Structuring or restructuring companies to benefit from investment treaties

With recent political shifts in the US and around the world, companies engaged in cross-border business should structure or restructure their businesses to take advantage of the protections of investment treaties against unexpected and unfair government acts.

Preamble

Under bilateral and multilateral investment treaties (for example, the Türkiye – Tanzania bilateral investment treaty (2011); the Dominican Republic-Central American Free Trade Agreement (2004)), countries make certain promises to the companies and individuals of the other country treaty signatories. When political winds shift, governments can end up breaching those treaty obligations. For example, government guarantees of subsidies could induce a foreign company to invest in a local energy project, but a new government revokes those subsidies without providing the foreign company due process and compensation for the loss of its investment in the energy project. In such cases, companies domiciled in a state that is signatory to an investment treaty with the host state may resort to investor-state arbitration to recoup monetary losses resulting from the government’s acts.

The benefits of investor-state arbitration

Investor-state arbitration, also referred to as investor-state dispute settlement (ISDS) and investment treaty arbitration, offers many advantages to other forms of dispute settlement, including:

• Companies or individuals have the right to submit an investment dispute with the host government directly to international arbitration.
• Arbitration sits above national law and is governed by the terms of the relevant treaty and international law, which cannot be unilaterally changed by the host state.
• Investor-state arbitration is distinct from and complementary to any contractual remedies that an investor may have against a state or state-owned counterparty (some contractual claims can be brought in parallel with treaty claims).
• Government compliance with treaty arbitration awards is generally good in light of public nature of disputes and diplomatic pressures.

Treaty planning and tips for structuring or restructuring of companies to benefit from investment treaties

To enjoy recourse to investor-state arbitration, the owner of an investment affected by government acts must be a national of a contracting state to an investment treaty with the state where the investment is located. The owner company’s interest in the affected investment may be indirect.

Companies with existing cross-border business should evaluate current treaty protections. Companies making new foreign investments or those that do not currently enjoy the protections of any investment treaties should consider structuring or restructuring their investments in jurisdictions with favorable investment treaties. In other words, these companies should engage in “treaty planning.”

For example, no investment treaty is currently in force between Turkey and Algeria. Therefore, a Turkish company cannot bring a treaty arbitration against Algeria should Algeria’s actions negatively affect the Turkish company’s investment in Algeria. There is, however, an investment treaty in force between Luxembourg and Algeria. Thus, if the Turkish company creates a vehicle in Luxembourg to own the Algerian investment, the Turkish company may enjoy the protections of the Luxembourg-Algeria treaty, including recourse to investor-state arbitration, through the Luxembourgish vehicle.

Tips for treaty planning

Restructuring to have access to investor-state arbitration is prudent and legitimate when done in good faith.

Good-faith restructuring:

• Takes place before or during operations,
• No specific foreseeable dispute,
• Intent to continue investment in host state,
• Can be for the purpose of invoking treaty protections.

Bad-faith restructuring:

• Reaction to a specific dispute with the host state,
• Specific dispute has already arisen or is foreseeable.

Conclusion

Recent political upheavals in the US and around the world increase the risk of adverse government actions for companies with international business. Nearly 3,000 existing investment treaties offer protection against such eventualities.

To best protect foreign investments, companies should spot problematic trends early, and evaluate whether they have treaty protection in place. If not, companies should consider restructuring in a jurisdiction with favorable investment treaties. Governments may heed their treaty obligations or foreign investors may appeal to those obligations as leverage in negotiations with the host government. If all else fails, companies can resort to investment treaty arbitration to recover monetary damages.