Foreign Investors Should Consider Treaty Protections When Structuring Their Investments Abroad

• Jurisdiction: United States,Federal
• Citation: Vol. 1 No. 1
• Publication year: 2024

[Page 33]

Michael G. Jacobson, Maria A. Arboleda, and Orlando F. Cabrera C. ^*

In this article, the authors explain why it is important for investors seeking to invest abroad to consider treaty protections.

Investors seeking to invest abroad—including investment funds—should safeguard and strengthen their investments by considering treaty protections. Investment treaties can provide foreign investors access to substantive protections under international law. Many investment treaties provide neutral forums to resolve potential disputes through investor-state dispute settlement (ISDS). These arbitral tribunals have the power to issue monetary damages awards to compensate foreign investors that are harmed by their host governments in a manner that breaches the treaty. When structuring investments abroad, investors should understand the requirements for treaty protections and structure their investments accordingly.

Several tribunals, including recent tribunals in Elliott Associates v. South Korea and Gramercy v. Peru, have held that nationality planning, including for investment funds, is not an abuse of process or a bar to jurisdiction. ¹ Nationality planning consists of channeling investments through a country other than the investor's home state for tax, corporate, or other purposes. Reasonable nationality planning can include protecting investments through states that have investment treaties in place with the host state. Investors can structure their investments at the outset or can restructure their investments at a later time and secure treaty protections. Most importantly, investors should keep in mind the timing of the purported investment, the timing of the claim or dispute, the substance of the transaction, the true nature of the operation, and

[Page 34]

the degree of foreseeability of the governmental dispute at the time of restructuring. ²

This is an issue of critical importance for investors, including in particular investors in the North American Region. On July 1, 2023, the opportunity to bring claims under the North American Free Trade Agreement (NAFTA) through the legacy claims clause of the United States-Mexico-Canada Agreement (USMCA) expired.

The USMCA has much weaker protections for foreign investors in North America than its predecessor agreement, NAFTA. The USMCA contains a limited bilateral ISDS clause between the U.S. and Mexico. ³ Canada is outside the scope of USMCA's ISDS mechanism. ⁴ The USMCA provides comprehensive ISDS protections for covered government contracts and lesser protection for other types of contracts and investments. ⁵ Thus, U.S., Canadian, and Mexican investors in the North American region should carefully reassess their investments, and consider restructuring them now if they want to ensure investment treaty protections.

While treaty protection requirements may vary depending on the treaty at issue, there are some principles every prudent investor should consider: who intends to qualify for protection, and the limits of corporate restructuring for this purpose.

What Are Investment Treaties and Who Qualifies for Protection?

Investment treaties protect investors of one treaty party (or the home state) when investing in the other treaty party's territory (or the host state). Most investment treaties grant investors and their investments certain protections under international law from harm caused by the host state, including, for example:

■ Fair and equitable treatment by the host state's government, such as protection of investors' legitimate expectations of a predictable and stable economic environment, ensuring due process, and preventing arbitrary and discriminatory conduct;
■ Protection from direct and indirect expropriation, nationalization, and similar conduct;
■ Non-discrimination when compared to host country investors and third-country investors and their investments; and

[Page 35]

■ In some treaties, the host state's adherence to commitments and undertakings concerning investments and investors, often in the form of contracts with foreign investors.

Many investment treaties provide protections to a broad category of foreign investors, including individuals who are nationals of a home state and companies with the nationality of the home state. Investment treaties usually determine a company's nationality by its place of incorporation, and also sometimes through its principal place of business activities, place of corporate seat, and/or place of control. It is important to assess each investment treaty to ensure the scope of protections.

Funds Have Successfully Structured Foreign Investments and Received Compensation Under Investment Treaties

Funds' structures can be a dispositive factor when tribunals consider jurisdiction because treaty protection typically depends on the nationality of the investor, the investor's control, and the nature of the investment in the host state. Multiple funds have...