First Court Decision to Interpret Sanctions Against Russia Adopts Broad Interpretation of Corporate “Control”

Canadian sanctions against Russia under the Special Economic Measures (Russia) Regulations, (Russia Regulations) affect nearly every Russian industry, including companies incorporated outside Russia that are indirectly or partially owned by sanctioned Russian shareholders.

In Angophora Holdings Limited v. Ovsyankin (Angophora v. Ovsyankin), the first court decision considering the Russia Regulations, the Court of King’s Bench of Alberta (Court) interpreted Canadian sanctions broadly, applying them to property of a corporate subsidiary which was not itself a sanctioned entity.

CANADA’S SANCTIONS AGAINST RUSSIA

Under section 3 of the Russia Regulations, it is prohibited to deal in any property that is “owned, held or controlled by or on behalf” of a “designated person” (a sanctioned person). Under section 5, it is also prohibited to knowingly cause, facilitate or assist in such a dealing.

This prohibition can cause uncertainty for Canadians who are dealing with an unsanctioned company that is partly or indirectly owned by a sanctioned shareholder. Unlike in jurisdictions such as the United States, Canadian sanctions laws do not impose a clear “50% ownership rule” that automatically extends prohibitions to entities that are 50 per cent or more owned or controlled by a sanctioned person.

Until Angophora v. Ovsyankin, the meaning of “owned, held or controlled by or on behalf of” had not been interpreted by a Canadian court in the context of sanctions.

BACKGROUND

Angophora Holdings Limited (Angophora) was a non-sanctioned subsidiary of a Luxembourg joint venture that was in turn 50 per cent owned by Gazprombank, a Russian bank subject to sanctions under the Russia Regulations.

On December 15, 2020, the London Court of International Arbitration granted an award in favour of Angophora against Andrei Ovsyankin, a businessperson with assets in Canada. The award related to allegations that Mr. Ovsyankin had engaged in corporate wrongdoing that reduced the value of a Cypriot company, Grooks Global Limited and its Russian subsidiaries (collectively, Grooks) in which Angophora held shares.

Angophora wished to realise the award by seizing and selling condominiums in Alberta owned by Mr. Ovsyankin (Property). Angophora successfully applied to convert the award into a Recognition and Enforcement Order (Enforcement Order) in Alberta in September 2021.

Mr. Ovsyankin applied to stay execution of the Enforcement Order, arguing that the liquidation of his Property and payment of the proceeds to Angophora would breach sections 3 and 5 of the Russia Regulations.

DECISION

The case required the Court to apply the legal test for granting an injunction. The first element of that test required Mr. Ovsyankin to demonstrate a strong prima facie case that Angophora’s execution of the Enforcement Order would be contrary to the Russia Regulations.

The Court found that there was a strong prima facie case that Angophora may be “controlled by or acting on behalf of a corporation subject to the Russian sanctions”, and therefore distributing the proceeds from the Property would risk offending sections 3 and 5 the Russia Regulations.

The Court began by finding that Angophora controlled the Property by holding the Enforcement Order. Although Angophora itself was not a designated entity under the Russia Regulations, the Court found a strong prima facie case that Angophora was controlled by, or acting on behalf of, Gazprombank. Control of Angophora by Gazprombank was equated with control of the Property of Angophora. This was due to a combination of factors, including the following:

• Gazprombank’s 50 per cent indirect ownership interest in Angophora would meet the definition of control under U.S. sanctions law
• Gazprombank advised Angophora in relation to the transaction with Mr. Ovsyankin and the acquisition of Grooks
• Grooks’ four subsidiaries in Russia were primarily overseen by advisors of Gazprombank
• A Chief Financial Controller of one of Grooks’ Russian subsidiaries took instructions from Gazprombank and reported directly to Gazprombank’s management board
• Angophora’s Enforcement Order proceedings were supported by a managing director of Gazprombank
• Angophora’s only witnesses at the London arbitration were employees of Gazprombank

On disposition, the Court found that selling the seized property would not breach the Russia Regulations because the Enforcement Order was granted before Gazprombank became a designated entity under the Russia Regulations, and that civil enforcement proceedings were pursued in good faith. The Court cautioned, however, that before distribution of the proceeds, persons in Canada may wish to be satisfied that they are not facilitating or engaging in a prohibited dealing in breach of the Russia Regulations.

KEY TAKEAWAYS

The Court decision signals a willingness to interpret the Russia Regulations broadly. Among other things, the Court noted that the purpose of the Russia Regulations is to “seek to impose an economic cost on Russia” and stated that sanctioned companies must not be allowed to circumvent sanctions by “continuing to have access through non-designated parties that they control.”

Whether this approach will be followed by other Canadian courts and regulators remains to be seen. In any event, given the significant reputational impact of potential noncompliance with Canadian sanctions, and the importance that the Canadian government places on the Russia Regulations, businesses should be careful to ensure that their practices are entirely compliant with the requirements of Canadian sanctions laws with appropriate regard to the government’s policy objectives, including the impact on property of subsidiaries of sanctioned persons.

For further information, please contact:

Roy Millen                                  604-631-4220
Vladimir Shatiryan                     416-863-4154
Brady Gordon                            604-631-5255

or any other member of our International Trade or Financial Services Regulatory groups.