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EMTA Special Seminar: Recent Developments in Emerging Markets Arbitrations (London) - Feb. 23

EMTA SPECIAL SEMINAR: RECENT DEVELOPMENTS IN EMERGING MARKETS ARBITRATIONS
Thursday, February 23, 2017

Hosted by 

allen & overy 

One Bishops Square
London E1 6AD 

 

This EMTA Special Seminar is aimed at both EM investors and legal advisors, and will provide analysis and commentary on how arbitration affects investments in the Emerging Markets. 

Specific topics to be addressed will include: 

11:30 a.m. Registration

12:00 noon – 1:30 p.m. Panel Discussion 

Jeffrey Sullivan (Allen & Overy) – Moderator
Mark McNeill (Shearman & Sterling)
Peter Griffin (Slaney Advisors) 

Support provided by Allen & Overy and Shearman & Sterling.


This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.

*CLE credit will be available for NY attorneys.  This seminar is non-transitional and appropriate for experienced attorneys only.  Please click here for details on EMTA’s Financial Hardship Policy.

Registration fee for EMTA Members US$95 / US$695 for non-members. 


London Welcomes Second EM Arbitration Panel

The Second Annual Panel on EM Arbitrations was held on February 23, 2017 at the London offices of Allen & Overy. Jeffrey Sullivan (Allen & Overy) moderated the panel, with the following panelists: Mark McNeill (Shearman & Sterling) and Peter Griffin (Slaney Advisors). The event was supported by Allen & Overy and Shearman & Sterling.

McNeill observed that foreign investors often structure their investments with tax efficiencies in mind (e.g., historically, many investments into India have been made through Mauritian entities for this reason), or with an eye towards the later disposal of the investment (e.g., alienating shares in a Hong Kong holding company is generally easier than seeking government approvals to sell the underlying investment in China). Less frequently, however, is attention paid to ensuring that an investment is protected under one or more investment treaties.

There are approximately 3,000 investment treaties in force around the world, including bilateral and multilateral treaties. As McNeill explained, investment treaties provide an investor (either a natural or legal person) with the right to bring a direct action against a State that has caused harm to its investment. This direct right of action was revolutionary in international law, since previously only a State could bring an international claim, and individuals had no direct means of claiming compensation for violations of international law. Furthermore, investment treaties typically contain broad substantive protections, including against unlawful expropriations, unfair or inequitable treatment, discriminatory treatment or prohibitions on the right of an investor to repatriate its investment returns. These protections are often more robust that those available under the domestic legal system of the host State (indeed, the sovereign action that is the subject of a treaty claim may be immune from suit under the domestic law), and broader than the protections that are typically provided under political risk insurance policies.

At the same time, securing investment treaty protections can often be much easier and less costly than purchasing political risk insurance. Indeed, an investor may already be well protected if it benefits from a favorable treaty between its home State and the State in which it is investing. In other instances, it is possible to gain access to a favorable treaty simply by incorporating a holding company in another jurisdiction, without the need to have a business presence in that other State. The Netherlands is a popular jurisdiction in this respect because an investor can often secure the right to bring a claim under a Dutch investment treaty simply by incorporating a holding company in the Netherlands.

Critics often point out (correctly) that investment treaty arbitrations themselves can be lengthy and expensive, and that bringing a claim can risk inviting retribution by the host State government against the investor’s long-term investment. On the other hand, simply having the ability to bring a direct claim against the State can give an investor powerful leverage that can be used to pressure the government to settle a dispute.

It is important to recognize, however, that not all investment treaties are alike in terms of the substantive protections and procedural rights they offer. An investor’s claim may be viable under Treaty A, but time-barred under Treaty B. Treaty A may require the investor to litigate the dispute in the courts of the host State for 18 months as a prerequisite to bringing a treaty claim, whereas Treaty B may preclude any dispute that has been previously litigated. If the investor is concerned, for example, that the host government may subject its investment to excessive fiscal measures, the investor should ensure that the relevant treaty does not preclude claims in respect of taxation (as many treaties do). These are just some of the many examples that illustrate the importance of reading one’s treaty carefully, or perhaps arranging for redundant treaty protections in respect of a particularly important investment. An additional point is
timing. The ideal time to structure an investment to maximize investment treaty protections is at the time the investment is being made. Often tax planning and investment treaty planning are perfectly compatible and do not give rise to either-or dilemmas. However, an existing investment structure can usually be restructured to gain treaty protections at any time up to the point at which an investment dispute has arisen or becomes reasonably foreseeable. After that point in time, an arbitral tribunal will generally dismiss any claim that is submitted on the basis that the investor has artificially and untimely sought to manufacture a jurisdictional basis for its claim.

Finally, there is the question of which participants in a complex investment structure can benefit from the treaty protections; is it only the investor itself, or can other participants, such as debt or equity holders, also bring a claim? The question cannot be answered comprehensively in the time allotted. The quick answer is that the “unity of investment” doctrine often gives standing to bring a claim to secondary parties whose interests are considered essential to the establishment of the original investment.

McNeill also briefly discussed some recent developments in international Investment treaties. In general, investment treaties reached something of a “high water mark” in terms of generous investor protections at the end of the Cold War, followed by a long period of retrenchment in which substantive and procedural protections have been gradually refined, often in response to arbitral decisions interpreting and applying investment treaties. Perhaps the most interesting treaty development for this forum is the collective action provision in Annex 8b of the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which prevents holdouts in a sovereign debt exchange or other similar workout process (in which the holders of no less than 75 percent of the aggregate principal amount of the outstanding debt have consented to the process) from bringing a claim under the investment treaty. It will be interesting to observe whether this becomes the policy of other States as they sign new investment treaties or replace existing ones.

Griffin opened his remarks by claiming that the confluence of arbitration related issues is significant for EM investors and their businesses, regardless of whether they have arbitration clauses in their negotiated documents. The potential development of the secondary market is relevant because Emerging Markets tend to give rise to a disproportionate amount of arbitrations since it is seen as a safe way to litigation. EM arbitration awards are extremely high (e.g., Yukos mega award against Russia, which was subsequently set aside by the higher court) and, as such, have a significant impact on a sovereign’s indebtedness and credit profile. The impact on the sustainability of a sovereign can have catastrophic effects.

Arbitration awards against EM sovereigns are usually not voluntary complaint, whereas before the assumption was that the losing party would pay. A recent research report cited 40% non-compliance that required coercive action. Winning an award is only half the battle, the award must be converted into cash. Thus, an owner of an arbitration award may reasonably decide that it does not want to embark on the time-consuming and expensive enforcement process, but rather it wants to sell all or a portion of its arbitral award. On the buy side of such awards, investors looking at the champerty issue (a law against buying an asset for the purpose of bringing a lawsuit) may not want to buy a claim because of uncertainty in collection, but if the arbitral award is in an amount certain bearing a relatively high rate of interest that investor may be interested. The marketplace between such buyers and sellers is still in its nascent, word-of-mouth stage. Awards are typically sold at an extreme discount to face value, which is inefficient and may have an undesirable effect on the holder of such award and the sovereign. This can be fixed with a securitization model, where a large arbitral award can be transformed into smaller assets (similar to the 1990s large bilateral loans being transformed into tradable Brady bonds).

He also discussed the Repsol case, where Argentina issued bonds to Repsol to satisfy an arbitral award and Repsol sold the bonds to JPM. This scenario is attractive for sovereigns since it eliminates aggressive enforcement actions and attractive to creditors as it eliminates the uncertainty of enforcement, with a quick cash outlay of orderly coupon payments.

He noted that the big development in London this year was the emergence of sovereign arbitration default insurance. “This appetite to insure is a game changer”. It is now possible to procure an insurance policy that will pay within 90 days of a sovereign’s non-payment (excluding Russia, Argentina and Venezuela and some others). The cost is 5-10% of the sovereign award payment, so many insurees obtain insurance on only a portion of the award amount to cover their legal and other expenses. Insurance can be procured after arbitration has started, but before the award is rendered. Insurers participate since they are betting against the awards and forecasting that more lawyers will lose their suits against sovereign than win them.

Litigation funds have had significant success in recent years, while the number of cases has stayed relatively the same. The question of whether it’s advisable to invest in such litigation funds is dependent on whether the fund is suitable for a particular investor, as the funds all have their idiosyncrasies and predilections.

As for Trump and Brexit, Griffin stated that both will likely have significant effects for arbitrations and a massive impact on sovereign States, as they both signify a rejection of international institutions (exhibiting a profound distrust and antipathy) and repudiation of experts.

Sullivan discussed recent developments in EM arbitrations, including those against Russia, Venezuela, France and Romania. He also explored the issue of sovereign immunity, which has two components - immunity from suit, as well as immunity from execution. What assets are used by a sovereign (those used for commercial purposes in the relevant jurisdiction are not immune) and whether the contract contains a waiver of such immunity are also relevant considerations.