Russia: When is a Russian really a foreigner? And can minority investors get their due in a legal system rigged to favour insiders? A decision next week from Russia's Supreme Commercial Court will help answer those questions.
In 2008, Kores Invest backed out of a mandatory buy-out offer for electricity generator TGK-2. Kores is owned by local energy group Sintez, controlled by Russian senator Leonid Lebedev. The largest TGK-2 minority investor, with a 25 percent position, is also the largest foreign portfolio investor in Russia, Prosperity Capital Management. The minority holders say Kores owes them $350 million, of which Prosperity's share is $300 million.
Kores argues the offer was invalid because it fell foul of a 2008 law, which states that foreigners need government permission to acquire more than 50 percent of "strategic" companies. Kores never received that permission, because it never asked.
But hang on. The foreigners in this tale are the sellers, not the buyers. Kores, Sintez and Lebedev are all firmly Russian.
Welcome to the topsy-turvy world of Russian law. Kores argues that it is actually foreign-related, and therefore covered by the law, because its parent has some subsidiaries located abroad. It does not matter that the overseas affiliates all have Russian owners or that none of them were involved in the aborted buy-out.
So far, Russia's courts have all accepted Kores's tortured legal logic. It's hard to say whether these judgements reflect more badly on the drafting of the law or on the legal system. But the key fact is that corporate disputes in Russia are often decided on the basis of lobbying. That gives local oligarchs a big edge over small investors and foreigners. The TGK-2 minority investors hope Russia's highest commercial court will see matters differently. After all, most big Russian companies also have foreign subsidiaries, so this interpretation of the law would theoretically invalidate other recent acquisitions. The result could be chaos. But then again, legal logic and consistency are not Russia's strong-points.
