Russian sanctions: can shares still be transferred?
In a recent ruling, the Netherlands Enterprise Court held that frozen shares in a buyout procedure can only be transferred via consignment of the buyout price. This means that the purchase price of the shares is not paid directly to the sanctioned shareholder, but is deposited into a separate escrow account. However, an opinion from the European Union suggests that this issue is less complicated than that: under certain circumstances, frozen shares may also be transferred in the normal way, provided that the proceeds are immediately frozen.
What were the facts of this case?
Cicerone operated a petrol station in Ukraine through Ukrainian operating companies. The company was originally a joint venture between SOI, with a 51% stake, and Todwick, with a 49% stake. In 2022, Todwick’s ultimate beneficial owner (UBO) was placed on the EU sanctions list, with the result that Todwick’s shares in Cicerone were frozen. Cicerone ran into serious financial difficulties following the Russian invasion of Ukraine in 2022. SOI subsequently provided emergency funding to Cicerone, diluting Todwick’s shareholding to less than 5 per cent. SOI then initiated a buy-out procedure before the Enterprise Chamber, with a view to acquiring Todwick’s remaining shares.
In a buyout procedure, a shareholder holding at least 95 per cent of the shares may ask the court to order the other shareholders to transfer their shares. Normally, the Enterprise Chamber sets the price of the shares and establishes a reasonable period for the minority shareholder(s) to transfer these shares. The freezing of the shares complicated this case.
The Netherlands Enterprise Court ruled that, due to the sanctions regime, Todwick could not and was not permitted to transfer the shares voluntarily, nor was he permitted to receive any payment for them. Consequently, an exception was made to the usual rule that the shareholder is first given the opportunity to comply voluntarily with the buy-out order. Once the value of the shares had been determined, the transfer could take place by depositing the purchase price, with interest, into the escrow account.
An asset freeze does not automatically mean that shares cannot be transferred
The ruling of the Netherlands Enterprise Court in the above case appears to suggest that a freeze on assets blocks the normal transfer of shares. That premise seems too absolute. It follows from an opinion of the European Commission dated 27 May 2021 that changes to frozen assets are possible under certain circumstances, provided that the freeze itself remains in place. The aim is to prevent the sanctioned party from using the assets.
For frozen shares, this means that a sale at a market-based price is, in principle, possible provided that the proceeds are immediately frozen. In this way, the sale has no material effect on the freeze or the total value of the assets, only on their composition.
Practical implications
For companies dealing with frozen shares, this ruling does not mean that the regular transfer of those shares is, by definition, impossible. In principle, an asset freeze does not prevent the transfer of frozen shares, provided that the proceeds are immediately frozen and the sanctions rules are materially complied with.
In practice, it is therefore advisable to first investigate whether the shares can be delivered voluntarily, for example by paying the purchase price into a frozen bank account held by the transferring party or via an escrow arrangement. Only if voluntary delivery does not take place within a reasonable period should transfer via consignment be considered.
If consignment is chosen, particular attention must be paid to the fact that the funds deposited into the consignment account are not automatically frozen. The parties would therefore be well advised to consult the Ministry of Finance, as the administrator of the consignment account, in good time and to obtain confirmation that the purchase price will be frozen immediately. This will prevent a transaction that is specifically intended to be sanctions-compliant from nevertheless giving rise to a sanctions risk.
Do you have any questions about frozen assets or any other questions regarding sanctions, do not hesitate to contact us.
