In a previous article (see A. Frey, Investment Treaty Arbitration: How Multinational Food and Beverage Companies Can Avoid Litigation in Foreign Courts), we explained how a U.S.-based company that had established a subsidiary abroad could benefit from protections against unfair conduct of a foreign State that are found in most bilateral investment treaties (“BITs”), including the right to arbitrate disputes in a neutral forum rather than in foreign court systems.

The U.S. alone is a party to more than 40 different investment treaties, all of which offer robust protection against unfair treatment by a host State. Similar treaties exist between other countries, and there are over 2300 BITs in force today.¹ While each treaty is different and terms vary, most BITs protect foreign investors with substantive legal obligations that a host State must respect. The key to an investor benefitting from these protections is ensuring that the investor and its investments are covered by an enforceable investment treaty.

While many BITs are in force today, there are notable gaps in investment protection coverage. For example, several countries – including Spain, Vietnam, the Russian Federation, India, France, Venezuela and others – do not have a BIT in force with the U.S.

Nevertheless, it would be wrong for a U.S. investor to believe that it cannot enjoy the protection of a BIT simply because its investment was based in a country that is not a party to a BIT with the U.S. This is because international law permits an investor to structure its investments to take advantage of protections in a treaty before a dispute with a foreign state arises.²

Just as a company may decide to operate through a subsidiary for tax or other reasons, investment treaty “planning” is often employed by multinational companies in structuring (or restructuring) investments to take advantage of protections afforded by a bilateral or multilateral investment treaty, and investment treaty tribunals have acknowledged and approved that type of planning.

For example, a U.S.-based company operating in Spain may wish to establish a subsidiary in a country like Panama, which has had a BIT in force with Spain since 1997. The U.S. company could structure its investment in Spain through a Panamanian vehicle prior to beginning operations in Spain, or it could restructure an existing Spanish investment by inserting a Panamanian investment company into the corporate chain as a parent of the Spanish investment. This practice, which is sometimes pejoratively referred to as “treaty shopping,” is neither unlawful nor improper.

However, international arbitration tribunals have rejected claims in cases where an investor restructured its investment holding after a dispute with the host State had clearly arisen. This means that treaty planning is permissible for general purposes, either at the outset or during the course of operations, but is not allowed as a reaction to a specific disagreement with a host State.

More specifically, tribunals have found that an investor cannot restructure for treaty protection once a dispute with the host State has “crystallized” or once a specific dispute has become foreseeable. For example, in the much publicized case of Philip Morris v. Australia, the tribunal found that Philip Morris’ restructuring was abusive since it occurred after Australia formally announced its intention to implement plain-packaging regulatory requirements that are widely viewed as potentially harmful to the tobacco industry.³ Had Philip Morris structured its Australian investments to gain protection of a treaty prior to Australia indicating an intention to enact the legislation, the outcome may have been different.

Tribunals generally consider the specific facts of each case to determine whether an untimely restructuring was justified or abusive. In particular, tribunals have considered whether other corporate interests—such as shareholder motivations, tax benefits, or other regulatory motivations—justified the restructuring. Tribunals also consider whether an investor notified the host State of the restructuring and whether the holding company injected additional capital into the investment after the restructuring, and tribunals tend to be mindful of the fact that the restructuring processes may take several months to complete (and thus a dispute may arise unexpectedly, before the restructuring is final).

In sum, if a company wishes to ensure that its investments are protected by an investment treaty, it should not wait for a potential dispute to arise before restructuring. A prudent investor would take stock of whether its existing business operations are covered by operative treaties and consider restructuring to obtain protection for any operations that are not, as part of the normal course of business.

King & Spalding’s international arbitration attorneys are available to advise on the existing structure of any multinational investments, as well as to assist in treaty planning for those who wish to ensure that their foreign business operations are fully protected.