Transnational Corporations unveiled: The case of the Vanishing Corporate veil in Investor-State arbitration

Company Law Forum with presentation by Post Doc Yonit Percival.

 

From a business perspective, transnational corporations (TNCs) are a single economics unit. It is characterised by cross-border control over, and participation in the operations of subsidiaries and/or associated entities linked by contractually based managerial control systems. Yet, in law, TNCs are conjured up as merely a collection of commonly held separate juridical persons, each enjoying limited liability, and possessing its own nationality. Put simply, in law, TNCs do not exist. Power, and links of unity and control vanish behind a corporate veil that enables structural and strategic flexibility. At best, it may be dislodged in a handful of exceptional circumstances, leaving corporate nationality intact in any event. Coupled with jurisdictional barriers erected by international laws around the nationality of each component company, claims for harms caused to people and the environment become exceptionally difficult.

However, this same legal framework, from which TNCs so greatly benefit, turns into an obstruction when it comes to the exercise of their right to claim against states before foreign tribunals.  The obstruction arises in connection with the requirement that the claiming investor must be a national of a country other than the host state for the purposes of being covered by the protection of a bilateral investment treaty (BIT), and establishing the jurisdiction of the Center for the Settlement of Investment Disputes (ICSID). The problem is that an increasing number of domestic investment laws require that the entry of foreign investment into the host state territory be made through a locally incorporated company. In this case, the general proposition is that such company is a national of the host country, entirely subject to the legal system that gave it existence. Thus, the foreign corporation, being a wholly separate legal entity, may no longer be able to shield its investment from domestic laws, and foreign tribunals may find the scope of their jurisdiction greatly reduced. To overcome this problem, the ICSID Convention and many international investment agreements introduce the concept of intrafirm control, thereby, giving effect to the economic reality over and above the legal structure, and, in effect, acknowledging the TNC as a unit.  The corporate veil logic is further set aside, when access to ICSID is granted to shareholders, to be identified by reference to the TNC corporate structure, notwithstanding that the alleged wrong was done to the company. Conversely, under general principles, it would be rare for the corporate veil to be lifted, so as to allow direct action by shareholders for injury to the company.

Viewed from a systemic perspective, the protection of TNCs appears to be catered for in a way that is denied to people and the environment.  In particular, the requirement of consent means that the control innovation is likely to remain the privilege of corporations and their representative states. Some argue that the spread and repetitiveness of BITs confers on them the status of customary international law. If this is so, and given that jurisprudence developed by investment arbitration is a most important source of reference on the issue of control, it may be said that private tribunals and TNCs are now engaged in the creation of international law, changing it, alternatively leaving it intact to reflect their view of how the global space is to be shaped. 

 

 

 

Published Oct. 22, 2015 3:59 PM - Last modified Oct. 23, 2015 1:30 PM