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Ingosstrakh struggle intensifies

PPFI wages a legal battle over Russian insurance company

August 27th, 2008 issue

By Patrick Sisson

IngosstRakh ownership breakdown

A timeline of the Ingosstrakh
ownership dispute

August 2006 A Russian investor approaches PPFI regarding the purchase of Ingosstrakh shares. The subsequent offer is deemed ?unfair? by PPF, a company related to PPFI
December 2006 PPFI purchases 38.46 percent of Ingosstrakh through its subsidiary in Cyprus
October 2007 Ingosstrakh shareholders vote to reduce PPFI's shares to below 10 percent at an extraordinary general meeting. PPFI representatives do not attend
February 2008 A Russian appellate court declines BasEl's request to invalidate PPFI's purchase of Ingosstrakh shares
July 2, 2008 An unknown Russian court issues an injunction denying PPFI its minority shareholder voting rights at Ingosstrakh's annual general meeting
Aug. 15, 2008 PPFI files lawsuits with the Arbitration Court in Moscow and the Financial Arbitrator regarding the October 2007 share reduction
Aug. 19, 2008 PPFI places an advertisement in a Russian newspaper calling on judges to expose the identity of the court that issued the July 2 injunction

For the Post
Czech billionaire Petr Kellner and Russian oligarch Oleg Deripaska are used to closing deals and getting their way.
The first Czech to grace the Forbes billionaire list, Kellner went from selling Ricoh copiers in Prague to building an empire from investments in largest local insurer Česká pojišťovna (ČP), while aluminum magnate Deripaska is purportedly mulling the purchase of an English Premier League soccer team — the ultimate stamp of prestige among Russian tycoons.
Now, a long-running dispute over the Russian insurance giant Ingosstrakh suggests that one of these moguls will have to bend.
Kellner’s investment group, PPFI, is in the midst of a battle with Deripaska’s Basic Element, or BasEl, investment group over its 38.46 percent stake in Russian insurance company Ingosstrakh, and what it calls heavy-handed attempts to muscle them out of their investment.
Years of bickering, including numerous court actions and call-outs in the press, have escalated to a standoff.
In the most recent counteroffensive, PPFI filed lawsuits Aug. 15 with both the Arbitration Court in Moscow and the Financial Arbitrator regarding an October meeting that resulted in the diminishment of PPFI’s Ingosstrakh shares below 10 percent, and expects a response within 30 days.
The company also placed an advertisement in the Russian newspaper Izvestiya Aug. 19, calling on judges to expose the “secret” Russian court whose July 2 injunction prevented PPFI from exercising its minority shareholder voting rights during Ingosstrakh’s annual general meeting.
At press time, PPFI spokesman Jan Piskáček said the company still didn’t know the details of the court ruling, of which it learned via Ingosstrakh’s Web site.
“It seems that the situation is developing according to a proven 1990s-style scenario in order to kick the 40 percent shareholder out of the business by any means,” said Piskáček. “In this case, we are dealing with the most experienced corporate warrior from [that era in Russia], when odd methods were used to seize property or force shareholders out. This is what the whole Ingosstrakh case is about.”
BasEl, the majority shareholder, sees things differently.
“We are ready to buy PPFI’s shares of Ingosstrakh for a fair price,” said Petr Greiding, PR director of the firm’s financial services sector. “In order to determine it, we offered to organize an initial public offering in collaboration with PPFI so that the free market could determine the price. Unfortunately, PPFI doesn’t agree with our proposals.”
Power play
The Ingosstrakh saga began in 2006, when Russian investor Aleksandr Mamut approached the PPFI equity group (controlled by majority shareholder Tomáš Brzobohatý), with an offer to purchase a limited-liability group that owned shares in Ingosstrakh. Kellner’s PPF holding — whose ownership is indirectly linked to PPFI — was also interested.
But, at a meeting in Prague that August, BasEl presented a business deal that PPF considered unfair. Among other restrictions, BasEl said PPF could not operate independently on the insurance markets in the countries of the former Yugoslavia and the Commonwealth of Independent States (CIS).
The proposed deal also required PPF to replace members of the ČP board, and could acquire no more than 38.5 percent of Ingosstrakh. PPF declined the offer.
However, PPFI — where Kellner owns a minority share — went ahead with the purchase. To enable the transaction, the company founded a subsidiary in Cyprus, Durbe Limited, via its existing subsidiary PPF Beta. According to PPFI, the deal was approved by the Russian Federal Anti-Monopoly Service (FAS) in December 2006.
Because it wasn’t a direct purchase of shares by a foreign entity, Piskáček said the deal was “in line with market standards” and did not require separate authorization from the Federal Insurance Supervision Service, Russia’s insurance market regulator.
This argument was upheld by a Russian appellate court, which declined BasEl’s request to invalidate the transaction in a February ruling. However, BasEl continues to question the validity of this authorization.
“Russian insurance law says that foreign investors intending to buy shares in Russian insurance companies have to request authorization by the regulating authority, which is the Federal Insurance Supervision Service,” said Greiding. “In the case of Ingosstrakh, it wasn’t done. Foreign investors need to ask before acquiring formal shareholders. This deal is nontransparent and we are still in tribunal regarding its legality.”
Last October, Ingosstrakh called an extraordinary general meeting. The participating shareholders voted to quadruple the company’s share capital, diminishing PPFI’s 38.46 percent share and reducing its clout. According to Grieding, Ingosstrakh would use the extra capital to create a network of 24 medical clinics around Russia and acquire additional insurance companies in CIS countries.
PPFI representatives, who say the company failed to properly inform them of the meeting, did not attend.
For PPFI and BasEl, the decisions made at the October meeting have been an ongoing catalyst for disagreement.
PPFI claims its shareholder rights had been violated, while Greiding said that, after PPFI blocked the sale of new shares, “[BasEl] concluded PPFI is not a long-term investor ready to develop the company.”
PPFI, in partnership with the Italian insurance firm Generali, has made offers to buy out Deripaska’s interest in Ingosstrakh, but wildly differing estimates on the firm’s value have made talks difficult. Piskáček hinted a lack of cooperation by BasEl were the primary cause of these difficulties.
“To determine the price, a due diligence process could be helpful,” he said. “Despite holding almost 40 percent of the shares, we have had very limited and fragmented access to the company’s books, and therefore are not fully informed about the company’s possible financial liabilities.”
Piskáček also reiterated that PPFI remained open to negotiations. “PPFI is willing to purchase BasEl’s stake in Ingosstrakh at a price several times higher than BasEl [offered for] the buyout of PPFI shares,” he said. “On the other hand, we are ready to sell our stake for a fair price.”
The Ingosstrakh power struggle is another example, according to many observers, of the difficulties encountered by foreign investors in Russia.
At a time when the price of commodities has skyrocketed, many foreign oil companies — like Shell and British Petroleum, which is locked in a battle over control of TNK-BP, a joint venture with Russian investors — have seen deals or partnerships sour over official pressure.
Political factors weigh heavily in Russia’s financial sector, a “tricky one to get involved in and trust the benevolence of your partners,” according to Pankaj Ghemawat, a professor at Harvard Business School and IESE Business School in Barcelona and the author of Redefining Global Strategy.
“There’s a market there, but you need to navigate the tricky shoals of all the uncertainties that simply could not be abolished by putting in a series of laws after the fall of the Soviet Union,” he said. “You need time to build up credible institutions.”
Even Russian President Dmitri Medvedev spoke earlier this year of the need to change the “legal nihilism” in the country.
Ghemawat, for one, does not have much optimism that change is on the horizon. Many of the experts he consulted say there is currently a lack of initiative to strengthen the country’s legal framework, he said.
Patrick Sisson can be reached at business@praguepost.com


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