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06KIEV3865, UKRAINE: SUPREME COURT RULES AGAINST PROPORTIONAL

October 5, 2006

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Reference ID Created Released Classification Origin
06KIEV3865 2006-10-05 10:37 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXYZ0000
RR RUEHWEB

DE RUEHKV #3865 2781037
ZNR UUUUU ZZH
R 051037Z OCT 06
FM AMEMBASSY KIEV
TO RUEHC/SECSTATE WASHDC 1838
INFO RUEHMO/AMEMBASSY MOSCOW 1207

UNCLAS KIEV 003865 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: DECL: NA 
TAGS: ECPS EINV RS UP
SUBJECT: UKRAINE: SUPREME COURT RULES AGAINST PROPORTIONAL 
SHAREHOLDER RIGHTS IN TELENOR CASE 
 
Sensitive but Unclassified. Not for Internet Distribution. 
 
1.  (SBU) Summary.  The Commercial Chamber of Ukraine's Supreme 
Court ruled on October 3 in favor of a lower court's finding that 
mobile phone operator KyivStar's shareholders are entitled to equal 
representation on the company's Board of Directors, regardless of 
how many company shares each shareholder may hold.  The Court made 
the counterintuitive decision in a highly publicized dispute between 
mobile phone operator KyivStar's two sole shareholders -- the 
Norwegian mobile phone company Telenor and Storm, a 100% subsidiary 
of the Russian Alfa Group.  This ruling could seriously damage 
Ukraine's investment climate and encourage corporate raiders who 
already use Ukraine's weak courts to execute questionable takeover 
schemes.  End Summary. 
 
2.  (SBU) The October 3 Supreme Commercial Court hearing, which 
Econoff attended, was the latest of nine Ukrainian court cases that 
Alfa Group's Storm had filed as part of a long-running shareholders' 
dispute with Telenor.  Storm petitioned the Ukrainian courts to 
declare the KyivStar Shareholders' Agreement invalid and to 
recognize Storm's 43.5% share in the company as entitling it to 
representation on the Board of Directors equal to that of Telenor, 
which held 56.5% of the company.  In this manner, Storm hoped to 
gain greater control over KyivStar, Ukraine's #1 mobile phone 
operator. (Note: KyivStar's revenues for the first six months of 
2006 topped $757 million.)  Telenor management told the Embassy on 
September 20 that Storm also had blocked KyivStar Board of Directors 
and shareholders meetings for a year and a half (by failing to show 
up for meetings) in an effort to force out Telenor. 
 
3. (SBU) In the lead-up to the hearing, Telenor launched a 
country-wide media campaign warning of the dire affects an adverse 
ruling could have on other foreign businesses in Ukraine. 
Then-Chief of the Presidential Secretariat Oleh Rybachuk made a 
public statement on September 6 echoing Telenor's warnings. Despite 
the publicity, the October 3 proceeding, at which representatives of 
the U.S. and Norwegian embassies were present, was over surprisingly 
quickly.  The panel of judges rejected out of hand Telenor's motions 
to prevent their hearing of the case, then proceeded to arguments. 
After 20 minutes of deliberation, the judges announced their 
decision, raising doubts among observers whether the issue was 
decided in advance. 
 
4.  (SBU)  The decision reversed, apparently on procedural grounds, 
a Higher Economic Court decision of June 27 in favor of Telenor. 
That June 27 decision had itself reversed the Higher Economic 
Court's own December 22, 2005 decision declaring a number of 
Kyivstar's Shareholder Agreement statutes illegal and granting Storm 
equal representation rights on the Board of Directors.  The 
Commercial Chamber's ruling on October 3 reinstated the original 
December 22 decision, leaving Telenor with no higher court of 
appeal.  Telenor told us it would file suit on the matter in New 
York, designated in the Kyivstar Shareholders Agreement as the venue 
for arbitration of disputes.  Telenor also told us it will work 
around the decision by subdividing its shares among five 
wholly-owned and specially-created Telenor subsidiaries.  According 
to the court ruling, each of these subsidiaries would be eligible 
for a board seat, thus retaining Telenor's five seats on the 
nine-seat board. 
 
5.  (SBU) A Kiev-based lawyer told EconOff that the October 3 
decision was unlikely to set a specific legal precedent, since the 
judgment appeared based on a strained interpretation of KyivStar 
company bylaws. He noted that assessing the full legal ramifications 
would have to await publication of the court's decision, which 
usually occurs from several days to two weeks after proceedings.  He 
warned, however, that the decision dramatically underlined the sorry 
state of the Ukrainian judiciary.  Telenor executives admitted, in a 
September 20 meeting with Econ Counselor, that Ukrainian law on 
board seat distribution was contradictory and that it could be read 
as condoning the "one investor, one seat" interpretation.  One U.S. 
contact with long experience in Kyiv told Econ Counselor he believed 
Telenor's case may have been hurt by the relative inexperience of 
its legal team in litigation, as opposed to the well-known 
litigators hired by Alfa Group for this case. 
 
6.  (SBU) Comment.  Ukraine is known for the creative way in which 
corporate raiders use the court system and the often contradictory 
legal regime to support complex takeover schemes.  The current 
decision, however, is notable in that it places a Supreme Court 
stamp of approval on one type of legal manipulation.  Many in the 
business community here fear the decision may encourage business 
predators to attempt even more audacious schemes in the future.  The 
decision will likely damage the investment climate by strengthening 
investor perceptions that Ukrainian courts are weak and 
unpredictable, while casting doubt on the inviolability of contracts 
in Ukraine.  End Comment. 
 
TAYLOR

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