Summer 2017. A client came to our office seeking advice on bankruptcy proceedings in Belarus. The client was a foreign investor of a large company (an LLC held by two shareholders) who wanted to withdraw from it. Naturally, a foreign shareholder and a Belarusian shareholder ended up having a dispute on the return of investment.
Why would such dispute arise though? The company had excellent Articles of Associations and a well-developed system of checks and balances that catered to the interests of both shareholders. There was a functioning Board of Directors and the representative of the Belarusian partner was the company’s Director.
The reason for the dispute was, however, different: our client, the foreign investor, did not manage to find common ground with the Belarusian partner.
How was the conflict resolved?
Two weeks from the client’s visit to our office, the Director as well as the Board of Directors were dismissed, a new version of the Articles of Associations was registered and the Belarusian partner ceased to be the company’s shareholder.
On that sunny summer day of 2017, our client had no idea that such an effective resolution of the conflict was at all possible: he was able to return most of his investment just half a year after the conflict within the company was resolved.
This story is a perfect example of how excellently formulated Articles of Associations, the decision-making procedure, the system of checks and balances, the presence of the Board of Directors, the Auditor and highly qualified management team do not always exclude or prevent a corporate conflict. Think of buying a mobile phone: even if you get the best one on the market, you will not be able to fix the problems of poor communication quality, since it falls within the mobile operator’s, not the manufacturer’s, sphere of competence.
What tends to surprise foreign clients in the system of resolving corporate conflicts in Belarus?
- Shareholders’ de facto “helplessness”
Oftentimes foreign clients are surprised at how “helpless” a shareholder ultimately happens to be: despite owning even 90% of shares, he/she may not influence any decision of a company if a conflict between him/her and the Director of such company arises.
- Win with zero result
Clients are also surprised that, while it may be possible to win a court case on providing information about the company’s activities, such information may still remain unavailable.
- Business reputation does not matter
Belarusian business is borderline indifferent to claims on protecting business reputation. It is sometimes quite hard to explain why it is virtually impossible to initiate a criminal case against supposedly fraudulent actions of a shareholder or a Director.
Why does it happen?
We must admit that the aforementioned notions have a lot to do with the overall business environment in Belarus. The fact that corporate law is far from perfect, both materially and procedurally, is just one of the reasons. Corporate conflicts in Belarus often result from the lack of legal culture and legal awareness.
When setting up a company in cooperation with somebody, one must always be aware of the possibility of a corporate conflict. That, in its turn, necessitates having an alternative action plan.
Therefore, whatever side of a corporate conflict one is on, there are no grounds to presume that the other party is acting in good faith or has a high level of legal culture. That is what the Belarusian reality is like.
What needs to be done?
The only effective mechanism is the constant oversight over one’s business. If a conflict is about to happen it is helpful to do some planning, using the required human, financial and operational resources.
Practice shows that the later one gets actively involved in a corporate conflict the higher is the risk of losing practically everything in it.
Each action of one’s opponent must be followed by taking a counter-action or by a consciously made decision not to take any. One should model the opponent’s actions and take a range of preventive measures in order to eliminate the chance of the opponent taking a particular action.
We have dealt with cases when a Director who did not want to be dismissed, opposed shareholders’ decision on his dismissal and, exploiting the loyalty of the company’s employees, would not let the new director access the working place for a month. In the course of that month documents and seals were destroyed and the former Director managed to avoid any substantive penalty.
How can it be combated?
Unfortunately, such cases would typically take a court at least two months to handle. Within that time relevant evidence may be completely destroyed. Police prefers not to intervene in such situations. The only way out is seeking an opportunity to get to the company’s territory and physically take the dismissed person out of the working place.
Handling a corporate dispute in Belarus has a lot to do with having a prompt reaction and teamwork skills. If you want to succeed in this sphere you would have to learn how to get the contacts of a locksmith working 24/7 to change the locks, because this would oftentimes be more important than knowing the company’s Articles of Association by heart.
Currently we face a situation when many rules of dealing with corporate disputes in Belarus are not similar to those in other states. On the one hand, Belarusian judicial system is quite fast at delivering judgements, on the other – there are very few possibilities of taking effective interim measures. That is why, in such situations the ones you should be able to rely upon are yourself and your team.
This article marks the beginning of our dive into the mysteries of resolving corporate conflicts in Belarus. In our upcoming materials we would make a more in-depth overview of the possible strategies of handling corporate disputes, illustrated by real cases and supplemented by effective recommendations.