The protection of

minority shareholders
rights in Russia in 2008
Author of the report: A. Navalny
300 thousand of new shareholders

• “People's” IPOs held by three of the major state companies led to the emergence of 300 thousand
of new shareholders:
Rosneft – 145 thousand
VTB Bank – 160 thousand
Sberbank – 95 thousand

• Low dividends and constant media reports about corporate corruption are the main reasons that
ordinary shareholders are beginning to conduct independent investigations with the aim of
protecting their rights.

• This report is based on one of these investigations. It was conducted by a minority shareholder, A.
Navalniy and looked into the activities of a number of major companies.

• The companies Rosneft, Gazprom, Gazpromneft, Surgutneftegaz, Transneft, and Sberbank

became the subjects of the investigation.

• The aim of this investigation was to disclose the information about the activities of these
companies that is being kept from shareholders.
Regulatory framework

• Article 67 of the Civil Code of the Russian Federation:

shareholders have the right to participate in the management of the company’s affairs and receive
information about the company’s activities and to become acquainted with its accounting records
and other documents.

• Articles 89, 90, 91 The Federal law “Joint stock companies”:

the company is obligated to provide shareholders with any information requested. Exception:
accounting records and the minutes of meetings of the company’s executive body (Management
Board). This information is provided to shareholders who hold at least 25% of the company’s
shares.

• Article 9 Federal law “About information” :

access to information can be limited only for reasons related to national security. No other
limitation is allowed.
Gunvor

co-founder of Gunvor, Gennady Timchenko, Switzerland

• One of the largest traders, the seller of more than 30% of the crude oil produced in Russia.
• According to the media, Gunvor exports more than half of the oil produced by Rosneft, half of the
oil produced by Gazpromneft and practically all of the oil produced by Surgutneftegaz public
corporation.
• According to a number of shareholders opinion, the aim of Gunvor’s activities is to transfer out of
the company and steal company oil profits.
Demands made to companies working with Gunvor and
Court action

• Inquiries about contracts with Gunvor were sent to Rosneft, Gazpromneft, and Surgutneftegaz.
The following information was requested:
the exact terms of the company partnership with Gunvor,
who made the decision about the deal,
the economic justification for partnering with the oil trader.

• The companies refused to answer any questions relating to Gunvor.

• Court action relating to Gunvor:

The claims were filed against Rosneft, Gazpromneft, and Surgutneftegaz relating to the disclosure
of information about their partnerships with Gunvor.
The claims were reviewed in the arbitration courts and the arbitration courts of appeals in
Moscow, St. Petersburg, and Khanty-Mansiysk.
Over the past 6 months, 7 court cases (including three appeals and one cassation) were held
involving Gunvor. Two cassations are still up for review.
Reasons for refusing to disclose information relating to
Gunvor

• According to the company-defendants and court decisions, the information that has been
requested by Navalny is located in documents that are considered accounting records. According
to the existing laws, access to these documents is only available to shareholders who hold at least
25% of the company’s voting shares.

• The concrete documents that contain the information requested by Navalny, meaning their
numbers, dates and names, has not been indicated.
Transneft’s expenses on charity

• Transneft public corporation — a company where the state is majority shareholder — uses
47,528 km of oil pipelines in Russia. In 2007, Transneft transported 463.8 million tons of crude
oil (93% of all of the oil produced in Russia) to domestic and foreign markets.

• Transneft’s total expenses on charity in 2007 made 7.2 billion rubles out of a total of 64.7 billion
rubles in net profits (that is 11.1% of net profits). 7.2 billion rubles made 60% of all charitable
contributions made in Russia in 2007.

• All told, for all of 2007 and the first nine months of 2008, more than 8 billion rubles (more than
300 million dollars) were spent on charitable contributions. However, the exact identity of the
recipients of this unprecedented charity has not been indicated anywhere.
Civil and criminal investigations into these “strange”
charitable contributions

• Inquiries were made to Transneft to reveal the recipients of this charity and also for other
information concerning this topic. The company stated that information about charitable
contributions cannot be revealed.

• Civil investigation:
over the past 8 months, three arbitration court hearings were held concerning claims that were
filed against Transneft. All of the courts took the company’s side. The reasons given for the refusal
of the claims was that the information that was being requested was contained in the company’s
accounting records.

• Criminal investigation:
a statement about a crime being committed was filed with OBEP (Economic Crimes Department)
of the Main Department of Internal Affairs in the Central Administrative District in the city of
Moscow. OBEP twice attempted to halt the investigation. Twice, these actions of the police were
stopped by way of a judicial proceeding. Currently, the case is being investigated.
Rosneft: contract with CNPC and expenses on the social-
economic development of the company

• Contract with CNPC:

in 2005, Rosneft concluded an agreement with China National Petroleum Corporation (CNPC) for
the supply of oil. The contract provided for the supply of 48.4 million tons of oil to China up to
2010.
A number of shareholders figured that this contract was unprofitable for the company and was
concluded for political reasons.
The company was sent an inquiry which requested a copy of the contract so that the shareholders
could become acquainted with it.
The company refused.
An investigation into the contract was launched upon the filing of a statement by shareholders
with the Economic crimes directorate.
Currently the case has been under investigation for a few months. Rosneft is refusing to provide
information about the contract even to the law enforcement authorities.

• Expenses on the social — economic development of the company:

in 2007, 90% of the company’s profits (145 billion rubles) went to “investment and the social-
economic development of the company”.
The company, for a number of months now, has been refusing to provide detailed information to
the shareholders on how this money is going to be spent.
Gazprom: criminal investigations into a proved crime

• In 2005, a criminal case was launched into fraud that was committed at Gazprom.

• One of its subsidiary companies (Mezhregiongaz) purchased gas from independent producers, not
directly, but through intermediaries, at an inflated price.

• That fact that Gazprom suffered a loss of 1.49 billion rubles was proven in many expert
evaluations.

• Gazprom’s management is refusing to admit that the company suffered a loss and is doing
everything it can to have this investigation closed.
Shareholder as an injured party

• A. Navalny, as a Gazprom shareholder, demanded that he should be recognized as an injured

party and as a civil claimant in this criminal case.

• Despite the fact that the shareholder owns an insignificant share of the company’s stock, the
investigating body was forced to recognize him as an injured party .

• This instigated the further investigation of the case, attracted the attention of the media and gave
the shareholder the opportunity to become acquainted with all of the case materials.
An experiment in attempting to involve the state and major
shareholders in the investigation

• A statement was filed with the Federal Agency for State Property Management
(Rosimushchestvo), which manages the government’s share in Gazprom (38.37%) demanding
that it also come out as an injured party in the Mezhregiongaz fraud case.

• A request to join the case was filed with the largest European gas company E.On. Rurhrgas AG
(owns 2.5 % Gazprom’s shares).

• Answers to these requests are currently being awaited. Refusals will be appealed in Russian and
German courts.
Attempting to involve independent directors

Oleg Vyugin (Transneft ):

Oleg Vyugin refused to answer any inquiries from minority shareholders.

A claim was filed against Vyugin in connection to the fact that he did not
respond in any way to the request for assistance in uncovering information.
The claim was denied.

Hans-Jörg Rudloff (Rosneft ):

Notwithstanding media reports and a public outcry over the violation of

the rights of the company’s shareholders, Hans-Jörg Rudloff prefers to
remain uninvolved in the situation and isn’t, in any way, assisting
activities directed towards the protection of shareholder rights.

Sergei Guriev (Sberbank):

Guriev is the only independent director who responded to the requests of

the minority shareholders and promised to assist the investigation.
However, it turned out that Guriev himself couldn’t gain access to the
information demanded.
Foreign investigations

• William Browder — the owner of the Hermitage Capital Management hedge fund. Hermitage has
actively fought for its rights as a shareholder, including against such companies as Gazprom and
Surgutneftegaz, and, overall, has asserted the rights of minority shareholders.

• Browder is attempting to have recognized as treasury stock, 62% of the stock of Surgutneftegaz
that is located on the balance sheets of its subsidiaries and have it redeemed. The result of this
could be a substantial increase in the share that minority shareholders hold, which would allow
them to bring in independent representatives onto the Board of Directors and participate in the
management of the corporation.

• Browder’s activities have led to him being barred from entering Russia. A criminal case was
launched.
Summary

Currently, the possibility of court protection of the rights of the minority shareholders of large
companies in Russia has practically run dry and further actions in this direction within the
framework of the Russian legal system hold little promise for a number of reasons:

• Courts assign any requested information as information that can only be accessed by major
shareholders.

• The courts make these decision under pressure from authorities.

• The institution of independent directors doesn’t work as it should.

• Foreign investors shrink away from taking on such problems and attempt to ignore violations of
minority shareholder rights
The outlook in the fight for the rights of Russian
shareholders

The outlook in the fight for the rights of Russian shareholders is, to a large extent, connected with:

• the possibility of holding liable the management of Russian corporations on the basis of
international legal documents (conventions).

• international criminal investigations into the unjust enrichment of government officials corporate
managers. The search for and arrest of funds that have been stolen from shareholders.

• putting pressure on international corporations that directly or indirectly participate in corrupt

schemes that transfer assets out of companies or cover up such activities.

• the readiness of the international community to become involved in the problem relating to the
violation of the rights of Russian shareholders, including the creation of a system of mutual
relations where the observance of the rights of shareholders becomes one the main conditions for
access to loans.