Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Choice of Law

CANADIAN UPDATE – Supreme Court of Canada Extends its Jurisdiction

Editors’ Note:  This update was authored by Poonam Puri, a Professor of Law and former Associate Dean at Osgoode Hall Law School, and an affiliated scholar with the Canadian law firm, Davies Ward Phillips & Vineberg LLP (“Davies”), and Davies partners Sarah V. Powell,  who practices in the areas of environmental, aboriginal and energy law, and litigation partners Luis Sarabia and George J. Pollack. It was submitted to XBMA by Davies partner Berl Nadler who is a member of XBMA’s Legal Roundtable.

Highlights: 

  • On September 4, 2015, the Supreme Court of Canada held that the Ontario court has jurisdiction to hear an action brought by Ecuadorian plaintiffs seeking the recognition and enforcement in Ontario of an Ecuadorian judgment against the U.S. multinational corporation Chevron (Chevron US) and its Canadian subsidiary (Chevron Canada) even where Chevron US had no connection to and no assets in Ontario and Chevron Canada was a stranger to the underlying judgment in Ecuador.
  • The Supreme Court’s decision also opens the door for judgment creditors to argue that a subsidiary corporation’s assets should be available to satisfy a judgment against a parent corporation.
  • The ruling, however, leaves in place the substantive defences available under Canadian law to rebut such claims.

Main Article

On September 4, 2015, the Supreme Court of Canada unanimously held in Chevron Corp v. Yaiguaje that the Ontario court has jurisdiction to hear an action brought by Ecuadorian plaintiffs seeking the recognition and enforcement in Ontario of a US$9.51-billion Ecuadorian judgment for environmental damage against the U.S. multinational corporation Chevron (Chevron US) and its Canadian subsidiary (Chevron Canada). Remarkably, Chevron US had no connection to and no assets in Ontario and Chevron Canada was a stranger to the underlying judgment in Ecuador for which recognition and enforcement is being sought in the Ontario court.

The Supreme Court’s decision should be of interest both to Canadian multinational corporations with foreign operations and to foreign entities with operations or assets in Canada because it reduces the procedural obstacles to recognizing and enforcing foreign judgments in Canada. Significantly, however, the ruling leaves in place the substantive defences available under Canadian law to rebut such claims. The Supreme Court’s ruling means that the case will now return to an Ontario court to determine whether the Ecuadorian judgment can be properly recognized and enforced in Ontario.

Background

In 2012, Ecuadorian plaintiffs commenced a recognition and enforcement action in Ontario against both Chevron US and Chevron Canada. Chevron US is a Delaware corporation with its head office in California. Chevron Canada is a wholly owned, seventh-level subsidiary of Chevron US, with its head office registered in Alberta. The plaintiffs served Chevron US in California and Chevron Canada in Mississauga, Ontario, where it maintains an office.

Chevron US and Chevron Canada moved before the Ontario court, seeking, inter alia, (i) a declaration that the Ontario court lacked the jurisdiction to hear the plaintiffs’ recognition and enforcement action, and (ii) an order dismissing, or permanently staying, that action.

The Ontario Superior Court of Justice held that the Ontario court has jurisdiction over both Chevron US and Chevron Canada. Nonetheless, the motion judge stayed the recognition and enforcement action on his own initiative because the judge held that Chevron US did not itself possess any assets in Ontario and that the plaintiffs had “no hope of success” in piercing the “corporate veil” in order to make the assets of Chevron Canada exigible to satisfy the judgment against its ultimate parent, Chevron US.

On appeal, the Ontario Court of Appeal agreed that the Ontario court has jurisdiction over both Chevron US and Chevron Canada, but held that the motion judge had erred in granting a discretionary stay of the action.

The Supreme Court unanimously upheld the decision of the Ontario Court of Appeal noting that different principles are engaged when considering actions in the first instance and actions for recognition and enforcement of foreign judgments. The purpose of the latter is to allow a pre-existing obligation to be fulfilled, which involves facilitating the collection of a debt already owed by a judgment debtor. The court’s role in enforcement proceedings is less invasive than an action in the first instance, militating in favour of generous and liberal enforcement rules for foreign judgments.

No Real and Substantial Connection to Ontario Is Required

The Supreme Court held that there is a low threshold for foreign judgment creditors to commence recognition and enforcement actions of foreign judgments in Ontario. The Court unambiguously held that there is no requirement to find a “real and substantial connection” between the enforcing Canadian court and the foreign action or judgment debtor.

The test for an Ontario court to recognize and enforce a foreign judgment is whether the foreign court validly assumed jurisdiction in the first instance; the foreign court must have had a real and substantial connection with the litigants or the subject matter of the dispute. This will be satisfied if the defendants submitted to the jurisdiction of the foreign court.

In addition, for the Ontario court to assume jurisdiction over the recognition and enforcement action, the defendant must have been properly served – either inside or outside Ontario – under the province’s Rules of Civil Procedure (Rules).

Defendant Is Not Required to Have Assets in Ontario

The Supreme Court held that it is not necessary for foreign debtors to possess assets in Ontario in order for the Ontario court to take jurisdiction in a recognition and enforcement action. The Court noted that in today’s globalized world and electronic age, to require that a judgment creditor wait until the foreign debtor is present or has assets in the province before a court can find that it has jurisdiction in recognition and enforcement proceedings would be to turn a blind eye to current economic reality. The Court stated that there is nothing improper with allowing foreign judgment creditors to choose where they wish to enforce their judgments and to assess where their debtor’s assets could be found or may end up being located one day.

Veil Piercing of a Subsidiary to Satisfy a Parent Corporation’s Debt

The Supreme Court explicitly stated that the Ontario court’s jurisdiction over Chevron US and Chevron Canada did not prejudice future arguments regarding their distinct corporate personalities; nor did it settle the question whether Chevron Canada’s assets should be available to satisfy Chevron US’s debt.

Nonetheless, the Supreme Court’s decision opens the door for judgment creditors to argue that a subsidiary corporation’s assets should be available to satisfy a judgment against a parent corporation.

Existence Versus Exercise of Jurisdiction

The Supreme Court draws a clear distinction between the existence of jurisdiction and the court’s exercise of jurisdiction. Once parties move past the jurisdictional phase, it may still be open to a judgment debtor/defendant to argue the following:

  • The proper use of Ontario judicial resources justifies a stay under the circumstances.
  • The Ontario courts should decline to exercise jurisdiction on the basis of forum non conveniens.
  • One of the available defences to the recognition and enforcement of a foreign judgment (i.e., fraud, denial of natural justice in the foreign proceeding or public policy in Canada) should be accepted in the circumstances.
  • A motion should be brought for summary judgment or for determination of an issue before trial under the Rules.

Conclusion

The plaintiffs in Chevron Corp. v. Yaiguaje may ultimately not succeed on the merits of their recognition and enforcement action in Ontario. And they may be unsuccessful in collecting damages in Ontario from either Chevron US or Chevron Canada. Nonetheless, the Supreme Court’s decision has implications for the transnational litigation strategies pursued by Canadian multinational corporations and by non-Canadian entities with operations or assets in Canada. Subsequent developments in this litigation may also provide valuable lessons in parent-subsidiary governance.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Global Update – Cross-Border Schemes of Arrangement and Forum Shopping

Editors’ Note: This paper was authored by Jennifer Payne, who is Professor of Corporate Finance Law at the University of Oxford.

Executive Summary:  A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts.  These decisions have proved controversial in some quarters, with concerns being raised that allowing these schemes of arrangement to proceed facilitates forum shopping. The purpose of my paper, Cross-Border Schemes of Arrangement and Forum Shopping, is to consider this use of English schemes of arrangement by non-English companies, and particularly by companies registered in other EU Member States. This paper also assesses the concerns raised regarding forum shopping in this context and rejects these concerns.

Main Article:

The English scheme of arrangement has existed for over a century as a flexible tool for reorganising a company’s capital structure. Schemes of arrangement can be used in a wide variety of ways. In theory a scheme of arrangement can be a compromise or arrangement between a company and its creditors or members about anything which they can properly agree amongst themselves. It is common to see both member-focused schemes and creditor-focused schemes. In practice the most common schemes are those which seek to transfer control of a company, as an alternative to a takeover offer, and those which restructure the debts of a financially distressed company with a view to rescuing the company or its business.

In recent years schemes of arrangement have proved popular as a restructuring tool not only for English companies but also for non-English companies. A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts, including Re Rodenstock GmbH [2011] EWHC 1104 (Ch), Primacom Holdings GmbH [2012] EWHC 164 (Ch), Re NEF Telecom Co BV [2012] EWHC 2944 (Comm), Re Cortefiel SA [2012] EWHC 2998 (Ch) and Re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch). Typically, these cases involve financially distressed companies registered in another EU Member State making use of an English scheme of arrangement without moving either their seat or Centre of Main Interest (COMI). In general, the main connection to England is the senior lenders’ choice of English law and English jurisdiction as governing their lending relationship with the company.

These decisions have proved controversial in some quarters, with concerns being raised that allowing these schemes of arrangement to proceed facilitates forum shopping. The idea of forum shopping often carries negative connotations, and is associated with debtors seeking legal regimes that will favour the debtor at the expense of the creditors. The purpose of my paper, Cross-Border Schemes of Arrangement and Forum Shopping, is to consider the use of English schemes of arrangement by non-English companies, and particularly by companies registered in other EU Member States. This paper also assesses the concerns raised regarding forum shopping in this context. The paper rejects these concerns.

In particular, this paper asserts that forum shopping is not always problematic. In some instances the debtor may be driven by a desire to utilise a form of proceeding in a particular jurisdiction with a view to maximising returns to creditors. For example, if a financially distressed company has no domestic option which would allow it to restructure and to carry dissenting creditors with it, to deny access to a scheme of arrangement may result in insolvency for the company. Such an outcome is likely to be worse for creditors than a successful debt restructuring. To demand that the company forego this option, and go into liquidation, would be of little or no benefit to the creditors or other stakeholders of the company. Modern businesses typically have most value as going concerns. Since liquidation unnecessarily destroys a large amount of that value, rehabilitative restructurings are almost always preferable for companies and their creditors. Schemes of arrangement may therefore offer a valuable pre-insolvency solution that can transcend international borders.

The full version of the paper is available for download here.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

DUTCH UPDATE – Dutch Court Assumes International Jurisdiction and Declares An International Collective Settlement Binding

Editors’ Note: Kees Peijster and Geert Potjewijd are partners at De Brauw Blackstone Westbroek, resident in Amsterdam and Beijing, respectively, and are members of XBMA’s Legal Roundtable.  As leading Dutch M&A lawyers, they have broad expertise handling significant cross-border transactions involving China and the Netherlands.  The authors are Ruud Hermans, head of De Brauw´s corporate litigation, and Jan Tjeenk, partner in financial markets and corporate litigation.

Highlights: 

  • The Netherlands has become an attractive venue for settling international mass claims, irrespective of whether any litigation has taken place in the Netherlands.
  • The Netherlands is the only European jurisdiction offering a procedure to declare a collective settlement binding on all class members on an “opt out” basis.
  • Recently, the Amsterdam Court of Appeal declared an international collective settlement binding in a case where none of the potentially liable parties and only a limited number of potential claimants were domiciled in the Netherlands.
  • The decision will in principle have to be recognized in all European Member States, Switzerland, Iceland and Norway and, depending on local law, possibly in other countries as well.

MAIN ARTICLE

On 17 January 2012, the Amsterdam Court of Appeal declared an international collective settlement binding in a case where none of the potentially liable parties and only a limited number of the potential claimants were domiciled in the Netherlands. This decision confirms the Court of Appeal’s earlier provisional decision to assume international jurisdiction. The decision will in principle have to be recognised in all European Members States, Switzerland, Iceland and Norway. The Netherlands is the only European country where a collective settlement can be declared binding on an entire class on an “opt out” basis. This makes the Netherlands an attractive venue for settling international mass claims, irrespective of whether any litigation has taken place in the Netherlands. This option has become more important since the U.S. Supreme Court’s decisions in Morisson v. National Australia Bank and Hoffman-La Roche v. Empagran.

See for more general information on the Dutch Act on the Collective Settlement of Mass Claims (Wet collectieve afwikkeling massaschade; the “WCAM”): Ruud Hermans and Jan de Bie Leuveling Tjeenk, International Class Action Settlements in the Netherlands since Converium, in The International Comparative Legal Guide to: Class & Group Actions 2012.

Background of the case

Converium Holding AG (“Converium”) is a Swiss reinsurance company (currently known as SCOR Holding AG). Converium was a wholly owned subsidiary of Zürich Financial Services Ltd (“ZFS”) until 2001, when ZFS sold all its Converium shares through an IPO. Converium shares were listed on the SWX Swiss Exchange and Converium ADSs were listed on the New York Stock Exchange. Converium’s share price declined after the company announced increases in its loss reserves in the period from 2002 through 2004. These announcements led to securities class actions in the United States against Converium and ZFS on behalf of a worldwide putative class. The United States District Court for the Southern District of New York (the “U.S. Court”) certified a class consisting of all U.S. persons who had purchased Converium securities on any exchange, as well as all persons – regardless of their residence – who had purchased Converium securities on a U.S. exchange (the “U.S. Purchasers”). The U.S. Court excluded from the class all non-U.S. persons who had purchased Converium securities on any non-U.S. exchange (the “Non-U.S. Purchasers”). The U.S. class action was settled and these settlements (the “U.S. Settlements”) were approved by the U.S. Court. Both Converium and ZFS then settled the potential claims of all Non-U.S. Purchasers with a Dutch foundation representing the Non-U.S. Purchasers (the “Non-U.S. Settlements”). The Non-U.S. Purchasers were predominantly domiciled in Switzerland and the U.K. Only a few were domiciled in the Netherlands. De Brauw acted as legal counsel to ZFS in its successful application to the Amsterdam Court of Appeal to declare this settlement binding.

Decision

The Amsterdam Court of Appeal (the “Court”) confirmed its provisional decision on jurisdiction which followed substantially the same line of reasoning as its Shell decision. But the Converium settlement is less connected to the Netherlands than the Shell settlement. In Converium, none of the potentially liable parties and only a limited number of the interested persons were domiciled in the Netherlands. The Court emphasised the significance of a Dutch foundation representing the interested persons and having to distribute the settlement relief under the settlement agreement. This suggests that even without any interested persons domiciled in the Netherlands the Court could have jurisdiction to declare the settlement binding. In its earlier provisional decision, the Court explicitly referred to the limitations for the U.S. courts to do the same in securities and anti-trust cases as a result of the U.S. Supreme Court’s decisions in Morrison v. National Australia Bank and Hoffman-La Roche v. Empagran.

In Converium, a number of defendants argued that the amount of settlement relief for the Non-U.S. Purchasers under the Non-U.S. Settlement concluded by Converium was unreasonable, because the amount of settlement relief for the U.S. Purchasers under the U.S. Settlements was relatively higher. The Court dismissed this objection on the ground that the legal position of the Non-U.S. Purchasers differed substantially from the legal position of the U.S. Purchasers, because the Non-U.S. Purchasers had been excluded from the class by the U.S. Court and no litigation by Non-U.S. Purchasers had been initiated outside of the U.S.

The same defendants also argued that the amount of settlement relief was unreasonable, because the fees for U.S. plaintiffs’ lead counsel, to be deducted from the settlement relief, were too high. The Court dismissed this objection on the ground that the work in connection with the settlement had been carried out for a substantial part within the U.S. jurisdiction by U.S. law firms and that what is considered customary and reasonable in the U.S. may be taken into account in applying the reasonableness test under Dutch law.

The Court also ruled that the representativity test had been met because the Dutch foundation representing the interested persons had various participants and supporters, including shareholder associations and institutional shareholders, domiciled in Switzerland and the U.K., where most known Non-U.S. Purchasers were domiciled.

Implications

The Netherlands is the only European jurisdiction offering a procedure to declare a collective settlement binding on all class members on an “opt out” basis. Using the Shell decision as a precedent, the Converium decision confirms that the Amsterdam Court not only has jurisdiction to declare an international collective settlement binding on all class members, irrespective of their domicile, but also has the appetite to facilitate such settlements even if the parties to the settlement and the class members only have a limited connection to the Netherlands.

All EU Member States, Switzerland, Iceland and Norway will in principle have to recognize the Converium decision. However, no case law on this issue exists at this point. Whether other countries will also recognize it, will depend on local law.

The Converium decision confirms that the Netherlands is Europe’s most attractive venue for facilitating international settlements. It is irrelevant in this context whether the settlement forms the outcome of class action litigation, and if it does, in which country the litigation took place.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

RUSSIAN UPDATE – English Law Still Dominates in Russian M&A Transactions; a Comparison Shows Why…

Editors’ Note: This paper was co-authored by Goltsblat BLP (the Russian practice of Berwin Leighton Paisner) partners Ian Ivory and Anton Rogoza. Mr. Ivory is Head of English Law – Corporate Finance at Goltsblat BLP, where he and Mr. Rogoza focus on mergers and acquisitions, private equity, joint ventures and corporate restructuring projects. They often represent international companies in connection with their investments in Russia. This paper is a summary of a report entitled “Use of English law in Russian transactions – a comparative review” which was recently published by the authors.

This paper is the first in a series of papers on the choice of law in international M&A transactions. We invite further papers on this topic.

Highlights:

  • Despite developments in Russian corporate legislation, the mergers and acquisitions and international finance markets in Russia still heavily rely on English law.
  • Business partners in Russia often choose to enter English law governed shareholders’ agreements because English law gives them the flexibility to structure an agreement in exactly the way they want, and English law has an established use of a number of key provisions which are often invaluable in shareholders’ agreements. These key provisions include concepts such as put and call options, rights of veto, restrictive covenants, drag along and tag along provisions, good leaver and bad leaver provisions, step-in rights, share ratchets and deadlock mechanisms, which Goltsblat BLP regularly advise clients on.

MAIN ARTICLE

The following summary table comparing English and Russian law positions demonstrates why many parties in Russian deals rely on English law:

Legal concept and summary English law position Russian law position
Assignment
Transfer of rights in a contract from one party to a new third party. Use is well established. Use is well established.
Call options

The right for one party to require another party to sell its shares.

Use is well established.

Use is not well established.

Performance is often secured through the grant of a power of attorney. Irrevocable power of attorney not permitted.
Completion accounts
Mechanism for carrying out a completion date audit of the company, to facilitate an adjustment to the purchase price. Use is well established. Theoretically possible but not tested in the courts.
Conditions precedent
Provisions stating that the contract (or certain parts of the contract) will only come into force if and when agreed conditions are met. Use is well established. Only permitted if the whole contract is conditional.Conditions must be outside of the control of the parties.
Covenants and veto rights
Contractual promise to do, or not do, something, or to stop something from happening. Use is well established. Positive covenants permitted.Negative covenants and rights of veto are unlikely to be enforceable.
Damages for breach of contract
Financial compensation payable to an innocent party for breach of contract by the other party, to compensate for loss suffered from the breach. Use is well established.Subject to rules on causation, remoteness and mitigation.Damages for loss of profit and consequential loss are possible.Grossing-up provisions permitted. Two main options available:- unwind transaction and return purchase price (without costs, etc.);or- seek price reduction to reflect actual state of the asset.
Damages for loss of profit and consequential loss are possible but can be difficult to prove.
Grossing-up provisions not recognised.
Deadlock mechanisms
Contractual provisions used to break a deadlocked decision between the parties, often leading to the buy-out of one of the parties. Use is well established. Theoretically possible but not tested in the courts.
Deferred consideration
Payments of part of the purchase price at intervals after completion, often linked to agreed performance targets. Use is well established. Use is well established.
Dispute resolution and jurisdiction clauses
The process agreed for resolving disputes under the contract and the jurisdiction of the dispute hearing. Use is well established. Use is well established.
Drag along
Mechanism allowing a majority shareholder selling its shares to force the minority shareholders to sell their shares at the same time. Use is well established. Theoretically possible but not tested in the courts.Irrevocable power of attorney not permitted.
Earn-outs
Deferred consideration based on achievement of agreed financial targets for an agreed period after completion. Use is well established.Contract frequently includes covenants restricting conduct of the business during the earn‑out period. Theoretically possible but not tested in the courts.Negative covenants and rights of veto during the earn-out period are unlikely to be enforceable.
Escrow arrangements
Arrangement to deposit title documents and/or completion monies with a third party escrow agent, who then releases them once the completion conditions have been satisfied. Use is well established. Escrow arrangements are not currently recognised.
Good leaver/bad leaver provisions
Contractual mechanism obliging employee shareholders to sell their shares when they leave the company, for a set price depending on the circumstances of their departure. Use is well established. Theoretically possible but not tested in the courts.Irrevocable power of attorney not permitted.
Linking “bad” leaver events to the restrictive covenants would not be enforceable.
Indemnities
Contractual undertakings to compensate for a particular loss or liability. Use is well established. Not currently recognised.
Joint and several liability
All parties are each liable for the full amount of the claim and must agree contributions amongst themselves. Use is well established. Use is well established.
Limitations on liability

Provisions restricting the ability of one party to bring a claim against the other.

Use is well established.

Possible but with certain limitations.

Attempts to exclude liability for fraud or dishonesty are void and unenforceable.
Limitation periods (for breach of contract)
Time periods for issuing legal proceedings for breach of contract claims. 6 years from the date of breach. 12 years for contracts executed as a deed. (Generally) 3 years from the date the innocent party learns (or should have learned) of the breach.
Can be reduced by agreement. Cannot be reduced or increased by agreement.
Limited recourse liability
Limits the contractual liability of one party to another, generally by restricting recourse to the enforcement of security over a specific asset only. Use is well established. Not currently recognised.
Penalties

Obligation to pay a sum of money in the event that a contract is breached that is higher than the loss suffered.

Penalties are void and unenforceable.

An obligation to pay a sum that is no higher than a genuine pre-estimate of the loss (i.e. liquidated damages) is enforceable. Permitted but amounts need to be reasonable.
Preferential share rights
Rights for one class of (i.e. preference) shares to receive greater or prior ranking economic rights than other shares (e.g. in respect of dividends/returns of capital). Use is well established. Not available for LLCs.Basic preference shares available for JSCs.
Put options
The right for one party to require another party to purchase its shares. Use is well established. Use is not well established.
Reasonable and best endeavours
The efforts that a party must go to in order to ensure that something outside of its direct control is done. Use is well established. Not recognised under Russian law.
Representations
Statements which induce a party to enter into a contract. Use is well established.Often expressly excluded on M&A transactions (other than for fraud). Representations outside of the contract not recognised.
Restrictive covenants
Non-compete undertakings given in relation to the protection of the business. Use is well established, and is generally enforceable so long as the restrictions are reasonable in scope and duration. Risk of being deemed illegal and non-enforceable.
Retention accounts
An account jointly controlled by a seller and buyer, holding part of the purchase price, to be released to seller on the satisfaction of agreed conditions or to buyer to settle warranty claims. Use is well established. Retention accounts are theoretically possible but not tested in the courts.
Share ratchets
Mechanism to increase/decrease the number of shares and/or amount of sale proceeds a shareholder receives, based on a performance formula. Use is well established; less popular now, often due to tax issues. Theoretically possible but not tested in the courts.
Step-in rights
Mechanism allowing one party to “step-in” and take voting control of the board and/or shareholder meetings. Use is well established. Theoretically possible but not tested in the courts.
Right is triggered by agreed events of default.
Tag along
Mechanism allowing minority shareholders to sell their shares at the same time as the majority shareholder sells its shares. Use is well established. Theoretically possible but not tested in the courts.
Third party rights
Third party who is not a signatory to the contract may still enforce provisions beneficial to it. Use is well established. Use is well established; the third parties must be expressly named.
Warranties
Statements or promises in a contract that confirm particular facts or circumstances. Use is well established.Can cover a wide range of topics, including on the purchase of the shares in a company, the underlying business and assets of that company. Basic warranties only, implied by law. Cannot be amended or extended.Do not apply to the underlying business and assets if buying shares. The absence of liabilities cannot be warranted.

To see the full report, Use of English Law in Russian Transactions, a Comparative Review, please click Report

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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