Venezuela as a case study in limited (sovereign) liability

Abstract

... Venezuela is in a severe economic crisis. An October 2016 debt swap bought some time for beleaguered state-owned oil company Petróleos de Venezuela, S.A. (PDVSA), but there remains speculation about default by both PDVSA and the government.1 Default would invite comparisons to the case of Argentina. Like that country, Venezuela has issued bonds governed by New York law and accepted the jurisdiction of New York courts. Some Venezuelan bonds also include the same pari passu clause used by Argentina, which holdout creditors used to extract a preferential settlement.2 The Venezuelan economy, moreover, is largely dependent on oil exports. A default by either the government or PDVSA would prompt creditors to try to seize oil-related assets, such as rights to payment for oil shipments. In short, Venezuela, like Argentina, may prove a tempting target for litigation by holdout creditors. In this article, we explore some of the legal considerations that would govern such litigation. We do not address the pari passu clause, which has been covered at length elsewhere.3 Nor do we address prospects for a successful restructuring, although we concede that Venezuela has options not available to Argentina.4 Instead, our goal is to address speculation that, because the Venezuelan economy depends so heavily on oil revenues, the country is uniquely susceptible to litigation by holdout creditors, who could position themselves to seize oil-related assets. We emphasize barriers to such litigation, which will be familiar to corporate lawyers but are often overlooked in discussions of sovereign debt. For instance, PDVSA does not own its hydrocarbon reserves; these belong to Venezuela. To frustrate PDVSA’s creditors, the government might transfer exploitation rights to a new entity.5 Moreover, neither the government nor PDVSA directly own oil-related assets outside of Venezuela. Instead, they own shares in other entities, which directly or indirectly control foreign oil assets. To get at these assets, creditors of Venezuela and PDVSA will have to overcome the barrier posed by the corporate law doctrine of limited liability.