Position of NLМК OJSC in the dispute regarding the purchase of Maxi-Group OJSC and the events associated with it
At the end of 2007, NLMK and Nikolai Maximov concluded a share purchase agreement on the acquisition by NLMK of a controlling interest in Maxi-Group (OJSC Maxi-Group and its subsidiaries). In concluding this agreement, NLMK aimed to expand its business activities by acquiring a promising enterprise involved in the production of long products.
The rights of NLMK as the buyer were protected by the structure of the transaction, which provided for payment to be made in two stages: 1) an advance payment would be made to Maximov upon the signing over of ownership rights to the shareholding to NLMK; and 2) payment of the final balance would be performed following the completion of due diligence, a standard procedure for transactions of this nature. The rights of the buyer were also protected through the warranties and representations made by Maximov, as relating to all material aspects and the standing of Maxi-Group companies.
The formula used to calculate the value of the assets was based on information supplied by Maximov and his assurances that at the time of the conclusion of the agreement, Maxi-Group companies were in line with a wide range of preconditions that had been agreed upon; and were not under threat of bankruptcy.
Having received operational control over the asset and having begun to perform due diligence, NLMK became aware that the financial situation of Maxi-Group was radically different from that which had been promised. The financial checks on Maxi-Group and its subsidiaries were made difficult by a sabotaged accounting system; and the destruction of original documentation. It took several years of legal dispute, with over a hundred legal cases and countless appraisals, in order to produce an accurate picture of the condition that Maxi-Group was in at the moment of the acquisition; and to therefore assess the scale of the violations that Maximov and his associates were guilty of during the sale of the controlling interest in the company.
Maxi-Group’s financial statements turned out to be inaccurate; its receivables were irrecoverable; and its payables were significantly larger than that which Maximov had declared when the agreement with NLMK was concluded.
In fact, at the time of the transaction Maxi-Group had no market value. Most of the organizations within Maxi-Group had a negative net-asset balance. 62 of the 73 companies in Maxi-Group were insolvent and bankrupt, were in the red.
A critical working capital deficit arose as a result of a number of factors including unrecoverable receivables of more than 10 billion rubles. When the acquisition was concluded, Maximov provided assurances that these receivables were recoverable and stemming from arm’s length transactions. As a result, these receivables were accounted for when determining the total value of Maxi-Group as a concern. In reality, debtors turned out to be organizations controlled by Maximov himself. He opted against fulfilling his market liabilities and resolved to bankrupting the debtors even before the financial and legal due diligence of the Group was complete. Accounts receivable turned out to be irrecoverable and requiring of immediate provisioning. Ural District courts would subsequently quality Nikolai Maximov’s model of conduct as potentially detrimental to the investment processes and the entire business (see Order of the Seventeenth Arbitration Court of Appeal d.d. 27.02.2012 on case # А60-1260/2009 and Order of the Arbitration Court of the Sverdlovsk Region d.d. 24.03.2014 on case #А60-32798/2007).
Maximov also misled NLMK in terms of the amount of Maxi-Group’s debt. The actual amount of accounts payable exceeded the promised level by eight billion rubles, totaling over 54 billion rubles. This was a crucial factor, given the fact that NLMK would bear the full burden of refinancing these loans. This meant that at the time the transaction with NLMK was concluded, Maxi-Group in actual fact did not belong to Maximov, but rather to external creditors.
The Share Purchase Agreement between NLMK and Maxi-Group was annulled by the court in 2014 as a transaction concluded under influence of fraud perpetrated by Maximov. Maximov was ordered to refund the advance payment of 7.3 billion rubles to NLMK (see Order of the Moscow Arbitration Court d.d. 07.04.2011 on case #А40-26424/2011). This decision was supported by competent courts at all levels. The final award on the dispute was made by the Supreme Court of the Russian Federation on April 9, 2015. The court noted that NLMK had acquired shares in a loss-making business as a direct result of Maximov’s fraudulent actions; which was clearly at odds with NLMK’s declaration of intent at the time of the transaction.
Before the SPA was annulled, Maximov made an attempt to claim a part of the purchase price from NLMK by filing a lawsuit with the International Commercial Arbitration Court (ICAC) at the Chamber of Commerce and Industry (CCI) of the Russian Federation. In the course of the ICAC proceedings, Maximov, acting though his representatives, backed out of the warranties and representations he had signed at the time the deal was made. Nevertheless, in 2011 the ICAC made an unlawful award in favour of Nikolai Maximov.
Several months later the ICAC award was overruled by a competent court in light of procedural infractions and violation of the principle of legality and public order in the Russian Federation. This ruling was supported by higher courts, including the Supreme Arbitration Court of the Russian Federation (see court orders on Moscow Arbitration Court case #35844/11).
As a result of acquiring Maxi-Group shares, and considering the crucial role Maxi-Group companies play for the local communities in their regions of operation, NLMK was obliged to refinance all the Group’s bank loans. NLMK’s total expenditure associated to the acquisition of Maxi-Group exceeded 62 billion rubles.
Protecting its rights as the main debtor of Maxi-Group companies, NLMK instituted recovery proceedings against a number of share stocks of the Group’s companies. Several companies, including OJSC Maxi-Group itself, were declared bankrupt. These bankruptcy proceedings are currently still ongoing.