BVI Offshore Business: Grey Area

Chinese beverage giant, joint venture Wahaha Group, finally settled the long-lasting legal dispute with the French food and beverage group Danone SA, which started in 2007 with Danone’s complaint that Wahaha Group was running separate businesses selling Wahaha-branded products.  Since that year, the French group has filed more than 21 lawsuits in several countries – the British Virgin Islands, France, Sweden, Italy and the U.S. – to receive control of the $2.4 billion Wahaha brand.  Its claims were rejected by all courts, including the BVI court, which, however, had  once brought several BVI firms registered under Wahaha group into receivership and froze their assets, but later on revoked the decision.

The final settlement of the dispute was achieved with “the support of both the Chinese and French governments” by Danone agreeing to sell its 51 per cent stake in the Danone-Wahaha joint venture to Chinese partners. 

Neither of companies discussed a price of the sale, which made about $438 million, according to Chinese media. This sum makes less than a fifth part of the $2.6 billion that Wahaha lawyers said Danone demanded in the beginning of arbitration to end the dispute.

By this sale agreement, upon its approval by the Chinese government, Wahaha and Danone will conclude their joint venture relationship, and all legal proceedings related to the disputes between them will come to their end.  The joint venture was established by the Chinese and French groups in 1996 to produce bottled water and other beverages under the Wahaha brand.

Frank Riboud, CEO and chairman of Danone, said that since Danone entered the Chinese market in 1987, it has been highly committed to its Chinese business, and will accelerate its growth in the country despite the end of the French-Chinese joint venture.

The Chinese joint venture Wahaha Group, which is involved in a long-lasting dispute with Danone, announced that it has received a new adjudication order from the High Court of the British Virgin Islands. By the decision of the BVI court, the claim of Danone was rejected, and the interim freezing of Chinese group’s assets was revoked, along with the order that would allow KPMG to take over the assets of Wahaha’s non-joint ventures as the receiver.

The previous decision of the BVI Court on asset freezing was based on the words of the Chairman of Danone Asia Pacific Management, while the defendant – Wahaha Group – was absent from the court. KPMG then allegedly violated China’s judicial sovereignty by sending BVI and Samoa court orders without the permission of the Chinese authorities. Now, after another claim was made in the BVI High Court and the judgment was pronounced more than one month ago, KPMG is still yet to apologize and provide the required financial compensation to Wahaha.

On December 17, 2008, the BVI High Court opened the court case which overruled Danone’s claim. The adjudication order, which went into effect on December 19, not only made the freezing and receiving orders invalid, but also requested Danone to pay related fees that Wahaha incurred during the case. Additionally, the Chinese group will have the right to decide whether or not to cease if Danone fails to submit a stay pending appeal to the appellate court within 2 weeks.

Legal councel of Wahaha Yang commented on the new verdict of the High Court of BVI, saying that it showed fairness and justice of the international judicial environment and that it will definitely affect the results of the Stockholm arbitration case.

Publisher of BVI News Online Merrick Andrews is going to file formal complaint to the British Virgin Islands governor and deputy governor. The subject of the complaint is the ban of one of the publication’s reporters from attending magistrate court proceedings.

Andrews said he had not received information from the magistrate, and he sought the assistance of police officers concerning court matter on November 21. After this case, he tried to contact the Governor and Deputy Governor of the BVI, but without success. Now, having not received any kind of verbal respond, he is preparing formal letter on the matter.

Magistrate Valerie Stephens banned the BVI News Online reporter from her court because of the report concerning burglary at the magistrate’s home; also, being requested to pull the story, the editor refused to do it. The magistrate is convinced that the story should not be published because it “compromised her security”, but Andrews said the report was in relation to a burglary, and not to the magistrate’s security.

By words of a reporter, that is a sad week for journalism and freedom of expression in the BVI, and another sad fact is that the territory has no media association. The publisher/editor said that they are going to continue to fight the injustice from the justice system.

Premier and Minister of Finance Hon. Ralph T. O’ Neal, has made an announcement in the beginning of October concerning the BVI government plans to launch a transparent investigation into the issue of the disbursement of more than US$45 million between a Bermuda-registered IPOC International Growth Fund Ltd, and the British Virgin Islands. This amount was confiscated by the BVI court some months ago, after the 17 month investigating period carried out by authorities of the British Virgin Islands and Bermuda, and after the BVI- and Bermuda-based companies pleaded guilty to providing false information and perverting justice course. It was found out that in 2004-2005 the IPOC group lied about the source of $40 million that was lodged with the court of a separate civil matter.

The three BVI companies - Albany Invest Limited, Lapal Limited and Mercury Limited, - were also ordered to pay a total of $2.2 mln in costs and $300,000 in fines for their part in the offences. All the defendants including BVI companies are within the IPOC group.

In the centre of the case there was a long dispute between IPOC and Alpha Group which is the owner of the BVI-registered  LV Finance Group Limited; it is suggested that the $45 mln amount plus was transferred and divided in half between the BVI and Bermuda without the awareness of the BVI government.

Premier O’Neal said that the BVI government was not aware of the disbursement seized by the BVI High Court from a Bermuda company, and announced that the government will be launching a transparent investigation into the issue.

The dispute between the French Group Danone and China-based joint venture Wahaha Group which is already continuing for one-and-a-half year long has finished with Danone paying 570 million yuan to the Chinese company, and its high-profile legal actions worldwide have been questioned by shareholders.

In June 2007, Danone filed a complaint against the BVI company Ever Maple Trading Ltd., which, by its words, has the controlling stock of Hangzhou Hongsheng Beverage Co Ltd. - the parent company of Danone’s joint venture partner, Hangzhou Wahaha Food and Beverage Sales Co. Later on, the counter-claim of the Chinese Group has followed, which sued Danone for conducting its business illegally.

In November 2007, the High Court of the BVI brought several BVI firms registered under Wahaha Group into receivership, and froze their assets until further decision. An international auditing firm KPMG, which had been appointed the receiver of each of the BVI companies, became also involved in the dispute between the companies. One month later, Danone filed the case against the parent of the BVI company in Samoa, again applying for appointment of KPMG as the receiver. Danone alleged that the non-joint ventures impaired its interests, while Wahaha claimed the ventures have nothing to do with Danone.

Now, Wahaha sent a petition to the court, accusing KPMG of violating Chinese laws, and affecting its normal production and operation for which the company asked for compensation and a public apology from the auditing firm. KPMG is said to have violated China’s judicial sovereignty by sending BVI and Samoa court orders, because foreign institutions and individuals are not allowed to deliver documents and conduct  investigations in China without permission from relevant Chinese authorities.

Also, according to the laws of BVI and Samoa, a company shall not be ordered to be taken over unless its property is really threatened, and it is suspected of non-normal operation. Danone, however, is still normally operating investment company, as well as the non-joint ventures of Wahaha invested by Danone. British Virgin Islands is the most popular offshore jurisdiction in the world, but it has only one judge. It can be said that Danone cheated the BVI court when applying for arbitration in the event that the BVI company was absent, according to a source at the BVI company.

In the beginning of May, BVI court confiscated more than US$45 million from a Bermuda-based IPOC International Growth Fund Ltd.  which pleaded guilty of serious frauds. Further on, Justice ordered three other defendants – BVI-registered companies Lapal Limited, Albany Invest Limited, and Mercury Import Limited – to pay a total of $2.2 million in costs and $300,000 in fines for their part in the offences. The court order, which prosecutors say may be the largest court order of its kind ever made in the Commonwealth, came after a 17 month investigation by authorities in the British Virgin Islands and Bermuda, and after the Bermuda- and BVI-based companies pleaded guilty to providing false information and perverting the course of justice. Criminal charges were filed against the four companies on April 21, and the defendants were committed to the High Court on April 25.

It was alleged that between 2004 and 2005, the IPOC group gave wrong information about the source of $40 million which had been lodged with the court as part of a separate, civil matter. At the centre of that legal case there was a long dispute between IPOC and Alpha Group. Through its lawyers in the BVI, Alpha alleged that $40 million in legal costs put up by IPOC were sourced from the proceeds of crime, but it was argued by IPOC that the money originated from consultancy services supplied to a number of companies, including those registered in the U.S. A matter settlement agreement was concluded in the end of November 29 between the IPOC Fund and BVI-registered LV Finance Group Limited, owned by Alpha Group.

The investigation and prosecution of the IPOC case by the BVI authorities was carried out with the co-operation of authorities in Bermuda; a Memorandum of Understanding concerning the IPOC investigation was signed between the two jurisdictions in July 2007. The Bermuda and BVI governments spent a combined $2.3 million on the investigation.

The shareholders of St. Petersburg retail chain Lenta August Meyer and Oleg Zherebtsov continue emotional discussions and mutual accusations, trying to force each other out from company’s management. By words of an American shareholder, the subject of conflict and disagreement is about the illegal takeover of Lenta LLC by two of the main shareholders - Oleg Zherebtsov and Vladimir Senkin. Lenta LLC, the retail chain that operates 26 hypermarkets across Russia, is fully owned by Lenta Ltd., registered in the British Virgin Islands, and its takeover was not approved by the majority of BVI company’s board of directors and, actually, by any other Lenta shareholders.

The conflict arose from the dismissal of Lenta LLC’s general director Sergei Yushchenko. After his contract expired, the majority of members of the board voted to appoint Vladimir Senkin to the position of general director. Senkin was proposed by Oleg Zherebtsov, the founder of Lenta who holds 35% stake. Meyer, who is the owner of 36%.4 stake, opposed the decision and held an extraordinary meeting of Lenta Ltd.’s shareholders where elected a new board of directors and voted to retain Yuschenko as general director of Lenta LLC and CEO of the BVI company.

Zherebtsov said that Meyer demanded his resignation from the position of general director of Lenta LLC at the end of 2006, and after this was done he demanded his resignation from the position of chairman of Lenta Ltd. and the sale of his shares, but this was refused. After the refusal of Zherebtsov, Meyer and Yuschenko tried to sell the BVI company to an outside investor, probably to another Russian retail chain.

Alexander Arbouzov, lawyer at Beiten Burkhardt St.Petersburg, indicated that if Lenta Ltd. owns 100% of the shares of Lenta LLC, the board of directors of Lenta LLC should be elected on the BVI where the parent company is incorporated by its shareholders. He could not conclude that one of the shareholders is trying to take over the company. Probably the dispute will be solved with the BVI court.

It has already been discussed previously that Norwegian Hydro Aluminium passed money through BVI-based intermediary in its deals with the Tajikistan Aluminium company.

Then, the case of the largest missing aluminium amount in the world was considered in the High Court in London. The loss was estimated at as high as USD 500 million per year. This money disappeared from the Tajikistan Aluminium Plant, whose principal trading partner is Hydro Aluminium, the state-controlled Norwegian aluminium producer.
The prehistory of the agreement between Hydro and Talco, most important industrial and trading enterprise in Tajikistan wholly owned by the Tajik government, has been described previously. Several years ago, Hydro sued Talco and won the case.

Now, Talco and CDH Investments, a company linked to this case and registered in the British Virgin Islands, are charged with unlawful conspiracy and theft. That is why, under the decision of the High Court in London, the case was moved to the British Virgin Islands jurisdiction.

It is also worth mentioning that a press release, issued through the Tajik news agency Asia-Plus on December 21, defends reassigning sales contracts and the tolling operations of the offshore cutout companies.

In November, the court of the British Virgin Islands announced its judgement in the case of Russia’s Alfa Telecom Turkey Limited, – an affiliate of Alfa Telecom, one of Russia’s leading private equity telecommunications, - versus Cukurova Finance International Limited; the decision against Alfa confirmed the ownership of Cukurova Holding over a contested stake in Turkcell.

The ruling of the British Virgin Islands court was just part of a series of legal dispute over Turkcell involving its major shareholders Cukurova, Russian private equity firm Alfa, and Nordic telecommunications giant TeliaSonera.

Under the November 2005 deal, Cukurova sold Alfa a 13.22% stake in Turkcell in return for a financing package of $1.7 billion. In November 2006, Cukurova repaid $357 million of the loan and paid $217 million interest. In May this year, Cukurova said it was suing Alfa Telecom Turkey Ltd because Alfa would not accept the early repayment of the remainder of Cukurova’s debts. This move followed Russian firm’s decision to start a court case against Cukurova claiming it had defaulted on the outstanding debt of $1.35 billion (13.8% stake). Alfa alleged Cukurova of trying to use its Turcell stake as collateral to raise new financial to repay the debt.  It is important to add that loan was secured and share charges had been granted under both British Virgin Islands law and English law over Cukurova Finance shares and shares of its British Virgin Islands incorporated subsidiaries.

Altimo, which is the telecommunications investment arm of Alfa, said the court had recognised Altimo’s security rights over the contested shares, however, Cukurova was blocking the company’s appropriation of them. It is said in Altimo’s statement that the Court admitted the appropriation of the shares made by Altimo earlier this year was not technically possible, since Cukurova Group has intentionally blocked the registration of Altimo as the owner of the shares in the share register.

The unlisted Cukurova has a total 21.3% stake in Turkcell. TeliaSonera which is also involved in a legal dispute over its bid to increase its stake, is the holder of 37.1% of Turkcell.

On Thursday November 29, the High court of Hamilton (Bermuda) validated a matter settlement agreement between Bermuda company IPOC International Growth Fund Limited and  BVI-registered LV Finance Group Limited, owned by Alpha Group. The court’s validation finally brings to an end a series of global litigations and arbitrations which took place during the last years.

The dispute between the companies, which was more than USD 2 billion worth, included arbitrations in Zurich and Geneva, related actions in the British Virgin Islands, Bermuda and other jurisdictions. The last suit discussed in our blog was brought by BVI Public Prosecution’s Office against Russian Telecom Minister Leonid Reiman. Also, recently, as a result of legal battle between the Bermuda and BVI-based companies, a civil tribunal in Switzerland has concluded that Reiman secretly owns stakes in Russian telecoms through the IPOC fund. This ruling of the BVI court is said to be a politically-motivated attack against M.Friedman who controlled Alpha Group.

The actions that started in September 2003 caused much response in the international press. The initial dispute was over a 25% stake in Russian mobile phone operator MegaFon. IPOC claimed to have bought the stake in 2001 from LV Finance Group, while the BVI company still owned this stake.

The settlement agreement required Court approval, which was obtained from Justice Jan Kawaley. SJ Berwin partner Justin Michaelson acting on behalf of LV Finance Group Limited said: “This represents a terrific result for LVFG and is a vindication of our client’s position in response to all IPOCs claims.” Other lawyers acting on behalf of the BVI group were Jeffrey Elkinson of Conyers Dill and Pearman, and Dr Balz Gross of Homburger Rechtsanwälte.