Uncertified translation from Russian To the Eighteenth Arbitration Court of Appeal 83 Lenina Prospekt, Chelyabinsk, 454080 Claimant 1: PJSC Rosneft Oil Company 26/1 Sofiyskaya Nab., 117997 Moscow Claimant 2: PJSC Bashneft 30/1 Karl Marx St., 450077 Ufa Claimant 3: The Ministry of Land and Property Relations of the Republic of Bashkortostan 13 Tsuryupy St., 450008 Ufa Defendant 1: Sistema PJSFC 13/1 Mokhovaya St, 125009 Moscow Defendant 2: JSC Sistema Invest 17/8/9 Prechistenka St, bld. 1 119034 Moscow Case No А07-14085/2017 APPEAL to the Judgment passed by the Arbitration Court of the Republic of Bashkortostan dd 30 August 2017 on case No А07-14085/2017 PJSC Rosneft Oil Company ("Claimant 1" or "Rosneft"), PJSC Oil Company Bashneft ("Claimant 2" or "Bashneft") and the Ministry of Land and Property Relations of the Republic of Bashkortostan ("Claimant 3" or the "Ministry") filed a claim with the Arbitration Court of the Republic of Bashkortostan against Sistema PJSFC ("Defendant 1" or "Sistema") and JSC Sistema Invest ("Defendant 2" or "Sistema Invest") on joint and several recovery of damages totalling RUB 170,619,477,257.91 from Defendant 1 and Defendant 2 (jointly, "Defendants") in favour of Bashneft. According to the claim, damages were allegedly inflicted on Bashneft in the course of the reorganisation of Sistema Invest and Bashneft in 2014 whereby a new company CJSC Bashneft Invest ("Bashneft Invest") was demerged from Sistema Invest and simultaneously merged with Bashneft (hereinafter the process of reorganising Sistema Invest, Bashneft Invest and Bashneft is also referred to as the "Reorganisation"). In its judgement on this case dd 30 August 2017 ("Judgment Appealed Against"), the first instance court granted the claim in part, ordering that damages in the amount of RUB 136,273,554,065 shall be recovered from the Defendants jointly and severally in favour of Bashneft. The remaining part of the claim was denied. Sistema believes that the Judgment Appealed Against is unlawful and ungrounded with regard to the granted claim, that it was passed with gross violations of substantive and procedural laws and shall be reversed in the appeal procedure. 1 Contents of the Appeal CIRCUMSTANCES OF THE CASE ..................................................................................................................... 7 CONCLUSIONS OF THE COURT IN THE JUDGMENT APPEALED AGAINST ...................................................... 9 ERRONEOUS CONCLUSIONS OF THE COURT ON THE MERITS OF THE DISPUTE ......................................... 10 1. The court's conclusion that Bashneft "lost" 49.41% of shares of Sistema Invest worth RUB 57,232,844,800 and the rights of claim under loan agreements worth RUB 36,930,220,021 is wrong, since cancellation by Bashneft of 16.8% of its own shares received in exchange for the above assets in the course of the Reorganisation does not mean absence of "due consideration." .............................. 11 1.1. The court's conclusion that Bashneft lost its assets in the course of the Reorganisation is incorrect: Bashneft did not "lose", but exchanged its assets, receiving its due share of Sistema Invest's assets in return. ................................................................................................................. 12 1.2. Bashneft lawfully cancelled its own shares received in the course of the Reorganisation; in the Judgment Appealed Against, the court did not refer to a single law provision that would require Bashneft to keep its own shares for the purpose of reselling them; there are no such provisions ....................................................................................................................................... 15 1.3. When passing the Judgment Appealed Against, the court did not take into account the position of a competent authority - the Russian Central Bank, which confirmed that acquisition and cancellation by Bashneft of its own shares in the course of the Reorganisation was lawful and did not inflict damages on Bashneft. ....................................................................................... 17 1.4. Acquisition and cancellation of its own shares by Bashneft is a lawful form of distribution of equity capital represented by such shares among shareholders and, therefore, cannot inflict damages on Bashneft. .................................................................................................................... 18 1.5. Pursuant to Ruling of the Constitutional Court of the Russian Federation No 3-П dd 24 February 2004, the court did not have the right to assess the economic advisability of Bashneft's cancellation of its ordinary shares received in the course of the Reorganisation; besides, the court made a wrong conclusion that the fact that Bashneft could issue ordinary shares to raise funds at any moment had no bearing on the case. ....................................................................... 19 1.6. Cancellation by Bashneft of its own shares was beneficial for all of its shareholders and, consequently, for the company as a whole, not for the Defendants alone................................... 21 1.7. The court wrongfully ignored the fact that on 3 July 2014, Bashneft started an additional issue of ordinary shares, the number of which was comparable to the number of cancelled shares, for the purpose of doing IPO and raising funds for the company; in July 2015, the new shareholders of Bashneft (the Russian Federation and the Republic of Bashkortostan) decided not to go through with the issue, that is, following the court's logic, it was they who prevented sale of the stake in the open market and raising of funds ............................................................. 22 1.8. Recovery of damages from Bashneft's so-called "loss" of 49.41% of Sistema Invest shares and the rights of claim under the loan agreements would result in unjust enrichment of Bashneft 24 1.9. The court's conclusions about the alleged economic inadvisability of eliminating cross shareholding and repaying intra-group loans through the Reorganisation and the advisability of 2 selecting another scenario for dividing assets of Sistema Invest are erroneous and do not have a legal meaning for determining whether damages were really inflicted ........................................ 26 1.10. The Opinion of the Financial Research and Innovation Institute of Economic and Legal Studies (FRII ELS), from which the court drew the conclusion about the economic inadvisability of the cancellation of shares, is inadequate evidence; at the same time, the court did not give any opinion on the opinions of leading Russian economists and reports of analysts and the Moody's rating agency, which unambiguously indicate that there were no losses from the Reorganisation................................................................................................................................ 28 1.11. The court did not give any opinion on Sistema's arguments that cancellation of shares by Bashneft was in no way different from cancellation of shares performed by other Russian companies in the course of their reorganisations (Rostelecom, Polyus, Uralkali) ......................... 29 1.12. The case files do not have a single evidence related to the specific market value of the 49.41% stake in Sistema Invest; the market value of the 49.41% stake in Sistema Invest, with a no-control discount applied, does not exceed RUB 42,924,633,600 ............................................. 31 2. Bashneft did not suffer damages in the amount of RUB 12,466,869,998 from the cancellation of shares purchased from minority shareholders in accordance with Article 75 of the Law on Joint-Stock Companies. .............................................................................................................................................. 33 2.1. The court wrongly applied Article 75 of the Law on Joint-Stock Companies when it came to the conclusion that the buyback of shares from minority shareholders was not Bashneft's obligation by force of law. .............................................................................................................. 33 2.2. By acknowledging that the cancellation of shares by Bashneft inflicted damages on the company, the court disregarded Article 101 of the Civil Code of the Russian Federation, Article 29 of the Law on Joint-Stock Companies and Clause 14.4 of Bashneft's Charter that expressly authorise Bashneft to cancel repurchased shares. ........................................................................ 35 2.3. Pursuant to Ruling of the Constitutional Court of the Russian Federation No 3-П dd 24 February 2004 the court did not have the right to assess the economic advisability of Bashneft's cancellation of its preference shares; in filing the lawsuit the Claimants are abusing the law (Article 10 of the Civil Code of the Russian Federation), since Bashneft has the right to issue preference shares and raise funds whenever it wishes to do so. .................................................. 36 2.4. Recovering the expenses incurred by Bashneft in relation to the buyback of preference shares from minority shareholders from the Defendants without transferring shares to them will lead to Bashneft's unjust enrichment. ........................................................................................... 37 2.5. The court did not give any opinion regarding the statement of Rosneft's representative, who confirmed that a buyback