2020-06 OECD - DG PPT for reflective loss in ISDS final - corrected presentation … ·...

CLAIMS FOR REFLECTIVE LOSS

UNDER INVESTMENT TREATIES

David Gaukrodger

Senior Legal Adviser

Investment Division

OECD

OECD-hosted Side MeetingUNCITRAL Working Group III on ISDS Reform

Resumed 38th session, 20-24 January 2020, Vienna

22 January 2020

Outline

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1. Contrast between domestic law and unique ISDS interpretation generally allowing

reflective loss claims

2. Allowing reflective loss claims expands scope of ISDS and generates multiple

potential claims for the same injury

3. Treaty shopping and forum shopping in ISDS using attribution of reflective loss

claims

4. Minority shareholder claims for reflective loss

5. Effects of availability of reflective loss claims for some shareholders on corporate

law and finance

6. Company recovery regimes: NAFTA-style derivative action and deemed foreign

company models

7. Links and contact

Domestic Law: “No Reflective Loss” principle bars shareholder claims for reflective loss

Creditors Government

Direct Shareholder Entity

Operating company

sole permissible claimant

claim

alleged harm

No Reflective loss claims by shareholders

Indirect Shareholder Indirect

shareholder Indirect

shareholder

3

DONNADomestic and foreign

non-coveredshareholders (20%)

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

Alleged harm

GRETELIndirect covered

shareholder (100%)

HANSEL?

ISDSclaim

4

JERRY?

ISDS: Reflective Loss Claim

ISDS: Multiple Reflective Loss Claims – Unrelated Entities

DONNADomestic and foreign

non-coveredshareholders

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder

FRANKForeign covered

shareholder

alleged harm

GRETELIndirect covered

shareholder

ISDSclaim

ISDSclaim

5

HANSEL? JERRY?

ISDS: Multiple Reflective Loss Claims – Related Entities

DONNADomestic and foreign

non-coveredshareholders

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder

FRANKForeign covered

shareholder

alleged harm

GRETELIndirect covered

shareholder

ISDSclaim

ISDSclaim

6

HANSEL? JERRY?

DONNADomestic and foreign

non-coveredshareholders (20%)

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

alleged harm

GRETELIndirect covered

shareholder (100%)HANSEL?

ISDSclaim

7

JERRY?

ISDS: Potential Claims 1

DONNADomestic and foreign

non-coveredshareholders (20%)

GovernmentABLE

Domestic operating company

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

BAKERCreditors of ABLE

alleged harm

GRETELIndirect covered

shareholder (100%)HANSEL?

ISDSclaim

8

JERRY?

Claim under contract or domestic law

ISDS: Potential Claims 2

DONNADomestic and foreign

non-coveredshareholders (20%)

GovernmentABLE

Domestic operating company

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

BAKERCreditors of ABLE

alleged harm

GRETELIndirect covered

shareholder (100%)HANSEL?

ISDSclaim

9

JERRY?

ISDSclaim

ISDS: Potential Claims 3

ISDS: Treaty Shopping Using Attribution of Reflective Loss Claim(s)

Non-covered Shareholders

20%

ALPHAOperating company

Creditors

EPSILON80% - covered Nationality: E

E-G Treaty

alleged harm

KAPPA100% - coveredNationality: K

K-G Treaty

DELTA100% - coveredNationality: DD-G Treaty

KAPPA has several

choices for shopping

Government

Creditors

10

ISDS: Forum Shopping Using Attribution of Reflective Loss Claim(s)

11

Non-covered Shareholders

20%

ALPHAOperating company

Creditors

EPSILON80% - covered

E-G TreatyPCA

alleged harm

KAPPA100% - covered

K-G TreatyICSID

DELTA100% - covered

D-G TreatyAI-SCC

KAPPA has several

choices for shopping

Government

Creditors

ISDS: Minority Shareholder in Large Domestic Company

Domestic non-covered

shareholders (91%)

Large domestic company;Eg. market

capitalisation USD 100 billion

Covered financial investor, e.g. hedge

fund (9%)

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Government Creditorsalleged harm

ISDSclaim

Domestic Law: “No Reflective Loss” principle bars shareholder claims for reflective loss

Creditors Government

Direct Shareholder Entity

Operating company

sole permissible claimant

claim

alleged harm

No Reflective loss claims by shareholders

Indirect Shareholder Indirect

shareholder Indirect

shareholder

13

Corporate finance: repayment rank order

• Secured debt

• Unsecured debt

• Subordinated debt

• Preference shares

• Ordinary shares (common equity)

* Source: Prof. Eilís Ferran, “Reflective loss”, presentation at the OECD, 16 October 2013.

Domestic Law: Who is Protected? – All Investors

Creditors Government

Direct Shareholder Entity

Operating company

sole permissible claimant

claim

alleged harm

No Reflective loss claims by shareholders

Indirect Shareholder Indirect

shareholder Indirect

shareholder

15

ISDS Reflective Loss Claim: Who is Protected?*

DONNADomestic and foreign

non-coveredshareholders

ABLEDomestic operating

company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder

FRANKForeign covered

shareholder

GRETELIndirect covered

shareholder

ISDSclaim

16

HANSEL? JERRY?

* Note: This slide and the next slide have been corrected from the versions discussed at the side meeting. Frank’s treaty coverage, which was inadvertently omitted, has been restored.Frank is not protected by the claim by Chelsea. It may bring its own ISDS claim if its individual loss is significant; this would generate multiple claims for the government and high costswhile still leaving investors unprotected. Only a company claim protects all investors. On the categories of excluded and potential claimants for reflective loss in ISDS and claimincentives, see Gaukrodger (2013b), pp. 47-48, http://dx.doi.org/10.1787/5k3w9t44mt0v-en.

Government

alleged harm

ISDS Reflective Loss Claim: Who is not Protected?

DONNADomestic and foreign

non-coveredshareholders

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder

FRANKForeign covered

shareholder

alleged harm

GRETELIndirect covered

shareholder

ISDSclaim

17

HANSEL? JERRY?

ISDS: NAFTA-style Derivative Claim

$$

DONNADomestic and foreign

non-coveredshareholders (20%)

GovernmentABLE

Domestic operating company

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

1. alleged harm

3. if claim successful, damages payable only

to ABLE (company)

2. derivative ISDS claim on behalf of ABLE;

requires waiver of other recourse by CHELSEA

and ABLE

18

GRETELIndirect covered

shareholder (100%)HANSEL? JERRY?

ISDS: Deemed Foreign Company Claim

19

$$

DONNADomestic and foreign

non-coveredshareholders (20%)

Government

ABLEDeemed foreign for ISDS due to foreign

covered control

BAKERCreditors of ABLE

CHELSEAForeign covered

shareholder (60%)

FRANKForeign covered

shareholder(20%)

1. alleged harm

3. if claim successful, damages payable only

to ABLE (company)

2. ISDS claim

GRETELIndirect covered

shareholder (100%)HANSEL? JERRY?

Links

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Gaukrodger, D. (2013), “Investment Treaties as Corporate Law: Shareholder Claims and Issues of Consistency”, OECD Working Papers on International Investment, 2013/03. http://dx.doi.org/10.1787/5k3w9t44mt0v-en.

Gaukrodger, D. (2014a), “Investment Treaties and Shareholder Claims for Reflective Loss: Insights from Advanced Systems of Corporate Law”, OECD Working Papers on International Investment, 2014/02. http://dx.doi.org/10.1787/5jz0xvgngmr3-en.

Gaukrodger, D. (2014b), “Investment Treaties and Shareholder Claims: Analysis of Treaty Practice”, OECD Working Papers on International Investment, 2014/03. http://dx.doi.org/10.1787/5jxvk6shpvs4-en.

OECD (2016), “The impact of investment treaties on companies, shareholders and creditors”, OECD Business and Finance Outlook 2016, Chapter 8. http://oe.cd/1Zv.

OECD (2018), Treaty Shopping and Tools for Reform, Investment Treaty Conference materials, pp. 11-15, figs. 1-3. http://oe.cd/TS-analysis.

UNCITRAL (2019), “Possible reform of investor-State dispute settlement (ISDS): Shareholder claims and reflective loss. Note by the Secretariat”, A/CN.9/WG.III/WP.170, 9 August 2019. https://undocs.org/en/A/CN.9/WG.III/WP.170.

Arato, J. et al (2019), “Reforming Shareholder Claims in ISDS”, Academic Forum on ISDS Working Paper 2019/9.http://bit.ly/ISDS_AF_SRL_2019

Contact

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For questions or comments regarding this presentation, please contact david.gaukrodger@oecd.org.