Ukraine's corporate raiders take time out - but for how long?

By bne IntelliNews February 10, 2010

Graham Stack in Kyiv -

Like most other industries in Ukraine in 2009, the burgeoning business of "corporate raiding" took a breather in 2009, but some analysts expect raiders to return when economic growth restarts.

Corporate raiding in Ukraine is a euphemism for the illegal and corrupt manipulation of Ukraine's patchy legislation and ramshackle institutions to seize control of unsuspecting companies. Measures typically employed range from excluding shareholders from meetings by holding them at short notice in a distant location to alteration of company registers, to purchasing or faking court decisions. It is the most blatant symptom of Ukraine's terrible investment climate that groups this EU hopeful with far poorer developing countries in ratings of corruption, economic freedom and ease of doing business.

But for all the bad news in 2009 concerning the economic crisis, one bright point seemed to be the sharp decline in incidents of raiding. While there are no statistics specifically on corporate raiding, since there is no legal definition of the offence and its methods are continually changing, market observers agree that in 2009 corporate peace unexpectedly broke out. "After the furious activity of 2007-2008, 2009 was suddenly very quiet," Jury Kravets, spokesman for the Ukrainian Antiraider Movement tells bne. Vitaly Burdak of Kyiv law group Pavlenko & Poberezhnyuk agrees: "In 2009 there was calm after the wave of raiding in 2008."

Law of the land

It would be nice to think that government attempts to improve corporate governance had paid off. In September 2008, Ukraine's parliament the Rada finally passed a law on joint stock companies (JSCs) that was immediately hailed as a leap forward in protecting shareholder rights. Previous to the law, the only legal text regulating JSCs was one section of a 1991, ie. Soviet-era, law on "business associations." The new law detailed for the first time the conditions and standards for establishing, governing and cessation of JSC activity, and the legal status and mechanisms that protect shareholders' interests. Pretty much the basics for civilized investing, bringing Ukraine into line with international and EU norms. The law "will protect the rights of minority shareholders whilst at the same time protecting businesses from possible abuse and attacks by minority shareholders - so called 'raider attacks'," Oleg Marchenko of Magister's law firm said at the time.

With the main part of the law entering into force six months later, and the number of corporate raids apparently nosediving in 2009, it would seem that the law achieved its goal. "Life has become difficult for raiders now, with the JSC law seriously complicating matters for them," Sergei Petrashko, head of the State Commission on Securities and Stock Exchange that played a key role in drawing up the law, proudly claimed in December.

But analysts say it's too early to get out the champagne, pointing out that the 2009 crisis impacted on raiders just as it did on all other market actors. "The drop in raiding activity was in fact hardly due to the law on Joint Stock companies, which only entered into force less than a year ago, but was simply due to the economic crisis and the drop in liquidity," argues Burdak, "While the risks for raiders remained the same, in legal terms, that the raid might not be successful, the drop in the market's liquidity meant that the profit chances were significantly reduced."

"Raiders are also only human," says Kravets, "and had difficulty raising funds last year for the costs, including bribes, needed for a successful raid." Indeed, statistics from Russia's Interior Ministry confirm there was a drop in corporate raiding there as well in connection with the crisis

The jury is now out on whether raiders will return as soon as the economy picks up. Kravets even sees raider activity already increasing as of late 2009.

On the other hand, Burdak argues that besides the law on JSC, there have been a number of other measures passed that will have a more direct affect on keeping raiding down. "In fact, the main aim of the law on JSCs was not to put an end to raiding, but to make it easier for companies to attract capital on the stock exchange," he explains. "Recent changes to the criminal code should impact more directly in clamping down on raiders."

In addition, according to Petrashko, in 2009 there was a purge of provincial judges who had specialized in hearing cases at the behest of raiders and tighter regulation of court activities.

The real significance of the joint stock law will take longer to unfold, and will be more relevant for the stock market as a whole than for the narrow issues of raiding, agrees Olga Tripol'skaya, deputy director of the Ukraine Association of Investment Business, lobbyists for operators on Ukraine's stock exchange. The law on JSCs implements a shift from the post-privatisation proliferation of closed and open joint stock companies - with only the latter traded publicly - to the strict Western division between private and public companies. Companies registering as public companies will be forced to list publicly and disclose full information, says Tripol'skaya. Minority rights will benefit from clear specification of obligatory buy-out rights.

Companies have to change their status by April 30, 2011, and most are only starting to think about it now, so the real affect will be felt much later. Minority investors will definitely gain, but in a certain sense raiders may also derive benefits, says Burdak, since they often use minority rights as a weapon to remove company management.

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