BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE TOKYO WASHINGTON, D.C. How Foreign Investors Use Investment Treaty Protections prepared for the Andrew W. Shoyer with support from the GE Foundation July 2009

2 Overview ▪ Investment treaties – powerful protection against political risk for international investments ▪ How to use investment treaties - in structuring investments - in dealing with host governments

3 Investment Treaties: The Basics Over 2800 International Investment Agreements (IIAs) in force today, including: ▪ Bilateral Investment Treaties (BITs) ▪ Free Trade Agreements (FTAs) ▪ Economic Partnership Agreements (EPAs) ▪Energy Charter Treaty (ECT)

4 Investment Treaties: The Basics Core objectives: ▪ To provide foreign investors with broad protection against adverse government actions: - Any level of government - Variety of government actions ▪ To provide investors with direct right of action to enforce treaty rights against governments ▪ To provide investors and host States with neutral, international fora to arbitrate disputes

5 Investment Treaties: The Basics Investment treaties provide a broad range of investments and investors with: ▪ Substantive standards of protection for investments and investors ▪ A powerful arbitration mechanism that allows investors to seek monetary compensation if the host country falls short of its obligations

6 Broad Definitions of Investment and Investor Covered foreign investments typically include : ▪ Company or enterprise ▪ Shares, stock, and other forms of equity, as well as bonds, debentures, and other forms of debt interests, in a company ▪ Contractual rights ▪ Tangible and real property ▪ Intangible property: rights such as leases, mortgages, liens and pledges ▪ Intellectual property: copyrights, trademarks, patents and trade secrets ▪ Rights conferred by law: licenses and permits

7 Broad Definitions of Investment and Investor Covered investors typically include: ▪ National of a State that is party to the treaty ▪ Legal entity organized in a State that is party to the treaty ▪ Subsidiary, wherever located, of entity organized in a State that is party to the treaty

8 Typical Substantive Protections General standards of treatment commonly include: ▪ Fair and Equitable Treatment ▪ Full Protection and Security ▪ National Treatment ▪ Most-Favored-Nation Treatment ▪ Protection against Expropriation ▪ Additional guarantees against any impairment of the management, maintenance, use, enjoyment or disposal of investment through unreasonable or discriminatory measures

9 Typical Substantive Protections Fair and Equitable Treatment: ▪ Legitimate expectations of the investor ▪ Non-discrimination ▪ Transparency ▪ Due process ▪ Non-arbitrariness

10 Typical Substantive Protections Full Protection and Security: ▪ Government protection from harmful acts by non-governmental actors ▪ More than just protection from criminal or violent acts ▪ Closely connected to the Fair and Equitable Treatment standard

11 Typical Substantive Protections Non-Discrimination: ▪ Treatment no less favorable than domestic investors (National Treatment) ▪ Treatment no less favorable than investors from third States (MFN Treatment) ▪ Typically measured by discriminatory effect, not intent.

12 Typical Substantive Protections Protection against Expropriation and Equivalent Measures: ▪ What constitutes an expropriation? - Direct seizure of property - Nationalization - Arbitrary termination of a contract or concession - Regulatory taking - Creeping expropriation ▪ What generally does not constitute an expropriation? - Bona fide, non-discriminatory use of police power

13 Typical Substantive Protections Protection against Expropriation and Equivalent Measures: Expropriation is permitted only if it is: ▪ Non-discriminatory ▪ For a public purpose ▪ Accompanied by compensation - Compensation must be prompt, adequate, and effective - Compensation shall reflect the fair market value of the investment prior to its expropriation

14 Typical Substantive Protections Prohibited performance requirements: ▪ Local content requirements ▪ Export requirements ▪ Foreign exchange requirements

15 Typical Substantive Protections Umbrella Clause: ▪ Governments must meet their contractual obligations ▪ Governments must not abuse their sovereign powers to invalidate their obligations ▪ Breaches by governments of their contractual obligations may give rise to a treaty claim

16 Resolution of Investment Disputes Common contexts of investment disputes: ▪ Expropriation – Nationalization ▪ Creeping expropriation through series of measures destroying the value of the investment ▪ Repudiation or wrongful termination of government contracts and concessions ▪ Discrimination de jure or de facto ▪ Regulatory measures impairing arbitrarily the value of an investment

17 Resolution of Investment Disputes Consent of the parties: ▪ State parties consent to dispute settlement by signing the BIT: This constitutes a standing offer to arbitrate disputes with the other state’s investors ▪ Investors consent through submission of claim in the forum of their choice

18 Resolution of Investment Disputes Enforcement of Awards: ▪ Awards usually consist of money damages but can include reparation or specific performance. ▪ Arbitral awards can be enforced all over the world through the New York Convention. ICSID awards are enforced pursuant to a special mechanism contained in the ICSID Convention. ▪ Different reviewing mechanism of the awards exists. Usually, the scope of annulment proceedings are narrower than appeals. ▪ Track record of government compliance with investment treaty awards is very good.

19 How to Use Investment Treaties When making an investment: Due diligence and structuring ▪ How strong are the treaties available to us? What standards of protection are offered under each? ▪ What kinds of adverse government action are most probable, or pose the greatest risks to the investment? Are they actionable under the available treaties? ▪ Are there other treaties that would offer a stronger or better- suited level of protection, if the investment is structured differently (through other jurisdictions)? ▪ How do investment treaty protections line up with tax treatment issues, double taxation treaties, etc.? What is the optimal structure from both investment and tax perspectives?

20 How To Use Investment Treaties Importance of structuring investments: ▪ Investor’s “home” country may not be a party to a BIT with the foreign country in which the investor is active ▪ The investor may be able to structure its investments through subsidiaries in countries that do have BITs with the target country ▪ The investor may also increase its level of protection by selecting the most suitable BIT

21 How To Use Investment Treaties Protection of Indirect Investment: ▪ Treaties may allow: - Investors from a non-treaty State to structure investment through subsidiary in a treaty State -Investors from a treaty State to structure investments through subsidiary in a non-treaty State ▪ Caution: some treaties restrict coverage of such investments

22 How To Use Investment Treaties Structuring an Investment Investors from a non-treaty State can structure investment through subsidiary in a treaty State State C State A State B BIT Local Company C Company A Subsidiary B

23 How To Use Investment Treaties Structuring an Investment Investors from a treaty State can structure investments through subsidiary in a non-treaty State State C State A State B BIT Local Company C Company A Subsidiary B

24 How to Use Investment Treaties After a dispute arises: Are we protected by one or more investment treaties? ▪ Nationality of the investing entity ▪ Nature of the investment (may restrict the protection offered by an investment treaty) ▪ Is there an investment treaty in force between the investor’s home State and the host State? ▪ If not, is there an investment treaty in force between the host State and any other State in the investor’s corporate chain?

25 How to Use Investment Treaties After a dispute arises: Is a State or a State-controlled entity involved? ▪ Has the investor or investment been harmed by acts or omissions of a State agency or a State-controlled entity? ▪ Harmed by a regulatory action? ▪ Harmed by a contractual breach by a State or a State entity?

26 How to Use Investment Treaties After a dispute arises: Negotiating with the government ▪ Knowing your investment treaty rights can provide powerful tool in negotiations with the host State ▪ A foreign investor can use rights provided under investment treaties as leverage in negotiations before invoking dispute settlement proceedings ▪ Once dispute settlement proceedings have been invoked, foreign investor can seek to settle the case based on the strengths of its claims

27 How to Use Investment Treaties After a dispute arises: Moving to a better suited forum ▪ When the investor faces a claim initiated by State entities in the host State’s courts ▪ When the investor’s contract with the host State provides for litigation in the host State’s courts, or less attractive arbitral fora CASE STUDY: GE & Bechtel v. India (Dabhol)

28 How To Use Investment Treaties Think about investment treaties ▪ When structuring investments ▪ When problems arise with government actions