‘In our state, a majority owner is often completely rightless,’ notes Lada Konduforova, Chief Legal Officer at Smart-Holding.
One of the high-profile corporate scandals of recent times was the situation around Amstor Group. Disagreements arose between the majority owners of the retail store chain, who collectively own 70% of the Group's capital, and Volodymyr Vagorovskyi, whose share is 15%. Lada Konduforova, Chief Legal Officer at Smart-Holding, spoke about the essence of the conflict and its impact on the retailer's business activities.
— Could you please tell us about the background of the conflict?
— In 2009, Smart-Holding received an offer to acquire a stake in Amstor Group that was on the verge of bankruptcy. The Group's total debts were over USD 340 million. As a result of the deal concluded at the end of 2009, the majority owners of the retail store chain (companies associated with Eduard Shifrin and Oleksandr Schneider, the former owners of Zaporizhstal – editor's note) had their participation in the capital decreased from 60% to 15%, and Volodymyr Vagorovskyi – from 40% to 15%. Smart-Holding and its partners received a total of 70%. By the decision of the shareholders, Mr. Vagorovskyi became the co-chairman of the Group's Supervisory Board and de facto he supervised the operational activities of all enterprises belonging to Amstor Group.
— Were there many of them?
— More than 15. The Group can be conditionally divided by areas of activity. For example, Amstor LLC and its subsidiaries were the owners of real estate, Trading House Amstor LLC was directly involved in retail activities, other companies were engaged in wholesale trade, logistics, construction of new shopping centres, etc.
— Did you change the management when you became the majority shareholders?
— No. We did not insist on a change of the management. This is probably what later turned against us, but at that time, the relations between the owners were friendly and trust-based.
— What happened next?
— Until 2014, the retail store chain was actively developing. From 23 Amstor stores concentrated mainly in eastern Ukraine (this is the number in 2009) the chain expanded to 38 outlets. The chain's stores also appeared in Kyiv.
Smart-Holding, while exercising high-level supervision and not interfering with the operational management of the Group's companies, insisted on the introduction of more modern and transparent standards of management, financial reporting, personnel development, etc. At the same time, Amstor Group kept itself stand-alone, and its management constantly made obstacles and did everything to ensure that Amstor remained a kind of a “black box” for the owners. Later, the reasons for such actions came to light. We saw that monetary funds were withdrawn from the Group, and then equipment and vehicles turned out to be owned by some third-party companies. These actions were made with a significant excess of authority by officials of the enterprises. And at the end of 2014, the companies controlled by Mr. Vagorovskyi began to transfer employees, re-conclude contracts with suppliers and re-sign lease agreements. In addition, debts to banks and suppliers remained with the companies from which all cash receipts were withdrawn. Overdue payments are currently estimated at over half a billion Ukrainian hryvnias.
— According to media reports, attempts are being made to challenge the 2009 deal under which Smart-Holding received a majority stake in Amstor. What arguments does the claimant put forward?
— There is such a dispute indeed, but this is not the only thing that Mr. Vagorovskyi is undertaking. Once a number of schemes to withdraw money from Amstor were revealed, and then attempts to practically transfer the retail business to third-party companies, at the end of 2014 the owners decided to change all the management in Amstor Group. To prevent that, some armed people blocked the operations of our stores for almost ten days. This enabled people loyal to Mr. Vagorovskyi to take out all the documentation and New Year's cash proceeds from the shopping centres and destroy the IT infrastructure of the stores. Then Mr. Vagorovskyi initiated a series of lawsuits that freezed the launch of the retail chain’s operations. In some lawsuits, he accuses Smart-Holding of raidership (illegal takeover), no matter how nonsensical it may seem. In others, he challenges the right of the owners, who collectively own 85%, to change directors of the companies. As for the above-mentioned dispute, it is not the deal as a whole that is being contested, but one agreement concerning one of the Group's companies. This is the alienation of a 12% stake in the company's authorized capital by Cyprus-based Lorley Investment LTD to another company.
— What rights, according to the claimant, were breached?
— The statement of claim states that Lorley Investment LTD was not aware that an authorized person, who was issued a power of attorney many years ago, alienated a stake in one of Amstor's companies, and this person allegedly exceeded his/her powers. During six years, the company represented by its directors allegedly “had no idea” that such a deal had been concluded. At the same time, quite by accident, in April 2014, according to the claimants, the company learned that it had 12% less equity participation than it had thought. Mr. Vagorovskyi denies any connection with the claimant. At the same time, we have documents signed personally by Mr. Vagorovskyi that clearly indicate who are the sellers and who will be the buyers of Amstor Group. Lorley Investment LTD is mentioned there as one of the sellers. In 2009, Mr. Vagorovskyi assumed obligations for the purchase and sale of shares, including the shares in this company. If the said company had no relation to Volodymyr Vagorovskyi, then how did he assume obligations in respect to this legal entity? Moreover, Volodymyr Vagorovskyi was a co-chairman of the Group's Supervisory Board particularly as a representative of Lorley Investment LTD.
— If the dispute is resolved in favour of the Cyprus-based company, what will change in Amstor's ownership structure?
— Nothing fundamentally. Even if we assume that the court agrees with the arguments of the claimant and makes a decision in his favour, the following will happen: he will own a 22% stake in one of the Group's companies. And what will change in terms of corporate governance? He had a minority stake, so it would remain in comparison with the rest of the participants. The company's articles of association stipulate that decisions of the meeting of participants regarding the appointment or change of director are made by a simple majority, and the quorum of the meeting is 60% of the votes. Accordingly, it is at least unreasonable to draw further legal conclusions that the owners of the company, who own 70%, did not have the right to change the director at their own discretion.
— At the same time, the Vagorovskyi brothers publicly stated that Smart-Holding paid practically nothing, and they were allegedly forced to conclude that deal...
— The terms of the deal, including the payment obligations, are determined by the relevant agreements. Smart-Holding fulfilled all the terms and conditions. If Messrs Vagorovskyi believed that their rights had been violated, at least one claim would have been filed during six years. The amount of the deal, which was determined by the parties, is a symbolic one. The asset's price was negative at the time of the selling. The 2008 crisis severely crippled Amstor. For example: the total amount of debt to banks was about USD 250 million, and all real estate objects were subject of pledge. The Group could not get itself out of the debt hole. It needed support, sources of funds that it found on its own initiative in Smart-Holding. At the same time, there were debts to suppliers, to the majority owner and his structures too. In this situation it is inappropriate to say that Smart-Holding and its partners, who provided resources so much needed to the Group and acted as guarantors to the banks, which made it possible to restructure the debts, “did not pay anything”. In addition, dividends were not paid to the participants of the Group, including Smart-Holding. All funds were reinvested by the owners in the development and expansion of the business. As at 2014, Amstor retail store chain expanded to 38 outlets. Speaking about some sort of “coercion” to conclude the deal, it turns out that at first during the year, while the negotiation process was going on (approximately from February to December 2009), the sellers were “forced” to sell the business, and then they were “forced” to manage it.
— How did the ongoing corporate conflict affect the operation of the company?
— The operation of the company in the territory controlled by the Ukrainian government is completely blocked. The stores operate only in the ATO zone. So far, we do not have a possibility to control the situation in these stores. In the rest of the shopping centres, all documentation disappeared, including financial and HR documents. Cash registers, IT infrastructure, and all databases were destroyed. All this does not make it possible to carry out business activities. Unfortunately, there are no measures stipulated by the legislation that would allow us to quickly revive them. It is necessary to re-obtain all permits and approvals. The companies are also unable to submit reports to the tax authorities due to the completely missing primary documentation.
The companies of the Group also faced massive filing of claims by suppliers whom they did not pay for delivered goods. So, the workload for lawyers increased significantly.
— How do the stores’ staff react to what is happening?
— The situation is not a simple one, and the stores’ employees do not always understand what is happening. The backbone of the team, which is loyal to Mr. Vagorovskyi, as we now understand, for quite a long time was being prepared for a possible change in ownership... As the telephone numbers of the companies’ directors were changed on the eve of the New Year, it is difficult to reach them. Few of them make it easy to get in touch with them. Announcements of the change of senior managers were posted in the regional and central press with a request to officials to appear at the location of the company and make the transfer of documents and files. Alas, very few people showed up. It is difficult to understand what drives people's behaviour in this situation. A violation of the law is seen in such actions, which means that the perpetrators can be brought to justice, personal responsibility, and up to criminal liability.
— Did Smart-Holding turn to law enforcement agencies regarding the response to the facts you voiced?
— Of course, it did. However, it is not all as easy as it sounds. An owner in our state is often absolutely helpless and in essence rightless. After turning to law enforcement agencies with a statement that the company’s documents werе missing, for example, law enforcement officers demand... to provide evidence confirming that the missing documents had existed. That is, the owner's statement is not enough. Some kind of confirmation is needed, but they do not specify how such confirmation should look and who can provide it so that this would be enough to initiate a criminal case and help in finding what was missing. In addition, in our opinion, the investigation of the appeals from the new senior managers of the Group's companies shows an extremely slow progress. At the same time, law enforcement agencies respond to nonsensical statements of Messrs. Vagorovskyi with lightning speed.
— That is, it turns out that the minority participant interferes with doing business and puts sand in the wheels of the majority owner?
— That is what it comes down to. To implement such a scenario, it is not even necessary to own a stake in a business: any person in control of the operating activities of a company, for example, a company director, is able to completely block any actions of such a company’s owners, regardless of their share of ownership – even if it is 100%. That is, in fact, what was done in the situation with Amstor.
(Interviewed by Vadym SHPACHUK, "Legal Practice")