Yukos case: Dutch Asset Protection is Key for Real Estate Investments

Foreign investments shall be set up in a way that risks shall be mitigated. One of the risks can be political risk. Foreign investors and lenders shall protect their assets and mitigate the risk of expropriation whereby the foreign state will not or insufficiently compensate the investors or lenders. In case of real estate investments in countries with an increased political risk, this is even more relevant as real estate investments often have a long-term horizon.

Asset protection can be obtained in many ways, for example by means of an ad-hoc sovereign or government assurance providing direct recourse to the state in case of breach of contract, acknowledgement that bank accounts of operational companies can, despite local foreign currency regulations, be retained outside the country of investment, or support from export credit agencies in a form of guarantee or insurance.

When setting up business in riskful countries it can be wise to have a Dutch holding or finance entity in place within the real estate structure. The Netherlands gives asset protection because of three lines of defense against expropriation. The owners of the Yukos assets brought all three lines into practice. The Yukos case consists of numerous court cases to obtain control over the assets of Yukos, a bankrupt Russian oil producer. Its bankruptcy was the result of an illegitimate tax claim.

Although the conflict was fought out in a different industry, the lessons can be applied to the real estate industry.

First measure: Investment protection treaties.

Bilateral investment protection treaties are concluded by two countries to protect investments made by a national of either of the states into the other. They aim to provide legal protection to the investor and lender. The number of bilateral investment protection treaties entered into by the Netherlands is higher than most other countries. The Netherlands also entered multilateral investment protection treaties. Very relevant for the Yukos case is that the Netherlands is a member of the Energy Charter, an international agreement which creates a multilateral framework for cross-border cooperation in the energy industry. The Energy Charter also covers legally binding dispute resolution procedures. In 2014, one part of Yukos battle, a nearly 10-year-long Yukos case was decided by the Permanent Court of Arbitration in favour of the claimants. On the basis of the Energy Charter, the Permanent Court rewarded the claimants with a record-breaking USD 50 billion award. The case is not finished yet as the authority of the Permanent Court of Arbitration based in the Hague is currently disputed before Dutch courts.

Second measure: STAK

A type of Dutch foundation (‘STAK’), can be used for many purposes. For asset protection it is very useful as it can prevent for hostile takeovers. A STAK can be structured in such way that the owners of depository receipts have no control over its assets. Instead the control is with its directors.

Yukos managers incorporated a STAK in the year 2005. At the time, Financial Performance Holding, a Yukos entity, transferred its assets to STAK Yukos International to protect shareholders' interests.

Third measure 3: Territorial approach to bankruptcies

The Netherlands apply a territorial approach to bankruptcies. The territorial approach makes that the Dutch courts will not solely rely on a bankruptcy judgment from outside the European Union. Judgments will be verified whether it does not conflict with local public order. This defense was successfully brought into action in another part of the conflict, called the Yukos Finance case, involving around € 800 million of assets. The Dutch Court concluded that the Russian tax rules were violated and that this was done with the obvious purpose to provoke payment power and ultimately cause the bankruptcy of Yukos.