After several years of corporate governance improvements driven by the project of creating an international financial center in Moscow, one sees a reverse trend, a crackdown on minority shareholders’ rights. Specifically, shareholders cannot request documents anymore and have been virtually deprived of the right to approve major transactions. The Russian Parliament has rejected the amendments intended to strengthen the procedure for mandatory offers applicable to acquisitions of large stakes in listed companies. What is worse, there is a proposal to abandon the “one share one vote” principle, actually the basic rule protecting investors of public joint-stock companies practically meaning that the shareholder’s influence on the company’s business should be proportional to the ownership interest.
The Ministry of Economic Development’s Expert Council for Corporate Governance – in which the investment community is not even represented yet – proposes that public joint-stock companies be allowed to issue shares carrying super-rights. Such shares, according to the initiators, will belong to the founders of businesses, which will ensure proper development of innovative companies under the Russian jurisdiction. Within this framework, financial investors are regarded as the key factor hampering such development as they allegedly seek to seize control at the first opportunity and ruin their own business.
First, the initiative aims to solve a problem that has not even arisen yet. Seriously, one can hardly imagine unreasonable investors in need of external care actually depriving them of voting rights in relation to their investments. Furthermore, if the founder cannot at least convince investors that the company pursues an appropriate strategy, investors avoid investing in such a company in the first place, let alone there may be problems with the strategy as such.
Secondly, the Russian market knows no precedent of minorities ousting the majority shareholder from the company management, while evidence to the contrary is ubiquitous. A rhetorical question poses itself: is the number of cases where minority shareholders are prejudiced likely to subside or increase with the principal shareholder’s influence on decision-making being disproportionately higher than the equity stake in the company?
Thirdly, the casual link between the possibility to issue shares carrying super-rights and the pace of economic development, if at all, has not been proven. We believe that the main reasons for setting up high-tech companies under non-Russian jurisdictions have nothing to do with the Russian corporate legislation.
But the potential lack of control over the principal shareholder could catapult us back into the “turbulent corporate 1990s”, especially given that the authors seem to be advocating less responsibility for directors and higher liberalization in related-party transactions in another block of their initiatives.
One should not forget either that even theoretically good ideas tend to degenerate into failures when implemented in Russia amid the local law enforcement practice. It is no coincidence that the jurisdictions where the “one share one vote” principle does not necessarily apply (including the US and the UK) ensure advanced regulatory and judicial protection of shareholders’ rights, including protection against abuse on the side of controlling persons. In Russia, one could hardly find at least three cases of the regulatory body or minority shareholders successfully imposing liability on the controlling person of a company. The authors of the initiatives seem to simply ignore this.
The Russian financial sector taken broadly, we recently witnessed pension savings of millions of citizens – including income from their investment – safely “privatized” by a number of asset management companies responsible for their management under cover of effective actions (such as IPOs of companies belonging to the same groups). The establishment of new investment vehicles without providing investors with adequate rights could entail equally disastrous consequences. Furthermore, where more competent institutional investors can distinguish between fraudulent and real projects, private investors may have to suffer another blow.
It should be noted that the Government’s Expert Council is considering the possibility of allowing existing listed companies to issue such shares – which is obviously tantamount to depriving their minority shareholders of the rights currently given to them, the persistence of which they assumed when buying their stakes. As regards the “powerless” minority shareholders of yet-to-be-established new companies, it seems logical to insist that they should be aware of what they invest in. This logic, however, is perverse.
One of the fundamental questions in relation to the corporate law policy is whether the corporate legislation protects the weaker side of corporate relations, namely, minority shareholders. The Russian corporate law has so far successfully met this challenge, a huge advantage of our jurisdiction in the eyes of investors.
Large businesses in triumph over small shareholders
If no restrictions apply to setting up companies stripping minority shareholders of their rights, such shareholders can be prejudiced in any way. The media, again, will buzz about thousand and one violations against shareholders’ rights. Saying that investors had to realize themselves what they invested in is a lame argument in this case.
The world currently considers the full use of the “one share one vote” principle as the best practice. The largest global portfolio investors and the platforms established by portfolio investors and corporate governance experts advocate this principle in their public policies. UN-supported principles for responsible investment signed by more than 2,000 participants of the investment community refer to “multi-vote” shares as a factor preventing investors’ active ownership and efforts to ensure companies’ responsible behavior. According to the G20/OECD corporate governance principles, “multi-vote” shares create opportunities for abuse on the part of the controlling shareholder. The same approach is typical for the BRICS. In Brazil, such shares are not in use at all; in India, they look more like preferred shares in Russia. Having such shares dramatically limits listing opportunities in China and makes listing impossible for new companies in the RSA. In the UK, “multi-vote” shares are not allowed for premium-listed companies. Limitations are imposed on the inclusion of multi-vote stock issuers or their weight in indices. By contrast, we are now supposed to move from the forefront of good corporate governance to the land of outsiders.
In view of the above, multi-vote shares, if any at all, should only be allowed for new public JSCs and based on the prudent Chinese model. The new public JSC is to meet the specific criteria of a fast-growing high-tech business. The supershares must belong to the company founders. Their only advantage should be a higher, to a certain extent, number of votes, which should not apply to strategic decisions, electing independent directors and issues related to shareholders’ rights. The shares should lose their special status if the company founder ceases to own them. Besides, such companies, in any case, should provide additional protection of shareholders rights’ (opportunities to request documents from the company, a lower ownership threshold for court actions), etc.
Otherwise, the establishment of “multi-vote” shares will be another showcase of seemingly good intentions paving a road the Russian corporate governance is not advised to follow.
Written by: Director, Prosperity Capital Management (PCM); Director of Corporate Governance, PCM Representative Office