What majority shareholder in the mine owns: new questions in the Inskoy mine case
A court process over extortion of 51% of shares in the Inskoy coal mine has brought to light a range of pressing legal issues demanding a serious consideration in the present context. Among these issues is a comparison of an alleged extortion of shares with a similar action with respect to the “title of property,” and, on the whole, if there is a possibility to extort the “title of property” of an enterprise.
How the value of the shares object to the extortion should be valued? Is it appropriate to size up the property on the basis of the book value of the fixed assets? These questions of law enforcement and judicial practice raised in the previous material on the Inskoy mine case RAPSI addressed to experts in these legal issues.
Former representatives of the Kemerovo regional authorities and local businesses are being charged since 2018 with extortion on an especially large scale of shares and “property title” at the balance value of 2.7 billion rubles (about $36.7 million at the current exchange rate) of an enterprise, at that time with multibillion-ruble debts.
The value of property of Inskoy mine has been established on the basis of the data presented in a bookkeeping balance sheet with respect to the fixed assets value. However, the prosecution failed to take into account the mine’s liabilities totaling to 11 billion rubles (about $143 million). The defense, in turn, believes the charges of extortion with respect to the “property title” are inappropriate because, among other things, the market value of the object of extortion has not been determined. At the time of an economic crisis, such a specific situation in the sphere of law becomes especially topical and needs to be analyzed.
RAPSI has polled famous criminal law experts, formulating its questions as follows: “A citizen is charged with extortion, at that, it is recognized that the object of the crime is the property of the victim represented by shares at the nominal value of 250,000 rubles (about $3,500), whereas their market value makes 1 ruble, and the “property title”, i.e. the right to the fixed assets at the book value of 2.5 billion rubles (circa $34 million). The question is if the nature of this crime be defined as extortion of shares and the “property title” of a corporate entity?
Piercing the corporate veil
Gennady Esakov, Head of the Department of Criminal Law and Criminology of the Higher School of Economics, LL.D. is of the opinion that extortion of shares is equivalent to extortion of the property title:
“As concerns criminal cases, the judicial practice allows so to speak the “piercing of the corporate veil.” In this case real valuable property on the balance sheet of an independent legal entity is the ultimate object of the property-related offences. The case law demonstrates that in the process of appraisal of damages caused by the offence the value of the property being sort of “behind” the shares may be taken into account. Extortion of shares will be regarded only as an instrument of access to managing the property. Such an approach has been fixed in the judicial practice, although there is a number of questions in this respect from the point of view of civil law.”
The position of the prosecution in the Inskoy mine case demonstrates exactly this approach. It focuses primarily on the details of the very process of extortion of shares, including the motives driving the defendants, who, according to the case materials, were not clearly profit-motivated to replace the shareholder. In the course of the pretrial investigation the market value of the property was also not taken into account, investigators just did not try to estimate it.
Ownership title cannot be extorted
Samvel Kochoi, Professor of the Department of Criminal Law of Kutafin Moscow State Law University (MSAL), Honorary Figure of Russian Higher Education of the Russian Federation, LL.D. believes that the statement of offence is incorrect and contradicts the case law:
“Only property may be recognized as the object of extortion; a right cannot be the object of crimes against property in principle. It follows from the Judgement of the Plenum of Russia’s Supreme Court of December 17, 2015, No. 56 “On judicial practice relating to cases over extortion” (Article 163 of Russia’s Criminal Code).
“The said Judgement defines property as “documentary fixed possibility to exercise owner’s or legal holder’s powers in relation to certain property.” Nevertheless, Russia’s Civil Code defines “property title” neither as a thing, nor any other property, including property rights.”
Basing on the aforesaid norms the expert comes to the conclusion that the right to property by no means can be considered to be the object of extortion.
The essence of the matter is in the details
Ivan Klepitsky, Professor of Kutafin Moscow State Law University (MSAL), LL.D., notes that when hearing a case over extortion a court to correctly qualify it needs at the very beginning to determine the method of appraisal of damages. It is necessary to choose either the value of shares proceeding from stock exchange quotations, if any, or the value of the share in the capital. At that, it should be not about the nominal value:
“The question as it has been formulated is a question of fact, not of law. It is necessary to look at who extorts what and from whom. At that, it will be inadmissible to segment the essence – object of extortion is either shares, or control over capital. If criminal intent is to seize or retain control – it is extortion of a property-related operation (a deal with property); in this case it would be correct to appraise the amount of extortion taking into account not only assets, but also debts of the company, as well as the respective share in its capital. In case the intent is only to seize shares and it is not related to participation in the management – the amount will not be a great one. In case there are doubts about the amount, it may be subjected to expert evaluation; however, the expert is to know what exactly was extorted and if there was an interest as to participation in management. In any case extortion is criminally liable, no extortion is to be defined as a petty one.
It is important to add that in the Inskoy mine case a number of important arguments has not been paid due attention because of the failure to conduct an expert evaluation of the market value of shares. Firstly, the amount of dividends on profits the defendant claimed alleging he lost them could not be in fact gained because of the changes in the market situation in 2018 and later. Secondly, according to a number of witnesses the enterprise’s property has been extremely worn out. Thirdly, the enterprise was in debt and it was bankrupt. The prosecution failed to mention all these facts.
Majority shareholder is not equal to owner
Pavel Yani, Professor of the Department of Criminal Law and Criminology of Lomonosov Moscow State University, member of Academic Advisory Boards at Russia’s Supreme Court and the Federal Chamber of Lawyers, Academic Advisor of the Research and Educational Center “Criminal and Legal Examination” of Lomonosov Moscow State University, LL.D., is of the opinion that even a majority interest does not give its owner rights to the property of an enterprise:
”Civil legislation envisages separateness of property owned by a legal entity. Only founders of state-owned and municipal unitary enterprises have proprietary rights to properties of enterprises. Shareholders in commercial organizations do not have ownership rights as to properties of legal entities, shares in which they own. All such properties belong on the basis of ownership title to these commercial organizations; these properties are created at the expense of contributions from the founders (participants), shareholders, as well as produced and purchased by an enterprise in the process of its activities. Exactly such an approach has been confirmed by numerous court decisions and judicial practice.”
The expert has also noted that when determining the amount of extortion only the market value of shares in the company may be taken into account, but not the value of the property owned by the company. Therefore, in this case the object of the incriminated extortion of shares and the right to the property owned by the victim cannot be included in the “property title” of the company.
Sound understanding of figures and facts
A court process with respect to a case over extortion requires attention to details of the respective illegal behavior, the establishment of facts, details, and an appraisal of damages on the basis of an expert examination. The expert monitoring the case have arrived to a conclusion that a range of facts and details, which influenced the formation of the position of the prosecution as to the Inskoy mine case were the result of an interpretation and not of an examination. As a result, the evidence provided by witnesses about a unique complex situation of the enterprise different from that in some other ordinary case is difficult to be unambiguously verified by figures and facts.
As a result, four years after the crime was committed the court has not been able to find a definite answer to the question about the aims the defendants, ex-representatives of the regional administration, ex-officers of security agencies, and businessman Alexander Shchukin pursued in the course of the events resulting in the change of the mine’s management. No answer has been found also with respect to the justification of the amount of damages the prosecution alleges the defendants caused.
In the context of the judicial practice, the case of the Inskoy mine gives rise to a discussion about what is to be taken into account when investigating a case over extortion of shares, and if current practices need to be changed, for example by making obligatory to carry out expert evaluation in order to determine the value of the object of extortion – shares and participating interests in the charter capital.