the protection of minority shareholders rights in russia

8/14/2019 The Protection of Minority Shareholders Rights in Russia

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The protection ofminority shareholders

rights in Russia in 2008Author of the report: A. Navalny


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300 thousand of new shareholders

People's IPOs held by three of the major state companies led to the emergence of 300 thousandof new shareholders:

Rosneft 145 thousand

VTB Bank 160 thousand

Sberbank 95 thousand

Low dividends and constant media reports about corporate corruption are the main reasons thatordinary shareholders are beginning to conduct independent investigations with the aim ofprotecting their rights.

This report is based on one of these investigations. It was conducted by a minority shareholder, A.Navalniy and looked into the activities of a number of major companies.

The companies Rosneft, Gazprom, Gazpromneft, Surgutneftegaz, Transneft, and Sberbankbecame the subjects of the investigation.

The aim of this investigation was to disclose the information about the activities of thesecompanies that is being kept from shareholders.


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Regulatory framework

Article 67 of the Civil Code of the Russian Federation:

shareholders have the right to participate in the management of the companys affairs and receiveinformation about the companys activities and to become acquainted with its accounting recordsand other documents.

Articles 89, 90, 91 The Federal law Joint stock companies:

the company is obligated to provide shareholders with any information requested. Exception:accounting records and the minutes of meetings of the companys executive body (ManagementBoard). This information is provided to shareholders who hold at least 25% of the companysshares.

Article 9 Federal law About information :

access to information can be limited only for reasons related to national security. No otherlimitation is allowed.


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Gunvor

One of the largest traders, the seller of more than 30% of the crude oil produced in Russia.

According to the media, Gunvor exports more than half of the oil produced by Rosneft, half of theoil produced by Gazpromneft and practically all of the oil produced by Surgutneftegaz publiccorporation.

According to a number of shareholders opinion, the aim of Gunvors activities is to transfer out ofthe company and steal company oil profits.

co-founder of Gunvor, Gennady Timchenko, Switzerland


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Demands made to companies working with Gunvor andCourt action

Inquiries about contracts with Gunvor were sent to Rosneft, Gazpromneft, and Surgutneftegaz.The following information was requested:

the exact terms of the company partnership with Gunvor,

who made the decision about the deal,

the economic justification for partnering with the oil trader.

The companies refused to answer any questions relating to Gunvor.

Court action relating to Gunvor:

The claims were filed against Rosneft, Gazpromneft, and Surgutneftegaz relating to the disclosure

of information about their partnerships with Gunvor.The claims were reviewed in the arbitration courts and the arbitration courts of appeals inMoscow, St. Petersburg, and Khanty-Mansiysk.

Over the past 6 months, 7 court cases (including three appeals and one cassation) were heldinvolving Gunvor. Two cassations are still up for review.


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Reasons for refusing to disclose information relating toGunvor

According to the company-defendants and court decisions, the information that has beenrequested by Navalny is located in documents that are considered accounting records. Accordingto the existing laws, access to these documents is only available to shareholders who hold at least

25% of the companys voting shares.

The concrete documents that contain the information requested by Navalny, meaning theirnumbers, dates and names, has not been indicated.


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Transnefts expenses on charity

Transneft public corporation a company where the state is majority shareholder uses47,528 km of oil pipelines in Russia. In 2007, Transneft transported 463.8 million tons of crudeoil (93% of all of the oil produced in Russia) to domestic and foreign markets.

Transnefts total expenses on charity in 2007 made 7.2 billion rubles out of a total of 64.7 billionrubles in net profits (that is 11.1% of net profits). 7.2 billion rubles made 60% of all charitable

contributions made in Russia in 2007.

All told, for all of 2007 and the first nine months of 2008, more than 8 billion rubles (more than300 million dollars) were spent on charitable contributions. However, the exact identity of therecipients of this unprecedented charity has not been indicated anywhere.


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Civil and criminal investigations into these strangecharitable contributions

Inquiries were made to Transneft to reveal the recipients of this charity and also for otherinformation concerning this topic. The company stated that information about charitablecontributions cannot be revealed.

Civil investigation:

over the past 8 months, three arbitration court hearings were held concerning claims that were

filed against Transneft. All of the courts took the companys side. The reasons given for the refusalof the claims was that the information that was being requested was contained in the companysaccounting records.

Criminal investigation:

a statement about a crime being committed was filed with OBEP (Economic Crimes Department)of the Main Department of Internal Affairs in the Central Administrative District in the city of

Moscow. OBEP twice attempted to halt the investigation. Twice, these actions of the police werestopped by way of a judicial proceeding. Currently, the case is being investigated.


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Gazprom: criminal investigations into a proved crime

In 2005, a criminal case was launched into fraud that was committed at Gazprom.

One of its subsidiary companies (Mezhregiongaz) purchased gas from independent producers, notdirectly, but through intermediaries, at an inflated price.

That fact that Gazprom suffered a loss of 1.49 billion rubles was proven in many expertevaluations.

Gazproms management is refusing to admit that the company suffered a loss and is doingeverything it can to have this investigation closed.


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Shareholder as an injured party

A. Navalny, as a Gazprom shareholder, demanded that he should be recognized as an injuredparty and as a civil claimant in this criminal case.

Despite the fact that the shareholder owns an insignificant share of the companys stock, theinvestigating body was forced to recognize him as an injured party .

This instigated the further investigation of the case, attracted the attention of the media and gavethe shareholder the opportunity to become acquainted with all of the case materials.


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Attempting to involve independent directors

Oleg Vyugin (Transneft ):

Oleg Vyugin refused to answer any inquiries from minority shareholders.A claim was filed against Vyugin in connection to the fact that he did notrespond in any way to the request for assistance in uncovering information.The claim was denied.

Sergei Guriev (Sberbank):

Guriev is the only independent director who responded to the requests ofthe minority shareholders and promised to assist the investigation.However, it turned out that Guriev himself couldnt gain access to theinformation demanded.

Hans-Jrg Rudloff (Rosneft ):

Notwithstanding media reports and a public outcry over the violation ofthe rights of the companys shareholders, Hans-Jrg Rudloff prefers toremain uninvolved in the situation and isnt, in any way, assistingactivities directed towards the protection of shareholder rights.


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Foreign investigations

William Browder the owner of the Hermitage Capital Management hedge fund. Hermitage hasactively fought for its rights as a shareholder, including against such companies as Gazprom andSurgutneftegaz, and, overall, has asserted the rights of minority shareholders.

Browder is attempting to have recognized as treasury stock, 62% of the stock of Surgutneftegazthat is located on the balance sheets of its subsidiaries and have it redeemed. The result of this

could be a substantial increase in the share that minority shareholders hold, which would allowthem to bring in independent representatives onto the Board of Directors and participate in themanagement of the corporation.

Browders activities have led to him being barred from entering Russia. A criminal case waslaunched.


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Summary

Currently, the possibility of court protection of the rights of the minority shareholders of largecompanies in Russia has practically run dry and further actions in this direction within theframework of the Russian legal system hold little promise for a number of reasons:

Courts assign any requested information as information that can only be accessed by major

shareholders.

The courts make these decision under pressure from authorities.

The institution of independent directors doesnt work as it should.

Foreign investors shrink away from taking on such problems and attempt to ignore violations ofminority shareholder rights


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The outlook in the fight for the rights of Russianshareholders

The outlook in the fight for the rights of Russian shareholders is, to a large extent, connected with:

the possibility of holding liable the management of Russian corporations on the basis ofinternational legal documents (conventions).

international criminal investigations into the unjust enrichment of government officials corporatemanagers. The search for and arrest of funds that have been stolen from shareholders.

putting pressure on international corporations that directly or indirectly participate in corruptschemes that transfer assets out of companies or cover up such activities.

the readiness of the international community to become involved in the problem relating to theviolation of the rights of Russian shareholders, including the creation of a system of mutualrelations where the observance of the rights of shareholders becomes one the main conditions foraccess to loans.

the protection of minority shareholders rights in russia

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