Copyright (c) 2006 Syracuse Journal of International Law and CommerceSyracuse Journal of International Law and Commerce

Spring, 2006

33 Syracuse J. Int'l L. & Com. 523

LENGTH: 14360 words

NOTE: PIERCING THE CORPORATE VEIL IN THE INTERNATIONAL ARENA

NAME: Katherine E. Lyons*

BIO:  *J.D. candidate Syracuse University College of Law, 2006. I wish to thank Professor Aviva Abramovsky, Assistant Professor of Law, for her advice and encouragement. I also wish to thank my family and friends for their love and support.

SUMMARY:... International tribunals often struggle with the question of whether to determine corporate nationality according to a corporation's state of incorporation or by the nationality of a corporation's predominant shareholders and managers, thereby "piercing the corporate veil." ... The number of foreign investment contracts containing consent clauses submitting disputes to the ICSID for arbitration increased significantly over the years. ... The Ukraine offered three objections considered by the ICSID: 1) Tokios Tokeles was not a genuine "investor" of Lithuania, 2) Tokios Tokeles did not make an "investment" "in accordance with the Laws and Regulations" of Ukraine, and 3) the dispute in the case did not arise from the investment. ... The determination of corporate nationality should be considered in light of the ICSID Convention's goal, which was to facilitate foreign investment. ... Assuming in this case that the treaty between the two countries does not provide for the settlement of any disputes by the ICSID (or the ICJ) and that the shareholders cannot sue the other country in domestic courts, it will be necessary to pierce the corporate veil in order to allow them to initiate proceedings with an international tribunal. ...  

TEXT: [*523] 

Introduction International tribunals often struggle with the question of whether to determine corporate nationality according to a corporation's state of incorporation or by the nationality of a corporation's predominant shareholders and managers, thereby "piercing the corporate veil." This question affects whether certain cases involving foreign investors may be heard by an international tribunal, as opposed to a domestic court. Because at least one party to an international foreign investment dispute usually prefers to try the case in a neutral forum, this jurisdictional issue is often litigated in cases before international tribunals.

The jurisdiction of international tribunals has been undefined since the modern era of international arbitrations began in 1794 with the signing of the Jay Treaty between the United States and Great Britain. n1 At the turn of the twentieth century, international tribunals reached new levels of judicial procedure and gained a better understanding of international disputes. n2 Recently, jurisdictional issues with respect to corporate nationality came under the scrutiny of certain tribunals as more corporate transactions are international in scope. n3 According to Jackson H. Ralston, a scholar on foreign investment:

 The growth of foreign direct investment (FDI) and the expansion of transactional corporations (TNCs) have been possible partly because of the lowering of national barriers to the movement of goods and services and to the location of factories and offices. More recently, bilateral and multilateral agreements have increasingly held national treatment as the proper standard for foreign affiliates. If this were to become the norm, it would ease the problems associated with the  [*524]  notion of corporate nationality, although the need to determine a firm's nationality would not disappear. n4

 Consequently, as the business world becomes even more interactive on a global level, the need for a clear standard for determining corporate nationality increases greatly.

As a general rule, nationality is defined as "the legal relationship linking individuals to a particular state." n5 In international law, a state usually has jurisdiction over people, goods, activities within its borders, and nationals, whether or not they are within its borders. n6 It is important to determine a company's national identity because it determines various "capabilities, rights, and duties" under the law, and it is required where "national legislation favors domestic firms or where international law and practice accord a distinctive status to foreign enterprises." n7 It is important to note that "corporate nationality" is usually used in a broader sense than "nationality" when referring to individuals. n8

There are several assumptions underlying the distinction between foreign and domestic firms. These assumptions include:

 . National borders are deemed as primary importance because they correspond to economic as well as political dividing lines; they separate not only discrete political units, but also discrete national economies; ... and 

 . The economic circumstances of countries ...vary enormously, and these differences should help determine the standards of TNC treatment to which they are held. n9

 Historically, the tests used to identify a company's nationality stemmed, in whole or in part, from the company's place of incorporation, location of company headquarters, and nationality of  [*525]  predominant shareholders and managers. n10 The state of incorporation is the main test for common law legal systems, and the location of the company's headquarters is the predominant test used by civil legal systems in continental Europe. n11 The third test, which considers the nationality of predominant shareholders and managers, is the most controversial because it is "political in origin, since, in many countries, it was first used in wartime to deal with locally incorporated companies whose shareholders were enemy aliens." n12 Regardless of this fact, the test is often used in various regulatory contexts and has been used by states to establish jurisdiction over corporate activities of foreign affiliates owned by their nationals. n13

This Note will focus on the issue of whether corporate nationality should be determined according to a corporation's state of incorporation or by the nationality of a corporation's predominant shareholders and managers, thereby "piercing the corporate veil." Specifically, this determination affects whether a case may be heard by the International Center for Settlement of Investment Disputes (ICSID) when one party to the case is incorporated in a particular state but has a predominant number of shareholders and managers, who are of the same nationality as the adversarial party's state.

Section I of this Note looks at the role foreign investment plays in international law. Section II discusses the recent developments in deciding investment dispute cases in the ICSID, and Section III considers an alternative method of determining corporate nationality. Section IV compares the approach chosen by the ICSID to the one used by the International Court of Justice (ICJ), and finally, Section V reflects on which method properly supports the goals of the ICSID Convention.

Finally, the conclusion discusses a recent survey that polled various members of the international community and asked the respondents for feedback regarding their experiences with the ICSID. Although the survey generated much positive feedback, some of the respondents' comments also suggest that the ICSID will serve the international community more effectively in the future if it pierces the corporate veil in certain situations involving foreign investors. Considering that the goal of the ICSID is to settle foreign disputes and facilitate foreign investment, it may only make sense for the court to  [*526]  pierce the corporate veil in situations where the majority of a company's shareholders are of a nationality that is different from the company's state of incorporation.

I. Foreign Investment and International Law International law relating to foreign investment generated much controversy beginning in the second half of the twentieth century. n14 After the Second World War, the newly independent states sought economic freedom and an international system that would allow more access to world markets. n15 As a result, multinational corporations evolved as the principal instrument of foreign investment and international law began to set forth a clear set of rules for investment in foreign corporations. n16

Foreign investment is protected by both domestic law of the host state and the diplomacy of the home state. n17 Such protection is essential because foreign investment would cease to exist without the protection of personnel and equipment in foreign states, due to the high level of political risk involved. n18 Political risk can be defined as "the risk faced by an investor that a host country will confiscate all or a portion of the investor's property rights located in the host country." n19

Interference with property rights can occur in many ways, but five specific types of political risk are identified in the international arena. n20 These include "expropriation (including confiscation and nationalization), de facto expropriation (including creeping and indirect expropriation), currency risk, the risk of political violence, and the risk of breach of contract by the host state." n21 Usually, situations involving political risk involve multiple types of risk, and the lines between these categories are often blurred. n22

Foreign investment incorporates international law principles because it involves the transfer of people and property from one state to  [*527]  another. n23 This transfer creates a potential for conflict, as each state attempts to secure a competitive advantage over existing companies in the host state. n24 International law on foreign investment grew out of the already existing norms on the "diplomatic protection of citizens abroad and of state responsibility for injuries to aliens." n25 Extending the norms on the diplomatic protection of aliens to include the protection of foreign investment was a logical step, since the protection of property and investments are so closely tied to citizens abroad. n26

II. The International Center for Settlement of Investment Disputes (ICSID)

A. About the ICSID The ICSID arbitrates foreign investment disputes between contracting states who qualify as nationals of member countries. n27 It was created under a treaty by the World Bank and was entered into force on October 14, 1966. n28 The beginning of the preamble of the Convention

on the Settlement of Investment Disputes between States and Nationals of Other States effectively states the role of the court:

 The Contracting States 

 Considering the need for international cooperation for economic development, and the role of private international investment therein; 

 Bearing in mind the possibility that from time to time disputes may arise in connection with such investment between Contracting States and nationals of other Contracting States; 

 Recognizing that while such disputes would usually be subject to national legal processes, international methods of settlement may be appropriate in certain cases; 

 Attaching particular importance to the availability of facilities for international conciliation or arbitration to which Contracting States and nationals of other Contracting States may submit such disputes if  [*528]  they so desire... . n29

 According to the Convention, parties must voluntarily consent to arbitration. n30 Once the parties consent, they are bound to follow through with the hearing and abide by the award. n31 The ICSID does not arbitrate the disputes itself. n32 Rather, the arbitrators appointed by the parties hear the case, and the Center assists in the proceedings by performing a variety of administrative functions. n33

The number of foreign investment contracts containing consent clauses submitting disputes to the ICSID for arbitration increased significantly over the years. n34 Agreements between states and foreign investors commonly submit disputes to the Center. n35 In addition, hundreds of bilateral and multilateral investment treaties provide for dispute settlement by the ICSID. n36

B. ICSID Jurisdiction

1. General Requirements Jurisdiction is "the exercise of power by a state over persons and property and control over events that affect its peace, order and good government." n37 Generally, international tribunals must have jurisdiction to cover the parties and the subject matter, including the relief that is granted. n38

When cases are presented before an international tribunal, the court most likely has jurisdiction over the claims of nationals of the contending states. n39 Traditional notions of international law prohibited  [*529]  international disputes between a state and its own national due to the sovereignty of the state. n40 However, the scope of the state's sovereignty decreased significantly over the last few years, and the traditional notion of state sovereignty is giving way to the notion of "people's sovereignty." n41 As a result, modern

international law allows some claims by an individual against its state of nationality to be heard in an international forum. n42

Problems regarding international jurisdiction arise primarily because of its limited capacity. n43 International tribunals with more general powers to hear and decide cases encounter less problems because they would not face as many legal and political limitations. n44 In fact, the problems associated with international jurisdiction are directly proportional to the number of curbs and limitations placed on the judicial function. n45

2. Specific Requirements The jurisdiction of the ICSID is defined in Article 25 of the ICSID Convention Regulations and Rules. n46 The ICSID Convention states that two aspects of consent must be fulfilled for the Tribunal to have jurisdiction over the parties. n47 The first requirement of consent is found in Article 25(1) of the ICSID Convention, which states that the "jurisdiction of the Center shall extend to any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contract state." n48 This means that consent to arbitration by the ICSID must exist between the states as signatory parties to the ICSID Convention. n49 The second aspect requires consent to the "submission of a dispute to ICSID arbitration by the parties to the dispute itself." n50

 [*530]  Article 25(2)(a) specifically sets forth the criteria for parties to qualify as "nationals of a contracting state" for purposes of the dispute. n51 Article 25(2)(b) requires each party to have "the nationality of a contracting state other than the host state on the date of consent to the jurisdiction of the Center." n52 If this is not the case and one party has the same nationality as the host state, the parties must agree that the party should be treated as a national of another contracting state due to foreign control. n53

This requirement means that foreign nationality is contingent upon foreign control. n54 Because of this causal connection, the host state must have notice of the foreign control at the time of the agreement. n55 After this connection is shown, the burden shifts to the host state, which must now show that the causal connection did not exist at the time of the agreement. n56

C. Recent Developments in Deciding ICSID Cases

1. Amco Asia Corp. et al. v. Republic of Indonesia In 1984, the ICSID considered the issue regarding whether corporate nationality should be determined according to a corporation's state of incorporation or by the nationality of a corporation's predominant shareholders and managers, thereby "piercing the corporate veil." n57 In Amco Asia Corp. et al. v. Republic of Indonesia, the ICSID decided whether an Indonesian company should be regarded as a national of the United States. n58

The dispute in this case arose out of Amco's hotel investment in Indonesia. n59 The Republic of Indonesia authorized Amco's investment for a period of thirty years, but in 1980, it seized the investment in a military action and canceled the investment license. n60 Amco claimed that the Republic did not have the right to seize the investment and  [*531]  cancel the license. n61

For purposes of personal jurisdiction, the Tribunal found that it had jurisdiction over the parties and held that "the concept of nationality is there a classical one, based on the law under which the juridical person has been incorporated, the place of incorporation and the place of the social seat." n62 The Tribunal also held that this ruling was in accordance with the ICSID Convention, as the Tribunal was looking at "the foreign juridical person which controls the local one" rather than the "nationality of the juridical or natural persons who control the

controlling juridical person itself: in other words, to take care of a control at the second, and possibly third, forth, or xth degree." n63

2. Tokios Tokeles v. Ukraine

a. Background In Tokios Tokeles v. Ukraine, the ICSID recently held again that nationality should be determined by the state of incorporation. n64 Tokios Tokeles, the claimant, was incorporated in Lithuania as a "joint-stock company," but the majority of its shareholders and managers were Ukrainian. n65 Under Ukrainian law, the company created Taki Spravy in 1994, a wholly owned subsidiary, to advertise, publish and print material in the Ukraine. n66 As the parent company, Tokios Tokeles made an initial investment in Taki Spravy and continually reinvested Taki Spravy's profits into the subsidiary, resulting in a total investment of 6.5 million USD in the period 1994-2002. n67

Tokios Tokeles sued the Ukraine alleging it violated the Bilateral Investment Treaty between the Ukraine and Lithuania (Ukraine-Lithuania BIT), signed in February 1994, because it "engaged in a series of unreasonable and unjustified actions against Taki Spravy that adversely affected the Claimant's investment." n68 Specifically, Tokios Tokeles maintains that the Ukrainian government took the following actions in response to Taki Spravy's publication of a book that  [*532]  favorably portrayed a leading Ukrainian opposition politician:

 (1) Conducted numerous and invasive investigations under the guise of enforcing national tax laws; (2) pursued unsubstantiated actions in domestic courts, including actions to invalidate contracts entered into by Taki Spravy; (3) placed the assets of Taki Spravy under administrative arrest; (4) unreasonably seized financial and other documents; and (5) falsely accused Taki Spravy of engaging in illegal activities. n69

 The Ukraine argued that the case could not be heard by the ICSID because Tokios Tokeles was a Ukrainian entity and unable to qualify as a national of Lithuania under Article 25 of the ICSID Convention. n70

The Ukraine offered three objections considered by the ICSID: 1) Tokios Tokeles was not a genuine "investor" of Lithuania, 2) Tokios Tokeles did not make an "investment" "in accordance with the Laws and Regulations" of Ukraine, and 3) the dispute in the case did not arise from the investment. n71 The Tribunal considered the issues regarding corporate nationality under the first objection.

b. Relevant Legal Provisions The ICSID relied heavily on Article 25 of the ICSID Convention and Articles 1 and 8 of the Ukraine-Lithuania Bilateral Investment Treaty (BIT) to make its decision. n72 The relevant part of Article 25 sets forth the requirements that must be met for ICSID jurisdiction:

 (1) The jurisdiction of the Center shall extend to any legal dispute arising directly out of an investment, between a Contracting State ... and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Center. When the parties have given their consent, no party may withdraw its consent unilaterally. 

 (2) National of another Contracting State means: 

 ... . 

 (b) any juridical person which had the nationality of a Contracting State  [*533]  other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention. n73

 Based on Article 25, the Tribunal has jurisdiction over a dispute if one of the following requirements are met: "(1) the Claimant is an investor of one Contracting Party; (2) the Claimant has an investment in the territory of the other Contracting Party; (3) the dispute arises directly from the investment; and (4) the parties to the dispute have consented to ICSID jurisdiction over it." n74

The Tribunal referred to Article 25 to emphasize the deference it must give to the definition of corporate nationality set forth in the agreement between the States, and explained that Article 25 is not meant to define corporate nationality but, rather, to set the "outer limits" within which disputes may be heard before the ICSID. n75 As a result, the Tribunal concluded that the parties should be given broad discretion in defining corporate nationality in their treaty or convention and any reasonable definition should be accepted by the ICSID. n76

The Tribunal next looked to the Ukraine-Lithuania BIT to determine which definition of corporate nationality that the parties agreed upon. n77 In interpreting this definition, the ICSID made sure to adhere to the rules set forth in the Vienna Convention on the Law of Treaties, specifically Article 31, which states that "[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose." n78

The relevant parts of the treaty were found in Articles 1 and 8. Article 1(2) of the Ukraine-Lithuania BIT defines "investor" as:

 (a) in respect of Ukraine:  [*534]  -natural person [sic] who are nationals of the Ukraine according to Ukrainian laws; 

 -any entity established in the territory of the Ukraine in conformity with its laws and regulations; 

 (b) in respect of Lithuania: 

 -natural person [sic] who are nationals of the Republic of Lithuania according to Lithuanian laws; 

 -any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations; 

 (c) in respect of either Contracting Party - any entity or organization established under the law of any third State which is, directly or indirectly, controlled by nationals of that Contracting Party or by entities having their seat in the territory of that Contracting Party; it being understood that control requires a substantial part in the ownership. n79

 Article 8 of the Ukraine-Lithuania BIT provides in relevant part:

 (1) Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment on the territory of that other Contracting Party shall be subject to negotiations between the parties in dispute. 

 (2) If any dispute between an investor of one Contracting Party and the other Contracting Party can not be thus settled within a period of six months, the investor shall be entitled to submit the case to: 

 (a) The International Center for Settlement of Investment Disputes (ICSID) ... . n80

 With respect to section (2)(b) of Article 1, the Tribunal found:

 In light of the object and purpose of the [BIT], the only relevant consideration is whether the Claimant is established under the laws of  [*535]  Lithuania. We find that it is. Thus, the Claimant is an investor of Lithuania under Article 1(2)(b) of the BIT ... The Claimant is an "investor" of Lithuania under Article 1(2)(b) of the Ukraine-Lithuania BIT based on its state-of-incorporation. n81

 As a result, Tokios satisfied the first prong of the test under Article 25 mentioned above, namely, that "the claimant is an investor of one contracting party." n82

The ICSID also found that Tokios was an investor of Lithuania according to the ordinary meaning of Article 1(2)(c) because it is a "thing of real legal existence that was founded on a secure basis in the territory of Lithuania." n83 In addition, the Tribunal stated that Article 1(2)(c) refers to "any entity," and restricting the scope of investors would be inconsistent with the purpose of the treaty, which was to provide broad protection of investors. n84

Finally, the ICSID noted that parties are allowed to exclude "entities of the other party that are controlled by nationals of third countries or by nationals of the host country" when

making investment agreements. n85 Because the contracting parties failed to include such language in the Ukraine-Lithuania BIT, the Tribunal chose not to impose this limit on the agreement. n86 The Tribunal ultimately declined to pierce the corporate veil and held that corporate nationality should be determined by the company's state of incorporation. n87

III. An Alternative Method of Determining Corporate Nationality

A. Tokios Tokeles v. Ukraine Dissenting Opinion Strong arguments were made in the dissenting opinion to Tokios Tokeles v. Ukraine as to why the Tribunal should pierce the corporate veil and decide corporate nationality based on the nationality of a corporation's controlling shareholders and managers. n88 According to [*536]  the dissent, this approach would be more consistent with the goal of the ICSID Convention, which was to facilitate international investment. n89

The Report of the Executive Directors on the Convention set forth the object and purpose of the ICSID Convention. n90 In relevant part it states that:

 The Executive Directors are prompted by the desire to strengthen the partnership between countries in the cause of economic development. The creation of an institution designed to facilitate the settlement of disputes between States and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international capital into those countries which wish to attract it. n91

 In addition, the Executive Directors believed that the Convention would offer international methods of settlement that would accommodate the special characteristics of the disputes covered and provide "qualified persons of independent judgment" to settle the cases. n92

The ICSID Convention recognized the possibility that disputes may arise between contracting states and calls for "facilities for international conciliation or arbitration to which Contracting States and nationals of other Contracting States may submit such disputes if they so desire" in its preamble. n93 Consequently, Article 25 created the jurisdiction of the ICSID to cover disputes "between [a] Contracting State ... and a national of another Contracting State ... ." n94 The Tokios Tokeles v. Ukraine dissent points out that the ICSID only has jurisdiction over international investment disputes. n95 That is, the disputes must be between States and foreign investors. "It is because of their international character, and with a view to stimulating private international investment, that these disputes may be settled, if the  [*537]  parties so desire, by an international judicial body." n96

The dissent also argues that the Tribunal should "have checked first whether the Tribunal has jurisdiction under Article 25 of the Convention - interpreted, as the Decision recalls, in light of its object and purpose - and then, in a second stage, whether it has jurisdiction also under the bilateral investment treaty." n97 Instead, the Tribunal began its analysis by deferring to the definition of corporate nationality contained in the Ukraine-Lithuania BIT and then considered the consistency of Article 1(2) of the BIT with the ICSID Convention. n98

B. Similar Approach Used for Multinational Corporations Definitions of corporate nationality are also considered in conjunction with multinational corporations. In examining whether corporate nationality affects global strategy, a definition of corporate nationality similar to the one used in the Tokios Tokeles dissent is presented:

 

Given that global strategy involves integration of operations and personnel across nations, the nationality of the company concerned should a priori have some effect. But nationality is a multidimensional phenomenon (including citizenship, history, culture and experience) and can apply to different aspects of ... [a multinational corporation] (including the past and current location of corporate headquarters, the nationality of managers, and the national location of units and subsidiaries). n99

 This definition resembles the historical tests used to identify a company's nationality mentioned above (i.e. the company's place of incorporation, location of company headquarters, and nationality of predominant shareholders and managers). n100

When studying the effects that the nationality of the parent company has on multinational corporations and the strategies that they employ, some researchers defined "nationality as the country in which most headquarters (HQ) managers of the parent company are  [*538]  located." n101 Overall, these studies concluded that nationality of the parent company affects global strategic choices, such as market participation, product choice, location of the value chain, marketing, and competitive moves. n102

IV. The International Court of Justice (ICJ) Approach

A. About the ICJ The ICJ is another judicial tribunal that may hear international investment disputes. Seated at the Peace Palace at The Hague, it serves as the "principal judicial organ of the United Nations." n103 The ICJ replaced the Permanent Court of International Justice in 1946, and is composed of fifteen nationally diverse judges elected by the United Nations General Assembly and Security Council. n104

The ICJ serves two main purposes, including: 1) to decide legal disputes between conflicting states; and 2) to issue advisory opinions on international questions of interest. n105 The goal of the ICJ is not as narrow as the goal of the ICSID. Rather, it is "based on the principle of the sovereign equality of all peace-loving states, and open to membership by all such states, large and small, for the maintenance of international peace and security." n106

B. ICJ Jurisdiction The ICJ retains jurisdiction over a case when one of the following three situations occurs: 1) the conflicting states submit a special agreement regarding the dispute to the Court; 2) a jurisdictional clause exists, typically in cases where the states are parties to a treaty or convention containing a provision stating "in the event of a disagreement over its interpretation or application, one of them may refer the dispute to the Court;" or 3) each state has made a declaration "under the Statute whereby each has accepted the jurisdiction of the Court as compulsory in the event of a dispute with another state having made a similar  [*539]  declaration." n107 In cases where disputes over jurisdiction arise, the ICJ has the authority to decide jurisdictional questions. n108

C. Recent Developments in Deciding ICJ Cases

1. Case Concerning the Barcelona Traction, Light and Power Co., Ltd.

a. Background On the subject of corporate nationality and "piercing the corporate veil," the ICJ decided the Case Concerning the Barcelona Traction, Light and Power Co., Ltd. in 1970. n109 In Barcelona Traction, the Belgium Government filed a suit on behalf of Belgium nationals, who were shareholders in the Barcelona Traction, Light and Power Co., Ltd. n110 The suit was against the

Spanish Government for damages allegedly caused by the Barcelona Traction Company on account of illegal actions taken by the Spanish State. n111

The Barcelona Traction Company was a holding company incorporated in Toronto, Canada, that formed subsidiary companies in Spain for the purpose of producing and distributing electrical power. n112 The Belgium Government maintained that many of the company's shareholders were Belgium nationals, but the Spanish Government argued that this fact could not be proven and that the non-Belgian trustees should be regarded as the shareholders for the purposes of this case. n113 When a dispute arose over several series of bonds issued by the Barcelona Traction Company, the parties brought the matter to the ICJ. n114 The Court was then faced with:

 A series of problems arising out of a triangular relationship involving the State whose nationals are shareholders in a company incorporated under the laws of another State, in whose territory it has its registered office; the State whose organs are alleged to have committed against  [*540]  the company unlawful acts prejudicial to both it and its shareholders; and the State under whose laws the company is incorporated, and in whose territory it has its registered office. n115

 These problems illustrate the complexity of the relationships that exist in many international transactions.

b. Issues Surrounding Corporate Nationality Amid the complexities of this particular case, the court discussed the issues surrounding the corporate nationality of the Barcelona Traction Company and tried to answer the question of whether Belgium's right as a State was violated when its nationals' suffered infringement of their rights as shareholders in a Canadian company. n116 The ICJ determined that the issue must be decided in light of the "general rules of diplomatic protection," and it is ultimately weary of recognizing such a right. n117 This is due to the fact that it could "create an atmosphere of confusion and insecurity in international economic relations ... as the shares of companies whose activity is international are widely scattered and frequently change hands." n118

With regard to the company's incorporation in Canada, the Court said:

 In the present case, it is not disputed that the company was incorporated in Canada and has its registered office in that country. The incorporation of the company under the law of Canada was an act of free choice. Not only did the founders of the company seek its incorporation under Canadian law but it has remained under that law for a period of over fifty years. It has maintained in Canada its registered office, its accounts and its share registers. Board meetings were held there for many years; it has been listed in the records of the Canadian tax authorities. Thus a close and permanent connection has been established, fortified by the passage of over half a century. n119

 In addition, the Court did not find that Barcelona Traction's connection  [*541]  with Canada was "weakened by the fact that the company engaged from the very outset in commercial activities outside Canada" because that was the declared objective of the company. n120

Finally, the ICJ commented directly on the practice of piercing the corporate veil in this case. The Court stated:

 The law has recognized that the independent existence of the legal entity cannot be treated as an absolute. It is in this context that the process of "lifting the corporate veil' or "disregarding the legal entity' has been found justified and equitable in certain circumstances or for certain purposes. The wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent the misuse of the privileges of legal personality, as in certain cases of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations... . However, it has also been operated from within, in the interest of - among others - the shareholders, but only in exceptional circumstances. n121

 The ICJ ultimately held in favor of the Spanish Government's claim by fifteen votes to one and found that the particular circumstances in this case were not sufficiently "exceptional" to pierce the corporate veil in the interest of the shareholders. n122

However, investors should be aware that the effect of this holding will not be applicable if the standing of shareholders to bring suit before the ICJ is altered by the bilateral investment treaty between the parties. n123 A state may have standing to bring an action on behalf of shareholders who are nationals of the states if the treaty provides "that "investment,' for purposes of the treaty, includes equity interests in a company." n124 The action brought by the state is then a claim for breach of the treaty rather than for a breach of customary international law. n125

 [*542] 

2. Case Concerning Elettronica Sicula S.P.A. (ELSI)

a. Background The ElSI Case is another case that was heard by the ICJ on the subject of international foreign investment and corporate nationality. Decided by the ICJ in 1989, it involved a proceeding against the Republic of Italy and was brought by Elettronica Sicula S.p.A. (ELSI). n126 ELSI was an Italian company, which was owned 100 percent by two United States corporations, Raytheon and Machlett. n127 The United States requested that the dispute be resolved by a Chamber Court in the ICJ, and Italy consented to this request. n128

The United States alleged that Italy violated the Treaty of Friendship, Commerce and Navigation (FCN) and its 1951 Supplement through acts and omissions contrary to these agreements. n129 Specifically, the Italian government prevented Raytheon and Machlett from liquidating their assets in their wholly-owned Italian corporation, ELSI, and subsequently caused them to file for bankruptcy. n130 From the facts of the case, it was apparent that the reason the U.S. government brought the case against the Italian government before the ICJ "resulted from its espousal of the cause of Raytheon and Machlett, the shareholders," not from its espousal of the cause of ELSI. n131

b. Issues Surrounding Corporate Nationality The restrictive standard set forth by Barcelona Traction was relaxed by the standard used in the ELSI Case. n132 In the ELSI Case, the Chamber's Judgment did not question the jurisdiction of the Court to hear the case. n133 In reaching this decision, the court cited Article 36 of the FCN Treaty, which stated, "Any dispute between the High Contracting Parties as to the interpretation or the application of this Treaty ... shall be submitted to the International Court of Justice, unless the High Contracting Parties shall agree to settlement by some [*543]  other pacific means." n134

However, Judge Oda issued a separate opinion in which he addressed the issue of corporate nationality as it pertained to this case:

 One could well be led to wonder whether a foreign country (the United States) whose nationals practically controlled the corporation (ELSI) of the host country (Italy) or had a substantial interest in the enterprise (ELSI) in that host country could in fact espouse the cause of that company in a dispute with the latter country. n135

 Judge Oda recognized the paradox that exists when considering this question; nonetheless he believed that the United States could properly advocate the Italian company's cause against the Italian government. n136

Judge Oda pointed to three FCN treaty articles, which he deemed "extraordinary," that the United States could have used to present its claim to the Court. n137 The three provisions were "specifically designed to protect the interests of United States corporations possessing stock or a substantial interest in an Italian corporation or enterprise, or more concretely, the interests of Raytheon and Machlett (United States corporations) as shareholders of ELSI (an Italian company)." n138 He believed that these provisions alone could have been employed to protect the interests of the United States corporations as shareholders; yet, they were ignored by both parties and the judge throughout the proceedings. n139

The ELSI Case is important with regards to corporate nationality because an ICJ judge looked beyond the supposed nationality of the corporation, according to its state of incorporation, and instead, looked to the nationality of its shareholders. The United States brought this claim against Italy's government on behalf of its nationals, but technically, the case was between an Italian corporation and the Italian government. This willingness of the ICJ to hear such a case demonstrates a more relaxed standard than the one used by the Barcelona Traction Court, and it lends some support to the argument that corporate nationality should be decided by the nationality of a corporation's predominant shareholders and managers.

 [*544] 

V. Corporate Nationality in Light of the Goals of the ICSID Convention

A. Two Conflicting Viewpoints The determination of corporate nationality should be considered in light of the ICSID Convention's goal, which was to facilitate foreign investment. n140 The arguments in favor of the majority ruling in Amco Arbitration and Tokios Tokeles center around the parties' "broad discretion to define corporate nationality" within their contract and agreement. n141 The arguments also point to the traditional practice of determining corporate nationality according to its state of incorporation. n142

Professor Christoph Schreuer states that "definitions of corporate nationality in national legislation or in treaties providing for ICSID's jurisdiction will be controlling for the determination of whether the nationality requirements of Article 25(2)(b) have been met." n143 In addition, he believes that the ICSID should accept "any reasonable determination of the nationality of juridical persons contained in national legislation or in a treaty." n144 It is also contended that the Tribunal was justified in determining nationality in a broader sense because the Convention's objective was to establish "the common will of the parties" using a principle of good faith. n145 These arguments, however, are subject to some convincing criticism.

Those who disagree with the outcomes of Tokios Tokeles and Amco Arbitration argue that deciding nationality based solely on the state of incorporation is inconsistent with the goal of the ICSID Convention. n146 The Convention chose not to define "juridical person," and there may be circumstances in which the tribunal could use a more flexible standard in applying Article 25(2)(b). n147

The ICSID is an international judicial body, which was created for the purpose of settling disputes that are foreign in character n148 and to decide cases in complete disregard of the "origin of the capital" behind  [*545]  foreign investments is contrary to the purpose of the Tribunal. n149 ICSID Tribunals must be cautious in determining their jurisdiction because an unjustified extension could infringe on the jurisdiction of domestic courts. n150 It is not up to the parties to decide the jurisdiction of the Tribunal, and ICSID should not leave the method for determining the nationality of states to the contracting parties. n151

In addition, ICSID should not necessarily follow the same jurisdictional requirements as the ICJ because the goals of the two judicial bodies differ substantially. The ICJ's goal of maintaining international peace and security is much broader than ICSID's goal of facilitating foreign investment. As a result, where the ICJ is hesitant to decide corporate nationality based on the nationality of the shareholders and managers, it can be argued that ICSID has more latitude to pierce the corporate veil in furtherance of international business investments.

B. One Possible Solution The theory of international company law for the incorporation of corporate entities is proposed as one possible solution to the nationality dilemma. n152 International company law, if instituted, would create international public policy and deal with the legal treatment of international companies. n153 Because "national laws can be fully effective only within the limits of national jurisdiction," they are not properly equipped to handle international transactions that lead to jurisdictional conflicts. n154 A system of international company law would simplify the process and fill in the "gap of legal regulation at the international level." n155

There are, however, drawbacks to international company law, and lack of interest in the theory is often due to the notion that such a body of law is impractical. n156 Criticisms of the idea include: 1) "it would be too hard to draft such a statute, presumably in the form of an international convention;" n157 2) "it would be unlikely that all major home and host States would agree to be bound by it;" n158 and 3)  [*546]  "[transactional companies] themselves have consistently opposed it." n159

Proponents of international company law argue that these problems can be solved by bringing various national laws closer together through public policy, legislation, and appropriate legal methods and approaches by private courts. n160 However, it may be difficult to bridge the gap between different national company laws and obtain agreement on the policies by the international community. n161 A voluntary legislation scheme was suggested to combat this criticism, in which the advantages of international incorporation are provided on a voluntary basis. n162

Conclusion This Note focused on the issue of whether corporate nationality should be determined according to a corporation's state of incorporation or by the nationality of a corporation's predominant shareholders and managers, thereby "piercing the corporate veil." As both Amco Arbitration and Tokios Tokeles illustrated, the determination has an effect on whether a case may be heard by the ICSID when one party to the case is incorporated in a particular

state but has a predominant number of shareholders and managers who are of the same nationality as the adversarial party's state.

After considering the general jurisdiction requirement for international tribunals, this Note looked specifically at the jurisdiction of the ICSID and considered the recent developments in deciding investment dispute cases in the ICSID. An alternative method of determining corporate nationality was also explored using the Tokios Tokeles dissent and the approach used by multinational corporations. In an effort to put these differing approaches in context within the broader international community, the approach chosen by the ICSID to determine corporate nationality was compared to the one used by the ICJ. Finally, the last section of this paper provided competing views on which method properly supports the goals of the ICSID Convention.

A strong case is made for the argument that corporate nationality should be determined according to the nationality of the primary stakeholders and management. Although this viewpoint is not yet fully embraced by the international tribunals, it pervades the separate concurring and dissenting opinions written by judges on several  [*547]  occasions. It will only be a matter of time before the international community realizes the value in hearing cases where the parties are truly foreign nationals.

Given that the ICSID's goal is to settle foreign disputes and facilitate foreign investment, it only makes sense for the Court to pierce the corporate veil in many situations. Consider a case such as the ELSI Case, where nearly 100 percent of a country's corporation is controlled by another country's nationals. n163 In order to facilitate foreign investment, the nationals holding stock in the other country's corporation must feel secure in the fact that they will have access to a court to address any wrongs committed by the corporation.

Assuming in this case that the treaty between the two countries does not provide for the settlement of any disputes by the ICSID (or the ICJ) and that the shareholders cannot sue the other country in domestic courts, it will be necessary to pierce the corporate veil in order to allow them to initiate proceedings with an international tribunal. Absent this option, the shareholders will be less likely to invest in foreign corporations, thereby defeating the purpose of the ICSID.

Recently, a questionnaire was sent to member governments, arbitrators, parties and ICSID stakeholders to assess their satisfaction with the tribunal. n164 The goal of the survey was threefold: 1) to provide "information of the perceived strengths and weakness of ICSID from the point of view of key constituencies," n165 2) to explore suggestions for change or improvement, and 3) to serve "as a baseline against which future progress can be gauged." n166

The results of the survey show that many of the respondents are very involved with the ICSID, and that the "ICSID is seen as playing a vital role when it comes to the international investment/business community." n167 The detailed findings show that seventy-nine percent of the respondents felt that the ICSID played some role in their "country's legal framework for foreign investments," and sixty-one percent of the respondents thought that the ICSID contributed to a positive investment climate. n168 Ninety-nine percent of the respondents thought that the ICSID is important to foreign investment, and ninety-seven percent felt [*548]  that "settlement of investment disputes under ICSID is fair." n169

Overall, the results of this initial survey were very positive for the ICSID. However, one of the major complaints by respondents was that the ICSID needs to do more to make countries aware of its existence and activities. n170 The ICSID is currently dealing with a small subset of the international community and can be utilized more extensively. If the ICSID broadened its jurisdictional standards, which one respondent labeled as "too restrictive," by piercing the

corporate veil in certain situations, it would more effectively serve the international community. n171

Foreign investors, in particular, would benefit from this expansion in international jurisdiction. In addition, because problems regarding international jurisdiction arise primarily due to the court's limited capacity, it would be beneficial to allow the courts more general power when determining corporate nationality and international jurisdiction. n172 As a result, international tribunals would encounter fewer problems when deciding issues of international jurisdiction because they would not face such limited guidelines.

Legal Topics:

For related research and practice materials, see the following legal topics:Business & Corporate LawCorporationsShareholdersDisregard of Corporate EntityGeneral OverviewInternational LawDispute ResolutionTribunalsInternational Trade LawDispute ResolutionArbitration

FOOTNOTES:

n1. Jackson H. Ralston, International Arbitration from Athens to Locarno, at vii (Stanford Univ. Press 1929); see also ICJ, A Guide to the History, Composition, Jurisdiction, Procedure and Decisions of the Court: History (1996), http://www.icj-cij.org/icjwww/igeneralinformation/ibbook/Bbookframepage.htm (last visited Mar. 30, 2006).

n2. Ralston, supra note 1.

n3. Id.

n4. UNCTAD, World Investment Report: Transactional Corporations and Integrated International Production, 183 (1993), available at http://www.unctad.org/Templates/webflyer.asp?docid=1055&intItemID=2432&lang=1&mode=downloads (last visited Mar. 30, 2006).

n5. Id. at 184.

n6. Id.

n7. Id. at 183.

n8. Id. at 184.

n9. UNCTAD, supra note 4, at 184.

n10. Id. at 185.

n11. Id.

n12. Id.

n13. Id.

n14. M. Sornarajah, The International Law on Foreign Investment 1 (Cambridge Univ. Press 1994).

n15. Id.

n16. Id. at 1, 4.

n17. Id. at 5.

n18. Id. at 5; see also Paul E. Comeaux & N. Stephan Kinsella, Protecting Foreign Investment Under International Law: Legal Aspects of Political Risk 1 (1997).

n19. Comeaux & Kinsella, supra note 18.

n20. Id. at 3.

n21. Id.

n22. Id.

n23. Sornarajah, supra note 14, at 7-8.

n24. Id. at 8.

n25. Id.

n26. Id.

n27. ICSID, About ICSID, http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/about/main.htm (last visited Mar. 30, 2006).

n28. Id.

n29. ICSID, Convention on the Settlement of Investment Disputes between States and Nationals of Other States pmbl. (2003), http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/basicdoc/basicdoc.htm (last visited Mar. 30, 2006).

n30. Id.

n31. Id.

n32. ICSID, ICSID Cases, http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/cases/main.htm (last visited Mar. 30, 2006).

n33. Id.

n34. Ibrahim F. I. Shihata, Foreword to Christoph Schreur, The ICSID Convention: A Commentary (Cambridge Univ. Press 2001), available at http://www.dundee.ac.uk/cepmlp/journal/html/schreuer.html (last visited Mar. 30, 2006).

n35. Id.

n36. Id.

n37. Id.

n38. Ralston, supra note 1, at 58.

n39. Id. at 59.

n40. Nii Lante Wallace-Bruce, The Settlement of International Disputes: The Contribution of Australia and New Zealand 8 (Martinus Nijhoff Publishers 1998).

n41. Id. at 9.

n42. Id.

n43. Ibrahim F. I. Shihata, The Power of the International Court to Determine its Own Jurisdiction 2 (Martinus Nijhoff Publishers 1965).

n44. Id. at 2-3.

n45. Id. at 2.

n46. ICSID, supra note 29, art. 25

n47. Chittharanjan F. Amerasinghe, Jurisdiction of International Tribunals 626 (Kluwer Law Int'l 2003).

n48. Id.; see also ICSID, supra note 29.

n49. Amerasinghe, supra note 47, at 631; see also ICSID, List of Contracting States, http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/constate/c-states-en.htm (last visited Mar. 30, 2006).

n50. Amerasinghe, supra note 47, at 633.

n51. ICSID, supra note 29, art. 25.

n52. Amerasinghe, supra note 47, at 650.

n53. Id.

n54. Id. at 655.

n55. Id.

n56. Id.

n57. Amco Asia Corp. et al. v. Republic of Indonesia, 23 I.L.M. 351 (1984), available at 1984 WL ILM.

n58. Id.

n59. Id. at 352.

n60. Id.

n61. Id.

n62. Amco Asia Corp., 23 I.L.M. 351.

n63. Id.

n64. Tokios Tokeles v. Ukraine, 2004 ICSID (W. Bank) No. ARB/02/18 (April 29), available at http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/cases/tokios-decision.pdf (last visited Mar. 30, 2006).

n65. Id. P 1.

n66. Id. P 2.

n67. Id.

n68. Id. P 3.

n69. Tokios Tokeles, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 3.

n70. Id. PP 8, 21.

n71. Id. P 23.

n72. Id. P 14.

n73. ICSID, supra note 29, art. 25.

n74. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 20.

n75. Id. P 19.

n76. Id. P 26.

n77. Id. P 16.

n78. Vienna Convention on the Law of Treaties art. 31(1), May 22, 1969, 1155 U.N.T.S. 331, quoted in Tokios Tokeles, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 27.

n79. Agreement between the Government of Ukraine and the Government of the Republic of Lithuania for the Promotion and Reciprocal Protection of Investments art. 8, Feb. 8, 1994, [hereinafter Ukraine-Lithuania BIT], quoted in Tokios Tokeles, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 18.

n80. Ukraine-Lithuania BIT, supra note 79, art. 1, quoted in Tokios Tokeles, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 16.

n81. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, PP 38, 43.

n82. Id. P 20.

n83. Id. P 28.

n84. Id.

n85. Id. P 36.

n86. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 36.

n87. Id. P 63.

n88. Tokios Tokeles v. Ukraine, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 13, 18, 19 (Apr. 29, 2004) (Weil, J., dissenting), available at http://0-

www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/cases/tokios-dissenting_opinion.pdf (last visited Mar. 30, 2006) [hereinafter Weil Dissenting Opinion].

n89. Id. P 30.

n90. ICSID, Report of the Executive Directors on the Covention on the Settlement of Investment Disputes between States and Nationals of Other States, P 9 (1965), at http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/basicdoc/basicdoc.htm (last visited Mar. 30, 2006).

n91. Id.

n92. Id. P 11.

n93. ICSID, supra note 29.

n94. Id.

n95. Weil Dissenting Opinion, 2004 ICSID (W. Bank) Case No. ARB/02/18, P 5.

n96. Id.

n97. Id. P 14.

n98. Id.

n99. Johan Roos, Effects of Nationality on Global Strategy in Major American, European, and Japanese Multinational Companies (Working Paper), Marketing Science Institute 13 (1996).

n100. UNCTAD, supra note 4, at 185.

n101. Id.

n102. Id.

n103. ICJ, International Court of Justice: General Information - The Court at a Glance (2005), available at http://www.icj-cij.org/icjwww/igeneralinformation/icjgnnot.html (last visited Mar. 30, 2005).

n104. Id.

n105. Id.

n106. ICJ, supra note 1.

n107. Id.

n108. Id.

n109. Barcelona Traction, Light, and Power Co., Ltd. (Belg. v. Spain), 1970 I.C.J. 3 (Feb. 5).

n110. Id. P 1.

n111. Id.

n112. Id. P 8.

n113. Id. PP 8, 9.

n114. Barcelona Traction, 1970 I.C.J. 3, P 23.

n115. Id. P 31.

n116. Id. P 35. "Has a right of Belgium been violated on account of its nationals' having suffered infringement of their rights as shareholders in a company not of Belgian nationality?" Id.

n117. Id. P 36.

n118. Id. P 96.

n119. Barcelona Traction, 1970 I.C.J. 3, P 71.

n120. Id.

n121. Id. PP 56-57.

n122. Id. PP 102-3.

n123. Comeaux & Kinsella, supra note 18, at 42.

n124. Id.

n125. Id.

n126. Elettronica Sicula S.p.A. (U.S. v. Italy), 1989 I.C.J. 15, 17 (July 20) [hereinafter ELSI Case].

n127. Id. P 12.

n128. Id. PP 1-3.

n129. Id. P 12.

n130. Id. PP 14, 15.

n131. Elettronica Sicula S.p.A. (U.S. v. Italy), 1989 I.C.J. 15, 83 (July 20) (separate opinion of Oda, J.) [hereinafter Oda Opinion].

n132. UNCTAD, supra note 4, at 185.

n133. ELSI Case, 1989 I.C.J. 15, P 48.

n134. Id.

n135. Oda Opinion, 1989 I.C.J. 15, at 91-92.

n136. Id. at 92.

n137. Id. at 90.

n138. Id. at 89.

n139. Id. at 90.

n140. ICSID, supra note 90.

n141. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 26.

n142. UNCTAD, supra note 4, at 185.

n143. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 26

n144. Id.

n145. Amerasinghe, supra note 47, at 627.

n146. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 30.

n147. Amerasinghe, supra note 47, at 668.

n148. Tokios Tokeles, 2004 ISCID (W. Bank) Case No. ARB/02/18, P 3.

n149. Id. P 6.

n150. Id. P 8.

n151. Id.

n152. UNCTAD, supra note 4, at 189.

n153. Id.

n154. Id.

n155. Id.

n156. Id.

n157. UNCTAD, supra note 4, at 189.

n158. Id.

n159. Id.

n160. Id.

n161. Id.

n162. UNCTAD, supra note 4, at 189.

n163. ELSI Case, 1989 I.C.J. 15, at 19.

n164. ICSID, Stakeholder Survey 3 (2004), http://0-www.worldbank.org.uncclc.coast.uncwil.edu:80/icsid/icsid-client-survey-100904.pdf (last visited Mar. 30, 2006).

n165. Id.

n166. Id.

n167. Id. at 5.

n168. Id. at 13.

n169. ICSID supra note 164, at 18.

n170. Id. at 27.

n171. Id. at 30. ("The difference in my rating, excellent for secretariat's activities and good for tribunal's process is given by same areas of disagreement towards the substance of tribunal's decisions on jurisdiction, somewhat too restrictive.") Id.

n172. Shihata, supra note 34.