STATEMENT ON THE SENTENCE OF THE KOMSOMOLSKY DISTRICT COURT OF TOGLIATTI DATED 5 JULY 2019

As promised, Togliattiazot Public Joint-Stock Company (TOAZ PJSC, the Company) is publishing the sentence of the Komsomolsky District Court of Togliatti and the appeals of the Company representatives and the defence. Introducing the publication, we consider it necessary to state the following:

The specified sentence is an obvious miscarriage of justice.

As TOAZ PJSC has repeatedly said, the criminal case in which the sentence is passed, in the opinion of the Company, resulted from the corporate conflict instigated by the minority shareholders – Joint-Stock Company United Chemical Company Uralchem and E.Ya. Sedykin (already convicted by the sentence of the Krasnoglinsky District Court of Samara dated 28 July 2017 for the actions aimed at seizing control over Togliattiazot OJSC) in an attempt to illegally takeover our successful enterprise, to pressurize the management and employees using criminal cases, force protection by law enforcement agencies and unsubstantiated accusations.

We believe that only detailed study and discussion of the sentence would prevent blatant violations of the Law, which might have an effect on both the activities of the efficiently-run industrial enterprise and overall economic activities in the Russian Federation.

Taking into account the considerable volume of the sentence, below we are publishing the aspects with comments regarded by the Company representatives and the defence as the most critical.

1. The sentence claims that all products produced by Togliattiazot OJSC (ammonia and urea), sold to Nitrochem Distribution AG in 2007-2012, was stolen, and the funds received on the accounts of Togliattiazot from Nitrochem in the amount of over RUB 65,5 bln, were allegedly transferred to the ownership of a criminal group, which was impossible in itself.

TOAZ PJSC has been unequivocal in stating that no products of the company were stolen, ammonia and urea were realized under formal contracts with Nitrochem Distribution AG, the funds received (exceeding the costs of goods manufactured almost twofold) were transferred to the ownership of the Company and were spent on its needs. It is impossible to steal the enterprise products fully paid for by the enterprise counterparty and transferred to the buyer.

The fact of transfer of the funds in full specifically to the ownership of Togliattiazot is confirmed by not only the documents presented by our enterprise, but also by the fact that those funds were spent on purchasing raw materials, paying for electricity, paying taxes, salaries to the factory personnel as well as dividends to the company shareholders, including Joint-Stock Company United Chemical Company Uralchem and Sedykin. The court's contention in the sentence also contradicts the charge, where the investigating agency admitted that payment for the products was transferred to the ownership of Togliattiazot as a legal entity.

2. In the judgement of the court of the first instance, Togliattiazot sold products to Nitrochem at non-market prices, which means embezzlement of the whole products. The court deduced it from the expert opinion, while the sentence includes no market prices themselves.

The findings of experts, in turn, are based on the data on the chemical products prices provided in market reports by agencies (such as Argus and FMB), only applicable to spot sales of small batches of products, yet compared to the contract prices of Togliattiazot for much larger volumes of sold products.

The sentence contains the conclusion of experts that Togliattiazot also sold its products at spot prices, so when calculating the prices no allowance should be made for wholesale products, despite the fact that over one and a half million tonnes of ammonia a year was sold to Nitrochem under annual contracts and additional monthly agreements. It is only natural for the laws of the market to establish that a buyer able to buy such volumes of products year in year out enjoys to a certain extent a privileged position in terms of the prices offered to the buyer. Nobody could fail to see that, but Judge Kirillov of the Komsomolsky District Court of TogliattI made it seem in the sentence as if he did not understand that a railway car of wheat sold by retail would always outvalue a railway train with 100 and over railway cars of wheat sold in bulk.

3. Importantly, the court set a dangerous precedent by comparing the price formed in the period when the delivery actually took place and fixed in the contract with the market price effective at a later point in time specified in the “Cleared” stamp in the cargo customs declaration. Due to objective reasons, that occurred a few months later than the actual delivery. During this time the product itself was already used by its new owner or resold by him, while the market price changed considerably (as established in the judicial proceedings, between 18% and 250%).

It is natural that, when entering into a supply contract, it impossible to predict the market prices that will be valid in several months.

However, as a matter of fact, the charges state especially that Togliattiazot OJSC failed to predict the prices that would be established in a few months when selling products at the prices existing in the period when the supply actually occurred. The total value of the whole sold products determined by the prices that were “guessed wrong” is groundlessly recognized as stolen. It comprises the so-called “damage”, which is in fact mythical.

In addition, a huge time gap between the actual supply and affixing the “cleared” stamp to the cargo customs declaration is typical of the entire foreign economic activity. It is universal in occurrence and constant throughout Russia. In that situation we have no option but to acknowledge the following: if the sentence in the case of Togliattiazot becomes final, it will set a precedent, by means of which it is possible to destroy any export-oriented business and to isolatethe persons running or owning it from society.

4. Subject to the expert opinion, the court assumed that the value of the company’s products amounted to RUB 84.1 bln (the judge had to admit numerous mistakes of experts for a total amount of over RUB 6.5 bln, flatly refusing to examine the experts in court and to commission a new expert review, regardless of other material irregularities).

It should be noted that the experts only included the cases of selling products at the prices below market value, established by themselves, in their opinion, leaving out the cases when products were sold, in their opinion, at market prices or at prices above the market value, which led to making an unreliable expert opinion.

5. Moreover, Judge Kirillov did not consider the fact that the same experts in the criminal case, having held that the products prices were non-market during all the months of 2008-2011, had earlier made an expert opinion in the arbitration case on the same issues for 2010 and have found that Togliattiazot sold its products at the market prices over 6 months out of 12 months.

This happened because in the arbitration case the experts used the allowable market price interval of +/-20% under the rules of Article 40 of the Tax Code of the Russian Federation, while they chose not to use it in the criminal case.

Regarding one and the same period (2010), one and the same experts determined different volumes of one and the same sold products and different products market prices, which evidences inherent contradictions between these two expert opinions as well as different expert approaches inexplicably applied by them when conducting expert reviews in the arbitration and criminal cases, arriving at different conclusions on the same issues of determining the prices for sale of products by Togliattiazot to Nitrochem.

No proper evaluation of that essential fact was made by the court of the first instance.

6. The judge completely disregarded the funds received by Togliattiazot from Nitrochem for the sold products in the amount of RUB 65.5 bln (even if applying the court’s logic on selling at non-market prices) and did not deduct that amount from RUB 84.1 bln (hypothetical market value) in order to establish the short-received funds difference.

On the contrary, the court absurdly stated that Togliattiazot supposedly did not receive any funds at all (which is refuted by the criminal case file and the investigation itself) – specifically in order not to establish that difference (even though it amounts not to RUB 84.1 bln, but to 84.1 - 65.5 = RUB 18.6 bln) and not to adjust the civil claim brought by Joint-Stock Company United Chemical Company Uralchem, the minority shareholder, the unlawful satisfaction of which by the court in the sentence in the amount of over RUB 87.6 bln is directed to the hostile takeover of the enterprise.

7. It is worth noting individually that the court also ignored the fact that dividends were paid to shareholders, including Uralchem (in particular, about RUB 400 mln was paid to Uralchem in the incriminated period), however the judge also considered the funds received by Uralchem as well as the taxes paid by Togliattiazot to the budget of Russia as stolen.

8. In determining the civil claim, the court interpreted the classical institutions of corporate law in an absolutely unprecedented and revolutionary way, having completely refused using the recognized instruments of that specific legislation.

The scope of “affiliation”, “interested party transaction”, the procedure for their identification, the issues of the dividend policy freedom, transaction approval procedure and consequences of its disapproval have been explained by the Supreme Court of the Russian Federation and the Supreme Court of Arbitration of the Russian Federation multiple times. Contrary to the legislation of the Russian Federation and overall established case law of the corporate law application, in the sentence Judge Kirillov “acknowledged” the shareholders as holding rights to the property of the joint-stock company, the dividend policy freedom was downright “revoked”, the affiliation was “established” based on witness evidence, and “common concepts” were used to establish an interested party transaction. With reference to the peculiarities of proving in the criminal procedure, the judge admitted that it is to no avail to prove those facts in the procedure established by the legislation of the Russian Federation, which means that they can be proved in various ways, for example by the same voting of different persons at a shareholder meeting or by them granting powers of attorney to one and the same person.

9. The court found that a shareholder can have a share in the revenues of a company from selling products pro rata to the number of shares held. Notably, in the hypothetical revenues, calculated by an unknown specialist, rather than in the actual ones. And namely in the revenues, rather than in the net profit, that is, without taking into consideration all the company costs, taxes and dividends actually already paid to one and the same shareholder. Judge Kirillov neglected the mechanism for distribution of profit by the shareholder meeting established by the law.

10. Despite the basic economic rules, the Judge held that a profit-making enterprise should not take on loans, otherwise it is not a profit-making one.

11. In violation of the business entity convention, the Judge held not only the defendants, but also the companies allegedly controlled by them jointly and severally liable. The sentence completely abolishes the rule that companies are not liable for the debts of their shareholders.

12. In the sentence, judge Kirillov satisfied the civil claims brought by Uralchem and E.Ya. Sedykin, the minority shareholders of Togliattiazot PJSC, based on the civil legislation regulations, which are not applicable if only because they were adopted years after the events examined by the court occurred.

13. The civil claims of Uralchem in itself was brought by the minority shareholder on behalf of Togliattiazot PJSC, despite multiple statements by the company that no embezzlement of products occurred, and therefore there are no claims against anyone, and the company representatives in court were not even admitted to the determination of the civil claim within the framework of the criminal case, since judge Kirillov considered that participation of Uralchem, the minority shareholder, as a representative of Togliattiazot PJSC, which has been being in a corporate conflict with the company for many years, sufficiently defends the interests of Togliattiazot PJSC.

14. Judge Kirillov indicated in the sentence, basing his conclusion on the flawed expert review, that the chemical products value amounted to RUB 84 bln 180 mln 250 thous., however a considerable volume of the satisfied Uralchem claim for a total amount of RUB 87 bln 665 mln 334 thous. was comprised of the interest on the recovered amounts, which cannot be accrued at all.

All these and many other violations committed by the court of the first instance when considering the criminal case are detailed in the appeals of the representatives of Togliattiazot PJSC and the defence.

Togliattiazot PJSC recognized by the Komsomolsky District Court of Togliatti as the victim appealed against the sentence on account of its unlawfulness, groundlessness and absurdity.

Appeals shall be reviewed by the Samara Regional Court on 8 October 2019.