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From Russia with love

Emerging market governments may be keen to attract foreign equity investment, but, as foreign investors in Russia are learning, the lack of legal protection threatens to stop such investment in its tracks. By Christopher Stoakes.

Imagine that you are a minority shareholder in a major Russian company (R). You attend the annual general meeting (AGM) only to discover that the controlling shareholder, another company (S), has authorized a massive issue of additional shares - something that was not mentioned even in passing in the notice of the AGM. These additional shares can be placed at the sole discretion of the board. The board is at liberty to place them with corporate insiders or a dominant shareholder such as S at below-market prices and without being subject to any rights of pre-emption (proportional allotment to existing shareholders). Once S and its affiliates have achieved a 75% shareholding (the level required for most major corporate decisions) R can be merged into S's group on terms which deliberately understate the value of the merged company. This will provide a huge windfall for the S group, dilute your shareholding and wipe out its value.

Seeing this coming, you attempt - as a significant minority shareholder - to secure representation on the board. Tactics are employed to prevent you. You call for independent auditors to ensure arm's-length terms but your call falls on deaf ears.

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