BULGARIA: 2008 REPORT ON INVESTMENT DISPUTES AND

UNCLAS SOFIA 000406 SIPDIS E.O. 12958: N/A TAGS: EINV KIDE CASC PGOV BU SUBJECT: BULGARIA: 2008 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS REF: STATE 55422 ¶1. The United States government is aware of two (2) claims of U.S. persons that may be outstanding against the Government of Bulgaria (GOB). ¶2. List is keyed according to reftel instructions. (A.) Claimant A (ongoing case) (B.) 2000 (C.) In 1999, Claimant A established a subsidiary. While Bulgaria was undergoing its privatization process, the subsidiary of Claimant A purchased a controlling interest in a Bulgarian fertilizer company and became a primary holder of the fertilizer company's shares. Shortly thereafter, a Ukrainian partner in Claimant A's subsidiary acquired all the claimant's shares in the fertilizer company through a scheme involving a bogus loan. The Ukrainian partner did this by utilizing a separate holding company that it controlled and which was registered in Cyprus. Acting on behalf of the subsidiary of Claimant A, but without its consent or authority to act as power of attorney, the Ukrainian partner signed a loan agreement between the claimant's subsidiary (on behalf of the fertilizer company) and the separate holding company for $4 million in order to purchase pipes. When, as expected, the fertilizer company could not repay the loan, the Ukrainian partner's holding company sued and gained control over Claimant A's subsidiary and consequently acquired all the subsidiary's shares of the fertilizer company. On August 30, 2000, Bulgaria's Regional Court in Vratsa issued a decision regulating the transfer of 86% of the shares (9,683,000 total) of the fertilizer company from Claimant A's subsidiary to the Ukrainian partner's holding company. Shortly after the holding company took over the shares of the fertilizer company, Bulgaria's Privatization Agency agreed to sell the remaining 14 percent of the shares still held by the Government of Bulgaria to the holding company. Since that time, Claimant A has been ensnared in a legal battle centered on questions of jurisdiction and reciprocity. Bulgarian courts claimed that they did not have jurisdiction because the case is between two companies that were registered abroad. And when Claimant A won its case before the New York Supreme Court in June 2001, Bulgaria refused to recognize the New York court's decision because the United States and Bulgaria do not have a reciprocity agreement. However on July 14, 2003, Sofia's City Court issued a decision ordering the Ukrainian partner's holding company to restore the shares it had acquired through the unauthorized loan to Claimant A's subsidiary. In response, the holding company submitted an appeal to the Sofia Appellate Court, and on December 18, 2003 it overruled the decision of Sofia's City Court. Following the above decision, Claimant A submitted an appeal before the Supreme Court of Cassation (SCC),which was heard by its Commercial Division (case No. 144/2004) on June 16, 2004. This is Bulgaria's highest court and its decision was considered final for all parties concerned. On September 10, 2004, a three-judge panel of the SCC upheld the decision of the Sofia Appellate Court in favor of the holding company. On March 8, 2005, a five-judge panel of the Supreme Court of Cassation issued its final decision and turned down yet another appeal. Meanwhile, a separate case went forward in the Vratsa District Court based on a claim made by Bulgaria's state-owned natural gas company and Bulgaria's state-owned electric company to find the fertilizer company insolvent. The court declared the fertilizer company insolvent on December 14, 2004. Despite the District Court's ruling, Bulgaria's Post-Privatization Agency (PPA) initiated legal proceedings against Claimant A for failing to meet commitments under its privatization contract. In addition, the PPA sent, on April 11, 2005, a letter requesting that Claimant A pay $7.4 million for non-performance under the privatization contract. The U.S. Embassy asked the PPA to reconsider this in light of the Bulgarian Court's determination that Claimant A is not the owner of the plant. The director of the PPA responded that it was her understanding that the privatization agreement allowed for 100% of the company shares to be transferred, while all liabilities for performance under the privatization agreement stayed with the buyer. We relayed this information to the attorney for Claimant A with a request to confirm. No response has been received. The privatization agreement in fact allowed for the transfer of shares to third parties, while Claimant A retained all liabilities and responsibilities. There have been no new developments in the status of this dispute since last year's report was submitted. (A.) Claimant B (ongoing) (B.) 1999 (C.) In 1999, Claimant B, through its daughter company, started to develop a copper/gold deposit located in Chelopech based on a contract it had with the Government of Bulgaria, which granted Claimant B concession to mine underground resources (gold, copper, pyrite ore) from Bulgaria's Chelopech Deposit. Though Claimant B is a Canadian company with about 40 percent of the shares held by U.S. companies and individuals, we are including the dispute in this report, as it is considered a landmark case in Bulgaria and significantly impacts U.S. shareholders. In order to proceed with its development of the Chelopech mine, Claimant B was asked to submit an Environmental Impact Assessment (EIA) to the Bulgarian Ministry of Environment and Waters (MoEW.) In November 2005, Claimant B submitted an EIA conducted by an independent team of experts, which was to be followed by EIA public hearings a month later. However, the Ministry of Environment and Waters refused to accept the EIA. In March 2006, Claimant B filed an appeal against the MoEW for its silent refusal to rule on the EIA. At the end of 2006, a three-member panel of Bulgaria's Supreme Administrative Court revoked the MoEW's refusal to respond to the EIA and obligated the MoEW to issue a resolution on the EIA, which the MoEW appealed against. In April 2007, a five-member panel of the Supreme Administrative Court re-confirmed that its Resolution 10363/24.10.2006 was final and that the MoEW must review the EIA. In June 2007, Claimant B filed a claim in the European Commission against the MoEW for refusing to rule on the EIA, which had delayed a new investment worth 250 Million Euro. In response, the GOB tentatively suggested a "compromise." In March 2008, the Bulgarian Prime-Minister and MoEW publicly announced their intention to establish a Public-Private Partnership (PPP) with Claimant B, whereby the state would acquire a 25 percent interest in Claimant B's new copper and gold mining operations. In return, the state would process the project for free. The government explained that the dividend the state would acquire from its interest in its 25% share in the mining operation would go to a so-called "Silver Fund", a government-endorsed pension fund. This pension fund would draw equity from privatization proceeds and concession fees. Claimant B confirmed that it has entered, in-principle, into an agreement with the GOB concerning the proposed expansion of the Chelopech copper-gold mine and processing facility. Although this deal is still tentative, it appears that if it were to occur, Claimant B would be satisfied with the arrangement, as it would enable it to carry on with its investment. This case is not yet resolved. ¶3. Claimant reference list: Claimant A: IBE Trade, U.S. Company Claimant B: Dundee Precious Metals, Canadian-U.S. Company KARAGIANNIS