Brokers lose court ruling in stock row

A Kyiv court has delivered another blow to minority shareholders in Ukraine, ruling in favor of a large steel mill accused of watering down $60 million in minority stocks last summer.

The Kyiv City Economic Court ruled on Feb. 27 that Kyiv-based investment banks Dragon Capital and Concorde Capital had falsely accused one of Ukraine’s largest steel mills, Zaporizhstal, of violating their rights as minority shareholders and ordered the investment firms to retract their public accusations.

The court ruling refers to statements made last year by executives of both investment firms, which called a June 7, 2006 decision by Zaporizhstal’s meeting of shareholders to almost double the mill’s statutory capital “the theft of funds from minority shareholders.”

Before the controversial decision of June 7, 2006, the minority shareholders had controlled 8 percent of Zaporizhstal’s shares for a total value of approximately $60 million, according to Oleksandr Zavodetsky, head of Dragon Capital’s legal department.

The Kyiv court said the investment firms’ statements, made during a press conference following the Zaporizhstal board decision, hurt the business reputation of the mill.

The share release increased Zaporizhstal’s statutory capital from $42 million to $131 million by merging the steel mill with five affiliate companies, including steel-trading companies controlled by the mill’s majority shareholders.

During their June 2006 press conference, the minority shareholders claimed that Zaporizhstal had diluted their share capital and thus decreased the value of their stocks threefold. Moreover, the minority shareholders said they had not been given a fair option to buy stocks from the new issuance.

The investment companies claimed that, instead, they were offered the option of selling their minority shares at “the diluted” price – up to 10 times lower than the market price.

Zavodetsky said that minority shareholders had every reason to suspect that no actual assets from the five companies had been transferred to Zaporizhstal in exchange for the additionally issued shares, which makes last year’s share release look like a simple dilution. Trading companies of this kind have been widely used in export-oriented business in Ukraine, such as steel, to transfer price profits out of the mill to offshore companies located in countries with lower tax burdens.

Canada-based Soviet emigre Alex Shnaider, 38, and Ukrainian businessman Eduard Shifrin control Zaporizhstal through British Channel Isles-based Midland Resources. Companies controlled by Shnaider’s father-in-law, Boris Birshtein, were active in Ukraine during the 1990s, trading in steel and other export-oriented commodities. Shifrin landed 26th in the Kyiv Post’s survey of the top 30 richest people in Ukraine with capital of $274 million.

The court also dismissed claims by Concorde and Dragon that they had purposely not been informed about last summer’s share emission by Zaporizhstal, nor invited to the board meeting.

Kostyantyn Sytniuk, who represented Zaporizhstal in court, said none of Zaporizhstal’s shareholders, minority or otherwise, were prevented from attending the June 7 board meeting.

The legitimacy of the procedure of the shareholders’ meeting was confirmed by four earlier court rulings in August and November of 2006, Sytniuk said.

And now this latest ruling, in February, obliges the minority shareholders to retract their public accusations against Zaporizhstal.

But Dragon and Concorde both have challenged the latest ruling with the Kyiv Economic Appeals Court.

Dmytro Tarabakin, director of Dragon Capital, argues in the March 5 appeal that the City Economic Court attributed to Dragon Capital accusations that they never made, as it took for granted Zaporizhstal’s claims.

In addition, he said the court failed to examine the validity of the original claims regarding the violations against the minority shareholders.

Sources close to the process have told the Post that both sides will likely attempt to resolve the conflict through negotiations.

In a statement to the Post, Zaporizhstal co-owner Shnaider dismissed the claims of Dragon Capital and Concorde Capital.

“We have been assured by our legal counsel in Ukraine that everything has been done in an above-board manner that is completely open to scrutiny. We have no concerns whatsoever about these claims.”

Experts have long warned that Ukraine’s legislation falls short on protecting minority shareholder rights, allowing majority shareholders to dilute the stakes of smaller investors or shift assets from prized companies to other legal entities at will.

Roman Marchenko, Senior Partner of the Ilyashev & Partners law firm, said that recently Ukrainian courts have had a tendency to make decisions favoring majority shareholders.

“To prove that in making the decision, the interests of minority shareholders were violated is no longer enough. You need to prove that the decision would have been different if the procedure had been perfectly correct.”

Marchenko added that to protect the interests of minority shareholders, legislation should outline the mechanism of buying back minority shares at market price by the majority owners – something that is currently non-existent.

Zaporizhstal is Ukraine’s fourth largest steel mill and the 54th largest in the world. According to a May 27, 2005 article by Canada’s Globe and Mail daily, Snaider and Shifrin first acquired an interest in the mill during the privatization frenzy of the late 1990s and later acquired full control. The paper said Snaider has since turned down offers to sell the steel mill for as much as $1.2 billion.