21 August 2013
Practice Group:
International
Arbitration
Investment Protection Alert: Zimbabwe
Indigenization Program
By Wojciech Sadowski, Tomasz Sychowicz, Ania Farren, Ian Meredith and James Green
Following the re-election of President Robert Mugabe, the Zimbabwe Government is now
reported to be pushing forward with its policy of “indigenization” of the country’s economy,
which consists of ensuring that indigenous Zimbabwean investors hold not less than 51% or a
controlling interest of the shares in companies operating in Zimbabwe. This may involve a sale or
other transfer of shares by foreign investors, who agree to a disposal to indigenous Zimbabwean
investors due to the risk of losing their operating licenses should they refuse.
In addition the Government plans to establish an alternative, racially exclusive stock exchange
where shares may only be held by indigenous Zimbabweans. There is as yet no legislation in place
for such a structure and it is not clear how it would work. Although the indigenization program
was started by the Government some 6 years ago, it is understood to be acquiring a new political
impetus now, following the results of the elections of 31 July 2013. However, a substantial
progress in the indigenization program will only be possible if the indigenous investors are not
required to pay full compensation for shares they acquire.
The practical result of the “indigenization” for foreign investors will be a disposal of part of their
shareholdings in their Zimbabwean investments and the likely decrease in value of the remaining
minority stake. In light of these developments, investors who are likely to be affected by the
measures should consider whether their investments in Zimbabwe are or can be adequately
protected under a bilateral investment treaty ("BIT").
The BITs envisage international law levels of protection for foreign investors, including protection
against expropriation or discriminatory treatment. In addition, they provide for access to
international arbitration for resolution of any disputes concerning the investment.
In practical terms, the BITs allow foreign investors to obtain compensation for detriments suffered
due to state actions, even if the latter are in conformity with domestic laws.
Zimbabwe has signed 30 BITs, but only the treaties with the 6 following countries were ratified
and are in force: China, Denmark, Germany, Netherlands, Serbia and Switzerland1. Importantly,
Zimbabwe is also party to the 1965 Washington Convention on the Settlement of Investment
Disputes between States and Nationals of Other States ("ICSID"), which establishes a legal and
institutional framework for the resolution of investor-state disputes. Consequently, foreign
investors who qualify under one of the aforementioned BITs could potentially be able to avail
themselves of the investment protections and to seek compensation for the loss of shares in their
Zimbabwean subsidiaries.
The low number of treaties ratified by Zimbabwe may be offset by the fact that the BITs allow
investors from third countries to structure their investments so as to obtain investment treaty
protection. For example, the Zimbabwe-Netherlands BIT is applicable not only to investments
made by Dutch companies, but also to those made by companies controlled, directly or indirectly,
by a Dutch entity. Accordingly, it may be advisable to establish a Dutch intermediary and add it
into the corporate structure of the investment to gain access to the protections guaranteed in the
BIT. The same possibility is available under the Zimbabwe-Switzerland BIT.
1
According to UNCTAD Database, available at: http://unctad.org/Sections/dite_pcbb/docs/bits_zimbabwe.pdf
Investment Protection Alert: Zimbabwe indigenization
program
Such corporate restructuring, or nationality planning, for BIT-purposes is becoming a frequent
business practice all across the world. It is particularly relevant for businesses operating in
countries of high political risk, low legal security and which have a limited number of BITs in
force, like Zimbabwe.
The decisions of arbitral tribunals deciding investor-state disputes confirm that corporate
restructuring can serve as a valid and effective legal tool for foreign investors. The only
prerequisite is that the new corporate structure must be established before a dispute has arisen, i.e.
before the state adopts measures that adversely affect the investment. Any restructuring after this
date may be considered abusive forum-shopping and the investor may be precluded from invoking
the BIT provisions.
Given the present situation in Zimbabwe, adequate advice and planning should be considered at
this time to ensure that a crisis is avoided which may impact on a substantial part of an investor’s
shareholding. It must be added that such restructuring may be coupled with tax optimization,
providing even broader benefits for the investors.
Should you have any questions regarding the described situation in Zimbabwe or the possibilities
for restructuring your business operations in the BIT context, please do not hesitate to contact us.
Authors:
Wojciech Sadowski
Tomasz Sychowicz
Ania Farren
wojciech.sadowski@klgates.com
+48.22.653.4201
tomasz.sychowicz@klgates.com
+48.22.653.4233
ania.farren@klgates.com
+44.(0)20.7360.8175
Ian Meredith
James Green
ian.meredith@klgates.com
+44.(0)20.7360.8171
james.green@klgates.com
+44.(0)20.7360.8105
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