Under martial law: corporate conflicts have become more frequent in Ukraine
Property rights protection is becoming a major pain point for businesses in Ukraine. The country is undergoing a major reshuffle in corporate law, which has brought new developments, such as courts in the Anti-Terrorist Operation (ATO) zone, as well as a pronounced political component. Forbes spoke with lawyers and investment market experts about how the increased demand for protecting corporate interests has changed today, and what new tactics have emerged in corporate raiders' arsenals.
The Notorious Courts of Donbas
Ukrainian court seals remain in the ATO territory, which are used to backdate court decisions. Proving that such a decision was made during the ATO and is a forgery, rather than being considered, say, before the conflict, is very difficult.
Over the past year, Forbes has reported on several dozen corporate conflicts related to the redistribution of spheres of influence and the protection of property or creditor rights. For example, OTP Bank reported difficulties in returning its equipment leased to the agricultural company Mriya. One of the company's owners, Ivan Guta, ranks 28th on the Forbes list, with an estimated net worth of $277 million. Another co-owner of Mriya, Mykola Guta, is currently wanted by the police. The issue of repayment is also pending between Delta Bank co-owner Mykola Lagun and Nadra Bank shareholder Dmitry Firtash.
In addition to traditional processes of redistributing spheres of influence, new methods of acquiring other people's corporate rights have emerged in Ukraine amid the ongoing conflict in the east. As Forbes previously reported, since the beginning of the conflict, businesses have been actively using the Anti-Terrorist Operation (ATO) to write off debts and avoid repaying loans: a wide range of methods are being used, from staging the physical disappearance of an individual in the ATO zone to transferring debts to people registered as residents of the Donbas.
One of the new schemes that has become widespread in recent months has been the use of courts from the ATO territory. "After part of Ukraine found itself in a gray zone, until the administration of justice in the ATO territory was legally regulated, courts in those regions continued to hear cases, even though those regions were no longer effectively controlled by Kyiv. This led to a number of court decisions—dozens, even hundreds—that, for one reason or another, are now difficult to appeal.
A corrupt court in the ATO zone is being given the opportunity to rubber-stamp a court decision from a year ago, when there was no combat in that territory. For example, from January 2014 or December 2013. This court decision transfers corporate rights to corporate raiders.
"And although they were clearly unlawful, the point is that holding judges accountable for issuing a predeterminedly unlawful decision, or even appealing such a decision through the usual procedure, is quite difficult," explains Mikhail Ilyashev, senior partner at Ilyashev & Partners. As a lawyer, he was recently involved in a high-profile dispute that took place at 1 Dniprovskyi Descent, a building occupied by the World Bank's office in Ukraine. The dispute centers on the corporate rights of Lira-2000, a company that leases space in the city center.
According to Ilyashev, all materials from controversial cases are not physically transferred to regions unaffected by military action, but are stored in an archive within the ATO territory. "Naturally, the raiders took advantage of this. They had previously used such courts, and now they can obtain the necessary decisions retroactively. Because it's impossible to verify exactly when the decision was made," Ilyashev emphasizes.
The scheme works like this. A corrupt court in the ATO zone is given the opportunity to rubber-stamp a court decision from a year ago, when there was no fighting in that territory yet. For example, from January 2014 or December 2013. Based on this court decision, corporate rights are transferred to corporate raiders. "It could then take years to get to the bottom of it. Because to the enforcement service, this decision looks like a regular court decision, and the enforcement service itself is not obliged to verify every court decision to determine whether it was issued or not. Moreover, there are territories in the ATO that have changed hands," notes Ilyashev. He names the Starobilsky District Court in the Luhansk Oblast among the most "distinguished" ones.
Naturally, after the Revolution of Dignity and the outbreak of armed conflict in Donbas, there was increased demand for property protection in the country. Eric Naiman of Capital Time believes that the disputes are more about cash flows than property. His company was searched last year, and its servers were seized. The search was conducted by SBU agents, and the process itself was aimed at uncovering details related to Vyacheslav Kruk's business.
As in other periods of regime change, some asset redistributions are being carried out under a political veneer. These days, in such incidents, former owners are accused of collaborating with the previous authorities. "We're seeing that many businesses in Ukraine are currently being subjected to corporate raids. Property is being redistributed, sometimes under the guise of political struggle. Allegedly, people were working with the previous regime," Rovshan Tagiev, head of the Assembly of Nationalities of Ukraine, told Forbes.
Someone can speculate in politics and seize businesses, even using people who were on the Maidan. I don't want to cast aspersions on anyone, but ultimately, the law must apply, and all volunteer groups must be active, fighting on the front lines for Ukraine's territorial integrity, not preoccupied with dividing up businesses and identifying certain shareholders. Rovshan Tagiev, head of the Assembly of Nationalities of Ukraine
His organization, for its part, is dedicated to protecting property rights, working with lawyers and human rights activists and monitoring the situation in this area. "Someone can exploit politics and seize businesses, even using people who were on the Maidan. I don't want to cast aspersions on anyone, but ultimately, the law must apply, and all volunteer groups must be active, fighting on the front lines for Ukraine's territorial integrity, not focusing on dividing up businesses and identifying particular shareholders," Tagiev believes.
How can a business protect itself? Timur Kogan, an associate partner at Atlas Advisors, points out that "property protection mechanisms such as asset structuring through non-residents and cross-ownership remain popular in the country." Another very effective way to protect business assets is to transfer them to separate companies while simultaneously securing them as collateral with a related or partner bank, or with one's own companies.
"Consequently, collateral disrupts the entire scheme of potential corporate raiding. Companies, among other things, distribute their revenues among various legal entities to reduce the visibility of their business's profits. The participation of international financial institutions has also become an important element in protecting property rights," Kogan states. These institutions include the European Bank for Reconstruction and Development and the International Finance Corporation.
Mikhail Ilyashev adds that, given the challenging situation and precedents regarding court decisions on corporate rights rendered in the ATO zone, a general legislative solution for protecting property rights is needed. "I believe a comprehensive solution is needed nationwide regarding the review of court decisions from the ATO zone. Because, for example, criminals could seize the same seal and stamp numerous such decisions. The enforcement service is not yet obligated to review every decision. An additional procedure is needed to verify the existence of similar court decisions in the ATO zone—for example, through the Court of Appeal. Or a specific procedure for forwarding such decisions should be developed and adopted, so that they cannot simply be brought in by a party for enforcement," Ilyashev suggests.
Forbes
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