Page 1 of 2 Court casts shadow over Rusal listing
By John Helmer
MOSCOW - It is the clash of the titans of the global nickel, aluminum, copper,
bauxite, cobalt and platinum markets - Vladimir Potanin's Norilsk Nickel,
Russia's largest mining company, versus Oleg Deripaska's United Company Rusal,
the world's biggest aluminum producer.
Deripaska, Russia's richest man, is seeking to take over Norilsk, but his
campaign has run into an unprecedented series of international court rulings,
blowing the whistle on his business tactics. Blackening reputations, a court in
Britain has ruled, is a
red-card offense - whether committed in Russia, England, Switzerland, West
Africa or Central Asia.
Hong Kong's market regulators are obliged to follow carefully, because Rusal
has publicly said it may try to sell its at present unlisted shares on the Hong
Kong market if it fails to gain admission to the London Stock Exchange. No
significant Russian company has previously listed on the Hong Kong exchange
(HKEx) while, with the exception of the HSBC and Standard Chartered banks,
there are no large non-Chinese companies on the bourse that are also co-listed
outside Asia.
There is just one aluminum producer in the top-40 HKEx companies, Aluminum Corp
of China. With a market capitalization of about US$20 billion, it would trail
well behind Rusal's estimated market cap of between $30 billion and $50
billion. Rusal's investment footprint in Asia is small, with an alumina
refinery stake in Australia, a cathode plant in China, and a plan to build an
anode plant there.
Its export trade with Asia isn't small, but it amounts to about one-third of
its total exports. For the Hong Kong market, Rusal's unprecedented interest
would appear to be a combination of legal fallback for Deripaska, and a
consolation prize to his shareholding partners for the failure to list in
London. It's a prize they have not yet agreed to.
Rusal, with annual output of 4.2 million tonnes of aluminum and 11.3 million
tonnes of alumina, accounts for 12% of the global market in those products. But
who owns the company?
That question is being tested in a highly unusual High Court proceeding in
London between Deripaska and his former patron and business partner, Mikhail
Chernoy (Michael Cherney). That case is one of the factors driving Deripaska
out of contention for the LSE, towards Hong Kong.
On July 3, Justice Christopher Clarke issued a 63-page ruling, granting the
application of Chernoy to a High Court trial of a $6 billion claim to his stake
in Rusal, and in Deripaska's holding, Basic Element. For the first time in an
international court, Deripaska was defeated on the issue of jurisdiction. He
must now accept service and stand trial for the partnership agreement he signed
with Chernoy at the Lanesborough Hotel in London in March 2001.
As presented in court, and reviewed in detail by the judge and forensic
experts, the text of that agreement requires Deripaska to hold, and repay, a
20% stake of his business in trust for Chernoy; plus dividends payable since
then; plus the value of asset sales and related profits he has earned with
Chernoy's stake over the past seven years.
According to Clarke's ruling, "The two most important witnesses are the parties
themselves. A substantial proportion of the relevant material (eg as to company
structures, instructions to lawyers and accountants and movement of funds) must
be in writing. Several witnesses such as the representatives of Syndikus and Mr
Philipides, Mr Mishakov and others are likely to be seasoned travellers.
Neither party has suggested that they will suffer significant prejudice if the
trial takes place here." The names mentioned by the judge refer to transaction,
accounting and other witnesses identified in the court evidence and by the
lawyers' testimony.
"Taking all those considerations into account, I am persuaded that the risks
inherent in a trial in Russia (assassination, arrest on trumped up charges and
lack of a fair trial) are sufficient to make England the forum in which the
case can most suitably be tried in the interests of both parties and the ends
of justice and, accordingly, the proper place for the determination of this
claim."
The implications for one of the world's most potent aluminum groups are
unprecedented, and won't be long in appearing.
Deripaska's Russian shareholders - Mikhail Prokhorov with 14% and Victor
Vekselberg with 18.9% - have already shown signs that they are ready to break
away from Deripaska's control of Rusal (he holds 58.9%), if they believe he
cannot manage a value-enhancing public share listing for Rusal in the London
market; and failing that, either list somewhere else, or take over an already
listed company. Hong Kong is the first fallback option; the takeover of Norilsk
Nickel, Russia's largest mining company, is fallback option two. Hong Kong was
identified after the London initial price offering (IPO) was pulled last year;
the takeover of Norilsk Nickel has been an official target of Rusal statements
since last December.
Buyback agreement
According to the agreements Deripaska has signed with Prokhorov and Vekselberg,
indicated by bank sources, Russian publications and Prokhorov's holding, if he
cannot achieve a listing at all, in 15 months he must buy back their unlisted,
unvalued stakes in Rusal. Depending on their agreement of how to value Rusal,
they would be owed between $10 billion and $17 billion. That's cash Deripaska
doesn't have - he was obliged to borrow almost $5 billion to finance his recent
deal with Prokhorov. Since the Clarke ruling on July 3, it's also money
international bankers believe he's unlikely to be able to borrow, so long as
the Clarke ruling assigns the Chernoy claim "a reasonable prospect of success".
In deciding in favor of Chernoy, Clarke provides the first independently
verified account of the history of the Russian aluminum business. This is based
on an evidence file the judge says comprises 16 lever arch files; he estimates
that they require almost three days, doing nothing else, to read.
Let Judge Clarke set out his opinion and ruling in his own words:
This
is not a run of the mill claim. 66% of UCR Rusal is said to be worth of the
order of $23 billion. If so 13.2% is worth $4.6 billion, making the claim,
after deduction of the $250 million, worth about $4.35 billion. The payment of
such a claim, if valid, would be beyond the reach of most individuals. But Mr
Deripaska was, on his account, the beneficial owner of the majority of the
shares of Rusal, together with many other commercial interests. The Rusal group
employs some 100,000 people. Mr Deripaska's other companies employ over
250,000. He is said to be the richest man in Russia and ninth on the list of
world billionaires.
Mr Geoffrey Vos, QC, for Mr Cherney submitted that, where a claimant puts
forward credible evidence of an agreement that is both at the heart of his
claim and the foundation of his claim to English jurisdiction, but there is a
conflict of evidence as to whether the agreement relied on was made, the Court
should not attempt to resolve that conflict, and, if the claimant has presented
a good arguable case, should not apply the Canada Trust gloss i.e. determine
which side has much the better of the argument. If both parties have an
arguable case on the point, to require the claimant to show that his case is
markedly better than that of his opponent is, in effect, to require him to
establish it on the balance of probabilities, when the authorities show that
that is not necessary: Seaconsar 453 C-F; Canada Trust 555 D.
The essential test, laid down by the rules, is that the claimant must satisfy
the court that England is the proper place in which to bring the claim. If he
satisfies the court of this, the court has discretion to permit service out. As
Rix, LJ pointed out in Konkola, the discretionary nature of the exercise
enables the Court to couch its decision in terms that do not prejudice the
final trial wherever it may be, eg by deciding that the material before it is
not sufficiently good to displace an established jurisdiction, or, presumably,
to establish jurisdiction here.
I have come to the conclusion that, even in a case where there is a dispute
between two apparently credible witnesses the Court should usually, before
giving permission, be satisfied that the claimant's contentions about the
alleged agreement provide a much better, or at any rate a better, argument in
favour of there being the ground for jurisdiction alleged than of there not
being one. In granting permission to serve out of the jurisdiction the court is
exercising an exorbitant jurisdiction over those who are not within its
ordinary reach. In those circumstances the court is, as it seems to me,
justified in applying the good arguable test in that manner in order to avoid
the risk of compelling individuals or companies to submit to a jurisdiction to
which they ought not in truth to be made subject. Further if, as Canada Trust
indicates, the concept which the phrase reflects is "of the court being
satisfied or as satisfied as it can be having regard to the limitations which
an interlocutory process imposes that factors exist which allow the court to
take jurisdiction", it ought ordinarily to require that, when the Court looks
at the material, it finds the points in favour of the ground for jurisdiction
alleged to be more than just evenly balanced by those which point the other
way.
The judge also takes pains to sift through the evidence
that Chernoy has been the victim of at least one assassination attempt, and of
widely published claims that he has had criminal associations, especially with
a key figure in the case - Anton Malevsky. Malevsky was killed in a parachuting
accident in South Africa several years ago.
Alleged extortionist
Malevsky's importance is in Deripaska's evidence that the only reason he paid
Chernoy money, following the London agreement of 2001, was that he had to pay
off Malevsky, an alleged extortionist. The judge did not believe this claim.
"Mr Deripaska appears to have sought to hide any connection with Mr Malevsky
from a Swiss Investigating Magistrate. On 17th February 2005 he told him: 'I
know this person [Mr Malevsky] only by name. I have seen his name in the
press'. Mrs Malevsky says that this statement is completely untrue and, in the
light of her evidence, that seems likely to be so. She also states that the
accusation that her husband was involved in organized crime is completely
false."
At the end of his summary of Chernoy's, then Deripaska's claims about the
evidence of their agreements, Clarke concludes: "I am satisfied that Mr Cherney
has a reasonable prospect of success in respect of his claim."
This judicial statement may have immediate accounting implications for Rusal as
a Jersey-registered company, whose financial accounts are required to make
provision for significant legal liabilities if they are to qualify for the
listing requirements of the London Stock Exchange and others. Until now, Rusal
has told its listing advisors that the Chernoy case has no "reasonable prospect
of success". Rusal's balance-sheet and market valuation look a little different
with a $6 billion contingency set aside.
This $6 billion hole in Rusal accounts looks just as big in Hong Kong as in
London.
Here, for the first time, is a leading English judge's assessment of the truth
of the matter: "I cannot and do not purport to determine who is right on this.
One side or other is plainly telling lies on a grand scale. But I am satisfied
that, on the material presently before me, Mr Cherney has a good arguable case
on this point, in the sense that he has a strong argument and that, insofar as
any judgment can be made on present material, he has much the better side of
the argument. I say that for a number of reasons."
And so to the nub of the most important litigation in the aluminum industry:
"Whether any agreement is found to have been made as alleged is in large
measure dependant on whether or not the parties were partners in business or
extortioner and victim. The answer to that depends, in part, on what happened
in the relevant part of the aluminum business in Russia between 1993 and 2001.
Any evidence on that topic is likely to come predominantly from Russians, who
are likely to want to give evidence in Russian, or from Russian documents.
Russia has an operating legal system of which Mr Cherney can avail himself.
"It is, however, apparent to me that, if this claim is not allowed to proceed
in England, it will not proceed in Russia. It is unrealistic
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