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Mikhail Ilyin wrote for «RBC» on judicial practice regarding the liability of members of companies’ boards of directors

28 January 2015

Moscow City Arbitration Court decided to collect in favor of Moscow Venture Company (MVC) the sum of 14.7 million Rubles overpaid to its CEO Vitaly Petrov. The funds should returned by Petrov himself and by the two members of MVK’s Board of Directors, who voted to approve an irregular employment contract, including an independent director, MFTI Professor Yury Ammosov. In practice, it is very rare that Russian courts hold boards of directors personally liable.

Failed to invest in time

JSC "Moscow Venture Company" was established in December 2006, under the previous mayor of the Russian Capital Yury Luzhkov. Petrov became its CEO later - since 31 August 2008. The plan was that MVC’s authorized capital would be 1.5 billion Rubles, but due to the crisis it was reduced to 310 million Rubles, and the city authorities were going to increase the budget over time; the City Hall has provided the funds by the end of 2009.

In May 2009, Petrov told to CNews that MVC was going to spend money on IT projects, green transport, energy-saving technologies and new materials. The plans included providing state authorities with systems of electronic documentation and starting a project in Moscow to assemble a special smartphone based on Taiwan’s HTC. According to Petrov, slightly more than a half of the investment was to go to create an investment fund (the management company to be chosen in bidding process), and the rest being spent on the direct financing of projects. MVC’s interest in each of the projects had to be 25 per cent plus one share. MVC was going to invest in companies with annual profitability of not less than 30 per cent, the yield of the MVC itself was to exceed this level. In summer of 2011, already under Sergey Sobyanin as a mayor, Moscow City Chamber for Control and Audit found that the MVC has made no investments since its foundation. Petrov explained to Izvestia newspaper that decisions on specific projects according to the order of the Moscow City Government had to receive the approval of a special interdepartmental commission, whose purpose was to assess the effectiveness of the use of the City’s shares, and it was disbanded in summer of 2010. Nevertheless, MVC selected 92 projects that had passed the preliminary examination, and in 21 projects it signed a preliminary agreement with the founders and co-investors. Moscow City Department of Property in December 2011 assigned the management of MVC to Lefex Law Firm and in January 2012 Petrov was fired. In MVC’s 2011 annual Lefex informed that it was taking "measures aimed at minimizing the losses incurred by MVC". The report noted that the company's loss in 2009 amounted to 14.1 million Rubles, in 2010 it constituted 32.6 million rubles, in 2011 it reached 150.4 million Rubles. Lefex reported that MVC filed lawsuits against the former management. The reason for the lawsuits was that Petrov’s salary was 10 times more than what "was established in the relevant directive of Moscow City Department of Science, Industrial Policy and Entrepreneurship", i.e. 120 thousand Rubles. Petrov also received a "golden parachute" in an amount of 36 average monthly salaries. It is alleged in Lefex’s documents and lawsuits that that in 2011 Petrov received 28.8 million Rubles as his salary and bonuses. In 2012 Petrov himself demanded from Tverskoy District Court to order MVC to pay him a "parachute" and salary arrears totaling 50 million Rubles, but without success. Lefex, in its turn, was more successful: Moscow City Arbitration Court in April 2014 decided that Petrov was to return to MVC 15,654,000 Rubles that had been paid to him as bonuses for the yeas 2009 and 2010. The court held that "Petrov, while being the general director of the company, wrongfully issued an order to pay himself the bonuses contrary to the interests of the company and in the absence of legal grounds".

Voted at their own expense

On Monday January the 19th judge of Moscow City Arbitration Court Yelena Bashlakova-Nikolayeva ruled in favor of Lefex in yet another dispute: Petrov was to return another 14,661 million Rubles, though not solely, but together with Yevgeny Balashov, former chairman of the Board of Directors and former deputy Director of Moscow City Department of Science and Industry, as well as independent director Yury Ammosov.

The court will publish the reasoning of the decision on 26 January. As it was explained in court by Irina Frolova, Lefex’s attorney, these 14.661 million Rubles reflect "the difference between the salary of 120 thousand Rubles per month, as it was stated in the directive, and the funds that have actually been paid to the general director for the period of the [employment] contract". Frolov added that this amount includes some of the 15.654 million Rubles that were to be collected from Petrov in accordance with the decision of the arbitration court in April of the last year. At this time, the court decided that the damage must be indemnified not only by Petrov, but also by the members of the Board of Directors who approved the employment contract with the CEO at the meeting of July 1, 2010.

MVC’s Board of Directors included five people: Petrov himself, Balashov, Ammosov, as well as the former head of the Moscow Department of Property Roman Kamaev and former director of the Finnish-Russian innovation center FinNode Timo Koponen. But Lefex does not have any claims against Kamaev and Koponen, said Frolova: "It is our discretionary right to sue those persons whom we consider necessary to sue". Balashov and Petrov had to vote in accordance with the guidelines of the respective Department or either to vote against any proposal if there are no directives – this is required under the Resolution of the Moscow government No. 576 dated July 3, 2007, as Frolova stated in court. Ammosov same, in her opinion, "carried out deliberate misleading practices" and violated the norms of the law "On Joint Stock Companies".

She contends that the levels of salaries in other venture capital companies was a wrong reference point: "What is the salary of Chubais is irrelevant to the case". According to "RUSNANO", in 2013 the income of the chairman of the corporation Anatoly Chubais amounted to 207 million Rubles. The defendants did not agree with it: none of the companies, in which the City owns stocks, is engaged in venture capital activities and it is impossible to find a competent director for 120 thousand Rubles, said Alexey Golovanov, Petrov’s attorney. In order to find a specialist for this post, one must take into account the salaries of directors at the centers of development, i.e. Russian Venture Company, Rusnano and Skolkovo Foundation, as Ammosov stated in court. Balashov explained that the estimate for fair salaries for the Board of Directors was prepared in 2010 by the head of administration at the Moscow Department of  Property Anton Poskonin (now he is a general director at "Oboronservis").

The attorneys will decide on their intentions to appeal after they see the reasoning of the judgment, Golovanov said. We were unable to contact Petrov and Kamaev. Koponen declined to provide comments.

In the Russian practice, the courts rarely attracted members of boards of directors to personal liability of, says Mikhail Ilyin, partner at S&K Vertical Law Offices. Sometimes courts order the directors to compensate the damages incurred due to the approval of transactions that led to the bankruptcy of an enterprise: for example, the directors of Yarbank and Granit Bank had to provide such compensations, says the lawyer. According to him, the Higher Arbitration Court has already determined that if the actions of the members of a board of directors and a general director constitute the cause of the losses, they should indemnify jointly.

P.jpgDespite the existence work-related risks of the members of a board of directors, their insurance is not common in Russia, said Ilyin. It is different abroad: after the Enron bankruptcy its shareholders have filed lawsuits against 18 members of the Board of Directors and they had to pay a fine of 168 million USD. Only 13 million USD were paid by ten managers out of their own pocket, insurance companies reimbursed the rest.

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