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Business MONDAY, 28 May 2007

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Twelve lines that may make Rusal's Deripaska a poor man

Disclosure of the Chernoy-Deripaska agreement confirms US charge, and could put London share listing in doubt.

Mikhail Chernoy is still the real owner of 20% of the shares of Rusal

Photo the Standart
By John Helmer


In twelve brief lines of less than impeccable Russian, dated March 10, 2001, Oleg Deripaska, contender to be the world's dominant producer of aluminium, and the man who put him in business, Mikhail Chernoy, appear to have agreed on a formula that obliges Deripaska to share 20% of the value of Deripaska's shares in Russian Aluminium (Rusal), when or if those shares are sold.
If Chernoy is able to enforce their payment agreement, Deripaska would owe him $6 billion - assuming Rusal meets its target capitalization of $30 billion. Rusal has recently upped the number of shares it proposes to sell - from 15% to 25% -- but even on the high side, and again assuming the market values Rusal at the price Deripaska wants, he will draw just $5 billion from the share sale. In short, Deripaska will be short -- $1 billion short of being able to pay Chernoy what he says he is owed for the trust their agreement created.
Never before have the intimate business affairs and practices of the Russian metals oligarchs become so public; this is due, in part, to the fact that Chernoy has filed suit in the UK High Court to obligate Deripaska to honour the alleged six-year old deal. And according to a judgement issued by Justice Langley on May 5, citing oral argument by lawyers before the bench several weeks earlier, "it is alleged that this agreement was expressly made subject to English law and that it is evidenced by a written contract agreed and drafted in England. The written contract does not include an English law clause."
Readers keen to know what exactly happened on the evening of November 26 last, outside Deripaska's home at 5 Belgrave Square, London, when Chernoy's process server intercepted him, can find the details in the text of Langley's ruling at 2007 EWHC 965 (Comm) -- Case No: 2006 Folio 1218.
Also to be found there are tantalizing details of Deripaska's London home; three houses in France; two Gulfstream jets; one Sikorsky helicopter; and  the number of times he lays his head upon the evening pillow in Moscow and London by the year. The judge's ruling, for example, reveals some curiosities of  Deripaska's family life, including the fact that of the 36 nights he spent at the London home in 2005, just 5 of them were shared with his wife; in 2006, he was with her at the house just 7 of the 33 nights he spent there.  In short, Belgrave Square appears to be a bachelor pad. To Judge Langley, "in many ways its use by Mr Deripaska resembles that of a private hotel. It is infrequent, intermittent, and generally fleeting. The house has the character of continuity and permanence; its use does not." Nor, the judge ruled, is it a place where Deripaska runs his global metals and minerals business. "The probability, "said the judge, "is that in a real sense they [business affairs] are managed at the highest level by Mr Deripaska wherever he happens to be, and that is by far and away mostly in Russia."
The Langley ruling is not exactly the victory for Deripaska, which it may appear; though it is the third or fourth time that a London judge has found that claimants against Deripaska have failed to establish his domicile in England, in order to proceed against him in the English courts. For it is the text of the agreement that suggests, more damaging than domicile, that, wherever Deripaska goes, he is in an ongoing business relationship with Chernoy; that this extends back to March 10, 2001, and that,  according to the text of the agreement, this extends forward by at least six months past the IPO date, when Deripaska starts selling shares.
As yet to be tested for evidential value, the text suggests that Deripaska is Chernoy's trustee; that shares Rusal will offer on the London Stock Exchange are beneficially owned by Chernoy; and that Deripaska has already paid Chernoy about $250 million in obligations. The agreement also suggests that Deripaska promised Chernoy to start selling Rusal shares between 2004 and 2006, something he either couldn't, or wouldn't do. The proposed IPO is thus running late, a circumstance which Morgan Stanley and JP Morgan, Rusal's bankers, may be obliged to explain to future and potential shareholders, when they draft their prospectus.
Deripaska can move on to administer Rusal from new homes in India, or the Krasnodar region of southern Russia, or from Moscow. But the question for UK market regulators, as well as for potential investors in Rusal shares, is whether the determination that Deripaska is not allowed to enter a country might also apply to the attempt to list the shares of his company Rusal on the island of Jersey, under the jurisdiction of the UK courts. What shareholders are obliged to care about is whether, in the event of a claim relating to the Rusal company, after the proposed IPO, they would find it as difficult to hold Deripaska accountable for his promises as Chernoy is finding.
Thus, it happens that the success with which Derikpaska's lawyers have defended his conduct from Judge Langley's ruling on domicile in London, becomes an albatross around Deripaska's neck,  as he prepares for the Rusal IPO.  That albatross is also draped, most unfortunately, around the credit rating of Rusal;  and around a number of covenants which have been signed on behalf of Rusal, also relating to Chernoy's claimed  shareholding in the company.
For those investment bankers who remember Samuel Taylor Coleridge's poem, the problem of the 12-line agreement that purports to obligate Deripaska to share his IPO proceeds with Chernoy, the melancholy verse may be adapted to read:

Money, money, everywhere,
And all the boards did shrink;
Money, money, everywhere,
Nor any drop to clink.

 According to the second part of the agreement with Chernoy, Deripaska has to sell the shares, which Chernoy previously gave him to manage, and to pay him off. But this has not been done


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