Caspian Business Journal

Legal Developments in the Caspian Region

In this month’s legal column, Kenyon S. Weaver talks to GRATA Law Firm’s U.S. Representative Arlan Yerzhanov about what foreign investors need to look out for in the year ahead in Kazakhstan. He also takes a closer look at what those looking to ship freight from the U.S. to Central Asia can learn from Ace Motors v. Total Transport, Inc. Interview with Arlan Yerzhanov of the GRATA Law Firm (Part I).

Before the winter holidays, I sat down with Arlan Yerzhanov, a Partner and the Representative in the United States for GRATA Law Firm. GRATA, a Kazakh law firm, is not only the largest law firm in Central Asia (with an office in Baku, too) but is unique in its Western reach, with lawyers in London and New York City.  To say that 2009 was an interesting year for Kazakhstan would be an understatement, and over espresso I had the opportunity to ask Yerzhanov what 2010 would bring and what foreign investors with an eye on Kazakhstan should expect.

CBJ: Will foreign participation in the Kazakh economy be different in 2010 than it has been in years past, and why?

Yerzhanov: Foreign participation in the Kazakh economy will be different, and the reason is the world financial crisis and Kazakhstan’s integration into that world financial system. Kazakh banks borrowed money from abroad and injected the money into the Kazakh economy. Well, that credit from abroad has dried up.  Thus, the usual way of providing credit to Kazakh businesses is no longer an option. Foreign investors into the Kazakh economy now have to figure out other ways.

CBJ: And what are those? What are the options for foreign investors who see profit opportunities in the Kazakh economy?

Yerzhanov:Equity, mergers and acquisitions. But because equity is a road travelled only by the largest companies, 2009 and 2010 will be years of M&A in Kazakhstan.  IPOs are no small thing, as everyone knows. Meanwhile, the Kazakh economy is growing again, and it will continue to grow in 2010, and in lieu of direct loans via banks, M&A will grow. GRATA is seeing many U.S. private equity companies interested because now is the time for them to come to Kazakhstan while the banks are unable or unwilling to provide credit.

CBJ: M&A is no small thing, either. Such private equity investors will – or should – ask what kind of road map they can expect when considering acquiring a Kazakh business. What would such a road map look like?

Yerzhanov: Well, the first thing to know is that Kazakh Law – and specifically Clause 1114 of the Civil Code – provides that Kazakh Law governs any Sales and Purchase Agreement (SPA).  Because Clause 1114 mandates that the transfer of any share of a company be governed by Kazakh Law, foreign investors need to know that that will do to their SPA.

CBJ: Is there a way to avoid having the SPA governed by Kazakh Law?

Yerzhanov: No, and here’s why.  Let’s say that an SPA provides that U.S. or U.K. law govern, and, furthermore, that disputes will be settled by international arbitration. And let’s suppose a foreign investor who is dissatisfied with the result of an SPA takes a case to arbitration and the arbitral panel applies the law as provided for in the contract – U.S. or U.K., whichever it may be.  When it comes time for enforcement, and the foreign investor returns to Kazakhstan, a Kazakh court can say that the SPA or the clause for the provision of U.S. or U.K. law was invalid from the start because it violates Clause 1114 and, accordingly, violates public policy.  Kazakhstan is a signatory to the New York Convention [the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958], but there is a public policy exception in that Convention.  Thus it’s possible that a Kazakh court can reject enforcement.

CBJ: So better to find out what compliance with Clause 1114 – that is, with Kazakh Law – entails.

Yerzhanov: Precisely. And what foreign investors need to know about an SPA governed by Kazakh Law comes down to the clauses. In the U.S. and U.K., the SPAs shift the liability from the target company to the acquiring company. In the U.S. and U.K., standard SPAs have clauses: representations and warranties, conditions precedent, and indemnities.

CBJ: Those clauses shift the liability from the acquirer to the target, and puts the target company at risk of breaching the SPA.  Without those clauses, the acquirer – the foreign investor – now may be left holding the bag.

Yerzhanov: It’s not necessarily true that including such kinds of clauses mean nothing, only that they are meaningful within the context of Kazakh Law, and Kazakh Law is not the same.  Therefore, the clauses – or the clauses as phrased – may not work under Kazakh Law.  Therefore a foreign investor has to know that simply cutting and pasting from a SPA governed by U.S. or U.K. law into the SPA for a Kazakh business will protect the investor.

CBJ: So what can foreign investors do?

Yerzhanov: Due diligence becomes more important than ever. You have one chance to understand exactly what you, the foreign investor, are purchasing because it is extremely difficult to claim, after the SPA is signed, that the target company either breached the SPA or is otherwise liable to you, the foreign investor. And the look into a company’s history may find that history to be full of twists and turns.

CBJ: So, CAVEAT EMPTOR, or “buyer beware.”

Yerzhanov: Company sold “as is.” And remember, the Kazakh target company is interested in putting on its best face.

CBJ: What kind of twists and turns should an investor be aware of?

Yerzhanov: State approvals. Companies can have gone through many changes of ownership over time, and those changes are reflected in the adoption of new company charters. Under Kazakh Law,  however, some companies such as in the mining or energy sectors are required to give the State the right to purchase the shares.  A failure to get a State waiver – proof that the State was offered the chance to buy the shares, but declined to do so – puts at risk the current owner’s ownership.

CBJ: What else?

Yerzhanov: In the simplest terms, lack of consideration actually paid. Transfers of ownership are not complete until the money has actually been paid. Only then can the new owners fully claim that they own the company. The contract transferring ownership may say that money has been paid, but it’s the bank statement that ensures that the new owners are now the rightful owners and, in turn, can sell to a foreign investor.

CBJ: There’s the issue, of course, of certain sectors being off limits or limited with regard to foreign investment.

Yerzhanov: Of course. Media is a good example. There may be ways to ensure that foreign investors who see opportunities in such sensitive sectors may nevertheless be able to invest in such sectors. We have been involved in a number of deals involving foreign participation in a sector that is limited, for national security reasons.

CBJ: And this is just a general road map.

Yerzhanov: We haven’t even gotten into how Kazakh Law distinguishes between joint stock companies and limited liability companies, the two main vehicles for foreign investors looking to get involved in M&A! (End of PART I: In February, read the continuation of my interview with Arlan Yerzhanov, when we discuss about issues in Kazakhstan employment law that foreign investors ignore at their peril.)

Shipping cars from the United States to Central Asia? Ace Motors v. Total Transport, Inc. and the Carmack Amendment.

Ace Motors, Inc. v. Total Transport, Inc. 2009 U.S. Dist. LEXIS 112492 (N.D. Ill., December 1, 2009) is an unremarkable case in and of itself, but it provides a useful window for those shipping freight from the United States and the legal protections afforded to them by the American legal system.

The mundane facts: Kyrgyz businessman Ermek Abdildaev (“Abdildaev”) bought three cars from Ace Motors, Inc. (“Ace”), to be shipped to Kyrgyzstan for resale, two 2006 Lexis LX 470s and a 2000 Toyota Landcruiser.  The Lexis set Abdildaev back $46,300; the Toyota, $15,500.  Abdildaev paid Ace $1,100 in shipping costs.  Ace then hired Total Transport, Inc. (“Total”) to do the actual transporting of the cars to port in New Jersey for shipping to Kyrgyzstan. Along the way to New Jersey, however, Total’s driver wrecked the truck carrying Abdildaev’s Lexis and Toyota (along with 7 other cars), resulting in a total loss of the two vehicles.

Ace filed suit against Total; Abdildaev intervened to file suit against both Ace and Total. In his suit, Abdildaev stated that he had expected to make $2,500 in profit from the sale of the two cars. Both plaintiffs sued pursuant to the Carmack Amendment. While each of the fifty States has its own laws and, accordingly, causes of action for torts such as negligence, Congress passed the Carmack Amendment to preempt all “state causes of action against carriers for lost or damaged goods” [1].

Under the Carmack Amendment, any cargo shipped by a “carrier” or “freight forwarder” as defined by the Interstate Commerce Act is covered. As you might expect, these categories are very broad, including nearly any person involved in the movement of a good [2]. To make a case under the Carmack Amendment, moreover, a plaintiff need only show: “(1) delivery in good condition; (2) arrival in damaged condition; and (3) the amount of damages” [3]. So it’s straightforward.  And because it is federal law, foreign purchasers such as Abdildaev do not have to worry about whether his goods may be damaged in certain States which provide less protection for purchasers than others.

Abdildaev won his motions for summary judgment, having shown that he bought the vehicles in good condition, that they were damaged, and that he suffered a loss as a result. The court held against both Ace and Total, finding that even Ace, the dealer, was subject to the Carmack Amendment, and, accordingly, that they were jointly and severally liable.  Ace Motors may be an ordinary case, but it shows the legal protections afforded foreign purchasers of goods in the United States.

Footnotes:

[1] See REI Transport, Inc. v. C.H. Robinson Worldwide, Inc., 519 F.3d 693, 697 (7th Cir). [2] See 49 U.S.C. § 14709. [3] REI Transport, 519 F.3d at 699 (quoting American Nat’l Fire Ins. Co. v. Yellow Freight Sys., 325 F.3d 924, 929 (7th Cir. 2003).