Taxation and expropriation - the destruction of the Yukos oil empire.

• Author: Stephan, Paul B.
• Position: IV. The Aftermath - Litigation Everywhere through VI. Conclusion, with footnotes, p. 27-52

4. THE AFTERMATH--LITIGATION EVERYWHERE

   After 2004, all of Yukos within Russia was either seized or crippled. But because the company had an international dimension, the government and its cat's-paw courts could not control everything involving Yukos. Foreign affiliates and assets survived the attack and had to be disposed of. Foreign shareholders remained free to demand compensation for the destruction of their property. In particular, foreign managers affiliated with the company as well as the shareholders had the capacity and inclination to fight back against the Russian government. As a result, offshore litigation exploded.

   The foreign legal proceedings triggered by the destruction of Yukos fall into three categories. First, the Russian government invoked the jurisdiction of foreign courts either to extradite people associated with Yukos, to lend assistance in the collection of evidence to be used in criminal prosecutions, or to claw back the overseas assets of Yukos. Yukos interests responded, for the most part successfully. Second, Yukos stakeholders, either creditors or shareholders, brought actions against Rosneft and other Russian entities and person in foreign courts. The plaintiffs so far have had only limited success. Finally, several groups of Yukos shareholders and the company itself invoked treaty rights to international adjudication against the Russian government. Investment tribunals have upheld these rights, but the European Court on Human Rights (Strasbourg Court) reached a mixed result. The most important proceeding, in terms of the size of the claim, remains pending. I describe each litigation in turn.

   1. Russian Claims on Foreign People and Property

      Having consummated the destruction of Yukos and incarcerated its leadership in Russia, the government sought others who had fled abroad. In the United Kingdom, Cyprus and Lithuania, it tried to extradite persons associated with the company. In each case, the local courts rejected the request because of what they regarded as deficiencies in the criminal and tax proceedings in Russia. (59) In Liechtenstein and Switzerland, Russia requested that the local authorities seize the records of certain companies that had transacted with Yukos so as to bolster its prosecution of Khodorkovsky and others. In both instances, the courts refused legal assistance because of what of they held to be abuses in the Russian proceedings. (60)

      As of 2004, Yukos held several offshore financial subsidiaries, including Yukos Finance B.V. in the Netherlands and Yukos CIS in Armenia. Once Yukos went into bankruptcy, the Russian administrator purported to sell these companies to Rosneft and Promneftstroy, a former Rosneft subsidiary, as part of the settlement of Yukos's debts. In the Netherlands, a Dutch court refused to recognize the Russian bankruptcy proceeding because of what it regarded as manifest shortcomings. It instead upheld the decision of the local managers of Yukos Finance to transfer its most significant assets to a Dutch stichting, a protective trust under local control. Included in the trust assets was Yukos Capital S.a.r.L., a Luxembourgish entity that figures in the Dutch and British litigation discussed below. (61)

      The one foreign jurisdiction that did recognize the Russian bankruptcy was Armenia. The local administrator of Yukos CIS initially obtained an injunction against its transfer to Rosneft, but the Armenian courts reconsidered and allowed Rosneft to register itself as the company's owner. Legal challenges to this decision continue, but given the high degree of dependency of the Armenian government on Russia and the poor reputation of the local courts for independence and integrity, the prospects of success seem slight. (62)

      On balance then, Russia's efforts to obtain external legitimacy from foreign courts for its attack on Yukos have all failed, excepting only those in its Armenian satellite. In each case, the foreign court made its own assessment of the criminal prosecutions and the tax and bankruptcy proceedings and found them fundamentally flawed. In particular, no country has cooperated with any Russian criminal prosecution.

   2. Attacking the Yukos Transactions in National Courts

      Yukos shareholders and overseas managers were not content to play defense in non-Russian national courts. Once it became clear that the Russian government intended to destroy the company, they sued in foreign courts to block, delay, or at least call attention to the attack on the company. Results have been mixed. While no other court has attempted to undo the company's expropriation, one offshore entity has managed to obtain substantial compensation from Rosneft. I discuss each wave of lawsuits in turn.

      1. United States

         Even before the consummation of the government's expropriation of Yukos, the company's external representatives sought to enlist a U.S. bankruptcy court to forestall the sale of YNG. Yukos filed for voluntary bankruptcy in Houston in December 2004, seeking to block the pending YNG auction and to effect a reorganization. The court issued a temporary restraining order forbidding Gazprom and Deutsche Bank, two entities that had appeared as potential bidders, from participating in the auction, finding that "the series of events within Russia which has led to the notice of an auction of the principal producing assets of Yukos Oil Company ... is inconsistent with the regular application of Russian law within Russia." (63) As noted above, Rosneft circumvented this order by using BFG as the auction purchaser. (64) A few months later, the Houston court determined that, based on the totality of the circumstances, the possibility of U.S. proceeding achieving a reorganization of Yukos was too remote and ordered dismissal of the case. (65)

         Yukos shareholders next brought a civil suit in Washington against Russia, Rosneft, and a number of Russian officials. They alleged numerous violations of federal, state, and Russian law for what they characterized as effectively the theft of the company's assets. The court observed that the allegations in the complaint "tell a troubling story if proven true," but ruled that it lacked jurisdiction to hear the case. (66) According to the court, all of the defendants either enjoyed foreign sovereign immunity or lacked sufficient contacts with the United States to permit the assertion of judicial power. With this decision, U.S. litigation came to an end, excepting only requests for evidentiary assistance with respect to the European civil suits discussed below. (67)

      2. Netherlands

         The creation of the Dutch stichting allowed overseas Yukos managers to assert claims against the Russian entities created by the bankruptcy. Yukos Capital S.a.r.L. (Yukos Capital), a wholly owned subsidiary of Yukos Finance B.V., asserted that YNG had defaulted on a loan and, pursuant to the loan agreement, obtained arbitration of the claim in the Russian Chamber of Commerce. In 2006 the Chamber's International Commercial Court (ICC) awarded Yukos Capital $425 million, at about the time when Rosneft became the legal successor to YNG. Rosneft in turn sought Russian judicial review of the ICC's decision, while Yukos Capital sought to enforce the arbitral award against Rosneft in the Netherlands.

         In 2007 the Russian arbitrazh courts annulled the ICC award. Yukos Capital sought leave to enforce the award in the Netherlands, notwithstanding the Russian annulment. A first-instance Dutch court ruled that the determination of the Russian courts was binding, but the Amsterdam Court of Appeal reversed. It held that Yukos Capital had overcome the presumption of regularity normally accorded to a foreign judicial decision by proving that the Russian courts were not impartial and independent. As a result, the rules of private international law and the Dutch public order required the Dutch courts to ignore the Russian annulment decree and to treat the arbitration award as enforceable. (68) Rosneft then paid the award while reserving its right to seek to claw back the payment in other proceedings.

         The Dutch litigation is significant. It represents the first time when a non-Russian court concluded that the performance of the Russian judiciary in the enforcement of the tax award against Yukos and the subsequent sale of YNG represented a lawless surrender of authority to the government. (69) Moreover, the outcome involved a significant amount of money, even if it was only a small fraction of the value of the assets seized by the Russian government and transferred to Rosneft.

      3. United Kingdom

         Attacks on Rosneft in the British courts proceeded in two waves. First, the Russian government in 2006 sought to capitalize on the recent engorging of Rosneft at Yukos's expense by listing Rosneft's shares on the London Stock Exchange and offering a minority interest for sale to the public (IPO). The Financial Services Authority (FSA), the U.K. regulator, along with the Stock Exchange, approved the proposed listing and IPO. Yukos entities then sought to set that decision aside. They maintained that the offering would violate a provision of British law forbidding a listing intended to launder the proceeds of a crime.

         The High Court rejected Yukos's argument. It understood the relevant legislation as allowing the FSA to apply the act of state doctrine so as to bar any challenge to the validity of the Russian government's actions under Russian law. Thus, as a matter of Russian law, no theft had occurred, meaning that the sale of Rosneft stock in London would not result in laundering of the proceeds of a crime. (70) The court was careful not to decide that the FSA had correctly interpreted the act of state doctrine, but rather determined only the FSA had the discretion to interpret the doctrine as it did. In particular, the court did not understand the statute as requiring the FSA to determine that Rosneft was innocent of participation in violations of international law, in...