7 May 2010
The Moscow Times features Grigory Chernyshov comments on a bill that would fight circular ownership structures by depriving a company's subsidiaries of voting rights and dividends from owning shares in the parent firm


Duma Gets Bill Limiting Cross Holding Ownership

Filipp Sterkin

State Duma deputies have introduced a bill that would fight circular ownership structures by depriving a company's subsidiaries of voting rights and dividends fr om owning shares in the parent firm, although experts said the proposals went too far.

The amendments limiting the use of cross holdings were submitted by four Duma committee chairmen from United Russia. When subsidiaries buy the parent company's shares, managers are able to control the firm to shareholders' detriment and the company becomes less transparent, the deputies wrote in explanatory notes to the bill. There are also risks of conflicts of interests, Viktor Pleskachevsky, a co-author of the bill and chairman of the Property Committee, told Interfax.

The other co-sponsors are Financial Markets Committee chairman Vladislav Reznik, Constitution and State Affairs Committee chairman Vladimir Pligin and Economic Policy and Entrepreneurship Committee chairman Yevgeny Fyodorov.

The amendments would include all firms in a company's consolidated results to international financial reporting standards or its combined results to Russian financial reporting standards. The changes do not ban a subsidiary from holding shares in its parent company, but the owner would not have voting rights or be able to receive dividends with the shares.

The bill would also prevent subsidiaries from obtaining "financial instruments … recognizing the rights to shares," and it would require those already purchased to be sold within 180 days of the bill becoming law.

While cross ownership can allow management to control a company to the detriment of shareholders, the proposed bill is too radical, said Anton Sitnikov, a partner at Goltsblat BLP. The market should be able to decide whether to invest in a nontransparent company, agreed Grigory Chernyshov, a partner at Egorov, Puginsky, Afanasiev & Partners.

A company's own shares are typically needed for mergers and acquisitions, said an official at a company that uses a cross ownership scheme.

Chernyshov said direct subsidiaries should be banned from voting with a parent company's shares, which would settle the problem of quasi-treasury shares. In court, it is difficult for minorities to prove that the de facto owner of such shares is the parent company, which is not allowed to vote with treasury shares, he said.

Cross holding ownership reached its peak in 1995 and 1996, although it is rarely used now, said Andrei Dobrynin, a partner at New Russia Growth Capital Advisers.

"Sometimes quasi-treasury shares appear during a reorganization, though the stakes are typically insignificant," Chernyshov said.

For example, Gazprom's structures have 3.1 percent of its shares, including 2.93 percent that it received from E.On; Rosneft subsidiary RN-Razvitiye had 9.44 percent of the state company, which it received during the sell-off of Yukos assets; Inter RAO's fully owned subsidiary Inter RAO Capital has 4.31 percent of its parent company from a reorganization; Acron's subsidiary Dorogobuzh has 8.7 percent of the fertilizer maker's shares.

A year ago, Norilsk Nickel approved the transfer of 4 percent of its shares to subsidiaries, and at the end of the year, one of them, OGK-3, sold its 0.14 percent stake. Some subsidiaries have also received large stakes in their parent firms. Last year, IzhAvto's fully owned subsidiary Izh-Komplekt received a 24.9 percent stake in the carmaker.

The most famous example of cross ownership was with AvtoVAZ. Three of its subsidiaries — AVVA, TsO AFK and IFK — owned 66.51 percent of the carmaker's voting shares until 2008.

An official in the White House said the government had not yet considered the proposal.

"The conflict between principals and agents needs to be fought differently, not with such localized measures," said Ivan Oskolkov, director of the Economic Development Ministry's corporate governance department. "Shareholders need to be stimulated to reach agreement on the management of a company and to motivate managers correctly, not introduce another set of bans."