‘Corporate raiders’ are notorious for utilizing loopholes in vague legislation and a corrupt court system to strip away ownership of prized assets
Investment banks have played a large role in attracting investment to Ukraine over the years, drawing Western portfolio investors to the country’s risky yet promising equity market.
The Orange Revolution slapped Ukraine onto the radar screen of Western portfolio investors, driving up the price for Ukrainian equity. A surge of stock activity, the arrival of new strategic investors and increased crediting of Ukrainian companies by Western lenders has lifted foreign direct investment over the past two years.
Net foreign direct investment (FDI) into the Ukrainian economy more than tripled in the first three quarters of 2006 year-on-year to $3.6 billion, almost three-and-a-half times more than during the same period in 2005. Last year, FDI surged to $7.3 billion, nearly five times more than in 2004. Much of the 2005 inflows can be attributed to last year’s landmark $4.8 billion privatization sale of the Kryvorizhstal steel mill to Mittal Steel and the $1.1 billion sale of Aval Bank to Austria’s Raiffeisen Banking Group.
Investment banks hope this trend will continue, but they are concerned that mounting threats from so-called ‘corporate raiders’ could spook investor confidence, holding up a lot of fresh investment.
‘Corporate raiders’ are notorious for utilizing loopholes in vague legislation and a corrupt court system to strip away ownership of prized assets. Buying a few shares in a company and flooding it with dubious lawsuits is one tactic they commonly employ.
Influential Ukrainian business groups have employed aggressive corporate takeover tactics for years in settling differences among themselves. They have rarely, until recently, targeted large foreign corporations openly. The troubling trend is that large foreign investors, such as U.S.-based agriculture giant Bunge, are increasingly being targeted – a signal that anyone is fair game.
The repercussions
Tom Warner, chief strategist at Kyiv-based investment bank Concorde Capital, said there are many things in Ukraine that are lumped together and called “the raiders’ attacks.”
“Every country has hostile takeovers. And there is nothing abnormal or bad about them,” he said. “But when people talk in a negative sense about raiders’ attacks in Ukraine, they mean the using of vague legislation and corruptive lawsuits against the company based on the minimum rights that minority shareholders have,” he added.
Michael Maltzoff, partner at Kyiv-based investment bank Dnieper Capital, said Ukraine’s escalating ‘corporate raider’ problem can shake foreign investor confidence and substantially decrease the rate of investment inflows that have been steadily increasing since the Orange Revolution.
“It is extremely dangerous for the investment climate,” said Maltzoff, who set up Dnieper Capital last year. Maltzoff, a former consultant at Credit Suisse First Boston was, until recently, a partner of Konstantin Grigorishin, one of Ukraine’s leading businessmen.
“It’s not very difficult to use the shortcomings of the legal environment in Ukraine to attack bona fide investors, because there are holes in the law and the judges can be very corrupt. I see [raiders’ attacks] as a number one problem for investors,” Maltzoff added.
Yuriy Prozorov, head of research at the TEKT Group and president of the Ukrainian Society of Financial Analysts, said the risks associated with raider attacks are high mainly because the country’s laws governing shareholder rights are weak.
Ukraine lacks European-level legislation, he said, adding that legislators have repeatedly stalled on passage of a law on joint stock companies, which could alleviate many of the problem areas.
The investment community has urged Ukraine’s parliament to pass the legislation for several years now, but vested interests have stalled the process. Repeated requests by Ukrainian President Viktor Yushchenko to adopt the legislation have gone unanswered, but there is renewed hope that the law will be passed in coming months.
Maltzoff said shortcomings in legislation are a clear problem, but the underlying cause of most serious conflicts that spoil Ukraine’s investment climate stem from the refusal of business to behave in a “civilized manner.”
“Once a focused group exploits the law for its advantage and is willing to break all the rules, it is very difficult to fight against it,” he said, adding that Russian companies have also bent rules using corporate raider tactics to muscle away assets.
Abuse of the system
Mykhailo Ilyashev, managing partner at Kyiv’s Ilyashev & Partners law firm, said Ukraine’s weak investment reputation and the corporate raider issue has been abused by some high profile foreign investors who have used it to pressure foes in genuine disputes.
Some have sought out media attention, claiming they are victims of corporate raider attacks. In reality, they have been entwined in genuine disputes with business partners or co-shareholders.
The media attention gained from claiming to be a victim of a corporate raider attack has applied pressure to the other side, usually a Ukrainian or Russian partner.
Ilyashev cited a shareholder conflict between Moscow’s Alfa Group and Norwegian telecom Telenor over management rights at mobile telecommunications operator Kyivstar as an example.
Claims by Telenor that Kyivstar was being victimized by a raider attack in their conflict with Alfa Group “is nonsense,” Ilyashev said.
The lack of a clear understanding and legal definition of what corporate raider attacks are leaves room for abuse.
“Some [companies] consider raider attacks as an aggressive takeover. Others think it is some kind of fraudulent operations to get the ownership over an enterprise. Others believe it is hostile acquisition. Not all the raider attacks are illegal. It can be hostile acquisition,” Ilyashev added.
Legal and judicial reform are required to clarify all these issues and to put an end to the widespread damage caused by so-called raider attacks, according to Ilyashev.“The basis for any raiding is a court’s decision, often a disputable one,” he added.
