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The crux of the conflict
The Crux of the Ingosstrakh Conflict: 2007 - 2010
The 2007-2010 conflict between Ingosstrakh shareholders has become a major feature of the investment climate and current corporate governance standards in Russia. The essence of the conflict between the shareholders – PPF Investments (PPFI) and Bazovy Element (BazEl)– is that after three years of disputes and litigation, the minority shareholders of the insurer have practically no chance of influencing the basic strategic decisions made by the company. Despite PPF Investments holding an almost 40 percent interest in Ingosstrakh, due to tough opposition from BazEl the minority shareholders they have so far been unable to enforce some of their fundamental shareholder rights, such as the right to participate in working groups with the Board of Directors and to manage their assets together with the majority shareholder. The fact that the conflict is far from resolved has had an adverse impact on the development of one of the largest insurers in Russia and increasingly the country’s image in the eyes of foreign investors.
Phase 1
The conflict broke out in the autumn of 2007 when BazEl, supporting the insurer’s management, tried to dilute PPFI’s shareholding by increasing the registered capital of the company. The extraordinary general meeting of shareholders, which approved the additional share issue, did not take place in accordance with the Russian law and Ingosstrakh even failed to notify the minority shareholders about the EGM.
Phase 2
The conflict took the form of a fight against the discriminatory provisions of the Board of Directors Rules, which were at variance with the legislation of the Russian Federation. Through these provisions, BazEl was trying to apply additional restrictions to participation on the Board of Directors – such as the requirement for Russian citizenship and for university-level education exclusively focused on finance or economics
Phase 3
At present there is a dispute about the biased transactions approved at the general meetings of the insurance company and, more generally, about which companies are held and controlled by the majority shareholder, the Bazovy Element Group. The minority shareholders believe that, contrary to law, BazEl votes for the adoption of transactions involving conflict of interest, i.e. transactions to which BazEl itself (the companies it holds) is a party. The law says that BazEl must abstain from voting or its votes must not be taken into account. Minority shareholders suspect that BazEl, whose assets lack liquidity, is trying to save these assets at the expense of Ingosstrakh, which has positive financial results at present.
PPF Investments continues to defend not only its indisputable rights and corporate governance standards, but also the transparency of Ingosstrakh’s business and its compliance with Russian legislation and with generally accepted international legal standards. Unfortunately, only a decision from legal courts can enforce Ingosstrakh and BazEl to gradually give up the methods of resolving corporate issues that developed in the “feverish” 1990s.
All experience gained during this conflict indicates that BazEl’s main objective is to prevent the minority shareholders, who hold almost 40% of Ingosstrakh’s capital, from participation in running of the company. BazEl applies wilful and wanton practices, acting clearly in the interests of the BazEl Group, which is currently having financial difficulties.
The History of the Conflict
Month after Month, Year after Year
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2007
- Extraordinary general meeting of Ingosstrakh, concealed from the minority shareholders: decision taken to quadruple the registered capital through an additional issue of shares without the participation of the holders of a 38.46% interest.
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2008
- By a simple majority of the majority shareholder’s votes, the extraordinary general meeting of Ingosstrakh adopted a new version of the Board of Directors Rules, discriminating against the minority shareholders.
- The arbitration court rejected Ingosstrakh’s claim that PPFI breached the law when entering Ingosstrakh and confirmed the legality of 38.46% of the insurer’s share capital to be controlled by PPFI; the transaction was in compliance with the legislation of the Russian Federation.
- The arbitration court of the City of Moscow approved the Ingosstrakh minority shareholders’ claim and found the insurer’s additional share issue invalid: PPFI’s landmark victory in the court.
- Ingosstrakh’s annual general meeting was interrupted: BazEl took time out to ensure finally that representatives of the minority shareholders do not become members of the Board of Directors: by issuing a false execution order, that nobody has seen
- The court annulled the discriminatory provisions of Ingosstrakh Board of Directors Rules: another victory for the minority shareholders in court.
- At an extraordinary general meeting, representatives of minority shareholders were elected to the Board of Directors for the first time.
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2009
- PPF Investments stated that it was prepared to purchase a majority stake in Ingosstrakh from BazEl for 30 billion roubles. BazEl terminated its dialogue with PPFI.
- Ingosstrakh minority shareholders presented their constructive proposals for how to improve corporate governance in Ingosstrakh; no response was received.
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2010
- The arbitration court of the City of Moscow rescinded and declared invalid the decision of the 2009 annual general meeting of Ingosstrakh concerning the biased transactions. Minority shareholders voted against the decision, which was at variance with the Russian law. Minority shareholders continue to challenge in courts the biased transactions, adopted at the insurer’s general meetings by the simple majority of the votes of the majority shareholder.