The legal standing of the minority shareholders is no longer a subject of debate thanks to several ICSID tribunals which established that foreign minority shareholders can assert claims separate from that of the local company in the host State. Notwithstanding, the critical date for determining foreign control is not yet crystal clear.
The foreign shareholders of a local company may be left with no choice but to contemplate whether to retain their shares once their rights have been violated under the applicable investment treaty by the host State. In such cases, the procedural puzzle of whether these shareholders should be permitted to bring a claim under ICSID after the share transfer requires a clear solution. Although there is a considerable increase in the number of investors exiting the host State after the violation of BIT rights, there are not many ICSID tribunal decisions on their legal standing afterwards.
First, it is worth mentioning that there exists no requirement for continuous ownership of an investment under ICSID Convention Article 25/2(b). This is well-established by ICSID decisions which did not require investors to retain their investments throughout the arbitration. For instance, in EnCana v. Ecuador, with respect to the legal standing, the ICSID tribunal underlined that it was irrelevant whether the claimant retained its investment throughout the proceedings.
In Daimler v. Argentina, it wasobserved that investment claims are separable from the underlying investment and, they are not transferred in conjunction with the share sales unless explicitly agreed otherwise. Therefore, the essential issue is to determine the date that entitles the shareholder to bring forth an ICSID claim, also referred to as the “critical date”.
With reference to identifying the critical date, one possibility is that the shareholder transfers their shares after the institution of the proceedings. It was observed in those cases that respondents generally raise a jurisdictional objection based on the loss of legal standing. In response, claimants generally respond to this allegation by arguing that the legal standing is a matter of jurisdiction and, the jurisdiction of the tribunal should be determined at the time of the institution of the proceedings. The ICSID tribunals generally favored claimants in these instances.
In this context, the time of “the institution of the proceedings” is also critical. The definition of the institution of the proceedings is not precise and depends on the applicable arbitration rules. According to 6(2) of the ICSID Institution Rules, “A proceeding under the Convention shall be deemed to have been instituted on the date of the registration of the request”. In Ceskoslovenska Obchodní Banka, A.S. v. Slovak Republic, the ICSID tribunal specifically referred to the date of the registration of the request for arbitration as the critical date.
On the subject of whether the investor could exit right after the institution of the proceedings, the ICSID tribunal in El Paso v. Argentina noted that El Paso’s request for arbitration was registered on 12 June 2003 and, El Paso transferred its interests on 23 June 2003, one-half weeks after bringing its claims. Although the tribunal found it disturbing that there was such a short time between bringing its claims and the transfer of its interests, in the end El Paso’s claim was found admissible.
On the other possibility of share transfer prior to the institution of the proceedings, Douglas refers to the critical date as investors having control over the investment in the host State at the time of the alleged breach under the BIT. If this determination is accepted, not only can the investor establish legal standing prior to the institution of the proceedings (i.e. registration of the request for arbitration by ICSID) but also long before officially filing a claim. The tribunal in Philip Morris Asia Ltd. v. Commonwealth of Australia adopted the same principle by reasoning that: “the test for a ratione temporis objection is whether a claimant made a protected investment before the moment when the alleged breach occurred”.
However, according to Schreuer, a foreign shareholder must have strictly retained its share in a local company of the host State at the time of consent by the host State on equal treatment. ICSID tribunals are seeking this requirement for jurisdiction at the time of the consent but have also indicated some concern regarding subsequent developments.
In light of the above, for investors contemplating an exit while retaining their investment related claims, the current precedent favors the registration of the request for arbitration as an appropriate time for the disposal of shares. However, even if such transfer may not affect the legal standing of shareholder, it will have an impact on the quantum of damages to be awarded by the ICSID tribunals. In case the share transfer generates profits, ICSID tribunals tend to reduce the compensation to prevent double recovery. Hence, shareholders should observe these referred precedents of ICSID tribunals prior to developing any exit strategies.