Venezuela is Like... PDVSA's Alter Ego, and Vice Versa?
And so it begins. As Anna notes, Venezuela is in dire straits, yet its stubborn insistence on paying bondholders puts it in the running for "world's slowest train wreck." When the wheels finally leave the tracks, expect a free-for-all in which competing claimants (bondholders, arbitration claimants, etc.) fight to recover as much as possible, both from the government and from state-owned oil company PDVSA. The major players will include creditors holding billions of dollars in arbitration awards against Venezuela. These creditors, unlike those holding government or PDVSA bonds, need not fear a debt restructuring. They will, however, have to find attachable assets that can be seized to satisfy their claims.
Enter Canadian mining company Crystallex, which has been trying to enforce a $1.2 billion arbitration award against Venezuela, so far without success. A few days ago, it tried a new tack--one with broader implications for any restructuring of Venezuela's or PDVSA's debt. Crystallex asked a federal court in Delaware to attach the shares of PDV Holding, Inc., a Delaware company that is the ultimate U.S. parent of CITGO petroleum. PDV Holding is owned by PDVSA, which, in turn, is owned by Venezuela.
These questions of "alter ego" liability will play a crucial role in Venezuela's debt crisis. We have discussed this subject multiple times already here on Credit Slips, mostly in connection with proposals to have the government strip PDVSA of its right to exploit hydrocarbon reserves. An even more important question--which I hope to address in another post--is whether PDVSA can structure its operations to sell oil in the United States without having creditors seize the receivables. This question also depends in part on the law of alter ego liability. Yet another question--raised by Crystallex--is whether the government's creditors can seize its indirect stake in CITGO.*
It's early days in Crystallex's attempt to seize PDVSA's interest in PDV Holding. Crystallex has asked to submit an extra-long brief justifying its request. Here's a copy of the proposed brief, which offers a forceful and relatively complete argument for why PDVSA should be treated as Venezuela's alter ego. In brief: "PDVSA is so extensively controlled by the government that it is impossible to say where one ends and the other begins." To make the point, Crystallex has mined PDVSA's Twitter feed, noting that on at least 100 occasions, PDVSA has tweeted "PDVSA es Venezuela."
I don't know what this proves, except that I should be glad not to have worked at the law firm representing Crystallex. ("Hey Weidemaier, we need you to stay late to count how many times PDVSA has tweeted that it "is" Venezuela!) The doctrine of alter ego liability does ask whether the shareholder (Venezuela) controlled the entity (PDVSA). But in the context of state-controlled entities, this question can be a bit silly. What should matter is whether the government has used the corporate form to defraud creditors or in ways that undermine the Foreign Sovereign Immunities Act. Still, this case is one to watch. If the court holds that PDVSA is Venezuela's alter ego, this will complicate the (inevitable) government and PDVSA debt restructurings.
* Query why Crystallex values PDV Holding shares. Shareholders can be wiped out in bankruptcy and are last in line behind other creditors, of which CITGO has plenty. On the other hand, seizing the shares might allow Crystallex to disrupt Venezuela's oil pipeline to the United States and would probably force the government to make some hard choices about how to structure its U.S. oil operations.