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‘War and Peace’ International Wealth Structuring for Russian & CIS HNWI clients 7th CIS Local Counsel Forum Yerevan, 6-8 June 2012 Joint presentation Withers.

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Presentation on theme: "‘War and Peace’ International Wealth Structuring for Russian & CIS HNWI clients 7th CIS Local Counsel Forum Yerevan, 6-8 June 2012 Joint presentation Withers."— Presentation transcript:

1 ‘War and Peace’ International Wealth Structuring for Russian & CIS HNWI clients 7th CIS Local Counsel Forum Yerevan, 6-8 June 2012 Joint presentation Withers LLP, IFG Trusts (Switzerland) and G. Leontiou LLC

2 ‘War and Peace’: Russia & CIS: Wealth planning and International Tax Structuring Speakers: Olga Boltenko Partner, Withers LLP Tatiana Rydeard, Vice President, IFG Trust (Switzerland) Ltd

3 Setting Up the Scene Gentlemen agreements vs. legal structures Changing political and legal landscape Cheap and cheerful vs. complicated and expensive International centres of doing work for Russian & CIS clients

4 Outline of Presentation Case Study Wealth planning: General Issues and Popular Structures Advantages of wealth planning General issues for Russian & CIS clients Painful issues Structures Relinquishing control Retaining influence Corporate Tax Planning: Holding Structures Financing Structures Intellectual Property Structures Trading Structures Painful Issues

5 Case Study: Fictitious Character Mikhail Ivanov

6 Case Study: Driving Factors for HNW Russian & CIS Clients Confidentiality Political risk Assets protection International risk diversification Access to international capital markets Tax planning Succession planning Matrimonial planning

7 Wealth Planning: General issues No local vehicles in Russia & CIS Trusts vs. foundations vs. insurance wrappers vs corporate structures Common law concept of a trust – alien to the Russian and CIS countries laws Popular jurisdiction's - choice of law and trustees Community of property between husband and wife Recognition of pre-/post-nuptial agreements Forced heirship rights

8 Advantages of Wealth Planning Preservation of wealth, protection from: Spouse Other family members Creditors Tax authorities Forced heirship Succession planning Confidentiality of ownership

9 Wealth Planning: Painful Issues and Challenges for Russian and & CIS clients No clear guidance Conflict of law issues in Russia & CIS Conflict of law issues abroad “Trust is good, but control is better” Where to sue, that is the question What will a local judge say? Recognition and enforcement of judgements

10 Structures Trust Separation of beneficial ownership and legal ownership Settlor, beneficiaries and trustees Foundation Legal entity set up for specific purpose Corporate structures Insurance wrappers

11 Trusts v Foundations Ruling body TrusteesFoundation council Ownership of assets Legal – trustees Beneficial – beneficiaries Held by the Foundation Instruments of control Trust deed Protector Letter of wishes Court protection Foundation deed By-laws Court protection Advantages Extensive case law Beneficiaries’ right to info Council can include the founder and trusted advisors Disadvantages Trustees are often professionals unknown to settlor Limited judicial precedent

12 Corporate Structures Advantages Control during lifetime? Control over who benefits during life and on death Disadvantages Tax Corporate restrictions Divorce courts Forced heirship

13 Insurance Wrappers Advantages Flexible and movable asset Confidentiality Disadvantages Unclear tax position in Russia & CIS countries High and complex compliance Divorce courts Forced heirship

14 Relinquishing Control Whichever approach is taken control of assets will need to be relinquished

15 Retaining Influence Ways to retain influence: Letter of wishes Retention of powers Protector Private trust company Choice of jurisdiction Ensure structure is not a sham

16 Letter of Wishes Allows the settlor to express his wishes Advantages Settlor can influence the decisions of the trustees Confidential – generally Disadvantages Not legally binding

17 Retention of Powers The settlor of a trust can retain powers, for example: Power to appoint the protector, power to appoint new trustees Consent to dispositive powers, including power to revoke? Advantages Simple Can change trustees Disadvantages Limited powers Retention of too many powers may threaten legitimacy of trust

18 Protector Individual/group of individuals/a company appointed by settlor Role and powers can vary between trusts Advantages Independent safeguard Promoting the settlor’s wishes Monitoring trustees’ performance Liaising between the trustees and the beneficiaries Disadvantages If too much involvement will be considered quasi-trustee

19 Private Trust Company (PTC) (1) Family Trust Directors of PTC exercise trustee powers Protector has power to hire and fire trustees and block key decisions Private Trust Company Purpose Trust Trustees of purpose trust appoint directors of PTC Protector has power to hire and fire trustees

20 Private Trust Company (PTC) (2) Advantages Legal personality Flexibility Privacy Settlor/beneficiary as director Disadvantages Control shared with other directors Directors owe duty to PTC Corporate formalities

21 Corporate Tax Planning for Russia & CIS Business driven approach: Consider potential strategic decision for holding structure, i.e. co-investors, IPO, new businesses Finance flow analysis Potential segregation of IP and trading functions

22 Corporate Tax Planning: Holding Structures BVI – Cyprus – Russia/Ukraine/Moldova/Belarus BVI – Cyprus - Armenia (as soon as DTT comes into force) Jersey – Cyprus/Malta – EU (The Netherlands, Switzerland, Hungary, Luxembourg, Austria, Sweden, Belgium, Ireland etc.) – Russia/Kazakhstan IOM – UK – Kazakhstan/Belarus

23 Holding Structure: Example Cyprus / Malta The Netherlands, UK, Luxembourg, Belgium, Austria, Switzerland Jersey / BVI Kazakhstan UkraineRussia

24 Corporate Tax Planning: Financing Structures Treaty based structures using: Cyprus Netherlands Belgium Luxembourg Luxembourg with a Swiss branch Non-treaty based structures using: Offshore back-to-back financing using arm’s length publicly traded financial institution?

25 Corporate Tax Planning: Intellectual Property Structures Onshore royalty companies Cyprus Netherlands Luxembourg Switzerland Offshore Isle Of Man Jersey Guernsey

26 Corporate Tax Planning: Trading Structures Onshore trading Cyprus Switzerland – typically, Zug, Geneva, Vaud, Schaffhausen (but not only) Malta Offshore Any IFC Singapore Hong Kong

27 Corporate Tax Planning for Russia and CIS: Painful Issues Beneficial ownership Anti-abuse doctrine/substance over form Management and control test Substance requirements Permanent establishment Disclosure of beneficiaries Thin capitalisation Transfer pricing Russian & CIS DTTs – changing scene

28

29 ‘War and Peace’: International Litigation Issues Speakers: Christopher Coffin, Withers LLP Gregoris Leonitou, G. Leontiou LLC

30 About Withers’ Litigation Practice Over 70 lawyers providing litigation and arbitration services worldwide from the UK, US, British Virgin Islands, Singapore, Hong Kong and Milan Specialist lawyers in commercial litigation, arbitration, insolvency, contentious trust and succession, employment law, art and reputation management Expertise in managing substantial litigation cases in all of the major offshore jurisdictions Withers is the only global onshore law firm with an offshore office and permanent lawyers in the British Virgin Islands

31 About Withers’ Litigation Practice (cont’d) Clients include banks, corporate entities, governments and government agencies, funds and entrepreneurs Business sectors include banking, financial services, energy, commodities and insurance Languages spoken include Russian, Romanian, Italian, Greek, Spanish and French

32 English Approach to Oral Agreements Requirements for a legally binding contract: Offer and acceptance of specific and complete terms Consideration (or execution as a deed) Intention to create legal relationship Written instrument only required for few types of contract: eg Dealings with interests in land Assignments of contractual or intellectual property rights Transfer of shares Guarantees Any contract by deed NB: ‘writing’ includes electronic communications – s, SMS etc

33 English Approach to Oral Agreements (2) Certain transactions must be by deed (and therefore in writing): Transfer or creation of an interest in land (including a mortgage or charge) Lease for more than 3 years Appointment of trustees Power of attorney Gift of tangible goods when not delivered Release of a debt, liability or obligation Variation of a deed

34 English Approach to Oral Agreements (3) An oral agreement is legally enforceable if it meets the requirements for formation of legally binding contract BUT: Enforcement will require evidence of the terms, and The terms must be certain and complete A ‘gentleman’s agreement’ is by definition not legally enforceable, as usually it is: Too uncertain to enforced A promise with no consideration – so not a contract An agreement to agree – so not enforceable

35 English Approach to Oral Agreements (4) Agreements to agree English law regards these as unenforceable – in contrast to other European jurisdictions (Walford v Miles [1992] 2 AC 128) Agreements to negotiate in good faith may also be unenforceable The principle is that each party must be free to advance its own interests in negotiations and to withdraw from negotiations In certain cases, if contained in a binding agreement, and related only to specific issues which can be measured, a commitment to negotiate in good faith may be held to be enforceable But this issue still undermines Heads of terms and Side letters

36 English Approach to Oral Agreements (5) Example: Mr B wished to sell his company to a consortium but wanted to invest in the new merged entity that would be created The Share Purchase Agreement was drafted to be conditional on an Investment and Shareholders’ Agreement being executed to allow Mr B to invest BUT also allowed the consortium to waive that condition Mr B secured a side letter agreeing to offer him the investment opportunity and negotiate the ISA – but this never happened Mr B sued – but the side letter was held to be an unenforceable agreement to agree despite being intended to create legal relations and being drafted by lawyers! Barbudev v Eurocom Cable Management Bulgaria EOOD & ors [2012] EWCA Civ 548)

37 English Approach to Oral Agreements (6) Effect of statements made if not contractual Assurances given outside of contract may be held to be misrepresentations or negligent misstatements BUT For misrep, claimant must show that the statement was made to induce him to enter a contract, and that he relied upon it, and that it was false For negligent misstatement, claimant must show that the maker of the statement owed him a duty of care which the making of the false statement breached If a fully negotiated commercial contract follows it is likely to exclude or limit the defendants’ liability for pre-contractual statements

38 English Approach to Oral Agreements (7) Difficulties with disputes over an oral agreement Lack of detailed terms, eg jurisdiction & governing law clauses (although in the Cherney v Deripaska litigation – the only jurisdiction clause argued for was orally agreed) Contradictions with related written contracts and entire agreement clauses Evidential conflict inevitable and will require full trial to resolve with result dependant on availability, performance and credibility of witnesses

39 English Approach to Oral Agreements (8) Example: Recent case in High Court concerning an oral agreement to distribute a company's income to its shareholder-directors in proportion to their shareholdings - the trial judge’s finding in favour of the contract contended for was largely based on the quality of the witnesses: “M's evidence that the parties had agreed … had been reliable. S, on the other hand, had been an unsatisfactory witness who did not want to admit that he remembered that important meeting and what had been agreed. It was a commercial agreement between experienced businesspersons and involved large sums; that pointed to its having been intended to have legal effect” MSL Group v Clearwell International [2012] EWHC 3707 (QB)

40 Shareholders Agreements

41 G. Leontiou LLC Litigation Practice Specialist lawyers in commercial litigation, arbitration, shareholder disputes, internet start-ups and projects and corporate litigation. Expertise in managing large-scale litigation cases, including commercial arbitration cases in the Permanent Court of Arbitration in The Hague Managemetn and coordination with local counsels in multi-jurisdictional disputes, with experience in Cyprus, United Kingdom, British Virgin Islands and Guernsey. Wide global network of associates. Clients include corporate entities, high net worth individuals, government agencies and municipalities and private entrepreneurs. Main Business areas include corporate and commercial law, financial services, trusts, internet law and regulation, shipping and banking. Languages spoken include Greek, English and Russian.

42 Legal Regime Statutory Rights Contractual Rights Shareholders Agreement –Vs- Articles of Association Shareholders Oppression Blocking Powers of Shareholders (percentages) Focal Points for Initial Setup

43 Issues arising when the SHA provides for a power to appoint an equal number of nominee directors in the Board How does an impasse in decision making occur? How do professional service providers react? How to best preserve evidence and documents, especially when these are in 3 rd party hands? Company Management

44 Categories of Shareholder disputes Remedies for breach of SHA Oppression Actions Derivative Actions Double Derivative Actions Damages Injunctive Relief If under an Oppression Action, Liquidation or Buyout of Shares Shareholder Dispute and Remedies

45 Statutory Basis Examples Remedies Allegation of Unfair Prejudice/Oppression

46 Statutory Shareholder Claims Arbitrability of statutory shareholder claims under English Law Is it relevant whether Unfair Prejudice may be termed as a dispute between shareholders in the jurisdiction where the SPV or structure is based?

47 Advantages Disadvantages Confidentiality, Fast-Track Adjudication (?), Costs, Specialized Knowledge Not always possible in case of Oppression / Unfair Prejudice Claims. May still need to resort to judicial adjudication in order to achieve injunctions in different jurisdictions. Non appealable. Arbitration Clauses in SHA

48 Securitization of Company’s Assets How do we best secure the investment? Register a Charge over the Company’s Asset Not every security interest is Registrable Company’s Assets in Dispute

49 Are all financial instruments the same? Will using an “off the shelf” document serve the purpose? Tailor-made solutions Guarantees Bonds Pledge of Shares Financial Instruments

50 How to Fund the Cost of Dispute Resolution

51 Litigation Costs The risks of litigation or arbitration Cost – pursuing a £5m claim could take 2 years and cost £1m Uncertainty of outcome The English costs rule Costs follow the event, ie the loser pays the winner’s legal costs can apply in international arbitration depending on governing law Contrast with American rule of no costs shifting Mitigating the costs Sharing the risk Funding the cost

52 Options for Funding Principal options for commercial or high value disputes Insurance – after the event insurance (commonly called ATE) Lawyers’ fee arrangements – fixed or capped fees or Conditional Fee Agreements (called CFAs) Third party funding – the new market for investors in commercial litigation (known as litigation funders)

53 After the Event Insurance (ATE) Bespoke policy taken out after the dispute has arisen Assessment of merits requires at least 60% chance of success Typically covers adverse costs; can cover own disbursements Premiums are High – typically 35-45% of cover Usually deferred and self-insured Often with a discount on premium for early settlement Recoverable from losing party (under current court rules) Policy must be disclosed to other parties ATE rarely available for a defendant

54 Lawyers’ Fee Arrangements Available models of charging Pay-as-you-go / traditional: agreed hourly rates and regular billing Fixed or capped fees for case assessment and for defined stages of a case More flexible fees? The limitations of English law Contingency fees for court and arbitration work illegal Linking a lawyer’s fee to the outcome not permissible Statutory exception for Conditional Fee Agreements (CFAs) only

55 Conditional Fee Agreement (CFA) A CFA is a written agreement with your lawyer providing for: No fee or a discounted fee payable during the case On success, you pay normal fees plus a percentage uplift “success fee” Maximum uplift is 100% of normal fees Percentage uplift can be staged to increase as case progresses Success fee is recoverable from the losing party (currently) Shortfall on recovery payable by you, but lawyers often waive payment CFA must be disclosed to other parties, but not the terms or the success fee until case concluded Available to both claimants and defendants

56 Funding Litigation – Future Developments Fundamental changes in the English funding regime April 2013 will see Contingency fee arrangements legalised Success fees and ATE premiums no longer recoverable Stricter costs management by many civil courts Expectation is that more flexible charging and funding arrangements will be offered, both by lawyers and litigation funders

57 Multi-forum Disputes

58 Are such disputes avoidable? If yes, to what extend? What type of Agreement to choose? Arbitration Clauses – are they useful when shareholders are afforded statutory protection? Prima Facie Jurisdiction Use of Co-Operation Agreements, Joint Venture Agreements and Shareholder Agreements Choice of Law Clauses Nominee Directors and “Effective Management and Control” – Dangers of compromising by granting too wide powers to shareholders Multiple Jurisdictions

59 Lis Alibi clauses – effect on staying or dismissing actions when brought in more than one jurisdictions Shareholders Agreement – should Company be a party of the Shareholders Agreement? Will making the Company a party to the Shareholders Agreement help to ring- fence it against bringing actions in the jurisdictions where the company has been registered in? “LIS ALIBI”

60 Attacks on Structures

61 Creating an effective and robust structure Who is likely to attach your structure? Fiscal Authorities, Governmental bodies, Divorcing Spouses and disappointed family member. What can be done? Can a Trust be modified? Challenging trustee’s decisions Audit review on structures Strategic planning on the outset Multi-Jurisdictional Structures Choice of Jurisdiction for the structures and Trusts equally important Questions as to double tax treaties, bilateral or multilateral international conventions Attacks on Structures

62 Attacks on Structures: Introductory Points Consequences of English law as governing law of structure: a shareholders’ agreement creates contractual obligations and thereby excludes the possibility of claims of ‘quasi-partnership’ between the contracting shareholders - English law will not impute fiduciary duties into contractual relationships separate legal personality of companies – no room for arguing ‘single economic entity’ – parent company has no beneficial interest in assets owned by subsidiary

63 Attacks on Structures: Assets in Trust Claims may be by government, spouse or creditors Types of claim through settlor vary enormously: Proprietary claim: tracing into trust property Vesting of beneficial interest / beneficial powers in the settlor’s trustee in bankruptcy Creditors’ revocatory action (s423 Insolvency Act 1986) Enables transaction at an undervalue entered into with the intention of defrauding creditors to be set aside Fraudulent disposition legislation in many offshore jurisdictions

64 Attacks on Structures: Assets in Trust (2) Types of claim through settlor (contd) In personam compulsion by the onshore court : eg US case in which court compelled the operators of a pyramid scheme to either disgorge funds they had garnered from their fraudulent activities, or be arrested. While debtor's prison has been abolished, the court's right to imprison persons for contempt of court, such as the wilful refusal to repatriate assets (which in this case had been stowed away in the Cook Islands) remains unquestioned. FTC v Affordable Media (Anderson), 179 F.3d 1228 (9th Cir. 1999)

65 Attacks on Structures: Assets in Trust (3) Another example An individual in Turkey retained an express power of revocation over two Cayman Islands discretionary trusts into which USD24m had been settled Following the collapse of his business amidst allegations of a massive fraud, judgment was entered against him for USD30m first in Turkey and then in Cayman The judgment creditor applied to the Cayman Islands court for the appointment of an equitable receiver to exercise the power of revocation The case went to the highest appeal court, the Privy Council in London, which decided that the Cayman Islands court had the power to appoint the receivers over the power to revoke two Cayman Islands trusts. TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17

66 Attacks on Structures: Assets in Trust (4) Creditor or trustee in bankruptcy may argue trust is a sham Key risks – Are there grounds to suggest… The document does not create a valid trust? The structure is merely a cloak or a mask? The trust does not hold real economic value? The transaction under which value was transferred is a sham? Key question often is how much control does the settlor retain?

67 Attacks on Structures: Assets in Trust (5) Recent example of court suspecting a sham: Two wealthy individuals were alerted to likelihood that guarantees they had given would be relied upon They then began to divest themselves of the entirety of their assets, by placing them in discretionary trusts with themselves as beneficiaries Later beneficial class changed to just their wives and children In action to enforce the guarantees, the two were ordered to disclose the trust documents On appeal it was held that the court had been entitled to infer that the trustees of these trusts would act on their instructions and that, therefore the trust documents were effectively in their control. North Shore Ventures Ltd v Anstead Holdings Inc [2012] EWCA Civ 11

68 Olga Boltenko Withers LLP Tel: Tatiana Rydeard IFG Trust (Switzerland) Ltd +41 (0) Christopher Coffin Withers LLP Tel: +44 (0) Gregoris Leontiou G. Leontiou LLC Tel:


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