At the COP26 climate summit in November 2021, over forty countries committed to phase out use of coal-fired power. Even before this summit, a number of States had already started the process of phasing out coal-powered energy domestically, often providing compensation packages for mining companies, coal-powered plants and affected workers.
Adopting policies that will help States achieve net zero emissions is laudable. However, in doing so, the rights of all stakeholders must be considered. Failure to do so may lead to disputes between companies affected by the energy transition and States, including about whether the implementing State is providing adequate (or any) compensation to affected companies.
This blog post looks at what a recent decision on the phase out of coal in Canada tells us about the types of disputes that can arise in the energy transition and the risks involved in restructuring investments impacted by the transition.
What type of disputes?
There are over 2,500 international investment treaties that provide protection to foreign investors with investments in the territory of a State which is signatory to one of these treaties. Depending on the treaty, protected investors may bring claims alleging for example (i) the substantial deprivation of their investment without adequate compensation or (ii) discriminatory treatment if other impacted domestic or foreign companies are given better treatment. These disputes are resolved by international arbitration.
What happens if I need to restructure my investment while a dispute is ongoing?
While these disputes are ongoing, investors may find that they need to restructure their operations to address liquidity issues. In such cases, the investor should tread carefully so as not to lose treaty protections.
A recent decision, Westmoreland v Canada, is illustrative: certain forms of restructuring, which may carry tax or other benefits, could inadvertently lead to the loss of the right to bring an international treaty claim against the State.
The Westmoreland dispute was between Westmoreland Mining Holdings LLC (Westmoreland Mining) and Canada relating to Alberta’s decision to phase out coal-powered energy and compensate coal-fired power plants but not the coal mines that were there to exclusively supply the power plants. A number of these coal mines were owned by the Westmoreland Coal Company (WCC).
In 2018, WCC initiated an arbitration against Canada under Chapter 11 of the North American Free Trade Agreement (NAFTA) claiming breach of the fair and equitable treatment standard and discriminatory treatment, with damages exceeding US$470 million.
While the arbitration was ongoing, however, WCC filed for bankruptcy, citing competition from other energy sources as a major driver of its financial difficulties. WCC’s first-tier lienholders entered into an agreement under which they agreed that they would provide a bid of last resort if no one else bid to acquire WCC’s assets including the NAFTA claim. The acquisition was to take place via a newly created entity, Westmoreland Mining, which would not take on WCC’s liabilities. WCC would eventually be wound up.
No bidder materialized. WCC thus transferred the Canadian coal mines and the NAFTA claim to Westmoreland Mining (among other assets). WCC then discontinued the proceedings it had started against Canada and Westmoreland Mining initiated a new arbitration against Canada.
Canada objected to Westmoreland Mining bringing the claim. According to Canada, under Chapter 11 of NAFTA, only the investor who owns the investment at the time of the State’s measures has a right to bring a claim.
The tribunal agreed with Canada. According to the tribunal, the only way that Westmoreland Mining could have brought a claim against Canada was if it could prove that it was the successor in interest to WCC. The tribunal analyzed how the restructuring was undertaken and found that Westmoreland Mining was not a successor to WCC. To arrive at this conclusion, the tribunal took note of the fact that Westmoreland Mining was not created by WCC but rather by its first-tier lienholders who, as WCC’s creditors, were adverse to WCC. The tribunal also noted that Westmoreland Mining acquired WCC’s assets, including the NAFTA claim, in an arms-length transaction which reinforced the view that Westmoreland Mining was not a successor to WCC.
How to restructure your investment without losing your treaty rights
The Westmoreland tribunal emphasized that its analysis that Westmoreland Mining could not bring a claim against Canada was based on the specific process by which Westmoreland Mining came into being and acquired the NAFTA claim, noting that that this was not a corporate restructuring whereby Westmoreland emerged from WCC’s ashes nor was Westmoreland spun out of WCC. This suggests that the latter forms of restructuring would have allowed Westmoreland Mining to bring the claim against Canada. Another possible option may have been to keep WCC as claimant until the arbitration’s conclusion although this may have caused issues with respect to WCC’s debts.
As the energy transition leads to changes which impact investors and their operations around the world, investors must act carefully in restructuring impacted assets to ensure the continued protection of treaty rights. We are available to advise you if you have any questions about how to ensure access to or maintain treaty protections of your investments, including when restructuring distressed businesses and any other form of corporate restructuring.