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Indirect Ownership

I. Introduction and definition


At the outset, it’s important to understand that "control" is not necessarily the same as "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 See further, Foreign control, ownership and investment arbitration.


In other words, as explained by Professor Christopher 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 See further, Shareholders, Minority shareholders.


That said, on one hand, 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

II. Types of 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.5 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:

  1. Shareholding through an intermediary in the investor’s home State;6
  2. Shareholding through an intermediary in the host State;7
  3. Shareholding through an intermediary in a third State.8

III. Treaty practice on coverage of indirect ownerships


On the one hand, most contemporary Bilateral Investment Treaties (BITs) deal with indirectly-held investments.9 The coverage of indirect investments is usually referred to in BITs’ general definition of “investment”, which applies to all assets,10 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.11 Also, many BITs “expressly refer to indirect shareholdings, rather than generally to indirect investments”.12


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.13 As explained by David 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.”14

IV. Complex ownership chains in international investment arbitration


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) on 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).15


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.16 All in all, only 20% of corporate claimants were owned by parents in third countries, while approximately 68% were active claimants with ownership information.17 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.18

V.  Arbitral tribunals' practice on investment through layers of intermediary companies

A. Admission of claims brought by indirect shareholders


Inclusion of the term “shares” within the definition of investment in most BITs enables (direct or indirect) shareholders to bring their claims to investment arbitration tribunals.19


Subject to the treaty and operative facts at hand, tribunals have accepted their jurisdiction to hear the claims of non-controlling, indirect shareholders20 and minority shareholders.21 Some tribunals have also found that a passive ownership of shares is not enough,22 while others refused to add such a requirement when it is not explicitly mentioned in the investment treaty.23


In some instances, subject to language of the applicable treaty, tribunals have decided that indirect investors may even submit a claim of denial of justice under the fair and equitable treatment standard even if it has not participated in the disputed national proceeding.24


Other tribunals have also 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 non-controlling.25


Some arbitrators have argued that the indirect owner of an investment might even be of the same nationality of the host State and still be able to file a claim against its origin nationality country.26 However, others have disagreed with this argument, even when based on the same set of facts.27

B. Limits of indirect claims


Some arbitrators mentioned however that indirect claims may be rejected depending on:

  1. the commercial reality of the investment28 (see further Nationality of the investment);
  2. a domestic law analysis, which may exclude indirect investments from the scope of protection of investment treaties;29
  3. a “cut-off point” that may be laid down when addressing indirect claims in complex corporate chains;30 or
  4. whether the assets of the interposed company qualify or not as the indirect owner’s investment.31

This approach contrasts with that of some arbitral tribunals which considered that the broad definition of investment in some treaties that include indirect interests “necessarily implies that there may be one or several layers of intermediate companies or interests intervening between the claimant and the investment.”32

VI. 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.33 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).34


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.”35 As Katia 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.”36


For detailed analysis on the issue of double recovery and others related see further Parallel proceedings, Abuse of process, Bona fide, Indirect claims.

VII. Domestic companies ultimately owned by a national of the host country


The above considerations are applicable under ICSID Article 25(2)(a), or Article 25(2)(b) first part of the ICSID Convention. However, the outcome may change should a claimant submit a claim based on the second part of Article 25(2)(b) of the ICSID convention, 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.37 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. See further Nationality of Investment and Territoriality of Investment.


Gaukrodger, D., Investment Treaties and Shareholder Claims: Analysis of Treaty Practice, OECD Working Papers on International Investment, 2014, p. 18.

Schreuer, C., Shareholder Protection in International Investment Law, 2005.

United Nations Conference on Trade and Development, World Investment Report 2016: Investor Nationality – Policy Challenges, 2016, p. 171.

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

De Gramont, A. and Gritsenko, M., Key Issues and Recent Developments in International Investment Treaty Arbitration, 2007 ABA Section of International Law Spring Meeting.

Uchkunova, I., Indirect Investments Through Chain Of Intermediary Companies:
A Philosopher’s Stone Or Not Any More?,
Kluwer Arbitration Blog, 13 July 2013

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