Article of necessity

-- 18 November 2009 --
TEXT: E. Andreeva
PHOTO: daveporter -

‘It is usually more important that a rule of law be settled than that it be settled right’, said Justice Brandeis of the Supreme Court of the United States almost a century ago.

Today it is hard to find a more divisive issue, not only in Russia but in other countries too, than whether the law on golden handshakes is just and fair.

In Russia the matter is not just about integrity and predictability but it is of immense practical importance: for many foreigners terminal payments are a crucial element of their contractual arrangements and without them they would not even consider Russia as an employment destination.

Some legislative changes suggest that these arrangements could be under threat. Recent developments, however, show that those concerned can, at least for a while, put their minds at ease. Although courts see potential pitfalls in the law on gratuitous payments they will not give them up easily.


Well off and vulnerable

Alan is from New York. He likes Russia, he says, and he even speaks a little local lingo. Yet Alan would probably not have left his American home and moved to Moscow if it had not been for a generous salary, and on top of that, a golden handshake, an arrangement to pay a substantial severance if he loses his job for whatever reason - dismissal, company restructuring, or takeover. For him to find that the agreement has become wobbly would be a shock.

Russian labour legislation is rooted in Soviet law and despite substantial changes during the last two decades courts tend to see an employee as the weaker party. Even if he makes millions of dollars in a single year, and the company is on the brink of collapse, in the eyes of the law the employee has remained a member of the proletariat, fragile and vulnerable.

The fundamental conflict that lies at the heart of a golden handshake arrangement is that it does not provide easily identifiable benefits to a company as it is paid when an employee leaves the job. It can therefore be challenged as a transaction with no substance.

This, though, has never worked. Russian courts have been consistent in claiming that the purpose of terminal payments is not the benefit of a company but that of an employee and, therefore, it is irrelevant whether there is any advantage to the company or not.

This practice might change. On June 5, 2009 the law 'On changes to certain legislative acts of the Russian Federation' came into effect. The law stipulates that transactions at undervalue are voidable. Thus, gratuitous payments to employees are now at risk.


Don’t play with Gazprom

The Court of Appeal of the Stavropol region ruled last Thursday that the former head of the Second Generation Company of the Wholesale Electricity Market (OGK-2) Michael Kuzichev must pay back about $16m, which he, as the CEO of the company, had paid to top-managers as "golden handshakes".

In January 2008, in anticipation of a takeover by Gazprom, Kuzichev signed agreements with senior managers that substantial severance payments would be made in the event of early dismissal. In May, less than five months later, he paid them between $700,000 to $1.5m each. The truth of the matter, however, is that such amounts are not something out of the ordinary in this industry: similar payments were normal practice within the group.

The plaintiffs demanded on behalf of the company to recover from the former director what he paid as golden handshakes. They claimed that he, as CEO, did not have sufficient authority to enter the agreements, and that the company did not benefit from those contracts.


Solomon's solution

The long legal battle ended with victory for Gazprom. Notably, however, the golden handshake agreements were left intact. What is paid is paid and will not be returned.

The court thus avoided the thorny issue of whether golden handshakes were legitimate and, in a broader sense, just. Apparently, if there is consensus it is that they are indispensable.



Golden handshakes withstood the attack. Can't do without them