9 June 2011
Russia Profile publishes commentary by Dmitry Stepanov

Minority Rapport

The Kremlin Is Taking Steps to Guard Minority Shareholder Interests Against Abuses and Mismanagement

By Tai Adelaja

The Russian government has stepped up efforts to improve the country's investment climate and mobilize foreign direct investment by proposing a significant expansion of minority shareholder rights. A draft bill submitted to the State Duma on Tuesday sought to guarantee more transparency in corporate governance by giving minority shareholders access to all corporate information, including the right to inspect the records of a company’s affiliates, a hitherto contentious issue.

The bill, which was prepared by the Economic Development Ministry on orders from President Dmitry Medvedev, also grants minority shareholders with at least ten percent of a company’s shares the right to request an immediate audit of the company’s accounts and cross-check the reliability and accuracy of the company's financial statements.

In a country where majority ownership of a company is often a winner-takes-all affair, experts say minority shareholders have had a hard time preserving their rights, especially when majority owners misapply or misuse company assets. In one of the most recent cases, Sun Interbrew’s subsidiary, Sakatini Ltd., and dairy giant Wimm-Bill-Dann, two of the best-known brand names in Russia, are locked in a legal battle over the rights of minority shareholders in a leading Far East brewery. Sakatini, which controls a 25 percent blocking stake in Wimm-Bill-Dann’s affiliate Pivoindustria Primorya, threatened in April to sue the juice and dairy giant for repeatedly blocking its representatives' attempts to attend the annual shareholders meeting of its affiliate, The Moscow Times reported. Pivoindustria also allegedly denied admission to other foreign minority shareholders like Tiger Securities, a Vladivostok securities firm. Andrew Fox, the chairman of the Tiger Securities board, said two guards blocked his way to the registration table and kept him away until the registration deadline passed. "Two big guys say you can't register because their bosses say so. What am I supposed to do?" The Moscow Times quoted Fox as saying. "This is a caveman level of doing business."

Alexei Navalny, the country’s leading whistleblower on corruption and a crusader for minority shareholder rights, sees the new amendments as a major breakthrough in expanding the rights of minority shareholders. "The groundbreaking provision is the one allowing minority shareholders to seek information on a company's affiliates," Navalny said. "This will pave the way for more in-depth investigations into their activities." Navalny, a minority stakeholder in many major Russian companies, including Gazprom and VTB, went to court against Rosneft last year in an attempt to get hold of a copy of a shareholder agreement protocol he was denied access to. The Moscow Arbitration Court supported Navalny on the issue in August, but Rosneft has appealed the decision and filed a separate complaint with the Constitutional Court.

Dmitry Stepanov, a partner at the Yegorov, Puginsky, Afanasyev & Partners law firm, also said the government-sponsored bill represents a major vindication of minority shareholder rights for good corporate governance. He cautioned, however, that the current draft is a double-edged sword because it gives only shareholders with 25 percent blocking stake unlimited access to corporate information. The present bill does not yet give foreign portfolio investors the right to demand information from a company’s affiliates, although such measures may be in the pipeline, he said.

In a February 10 landmark ruling, Russia's Supreme Arbitration Court affirmed minority shareholders' right to fundamental documents or information in a company they have shares in. The ruling also gave minority shareholders the right to request any document from the company, including contracts and documents containing commercial or other types of secrets, as long as the recipient signs a nondisclosure agreement or secret information is deleted from such documents. However, the court stopped short of endorsing a minority stakeholders’ right to request confidential documents or other information from a company's subsidiaries, a loophole, experts say, Russian companies have been exploiting.

Many Russian companies also allegedly transfer operational control of core economic activity to their subsidiaries in efforts to deny shareholders the right to access documents that really reflect the true state of things inside the companies, the Kommersant daily reported on Wednesday. The Supreme Arbitration Court has also imposed other limitations, such as the right of majority stakeholders to deny access to old documents "that does not offer value for analysis" because the statute of limitations has expired, and in situations where a minority shareholder is perceived as acting in the interest of a competitor.

"The new amendments, if passed, will alter judicial practice for good," Roman Bevzenko, the head of the court's private law department at the Supreme Arbitration Court, told Russia Profile on Wednesday. "The practice of denying someone who is a shareholder only in the parent company from obtaining information from its subsidiaries has long been a contentious issue because a lot of violations in minority shareholders rights in Russia today are committed through the company's subsidiaries." Bevzenko said, however, that Navalny's much-publicized activism has little bearing on the on-going efforts to reform the country’s company law. “The government has long been holding consultations with legal experts, including with judges at the Supreme Arbitration Court, on how to tackle the issue of information disclosure and protect minority shareholders rights,” Bevzenko said. “This is all about reforming and streamlining company law to attract investors and improve the investment climate in the country.”

But while the draft has won the general approval from pundits, some have expressed concerns that it was not explicit enough. Some legal experts, like Stepanov, believe that any future corporate law should not give a blank check to minority shareholders to requisition confidential information. “According to the new draft, when a minority shareholder seeks confidential information, he has to sign a nondisclosure agreement,” Stepanov said. “However, the bill does not explain how to guide against disclosure of confidential information by a careless investor, and who takes responsibility for potentially harmful consequences of disclosing a company's confidential information.” Unless there is a clear-cut provision in the new draft for this, no big company or corporation will disclose confidential information, he said. “And they would be right because a careless information leakage could cost a company millions of dollars in revenues.”