Derivative Actions and Indirect Claims

1. Nationality and Investment Treaty Claims London, Friday May 6, 2005 Derivative Actions and Indirect Claims Robert Wisner Appleton & Associates International Lawyers rwisner@appletonlaw.com

2. Standing Under Investment Treaties • What is necessary link between Claimant and investment? • Claims are not limited to direct interference by host state with assets owned directly by the Claimant

3. Standing Under Investment Treaties • US Model BIT: “investment” means every asset that an investor owns or controls, directly or indirectly, … • Investment protections extend to subsidiaries incorporated in host state

4. A. Derivative Actions • NAFTA distinguishes between direct and derivative investor claims • Article 1116 • Claim by an Investor of a Party on its Own Behalf • Article 1117 • Claim by an Investor of a Party on Behalf of an Enterprise

5. Direct v. Derivative CLAIMS –A Distinction Without a Difference? • Pope & Talbot v. Canada: • Claim for discrimination against Canadian enterprise 100% owned by U.S. investor • Claim under Article 1116 for loss or damage includes lost profits of enterprise and not just direct interference with shares • GAMI v. Mexico reached the same conclusion

6. Direct v. Derivative Claims –A Distinction Without a Difference? • Mondev v. USA: • Recovery for claim that should have been brought under Article 1117 should not be paid directly to investor but to its investment • Solution is to allow amendment from Article 1116 to Article 1117 rather than new proceedings “where mere procedural defect involved”

7. Standing of Investors Under BITs • Lack of express references to derivative claims has never been an obstacle • AAPL v. Sri Lanka • First BIT case • Value of shareholding is reduced by damages to local company’s assets • Damages limited to value of shares, not value of assets

8. Minority Shareholders Have Standing to Bring Derivative Claims Claimant Others • Argentina decisions repeatedly confirm standing to bring claims for wrongs to enterprise (Lanco, CMS, Enron I) +50% -50% Local Enterprise

9. Is there A Cut Off Point For Minority Shareholders? Enron I • Enron’s participation was specifically sought by Argentina, so remoteness issue did not arise Enron 50% Local 55% Local

10. Is There A Cut Off Point For Minority Shareholders? PSEG • Minority shareholders cannot claim with majority shareholders and local companies • What if PSEG and the local company did not claim? Claimant (PSEG) Claimant (NACC) 25% majority Claimant (Local)

11. B. Indirect Claims Claimant • Waste Management v. Mexico II – No intention to exclude investors who invest through holding companies incorporated in non-NAFTA countries 3rd Country Local Enterprise

12. Indirect Claims – Cont. • Consistent with decisions of Iran US Claims Tribunal (Pomeroy, R. J. Reynolds) • Issue led to dissenting opinion in Sedelmeyer v. Russia • Treaty language allows indirect claims, but thereby creates potential for multiple claims (Lauder, CME)

13. Indirect Control Does Not Require Ownership – S.D. Myers, Inc. v. Canada Myers Family control Myers Canada Claimant Operations in Canada

14. No Ownership or Control - Lesi – DIpenta v. Algeria • Without valid assignment, Claimant had no standing as there was no ownership or control of the investment LESI DIPENTA Contract Ownership Claimant ALGERIA

15. Summary • Tribunals have adopted a broad and flexible approach to standing issues • Future cases may impose limits on minority shareholder claims