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Petersen Energia Inversora S.A.U. v. Argentine Republic

United States Court of Appeals, Second Circuit

July 10, 2018

Petersen Energia Inversora S.A.U. and Petersen Energia, S.A.U., Plaintiffs-Appellees,
Argentine Republic and YPF S.A., Defendants-Appellants. [*]

          Argued: June 15, 2017

         On Appeal from the United States District Court for the Southern District of New York

         Appeal from an order of the United States District Court for the Southern District of New York (Preska, J.), denying defendants-appellants' motion to dismiss under (1) Federal Rule of Civil Procedure 12(b)(1) for lack of subject mater jurisdiction on grounds of foreign sovereign immunity and (2) Federal Rule of Civil Procedure 12(b)(6) pursuant to the act of state doctrine.

          Michael K. Kellogg (Mark C. Hansen, Derek T. Ho, Benjamin S. Softness, on the brief), Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C, Washington, D.C., and Reginald R. Smith, King & Spalding LLP, New York, New York, for Plaintiffs-Appellees.

          Maura Barry Grinalds, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, and Martin Domb, Benjamin Joelson, Ackerman LLP, New York, New York, for Defendant-Appellant Argentine Republic.

          Michael A. Paskin, Cravath, Swaine & Moore LLP, New York, New York, and Thomas J. Hall, Marcelo M. Blackburn, Chadbourne & Parke LLP, New York, New York, for Defendant-Appellant YPF S.A.

          Before: Winter, Calabresi, and Chin, Circuit Judges.


         Defendants-appellants the Argentine Republic (“Argentina") and YPF S.A. ("YPF") (together, "defendants") appeal an order of the United States District Court for the Southern District of New York (Preska, J.), denying defendants' motions to dismiss under (1) Federal Rule of Civil Procedure 12(b)(1) for lack of subject mater jurisdiction on grounds of foreign sovereign immunity and (2) Federal Rule of Civil Procedure 12(b)(6) pursuant to the act of state doctrine. We affirm the district court's order insofar as it denied the motion to dismiss under the Foreign Sovereign Immunity Act and we dismiss defendants' appeal as to the act of state doctrine.


         Unless otherwise noted, the facts herein are undisputed. They are drawn from the complaint and the documents submited by the parties in reference to defendants' motions to dismiss.

         I. YPF Becomes a Publicly Traded Company

         YPF is a petroleum company that was wholly owned and operated by the Argentine government until 1993. That year, in accordance with broader efforts to reform its economy, Argentina decided to privatize the petrol firm through an initial public offering ("IPO") of nearly 100% of YPF's voting stock (the "shares"). [1] Argentina and YPF took a number of steps to entice investors to participate in the IPO and thereby ensure its success, two of which are particularly relevant to this case. First, they arranged for YPF to offer shares in the United States as American Depository Receipts ("ADRs") listed on the New York Stock Exchange ("NYSE"). Second, they amended YPF's bylaws - that is, the contract governing the relationship among YPF, Argentina (in its capacity as a shareholder), and other YPF shareholders. In particular, the bylaws were amended to incorporate protections for investors from (1) hostile takeovers and (2) atempts by Argentina to renationalize the company. These takeover protections form the basis of this breach of contract dispute, and so we describe them in some detail.

         Section 7(d) of the amended bylaws prohibits (with certain exceptions inapplicable here) the direct or indirect acquisition of YPF shares if the acquisition results in the acquirer controlling 15% or more of the shares, unless the acquirer makes a tender offer for all of the outstanding shares in accordance with certain procedures and at a price determined by a formula in the bylaws. Among the prescribed procedures, section 7(f) requires that any such tender offer comply with the rules and regulations imposed by the governments and stock exchanges where YPF's shares are listed. Because YPF's securities were to be listed on the NYSE, those conducting tender offers in accordance with these shareholder protection measures would be compelled by section 7(f) to comply with NYSE and Securities and Exchange Commission ("SEC") rules and regulations. Section 7(f)(iv) further obligates the acquirer to publish notice of its tender offer "in the business section of the major newspapers . . . in the City of New York, U.S.A. and any other city where the shares [of YPF] shall be listed." App. 340. Perhaps most importantly for purposes of this appeal, section 28(A) of the bylaws extends the tender offer requirement of sections 7(e) and 7(f) to:

all acquisitions made by the [Government of Argentina], whether directly or indirectly, by any means or instrument, of shares or securities of [YPF], 1) if, as a consequence of such acquisition, the [Government] becomes the owner, or exercises the control of, the shares of [YPF], which, in addition to the prior holdings thereof of any class of shares, represent, in the aggregate, at least 49% of the capital stock [of YPF]; or 2) if the [Government] acquires at least 8% of class D outstanding shares of stock, while withholding class A shares of stock amounting at least to 5% of the capital stock.

App. 432.

         The penalties for breaching these provisions are drastic. Section 7(h) provides that "[s]hares of stock and securities acquired in breach of [the tender offer requirements] shall not grant any right to vote or collect dividends." App. 342. And section 28(C) extends such treatment to shares acquired by Argentina, unless its breach is accidental. In that case, "[t]he penalties provided for in subsection (h) of Section 7 shall be limited . . . to the loss of the right to vote." App. 355. At botom, these shareholder protection measures appear to promise investors a compensated exit from their ownership position in the firm if Argentina were to decide to renationalize YPF.

         Argentina and YPF touted these protections in the prospectus filed with the SEC in connection with the IPO. That document stated that "[u]nder [YPF's] By-laws, in order to acquire a majority of [YPF's] capital stock . . ., the Argentine Government first would be required to make a cash tender offer to all holders of [the shares] on terms and conditions specified in the By-laws." App. 23. The prospectus further stated that "any Control Acquisition carried out by the Argentine Government other than in accordance with th[at] procedure . . . will result in the suspension of the voting, dividend and other distribution rights of the shares so acquired." Id. (alteration in original).

         By all accounts, Argentina's marketing efforts worked. YPF launched a successful IPO on June 29, 1993. Through the sale of YPF securities, Argentina raised billions of dollars in investment capital with the largest share (more than $1.1 billion in total) coming from the sale of ADRs in the United States on the NYSE. A firm called Repsol S.A. ("Repsol") emerged from the IPO as YPF's majority shareholder. Even after the IPO, however, Argentina continued to participate in YPF's corporate governance as a commercial actor. It remained a holder of YPF's Class A shares, entitling it to elect at least one member of the firm's board of directors. Argentina also retained a veto right over certain third-party acquisitions of YPF's capital stock. After the IPO, YPF's shares, via the ADRs, were traded publicly on the NYSE and other exchanges.

         Plaintiffs-appellees Petersen Energía Inversora, S.A.U. and Petersen Energía, S.A.U. (together, "Petersen") entered the picture in 2008. Between 2008 and 2011, Petersen conducted a series of acquisitions and came to own approximately 25% of YPF's shares, held in the form of ADRs issued by the Bank of New York Mellon in New York City. All of Petersen's acquisitions were made in accordance with YPF's bylaws, including the tender offer provisions in section 7. The bulk of Petersen's shares were purchased from Repsol and their purchase was financed by Repsol and various financial institutions, which maintained a security interest in the stock as collateral. As part of a shareholder agreement with Petersen, Repsol agreed to cause YPF to make biannual distributions of 90% of its profits to shareholders via dividends in accordance with section 25 of the bylaws. Petersen often used these dividends to make payments on the loans it used to finance the purchase of YPF stock.

         All of that changed in 2012. Early that year, members of the Argentine government began publicly criticizing Repsol's and Petersen's management of YPF and started discussing the prospect of renationalizing the company. The value of YPF's ADRs plummeted in response to this news. To put what happened next in the appropriate context, it helps to understand a litle about the mechanics of Argentine expropriation law.

         II. Argentine Expropriation Law

         Expropriation is the "governmental taking or modification of an individual's property rights." Expropriation, Black's Law Dictionary (10th ed. 2014). A "classic example" is the government's condemnation of a parcel of land to make way for some public good, like a road. Murr v. Wisconsin, 137 S.Ct. 1933, 1939 (2017). The enactment of land use regulations may also, in some cases, constitute an expropriation. See id. But these land-based examples understate the breadth of a sovereign's power of expropriation, which can be vast. That is so because all types of property can be expropriated, whether tangible or intangible. Personal property, airspace rights, contract rights, even the shares of a corporation - at least in theory, a sovereign can expropriate them all. See Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 128 (1978) (discussing a "taking" of airspace rights); accord August Reinisch, Expropriation, in The Oxford Handbook of International Investment Law 407, 410 (Peter Muchlinski et al. eds., 2008) ("It is generally asserted that expropriation may affect not only tangible property but also a broad range of intangible assets of economic value to an investor. Property that may be expropriated by states thus comprises immaterial rights and interests, including in particular contractual rights."). In reality, however, whether a government may expropriate property, what property is subject to expropriation, and how much the government must compensate the individual it expropriated the property from (if at all) are largely questions of law of the expropriating nation. Leo T. Kissam & Edmond K. Leach, Sovereign Expropriation of Property and Abrogation of Concession Contracts, 28 Fordham. L. Rev. 177, 184 (1959) ("States are at liberty to carry out . . . expropriations in the manner and form they consider best; . . . they are free to operate their municipal system of property according to their own national genius . . . ."); compare Org. for Econ. Co-operation & Dev., "Indirect Expropriation" and the "Right to Regulate" in International Investment Law, in International Investment Law: A Changing Landscape 43, 43-72 (2005) (discussing limits imposed on expropriations by customary international law). In this case, we look to Argentine law. See Garb v. Republic of Poland, 440 F.3d 579, 594-98 (2d Cir. 2006).

         Article 17 of Argentina's National Constitution sets the conditions under which property may be expropriated by the Argentine government. To effectuate an expropriation consistent with Article 17, two conditions must be met: (1) the Argentine Congress must declare a public use for the property to be expropriated and (2) the owner of the property must be compensated. The Argentine government has passed laws to clarify what property is subject to expropriation and to specify the procedures that must be followed to meet the conditions for expropriation.

         One such law is Law 21, 499, known as the "General Expropriation Law." App. 57. It empowers, among other entities, the Argentine Federal Government to act as an expropriator. As for the declaration of public use required by Article 17 of the National Constitution, section 5 of the General Expropriation Law clarifies that the Argentine Congress "shall particularly refer to specific property" to be expropriated in its declaration and section 1 provides that "[p]ublic use, which is required as legal grounds for expropriation, comprises all cases where public welfare may be involved." App. 185-86. The law further declares that "[a]ll such property as may be convenient or necessary to satisfy [that] 'public use' purpose, whatever the legal nature thereof, whether publicly or privately owned, or be they things or not, may be subject to expropriation . . . ." App. 186. As for compensation for that property, section 10 of the General Expropriation Law provides that the owner shall receive "the objective value of the property plus any direct and immediate damages resulting from expropriation," such amounts to be fixed by agreement of the owner and expropriator or pursuant to a court proceeding. App. 187. And, presumably to prevent the owner's malfeasance while compensation is being fixed, section 16 of the law proclaims that »[n]o contract executed by the owner after the effective date of the law declaring the expropriation of the property and which may imply the creation of any right or interest in the property shall be good as against the expropriator." App. 187.

         Accordingly, with this legal backdrop in mind, we return to how Argentina regained control over YPFs affairs in the spring of 2012.

         III. Argentina Regains Control of YPF

         On April 16, 2012, pursuant to the General Expropriation Law, Argentina proposed legislation that would expropriate directly from Repsol 51% of the voting stock of YPF. On the same day, the Argentine National Executive Office decreed that it was empowering an "Intervenor" to seize immediate control of YPF's operations and to operate the company as a going concern while the Argentine Congress considered the expropriation legislation. Action was swift. Indeed, before some of these measures were even announced publicly, the Intervenor seized control of YPF's facilities, replaced top management with government officials, and escorted YPF's then-CEO off the premises. The Intervenor also cancelled regularly-scheduled meetings of YPF's board of directors and refused to make expected dividend payments.

         Argentine officials were also quick to declare that, despite having acquired control of the company, Argentina and YPF had no intention of complying with the tender offer provisions of YPF's bylaws. For example, on April 17, 2012, in a speech before the Argentine Senate, the country's Deputy Economy Minister described as "fools . . . those who think that the State has to be stupid and buy everyone according to YPF's own law, respecting its by-law." App. 29 n.1. He also dismissed the tender offer requirements as "unfair" and a "bear trap." Id.

         On May 3, 2012, the proposed expropriation legislation was enacted as Law 26, 741 with an effective date of May 7, 2012 (the "YPF Expropriation Law"). In accordance with Article 17 of the National Constitution, the YPF Expropriation Law pronounced Argentina's national public interest in achieving "self-sufficiency in hydrocarbon[] supply," App. 165, by, inter alia, integrating "public and private . . . capital into strategic alliances aimed at the exploration and ...

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