The notion of indirect claims under international investment agreements (IIAs) comprises (i) claims by indirect shareholders in respect of harm to a local or intermediary company’s assets; and (ii) claims by shareholders for indirect (or “reflective”) loss. The latter category refers to the loss of value of shares held in the stock of a local or intermediary entity, which in turn owns the assets directly affected by the host state’s measures.
II. General treaty practice and jurisprudence of investment tribunals
Claims by indirect shareholders in respect of harm to a local or intermediary company’s assets are uncommon in international investment law. The early case of Sedelmayer v. Russia represents a notable exception, involving claims by an indirect shareholder in relation to assets held in the host state through a local joint stock company. The claimant did not seek to recover the value of its shareholding in the local entity, but instead brought claims of expropriation in respect of that entity’s assets.1
By contrast, claims for indirect loss are rather frequent. While not expressly regulated under IIAs, such claims have been traditionally understood to fall within the jurisdiction of arbitral tribunals. IIAs typically extend their material scope of protection to directly or indirectly held shares, and their personal scope of protection to direct or indirect shareholders; in this light, reasoning that IIAs contemplate no express ratione materiae or personae jurisdictional bars to shareholdings, arbitral tribunals have been generally receptive to indirect loss claims.2
CMS Gas Transmission Company v. Argentina, ICSID Case No ARB/01/08, Decision on Jurisdiction, 17 July 2003, para. 65; GAMI Investments, Inc v. Mexico, Final Award, 15 November 2004, paras. 29-30; Sempra Energy International v. Argentina, ICSID Case No ARB/02/16, Decision on Jurisdiction, 11 May 2005, para. 93.
III. Shareholder claims for indirect loss in domestic and public international law
Other international adjudicatory bodies have strictly conditioned shareholder claims for indirect loss. Indicatively, the International Court of Justice has reasoned that diplomatic protection must be denied when mere shareholder “interests” (as opposed to direct rights, such as the right to vote in general meetings or receive declared dividends) are harmed.3 Under the Draft Articles on Diplomatic Protection, this “no reflective loss” principle is waived when the direct investor no longer exists under the laws of its place of incorporation, or when it is locally incorporated.4 Similarly, the European Court of Human Rights denies standing to shareholders for indirect loss claims, provided that the company itself can bring a claim under the European Convention on Human Rights and that the claiming shareholder does not possess a substantial controlling interest in the company.5 In turn, domestic courts in various jurisdictions have held that only direct shareholders’ rights may form the subject-matter of a dispute.6
IV. Risks and externalities of indirect shareholder claims
The approach of other international adjudicatory bodies and domestic courts reflects a number of concerns which hold equally true in international investment law: (i) the risk of parallel proceedings by multiple shareholders, or by the shareholder and the direct investor, which may result in double harm for respondents or conflicting outcomes;7 (ii) the risk of subjecting recovered assets to the fiscal regime of the indirect shareholder, which will often be a holding company incorporated in a low-tax jurisdiction;8 (iii) the recovery of corporate assets by shareholders at the expense of creditors;9 and (iv) the calculation of damages as a percentage of the value of the underlying asset or, more generally, without reference to considerations specific to share pricing.10
Valasek, M., and Dumberry, P., Developments in the Legal Standing of Shareholders and Holding Corporations in Investor-State Disputes, ICSID Review-Foreign Investment Law Journal, 2011, p.73; Franck, S. D., The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions, Fordham Law Review, 2005, p.1568.
Hochtief Aktiengesellschaft v. Argentine Republic, ICSID Case No ARB/07/31, Decision on Liability, 29 December 2014, para. 315; Sempra Energy International v. Argentina ICSID Case No ARB/02/16, Award, 28 September 2007, para. 479; Nykomb Synergetics Technology Holding AB v. The Republic of Latvia, SCC Case No 118/2001, Award, 16 December 2003, para. 179.
V. Recent trends and developments
Under “new generation” IIAs, states have sought to mitigate the risk of parallel proceedings arising out of indirect shareholder claims by: (i) requiring a waiver of recourse to alternative fora by the shareholder and the direct investor;11 (ii) clarifying that, in the case of derivative actions, i.e. claims for direct loss by the shareholder on behalf of a potentially expropriated or non-functioning local company, damages must be paid to the direct shareholder;12 (iii) interpreting the requirements of “identity of parties” and “subject-matter” under “fork-in-the-road” or “local remedies” clauses broadly, thereby ascribing preclusive effects to claims filed before alternative fora, by different entities in the corporate chain, for the same facts;13 (iv) providing for the possibility of staying or consolidating proceedings, or otherwise requiring the tribunal to take parallel actions into account when issuing its award.14
Tribunals have also become increasingly mindful of the risks and externalities of indirect loss claims, relying on general principles such as collateral estoppel,15 res judicata16 or abuse of process17 to caution against the initiation of multiple proceedings by related entities in respect of the same facts. Parallel proceedings, including parallel shareholder claims, are also being discussed as part of UNCITRAL’s current work on ISDS reform.18
Comprehensive Economic and Trade Agreement between Canada and the European Union, signed on 30 October 2016, provisionally entered into force on 21 September 2017, Article 8.22.2; Comprehensive and Progressive Agreement for Trans-Pacific Partnership, signed on 8 March 2018, entered into force on 30 December 2018, Article 9.21.2(b).
Comprehensive Economic and Trade Agreement between Canada and European Union, signed 30 October 2016, provisionally in force as of 21 September 2017, Article 8.12.4; Comprehensive and Progressive Agreement for Trans-Pacific Partnership, signed on 8 March 2018, entered into force on 30 December 2018, Article 9.29.5.
Eskosol S.p.A. in liquidazione v. Italian Republic, ICSID Case No. ARB/15/50, Decision on Respondent’s Application under Rule 41(5), 20 March 2017, para. 167; Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v. Grenada, ICSID Case No. ARB/10/6, Award, 10 December 2010, para. 7.1.7.
Ampal-American Israel Corp., EGI-Fund (08-10) Investors LLC, EGI-Series Investments LLC, BSS-EMG Investors LLC and David Fischer v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1 February 2016, para. 331; Orascom TMT Investments S.a.r.l. v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/12/35, Award, 31 May 2017, para. 542.
Páez-Salgado, D., Settlements in Investor-State Arbitration: Are Minority Shareholders Precluded from Having Its Treaty Claims Adjudicated?, Journal of International Dispute Settlement, (2017), pp. 101-124
Bentolila, D., Shareholders’ Action to Claim for Indirect Damages in ICSID Arbitration, Trade, Law and Development, 2010.
Demirkol, E.C., Admissibility of Claims for Reflective Loss Raised by the Shareholders in Local Companies in Investment Treaty Arbitration, ICSID Review-Foreign Investment Law Journal, 2015, pp. 391-413.
Vanhonnaeker, L., Shareholders' Claims for Reflective Loss in International Investment Law, 2020.
Valasek, M., and Dumberry, P., Developments in the Legal Standing of Shareholders and Holding Corporations in Investor-State Disputes ICSID Review- Foreign Investment Law Journal, 2011, pp. 34-75.