Update on Russian case law regarding trying to force BNY and Raiffeisenbank to convert ADRs through the Russian courts

In this post we provide a sixth update on recent Russian court decisions. 

Case 6: If you did not apply for 'Forced Conversion' in 2022 you can't ask a Russian court to force Raiffeisenbank to do so now 

This case involves Ms Staroseltseva that bought depositary receipts of Polyus in August 2023. She was allowed to do so since Polyus was granted an extension of their depositary receipts program beyond April 2022 by the Russian government committee. 

However, as the purchased the depositary receipts beyond the deadline for forced conversion in 2022, she could not participate in the forced conversion. 

She therefore decided to start legal proceedings against BNY and Raiffeisenbank Russia in the Russian courts. She was trying to get a Russian court order that would force Raiffeisenbank Russia to take the underlying shares out of the depositary account for the Polyus depositary receipts program and to transfer these ordinary shares to her own account. 

The Moscow arbitration court and the appellate court interestingly did not really go into the case against BNY, but only looked at the arguments of Raiffeisenbank Russia as defendant. It would have been interesting if the courts would indicate whether the Russian courts are competent to consider cases against BNY. 

The courts determined that the legislator had limited the period for forced conversion on purpose and that it would be inappropriate for the Russian courts to establish another mechanism for forced conversion outside of the Russian law that specifically covered forced conversion. 

The courts therefore rejected the case. All the case materials can be found here: https://kad.arbitr.ru/Card/2be0d8e0-36d4-4b39-9077-090a107d0c21 

Why is this case interesting? 

This case shows that it is difficult for holders of depositary receipts to try and get their depositary receipts converted through the Russian courts. The Russian courts seem to take the approach that investors had the opportunity to apply for forced conversion via the established mechanism in the Russian legislation. 

We do not find the argumentation of the Russian court convincing as the Russian courts have allowed for 'forced transfers of accounting rights' to take place outside of the established procedure for forced transfer. 

To us, a more convincing argument seems that the competence of the Russian courts is more firmly established in Russian law for cases involving Russian ordinary shares that are securities that are issued under Russian law (even if they are held through western brokers). Whereas the competence for the Russian courts in cases regarding depositary receipts (which are normally securities that are issued under the law of the United States) can probably only be established on the basis of article 248.1 of the Russian Arbitration Procedural Code, which was introduced to give the Russian courts competence in cases where foreign sanctions affect Russian entities. 

Given this case we do not share the analysis of GFLO Consultancy (https://gflolaw.com/en/recover-blocked-russian-shares-adrs/) who seem to advocate pursuing cases against western brokers and depositary banks in the Russian courts in order to get a Russian court order that would force the Russian custodian bank to transfer the underlying shares of the depositary program to the account of the investor pursuing conversion of the depositary receipts.