An artificial war


 

Tension between shareholders and management can take peculiar, whimsical forms. Sometimes this can even get personal and when this happens the whole story receives a touch of burlesque and ridicule.

On March 4 the Moscow Arbitrazhniy Court dismissed the suit of Russian Standard Vodka Ltd (RSV), the owner of the famous brand, to recover $10m from its ex-CEO Carlo Radicati which he had spent on marketing.

Back in 2007 Rustam Tariko, the major shareholder of RSV, offered the job to his old friend: Carlo Radicati was the head of Bacardi-Martini Group in Russia and the Tariko’s structures, its distributor. Mixing friendship with employment can be treacherous and Radicati soon left the company. The shareholder, he said, interfered in operational management too much and he could not do his job properly.

He did not just leave, though. He left for Russian Alcohol, the competitor, and that was a declaration of war. War he wanted, war was what he got: RSV not only initiated civil actions against Radicati but tried - unsuccessfully - to prosecute him criminally.

In November 2005, before the Italian took up the office, RSV made a deal with Russian Standard Vodka (USA) Inc, a New York company, so that the latter would market vodka in the United States. The approach eventually changed and sales as well as promotion to the American market were assigned to another company Roust Trading Limited.

Judge decided to ask what precisely the tattered cliché stands for
 

Radicati, nonetheless, did not stop the agreement and paid over $10m to the American company which, according to RSV, was excessive and unnecessary. Thus, they claim, he failed to act in good faith in the interests of the company.

What are the interests of the company and to whom, exactly, the duty of a director is owed is an age-old problem. At first the answer is clear: a director must act for the benefit of a company.

Yet the assets and liabilities of a corporate entity is a highly abstract concept. Its function, essentially, is to separate the income and losses generated by the business from those who invest in it, manage it, work for it, or deal with it. ‘The interests of a company,’ Lord Nourse, a British judge, said, ‘as an artificial person, cannot be distinguished from the interests of the persons who are interested in it.’

Thus, to say simply that directors should act in the interests of the company is to say very little, if anything at all, about where the law on the directors’ duties stands.

RSV’s lawyers have cherished the very vagueness of the matter because it gave them a clear win, unless a judge decided to dig down and ask what precisely the tattered cliché stands for. The ruling implies that the duties of a director are owed to the shareholders and not to the ghost of a juridical persona.

It has been proven, Yakov Mastinski, the Radicati’s lawyer, says, that all the companies involved including RSV, RSV-USA, and even Roust Trading Limited belong to the same group and are owned by the same person. Though technically different entities they represent one pocket and, because the payments in question were within the group, there was no loss for the whole.

The story which at first looked as an attempt of a local entrepreneur to find justice and flog a roguish expatriate turned out to be about revenge, unsuccessful and, therefore, pitiful.

 

March 15, 2010
text: J. Vermin
picture: NatalyArt - Fotolia.com

 

 


THERE ARE PLENTY OF INSTRUMENTS TO CONTROL MANAGEMENT
TEXT: Anton Malginov, partner & Ludmila Baleevskikh, lawyer - Muranov, Chernyakov & Partners

In the absence of effective control by shareholders there is a real risk that the powers of management will be exercised for purposes other than those for which they were conferred The actual scale of abuse is difficult to assess because of its high latency. Judging by the court’s statistics, though, the number is quite large.

The main responsibility of management to a company and its shareholders is to act in the company’s interests ‘reasonably and in good faith’. There is no legislative definition of these principles, and that complicates their application in practice. Some guidance in this respect is the Corporate Code of Conduct (the act of a recommendatory nature, approved and recommended by the RF Government in 2001) according to which acting reasonably and in good faith in the interests of a company means that in exercising their rights and duties they must "show care and diligence, which would be expected from a prudent manager in a similar position under similar circumstances." Thus, the courts assess not the degree of good faith or reasonableness, but rather try to ascertain whether the actions of the person were directly intended to damage the company.

In practice there are plenty of instruments to control management and to prevent abuse: particularly the employment contract (inclusion of an additional disciplinary clauses to increase liability), establishing in the company’s charter of the order and conditions of approval of certain transactions by the general meeting or by the board, adoption by the company of the Code of Corporate Conduct (now fairly widespread practice), improving of the system of informing shareholders about the activities of managers (i.e. audit), liability insurance for the managers (the practice, widely used abroad, but in Russia is not yet usual). Each of these instruments has its drawbacks and advantages. The best results are achieved by a combination of them all.

 

 

On the benefit of giving clear answers to murky questions
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