that TGN had given its written consent to an alteration of the basic
rules governing the Licence to ensure that it could continue to realise a
commercial return on its gas transportation activities during the period of
economic recovery in Argentina. Could CMS assert that it is not bound by
this corporate act and claim damages in an investment treaty arbitration on
the basis of TGN’s commercial return prior to the alteration of the Licence?
Or suppose that TGN had recovered damages in the Argentine courts for
the Government’s failure to comply with the terms of the Licence and the
proceeds were reinvested by TGN. Could CMS recover further damages,
perhaps on a different basis, in an investment treaty arbitration? Suppose
finally that TGN returns to profitability and the Board of Directors resolves
to reduce its indebtedness to creditors rather than pay dividends to shareholders.
Could CMS nevertheless recover an amount commensurate with
the value of its shares prior to the financial crisis in Argentina in an investment
treaty arbitration?
If the tribunal’s reasoning is followed to its logical conclusion, each of these
questions would be answered in the affirmative.
(ii) Breach by the host state of the obligation of fair and equitable
treatment or full protection or security or national treatment or mostfavoured-nation
treatment or other minimum standard of treatment
with respect to measures attributable to the host state taken against
the company except where the company is deprived of capacity or
a remedy in accordance with Rule 49
820. The first limb of Rule 49 provides that claims by shareholders for reflective
loss where the company’s assets have been expropriated are admissible. In such
a situation, the shareholder’s rights are devoid of content; they are rights to an
160
Ibid. para. 302.
161
Ibid. paras. 275, 302–3.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 435
empty corporate shell. It follows that the shareholder’s rights have been indirectly
expropriated as well as the company’s assets and hence the shareholder’s
claim for expropriation must be admissible. In contradistinction, if the company
has been prejudiced by measures attributable to the host state which fall short of
the expropriation of its assets, the shareholder’s rights are not thereby extinguished
and the damage to the shareholder has merely taken the form of a
diminuition in the value of its shares. In this situation, the shareholder must look
to the company to pursue a remedy against the host state for the shareholder’s
rights have not been prejudiced, only its interests.
821. Where investment treaty tribunals have admitted shareholder claims for
reflective loss founded upon a breach of the obligation of fair and equitable
treatment or full protection or security or national treatment or most-favourednation
treatment or other minimum standard of treatment, an intractable problem
has arisen as to where to draw the line. The problem was confonted in Enron v
Argentina. The problems with the solution proposed by the tribunal reinforces the
justification for Rule 49.
821C. Enron Corporation and Ponderosa Assets, L.P. v The
Argentine Republic162
The facts in the Enron case bear many similarities with the CMS case, and
the claims were based upon the same Argentina/USA BIT. Enron’s investment
in the privatised gas industry of Argentina was in the ‘TGS’ com-
pany,163
the owner of a network for the transportation and distribution of
gas produced in the southern provinces of Argentina.164
Enron was the
ultimate beneficiary of 35.263 per cent of the shares in TGS, having structured
its investment through several corporate layers.165
Enron advanced two claims against Argentina. The first concerned stamp
taxes levied by several Argentine provinces on the operations of TGS.166
The second was an ‘ancillary claim’ arising from the refusal of the
Argentine Government to allow the adjustment of tariffs pursuant to the
United States Producer Price Index and the calculation of tariffs in US
dollars.167
162
Enron v Argentina (Preliminary Objections) 11 ICSID Rep 273; (Merits).
163
Transportadora de Gas del Sur.
164
(Preliminary Objections) 11 ICSID Rep 273, 277/21.
165
Ibid. Enron’s beneficiary interest in the shares of TGS was held by two corporate structures. First,
Enron owned two companies, ‘EPCA’ and ‘EACH’. These two companies owned 50% of the
shares in ‘CIESA’ (an Argentine company). CIESA owned 55.30% of the shares in TGS. Second,
EPCA, EACH and ‘ECIL’ (another Enron-owned company), owned 75.93% of ‘EDIDESCA’ (an
Argentine company). EDIDESCA owned 10% of the shares in TGS. Through these two structures,
Enron claimed beneficial ownership of 35.263% of the shares in TGS.
166
(Preliminary Objections) 11 ICSID Rep 273, 278/25.
167
Enron v Argentina (Preliminary Objections: Ancillary Claim) 11 ICSID Rep 295, 296/8.
436 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
Argentina raised an objection to the admissibility of Enron’s claims because
Enron could not, as a shareholder of TGS, identify any rights attaching to
that shareholding, which had been affected by measures attributable to
Argentina. The tribunal stated the question to be decided in the following
terms:
The Argentine Republic has rightly raised the concern about the fact
that if minority shareholders can claim independently from the
affected corporation, this could trigger an endless chain of claims,
as any shareholder making an investment in a company that makes
an investment in another company, and so on, could invoke a direct
right of action for measures affecting a corporation at the end of the
chain.168
The tribunal dealt with this ‘concern’ as follows. First, it correctly characterised
the question as one of admissibility.169
Secondly, the tribunal postulated
that it could be resolved by ‘establishing the extent of the consent to
arbitration of the host State’.170
Thirdly, the tribunal ruled that ‘[i]f consent
has been given in respect of an investor and an investment, it can be
reasonably concluded that the claims brought by such investor are admissible
under the treaty’.171
Fourthly, by applying this test to the facts, the
tribunal concluded:
At the hearing on jurisdiction held in the present case, the Tribunal
put a question to the parties as to whether the Claimants had been
invited by the Government of Argentina to participate in the investment
connected to the privatization of TGS. It turned out that this
had been precisely the case.172
It followed that all the claims advanced by Enron were admissible.173
The test for admissibility devised by the tribunal was thus founded upon the
criterion of an ‘invitation’. The specific indices of the invitation extended by
Argentina to a class of foreign investors that included Enron were
recounted as follows:
[T]he Information Memorandum issued in 1992 and other instruments
related to the privatisation of the gas industry had specifically
invited foreign investors to participate in this process. A ‘road show’
168
(Preliminary Objections) 11 ICSID Rep 273, 283/50.
169
Ibid. 283–4/52.
170
Ibid.
171
Ibid.
172
Ibid. 284/54.
173
Ibid. 284/56. This test was approved in: African Holding Co. v Congo (Preliminary Objections)
paras. 100–1. Again, in Société Générale v Dominica (Preliminary Objections) paras. 49–51,
the tribunal applied the test in Enron and concluded that it could extend to claims by entities
separated from the investment ‘by several corporate layers’.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 437
followed in key cities around the world and specific meetings with the
Claimants were held in this context.174
The criterion of an ‘invitation’ for the purposes of determining the admissibility
of shareholder claims is very problematic. Reliance upon such conduct
of a third party would not create an independent duty to a shareholder
in municipal legal systems.175
In the Enron case, the Information
Memorandum (a document with no legal significance that was prepared
by private consultants), a ‘road show’ and ‘specific meetings’ were found to
discharge the test. Would the investor’s attendance at a presidential
banquet also qualify? Or would lunch with the relevant minister suffice?
In short, the test proposed by the tribunal suffers from its obvious subjectivity
and cannot be generalised without confronting the intractable difficulty
of where to draw the line. At one level it could be said that all foreign
investors who qualify for investment treaty protection are ‘invited’ by the
host state, insofar as the very policy underlying the treaty is the promotion
and encouragement of such investments.
The proper test for admissibility of shareholder claims in this context does
not rest upon evidence of an ‘invitation’ by the host state but rather upon
the existence of a legal relationship between the investor and the host state.
If, for example, the Information Memorandum had established a contractual
relationship between Enron and Argentina, then Enron’s investment
treaty claims based upon the disappointment of its contractual expectations
might have been admissible within Rule 47. But if the claimant did not
secure a direct legal relationship with the host state, then the investment
treaty cannot fill this void. Indeed, it would be very surprising if a sophisticated
investor like Enron contemplated that its participation in a ‘road
show’ and the like would attain singular importance for the admissibility of
its treaty claims several years later.
As previously stated, the tribunal affirmed the admissibility of the claims,
thus permitting Enron to challenge the imposition of a tax upon TGS,
despite these two entities being separated by three corporate layers. It was
noted in relation to the CMS case that the legal quagmire into which
interested third parties are thrown by such an approach to admissibility
was identified and then passed over by the Tribunal; the same can be said
about the Enron award. Here TGS had been successful before the Argentine
Supreme Court in securing a provisional stay for the collection of the
taxes.176
The tribunal nevertheless decided to proceed to the merits of
Enron’s claim, which alleged the expropriation of its investment by the
174
Enron v Argentina (Preliminary Objections) 11 ICSID Rep 273, 284/55.
175
For instance, in England, the Court of Appeal ruled that a private bank did not owe an
independent duty to a shareholder in addition to the company even where the bank courted
the shareholder to be its client and gave investment advice to the shareholder personally:
Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612.
176
(Preliminary Objections) 11 ICSID Rep 273, 278/26.
438 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
imposition of the taxes.177
Suppose, in the meantime, the general meeting
of shareholders of TGS decided to ratify a settlement with the provincial tax
authorities for a third of the amount presently claimed and a reduction on
TGS’s future tax liability. Enron causes the TGS shareholders in which it
has an indirect interest, CIESA and EDIDESCA, to vote against the settlement,
but the majority shareholders prevail. Can Enron maintain its investment
treaty claim against Argentina? Or consider a scenario whereby the
provisional stay is lifted and the taxes are imposed. Enron then successfully
prosecutes its investment treaty claim and recovers damages. But following
the tribunal’s award, TGN manages to have the imposition of taxes quashed
in the Argentine courts as ultra vires.178
Surely these variations on the theme
are not so far-fetched as to justify a primitive solution that is oblivious to
them. The tribunal in GAMI certainly did not think so.
822. The concern expressed by the Enron tribunal about the prospect of an
endless chain of claims of different shareholders in different companies with
indirect control over the same investment was taken up in Noble v Ecuador.179
The tribunal’s answer to this problem does not inspire confidence:
The Tribunal does not disagree with the statement made by the Enron
tribunal. There may well be a cut-off point somewhere, and future tribunals
may be called upon to define it. In the present case, the need for such a
definition does not arise. Indeed, the cut-off point, whatever it may be, is
not reached with two intermediate layers. The relationship between the
investment and the direct shareholder, on the one hand, and the indirect
shareholder, on the other, is not too remote.180
823. It is impossible to make a legal judgment on the remoteness of a claim unless
one has a legal test for remoteness in mind. The ‘need for such a definition’
certainly did arise.
(iii) The intractable problems of quantifying the loss for inadmissible
shareholder claims
824. A tribunal’s failure to give proper analysis to the admissibility of a
derivative claim by a shareholder generates intractable problems in respect of
the quantification of damages if the claim is upheld on the merits. In other
words, the assertion of jurisdiction over an inadmissible claim by a shareholder
177
Ibid. 288/74. It was essential for Enron to make out a case of expropriation in order to fall within
the exception to the exemption of taxation matters from the scope of the tribunal’s jurisdiction
ratione materiae in Article XII of the BIT, which is reproduced at ibid. 285–6/61.
178
According to the tribunal: ‘The Federal Government has supported before the courts TGS’s
arguments in respect of the illegality or inapplicability of the taxes assessed, including the view
that some taxes violate the law of Federal Co-participation that governs the relationship between
the Federal Government and the Provinces’ (ibid. 278/26).
179
(Preliminary Objections).
180
Ibid. para. 82.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 439
leads to consequential errors in the assessment of damages. Two such consequential
errors can be found in the jurisprudence to date.
825. The first is for the tribunal to assess the damages to an investment in shares
flowing from a breach of an investment treaty obligation by employing the
standard of compensation for an expropriation even where the tribunal has ruled
that there has been no expropriation. If there has not been an expropriation of the
assets of the company and the shares retain a positive value, then a tribunal
cannot assess the damages payable to the shareholder as if those shares had no
value at all. To avoid the obvious injustice to the host state by following this
approach, tribunals have ordered the claimant to transfer its shares to the host
state. This was the solution adopted in CMS v Argentina and, for the reasons
considered below, it is flawed as beyond the powers of the tribunal.
826. The second consequential error is to assess damages on the basis of a crude
estimate of the loss to the shareholder caused by an injury to the company. The
leading example of such an error is the award in Nykomb v Latvia.
826C. CMS Gas Transmission Company v The Republic
of Argentina181
It is important in this context to recall that the tribunal dismissed the
expropriation claim because ‘the investor is in control of the investment;
the Government does not manage the day-to-day operations of the company;
and the investor has full ownership and control of the investment’.182
As stated in Rule 49, a claim for reflective loss based upon the total destruction
of the value of the shareholding due to the expropriation of the assets
of the company is prima facie admissible and such a claim, if substantiated,
would not cause difficulties for the assessment of damages: the investor
would be entitled to recover the market value of the shares before the acts
constituting the expropriation. But what of a finding that certain general
measures of the host state have impaired the value of shares, which are still
within the ownership and control of the investor? This was the essence of
the tribunal’s determination that the fair and equitable standard and the
umbrella clause had been violated by Argentina. One might assess the
damages as the amount corresponding to the deterioration in the value of
the shares during the relevant period when the acts attributable to the host
state caused the impairment. Such an approach does, however, present a
tribunal with an acute problem. So long as the investor remains the owner
of the shares, and the company a going concern, there is a distinct possibility
that the share value has or will improve along with the fortunes of the
company over the course of time.183
181
(Merits).
182
Ibid. para. 263.
183
The tribunal indeed forecasted significant improvements in relation to the demand for gas and
the revenues of TGN in its assumptions for the discounted cash flow analysis (ibid. para. 446).
440 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
How, then, did the CMS tribunal deal with this conundrum? In effect, the
tribunal assessed the damages owing to CMS as if there had been a total
destruction of the share value and thus an expropriation. It employed
the discounted cash flow method to determine the value of TGN before
the adjudged violations of the BIT and awarded damages based on a
proportion of this value corresponding to the shareholding of CMS.184
The discounted cash flow method is employed to determine the value of
an enterprise in the context of a sale to a purchaser in the market. If the
enterprise has been expropriated, then this method is clearly appropriate.
But TGN had not been expropriated; it continues to conduct its activities in
the gas sector in Argentina and, in the fullness of time, one would expect
that its share value will increase as the Argentine economy recovers. CMS
anticipated this obvious objection to its double recovery and so offered to
transfer its shares in TGN to Argentina.185
The tribunal endorsed this offer
by making an order to that effect and calculated the price Argentina was
obligated to pay.186
This compulsory purchase order was essential to the
logic of the tribunal’s assessment of damages, which had proceeded on the
fiction that CMS had been deprived of its shares or the entire value thereof.
But it was manifestly beyond the jurisdiction of the tribunal to make such an
order. On what basis can one party to arbitration proceedings be compelled
to purchase an asset from the other party? A tribunal has jurisdiction to
determine the compensation flowing from a breach of a legal obligation.
It is impossible to rationalise the sum payable by Argentina pursuant to the
compulsory purchase order as part of that compensation.
827. By embarking upon the adjudication of what should have been found to be
an inadmissible claim, the tribunal in CMS ultimately had to resort to a fiction in
order to assess damages (the expropriation of CMS’s shares) and an impermissible
device to mitigate the injustice of that fiction (a compulsory purchase order).
There is no better illustration of the importance of a disciplined and principled
approach to the admissibility of claims. In GAMI v Mexico,187
GAMI sought to
bypass the task of assessing the damage caused by the acts of maladministration
attributable to Mexico – a task the tribunal described as perhaps being ‘impossible’
– by suggesting the following ‘remedy’: it quantified its loss as if the value
of its shares had been totally destroyed and simultaneously offered to transfer
its shares in GAM to the Mexican Government. This was the same ploy adopted
by the tribunal in CMS. But the tribunal in GAMI flatly rejected this approach:
GAMI has staked its case on the proposition that the wrong done to it did
in fact destroy the whole value of its investment. GAMI seeks to lend
credibility to its posture by agreeing to relinquish its shares in GAM as a
condition of the award it seeks. It suggests that any residual value is
184
Ibid. para. 411.
185
Ibid. para. 465.
186
Ibid. para. 469.
187
(Merits).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 441
therefore of no moment. This posture is untenable. The Tribunal cannot be
indifferent to the true effect on the value of the investment of the allegedly
wrongful act.188
827C. Nykomb Synergetics Technology Holding AB v Republic
of Latvia189
This award has already been examined in the context of Rule 44. It will be
recalled that the tribunal decided to exercise its jurisdiction over a claim
brought by the parent company, Nykomb (a Swedish company), in respect
of a dispute concerning an entitlement to a double tariff rate in a contract
between its local subsidiary, Windau, and the Latvian state company,
Latvenergo.
The following determination by the tribunal should have resulted in a
finding of inadmissibility in respect of Nykomb’s derivative claim:
In the present case, there is no possession taking of Windau or its
assets, no interference with the shareholder’s rights or with the
management’s control over and running of the enterprise – apart
from ordinary regulatory provisions laid down in the production
licence, the off-take agreement, etc.
The Tribunal therefore concludes that the withholding of payment at
the double tariff does not qualify as an expropriation or the equivalent
of an expropriation under the Treaty.190
Nykomb was alive to the legal difficulties of maintaining a derivative action
as a shareholder of Windau. In its submissions, Nykomb suggested that the
tribunal’s award might be considered as binding upon Windau as well by
virtue of the doctrine of res judicata in international law as this entity was
‘wholly-owned and under direct control’ of Nykomb.191
If the award of the
tribunal were to be res judicata against Windau as a ‘privy’ of Nykomb, then
it would be difficult to maintain that Nykomb was not bound by Windau’s
choice of jurisdiction in its Contract with Latvenergo by virtue of the same
close relationship. In the event, the tribunal did not consider Nykomb’s res
judicata point in its award.
Nykomb further anticipated problems in the quantification of its losses and
alleged that the tribunal had the discretion to award damages ‘directly to
the investment enterprise Windau rather than to Nykomb as claimant
investor’.192
The tribunal implicitly rejected this contention because its
188
Ibid. para. 133.
189
(Merits) 11 ICSID Rep 158.
190
Ibid. 194/section 4.3.1.
191
Ibid. 161/section 1.2.1.
192
Ibid.
442 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
exercise of jurisdiction was premised upon the notion that ‘[Nykomb] must
be understood to claim for the losses or damages it has incurred itself’ as
opposed to those incurred by Windau as the party to the Contract. The
tribunal went on to adjudge that Latvenergo’s insistence that the 0.75 tariff
multiplier should be applied instead of the double rate was a breach of the
ECT.193
What losses or damages had Nykomb suffered as a result?
The tribunal must be commended as being among the first to acknowledge
the axiomatic rule of valuation that a loss to a company is not reflected
exactly as a loss to a shareholder:
[T]he reduced flow of income into Windau obviously does not cause
an identical loss for Nykomb as an investor. If one compares this with
a situation where Latvenergo would have paid the double tariff to
Windau, it is clear that the higher payments for electric power would
not have flowed fully and directly through to Nykomb. The money
would have been subject to Latvian taxes etc., would have been used
to cover Windau’s costs and down payments on Windau’s loans etc.,
and disbursements to the shareholder would be subject to restrictions
in Latvian company law on payment of dividends. An assessment
of [Nykomb’s] loss on or damage to its investment based directly on
the reduced income flow into Windau is unfounded and must be
rejected.194
The problem of quantifying ‘reflective loss’ has been analysed extensively in
many jurisdictions. It is an issue that does not evaporate in the international
stratosphere of an investment treatment claim. The tribunal was forthcoming
in recognising the complexity of the problem195
but, in so doing, left
itself exposed to criticism for the arbitrariness of its solution. The tribunal
resolved to make a ‘discretionary award’ by taking the loss estimated to have
been suffered by Windau and dividing it by three.196
There is no explanation
of how the factor of three was calculated. The claimant/shareholder
was thus absolved from having to prove causation and the quantum of its
damages in the normal way.197
193
Ibid. 194/section 4.3.2. The tribunal found specifically that Nykomb had been subjected to a
‘discriminatory measure’ in the context of Art. 10(1) of the ECT.
194
Ibid. 200/section 5.2. Elsewhere, the tribunal noted that: ‘An award obliging the Republic to
make payments to Windau in accordance with the Contract would also in effect be equivalent
to ordering payment under Contract No. 16/07 in the present Treaty arbitration.’ Ibid. 199/
section 5.1.
195
The tribunal noted that: ‘[T]he loss or damage suffered by Nykomb as an investor is difficult to
quantify’. This difficulty was augmented by the fact that ‘the Tribunal had little material upon
which to base an assessment, apart from various submitted financial analyses and Windau’s
accounts for the last few years’ (ibid. 200/section 5.2).
196
Ibid.
197
The tribunal noted that: ‘[T]he Claimant has submitted rather limited documentation concerning
the financial and economic situation of Windau and the circumstances concerning its own
investment’ (ibid.).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 443
G . T H E S P E C I A L C A S E O F T H E E U R O P E A N
C O N V E N T I O N O N H U M A N R I G H T S
828. It is instructive to consider the jurisprudence of the European Court of
Human Rights on shareholder claims for reflective loss based upon Article 1 of
Protocol No. 1 (‘A1P1’) of the European Convention on Human Rights which,
like the majority of investment treaties, does not expressly regulate the problem.
The solution has, therefore, been developed judicially by interpreting the text of
A1P1 in conformity with general principles of law relating to the rights attaching
to shareholdings in limited liability companies. A1P1 reads:
Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the
public interest and subject to the conditions provided for by law and by the
general principles of international law.
The proceeding provisions shall not, however, in any way impair the right
of a State to enforce such laws as it deems necessary to control the use of
property in accordance with the general interest or to secure the payment of
taxes or other contributions or penalties.
829. The Court has never had any difficulty in recognising that shares constitute
a ‘possession’ for the purposes of A1P1.198
Hence the starting point is no
different from an investment treaty that includes shares in its definition of an
investment. But whereas that consideration tends to signal the end of the
analysis in the investment treaty context, the European Court of Human
Rights has addressed the separate question of admissibility by seeking to preserve
the essential characteristics of a shareholding as revealed in comparative law. The
leading case is Agrotexim v Greece:199
[I]n its report the Commission seems to accept that where a violation of a
company’s rights protected by Article 1 of Protocol No. 1 (P1-1) results in a
fall in the value of its shares, there is automatically an infringement of the
shareholders’ rights under that Article (P1-1). The Court considers that such
an affirmation seeks to establish a criterion – and in the Court’s view an
unacceptable one – for according shareholders locus standi to complain of a
violation of their company’s rights under Article 1 of Protocol No. 1 (P1-1).
It is a perfectly normal occurrence in the life of a limited company for
there to be differences of opinion among its shareholders or between its
shareholders and its board of directors as to the reality of an infringement
of the right to the peaceful enjoyment of the company’s possessions or
198
E.g. Bramelid and Malmström v Sweden (1982) 29 DR 64.
199
21 EHRR 250.
444 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
concerning the most appropriate way of reacting to such an infringement
… To adopt the Commission’s position would be to run the risk of
creating – in view of these competing interests – difficulties in determining
who is entitled to apply to the Strasbourg institutions … Concerned to
reduce such risks and difficulties the Court considers that the piercing of
the ‘corporate veil’ or the disregarding of a company’s legal personality
will be justified only in exceptional circumstances, in particular where it
is clearly established that it is impossible for the company to apply to
the Convention institutions through the organs set up under its articles of
incorporation or – in the event of liquidation – through its liquidators.200
830. Agrotexim has been subsequently applied in numerous cases before the
Court.201
Moreover, in Olczak v Poland,202
the Court adopted the International
Court of Justice’s distinction between a shareholder’s rights and interests in
Barcelona Traction:
A wrong done to the company can indirectly cause prejudice to its shareholders,
but this does not imply that both are entitled to claim compensation.
Whenever a shareholder’s interests are harmed by a measure directed
at the company, it is up to the latter to take appropriate action. An act
infringing only the company’s rights does not involve responsibility
towards the shareholders, even if their interests are affected.203
831. The Court has recognised an exception to this general rule of inadmissibility
for derivative claims in cases where the company has been put into
liquidation and the shareholders have been deprived of an opportunity to contest
the validity of the appointment of receivers for the company.204
200
Ibid. paras. 64–6.
201
Samardžić and Ad Plastika v Serbia (Case 28443/05, 17 July 2007) paras. 30–2; Teliga v Ukraine
(Case 72551/01, 21 December 2006) para. 87; Bulinwar Ood and Hrusanov v Bulgaria (Case
66455/01, 12 April 2007) para. 27; Terem Ltd, Chechetkin and Olius v Ukraine (Case 70297/01,
18 October 2005) paras. 28–30; ‘Iza’ Ltd and Makrakhidze v Georgia (Case 28537/02, 27
September 2005) paras. 28–30; Amat-G Ltd and Mebaghishvili v Georgia (Case 2507/03, 27
September 2005) paras. 32–4; Géniteau v France (No. 2) (Case 4069/02, 8 November 2005) para.
22 (‘La Cour relève que … le requérant ne se plaint pas en l’espèce d’une violation de ses droits en
tant qu’actionnaire de la société Valeo, mais que son grief se fonde exclusivement sur l’allégation
selon laquelle une violation du droit au respect de ses biens résulterait de la baisse de valeur de ses
actions du fait d’une atteinte au patrimoine de la société. Se pose dès lors la question de savoir si le
requérant peut se prétendre “victime” au sens de l’article 34 de la Convention. La Cour rappelle sa
jurisprudence, selon laquelle il n’est justifié de lever le “voile social” ou de faire abstraction de la
personnalité juridique d’une société que dans des circonstances exceptionnelles, notamment
lorsqu’il est clairement établi que celle-ci se trouve dans l’impossibilité de saisir par
l’intermédiaire de ses organes statutaires les organes de la Convention.’).
202
(Case 30417/96, 7 November 2002).
203
Ibid. para. 59.
204
Credit and Industrial Bank v Czech Republic (Case 29010/95, 21 October 2003) para. 6; G.J. v
Luxembourg (Case 21156/93, 26 October 2000) para. 24. A further exception has been
recognised in relation to a ‘one-man’ company: Khamidov v Russia (Case 72118/01, 15
November 2007) para. 12.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 445
H . T H E S P E C I A L C A S E O F N A F TA
832. Articles 1116 and 1117 of NAFTA create a sophisticated mechanism for
dealing, inter alia, with shareholder actions. Article 1116 governs a ‘claim by
an investor on its own behalf’ in relation to damage caused by the breach of a
NAFTA obligation. Article 1117, on the other hand, deals with a ‘claim by an
investor on behalf of an enterprise’. An enterprise is defined as ‘a juridical
person that the investor owns or controls directly or indirectly’.
833. It is clear that a non-controlling shareholder cannot make a claim under
Article 1117, for paragraph 3 of Article 1117, which deals with the potential
multiplicity of proceedings, refers to the possibility that a ‘non-controlling
investor’ in the same enterprise is making a claim under Article 1116.205
Moreover, if a non-controlling shareholder in an enterprise has submitted a
claim under Article 1116, and that claim is for reflective loss, then it is obliged to
submit written evidence to the arbitral tribunal that the enterprise itself has
waived any claim for damages in any other judicial forum (including, it would
seem, an international forum)206
as a condition precedent to the submission of
its claim under Chapter 11 of NAFTA in accordance with Article 1121. Hence,
if the majority of shareholders of the enterprise in question vote against the
waiver, the non-controlling shareholder cannot bring a claim for reflective loss
under Article 1116 of NAFTA. A waiver is also required from the enterprise in
the case of a claim brought under Article 1117.
834. These provisions are carefully designed to eliminate as far as possible the
problem of multiple proceedings relating to the same loss caused by the same
measures attributable to the host state by prohibiting claims by minority (or
majority) shareholders where the company itself is pursuing a remedy in a
205
The text of Art. 1117(3) reads: ‘Where an investor makes a claim under this Article and the
investor or a non-controlling investor in the enterprise makes a claim under Article 1116 arising
out of the same events that gave rise to the claim under this Article, and two or more of the claims
are submitted to arbitration under Article 1120, the claims should be heard together by a
Tribunal established under Article 1126, unless the Tribunal finds that the interests of a disputing
party would be prejudiced thereby.’ See Appendix 3.
206
Art. 1121(1)(b) refers to ‘any administrative tribunal or court under the law of any Party, or other
dispute settlement procedures’. Insofar as Art. 1117 refers to ‘an investor of a Party, on behalf of
an enterprise of another Party’ then the possibility of the enterprise having a separate right under
Art. 1116 of NAFTA or another investment treaty is excluded (as the enterprise would be a
national of the host state), unless ‘another Party’ could be the third NAFTA State (i.e. not the
national State of the investor and not the host state of the investment). This possibility, however,
appears to be excluded by the subsequent use of the post-determiner ‘other’: ‘An investor of a
Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns
or controls directly or indirectly, may submit to arbitration under this Section a claim that the
other Party has breached an obligation.’ Nevertheless, the reference to ‘other dispute settlement
procedures’ in Art. 1121 might well encompass international arbitration based upon an arbitration
agreement in a contract between the enterprise and the host state.
446 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
different judicial forum.207
Moreover, Article 1135 serves to protect the rights
of the creditors of the enterprise by ensuring that any damages recovered by an
action brought on behalf of the enterprise pursuant to Article 1117 are paid to
the enterprise and not to the investor/shareholder, thus allowing the creditors to
enforce any security interests or other rights they may have over the assets of the
enterprise, which would include the award.208
835. The question left open by the careful scheme enacted by Articles 1116 and 1117
is whether a shareholder can bring an action for reflective loss under Article 1116, in
addition to an action to recover damages for an injury to its direct rights. The
arguments for and against each possible interpretation are evenly balanced. One
must first resolve a threshold question as to the relationship between Articles 1116
and 1117. Can an investor who does own or control an enterprise elect to bring a
claim under Article 1116 for reflective loss, or must it bring an action under Article
1117 in this situation? The latter interpretation is to be preferred. Otherwise the
safeguard built into Article 1135(2) to protect creditors of the company would be
nullified because the investor would recover the damages suffered by the enterprise
directly under Article 1116, rather than the enterprise itself in an action under Article
1117. Thus, according to the tribunal in Mondev v USA:
Having regard to the distinctions drawn between claims brought under
Articles 1116 and 1117, a NAFTA tribunal should be careful not to allow
any recovery, in a claim that should have been brought under Article 1117,
to be paid directly to the investor.209
836. The inference here is that if a claim can be brought under Article 1117 then
it must be brought under Article 1117 rather than Article 1116. The same
inference must be drawn from the documents accompanying the implementation
of NAFTA in the United States:
Articles 1116 and 1117 set forth the kinds of claims that may be submitted
to arbitration: respectively, allegations of direct injury to an investor, and
allegations of indirect injury to an investor caused by injury to a firm in the
host country that is owned or controlled by an investor.210
837. Then we must turn to the waiver requirements for an Article 1116 claim as
set out in Article 1121(1):
1. A disputing investor may submit a claim under Article 1116 to arbitration
only if:
207
Save for ‘injunctive, declaratory or other extraordinary relief, not involving the payment of
damages, before an administrative tribunal or court under the law of the disputing Party’.
208
Mondev v USA (Merits) 6 ICSID Rep 181, 212/84.
209
Ibid. 213/86.
210
North American Free Trade Agreement, Implementation Act, Statement of Administrative
Action, H.R. Doc. 103–59 (Vol. 1, 1993) 145.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 447
[…]
(b) the investor and, where the claim is for loss or damage to an interest in
an enterprise of another Party that is a juridical person that the investor
owns or controls directly or indirectly, the enterprise, waive their right to
initiate or continue [other legal proceedings] …
838. If Article 1121(1)(b) were to be interpreted in isolation from the previous
conclusion with respect to the relationship between Articles 1116 and 1117, the
following possibilities arise:
(a) the investor is permitted to bring a claim for reflective loss, but only where
the investor owns or controls the enterprise and a waiver is submitted by that
enterprise, or
(b) the investor is permitted to bring a claim for reflective loss, both in circumstances
where either (i) the investor owns or controls the enterprise and a
waiver by the enterprise is given, or (ii) where the investor does not own or
control the enterprise and the waiver requirement for the enterprise is
thereby implicitly dispensed with, or
(c) the reference in Article 1121(1)(b) to a claim ‘for loss or damage to an
interest in an enterprise’ implies that any claim under Article 1116 must be
for the direct infringement with the investor’s rights over its shares (i.e.
claims covered by Rule 47) but only where the investor owns or controls the
enterprise in question, or
(d) same as for (c) but such direct claims can be made both in circumstances
where either (i) the investor owns or controls the enterprise and a waiver by
the enterprise is given, or (ii) where the investor does not own or control the
enterprise and the waiver requirement for the enterprise is thereby implicitly
dispensed with.211
839. If the premise that a claim that can be brought under Article 1117 must be
brought under Article 1117 is correct, then possibilities (a) and (b) can be
excluded. Possibility (c) should also be excluded because otherwise a minority
shareholder would not be able to pursue a claim alleging the expropriation of its
shareholding caused by the host state’s confiscation of the assets of the company.
That leaves possibility (d) as the best interpretation of the problematic
Article 1121(1)(b).
840. A further aspect of Article 1121 should be noted. Paragraph 4 absolves the
investor from procuring a waiver from the enterprise in the context of claims
under Article 1116 or 1117 if the host state has deprived the investor of control
211
One clarification must be made in relation to this analysis of the possible interpretations of Art.
1121(1)(b): it is not possible to interpret that provision as excluding a claim by an investor under
Art. 1116 who does own or control the enterprise because otherwise the provision would of
course be rendered meaningless.
448 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
over the enterprise. Without this important exception to the waiver requirement,
a denial of justice would be condoned by Chapter 11 of the NAFTA if the
investor were to be deprived of a remedy both in a municipal and international
forum due to measures attributable to the host state.
840C. Mondev International v United States of America212
The Boston City’s planning agency, BRA,213
selected Mondev and its joint
venture partner Sefrius Corporation to construct a department store, retail
mall and hotel in a dilapidated area of Boston.214
Mondev and Sefrius
formed a company ‘LPA’215
to implement the project and LPA then signed
a ‘Tripartite Agreement’ with the City and BRA to govern the rights and
responsibilities of the parties.216
Mondev brought several NAFTA claims based upon the disappointment of
its contractual expectations in the Tripartite Agreement under Article 1116.
The United States objected to Mondev’s standing to bring a claim under
Article 1116 on the basis that it was LPA that had suffered the alleged loss
and not Mondev.217
On this point, the Tribunal noted:
[I]t is certainly open to Mondev to show that it has suffered loss or
damage by reason of the decisions it complains of, even if loss or
damage was also suffered by the enterprise itself, LPA.218
This statement is no doubt correct. If Mondev’s claims alleged that it had
suffered a distinct loss by reason of acts attributable to the United States,
then such claims were clearly admissible under Article 1116. But could
Mondev recover damages for an injury to LPA rather than to its rights as
a shareholder in LPA? The United States maintained that such a claim for
reflective loss must be brought on behalf of LPA as an enterprise under
Article 1117 so as to give proper effect to Article 1135(2) and its concern
with the protection of the company’s creditors.219
The tribunal’s decision
on this point has been mistakenly interpreted in subsequent cases and thus
justifies full quotation and analysis here. By way of background, Mondev
had filed a waiver with respect to other legal proceedings pursuant to
Article 1121 not only on its own behalf but on behalf of LPA as well.220
Mondev had not, however, referred to Article 1117 in its Notice of
Arbitration.221
The tribunal’s decision reads:
212
(Merits) 6 ICSID Rep 181.
213
Boston Redevelopment Authority.
214
6 ICSID Rep 181, 200/37.
215
Lafayette Place Associates.
216
6 ICSID Rep 181, 200/37.
217
Ibid. 212/82.
218
Ibid.
219
Ibid. 212/82, 212/84.
220
Ibid. 195/12.
221
Ibid. 204/49.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 449
Having regard to the distinctions drawn between claims brought
under Articles 1116 and 1117, a NAFTA tribunal should be careful
not to allow any recovery, in a claim that should have been
brought under Article 1117, to be paid directly to the investor.
There are various ways of achieving this, most simply by treating
such a claim as in truth brought under Article 1117, provided
there has been clear disclosure in the Article 1119 notice of the
substance of the claim, compliance with Article 1121 and no prejudice
to the Respondent State or third parties. International law
does not place emphasis on merely formal considerations, nor
does it require new proceedings to be commenced where a merely
procedural defect is involved. In the present case there was no
evidence of material nondisclosure or prejudice, and Article 1121
was complied with. Thus the Tribunal would have been prepared,
if necessary, to treat Mondev’s claim as brought in the alternative
under Article 1117.* In the event, the matter does not have to be
decided, since the case can be resolved on the basis of Claimant’s
standing under Article 1116. But it is clearly desirable in future
NAFTA cases that claimants consider carefully whether to bring
proceedings under Articles 1116 and 1117, either concurrently or
in the alternative, and that they fully comply with the procedural
requirements under Articles 1117 and 1121 if they are suing on
behalf of an enterprise.222
In a footnote to the sentence marked with a ‘*’ in this passage, the Tribunal
stated that: ‘Another possibility, if the case should have been brought under
Article 1117, would be for the tribunal to order that the damages be paid to
the enterprise.’223
From this passage one must conclude, first, that claims for reflective loss
must be brought under Article 1117. The tribunal employs the word
‘should’ in the obligatory sense on two occasions in this context. Second,
the tribunal was clearly of the view that Mondev’s claims should have
been brought under Article 1117 and was prepared to treat them in this
way if Mondev’s defective reliance on Article 1116 were to have been
fatal to its case. Alternatively, the tribunal was prepared to exercise
jurisdiction pursuant to Article 1116 but insist upon the payment of
any damages to LPA rather than to Mondev. In the event, however,
the tribunal rejected Mondev’s claims on the merits, and hence a definitive
ruling on the admissibility of its reliance upon Article 1116 was
unnecessary.224
222
Ibid. 213/86.
223
Ibid. 213/note 24.
224
The tribunal had previously joined questions of jurisdiction and admissibility to the merits.
6 ICSID Rep 183, 187.
450 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
841. In Enron v Argentina,225
the tribunal describes the arguments of Mondev
and the United States and then reproduces the following truncated extract of the
tribunal’s reasoning:
In the Tribunal’s view, it is certainly open to Mondev to show that it has
suffered loss or damage by reason of the decisions it complains of, even if
loss or damage was also suffered by the enterprise itself … For these reasons,
the Tribunal concludes that Mondev has standing to bring its claim.226
842. As the foregoing analysis reveals, there is a great deal of learning concealed
behind the ellipsis in this quotation. The tribunal in Enron elaborated no
further upon it; evidently concluding that this passage spoke for itself in the
context of dismissing Argentina’s reliance upon the Mondev case.
843. In UPS v Canada,227
the tribunal characterised the ‘distinction between
claiming under Article 1116 or Article 1117’ as ‘an almost entirely formal one’.
But the tribunal was careful to confine this statement to the circumstances of the
case, which involved a claim by UPS as the sole owner of the investment
company, UPS Canada. According to the tribunal:
If there were multiple owners and divided ownership shares for UPS Canada,
the question how much of UPS Canada’s losses flow through to UPS – the
question posed by Canada here – may have very different purchase.228
844. The tribunal’s characterisation of the distinction between Articles 1116 and
1117 as merely ‘formal’ is unfortunate, but it is clear that the tribunal was alive
to the problem posed by a derivative claim prosecuted under Article 1117.
I . R E L E VA N T P R O V I S I O N S O F I N V E S T M E N T
T R E AT I E S A N D T H E I C S I D C O N V E N T I O N
845. Some investment treaties contain express provisions that regulate the
instances where a controlling shareholder is permitted to claim on behalf of
and in the name of its company incorporated in the host state for the purposes of
Article 25(2)(b) of the ICSID Convention.229
Article VII(8) of the USA/
Argentina BIT has received the most attention to date:
225
(Preliminary Objections: Ancillary Claim) 11 ICSID Rep 295.
226
Ibid. 301/35. See also: Enron v Argentina (Preliminary Objections) 11 ICSID Rep 273, 283/48.
227
(Merits).
228
Ibid. para. 35.
229
Asian–African Legal Consultative Committee Model BIT, Art. 1(c), UNCTAD Compendium
(Vol. III, 1996) 117; Switzerland Model BIT, Art. 8(3) (‘A company which has been incorporated
or constituted according to the laws in force on the territory of the Contracting Party and
which, prior to the origin of the dispute, was under the control of nationals or companies of the
other Contracting Party, is considered, in the sense of the Convention of Washington and
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 451
For purposes of an arbitration held under paragraph 3 of this Article, any
company legally constituted under the applicable laws and regulations of a
Party or a political subdivision thereof but that, immediately before the
occurrence of the event or events giving rise to the dispute, was an investment
of nationals or companies of the other Party, shall be treated as a
national or company of such other Party in accordance with Article 25(2)(b)
of the ICSID Convention.230
846. Article 25(2)(b) of the ICSID Convention provides in relevant part:
[A]ny juridical person which had the nationality of the Contracting State
party to the dispute on that date and which, because of foreign control, the
parties have agreed should be treated as a national of another Contracting
State for the purposes of this Convention.
847. Article VII(8) of the USA/Argentina BIT is thus an ‘agreement’ as to the
circumstances in which companies incorporated in, say, Argentina, should
nevertheless be considered as nationals of the USA, thereby permitting such
companies to prosecute investment treaty claims in their own name. For a
company to be ‘an investment of nationals or companies of the other Party’
pursuant to Article VII(8), that company must be ‘owned or controlled directly
or indirectly’ in accordance with the definition of an investment in Article I(1)
(a) of the USA/Argentina BIT.
848. According to the tribunal in Sempra v Argentina,231
these specific provisions
dealing with claims on behalf of companies with the nationality of the host
state gave a shareholder an option as to whether to bring a claim in the name of
the company (assuming that it has the requisite control) or to pursue a derivative
claim on its own behalf.232
It is difficult to imagine why a shareholder would
elect to bring a claim for the account of its company if it had the option of
bypassing the company altogether. The company might be liable to pay creditors,
local taxes and discharge other obligations before distributing the residual
amount of any damages recovered to the shareholders. It is also difficult to
according to its Article 25(2)(b), as a company of the latter’), ibid.181; UK Model BIT (1991),
Art. 8(2), ibid. 189; USA Model BIT (1994), Art. 9(8), ibid. 202; Malaysia Model BIT, Art. 7(2),
ibid. (Vol. V, 2000) 329; Netherlands Model BIT, Art. 9 (‘a legal person which is a national of
one Contracting Party and which before such a dispute arises is controlled by nationals of other
Contracting Party shall, in accordance with Article 25(2)(b) of the Convention, for the purpose
of the Convention, be treated as a national of the other Contracting Party’) ibid. 336; Denmark
Model BIT, Art. 9(3), ibid. (Vol. VII) 284; Mongolia Model BIT, Art. 8(5), ibid. (Vol. IX), 306;
Sweden Model BIT, Art. 8(3), ibid. 313; Kenya Model BIT, Art. 10(c)(iv), ibid. (Vol. XII) 309;
Energy Charter Treaty, Art. 26(7), Appendix 4.
230
Available at: www.unctad.org/sections/dite/iia/docs/bits/argentina_us.pdf.
231
(Preliminary Objections).
232
Ibid. para. 42. The opposite conclusion was reached in BG v Argentina (Merits) para. 214, in
relation to shareholder claims based upon rights of the company under a licence granted by the
host state.
452 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
fathom why the contracting state parties would have included provisions like
Article 25(2)(b) of the ICSID Convention and Article VII(8) of the USA/
Argentina BIT in these international treaties if they could be bypassed at the
unilateral election of prospective claimants. Finally, it is hardly consistent with
the principles of treaty interpretation in Article 31 and 32 of the Vienna
Convention on the Law of Treaties and the principle verba aliquid operari
debent for an express provision of a treaty to be deprived of any utility.233
The
tribunal in Sempra sought to meet this inevitable criticism of its approach in the
following way:
At first sight, the Respondent notes, if an option such as the one discussed
were to be permitted this would lead to a contradiction since a shareholder
could always claim as such under the first sentence of the article, thus
rendering the second sentence redundant. But in fact there is no such
contradiction. It is conceivable that where various investor companies
resort to arbitration, some can do so as shareholders and others as companies
of the nationality of the State that is a party to the dispute, on the basis
of the various corporate arrangements and control structures.234
849. Is it really plausible that the Contracting States to the ICSID Convention
had this ‘conceivable’ scenario in mind when they drafted Article 25(2)(b) of
the ICSID Convention? Schreuer’s analysis of the travaux préparatoires suggests
otherwise:
A suggested solution to give access to dispute settlement not to the locally
incorporated company but directly to its foreign owners was discarded. It
was soon realized that this would not be feasible where shares are widely
scattered and their owners are insufficiently organized.235
J . T H E S P E C I A L C A S E O F T H E I R A N / U S
C L A I M S T R I B U N A L
850. The American negotiators of the Algiers Declarations insisted upon a
specific provision dealing with claims for reflective loss.236
Article VII(2) of
the Claims Settlement Declaration reads:
‘Claims of nationals’ of Iran or the United States, as the case may be,
means claims owned continuously, from the date on which the claim arose
to the date on which this agreement enters into force, by nationals of that
233
A similar approach was taken in: LG&E v Argentina (Preliminary Objections) 11 ICSID Rep
414, 423/50; Camuzzi v Argentina (Preliminary Objections) para. 32.
234
(Preliminary Objections) para. 44.
235
C. Schreuer, The ICSID Convention: A Commentary (2001) 291 (references to Documents
Concerning the Origin and the Formulation of the Convention (1968) are omitted).
236
G. Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal (1996) 88.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 453
state, including claims that are owned indirectly by such nationals through
ownership of capital stock or other proprietary interest in judicial persons,
provided that the ownership interests of such nationals, collectively, were
sufficient at the time the claim arose to control the corporation or other
entity, and provided, further, that the corporation or other entity is not itself
entitled to bring a claim under the terms of this agreement.237
851. The salient features of this provision are, first, that the shareholder must have
control over the corporation in question for its claim for reflective loss to be
admissible. ‘Control’ in this context was found by the Iran/US Claims Tribunal to
be exercised where US nationals owned more than 50 per cent of the shares in the
corporation. In no case was control found to exist where US nationals owned less
than 50 per cent.238
The second salient feature is the avoidance of multiple
proceedings with respect to the same injury to the corporation. If the corporation
is itself entitled to bring a claim under the Claim Settlement Declaration, then
the shareholders are barred from doing so. One of the particular objectives of
the Algiers Declarations was to terminate all litigation between the governments
of each state party and the nationals of the other239
and hence the possibility of
overlapping claims in the municipal courts was excluded by the mutual agreement
of Iran and the United States.
852. The Algiers Declarations were designed to diffuse an acute diplomatic
crisis and facilitate the settlement of claims relating to a specific event and
Article VII(2) on shareholder claims must be seen in this context.240
The effect
of the Declarations was to extricate the complex litigation pending before
municipal courts and channel it into a neutral forum over which both states
had a measure of control. In contradistinction, the dispute resolution procedure
237
Reprinted at: (1981) 75 AJIL 418.
238
G. Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal (1996) 90.
239
General Principle B of the General Declaration, ibid.; Phillips Petroleum Co. v Iran (Case ITL
11-39-2, 30 December 1982) 1 Iran-US CTR 487; Amoco International Finance Corporation v
Iran (Case 310-56-3, 14 July 1987) 15 Iran-US CTR 189, 196–7.
240
The same observation applies in relation to several Peace Treaties that contain provisions
allowing certain types of shareholder actions. For example, Art. 297(e) of the Treaty of
Versailles (1919): ‘The nationals of Allied and Associated Powers shall be entitled to compensation
in respect of damage or injury inflicted upon their property, rights or interests including
any company or association in which they are interested, in German territory as it existed on 1st
August, 1914’. The Treaties of Peace of 1947 with Italy, Romania, Bulgaria, Hungary and
Finland contains a more detailed provision concerning shareholder claims. Art. 78(4)(b) of the
Italian Treaty is representative: ‘United Nations nationals who hold, directly or indirectly,
ownership interests in corporations or associations which are not United Nations nationals
within the meaning of paragraph 9(a) of this Article, but which have suffered a loss by reason of
injury or damage to property in Italy, shall receive compensation in accordance with subparagraph
(a) above. This compensation shall be calculated on the basis of the total loss or damage
suffered by the corporation or association, and shall bear the same proportion to such loss or
damage as the beneficial interests of such nationals in the corporation or association bear to the
total capital thereof.’ See: M. Jones, ‘Claims on Behalf of Nationals Who Are Shareholders in
Foreign Companies’ (1949) 26 BYBIL 225, 251–4.
454 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
in investment treaties is not premised upon the total exclusion of the municipal
court system of each contracting state party. Rather the relationship is one of
coordination and the sophisticated scheme created by Articles 1116, 1117,
1121 and 1135 of NAFTA reflect this reality. In light of the careful balance
struck in these specific provisions of the Claim Settlement Declaration for the
Iran/US Claims Tribunal and NAFTA, it surely would be disingenuous to
conclude that the absence of a specific provision in most bilateral investment
treaties to regulate the admissibility of claims by shareholders for reflective
loss means that any such claim should be determined by the tribunal regardless
of the possibility of multiple proceedings or the potential prejudice to third
parties.241
Rule 50. For a claim to be admissible pursuant to Rule 49, the tribunal
should satisfy itself that the shareholder’s claim will not:
(i) unfairly expose the host state or the company to a multiplicity
of actions; (ii) materially prejudice the interests of the
creditors of the company; or, (iii) interfere with a fair distribution
of the recovery among all interested parties.
853. This principle has been adapted from the American Law Institute’s Report
on Corporate Governance,242
which has codified the discretion exercised by the
courts in the majority of states in the USA in relation to direct recovery by
shareholders in closely-held companies. The principle does not reflect the
position in English law; indeed the Court of Appeal recently distanced itself
from the American Law Institute’s formulation in Day v Cook.243
854. The remarkable and disquieting feature of the investment treaty jurisprudence
is that tribunals have so readily abdicated their responsibility to give
proper consideration to the factors listed in Rule 50. The common refrain is no
more sophisticated than ‘it is not our problem’. For instance, the totality of the
tribunal’s consideration of these factors in Pan American Energy v Argentina244
is revealed in the following statement:
Another point raised by the Respondent in its Memorial on Jurisdiction …
in connexion with foreign shareholders’ claims is that the latter, in recovering
their investment, do so to the prejudice of other domestic or foreign
shareholders, creditors and employees. This may be true; but it does not
241
Harza v Iran (Case 232-97-2, 2 May 1986) 11 Iran-US CTR 76, 87 (the rights of shareholders
under the Algiers Accords were ‘an exception to the normal rule of international law that
shareholders may not bring the claims of the corporation (as opposed to claims relating to their
ownership rights), it should be construed narrowly’).
242
American Law Institute, Principles of Corporate Governance: Analysis and Recommendations
(1994) para. 7.01.
243
[2001] PNLR 32, at para. 42 (Arden LJ).
244
(Preliminary Objections).
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 455
empower this Tribunal to stray from the path traced by the Contracting
Parties in their BIT, which unquestionably protects shareholdings.245
855. Is it really plausible that the ‘path traced by the Contracting Parties in their
BIT’ leads straight into a legal quagmire? Investment treaties unquestionably do
protect shareholders; but it is doubtful whether they do so at the expense of all
other interested parties and in a manner that undermines the fundamental characteristics
of the limited liability company. This dictum in Pan American Energy
rests upon an assumption of no limiting principle of admissibility; in other words,
once the ratione personae jurisdiction over the shareholder is established, there is
no further analysis required as to whether its claims are admissible. That must be
wrong for the reasons that have been explored in this chapter.
856. In the same spirit of abdicating responsibility for the development of a
coherent relationship between the investment treaty regime and municipal legal
orders, several tribunals hearing claims by shareholders have proclaimed as
irrelevant the fact that the company is actively negotiating with the host state to
achieve a settlement in respect of any prejudice caused to the company by the
acts of the host state. This apparently extends to circumstances where the
company’s position in such negotiations contradicts the litigational approach
of the shareholder.246
Similarly, the company’s pursuit of a claim in the local
courts of the host state has been discarded as a factor that might be relevant in
considering the admissibility of an investment treaty claim by the shareholder
for the same prejudice.247
The company’s ratification of an exclusive jurisdiction
clause in favour of the host state’s courts has also been ignored as a relevant
circumstance, even where the object of the shareholder’s claims are rights based
upon a contractual relationship between the company and the host state.248
One
factor that has at least generated sympathetic overtones from some tribunals is
the distinct possibility that there will be double recovery from the host state in
respect of the same prejudice by the shareholder and the company. In Camuzzi v
Argentina249
it was said:
This is a real problem that needs to be discussed in due course, but again it
is an issue belonging to the merits of the dispute. In any event, international
245
Ibid. para. 220.
246
AES v Argentina (Preliminary Objections) 12 ICSID Rep 312, 323/62, 325/71; Camuzzi v
Argentina (Preliminary Objections) para. 97; CMS v Argentina (Preliminary Objections) 7
ICSID Rep 494, 512/86 (‘it is not for the Tribunal to rule on the perspectives of the negotiation
process or on what TGN might do in respect of its shareholders, as these are matters between
Argentina and TGN or between TGN and its shareholders’).
247
Pan American Energy v Argentina (Preliminary Objections) paras. 154–60
248
AES v Argentina (Preliminary Objections) 12 ICSID Rep 312, 329/93; CMS v Argentina
(Preliminary Objections) 7 ICSID Rep 494, 510/76; Azurix v Argentina (Preliminary
Objections)10 ICSID Rep 413, 436/79; National Grid v Argentina (Preliminary Objections)
para. 169; Siemens v Argentina (Preliminary Objections) 12 ICSID Rep 174, 216/180.
249
(Preliminary Objections).
456 T H E I N T E R N AT I O N A L L AW O F I N V E S T M E N T C L A I M S
law and decisions offer numerous mechanisms for preventing the possibility
of double recovery.250
857. The ‘numerous mechanisms’ available in international law were not
articulated by the tribunal. In contrast, the tribunal in Impregilo v Pakistan251
was far less certain about this purported capacity of international law to ensure
fairness and justice among all stakeholders if there is no limitation upon the
admissibility of claims by shareholders: ‘a tribunal has no means of compelling
a successful Claimant to pass on the appropriate share of damages to other
shareholders or participants’.252
858. One of the factors leading to the International Court of Justice’s decision on
admissibility in Barcelona Traction was its concern that a settlement between
the company and the host state might be jeopardised by potential claims brought
on behalf of the shareholders, as well as the more general problem of the
multiplicity of claims in relation to the same prejudice.253
Investment treaty
tribunals are obliged to shape principles of admissibility for shareholders’
claims that give due consideration to the same problems. The guidance provided
by the American Law Institute’s Report on Corporate Governance254
is apposite
for this purpose. In accordance with Rule 50, there are three factors that a
tribunal should take into account before ruling upon the admissibility of a claim
by a shareholder for reflective loss: first, whether the claim will unfairly expose
the host state or the company to a multiplicity of actions; secondly, the extent to
which the claim will materially prejudice the interests of the creditors of the
company; and thirdly, whether the claim will interfere with a fair distribution of
the recovery among all interested parties.
250
Ibid. para. 91. (Semble): Suez v Argentina (Preliminary Objections) para. 51.
251
(Preliminary Objections) 12 ICSID Rep 245.
252
Ibid. 276/152. The tribunal cited: Blount Brothers Corporation v Iran (Case 215-52-1, 28
February 1986) 10 Iran-US CTR 64.
253
(Belgium v Spain) 1970 ICJ Rep 3, 49–50; (contra) Tanaka J, 130.
254
American Law Institute, Principles of Corporate Governance: Analysis and Recommendations
(1994) para. 7.01.
A D M I S S I B I L I T Y: S H A R E H O L D E R C L A I M S 457