The High Court ruled on the balancing payment due on the termination of a joint venture.
Background:
The parties are two businessmen who entered into a joint venture related to Moscow retail sites around 2014. The formal joint venture shareholders agreement was only signed in 2015 with an equal split between Mr. Rogachev and Mr. Goryainov. Six markets came into the joint venture: K24, K25, LB 30, U26, V177 and M1. The joint venture was unsuccessful and short-lived. By around the summer of 2015, Mr. Goryainov requested and Mr. Rogachev agreed to terminated it.
The parties were then unable to agree upon financial terms as part of the termination of their business relationship. What has been agreed is that, post-termination, Mr Rogachev will own K24, K25 and LB30, and Mr Goryainov will own V177 and U26; a large part of V177 being subject to a lease in favour of the supermarket chain Lenta.
Mr. Rogachev issued proceedings against Mr. Goryainov in December 2018 in the High Court and obtained a without notice freezing order against Mr. Goryainov, which was later discharged due to a failure by Mr. Rogachev to give full and frank disclosure.
The current proceedings involved three questions; what did each party put in, what has each taken out and finally, what is the value of the sites retained by each of them. Mr. Rogachev claims that a balancing payment of US$28 million is due to him while Mr. Goryainov argued that a balancing payment of around US$116 million is owed to him.
Decision:
HHJ Johns KC conducted a careful analysis of the fact to answer each of the three questions. Ultimately, he found in favour of Mr. Rogachev. Based on the facts, Mr. Rogachev did contribute more to the acquisition of V177. The Court asked itself whether the cost of borrowing, namely loan interest, to raise funds for capital expenditure could itself counted as part of the capital expenditure. The Judge decided that such loan interest should be part of Mr. Goryainov's capital expenditure.
As the Court noted “A key element in determining profit is, of course, revenue” which resulted in an analysis of what the party took out. The valuation was the hardest part due to the different nature of the sites; U26 is a food hall, V177 is a shopping centre with Lenta occupying a very significant area of it as an anchor tenant and K24, K25 and LB30 are farmers' markets. There was also a problem as the experts did not apply the same currency to the valuation, with one providing it in US dollars and the other in Russian ruble. HHJ Johns KC decided to carry the valuation in rubles to reflect the market reality.
The precise calculation of that amount will be the subject of further expert work before a consequential hearing to take place in December.
Implications:
This case is fact heavy but it highlights the importance of choosing experts well. This decision also highlights the need to have clear clause in case of termination but also keep record of the transactions. It is also important for any valuation to reflect the market reality and be express in the currency applicable to the country.