Sanctions prevent independent directors from gaining votes from foreign shareholders


ADR/GDR holders cannot vote if a person hit by sanctions is nominated to the Board

Tatyana Lomskaya / Vedomosti

The owners of ADRs and GDRs of the companies where one or more Board of Directors members are targeted by the U.S. sanctions on Russia could not take part in the election of the Board of Directors as Western custodians refused to provide this service to them, as found out by experts of Russia’s Higher School of Economics and the Association of Institutional Investors (API).

The problem is exemplified by the Rostelecom and Aeroflot cases (their custodians being JPMorgan Chase and Deutsche Bank): the investors of both companies failed to vote for any of the candidates. The Board of Directors of Rostelecom is chaired by Sergei Ivanov, the Special Representative of the Russian President for nature protection, environmental and transport matters (head of the Presidential Administration of Russia at the time the sanctions were imposed), while CEO of Rostec Sergey Chemezov is a member of Aeroflot’s Board of Directors. Both are on the list of Specially Designated Nationals (the “SDN List”).

ADR holders do not vote themselves but transfer their votes via a custodian bank, according to a comment by Oleg Zhiznenko, a co-owner of the R.O.S.T. and JSC Independent Registrar Company: the custodian then provides the registrar with statistics on the number of shares registered to it which voted “for”, “against” or “abstained”, without disclosing the names of the holders.

There are custodians refusing to transfer statistics on the votes of their clients if one or more candidates to the Board of Directors are on the U.S. sanction list, the API Executive Director Alexander Shevchuk says: they either bar investors completely from voting at shareholders meetings, or allow them to vote on issues not related to Board members.

Voting for candidates hit by the sanctions is prohibited, says Cas Sydorowitz, CEO of the UK-based consulting company Georgeson: “The infrastructure makes these issues “not subject to voting”, while investors are still allowed to vote on other issues.”

The custodian banks of Aeroflot, RusHydro and Inter RAO informed ISS, an international proxy advisory firm, that some of the resolutions would be disregarded on account of the sanctions; ISS has therefore revised its report, now classifying some of the issues (election of the Board of Directors and remuneration payable to directors) as ‘non-voting issues’ to ensure that the votes cast by the shareholders [on other agenda items] are not invalidated,” ISS, one of the advisory firms providing voting guidance to many investors (another one being Glass Lewis), said in a response to Vedomosti’s inquiry.

U.S. citizens are banned from not only engaging in financial transactions with SDN-listed persons, but also from providing any services to them, a representative of the U.S. Treasury commented, adding that this is probably the real motive behind the voting restrictions: “The U.S. Treasury’s Office of Foreign Assets Control does not instruct businesses how they are to comply with the sanctions – it only informs them of prohibitions. It is up to banks to decide how to comply with the sanctions.”

JPMorgan Chase did not respond to a call for comment. Rostelecom notifies the custodian bank of the convening of the meeting and the meeting agenda, followed by a review, jointly with the voting ballot distributing organization, of the agenda items and the candidates nominated to the Board of Directors for compliance or non-compliance with the sanctions, the company’s spokesman said: “We did not make any special conditions or exceptions, it was at their discretion.”

Deutsche Bank declined to comment, while Aeroflot’s spokesperson referred the issues to the minority shareholders.

In 2016, Igor Sechin (CEO of Rosneft and Chairman of the Board of Directors of Inter RAO), another SDN-listed candidate, was nominated (but not elected) to the Board of Directors of RusHydro. The Bank of New York Mellon, the custodian of RusHydro’s and Inter RAO’s GDR programs, did not respond to a call for comment. “The holders of depositary receipts are normally active voters on the agenda, including issues related to the election of Board of Directors members. The historical proportion of the voting holders of depositary receipts is 35-40%,” RusHydro’s spokesperson commented without saying whether they voted in 2016. Ballot papers for GDR holders are based on the standard ballot papers, and the custodian bank is not authorized to make changes to its items, he added. This year, there are no SDN-listed candidates nominated to the hydropower company’s Board of Directors. Inter RAO did not respond to the request.

Depositary receipts account for a small percentage of the above-mentioned companies’ share capitals. However, these votes could have had an impact on the composition of the Boards of Directors. If allowed to vote, the foreign shareholders would have supported a candidate nominated by the minority shareholders, thus bringing more independent candidates to the management bodies, Alexander Shevchuk says. In addition to receipts, foreign banks hold local shares in companies, which they may not have voted either, which means that the share of foreign investors is greater (up to 5%), he notes.

According to the Moscow Exchange listing requirements, state-owned companies listed on the 1st or 2nd level are subject to a minimum quota for the number of independent members on their Boards of Directors, which is partially achieved with the Government’s share packages, Shevchuk points out: the Government’s representatives are not always comfortable for the other shareholders, although technically meeting the applicable independence requirements.

Oleg Fedorov, a member of the ALROSA Supervisory Board, who was nominated by minority shareholders to the Board of Directors of Rostelecom but failed to gain enough votes in 2016 is nominated again this year; the remaining 11 candidates are nominated by Russia’s Federal Agency for State Property Management (Rosimushchestvo) whose spokesperson did not respond to a call seeking comment). Besides, international investors have nominated Alexey Germanovich, a current independent director of Aeroflot, and Vladimir Potapov, Chairman of the Board of Directors at VTB Capital Asset Management, to Aeroflot’s Board of Directors this year. According to Potapov, Alexander Shevchuk is representing the minority shareholders’ consolidated position. Germanovich refused to comment on the matter, while Fedorov could not be contacted.

In its recommendations to the shareholders of Aeroflot, Rostelecom, Inter RAO and RusHydro, ISS took into account the independence of Board candidates, among other factors, the ISS spokesperson said. Ivanov, Chemezov and Sechin affiliated with the Government, the majority shareholder of three state-owned companies, are not independent and were not therefore recommended for voting. “In Russia, we normally recommend that shareholders vote for independent candidates only and refrain from voting for any candidates targeted by the sanctions. We definitely did not recommend voting for any of these candidates (Ivanov, Chemezov and Sechin) at the three companies and recommended supporting only independent candidates in 2016,” Glass Lewis said in response to our inquiry.

This year, Sechin, Chemezov and Ivanov are again on the lists of candidates to the Boards of Directors at state-owned companies.

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