Late last year, Abris Capital Partners, a central and eastern Europe-focused private equity firm, sued the Polish government for PLN 2 billion (€478 million; $597 million) alleging it will incur losses after the state forced the fund to sell its stake in Polish lender FM Bank.
The claim is a timely reminder of the usefulness of effective investment treaty planning for private equity investments in high-risk jurisdictions.
Abris owned FM Bank PBP. The bank was created in July 2013 following the merger of two Abris-owned banks, FM Bank and Bank Przedsiebiorczosci (PBP). After the merger, the Polish Financial Supervision Authority (KNF) alleged that Abris had failed to manage the merged entity in a stable and cautious manner and to consult KNF on its choice of chief executive. KNF therefore ordered Abris to sell its stake in FM Bank within one year of the order – a punishment appearing totally out of proportion with the alleged offence.
According to news reports, Abris, which is registered in Luxembourg, has claimed a breach of its rights under the Poland-BLEU (Belgium-Luxembourg Economic Union) bilateral investment treaty (BIT). Abris claims that KNF’s decision to force Abris into a distressed sale of its assets without proper cause amounts to unfair and inequitable treatment contrary to the terms of the treaty (a common investment treaty protection).
An ace up an investor’s sleeve
Experience shows that when a foreign investor and a host state square up, the host state tends to hold the lion’s share of negotiating leverage in its corner. A sovereign state is able to marshal all the machinery of the state to exert pressure on the foreign investor. Investment treaty protections can help to level the playing field.
Abris’ pursuit of arbitration against Poland is reminiscent of the claim brought in 2012 by Lone Star Funds against South Korea, alleging interference with the sale of its stake in Korea Exchange Bank. Lone Star, which held its stake through a Belgian vehicle, claimed that South Korean government interference with the sale of its investments depressed the sale price in violation the BLEU-Republic of Korea BIT.
As with Abris, Lone Star’s investment treaty rights strengthened its hand, giving it access to a potential remedy from a neutral international arbitration tribunal.
The extra planning is worth the effort
For many private equity funds, investment treaty planning is not high on the list of priorities when investing in assets in emerging economies. However, as Abris and Lone Star’s claims show, BITs can provide an effective route to recourse when no other route is available, and they create valuable negotiating leverage in the event of a total loss or impairment of the value of the assets arising from the imposition of adverse state measures.
Although the doomsday scenario is often far from the minds of the deal-makers at the time of deal closing, investment treaty structuring can dovetail with efficient tax structuring. Experience shows that is a worthwhile investment of time when investing in high-risk jurisdictions and in sectors subject to high levels of state-supervision (such as banking, telecommunications, natural resources, energy and infrastructure).
Moreover, the protections afforded by BITs are available without having to negotiate access to them with the host state. There are approximately 3,000 executed bilateral and multilateral investment treaties in place throughout the world. The nature of the protections available vary from one treaty to another, but almost all states have signed up to one or more of them. To take advantage of those protections, the investor need only structure ownership of its investment in the manner required by the particular treaty. The requirements vary from treaty to treaty and, while some can be onerous, many cover indirect investments and require only the establishment of a holding company in a particular jurisdiction.
Investment treaty planning should be the rule rather than the exception. If treaty protections are available at low cost, responsible investors ought to see it as their duty to seek them out. You never know when you might need the ace up your sleeve.
Based in London, Patrick Taylor is part of the international dispute resolution practice at law firm Debevoise & Plimpton.