The majority of international investment cases involve companies as investors.¹ While international and municipal laws generally regard companies as distinct from their shareholders,² “a wrong done to the company frequently causes prejudice to its shareholders.”³

Historically, shareholders had to rely on the discretionary right of the State of their nationality to exercise diplomatic protection in disputes arising from State measures against the shareholders’ companies. International law did not provide an autonomous right of action for shareholders to bring claims for adverse interference by a host State against the shareholder’s company.⁴ With the proliferation of international investment treaties, however, shareholder claims “against measures taken by a State vis-à-vis the company in which they hold shares is a common occurrence in modern investor-State arbitration.”⁵ Diplomatic protection has become a last resort solution in cases where treaty protection remains unavailable.⁶ In the case of investment treaties, arbitral tribunals have consistently interpreted these treaties as lex specialis granting shareholders wide access to investor-state dispute settlement to claim for their affected interest, independently from the corporate entity.⁷

It is jurisprudence constante that shareholders have standing to bring autonomous investment treaty claims against host States for interference with their companies, whether the investor is a foreign legal person, an individual, or an entity locally incorporated in the host State.⁸

The legal standing of shareholders to submit claims against host States depends on the wording of the legal instrument under which the arbitral tribunal is constituted.⁹ By contrast, municipal law is not authoritative, but operates by renvoi to assist arbitral tribunals in defining the contours of the shareholding rights and deciding whether the shareholder claims meet treaty requirements.¹⁰

Shareholders may be individuals or juridical entities.¹¹ With regard to juridical entities, protected shareholding often takes the form of (i) a direct investment by a foreign corporation in the host State, (ii) the set-up of a parent corporation to invest in a foreign country through a wholly owned subsidiary, or (iii) an investment flowing from an intermediary company incorporated in a third State.¹²

In order to bring claims and benefit from treaty protection standards, a foreign shareholder must have the nationality of a State other than that of the host State.¹³ For physical persons, nationality depends on the laws of the State of citizenship. For corporate shareholders, based on the applicable treaty, the standard test of corporate nationality may consider (i) the place of incorporation, (ii) the place of the siège social, (iii) the place of constitution or (iv) the place of control.¹⁴

Notably, under ICSID treaty-based arbitration, Article 25 of the ICSID Convention establishes a two-fold regime with regard to the jurisdictional requirement of “national of another Contracting State”:

1.  Natural persons who had the nationality of a Contracting State other than the State party on the day they file for arbitration are entitled to bring a claim.¹⁵
2. Upon consent between the Contracting States as reflected in the wording of the applicable treaty, locally incorporated corporations may bring claims against host States provided that on the date they file for dispute they were subject to foreign control.¹⁶ ICSID tribunals have recognized this exception without obstacle.¹⁷

As a general rule, a tribunal has jurisdiction ratione materiae if the dispute in question arises out of an “investment” in the host State. International law does not provide for a definition of “shares” or “shareholders” and, again, the scope of the protected shareholding varies in accordance with the applicable investment instrument.¹⁸

In this respect, the majority of bilateral or multilateral investment treaties operate with permissive definitions of what constitutes an "investment" for the purpose of jurisdiction, often referring to "every kind of asset" including "shares,"¹⁹ or encompassing a direct reference to "shares of stock, bond interest or participation" in corporations.²⁰ A protected investment thus may concern minority or majority shareholdings,²¹ which may be direct or indirect through another company,²² and controlling or non-controlling.²³

Specific to ICSID treaty-based arbitration, the shareholder transaction must satisfy the definition of “investment” both under the applicable investment treaty and Article 25 of the ICSID Convention,²⁴ with some arbitral tribunals requiring satisfaction of the Salini test.²⁵

Accordingly, absent any specific treaty restrictions, shareholders typically have legal standing irrespective of the amount of shares they own or the effective mode of corporate control.²⁶ In addition to shares, the foreign shareholder’s protected investment can also be composed of (i) contractual rights, possibly co-owned with the local company,²⁷ and (ii) direct contribution in the form of money or physical assets.²⁸

Unless expressly provided otherwise in the applicable treaty, arbitral tribunals have also confirmed that the origin of capital contributing to the shareholder investment is indifferent for jurisdiction to be upheld.²⁹

Unless expressly stated otherwise in the applicable instrument, treaties do not apply retroactively under customary international law.³⁰ For an arbitral tribunal to have jurisdiction ratione temporis, the dispute must fall within the period of validity of the treaty invoked. In the context of shareholder claims, the dispute must stem from a conduct of the host State having affected the shareholder at the time the applicable treaty is into force.³¹

For instance, while corporate restructurings are permissible in practice,³² their timing is a decisive factor Here, arbitral tribunals will only exercise jurisdiction ratione temporis if the dispute arose after the restructuring was carried out,³³ unless the infringing acts persist after the acquisition of nationality.³⁴

A foreign shareholder may bring claims against host States for loss in their capacity as (i) shareholder, (ii) party to a contract, and (iii) direct owner of property or other assets.

ISDS practice shows that foreign shareholders typically argue violations of the following standards: fair and equitable treatment;³⁵ full protection and security;³⁶ and expropriation,³⁷ under three scenarios.

1. First, foreign shareholders may bring claim for direct interference affecting the rights connected to the shareholding, namely the shareholder’s administrative rights (to attend general meetings, vote and appoint board members) and economic rights (to receive dividends and a proportionate share of the company’s residual value upon liquidation).³⁸
2. Second, foreign shareholders may bring claim for reflective or indirect loss incurred by way of direct adverse interference by the host State with the local company. Here, the shareholder is suing for the consequential diminution of the value of its shares caused by acts directed to the company itself.³⁹
3. Lastly, foreign shareholders may bring claims in lieu of the local company in which they hold shares, irrespective of any personal loss. This type of indirect claim is commonly referred to as “representative claim” and entails that the applicable treaty expressly provides for it, such as Article 1117 of the NAFTA.⁴⁰

Limits to the admissibility of shareholder claims have progressively emerged from the ISDS practice in attempt to prevent abusive proceedings. As a primary rule, the scope of compensation of the shareholders is limited to the value of their equity participation in the company or direct assets,⁴¹ exclusive of these owned by the locally incorporated company.⁴² Further, some tribunals have discussed the application of a “cut-off point” from the protection under investment treaties whenever the foreign shareholder’s interest in a company is too miniscule or remote.⁴³ Other tribunals have ruled that the acquisition of shareholding for a nominal price does not pass the “contribution” test to qualify as an investment under the ICSID Convention.⁴⁴ Another limit flows from the timing of the shareholding acquisition, which must not be fraudulent for the purpose of jurisdiction.⁴⁵ Similarly, arbitral tribunals have refused to exercise jurisdiction over shareholder claims if the sole purpose of a corporate restructuring was to access investment treaty protections.⁴⁶ (See further Abuse of Process and Treaty Shopping.) The distinction between beneficial⁴⁷ and nominal ownership of shares may also come into play depending on the treaty provisions.⁴⁸

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