Minority Shareholdings
by Denis Korolev, Partner, IVJ Legal Bureau L.L.C for Corporate Finance Magazine
M&A GUIDE 2004 T0 2005
A STATEMENT BY IVJ LEGAL BUREAU
corporatefinancemag.com – September 2004
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Despite certain political risks the Russian domestic equity market remains being subject to, as has recently been evidenced by the Government investigation into alleged tax abuse by Yukos Oil Company, effectively resulting in collapse of the company’s stock prices and high equity market volatility generally, international investment community appears to remain, broad and large, convinced of potential attractiveness, as well as undervalued status, of Russian companies’ stocks.
At the same time full-scale cross-border acquisitions in the Russian domestic corporate market are relatively few; albeit not yet to be named a prevailing tendency, still a wider interest is being displayed towards acquisition of minority shareholdings in Russian joint-stock companies, which raises the natural issues of strategic expectations and legal implications inherent in such acquisitions.
Minority shareholding acquisition strategies
Most typically, acquisition of minority shareholding in Russian joint-stock companies is guided by either short term venture investment considerations or strategic investment intents.
Venture investment interest
Just like in the more advanced markets, venture investment into Russian companies’ stocks is performed in anticipation of either high re-sale yield or high dividends, or both; as a general rule, such acquisitions are not intended to provide investor with an involvement into the target company’s business affairs and/or internal decision- making. With liquidity of the target stocks being the critical consideration for such investment, relative acquisitions are effectively confined to publicly traded instruments; hence, legal due diligence of a target company by an investor is rather rudimentary, if performed at all, in reliance on stock exchanges’ monitoring and control instrumentaria, including, inter alia, trade clearing and settlements and issuers’ information disclosure compliance control. Apart from matters of legality of title transfer and recording, legal aspects of venture acquisitions are of little or no interest for a relevant investor.
However, as Table 1 below clearly demonstrates, Russian stock exchange market remains
extremely narrow: trading through consolidated equity markets of RTS (Russian Trading System) and St. Petersburg Stock Exchange, the major national exchange traded stocks market place, is limited to 246 stocks (common and preferred), while MICEX (Moscow Inter-Bank Currency Exchange), the second biggest securities exchange, is largely dedicated to corporate and government (municipal) debentures with only 32 corporate stocks (common and preferred) listed.
As a result, venture equity acquisition through Russian domestic stock exchanges is essentially limited to a relatively small number of national blue chip corporations’ stocks publicly traded in the highly volatile market, while the vast majority of domestic businesses incorporated in form of joint-stock companies are not listed with any of the national or foreign stock exchanges, with their shares only available in the OTC market.
While being by far less exposed to political volatility factors as compared to publicly traded stocks, Russian OTC stock market, however, secures generally a substantially lower degree of immediate liquidity. It is for this reason that acquisition of minority shareholding in a nonpublic Russian company is more frequently contemplated by foreign investors as a strategic, rather than venture, acquisition.
TABLE 1
Strategic investment
As opposed to venture investment in Russian equities, strategic acquisitions of minority shareholdings are frequently performed with a view to future take-over or, at least, gradual buildup of a majority or controlling shareholding. Such strategy is usually employed where a company’s equity is widely held as a result of the issuer transformation into a joint-stock company in the course of the “first wave” of privatization of Russian Government owned enterprises in 1991 – 1993 or for other reasons.
Minority shareholding acquisitions may also be considered with respect to Government owned enterprises undergoing gradual privatization; in such cases holding of a minority stake may secure better position during subsequent offerings of Government-held stocks. Moreover, acquisition of a relatively significant (preferably, over 25%) minority stake in similar companies would most frequently result in obtaining effective control over the company’s business affairs as the Government’s involvement in such companies’ management is rarely extensive.
Recently, however, acquisition of minority shareholdings has notably developed into a tool for entering industry-specific Russian domestic markets by way of setting up a long–term corporate relationship with existing company shareholders. The value of such acquisitions is rarely created through dividends distribution policy, but evolves through sharing in the company’s cash flows by establishment (in concert with domestic majority shareholders) of commercial relationship between the target company and the relevant minority shareholder’s enterprise (in form of exclusive supply and/or distribution contractual arrangements, provision of various IP rights, technology and/or know-how access, etc.).
Minority shareholdings are sometimes acquired in holding vehicles for the purpose of bartering the same at a later date for majority or controlling stake in an operating subsidiary within the group.
Finally, minority shareholdings may be acquired with a view to build up an “exit premium” value by employing greenmail techniques or by way of “tendering” the strategically attractive minority shareholding among other company shareholders striving for control position.
Strategic investment: legal implications Regardless of background considerations leading to strategic acquisition of a minority shareholding it requires a by far more extensive awareness of the target company’s business affairs status, internal management and decision-making procedures, as well as minority shareholders’ legal position.
Legal status of shareholders in Russian jointstock companies is rather extensively regulated by national corporate law statutes, with a general tendency of expanding minority shareholders’ rights protection instrumentaria.
Featured below is a brief overview of principal rights and remedies that acquisition of minority shareholding provides access to.
General
Each ordinary share in a Russian joint-stock company confers to its holder a standard set of rights, including:
(i) right to attend (personally or by proxy) shareholders’ meetings and to vote on any matter of business transacted at such meeting;
(ii) right to receive dividends (where so resolved bya shareholders’ meeting);
(iii) right to share in a company’s assets remaining available for distribution upon company winding-up and liquidation;
(iv) right of access to certain company information and documents (with certain restrictions discussed below);
(v) right to demand redemption of his shares in an event a shareholders’ meeting shall approve company reorganization or a major transaction, provided the relevant shareholder shall vote against such resolutions or fail to vote (abstain from voting);
(vi) right to demand redemption of his shares in
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Table 1
Companies listed Monthly reported Monthly stock Monthly trade
stock trades trade volume volume, Millions
(June 2004) (June 2004) (June 2004)
Consolidated stock exchange 170 61,462 988,012,558 $1,896
market of RTS and St. Petersburg (August 2004) (including REPO)
Stock Exchange (with clearing
through RTS)
NYSE 2,750 74,010,200 28,799,100,000 $914,200
(2003 annual report)
LSE 2,757 5,085,539 164,116,400,000 £376,572
(July 2004)
M&A GUIDE
2004 T0 2005
corporatefinancemag.com September 2004 cf 43
an event a company shall reduce its registered capital or redeem up to 10% of its outstanding stocks without such reduction;
(vii) in case of public allotment and placement of new shares, right of pre-emptive acquisition of such shares pro rata to his existing shareholding (of the same category and type);
(viii) in case of private allotment and placement of new shares, right of pre-emptive acquisition of such shares pro rata to his existing shareholding (of the same category and type), provided the relevant shareholder shall vote against such placement or fail to vote (abstain from voting).
Certain additional rights are granted by law to certain categories of minority shareholders
depending on the size of their shareholding.
Where shareholding is at least 2%
A holder of at least 2% of a company’s voting stock is entitled to propose business to be transacted at annual shareholders’ meetings, candidates to be elected members of the board of directors, management board (if any), internal auditing committee, counting commission (if any), and/or the company general director (CEO).
Where shareholding is at least 10%
A holder of 10% of voting stock is entitled to demand at any time that an extraordinary shareholders’ meeting shall be convened, and, shall such demand be rejected or ignored, shall be entitled to convene a meeting and for this purpose to exercise appropriate authority of the company’s board of directors.
In addition, a holder of at least 10% of voting stock is entitled to demand at any time audit of a company’s financial and business affairs.
Where shareholding is in excess of 25%
Shareholding in excess of 25% would provide control over resolutions of shareholders’ meetings requiring a 3/4 majority vote, in particular:
(i) to amend a company’s charter;
(ii) to reorganize a company;
(iii) to wind up a company, appoint a liquidator and approve interim and final liquidation accounts;
(iv) to determine number, face value, category (type) of declared (unallotted) shares, as well as scope of rights such shares shall convey;
(v) to redeem company’s shares;
(vi) to approve a major transaction in excess of 50% of a company’s assets balance sheet value;
(vii) to perform private placement of a company’s shares (unless a higher majority is required by the company charter);
(viii) to perform public placement of a company’s ordinary shares in excess of 25% of earlier allotted ordinary shares (unless a higher majority is required by the company charter); and
(ix) to perform public placement of securities convertible into ordinary shares of a company in excess of 25% of earlier allotted ordinary shares (unless a higher majority is required by the company charter).
Besides, holders of over 25% stake enjoy wider rights of access to accounting books and records, as well as minutes of the management board (if any) of a company.
Pre-emption
In addition, shareholders in closed joint-stock companies are entitled to the statutory preemption right (right of first refusal) with respect to shares of stock offered for sale by existing shareholders; it should be noted, however, that pre-emption rights are only enforceable with respect to disposal of relevant shares for value, i.e. no demand for pre-emptive acquisition shall be legal (or enforceable) where a selling shareholder makes a disposal of his shares without any consideration (e.g. by gift). Moreover, right of first refusal is only applicable with respect to selling shares to a third party and shall not extend to cover transfer of shares from a shareholder to another shareholder of a company.
cf
44 cf September 2004 corporatefinancemag.com
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Appointment of the Board
According to Russian corporate law, a board of directors shall be appointed by cumulative vote of a shareholders’ meeting, i.e. each voting shareholder shall be entitled to a number of votes determined by multiplying number of voting shares such shareholder holds and a number of members to be elected to the board of directors (with the statutory minimum of 5).
Therefore, a holder of at least of 1/5 of a company’s voting stock is entitled to nominate at least one member of the board.
***
IVJ Legal Bureau
Moscow Office
2, Obolensky Pereulok, office 3
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M&A Review quickly guides you
through the deals that matter. Learn
more about the financing techniques
and structures used in this month’s
most notable deals.
www.corporatefinancemag.com
corporatefinancemag.com
May 2004M&A REVIEW1
All the market news and league tables compiled using Dealogic’s M&A Global
French-German drug company Aventis
has accepted an improved offer from
French drug company Sanofi- Synthelabo,
which values Aventis at €55.3
billion ($65 billion). Sanofi nearly doubled
the cash element of its bid to €20
per share, which raised its bid by 14%.
The offer now includes five Sanofi
shares and €120 for every six Aventis
shares, valuing each Aventis share at
€68.93. The deal is a turnaround for
both companies. Aventis originally
rejected an earlier hostile offer saying
the company would be stronger without
Sanofi. It even went so far as
initiating talks with Swiss drug company
Novartis to obstruct Sanofi’s bid.
However the French government
exerted strong influence to create a
“national champion” in the pharmaceuticals
industry. Despite comments
from French president Jacques Chirac
and German chancellor Gerhard
Schroder that the deal should be a private
sector matter, French PM
Jean-Pierre Raffarin applied intense
pressure to Aventis. A bid from Novartis
could have led to a regulatory battle
in Europe – with the French government
in support of a Sanofi-Aventis deal
and the European Union’s competition
In this issue
2 Deal Focus:Tullow oil; Belgium
4Moves:Joseph Chu at Rabobank;
Roberto Casati at Cleary Gottlieb
6 Regional Focus: Central &
Eastern Europe
8 Company Focus:Royal Bank of
Scotland
9 Deal Data:The top deals profiled
from around the world
22 M&A league and volume tables
Issue 38 May 2004
The French blockbuster
continued on page 2
Largest pharmaceutical deals since May 1, 2001
AnnouncedCompleted Value ($m) Target Target Target Business Bidder Bidder Bidder
Name Nationality Description Name Nationality Advisers
26/01/04 77,874.891Aventis SA France Pharmaceutical product Sanofi- France ML, BNPP
developer and producer Synthelabo
15/07/02 16/04/03 59,825.570Pharmacia Corp USA Manufactures and sells Pfizer Inc USA BEAR,
pharmaceutical products LFNY
17/12/01 16/07/02 10,791.130Immunex Corp USA Discovers, manufactures Amgen Inc USA GS, BEAR,
and markets therapeutic SSB
products
10/10/03 08/04/04 10,089.806 Amersham plc UK Pharmaceutical provider of General Electric USA GS
imaging products and srvcs
24/02/04 7,880.771 Fujisawa Pharma- Japan Manufacturer of Yamanouchi Japan MS
ceutical Co Ltd biopharmaceutical products Pharmaceutical Co
07/06/01 02/10/01 7,800.000 DuPont Pharma- USA Manufactures pharma- Bristol-Myers USA JPMC
ceuticals Co. ceutical products Squibb Co.
23/06/03 12/11/03 6,442.000 Biogen Inc USA Developing, manufacturing IDEC Pharma- USA ML
and marketing drugs ceuticals Corp
31/10/03 22/01/04 3,419.210 Sicor Inc USA Generic pharmaceuticals Teva Pharma- Israel LEHINC,
ceutical Industries CSFB
10/12/01 01/10/02 2,980.885 Chugai Pharma- Japan Medicines for human use Roche Holding Switzerland GS
ceutical Co Ltd AG
(50.1%)
07/05/01 07/05/01 2,794.032 Roche Holding Switzerland Developer and manufacturer Novartis AG Switzerland
AG (20%) of pharmaceutical and
chemical products
SOURCE: DEALOGIC
corporatefinancemag.com April 2004M&A REVIEW1
All the market news and league tables compiled using Dealogic’s M&A Global
DEAL AT A GLANCE
»Merger creates world’s largest
brewery
»Combined revenueof $11.9 billion
The Interbrew and AmBev merger,
announced in the first week of March,
will, the participents hope, create the
perfect brew – a beverage company
with strongholds in both Europe and
the Americas. Ranked the fourth and
fifth largest brewers in the world respectively,
according to drinks market
researcher Canadean, the two companies
together will rank number one or
number two in more than 20 beer markets
with best selling brands such as
Stella Artois, Becks and Skol.
The new ompany,InterbrewAmBev,
will, on a 2003 pro forma basis, have a
global market share of approximately
14%, combined revenue of $11.9 billion
and EBITDA of $3.0 billion.
Interbrew CEO John Brock says:
“Joining with AmBev, Latin America’s
leading brewer. preserves the best of
both companies, while enhancing our
profitability and prospects. For Interbrew,
it also represents an opportunity
to enter some of the fastest growing
beer markets in the world.”
In this issue
3 Deal Focus:Russian M&A;
publishing deals lift Media sector.
4Sector Focus:Retail
6Moves:Ian Williams at Baird and
Francois Facon at BNP Paribas
7 Company Focus: Tesco
8 Deal Data:The top deals profiled
from around the world
20 M&A league and volume tables
Issue 37 April 2004
Merger creates brewery giant
continued on page 2
Latin American Beverage Industry M&A Deals
Announced CompletedValue Target Target Target Business Bidder Name Bidder Bidder
($m) Name Nationality Description N ationality Advisers
03/03/04 — 4,117.283 Companhia de Bebidas Brazil Beverage products Interbrew SA Belgium Goldman Sachs
das Americas SA & Co, Lazard
AmBev (21.8%)
10/12/03 28/01/04 129.599 Embotelladora Latino- Peru Beverage products Corporacion Jose R Peru JP Morgan
americana SA – ELSA L indley SA
(60%)
14/01/03 17/04/03102.700 Quilmes Industrial SA- Argentina Holding Company Beverage Associates United States —
QUINSA (15%) C orp – BAC
04/11/03 04/11/03 42.514 Embotelladoras Arca Mexico PET injection and Amcor Ltd Australia —
SA de CV (PET injection blow-molding
and blow-molding)
02/12/03 02/12/0336.000 Cerveceria SurAmeric- Ecuador Brewery Companhia de Bebidas Brazil —
ana SA (80%) das Americas SA –
AMBEV
12/02/04 12/02/04 32.382 Embotelladora Rivera Peru Assets Companhia de Bebidas Brazil —
SA (Assets) das Americas SA –
AMBEV
01/04/03 23/06/03 23.260 Union de Cervecerias Peru Beverage products Bavaria SA Colombia BBVA Corporate
Peruana Backus y Finance
Johnston SA (32%)
11/12/03 11/12/03 10.190 Decasa Brazil Distillery Grupo Tenorio Costa Brazil —
08/06/03 08/06/03 4.500 Bodegas Nieto SenetinerArgentina Winery Molinos Rio de la Plata Argentina —
(39%)
15/09/03 15/09/034.000 Bodegas y Vinedos Argentina Wine producer Private Investor Argentina —
Lopez (33%) (Hector Fernando Colella)
Source: Dealogic
M&A GUIDE
2004 T0 2005