Clear Regulation of Corporate Mergers as Step Toward More Civilized Stock Market and Better Investment Climate
The Russian market of corporate supervision is quite young and is insufficiently regulated by legislation. Unfair corporate takeovers are becoming common practice, which enables buyers to gain control over a target company at an unreasonably low price through various abuses (including due to imperfections in corporate and procedural legislation as well as judges’ dishonesty) while shareholders suffer losses. Such a situation undermines investors’ trust in the stock market, holds down investments in Russian companies and negatively affects the overall investment climate.
One way to solve these problems is detailed and effective regulation of a merger, i.e. the purchase of the controlling or a large stake in a company by one person or group of people connected with one another. The mechanism of such regulation should ensure a balancing of interests among the stake buyer, previous shareholders and the company management. Correct organization of such a mechanism will help make unfair takeovers more costly and risky, and, therefore, less profitable than a lawful and legally clean merger.
In order to solve the abovementioned problem, the Federal Service for Financial Markets (FSFM) has drafted amendments to Article 80 of the Federal Law “On Joint-Stock Companies.” Now this article sets specific responsibilities for entities that intend to purchase 30 or more percent of voting shares in a joint-stock company. Thus, before purchasing such a stake these entities should inform the target company of their intention and after the deal is closed they should give the remaining shareholders the opportunity to sell their shares at a fair price should they wish to do so. This article, however, provides practically no sanctions for violation of these requirements. In addition, it refers only to companies that have over one thousand shareholders. This article does not answer a range of questions arising over the course of a merger.
The FSFM suggests revising this article significantly, applying it to all joint-stock companies (regardless of the number of shareholders) and closely regulating all spheres regarding the rights and responsibilities of all merger participants and procedures of their interaction. The draft law sets requirements for the merger notification presented to the target company by the bidder, the procedure for its delivery, the order and timeline for its receipt by shareholders. It is advisable that responsibilities of the target company’s Board of Directors be determined, for instance, the responsibility to shape and communicate to shareholders its opinion on whether the price offered by the bidder is fair and whether it is worth accepting the offer.
In the event of a “mandatory offer” to other shareholders by the company that purchased a large stake, it is necessary to establish a clearer mechanism for setting a share redemption price. It is then necessary to enable the buyer to withdraw or correct the takeovers bid, including changing the price, and entitle other companies to make competing bids. Such bidding will help find an appropriate price that would be beneficial for previous shareholders and would not infringe on the buyer’s interest.
Finally, it is necessary to provide acceptable methods of protecting against takeovers since now it is sometimes the case that managers or controlling shareholders that do not want a merger use protective methods that may be unlawful or may contradict other shareholders’ interests.
Apart from amendments to the law “On Joint-Stock Companies,” the FSFM’s initiative will also cover amendments to the law “On Securities Markets” with regard to the disclosure of information during a merger.
Source: Federal Financial Markets Service
