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By John Helmer in Moscow

Despite a brace of judicial rulings from the English courts against blackening reputations as a business tactic, United Company Rusal has reacted to the defeat of its candidates for the Norilsk Nickel board with this blistering 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, 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 Oleg 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 Mineweb’s 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 have followed two decisive defeats in the voting for the Norilsk Nickel board – the AGM vote on June 30, and the first board meeting on July 7: http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=56116&sn=Detail
But 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 bauxite mines and an 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.”

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 up.

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 of 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 most important of the High Court judgements regarding Rusal and Deripaska was issued on July 3 by Justice Christopher Clarke. This has been reported by Mineweb in detail: http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=56148&sn=Detail

The full text of the High Court judgement is at: http://johnhelmer.net/wp-content/uploads/2008/07/michael-cherney-v-oleg-vladimirovich-deripaska.doc

The ruling in this case obliges Deripaska to face trial in the High Court on claims by his former patron and business partner Mikhail Chernoy (Michael Cherney) that Deripaska has contractual and trust obligations to Chernoy, which he has yet to honour and pay. Mineweb reports calculate that, depending on the equity valuation of Deripaska’s Rusal stock; the dividends Rual paid shareholders (except for Chernoy) since 2001; and the value of asset disposals and purchases in and through Rusal, Chernoy’s claim is for at least $6 billion. According to Judge Clarke, “I am satisfied that Mr Cherney has a reasonable prospect of success in respect of his claim.”

This ruling has triggered serious problems for Rusal and its international bankers over whether the company is now obliged to provision for up to $6 billion in legal contingencies; whether covenants signed by Deripaska and attached to loan agreements have been called into doubt; and whether the High Court ruling constitutes a material change in loan circumstances that triggers mandatory bank reviews of loan terms and conditions.

Currently, the financial implications being studied by the banks put potentially 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 Vladimir Potanin and his Interros holding.

Judge Clarke also put an unprecented 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 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. According to Clarke: “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. 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. 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 system. On the contrary I do not doubt that there 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.

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