Andrey Kornitsky of S&K Vertical has commented for on Sistema's position in respect of the lawsuit of Rosneft

4 july 2017 2017-07-4

In the context of the high-profile process initiated by Rosneft based the reorganization of Bashneft, AFK Sistema, despite recent developments that clearly did not do good to it, continue to maintain the most open policy: this time the company offered those who find the dispute interesting, to get acquainted with its reply to the statement of claim. In the 62-page document, it explains in detail why the court should support the financial corporation, referring to the positions of higher courts in a number of contentious issues.

The goals of the reorganization of Bashneft

The reorganization of Bashneft was started by Sistema in order to bring the company to an IPO (public offering of shares on the London Stock Exchange - ed.) and, as a result, to attract the money of foreign investors. Before that, the structure could not boast of transparency due to the availability of a ring scheme for owning its shares: the controlling stake was held by AFK, but the other part was on Sistema-Invest's balance sheet, half of which belonged to the corporation and the other to Bashneft itself. Therefore, it was decided to split CJSC Bashneft-Invest out of Sistema-Invest, and to join it to Bashneft. The procedure provided that the share capital of the latter would be reduced, including by paying off part of the preferred shares bought from those shareholders who disagreed with the reorganization.

The main assets of Sistema Invest were the Bashkir Electric Grid Company (BESK, which provides Bashneft with electricity), and the Ufaorgsintez refinery (which affects the proceeds from the sale of oil products); after the reorganization of Bashneft, they remained with AFK. This fact led to the claim by Rosneft, which, in particular, insists that due to the loss of Sistema Invest, Bashneft lost indirect control over their shares and did not receive an "equivalent consideration" in return. Igor Sechin's company also recalls how the preferred shares we repayed - they, in the opinion of the plaintiffs, should have been offered to the "third parties" for redemption. At the same time, Rosneft increased the initially claimed amount of the claim by 64 billion rubles, suggesting that the court transfer the amount of alleged claim to US dollars, and then converted back into rubles at the exchange rate as of May 22, 2017.

According to AFK, all of this has two foremost circumstances behind: first of all, the charter of Bashneft provides for ordinary and privileged shares, which it has the right to place at any time and the number of which is more than 1000 times greater than the number of redeemed ones, and, secondly, that two months after the end of the reorganization, the Board of Directors of Bashneft decided to increase the charter capital of the company by placing it through open subscription, that is, 37 million ordinary registered shares, identical to those redeemed. Thus, Bashneft not only has the legal opportunity at any time to issue new shares in exchange for the repaid for sale to third parties, but this opportunity has been put into practice.

So, why did Rosneft initiate the dispute? It is unlikely that an exhaustive answer will be received to this question. However, it should be noted that the media repeatedly reported that Sechin's team has been fighting for Bashneft since the 2000s (as it was with Yukos). Then they even assumed that Vladimir Yevtushenkov is only a temporary holder of the shares of the company, which buys them out to eventually transfer to Rosneft. In favor of this version, the following argument was made: in 2005, he bought a blocking stake in the company for his own $ 600 million, and to purchase the remaining stakes in 2009, he had to take $ 2 billion from the state-owned VTB for the period of 7 years.

Four brief arguments in favor of Sistema

1. Why is it not liable in accordance with the Law on Joint Stock Companies

The isses arising out of relationship between the company and its shareholders, including the compensation for damages, are governed by special rules of corporate legislation, as it follows from the position of the Supreme Court (for more details, see "" Timer and his team: who will answer for the losses of the bank's shareholders after the readjustment.") Therefore, the dispute should be settled on the basis of Clause 3, Clause 6 of the Law on Joint Stock Companies, which states that the shareholders of the subsidiary structure of the company are entitled to demand compensation from the "mother company" for the losses incurred. This claim may be filed only by the minority shareholderrs of the "daughter," while it itself, as well as the new parent company, does not have such a right.

Civil liability is applied in determining whether there was an offense, which includes harm, wrongful conduct of the person who caused it, causal relationship between these elements, as well as the fault of the perpetrator. The amount of damages is subject to proving, and the absence of at least one of these conditions is the basis for refusal to satisfy the claim (definition of the Supreme Commercial Court of Justice dated March 24, 2008 No. VAS-3612/08).

In the case under consideration, none of the legally significant circumstances necessary to satisfy the claim exist, since the reorganization of Bashneft was legitimate and did not cause losses that Rosneft invented, as they say in Sistema. Moreover, it (that is, the reorganization) brought a significant profit, which is confirmed by the data of the Bashneft's accounting for the second quarter of 2014 (see here): compared to the first quarter, the company's net profit exceeded 18 billion rubles. (+ 21.5%). As a result of the same year, it received a net profit of 65.27 billion rubles. Quotations of its shares on the stock exchange have also increased (a key indicator that allows one to determine how beneficial a corporate action is for a company).

Bashneft did not "lose" Sistema-Invest shares, but exchanged them for a 100% stake in Bashneft-Invest. It did not own the shares of BESK and Ufaorgsintez, as they were on Sistema-Invest's balance sheet, and therefore could not lose them. As for the repayment by the company of its own shares received as a result of the reorganization, it could not result in losses - "it is absurd to regard as an illegal behavior causing losses to the joint-stock company, what is actually an institution of corporate law" (the company's for-profit acquisition of its own shares for the purpose of redemption and reduction of the share capital ), widely used in practice by Russian, including all major state companies, and international companies (Aeroflot, Rostelecom, Norilsk Nickel, VTB Bank). Moreover, Bashneft retained the right to re-issue the same number of ordinary shares that were redeemed in order to raise funds. New shares may be placed by subscription, that is, on paid transactions (clause 2.1 of the Constitutional Court's judgment dated February 10, 2009 No. 372-O-O).

The recovery of losses from the so-called "loss" of Bashneft by Sistema-Invest will lead to unjust enrichment, which is not expected at the expense of the other party (definition of the Supreme Commercial Court dated February 17, 2012, No. VAS-1369/12). "All the arguments of the plaintiffs as to the alleged loss of Bashneft as a result of the reorganization are untenable, are based on total denial of the institution of acquisition and repayment by the joint-stock company of its own shares, contradict the law, the legal positions of the Constitutional Court, the Supreme Court, Supreme Commercial Court as well as the generally accepted corporate practice and the circumstances of the case and are aimed at unjustified enrichment at the expense of the defendants disguised as recovery of losses," - Sistema writes, providing as support the statement by the experts of Gazprombank and Morgan Stanley, from which it follows that the reorganization had a positive impact for the preparation of "Bashneft" for the IPO and improved the position of minority shareholders.

2. Why one cannot qualify its actions as abuse of rights

Claimants are trying to achieve this, referring to paragraph 1 of Art. 10 of the Civil Code. However, in the case there are no grounds for the application of the sanctions specified therein, because the civil liability of the parent company for the intentional infliction of damages to the subsidiary is regulated by the same Article 3, 6 of the Law "On Joint-Stock Companies" (for example, Resolution of the Plenum of the Supreme Commercial Court dated July 30, 2013, No. 62). Proceeding from it, the shareholders of the "daughter" have the right to seek damages. At the same time, we must not forget that the reorganization of Bashneft itself was open and transparent and was carried out in full compliance not only with the requirements of the current legislation, but also in accordance with Russian and global corporate practices, including the corporate practices of Rosneft itself. Independent directors, including foreign ones, voted for it.

3. Why one cannot seek damages from the rate difference

First, the use of the US dollar as the currency of the debt in the calculation of losses is contrary to the Civil Code: according to Art. 140, ruble is the only legitimate means of payment, mandatory for acceptance at face value throughout the territory of Russia. Simultaneously Art. 317 establishes that monetary obligations must be expressed in rubles, unless otherwise provided by current legislation. "Rosneft" does not name the rule of law, which would provide for the possibility of using foreign currency as a debt, because it does not exist. There is no agreement between Sistema and the plaintiffs on the use of the American currency as an obligation, although this is possible, as it is stated in paragraph 7 of the Information Letter of the Presidium of the Supreme Commercial Court dated November 4, 2002, No. 70 "On the Application by Commercial Courts of Articles 140 and 317 of the Civil Code" For this the parties had to agree directly. In such a situation, foreign currency is an equivalent, to which the parties of the obligation are guided in the implementation of ruble settlements. Judicial practice is uniformly based on the fact that the exchange rate difference that arose as a result of fluctuations in the exchange rate is not a loss, since there is no unconditional causal relationship between it and the actions of the party to the obligation (the decision of the Supreme Court dated May 17, 2017 No. 307-ES17-4648 in the case No. A56-95636/2015).

The claim, if satisfied in this part, can have extremely negative consequences as it can start the line of respective judicial practice, which can be used by unscrupulous participants in civil turnover, commented Andrey Kornitsky, head of projects at S&K Vertical.

4. Rosneft forgot about the statute of limitations

In the claims, the period of statute of limitations by all of the plaintiffs, Sistema claims. Thus, Art. 196 of the Civil Code states that the general limitation period is three years from the day when the person learned or should have learned about the violation of his right, and not about the occurrence of losses caused by violations (referred to in paragraph 1 of paragraph 10 of the Decree of the Plenum of the Supreme Commccial Court dated July 30, 2013 No. 62 and confirmed in paragraph 3 of the Resolution of the Plenum of the Supreme Court dated September 29, 2015 No. 43 "On some issues related to the application of the rules of the Civil Code on the limitation period"). In this case, it began to flow not later than February 3, 2014 - from the day when the extraordinary general meeting of shareholders of Bashneft was held, at which it was decided to reorganize it by joining Bashneft-Invest. It should also be taken into account that the claim based on Clause 3 of Art. 6 of the law "On Joint Stock Companies" could be declared on behalf of and in the interests of Bashneft by any minority shareholder. Any of them knew about the terms of the corporate decision and about the scheduled redemption of shares not later than that date. "The passage of the limitation period is an independent ground for refusing all plaintiffs to satisfy the claim," Sistema stresses.

The arguments about the plaintiff's being outside the limitation period may not be as successful - in corporate disputes, courts often expressed the view that it was necessary to take into account the date when the plaintiff had a real opportunity to go to court with a lawsuit (after the restoration of corporate control), says Alexey Chernykh of Kulkov, Kolotilov & Partners.

At the same time, Sistema publicly discloses all relevant information in accordance with the rules of exchanges and best practices, adds Pavel Ivchenkov, attorney at Delovoy Farvater. And Mikhail Budashevsky of Khrenov & Partners notes the high level of argumentation of the defendant's own theses. "Separate attention should be given to the fact that Sistema is not limited to the statement of the wrongfulness of the plaintiff's arguments, but gives its own position on almost every circumstance that matters to the case, the lawyer emphasizes.

What is the conclusion of independent experts

In addition, several experts came to the Sistema's website and were asked to answer a number of questions that concern both AFK and Rosneft (on which the AFK bases its position on the lawsuit, which the company's lawyers announced at the meeting on June 27). All of them boil down to the fact that Yevtushenkov's position is justified. Thus, CEFIR confirms that the Bashneft cross-shareholding scheme was a negative factor when preparing the company for the IPO, BESK and Ufaorgsintez, not being its profile assets, adversely affected the development of the company, and the repayment of its own shares by the issuer could not lead to a loss and was beneficial for shareholders. Professor and head of the civil law department of the Faculty of Law of the Moscow State University Yevgeny Sukhanov admits that the newly founded society has no right to seek compensation for previous losses to its subsidiary along with minority shareholders. "It should be assumed that such a purchaser of a controlling stake ... as a reasonable and prudent entrepreneur should have known about the real state of affairs in the economic society, whose shares it is acquiring," Sukhanov writes. Another supporter of Sistema's position that Rosneft and Bashneft do not have the right to demand damages rate differences is Bronislav Gongalo, head of the civil law department at the Ural State Law University, director of the Ural branch of the the President's Private Law Research Center named after S.S. Alekseev.

Raiffeisenbank on the case's perspectives

Raiffeisenbank has published an analytical note for investors, which provides three options for the development of events in the event of Sistema's loss in the case and speculates on what this could mean for MTS, whose shares were arrested the other day as part of the security of the claim. Its author, telecommunications and media analyst Sergey Libin, makes it clear that the current development of events does not inspire optimism about the prospects of the AFK. In the baseline scenario (if the claim is satisfied), the corporation will pay claims through external financing and retain control over the said assets: in this case part of the costs will be transferred by paying additional dividends to MTS or issuing intra-group loans. A tough option, according to Raiffeisenbank, is the loss of AFK of a significant stake in MTS (36.6% of the shares), which is estimated at 232 billion rubles at current market value, and an increase in the debt burden. The option of selling other assets (for example, shares in the Children's World) is not excluded, with the package retained in the MTS, but it seems difficult to implement. Libin notes that the bank views the first scenario, in which Sistema attracts external financing and partially redistributes the debt burden on MTS, as the base one, and the loss of MTS, rather, as a stress test.

Andrey Kornitsky of S&K Vertical believes that the judge's actions in this regard (in particular, the adoption of interim measures in the form of seizure of shares owned by the defendants, valued at 185 billion rubles, and the appointment of a court hearing In the case (that is, the case has been prepared for consideration) even before the defendant's response was filed), demonstrate that the probability of partial or full satisfaction of the plaintiff's claims is still quite high. "In any case, the commercial court, when deciding on this case in accordance with the requirements of Article 168 and Article 169 of the APC, must carry out legal assessment of all the arguments of the defendant given in its reply. In this regard, the court's decision in this case raises serious interest from the point of view of judicial practice," - says the lawyer.

What lawyers think about Sistema's reply

Sistema takes the right position, says Oksana Peters, managing partner of Tilling Peters: in fact, the defendant's arguments are reduced to the lack of intent to commit unlawful acts and damages to the plaintiff, as well as the causal relationship between the actions of the defendants and the alleged losses of the plaintiff, which in accordance with the existing law enforcement practice excludes the possibility of satisfying such a claim in court. "The most reasonable arguments are the AFK's arguments that Rosneft's expert opinion was prepared without taking into account the non-controlling stake in one of the defendants and the corresponding discount," the lawyer continues. "In addition, the repayment of one's own shares is in accordance with the law, is a normal corporate practice and is an independent decision of the plaintiffs, in which one can not blame the defendants."

Indeed, it is strange to reproach the defendants that their actions caused the repayment of Bashneft's treasury shares acquired as a result of the reorganization, instead of selling, Aleksey Chernykh agrees, explaining that if these shares were alienated to third parties, then the Federal Property Agency, and then Rosneft, would be holders of a significantly smaller share. With all this, given the uniqueness of the conflict between the parties, it is difficult to forecast the judicial process, says Sergey Yegorov, managing partner of the law office of the EMPP: "Proof of damages in court is in general the task which is extremely ungrateful with a likelihood of success tending to zero, but this forecast is applicable only to the ordinary, "terrestrial" disputes."

Sistema is more likely to be in a strong position, as it presents evidence of the economic benefits that the plaintiffs have received from the reorganization, confirming this with relevant evidence, and also points out that Rosneft is still not deprived of the opportunity to conduct an IPO and receive additional investments, and hence, no losses have arisen, concludes Oksana Peters.

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