Russian companies can misuse the mechanism of mandatory or non-mandatory offers to violate the rights of minority shareholders, which calls for legislative improvements and broader regulatory powers of the Central Bank, according to the Association of Institutional Investors (API).
In the API’s view, the price of the voluntary offer of Lebedinsky GOK (owned by Alisher Usmanov’s Metalloinvest Holding) to repurchase 10% of the shares in Mikhailovsky GOK (MGOK), another key asset of the holding, from Sberbank’s Cypriot entity could be significantly understated.
The API considers Metalloinvest Holding’s voluntary buyback offer could be a remake of the squeeze-out of Uralkali minority shareholders and calls on the Central Bank to “protect the legitimate interests” of MGOK’s minority shareholders.
The text of the API’s letter addressed to Central Bank Governor Elvira Nabiullina is available to Interfax.
The API believes that the voluntary offer price (16.7 thousand rubles per share) may directly influence the price of the subsequent mandatory buyback price.
“Seeing as the shares of MGOK were repurchased using a similar offer, even if it was voluntary, not mandatory, it can be easily assumed that the real purpose of these transactions was to create an opportunity for Lebedinsky GOK to use the mechanism for squeezing out minority shareholders at an agreed price,” the letter says.
As noted in the investment community’s comment for the Central Bank, “the price of the voluntary offer, according to investors’ calculations based on a conservative EV/EBITDA estimate of 3.5-4.0x and an IFRS EBITDA of about 68 billion rubles in 2018 and about 90 billion in 2019, may be 2.6-3 times below the fair stock price unadjusted for minority interest and low liquidity discounts.”
Metalloinvest called the API’s assumption about the unfair buyback price groundless.
“When determining the voluntary buyback price of 16.9 thousand rubles per share, Lebedinsky GOK proceeded, among other things, from the prices at which Mikhailovsky GOK shares were acquired in 2011 to 2017, ranging from 4.5 to 9.8 thousand rubles per share,” the company’s spokesperson told Interfax.
Metalloinvest also noted that Lebedinsky GOK’s voluntary offer strictly conformed to the Russian law where no mandatory voluntary buyback price setting requirements are established.
“The mandatory buyback shall be conducted in strict accordance with the current law of the Russian Federation, with an independent valuer engaged to determine the fair market price of Mikhailovsky GOK shares,” the spokesperson of the mining & smelting holding added.
At the beginning of August, Metalloinvest disclosed the repurchase from Sberbank’s Cypriot entity Sberbank Investments Limited of the 10% stake in MGOK sold to Sberbank one year earlier. As a result of the transaction, Metalloinvest’s Lebedinsky GOK has consolidated 99.3% of MGOK shares. According to the latter company’s 2018 report, its free float is 0.683% distributed among more than 1,500 shareholders. Later, Lebedinsky GOK launched a voluntary offer to repurchase all the outstanding MGOK shares at a price of 16,866 rubles 10 kopecks per security. Therefore, the transaction with Sberbank amounted to 12 billion rubles.
WHEN HISTORY REPEATS ITSELF
In late summer, the API already sent to the Central Bank a similar request calling for protection of minority interests during the squeeze-out of Uralkali shareholders whose shares were repurchased at a price the investment community thought to be artificially understated.
At that time, the API, technically a shareholder of Uralkali holding 10 shares, asked the Central Bank to turn attention to the preceding transactions between Sberbank’s subsidiary company Sberbank Investments and Rinsoco Trading (beneficially owned by businessman Dmitry Lobyak) as the latter company requested the buyback of Uralkali shares at a price of 120 rubles per security, which implied a 20% premium above the stock market price. In the course of these transactions, Lobyak’s company first sold 10.18% of the potash producer’s ordinary shares to Sberbank’s entity, then repurchased them through a mandatory offer (at a price of 89.3 rubles per security).
“In view of the investment community, the actions of Sberbank Investments, Uralkali and its substantial shareholders have acted in a way that could be considered as artificial repurchase price manipulation with the aim of the subsequent squeeze-out of minority shareholders at a cheaper price,” the API’s letter noted.
API Executive Director Alexander Shevchuk admits that the appeals to the Central Bank have not so far yielded a direct effect: the regulator recommends filing a legal claim as its own powers do not go beyond assessing compliance with technical offer requirements. The API therefore proposes expanding the Central Bank’s powers. “Investors would like to see opportunities for effective pretrial protection of their rights or to be backed by the regulator when going to court so as to minimize costs. Despite its mega-regulator status, the Central Bank only has formal powers to suspend the buyback actions (when considering the request for repurchase by the issuer). According to investors, the regulator should be given the power to freeze the buyback procedure, to seize all necessary documents and to conduct its own investigation, including the subsequent use of its results in court proceedings when requested by disgruntled minority shareholders – where the regulator is involved as a third party – or at its own initiative when being sued by the issuer for suspending the buyback,” Shevchuk told Interfax.
The regulator should be empowered to order an independent assessment when doubting the price proposed by the issuer submitting a buyback request, and to use a professional judgment, the API believes.
Besides, according to Shevchuk, the law should be amended so as to remove the legal loopholes that currently enable “fixed games” such as the one involving Uralkali, MGOK and Sberbank’s subsidiaries. “The law should leave no room at least for blatant abuse,” he said.