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Merger law reform in Australia: What next after the Exposure Draft?
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
The energy sector has traditionally been fertile ground for investment disputes. According to statistics collected by the International Centre for Settlement of Investment Disputes (ICSID), of the total cases ever registered under the ICSID Convention, 31 percent are either oil, gas and mining or power and energy related. That remains true to date, with 24 percent of new cases registered in 2017 falling in those sectors.
There is no reason to suggest that trend will change any time soon. The United Nations Conference on Trade and Development (UNCTAD) predicts a 5 percent growth of global foreign direct investment (FDI) flows in 2018. In 2017, there was around US$150 billion worth of cross-border mergers and acquisitions and FDI greenfield projects in the energy sector alone, comprising a little over 10 percent of the total value that year. Greater volumes of investment will naturally lead to greater volumes of investment disputes.
However, a closer examination reveals a pattern underlying the data, illustrating a regional divergence between “East” and “West” in relation to investor-state dispute settlement (ISDS) generally and in particular in relation to the energy industry. That pattern is supported by other developments in the energy space, and more broadly, which evidence a similar divergence between those regions.
There is, of course, no concrete dividing line between “East” and “West” – these are not concepts with fixed definitions or meaning. In economic terms, however, these are helpful geographical markers, which can be used to illustrate global economic trends. As one principal driver of ISDS is the underlying FDI flow, these classifications are also helpful to understand trends emerging in ISDS.
UNCTAD defines East Asia broadly as China, Japan, North and South Korea, and Mongolia, and South-East Asia as a group of states including Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. In this article, these regions are referred to as the “East”. As for the “West”, historically this has been understood as Europe and Northern America.
Although a similar theme is being seen on both sides of the Atlantic, the 28 Member States of the European Union (EU) provide the most vivid example of the divergence between East and West in attitudes towards ISDS. The EU is taking a critical look at the ISDS system itself, which currently protects foreign investments and affords foreign investors the right to sue host states for certain misconduct. As a result, in the future, ISDS may become less common or it may simply be resolved in a new forum. On the other hand, the East, led of course by China, is growing in size and importance in terms of FDI and that pattern is beginning to be reflected in the ISDS system, which evidences a growth in claims involving both Eastern investors and respondent states from the region.
Western states have historically been the bastion of ISDS in the energy sector. According to UNCTAD statistics, investors from the West have been the most frequent claimants, with North American and European investors taking all top 12 spots on UNCTAD’s claimant leader board. Increasingly, however, Western states are also becoming respondents – Spain, Czech Republic, Canada, Poland, Russia and Ukraine all featured in the top 12 spots on UNCTAD’s respondent leader board. This trend is reflected in the energy sector. Since 2014, a total of 63 new energy-related investment arbitrations were commenced, of which 78 percent were brought against EU Member States.
Perhaps related to that trend is the shake-up of ISDS recently seen in the EU. There is a growing trend of political resistance to ISDS within the EU – as evidenced by the Wallonian stand-off over the ISDS provisions of the EUCanada Comprehensive Economic and Trade Agreement (CETA) and the recent decision of the Court of Justice of the EU (CJEU) in Slovak Republic v Achmea BV. In the Achmea case, the CJEU held that ISDS provisions in bilateral investment treaties (BITs) as between EU Member States are incompatible with EU law and that these provisions have no legal effect.
The scope of the CJEU’s decision is not entirely clear, in particular if and to what extent it affects the Energy Charter Treaty 1994 (ECT). The ECT is a multilateral treaty, to which many EU Member States have signed up and therefore its ISDS provisions apply to disputes as between EU Member States. The EU Commission recently published guidance stating that in its view, the Achmea judgment is also relevant for the application of the ECT as between EU Member States, and the ECT “cannot be used as a basis for dispute settlement between EU investors and EU Member States”. This is significant as the ECT accounts for a large proportion of ISDS; of energy-related ISDS since 2014, 76 percent were brought under the ECT, and only 24 percent were brought under BITs.
The EU has also shown hostility towards ISDS provisions in new trade treaties with non-EU states, notoriously stating in the context of negotiations for the Japan-EU Economic Partnership Agreement (JEEPA) that “Investorto- State Dispute Settlement, is not acceptable. For the EU ISDS is dead.”. The EU wishes to instead implement a new Investment Court System. That system however faces a number of barriers to implementation, including significant scepticism within other Western states. (Read more about the EU’s proposed reform of ISDS in our article The EU’s proposed reform of ISDS – the future or a fiasco?).
What is clear, however, is that, notwithstanding the West being the primary user and beneficiary of ISDS protections to date, that system is under attack in the West.
The trend of global FDI clearly indicates the importance of Eastern states to global investment flows. In 2016 and 2017, FDI flows to the region remained stable at US$476 billion, according to UNCTAD. Developing Asia was the biggest recipient of FDI in 2017, with its share of global FDI rising from 25 percent in 2016 to 33 percent in 2017. China, in particular, had a record year for FDI, attracting US$136 billion of inbound investment.
In contrast, FDI flows to developed economies saw a dramatic fall of nearly one-third. The EU experienced a 42 percent decline in inbound FDI compared to 2016 (though the statistics are somewhat skewed by 2016 having featured an unusually high level of inbound FDI). These numbers illustrate a growing number of investors seeking higher returns in the Asian region, or a “migration” of FDI capital from West to East. Intra-regional investment is also on the rise. The People’s Republic of China’s Belt and Road Initiative is anticipated to generate a boom in Chinese investment, a significant proportion of which will be in East. The energy sector will attract a significant portion of that capital. World energy demand is projected to grow by 1.3 percent per annum until 2040, with almost all of the growth expected to originate in the Asia Pacific region, and according to the ECT, China is predicted to be the largest growing market for energy for years to come.
As expected, there are signs that investment disputes are following the flow of FDI. Between 1972 and 2015, 539 cases were registered with ICSID and of those only 42 involved a party (either foreign investor or respondent host state) from the South-East Asia Pacific region. However in 2016 and 2017 alone, 14 new cases were filed against respondent states in that region. Given the regional importance of China, it is significant that 2011 saw the first claim lodged against China with ICSID, and since then two more claims have been filed. Notably, in 2017 the first claim by an EU investor was made against China. Equally, there is evidence of growth in the number of claims brought by Eastern investors. To date, there have been only 20 reported claims brought by Eastern investors. However, of that number, 12 were brought since 2012 and seven in the last three years alone. Those statistics are telling.
Politically, there is less evidence of opposition to ISDS as a dispute resolution mechanism in the East. For example, in January 2018, the Trans- Pacific Partnership was agreed between eleven states in the Asia Pacific region (though not yet ratified), and that treaty includes extensive ISDS provisions.
ISDS will remain a critical component of foreign investors’ dispute resolution toolkit to protect investments across the globe, particularly in the energy sector. There are, however, signs that a divergence is opening up between the East and the West in attitudes towards ISDS.
There is some evidence suggesting that the energy sector will see an increase of ISDS involving both Eastern investors and states, given the rapid growth of investment in the East. In the West, there is evidence of a desire (most apparent in the EU) to withdraw the ISDS umbrella.
The ramifications of that could be significant for foreign investors from or into the West. ISDS provisions were introduced to fill a need on both sides of the deal – host states wished to increase foreign investment and foreign investors desired enforceable ways to protect their investments. Prior to ISDS, there was often no effective way to deal with state misconduct – foreign investors could resort to local courts or state-state diplomacy (or hostility), and in practice neither proved satisfactory, which drove up the risk and therefore the cost profile of FDI. It will be interesting to see whether this divergence of approach to ISDS between East and West will have a corresponding effect on FDI flows in the future.
Publication
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
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