Q I Q I Q I Q I Q I Q I Q II Q II Q II Q II Q II Q II Q II Q IV Q IV Q IV Q IV Q IV Q IV Q III Q III Q III Q III Q III Q III RUSSIAN ECONOMY IN trends and outlooks During the period under review, when purchasing companies on the territory of Russia in 92% of cases corporate buyers from EU countries assumed control over the target; in 4% of transactions they bought 50% in the company; in 2%, they purchased a blocking stake, or 2649% in the authorized capital.
During the same period when purchasing companies on the territory of Russia, buyers from former Soviet Union countries in 80% of transactions acquired a controlling stake and in 20% of transactions, 50% of shares in the target companies. Buyers from other foreign countries in 89% of cases acquired a controlling stake, in 6% of transactions, 50% in the target companies, and in 5%, up to 49% in the companies.
The majority of transactions in which foreign companies bought targets in Russia were controlling stake acquisitions by EU and former Soviet Union countries (Fig. 14).
Number of transactions 1-25% 26-49% 50% Control 1-25% 26-49% 50% Control 1-25% 26-49% 50% Control EU countries FSU republics Other foreign countries Fig. 14. Share in Russian M&A targets bought by foreign companies, between Q2 2003 and Q2 2009.
The most frequent transactions in the period between Q2 2003 and Q2 2009 were controlling stake acquisitions. The next phase in the development of this market will see the emergence of new technologies for conducting transactions, company expansions through industry concentration, consolidation into specialized holding companies.
Russian companies' attempts to enter the world M&A market are being made more difficult both by competition, which in recent years has become more fierce, and by the absence of Section Institutional Problems a clear and practicable program of support for Russian investment abroad. In addition to the lack of access to new assets inside the country and a growing competition on the domestic market from Russian and foreign companies, the drive towards acquiring assets abroad is largely informed by the desire to reduce dependence on the state and the tax base and to ensure the safety of assets.
According to available preliminary data, in the first nine months of 20091 a total of completed transactions were recorded (including 24 transactions carried out within the framework of Russian Federal Property Fund auctions), which is 43% fewer transactions than in January – September 2008 (964). The decrease in the value of the Russian M&A market slowed down: in the first nine months of 2009 the value of the market dropped from $98.2 bln in 2008 down to $41.4 bln in 2009. According to the findings of the study, the aggregate data on the Russian M&A market look as follows:
– in terms of the number of transactions, the year 2009 (546 transactions) is comparable to 2003 results;
– in terms of the amount, the year 2009 ($41.4 bln) is comparable to 2006 results;
– the average transaction price was $97.7 mln;
– ratio to macroeconomic indicators (4.6% — ratio between the amount of transactions and Russian GDP) is comparable to 2004;
– 52 transactions worth over $100 mln;
– management buyouts (MBO) account for 2% of the market in terms of the amount and 3% of the market in terms of the number of transactions;
– transactions in the energy sector make up 68% of the market in terms of the amount and 10% of the market in terms of the number of transactions;
– controlling state acquisitions make up 37% of the market in terms of the amount and 19% of the market in terms of the number of transactions;
– 13% of transactions account for 90% of the value of the market;
– diversification transactions make up 18% of the market in terms of its value and 33% of the market in terms of the number of transactions;
– foreign companies' acquisitions of Russian companies make up 9% of the market in terms of the number of transactions and 18% of the market in terms of its value.
Below are the more significant features of the Russian M&A market that make it different from the Western practice of capital consolidation:
– weak direct control from state regulators over M&A processes in progress;
– little use of organized stock market instruments in M&A transactions (the majority of transactions involve not publicly listed but private companies, although there is some positive dynamics there);
– minority shareholders' inability to have considerable influence over company operations;
– lack of transparency as regards companies' ownership structure (end beneficiaries);
– single ownership of, on average, considerably larger blocks of shares than in Western companies;
– high level of transactions carried with the use of offshore entities;
A study of the Russian M&A market conducted by ReDeal analytical group within the Mergers.ru project/ "Mergers and Acquisitions in Russia". The study covers completed processes of the transfer of corporate control rights (M&A processes) in Russia.
RUSSIAN ECONOMY IN trends and outlooks – continued prevalence of hostile takeovers1 and criminal seizure of assets;
– lack of disclosure on a considerable number of M&A transactions caused by desire to maintain confidentiality both to conceal data on beneficiaries and to prevent undesirable transactions on the part of competitors, including hostile takeovers and seizure of assets (according to some estimates, at least 30-40% of the total amount of public transactions are shadow transactions);
– use of administrative resource and non-market methods to facilitate the acquisition of assets by the state, state corporations and state-controlled companies with mixed ownership.
Such factors as high concentration of ownership, insufficient development of marketeconomy institutions, low effectiveness of the judicial system, lack of transparency in ownership rights, and corruption have a systemic influence on all aspects of the Russian M&A market. At the same time, low transparency and little information on transactions, lack of professional intermediaries and active involvement of state companies suggest, among other things, that the corporate control market is experiencing efficiency problems.
5.5. Corporate Governance and Legislation on Legal Entities In March 2009, submitted for the debate was the draft Concept of Development of the Legislation on Legal Entities (hereinafter, the Concept) which was developed in accordance with the Decree No. 1108 of July 18, 2008 of the President of the Russian Federation on Upgrading of the Civil Code of the Russian Federation and set the guidelines for development of the legislation on legal entities2. The document was expected to be submitted to the President early in summer 2009.
A typical complaint about the Law on Joint-Stock Companies of 2005 as amended since 2002 was the fact that it excessively reproduced the Anglo-Saxon scheme of protection of shareholders’ rights (minority shareholders). The Concept of Development of the Corporate Legislation until the Year 2008 (prepared by the Ministry of Economic development of the Russian Federation) which became the main program document in the 2000s in that particular area is to some extent a manifesto favoring the scheme of protection of majority shareholders’ rights. In fact, it suits to a great extent such actual economic processes in corporate governance as are typical of the most Russian companies (the continental European scheme). At the same time, radical changes in the regulating strategy should not result in new imbalances to the detriment of one or another group of entities of the corporate relations.
The draft Concept of 2009 is a new effort to carry out a system-based development of mechanisms of corporate governance and solve the most topical Russian problems in that In the West, the term "hostile takeover" is used to mean the acquisition of a company's assets without its shareholders' consent, often without paying an adequate compensation and/or with the violation of shareholders' other civil rights and interests. In Russia this term is often used to describe actions related to acquiring assets through committing criminal offences (fraud, forgery, share register theft, bribery, etc.). This approach appears erroneous. It is important to have a clear definition of the term since the authors propose countering criminal seizure of assets with the same measures that have been developed in the West to counter hostile takeovers and cannot be effective when applied to quite different phenomena.
Draft Concept of Development of the Legislation on Legal Entities is an integral part of the general draft Concept of Development of the Civil Legislation of the Russian Federation which is being prepared by the Private Law Research Center under the President of the Russian Federation by order the Council for Codification and Upgrading of the Civil Legislation of the Russian Federation under the President of the Russian Federation.
Section Institutional Problems area. From the conceptual viewpoint, it is important to understand if substitution (may it be a gradual one) of the corporate governance scheme and growth in level of responsibility of the business’ actually take place.
5.5.1. “Corporate” Rights A specific feature of the Russian scheme of corporate governance is a limitation of rights of participants in Russian economic entities, including shareholders as regards the company’s property. Shareholders are recognized to have statutory rights – the right of demand to the company (Article 2 of the Federal Law on Joint-Stock Companies, the notion of a “share” set forth in Article 2 of the Federal Law on Securities). In accordance with the Civil Code, participants in economic relations are recognized to have either statutory rights to the company or proprietary rights to the company’s property (Article 48 (2) of the Civil Code). Without elaborating on theoretical aspects of the issue, it is to be noted that statutory rights are relative to the extent that they are a sort of derivatives from proprietary rights which include the right of ownership which factor is reflected in every aspect of realization of such rights (including protection thereof).
The architects of the Concept suggest that apart from statutory rights participants in economic entities, including shareholders should be legally recognized the rights of participation in the company, and that would permit amendment of the status of founders and shareholders of the company. Participants’ aggregate rights (statutory rights, that is, the right of demand to the company and the right of participation in it) are proposed to be called “corporate” rights of participants in economic entities.
In addition to the above, the Concept provides for the following:
– Introduction of a possibility for participants to dispute decisions passed by general meetings of shareholders and other collegial bodies, as well as conditions of withdrawal or exclusion from the number of participants (for all the types of legal entities) ;
– Inclusion in the Civil Code of a provision granting participants in any corporation the right to receive information.
5.5.2. Dependence of the Boards of Directors Expansion of the rights of founders and shareholders is accompanied by efforts to change to some extent regulation of activities by boards of directors of joint-stock companies. By admitting the fact that the overlap of the management function and the supervision function is a key problem, the architects of the Concept propose “introduction of a more efficient structure of bodies of a joint-stock company” with an explicit division of the above functions between such bodies. However, the proposed measures, that is, a refusal to use the name “the Board of Directors” and call it instead “the Supervisory Council”, as well as the ban on a simultaneous holding of offices both in the Supervisory Council and the Board of a joint-stock company are not enough to contribute to any resolution of the above problem.
The Russian corporate governance of joint-stock companies was modeled in 1990s after the US scheme where the structure of corporate governance is characterized by a higher dispersion of the equity capital which factor prevents the board of directors to be put under control by a single shareholder.
In Russia, the situation is quite the opposite: according to the outputs of the information transparency survey carried out in 2007 by the Standard&Poors Rating Agency out of eighty large Russian companies 74 companies had at least one major shareholder which owned more RUSSIAN ECONOMY IN trends and outlooks than 25% of the equity, while 57 companies were controlled ones in which over 50% of the equity was owned by a sole shareholder or a group of shareholders which made an agreement between themselves. Such a breakdown of corporate ownership is a mirror reflection of the composition of boards of directors: 46% of directors surveyed are direct representatives of controlling shareholders, while another 21% of directors are made up of different insiderdirectors, including senior executives. Such a situation in leading companies (along with an empirical estimate) permits to assert that in other 180,000 Russian joint-stock companies which activities lack transparency the extent of control over the board of directors by major shareholders is much higher.
Controllability of the board of directors by a major shareholder or a group of shareholders often results in taking of such decisions which suit the interests of the controlling shareholder rather than the company. Due to a lack of mechanisms of settlement of disputes, conflicts between different groups of shareholders often overgrow into corporate wars and takeovers of corporate assets.
To reduce that extent of control over the board of directors by the controlling shareholder (which problem is the most topical in the Russian system of corporate governance), it is important to carry out the following:
1) Introduce changes in the composition of the board of directors and the decision-making procedure and legislative consolidate mandatory representation in the board of directors of minority shareholders and representatives of controlled entities along with the expansion of the range of issues on which the board of directors is required to take unanimous decisions1.
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