Germany’s Martin Bauer Group says it may lose its stake in Ukraine’s enterprise Liktravy because of a dispute with a minority shareholder.
The German investor calls it an attempt to extort money, while the shareholder claims he is acting legally in defense of his corporate rights.
These kinds of disputes are not unusual in Ukraine and they are hurting the nation’s ability to reach its investment potential.
Business disputes in Ukraine are exacerbated by unclear legislation, unreliable courts and no rule of law – or law of the jungle, some would say.
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These disputes are why many businesses create a second layer of protection abroad, in the form of offshore corporate entities, or write clauses into contracts requiring that lawsuits get adjudicated abroad.
All of these obstacles add cost and uncertainty to investing in Ukraine.
Some argue that these problems cause many foreign investors to bypass the nation in search of a friendlier business environment, or at least a more predictable legal environment – such as in the 27-nation European Union.
The Martin Bauer Group, a major producer of herbal teas and other products, bought 24 percent of the Ukrainian enterprise Liktravy at the end of 2010.
Martin Bauer considered it a lucrative investment and a great partnership.
The Zhytomyr company supplies 70 percent of herbs in Ukraine and both companies have more than 80 years experience in the field.
The German investors were obviously unhappy to learn that they may lose their shares in Liktravy.
Minority shareholder Oleg Stetsenko, who owns only 3 stocks out of 340,000, filed a lawsuit to cancel shares issued after 1999.
“It may lead to a situation in which those shares never existed,” said Bogdan Borovyk, a lawyer at Beiten Burkhardt, which represents the German investor in Ukraine. “In fact, the legal consequences of this case are not clear. It is not a normal situation when shares issued six to 12 years ago are canceled.”
In fact, the legal consequences of this case are not clear. It is not a normal situation when shares issued six to 12 years ago are canceled.”
– Bogdan Borovyk, a lawyer at Beiten Burkhardt.
The lawsuit was preceded by a smear campaign against Martin Bauer in the Ukrainian media, during which Liktravy also faced multiple checks by tax police and other state authorities.
Martin Bauer’s lawyer called the situation a classic example of “greenmail,” an attempt by minority shareholders to threaten the firm and force it to buy their shares back at a higher price. The term derives from words blackmail and greenback, or money – the main object of corporate raiders.
Stetsenko rejects allegations that he is a greenmailer, blackmailer or corporate raider. He said the shares were issued improperly, threatening minority shareholder rights. “I defend my corporate rights and all my actions are carried out within the legal framework,” Stetsenko said. “None of my actions are illegal.”
A Kyiv local administrative court ruled against Stetsenko. But he plans to appeal it.
Andriy Semydidko, director of the Anti-Raider Union of Entrepreneurs, a nongovernmental organization which protects local businesses from raider attacks, hostile takeovers and greenmail, says such conflicts can go on for months.
“The budget of such a greenmailing campaign is about $10,000-$20,000,” Semydidko said. “An individual organizing it may demand five times more in exchange for his stake in a firm or a peace argument.”
Before the 2004 Orange Revolution, which led to the overturning of a rigged presidential election, Semydidko got up to 50 complaints alleging “greenmail” each year.
Producing in the country for the country, like we do in Russia, Poland, The Czech Republic, has emerged as a successful strategy. We have a lot of experience in expanding into foreign markets and we know that each market has its peculiarities.”
– Wolfgang Hidding, a spokesperson for Martin Bauer.
According to Semydidko, back in the authoritarian days of ex-President Leonid Kuchma, the tactic of blackmailing majority shareholders proved effective. However, the side that won state backing tended to prevail.
Then, under President Viktor Yushchenko’s administration from 2005-2010, centralized state authority weakened – a circumstance that favored corporate raiders even more, Semydidko said. Violence was even used to take over enterprises with impunity.
Now, with President Viktor Yanukovych centralizing power in his hands, some fear corporate raiders are seeking to rely on strong state backing, as they allegedly did under Kuchma.
“We don’t see many violent takeovers now, but minority shareholders are again trying to use the strong power ‘vertical’ to threaten companies,” Semydidko said. “We will have more examples of Liktravy’s [experience] in the near future.”
The German company still has faith in Ukraine’s courts and plans to become a major shareholder at Zhytomyr’s Liktravy. They hope to succeed and sell more Ukrainian-grown herbs to Ukrainians.
“Producing in the country for the country, like we do in Russia, Poland, The Czech Republic, has emerged as a successful strategy,” said Wolfgang Hidding, a spokesperson for Martin Bauer. As to the potential risks of investing in Ukraine, Hidding answered: “We have a lot of experience in expanding into foreign markets and we know that each market has its peculiarities.”
Kyiv Post Staff Writer Oksana Faryna can be reached at [email protected].
