Yukos in The United States
Yukos had been widely lauded, since the early 2000s, as the most visible initiator of modernisation in the Russian oil sector. The company’s determined and commercially savvy focus on standards of transparency and corporate governance was largely based on American models. This effort was supported by actively hiring foreign specialists for crucial positions, including American oil experts Bruce Misamore, who joined in 2001 as CFO, and Steven Theede, who joined in 2003 as Chief Operating Officer.
Given this, it is little surprise that Yukos on occasion was drawn into the US judicial system in its fight against the sham bankruptcy and expropriation of assets.
The first case took place in December 2004, as the Russian authorities were forcing through the auction of YNG in Moscow (discussed above). Yukos filed a Chapter 11 bankruptcy case in the US, with the hope of halting the Russian authorities’ actions to enforce its tax claims. Yukos also stated it wanted to obtain the financial flexibility to obtain loans superior to claims of the Russian authorities, to finance operations, to restructure tax debt, and to create a surviving entity that could seek redress against the Russian authorities and other entities on behalf of shareholders, employees, and creditors.
During the course of the hearing, the court made several statements agreeing with Yukos’ claims of bias, absence of the rule of law and expropriation:
The citizens of Russia, the United States and elsewhere have a public interest in the ordinary progress of the rule of law. … In the instant case, the appearance to plaintiff and its investors, of such a confiscation, is created by what appears, on the evidence before this court, to be the inconsistent application of Russian law within the Russian legal system.
The weight of the evidence supports a finding that it is substantially likely that the assessments and manner of enforcement regarding [Yukos’] taxes were not conducted in accordance with Russian law.
The evidence supports a finding of the likelihood that [Yukos’] shares of YNG will be sold for approximately half the value estimated by two different investment bankers.
Despite these strong statements, the court ultimately concluded that, given the “totality of the circumstances”, the bankruptcy proceedings could not be sustained. A number of reasons were given, which focused around the central, intractable issue that the majority of Yukos’ business and financial activities continued to take place in Russia and would require the participation of the Russian government – the very body Yukos was seeking to restrain.
Successfully dealing with Russian-based assets was looking increasingly unlikely. Indeed, once the Russian bankruptcy proceedings for Yukos had commenced and Yukos’ Russian assets been expropriated. The fight moved elsewhere.
Mazeikiu Nafta and the New York Freezing Order
The most valuable non-Russian Yukos asset was a 53.7% stake in the Mazeikiu Nafta oil refinery in Lithuania. A so-called ‘downstream’ oil company, Mazeikiu was engaged in pipeline operations, oil refining, marine terminal operations, and logistics of crude oil and refined products, and was worth approximately US$1.45 billion.
The shares in Mazeikiu were originally held by Yukos’ wholly owned Dutch subsidiary Yukos Finance. After the restructuring of Yukos’ foreign entities in early 2006 (detailed above) Yukos International held the shares, and was in turn wholly owned by the Yukos foundation, Stichting I.
In early 2006 the management of Yukos International announced they intended to sell Mazeikiu. Their intention was to protect the asset from the Russian authorities and ensure the proceeds were used for the payment of creditors of Yukos, the representation and protection of the interests of Yukos and the maintenance of proceedings, including before the ECtHR, with a view to striving "for distribution of any funds received by it and to be received through a scheme to shareholders of Yukos Oil Company in accordance with applicable law and principles of reasonableness and fairness".
After learning of Yukos management’s intention, on April 13, 2006, the Russian receiver, Rebgun, commenced Chapter 15 bankruptcy proceedings in the United States. His stated intent was to prevent the sale of the shares in Mazeikiu. Rebgun asked the US bankruptcy court to extend comity to an order granted by the Arbitraz Court in Russia, enjoining Yukos’ US management from selling Yukos’ majority interest in AB Mazeikiu. The US court agreed to do so, imposing a Temporary Restraining Order (TRO) which mimicked the Russian order, until the court had an opportunity to rule on the Rebgun’s request for a preliminary injunction.
Yukos and its majority shareholder, both of whom had been extensively involved in a marketing process to identify a potential buyer for Mazeikiu, opposed the interim receiver’s request for injunctive relief. The TRO granted by the US bankruptcy court was extended several times in order to allow Yukos’ management to provide Rebgun with all of the relevant details regarding the contemplated sale. Despite this, Rebgun refused to withdraw his request for injunctive relief because of certain transaction risks he believed existed.
As a result, on May 25, 2006, the US bankruptcy court held another hearing on Rebgun’s request for injunctive relief. This time, the court refused to further extend the TRO, convinced that the sale of Mazeikiu was for reasonable value and in the best interests of all parties.
The US court also determined that a procedure could be established by the Dutch courts (where Yukos Finance and Yukos International were based) to hold the net proceeds from the sale pending the filing and adjudication of various claims against Yukos.
In particular, the order entered by the US bankruptcy court following the hearing:
- Authorized Yukos’ management to consummate the sale of stock in Mazeikiu held by Yukos;
- Required Yukos’ management to deposit all of the net sale proceeds with the bailiff under the supervision of the district court in Amsterdam; and
- Requested that the district court in Amsterdam establish a claims filing and resolution procedure so that the proceeds from the sale of the stock in Mazeikiu could be distributed to creditors of Yukos.
A press release from Yukos issued after termination of the temporary restraining order stated:
The judge found that Yukos Oil Company conducted itself appropriately in its dealings with Mr Rebgun and has obtained a fair sale price for the 53.7% share stake it has in the Lithuanian refinery AB Mazeikiu Nafta. The risk of not going forward to sign a sale to the nominated purchaser far outweighed any concerns raised by Mr Rebgun and the judge permitted the termination of the temporary restraining order so that Yukos Oil Company can sign the Sale Purchase Agreement as a fair and proper transaction. Yukos Oil Company is very happy about this. Its management is thereby vindicated on two fiduciary goals; one to obtain a fair sales price, and two to take proper care of the proceeds secured at the closing of the sale. The judge’s ruling this morning supported the first goal and this afternoon further court discussion will address the second goal. We are confident that an appropriate system will be put in place to protect legitimate creditors.
The Mazeikiu oil refinery was ultimately sold for US$1.2 billion. In accordance with the freezing order, the proceeds were placed in a bank account in the Netherlands, in the name of Yukos International.