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.
YPF
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:
|
Item
|
Comment
|
|
Preamble
|
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.
Resources:
- 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
