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Naftogaz Vs. Kolomoyskyi: Hidden Dangers of Ukrnafta Agreement

09.06.2015

Dmytro Shemelin, Lawyer at Ilyashev & Partners Law Firm
Source: Liga

A lawyer of Ilyashev & Partners Law Firm Dmytro Shemelin has analyzed the shareholder’s agreement of the owners of Ukrnafta and came to conclusion that the position of the state is far from being perfect.

On Friday, 05 June, during a one-hour long answer session the Prime Minister of Ukraine, Arseniy Yatseniuk, made a statement that the Cabinet of Ministers is unable to replace the management of Ukrnafta. The main reason is the shareholder’s agreement between NJSC Naftogaz and minority shareholders (group of companies Privat) which limited the powers of Naftogaz related to matters of employment. Mr. Yatseniuk informed the participants of the press conference that in case of replacement of the management the state may suffer punitive sanctions in the amount of up to $5 bln for which he disingenuously thanked Ms. Yulia Tymoshenko who was present in the sessional hall at the moment. According to the Prime Minister NJSC Naftogaz signed the Agreement at Ms. Tymoshenko’s instruction and order.

On the same day emerged the comments that the Prime Minister made a mistake and that in case of replacement of the company’s management unagreed between Privat and the state the former is under no threat as long as the amendments to the Law on joint stock companies introduced in spring 2015 neutralize the provisions of the shareholder’s agreement on the basis of which Igor Kolomoyskyi had a possibility to control appointment and replacement of the management of Ukrnafta.

LIGA Business Inform asked a lawyer of Ilyashev & Partners Law Firm, Dmyto Shemelin, to comment on whether the voiced opinion corresponds to reality.

The essence of the problem is that in 2010 the shareholders of Ukrnafta entered into Agreement on the procedure of formation of its managerial bodies and subjected it to the English law and international arbitration. At the same time as late as in 2008 the Supreme Court of Ukraine clarified that such agreements must be reviewed only by Ukrainian courts and governed only by Ukrainian law.

The opinion of the Supreme Court in 2008 raised a lot of controversies but, in general, such practice is being observed until now. That is why even if the foreign shareholders manage to win arbitration in London regarding the management of Ukrnafta it will be unlikely to enforce the decision in Ukraine. As a result there can be no arbitration award regarding the change of the management. But the story is not anywhere near its end. If the arbitration award cannot be enforced in Ukraine it can be really enforced in a foreign country. Endangered can be the foreign assets of Naftogaz and Ukrnafta which is also a party to the agreement.

For example, under the arbitration award the creditor may interfere into performance by Naftogaz of the agreements with foreign gas suppliers. As opposed to the state, which enjoys sovereign immunity, Naftogaz is an ordinary joint stock company assets of which are not particularly protected in any foreign court.

Among the topical issues is the issue of the state’s foreign liability in this conflict. Formally speaking neither Naftogaz nor Ukrnafta constitutes a part of the state and is obliged to bear independent responsibility for their actions. However, if then-Prime Minister Yulia Tymoshenko had really provided her consent for execution of the draft of the shareholder’s agreement in 2010 containing arbitration and English law clauses (as a People’s Deputy from the President’s Block in the Ukrainian Parliament, Sergiy Leshchenko claims) the situation changes fundamentally.

If the arbitration award cannot be enforced in Ukraine it can be fully enforced abroad. Foreign assets of Naftogaz and Ukrnafta may be at risk.

It means that in 2008 the state, as represented by the Supreme Court, declared the shareholder’s agreements with application of the foreign laws as illegal and not being subject to arbitration, and in 2010 allowed execution of allegedly outlawed agreement in the interests of its own company – Naftogaz.

After this, regardless of the fact that the Prime Minister, representatives of Naftogaz and of all the “ministries and agencies” (listed in the letter of Naftogaz as of January 22, 2010) were fully aware of the Agreement (and its unlawfulness) they took no efforts to bring the situation into conformity with the law and until 2015 they acted as if no violations had been allowed.

It is understood that in the present life of Ukraine such things do not happen very often, but an international will unlikely favor that. International law has, at least, two concepts which may potentially result in the responsibility of the state in this case, for example, within the process of investment arbitration.

Firstly, it is estoppel principle which means that a party must not act contrary to its previous position if such position is relied upon by another party. Otherwise, if the state and all the interested parties have been treating the agreement as lawful and acted accordingly today it is not possible to withhold recognition of the arbitration award on the grounds that the agreement had been unlawful right from the moment of its execution.

Secondly, there is a concept of “lawful expectations”: agreement approved by the state predictably creates among its parties (including foreign shareholders) lawful expectation that it will be performed and protected by the state. Moreover, such situation lasted for more than four years under several governments until, finally, the state decided to “alter its mind”. It is quite evident that parties to the Agreement may suffer losses as a result of their reliance onto its lawfulness.

Its is understood that real recovery of losses from the state will depend on a number of accessory factors including the manner in which each party acted throughout recent four and a half years, what such party stated and relied upon. But it is not worth ignoring the international component thoughtlessly – a dispute of former YUKOS shareholders with the Russian Federation is a bright illustration of this.

 

 
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