22.07.08

This is according to a ruling of the Presidium of the Supreme Arbitration Court (SAC) of the Russian Federation. Such dilution is one method used in hostile takeovers. However, the restoration of the shareholder's status will likely be difficult, requiring a legal contestation of a whole chain of transactions and corporate decisions.

However, the Presidium validated other methods of defense on June 3 in a lawsuit filed by Voronezh companies. The resolution was signed by Anton Ivanov, President of the SAC.

In 2001, joint-stock company “NPK ‘Energia’" was sold to LLC “Vastr”  an 81,53 percent shareholder in LLC “Kosmos-Envo” (later renamed to “Kosmos-K”). In 2005, the charter capital of “Kosmos-K” grew to 100,000 RUR, while shares belonging to LLC “Vastr” decreased to 40 percent (with two other individuals holding 30 percent of shares each).

In 2004, after the change of ownership, “NPK ‘Energia’” filed a lawsuit with the Arbitration Court of the Voronezh Region demanding a restoration of their share in “Kosmos-K,” arguing that the sale agreement had been signed by the chairman of the board of directors – who was not entitled to conduct such transactions.

The Presidium ruled to return not the assets formerly held by company, but the share of former corporate control. The Presidium President explained that it is not always possible to vindicate (retrieve from unlawful possession) stocks or shares. But this mechanism may be applied to other legal cases, including contestation of decisions made by shareholder meetings. Share holders who see their shares of company participation decreased may now have the right to demand financial compensation for this.

Some lawyers warn that if recovery of corporate participation is used too often, it will harm the stability of business in Russia. Ivanov is confident that such will not be the case: decisions need to be made on case-to-case basis, taking into account facts of each case; recovery of participation must be used when financial compensation is not sufficient and a return of participation share is not otherwise possible.

Dilution of participation is seldom used in large business disputes. However, there are exceptions: “Ugraneft” in a lawsuit filed in the Commercial Court of London’s High Court, claims that its share in joint-venture company “Sibneft-Ugra” (half-in-half participation with “Sibneft”) was unduly diluted from 50 percent down to 0.96 percent.

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