Last month, Putin approved Russia’s largest asset sale since the post-Communism privatisation programme. The government is planning to sell off US$59bn of assets, opening the door to international investors that are interested in large state-owned companies, such as VTB Bank, Transneft and Sberbank.
Russia is a lucrative market with good economic prospects, particularly compared to western European markets that will continue their deleveraging process in the short- to medium-term. But with these opportunities come risks. The Russian market has a particular regulatory, legal and business landscape for potential bidders to navigate and investors will need to tread carefully.
The shareholder agreement under Russian law is less flexible than other jurisdictions so investors need to be smart about the law. They need to get to know and understand how the shareholder structure works in the firms that they are trying to invest in.
As an investor you need to be clear about your rights and powers once you become a shareholder, particularly in companies that are used to being run and controlled by the state. You need to understand what the relationships are like between the other shareholders; be aware of the dividends policy and the rules governing the minority stakes; understand whether there are passive or aggressive investors; how your investments will be protected; and what the process is for when – or if – you decide to take your investment out of the company. The more an investor knows about the shareholder structure and corporate governance of the firm the better.
Some of the legal mechanics under shareholder agreements are still undergoing a process of development under Russian law and practice, while courts gain more experience of those devices. In the meantime, English law is often used on Russian deals for mechanics, such as tag and drag rights, put and call options, step-in rights and deadlock mechanics (including Texas shootout and Russian roulette).
The Judicial System
The Russian judicial system and contractual obligations do remain an issue, so it is important that investors seek advice on exactly how the shareholder structure will work in Russia and in the firm where they want to invest. Technically speaking, all investors in a company, such as VTB, should be treated equally, but this is not always the case.
Russian corporate law is rapidly developing and operates differently to international legal systems, such as English law in some areas. For example, Russian law does not currently make use of extensive representations and warranties on commercial deals. Certain areas, such as the absence of liabilities, cannot be warranted.
Furthermore ‘indemnity’, the means to compensate another party to a contract for any loss that such other party may suffer during the performance of the contract, still needs to be enforced by Russian law.
Completion accounts and earn-outs can be dealt with under Russian law, but need to be structured in different ways, via pricing assumptions and price adjustment mechanisms.
Western investors also often prefer to rely on courts outside of Russia for dispute resolution, particularly the London Court of International Arbitration (LCIA). Judgments in the LCIA can be registered with Russian courts and locally enforced against assets based in Russia.
Therefore, taking all of these aspects into account, good advice will be essential throughout the whole process and we would encourage the investors to make their own due diligence in the firm they want to invest in to ensure they are getting a good, fair price and accurate information about the company.
As a shareholder, you need to get to a point where the information about the structure of the company and the shareholders is very transparent and your rights as an investor, whether the majority or minority, are well protected. Investors will need to weigh up the risk of their investments, as they do in all cases anywhere in the world, but in Russia it will be vital that they understand the Russian laws which govern those in the boardroom – and those outside it – to ensure their investment literally pays off.
The Auction Process
How the auction will be structured will be interesting and the resolution on how to do this will be led by the government. I expect there will be different types of bidder for the companies. Asian investors have the money to put in, there will be strategic biddings from the western markets and local Russian firms will also be involved. The appointment of the 10 international advisors, including Goldman Sachs, Morgan Stanley and JP Morgan, will ensure the bidding process is fair, as they will act to international standards.
Some improvements do need to be made to the information flow for the auction. While it is a ‘public auction’, more information needs to be available to the public and the press to ensure a confident and comfortable process. The government is yet to announce the full details of how they will handle the auction and there could be variety methods used. Russian courts will also need to get fully up to speed on how to handle the sale.
The Russian asset sale and potential string of privatisations has been received very warmly in the international markets, as well as locally here in Russia. The influx and scale of new investors into key companies in Russia will help create a better business climate and improve corporate governance standards as the new shareholders will push the need for greater transparency in the boardroom. The new influx of investors will also improve the management of the state-owned firms, as they bring knowledge, experience and a fresh approach to inject into the companies’ strategy and vision.
It might not be until three to five years after privatisation that we will really see the impact of the asset sale on the Russia as a whole, but I think that the sale will be very successful for Russia and boost its economy even further.
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