Disputed Share Ownership in the Energy Sector - International Law Office

A recent court case has caused concern in the foreign investment community. The case involves the ownership of shares in the largest downstream oil company Azpetrol and the largest oil transporter Azertrans.

Facts

Azpetrol International Holdings BV (AIH), a company incorporated in the Netherlands, held 99.5% of the shares in Azerbaijan incorporated company Azpetrol Neft Shirketi (ANS). The remainder of the shares were owned by a Mr Ibrahim Mammadov. ANS in turn owned 100% of the shares in each of the Azerbaijan incorporated companies Azpetrol Ltd and Azertrans Ltd. Azpetrol is the largest distributor of petrol and oil products in Azerbaijan. Azertrans is the largest transporter of crude oil and oil products by rail in Azerbaijan.

By means of a group restructuring, 100% of the shares in each of Azpetrol Ltd and Azertrans Ltd were transferred to AIH. AIH's 99.5% holding in ANS were then transferred to Mammadov.

Following the arrest in October 2005 of Mr Rafig Aliyev, the then head of the Azpetrol group of companies, actions were commenced to reverse the transfers of shares in these companies. The Ministry of Taxes and Mammadov each made separate applications in respect of each of Azpetrol and Azertrans. The court of first instance combined the two applicants' actions into one action in respect of Azertrans and one in respect of Azpetrol.

Law

The claim of the Ministry of Taxes was based on the alleged breach of Article 88.2 of the Civil Code of Azerbaijan (2000). Article 88.2 prohibits 100% ownership of the shares in an Azerbaijani company by a company which itself has a sole shareholder (whether a natural person or a legal entity). In practice, this article of the Civil Code has been ignored. In this case the Ministry of Justice, as the company registration authority, having been provided with full constitutional documents on each of the companies involved in the share transactions, registered changes to the charters of Azpetrol and Azertrans in 2004 and 2005 and made the appropriate entries in the state register.

Decision

The court held that the transfer of shares by ANS to AIH was a breach of Article 88.2, and the transfer of Azpetrol and Azertrans shares by ANS to AIH constituted an infringement of the shareholder rights of Mammadov. The court ordered that the original share transactions be reversed by the transfer of shares in Azpetrol and Azertrans to ANS within a 30-day period, during which time an appeal could be lodged. On the application of Mammadov, however, the court ordered that the share transfer be effected immediately. Leave to appeal was granted.

Comment

According to press reports, the result of the decision is that all shares in both Azpetrol and Azertrans are now held by ANS, 100% of the shares in which are held by Mammadov. The decision would thus appear to have resulted in a further breach of Article 88.2 and in reality has failed to reverse the initial transactions, in that Mammadov's original indirect 0.5% ownership of Azpetrol and Azertrans has now increased to 100%. It is to be hoped that a decision which is legally so unsatisfactory will be overturned on appeal.

While it is believed that the motivation for the case was political, the ease with which a shareholder in an Azerbaijani company can be deprived of its shares is nevertheless a major concern. In view of the foreign ownership of Azpetrol and Azertrans, should the appeal process in Azerbaijan not succeed, it may be expected that claims will be lodged under both Azerbaijani investor protection legislation and international law.

For further information on this topic please contact Benjamin Paine or Elchin Mammadov at Ledingham Chalmers by telephone (+994 12 493 6669) or by fax (+994 12 498 7132) or by email (benjamin.paine@ledinghamchalmers.com or elchin.mammadov@ledinghamchalmers.com).