Interview with Anil Yilmaz: The Nationality of Corporate Investors under International Investment Law – Part II: A case for the real seat standard – Stephanie Triefus

In Part I of this series, Dr Anil Yilmaz and Assistant Editor Stephanie Triefus discussed how international investment treaties are being used in a way that unduly expands the reach of this controversial legal regime. This part elaborates on why existing safeguards are not sufficient, and how states should proceed with investment treaty reform to combat this issue.

ST: An ISDS case brought against Australia by Phillip Morris was unsuccessful because the tribunal found that Philip Morrisclaim was an abuse of rights – Phillip Morris Asia acquired an Australian subsidiary for the purpose of initiating arbitration under the Australia-Hong Kong BIT. Is this an example of the current system working to prevent claims that states have not consented to? What are the problems with abuse of rights arguments and other challenges to corporate identity that states have used in arbitration to combat this issue?

I’ll start by saying a few things about the Australia case. It was a very well-known case because of the tobacco measures and public health questions around it, and it was going somewhat in parallel with the Philip Morris v Uruguay case. Unlike the Uruguay case, the Australia case didn’t proceed to the merits, because Australia was successful in its objection that Philip Morris was abusing its right to invoke that investment treaty. And that was because in anticipation of the dispute, Philip Morris restructured its investment in Australia to move its holdings to Hong Kong, and that was found to be an abuse of rights in this particular case, and therefore the claim was dismissed. The tribunal didn’t consider Philip Morris genuinely to be a Hong Kong investor to be able to benefit from that investment treaty and that’s a successful outcome in this context. But it was a difficult and hard-fought decision, probably by skilled Australian counsel, and there were very particular circumstances. 

It’s very difficult to make a successful abuse of rights argument. First, you have to demonstrate that there was a lack of good faith in the acquisition of the investment, which requires you to go into the intentions of the investor at the time they acquired that corporate entity. The other question is about the timing of when the investor restructured their investment and that seems to be a condition on its own, but it also helps to demonstrate whether the investor was lacking good faith. Timing is important to demonstrate whether a dispute was already reasonably foreseeable at the time of restructuring. In this particular case, the timing of the restructuring was off: the plain packaging policy plans were already announced, and the dispute was foreseeable by Phillip Morris because Australia had already expressed its intention to regulate the tobacco industry through plain packaging. The Tribunal also looked at whether access to the investment treaty was the only or the dominant purpose of the restructuring or whether there were other legitimate reasons. In this particular instance, it was held that Philip Morris’ dominant reason for restructuring was benefitting from that investment treaty. As the timing of the restructuring was off and Philip Morris seemed to lack good faith in that restructuring, the tribunal found there was an abuse of rights. But there have been quite a few other cases where states haven’t been able to make this argument successfully because it’s quite difficult to show that an investor has restructured their investment in a certain way, only or primarily for the purpose of benefiting from investment treaty protection. And indeed, there might be other reasons for it as well, such as tax reasons. 

There are quite interesting decisions on when a dispute becomes reasonably foreseeable by the investor. In one case Exxon Mobil introduced two Dutch subsidiaries to their investment structure to be able to benefit from the Dutch-Venezuela investment treaty, whereas Exxon Mobil is obviously an American corporation. Venezuela challenged the tribunal’s jurisdiction and argued, among other points, that there was an abuse of rights. The Tribunal held that Exxon Mobil couldn’t have known that that particular dispute was going to arise at the time of restructuring. But my reading of the facts is that there was already a wave of nationalisations going on in Venezuela in the oil industry at the time and I think you’d have to be naive to think that Exxon Mobil wouldn’t be affected by that. Although the concrete dispute before the tribunal had not yet emerged, there were other similar disputes between the two parties. It should have been reasonably foreseeable to a multinational oil company with top legal advisers that a dispute was imminent, and to me it was clear that Exxon Mobil restructured and chose the Netherlands as their vehicle. It is very difficult to prove that this was their actual intention, unless you have access to internal corporate correspondence, which is unlikely. So overall, the Phillip Morris v Australia case is an exception. Abuse of rights has its place in investment treaty law, but it’s a very exceptional tool and I don’t think it’s the solution to the question of corporate nationality. 

ST: Right, so there is more to it than just pointing to these cases where the state wonand saying that the system is working. Nicolas Perrone also discussed this in his interview in relation to the Phillip Morris v Uruguay case, saying that its not that the Tribunal said that Uruguay can act in the public interest how it sees fit, but that Uruguay could do what the WHO said was fit.

AY: Cases like Phillip Morris v Australia and Phillip Morris v Uruguay are often referred to as cases where public interest prevailed, and it’s great that states prevailed, but when you read the decisions closely you can see how many conditions that came with and how difficult it is to implement in other circumstances. All the stars have to align for these kinds of successful decisions from a public interest perspective. If a state wants to be more progressive than what the international instruments provide then it is being disproportionate in the eyes of an investment tribunal. Even when a state is taking measures to fulfil its obligations under international human rights or environmental law, such steps can be viewed as disproportionate by tribunals. There is also often a binary approach to these debates, where the state is viewed as being in the right, but often the state can be complicit in enabling the harmful investment activity in the first place. We need an investment governance debate that is not centred exclusively around investor interests, but one that takes the rights of host communities very seriously. The current system is badly designed in the sense that all the cards are stacked in favour of the investor. This is the same for provisions on personal scope of treaties, which is where corporate nationality issues arise from. It’s very much in favour of investors to manipulate it in a way that benefits them. I don’t disagree that every legal person or individual is entitled to basic legal protections, but what we get from investment treaties is so much more than that. 

ST: In your book you discuss some of the negative impacts of the current arbitral approach to corporate nationality for the perceived legitimacy of international investment law. What solutions do you put forward in the book to address these impacts? What is the way forward?

In the book I discuss how most investment treaties refer to any company incorporated in their jurisdiction as a protected investor, following the incorporation theory. And incorporating a company is a really easy thing to do, people can easily incorporate businesses in most jurisdictions without having any real business presence. Another school in corporate law that deals with regulating corporations is the real seat theory, where what the state requires for a company to be governed by their law is that the company is seated and has its headquarters in that jurisdiction. Germany follows that approach and some other continental European countries and maybe other civil law jurisdictions following those legal standards do it. And there you require a more genuine connection to the state, not merely having a registration on paper or an office, but having the seat of your management, finance and human resources etc there, as well as a reasonable body of staff members based there. I argue in the book that if states continue to conclude investment treaties, instead of adopting the incorporation standard which they often do, they should choose the real seat standard. One of the things that I warn against is that they need to be quite descriptive in drafting this standard, to provide sufficient detail as to what counts as ‘real seat’. There have been instances in arbitral case law where the treaty stipulated that a protected investor is one that has its real seat in that jurisdiction, and arbitration tribunals again adopted a very loose interpretation of that term. They were satisfied that if an investor merely had an office rented in that particular jurisdiction that would be sufficient to satisfy the real seat test. In the book I suggest that states provide sufficient detail in their treaty provisions to eliminate that kind of expansive interpretation and that they’re very clear about what constitutes real seat and how investors can satisfy the standard. 

I have little faith that most investment tribunals will stay true to the spirit of the real seat standard even if a treaty provides sufficient detail on its meaning, but that’s still one way of limiting the personal scope of investment treaties to genuine beneficiaries. Obviously, an investor can still go to a different jurisdiction and set up their headquarters there, so they could treaty shop in that way, but it’s a lot harder – and if a company is moving its headquarters to another jurisdiction, then I think it’s fair that they benefit from an investment treaty from the jurisdiction. 

Another legal standard that can be useful is the denial of benefits clause. I think it’s quite important for states to provide sufficient clarity in their denial of benefits clauses in terms of when they can invoke them because that’s been a problem in practice. In most Energy Charter Treaty (ECT) cases tribunals didn’t accept states invoking the denial of benefits clause to deny benefits to an investor that wasn’t a national of an ECT contracting state, because they did it after the dispute arose and tribunals said that this removes predictability for the investor and therefore states should invoke the denial of benefits clause prior to the dispute arising, or at the time of the investment. But that’s just ridiculous, how can you invoke a denial of benefits clause before you know you’re having a dispute with an investor? And you might not even know until you have a dispute and you receive your notice of arbitration that the investor is actually registered in and ECT country rather than in a third country. So that’s been one problem that prevented states from successfully invoking denial of benefits clauses. I think one very important thing for states to do is to make clear as to when they can validly invoke the denial of benefits clause.

The other problem is that some denial of benefits clauses allow denying benefits if the investor does not have genuine connections to the home state, and again in interpreting that standard ECT tribunals have been very generous to investors. There are some examples from case law that I discuss in the book from the Americas, because the US and Canada often use denial of benefits clauses in their treaties, and these are examples where states were able to invoke those clauses successfully after a dispute was already happening and the tribunals did interpret the concept of genuine connections more reasonably, so there have been successful instances. But again, it’s a gamble – you don’t know what approach any given tribunal will take and what path of jurisprudence they will follow because you’ve got the ECT case law and you’ve got the case law from the Americas. It could go either way, it’s quite uncertain. So the best way forward for states, I think, is to be as clear as possible in their investment treaties on those key issues.  

The ILA Reporter thanks Dr Yilmaz for her time.

Stephanie Triefus is a PhD Candidate at Erasmus University Rotterdam in the field of human rights and international investment law and an Assistant Editor of the ILA Reporter.

Suggested citation: Stephanie Triefus, ‘Interview with Anil Yilmaz: The Nationality of Corporate Investors under International Investment Law – Part II: A case for the real seat standard’ on ILA Reporter (15 June 2021) <>