The rights of a shareholder are proportionate to the size of its shareholding

— How are shares bought out fr om minority shareholders?

— The rules for such buyouts are enshrined in the Law “On Joint-Stock Companies”. The law uses several concepts, including voluntary and mandatory buyout offers and a simple buyout. I would like to stress here that these requirements only apply to open joint-stock companies. Let us now consider each of the categories in more detail.

If a shareholder owns less than 30% of shares, it may send the remaining shareholders a voluntary buyout offer for their shareholdings. The offer should state clearly, inter alia, the buyout schedule, the share valuation mechanism and the share price. Furthermore, a share buyout should be accompanied by the issue of a bank guarantee. In other words, the shareholder offering to buy out shares should acquire a bank guarantee from a credit institution equivalent to at least the volume of the intended purchase that should be valid for at least six months after the expiry of the payment period for the acquired shares.

As a result, the purchase of shares in a large bank is fraught with significant expenditure for the acquirer. Many people believe that such a measure at the height of the financial crisis creates obstacles to the flexible restructuring of a business. However, a bank guarantee protects the interests of shareholders that agreed to sell their shares on receipt of the offer and announced of alienation of their shares to the acquirer within the time periods specified in the offer. This makes it possible to avoid the potential risk that a buyer may not discharge its payment obligations in financial transactions. In this case the seller contacts the bank that issued the bank guarantee and receives the designated amount that it is entitled to.

Another shareholder may also participate in the acquisition of shares and send a competing offer. If shareholders previously indicated their consent to the first offer and then received a more favourable offer, they may revoke the first offer. Such a procedure creates the groundwork for competitive share purchases.

A mandatory buyout offer occurs in three cases: the acquisition of more than 30%, 50% or 75% of shares. When exceeding each of the above lim its, a buyer should make a buyout offer to the remaining shareholders. If a shareholder fails to send a relevant offer to the remaining shareholders, it may exercise its rights to manage the company as a shareholder that holds less than 30%, 50% and 75% of shares, respectively. In other words, if a shareholder bought 35% of the shares and failed to send a mandatory purchase offer, then 5% of its shares will not be considered during the general shareholder meeting when establishing a quorum and voting. In addition, mandatory requirements (submission of an offer, mandatory bank guarantee) also apply here as was the case with the voluntary offer.

If a shareholder accumulates 95% of shares after performing a final buyout, it may send a request to the remaining shareholders to buy the remaining company shares from them. The minority shareholders may in turn request the buyout of their shareholdings by the majority shareholder, if the former’s request was not delivered for some reason.

There is one restriction: a majority shareholder may only demand the compulsory sale of remaining shares if it acquired at least 10% of the shares in the final acquisition as a result of a voluntary or mandatory offer. In other words, if it already had a 91% stake, it would not be entitled to send such an offer. 

— Can minority shareholders reject such an offer and go to court?

— The Constitutional Court of the Russian Federation has received such appeals. Minority shareholders objected to the ability of the majority shareholder to decide unilaterally on a share buyout. Individuals appealed in court that their constitutional rights were being breached in this way. However, the court ruled that if a buyout is performed without breaching legislation and a fair price is paid for the shares, the transaction does not contravene the Constitution. The law protects both the shareholder rights and the status of a joint-stock company and also guarantees its development.

— How is the fair value calculated?

— There is one general principle: the fair value of shares is pegged to their market value. However, there are certain differences when calculating the value of marketable securities and non-marketable securities. The price of the listed shares should be no less than their weighted average price for the past six months. In other words, if the market goes down, the weighted average price will be higher, and if the market grows, the weighted average price will be lower.

The value of non-marketable shares is calculated on the basis of their estimated market price through an independent appraisal. There is one main difficulty – a controlling shareholder can manipulate the reporting and thereby understate the share price.

If the rules or requirements on fair value were violated at some stage, the shareholders that incurred losses may claim for damages.

The shareholders’ rights are also protected by another rule of law. It is common knowledge that buyers acquire large shareholdings at a price that is several times higher than the price of a single share. When a shareholder makes a mandatory offer, the price may not be below the market or weighted average price and also may not be below the price at which the shares would have been acquired or would have been offered for acquisition from any other person over the past six months.
 
— Does legislation set any requirements for the buyer?

— The Law “On Banks and Banking” stipulates that a mandatory notice should be sent to the Bank of Russia on purchases of over 1% of participation interest or shares in a credit institution. If a buyer purchases more than 20% of the shares, it is subject to several stages of additional approvals, including with the Federal Antimonopoly Service, although there are several other thresholds.

An acquirer encounters the following major difficulty: in most cases the buyer is interested in acquiring only a share in the bank, rather than 100% ownership, for example 35% of a bank’s shares. In this case the buyer has to send an offer to the remaining shareholders, in other words, an offer to buy 100% of the bank’s shares and back the offer with a bank guarantee. As I mentioned earlier, there is no guarantee that the Bank of Russia will approve the transaction.

We can say that this rule of law, as applied to banks, is effective on the market primarily owing to an extensive amount of preparatory work that acquirers perform to establish informal relations with other shareholders.