International Restructuring Newswire
This issue looks at restructuring changes across The Netherlands, Canada, Australia and the UK, and an article on revisions to India’s bankruptcy laws.
One of the many questions raised by the UK’s pending withdrawal from the European Union is what impact Brexit may have on protections afforded to foreign direct investments in the UK and overseas through bilateral investment treaties (BITs) and, importantly, the availability of investor-state arbitration. We consider Brexit’s impact on BITs between the UK and (i) non-EU countries (extra-EU BITs); and (ii) EU countries (intra-EU BITs). Each give rise to different considerations, however, we suggest that ultimately Brexit may improve the UK’s ability to attract companies to structure their investments in the UK so as to take advantage of the UK’s BIT regime.
The UK is a signatory to more than 100 BITs with other countries around the world plus some 55 treaties containing investment provisions. These contain reciprocal undertakings that promote and protect private foreign direct investments made by UK investors overseas and by overseas investors within the UK. They impose obligations on the host state (i.e. the state in which the investment is made) to ensure that foreign investors have certain guarantees as to the treatment of their investment such as: fair and equitable treatment; treatment no less favorable than that provided to investors under other treaties; free transfer of funds without restrictions; and compensation in the event of unjustified expropriation. Typically, they also provide a mechanism for resolving disputes through international arbitration.
Following the entry into force of the Lisbon Treaty in 2009, the EU assumed exclusive competence over certain areas, including foreign direct investment as part of the EU’s “Common Commercial Policy”. Where power is exclusively conferred upon the EU, EU Member States (including the UK) are no longer entitled to negotiate and conclude BITs in respect such matters without the EU’s approval. Moreover, acting alone, the EU may enter into agreements without requiring individual EU Member State ratification. By contrast, where powers remain exclusively with EU Member States or are shared with the EU rather than exclusively conferred upon either, the EU cannot act alone in respect of those powers.
Until recently, the legal position as to the scope of the EU’s powers in respect of trade and investment was not clear cut. The question of the EU’s powers in these respects came before the Court of Justice of the EU (CJEU), having been referred in the context of the EU’s competence to conclude the EU-Singapore Free Trade Agreement (EUSFTA). EUSFTA is a “new generation” free trade agreement in that it extends beyond matters of customs duties and of non-tariff barriers in the area of trade in goods and services, to address other matters of trade including direct and indirect foreign investment (amongst others). The European Council and most EU Member States asserted that some provisions in EUSFTA concern matters outside the EU’s exclusive competence. The EUSFTA is viewed as a test case for other new generation free trade agreements.
The first indicator of the direction the CJEU might take was the opinion of Advocate-General Sharpston on EUSFTA who advised that the EU does not have exclusive competence over all matters in EUSFTA. Advocate-General opinions are not binding on the CJEU but are often followed. On 16 May 2017, the CJEU published its own opinion (opinion 2/15) concluding that whilst most of EUSFTA falls within EU exclusive competence (including foreign direct investment), two provisions, namely, non-direct foreign investment (i.e. “portfolio” investments made without any intention to influence the management and control of an undertaking) and the investor-state dispute resolution regime (ISDS), are within a shared competence. The CJEU stated that EUSFTA cannot be entered into by the EU acting alone; full EU Member State approval is needed (i.e. approval from all 38 EU national and regional parliaments).
This will no doubt hinder the EU’s ability to conclude free trade agreements efficiently and effectively. A high profile example is provided by the comprehensive free trade agreement between Canada and Europe (CETA) which – after seven years of negotiations – faced opposition from the Belgian regional parliament in Wallonia which objected to certain provisions.
The CJEU’s opinion 2/15 did not set out why full approval is needed. In areas of shared competence a political choice is made as to whether the EU or EU Member States will exercise the competence (though in practice the default is usually for both to be involved). If the CJEU’s position is (as it appears to be) that EU Member State approval is required for any agreement in an area of shared competence, this decision potentially has very wide ramifications.
The UK is a party to 84 BITs with non-EU countries. Transitional measures allow BITs between EU Member States and non-EU countries (extra-EU BITs) which address matters within the EU’s exclusive competence to remain in force until such time as they are replaced by EU-wide international investment agreements between the EU itself and non-EU countries.
The European Commission (EC) has been gradually seeking to replace extra-EU BITs and has already agreed trade and investment agreements with Canada, Singapore and Vietnam (though these are yet to come into force) and is in the process of negotiating agreements with others including the US and China (though the status of these negotiations is in question given the Trump administration’s stated preference for bilateral rather than multilateral agreements and the UK’s intended withdrawal from the EU).
There had been some question over whether existing BITs between non-EU countries and individual EU Member States would automatically terminate and cease to be valid once EU-wide agreements come into force. This has been clarified in the CJEU’s opinion on EUSFTA which found that the EU has the power to enter into agreements with non-EU countries which replace commitments in BITs previously concluded between individual EU Member States and non-EU states, so long as the provisions in question fall within areas of EU exclusive competence.
There are a number of uncertainties around the impact Brexit will have on EU negotiated international trade and investment agreements. It is unclear whether the UK will automatically cease to be a party to all or parts of such agreements, whether the UK must formally give notice of termination, or whether there are other options. It is also unclear whether or to what extent “sunset clauses” within those agreements, which provide for the continuation of certain provisions for a certain period of time (often decades) after termination, will apply. This lack of clarity is partly due to the fact that whilst many EU negotiated agreements address what happens when states join the EU, none address EU Member States leaving the EU. As with much of the legal fall-out from Brexit, we are in somewhat unchartered territory.
Some commentators speculate that the UK may no longer be bound by any EU negotiated treaties with non-EU countries. However, the Attorney-General’s opinion on EUSFTA noted that “If an international agreement is signed by both the [EU] and its constituent Member States, both the [EU] and the Member States are, as a matter of international law, parties to that agreement. … [A Member State’s] participation in the agreement is, after all, as a sovereign State Party, not as a mere appendage of the [EU] (and the fact that the [EU] may have played the leading role in negotiating the agreement is, for these purposes, irrelevant).”. The CJEU did not address this question in its opinion on EUSFTA. The position will no doubt need to be considered on a case by case basis and the legal impact of Brexit will likely depend in part on whether the agreement in question was a mixed agreement, whether it was ratified by the UK and the EU, or whether it was an agreement exclusively within the EU’s competence and concluded by the EU alone.
Regardless, the UK’s existing 84 extra-EU BITs will remain valid, which could be to the UK’s advantage. Firstly, given that most EU international agreements are mixed agreements like EUSFTA, the obligation to involve all EU Member States will necessarily hamper the progress of negotiating and implementing EU-wide international agreements. Secondly, the fact that the majority of the UK’s extra-EU BITs include investor-state arbitration provisions could give the UK a strategic advantage from the perspective of investors. A significant feature of the EU’s approach to EU-wide international investment agreements is its policy of replacing investor-state arbitration with a two-tiered Investment Court System (ICS). (The EU’s ICS proposals are discussed in detail in another article in this issue “The EU’s proposed reform of investor-state dispute settlement”). ICS will likely feature in, or at least form a central plank of negotiations in relation to, all of the EU’s future BITs. However, those ICS provisions have proved controversial.
The EU argues that the ICS would provide greater transparency and protect investment whilst preserving the rights of governments to regulate. But concerns have been raised (particularly by investors) about the lack of party autonomy, accountability and sustainability of the ICS. The EU’s negotiations with the US over the Transatlantic Trade and Investment Partnership (TTIP) stalled partially due to differing views over the EU’s ICS proposals. The ICS was also a sticking point to obtaining EU Member State approval of CETA. Some believe that the EU’s ICS proposal is not compatible with EU law – a question which the CJEU was not asked to address in its recent opinion on EUSFTA but which is likely to be referred to the CJEU for determination shortly. The CJEU’s finding that ISDS regimes are not within the EU’s exclusive competence represents a further set-back to the EU.
An interesting conundrum results from the EU having exclusive competence over foreign direct investment but sharing competence with the EU Member States over ISDS. EU Member States cannot enter into foreign direct investment treaties (save with EU permission). The EU may enter into foreign direct investment agreements alone, but those would be toothless without some form of ISDS mechanism which it EU cannot unilaterally impose on EU Member States. As a result, the EU and all the EU Member States will need to reach agreement on these matters if they wish to avoid a deadlock. At this point, how they will reach agreement is not clear. If the EU insists on EU Member States adopting ICS provisions, it is likely to face serious opposition. Conversely, if the EU’s ICS proposals are not widely adopted by all EU Member States, it could render the EU’s ICS ambitions largely redundant.
After Brexit, the UK will also fully regain its powers to negotiate and conclude new investment agreements with non-EU countries, and in this respect it may benefit from being able to conclude deals with non-EU countries more efficiently and effectively than the EU. According to the UK government, a number of countries have already expressed an interest in concluding agreements with the UK once it has exited the EU. The Trump administration has gone as far as to suggest that an agreement with the UK could be concluded within months of Brexit. It remains to be seen if this enthusiasm continues and the UK is able in practice to quickly secure new investment agreements. But the opportunity is certainly there. Obviously however, in light of the CJEU’s opinion on EUSFTA, any mixed competence UK-EU trade agreement will necessarily entail more difficult, time-consuming negotiations given it will require full EU Member State participation.
There are currently more than 150 BITs between different EU Member States (intra-EU BITs). The EC is opposed to intra-EU BITs and views them as superseded by and/or incompatible with EU law.
In the arbitration cases of Eastern Sugar v Czech Republic and Eureko v Slovakia, challenges were made to the tribunal’s jurisdiction on the basis that the BITs under which proceedings had been commenced, namely BITs between the Netherlands and (respectively) the Czech Republic and Slovakia, ceased to be applicable once the Czech Republic and Slovakia joined the EU. In each instance the EC intervened to object to the applicability of the intra-EU BITs. In both cases the tribunals decided that they had jurisdiction to determine the disputes under those BITs, but the EC’s objections highlight the extent of its opposition to intra-EU BITs. The EC argued that intra-EU BITs should be terminated as most of their provisions are superseded by EU law and applying them could lead to discrimination between EU Member States. It stated that it intended to urge all EU Member States to take “concrete steps” to terminate intra-EU BITs and would not rule out resorting to infringement proceedings. The EC claimed that investor-state arbitration mechanisms within intra-EU BITs raised “fundamental questions” about compatibility with EU law and undermined the principle of mutual trust in the administration of justice within the EU. It rejected the idea of making investor-state arbitration available to investors from all EU countries, stating that it was firmly opposed to “outsourcing” disputes involving EU law.
The EC has now asked all EU Member States to terminate intra-EU BITs. So far Italy, Ireland and the Czech Republic have terminated all or some of their intra-EU BITs. Romania has agreed to submit to draft legislation approving the termination of its intra-EU BITs. Poland and Denmark have considered taking similar steps. The EC has brought infringement proceedings against Austria, the Netherlands, Romania, Slovakia and Sweden alleging that some of their intra-EU BITs violate EU law. Those cases will likely be referred to the CJEU. In the meantime, the CJEU is set to determine a dispute between Dutch insurer Achmea BV and Slovakia concerning the validity of the BIT between the Netherlands and Slovakia. If the CJEU rules that it is incompatible with EU law, it could undermine the enforceability of any award rendered under an intra-EU BIT.
The EU’s policy of seeking termination of intra-EU BITs notwithstanding that there is currently no adequate alternative in place (particularly in respect to investor-state dispute resolution mechanisms) could give post-Brexit UK a competitive advantage over other EU countries and increase its attractiveness to investors wishing to invest in Central and Eastern Europe. The UK currently has 12 intra-EU BITs (with Bulgaria, the Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). Once the UK leaves the EU, there will be no uncertainty regarding the validity of its BITs with EU Member States. Until such time as the UK enters into an investment agreement with the EU, those BITs will remain in force and will continue to offer both states and foreign investors important protections including the ability submit disputes to investor-state arbitration.
This issue looks at restructuring changes across The Netherlands, Canada, Australia and the UK, and an article on revisions to India’s bankruptcy laws.
Turkey offers significant potential as well as certain challenges to international investors and developers, in addition to domestic businesses.
On December 31, 2019, the State Council of the People's Republic of China (PRC or China ) released the Regulations on the Implementation of the Foreign Investment Law (Implementation Regulations) which took effect on January 1, 2020.