Interview with Vladimir Furman for Magazine “Accountant and Law”: Raiding: Definition, Essence and Legal Protection

- Raiding. When did this phenomenon appear in Kazakhstan?

Such human evils as greed, money-grubbing and aspiration to enrich oneself at the expense of another person underlie the phenomenon of raiding. The term “raiding” has come to the modern vocabulary from the English language. “Raiding” is translated as “invasion”, “attack”, “intrusion”, “raid”. Within this meaning, raiding has gone along with the human history from primitive times, when the strongest would take away prey from the weakest, until today when an invader in tandem with administrative resources misappropriates a commercially attractive enterprise.

In our understanding, raiding appeared with birth of a human being and will go along with him constantly. With enhancement of legislation and rise of ethic level and moral standards, however, this phenomenon will be fading away but will unlikely disappear for good.

What is raiding? Raiding is a means of misappropriation of another person’s property.  It is “easier to take something away than to create this something”.  Those who misappropriate another person’s property are never engaged in production or rendering of services. Raiding gives a possibility to acquire a “fast buck” – seize an enterprise and sell it at a higher price…

In Kazakhstan, the raiding phenomenon existed in Soviet times, when there was no private property, but there were vast pastures.  At first, the Party reported about enormous harvest and then about soil erosion and disutility of flora and fauna.  This phenomenon also manifested itself in labour relations when a professional and experienced specialist would be assigned to supervise over a complicated field of production operations.  Such specialist would take production on the right track, but would eventually be replaced by a relative, a friend, etc. 

With the advent of private property, temptation to take possession of somebody’s private property naturally escalated.  Initially, this phenomenon was referred to simply as “racketing” and eventually “raiding”, where not brigandish methods of raiding but methods with involvement of state officials were directed towards legal entities.

Within the meaning defined in the legislation of Kazakhstan, raiding appeared in Kazakhstan together with the advent of private property institute and has its own periodicity. The beginning of the first period of raiding in Kazakhstan coincides with the period of privatization, the second period - with the end of the 90-s and the third period – from 2008 until today.

- What are the features based on which you can determine that a corporate raid is planned in relation to your enterprise?

First of all, an enterprise must be successful, commercially attractive and have a potential; its foundation documents are far from perfect; statutory procedures and procedures set forth in the enterprise’s foundation documents for corporate decision-making and for alienation of participatory interest in the charter capital are not observed; there is a heavy credit debt; the enterprise’s entrepreneurship activity depends on intellectual property (trade mark, industrial design, firm name) that is not duly registered; there is a conflict between shareholders (participants) of the enterprise; blood/friendly/marital relations between participants are in place; there are corporate relations that are not duly specified in respective documents; internal conflicts, i.e. conflicts between the enterprise’s owner and its managers, are in place, etc.  

If, with one the above features in place, minority shareholders/owners of participatory interests file different kinds of, factitious as a rule, claims, the purpose of which is to dispute corporate decisions or to obtain relevant information relating to financial reporting, composition of participants/shareholders of the enterprise, capital structure, etc., when at the same time the enterprise becomes a subject of different kinds of checks (of fire engineering services, financial police, customs authorities, tax authorities, etc.) in the course of which the enterprise is requested to provide documents, and newspapers eventually print dirt about the enterprise, there are serious grounds to believe that a corporate raid is planned against your enterprise.

-         How does a typical scheme of a corporate raid look like?

As a rule, a victim provokes raiders itself.  One should not breach laws.  For corporate raiders, it is important to find the enterprise’s vulnerable spot.

A corporate raid of an enterprise can be performed by the following four main means. The first means is through the enterprise’s capital.  In order to call for a shareholders meeting and make a decision favourable for the raiders’benefit (for instance, change of the enterprises management), raiders purchase minority block of shares or participatory interests in the enterprise.  The second means is through the enterprise’s management. The enterprise’s management team transfers assets of the enterprise to its daughter companies or draws upon a credit at a large interest or all or almost all of the enterprise’s property is pledged. The third means is through credit indebtedness. In case if the enterprise has a few relatively small debts, raiders purchase such debts and eventually request simultaneous repayment of the debts. And the fourth means is through bankruptcy of the enterprise.

Professional raiders conduct a raid attack as much off-screen as possible.  Only after having collected all information and elaborated a raid plan and its partial realization, raiders start undertaking open actions rapidity and scale of which takes the enterprise’s management and its owner by surprise.  Eventually, security guards of the enterprise change and the former management is now allowed in.

-         How are raiding and corruption interrelated?

The main essence of raiding is illegal acquisition of a property right (on enterprises, as a rule) and establishment of control. As mentioned above, during the raid “troops” of representatives of law-enforcement bodies and of controlling state authorities that earlier treated activity of the seized entrepreneur or a legal entity with favour, start massive “landing” at the captured object.  Not only various sanctions in form of penalties, bans, limitations apply to the captured object but also permits or permitting documents, including those which form basis for development of the enterprises business, are “suddenly” revoked on various grounds.

Property right, for instance, on shares, participatory interests, immovable property, is subject to registration.  In cases of raiding, registration of such property is done on the basis of an illegal court judgement. Accordingly, there is a direct link between raiding and corruption.  The higher the corruption level the easier it is to perform a corporate raid of an enterprise, the more raid attacks take place.

-         To misappropriate enterprise, perhaps it is sufficient to have a manager of this enterprise interested in such misappropriation, whereas misappropriation of a large proprietary subject is virtually impossible without assistance of state officials.  It is possible to buy something without assistance of state officials but it is feasible to take this something away only with their assistance.  In your view, how important is it to have connections in governmental institutions for a successful raid operation?

I agree that it is sufficient to have a manger of a small or medium-size enterprise interested in misappropriation.  In principle, a manager may create one of the conditions for a raid. As a rule, when setting up an enterprise founders do not pay due attention to contents of foundation documents, especially in part of authorities of an executive body, as a result of which a chief executive officer has vast powers.  A top officer with practically unlimited powers may create a debt (if it is possible to negotiate with the officer) that can be used for attachment of property or paralyzing of the enterprise’s activity before selling the enterprises property through a tender or before initiation of a bankruptcy case. The enterprise or its property may eventually be purchased at a give-away price.

In a majority of cases, misappropriation of a medium or even a small-size enterprise, however, can be done not only by means of buy-out of credit indebtedness but also through other schemes specified above.  For purposes of misappropriation, it is necessary to collect a large amount of information about the enterprise and its owners. Larger portion of such information constitutes commercial secret, and it is not possible for a raider to collect such information officially. Therefore, such information can be collected with the assistance of state officials in the course of various checks.  As said above, in cases of raiding, registration of such property is done on the basis of an illegal court judgement.  Accordingly, illegal misappropriation of property is not possible without state officials.

-         Were raiders affected by the crisis?

On the one hand, the crisis decreased a number of raids; on the other hand, the crisis spurred it up.   Powerful enterprises with efficient and well-functioning management and developed connections held out in the crisis.  This is one category of enterprises not affected by the crisis. Another category includes enterprises the demand on services or products of which decreased. The third category includes enterprises affected by the crisis, which, however, can be in demand in the foreseeable future and, from a commercial perspective, have a high profitability potential.

At the moment, the first and the second categories present certain interest for raiders.  In addition, we consider that in view of drop in prices on immovable property and closing down of construction business, the main bulk of small and medium-size enterprises in the construction field were forced to terminate their activities.  Owners of formerly successful businesses having liquid assets and connections in governmental institutions would certainly aspire to enter another market and occupy a niche. Accordingly, raids would take place in new areas of entrepreneurship that are not typical for raiding.

-         On 11 January 2011 the Law of the Republic of Kazakhstan “On Introduction of Amendments and Changes into Certain Legislative Acts of the Republic of Kazakhstan on Fighting Illegal Misappropriation of Business and Ownership (Raiding)” was signed by the President of Kazakhstan N. Nazarbayev. What is your opinion, as a lawyer, on these amendments and changes introduced into the legislative acts and the Civil Code of RK? In your view, are all problems regarding to corporate raids of companies encompassed by this document?

This Law amended, among others, the Criminal Code of RK, by introducing Article 226-1 “Raiding” that envisages criminal liability for illegal acquisition of a property right on participatory interest in a legal entity (property, securities) and establishment of control over the legal entity as a result of the actions enlisted in this article. Under this Article, the minimum punishment is a penalty in the amount of 5,000 monthly calculation indexes, the maximum punishment is imprisonment for a term of seven years and up with confiscation of property and deprivation of a right to occupy certain positions.

Adoption of this Law is a progressive step forward that will certainly fight raiding and stop many from committing this crime, especially state officials who fall within the scope of Article 226-1.3 (b) of the Criminal Code of RK.

In our view introduction of such strict sanctions for raiding, however, will not eradicate this phenomenon in Kazakhstan.   Raiding will take place in our society because the law and the people who apply the law are not perfect. Raiders will use shortcomings of the legislation, look for flaws, and raid attacks will be more elaborated and sophisticated.

Raiding is a sophisticated use of legislation and administrative resources in-situ for respective purposes.  President of Kazakhstan extensively discussed this issue: “There are big corruption niches in the legislative acts governing regulatory approval system, control and supervision areas and state procurement.  Real practice on application of legislation demonstrates that legislation is often used for creation of artificial administrative barriers for development of small and medium business.”

Raiding is a rather complex phenomenon, and at times even the most objective judge may have difficulties to establish whether a state official acted with intent or such official’s actions are mere negligence or incompetence.

The Law also introduced amendments and changes into the Law “On Partnerships with Limited and Additional Liability”:

“Article 34.3 to be amended by adding part two that reads as follows: “compulsory buy-out of  participatory interest from a participant of the limited liability partnership shall be performed at a market price appraised by an independent appraiser conforming to the requirements established by an authorized body conducing state regulation in the field of appraisal activity on the basis of international standards.”

The Law must be clear and drafted in a way to exclude double interpretation. The above amendment may be construed differently because it is not clear where and to who the phrase “on the basis of international standards refers to: an independent appraiser or to authorized body?  Possibility for such double interpretation may cause difficulties in understanding during application of the legal norms.

Adoption of any law and introduction of amendments and changes into the legislation is a reaction to a systemic phenomenon that already exists in the society and requires legislative regulation.  According to Sir Winston Churchill “Different kites and deceivers committing various deeds do not even realize how they assist the society.  By analyzing their deeds, the society perfects the laws lived by.”

At first, a phenomenon must emerge and eventually become a phenomenon of systemic nature to have the society regulate it by law. Raiders are always one step ahead.  In Kazakhstan, they were speaking about raiding at least six-seven years ago, however, only this year the legislation on raiding has been adopted. 

Raiding is a complex phenomenon, and at times statutory requirements and the way an individual realizes protection of own rights may have features of raiding, but may not be raiding as such. Oppositely, a well-elaborated raid attack can be well disguised and be given a look of a legal activity.  Perhaps such category of cases should be adjudicated not by a sole judge but collectively, and even by a jury, because such judges would be much more difficult to manipulate.

Due to the above reasons the Law “On Introduction of Amendments and Changes into Certain Legislative Acts of the Republic of Kazakhstan on Fighting Illegal Misappropriation of Business and Ownership (Raiding)” is not perfect and will certainly be subject to amendments and changes. The phenomenon of raiding will exist until and unless the Law will be vigorously observed.  Only this can significantly decrease a number of corporate raids.  The legal database that existed before adoption of the Law provided great opportunities for fighting this evil.

-         Are there any distinctive features of the Law from the Russian law?

I am not an expert in Russian law, however, as far as I am aware the Russian legislation does not contain a definition “raiding”.

- To date, are there protection measures against raiding?

First of all, foundation documents must be thoroughly elaborated and, if necessary, amended and changed.  The same applies to various internal rules regulating procedures for corporate actions.  In their activity, raiders generally use flaws and shortcomings in the foundation documents, internal rules and breaches of the legislation made by an enterprise that are a target of a corporate raid.   For this purpose enterprises should not allow any “gray” and “shadow” wages, accounting, and activities.  Entrepreneurship activity must be conducted in strict compliance with the legislation in force.

-         From your perspective, will the changes adopted in the Law on Raiding solve the problem of raiding in Kazakhstan?

No, they will not. First of all, human flaws underlie raiding that will always accompany humans. Second, as said above, there are not any perfect laws and these laws are executed by imperfect people. Furthermore, according to a popular belief, profitability of “business” in form of raiding constitutes from 500% to 1,000%.  In our view, under market conditions, the theory of capital will take place of which C. Marx in his famous piece of work “[…] a certain 10 per cent will ensure its employment anywhere; 20 per cent. certain will produce eagerness; 50 per cent., positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent., and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged.”

Only constant and practical enhancement of the legislation and its rigorous observance will thwart raiding.

Авторы: Фурман В.

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