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
II. Locus Standi of shareholders
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
A. Shareholders as investors - ratione personae
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”:
B. Investment of shareholders - ratione materiae
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
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
C. Timing of shareholding - ratione temporis
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
III. Admissibility of shareholder claims
A. Grounds of shareholder claims
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.
B. Limits to the admissibility of shareholder claims
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
Alexandrov, S.A., The “Baby Boom” of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals – Shareholders as “Investors” under Investment Treaties, The Journal of World Investment and Trade, 2005.
Bentolila, D., Shareholders’ Action to Claim for Indirect Damages in ICSID Arbitration, Trade Law and Development, 2010.
Bottini, G., Chapter 15: Indirect Shareholder Claims, in Kinnear, M., Fischer, G.R., Almeida, J.M., Torres, L.F. and Bidegain, M.U. (eds.), Building International Investment Law: The First 50 years of ICSID, Kluwer Law International, 2015.
Bottini, G., Admissibility of Shareholder Claims under Investment Treaties, Cambridge University Press, 2020.
Clodfelter, M.A., and Klingler, J.D., Reflective Loss and its Limits under International Investment Law, in Beharry, C. L. (ed.), Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration.
Cohen Smutny, A., Claims of Shareholders in International Investment Law, in Binder, B. and Others (eds.), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, 2009.
Demirkol, E.C., Admissibility of Claims for Reflective Loss Raised by the Shareholders in Local Companies in Investment Treaty Arbitration, ICSID Review, Vol. 30, No. 2, 2015.
Kaufmann-Kohler, G., Multiple proceedings – New Challenges for the Settlement of Investment Disputes, in Rovine, A. W. (ed.), Contemporary Issues in International Arbitration and Mediation - The Fordham Papers 2013, 2014.
Laird, I.A., A Community of Destiny – The Barcelona Traction Case and the Development of Shareholder Rights to Bring Investment Claims, in Weiler, T. (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 2005.
Müller, D., La protection de l’actionnaire en droit international : L’héritage de la Barcelona Traction, 2015.
Orrego Vicuña, F., The Protection of Shareholders under International Law: Making State Responsibility More Accessible, in Ragazzi, M. (ed.), International Responsibility Today: Essays in Memory of Oscar Schachter, 2005.
Pellet, A., The Case Law of the ICJ in Investment Arbitration, ICSID Review,-Foreign Investment Law Journal, 2013.
Sasson, M., Chapter 5: Shareholders’ Rights, Substantive Law in Investment Treaty Arbitration: The Unsettled Relationship between International Law and Municipal Law, International Arbitration Law Library, Volume 21, Kluwer Law International, 2nd ed., 2017.
Schreuer, Ch., The ICSID Convention: A Commentary, Cambridge University Press, 2nd ed., 2001.
Schreuer, Ch., Shareholder Protection in International Investment Law, in Dupuy, P.-M., and Fassbender, B., Shaw, M. N. and Sommermann, K.P. (eds.), Common Values in International Law – Essays in Honour of Christian Tomuschat, 2006.
Douglas, Z., Can a Doctrine of Precedent Be Justified in Investment Treaty Arbitration?, 25 ICSID Review Foreign Investment Law Journal, 2010.
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