Russian Corporate Raiders – Fear No More?
Written by Retired United States Judge William Thomas Higgins
Almost twenty years after the fall of communism one can hardly describe Russian’s legal system as one that features a Western-style “rule of law.” Those new to Russia can only imagine what a wild country Russia was in the 90s. In the early days of Russia’s interpretation of capitalism, laws were few, hard to enforce and confusing at best: the rule of law back then was all about corruption. Back in the wild 90s, hungry and aggressive businessmen established a practice of corporate “raiding” that took the Western term to a literal sense. In that context, the 90s corporate raiders organized mobs of armed forces to physically storm and “raid” target companies. In parallel, they would pay off lawenforcement officials and the judiciary in order to further diffuse any viable defense options. These rough methods were too often used and unfortunately this dark chapter does plague the corporate history of some companies that operate in today’s Russian business world.
Mike Matthews in a recent picture
with Stevie Wonder provided by Russia Today
Time has moved on and fortunately this practice has become less and less common, especially in Moscow. The methods and targets have changed significantly as well. Currently, target companies are companies that are assetintensive; that is, companies that usually include in their balance sheets valuable real estate.
Corporate Raider Victim in the West: employees. In Russia: the shareholder
Corporate raiding was born in the West where the “raider” would find asset-intensive targets, often public companies that had assets that exceeded total market value. More sophisticated corporate raiders in the West would often even use the assets of the target company in an LBO (Leveraged Buy Out) to finance their purchase. These ruthless businessmen would then break up the target company and dispose of all the assets resulting often in the closure of the target companies and/ or massive job losses. Western corporate raiders do not exactly enjoy a great reputation either, since at the end of the day they have been seen as depriving people of their livelihoods. While the methods used in Russia, which include violence and coercion, are much more reprehensible than the corresponding Western approach, the result is not that much different in that their victim is deprived. The victim in the West being the employees; in Russia the shareholders.
Methods Changing; Laws Changing
The Russian government has not been sitting idly by watching this phenomenon, as they have been pro-actively trying to prevent and reduce the incidence of corporate raiding. There have been changes in the laws and other efforts as an attempt to reduce or eliminate Russianstyle raiding. Criminal laws have been strengthened and mob-style attacks can lead to serious jail sentences for those who organize and/or participate. According to a recent television program produced by staterun Russia Today, violent attacks still occur but with less and less frequency. The fact that state-run Russia Today has focused on this issue (see for example http://russiatoday.ru/documentary/release/958/video which aired in December 2007) manifests the government’s intention to eradicate this practice.
Another common method that has been used in recent years has been the forging of documents to reflect a fraudulent transfer of share ownership. It is now possible to use the internet in real time to see if any changes to corporate ownership of a company have been made by simply inputting a company’s tax identification number on the relevant web site (see for example http://www.ogrn-inn.ru/.)
Other methods used include forcing a company into bankruptcy through tricky judicial means and then holding an unannounced auction whereby the raider would obtain the assets for pennies in the dollar. Again, the real target being the underlying real estate. According to Alexander Makarov, Senior Associate at Hellevig, Klein & Usov, “In the recent past, raiders who used to employ the services of gangs and thugs are now building up their legal departments instead, in order to invent new ways to improperly seize the assets of target companies. Fortunately the government is trying to stay one step ahead of these ruthless business practices by amending laws such as those relating to bankruptcy in order to reduce the incidence of Russian raider activity.”
In addition to the change in the laws, Russia’s rule of law is indeed strengthening. As judges salaries have risen from a few hundred dollars several years ago to over $4,000 per month today, the temptation to accept a bribe is now less than before. Corruption’s decline is further accelerated by the strengthening of anti-corruption laws which are deterring more and more public servants from accepting bribes.
Jimi Hendricks’ Guitarist Mike Mathews Fought and Won
American Mike Matthews, was a sound-effects designer and also a promoter of Jimi Hendrix, bought an unusual Russian factory in Saratov in the 1990s. His factory makes vacuum tubes for guitar amplifiers and has almost a monopoly on this specific product (See http://russiatoday.ru/documentary/release/958/video) He was a victim of a raider attack, he fought back and won.
The good news is that illegal raiding is definitely on the decline and victims like Mr. Matthews are finding that it is possible to resist. In Moscow, cases are few and far between, and the victim companies are smaller and smaller. According to Passport Magazine there were approximately 350 cases in 2007 plus about 17% of the value of corporate takeovers in Russia incorporated improper means. Unlike in the past however, it is now possible to reverse these improper takeovers as with the case of Mr. Matthews. Incidences of corporate raiding are very rare in Moscow as the activity has now moved, at least for now, to the regions. While the overall trends are positive there is still some way to go before we see the complete eradication of Russianstyle raider activity.