Wednesday, April 25, 2012

Argentina’s expropriation of YPF Subsidiary – Does a bilateral investment treaty allow that?

On April 16, 2012, Argentina’s president, Christina Kirchner, has announced the planned expropriation of YPF. Is it legally possible for Argentina to do that?

You can obviously not expect a clear “yes” or “no” answer on this blog. This is because the question is too complex and political to be answered in a few paragraphs. The purpose of my article is to explain the legal basics underlying the conflict and to show which arguments can be developed by the different stakeholders.



 In a monopolistic oil and gas industry in Argentina, YPF has been state-owned until November 1992. In 1999, Repsol has bought 99 % of YPF’s capital stock. Before the expropriation, YPF was a 68 % subsidiary of Spanish Repsol.

The Argentine federal and provincial governments and the employee fund were also shareholders. However, their stake in YPF was insignificant. Despite its low participation in YPF its by-laws grant the Argentine government a “golden share mechanism”.

YPF is Argentine’s leading energy company and operating in the upstream and downstream segment of the oil and gas industry. Its upstream operations consist of the exploration, development and production of crude oil, natural gas and LPG. Its downstream operations include the refining, marketing, transportation and distribution of oil, petroleum products, petroleum derivatives, petrochemicals, natural gas, LPG and bio-fuels.

In FY 2010, the key figures for YPF were as follows:

Bilateral Investment Treaty (BIT)

To appreciate the legality of YPF’s expropriation, the major legal to document to analyze is the bilateral investment treaty concluded by Argentina and Spain on October 3, 1991.

Bilateral investment treaties between countries must be analyzed on a case by case basis. However, even though BIT are negotiated on an individual basis, most of them follow the same general structure:

The major goals of BIT are to promote greater economic cooperation, to recognize the beneficial economic effect of foreign investment, and to provide fair and equitable treatment of foreign investment.
Definition of “investment”
The definition of the term investment is usually very large and wants to cover any form of direct investment such as tangible and intangible property and stock or other interest in a company.
Definition of the term “investor”
The term investor includes any natural person or company belonging to the countries passing the BIT. As regards companies, the definition usually combines the criteria of the law under which the company has been set up, the nationality of the persons controlling such company, and the place of the company’s substantial business activities.
Most favorable treatment of foreign investment
Each party of a BIT normally grants a treatment of the foreign investment that is at least equal to the treatment of domestic investment or foreign investment from other third party countries.
Fair, equitable, non-discriminatory, and non-arbitrary treatment of foreign investment

Expropriation of foreign investment
Under a typical BIT, expropriation can occur under exceptional circumstances and for a public purpose only. In addition, prompt, adequate, and effective compensation must be paid and the expropriated party must be granted access to local jurisdiction to check the legality of the expropriation.
Free and prompt transfer of foreign investment related funds

Dispute Resolution
Usually, the dispute resolution clause in a BIT has a double degree: First, investors have access to courts in the country receiving the foreign investment. Second, ongoing litigation between the investor and/or its home country on the one hand and the country receiving the foreign investment on the other hand is solved via arbitration.

YPF’s Expropriation

First, we must recognize that the expropriation is not illegal as such. As a matter of fact, the BIT leaves Argentina with the right to decide such expropriation.

However, the crucial question is whether Argentina has applied the conditions of expropriation appropriately.

In its draft law No. 529/12, dated April 19, 2012, Argentina argues as follows:

  • Argentina’s self-sufficiency in the supply of hydrocarbons is declared a national public interest and priority for Argentina.
  • To fulfil this objective, 51 % of YPF’s equity is declared a public interest and subject to expropriation. The 51 % stake refers to the identical stake of class D shares (Class D shares are those held by private investors.) held by Repsol.
  • The price of the property subject to expropriation shall be determined in accordance with applicable Argentine legislation.

Reading the draft legislation, it seems that Argentina tries to create the public purpose for the expropriation by declaring it. In the following diplomatic negotiations and possible court hearings, this will probably not be enough. Beyond simply declaring public utility, Argentina will be asked to justify its decision on the merits.


  • 20-K Form FY 2010 for YPF Sociedad Anónima
  • Bilateral Investment Treaty between Argentina and Spain as of October 3, 1991
  • Christina Fernández de Kirchner’s announcement of YPF’s expropriation dated April 16, 2012
  • Draft Law No. 529/12 dated April 19, 2012
  • YPF’s by-laws as of April 24, 2012

Friday, April 20, 2012

Europe 2020 Project Bond Initiative

 On October 19, 2011, the European Commission has published its „Europe 2020 Project Bond Initiative”.

At the heart the Commission's initiative are 2 straightforward findings:

  • From the project sponsor's perspective, trans-European infrastructure projects will need considerable funding in the coming years. Bank and public financing are scarce and will remain scarce in the near future. Hence, there is a need for stimulating private funding.
  • From the private long-term investor's (pension funds, insurances, etc.) perspective, there is a strong demand for long-term investment opportunities. However, the European bond market for very long maturities is underdeveloped. Hence, there is a need for stimulating such long-term bond market.

The main advantages of infrastructure debt are its low default rates, high discovery rates in case of default, and low correlation with other assets. To encourage private funding for European infrastructure projects, the Commission plans to further enhance the credit rating of European infrastructure projects. The project bond initiative provides for the following support instruments:

The road map for the Europe 2020 Project Bond Initiative is divided into 2 phases:

  • 1st phase: Pilot implementation phase including a 20 MEUR EU budget from 2012 to 2013 (dates probably to be updated) and supporting up to 10 infrastructure projects with commercial potential in the transport, energy, and information and communications technology sector.
  • 2nd phase: Implementation of the initiative through the European Investment Bank (EIB) from 2013 on, supporting projects even in other sectors.

As regards the institutional relationship between the EIB and the EU, the initiative provides for a risk sharing mechanism between these institutions. The risk sharing mechanism can be vertical, e.g. involving a sharing of fixed loss percentages on a project by project basis, or horizontal, e.g. involving a first loss piece covered by the EU and the EIB covering the remaining part of the project bond support.

The multiplier effect between EU budget spending and private sector financing is meant to be around 15-20. This multiplier effect is based on 2 assumptions: For each EU budget Euro, EIB will mobilize 2 additional Euro and the EIB risk sharing instrument will cover 15-20 % of the project debt.

The Commission’s project bond initiate is currently under review by the Council of Ministers and the European Parliament; the adoption is planned for summer 2012.


  • European Commission Communication dated October 19, 2011
  • European Commission Proposal dated October 19, 2011 for a Regulation amending Decision 1639/2006 and Regulation 680/2007

Sunday, April 15, 2012

The Emergency Response Mechanism under the International Energy Program

High crude oil prices are currently in discussion in the financial press, especially with regards to the possible introduction of EU sanctions on Iran.

As can be seen in the below charts, crude oil prices, as measured by the WTI Crude Oil Index and the OPEC Basket, are on high levels these days.

On April 3, 2012, the Financial Times reported that „Talks between some of the world’s richest oil consuming nations over whether to release billions of barrels in emergency oil reserves are moving to a question of “when” rather than “if” to act.” In this article, I would like to discuss how the emergency mechanism under the auspices of the International Energy Agency work.

The Participating Countries in the International Energy Program are Austria, Belgium, Canada, Denmark, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States of America.

The goals of the International Energy Program are

  • to promote secure oil supplies on reasonable and equitable terms;
  • to take common effective measures to meet oil supply emergencies;
  • to promote co-operative relations with oil producing countries and with other oil consuming countries;
  • to establish a comprehensive international information system and a permanent framework for consultation with oil companies;
  • to reduce the Participating Countries' dependence on imported oil.

The program consists of 5 main building blocks:

  • Emergency reserve commitment: Each Participating Country commits to keep emergency oil reserves that correspond to 90 days of its net oil imports.
  • Emergency measures in the forms of a demand restraint to reduce the Participating Countries' rate of final consumption or in the form of an allocation right / obligation of oil, depending on the Participating Country's domestic production, net imports, and supply right.
  • Information system: The General Section strives to monitor the situation in the international oil market and the activities of oil companies, the Special Section wants to ensure the efficient operation of the emergency reserve commitment and the emergency measures.
  • Permanent framework for consultation with oil companies
  • Long-term cooperation among the Participating Countries to reduce their dependence on imported oil

Today's discussion in the financial press relates to the second building block. The International Energy Program contains in its Chapter IV very detailed rules that describe the decision-making process leading to such emergency measures. In summary, this decision-making process looks like this:

The IEA emergency response mechanism consists of 3 levels:

1st level

If the daily rate of oil supplies in the Participating Countries reduces by at least 7 % of their average daily consumption, each Participating Country might be asked to implement demand restraint measures to reduce its final consumption by at least 7 %; such demand restraint measures may be replaced by using excess emergency reserves. In addition, excess oil supply capacities might the allocated among the Participating Countries.

2nd level

If the daily rate of oil supplies in the Participating Countries reduces by at least 12 % of their average daily consumption, each Participating Country might be asked to implement demand restraint measures to reduce its final consumption by at least 10 %; such demand restraint measures may be replaced by using excess emergency reserves. In addition, excess oil supply capacities might the allocated among the Participating Countries.

3rd level

If cumulative daily emergency reserve draw down obligations have reached 50 % of emergency reserve commitments, the Governing Board may decide on the necessary measures, namely an increase in the level of mandatory demand restraint.


  • FT – “Oil buyers ready emergency stocks action” – April 3, 2012
  • Agreement on an International Energy Program (as amended on 25 September 2008)

Thursday, April 5, 2012

Groupon Revision of Financial Statements – Revenue Recognition under US GAAP

On March 30, 2012, Groupon has announced revised 4th quarter and full year 2011 results. Groupon revised namely its revenue and cost of revenue as follows:

As a consequence, Groupon's net income also decreased by 22.6 MUSD.

The revision of the 4th quarter results was above all linked to refunds paid by Groupon to its clients:

The revisions are primarily related to an increase to the Company’s refund reserve accrual to reflect a shift in the Company’s fourth quarter deal mix and higher price point offers, which have higher refund rates. The revisions have an impact on both revenue and cost of revenue.”

How Groupon recognizes revenue and refunds

As described in its 10-K report, Groupon accounts for its revenues using the formula:

Purchase Price paid by the customer for the Groupon (= the discounted offer of goods and/or services that Groupon targets by location and personal preference)

- Agreed Percentage of the Purchase Price that is paid to the featured merchant partner

- Applicable Taxes

- Estimated Refunds which can be recovered from the featured merchant

However, refunds which are not recoverable from the merchant are accounted for as Cost of Revenue.

Revenue Recognition under US GAAP

The way Groupon divides its refunds into Revenue and Cost of Revenue reminds me the more general question of gross vs. net revenue recognition under US GAAP.

As a rule of principle, a company should report

  • the gross amount billed to a customer if it has earned revenue as a principal from the sale of goods or services;
  • the net amount retained (= Amount billed to the customer – Amount paid to a supplier) if it has earned a commission or fee as an agent.

The FASB fixes 8 indicators for a company acting as a principal. 3 indicators suggest the company is acting as an agent.

In detail,

  • The primary obligor is responsible for fulfillment, including the acceptability of the products or services ordered or purchased by the customer.
  • General inventory risk exists if an entity takes title to a product before that product is ordered by the customer or will take title to the product if it is returned by the customer.
  • Having latitude in establishing prices means that the company can fix itself, within economic constraints, fix prices.
  • When the company changes the product / performs the service, this means that, from the perspective of the product or service, it adds value to the product or service.
  • Physical loss inventory risk exists if title to the product is transferred to the customer at the shipping point and upon delivery.
  • Assuming credit risk means that the company is responsible for collecting the sales price from the customer but must pay the supplier in any case.

In the case of Groupon, “revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction.”


  • Groupon Press Release dated March 30, 2012
  • Groupon 10-K as of March 30, 2012
  • FASB Accounting Standards Codification § 605-45-05 – Revenue Recognition – Principal Agent Considerations – Overview and Background