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In Angophora Holdings Ltd. v. Ovsyankin, the Alberta Court of King’s Bench (the “Court”) denied an application to stay an Enforcement Order (“Order”) for a $59.5 million arbitral award issued by the London Court of International Arbitration (“LCIA”) with respect to a Russian commercial dispute. Mr. Ovsyankin, whose investment properties in Alberta were seized, argued that a stay of the enforcement proceedings should have been granted because Angophora Holdings Ltd. (“Angophora”) was controlled by Gazprombank, an entity designated under Canadian sanctions related to Russia.
In its sanctions assessment, the Court interpreted the control test broadly as one of ownership or de facto control, including structural and functional criteria. Given the lack of any statutory definition or formal regulatory guidance, the Court reviewed the purposes and wording of the sanctions’ regulations, as well as the tests of ownership and control applicable in the U.S., EU and UK. The Court found that based on the U.S. definition of control and certain “functional” factors, there was prima facie control by Gazprombank. Despite this finding, the Court held that the enforcement of the Order in favour of Angophora would not be in breach of the sanctions regulations, but any subsequent distribution of proceeds relating to enforcement of the Order might raise sanctions issues.
The case is exceptional because no Canadian court has interpreted the concepts of ownership and control of subsidiaries by designated persons. With no formal regulatory guidance from Global Affairs Canada, the principles set out in Ovsyankin are now law in Canada.
Canadian Sanctions Related to Russia
The Special Economic Measures Act, (“SEMA”) allows the federal government to impose economic sanctions on foreign entities and individuals. In response to the Russian annexation of Crimea in 2014, the Special Economic Measures (Russia) Regulations, SOR/2014-58 (“Russia Regulations”) prohibited any dealing in the property of listed persons (Schedule 1), restricted certain categories of financing (Schedules 2 and 3), and introduced sectoral sanctions on Russian offshore, deep water and Arctic oil projects (Schedule 4). After the full-scale invasion of Ukraine in February 2022, the Russia Regulations were amended to include new sectoral sanctions and hundreds of new prohibited persons on Schedule 1, including Gazprombank. The breach of the Russia Regulations is a criminal offence punishable by significant fines or imprisonment under Section 8 of the SEMA.
Facts of Ovsyankin
As a general rule, all Russian commercial interests in the energy industry are directly or indirectly tied to the Russian government or its state-owned energy companies, such as Gazprom or Rosneft. These dealings often involve offshore jurisdictions. Where litigation arises on commercial matters, it is common for those matters to be governed by English law and feature costly arbitration proceedings in London.
Ovsyankin is no exception. Mr. Ovsyankin is one of the owners of the Paker Group, a Russian oilfield service company, through Retemmy Finance Ltd. (“Retemmy”) and Grooks Global Ltd. (“Grooks”), registered in BVI and Cyprus respectively. Angophora is a private equity investor that is also incorporated in Cyprus and owned, through a Luxembourg investment fund, by an Italian bank and by Gazprombank, a financial institution affiliated with the Russian state-owned gas company, Gazprom.
In 2012, Angophora purchased the shares of Grooks. As a result, Retemmy and Angophora entered into a shareholders agreement with respect to Grooks, where Mr. Ovsyankin personally guaranteed Retemmy’s obligations. When the relationship fell apart, Angophora successfully obtained a $59 million LCIA award on the grounds that Retemmy and Mr. Ovsyankin fraudulently reduced the value of jointly owned Grooks. Angophora successfully enforced this award against Mr. Ovsyankin’s investment properties in Alberta and obtained the Order in September 2021. Mr. Ovsyankin applied to stay the Order because Angophora was controlled by Gazprombank, an entity listed in Schedule 1 of the Russia Regulations.
Ownership and Control Test in Canada
Interpretation of the SEMA and the Russia Regulations
The Court in Ovsyankin had to deal with the issue of control of Angophora by Gazprombank. With no statutory definition of control or formal regulatory guidance, the Court determined that it was a “factual issue to be determined by the circumstances”. In its statutory interpretation, the Court found that “the Russian Sanctions” were remedial legislation and had to be given “such fair, large and liberal construction and interpretation as best ensures the attainment of its objects” pursuant to Section 12 of the Interpretation Act.
Arguably, as a penal statute, the SEMA and its Russia Regulations, should have been constructed strictly with respect to the ambiguity regarding the definition of “control”, rather than broadly and liberally interpreted. The Court’s “functional and practical” assessment of control was indeed factual and included a number of criteria that may not have been definitive of “control” from the corporate perspective.
Canadian corporate, commercial and regulatory law is familiar with issues of corporate control and these well-established legal concepts could have been used to help define the factual boundaries of control under the SEMA and the Russia Regulations. For example, the corporate control tests under the Investment Canada Act are regularly applied and interpreted by Canada’s Investment Review Division, specifically with respect to various state-owned entities. Both parties in Ovsyankin addressed these concepts in their briefs, but unfortunately the Court did not include this analysis in its decision.
Ownership in U.S., Structural and Functional Control in EU and UK
Having reviewed the purpose and wording of the Russia Regulations, the Court briefly discussed the U.S., EU and UK tests of ownership and control at paragraphs 31 to 35.
First, the Court held that the 50% ownership rule applicable in the U.S. caught Gazprombank as a 50% owner of Angophora.
It is important to note that the U.S. regulator, the Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”), has confirmed in its Frequently Asked Questions with respect to Ukraine/Russia, that control does not automatically amount to ownership and OFAC may nevertheless choose to designate an entity that is being controlled (FAQ 398). In designing its sanctions against Russia, the U.S. government preferred a more structured legal test of ownership over a factual determination of control. Any discretion on when and how control might play into a sanctions assessment was left with the regulator (where it likely belongs). Unfortunately, the Court in Ovsyankin did not explore these regulatory nuances and there was no suggestion that these matters could have been left to Global Affairs Canada to determine by way of designation, permit or otherwise.
Similar to Canada, the European Union offered limited guidance with respect to its de facto control test.
The United Kingdom provides better guidance as it relies on the test of 50% plus ownership or de facto control with a focus on corporate decision-making and authority – whether the sanctioned person, in most cases or in significant respects, by whatever means and whether directly or indirectly, could ensure that affairs of the entity in question are conducted in accordance with the sanctioned entity’s wishes. The UK’s focus on corporate decision-making and actual corporate authority over key decisions, or in the words of the Ovsyankin Court, “structural control”, is consistent with the Canadian Investment Review Division’s interpretation of control under the Investment Canada Act.
Based on its broad view of what may constitute control, the Court carefully reviewed what it called “the structural factors” with respect to Angophora and Gazprombank, including the composition of the corporate bodies, appointments, decision-making capacity and process. It concluded that Gazprombank did not have “structural control” of Angophora because it “cannot unilaterally act to direct the investments” of the holding entity or Angophora.
Next, the Court reviewed the factors that may have indicated that Angophora was “functionally and practically” controlled by Gazprombank at paragraph 40. This included the test of ownership, who conducted negotiations, provided investment oversight, appointed senior management, swore affidavits and even appeared as witnesses on behalf of Angophora. The answer in all cases was Gazprombank. Based on the U.S. definition of “control” and Ovsyankin’s “functional” factors listed above, the Court established a prima facie case of control.
The problem with this determination is twofold. First, the U.S. test is that of ownership, not control, and it does not apply under the SEMA and Russia Regulations because the U.S. test was developed and interpreted by OFAC for an entirely different statutory and regulatory framework of U.S. Executive Orders and Directives. Second, the “functional” factors are not consistent with the well-established concept of corporate control over decision-making and actual corporate authority of the entities in question. Angophora and Gazprombank are sophisticated corporate and commercial entities involved in complex international financing arrangements. The structural analysis demonstrated that there was no control.
From the “functional and practical” perspective, Angophora was free to choose who would provide its investment oversight, testify as witnesses in arbitration or swear affidavits in support of the enforcement proceedings in Canada – it makes sense that a Russian shareholder of Angophora, not the Italian bank, would look after investments in the Russian entities. To tie these “factual” factors into a definition of “control” under SEMA and Russia Regulations could result in an interpretation that is too broad and inconsistent with the statutory framework. The factual assessment needs to take place within the corporate and commercial boundaries of “control” that have been developed in Canada and can be applied in various regulatory contexts, including the SEMA and the Russia Regulations, the Investment Canada Act and other similar legislation.
Breach of Section 3 of the Russia Regulations
Based on the finding of a prima facie case of control, the Court had to then determine whether a stay was required and whether the enforcement of the Order was contrary to the Russia Regulations. The answer was “no” on both counts.
The Court allowed the enforcement of the Order through the sale of the seized properties – even though it was controlled by a designated person listed in Schedule 1 – because of the “scope of the REO [Order]”, and proceedings under it, were pursued in good faith by the civil enforcement agency. The Court also noted that any future distribution of proceeds may raise sanctions issues and any person in Canada “may wish to be satisfied that they are not in breach of the Russian Sanctions by further action. That, of course, is their decision”.
Section 3 of the Russia Regulations does not include a grandfathering mechanism or any exemption that would allow civil enforcement agencies to deal with the property of designated persons, such as Angophora (as controlled by Gazprombank). The “scope of the REO [Order]” is similarly not a factor that is relevant or material under the Russia Regulations. In any event, it is not entirely clear what the Court meant by referring to the “scope” of the Order in this context.
In terms of the Regulations, Section 3 either applies or it does not. Simply put, if there is a property owned or controlled by a designated person, no person in Canada may deal in these properties, enter into transactions, or provide financial or related services. The distinction between the continued enforcement and sale of the seized properties and the subsequent distribution of proceeds therefrom is not explicitly recognized under the Russia Regulations. The only difference between these two is that any distribution of proceeds by financial institutions or other similar entities may trigger an additional “duty to determine” (Section 6) and, if required, block these funds under the Russia Regulations.
Once the prima facie control was established, the Court had to interpret the Russia Regulations and determine whether the continued enforcement of the Order – as a single process, including the distribution proceeds, because enforcement is meaningless without distribution – by any person in Canada is consistent with Section 3 of the Russia Regulations. Instead, the Court chose an approach that amounts to selective grandfathering based on considerations that are not part of the Russia Regulations. It also raised a number of concerns, likely in obiter, regarding the distribution of proceeds, which was not technically before the Court in the stay application.
Given the potential criminal liability for any offences under the SEMA and Russia Regulations, these statements could put all of the Canadian parties involved, including the bailiffs, Land Titles Registry and financial institutions, in a position where they would likely have to seek a permit from Global Affairs Canada to proceed with any further enforcement in favour of Angophora as an entity controlled by Gazprombank.
Nick Bryanskiy and Tony Cioni are regulatory and commercial counsel at CITO Energy Law LLP, a Calgary law firm specializing in international energy projects.