On Corporate Raids

The term ‘corporate raid’ - meaning a hostile takeover but loaded with particularly negative connotation – has been brought into the language of the Supreme Commercial (Arbitrazh) Court. The novelty is remarkable: the justices demonstrated that they do not look on raiders with a friendly eye and intend to hold them liable for what they do.

In 2005 Sigma Capital Partners acquired an interest in shares of the mobile operator Smarts. As part of court proceedings Sigma managed to put into action extensive interim measures such as the ban on transactions with Smarts’s shares. In addition, the company was not allowed to change share capital, to carry out reorganization or liquidation. The measures were in place for two and a half years.

In May 2009, shareholders filed a suit against Sigma demanding the compensation of $100 million for unjustified restrictions on the company’s activity. Court in St. Petersburg has rejected the claim stating that shareholders themselves requested the moratorium on transactions with shares, as a defensive measure against the takeover, and that the prove of the amount of damages caused by the Sigma’s actions is inconclusive. The Court of Cassation upheld that decision.

The panel of judges of the Supreme Commercial Court disagreed. The judges noted that society needs protection against those who initiate unjustified claims and seek to enforce interim measures as a means to intimidate and to harm. The court, they said, may not deny a claim for damages on the grounds that their size ‘could not be established with a reasonable degree of confidence’; on the contrary, in such case the court must determine damages itself.

Edward Bekeschenko and Anton Maltsev from Baker & McKenzie share their thoughts on the case and how it will influence the court’s practice on the resolution of corporate conflicts.

In modern Russia, corporate raids, or hostile company takeovers, are a top issue. Even the President, Dmitry Medvedev, recently said that corporate raids stand second after corruption amongst the country's global problems. In a corporate raid, a company is taken over and stripped of its most attractive assets, including real estate, shareholdings in third companies and others, through a number of mechanisms, both formally legal and criminal. Among these are bankruptcy, privatization, pledge of shares, issuing of additional shares, tampering with the shareholder register, procurement of unwarranted court injunctions, shareholder greenmail.

Corporate raids are often followed by a number of court cases on both the part of the raider and the target company or its shareholders. If, after lengthy proceedings, the courts finally rule against the raider, the raider loses the money it invested in the raid. But it has been very difficult so far for the target company or its shareholders to obtain compensation from the raider for the damage caused by the raid. And it has been almost impossible to obtain compensation for the lost profit of the company caused by the raider's actions.

The situation may now change as the Supreme Commercial (Arbitrazh) Court of Russia has accepted the Sigma case for supervisory review.

The review hearing has not yet taken place, but some preliminary conclusions of the justices can be gleaned from their ruling to grant a review. Among other things, the ruling indicated that the difficulty of proving all the formal elements of damage in corporate takeover cases should not reduce the level of legal protection of shareholders from unwarranted encroachment on their rights. The court points out that unwarrantedly high risks of losing shareholder control may lead to negative macroeconomic and investment trends. The Supreme Commercial (Arbitrazh) Court will now schedule a hearing, study the case and issue a conclusive decree on the issue.

This is remarkable as it shows a change in the attitude of the courts to the question of compensation for damage.

So far, there has been a uniform approach among courts that no damage shall be compensated for unless the claimant proves the presence of several formal elements: breach, fact of damage, amount of damage, causal connection between the breach and damage, efforts to mitigate the damage. When it comes to a claim for the loss of profit (as a form of damage), the claimant is also required to prove efforts to obtain profit in the claimed amount. Thus the dismissal of damage claims in the Sigma case by lower instance courts was no surprise. It is quite difficult to prove all the elements, especially the specific amount of damage, in a raid-related case.

However, the Supreme Commercial (Arbitrazh) Court appreciates how detrimental a formalistic approach to damage claims is for the country’s economy, and in particular for investment in the shares of Russian companies, which have not been adequately protected from corporate raids. If a corporate raider risks being forced to pay multi-million dollar damage/lost profit claims as a result of the corporate raid, it if far less likely that a corporate raid will take place. We look forward to seeing whether the Presidium of the Supreme Commercial (Arbitrazh) Court of Russia will share the interesting conclusions made by the justices in the Ruling to Grant a Supervisory Review.

Baker & McKenzie