Investing In and Out of Russia - RULG

‘War and Peace’
International Wealth Structuring for
Russian & CIS HNWI clients
7th CIS Local Counsel Forum
Yerevan, 6-8 June 2012
Joint presentation Withers LLP, IFG Trusts (Switzerland)
and G. Leontiou LLC
‘War and Peace’:
Russia & CIS:
Wealth planning and
International Tax
Olga Boltenko Partner, Withers LLP
Tatiana Rydeard, Vice President, IFG Trust (Switzerland) Ltd
Setting Up the Scene
• Gentlemen agreements vs. legal structures
• Changing political and legal landscape
• Cheap and cheerful vs. complicated and expensive
• International centres of doing work for Russian & CIS clients
Outline of Presentation
Case Study
Wealth planning: General Issues and Popular Structures
Advantages of wealth planning
General issues for Russian & CIS clients
Painful issues
Relinquishing control
Retaining influence
Corporate Tax Planning:
Holding Structures
Financing Structures
Intellectual Property Structures
Trading Structures
Painful Issues
Case Study: Fictitious Character Mikhail Ivanov
Case Study: Driving Factors for
HNW Russian & CIS Clients
• Confidentiality
• Political risk
• Assets protection
• International risk diversification
• Access to international capital markets
• Tax planning
• Succession planning
• Matrimonial planning
Wealth Planning: General issues
• No local vehicles in Russia & CIS
• Trusts vs. foundations vs. insurance wrappers vs corporate
• Common law concept of a trust – alien to the Russian and CIS
countries laws
• Popular jurisdiction's - choice of law and trustees
• Community of property between husband and wife
• Recognition of pre-/post-nuptial agreements
• Forced heirship rights
Advantages of Wealth Planning
• Preservation of wealth, protection from:
• Spouse
• Other family members
• Creditors
• Tax authorities
• Forced heirship
• Succession planning
• Confidentiality of ownership
Wealth Planning: Painful Issues and Challenges
for Russian and & CIS clients
• No clear guidance
• Conflict of law issues in Russia & CIS
• Conflict of law issues abroad
• “Trust is good, but control is better”
• Where to sue, that is the question
• What will a local judge say?
• Recognition and enforcement of judgements
• Trust
• Separation of beneficial ownership and legal ownership
• Settlor, beneficiaries and trustees
• Foundation
• Legal entity set up for specific purpose
• Corporate structures
• Insurance wrappers
Trusts v Foundations
Ruling body
Foundation council
Ownership of assets
Legal – trustees
Held by the Foundation
Beneficial – beneficiaries
Instruments of control
Trust deed
Foundation deed
Letter of wishes
Court protection
Court protection
Extensive case law
Council can include the founder
Beneficiaries’ right to info
and trusted advisors
Trustees are often
Limited judicial precedent
professionals unknown to
Corporate Structures
• Advantages
• Control during lifetime?
• Control over who benefits during life and on death
• Disadvantages
• Tax
• Corporate restrictions
• Divorce courts
• Forced heirship
Insurance Wrappers
• Advantages
• Flexible and movable asset
• Confidentiality
• Disadvantages
• Unclear tax position in Russia & CIS countries
• High and complex compliance
• Divorce courts
• Forced heirship
Relinquishing Control
• Whichever approach is taken control of assets will need to be
Retaining Influence
• Ways to retain influence:
• Letter of wishes
• Retention of powers
• Protector
• Private trust company
• Choice of jurisdiction
• Ensure structure is not a sham
Letter of Wishes
• Allows the settlor to express his wishes
• Advantages
• Settlor can influence the decisions of the trustees
• Confidential – generally
• Disadvantages
• Not legally binding
Retention of Powers
• The settlor of a trust can retain powers, for example:
• Power to appoint the protector, power to appoint new trustees
• Consent to dispositive powers, including power to revoke?
• Advantages
• Simple
• Can change trustees
• Disadvantages
• Limited powers
• Retention of too many powers may threaten legitimacy of trust
• Individual/group of individuals/a company appointed by settlor
• Role and powers can vary between trusts
• Advantages
• Independent safeguard
• Promoting the settlor’s wishes
• Monitoring trustees’ performance
• Liaising between the trustees and the beneficiaries
• Disadvantages
• If too much involvement will be considered quasi-trustee
Private Trust Company (PTC) (1)
Trustees of purpose trust appoint directors
of PTC
Protector has power to hire and fire trustees
Directors of PTC exercise trustee powers
Protector has power to hire and fire trustees
and block key decisions
Private Trust Company (PTC) (2)
• Advantages
• Legal personality
• Flexibility
• Privacy
• Settlor/beneficiary as director
• Disadvantages
• Control shared with other directors
• Directors owe duty to PTC
• Corporate formalities
Corporate Tax Planning for Russia & CIS
• Business driven approach:
• Consider potential strategic decision for holding structure,
i.e. co-investors, IPO, new businesses
• Finance flow analysis
• Potential segregation of IP and trading functions
Corporate Tax Planning: Holding Structures
• BVI – Cyprus – Russia/Ukraine/Moldova/Belarus
• BVI – Cyprus - Armenia (as soon as DTT comes into force)
• Jersey – Cyprus/Malta – EU (The Netherlands, Switzerland,
Hungary, Luxembourg, Austria, Sweden, Belgium, Ireland etc.)
– Russia/Kazakhstan
• IOM – UK – Kazakhstan/Belarus
Holding Structure: Example
Jersey /
Cyprus /
The Netherlands, UK, Luxembourg,
Belgium, Austria,
Corporate Tax Planning: Financing Structures
• Treaty based structures using:
• Cyprus
• Netherlands
• Belgium
• Luxembourg
• Luxembourg with a Swiss branch
• Non-treaty based structures using:
• Offshore back-to-back financing using arm’s length publicly traded
financial institution?
Corporate Tax Planning: Intellectual Property
• Onshore royalty companies
• Offshore
Isle Of Man
Corporate Tax Planning: Trading Structures
• Onshore trading
• Cyprus
• Switzerland – typically, Zug, Geneva, Vaud, Schaffhausen (but not
• Malta
• Offshore
• Any IFC
• Singapore
• Hong Kong
Corporate Tax Planning for Russia and CIS:
Painful Issues
• Beneficial ownership
• Anti-abuse doctrine/substance over form
• Management and control test
• Substance requirements
• Permanent establishment
• Disclosure of beneficiaries
• Thin capitalisation
• Transfer pricing
• Russian & CIS DTTs – changing scene
‘War and Peace’:
International Litigation Issues
Christopher Coffin, Withers LLP
Gregoris Leonitou, G. Leontiou LLC
About Withers’ Litigation Practice
• Over 70 lawyers providing litigation and arbitration services
worldwide from the UK, US, British Virgin Islands, Singapore,
Hong Kong and Milan
• Specialist lawyers in commercial litigation, arbitration,
insolvency, contentious trust and succession, employment law,
art and reputation management
• Expertise in managing substantial litigation cases in all of the
major offshore jurisdictions
• Withers is the only global onshore law firm with an offshore
office and permanent lawyers in the British Virgin Islands
About Withers’ Litigation Practice (cont’d)
• Clients include banks, corporate entities, governments and
government agencies, funds and entrepreneurs
• Business sectors include banking, financial services, energy,
commodities and insurance
• Languages spoken include Russian, Romanian, Italian, Greek,
Spanish and French
English Approach to Oral Agreements
• Requirements for a legally binding contract:
Offer and acceptance of specific and complete terms
Consideration (or execution as a deed)
Intention to create legal relationship
• Written instrument only required for few types of contract: eg
Dealings with interests in land
Assignments of contractual or intellectual property rights
Transfer of shares
Any contract by deed
• NB: ‘writing’ includes electronic communications – emails, SMS etc
English Approach to Oral Agreements (2)
Certain transactions must be by deed (and therefore in writing):
• Transfer or creation of an interest in land (including a mortgage or
• Lease for more than 3 years
• Appointment of trustees
• Power of attorney
• Gift of tangible goods when not delivered
• Release of a debt, liability or obligation
• Variation of a deed
English Approach to Oral Agreements (3)
• An oral agreement is legally enforceable if it meets the requirements
for formation of legally binding contract
• BUT:
Enforcement will require evidence of the terms, and
The terms must be certain and complete
• A ‘gentleman’s agreement’ is by definition not legally enforceable, as
usually it is:
Too uncertain to enforced
A promise with no consideration – so not a contract
An agreement to agree – so not enforceable
English Approach to Oral Agreements (4)
• Agreements to agree
English law regards these as unenforceable – in contrast to other
European jurisdictions (Walford v Miles [1992] 2 AC 128)
Agreements to negotiate in good faith may also be unenforceable
• The principle is that each party must be free to advance its own
interests in negotiations and to withdraw from negotiations
• In certain cases, if contained in a binding agreement, and related only
to specific issues which can be measured, a commitment to negotiate
in good faith may be held to be enforceable
• But this issue still undermines Heads of terms and Side letters
English Approach to Oral Agreements (5)
Mr B wished to sell his company to a consortium but wanted to invest in the new
merged entity that would be created
The Share Purchase Agreement was drafted to be conditional on an Investment
and Shareholders’ Agreement being executed to allow Mr B to invest BUT also
allowed the consortium to waive that condition
Mr B secured a side letter agreeing to offer him the investment opportunity and
negotiate the ISA – but this never happened
Mr B sued – but the side letter was held to be an unenforceable agreement to
agree despite being intended to create legal relations and being drafted by
Barbudev v Eurocom Cable Management Bulgaria EOOD & ors [2012] EWCA Civ 548)
English Approach to Oral Agreements (6)
• Effect of statements made if not contractual
• Assurances given outside of contract may be held to be
misrepresentations or negligent misstatements BUT
For misrep, claimant must show that the statement was made to induce
him to enter a contract, and that he relied upon it, and that it was false
For negligent misstatement, claimant must show that the maker of the
statement owed him a duty of care which the making of the false statement
• If a fully negotiated commercial contract follows it is likely to exclude or
limit the defendants’ liability for pre-contractual statements
English Approach to Oral Agreements (7)
Difficulties with disputes over an oral agreement
• Lack of detailed terms, eg jurisdiction & governing law clauses
(although in the Cherney v Deripaska litigation – the only jurisdiction
clause argued for was orally agreed)
• Contradictions with related written contracts and entire agreement
• Evidential conflict inevitable and will require full trial to resolve with
result dependant on availability, performance and credibility of
English Approach to Oral Agreements (8)
• Recent case in High Court concerning an oral agreement to distribute
a company's income to its shareholder-directors in proportion to their
shareholdings - the trial judge’s finding in favour of the contract
contended for was largely based on the quality of the witnesses:
• “M's evidence that the parties had agreed … had been reliable. S, on
the other hand, had been an unsatisfactory witness who did not want to
admit that he remembered that important meeting and what had been
agreed. It was a commercial agreement between experienced
businesspersons and involved large sums; that pointed to its having
been intended to have legal effect”
MSL Group v Clearwell International [2012] EWHC 3707 (QB)
Shareholders Agreements
G. Leontiou LLC Litigation Practice
Specialist lawyers in commercial litigation, arbitration, shareholder disputes, internet
start-ups and projects and corporate litigation.
Expertise in managing large-scale litigation cases, including commercial arbitration
cases in the Permanent Court of Arbitration in The Hague
Managemetn and coordination with local counsels in multi-jurisdictional disputes, with
experience in Cyprus, United Kingdom, British Virgin Islands and Guernsey.
Wide global network of associates.
Clients include corporate entities, high net worth individuals, government agencies and
municipalities and private entrepreneurs.
Main Business areas include corporate and commercial law, financial services, trusts,
internet law and regulation, shipping and banking.
Languages spoken include Greek, English and Russian.
Focal Points for Initial Setup
• Shareholders Agreement –VsArticles of Association
•Legal Regime
•Shareholders Oppression
•Statutory Rights
•Blocking Powers of
•Contractual Rights
Shareholders (percentages)
Company Management
• Issues arising when the
SHA provides for a power to
appoint an equal number of
nominee directors in the
• How does an impasse in
decision making occur?
• How do professional service
providers react?
• How to best preserve
evidence and documents,
especially when these are in
3rd party hands?
Shareholder Dispute and Remedies
• Categories of Shareholder
• Remedies for breach of SHA
Oppression Actions
Derivative Actions
Double Derivative Actions
Injunctive Relief
If under an Oppression
Action, Liquidation or Buyout
of Shares
Allegation of Unfair Prejudice/Oppression
• Statutory Basis
• Examples
• Remedies
Statutory Shareholder Claims
• Arbitrability of statutory shareholder claims under English Law
• Is it relevant whether Unfair Prejudice may be termed as a dispute
between shareholders in the jurisdiction where the SPV or structure is
Arbitration Clauses in SHA
• Advantages
• Disadvantages
• Confidentiality, Fast-Track
Adjudication (?), Costs,
Specialized Knowledge
• Not always possible in case
of Oppression / Unfair
Prejudice Claims.
• May still need to resort to
judicial adjudication in order
to achieve injunctions in
different jurisdictions.
• Non appealable.
Company’s Assets in Dispute
• Securitization of Company’s
• How do we best secure the
• Register a Charge over the
Company’s Asset
• Not every security interest is
Financial Instruments
• Are all financial instruments
the same?
• Will using an “off the shelf”
document serve the
• Tailor-made solutions
• Guarantees
• Bonds
• Pledge of Shares
How to Fund the Cost of Dispute Resolution
Litigation Costs
• The risks of litigation or arbitration
Cost – pursuing a £5m claim could take 2 years and cost £1m
Uncertainty of outcome
• The English costs rule
Costs follow the event, ie the loser pays the winner’s legal costs
• can apply in international arbitration depending on governing law
Contrast with American rule of no costs shifting
• Mitigating the costs
Sharing the risk
Funding the cost
Options for Funding
Principal options for commercial or high value disputes
• Insurance – after the event insurance (commonly called ATE)
• Lawyers’ fee arrangements – fixed or capped fees or
Conditional Fee Agreements (called CFAs)
• Third party funding – the new market for investors in commercial
litigation (known as litigation funders)
After the Event Insurance (ATE)
• Bespoke policy taken out after the dispute has arisen
• Assessment of merits requires at least 60% chance of success
• Typically covers adverse costs; can cover own disbursements
• Premiums are
• High – typically 35-45% of cover
• Usually deferred and self-insured
• Often with a discount on premium for early settlement
• Recoverable from losing party (under current court rules)
• Policy must be disclosed to other parties
• ATE rarely available for a defendant
Lawyers’ Fee Arrangements
• Available models of charging
• Pay-as-you-go / traditional: agreed hourly rates and regular billing
• Fixed or capped fees for case assessment and for defined stages
of a case
• More flexible fees?
• The limitations of English law
• Contingency fees for court and arbitration work illegal
• Linking a lawyer’s fee to the outcome not permissible
• Statutory exception for Conditional Fee Agreements (CFAs) only
Conditional Fee Agreement (CFA)
• A CFA is a written agreement with your lawyer providing for:
No fee or a discounted fee payable during the case
On success, you pay normal fees plus a percentage uplift “success fee”
Maximum uplift is 100% of normal fees
Percentage uplift can be staged to increase as case progresses
• Success fee is recoverable from the losing party (currently)
• Shortfall on recovery payable by you, but lawyers often waive
• CFA must be disclosed to other parties, but not the terms or the
success fee until case concluded
• Available to both claimants and defendants
Funding Litigation – Future Developments
• Fundamental changes in the English funding regime
• April 2013 will see
• Contingency fee arrangements legalised
• Success fees and ATE premiums no longer recoverable
• Stricter costs management by many civil courts
• Expectation is that more flexible charging and funding
arrangements will be offered, both by lawyers and litigation
Multi-forum Disputes
Multiple Jurisdictions
• Are such disputes
• Use of Co-Operation
Agreements, Joint Venture
• If yes, to what extend?
Agreements and
• What type of Agreement to
Shareholder Agreements
• Arbitration Clauses – are
• Choice of Law Clauses
• Nominee Directors and
they useful when
“Effective Management and
shareholders are afforded
Control” – Dangers of
statutory protection?
compromising by granting
• Prima Facie Jurisdiction
too wide powers to
• Lis Alibi clauses – effect on
• Will making the Company a
staying or dismissing actions
party to the Shareholders
when brought in more than
Agreement help to ring-
one jurisdictions
fence it against bringing
• Shareholders Agreement –
actions in the jurisdictions
should Company be a party
where the company has
of the Shareholders
been registered in?
Attacks on Structures
Attacks on Structures
Creating an effective and robust structure
Who is likely to attach your structure?
Fiscal Authorities, Governmental bodies, Divorcing Spouses and
disappointed family member.
What can be done?
Can a Trust be modified?
Challenging trustee’s decisions
Audit review on structures
Strategic planning on the outset
Multi-Jurisdictional Structures
Choice of Jurisdiction for the structures and Trusts equally
Questions as to double tax treaties, bilateral or multilateral
international conventions
Attacks on Structures: Introductory Points
Consequences of English law as governing law of structure:
• a shareholders’ agreement creates contractual obligations and thereby
excludes the possibility of claims of ‘quasi-partnership’ between the
contracting shareholders - English law will not impute fiduciary duties
into contractual relationships
• separate legal personality of companies – no room for arguing ‘single
economic entity’ – parent company has no beneficial interest in assets
owned by subsidiary
Attacks on Structures: Assets in Trust
• Claims may be by government, spouse or creditors
• Types of claim through settlor vary enormously:
• Proprietary claim: tracing into trust property
• Vesting of beneficial interest / beneficial powers in the settlor’s
trustee in bankruptcy
• Creditors’ revocatory action (s423 Insolvency Act 1986)
• Enables transaction at an undervalue entered into with the
intention of defrauding creditors to be set aside
• Fraudulent disposition legislation in many offshore jurisdictions
Attacks on Structures: Assets in Trust (2)
• Types of claim through settlor (contd)
• In personam compulsion by the onshore court: eg
US case in which court compelled the operators of a pyramid scheme to
either disgorge funds they had garnered from their fraudulent activities, or
be arrested. While debtor's prison has been abolished, the court's right to
imprison persons for contempt of court, such as the wilful refusal to
repatriate assets (which in this case had been stowed away in the Cook
Islands) remains unquestioned.
FTC v Affordable Media (Anderson), 179 F.3d 1228 (9th Cir. 1999)
Attacks on Structures: Assets in Trust (3)
Another example
An individual in Turkey retained an express power of revocation over two
Cayman Islands discretionary trusts into which USD24m had been settled
Following the collapse of his business amidst allegations of a massive fraud,
judgment was entered against him for USD30m first in Turkey and then in
The judgment creditor applied to the Cayman Islands court for the appointment
of an equitable receiver to exercise the power of revocation
The case went to the highest appeal court, the Privy Council in London, which
decided that the Cayman Islands court had the power to appoint the receivers
over the power to revoke two Cayman Islands trusts.
TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17
Attacks on Structures: Assets in Trust (4)
• Creditor or trustee in bankruptcy may argue trust is a sham
• Key risks – Are there grounds to suggest…
• The document does not create a valid trust?
• The structure is merely a cloak or a mask?
• The trust does not hold real economic value?
• The transaction under which value was transferred is a sham?
• Key question often is how much control does the settlor retain?
Attacks on Structures: Assets in Trust (5)
Recent example of court suspecting a sham:
• Two wealthy individuals were alerted to likelihood that guarantees they
had given would be relied upon
• They then began to divest themselves of the entirety of their assets, by
placing them in discretionary trusts with themselves as beneficiaries
• Later beneficial class changed to just their wives and children
• In action to enforce the guarantees, the two were ordered to disclose
the trust documents
• On appeal it was held that the court had been entitled to infer that the
trustees of these trusts would act on their instructions and that,
therefore the trust documents were effectively in their control.
North Shore Ventures Ltd v Anstead Holdings Inc [2012] EWCA Civ 11
Olga Boltenko
Christopher Coffin
Withers LLP
[email protected]
Tel: + +41 44 488 8809
Withers LLP
[email protected]
Tel: +44 (0)20 7597 6101
Tatiana Rydeard
Gregoris Leontiou
IFG Trust (Switzerland) Ltd
[email protected]
+41 (0)44 286 2727
G. Leontiou LLC
[email protected]
Tel: 00357 22 44 17 22