Investors assess risks of tug-of-war between Rosneft and Sistema for market

Rosneft’s court victory over Sistema in the case of Bashneft’s losses may jeopardize the practice of stock repurchase from minority shareholders and paralyze voting by Boards of Directors on business restructuring issues, API investors believe.
On Monday, November 13, Sistema presented a letter from Alexander Shevchuk, Executive Director of the Association of Institutional Investors (API), to the Eighteenth Arbitration Appeal Court of Chelyabinsk handling the dispute between Rosneft and Sistema PJSFC over the damage amounting to 170.6 billion rubles caused to Bashneft. The letter is the API’s response to a request made by Maxim Muzyka, one of Sistema advocates. RBC has a copy of the letter the authenticity of which was confirmed by Mr. Shevchuk and a representative of Sistema.
“We have responded to the advocate’s request which posed issues of systemic relevance without reference to any company,” Alexander Shevchuk commented for RBC. “The API focuses on principles, not on the specific dispute between the two companies in which we deliberately do not intervene as long as we do not know all the details and seeing as there are both Rosneft and Sistema shareholders among the API members,” he added.
A dispute worth 170.6 billion rubles
In May, Rosneft filed a claim against Sistema seeking recovery of damage in the amount of 106.6 billion rubles caused to Bashneft during the latter company’s restructuring in 2014. This amount, according to Rosneft’s estimates, includes the loss from the transfer to Sistema of a 49.4% stake in Sistema Invest CJSC in exchange for Bashneft shares and other assets (57.2 billion rubles), the loss from the write-off of Sistema-Invest’s debt to Bashneft (37 billion rubles), the loss from the retirement of 3.9% of Bashneft shares which the oil company purchased from the minority shareholders opposing the terms of transaction (12.5 billion rubles). Rosneft later increased the amount of claim by 64 billion rubles to 170.6 billion rubles) taking into account the Russian ruble revaluation against the US dollar. On August 23, the arbitration court of the Republic of Bashkortostan allowed the claim in part, ruling to recover 136.3 billion rubles from Sistema. Both parties to the litigation appealed against the ruling. On November 13, the court of appeal postponed the trial until December 4.
At the request of Sistema, the API commented on the likelihood of the company incurring losses should shares be repurchased from the minority shareholders and subsequently canceled. The law obliges the company to make a stock repurchase offer to dissenting minority shareholders (in the Bashneft case, to the minority shareholders opposing the restructuring), and compliance with the law cannot infringe upon the rights of shareholders, Shevchuk emphasized in the letter. In his view, no losses arise in this case as the company repurchasing shares from its minority shareholders receives “equivalent property in terms of value.” The company can then sell the shares to get an equivalent in money or cancel them to “balance” the value of securities by reducing the amount of liabilities to shareholders (this means that it would have to pay less in dividends – RBC) as the shares of the other shareholders in the company’s profits would increase, the letter notes.
The court ruling to recognize the loss caused by the repurchase of shares from dissenting minority shareholders will entail negative consequences for the market, the head of the API points out. Majority shareholders will have an excuse for evading the repurchase of shares, while Board members will face a “hypothetical risk of committing an offence” regardless of how they vote on the repurchase of shares from minority shareholders, Shevchuk adds. Voting in the affirmative may bring about a claim seeking punishment for damaged caused to the company, the negative vote a claim from minority shareholders dissatisfied with the law violation, the API CEO notes warning that this may negatively affect the capitalization of Russian companies. The current stock repurchase system allows dissenting minority shareholders to sell their holdings at a price determined by law, while companies can avoid a share price slump if some of the shareholders oppose a corporate action. Should dissenting investors lose the share buyback guarantee, any restructuring or other corporate action can trigger a mass sale of shares in the market by disgruntled shareholders, sometimes resulting in a collapse in stock prices, the letter says.
Minority shareholders will not be hurt
“The API is a reputable organization uniting professional specialists. We made a point of presenting to the court the opinions of the leading scientific institutes in the field of law and economics and of actual investors represented by their association in this case,” Sistema’s official spokesperson Sergey Kopytov commented for RBC.
Rosneft’s spokesperson refused to comment on the API letter. According to the oil producer’s claim, the loss was caused to Bashneft by the cancellation of shares repurchased from the minority shareholders, not by the repurchase. “The controlling persons deprived Bashneft of the right to sell the shares to third parties and to recover its expenses for the buyback of shares,” the claim reads (its copy is available at RBC). A court ruling that the loss was caused by the cancellation of the shares is unlikely to compromise the practice of repurchase as such, Olga Snitserova, head of Sameta’s corporate practice, believes. In any case, repurchase of minority holdings is a must where consolidation reaches a threshold that requires one, this requirement will remain notwithstanding the court ruling, A2 lawyer Mikhail Alexandrov agrees. Otherwise, if the court rules that the loss was caused by the buyback of shares from minority shareholders, Sistema will have an opportunity to recover the money from investors through court action as well, the lawyer argues.
The court decision to recognize the cancellation of treasury shares by the company as a loss will have a weak effect on the value of Russian businesses, ACRA analyst Vasily Tanurkov notes explaining that the cancellation of shares following their repurchase as such does not affect the enterprise value and the stock price, since it does not entail any real cash outflows from the company.
However, the court ruling in favor of Rosneft could have an adverse impact on the investment climate in general, Mikhail Alexandrov warns: a foreign investor buying, restructuring and willing to sell a business would face the risk of a damage recovery claim. Unable to affect Russian corporate practice if made by a lower court, this ruling can become a judicial precedent if delivered by the economic panel of the Russian Supreme Court, the lawyer notes.

By: Alina Fadeeva, Timofey Dzyadko.
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