‘war and peace’ international wealth structuring for russian & cis hnwi clients

‘War and Peace’

International Wealth Structuring for Russian & CIS HNWI clients

7th CIS Local Counsel ForumYerevan, 6-8 June 2012

Joint presentation Withers LLP, IFG Trusts (Switzerland) and G. Leontiou LLC

‘War and Peace’:

Russia & CIS: Wealth planning and International TaxStructuring

Speakers:

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

• Structures

• 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

structures

• 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

Structures

• 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 Trustees Foundation council

Ownership of assets Legal – trustees

Beneficial – beneficiaries

Held by the Foundation

Instruments of control Trust deed

Protector

Letter of wishes

Court protection

Foundation deed

By-laws

Court protection

Advantages Extensive case law

Beneficiaries’ right to info

Council can include the founder

and trusted advisors

Disadvantages Trustees are often

professionals unknown to

settlor

Limited judicial precedent

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

relinquished

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

Protector

• 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)

Family Trust

Directors of PTC exercise trustee powers

Protector has power to hire and fire trustees and block key decisions

Private Trust

Company

Purpose Trust

Trustees of purpose trust appoint directors of PTC

Protector has power to hire and fire trustees

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

Cyprus / Malta

The Netherlands, UK, Luxembourg, Belgium, Austria,

Switzerland

Jersey /BVI

Kazakhstan UkraineRussia

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 Structures

• Onshore royalty companies• Cyprus

• Netherlands

• Luxembourg

• Switzerland

• Offshore • Isle Of Man

• Jersey

• Guernsey

Corporate Tax Planning: Trading Structures

• Onshore trading

• Cyprus

• Switzerland – typically, Zug, Geneva, Vaud, Schaffhausen (but not

only)

• 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

Speakers:

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

• Guarantees

• 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

charge)

• 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


• 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


• 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


Example:

• 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

lawyers!

Barbudev v Eurocom Cable Management Bulgaria EOOD & ors [2012] EWCA Civ 548)


• 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

breached

• If a fully negotiated commercial contract follows it is likely to exclude or

limit the defendants’ liability for pre-contractual statements


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

clauses

• Evidential conflict inevitable and will require full trial to resolve with

result dependant on availability, performance and credibility of

witnesses


Example:

• 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.

•Legal Regime

•Statutory Rights

•Contractual Rights

• Shareholders Agreement –Vs-

Articles of Association

•Shareholders Oppression

•Blocking Powers of

Shareholders (percentages)

Focal Points for Initial Setup

• Issues arising when the

SHA provides for a power to

appoint an equal number of

nominee directors in the

Board

• 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?

Company Management

• Categories of Shareholder

disputes

• Remedies for breach of

SHA

• Oppression Actions

• Derivative Actions

• Double Derivative Actions

• Damages

• Injunctive Relief

• If under an Oppression Action, Liquidation or Buyout of Shares

Shareholder Dispute and Remedies

• Statutory Basis

• Examples

• Remedies

Allegation of Unfair Prejudice/Oppression

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

based?

• 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.

Arbitration Clauses in SHA

• Securitization of Company’s

Assets

• How do we best secure the

investment?

• Register a Charge over the

Company’s Asset

• Not every security interest is

Registrable

Company’s Assets in Dispute

• Are all financial instruments

the same?

• Will using an “off the shelf”

document serve the

purpose?

• Tailor-made solutions

• Guarantees

• Bonds

• Pledge of Shares

Financial Instruments

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

payment

• 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

funders

Multi-forum Disputes

• Are such disputes avoidable?

• If yes, to what extend?

• What type of Agreement to

choose?

• Arbitration Clauses – are they

useful when shareholders are

afforded statutory protection?

• Prima Facie Jurisdiction

• Use of Co-Operation

Agreements, Joint Venture

Agreements and Shareholder

Agreements

• Choice of Law Clauses

• Nominee Directors and

“Effective Management and

Control” – Dangers of

compromising by granting too

wide powers to shareholders

Multiple Jurisdictions

• Lis Alibi clauses – effect on

staying or dismissing

actions when brought in

more than one jurisdictions

• Shareholders Agreement –

should Company be a party

of the Shareholders

Agreement?

• Will making the Company a

party to the Shareholders

Agreement help to ring-

fence it against bringing

actions in the jurisdictions

where the company has

been registered in?

“LIS ALIBI”

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 important• Questions as to double tax treaties, bilateral or multilateral

international conventions

Attacks on Structures

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)


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

Cayman

• 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


• 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?


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 BoltenkoWithers LLP

[email protected]

Tel: + +41 44 488 8809

Tatiana RydeardIFG Trust (Switzerland) Ltd

[email protected]

+41 (0)44 286 2727

Christopher CoffinWithers LLP

[email protected]

Tel: +44 (0)20 7597 6101

Gregoris Leontiou

G. Leontiou LLC

[email protected]

Tel: 00357 22 44 17 22

‘war and peace’ international wealth structuring for russian & cis hnwi clients

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