Philipp Kurek discusses additional protections under international investment laws for water company investors in Water Magazine

By Philipp Kurek

Partner Philipp Kurek argues that nationalisation of Thames Water may not spell trouble for stakeholders and institutional investors, as long as appropriate protections are in place for them under the appropriate investment treaty agreements.

Read Philipp’s article published in Water Magazine, 20 February 2024, here

Concerns for the future of Thames Water reached fever pitch in summer 2023 as fears intensified that the company, which serves about 25% of English households, may collapse. Around the same time, it emerged that the government was drawing up plans in case emergency renationalisation of Thames Water was required. Ultimately, the threat of nationalisation appears to have been narrowly avoided when investors agreed a turn-around plan and injected significant additional funds into the company.

However, whilst the threat of nationalisation appears to have been avoided for the time being, investors in Thames Water would be well advised to carefully consider the potential protections applicable to their existing, and any future, investments in the company.

To that end, it is important for investors to not only consider protections available under applicable contracts and national laws, but also often overlooked protections afforded by international investment laws that may be applicable to such investments, as well as steps that could – and should – be taken to maximise the protections afforded by such international laws.

Investment treaties as the source of additional rights and protections

The UK is party to more than 100 investment treaties with countries around the world, with each treaty generally affording certain protections to foreign investors from the countries with which the UK has concluded an applicable investment treaty.

However, not every investor qualifies for the protections contained in these treaties. Rather, whether an investor can avail themselves of relevant investment protections depends on the particular terms of each treaty.

Some treaties offer protections to investors by reference to their nationality or the country of their incorporation, without any requirement that the ultimate beneficial ownership or control needs to be in the relevant treaty jurisdiction – thus effectively affording treaty protection to investors provided they hold their investment through a qualifying holding company in the relevant treaty jurisdiction. Other treaties, however, contain more restrictive terms, requiring investors to have substantial business activities in their treaty home state (thus excluding pure holding/post-box companies from the treaty’s scope). Moreover, whether an investor may avail themselves of treaty protections also depends on the treaty’s definition of qualifying investments, though most treaties adopt a very wide definition and often cover “every kind of asset” owned or controlled by qualifying investors, including direct and indirect shareholdings, debt, bonds, contractual rights, and other financial interests.

Whilst the protections afforded by a treaty also depend on the specific terms of each treaty, most treaties provide for some key protections that would be highly relevant to investors holding a direct or indirect financial interest in Thames Water.

Most importantly, investment treaties generally contain protections against unlawful expropriation, including nationalisation of an investment unless such expropriation/nationalisation is accompanied by prompt, adequate and effective compensation, is carried out in the public interest, in accordance with due process, and is non-discriminatory. Therefore, any government action that would substantially deprive investors of the economic value of their investment without payment of fair market value compensation, or which illegitimately discriminates against some investors, could engage the UK’s liability under applicable investment treaties.

In addition, most investment treaties also impose an obligation on host states to accord foreign investments “fair and equitable treatment” – a very broad standard which, amongst other things, has been held to require host states to protect investors’ legitimate expectations, maintain a stable and predictable legal and business framework for investments, act proportionately, with procedural fairness, due process, and transparency, comply with contractual obligations, and refrain from arbitrary and discriminatory conduct. Thus, any intervention by the UK government (including Ofwat) that violates those protections, even if it falls short of renationalisation, could equally give rise to treaty claims against the UK.

Actions investors would be well advised to take now

At this stage, it is not clear what form UK government intervention in Thames Water may take (if any). However, given these uncertainties, investors (including shareholders, bondholders, and any others with a financial interest in Thames Water) should carefully consider whether their current investment structure affords them the above treaty protections and the ability to bring potential claims directly against the UK government in international arbitration.

To the extent existing investments do not currently benefit from applicable treaty protections, investors should note that it is perfectly acceptable – and common – for investors to structure, and restructure, their investments to secure and maximise applicable treaty protections, provided any such restructuring takes place before the relevant dispute has become reasonably foreseeable.

Given the events of 2023, and the challenges ahead, investors would be well advised to consider any potential restructuring as soon as possible so that it can be implemented in an orderly and tax efficient fashion and in good time before any dispute that may arise.

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