Disputes Series: Article 2
Ever since the hurried break up of state-owned companies following the collapse of the Soviet Union, disputes have raged over who actually owns these potentially valuable assets, which range from oil fields to telephone lines. The shaky rule of law in some former Eastern Bloc countries means foreign investors are increasingly seeking expert outside help to prove corruption in the international courts.
An international arbitration panel ruled last summer that Russia must pay $50 billion to the former shareholders of Yukos, finding that the country had bankrupted the one-time oil giant through a series of politically-motivated attacks, in order to appropriate its valuable assets.
The Yukos case, which saw former owner Mikhail Khodorkovsky jailed in Siberia for a decade, is breathtaking in its scale. However it highlights the issues which have led a range of companies operating in former Soviet countries into commercial disputes: the difficulty of proving ownership of assets which may have been distributed in a murky way in the first place, and the lack of a transparent court system. In the case below, K2 Intelligence was able to use its experience of unraveling complex corporate structures.
Problem: Our client was a German energy company that was locked in a legal fight with a Ukrainian company over a valuable operating company in Ukraine. The Ukrainians said they owned an option over the asset and our client contended that the option was not valid. One part of the legal dispute was about that fairly technical matter.
The rest was about who owned the Ukrainian company—an implausible-looking Belgian businessman who was said to be in control, or a senior figure in the Ukrainian government, who had used the company to reinvest the hundreds of millions of dollars he had been stealing from the state for years.
Our job was to demonstrate that it was the latter, and to demonstrate by any other means possible that the Ukrainian entities were all part of a very considerable money-laundering scheme.
Solution: Our client knew from the beginning that there was a senior Ukrainian government figure involved, so in this case we were demonstrating what was happening rather than finding out what was going on.
Looking at the issue of the option over the asset first, our client thought it had legitimately bought the energy business. However the other side’s claim was that there was a private agreement of an option that the German company hadn’t known about.
There was a middleman involved, who on the surface of it owned this option to buy the whole energy company. In fact, it was a way for a government minister to maintain a hold over the asset, which had belonged to him before it was “sold” to our client. The government minister effectively wanted to issue contracts to himself through private companies he owned, but couldn’t be seen to do this directly, so he hired a plausible-seeming middleman and made it look like he owned the option. It was his way to try to make the government’s involvement with the energy company look at arms’ length.
What we needed to demonstrate was that this arrangement had taken place. There was very detailed analysis of the corporate structure of the government minister’s holdings and the couple of middlemen holding them. Our job was to look closely at all these companies and who owned them in reality: we were building up circumstantial evidence that there was one central mind behind the structure.
We were also talking to people doing business with these companies, in order to determine if they could testify or demonstrate, through documents, that the controlling mind or shareholder was in fact the government minister. The case took three years to resolve.
The number of disputes involving Russian and former Eastern Bloc countries has increased in recent years, particularly those being brought to court in the UK and other foreign jurisdictions, according to a report by the journal Corporate Disputes. The main causes of dispute are ownership of assets, disagreements between shareholders and joint venture partners (often over private or verbal agreements said to have been made), and outstanding loans, according to the report.
One of the main reasons these kinds of disputes are more common in the region is because it is often one or several individuals who are the major shareholders, rather than a number of institutional investors.
This complex set of issues means more companies need expert help reaching a satisfactory resolution in disputes, such as that provided by K2 Intelligence. If you would like to speak to one of our experts about your concerns, please contact us.