Ferrexpo AG v Gilson Investments Ltd and Ors

Hearing dates: 8, 9, 10 & 16 February 2012

Introduction

The defendant companies are challenging the jurisdiction of the English court over these proceedings, which were brought by the claimant on 22 November 2011. They apply for a declaration that the court has no jurisdiction to try the claim and should set aside the claim form and service of it upon the defendants, or a declaration that the court should not exercise any jurisdiction that it may have over the defendants in respect of the proceedings and should stay them.

The claimant is Ferrexpo AG ("Ferrexpo"), a Swiss company owned by Ferrexpo Plc, who are a FTSE 250 public company listed on the London Stock Exchange. Mr Kostyantin Zhevago is the Group Executive Officer of Ferrexpo Plc, and he and his family are the ultimate beneficial owners of 51% of their shares. Ferrexpo are represented by Mr Joe Smouha QC and Mr. Stephen Houseman.

The defendants are English companies with share capital of £1 or £2 and a single director. It appears from Mr Zhevago's evidence, which is not contradicted and which I accept for present purposes, that because they were incorporated here they could take advantage of double taxation arrangements between Ukraine and the United Kingdom and so not pay tax on dividends that they receive. The proceedings were served on them at their registered offices in England on 22 November 2011. They are represented by Mr. Ali Malek QC and Mr. Peter de Verneuil Smith.

The proceedings concern a Ukrainian company called OJSC (sc. Open Joint Stock Company) Ferrexpo Poltava Mining ("OJSC"), which owns and operates the Poltava mine. I understand that the mine is Ukraine's largest exporter of iron ore pellets. The evidence is that the mine is now worth at least US$1.2 billion, and I accept that as a realistic indication of its value. I also accept Mr Zhevago's evidence that it is one of the key economic assets of Ukraine.

Ferrexpo claim to own over 98% of the shares in OJSC, and the indirect interest in the mine is the only significant asset of Ferrexpo and their parent. The defendants dispute Ferrexpo's shareholding in OJSC or their right to retain it.

Background

The background to these proceedings is a long-running dispute between Mr. Zhevago and Mr. Alexander Babakov. Mr. Zhevago is a Ukrainian, and he has since 1998 been a State Deputy (broadly equivalent to a Member of Parliament) for the Poltava Oblast electoral district. He has many business interests. In the 1990s he became one of the richest men in Ukraine and he remains so.

Mr. Babakov, a Russian, has since 2003 been a member of the Russian Duma and is chairman of the State Duma Committee for Foreign Affairs. He apparently has substantial business interests in Ukraine. Ferrexpo plead that he is the ultimate beneficial owner of the defendants, and there is no evidence that contradicts that verified averment. I proceed on the assumption that it is correct.

Mr. Zhevago's rivalry with Mr. Babakov apparently goes back to the 1990s. In 1993 Ukraine began a privatisation programme, which included privatisation of natural resources enterprises. Mr. Zhevago and Mr. Babakov both invested in that privatisation programme, and competed in 1998 for a 35% share of EC Odessaoblenergo, a utility company transmitting and distributing electricity to the Odessa region. The bid was won by Overcom Enterprises Ltd, one of Mr. Babakov's affiliated companies, and Mr. Zhevago avers that his affiliate, FS Trading Ltd LLS ("FST"), should properly have had their tender accepted. This dispute has resulted in a protracted litigation in Ukraine. The Superior Arbitration Court held initially that the tender was improperly awarded to Overcom Enterprises Ltd, and, although that decision was overturned in 2000, in 2007 the Supreme Court of Ukraine reinstated it. In 2010 the Supreme Court overturned the 2007 decision, and at a new trial in 2011 the Court rejected FST's complaint on the basis that there was no right to appeal to the court in respect of the decision of a privatisation body.

The rivalry between Mr. Zhevago and Mr. Babakov in relation to OJSC also goes back many years. By 2001 both men with their respective associates had built up share holdings in OJSC, and, according to Mr. Zhevago, Mr. Babakov and others proposed to buy out him and his associates. Mr. Zhevago led a counter-offer to buy out Mr. Babakov's group. According to Mr. Zhevago, in the months of negotiation that followed he received threats from Mr. Babakov and "his allies": Mr. Babakov is said to have threatened to use political and other influence in Russia and Ukraine to take control of the company. Mr. Babakov denies this.

However that may be, eventually there was concluded an agreement dated 18 November 2002 and entitled "Agreement for sale and purchase of securities No K1911/27" (the "2002 SPA"), together with a so-called "lock-up agreement" (or "blocking agreement") of the same date. Both agreements were governed by the law of Ukraine. OJSC's registered and issued share capital was then UAH16,477,505, being 65,910,020 ordinary shares with a par value of UAH 0.25. (I shall refer to these shares as the "Original Shares") The defendants were the registered owners of some 40% of the issued share capital, 26,490,518 shares. The shareholding of Mr. Zhevago and his associates was nearly 55%. By the 2002 SPA four companies, which have been referred to as "Initial Purchasers" and which were beneficially owned by Mr. Zhevago and his associates, bought or purported to buy the defendants' entire holding in consideration of US$27 million. The parties to the 2002 SPA included, as well as the defendants and the Initial Purchasers, CJSC Dilovi Partnery (or CJSC Business Partners, "CJSC"), who were security traders and representatives of the Initial Purchasers, and JSB ING Bank Ukraine ("JSB ING") as custodian. Under the lock-up agreement the shares that were to be sold were to be held by JSB ING as custodian.

By clause 2.1 of the 2002 SPA the defendants were to sign and deliver to JSB ING instructions for the shares to be withdrawn from their accounts with JSB ING and transferred to the Initial Purchasers' accounts with them; and clause 2.4 provided that, "Ownership right to the Securities shall pass from the Sellers to the Purchasers only as of the date of deposit of the Securities to the Purchasers' account with the Custodian". As I shall explain, this method of transfer reflects that the Original Shares were electronic or "immobilised documentary", and that there were no traditional paper share certificates.

On 20 November 2002, according to Ferrexpo, a general meeting of shareholders in OJSC was held and resolutions were passed to increase the share capital in the company to UAH 639,986,294.20 and to increase the par value of an ordinary share to UAH 9.96. The defendants contend that they were then still registered shareholders, and it is in dispute whether they attended the meeting on 20 November 2002 and whether they voted in favour of these resolutions: according to Mr. Zhevago, they did so, but the defendants deny both that they attended and that they voted.

Following the resolution to increase the par value of the shares, the State Securities and Stock Market Commission ("SSSMC") issued a certificate dated 20 January 2003 certifying the issue of the new shares. In October 2004, November 2005, June 2006, December 2007 and October 2008 OJSC purported further to increase the number of its shares at a series of shareholder meetings. On each occasion a new share issuance certificate was issued by the SSSMC.

According to Mr. Zhevago it was common in Ukraine after a major corporate acquisition such as the 2002 SPA to seek to "de-risk" it (to adopt Mr. Zhevago's expression, which I understand to mean, or at least to include, taking steps to protect the acquisition from effective challenge) by moving the acquired shareholding through a chain of companies and usually dissolving the companies once they had transferred the shares. By 2006 the Initial Purchasers had transferred their shares. Collaton Ltd ("Collaton"), an Isle of Man company beneficially owned by Mr. Zhevago, purported between July and September 2006 to transfer to Ferrexpo 28,691,769 shares in OJSC in consideration of US$121,691,281.94 and CHF134,923,800 under four agreements (the "2006 SPAs"). All the 2006 SPAs were said to be governed by Swiss law and provided for disputes to be subject to arbitration in Zurich, Switzerland. By May 2007 Ferrexpo were ultimately owned by Ferrexpo PLC, who themselves were floated on the London Stock Exchange on 15 June 2007.

Between 2000 and 2004 Mr Zhevago gradually bought out the interests in the mine of his original partners or associates. From the time when Mr Zhevago first acquired an interest in the mine, very significant sums have been invested in it, and Ferrexpo have continued to make large investments. As a result, OJSC have been extremely profitable.

I have referred to the transfer of shares under the 2002 SPA and the increase in the number of shares issued and their par value. The relevant procedures...