I. Introduction and definition
At the outset, it’s important to understand that "control" is not necessarily the same of "ownership" of the majority of shares. "Control" has been defined as having the number of a company's voting shares that is by itself sufficient to make the key decisions of the company,1 regardless of the amounts of shares owned. As such, a majority shareholder may or may not control the company. This is to say that the ownership of a majority of shares does not necessarily mean control.2
In other words, as explained by Schreuer, "corporations are owned by shareholders who may themselves be companies. A shareholder may own the company entirely, may own a majority of its shares or may just own a minority of shares. A shareholder may or may not control the company, which is not necessarily the same as majority ownership."3
That said, immediate legal shareholders of a company are considered direct owners of investment. On the other hand, shareholders in an intermediary company that is a (direct or indirect) owner of the operating company are indirect owners. They can be either top-rank owners or a middle-rank entity.4
United Utilities (Tallinn) B.V. and Aktsiaselts Tallinna Vesi v. Republic of Estonia, ICSID Case No. ARB/14/24, Award, 21 June 2019, paras. 369-370; Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador (II), ICSID Case No. ARB/06/11, Decision on Annulment of the Award, 2 November 2015, para. 104; Caratube International Oil Company LLP v. Republic of Kazakhstan (I), ICSID Case No. ARB/08/12, Decision on the Annulment Application of Caratube International Oil Company LLP, 21 February 2014, para. 271.
Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, paras. 21, 52; Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on Jurisdiction, 29 June 1999, para. 40; Mera Investment Fund Limited v. Republic of Serbia, ICSID Case No. ARB/17/2, Decision on Jurisdiction, 30 November 2018, para. 175.
II. Treaty practice on coverage of indirect ownerships
On the one hand, most contemporary Bilateral Investment Treaties (BITs) deal with indirectly-held investments.7 The coverage of indirect investments is usually referred to BITs’ general definition of “investment”, which applies to all assets,8 as opposed to the particular sections covering interests in companies. This definition generally considers shares as investments and may also contain other indirectly held or controlled investments, such as debt.9 Also, many BITs “expressly refer to indirect shareholdings, rather than generally to indirect investments”.10
On the other hand, certain treaties do not explicitly address the issue of indirect ownership. For instance, the ASEAN (Association of South-East Asian Nations) Comprehensive Investment Agreement protects "any kind of asset", including a descriptive list which however does not explicitly mention indirect stocks.11 As explained by Gaukrodger, “under some treaties of this type, arbitrators have found that indirect shareholdings are covered (including for purposes of reflective loss) unless they are expressly excluded.”12
Estonia –Poland BIT (1993), Article 1; Portugal-United Arab Emirates BIT (2011), Article 1(1); Senegal – United States of America BIT (1983), Article I(c); Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, para. 113.
Gaukrodger, D., Investment Treaties and Shareholder Claims: Analysis of Treaty Practice, OECD Working Papers on International Investment, 2014, p. 18; Canada-Hungary BIT (1991), Article I(b)(ii); Argentina-BLEU BIT (1990), Article 1(2)(b); Congo, Democratic Republic of-United States of America BIT (1984), Article 1.
Gaukrodger, D., Investment Treaties and Shareholder Claims: Analysis of Treaty Practice, OECD Working Papers on International Investment, 2014, p. 18; Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 137; CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, paras. 66-69; Azurix Corp. v. The Argentina Republic (I), ICSID Case No. ARB/01/12, Decision on Jurisdiction, 8 December 2003, paras. 69, 73; Enron Creditors Recovery Corp. and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, paras. 35, 43-49, 58-60.
III. Coverage of complex ownership chains in International Investment Agreements
Complicated shareholding networks and relations can create a platform to considerably extend the role and influence of Foreign Investment Agreements in International Investment Arbitration. According to a research conducted by the UNCTAD (United Nations Conference on Trade and Development) into ISDS claims between 2010 to 2015, approximately one third of investor-State dispute settlement cases are initiated by claimants which are essentially held by a parent company/shareholder, which is located in a third country (not a party to the respective treaty).13
Further, according to the same UNCTAD research, more than 25% of those claimants do not have significant operations in the respondent State – this share may increase to 75% when considering transactions based on treaties concluded by major locations in the ownership centres.14 All in all, only 20% of corporate claimants were owned by parents in third countries, while approximately 68 per cent were active claimants with ownership information.15 Nearly half of claimants during that time period had substantial operations in the treaty country, but more than a quarter did not have substantial operations in the treaty country.16
IV. Investment through layers of intermediary companies
Inclusion of the term “shares” within the definition of investment in most BITs enables (direct or indirect) shareholders to apply their claims to investment arbitration tribunals.17 Tribunals have often accepted that indirect ownership is not a problem to act as a Claimant18 unless there is clear language otherwise.19
CEMEX Caracas Investments B.V. and CEMEX Caracas II Investments B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/15, Decision on Jurisdiction, 30 December 2010, para. 157; Cube Infrastructure Fund SICAV and others v. Kingdom of Spain, ICSID Case No. ARB/15/20, Decision on Jurisdiction, Liability and Partial Decision on Quantum, 19 February 2019, paras. 174, 185-188, 197; Siemens A.G. v. The Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 137; Mobil Cerro Negro Holding, Ltd., Mobil Cerro Negro, Ltd., Mobil Corporation and others v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, para. 165; Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012, paras. 230; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, paras. 123-124.
De Gramont, A. and Gritsenko, M., Key Issues and Recent Developments in International Investment Treaty Arbitration, 2007 ABA Section of International Law Spring Meeting, pp. 20-21; CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, para. 51; Azurix Corp. v. The Argentina Republic (I), ICSID Case No. ARB/01/12, Decision on Jurisdiction, 8 December 2003, paras. 65-66; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina Republic, ICSID Case No. ARB/02/1, Decision of the Arbitral Tribunal on Objections to Jurisdiction, 30 April 2004, para. 50; Siemens A.G. v. The Argentina Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 137.
V. Indirect owner’s loss and recovery
When a company suffers a damage, this does not automatically lead to direct injury to its shareholders, because the company (direct investor) and its shareholders (owners or indirect investors) are separate legal entities.22 Indeed, analysis of double recovery issues moved scholars to highlight the possibility of overcompensation, as a shareholder is not, in principle, entitled to seek compensation for the company's loss. Rather a shareholder is entitled to compensation for the decrease in share value (indirect damage).23
In the same vein, other scholars have cautioned that “investment through layers of intermediary companies hides a risk of multiplication of claims and double recovery.”24 As K. Yanacca-Small noted, this is so since “[t]he extension of treaty rights to indirect shareholders provides an opportunity for a group of companies to make multiple claims about the same investment by different companies in the community and against the same measures of the host state.”25
However, tribunals have held that it is not disputed that shareholdings are covered by the term "investment" included in Article 25(1) of the ICSID Convention, even if such shareholdings are indirect – in other words, held through indirect companies-and noncontrolling.26
VI. Indirect shareholding
As professor Schreuer noted, a claimant is not always an immediate shareholder of the affected company. In such cases, an investor may want to claim for damage caused to a company where it owns shares only through the intermediary of another company, depending on majority ownership and control issues.27 Warning that several range of possibilities may arise in the future, professor Schreuer divided intermediate shareholders into three categories depending on the country of seat or place of incorporation of the intermediate shareholder:
Schreuer, C., Shareholder Protection in International Investment Law, 2005; Enron Creditors Recovery Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, paras. 39, 49; Krederi Limited v Ukraine, ICSID Case No. ARB/14/17, Award, 2 July 2018, paras. 244-245.
VII. Domestic companies ultimately owned by a national of the host country
The above considerations are applicable when a claimant supports the ICSID jurisdiction either on Article 25(2)(a), or on the first part of Article 25(2)(b) of the ICSID Convention. However, the outcomes may change should a claimant submit the ICSID jurisdiction based on the second part of Article 25(2)(b), being a claimant who is a legal entity constituted in the host country but controlled by an investor of a foreign nationality. In this situation, after piercing the corporate veil, tribunals have stated that if the ultimate beneficial owner of the domestic company is also a national of the host country, ICSID tribunals lack jurisdiction.31 According to this trend, even if a foreign company allegedly controls a domestic company, the ultimate beneficial owner cannot be of the same nationality of the host country. However, as always, trends can change.
Ripinsky, S. and Williams, K., Damages in International Investment Law, 2008, pp. 148-161
Yannaca-Small, K., Parallel Proceedings in Muchlinski, P., Ortino, F. and Schreuer, C., (eds.), The Oxford Handbook of International Investment Law, 2008, pp. 1010-1011
Uchkunova, I., Indirect Investments Through Chain Of Intermediary Companies:
A Philosopher’s Stone Or Not Any More?, Kluwer Arbitration Blog, 13 July 2013