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TGK-2 and the Putin Discount

Another example from the bruising world of Russian corporate governance, minority rights, and rule of law, illustrating why the stock market remains discounted by 40% below other emerging market rivals.  From the Wall Street Journal:

Things went awry at TGK-2. As the financial crisis struck in late 2008, Germany’s RWE pulled out of an agreement to buy the company for $800 million in partnership with Leonid Lebedev, a billionaire Russian senator. His investment company, Kores, ended up as the company’s majority shareholder. Mr. Lebedev has refused to pay more than $300 million owed to minority shareholders who tendered stock in the TGK-2 mandatory offer. They include local and foreign investors, including Prosperity Capital Management, a fund with $1 billion invested in Russia’s energy sector.


Minority shareholders, corralled by Prosperity Capital, have takentheir case to the courts, but have little to show for it. Most recently,Russia’s Supreme Commercial Court has twice backed Mr. Lebedev’s claimthat he can’t honor the mandatory offer because his own acquisition ofTGK-2 breached the Strategic Investment Law on the grounds Kores is infact a foreign company. Russia’s antimonopoly service, FAS, said Koresis indeed Russian. Loath to overrule the courts, Prime Minister VladimirPutin has said the government will clarify the situation but not how.

The dispute has left some TGK-2 shareholders feeling angry andcheated. Meanwhile, Russia’s corporate-governance discount persists.