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Corporate Relations Research Center Publishes Study on Minority Shareholders' Rights

Corporate Relations Research Center, Kiev, Ukraine
PRNewswire, Kiev, Ukraine, Thursday, May 14, 2009
KIEV - Ukraine's Corporate Relations Research Center, a non-governmental public organization which unites Ukrainian political, economic, financial and media relations experts, today issued a study indicating that the nation's regulatory protection of minority shareholders' rights falls well short of standards elsewhere in Europe.

The study "Impairment of Minority Shareholders' Rights by Majority Shareholders in Domestic Companies" includes analysis of legislation in a number of European countries (Germany, France and Russia) concerning the regulation of relations between minority and majority shareholders. The study focuses on the following questions: Why minority shareholders' rights need protection and how this protection should be implemented?

The difficulty is connected with the method of decision-making in joint stock companies as the procedure is most often based on majority decisions. Therefore, in the absence of mitigating rules, a major shareholder can determine the most important steps of the company, and minority shareholders cannot influence them.

The study contains retrospective and current analysis of a number of corporate conflicts involving Ukrainian joint stock companies where irregularities have been alleged. For instance, an additional share issue at Zaporozhstal CJSC conducted in 2006 in which minority shareholders lost initial stakes is among the cases reviewed, along with another involving the Borschagovskiy Chemical Factory.

The study also criticizes English law which applies where Ukrainian-owned companies are registered in the UK for trading through the London Stock Exchange. The authors focus specifically on an upcoming shareholder vote on a possible share buy-back by Ferrexpo Plc, a London-listed iron ore company whose controlling shareholder is Ukrainian.

The authors contend that such a buy-back could be blocked by minority shareholders in other jurisdictions, such as France, where the Commercial Code specifically prohibits majority shareholders from voting on matters where they have a personal interest.

The research confirms that owners of majority stakes in joint stock companies tend to act in their own interests to the detriment of other shareholders. The research includes a list of legal methods used by some European countries to moderate the rigid majority principle and to prevent majority shareholders from making decisions detrimental to the company.

Such methods as separate voting, stricter quorum requirements, establishment of the qualified majority principle and prohibitions on voting by personally interested persons are applied in various combinations in order to resolve issues potentially harmful to the interests of minority shareholders.
Among such issues are:

      [1] Increases and reductions in authorized capital;
      [2] Reorganization of a joint-stock company;
      [3] Transactions in which certain shareholders are personally interested;
      [4] The conduct of large transactions;
      [5] Protection of the rights of outside shareholders when the company is entering into a group of enterprises as a dependent or affiliated company;
      [6] The conduct of transactions connected with a change of control over the company

Alongside voting mechanisms examined in the research, the rights of minority shareholders are also protected by direct regulations or prohibitions regarding the conditions and special procedures for decision-making which reserve a significant role for minority shareholders.

In the sphere of corporate relations, Ukrainian issuers are characterized first of all by a large number of minority stockholders, having emerged in the course of the privatization process; this peculiarity makes Ukrainian corporate relations very different from those in developed countries (where such relations have a long history of development).

According to the authors of the study, in order to prevent abuse, regulators need to vest in shareholders the right to bring action against company management on behalf of the whole enterprise to repair any damage caused by the officials. The authors also state that regulations need to acknowledge the possibility of transactions in which some shareholders may have an excessive interest and exclude them from voting on such transactions.

NOTE: The study "Impairment of Minority Shareholders' Rights by Major Shareholders in Domestic Companies" is available in English at http://corporativ.info/en/?/expert/2903/.

CONTACTS: Corporate Relations Research Center, +380-44-4900412
Svetlana Goncharova, Project Director, sveta@corporativ.info