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By John Helmer in Moscow

MOSCOW – It is the clash of the titans of the global nickel, aluminum, copper, bauxite, cobalt and platinum markets – Vladimir Potanin’s Norilsk Nickel, Russia’s largest mining company, versus Oleg Deripaska’s United Company Rusal, the world’s biggest aluminum producer.

Deripaska, Russia’s richest man, is seeking to take over Norilsk, but his campaign has run into an unprecedented series of international court rulings, blowing the whistle on his business tactics. Blackening reputations, a court in Britain has ruled, is a red-card offense – whether committed in Russia, England, Switzerland, West Africa or Central Asia.

Hong Kong’s market regulators are obliged to follow carefully, because Rusal has publicly said it may try to sell its at present unlisted shares on the Hong Kong market if it fails to gain admission to the London Stock Exchange. No significant Russian company has previously listed on the Hong Kong exchange (HKEx) while, with the exception of the HSBC and Standard Chartered banks, there are no large non-Chinese companies on the bourse that are also co-listed outside Asia.

There is just one aluminum producer in the top-40 HKEx companies, Aluminum Corp of China. With a market capitalization of about US$20 billion, it would trail well behind Rusal’s estimated market cap of between $30 billion and $50 billion. Rusal’s investment footprint in Asia is small, with an alumina refinery stake in Australia, a cathode plant in China, and a plan to build an anode plant there.

Its export trade with Asia isn’t small, but it amounts to about one-third of its total exports. For the Hong Kong market, Rusal’s unprecedented interest would appear to be a combination of legal fallback for Deripaska, and a consolation prize to his shareholding partners for the failure to list in London. It’s a prize they have not yet agreed to.

Rusal, with annual output of 4.2 million tonnes of aluminum and 11.3 million tonnes of alumina, accounts for 12% of the global market in those products. But who owns the company?

That question is being tested in a highly unusual High Court proceeding in London between Deripaska and his former patron and business partner, Mikhail Chernoy (Michael Cherney). That case is one of the factors driving Deripaska out of contention for the LSE, towards Hong Kong.

On July 3, Justice Christopher Clarke issued a 63-page ruling, granting the application of Chernoy to a High Court trial of a $6 billion claim to his stake in Rusal, and in Deripaska’s holding, Basic Element. For the first time in an international court, Deripaska was defeated on the issue of jurisdiction. He must now accept service and stand trial for the partnership agreement he signed with Chernoy at the Lanesborough Hotel in London in March 2001.

As presented in court, and reviewed in detail by the judge and forensic experts, the text of that agreement requires Deripaska to hold, and repay, a 20% stake of his business in trust for Chernoy; plus dividends payable since then; plus the value of asset sales and related profits he has earned with Chernoy’s stake over the past seven years.

According to Clarke’s ruling, “The two most important witnesses are the parties themselves. A substantial proportion of the relevant material (eg as to company structures, instructions to lawyers and accountants and movement of funds) must be in writing. Several witnesses such as the representatives of Syndikus and Mr Philipides, Mr Mishakov and others are likely to be seasoned travellers. Neither party has suggested that they will suffer significant prejudice if the trial takes place here.” The names mentioned by the judge refer to transaction, accounting and other witnesses identified in the court evidence and by the lawyers’ testimony.

“Taking all those considerations into account, I am persuaded that the risks inherent in a trial in Russia (assassination, arrest on trumped up charges and lack of a fair trial) are sufficient to make England the forum in which the case can most suitably be tried in the interests of both parties and the ends of justice and, accordingly, the proper place for the determination of this claim.”

The implications for one of the world’s most potent aluminum groups are unprecedented, and won’t be long in appearing.

Deripaska’s Russian shareholders – Mikhail Prokhorov with 14% and Victor Vekselberg with 18.9% – have already shown signs that they are ready to break away from Deripaska’s control of Rusal (he holds 58.9%), if they believe he cannot manage a value-enhancing public share listing for Rusal in the London market; and failing that, either list somewhere else, or take over an already listed company. Hong Kong is the first fallback option; the takeover of Norilsk Nickel, Russia’s largest mining company, is fallback option two. Hong Kong was identified after the London initial price offering (IPO) was pulled last year; the takeover of Norilsk Nickel has been an official target of Rusal statements since last December.

Buyback agreement
According to the agreements Deripaska has signed with Prokhorov and Vekselberg, indicated by bank sources, Russian publications and Prokhorov’s holding, if he cannot achieve a listing at all, in 15 months he must buy back their unlisted, unvalued stakes in Rusal. Depending on their agreement of how to value Rusal, they would be owed between $10 billion and $17 billion. That’s cash Deripaska doesn’t have – he was obliged to borrow almost $5 billion to finance his recent deal with Prokhorov. Since the Clarke ruling on July 3, it’s also money international bankers believe he’s unlikely to be able to borrow, so long as the Clarke ruling assigns the Chernoy claim “a reasonable prospect of success”.

In deciding in favor of Chernoy, Clarke provides the first independently verified account of the history of the Russian aluminum business. This is based on an evidence file the judge says comprises 16 lever arch files; he estimates that they require almost three days, doing nothing else, to read.

Let Judge Clarke set out his opinion and ruling in his own words:
This is not a run of the mill claim. 66% of UCR Rusal is said to be worth of the order of $23 billion. If so 13.2% is worth $4.6 billion, making the claim, after deduction of the $250 million, worth about $4.35 billion. The payment of such a claim, if valid, would be beyond the reach of most individuals. But Mr Deripaska was, on his account, the beneficial owner of the majority of the shares of Rusal, together with many other commercial interests. The Rusal group employs some 100,000 people. Mr Deripaska’s other companies employ over 250,000. He is said to be the richest man in Russia and ninth on the list of world billionaires.

Mr Geoffrey Vos, QC, for Mr Cherney submitted that, where a claimant puts forward credible evidence of an agreement that is both at the heart of his claim and the foundation of his claim to English jurisdiction, but there is a conflict of evidence as to whether the agreement relied on was made, the Court should not attempt to resolve that conflict, and, if the claimant has presented a good arguable case, should not apply the Canada Trust gloss i.e. determine which side has much the better of the argument. If both parties have an arguable case on the point, to require the claimant to show that his case is markedly better than that of his opponent is, in effect, to require him to establish it on the balance of probabilities, when the authorities show that that is not necessary: Seaconsar 453 C-F; Canada Trust 555 D.

The essential test, laid down by the rules, is that the claimant must satisfy the court that England is the proper place in which to bring the claim. If he satisfies the court of this, the court has discretion to permit service out. As Rix, LJ pointed out in Konkola, the discretionary nature of the exercise enables the Court to couch its decision in terms that do not prejudice the final trial wherever it may be, eg by deciding that the material before it is not sufficiently good to displace an established jurisdiction, or, presumably, to establish jurisdiction here.

I have come to the conclusion that, even in a case where there is a dispute between two apparently credible witnesses the Court should usually, before giving permission, be satisfied that the claimant’s contentions about the alleged agreement provide a much better, or at any rate a better, argument in favour of there being the ground for jurisdiction alleged than of there not being one. In granting permission to serve out of the jurisdiction the court is exercising an exorbitant jurisdiction over those who are not within its ordinary reach. In those circumstances the court is, as it seems to me, justified in applying the good arguable test in that manner in order to avoid the risk of compelling individuals or companies to submit to a jurisdiction to which they ought not in truth to be made subject. Further if, as Canada Trust indicates, the concept which the phrase reflects is “of the court being satisfied or as satisfied as it can be having regard to the limitations which an interlocutory process imposes that factors exist which allow the court to take jurisdiction”, it ought ordinarily to require that, when the Court looks at the material, it finds the points in favour of the ground for jurisdiction alleged to be more than just evenly balanced by those which point the other way.
The judge also takes pains to sift through the evidence that Chernoy has been the victim of at least one assassination attempt, and of widely published claims that he has had criminal associations, especially with a key figure in the case – Anton Malevsky. Malevsky was killed in a parachuting accident in South Africa several years ago.

Alleged extortionist
Malevsky’s importance is in Deripaska’s evidence that the only reason he paid Chernoy money, following the London agreement of 2001, was that he had to pay off Malevsky, an alleged extortionist. The judge did not believe this claim. “Mr Deripaska appears to have sought to hide any connection with Mr Malevsky from a Swiss Investigating Magistrate. On 17th February 2005 he told him: ‘I know this person [Mr Malevsky] only by name. I have seen his name in the press’. Mrs Malevsky says that this statement is completely untrue and, in the light of her evidence, that seems likely to be so. She also states that the accusation that her husband was involved in organized crime is completely false.”

At the end of his summary of Chernoy’s, then Deripaska’s claims about the evidence of their agreements, Clarke concludes: “I am satisfied that Mr Cherney has a reasonable prospect of success in respect of his claim.”

This judicial statement may have immediate accounting implications for Rusal as a Jersey-registered company, whose financial accounts are required to make provision for significant legal liabilities if they are to qualify for the listing requirements of the London Stock Exchange and others. Until now, Rusal has told its listing advisors that the Chernoy case has no “reasonable prospect of success”. Rusal’s balance-sheet and market valuation look a little different with a $6 billion contingency set aside.

This $6 billion hole in Rusal accounts looks just as big in Hong Kong as in London.

Here, for the first time, is a leading English judge’s assessment of the truth of the matter: “I cannot and do not purport to determine who is right on this. One side or other is plainly telling lies on a grand scale. But I am satisfied that, on the material presently before me, Mr Cherney has a good arguable case on this point, in the sense that he has a strong argument and that, insofar as any judgment can be made on present material, he has much the better side of the argument. I say that for a number of reasons.”

And so to the nub of the most important litigation in the aluminum industry: “Whether any agreement is found to have been made as alleged is in large measure dependant on whether or not the parties were partners in business or extortioner and victim. The answer to that depends, in part, on what happened in the relevant part of the aluminum business in Russia between 1993 and 2001. Any evidence on that topic is likely to come predominantly from Russians, who are likely to want to give evidence in Russian, or from Russian documents. Russia has an operating legal system of which Mr Cherney can avail himself.

“It is, however, apparent to me that, if this claim is not allowed to proceed in England, it will not proceed in Russia. It is unrealistic to suppose that Mr Cherney’s claim could be prosecuted with any hope of success without his giving oral evidence and he will not return there for three reasons. Firstly, he fears for his life; secondly, he fears that he may be arrested on what he claims would be trumped up charges; thirdly, he does not believe that he will get a fair trial. I have, therefore, to consider what significance if any, should attach to the fact that a trial in Russia will, in all probability never take place. That must depend on the extent to which any of Mr Cherney’s fears are justified and whether, even if justified, they afford any reason for having a trial not in Russia but in England.

“I am, as I have said, satisfied that, in this particular case, there s a significant risk that Mr Cherney will not obtain in Russia a trial unaffected by improper interference by state actors and that substantial justice may not be done.”

Less than a week after Clarke issued this stinging decision, Deripaska failed in a bid to put his candidates on the board of directors of Norilsk Nickel, in pursuit of his fallback option two. This is how Rusal reacted to the defeat with this ad hominem attack:

Moscow, 8 July 2008 – UC RUSAL, the world’s largest aluminium and alumina producer and 25% shareholder in Norilsk Nickel, is issuing the following statement in relation to the results of the first meeting of the new Norilsk Nickel Board of Directors which was held on 7 July 2008. The decisions made at this meeting demonstrate that the Board is controlled by Interros and does not represent the interests of all shareholders.

The election of Sergey Batekhin, deputy CEO of Interros [a Russian private investment company, whose main owners are Vladimir Potanin and Mikhail Prokhorov], as the CEO of Norilsk Nickel was made without any search being carried out to establish a shortlist and was not supervised by a Nomination Committee. Indeed the candidacy of the new CEO was presented by Interros at the meeting of the Board right after Vladimir Potanin, owner of Interros, had been elected as the Chairman. Members of the Board were denied the opportunity to have meetings with the candidate or study his biography and professional track-record. Mr Batekhin has no meaningful experience in metals and mining sector and has never served as the CEO of a public company. Furthermore there was no proper discussion as to why Denis Morozov, the current CEO who proved to be truly independent, was no longer suitable. It is thus not surprising that the vote to appoint Mr Batekhin passed by a margin of one director.

The election of Vladimir Potanin, owner of Interros, as Chairman of the Board, contradicts the policy of the independent proxy advisory firm ISS, which supports independent Chairman, and the specific recommendation of another major proxy advisory firm, Glass Lewis, which specifically recommended that Norilsk have an independent Board Chairman. Likewise, the UK Combined Code provides for the election of an independent director as the Chairman of the Board … Moreover, we are deeply concerned that Guy de Selliers appears to be the only truly independent director of the Board. The other two directors – Michael Levitt and Heinz Schimmelbusch, referred to by Interros as independent, are not independent. As it has been widely publicly reported in recent days, Michael Levitt has substantial financial ties to Interros, and ISS identified him as not independent. The status of Heinz Schimmelbusch as an independent director is also questionable due to his affiliation with the Interros management and his support of the decisions, initiated by Interros, to appoint Mr Potanin as Chairman and an Interros employee as Norilsk CEO. Moreover, Mr. Schimmelbusch was against the election of Guy de Selliers to chair the Board as an independent director.

In short, Rusal, controlled by Deripaska, is saying – either you agree with us, and do what we want, or you are not independent. A move is now expected to call an extraordinary general meeting of shareholders (EGM) to vote again on the board, with four additional seats added, according to the resolution of the AGM. The campaign for the 13-member board will last for 90 days.

Independent directors also take the position that their role as independents precludes public comment on board matters outside the boardroom. Guy de Selliers has not responded to attempts to ask him questions, and Rusal refuses to respond to questions. There are uncorroborated reports that Rusal has put particular pressure on Schimmelbusch to withdraw before the next round of board voting. In reporting on the contention, the Financial Times was obliged on July 10 to publish a correction of several claims the newspaper had issued, regarding Schimmelbusch and his corporate affiliations.

Rusal’s tactics are not new; and they have not gone unanswered.

Rewind the tape to November 24, 2003, when Justice Jack of the Queens Bench division of the UK High Court ruled in the case of Tekron Resources Ltd v Guinea Investment Co Ltd. Because the latter was a wholly owned affiliate of Rusal, this case was the first open court trial, outside Russia, of the international business practices of Rusal. The judge also ruled on the veracity and conduct of three high-ranking Rusal executives – Alexander Bulygin, chief executive; Andrei Raikov, currently head of Rusal’s raw materials group; and Pavel Ovchinnikov, head of the alumina group.

Justice Jack ruled in favour of Tekron, a small company of consultants in the Republic of Guinea, where Rusal operates the country’s biggest bauxite mines and only alumina refinery. The judge singled out Bulygin (spelling the name Boulygine). Charging him with improper attacks on the Tekron consultants, he concluded: “It is apparent from these matters that under threat of litigation in London Rusal have done what they can to blacken the names of Tekron and its principals in Guinea. On the evidence before me, they have not only failed but have secured indirect evidence that the Government considers that Tekron have behaved properly in its relations with the government.”

Considerable doubt
Jack also singled out Raikov, a senior executive of Rusal, then and now, for the quality of his testimony to the court. “The last is nonsense,” Jack ruled, “which must throw considerable doubt on the rest.” The allegations from the Rusal side, Jack ruled, “do not readily fit the facts”. Regarding testimony from Ovchinnikov, and the absence of documentary evidence to substantiate it, the judge ruled: “For these reasons, and the reasons I have set out, I should place little weight on the relevant passages in the statements.”

Rusal lost its case, and was obliged to pay the Tekron claim.

Rusal next appeared in the UK High Court between 2005 and 2007, when it was party to a suit between the Tajikistan Aluminium Plant, a smelter Rusal controlled at the time, and a group of its former managers and traders. Charges of fraud were alleged by both sides, and these have yet to be tested in trial. However, following hearings, in which the judge was skeptical of Rusal’s veracity, jurisdiction was confirmed for Rusal, but denied for Deripaska and Bulygin. In April 2007, Rusal then made an out of court settlement to withdraw from the case. The Tajik smelter followed by suing Rusal in London, and then in the British Virgin Islands, alleging fraud. The case was dismissed in London on jurisdictional grounds; it is still pending in BVI.

The full text of the High Court judgement on July 3 is here.

Currently, the financial implications are being studied by the banks, who must decide if they put serious constraints on Rusal’s and Deripaska’s capacity to borrow fresh funds in its challenge to take control of Norilsk Nickel from the alliance led by Potanin and his Interros holding.

Judge Clarke also put an unprecedented spotlight on the PR tactics used by Deripaska and Rusal against his adversaries and business rivals. In his ruling on evidence regarding the engagement of an English PR firm called Mirepco, Clarke accepted that a campaign had been arranged to blacken Chernoy’s public reputation in the UK, making it difficult, or impossible, for him to pursue his court case against Deripaska in London.

According to Clark’s recital, “a Project Status Report of 14th September 2007 states, inter alia, that the ‘desired end result is to ensure that the litigation being undertaken in the UK has no detrimental effect on the impending Initial Public Offering of Rusal in London. Preventing Cherney from obtaining entry to the UK would obviously assist the case but may not be fatal to his pursuit of it’.” Clarke added: “Mr Stewart [barrister for Deripaska] told me on instructions that Mr Deripaska never commissioned this report, and knew nothing about it at all. But no evidence has been filed that offers any explanation about it or about Mirepco’s activities.”

The Clarke ruling also acknowledged that reputational attacks have formed a crucial part of the campaign to prevent Chernoy claiming his stake in Rusal. He cited a Swiss appeals court ruling this past January, which exonerated Chernoy of allegations that have stemmed, the Swiss judges said, from whispering campaigns, not from verified police investigation. Chernoy is suing in an Israeli court for defamation originating with Deripaska.

According to Clarke in the London court: “I have set out the evidence given in relation to Mr Cherney’s alleged criminality or the lack of it in some detail because of the reliance that has been sought to be placed on it. I cannot, for the purposes of this application, begin to determine where the truth lies. Mr Cherney may be a gangster or the victim of Kompromat [the Russian term for black propaganda]. Mr Deripaska may be a spreader of calumnies about Mr Cherney, either true or false. The allegations against Mr Deripaska may be true. For present purposes it is material to note (a) that Mr Cherney has never been convicted of any crime anywhere; (b) that the highest Court in Switzerland has required the Cantonal Court to enter a non suit in relation to the charges against him; (c) that there is evidence in his favour of want of criminality on his part from individuals in very senior positions; but (d) that he is undoubtedly reputed to be a gangster in some of the public press in Russia and that there is hearsay evidence that this view is taken by some security personnel.”

This is the first time an international court has ruled against Deripaska’s credibility.

Prosecution risk
Clarke also ruled that Deripaska was powerful enough in Russia to influence the courts against his rivals. “It seems to me that there is a significant likelihood of Mr Cherney being prosecuted if he returns and a real possibility that Mr Deripaska might use his influence, or his ability to orchestrate feeling against Mr Cherney, to encourage the authorities to take that course.”

Deripaska has responded publicly, accusing Clarke of improperly insulting the Russian judicial system. But Clarke’s focus was on Deripaska’s capacity to influence the system: “Given the closeness of the link between the Russian State and Mr Deripaska, the alignment of his interests with those of the State, and the size and importance of Rusal, it seems to me,” Clarke ruled, “that the Russian State may well regard the question as to who was beneficially entitled to 20% of Rusal and is beneficially entitled to a 13.2% interest in UCR (even if the interest is held on trust for sale), as sufficiently important to justify encouraging the courts to see their way to rejecting Mr Cherney’s claims, if he were to present them in a Russian Court.”

Clarke added: “I am not deciding that a fair trial can never be obtained in the Russian arbitrazh [Russian term for the commercial court] system. On the contrary I do not doubt that there are many honest and good judges in the system at every level, who conscientiously seek to do justice according to the relevant legal principles and procedures, who are developing the arbitrazh system to relate to the commerce of the new Russia, and who do so without improper interference … I do however regard there as being a significant risk of improper government interference if Mr Cherney were to bring the present claims in Russia, where they would be very high profile proceedings indeed, such that substantial justice may not be done to him if he is required to proceed there.”

The board directors at Norilsk Nickel are already facing what Clarke warned might happen to Chernoy if he took his case to Moscow. In the three months that now lie ahead in the battle Rusal is waging for control of the Norilsk Nickel board, the UK court rulings are likely to play an unprecedented role in determining the outcome for Russia’s most important mining company.

Their echo is already being heard in Hong Kong.

Rusal and Deripaska’s spokesman were given, but declined, the opportunity to comment on a pre-publication draft of this article. On July 21, Justice Clarke granted Deripaska leave to appeal against his earlier ruling. A statement has followed from Deripaska’s PR agency Portman. “We believe that [Clarke’s] earlier jurisdictional judgment was wrong, as it effectively amounted to an allegation that the Russian Federation is unable to exercise its sovereignty by administering justice. We look forward to putting our case to the Appeal Court. On the substance of Mr Cherney’s claims, Mr Deripaska continues to believe that they are vexatious and utterly without merit. He will continue to defend himself vigorously against these claims.”

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