Following the re-election of President Robert Mugabe, the Zimbabwe Government is now reported to be pushing forward with its policy of “indigenization” of the country’s economy, which consists of ensuring that indigenous Zimbabwean investors hold not less than 51% or a controlling interest of the shares in companies operating in Zimbabwe. This may involve a sale or other transfer of shares by foreign investors, who agree to a disposal to indigenous Zimbabwean investors due to the risk of losing their operating licenses should they refuse.
In addition the Government plans to establish an alternative, racially exclusive stock exchange where shares may only be held by indigenous Zimbabweans. There is as yet no legislation in place for such a structure and it is not clear how it would work. Although the indigenization program was started by the Government some 6 years ago, it is understood to be acquiring a new political impetus now, following the results of the elections of 31 July 2013. However, a substantial progress in the indigenization program will only be possible if the indigenous investors are not required to pay full compensation for shares they acquire.
The practical result of the “indigenization” for foreign investors will be a disposal of part of their shareholdings in their Zimbabwean investments and the likely decrease in value of the remaining minority stake. In light of these developments, investors who are likely to be affected by the measures should consider whether their investments in Zimbabwe are or can be adequately protected under a bilateral investment treaty ("BIT").
The BITs envisage international law levels of protection for foreign investors, including protection against expropriation or discriminatory treatment. In addition, they provide for access to international arbitration for resolution of any disputes concerning the investment.
In practical terms, the BITs allow foreign investors to obtain compensation for detriments suffered due to state actions, even if the latter are in conformity with domestic laws.
Zimbabwe has signed 30 BITs, but only the treaties with the 6 following countries were ratified and are in force: China, Denmark, Germany, Netherlands, Serbia and Switzerland. Importantly, Zimbabwe is also party to the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID"), which establishes a legal and institutional framework for the resolution of investor-state disputes. Consequently, foreign investors who qualify under one of the aforementioned BITs could potentially be able to avail themselves of the investment protections and to seek compensation for the loss of shares in their Zimbabwean subsidiaries.
The low number of treaties ratified by Zimbabwe may be offset by the fact that the BITs allow investors from third countries to structure their investments so as to obtain investment treaty protection. For example, the Zimbabwe-Netherlands BIT is applicable not only to investments made by Dutch companies, but also to those made by companies controlled, directly or indirectly, by a Dutch entity. Accordingly, it may be advisable to establish a Dutch intermediary and add it into the corporate structure of the investment to gain access to the protections guaranteed in the BIT. The same possibility is available under the Zimbabwe-Switzerland BIT.
Such corporate restructuring, or nationality planning, for BIT-purposes is becoming a frequent business practice all across the world. It is particularly relevant for businesses operating in countries of high political risk, low legal security and which have a limited number of BITs in force, like Zimbabwe.
The decisions of arbitral tribunals deciding investor-state disputes confirm that corporate restructuring can serve as a valid and effective legal tool for foreign investors. The only prerequisite is that the new corporate structure must be established before a dispute has arisen, i.e. before the state adopts measures that adversely affect the investment. Any restructuring after this date may be considered abusive forum-shopping and the investor may be precluded from invoking the BIT provisions.
Given the present situation in Zimbabwe, adequate advice and planning should be considered at this time to ensure that a crisis is avoided which may impact on a substantial part of an investor’s shareholding. It must be added that such restructuring may be coupled with tax optimization, providing even broader benefits for the investors.
Should you have any questions regarding the described situation in Zimbabwe or the possibilities for restructuring your business operations in the BIT context, please do not hesitate to contact us.
According to UNCTAD Database, available at: http://unctad.org/Sections/dite_pcbb/docs/bits_zimbabwe.pdf