Some food for thought is provided by four separate opinions in which support was given to the view that the State or States of nationality of the shareholders may exercise diplomatic protection. Judge Tanaka found that, though there was (p. 126 )no rule of international law which allowed two kinds of diplomatic protection to a company and its shareholders respectively, there was no rule of international law which prohibited double protection. 137 Judges Fitzmaurice, Jessup and Gros did not go as far as Judge Tanaka, but held that in certain circumstances, particularly where the State of nationality of the corporation was the wrongdoing State, the State of nationality of the shareholders had the right to exercise diplomatic protection. 138 Judge Gros, moreover, felt that the foundation of a rule of economic international law must abide by economic realities and that, where the company's link of bare nationality did not reflect any substantial economic bond, as between the two possibilities the one on the test of which the law and the facts coincide must be chosen which meant that the State whose national economy is in fact adversely affected possesses the right to take legal action. 139
Judges Morelli, Padilla Nervo and Ammoun, on the other hand, in separate opinions supported the reasoning of the court and, further, rejected any suggestion that the State of nationality of the shareholders might take action where the State of nationality of the corporation was the wrongdoing State. 140 Judge Padilla Nervo was of the view that it is the poorer or weaker States, where the investments take place, that need to be protected against unwarranted diplomatic pressure from governments who appear to be always ready to back at any rate their national shareholders. 141
While the court ostensibly did not require a ‘genuine link’ in addition to incorporation for the company to be protected by its national State, four judges in the majority did make that a requirement. 142
The court also acknowledged that the shareholders' national State might extend diplomatic protection to it in three situations: first, where the direct rights of the shareholders are infringed; 143 secondly, where the company ceases to exist; 144 and thirdly, possibly, where the State of nationality of the corporation is the wrongdoing State. 145
Thus, the court in that case did accept that the State or States of nationality of shareholders mightexercise diplomatic protection on their behalf in three (p. 127 )situations two of which were: (i) where the company had ceased to exist in its place of incorporation; (ii) where the State of incorporation was itself responsible for inflicting injury on the company and the foreign shareholders' sole means of protection on the international level was through their State or States of nationality. As the shareholders in a company may be nationals of different States, several States of nationality may be able to exercise diplomatic protection in terms of these exceptions. As to the first of these two exceptions the court set a high threshold for determining the demise of a company. The ‘paralysis’ or ‘precarious financial situation’ of a company was dismissed as inadequate; the test of ‘practically defunct’ was likewise rejected as one ‘which lacks all legal precision’; the ‘company's status in law’ alone was considered relevant; only in the event of the legal demise of the company were the shareholders deprived of the possibility of a remedy available through the company and it was only if they had been deprived of all such possibility that an independent right of action for them and their State could have arisen. 146 Subsequent support has been given to this test by the European Court of Human Rights. 147The ICJ did not expressly state that the company must have ceased to exist in the place of incorporation as a precondition to shareholders' intervention. Nevertheless, it seems clear in the context of the proceedings before it that the court intended that the company should have ceased to exist in the State of incorporation and not in the State in which the company was injured. A company is ‘born’ in the State of incorporation when it is formed or incorporated there. Conversely, it ‘dies’ when it is wound up in its State of incorporation, the State which gave it its existence. It therefore seems logical that the question whether a company has ceased to exist and is no longer able to function as a corporate entity must be determined by the law of the State in which it is incorporated.
There is some evidence in State practice and arbitral awards which supports the second exception referred to in the previous paragraph. 148 However, the strongest support for the right of the State of nationality of the shareholders to exercise diplomatic protection is to be found in three cases in which the injured corporation had been compelled to incorporate in the wrongdoing State: the Delagoa Bay Railway Case, the Mexican Eagle Case, and the El Triunfo Case. While it is in (p. 128 )the circumstances of these cases that the protection is most needed, the decisions do not expressly limit protection to these circumstances.
In the Barcelona Traction Co Case, the respondent State, Spain, was not the State of nationality of the injured company. Nevertheless, the court did refer obiter to this exception, stating that:
It is quite true that it has been maintained that, for reasons of equity, a State should be able, in certain cases, to take up the protection of its nationals, shareholders in a company which has been the victim of a violation of international law. Thus a theory has been developed to the effect that the State of the shareholders has a right of diplomatic protection when the State whose responsibility is invoked is the national State of the company. Whatever the validity of this theory may be, it is certainly not applicable to the present case, since Spain is not the national State of Barcelona Traction. 149
After the Barcelona Traction Co Case was decided in 1970 the exception has been considered mainly in the context of treaties which, it is arguable, are a lex specialis. As such they support the right of the national State of the shareholders to intervene against the State of incorporation of the company, when it has been responsible for causing injury to the company. 150 In the ELSI Case 151 a chamber of the ICJ allowed the USA to bring a claim against Italy in respect of damages suffered by an Italian company whose shares were wholly owned by two US companies. The court avoided pronouncing on the proposed exception, even though Italy objected that the company whose rights were alleged to have been violated was incorporated in Italy and that the USA sought to protect the rights of shareholders in that company. This is probably because the court was not concerned with customary international law but with the interpretation of a bilateral Treaty of Friendship, Commerce and Navigation which in general provided for the protection of US shareholders abroad. However, the court did not oppose the exception in favour of the right of the national State of shareholders in a corporation to intervene against the State of incorporation where it is responsible for causing injury to the corporation. 152 The case was decided on the merits against (p. 129 )the USA, the claimant and the State of nationality of the shareholders, the decision being based on the interpretation of the treaty.
In any event this case possibly involved the infringement of the direct rights of the shareholders—an exception recognized in the Barcelona Traction Co Case. 153 Moreover, it is possible that this was a case in which the company had ceased to exist because it had gone into liquidation—another exception to the general rule recognized in the Barcelona Traction Co Case. Further, in this case, it may be contended, the court gave an affirmative answer to the question left open in the Barcelona Traction Co Case, whether the shareholders' national State might protect them when the company was injured by the State of incorporation. It cannot, thus, be concluded that there was a change from the position taken in the earlier case. 154 There are also many distinguishing factors.
It is to be noted that bilateral investment treaties and lump sum settlements as such do not reflect customary international law. They were rightly rejected as practice in the Barcelona Traction Co Case. Clearly, such agreements and treaties may be taken to reflect rather the desire of States to make certain that specific rules are applied under them which may be contrary to the customary law.
It must be acknowledged that the Barcelona Traction Co Case is today widely viewed not only as an accurate statement of the law on the diplomatic protection of corporations, particularly in the matter of the second exception, but as a true reflection of customary international law. Also, the practice of States in the diplomatic protection of corporations is today guided by that case. 155 This was, inter alia, clearly demonstrated by the response of delegates in the Sixth Committee to the question whether the rule in Barcelona Traction should be reconsidered. 156 (p. 130 )Of the 15 delegates who spoke on this subject, only one 157 suggested that the case should be reconsidered. All but one of the delegates who spoke on this subject represented developed States, which is an important fact, as it is unlikely that developing States would show much support for rules which accord more protection to shareholders of foreign companies to replace those in the Barcelona Traction Co Case. The writings of publicists do treat the case as the seminal decision on the diplomatic protection of corporations and the starting point of any discussion on the subject, 158 even though there is criticism of those rules.
To sum up, before the Barcelona Traction Co Case there was some support for the exception as formulated broadly, though there was some disagreement among legal commentators in interpreting the precedents in judicial decisions and State practice, especially on the extent of the exception. Theobiter dicta in the judgment in the case and in the separate opinions of Judges Fitzmaurice, Jessup and Tanaka have undoubtedly added to the weight of authority in favour of the broad exception. Subsequent developments, albeit in the context of judicial treaty interpretation, may have confirmed this trend. 159
On the assumption that the law of shareholder protection was being seriously evaluated, the ILC was presented by its rapporteur with the following options 160 in codifying and progressively developing the law:
(p. 131 )
After discussion and consideration, inter alia, of these alternatives, the ILC drafted the following articles regarding diplomatic protection and corporations, which not only clarify the rules as understood but modify and develop (p. 132 )them, I believe, in an acceptable manner, considering particularly that the rules emerging from the Barcelona Traction Co Case enjoyed general respect:
Continuous nationality of a corporation
1. 1. A State is entitled to exercise diplomatic protection in respect of a corporation that was a national of that State, or its predecessor State, continuously from the date of injury to the date of the official presentation of the claim. Continuity is presumed if that nationality existed at both these dates.
2. 2. A State is no longer entitled to exercise diplomatic protection in respect of a corporation that acquires the nationality of the State against which the claim is brought after the presentation of the claim.
3. 3. Notwithstanding paragraph 1, a State continues to be entitled to exercise diplomatic protection in respect of a corporation which was its national at the date of injury and which, as the result of the injury, has ceased to exist according to the law of the State of incorporation.
Protection of shareholders
A State of nationality of shareholders in a corporation shall not be entitled to exercise diplomatic protection in respect of such shareholders in the case of an injury to the corporation unless:
1. (a) The corporation has ceased to exist according to the law of the State of incorporation for a reson unrelated to the injury; or
2. (b) The corporation had, at the date of injury, the nationality of the State alleged to be responsible for causing the injury, and incorporation in that State was required by it as a precondition for doing business there.
Direct injury to shareholders
To the extent that an internationally wrongful act of a State causes direct injury to the rights of shareholders as such, as distinct from those of the corporation itself, the State of nationality of any such shareholders is entitled to exercise diplomatic protection in respect of its nationals.
In the Commentary to these Articles and Article 9 certain important points were made. These relate to the clarification and development of the law. They will be addressed here:
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