‘War and Peace’ International Wealth Structuring for Russian & CIS HNWI clients

1. ‘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

2. ‘War and Peace’:Russia & CIS: Wealth planning and International TaxStructuring Speakers: Olga Boltenko Partner, Withers LLP Tatiana Rydeard, Vice President, IFG Trust (Switzerland) Ltd

3. 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

4. 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

5. Case Study: Fictitious Character Mikhail Ivanov

6. 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

7. 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

8. Advantages of Wealth Planning • Preservation of wealth, protection from: • Spouse • Other family members • Creditors • Tax authorities • Forced heirship • Succession planning • Confidentiality of ownership

9. 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

10. 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

11. Trusts v Foundations

12. Corporate Structures • Advantages • Control during lifetime? • Control over who benefits during life and on death • Disadvantages • Tax • Corporate restrictions • Divorce courts • Forced heirship

13. Insurance Wrappers • Advantages • Flexible and movable asset • Confidentiality • Disadvantages • Unclear tax position in Russia & CIS countries • High and complex compliance • Divorce courts • Forced heirship

14. Relinquishing Control • Whichever approach is taken control of assets will need to be relinquished

15. 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

16. 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

17. 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

18. 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

19. Trustees of purpose trust appoint directors of PTC Purpose Trust Protector has power to hire and fire trustees Private Trust Company Directors of PTC exercise trustee powers Protector has power to hire and fire trustees and block key decisions Private Trust Company (PTC) (1) Family Trust

20. 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

21. 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

22. 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

23. Holding Structure: Example Jersey / BVI Cyprus / Malta The Netherlands, UK, Luxembourg, Belgium, Austria, Switzerland Russia Ukraine Kazakhstan

24. 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?

25. Corporate Tax Planning: Intellectual Property Structures • Onshore royalty companies • Cyprus • Netherlands • Luxembourg • Switzerland • Offshore • Isle Of Man • Jersey • Guernsey

26. Corporate Tax Planning: Trading Structures • Onshore trading • Cyprus • Switzerland – typically, Zug, Geneva, Vaud, Schaffhausen (but not only) • Malta • Offshore • Any IFC • Singapore • Hong Kong

27. 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

29. ‘War and Peace’:International Litigation Issues Speakers: Christopher Coffin, Withers LLP Gregoris Leonitou, G. Leontiou LLC

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. English Approach to Oral Agreements (5) 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)

37. 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 breached • If a fully negotiated commercial contract follows it is likely to exclude or limit the defendants’ liability for pre-contractual statements

38. 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 clauses • Evidential conflict inevitable and will require full trial to resolve with result dependant on availability, performance and credibility of witnesses

39. English Approach to Oral Agreements (8) 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)

40. Shareholders Agreements

41. 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.

42. Focal Points for Initial Setup Shareholders Agreement –Vs- Articles of Association Shareholders Oppression Blocking Powers of Shareholders (percentages) • Legal Regime • Statutory Rights • Contractual Rights

43. Company Management 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? Issues arising when the SHA provides for a power to appoint an equal number of nominee directors in the Board

44. Shareholder Dispute and Remedies Oppression Actions Derivative Actions Double Derivative Actions Damages Injunctive Relief If under an Oppression Action, Liquidation or Buyout of Shares Categories of Shareholder disputes Remedies for breach of SHA

45. Allegation of Unfair Prejudice/Oppression • Statutory Basis • Examples • Remedies

46. 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?

47. Arbitration Clauses in SHA 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. Advantages Disadvantages

48. Company’s Assets in Dispute Register a Charge over the Company’s Asset Not every security interest is Registrable Securitization of Company’s Assets How do we best secure the investment?

49. Financial Instruments Guarantees Bonds Pledge of Shares Are all financial instruments the same? Will using an “off the shelf” document serve the purpose? Tailor-made solutions

50. How to Fund the Cost of Dispute Resolution