|Bankovní||Bankovní Holding a.s. (see also Bivalence and České pivo)|
|Big Four banks||Česká spořitelna, a.s. (“CS”); Komerční banka, a.s. (“KB”); Ceskoslovenská obchodní banka a.s. (“CSOB”); and Investiční a Poštovní bankaa.s. (later known as IP bankaa.s., or “IPB”)|
|CI||Česká inkasní, s.r.o.|
|CNB||Czech National Bank|
|CS||Česká spořitelna, a.s., one of the Big Four banks|
|CSC||Czech Securities Commission|
|CSOB||Ceskoslovenská obchodní banka a.s., one of the Big Four banks|
|CZK||Czech Republic Koruny|
|GDP||Gross Domestic Product|
|Hypo-Vereinsbank||Hypo-und Vereinsbank AG|
|IPB||Investiční a Poštovní banka a.s./IP banka a.s., one of the Big Four banks|
|KB||Komerční banka, a.s., one of the Big Four banks|
|KBC||KBC Bank of Belgium NV|
|KoB||Konsolidační banka, s.p. ú v likvidaci, State-owned debt consolidation agency|
|NPF||National Property Fund|
|OJ||Official Journal of the European Communities|
|OPC||Office for the Protection of Economic Competition|
|PCA||Permanent Court of Arbitration|
|Saluka||Saluka Investments BV|
|SI||Slovenská Inkasná, spol, s.r.o.|
|Treaty||Agreement on Encouragement and Reciprocal Protection of Investments|
|UniCredito||Between the Kingdom of The Netherlands and the Czech and Slovak Federal Republic, signed on 29 April 1991 UniCredito Italiano Group|
At a Procedural Meeting held in London on 2 November 2001:
a. it was agreed that the UNCITRAL Rules were the applicable rules of procedure in this arbitration;
b. the parties accepted the Tribunal’s proposal that registry services for the arbitration should be provided by the Permanent Court of Arbitration ("PCA"), and the PCA agreed to provide such services;
c. Geneva, Switzerland, was selected as the place of arbitration, although this did not preclude the Tribunal from holding meetings at any other place, including The Hague, for the sake of convenience;
d. English was agreed as the language of the arbitration;
e. arrangements were made for the discovery of certain documents;
f. the following timetable for the submission of written pleadings by the parties was laid down (it being agreed that it would be more appropriate to use the international nomenclature for the parties’ written submissions rather than the terms used in the UNCITRAL Rules):
Claimant’s Memorial - 5 March 2002, and
Respondent’s Counter-Memorial - 17 May 2002;
g. the possibility of there being a second round of written submissions was reserved for future decision by the Tribunal, but tentative deadlines were set as follows:
Claimant’s Reply - 19 July 2002, and
Respondent’s Rejoinder - 13 September 2002; and
h. arrangements were made regarding questions of confidentiality.
a. that it was without jurisdiction to hear and determine the Counterclaim put forward by the Respondent in its Counter-Memorial;
b. that that Decision was without prejudice to the issue raised by the Respondent’s Notice to Dismiss of 15 August 2002, which had been joined to the merits by the Tribunal’s ruling of 10 September 2002;
c. that questions of costs arising as a result of the presentation by the Respondent of the Counterclaim set out in its Counter-Memorial were reserved until final consideration could be given to questions of costs in this arbitration as a whole; and
d. that the Tribunal would separately set out a revised timetable for the remaining written pleadings of the parties.
Having already received the Claimant’s Memorial and the Respondent’s Counter-Memorial, the Tribunal on 9 June 2004 endorsed the parties’ agreement to the following timetable for the submission of further written pleadings:
Claimant’s Reply - 24 September 2004; and
Respondent’s Rejoinder - 4 February 2005.
Those further written pleadings were submitted by the parties within the time allowed for them.
At those hearings, the Tribunal was addressed by:
On behalf of the Claimant:
Mr Jan Paulsson
Mr Peter Turner
Professor James Crawford SC
On behalf of the Respondent:
Mr George von Mehren
In addition, the Tribunal heard the following witnesses:
Called by the Claimant:
Mr Randall Dillard
Professor Hyun Song Shin
Called by the Respondent:
Mr Michael Descheneaux
Mr Pavel Racocha
Mr Ludek Niedermayer
Mr Jan Mladek
Mr Pavel Mertlik
Mr Kamil Rudolecky
Mr Ivan Pilip
Mr Pavel Kavanek
Professor Joseph J. Norton
Mr Brent Kaczmarek
(a) a declaration that the Czech Republic has breached Article 3 of the Treaty by failing to accord Saluka’s investment fair and equitable treatment;
(b) a declaration that the Czech Republic has breached Article 5 of the Treaty by depriving Saluka of its investment unlawfully and without just compensation equal to the genuine value of the investment;
(c) an order that the Czech Republic pay Saluka compensation for the damages that it has suffered as a result of the breaches of the Treaty, such damages to be determined by the Tribunal based on further submissions;
(d) interest on the compensation to be awarded to Saluka, in an amount to be determined by the Tribunal; and
(e) an order that the Czech Republic pay the costs of these arbitration proceedings, including the costs of the Tribunal and the legal and other costs incurred by Saluka, on a full indemnity basis.
In its pleadings, the Respondent requested the following relief:
(a) In its Notice to Dismiss, "that the Tribunal dismiss with prejudice the arbitration fded by Saluka and award the Czech Republic its attorneys’ fees and costs";
(b) In its Counter-Memorial,
(i) a declaration that Saluka breached the Agreement and engaged in other unlawful acts;
(ii) an order that Saluka pay the Czech Republic compensation for the damages suffered as a result of Saluka’s unlawful acts presently estimated to be approximately CZK 100 billion to CZK 260 billion (approximately US$3.22 billion to US$8.38 billion);
(iii) interest on the compensation awarded to the Czech Republic, in an amount to be determined by the Tribunal; and
(iv) an order that Saluka pay the costs of these arbitration proceedings, including the costs of the Tribunal and the legal and other costs incurred by the Czech Republic, on a full indemnity basis;
(c) In its Rejoinder (i.e. after the Tribunal’s Decision on Jurisdiction over the Respondent’s Counterclaims), "that the Tribunal render a final Award determining that the Czech Republic has not violated Articles 3 and 5 of the Treaty"; and
(d) At the conclusion of its oral submissions, the Respondent asked that the Tribunal "render an award determining that there was no violation of either Article 3 or Article 5 of the Treaty" and, in its Post-Hearing Brief, "that the Tribunal issue a Final Award determining that the Treaty was not violated".
(a) The Respondent repeated its contention that Nomura had not made its investment in IPB in order to keep IPB viable but to facilitate the acquisition of two valuable Czech breweries through control of IPB’s stake in them: Nomura’s real objective was not to invest in IPB’s banking operations but, by way of a Put Option scheme which in effect eliminated all downside risk from Nomura’s purchase of the IPB shares, to acquire and then sell on IPB’s shareholding in the brewery companies, which made Nomura’s real objective something other than a bona fide investment in IPB. The investment had not been lawfully made (as was generally required for investment protection), but was part of a "dishonest scheme to secure enormous benefits". Czech law required Nomura to file a business plan for its investment in IPB, and a false filing was a breach of that legal requirement. Nomura’s failure, in its filed business plan, to disclose its true objectives to the Czech authorities had led them to approve the purchase of IPB’s shares, which they would not otherwise have done. Nomura had not acted in good faith and had violated the principle of non-abuse of rights, for which reason Saluka was precluded from relying on the international arbitral process provided by the Treaty.
(b) In any event, the Respondent contended that Saluka did not have any real and continuous bona fide social or economic factual links to The Netherlands, and should therefore be disqualified from being considered as an "investor".
(c) Moreover, the Respondent maintained that, in the context of the circumstances which gave rise to this arbitration, the relationship between Nomura and Saluka was so close that they were in effect interchangeable as parties in these proceedings and that the terms "Nomura" and "Saluka" could be used interchangeably, Saluka being nothing more than a shell used by Nomura for its own purposes. Indeed, in the Respondent’s submission, such was the closeness of the relationship that the real party in interest was Nomura, and Nomura was not an eligible claimant under the Treaty.
(d) Saluka was not, so the Respondent contended, a bona fide "investor" as defined in the Treaty and was thus unable to have recourse to arbitration under it. The Respondent accordingly requested that the proceedings initiated by Saluka be dismissed.
(a) Saluka had not made an investment in the Czech Republic since it had invested nothing, acting merely as a conduit for Nomura’s investment: Nomura retained the voting rights associated with the IPB shares, participated in the management of IPB, and conducted all the dealings with the Czech authorities. Saluka was a mere surrogate for Nomura, and a claim under an investment treaty could not be brought by an entity which was a surrogate for another entity which, like Nomura, was not covered by the Treaty. Saluka was an agent for Nomura, not a true investor.
(b) While a simplistic or literal view of Article 1 of the Treaty might suggest that Saluka was a qualified investor, the Treaty had to be interpreted in light of the realities of the situation, and they showed that Nomura and Saluka had not conducted themselves as true investors.
(c) "Piercing the corporate veil" was permissible as an equitable remedy where corporate structures had been utilised to perpetrate fraud or other malfeasance. Nomura had used corporate structures to realise profit and put the banking sector at risk, and to perpetrate fraud against the Czech Republic. The corporate veil should therefore be pierced, the real interest at stake should be recognised to be Nomura’s, and, as Nomura was not within the Treaty definition of an "investor", the Tribunal was without jurisdiction.
(d) The Nomura Group had acted fraudulently and dishonestly throughout the events to which the case related. Nomura’s circular financing arrangements, the Czech beer deal, the Put Option and the establishment of the "Tritton Fund" (in the Cayman Islands) had all been conducted contrary to international bonos mores. This continuing failure to act in good faith and the abuse of process required that Saluka - which had never even been a bona fide holder of an investment which might have been injured - should be denied protection under the Treaty. Allegations of harm suffered by Nomura (rather than Saluka), and allegations based on the period before October 1998 when Saluka acquired its IPB shares, were outside the Tribunal’s jurisdiction.
(e) Moreover, the Claimant was acting in abuse of rights in instituting the arbitration since its purpose in doing so was to take advantage of the delay which would thereby be occasioned so that Nomura might gain advantage from the running of statutes of limitation in relation to civil or criminal proceedings which might be instituted by the Czech Republic in other fora.
(a) Saluka’s shareholding was not negated by allegedly not being "lawfully made" and therefore not bona fide', the only illegality which had been alleged concerned the Put Option, for which there was no basis and which in any event had already been held to be valid in an associated arbitration. In connection with obtaining the CNB’s approval for the Share Purchase Agreement, Nomura had duly filed its business plan, which had only to relate to its intentions regarding the future conduct of IPB’s banking operations.
(b) There was no need to consider whether or not Saluka had any factual links with The Netherlands, since the Treaty adopted the place-of-incorporation test and there was no basis for adding a "factual link" test.
(c) Saluka’s investment in IPB was a real investment.
(d) Nomura did not mislead the Czech authorities as to the nature of its investment in IPB, having made clear its role as a portfolio investor all along.
(e) Nomura’s acquisition of the brewery shares was a commercial and financial transaction which was not tainted by any impropriety.
(f) Nomura was a bona fide investor.
[T]o what extent, if at all, (1) can the Tribunal consider and make findings about the conduct of Nomura? (2) is Nomura a necessary party to these proceedings in relation to that conduct?
In the second place, the dispute between the Czech Republic and such an investor must be one "concerning an investment of [the investor]". The term "investments" is defined in Article 1(a) as follows:
The term "investments" shall comprise every kind of asset invested either directly or through an investor of a third State and more particularly, though not exclusively:
(i) movable and immovable property and all related property rights;
(ii) shares, bonds and other kinds of interests in companies and joint ventures, as well as rights derived therefrom;
(iii) title to money and other assets and to any performance having an economic value;
(iv) rights in the field of intellectual property, also including technical processes, goodwill and know-how;
(v) concessions conferred by law or under contract, including concessions to prospect, explore, extract and win natural resources.
(a) the purchase of IPB shares was not an investment since Nomura/Saluka had invested nothing in IPB;
(b) in so far as the purchase of IPB shares was an investment, it had not been lawfully made;
(c) the real party in interest in the arbitration was not the Claimant, Saluka, but Nomura, which was not an eligible claimant under the Treaty;
(d) the relationship between Nomura and Saluka was so close as to make them interchangeable;
(e) Nomura/Saluka was not a bona fide investor in IPB;
(f) Nomura/Saluka did not act in good faith in purchasing the IPB shares;
(g) Nomura/Saluka acted in abuse of rights in the purchase of IPB shares;
(h) Saluka had no real and continuous social and economic links with The Netherlands.
The Tribunal notes in passing that, although not in terms part of the definition of an "investment", it is necessarily implicit in Article 2 of the Treaty that an investment must have been made in accordance with the provisions of the host State’s laws. In relevant part, Article 2 stipulates that "[e]ach Contracting Party... shall admit such investments in accordance with its provisions of law". Accordingly, and as both parties acknowledge, the obligation upon the host State to admit an investment by a foreign investor (i.e. in the present context, to allow the purchase of shares in a local company) only arises if the purchase is made in compliance with its laws.
In this context, the Respondent has invoked the requirements of Section 16(1)(a) and (e) of the Czech Banking Act. This provides (in the translation submitted by the Respondent):
Prior approval of the Czech National Bank shall be required
(a) for the establishment of an ownership interest by foreign a person in an existing bank,4
(e) acquisitions or transfers of registered capital amounting to more than 15% of a bank’s registered capital, in the course of one or more transactions, by/to an individual or several persons acting in concert, unless due to inheritance.
While that provision of the Czech Banking Act establishes the need to obtain the CNB’s approval, it says nothing about the investor’s obligation to disclose its long-term plans and ultimate objectives.
The Respondent has in that respect invoked the provisions of the CNB’s Official Communication 23/1995, Article III(2)(c) of which provides:
The investor shall submit the application to the CNB together with the following documents:
2. if the investor is a legal entity
(c) a business plan (in the event that the required volume of shares represents 10% and more of the registered capital of the bank).
While that provision requires the submission of a business plan, the Tribunal has seen nothing to suggest that it imposes a legal obligation upon an investor to disclose its future long-term plans and objectives going far beyond the immediate purposes of its investment in the bank whose shares are being purchased. A "business plan" is inherently a label of considerable generality, and a Tribunal such as this must hesitate before reading into that label such a particular and far-reaching content.
Having thus considered the various challenges to its jurisdiction which the Respondent has advanced, the Tribunal concludes that the Claimant’s shareholding of IPB shares is an "investment" within the meaning of the Treaty, and that the Claimant is in respect of that investment an "investor" within the meaning of the Treaty. Accordingly, the Tribunal is satisfied that it has jurisdiction to hear the claims brought before it by the Claimant under the arbitration procedure provided for in Article 8 of the Treaty.
(a) The IPB proposal, rejected by the Czech Government, would have cost Czech taxpayers far less than the forced administration option. That option, says Saluka, was thus not in the public interest;
(b) The Respondent’s fact and expert witnesses were unable to point to a precise regulation with respect to a bank’s liquidity requirements which had been breached by IPB. There was thus, argues Saluka, no due process;
(c) The Forced Administrator never exercised truly independent judgment. Again, says Saluka, the forced administration measure was not taken under due process and was discriminatory;
(d) The Czech Government granted State aid to IPB’s competitors, thus infringing, says Saluka, the non-discrimination provision of Article 5;
(e) The Czech Government resorted to its regulatory power unlawfully for the sole purpose of transferring IPB’s business to CSOB. The measure, argues Saluka, was thus clearly discriminatory;
(f) The Czech Government never paid any compensation to Saluka after having deprived Saluka of its investment.
1. Each Contracting Party shall ensure fair and equitable treatment to the investments of investors of the other Contracting Party and shall not impair, by unreasonable or discriminatory measures, the operation, management, maintenance, use, enjoyment or disposal thereof by those investors.
2. More particularly, each Contracting Party shall accord to such investments full security and protection which in any case shall not be less than that accorded either to investments of its own investors or to investments of investors of any third States, whichever is more favourable to the investor concerned.
Even though Article 3.2 sets out, "more particularly", obligations to accord "full security and protection" as well as national and most-favoured-nation treatment, these formulations are merely indicative and are not exhaustive of the scope of the general standards laid down in Article 3.1. Furthermore, a violation of the national and most favoured-nation treatment obligations is not at issue here, and "full security and protection" is not less general a formulation than the standards set out in Article 3.1.
(a) the Czech Republic gave a discriminatory response to the systemic bad debt problem in the Czech banking sector, especially by providing State financial assistance to the other Big Four banks to the exclusion of IPB, and thereby created an environment impossible for the survival of IPB;
(b) the Czech Republic failed to ensure a predictable and transparent framework for Saluka’s investment;
(c) the Czech Republic’s refusal to negotiate with IPB and its shareholders in good faith prior to the forced administration was unreasonable and discriminatory;
(d) the provision by the Czech Republic of massive financial assistance to IPB’s business, once the beneficiary of such assistance had become CSOB following the forced administration, was unfair and inequitable; and
(e) the Czech Republic’s failure to prevent the unjust enrichment of CSOB at the expense of the IPB shareholders, including Saluka, upon the transfer of IPB’s business to CSOB and the aforementioned State aid following the forced administration was equally unfair and inequitable.
The Claimant has put much emphasis on the "systemic" nature of the bad loan problem that affected the Big Four banks from 1998 to 2000. The Claimant has referred in this context to an International Monetary Fund ("IMF") Report, defining a problem as "systemic" where the affected banks hold, in the aggregate, at least 20% of the total deposits of the banking system.42
On the basis of the available evidence, the Tribunal finds that the Czech Government changed its policy of non-assistance only after Nomura had acquired the shareholding in IPB on March 8, 1998. The earliest hint of such policy change was contained in a letter from the head of the NPF, Mr Ceska, to the chairmen of the boards of directors of KB, CS and CSOB dated 21 April 1998 which contained the following statement:
We further confirm that, dining the period prior to the full privatisation of the banks as aforesaid, we are ready to take such steps within our authority and power as shareholder of each of the banks [to ensure that the banks] comply with all regulatory requirements applicable to them, including capital adequacy and liquidity.
On 27 May 1998 the Government passed the following resolution:
The Government states that it is aware of its responsibility for the financial stability of the joint stock companies CSOB, KB and CS and that it is ready to secure such financial stability until the completion of the privatisation of those joint-stock companies.43
(a) by contradictory and misleading declarations about its policy towards the banking sector in crisis and by justifying IPB’s exclusion from the State aid granted to save the other banks on the grounds that it had already been fully privatised;
(b) by the unpredictable increase of the provisioning burden for non-performing loans; and
(c) by leaving the banks with no effective mechanisms to enforce loan security.
In the two appendices to the latter document, CSOB explained in more detail two alternative strategies for a takeover of IPB: firstly, the "transaction structure to be used in negotiated transaction with India"; secondly, the "transaction structure to be used in forced administration of India". The first "transaction structure" was characterised as not being without legal, political and implementation risk; but it was emphasised that it would "present a potential (and perhaps only [sic]) structure which, in light of the options available under current Czech law, addresses the goal of a rapid transfer of the India business to Carthago". The second "transaction structure" was characterised as being novel and as not being without legal, political and implementation risk either; it was also emphasised, however, that it would "present a potential (and perhaps only [sic]) structure which, in light of the options available under current Czech law, addresses the goals of minimal involvement of the Forced Administrator and of a rapid transfer of the India business to Carthago".
On 2 May 2000 the Governor of the CNB, Mr Tosovsky, expressed in a letter to the Minister of Finance, Mr Mertlik, some dissatisfaction with the negotiations between the Czech Government and Saluka/Nomura. He wrote:
As is well-known to you from a number of working meetings, the CNB, apart from the performance of its legal obligation of banking supervision, has also acted on the grounds of care in regard of the stability of the financial system and together with representatives of the Ministry of Finance and the National Property Fund it entered the talks with the main shareholder of the bank [i.e. Saluka/Nomura] and is contributing to the work of a working group whose establishment it initiated some time ago.
The aforesaid work brought about a widening of the awareness of the situation, clarified some opinions and priorities, but has not led as yet to a sufficiently expedite and clear course of action. The problem is not only the slow communication with the main shareholder [i.e. Saluka/Nomura], his unclear position at the bank and a certain unwillingness to discuss a specific course of action, but also certain "half-officiality" of communication between the state, the shareholder and the bank at a level other than supervisory.
However, Governor Tosovsky also stated in the following terms the basic conditions for a satisfactory solution:
I believe the most necessary is to expedite and refine the works and prevent thereby the creation of still greater costs. For this reason allow me to acquaint you with the foundation and conclusions which I made together with my colleagues in regard to the situation:
a) regardless of the specific results of the audit or supervision of the CNB at IPB it is possible to believe that without the substantial strengthening of the capital of the bank or a clean-up of assets, the bank will not be able to further exist,
b) from this point of view it appears to be unlikely that the planned sale of the bank to a new strategic investor is realizable as a commercial transaction without the support of the state.
The letter concluded by setting out three options for action: the stabilisation of IPB by a private entity with the support of the State (the option favoured by the Governor, provided the State would retain a certain control over the whole process), the nationalisation of the bank (an option that was said to involve considerable risk), liquidation or bankruptcy (an option that was characterised as totally undesirable).
On 2 June 2000 the Government repeated its 1 euro proposal. On 4 and 5 June, Nomura attempted to accommodate that proposal by presenting to the Deputy Finance Minister, Mr Mladek, and the Vicegovemor of the CNB, Mr Niedermayer, three alternative solutions to enable the entry of a strategic investor:
(1) Nomura would procure the transfer of 51% of the shares of IPB to the Government in return for acceptable financial assistance. The purchasing price should be 1 euro for 46.16% (i.e. the stake that Saluka already held in IPB) and market price for the remaining shares (which Saluka would have to acquire first). The IPB shares would then be sold for their purchase price to a commercial banking investor that was agreed in advance among the Government, CNB and Nomura. The commercial banking shareholder would recapitalise IPB and take management control on terms agreed in advance.
(2) Nomura would procure the recapitalisation of IPB with CZK 20 billion of new capital in return for acceptable financial assistance. The current and new shares of IPB would then be sold to a commercial banking shareholder who would become a controlling shareholder in IPB. The commercial shareholder would then recapitalise IPB and take management control.
(3) Nomura would procure the sale of 51% shareholder ownership of IPB to the CNB or the Government at fair market value defined as CZK 116 per share, representing the average purchase price of the seller.
None of these proposals was considered acceptable to the Government, mainly because they were seen to involve direct financial assistance by the State in favour of Nomura, or the State’s assumption of all of IPB’s losses and of the costs of IPB’s restructuring.
On Friday, 9 June 2000, the Czech news agency CTK reported the Deputy Finance Minister, Mr Zelinka, to have said that
[c]ompulsory administration makes sense, because talks with a potential investor are at an advanced stage and there is a danger that the bank will go bankrupt in the meantime.
Even though by law compulsory administration does not mean freezing the deposits, Zelinka does not see any other way of protecting the bank from being invaded by its customers.