Hulley v. Russia 2014
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801.The Tribunal accepts Mr. Nevzlin’s explanations. The Tribunal notes again that the Russian Federation called no fact witnesses of their own to contradict or weaken the testimony of Claimants’ fact witnesses. Respondent chose not to cross-examine Mr. Schmidt, simply noting instead that as he was Mr. Khodorkovsky’s criminal lawyer his statement is “special pleading.”901 Respondent also chose not to cross-examine Dr. Kovalev, whose evidence, accordingly, also stands unchallenged.
802.During the Hearing on the Merits, the Chairman of the Tribunal invited Respondent’s counsel:902
to address the allegations of harassment: Rieger being presented by the Prosecutor’s Office with a statement, ”Just sign here on the bottom line”; the number of Yukos employees who were detained; Misamore, who was told “You shouldn’t go back to Russia”; the campaign to make life impossible for Yukos-related officials, officers? That stands uncontradicted on the record right now. And it bothers us, my colleagues and me, and we would like to hear from the Respondent in respect of these matters.
803.With respect to Mr. Rieger, Respondent’s counsel pointed out that the incident had occurred in 2006, several years after the arrest of Mr. Khodorkovsky and that “it’s not atypical that an investigatory agency would have an idea of what they think a witness does or doesn’t know, and might suggest to that [witness] what that evidence is and then find out from the witness whether they agree with it or disagree with it. Mr. Rieger said he didn’t agree, and he didn’t sign it.” The Chairman recalled: “He was threatened, he was detained at the airport. This is background that speaks about the atmosphere. The Russian authorities are seen as being out to get Yukos.” Respondent’s counsel explained that: “I think that what you are seeing is the authorities having established that there was quite substantial fraud at many, many different levels of activity within a large company.”903
804.The Tribunal accepts the evidence of Claimants’ witnesses who testified with respect to the campaign of harassment and intimidation conducted by Respondent against Yukos. The Tribunal will now turn to the nature and consequences of the events described above.
901Counter-Memorial ¶ 696.
902Transcript, Day 19 at 46 (Respondent’s closing).
903Ibid. at 47.
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(b)Were the Actions of the Russian Federation Justified as Legitimate Law Enforcement Measures?
805.Respondent explains that its actions were consistent with a legitimate wide-scale investigation as part of “an attempt to enforce and try to understand what turned out to be one of the largest frauds in the experience of the modern Russian State.”904 Thus, in response to Mr. KosciuskoMorizet’s evidence recounting Mr. Khodorkovsky’s kompromat, Respondent observes that this “is absolutely consistent with the fact that the authorities had valid grounds to bring criminal charges against Mr. Khodorkovsky.”905 Likewise, Respondent describes as “no surprise” that Mr. Dubov would have been advised to leave the country and warned that every shareholder of Yukos would face criminal charges. Respondent states that this is “not inconsistent with the unbroken thread of tax evasion in which Yukos engaged and for which it was held to account.”906
806. In a similar vein, while acknowledging the unfortunate circumstances surrounding Mr. Aleksanyan’s illness, Respondent remarked that “it is not shocking” that the Russian authorities were interested in Mr. Aleksanyan, given his role since 2001 in suppressing information about vulnerabilities of Yukos in the low-tax regions.907
807.Respondent argues that the “searches of Yukos offices and the seizures of its records as part of Russian law enforcement authorities’ investigations have parallels in other countries as proper instruments of law enforcement, especially when those authorities are faced with the types of egregious violations in which Yukos engaged.” Respondent cites the EU and the U.S. as jurisdictions that authorize expansive and aggressive, even armed, searches and seizures to combat financial crimes.908
904Ibid. at 49–52.
905Transcript, Day 18 at 118–19 (Respondent’s closing); Respondent’s Post-Hearing Brief ¶ 205(iv).
906Transcript, Day 18 at 116–17 (Respondent’s closing); Respondent’s Post-Hearing Brief ¶ 205(ii).
907Transcript, Day 19 at 50 (Respondent’s closing).
908Respondent’s Post-Hearing Brief ¶ 209–10. For example, in the European Union, companies are often subjected to “dawn raids”, in which EU officials, without prior judicial authorization, conduct searches and seizures. See Transcript, Day 19 at 49–50 (Respondent’s closing) (“[I]n the United States a search warrant is never executed unarmed; it’s always executed by armed officers, sometimes wearing other gear that suggests something more than a simple commercial exercise. That’s the way it happens. In Russia, that’s the way it’s always done. It’s just their practice. It doesn’t reflect or project anything unique to Yukos.”). Claimants however point to the “very exacting standard of proof” at the ECtHR requiring “incontrovertible and direct” evidence, but that the ECtHR nevertheless accepted that “the circumstances surrounding the applicants’ criminal case may be interpreted as supporting the applicants’ claim of improper motives” and that “it is clear that the authorities were trying to reduce political influence
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808.As for the convictions of Messrs. Khodorkovsky and Lebedev in 2005, Respondent asserts that Claimants have not criticized the conduct of the Russian appellate judges who upheld the convictions.909 Respondent points to the ECtHR as having “rejected the central premise of Claimants’ argument that Mr. Khodorkovsky was prosecuted in 2005 for political or other improper reasons.”910
809.With respect to the second criminal trial of Messrs. Khodorkovsky and Lebedev, Respondent notes that it “had no effect on the investments at issue in these arbitrations and that, regardless, Claimants have not contested the factual bases of the charges in that trial. Their attempt to portray the charges as concerning the physical theft of oil, rather than complicated schemes of corporate abuse and sham auctions to secure underpayments of oil purchased from Yukos’ subsidiaries for the Oligarchs’ benefit, is manifestly baseless.”911 Respondent contends that the IBA Report was prepared without access to the full court file and without any knowledge of Russian criminal law, and that other criticisms reported by Claimants were biased and ill-informed.
810.Respondent also contends that its actions were necessary due to Yukos’ attempts to obstruct Russia’s investigative efforts.912 Claimants deny that Yukos was obstructing the investigation, and note that most of the evidence relied upon by Respondent was based on interrogation records of individuals that Respondent has failed to put forward as witnesses. Claimants urge the Tribunal to treat the interrogation records with skepticism, “[g]iven the campaign of terror being waged against persons associated with Yukos and the relentless pressure deployed by the prosecutors to get Yukos’ former employees or other Yukos-related persons to give false incriminating evidence against Yukos and Yukos’ management.”913
811.The Tribunal accepts that the Russian Federation had the power to conduct searches and seizures in Yukos’ premises during the ongoing criminal investigations. Nevertheless, having reviewed the record, the Tribunal finds that the investigation of Yukos was carried out by the
of ‘oligarchs’ and that the State was one of the main beneficiaries of the dismantlement of Yukos.” See Khodorkovsky v. Russia 2 ¶¶ 634–48, 931–32; and Claimants’ submissions dated 30 August 2013 ¶ 47 concerning that judgment.
909Respondent’s Post-Hearing Brief ¶¶ 204, 206.
910Khodorkovsky v. Russia 1; Rejoinder ¶ 1334.
911Respondent’s Post-Hearing Brief n.484. See also Rejoinder ¶¶ 1371–86.
912Counter-Memorial ¶¶ 674–79.
913Reply ¶¶ 77.
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Russian Federation with excessive harshness. Respondent’s counsel acknowledged that in the context of the large-scale fraud investigation “not everything is pretty in those circumstances, and we may each of us have circumstances that we would regret or have done differently.”914 The Tribunal considers “not pretty” to be an understatement in this case. The treatment of Yukos senior executives, mid-level employees, in-house counsel, external lawyers and related entities as described in this chapter support Claimants’ central submission that the Russian authorities were conducting a “ruthless campaign to destroy Yukos, appropriate its assets and eliminate Mr. Khodorkovsky as a political opponent.”915 The legal consequences of Claimants’ submission will be analyzed later in Part X of this Award when the Tribunal considers the alleged violations of Chapter III of the ECT.
812.The Tribunal will now examine the effect on Yukos, as a matter of fact, of the campaign of harassment and intimidation waged against it by Respondent.
(c)Did the Events Complained of Impact Claimants’ Investments or was Yukos Able to Carry on Unaffected?
813.Having noted that the record is replete with evidence of intimidation and harassment of Yukos personnel by the Russian authorities, the key question for the Tribunal is whether such intimidation and harassment actually disrupted Yukos’ operations and thus adversely affected Claimants’ investment.
814.Claimants maintain that the harassment and intimidation campaign “crippled” Yukos by prosecuting its management and paralyzing its operations through massive raids and seizures with a view to undermining the viability of Yukos.
815.Claimants’ witnesses spoke of the impact that the searches, seizures and, generally, the campaign of intimidation had on the company. As noted earlier, Mr. Misamore testified that the loss of key documents created difficulties in running the company and preparing the annual financial statements.916 Mr. Rieger stated that 60 to 70 percent of the accounting department’s documents were confiscated. He explained in his witness statement: “[w]hen you take into account the fact that all the day to day business operations of the company were reflected in
914Transcript, Day 19 at 51 (Respondent’s closing).
915Claimants’ Post-Hearing Brief, ¶ 165.
916Misamore WS ¶ 32.
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paperwork, such as invoices, bills, etc., we soon reached a stage where Yukos employees didn’t have access to the basic data they needed to perform their functions.” He recalled that “[t]he constant threats and harassment caused many of my former colleagues to leave the company and, in the worst case, the country; a fate that I would soon share.”917
816.Mr. Misamore described how staff retention became extremely difficult for Yukos. For example, he said that in the GAAP section of the accounting department “they all left the company because they didn’t want to be harassed.”918 Similarly, in defending the company’s decision to pay bonuses in 2004, Mr. Theede testified that:
[I]t was a Stalinesque-type of environment there. It was a fearful kind of a place to have to work. We never knew when we were going to have another raid, and people would come in and, as I said yesterday, knock computers off the desks, tip desks over, and just roughneck through the place; or when someone would be called in for questioning to the Prosecutor’s Office with totally unknown and illogical results. And in that kind of an environment, Yukos was not a particularly friendly place to work. We had huge concerns about retaining our employees. And if we didn’t meet contractual obligations to them to pay the bonuses, it was our view that they would begin to leave. And so it was in that light that we felt it was really very important that we lived up to the obligations we had to these people, just so we could retain them and so that we could continue to operate the company. Because if we lost those people, hiring others was going to be almost impossible, because people just—it was a scary place to be, and to bring new people in—in fact, I don’t really recall us being able to hire any new employees after the attack started . . .919
817.Respondent denies that Claimants have proven, as a matter of fact, that the harassment campaign impaired their investment.920 As mentioned earlier, Respondent notes for example that Mr. Khodorkovsky resigned voluntarily, that Yukos’ revenues in 2003 and 2004 were higher than before the arrests of Mr. Khodorkovsky and Mr. Lebedev, and that Yukos issued public statements following the arrest of Mr. Khodorkovsky to the effect that Yukos’ operations were proceeding normally.
818.Respondent argues that Mr. Misamore’s claims in his witness statement, seven years after the fact, about the disruptive effect of the raids, are not credible as they are contradicted by his contemporaneous statements to his colleagues, the audit committee and the board of directors in
917Rieger WS ¶¶ 28–29.
918Transcript, Day 9 at 244–45.
919Transcript, Day 11 at 15–16.
920Rejoinder ¶¶ 1338–45, ¶¶ 1387–99; ¶¶ 1400–34. Respondent’s Post-Hearing Brief ¶¶ 200–206. See also Respondent’s submissions of 30 August 2013 ¶ 7, concerning Khodorkovsky v. Russia 2.
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2003.921 Respondent points to the following evidence in the record:
The working group set up to deal study the effect of the government’s actions confirmed that as at August 2003, despite the searches and seizures, “[o]perational activities [were] proceeding normally” and as at September 2003 “there had been no new adverse developments” and it was “business as usual”922
Yukos stated on a conference call with financial analysts in November 2003 that Mr. Khodorkovsky’s arrest and subsequent resignation had “no impact whatsoever on [its] operations”923
Some 16 months later, Yukos stated to investors and the press that it “was extremely healthy.”924
The January–March 2004 internal Yukos newsletter publishing 2003 operational results of Yukos shows that the Company was not disrupted.925
819.The Tribunal views these statements of Yukos officers pertaining to the well-being of the company as an attempt by Yukos to project to its investors an image of stability and thus maintain their confidence. It is obvious to the Tribunal that a company which was targeted in the way Yukos was during those many years had to be severely affected and that its operations could not be managed by its officers and other employees in the normal and usual manner. In short, the Tribunal agrees with Claimants that, as a matter of fact, Respondent’s aggressive campaign against Yukos impacted significantly the management of the company.
820.Having reviewed the abundant evidence in the record of the intimidation and harassment of Yukos’ senior executives, mid-level employees, in-house counsel and external lawyers by the Russian authorities, the Tribunal is convinced that such intimidation and harassment not only disrupted the operations of Yukos but also contributed to its demise and thereby damaged Claimants’ investment.
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Transcript, Day 19 at 87–88, |
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922 |
Rejoinder ¶ 1422, Respondent’s Post-Hearing Brief ¶ 207, Report of Working Group, 25 September 2003, |
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Exh. R-4102. |
923Yukos Conference Call on Recent Developments – Final, Financial Disclosure Wire, 5 November 2003, Exh. R-3991.
924Russia’s Yukos says interim oil output up 5.3% on year in 2004, Prime-TASS Energy Service, 21 March 2005, Exh. R-509.
925Yukos Review, January–February–March 2004, Exh. C-23.
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821.The Tribunal will now turn its attention to another chapter in Claimants’ litany of conduct by the Russian Federation alleged to have negatively impacted their investment.
D.THE UNWINDING OF THE YUKOS–SIBNEFT MERGER
1. Introduction
822.In April 2003, Yukos, which was then Russia’s largest oil company, announced plans to merge with Sibneft, then Russia’s fourth largest oil company, into a new entity that would be called YukosSibneft Oil Company and constitute the world’s fourth largest private oil producer.
823.Steps were taken to effectuate the merger between April and October 2003. By 3 October 2003, the main components of the transaction (a share purchase and a share exchange between Yukos’ and Sibneft’s principal shareholders) had been completed. An Extraordinary General Meeting (“EGM”) of Yukos’ shareholders was scheduled for 28 November 2003 for the approval of the merger’s final details.926 However, shortly before the scheduled meeting, the Sibneft shareholders announced their intention to halt the merger process.927
824.Ultimately, the share exchange component of the merger was invalidated through a series of court cases in Moscow and the Russian Far Eastern province of Chukotka,928 and Sibneft was acquired by the Russian Federation through the State-owned company Gazprom.929
825.Claimants submit that Respondent was responsible for the unwinding of the merger, making it “one of the first casualties” of the Russian Federation’s assault on Yukos.930 According to
Claimants, Sibneft’s decision to halt the merger process was the direct result of Mr. Khodorkovsky’s arrest. The arrest led Sibneft to insist on a change of the senior executives of the merged entity. This request was not acceptable to Yukos and the deal was aborted. Claimants also argue that the Russian courts were then “only too happy to lend their assistance” by invalidating parts of the merger on spurious grounds, paving the way for the Russian
926Minutes No. 120/1-21 of the Board of Directors of Yukos, 25 September 2003, pp. 8–9, Item 11, Exh. C-1103.
927Misamore WS ¶ 37; Memorial ¶ 208; Counter-Memorial ¶ 326.
928Appeal Resolution of the Moscow Arbitrazh Court of 31 May 2004, Exh. C-72; Resolution of the Federal Arbitrazh Court for the Moscow District of 26 August 2004, Exh. C-73; Resolution of the Federal Arbitrazh Court for the FarEast District, 25 April 2006, Exh. C-78.
929Memorial ¶¶ 231−37.
930Ibid. ¶ 199; Reply ¶ 95.
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Federation’s acquisition of Sibneft.931 Claimants’ primary damages claim of USD 114.174 billion reflects the value of YukosSibneft as a successfully merged entity. Alternatively, Claimants submit that if the Tribunal does not hold Respondent responsible for the unwinding of the merger, the damages claim should be reduced by approximately USD 6 billion.932
826.Respondent denies any responsibility for the unwinding of the merger. Sibneft, Respondent argues, was neither exercising governmental authority nor acting under the instructions of Russian state organs. The Russian Government in fact supported the merger. Moreover, Sibneft’s leaders had every right to insist on changes to the management of the merged entity due to concerns about Mr. Khodorkovsky’s arrest and charges of criminal activities against him; in so doing, they were acting “in the pursuit of their own legitimate commercial interests.”933 As for the Moscow and Chukotka courts, Respondent submits that they acted in accordance with Russian company law. Respondent also suggests that Yukos acquiesced in the court proceedings as they allowed Yukos to cancel the merger without obtaining the approval of minority shareholders and thus risking further claims being brought against it.934
827.In this chapter, the Tribunal will consider the circumstances of the Yukos−Sibneft merger and seek to determine whether the Russian Federation is responsible for the unwinding of the merger. The Tribunal’s view on this issue may have an impact on the quantum of damages the Tribunal may ultimately award Claimants. The Tribunal will also consider in this chapter whether the merger was an important factor, as Claimants submit, in Yukos’ decision not to pursue its ADR listing on the NYSE. The Tribunal recalls that Respondent argues that Yukos’ decision was taken because the company had concerns about elements of its tax optimization scheme. The Tribunal will also consider Yukos’ declaration of a USD 2 billion interim dividend in November 2003 (“2003 Interim Dividend”), which Respondent argues was intended to shield this sum from the reach of the Russian tax authorities.935
931Reply ¶¶ 135−37.
932Ibid. ¶¶ 859, 861; Second Expert Report of Brent Kaczmarek, 15 March 2012 ¶¶ 65; 75−76.
933Counter-Memorial ¶¶ 322–30; Rejoinder ¶¶ 776–79.
934Rejoinder ¶¶ 805−06.
935Ibid. ¶¶ 809−23.
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2.Chronology
828.In the context of arguments about the Yukos−Sibneft merger, Respondent has accused Claimants of fighting a “losing battle with the calendar,”936 while Claimants have accused Respondent of attempting “to rewrite history”.937 The Tribunal therefore considers it useful to lay out a short chronology of key events.
(a)Merger is Announced; NYSE Listing is Put on Hold; Steps are Taken to Complete Merger
829.On 22 April 2003, Yukos and Sibneft announced their merger in a press release describing the principal features of the transaction.938 The merger would be achieved in two parts. Firstly, Yukos would acquire 20 percent (minus one share) of Sibneft shares from Sibneft’s principal shareholders for a cash consideration of USD 3 billion pursuant to a Share Purchase Agreement (“Share Purchase Agreement”). Secondly, Yukos would acquire 72 percent (plus one share) of Sibneft shares from Sibneft’s principal shareholders in exchange for 26.01 percent of the fully diluted share capital of Yukos pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”).939
830.A few days after the merger was announced, President Putin stated that he had approved the transaction in a meeting with Mr. Khodorkovsky, Mr. Roman Abramovich (a Board member and significant shareholder of Sibneft) and Mr. Evgeny Shvidler (Sibneft’s CEO).940
831.Concurrently with this announcement, the proposed listing of Yukos on the NYSE, which Yukos and a team of external advisers had been preparing for over a year, was put on hold. By then, Yukos and its advisers had conducted an extensive review of the company’s operations
936Transcript, Day 3 at 18 (Respondent’s opening).
937Transcript, Day 17 at 11 (Claimants’ closing).
938Yukos and Sibneft Agree in Principle to Merger, Yukos Press Release and Sibneft Press Release, 22 April 2003, Exh. C-629.
939Memorial ¶ 47 & n.61.
940Nevzlin WS ¶ 26; Dubov WS ¶ 69; Sibneft President Eugene Shvidler comments on upcoming merger with Yukos to create YukosSibneft, a new international energy super major, BusinessWeek Online, 21 May 2003, Exh. C-634.
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for purposes of drafting the required SEC form.941 A first draft had been circulated in June 2002 and a near final draft had been circulated on 19 March 2003.942
832.From April to October 2003, steps were taken to complete the merger. On 30 April 2003, Yukos and Sibneft’s principal shareholders signed the Share Purchase Agreement943 and the Share Exchange Agreement.944 The share exchange component of the merger was broken down into two tranches: the exchange of 57.5 percent of Sibneft shares for newly issued shares in Yukos representing 17.2 percent of Yukos’ fully diluted share capital and the exchange of 14.5 percent of Sibneft shares for 8.8 percent of Yukos shares (consisting of a mixture of newly issued shares, treasury shares and shares acquired through a share buy-back).945
833.On 1 May 2003, Yukos’ and Sibneft’s principal shareholders signed a Shareholders’ Agreement, which specified, inter alia, that the Yukos shareholder group would nominate the “Senior Management Positions.”946 On 27 May 2003, Yukos’ shareholders approved the merger.947
834.On 30 May 2003, Yukos made a first cash payment of USD 1.25 billion pursuant to the Share Purchase Agreement.948 On 30 June 2003, the Yukos Board of Directors adopted resolutions
941See Memorandum from Mr. Maly to Mr. Sheyko, 22 April 2002, Exh. R-184.
942Reply ¶¶ 101–02; Draft Yukos F-1 Form and Registration Statement Under the Securities Act of 1933, 19 March 2003, Exh. C-1067.
943Deed of Share Purchase between Kravin Investments Limited, White Pearl Investments Limited, Marthacello Co Limited, N.P. Gemini Holdings Limited, Heflinham Holdings Limited and Kindselia Holdings Limited, and Yukos Oil Company, 30 April 2003, Exh. C-1101 (hereinafter the “Share Purchase Agreement”). In another arbitration, Yukos’ lawyers described the Sibneft shareholders party to the Share Purchase Agreement as “companies incorporated under the laws of Cyprus . . . [and] ultimately controlled by Roman Abramovich, the owner of Chelsea Football Club and Governor of Chukotka.” See Yukos Oil Company v. Kravin Investments and others, LCIA Arbitration No. 4589, Statement of Case, 2 May 2005, ¶¶ 10−12, Exh. R-3601.
944Deed of Share Exchange between Kravin Investments Limited, White Pearl Investments Limited, Marthacello Co Limited, N.P. Gemini Holdings Limited, Heflinham Holdings Limited and Kindselia Holdings Limited, and Yukos Oil Company, 30 April 2003, Exh. C-1100 (hereinafter the “Share Exchange Agreement”).
945Ibid; see Memorial ¶ 47.
946Shareholders’ Agreement in respect of Yukos Oil Company among Yukos Universal Limited (hereinafter “YUL”), Hulley Enterprises Limited (hereainfter “Hulley”), White Pearl Investments Limited, N.P. Gemini Holdings Limited, Marthacello Co. Limited, Kindselia Holdings Limited, Heflinham Holdings Limited and Kravin Investments Limited, 1 May 2003, Article 6.1, Exh. C-1102.
947Minutes No. 2 of the Extraordinary General Meeting of Yukos Shareholders, 27 May 2003, Exh. C-50; Extraordinary meeting of YUKOS shareholders adopts decision associated with realization of transaction with Sibneft, Yukos Press Release, 28 May 2003, Exh. C-635.
948Receipt from Kravin Investments Limited, 30 May 2003, Exh. C-54; see Yukos Oil Company U.S. GAAP Interim Condensed Consolidated Financial Statements, 30 June 2003, p. 9, Exh. C-30.
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