Friday, June 8, 2012

The TNK-BP Joint Venture and its Confidentiality Dispute



The dispute


As reported by the financial press, BP intends to sell its stake in the TNK BP joint venture which displeases its partner AAR. AAR claims the violation of its existing shareholder agreement with BP which, according to AAR, does not allow to give any confidential information about the joint venture to third parties.











AAR Advisory Board members Leonard Blavatnik, Mikhael Fridman, and Viktor Vekselberg













AAR Advirsor Board member German Khan


An in-depth analysis of this litigation necessitates the analysis of the shareholder agreement and the joint venture, both in light of Russian (or any other applicable) law. However, what I would like to do today, without having access to this detailed information, is to write about the major issues that play a role in this litigation:


Confidentiality clauses

Let's first start with some general comments on confidentiality clauses and their main content:




To show you what lawyers are able to do when you leave them without control, please read the following example of a typical definition of confidential information.


Confidential Information shall mean, with respect to a party, all information (and all tangible and intangible embodiments thereof), which is owned or controlled by such party, is disclosed by such party to the other party pursuant to this Agreement, and (if disclosed in writing or by another tangible medium) is marked or identified as confidential at the time of disclosure to the receiving party, or (if otherwise disclosed) is identified as confidential at the time of disclosure to the receiving party and described as such in writing within thirty (30) days after such disclosure. Notwithstanding the foregoing, Confidential Information of a party shall not include information which, and only to the extent that, the receiving party can establish by written documentation (a) has been generally known prior to the disclosure of such information by the disclosing party to the receiving party ; (b) has become generally known, without fault on the part of the receiving party ; (c) has been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations ; (d) has been otherwise known by the receiving party free of confidentiality obligations prior to the disclosure of such information by the disclosing party to the receiving party ; or (e) has been independently developed by employees or others on behalf of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party as evidenced in writing (each, a Confidentiality Exception).


262 words in 2 sentences! This is a score of 24.49 on the Gunning Fox index and means that you need 24 years of formal education to understand the text on a first reading. Good luck!

By the the way, did you know that Goethe was a lawyer? Obviously, the profession has changed since his death in 1832.






Confidentiality vs. prohibition of assignment

The details of the confidentiality clauses agreed upon by BP and AAR are not public. However, I doubt that the “real” litigation is about confidentiality issues here. It seems to be more about preventing BP to sell its stake in the joint venture and, if BP succeeds nevertheless, to obtain maximum damages. However, can you forbid your partner in a shareholder agreement to sell his shares in the future?

The first obvious answer to this question would be “Why not? After all, if he signs, it is his own fault because he knew it before.” This line of reasoning is called freedom of contract and is actually a fundamental civil law principle in most jurisdictions.

However, the problem here is that forbidding someone to sell his own shares impairs his property rights. As property rights and their design are part of people's fundamental rights, the above described agreement conflicts possibly with the state's constitution which usually contains people's fundamental rights.

In in the particular case of shareholder agreements, it is widely accepted that,

  • on the one hand, a joint venture often necessitates a binding engagement of the partners over a specific period of time (If everybody can step out immediately, it is no more a joint venture!);
  • on the other hand, you cannot bind your partner forever.

Having said that, the balance between freedom of contract and the fundamental property rights will usually involve 2 main aspects:

  • Time (Depending on the project, an engagement period of 10 years may be a good benchmark for the validity of a prohibition of assignment.)
  • Serious and legitimate reason (To limit a person's property rights you need such a reason. Examples include social welfare, other interests of the community, and the profitability of the project.)


Resources:

  • “Oligarchs threaten BP's Russia sale plans” in FT dated June 3, 2012
  • “Russian watchdog targets TNK-BP dispute” in FT dated June 6, 2012