Key Aspects:

• In the pivotal case of Rusal (involving Deripaska & Vekselberg) versus Rio Tinto, Australia’s Court’s reasoning contributes to interpretive standards, not only regarding Supervening Illegality clauses in sanction compliance but also in understanding the concepts of Benefit and Indirect Control. 
• The decision notably underscores the importance of going beyond mere formal ownership percentage calculations. The Court articulates "While that approach to calculating indirect shareholding interests provides an appropriate estimate of economic interests, it tends to mask the actual degree of control or influence that might be wielded at various levels of the corporate hierarchy."
• This nuanced, almost teleological approach to legal interpretation influences the conventional understanding of the 50% rule in sanction compliance, spotlighting the importance of the context and the underlying spirit of associated legislation and not just the letter. 

Context

In the landmark case of Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43, that ultimately opposed Oleg Deripaska’s and Viktor Vekselberg’s Rusal to Rio Tinto, the Federal Court of Australia was tasked with navigating the complex interplay between international sanctions, contractual obligations, and the principles of statutory interpretation. 

The dispute centered around the impact of Australian Government sanctions against Russia, following its invasion of Ukraine, on the operations of the Gladstone alumina refinery, operated by Queensland Alumina Ltd (QAL) in partnership with subsidiaries of the Russian Federation-registered company, United Company Rusal IPJSC (UC Rusal), and entities within the Rio Tinto Group.

The Legal Dispute

The applicants, Alumina and Bauxite Company Ltd (ABC), Rusal Limited, and JSC Rusal, subsidiaries of UC Rusal, argued that QAL's cessation of alumina production and delivery under their contractual arrangements violated their rights. QAL and the Rio parties counter-argued, citing the sanctions as a legitimate basis for suspending their contractual obligations.

Central to the dispute was the interpretation of the Autonomous Sanctions Act 2011 (Cth) and the Autonomous Sanctions Regulations 2011 (Cth), particularly the definitions of "sanctioned supply" and the provisions relating to dealings with designated persons. The court was asked to determine whether the delivery of alumina by QAL to the applicants constituted a "sanctioned supply" and if the sanctions constituted a force majeure event that relieved the parties from their contractual obligations.

Understanding the Entities and Persons in the Lawsuit

Rio Tinto Group is a British-Australian multinational company that is the world's second-largest metals and mining corporation.

Queensland Alumina Limited (QAL) is one of the largest alumina refineries in Australia. It is owned by Rio Tinto Ltd (80%) and Russian aluminum producer United Company Rusal International PJSC (20% through its subsidiaries).

The parent company of United Company Rusal International PJSC is En+ Group IPJSC, which is also a company registered as an international public joint stock company in the Russian Federation, and which holds approximately 56.88% of the shares in UC Rusal. Messrs Oleg Deripaska and Viktor Vekselberg indirectly hold significant shareholdings in UC Rusal.

Understanding of Key Shareholdings: From EN+ to Queensland Alumina Limited

Interestingly enough, the judge, before venturing into analysis of the actual dispute details the shareholding structures of Deripaska and Vekselberg, highlighting that “While that approach to calculating indirect shareholding interests provides an appropriate estimate of economic interests, it has a tendency to obscure the degree of control or influence that may be able to be exercised at each level of the corporate tree. For that reason, the following paragraphs set out details concerning the relevant chain of shareholdings.”

Oleg Deripaska’s holding structure

UC Rusal Holdings:

Deripaska holds a 0.01% direct shareholding in UC Rusal through a nominee.

Deripaska has an overall interest in UC Rusal of approximately 25.58%.

En+ Holdings:

Mr. Deripaska holds approximately 44.95% of the issued shares in En+.

En+ holds approximately 56.88% of the shares in UC Rusal.

Effect of the 2020 transaction:

On 6 February 2020, En+ acquired 21.37% of its own shares from VTB Group.

While the acquisition was intended to simplify En+'s ownership structure and conform with the OFAC (Office of Foreign Assets Control) Agreement, Deripaska's effective financial interest in En+ increased to 54.56%.

Mr. Deripaska's effective financial interest in UC Rusal also increased to 31.03%.

Voting Rights:

Deripaska is prohibited from voting more than 35% of En+ shares, as per the agreement with OFAC.

Voting rights above that level are assigned to a voting trust obligated to vote in the same manner as the majority of shares held by shareholders other than Mr. Deripaska.

Other Shareholders:

Glencore holds 10.55% of the shares in En+.

En+'s subsidiary holds 21.37% of the shares in En+.

Viktor Vekselberg’s holdings

The judge asserts that  “it is common ground that he holds substantial indirect interests in the issued shares in SUAL (which, as stated above, holds approximately 25.52% of the shares in UC Rusal). 

Through the Renova Group, Mr Vekselberg holds:

(a) directly and indirectly all of the shares in New Aluminium Investments ILLC, which holds approximately 36.39% of the shares in SUAL; and

(b) approximately 42.28% of the shares in EMP Group LLC, which holds all of the shares in Aluminvest Holding ILLC, which in turn holds approximately 30.56% of the shares in SUAL.

Mr Vekselberg’s effective financial interest in UC Rusal is therefore approximately 12.58%”. 

The Case’s Arguments and the Supervening Illegality

The applicants contested that their participation in the QAL alumina joint venture and the consequent supply arrangements did not, and would not, contravene the Australian sanctions. They argued that their activities did not directly benefit any sanctioned entities or individuals within Russia. 

On the other hand, QAL and the Rio parties presented a defense grounded in the legality of their actions under the sanctions regime, asserting that the sanctions rendered the performance of the contracts illegal or, alternatively, constituted a force majeure event that excused performance.

The court's decision rested on a nuanced interpretation of the Autonomous Sanctions Regulations, the contractual provisions, and the principles of statutory interpretation. Justice O'Bryan meticulously dissected the legal and factual matrix to conclude that the actions of QAL and the Rio parties did not constitute a breach of contract. Instead, the imposition of sanctions by the Australian Government created a supervening illegality and force majeure that justified the cessation of alumina production and delivery to the applicants.

The notion of Indirect Benefit

The Court asserted that alumina delivered by QAL to ABC post-March 19, 2022 (after Australia designated the two businessmen), would likely have been destined for Russia to meet the demands of the Rusal Group. Consequently, financial benefits for either ABC or the Rusal Group, contingent upon the transfer price, would have ensued.

Most interestingly, even in the hypothetical scenario where UC Rusal and/or ABC successfully undertook measures to prevent the physical transfer of alumina delivered to ABC from the Gladstone Plant to Russia, the indirect or direct result of such delivery would have been the transfer of alumina for the financial benefit of UC Rusal.

In Para 427 of the judgment, it resumes perhaps the very essence of the issue of indirect benefit that has the potential to assess all types of sanction analysis, the direct and indirect beneficial ownership. 

A direct quote from para 427 “QAL indirectly makes the Gladstone Plant available for the benefit of Messrs Deripaska and Vekselberg. The benefits are not merely trading benefits to ABC which flow through to the ultimate shareholders of the Rusal Group. The benefits include the improved trading conditions for UC Rusal’s aluminium smelters in Russia, as explained earlier in these reasons. Even in the case of trading benefits to ABC, the retention of profits by ABC does not remove the financial benefit obtained by UC Rusal and its ultimate shareholders; the retention of profits results in an increase in value in ABC which is a benefit to UC Rusal and its ultimate shareholders. It follows that compliance with the terms of the Rusal Group Undertaking does not remove the risk of a contravention of the Russia Sanctions”.