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