Practice Pointer—Planning Ahead for Disaster: Structuring Investments Abroad Through Investment Treaties

Investors seeking to invest abroad should safeguard their investments by considering treaty protections. Investment treaties, also known as Bilateral Investment Treaties (“BITs”) (which are also sometimes part of Free Trade Agreements (“FTA”)), can provide foreign investors access to substantive protections under international law and neutral forums to resolve disputes through arbitration. Arbitral tribunals can issue monetary damages awards to compensate foreign investors harmed by a host government for treaty breaches. This is critical for investors now with the Russia-Ukraine war, which has already triggered investment treaty claims. It is also critical for U.S. investors in Mexico, because the United States-Mexico-Canada Agreement (“USMCA”) which entered into force in 2020 has much weaker protections for U.S investors in Mexico than its predecessor NAFTA, and no investment arbitration rights for U.S. investors in Canada. There are many other hubs for foreign investment around the world that present significant risk to foreign investors, where structuring investments with investment treaty protections in mind is an important way for foreign investors to mitigate risk.

What are Investment Treaties and Who Qualifies for Protection?

Investment treaties protect investors of one treaty party when treaties grant investors and their investments certain protections under international law from harm caused by the government, including: (a) non-discrimination; (b) protection from expropriation; and (c) fair and equitable treatment, comprising for example protecting investors’ legitimate investment-backed expectations, ensuring due process, and preventing arbitrary conduct.

Many companies have successfully structured foreign investments under investment treaties and received monetary compensation for harm.

Companies’ structures can be a dispositive factor when tribunals consider jurisdiction, because treaty protections require that foreign investors have jurisdiction as a national of a qualifying state. Some recent examples involve funds investing abroad and benefitting from lawful nationality planning when the host government harmed those investments.

In Gramercy v. Peru, two U.S. investors brought claims against Peru regarding their Peruvian agrarian bonds. Peru objected to jurisdiction alleging abuse of process based on the investors’ nationality planning. In 2022, the tribunal held that the claimants did not engage in abuse of process, because restructuring an investment to protect from possible future disputes amounted to legitimate investment planning. The tribunal subsequently found that Peru breached its treaty obligations vis-à-vis the investors, and ordered Peru to pay approximately $100 million.

Hedge fund Elliott Associates successfully arbitrated a case against South Korea. Elliott Associates filed for arbitration, alleging that South Korea breached the treaty by facilitating a controversial merger. South Korea argued that the claim should be dismissed, because Elliott Associates allegedly structured its investment to gain treaty protections at a time when the dispute was foreseeable. In 2023, the tribunal in its award rejected South Korea’s argument, because Elliott Associates was unaware of South Korea’s intended interference in the merger when Elliott Associates acquired additional shares to prepare for a potential proxy fight as a minority shareholder. The tribunal held that South Korea breached the treaty and ordered South Korea to pay $108.5 million.

In Carlyle v. Morocco, Carlyle Group brought investment treaty claims against Morocco for treaty breaches related to the disposition of crude oil owned by the Carlyle’s investment vehicles. Morocco challenged the tribunal’s jurisdiction arguing that the investors lacked standing because they made their investments through Cayman-registered special purpose vehicles. According to public reports, in 2022, the Carlyle Group and Morocco negotiated an agreement leading to the dispute’s discontinuance and Morocco agreeing to pay $14 million to the Carlyle Group.

When is Corporate Restructuring Impermissible?

Investment treaty tribunals have imposed some limitations on the types of permissible investment restructurings. Therefore, investors should structure their investments with investment treaty considerations at the outset, or at minimum before any harm incurred at the hands of the host state.

However, restructuring at a later time is also possible, depending on the timing and nature of the host government’s harmful acts. But tribunals differ in their approach to late-stage restructurings. For example, in the 2015 landmark case Philip Morris International (PMI) v. Australia, the tribunal held that it had no jurisdiction to decide the claim, because PMI engaged in an abuse of process by changing its corporate structure when it foresaw that the government was going to pass a law which led to the dispute. Thus, investors should evaluate and adjust their corporate structure before a dispute is reasonably foreseeable.

In sum, planning the corporate structure of foreign investments with an eye towards treaty protections is a critical step to plan ahead for possible disasters. If foreign investors ensure treaty protections are in place as early as possible, it will maximize those protections.