SCC tribunal finds Poland liable for expropriation over divestment order to Luxembourg investor
PL Holdings S.à.r.l. v. Republic of Poland (SCC Case No. V2014/163)
In a final award dated September 28, 2017, an SCC tribunal ordered Poland to pay EUR 176 million to a Luxembourg-based private equity firm after finding that the forced divestment of the company’s stake in a bank amounted to an expropriation under the Luxembourg–Poland BIT. In particular, the tribunal ruled that although the claimant was not deprived of its investment, the restrictions imposed by Poland’s banking regulator severely restricted certain rights forming part of the investment, thereby depriving the “Claimant of the full benefit of its rights of ownership to such an extent as to constitute an expropriation” (para. 320, Partial Award).
Background and claims
Capital PL Holdings S.à.r.l., a Luxembourg-based entity and a wholly owned subsidiary of Abris CEE Mid-Market Fund L.P. (Abris), invested in two Polish banks that were then merged to become FM Bank PBP (the bank), eventually becoming a 99.5 per cent shareholder.
Following the merger, KNF, the Polish banking regulator, initiated a series of measures stating certain management irregularities. In April 2014, KNF issued an order suspending the claimant’s exercise of voting rights and requiring it to sell all of its shares in the bank by December 31. Although KNF retracted its order in July 2014, the restriction on voting rights remained in force. Further, KNF instituted proceedings against the claimant to re-mandate the forced sale of its shares. In November 2014, KNF issued a third order requiring the claimant to sell all of its shares by April 30, 2015.
Despite assuring the claimant of reconsidering its third order, KNF repeatedly postponed the deadline for reconsideration, leaving the claimant with a limited period to execute a sale in order to avoid administrative sanctions. On November 26, 2014, the claimant filed arbitration, alleging that KNF’s measures amount to an expropriation of its investment without compensation, in violation of the BIT.
Tribunal dismisses Poland’s jurisdictional objections, including the intra-EU objection
Poland presented two belated objections to the tribunal’s jurisdiction. First, it argued that although the claimant is based in Luxemburg, the actual investor is Abris, registered in Jersey. Therefore, according to Poland, “the claimant was merely a ‘tool’ through which Abris made and controlled its own investment in Poland” (paras. 273–275, 296, Partial Award).
Second, relying on VCLT Articles 30 and 59, Poland asserted that the dispute resolution provisions of the BIT are incompatible with EU law, and that once Poland has acceded to the EU, its treatment of an investor from an EU member state (Luxembourg, in this case) is governed exclusively by EU law and may be challenged exclusively in the courts of the EU or its member states (para. 302, Partial Award). In addition, according to Poland, TFEU Article 344 vests exclusive authority to adjudicate the present dispute in the European judiciary.
The tribunal chose to address the objections despite the delay, but dismissed both of them, noting that Poland adduced no evidence to contradict the claimant’s representations on the claimant’s status as an investor under the BIT.
As regards the intra-EU objection, the tribunal, relying on RREF v. Spain, affirmed that “the treaty from which the tribunal emanates is for all practical purposes the tribunal’s ‘constitution,’ and it is on that instrument and that instrument alone that the tribunal’s authority depends” (para. 309, Partial Award). It held that neither VCLT Article 30 nor Article 59 nullify the BIT and thereby negate the authority of the tribunal to resolve the dispute. It further held that TFEU Article 344 has no application in this case as it is between the investor of an EU member state and another member state and not between two EU member states as envisaged under the TFEU.
Poland’s measures lead to deprivation of certain rights arising out of the investment, amounting to indirect expropriation
The claimant argued that KNF’s measures deprived it of its voting rights for a period of nearly 18 months, from April 2015 until it was forced to sell its shares, and that it thus sustained a loss of reasonably anticipated profits. According to the claimant, neither the order depriving it of its voting rights nor the order to sell its shares satisfies the conditions for lawful expropriation under BIT Article 4(1). Poland countered that it was well within its rights to regulate in certain areas, without such regulation being considered as a breach of the BIT.
In its analysis, the tribunal observed that the claimant was not deprived of its investment in the technical sense, but rather of certain rights forming part of it, namely, the right to vote and the right to dispose of the investment as it saw fit. It agreed with the claimant’s views that KNF’s measures severely restricted these rights, thereby depriving the claimant of the full benefit of its rights ownership to such an extent as to constitute an expropriation within the meaning of the BIT.
Poland’s measures found in breach of the proportionality principle
The claimant added that the measures taken by KNF could not be justified as legitimate good-faith regulations because they were arbitrary, inappropriate and out of proportion. Although the tribunal did not decide on the law applicable to the principle of proportionality, it applied a three-prong test to review whether the measures were (a) suitable for achieving KNF’s legitimate public purpose; (b) necessary for achieving that purpose, so that no less burdensome measure would suffice, and (c) not excessive in that its advantages are outweighed by its disadvantages.
As regards the first element of the test, although the tribunal was convinced that KNF’s measures were implemented to further a legitimate and substantial public interest, it found that the measures were not necessarily suitable. In its view, the management irregularities and the changes to the management board not being brought to KNF’s attention did not sufficiently justify the measures, especially when the bank’s financial and economic situation was stable and presented no threat to the security of customer deposits, and every irregularity flagged by KNF to the bank and its shareholders was swiftly fixed. It added that not only were these drastic measures imposed by KNF unnecessary and unwarranted, they were counter-productive in nature, thereby finding that the third prong of the test was satisfied: the measures were excessive by any measure, as the situation facing KNF was not so dire as to justify them.
Poland’s order to dispose of shares violated the claimant’s procedural rights
In addition to an expropriation claim, the claimant also alleged that KNF violated its procedural rights with these measures, in particular, by repeatedly postponing the deadline for deadline for reconsideration of the third order until such time as the claimant’s shares were required to be sold, thereby effectively depriving the claimant of its rights of appeal and the judicial protection afforded. Poland, in turn, argued that the third order merely ordered the claimant to “dispose of” (and not “sell”) its shares and that the claimant ultimately sold the shares of its own volition, at a juncture when a reconsideration ruling was pending.
The tribunal, however, found Poland’s position to be untenable as the most obvious way of disposing of the shares was by selling them. In addition, it noted the “most egregious procedural irregularity” (para. 408, Partial Award) at the hands of KNF when it postponed its decision on reconsidering its third and final order, thus barring the claimant’s fundamental right of access to court for redress.
Decision and costs
The tribunal found that Poland was in breach of BIT Article 4(1) on account of its expropriation of the claimant’s shareholding in the bank through restrictions taking the form of a suspension of its voting rights and the compulsory sale of shares.
In its partial award dated June 28, 2017, the tribunal made a determination as to the most accurate formula and valuation date for establishing asset value and damages, on the basis of which the experts adopted an agreed financial model.
In the final award, the tribunal adopted the experts’ joint report, ordering Poland to pay the claimant damages of PLN 653,639,384 (EUR 176 million), plus pre- and post-award interest set by reference to the Polish law on debts. It also made a costs order of EUR 3.5 million in favour of the claimants, while splitting the costs of the arbitration evenly.
Notes: The tribunal was composed of George A. Bermann (chair appointed by the SCC, U.S. national), Julian D. M. Lew (claimant’s appointee, British national) and Michael E. Schneider (respondent’s appointee, German national). The partial award is available at https://www.italaw.com/sites/default/files/case-documents/italaw9378.pdf and the final award is available at https://www.italaw.com/sites/default/files/case-documents/italaw10467.pdf
Gladwin Issac is a graduate of the Gujarat National Law University, India.