Domestic and foreign investors in Bulgaria are suffering increased interference by arbitrary government action. Instances of gross abuse of office are reported daily across all branches of government. For businesses vulnerable to politically sponsored overreaching-such as mid-and large-cap operations-reliance on domestic courts for effective recourse is no longer an underwrite business decision. Graft and political pressure have subdued the courts and the prosecution to the point where Bulgaria now officially ranks after failed states Haiti and Sierra Leone on the independence of the judiciary and undue influence index.
The rapidly mounting level of political risk coincides with the signing of the Multilateral Agreement for the Termination of Bilateral Investment Treaties between the Member States of the European Union ("Agreement"). Pursuant to the terms of the Agreement Bulgaria is terminating all of its 19 BITs with other Member States ("Intra-EU BITs"), including their respective sunset clauses, which are designed to secure coverage after termination of between 5 and 15 years. The Agreement was executed on 29 May 2020, and is currently in the process of ratification by the individual Member States, including Bulgaria. Investors in Bulgaria who have optimized for BIT protection through an EU jurisdiction will be imminently left without BIT protection.
In this scenario, the only recourse that will remain available at the international level will be to seek redress before the European Court for the Human Rights ("ECHR") for violations of the European Convention on the Human Rights. This supranational body, however, applies a strict exhaustion rule, has a 2% admissibility rate for cases originating in Bulgaria, and does not apply the full and effective compensation standard, which significantly lowers the amounts that an investor may receive as damages. For these reasons the ECHR cannot serve as an effective substitute for investment treaty protection and the international arbitration process available in most of Bulgaria's BITs, and the Energy Charter Treaty ("ECT"), to which Bulgaria is a party.
In the confluence of these unfortunate circumstances investors in Bulgaria face a number of salient questions. Can domestic investors (i.e. Bulgarian citizens or non-foreign owned domestic corporations) optimize for protection under a bilateral investment treaty? Can foreign investors that established their investments in the jurisdiction relying on an Intra-EU BIT optimize for protection through a non-EU jurisdiction? Can foreign investors who originally entered without investment treaty coverage optimize for protection after the establishment of the investment?
Based on the abundant line of precedent consisting over 60 arbitration awards discussing the issue of permissibility of corporate restructuring in the context of treaty optimization, the answer to each of these questions should generally be in the positive. In a majority of 64% of all cases investors have successfully overcome respondent states' jurisdictional objections based on the restructuring.
The decisive inquiry on the issue ordinarily focuses on the specific language of the applicable BIT and demarcates permissible from non-permissible restructurings by focusing on three key questions.
(1) The definition of the terms "investor" and "investment" in the applicable BIT. Where the claim is based on a broadly worded investment treaty, claimants succeed in overcoming objections to a restructuring in an overwhelming number of the awards. In this context a broad definition of investor is one based solely on the place of incorporation for entities or the citizenship for individuals; and for investment an all-encompassing recital of property and other rights that the BIT elevates to the status of a foreign investment in the host state.
(2) The timing of the restructuring. Tribunals pay particular attention to whether the restructuring was carried out before or after the dispute arose and whether such dispute was foreseeable to the investor at the time of restructuring. Where the tribunal is persuaded that the reasons for the restructuring were other than solely to access international arbitration in the face of an already adopted measure the objections fail in over 80% of the awards.
(3) Genuine economic activity in the host state. Where tribunals find that the claimant engaged in a genuine economic activity in the respondent state, the investors succeed in overcoming jurisdictional objections in nearly all decisions.
Using these general metrics as a guideline we perused the Bulgarian investment treaty program to suggest available options for domestic and international investors in Bulgaria interested in optimizing for BIT protection. While we strongly advise immediate action toward ensuring coverage, these suggestions are by no means an invitation for investors to undergo a restructuring without first consulting experienced investment arbitration lawyers. Each operation and each structure used in the lifetime of the particular enterprise have specifics that can only be addressed after careful analysis on a case by case basis.
Bulgaria is a signatory to 71 BITs, of which 59 BITs are in force, including the 19 Intra-EU BITs that are in the process of termination under the Agreement. Bulgaria has also ratified the ECT, which is not included in the multilateral termination Agreement. Investors engaged in "economic activity in the energy sector" who are not currently covered by the ECT can restructure for coverage through any jurisdiction in or outside of the EU for which the treaty is in force. For investors outside the energy space, of the 40 BITs that will remain in force for Bulgaria, we have identified 7 BITs that provide for (a) broad substantive protections; (b) broad arbitration provisions, including at a minimum the ICSID regime; (c) optimal terms to allow strong position against potential jurisdictional objections by Bulgaria based on the restructuring. The treaties are listed top-down in order of suitability:
- Lebanon offshore zone (also suitable for tax optimization)
In addition to these jurisdictions investors who wish to be covered or continue to be covered by the Netherlands - Bulgaria BIT even after the termination Agreement is ratified, and enters into force for Bulgaria, they may have that option through a restructuring to Aruba or one of the former Dutch Antilles - Curacao and St. Marteen. Parvan P. Parvanov, Esq, International Arbitration Chambers New York, J.D. Columbia Law School (Stone Scholar), and Prof. Berk Demirkol, Ph.D. Cambridge, International Arbitration, are experienced international arbitration lawyers based in New York and London.