General Meeting

This third order category refers to instances when important corporate decisions were made at general meetings of shareholders. The content of this category not only reveals the nature of corporate decisions at hand, but also shows how this crucially important corporate governance mechanism operates in the Russian environment.

In 1998 there were 12 disputes⁸³ reported in the Moscow Times in which general meetings played an important role in corporate proceedings. As opposed to previous third order categories, general meetings were most instrumental in disputes also coded as control and diversion of claims, see graph 4.20. Additional details of reported disputes featuring general meetings are presented in table 4.7.

Graph 4.20: General Meetings, 1998

83 10 individual disputes of which 2 were parallel coded.

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Table 4.7: General Meetings, 1998 Company Issue (decision

Under the Joint Stock Company law, charter amendments require a 75 percent vote. Rosneft was able to get a favourable verdict due to the fact that only 75 percent of the subsidiary‘s votes were present at the meeting, thereby giving its 51 percent stake a 68 percent weighting. Finding the other 7 percent was a matter of bargaining and subtle stealth.

Proposal was voted down by suspicious minority shareholders.

The motion was passed by only 58.2 percent of voting shareholders, the vast majority of which represented Yukos interests. Arrowhead Enterprises Ltd., which claimed 12.3 percent of the voting stock of Yukos‘ subsidiary

Samaraneftegaz, alleged that the vote violated Russian joint-stock law. The Federal Securities Commission was asked to investigate the matter.

The decision was declared illegal by the Tomsk Regional Property Fund and the transfer was blocked.

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A representative from Surgut (parent) was allowed into the meeting, though he was forbidden to participate. The reason was a faxed power of attorney letter, an act deemed in violation of the AGM

procedures established by the subsidiary‘s management. The representative watched helplessly as Surgutneftegaz's stake in the company was diminished from 42 percent to 11 percent.

It was alleged that Krasnoyarskenergo's chief executive, Vladimir Kolmogorov, was not allowed to vote the company's 28 percent stake in the power plant because he had been elected at a general meeting that was declared invalid by a local court.

KrAZ denied that there had been any irregularities at the meeting.

Mosenergo

The decision made economic sense and was approved at a general meeting despite the fact that some minority holdings were diluted.

Novolipetsk 4 Articles, ref. 29.1

Coding: Control

Nominations Despite holding 40 percent, a group of investors was blocked from getting board representation at Novolipetsk. The old management clearly did not want to share power with the new shareholders, some of which appeared as a result of the

controversial loan-for-shares deals. Once the court returned the ruling in favour of the shareholders, the old management

attempted to avoid allowing the shareholders to vote in their

representatives by removing voting from the agenda of the general meeting⁸⁴.

84 The culture of looking for loopholes and technical irregularities is very much visible in these sorts of conflicts. It appears that the spirit of the law is secondary to minor technicalities.

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Sergiyenko was suspended from office by Knauf on allegations of theft,

mismanagement and tax manipulation. His response was to hold his own meetings, physically remove Knauf from the building, and issue 64 percent new shares to dilute the Germans' stake. The local governor's office supported the share emission, saying it thought the factory should be re-nationalized. voting on dismantling the board due to an error on the part of the board. Inkombank representatives did not receive ballots for the vote. Inkombank successfully

petitioned the St. Petersburg Arbitration Court for an injunction on the meeting.

Even though initially the ruling was ignored, the decision of the court was eventually complied with upon delivery of the documents.

Analysis of the content of reported material belonging to this category unveils two main scenarios when general meetings were an integral part of corporate conflicts.

The first scenario relates to decisions about the amount of authority⁸⁵ the board of directors and consequently majority shareholders should have. Examples involving decisions considered at Yukos and Rosneft‘s general meetings reveal the extent of authority desired by the management. Perhaps Yukos‘ example is the most extreme when the board of directors asked shareholders to grant them authority to issue new shares without approval of the latter. Although this resolution was voted down, it nevertheless exposed the level of alertness required from minority investors. On a practical level however, it is evident that general meetings were a weak form of protection because of secret collusions and subtle stealth that could lead to approval of the most daring proposals (Rosneft). The second scenario

85 Hence control is a strongly represented second order code.

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extracted from the reported material refers to situations when general meetings were treated as a formality with the actual decision being made behind closed doors. The key point here is that in some cases approval of shareholders was not even considered as necessary since they were simply prevented from voting on either minor technicalities (Surgutneftegaz, Inkombank) or by physical removal from the venue (Knauf).

In 2006 there were only three disputes featuring general meetings. Those disputes were coded together with misimplementation, diversion of assets and claims categories. This is a visible reduction in reported material directly associated with general meetings. Further details of this category are presented in graph 4.21 and table 4.8.

Graph 4.21: General Meetings, 2006

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Table 4.8: General Meetings, 2006 Company Issue (decision

Acquisition Telenor executives accused VimpelCom of convening an illegal extraordinary

shareholders meeting and providing misleading information to shareholders regarding VimpelCom's purchase of

Ukrainian RadioSystems for $231.3 million.

Both shareholders of VimpelCom have a blocking stake. One of them was interested in a purchase of a competitor of the other. The Russian shareholder provided misleading information at the disputed extra-ordinary shareholders meeting and got the vote its way.

The decision to get rid of the two Yukos managers (Bruce Misamore and David Godfrey) was made by the court appointed Yukos receiver (Eduard Rebgun) and enforced by means of an extraordinary shareholder meeting that was ruled to be legitimate by a Dutch court⁸⁶. The two

managers were accused of trying to hide the company‘s assets.

A minority shareholder (Prosperity Capital Management) sought to boost its stake in the subsidiary Ritek (one of LUKoil's

production units) to 25% in order to be in a position to block the merger at the upcoming general meeting. The fund offered a 17%

premium to other minority shareholders.

In 2006 there was only one dispute that revealed a questionable conduct at a general meeting of shareholders (VimpelCom). Telenor (significant, but minority

86 A shareholder meeting (which was acknowledged by a Dutch court as legitimate) authorised the decision of the Yukos receiver to fire managers accused of hiding assets in a complex web of transactions.

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shareholder) received inaccurate information about a proposed acquisition and was simply tricked into voting in favour of what turned out to be a potentially damaging resolution. Conversely, the dispute involving LUKoil showed that some shareholders began treating general meetings as a reliable mechanism for controlling corporate decisions.

3.1.3.1 Implications for the Rule of Law with Reference to General Meetings Disputes

Unlike previous categories, analysis of disputes involving general meeting proceedings exposes a considerable improvement in investor perception of the rule of law in the country. On the surface this conclusion is supported by a significant drop in the number of reported disputes featuring general meetings (11 in 1998 and only 3 in 2006). Furthermore, in terms of the actual content of reported disputes, the blatant abuses of (shareholder) voting rights and illegal resolutions appear to be perceived as a legacy of the past.

Disputes reported in 2006 were fundamentally different in terms of the analysed category. The case involving VimpelCom (2006) was not as straightforward as disputes reported in 1998. Here, a shareholder (Alfa Group) proposed an acquisition of a competitor of the other shareholder (Telenor). Arguably, as far as the company and other minority shareholders were concerned that was a reasonable proposition that happened to be at odds with independent interests of Telenor. Of course it was no justification for withholding or misrepresenting relevant information⁸⁷, but nevertheless the decision at hand probably made economic sense for the entity in question. This is in stark contrast to some of the completely self-centred decisions pushed through at the general meetings reported in 1998. Moreover, in relation to the dispute involving LUKoil the 17%

premium on shares paid by a minority shareholder wishing to boost their holding to a blocking stake was a demonstration of the confidence in the legitimacy of the voting process. Such confidence simply did not exist in 1998.

87 Unfortunately, this characteristic remained an aspect of the perceived environment.

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