Public pension funds (PPFs), which can be outlined as massive pool of capital owned and managed instantly or not directly by governments to finance public pension techniques (see OECD), are lately named “essentially the most influential capital on the planet” – a November 2023 examine by Pondering Forward Institute reported that PPFs make up 52.8% of the world’s largest 100 asset homeowners, bigger than the belongings beneath administration of sovereign wealth funds (SWFs) (On the distinction between each types of state-owned funding automobiles, see right here). International SWF already noticed in 2021 that PPFs “have gained in significance and exercise to such an extent that they’re as we speak related in behaviour to SWFs”. It’s thus not surprising that PPFs will begin getting concerned in transnational dispute settlement proceedings and appeal to scrutiny with respect to their company identification and their formal ties with the state, as has been the case with SWFs (see right here and right here). Notably, in June 2023, an UNCITRAL tribunal interpreted the Funding Chapter of the 2007 Korea-US Free Commerce Settlement (KORUS) to permit the US hedge fund Elliott Associates to sue the Republic of Korea for the business determination of a Korean PPF in reference to a 2015 merger tainted by corruption on the highest governmental degree.
This weblog submit examines a contentious facet of the Elliott Associates v. Korea Award, i.e., whether or not the train of shareholder voting rights by Korea’s Nationwide Pension Service (NPS) within the context of a merger vote certified as “measures adopted or maintained by” Korea beneath KORUS. The tribunal dominated that NPS was a de facto state organ, and its actions have been subsequently “attributable to the Korean state”. This reasoning underpinned the tribunal’s train of jurisdiction over an basically intercompany dispute arising from a business act, which arguably broadened the treaty’s protection. Key to this end result was the tribunal’s conflation of attribution assessments beneath KORUS and regulation of state accountability with out clear justification. The award is presently topic to set-aside proceedings in the UK, exactly on the correctness of the tribunal’s discovering on subject-matter jurisdiction. Moreover, Korea is going through a separate, ongoing UNCITRAL arbitration introduced by one other US hedge fund additionally arising from NPS’s actions in the identical merger vote, making this evaluation timelier than ever.
Attribution as a jurisdictional challenge and the regulation of state accountability: leaping over the small gate?
The Elliott case arose from the 2015 merger between two subsidiaries of the Samsung group of firms, Samsung C&T and Cheil Industries. Elliott, a minority shareholder in Samsung C&T, had vocally opposed the deal for diminishing the worth of its investments and waged a shareholder marketing campaign to dam it, which was unsuccessful. The dispute entered the funding treaty realm after details turned public of quid professional quo between high-ranking Korean politicians and tycoons to rig the voting, together with Korea’s former president, former minister of well being and welfare, and Samsung vice chairman. Based on stories, they pressured the administration of NPS, one other minority shareholder and the holder of the casting vote on the Samsung C&T particular assembly on the merger, to approve the deal to guard the pursuits of the family-controlled Samsung group and help with the latter’s controversial succession plan. NPS itself was established as a PPF administration company with a separate authorized persona from the Korean authorities, included to handle the nation’s pension reserve funds beneath the Nationwide Pension Act (Arts. 1, 24, 26). Within the arbitration, Elliott satisfied the tribunal that NPS’s merger vote, influenced by the federal government, was arbitrary and violated the Minimal Customary of Therapy provision of the KORUS, ordering Korea to pay US$53.6 million in damages.
On the outset, the tribunal was referred to as upon to resolve on whether or not the impugned measure, i.e., NPS’s train of voting rights, fell beneath Article 11.1 KORUS (titled “Scope and Protection”). Pursuant to Article 11.1.1, the treaty’s funding chapter applies to “measures adopted or maintained by a Occasion”, outlined, for the needs of the KORUS Funding Chapter, in Article 11.1.3 of KORUS as:
measures adopted or maintained by
(a) Central, regional, or native governments and authorities; and
(b) Non-governmental our bodies within the train of powers delegated by central, regional, or native governments or authorities.
You will need to be aware that this provision considerations the scope of measures coated by the Funding Chapter, i.e., jurisdiction ratione materiae. In figuring out its personal jurisdiction, the tribunal neither dominated unequivocally that NPS is a authorities authority beneath Article 11.1.3(a), nor handled the chance that there is perhaps jurisdiction beneath Article 11.1.3(b) by discovering that NPS is a state instrumentality. Whereas a radical evaluation of each questions is past the scope of this submit, it’s value underscoring that NPS hardly matches throughout the class of presidency authority. Below Korean administrative regulation, NPS would qualify as “a authorized entity, group, or establishment owned or managed by the State apart from the State or a neighborhood authorities” (emphasis added) (see Act on the Administration of Public Establishments, Artwork. 4(1)). NPS can also be not listed as one of many authorities or administrative companies as a part of Korea’s public administration construction as stipulated within the Korean Structure and the Authorities Group Act (see additionally right here). The tribunal itself couldn’t conclude that NPS is formally a authorities authority beneath Korean regulation, as a substitute conceding that NPS is “organized as a company working beneath personal regulation” (para. 444).
To beat this problem of characterizing NPS as a authorities authority, the tribunal framed the query merely as “[w]hether the conduct of the NPS is attributable to the respondent” and based mostly its evaluation on the ILC Articles on State Accountability (ARSIWA) (the respondent itself framed its arguments on this method. See Award, paras. 368 & 387). In so doing, the tribunal conflated the problem of attribution as a jurisdictional challenge (ratione materiae) ruled by the treaty (as a matter of lex specialis) and the problem of attribution as a substantive query ruled by customary worldwide regulation codified in Articles 4-11 ARSIWA (see Hamester v. Ghana, para. 144; Mesa Energy v. Canada, para. 340; Tulip Actual Property v. Turkey, para. 327). Whereas each attribution questions search to elucidate which conduct quantities to a sovereign act, the definition in KORUS, as mentioned under, is narrower than what customary worldwide regulation supplies.
Since Article 11.1 of KORUS is about establishing the tribunal’s jurisdiction and never about figuring out the state’s legal responsibility/accountability, the aim of the narrowed definition is sort of clear: to circumscribe the tribunal’s competence. States are free to restrict their consent to adjudicatory jurisdiction, and that is with out prejudice to the query of state accountability, which belongs to the deserves (See ICJ Fisheries Jurisdiction (Spain v. Canada), paras. 55-56). By offering a narrowed definition of sovereign act, Article 11.1.3 limits the kinds of measures that may activate the treaty’s protection and the tribunal’s jurisdiction. This narrowing of scope is clear from the exhaustive phrases of Article 11.1.3, which can’t be broadened or deviated from by counting on customary worldwide regulation (because the arbitrators themselves acknowledged in Award, para. 441).
Firstly, Article 11.1.3(a) makes use of the wording “governments and authorities”. On its face, it doesn’t embody the attribution of conduct of personal regulation entities managed by or depending on the federal government. Furthermore, Article 11.1.3(a) doesn’t make use of the phrase “organ”, not to mention undertake the excellence between de jure and de facto organs acknowledged by ARSIWA (Commentary to Article 4, para. (11)). This distinction turned outstanding post-ARSIWA via the Worldwide Courtroom of Justice (ICJ) judgment within the Bosnian Genocide case, the rationale being to forestall states from escaping accountability once they commit acts via entities legally separate from, however appearing in “full dependence” on, the state (2007 Judgment, paras. 392-393). The context and rationale behind this doctrine, belonging to the regulation of state accountability, can’t be presumed to use to questions of jurisdiction, which hinges on the states’ consent. If the states events to KORUS wished Article 11.1.3(a) to cowl each de jure and de facto organs, they may have chosen a extra normal, catch-all language, e.g., to incorporate “any company, instrumentality or entity managed by” the federal government (see Iran-US Claims Settlement Declaration, Article VII(3)–(4)), and even included the language of Article 4 ARSIWA. As a substitute, the states elected a narrower formulation. Subsequently, “governments and authorities” in Article 11.1.3(a) ought to moderately be understood as solely referring to political subdivisions of a state (cf. 2012 US Mannequin BIT, Article 2(b)), which NPS is clearly not one.
Secondly, the slim language “governments and authorities” should be learn together with “non-governmental our bodies” in Article 11.1.3(b). As implied by the US in its non-disputing get together submission (NDPS), Article 11.1.3(b) is the solely jurisdictional gateway for acts of state enterprises (see paras. 4-5 the place the US characterised “state enterprise” as a “non-governmental physique”; Article 11.8.5 KORUS additionally classifies “state enterprises” not exercising delegated governmental powers as “personal events”). Consequently, business acts of state enterprises – resembling PPFs – are excluded from the scope of the tribunal’s jurisdiction since they don’t seem to be expressly talked about in Article 11.1.3(b), which solely refers to the train of powers delegated. Therefore, assuming {that a} business act was attributable to the state beneath the regulation of state accountability, e.g., if it was taken beneath the state’s earlier directions or route and management (Article 8 ARSIWA), or the state’s subsequent acknowledgment and adoption (Article 11 ARSIWA), it nonetheless wouldn’t be captured by Article 11.1.3(b). Some other interpretation would render the particular reference to the train of powers delegated in Article 11.1.3(b) redundant or meaningless. Once more, the tribunal didn’t analyze whether or not NPS as a non-governmental physique acted in a way that falls beneath Article 11.1.3(b).
The conclusion that Article 11.1.3 is narrower than – not coterminous with – the final attribution guidelines within the regulation of state accountability escaped the tribunal’s evaluation (in distinction with the holding in Al Tamimi v. Oman, paras. 320-322, the place the slim phrases of a treaty provision would prevail as a matter of lex specialis over attribution guidelines in ARSIWA). The tribunal in Elliott additionally refused to definitively conclude that an funding treaty can solely be breached by sovereign acts (Award, para. 625), a degree that different tribunals had unambiguously resolved within the affirmative (see Bayindir v. Pakistan, para. 377, Impregilo v. Argentina, para. 294 and Omega v. Panama, para. 318). By taking an equivocal stance, the tribunal implicitly endorsed the chance that its jurisdiction additionally extends to business acts of state enterprises or enterprise selections of personal entities beneath the state’s management (see Award, paras. 445-446) – a substantive challenge – thereby broadening the jurisdictional attain of Article 11.1.3 KORUS.
Conflating PPF and the state: Blurred line between de facto organs and “separate entities”
The tribunal overcame the problem of characterizing NPS as authorities authority by studying Article 11.1.3(a) to embody a de jure/de facto organ evaluation. However because the earlier half argues, this goes past the treaty’s scope. Whereas such a discovering would rightly allow the attribution of economic act – the train of shareholder voting rights to approve a company motion – to the state for the aim of discovering accountability (ARSIWA Commentary to Article 4, para. (6)), the tribunal was confronted with a definite challenge of jurisdiction ratione materiae beneath Article 11.1.3, which doesn’t cowl business acts of state enterprises. Be that as it could, the tribunal’s conclusion that NPS is a de facto organ is much more untenable.
At the start, it’s doctrinally settled that attribution is “based mostly on standards decided by worldwide regulation and never on the mere recognition of a hyperlink of factual causality” (ARSIWA Commentary to Article 2, para. (4)). Relatively than buttressing its evaluation on a normative basis or drawing inspiration from the case regulation on ARSIWA, the tribunal candidly embraced a factual/descriptive method, stating that:
“Article 11.1.3 of the Treaty makes no reference to Korean regulation, and accordingly the willpower of whether or not an organ is to be thought-about an organ of the State can’t be based mostly solely on Korean regulation however should additionally keep in mind the related details”,
and it proceeded to rule based mostly on “the wealth of proof earlier than it” (Award, paras. 444-445). Crucially, no reference was made to any worldwide regulation standards of de facto organ; the relevance of the ICJ’s “full dependence” check in Bosnian Genocide was dismissed in an opaque method in footnote 657. Attribution right here was thus handled merely as an “empirical assertion based mostly on an underlying factual matrix”, opposite to the letter and spirit of the ARSIWA guidelines the tribunal professed to be making use of.
Furthermore, the tribunal did not articulate the rules underlying its conclusion that NPS is “functionally and financially intently linked to, and successfully a part of, the Korean State” (Award, para. 445). As a substitute, the tribunal merely cited normal proof of operational linkages between NPS and the Korean state (e.g., appointment of officers by ministries, the state-owned nature of the fund, necessary contributions of residents to the fund, state supervision and audits), the state-wide function of NPS’s operation, and NPS’s impression on the state’s funds (Award, para. 444). Past that, nonetheless, it provided no perception as to what degree of governmental supervision is regular and arm’s size, or what it believed amounted to substantial or intensive state management over NPS’s administration and actions. This solely invitations extra questions as a result of PPFs and SWFs typically possess the traits cited by the tribunal (to various levels), i.e., public origin of administered sources, macroeconomic goals driving the funding actions, and normal management by the house state (Adinolfi, pp. 234-235).
The tribunal’s reasoning finally failed to influence when it gave little to no weight to the truth that NPS possessed a separate authorized persona. In precept, the existence of a authorized persona “can’t be presumed to be merely fictitious” (see Viñuales, para. 83). When an enterprise is legally separate from the state, jurisprudence of funding tribunals requires a excessive customary to rebut the presumption of impartial persona with a view to characterize it as a de facto organ, resembling via “the efficiency of core governmental features, direct day-to-day subordination to central authorities, or lack of all operational autonomy” (e.g., Almås v. Poland, para. 207-209; Ortiz v. Algeria, paras. 167–169). Likewise, in observe, when SWFs (related for current functions to PPFs) avail themselves of organ standing to learn from state immunity earlier than nationwide courts, they’re afforded the identical rebuttable presumption of separateness (notably, the principles of attribution within the regulation of state accountability and immunity are comparable); nationwide courts put primacy on this formal hyperlink of separate authorized persona over and above state management, together with the general public origin of sources and energy of presidency to nominate administrators and officers (see instances cited in OECD, pp. 14-18).
Opposite to this settled observe, the tribunal in Elliott provided no clear justification for dismissing NPS’s nature as a separate and autonomous entity finishing up business actions as an investor. It might be fascinating to check the tribunal’s reasoning by evaluating NPS to different “impartial” PPF administration entities, resembling CPP Investments and Caisse de dépôt et placement du Québec (which have been each created by public acts – act of parliament and act of nationwide meeting respectively – and established as Canadian Crown firms with board members appointed by the federal government, and the funds they managed are state-owned and funded by necessary pension contributions) and whether or not the tribunal’s determination might need implications on the attribution of economic acts of those entities to Canada, for instance. Within the absence of standards to differentiate which details are determinative to permit the piercing of the company veil, the tribunal probably opened the floodgates of treaty claims towards states for the conduct of PPFs and SWFs, no matter whether or not the impugned act is of a governmental or business nature. As well as, this interpretation multiplies the fortunes of investor claimants who might be able to sue the host state in funding treaty arbitration for the damages arising from the business actions of a PPF, and convey the latter earlier than a home court docket for a similar conduct (owing to the restrictive immunity concept).
Concluding Statement
The reliance on ARSIWA guidelines of attribution in Elliott Associates v. Korea to complement and substitute the treaty textual content may be very precarious. The state events, by agreeing on an exhaustive definition of state measures in Article 11.1.3 KORUS, excluded from the scope of the tribunal’s jurisdiction the conduct of non-governmental our bodies (resembling PPFs) which could in any other case have been attributable beneath the customary guidelines of attribution in ARSIWA. Whereas the tribunal selected to depart from the treaty’s textual content, it’s unclear whether or not the tribunal was certainly making use of customary guidelines of attribution, or any rule in any respect, by failing to find out the standards of attribution. Funding treaty awards have been annulled for failing to outline the brink for the applicability of a customary worldwide regulation norm (see Enron annulment determination, para. 395) or for falling again on customized to depart from the particular customary offered by the relevant treaty provision, whatever the substantive similarities between the 2 (see Sempra annulment determination, paras. 204-08).
By shelling out with a jurisprudential inquiry and evaluation of the suitable normative framework to find out whether or not a state enterprise is a de facto organ, it’s uncertain what sort of “steerage”, if any, follows from the reference to ARSIWA within the Elliott case, besides, maybe, the notion {that a} normative framework is pointless. Lack of consistency has lengthy been an issue in ISDS, such that the “identical rule of customary worldwide regulation was interpreted otherwise within the absence of justifiable floor for the excellence” (UN Doc No A/CN.9/935 (14 Could 2018), para. 21). If the tribunal’s method to attribution turns into the authoritative interpretation of Article 11.1.3 KORUS, it dangers imposing on the states events a extra onerous activity of getting to defend themselves towards a wider vary of treaty claims beneath the treaty, arising from business acts of PPFs and different separate entities not contemplated as a part of “governments and authorities”. Borrowing the phrases of one of many arbitrators, the method would lead to “an unjustified broadening of the jurisdictional gateway” (Mr. Thomas KC, Separate Opinion, para. 6). This isn’t sustainable for the final improvement of ISDS jurisprudence, contemplating that expansive interpretation of jurisdiction is without doubt one of the main causes fueling the backlash towards the system. Whether or not this method will affect different tribunals to be extra adventurist could also be value addressing via an much more specific treaty language, larger use of joint interpretations, or the attainable creation of an appellate mechanism as one of many ISDS reform proposals to be mentioned in July 2025 in UNCITRAL Working Group III.
