Content:
Introduction.
1. Analysis of international agreements and conventions ensuring the protection of investor rights.
2. Basic principles and standards on which the protection of investor rights is based.
3. Practice of litigation arising from international investments.
4. Investment transactions: types, stages, nuances.
5. Intellectual property.
6. The most favorable jurisdictions for investors.
1. Analysis of international agreements and conventions ensuring the protection of investor rights.
2. Basic principles and standards on which the protection of investor rights is based.
3. Practice of litigation arising from international investments.
4. Investment transactions: types, stages, nuances.
5. Intellectual property.
6. The most favorable jurisdictions for investors.
Investor protection is a fundamental aspect of stable and sustainable development of financial markets. In the context of globalization and rapid technological development, investors face increasingly complex and diverse risks.
Legal mechanisms for investor protection play a key role in ensuring confidence in financial systems and stimulating capital inflows. This article examines the main legal aspects aimed at protecting investors' interests, analyzes existing norms and regulations, and discusses current challenges and prospects in this area.
This article will be of particular interest to investors, as it will help them better understand how to effectively protect their investments, minimize risks, and make the most of existing legal instruments to ensure the safety and success of their investments.
Legal mechanisms for investor protection play a key role in ensuring confidence in financial systems and stimulating capital inflows. This article examines the main legal aspects aimed at protecting investors' interests, analyzes existing norms and regulations, and discusses current challenges and prospects in this area.
This article will be of particular interest to investors, as it will help them better understand how to effectively protect their investments, minimize risks, and make the most of existing legal instruments to ensure the safety and success of their investments.
Convention for the Protection of Investor Rights, 1997.
This Convention is aimed at creating favorable conditions for foreign investment and protecting the rights of investors in the territory of the participating states. It includes a number of provisions aimed at ensuring fair and equal treatment of foreign investors, as well as establishing mechanisms for resolving investment disputes.
Convention on the Settlement of Investment Disputes between States and Natural or Legal Persons of Other States (ICSID Convention ), 1965.
The Convention on the Settlement of Investment Disputes between States and Individuals or Legal Persons of Other States (ICSID Convention) provides protection for the rights of investors through the establishment of an independent arbitration center (ICSID), which resolves investment disputes and enforces arbitral awards.
*The United States ratified the Convention on June 10, 1966. The European Union as an international legal entity is not a party to the Convention. However, many EU member states, including Germany, France and Italy, are individual members. Kazakhstan ratified the Convention on October 21, 1992 and is a party. The Russian Federation signed the Convention on June 16, 1992, but did not ratify it.
Energy Charter Treaty, 1994.
The main purpose of the Treaty is to promote the attraction and protection of foreign investment in the energy sector, ensuring equal and fair conditions for all participants. The treaty provides a legal framework to protect investors from unjustified expropriation and guarantees the freedom to transfer funds.
BITs – bilateral investment protection agreements.
Bilateral Investment Treaties ( BITs ) are international agreements concluded between two states to establish mutual guarantees and stimulate the investment activities of companies . BITs aim to create a favorable investment climate by providing investors from one country with legal guarantees in the territory of another country.
For example, the Agreement on the Promotion and Mutual Protection of Investments between the United States and the Republic of Kazakhstan dated May 19, 1992. Among the main provisions:
This Convention is aimed at creating favorable conditions for foreign investment and protecting the rights of investors in the territory of the participating states. It includes a number of provisions aimed at ensuring fair and equal treatment of foreign investors, as well as establishing mechanisms for resolving investment disputes.
- The Convention establishes the principle of applying the most favorable legal regime for investors.
According to Article 5, the conditions for making investments, as well as the legal regime for the activities of investors in connection with the investments made, cannot be less favorable than the conditions for making investments and the regime for activities related to them for legal entities and individuals of the recipient country, with the exception of exceptions .
In this case, the recipient country should be understood as the state on whose territory the investment object is located.
- Protection against seizure, guarantees of compensation.
Under Article 9, investments of foreign investors are not subject to requisition or nationalization, except in exceptional cases when this is carried out in the public interest, on a non-discriminatory basis, in compliance with legal procedures and with the payment of prompt, adequate and effective compensation.
- Protection of the investor’s property interest.
Article 12 guarantees the right to transfer abroad funds related to their investments, such as profits, dividends, loan payments and other income, after paying all taxes and fees in accordance with the national legislation of the recipient country party to the Convention.
- Dispute resolution.
Within the framework of the said document, Article 11 contains a procedure for resolving disputes.
According to this norm, in the event of a dispute between a foreign investor and the host state, it is considered by the courts or arbitration courts of the countries participating in the disputes, the Economic Court of the Commonwealth of Independent States and/or other international courts or international arbitration courts.
Convention on the Settlement of Investment Disputes between States and Natural or Legal Persons of Other States (ICSID Convention ), 1965.
The Convention on the Settlement of Investment Disputes between States and Individuals or Legal Persons of Other States (ICSID Convention) provides protection for the rights of investors through the establishment of an independent arbitration center (ICSID), which resolves investment disputes and enforces arbitral awards.
*The United States ratified the Convention on June 10, 1966. The European Union as an international legal entity is not a party to the Convention. However, many EU member states, including Germany, France and Italy, are individual members. Kazakhstan ratified the Convention on October 21, 1992 and is a party. The Russian Federation signed the Convention on June 16, 1992, but did not ratify it.
Energy Charter Treaty, 1994.
The main purpose of the Treaty is to promote the attraction and protection of foreign investment in the energy sector, ensuring equal and fair conditions for all participants. The treaty provides a legal framework to protect investors from unjustified expropriation and guarantees the freedom to transfer funds.
- Prohibition of discrimination, most favored nation treatment. Within the framework of Article 10 of the Convention, each Contracting Party, in accordance with the provisions of this Treaty, encourages and creates stable and equal, favorable and transparent conditions for investors of other Contracting Parties to make investments on its territory. Such conditions include the obligation to provide, without exception, fair and equal treatment to investments by investors of other Contracting Parties.
- Freedom of translation. The agreement guarantees that the contracting parties allow investors to transfer payments related to their investments without delay and in freely convertible currency, as follows from Article 14.
- Protection from expropriation. According to Article 13, Investments of investors of a Contracting Party in the territory of any other Contracting Party are not subject to nationalization, expropriation or a measure or measures having similar consequences to nationalization or expropriation. In this case, we are talking about protecting the property interests of investors.
BITs – bilateral investment protection agreements.
Bilateral Investment Treaties ( BITs ) are international agreements concluded between two states to establish mutual guarantees and stimulate the investment activities of companies . BITs aim to create a favorable investment climate by providing investors from one country with legal guarantees in the territory of another country.
For example, the Agreement on the Promotion and Mutual Protection of Investments between the United States and the Republic of Kazakhstan dated May 19, 1992. Among the main provisions:
- Protection against expropriation: Investments may not be expropriated or nationalized except in the public interest, on a non-discriminatory basis, and with prompt, adequate and effective compensation.
- Freedom to transfer funds: Investors have the right to transfer funds related to investments, including profits, dividends and other income, without delay.
- Equal and fair treatment: Investors are provided with treatment no less favorable than that accorded to national or third-country investors.
- Dispute Resolution: Disputes between investors and the state may be referred to international arbitration, including ICSID.
- Principle of transparency.
Investors have the right to receive reliable and complete information about their investments.
- Fraud protection.
Investors must be protected from market manipulation.
- The principle of applying the most favored nation regime.
The acts contain rules according to which a regime should be applied, the conditions of which are no less favorable than the rules of the person’s personal law.
- The principle of protection against expropriation.
A number of agreements contain a provision prohibiting expropriation or other actions that have similar legal consequences.
- The principle of the right of access to dispute resolution mechanisms.
Agreements contain permissible dispute resolution mechanisms and the procedure for their settlement.
- The right to transfer funds. The principle of the right to repatriate investor income applies.
Achmea BV v. Slovak Republic.
- Facts of the case: The Dutch insurance company Achmea BV filed a claim against the Slovak Republic in 2008, alleging that Slovakia violated the bilateral investment treaty (BIT) between the Netherlands and Slovakia.
The dispute arose over the repeal of health care reform that allowed private companies to provide health insurance.
Thus, the Company considered that Slovakia had violated its obligations to protect investments, which were guaranteed by the bilateral agreement.
- Decision: In 2018, the Court of Justice of the European Union (CJEU) ruled that arbitration clauses in bilateral investment agreements between EU countries are incompatible with the EU legal order as they violate the autonomy of the EU legal system. This decision set a precedent and led to the abolition of many arbitration clauses in BIT within the EU.
- Facts of the case: The American oil company Caratube International Oil Company LLP (CIOC) filed a lawsuit against Kazakhstan in 2008, alleging that the Kazakh government illegally terminated their contract to develop oil fields in the Mangistau region.
- The plaintiff's (Caratube International Oil Company LLP (CIOC)) arguments were that the actions of the defendant (the Republic of Kazakhstan) , including the termination of the oil field development contract and the seizure of assets, constituted expropriation and a violation of their rights to fair and equitable treatment, which is guaranteed as international legal acts and is determined by a bilateral agreement between the United States and the Republic of Kazakhstan.
The plaintiff is actually alleged violations of the bilateral investment agreement between the United States and Kazakhstan.
- Decision: In 2012, the ICSID arbitration tribunal ruled in favor of Kazakhstan, finding that CIOC did not provide sufficient evidence to support its claims, in other words, the existence of significant US investment was not proven. However, in 2017, new arbitration proceedings led to partial satisfaction of the company's claims, and Kazakhstan was obliged to pay compensation.
-
Facts of the case: The Dutch company Charanne filed a lawsuit against Spain, challenging changes in Spanish legislation that affected incentives for renewable energy producers, including solar energy.
- The arguments of the plaintiff (investor Charanne BV) were that the defendant (Spain) did not adequately ensure the stability of the legal regime and thereby violated its obligations in the field of agreement. Also, according to the plaintiff, the defendant, through his actions, violated the provisions of the Energy Charter.
- Decision: The Arbitral Tribunal ruled in favor of the defendant, Spain, stating that the changes in legislation did not breach Spain's obligations under the Energy Charter; and the investor, in turn, is not guaranteed the immutability of the legal system and the absence of changes in legislation.
- Construction, real estate, raw materials and project finance.
The stages of these transactions as a general rule are as follows:- Selecting a country, assessing the legal system.
- Preparation of a business plan (joint venture agreement, management agreement).
- Risk analysis ( Due Diligence ) Comprehensive verification of the counterparty, including verification of reporting, to identify possible risks.
- Financing Search and provision of financial resources.
- Bureaucratic procedures: registration, obtaining appropriate permits for the implementation of the project.
- Project implementation.
Kinds:
Agreement on joint activities.
Often used in construction and industry. This form of transaction allows the investor to significantly protect his interests. As part of the joint activity agreement, the resources of investors are pooled, which increases the efficiency of investments.
Nuances for the investor:- Reducing risks by attracting a local partner who can take on some of the bureaucratic responsibilities thanks to an understanding of regional specifics.
- Consolidating a list of actions to resolve losses in the event of a crisis.
- One of the obligatory parties to the agreement is the person carrying out entrepreneurial activities.
- The state may be a party to such an agreement if the investor invests in a monopolized area of the economy.
Investment contract for construction.
Under this agreement, the foreign company undertakes the obligation to carry out construction work on the territory of the host state and put into operation a certain construction project for a fee.
Nuances for the investor:- The foreign investor carries out the entire range of works necessary for the construction and equipment of the facility, bearing full responsibility for their implementation.
- Investments can be presented both in the form of material resources (for example, building materials, equipment) and in the form of intangible resources ( for example, technology , intellectual property).
- There is a need to involve subcontractors in the implementation of certain types of work.
Management contract.
The investor has the option of concluding a management agreement with a local entity, under which the investor undertakes to manage the enterprise for a fee.
Nuances for the investor:- This agreement is often concluded in addition to the construction agreement.
- The local partner (host) has ownership of the facility.
- Control and all management consequences lie with the foreign investor.
Concession agreement
Nuances for the investor:- The products produced under the agreement, as well as the income received from its sale, belong to the investor by right of ownership.
- The investor's activities are subject to standard tax rules established by the legislation of the host state.
Build, Operate and Transfer Agreements (BOTAs).
Agreements of this kind are widely used in the implementation of large-scale infrastructure projects.
Nuances for the investor:- The investor’s activities under the agreement must be carried out in full compliance with the current legislation of the host state, including regulations governing the scope of investment activities, construction, taxation, etc.
- The investor is obliged to establish a new enterprise on the territory of the host state in accordance with the legislation of that state.
- Portfolio investments (stocks and bonds; investment funds).
Purchasing securities such as stocks and bonds to generate income from dividends or interest. Investments in mutual funds that allocate funds among a variety of assets.
Stages:- Risk assessment, market analysis.
- Selecting assets for investment.
- Purchase of assets.
- Securities portfolio management, monitoring.
Nuances for the investor:- Features of taxation of income received from securities.
- Possibility of applying tax and other benefits (with the risk of their cancellation).
- The possibility of bonds defaulting or the issuers not meeting their obligations.
-
Investments and private capital.
Investing in existing companies for their restructuring or expansion.
Stages:- Company search.
- Preliminary negotiations, approval.
- Risk analysis ( Due Diligence ) Comprehensive verification of the counterparty.
- Signing of the framework agreement.
- Preparation and approval of all documents.
Nuances for the investor:- Risk of lack of project implementation and loss of funds.
- The likelihood of money laundering if the company is an unreliable counterparty.
License agreement.
A licensing agreement is an agreement based on investing in intangible assets (patent, trademark, copyright) with the aim of generating income from their use or licensing.
An example is franchising, where a foreign investor as a copyright holder grants the right to use a set of exclusive rights (for example, a trademark, technology, know-how) to a local partner.
Stages:
A licensing agreement is an agreement based on investing in intangible assets (patent, trademark, copyright) with the aim of generating income from their use or licensing.
An example is franchising, where a foreign investor as a copyright holder grants the right to use a set of exclusive rights (for example, a trademark, technology, know-how) to a local partner.
Stages:
- Preliminary negotiations, approval.
- Risk analysis ( Due Diligence ) Comprehensive verification of the counterparty.
- Signing the agreement.
- Preparation and approval of all documents.
- The investor transfers to the local partner for temporary use intangible assets owned by them for a certain fee.
- When implementing the agreement, it is necessary to comply with the requirements of the legislation in the field of copyright and intellectual property of the host state.
- An investor providing rights to an object under a license agreement must provide reliable information about the rights of third parties.
USA
The United States has one of the most developed and complex legal systems in the world, with extensive jurisprudence in the area of investor protection. The Securities and Exchange Commission (SEC) maintains strict oversight of the financial markets, ensuring a high degree of transparency and protection of investor interests. The US common law system provides clear precedents, which contributes to predictable enforcement.
EU
The European Union has many legal acts aimed at creating favorable conditions for investment. In particular, the Transparency Directive (2004/109/EC) provides investors with the necessary guarantees to conduct transactions safely. In addition, many EU countries have entered into bilateral investment agreements (BITs) with other states, which provide additional protection for investor rights.
AIFC
The Almaty International Financial Center (AIFC) in Kazakhstan is focused on international standards and uses English law as the basis for its financial and investment regulations. The AIFC also has its own arbitration center, which provides effective mechanisms for resolving disputes.
Kazakhstan
The Republic of Kazakhstan has signed a number of bilateral investment agreements, but the country's legislation largely requires revision and improvement.
Russia
At the moment, the legal system of the Russian Federation does not fully protect the rights of investors and does not properly guarantee the security of transactions. Difficulties often arise in law enforcement, as well as in the execution of court decisions and other legal acts.
In connection with the above, the most favorable jurisdiction for protecting the rights of foreign investors seems to be the European Union, which provides:
The United States has one of the most developed and complex legal systems in the world, with extensive jurisprudence in the area of investor protection. The Securities and Exchange Commission (SEC) maintains strict oversight of the financial markets, ensuring a high degree of transparency and protection of investor interests. The US common law system provides clear precedents, which contributes to predictable enforcement.
EU
The European Union has many legal acts aimed at creating favorable conditions for investment. In particular, the Transparency Directive (2004/109/EC) provides investors with the necessary guarantees to conduct transactions safely. In addition, many EU countries have entered into bilateral investment agreements (BITs) with other states, which provide additional protection for investor rights.
AIFC
The Almaty International Financial Center (AIFC) in Kazakhstan is focused on international standards and uses English law as the basis for its financial and investment regulations. The AIFC also has its own arbitration center, which provides effective mechanisms for resolving disputes.
Kazakhstan
The Republic of Kazakhstan has signed a number of bilateral investment agreements, but the country's legislation largely requires revision and improvement.
Russia
At the moment, the legal system of the Russian Federation does not fully protect the rights of investors and does not properly guarantee the security of transactions. Difficulties often arise in law enforcement, as well as in the execution of court decisions and other legal acts.
In connection with the above, the most favorable jurisdiction for protecting the rights of foreign investors seems to be the European Union, which provides:
- Possibility of appeal to the Court of Justice of the European Union (CJEU).
- Availability of bilateral investment agreements (BIT) with other states.
- Availability of directives and regulations governing investment processes.
Can’t find an answer?
Leave your e-mail and we will contact you shortly
