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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
2
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%)
12
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
20
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