April 28 2009
On February 20 2009 the Eighth State Arbitrazh Court of Appeal ruled on a case in which a Russian company, OJSC VimpelCom, sought damages from a Norwegian company, Telenor. Its decision has significant implications for the underlying principles of Russian corporate law and its conclusions represent bold innovations in decisional practice. If the court's interpretation prevails and is more widely applied, many stakeholders in Russian companies, including private shareholders and the government, will potentially be liable for the actions of members that they nominate to a company's boards of directors.
On April 14 2008 Farimex Products Inc filed a claim for $3.8 billion in damages. Farimex was registered in the British Virgin Islands and held 25,000 American depositary receipts (ADRs) for shares in VimpelCom, which constituted 0.002% of the mobile telephone company's shares. The claimant argued that VimpelCom incurred the losses because the latter's shareholders prevented the company from accessing the Ukrainian market by delaying the acquisition of the entire shareholding of CJSC Ukrainian Radiosystems for one year. This transaction was backed by Alfa Group. However, Telenor, Alfa Group and OJSC CT-Mobile were all defendants in the case. Telenor held less than 30% of the shares in VimpelCom and Alfa Group held around 44%. OJSC CT-Mobile was the vehicle through which Alfa Group controlled 25.1% of the shares in another company, Megafon.
On August 16 2008 the Khanty-Mansiysk State Arbitrazh Court, the court of the region in which CT-Mobile was registered, ruled that Farimex could recover $2.8 billion from Telenor, as the latter's representatives on VimpelCom's board of directors had blocked the transaction. The court cleared the other defendants of all liability.
The appeal court upheld the decision, but reduced the sum to $1.73 billion. It also analyzed how such damages should be calculated.
VimpelCom had been trying to access the Ukrainian market since 2004. The first presentation on the planned acquisition of Ukrainian Radiosystems took place before VimpelCom's board of directors on November 4 2004. On February 18 2005 VimpelCom entered into an option agreement to buy 100% of the shares in Ukrainian Radiosystems. However, the board decided not to approve the transaction.
Approval was not obtained until September 14 2005 at a further extraordinary general meeting, convened in circumvention of the board. The acquisition took place on November 10 2005. Farimex calculated the amount of VimpelCom's lost profits for the period from November 2 2004 to April 14 2008, the date on which the lawsuit was filed. However, the court considered that the blocking of the decision to buy Ukrainian Radiosystems did not begin until April 22 2005; it also noted that VimpelCom did not obtain consent from Ukraine's anti-monopoly regulator until July 2005. It therefore calculated damages for the period between August 1 2005 and April 14 2008.
Furthermore, the court considered that Ukrainian Radiosystems' share of the Ukrainian market at the relevant time was 12%, as determined by Telenor, not 14% (which was the figure advanced by the experts at first instance).
The court found that Telenor, which owned 56.5% of another Ukrainian operator, Kyivstar GSM, was fully responsible for blocking VimpelCom's market entry. Telenor acted through members of VimpelCom's board; it had nominated them and they represented its interests. The court concluded that the presence of individuals nominated by Telenor to the board of directors enabled the Norwegian company to influence decisions on the acquisition of participatory interests in other companies. According to the court, Telenor was VimpelCom's parent company and should be held liable for the losses incurred through its subsidiary's fault.
Moreover, the court held that shareholders and holders of ADRs issued on the shares of Russian companies can be said to have an interest in a company's management and may file lawsuits on this basis.
By extension, it could be argued that any shareholder may recover losses from any other shareholder in a company, including a minority shareholder if the distribution of votes in a given case allowed the minority shareholder to influence a decision. The court's interpretation also supports previous judgments in which it was held that holders of depositary receipts are fully fledged shareholders that not only can participate in company management, but also can file lawsuits in Russian and foreign courts.
Many lawyers believe that the appeal court's decision materially affects the underlying principles of corporate law in Russia by changing one of the tenets of corporate governance: a board of directors must act in the interests of the company and the liability of its members is personal. The concept of liability attaching to a shareholder that proposed a candidate to the board of directors is not laid down in legislation. If the court's position prevails in practice, the essence of the joint stock company will change, as shareholders will assume all property risks related to the company's operations. Certain difficulties may arise, particularly where the government in its capacity as shareholder is required to be responsible for the actions of directors that it nominates to company boards.
The decision to make Telenor liable for losses presents certain risks, as it could result in owners of blocking shareholdings assuming secondary liability for company debts. In practice, it had previously been assumed that a minority shareholder could not be considered a parent company. However, the law does not stipulate a minimum participatory interest for a company to be recognized as a parent company. As a result, a court is free to determine whether a shareholder was able to influence a company's decisions.
The Court Bailiffs Service forwarded the decision to the Company Registry for the attachment of Telenor's shareholding. The attachment constitutes interim relief within the scope of the proceedings. If the decision on collection is not executed voluntarily, the shares may be sold at the stock exchange through a broker. However, this cannot be done until Telenor receives the court resolution on the initiation of enforcement proceedings. Attempts to serve Telenor with the resolution are believed to have been unsuccessful so far.
If court practice continues to follow the principles applied in this case, it could result in material changes in corporate relations both within and between companies.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.