Dutch asset protection is key for investments in riskful countries
Foreign operational activities shall be structured so that risks shall be mitigated. One of these risks is political risk. Foreign investors and lenders should try to protect their assets and mitigate the risk of expropriation whereby the foreign state does not or insufficiently compensate investors and lenders.
Asset protection can obtained in many forms, for example by means of an adhoc sovereign or government guarantee providing direct recourse to the state in case of breach of contract, acknowledgement that accounts of operational companies can, despite local foreign currency regulations, be kept outside the country of investment, support from export credit agencies in the form of guarantee or insurance.
When doing business in riskful countries it can be recommended to have a Netherlands holding or finance entity with a Netherlands registered address in place within your investment structure. The Netherlands excels in asset protection because of three lines of defense against expropriation. As described here below the owners of the Yukos assets brought all three lines successfully into practice. The Yukos case consists of multiple court cases to obtain control over the assets of Yukos, a bankrupt Russian oil company. Its bankruptcy was caused by unlawful tax claim.
Asset protection measure 1: Investment protection treaties.
A bilateral investment protection treaty is entered between two countries to protect investments made by a national of either of the states into the other. It aims to provide a level of legal protection to the investor and lender. The number of bilateral investment protection treaties concluded by the Netherlands is higher than most other countries. The Netherlands is also member of multilateral investment protection treaties such as the Energy Charter. This is an international agreement which establishes a multilateral framework for cross-border cooperation in the energy sector. The treaty also covers legally binding dispute resolution procedures. In 2014, the nearly 10-year-long Yukos case was decided by the Permanent Court of Arbitration in favour of the claimants on the basis of the Energy Charter, with a record-breaking $50 billion award. The case is not fully ended yet as the authority of the Permanent Court of Arbitration located in the Hague is currently disputed before Dutch courts.
Asset protection measure 2: STAK
A type of Dutch foundation, Stichting Administratiekantoor (‘STAK’), can be used for many purposes. For asset protection it is very suitable as it can prevent from hostile takeovers. A STAK can be structured in such way that the owners of certificates have no control over its assets, instead the control is with its board of directors.
Yukos managers established a STAK in the year 2005. At the time, Financial Performance Holding, a Yukos entity, transferred its assets to STAK Yukos International in order to protect shareholders' interests.
Asset protection measure 3: Territorial approach to bankruptcies
The Netherlands has a territorial approach to bankruptcies. As a result the level of asset protection of a Dutch holding company used for doing business in riskful countries is high. The territorial approach makes that the Dutch courts will not automatically rely on bankruptcy judgment from outside the EU. Such judgment will have to be tested whether it does not conflict with public order in the Netherlands. This defense weapon was successfully used in the Yukos Finance case involving approximately € 800 million of assets. The Dutch Court concluded that the Russian tax rules were violated and that this was done with the obvious intention to provoke payment power and ultimately cause the bankruptcy of Yukos.
Useful links:
Information on the International Energy Charter
UNCTAD list of Dutch bilateral investment treaties