Minority shareholders of Solikamsk Magnesium Plant JSC (SMZ), who bought its shares on the Moscow Exchange, asked for protection from the Central Bank from a possible withdrawal of their shares into state ownership at the suit of the security forces. With such a demand, the local prosecutor’s office addressed the Arbitration Court of the Perm Territory in the framework of the case on the illegal privatization of the company. Vedomosti got acquainted with the appeal of minority shareholders to the Central Bank, its authenticity was confirmed by their representative, managing partner of Law & Capital Viktor Obydennov.
1668 as one person
More than 1,500 shareholders became “single victims under the looming threat of forcible seizure of their property, the right to which each of them was obtained in good faith and in law,” according to the appeal, filed on behalf of 20 applicants. They ask the Bank of Russia to provide “active assistance in the litigation and take the side of all minority shareholders in order to prevent violation of their rights and legitimate interests, as well as to neutralize the destructive impact of this litigation on the Russian stock market.”
In the spring of 2022, the court declared the privatization of the SMZ carried out in the 1990s illegal and seized 89.4% of the plant’s shares from its four main owners into state ownership. The lawsuit was filed by the Prosecutor General’s Office, the defendants were Pyotr Kondrashev, Timur Starostin, Sergey Kirpichev and Igor Pestrikov. According to the department, the decision to privatize the SMZ was made by an unauthorized body. The defendants repeatedly denied all accusations and argued that there were no violations in the procedure, but lost in all instances.
Minority shareholders were not involved in the case at that time – the court considered that their rights and obligations were not affected in the privatization case. But subsequently, the shareholders still failed to stand aside: in August 2022, the prosecutor’s office of the Perm Territory asked the court to withdraw the remaining 10.6% stake in SMZ with a nominal value of 25 kopecks. 512 minority shareholders. Following a lawsuit filed by the Perm security forces, the court then prohibited the registrars from making any changes to the register in respect of the shares owned by the defendants. In November, the Moscow Exchange stopped trading in securities, which at that time cost 7,440 rubles. for one share.
In January 2023, the prosecutor’s office filed an amended claim with the arbitration court (Vedomosti has it) – it already lists 1,668 defendants, of which 1,657 are individuals.
The appeal of SMZ minority shareholders emphasizes that they have nothing to do with the company’s privatization in the 1990s. One of the applicants, Ilya Doronkin, bought securities through a broker in 2021-2022, he told Vedomosti. Another, Denis Semenov, claims that he acquired the shares in May 2022. Doronkin became a shareholder of SMZ, because he considered it promising to invest in “a unique domestic enterprise.” In his opinion, the exchange value of shares relative to the fundamental indicators of the company was underestimated.
Representatives of the Central Bank and the prosecutor’s office of the Perm Territory did not respond to Vedomosti’s requests.
Immunity from Seizures
The Law on Organized Auctions provides that property acquired in this way cannot be reclaimed from a bona fide purchaser. Transactions are concluded on a reimbursable basis, reminiscent of minority shareholders in circulation. In addition, the law establishes immunity for persons who have acquired property, provided that they could not have information that they were not buying it from the legal owner.
It seems logical that there is a presumption of ignorance of minority shareholders that, when buying SMZ shares on the stock exchange, none of them knew and could not know that they were acquiring shares from a non-owner, the applicants write. “If we proceed from the opposite, then both the issue of SMZ securities and the organized trading in these shares themselves were illegal,” the appeal says. Moreover, it is indicated there that over a long period of trading in shares on the Moscow Exchange, a huge number of owners of securities have changed.
It is impossible to imagine, the applicants write, how the requirements of Art. 301 of the Civil Code of the Russian Federation (reclaiming property from someone else’s illegal possession) and how exactly the prosecutor’s office will prove the dishonesty of each shareholder individually.
Another aspect that the applicants draw attention to is the conflict in judicial acts regarding the legal status of minority shareholders. The courts in the framework of the initial lawsuit of the Prosecutor General’s Office came to the conclusion that the rights and obligations of minority shareholders are not affected in the case – the subject of the dispute was a block of shares of four citizens. But the regional prosecutor’s office brought claims directly to all minority shareholders, and this directly affects their rights and obligations, the appeal says. Minority shareholders found themselves in a situation where, on the one hand, they were deprived from the very beginning of the opportunity to participate in the main court session and have the opportunity to influence its outcome. On the other hand, as defendants in the second case, they have obviously limited opportunities for protection, the appeal says.
They don’t know what they are buying
The story of illegal privatization is not the first – in 2021, the court found violations in the privatization of the Bashkir Soda Company and seized 95.72% of the shares into state ownership. But the remaining 4.5% of the shares were then left with minority shareholders.
The situation with the withdrawal of shares from bona fide investors undermines the foundation of the country’s financial system, says Yaroslav Kabakov, director of strategy at IC Finam. Claims for registration of privatization can be presented to many joint-stock companies, which means that in the stock market, the risks of confiscation of assets sharply increase among the owners of shares, he believes. A retail investor who purchases securities at organized auctions cannot and should not analyze privatization documents, Ilya Khersontsev, head of the Association of Retail Investors, agrees: such investors, on the contrary, should be protected by the state.
magnesium giant
SMZ is a strategic enterprise, the country’s largest producer of magnesium, products from rare earth elements, niobium and tantalum. The alienation of shares in SMZ, which was transformed from a state-owned enterprise, took place in 1992-1996. A joint-stock company was created at the plant, 51% of which was received by the staff, and 49% – by the regional property fund. Subsequently, the fund sold its stake. Kirpichev, Starostin and Kondrashev bought shares in the plant in 2016, and Pestrikov in 2015. In 2018, the plant paid dividends for the first time in two decades.
If the shares were purchased on the stock exchange through a broker, there is every reason to consider the current owners as bona fide purchasers, says Novator Legal Group partner Ilya Sorokin. The mass demand for shares by the prosecutor’s office can hardly be considered justified, he notes: it is necessary to deal with each specific case: under what circumstances were the securities acquired by each specific minority shareholder.
If the state needs the shares of minority shareholders, the company can make a market offer and buy these papers, Khersontsev believes.
It is hardly possible to count on the support of investors from the Central Bank, Sorokin believes. It is possible that the regulator will try to ignore the problem, referring to the fact that the dispute is exclusively in the judicial plane. And investors should be more active on their own in a lawsuit, says the lawyer. For example, try to appeal the restrictions imposed by the court on making changes to the register of shareholders.