RUSSIA’S STRATEGY NOT TO RESPOND SUBSTANTIVELY TO QUANTUM IN THE YUKOS ARBITRATION
In order to help the Tribunal reach a proper valuation of Yukos Oil Company, Claimants put forward 13 possible scenarios. The claims ranged from USD 30 billions to USD 114 billions (Final Award, para. 1701 – 1710) and the three main sets of scenarios were the following:
- The tax assessments against Yukos were a breach of the ECT
- The breach of the ECT caused the Yukos – Sibneft merger to fail,
- Yukos had a 70% chance of being listed in the NYSE
- The tax assessments were not a breach of the ECT, but the subsequent enforcement of the assessments was a breach.
- Despite the enforcement of the assessments, Yukos would have been given a certain amount of time to pay off the USD 24 billion (because of the considerable amount it represents).
Claimants’ expert reached a synthesised Enterprise value by weighing three different valuation methods (DCF 50%, Comparable Companies 40% and Comparable Transactions 10% (Final Award, para. 1717)) and proposed that the valuation date for Yukos should be the highest of either the November 2007 date (when Yukos was struck off the register) or the date of the award (which the Tribunal deems to be 30 June 2014).
Claimants estimated the value of the Yukos entity at both valuation dates, added hypothetical dividends not received from 2004 to 2007, the lost chance of being listed in the NYSE and-pre award interest on the dividends from the valuation date to the date of the Award (LIBOR + 4%) (Final Award, para. 1722 – 1724).
It should be noted that Claimants’ experts most likely did not disclose full soft copies of their models in the proceedings as the Tribunal expressed difficulties in following Claimants’ methodology and stated that it had to infer it from the appendices to the expert’s second report (Final Award, para. 1728). According to Mr. McClay of BDO (London), it is essential that one party discloses soft copies to ensure that the Tribunal understands all the steps of its methodology and also to determine, in particular, architectural problems, assumption disagreements and inconsistencies, input errors and whether the model works overall.
Respondent’s strategy not to submit a positive case on quantum
Respondent’s approach was far more simplistic, as it did not put forward a positive case on damages at all, but rather chose to point out errors and attack Claimants’ expert’s valuation (Final Award, para.1783). For example, Respondent disagreed with Claimants regarding the valuation date but did not set out an alternative date (although it suggested that it should be before the end of 2004 at the Hearing (Final Award, para.1738)). This was a dangerous strategy to adopt, as it is always possible to chip away at damages should an opposing party win.
Respondent’s experts stated that Claimants’ calculations were “riddled with errors” (Final Award, para. 1743, 1744) and corrected Claimants’ Comparable Companies valuation by excluding data with regard to Rosneft, Gazprom Neft and the international major oil companies from the analysis to reach an Enterprise value in 2007 USD of 32 billions lower than Claimants’ Enterprise value (Final Award, para. 1746). Respondent also disputed the reliability of the Comparable Companies and claimed that Comparable Transactions were indefensible from an economic perspective (Final Award, para. 1747) but never brought forward a methodology for valuating Yukos or any valuation figures of its own.
Mr. McClay of BDO (London) is of the opinion that the phrase “riddled with errors” is becoming a stock phrase in respondents’ expert reports and perhaps even part of a report template of some experts. Here, Claimants’ first expert report was indeed flawed; the valuation of YNG (Yukos’ main production subsidiary sold in a forced auction to Baikal, a fake entity bought by the State-owned Rosneft shortly after) contained obvious and significant errors which Respondent pointed out. Claimants’ expert then admitted to his mistakes but compensated for them in his second expert report by inflating other numbers to reach the same final amount claimed (Final Award, para. 1744, 1745). It is possible that Claimants’ expert’s errors undermined his credibility and led the Tribunal to lose confidence in him as the Tribunal stated that his “limited assistance to the Tribunal in its determination of Claimants’ damages” was a factor to consider when fixing the costs of Claimants (Final Award, para. 1884).
From a strategic point of view, it is often the case that a respondent does not provide calculations in order not to give credence to the claimant’s quantum. After all, the respondent does not have the burden to bring a claim on valuation and can decide to make the Tribunal’s work considerably harder. However, the respondent often faces a dilemma when it can reasonably expect the Tribunal to dismiss the claimants’ claims as unjustified and not even consider the quantum. Will it be worth incurring the costs of experts, including hearings when it might turn out useless?
Not bringing a positive case on quantum can sometimes backfire. What is the Tribunal to do when there is even partial acceptance of the claimant’s quantum but nothing from the other side? This approach can sometimes lead to dangerous consequences as it makes it difficult for the Tribunal to adopt only part of the respondent’s case and the Tribunal has only one party’s valuation to base its award on.
Nevertheless, in Yukos, Respondent’s expert succeeded in significantly reducing the value of the claim by pointing out some very large errors in Claimants’ experts’ calculations. Therefore, some of Respondent’s criticism of Claimants’ experts (the “corrected” version of Claimants’ Comparable Companies analysis and the adjustments to the principle errors) was useful to the Tribunal. The Tribunal found that ‘Respondent’s expert arrives – in orally advancing what “could be” a “useful” evaluation – at a “corrected” enterprise value in the amount of USD 67.862 billion and, assuming a 90/10 equity/debt capital structure, an equity value as of 21 November 2007 of USD 61 billions’ (Final Award, para. 1783).
Meetings of experts
According to M. MacGregor of BDO (London), a meeting of experts would have been helpful in this case considering the large gulf between the experts. It is likely that the technical valuation issues could have been resolved (or at least clarified) by a meeting and, given the costs of the experts (USD 8.5 millions for Claimants and USD 4.5 millions for Respondent), discussions would undoubtedly been cost effective.
The greater argument in support of experts meetings is that, considering the way the Tribunal used the evidence presented by the experts, it is unlikely that it obtained their complete, informed views about valuation before coming to its decision.
Although one party should, to the extent that it is possible, engage with the other side’s experts, it becomes unrealistic to expect that experts would be able to agree on any common figure where one party does not submit a case on quantum, as was the case here for strategic purposes.
– Olivier Marquais, Associate, Aceris LLC