Russian internet giant and one of Europe’s largest tech companies Yandex has come to an agreement with the Russian authorities to amend its governance and give an NGO with public participation control over its “golden share” with veto powers, in an effort to ally the state’s fears that a “strategically important” technology company will fall under the control of foreign powers.
“In our 22-year history, Yandex has consistently developed world-class services, which today play an important role in the lives of millions of people in Russia, and we continue to develop new ideas that will shape the future of the Russian and global tech sector,” said Arkady Volozh, chief executive officer of Yandex, said in a statement.
“We already have one of the only sizeable online taxi businesses in the world that is profitable, and still growing fast. We have some of the best self-driving car technology in the world. And you just have to look at what we are doing with our core search business, our personalised social platform Zen, Cloud and many other businesses to see that the possibilities are endless,” Volozh added.
Investors should welcome the decision as it removes the uncertainty hanging over the stock that it may be nationalised and will squash the rumours that have been circulating in the market.
“Today the company touches the lives of tens of millions of Russians every day. It holds extraordinary amounts of personal user data. It has developed and owned material IP, and other technology. Some call it Russian Google. That’s not right, actually it is Russian Google, Amazon and Spotify all in one. So if something were to happen to Yandex, it wouldn’t just hit the company, it would hit all of Russian society too,” one investor close to the company said commenting on the deal.
E-commerce in Russia already accounts for 4.5% of total retail turnover and is on course to double that share by 2024. The value of e-commerce in Russia hit $18.2bn in 2018 and is forecast to top $42.8bn by the time President Vladimir Putin steps down in 2024. At issue is not just the control over a company, but control over an essential piece of the economy’s commercial infrastructure.
As reported by bne IntelliNews, since its introduction the bill to cap foreign ownership has rocked the shares of Russia's most valuable digital major Yandex in particular, as it is rumoured that the Kremlin aims for more direct control in the company. Draft legislation was introduced to the Duma that would cap foreign ownership of the New York-listed $11bn market capitalisation company to 20%. More recently the same law was weakened to set the cap at 49% that would mean no changes to the current shareholder structure. However, investors have been unsettled by the debate and fear the state may take control of the company.
Volozh told staff on November 18 that Yandex will set up a “Public Interest Foundation” that will get a golden share and have a veto over a defined list of issues such as the sale of material IP, or the sale or transfer of Russian users’ personal data to foreign companies – questions which are deemed to affect Russia’s “national interest”
The non-governmental foundation is modelled on a Dutch stichting, an ownerless special-purpose vehicle often used to separate ownership from control and protect assets from hostile takeovers. Its board is made up of representatives from five Russian universities, three Russian non-governmental organisations, and three top Yandex executives, the Financial Times reported.
The Russian government is caught on the horns of a dilemma. On the one hand it is keen to see Yandex develop into a world-class company. It is already a European leader in innovation and a major boon for the government’s efforts to digitise the Russian economy. On the other hand, Yandex controls large amounts of personal data on the Russian population that the authorities are keen to safeguard. Russia has already implemented a set of laws that demand internet companies keep their data on users in Russia where it is subject to Russian law.
Yandex already has a golden share that is held by state-owned bank Sberbank since 2009, but this will now be transferred to the Public Interest Foundation.
Sberbank has also been at the forefront of tech innovation and is in the process of transforming itself into a technological platform. The CEO of the bank German Gref has already suggested dropping the word “bank” from its name and rebranding the retail banking giant as simply “Sber”.
However, Yandex has had a complicated relationship with Sberbank. In addition to successful joint projects Yandex Market and Yandex Money, they have also found themselves in stiff competition, particularly after Sberbank bought a 20% stake in Yandex rival Mail.ru to take its share in the company to 45% and will build up a rival business. The joint venture between Sberbank and Yandex to set up an e-commerce marketplace that would have taken a significant share of the Russian economy into the cloud reportedly ended in divorce in July after only a year of cooperation. But the companies continue to work together and industry insiders close to the two companies say their joint ventures are not only still functioning, but some are highly profitable. Since then Sberbank bought a 20% in Yandex competitor Mail.ru to take its share in the company to 45% and will build up a rival business.
The restructuring of Yandex’s management and the change of owner of the golden share will not affect the current shareholder structure of the company where Volozh remains the largest shareholder and in charge of day to day operations.
“We needed to find a decision that would satisfy three sides by keeping management in our hands, reassuring foreign investors about Yandex’s business potential, and defending national interests,” Volozh told staff in his email, explaining the need for the change.
Before the changes are put in place Yandex executives are due to meet with US investors, who own most of its free float, ahead of an extraordinary general meeting (EGM) slated for December 20 where the decision needs to be approved by shareholders.
“I am very committed to this business and urge our shareholders to support the proposals we are announcing today,” Volozh said in a statement. “With this behind us, we can get back to doing what we do best: innovating, providing world-class products and services to our users, and delivering superior returns to our investors.”
Striking the balance between corporate needs and public interests
The new structure also removes the danger that control of the company could easily fall into the hands of foreign portfolio investors, most of which are American.
The quirks of the shareholder structure means that the shares of the company’s CEO Volozh give him a de facto majority control of corporate voting. However, if Volozh were to die these voting rights would be cancelled and the votes would transfer to the publically owned shares, giving the majority control in the company to the pub;ic shareholders – something the Russian government was not happy about.
“No country in the world would like to see its biggest tech company that is deeply wired into its economy suddenly controlled from abroad overnight. This is not just a Russian issue. This is a global issue,” a market participant told bne IntelliNews. “This deal is a delicate balancing act of addressing Russia’s legitimate national security concerns but at the same time leaving one of Russia’s best and most successful management teams in control of the company in a deal that should also be acceptable to the company’s international shareholders.”
“The amendments include the creation of a Public Interest Foundation (PIF), with no economic rights, but with certain limited governance rights. The Company’s Priority Share, currently held by Sberbank, will be transferred to the PIF and its terms will be amended. The amended Priority Share will give the PIF the right to block the accumulation by a single entity, or a group of related parties acting in concert, of shares representing 10% or more of economic or voting interests in Yandex (compared with the current threshold of 25%),” Yandex said in a press release.
The proposed changes have to be approved at the EGM in December and requires 75% approval from the Class A Shareholders, so in this case Volozh alone won’t be able to push the deal through. There are a number of complicated corporate governance changes on the docket for the EGM that have to be approved by shareholders that include the creation of two new directors on the board that are there to represent the public interest. The powers of these directors is limited to questions that affect the public interest and national security concerns and the overall management of the company is left to its existing team.
“The PIF’s two designated directors will also serve on a newly created Public Interest Committee of the Yandex NV board, which will have oversight over a limited and clearly defined set of questions deemed to be of public interest,” Yandex said in a press release and went on to name those rights as:
The members of the 11 person PIF include: “representatives from five leading Russian universities (Higher School of Economics, Moscow Institute of Physics and Technology, Moscow State University, St Petersburg State University and the St Petersburg National Research University of Information Technologies, Mechanics and Optics) and three non-governmental institutions (the Russian Union of Industrialists and Entrepreneurs (RSPP), Moscow School of Management Skolkovo and the Endowment of Moscow School #57), all of which have long and successful histories of cooperation with Yandex. The PIF board will also include three representatives of Yandex management (Arkady Volozh, Tigran Khudaverdyan and Elena Bunina),” Yandex said.
Volozh has also changed the rules surrounding his shares and they votes they carry. As part of the deal he has agreed to lock up 95% of his shares for at least years, meaning he can’t sell during this period.
It was also agreed to change the rules surrounding the transfer of his majority voting rights in the event of his death. Volozh has now set up a family trust and in the event of his death the shares will be transferred to the trust for two years. The representative of the trust trust is obliged to vote in line with the board, in order to ensure business continuity. This arrangement is designed to provide some breathing space for shareholders to organise an orderly transition to a new management structure if Volozh were to die.
Capping foreign ownership
While Volozh didn't directly address the new draft law capping the foreign ownership in his email, clearly the changes are a result of the general problem of the increasingly important role of tech companies in the make up of a country’s economy and the legitimate national security concerns. Following the Second World War European countries adopted national agricultural policies as food supplies became a question of national security, and today technology has reached the same point. Tech is the new grain.
The bill introduced to the State Duma by lawmaker Anton Gorelkin, prohibiting foreign legal entities from owning more than 20% of internet information resources deemed significant for Russian infrastructure, follows on from a similar law that banned foreigners from owning 20% of press outlets in 2015 that caused a major shake-up in the industry.
Gorelkin has admitted that his bill is specifically aimed at Yandex and Mail.ru. According to him, Yandex is exactly the type of company it seeks to regulate: it’s registered in the Netherlands, 85% of its charter capital is listed on the NASDAQ stock exchange, and 49.2% of its voting rights belong to founder Volozh, who is a citizen of Malta as well as Russia.
“In reality, however, the presidential administration — specifically deputy chief of staff Sergey Kiriyenko, who oversees domestic policy — is behind both laws, according to several sources in internet companies and the federal bureaucracy. And, in this campaign, the bureaucracy and security agencies have found common cause with businessmen tied to the Russian state,” Alexandra Prokopenko of the Carnegie Endowment for International Peace wrote in a paper recently.
Yandex’s management and chairman of the board will hold an investor conference call today to discuss the proposed restructuring at 8:00 am US Eastern Time (4:00 pm Moscow time; 1:00 pm London time).