Sanctions against Russia: a court decision broadly interprets the “control” of companies

Canadian sanctions against Russia under the Special Economic Measures (Russia) Regulations (the “Russia Regulations”) affect virtually all sectors of the Russian economy, including companies incorporated in outside of Russia that are indirectly or partially owned by sanctioned Russian shareholders.

In Angophora Holdings Limited v. Ovsyankin (“Angophora v. Ovsyankin”), the first court decision based on the Russia Settlement, the Court of King’s Bench of Alberta (the “CBRA”) interpreted Canadian sanctions broadly, applying those -ci to the property of a subsidiary that is not itself a sanctioned entity.

Canadian sanctions against Russia

Pursuant to Article 3 of the Russia Regulations, it is prohibited to carry out a transaction relating to property “belonging to a designated person” (a “sanctioned person”) “or held or controlled by him or on his behalf “.

Under Section 5, it is also prohibited to knowingly do anything that causes, facilitates or contributes to such a transaction.

These prohibitions may create uncertainty for Canadians who transact with an unsanctioned company that is partly or indirectly owned by a sanctioned shareholder.

Unlike laws in other jurisdictions, such as the United States, Canadian sanctions laws do not impose 50% ownership rules such that the prohibitions automatically apply to owned entities or controlled 50% or more by a sanctioned person.

Prior to the decision in Angophora v. Ovsyankin, Canadian courts had never been called upon to interpret the meaning of the words “belonging to, or held or controlled by or on behalf of a designated person” in the context of sanctions.

context

Angophora Holdings Limited (“Angophora”) was an unsanctioned subsidiary of a Luxembourg joint venture which itself was 50% owned by Gazprombank, a Russian bank subject to sanctions under the Russia Regulations.

On December 15, 2020, the London Court of International Arbitration issued an arbitration award in favor of Angophora against Andrei Ovsyankin, a businessman with assets in Canada.

The decision related to allegations that Mr. Ovsyankin engaged in wrongdoing that reduced the value of a Cypriot company, Grooks Global Limited, and its Russian subsidiaries (collectively, “Grooks”) in which Angophora held actions.

Angophora sought to enforce the arbitration award through the seizure and sale of condominiums belonging to Mr. Ovsyankin (the “Properties”). In September 2021, Angophora applied for and obtained conversion of the award into an order of recognition and enforcement (the “Enforcement Order”) in Alberta.

Mr. Ovsyankin requested a stay of enforcement of the enforcement order, arguing that liquidating his assets and paying the proceeds to Angophora would violate Articles 3 and 5 of the Russia Regulations.

Decision

In this case, the CBRA had to apply the legal criteria for issuing an injunction. The first test required Mr. Ovsyankin to present strong prima facie evidence that enforcement of the execution order granted to Angophora would violate the Russia Regulations.

The CBRA concluded that there was strong prima facie evidence that Angophora could be controlled by, or act on behalf of, a company targeted by the Russian sanctions. Therefore, payment of the proceeds realized on the sale of the goods would risk contravening Articles 3 and 5 of the Russia Regulations.

The CBRA first established that Angophora had control of the assets by virtue of having obtained the execution order. Although Angophora was not itself a designated entity under the Russia Regulations, the CBRA found that there was strong prima facie evidence that Angophora was controlled by or acted on behalf of Gazprombank. -this.

Gazprombank’s control of Angophora was then combined with control of Angophora’s assets. This conclusion was based on a combination of factors, including the following:

• Gazprombank’s indirect 50% stake in Angophora complies with the definition of “control” under US sanctions laws;
• Gazprombank advised Angophora on the transaction with Mr. Ovsyankin and the acquisition of Grooks;
• Grooks’ four subsidiaries in Russia were under the primary supervision of Gazprombank advisers;
• a senior financial controller at one of Grooks’ Russian subsidiaries followed Gazprombank guidelines and reported directly to Gazprombank’s management board;
• the Angophora execution order proceedings were supported by a managing director of Gazprombank;
• the only Angophora witnesses heard in the London arbitration were Gazprombank employees.

The CBRA therefore concluded that the sale of the seized assets would not violate the Russia Regulations because the enforcement order was issued before Gazprombank became a designated entity under the Russia Regulations. Russia and that the civil law enforcement proceedings were initiated in good faith.

However, the CBRA pointed out that before paying the proceeds of a sale, persons in Canada would do well to ensure that they are not facilitating or at the same time carrying out a prohibited transaction in violation of the Russia Regulations. .

Key Takeaways

The CBRA’s decision indicates a willingness to interpret the Russia Regulations broadly. In particular, the CBRA argued that the purpose of the Russia Regulations is to impose an economic cost on Russia, and stated that sanctioned companies must not be able to avoid sanctions by continuing to have access to unprotected parties. designated areas over which they exercise control.

It remains to be seen whether this approach will be adopted by other Canadian courts as well as by regulators in the country.

In any event, given the significant impact that non-compliance with Canadian sanctions could have on a company’s reputation, and the importance that the government places on the Russia Regulations, companies should ensure that their practices fully comply with the requirements of Canadian sanctions laws with respect, in particular, to the government’s public policy objectives, including with respect to the ownership of affiliates of sanctioned persons.