Hostile Takeovers, Russian Style: How to Defend Against Them, and an Overview of Legislative Reform

1
Hostile Takeovers, Russian Style How to Defend
Against Them, and an Overview of Legislative
Reform

• EBC Conference Anti-Takeover Defenses and Their
  Legitimacy
• Kirill Ratnikov April 9, 2004

2
If Adam Smith were alive ...

• New law of Russian economics
• If your business is a success, if you have many
  profitable contracts, if your plant is equipped
  with advanced machinery, if foreign investors
  show an interest in you, it becomes more likely
  that an attempt will be made to ruin you and to
  take away your business with the use of
  administrative leverage.

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A takeover group features all elements of an
organized criminal group

• Oligarchic group (the customer who allegedly buys
  shares on the "open market" as a quasi-bona fide
  purchaser)
• Consulting group (turn-key "dirty work")
• Judges, bailiffs and officials ("administrative
  leverage")
• Black public relations (special force), press
  blocking.

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Price of a Takeover The Company's Annual
Revenues

• Kommersant, May 13, 2003

5
Prices Charged by Business Courts of First
Instance

• Mergers Acquisitions, October 20, 2003
  (Parliamentary Hearings)
• Interim Measures

6
Prices Charges by Business Courts of First
Instance (Continued)

• Judgments

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• In 2002, 1870 acquisitions occurred involving
  the takeover of a controlling stake and change of
  management, of which hostile takeovers accounted
  for 76. Most of the takeovers involved the "use"
  of "judicial decisions" and "administrative
  leverage".
• Parliamentary Hearings, May 2003

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MAs in Joint-Stock Companies Law

• Principle A fair (market) price should always
  be paid for shares
• Compliance with legal requirements with respect
  to
• Major transactions and interested party
  transactions
• Shareholders right to demand the valuation of
  their shares
• Shareholders right of first refusal in respect
  of additional shares
• Shareholders right to demand the redemption of
  their shares
• Compliance with anti-monopoly law
• Compliance with securities law.

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• V.V. Putin, Russian Federation
• From the Address to the Federal Assembly on April
  3, 2001
• Along with shadow economy, a sort of shadow
  justice has started to emerge in Russia.

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• Veniamin Yakovlev, Chairman, Highest Business
  (Arbitration) Court
• There exist three principal methods to take
  over another's property in this country illegal
  bankruptcy, the improper creation of governing
  bodies and structures by a company, and the
  illegal application of interim measures... They
  are sufficient to paralyze the operations of any
  efficient company.

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• Information on the Judicial System, February 20,
  2003 (State Duma Commission for Corruption
  Control)
• In Russia, the judicial community becomes
  increasingly corrupt. Professionals who practice
  as counsel in court note that proceedings,
  especially in business courts, more and more
  become a matter of the purchase and sale of
  requisite decisions and the legal skills of
  parties to the proceedings become completely
  useless.

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Transparency Internationals International
Corruption Index

• Russia ranks 71
• Next to it are India, Honduras and Tanzania.

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Vedomosti, April 7, 2004

• It is possible to make people who now buy
  euros dollars believe in the Russian economy
  only if ownership rights are guaranteed To this
  end, the corporate solidarity of law enforcement
  and judicial authorities should be terminated
  We should get rid of people who generate many
  inexplicable precedents in their judicial
  decisions
• Mr. Gref, Minister of Economic Development
  Trade (Speech at the Higher School of Economics)

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Examples of Methods Used for an Abusive Change of
OwnershipScenario I

• I. A shareholder(s) owning a 30 stake obtain(s)
  control of the company .
• A request to hold a special meeting (which has
  not been delivered to the Board of Directors)
• Want of quorum the meeting has not been held (a
  court's injunction preventing other shareholders
  from participating in the meeting)
• Adjourned meeting with a 30 quorum
• 1) Election of the Board of Directors (that will
  then elect a new General Director)
• 2) Amendments to internal documents
• 3) Transfer of the company's register to a new
  registrar.
• (Court orders preventing the controlling
  shareholders from participating in the meeting)
• Entering the premises of the company (a court
  order regarding the new General Director)
• Obtaining control over the register and cash
  flows
• A scheme involving promissory notes (bankruptcy)
  as a back-up option.

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Orders issued by courts in connection with claims
of minority shareholders

• Prohibiting a company from making any transaction
  with assets
• Attaching shares owned by a controlling
  shareholder and all movable and immovable
  property of the company concerned
• Prohibiting a company's governing bodies,
  officers or General Director from exercising
  their powers or affixing the company's seal
• Prohibiting the legally appointed registrar of a
  company from keeping the company's share register
  or counting votes at the general meeting of
  shareholders
• Ordering a company to allow a "new" General
  Director to enter its premises (as a basis for an
  attack by masked guards or policemen).

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Scenario II

• I. How to obtain control of a company in which a
  controlling stake is held by a holding (parent)
  company providing that its privatization occurred
  a few years ago?
• 1. A minority shareholder in a distant region
  would file a claim to challenge the privatization
  (based on failure by the controlling shareholder
  to satisfy investment conditions or otherwise
  (in practice no such failure has taken place))
• 2. As a result of the claim the controlling
  shareholder's stake in the target company would
  be seized and sold to an affiliate of the
  attacker. The attacker would allege to be a bona
  fide purchaser buying shares from bailiffs (State
  Property Fund) on the open market
• 3. The defendant would receive no notice of
  proceedings. Proceedings conducted in a closed
  session and without the examination of evidence.
  A flash sale of shares by bailiffs without giving
  the defendant an opportunity voluntarily to
  comply with the judgment rendered. Another option
  is the sale through the Russian Federal Property
  Fund that is effectively a direct sale

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Scenario II

• 4. Use of brokers as nominees. The shares would
  be sold along a chain of allegedly bona fide
  purchasers and end up in the hands of the
  attacker
• 5. Obtaining control over the register (by using
  administrative leverage including the Federal
  Commission for the Securities Market)
• 6. Creation of dual management
• 7. Entering the premises of the company
• 8. Black public relations
• 9. Attempted criminal prosecution of legal
  owners.

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• Interim Report on the Development
• of the Legal Basis Relating
• to Hostile Takeovers
• (March 2004)

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An abusive change of ownership as a threat to
Russia's national security

• State Duma.
• Ministry of Economic Development and Trade.
• Government.
• Highest Business (Arbitration) Court.
• Chamber of Commerce and Industry.
• Russian Union of Industrialists and Entrepreneurs
  (a proposed hot line).
• Moscow Government (a hot line).

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The State Duma of the Russian Federation

• 1. Recommendations following the Parliamentary
  Hearings on "Legal Support for Ownership as a
  Factor of Economic Stability in Russia," dated
  October 20, 2003.
• 2. Recommendations following the Parliamentary
  Hearings on "Problems of Legal Support for
  Ownership in the Russian Federation Defenses
  against Hostile Takeovers," dated May 12, 2003.

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Ministry of Economic Development and Trade

• 1. First Deputy Minister A. Sharonov's working
  group.
• 2. Two research projects.
• 3. Commencement of work on legislative
  amendments.

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Russian Government

• Medium-Term Economic Development Program of the
  Russian Government (2003) (Section 3.1)
• New Program to Be Shortly Publicized by Mr.
  Grefs Ministry (Draft to Be Completed Shortly)

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Highest Business (Arbitration) Court

• Resolution No. 11 of the Plenum dated April 9,
  2003 (On the Practice of the Review by Business
  Courts of Motions for Interim Measures
  Prohibiting the General Meeting of Shareholders).
• Work on certain other resolutions.

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Chamber of Commerce and Industry

• Hearings on "Hostiles Takeovers of Joint Stock
  Companies Problems and Solutions" (October 21,
  2003)
• and on Abusive Bankruptcies
• (Beginning of 2004)

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Future of Russia

• Total corruption and unstable rights of owners.
• Yes ? No ?
• Several major holding companies controlling main
  sectors of the national economy. Lack of
  competition and monopolistic prices.
• Yes ? No ?
• The choice is yours.