News

Forced conversion of the depository receipts: current Russian courts practice

Until recently, there was no court practice in Russia on the forced conversion of the depository receipts into shares. In light of the sanctions regime this issue became on trend and of current interest. Below you can see useful summary of the up-to-date Russian courts cases.

Results of claims on forced conversion of depository receipts by the courts of the first instance:

• Pending: 5

• Satisfied: 0

• Denied: 15

The same by the courts of appeal:

• Pending: 9

• Satisfied: 0

• Denied: 4

• Term for appeal has expired: 2

As you can render from the statistics it is quite negative. Let’s have a look on the diversity of the subjects of the claims:

- to oblige the defendant to convert the depository receipts into shares and to transfer the said shares to the depository account;

- to recognize the rights to securities through its forced conversion (see the Ruling of the State Commercial court of the Sverdlovsk region in case A60-7193/23 dated 06.05.2023);

- to recognize the refusal of the depository to convert as illegal, to enforce the execution of the conversion and to compensate a court penalty (astrent) (e.g. see the Decision of the State Commercial court of the city of Moscow (hereinafter the “SCC of Moscow”) in case A40-38055/23 dated 30.05.2023).

What we can see from the court practice is that timing in forced conversion is of the great essence. The SCC of Moscow stated in its Decision in case A40-17342/2023 dated 20.07.2023* that *the decision on the case under consideration would be unenforceable in case of satisfaction of the claim. The reason is that the deadline for the forced conversion has expired on 24.11.2022 - 10 working days later than the date of the deadline of the application filing being 10.11.2022.

This term being a final and conclusive term established for a person to exercise conversion rights vested with him under the threat of termination of substantive (underlying) right, which means that this term is a preclusive one. This output is confirmed by the response of the Central Bank of the Russian Federation No. 31-5-1/875 dated 22.05.2023. E.g. see the Decision of the SCC of Moscow dated 24.08.2023 in case A40-110422/23, see also cases A40-36508/2023, A40-16275/2023, A40-17420/2023, A40-17344/2023.

Those who tried to trial the list of the documents and requirements of the depositories required for the conversion received the negative ruling. It has been stated that the specified list of the requested information is based on the requirements of the Federal Law No. 114-FZ, and the submission of complete package of the required documents allows to confirm all the necessary information in order to carry out the forced conversion, to open a depo account for the applicant and to transfer the shares of the Russian issuer to it. See Citibank: decision of the SCC of Moscow in case A40-34852/2023 dated 27.07.2023. In another case the court dismissed the case, since the party did not fulfill all the requirements of the depository (unlike the other applicants) – see the Decision of the SCC of Moscow in case A40-36508/2023 dated 27.06.2023.

While there are no strict particulars on the procedure for submitting of documents stated by the law it has been in practice established by the depositories itself at its own and sole discretion, and the procedure differed from one depository to another which erode sensitive problematic of an ununified regulation. Thus, the Federal Law No. 114-FZ does not regulate the ways of obtaining the documents and information from the applicant necessary to conversion of depository receipts. There is also no specific on the documents available in the current circumstances confirming that the holder definitely holds the respective number of depository receipts (Part 21 of the Article 6 of the Federal Law No. 114-FZ). In this regard, the exact bank / depository has the right to independently determine how to obtain the relevant documents and information from the applicant (see the Decision of the SCC of Moscow in case A40-86335/2023 dated 02.08.2023). Some other applicants have fulfilled the requirements of the depository - see the Decision of the SCC of Moscow in case A40-86335/2023 dated 02.08.2023.

Another tackling issue is that the bank or depository in question does not have information about the persons which are the holders of securities accounted for on the depo account of a foreign nominee holder. Such information is available only to the respective broker, which, however, refuses to anyhow interact with the nominated bank on all issues related to the securities of the Russian sanctioned companies being the issuers of the securities (in one case, Sberbank PJSC). Thus, the said bank had no opportunity to obtain confirmation from the broker (as a foreign nominee holder on the securities) that the applicant is the owner of the exact amount of the securities (20.104 shares of PJSC Sberbank in the exact case under analysis). In this regard, notarization and receiving of only the apostilled copy of the original document (in case it is impossible to provide the original) is a reasonable and necessary requirement of the bank under the circumstances – see the Decision of the SCC of Moscow in case A40-36508/2023 dated 27.06.2023.

Custody chain of securities has been also a question under consideration in the Russian courts practice. Have a look into a case where a plaintiff has provided an information about the account number originating only from one foreign depository (the IB), without specifying the account number in the upper depository (the Clearstream) or the reasons of impossibility to obtain such information. Therefore, the failure to provide information about the account number together with the entire custody chain in all foreign depositories led to the reasonable doubts of the bank about the completeness of the provided information and its reliability – the court has stated in its Decision of the SCC of Moscow dated 04.08.2023 in case A40-17344/2023.

**One more detail of interest is the confirmation of impossibility of standard conversion. **The plaintiff attached written explanations (affidavit) to his application of claims, in which the plaintiff's executive director indicated that he had repeatedly addressed the broker with relevant requests, which were refused. However, the plaintiff did not provide the materials evidencing the facts of contacting the broker, for example, letters sent to the broker. Thus, the plaintiff did not confirm to the court in action the impossibility of obtaining securities (information) due to the effect of sanction restrictions. Written explanations of the director of the plaintiff, who was interested in the outcome of the case, were obtained out of court and could not have been recognized as the proper evidence – the Decision of the SCC of Moscow dated 16.05.2023 in case A40-34814/2023.

In the conclusion lets turn to some procedural aspects:

• The plaintiff did not comply with the mandatory pre-trial claim procedure. The claim has been declined (returned to the plaintiff) - Ruling of the SCC of Moscow dated 16.05.2023 in case A40-82333/2023;
• The court reasoned the refusal of the claim on additional grounds, in addition to those indicated by the depository - Decision of the SCC of Moscow dated 15.06.2023 in case A40-34708/2023, Decision of the SCC of Moscow dated 16.05.2023 in case A40-34814/2023;
• Exclusive jurisdiction is at the location of the issuer of the shares – corporate dispute Norilsk Nickel shares – jurisdiction of SCC of the Krasnoyarsk Region. Decision of the SCC of Moscow dated 13.05.2023 in case A40-99196/2023, Decision of the SCC of Moscow dated 18.07.2023 in case A40-99327/2023.

For questions and inquiries on ADR conversion, receiving of dividends of the Russian issuers and other related issues please contact us at ADR@magenta.legal.

By

Anton ShamatonovDarina ShamatonovaMaksim Vaskin