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Corporate law and governance, financial transaction taxes

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The Un-Fabulous Four

03.07.2011 / Vedomosti / 121 (2887)

Four major companies have expressed their concern to Vice Premier Igor Sechin over a draft bill initiated by the President. The companies are wary of disclosing information to minority shareholders and the Board of Directors.

Last week the State Duma passed in the first reading amendments to the Joint-Stock Companies Act and the Securities Market Act that considerably extend minority shareholders’ rights to corporate information. In March, following a session on investment climate improvement, President Dmitry Medvedev requested that the Government draft amendments to the procedure of disclosure. However, the bill disappointed several Russian majors — Rosneft, Transneft, Surgutneftegas and TGK-2. Their concerns are voiced in a 12 May letter to Vice Premier Igor Sechin who is in charge of the Fuel and Energy industry. TGK-2 confirmed this fact while Rosneft and Surgutneftegas declined to comment and Transneft was unavailable for comment.

All four companies are at odds with their minority shareholders. Rosneft and Transneft are in litigation with minority shareholder Alexey Navalny, declining to present him with Board of Directors protocols and other documents. Despite two lost appeals, the companies are attempting to block the disclosure of documents in cassation. Surgutneftegas has presented Navalny with protocols but not the appendices that the minority shareholder was also entitled to. The TGK-2 conflict between the main owner (Sintez group) and key minority holders Prosperity Capital, Deutsche Bank AG and Clearstream Banking (over 30% shares in total) is not information-based — in this case minority holders are attempting to appoint their representatives to the Board.

The new Government proposals will undermine the competitiveness of Russian companies and the investor appeal of the economy, warn the authors of the statement. For instance, companies will be under obligation to disclose information on their subsidiaries to all shareholders, not just the 25% holders as today. Companies are also unwilling to broaden shareholder access to commercial secrets — this, in their opinion, violates the ‘constitutionally important balance of interests of the shareholders and the company’. Companies should be protected against ‘investors seeking a quick profit’, says TGK-2. However, shareholders will only receive confidential information upon signing non-disclosure, according to the bill; this is common practice in many developed countries, says Partner at GBLP Anton Sitnikov. The President calls for regulating access to information, not making it unlimited, says the Prime Minister’s press secretary Dmitry Peskov.

The Government will listen to the state-owned and private companies when setting these regulations, he says.

Mostly, companies are against equal information access rights for the shareholders and the Board of Directors.

This is a very important norm, which should be reflected in the bill, says Ivan Oskolkov, department Director at the Ministry for Economic Development. The Department will propose it for the second reading.

The four companies are strongly opposed to this: members of the Board of Directors are hired managers, who do not invest in the company and cannot have equal rights with owners. Besides, the bill is not clear enough on confidentiality protection and that “creates a huge propensity for abuse on the part of Board of Directors”, the letter says.

This is a reaction to the switch of officials for independent directors on the Boards, says manager of one of the companies who signed the letter. “Different people appear on the Board of Directors, and that may lead to conflict of interest or misuse of information”.

Amendments to the bill allude to foreign practice, developed corporate law (the USA, Germany, the UK) doesn’t equalize information rights for shareholders and the Board of Directors.

Analyst Oleg Shvyrkov of Standard & Poor’s says he is bewildered by such an argument, because if international practice does not in any way restrict the Board of Directors’ access to information, including confidential information.

The Directors are “legitimate insiders” who are allowed access to any document, says Oleg Shvyrkov.

If a person is hired to manage the company, he has to be given an opportunity to work efficiently, stresses Oskolkov.

The Board of Directors are responsible for the reputational and financial risks of their decisions, and not providing them with complete information on the company is ridiculous, agrees Alexander Filatov, Director of the Corporate Governance Expert Centre.

Even today, there’s a way for directors to receive all info and documents by request with a non-disclosure agreement, independent directors Sergey Guriev (Mortgage Agency, Sberbank), Vladimir Gusakov (Russian Railroads, Mortgage Agency, Rosagroleasing) and Oleg Viugin (Transneft) say to “Vedomosti”.

Directors managed to get access also to the complete report on Transneft and its subsidiaries’ charity projects, adds Viugin, but these documents are not public.

In 2010, independent Aeroflot Director Sergey Aleksashenko received information on financial support to the aviation industry only by threatening to put the impeachment of the CEO on the Board of Directors agenda.

The representatives of UC Rusal on the Board of Directors of Nornikel could not get access to the information about Nornikel subsidiaries’ deals. That is why UC Rusal backs the new bill, says the representative of the company. “The company always insisted on the public companies being more transparent, especially to the Board of Directors, who represent the interests of the key shareholders”. The Nornikel representative refused to comment.

Margarita Lyutova, Philip Sterkin

Improvement of corporate governance, Project Group №2, Project Group №2, Alexander Filatov, Ivan Oskolkov, Oleg Shvyrkov