A group of investors operating on the Russian stock market sent a letter to President Vladimir Putin complaining about the State Duma's passage in the first reading of amendments to the law "On Joint Stock Companies."
The signatories represent about 70% of the assets managed by investment funds in Russia. This group includes Hermitage Capital Management, Prosperity Capital Management, Firebird Management LLC, Charlemagne Capital, East Capital, Halcyon Advisors, Morgan Stanley Investment Management, MC Trust, Third Point Management, Vostok Nafta, Alfred Berg Asset management, UK KIT, Troika Dialog and Aton.
According to the letter, the proposed amendments, which formalize the right to forcibly appropriate the assets of ordinary shareholders, including shareholders of privatized companies, for below market prices, pave the way for a new stage of confiscating their property. This step may prove to be the most retrograde development for the Russian economy in the last four years, the investors noted.
The rancor is over amendments to the law "On Joint Stock Companies," which was passed by the State Duma on July 7at the end of the spring session. The investors did not voice their concerns immediately after the event, and their recent actions are because the State Duma will have a second reading of the amendments in October 2004.
Their concerns are warranted. These amendments permit a shareholder with at least 90% of a Russian company's shares to buy out the minority shareholders. EU directives stipulate a similar mechanism for buying out minority shareholders. According to the contentious Russian amendments, the price of the shares is determined by an appraiser hired and paid by the majority shareholder. Therefore, even if the minority shareholders do not want to sell their shares for the specified sum, they will be forced to. Independent appraisers are virtually nonexistent in Russia, which is why the minority shareholders are bound to be robbed.
The indignant reaction of investment funds is understandable. As the letter demonstrates, most of the investment funds are run by foreigners, who, according to Russian legislation, can only be minority shareholders (depending on the type of company, they can own 2%-20% of shares). They will suffer more than everybody else if the amendments are passed. An overwhelming majority of ordinary Russian citizens, who invested their undervalued privatization vouchers in all kinds of enterprises, will also suffer losses.
The authors of these amendments designed them to prevent hostile takeovers, which are quite frequent in Russia. However, law-abiding citizens do not do hostile takeovers. Therefore, no amendments can stop them. This is mostly a question of corporate ethics.
Investors were not the only ones concerned about the potential unfair redivision of the market. The Federal Financial Markets Service and the Economic Development and Trade Ministry agreed to jointly draft a number of amendments before the second reading of the amendments. They suggest that stock threshold be increased from 90% to 95% and that majority shareholders not be allowed to set the purchase price.
The authors of the amendments already understand that they were too hasty. Victor Pleskachevsky, chairman of the State Duma's property committee, said that the authors intended to change these amendments. For example, majority shareholders can only buy out minority shareholders if the majority shareholder, rather than affiliated structures, own a consolidated share package. Plans are also in place to simplify the machinery for determining share prices before the calculation of net values. Vladislav Reznik, chairman of the State Duma's loan agencies and financial markets committee, said that majority shareholders might offer several appraisers to the minority shareholders.
Barring all these numerous amendments, the state may have to act as an appraiser in some cases, which may not be the best scenario. The letter does not mention this possibility.
