Training Course for Economies in Transition on a New Generation of International Investment Policies Sarajevo, 1-4 October 2013 Definition of investment, admission and establishment Jeff Sullivan - Allen & Overy LLP Allen & Overy 2012 1
Agenda 1. Introduction and context 2. Definition of investment 3. Definition of investor 4. Admission and establishment Allen & Overy 2012 2
Introduction Allen & Overy 2012 3
Introduction IIAs potentially expose States to international legal proceedings and significant financial liabilities Traditional BITs of the 1990s contained broad definitions and may be considered more favourable to investors Influence of previous arbitral decisions some interpretations not expected by States at time IIAs signed Individual treaty text is paramount Capacity-building is essential Allen & Overy 2012 4
Investor and Investment Defined terms in IIAs Key provisions is setting the scope of the IIA Must be a covered Investor with a covered Investment Consider the purpose of the IIA Host State development Attract of foreign investment Should ALL investments be covered? Several ways to narrow the scope of coverage by choosing specific language There is no perfect definition it will depend on the State s policies and preferences Allen & Overy 2012 5
Definition of Investment Allen & Overy 2012 6
Definition of investment Economic definition: Investment is the expenditure of capital in the expectation of future economic benefit No standard definition, but majority of treaties contain a broad asset-based definition of investments such as: The term investment means every kind of asset invested by investors of one Party in accordance with the laws and regulations of the other Party in the territory of the latter, and particularly, though not exclusively, includes: - movable and immovable property and any other property rights; - shares in companies and debt instruments; - claims to money or to any performance under contract having a financial value - intellectual property rights; and - rights conferred by law or contract Allen & Overy 2012 7
Potential problems with asset-based definition Extremely broad - the list is not exhaustive May encroach on right to regulate (e.g., intellectual property rights) May cover ordinary commercial transactions Contract for the the sale of goods May cover portfolio or passive investments Limited or no contribution to host State development May cover direct and indirect investments Treaty shopping May cover short-term investments or investments with no risk Allen & Overy 2012 8
Policy options 1. Use broad asset-based definition 2. Specifically exclude certain types of assets: Portfolio investment Commercial contracts (ordinary sales and services contracts) Government bonds Non-business assets Intellectual property rights not recognised by local law 3. Require investment to have certain characteristics: Commitment of capital, assumption of risk, expectation of gain/profit Investments must be made for purposes of long term economic relations Investments must be made in accordance with host State laws Allen & Overy 2012 9
Policy options (continued) 4. Place limitations on temporal scope of treaty Protection of investments made only after the treaty s entry into force Protection of investments made both prior to and after the entry into force, but with a limitation: This Agreement applies to investments made before or after its entry into force, but not to claims or disputes arising out of events which occurred prior to that date. 5. Place limitations on policy areas or industry sectors For example, treaty does not apply to taxation, grants or subsidies, public procurement, etc. For example, treaty does not apply to fisheries, nuclear energy, cultural industries, etc. Allen & Overy 2012 10
Closed-list definition Some BITs adopt a closed-list definition: Investment means the following assets invested in the territory of a Contracting Party in accordance with its laws and regulations: [list of assets covered] but investment does not mean [list of assets excluded] Allen & Overy 2012 11
Special characteristics US Model BIT (2012) investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and (h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges. Allen & Overy 2012 12
In accordance with local law requirement Illegal investment are deprived of treaty protection. Examples: Fraport v. The Philippines (2007) circumvention of local law requirements Plama v. Bulgaria (2008) fraud World Duty Free v. Kenya corruption Allen & Overy 2012 13
Definition of Investor Allen & Overy 2012 14
Definition of investor Definition of investor is closely tied to concepts of nationality and is crucial in determining the scope of treaty protection Investor is typically defined to include: Natural persons Legal entities Allen & Overy 2012 15
Natural persons Typical definition: physical persons who, according to the law of that Contracting Party, are considered to be its nationals What law governs nationality? Host State law governs nationality But customary international law may ignore national law and require genuine link or look to dominant and effective nationality Most IIAs do not require genuine link Although some require nationality AND permanent residence Dual nationals? Some treaties now require dominant and effective nationality Allen & Overy 2012 16
Legal entities Types of entities covered by the definition may vary Those with legal personality only Non-profit entities Government owned entities (SWFs) Allen & Overy 2012 17
Legal entities (continued) Nationality of the legal entity Majority of IIAs refer to place of incorporation: any entity constituted or organized under the law of the Contracting Party Advantage: ease of application Disadvantage: mail-box company, treaty shopping Other BITs require a more substantive link Seat or headquarters Ownership or control by natural persons who are nationals Real economic activities Allen & Overy 2012 18
Treaty shopping Investment by an investor from a non-contracting Party through an intermediate company established in the Contracting Party Investment by an investor from the host State through an intermediate company established in the Contracting Party Possible solutions: Requirement of seat and/or real economic activities Denial-of-benefits clauses Allen & Overy 2012 19
Policy options 1. Include all natural persons and all legal entities 2. Exclude certain categories of natural persons or legal entities: Natural persons with dual nationality Natural persons permanently residing in the host State Legal entities that do not have their seat or other economic activities in the home State 3. Include a denial of benefits clause Allen & Overy 2012 20
Denial-of-benefits clauses A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-party, or of the denying Party, own or control the enterprise. Two elements of the test: substantial business activities where does the company s owner/controller come from? Allen & Overy 2012 21
Admission and Establishment Allen & Overy 2012 22
Admission and Establishment Admission and establishment = market access General international law entry of aliens is in the discretion of States Entry regulations for FDI are common: Closing certain sectors for foreigners completely Restrictions for foreign ownership in certain industries Restricted admission to privatization Screening/authorization of foreign investments When do treaty protections begin to apply? Post-establishment Pre-establishment Allen & Overy 2012 23
Post-establishment Most European BITs Typical formulation: Each Contracting Party shall admit investments by investors of the other Contracting Party in accordance with its laws and regulations. Allen & Overy 2012 24
Pre-establishment treaty example Canada-Peru FTA of 2009: Article 803: National Treatment Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory Allen & Overy 2012 25
Policy options 1. Post-establishment Limited to compliance with domestic law 2. Pre-establishment Consider excluding certain sectors or sub-sectors Consider excluding existing non-conforming measures Allen & Overy 2012 26
Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Allen & Overy 2012 27 Definition of investment.ppt