Some managed investment funds may not be able to seek protection under bilateral investment treaties when investing abroad, according to a recent award rendered in an investment treaty arbitration between a various Spanish investment funds and the Russian Federation (Renta 4 S.V.S.A v Russian Federation). The arbitration was commenced under the Agreement for Reciprocal Promotion and Protection of Investments between Spain and the USSR (Spain-Russia BIT) and concerned a dispute arising in the wake of the dispossession of assets owned by Yukos Oil Company by the Russian Government in 2004. The tribunal dismissed the investment funds' claim for compensation on the basis that they were not "investors" in accordance with the definition under that treaty.
Investment treaty protection
Investment treaties can provide investors with an additional level of protection against government actions, especially in times of economic doom and gloom when governments often act with a view to protecting their domestic economy. The most common standards of protection available under BITs include:
- fair and equitable treatment of the investment;
- most favoured nation treatment, ie. the investor or investment is treated at least as favourable as investors or investments from third countries; and
- national treatment, ie. the foreign investor or investment is accorded the same treatment as the State's own investments or investors.
If the host State in which the investment is made fails to comply with an applicable standards, the investor may pursue a claim directly against the State. Typically an aggrieved investor will bring a claim against a State through an investor-State arbitration, often under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) or another international arbitral institution.
In Renta 4 S.V.S.A v Russian Federation seven Spanish investors claimed damages against Russia for losses arising from the takeover of the Yukos Oil Company in 2004. Three of the seven claimants were managed investment funds. In the proceedings Russia argued that the two investment funds (Eurofondo and Emergentes) were not "corporate bodies" but collective investment funds under Spanish law without legal personality, and as such would not qualify as "investors" within the definition under the Spain-Russia BIT. Article 1 of the Spain-Russia BIT defines an "investor" as any individual who is a national of either State, or a corporate body domiciled in either State.
Two of the claimants were investment funds which operated under a particular tripartite structure available for investment funds under Spanish law. Each of the funds was managed by a company which is capable of bringing claims in relation to the assets of the investment. The assets are held by a depository as custodian, who conducts the purchases and sales of the assets.
This particular structure resulted in the investment fund itself being without any legal personality. Eurofondo and Emergentes argued that it was proper for them to be put forward as claimants through the initiative of their management company (which was not a party to the proceedings) and thus to join the attributes of ownership and legal personality.
However, the tribunal decided that it was improper to apply a somewhat metaphysical notion of "joined attributes" to overcome the particular wording of the Spain-Russia BIT which requires the existence of a body corporate. Although one may only speculate whether the restrictive wording used in the definition of "investor" was intended or not, the effect was that because of the particular structure used for the investment funds they did not qualify as "investors". Consequently, their investment in the Yukos Oil Company was not protected under the Spain-Russia BIT against the alleged appropriation by the Russian Government.
With respect to another claimant, also an investment fund (Renta 4 S.V.S.A.), the tribunal held that it did not qualify as an investor as it held the investment, in form of American Depository Receipts (ADR) in Yukos, as custodian for another investment fund, again due to the particular tripartite structure available under Spanish law.
Consequences of the decision
The decision serves as a timely reminder for managed investment funds that it is key to the protection of their foreign investments that the investment (and the investment vehicle) is structured in a way to maximise the protection that is available under bilateral or multilateral investment treaties. This is particularly important for investments made in politically unpredictable states or regions which are economically unstable, where there is a real risk of the government seizing assets or taking control of the investment.
While arbitral awards such as this one are not binding precedent, they are still persuasive and may be used by states seeking to avoid their treaty obligations.
The definition of what comprises an "investment" varies between the different investment treaties. The same applies for the definition of an "investor" which can be as narrow as in the Spain-Russia BIT or as broad as, for example, in the Hong Kong-Australia BIT, which defines investor as being "corporations, partnerships, associations, trusts or other legally recognised entities incorporated or constituted or otherwise duly organised under the law".
Therefore, when setting up a managed investment fund one should consider (amongst other things):
- What are the relevant investment treaties under which the investment fund may potentially seek protection for its investments;
- Is it better to establish the investment fund at some other place to receive better protection under different BITs; and
- What are the requirements under the relevant investment treaties to qualify as an "investor" and as an "investment" and does the structure of the investment fund satisfy these requirements?