Who says you needs to own a controlling stake to control a company?
Ukrainian company directors have been proving that old adage wrong for years, using simple schemes to keep full control over their companies – even if the director owns only a minority stake himself, or sometimes no shares at all.
The problem is tied to the slow development of the Ukrainian share depository, an electronic stock clearinghouse that is supposed to ease the transfer of company shares from buyer to seller.
Even though a Ukrainian depository, run by JSC Interregional Securities Union, is already up and running, with over Hr 1.8 billion worth of shares deposited, company directors are wary of using the new service.
The root of this problem lies with privatization process in Ukraine, and the system of shares registration that grew up around it.
In textbook Ukrainian privatization, a company emits its shares, part of which are distributed among employees and management. The rest are sold via tenders or through the stock exchanges by the State Property Fund, and usually the state retains a sizable stake. Rarely is any one party left with a controlling stake.
Each company that emits shares is required by law to employ a registrar, who keeps track of the owners of the company's shares registers any change of ownership of existing shares.
However, the law allows the company itself to choose its own registrar. This is where the problems start.
'Usually, a company director creates his own registrar by appointing one of his best buddies, or he finds a registrar with whom he has very good relations,' said Yury Shapoval, JSC Interregional Securities Union vice president.
'The registrar supplies the company director with detailed information about who owns how many shares and, even more importantly, tells him when someone starts to buy up shares from minor holders with the purpose of gaining more control over the company or taking over the company altogether,' he said.
The minority share holders in Ukrainian companies are more often than not their own employees, and a company attempting a takeover will often approach them first when trying to build a controlling stake.
However, to buy these minority stakes, the company attempting the takeover has to register its ownership with the company registrar, who immediately informs the company director of the takeover bid.
'The director then visits each of his employees in turn and tells them that anyone who sells their shares will be fired immediately,' Shapoval said.
Many a takeover attempt has been scuttled in this way, most notably the French company Lafarge's attempt to gain a controlling interest in the Mykolayiv Cement Plant.
After winning a tender for a stake in the Mykolayiv plant, Lafarge went about building up its stake by buying up shares from company employees. But Lafarge found it next to impossible to register its ownership of these shares. The company registrar refused to re-register the shares, claiming there were errors in Lafarge's re-registration documents.
The registrar company was owned by Gradobank, which also holds a stake in Mykolayiv Cement.
'Obviously, Gradobank was trying to retain control over Mykolayiv Cement with the help of its own registrar,' Shapoval said.
Not surprisingly, the director-registrar partnership not only scares off potential foreign investors, it is also a burden on the company itself.
For a start, the company has to print up millions of paper shares, at a cost of around Hr 1 each. Under Ukrainian law, registered paper shares must bear the owner's name, so each time a share changes hands a new certificate has to be printed up with the new owner's name on it. Share certificates with the old owners names have to be stored with a bank for five years before they are destroyed, and the storage costs are billed to the issuing company.
A simple solution to all these problems would be to make use of a share depository and electronic shares, according to JSC Interregional Securities Union President Mykola Shvetsov.
'The depository allows ownership rights to be transferred quickly and eliminates the risk of shares' getting lost,' Shvetsov said.
What is more, the transfer of share ownership takes a matter of hours with the depository, as opposed to five to seven days through a company registrar, Shapoval added.
Unfortunately, these advantages to share owners are seen as distinct disadvantages to Ukrainian company directors, so the depository is not growing as fast as was hoped.
'If shares are stored at a depository, the company director or other interested owners cannot determine just who exactly owns these shares. They understand they can lose control over the company more easily and more quickly if their shares are stored at a depository, so they prefer not to use its services,' Shapoval said.
Despite the problems, plans are going ahead to turn the Interregional Securities Union depository into a national shares depository. The U.S. Agency for International Development is planning to invest $10 million in the depository's development, and the U.S. aid agency has already given consultants PricewaterhouseCoopers the job of implementing the project. The project is scheduled to be completed by next summer.
