During the last 15 years, a small group of former minority shareholders of one of Russia’s biggest iron ore mines, Lebedinsky Mining and Processing plant, known as Lebedinsky GOK in Russian (LGOK), has been trying to contest the price paid for their shares during a 2007 mandatory buyout. The former shareholders have gone to court several times, and each time they have lost the case. Now they have chosen a more radical way of dealing with the problem.

The fight looked like it would come to a definitive end when Russia’s Supreme Arbitration Court in 2013 dismissed an appeal brought by the minorities, confirming the decision of all the lower courts that the mandatory buyout was all done by the book. But in recent months they have begun to attack the company again by posting what the company calls “slanderous allegations” on anonymous Telegram channels and muckraking websites.

After a lull of many years, these media attacks resumed in 2021, when rumours emerged that the metallurgical holding company and Russia's largest iron ore producer Metalloinvest, LGOK’s parent company), and whose shareholder is tycoon Alisher Usmanov, was planning an IPO.

Mandatory buyout

The story started in August 2007 when Metalloinvest’s precursor Gazmetal, having consolidated a 99.47% stake in LGOK, announced a mandatory buyout of the last 0.53% from its minority shareholders. The deal took place that October, giving Gazmetal full control of the miner.

Under the Russian federal law on joint stock companies, any shareholder that owns over 95% of a company has the right to forcibly buy the remaining shares out.

Under the law on joint stock companies, the valuation of these deals is determined by the highest of three alternatives: an independent valuation by an appraiser; the highest purchase price by a shareholder paid in the previous six months; and a six-month weight share price quoted on the exchange over the previous six months.

That year the Russian assessor ZAO Gorislavtsev & Co. Appraisal assessed the value of the shares to be RUB5,383.29 ($210) per share, which valued the enterprise at $3.88bn in total. The highest price paid by a shareholder for LGOK shares in the six months preceding the buyout was RUB8,015.19 ($314). LGOK shares were not traded on the stock exchange, so this factor was not considered in determining the buyout price. As a result, under the joint stock company law, that meant the mandatory buyout price should be the highest price paid by a shareholder, or RUB8,015.19 ($314).

That was the price Gazmetal used to buy out the last 0.53% of shares from minority shareholders, in keeping with the law.

“We believe that its terms are extremely attractive to minority shareholders, as they exceed market quotations and are significantly higher than the price we determined by industry average financial ratios, which is RUB3,249 ($127),” Russian investment publication FINAM wrote at the time.

And that appeared to be the end of it, as none of the minority shareholders complained, and they were paid at the highest of three alternative prices – the highest purchase price by a majority shareholder paid in the six months before the buyout request was made.

The problems started the following year, in 2008, when iron ore prices significantly increased. In the year since the August 2007 buyout announcement, the contract price for iron ore jumped from $74 to $121 per tonne, a rise of almost two thirds (64%). In tandem, the unofficial valuations of the companies that produce iron ore also increased – though, naturally, this increase did not even come close to the growth in the value of the raw materials.

Miffed that they had missed out on the valuation surge, in 2008 more than 20 of the minority shareholders that had been bought out in the October deal went to the courts to seek compensation for the shares, demanding a higher price.

The claims were based on the difference in LGOK’s valuation at the time of the buyout in 2007 of around $4bn and that of a year later after iron ore prices surged, which the minority shareholders claimed had increased more than 15-fold to $60bn, although ore prices had risen less than two-fold.

The courts rejected the claims, finding that no regulations had been violated during the buyout.

Several experts, commenting on the court cases in the media, noted that the point of share deals is judging when they reach peak value and then selling them. The idea that you can sell a share and then come back a year later to ask for more money because the shares had become more valuable runs against the very idea of a market.

But the minorities were not put off. In 2009 they commissioned a new valuation report, which concluded that the shares were worth RUB23,477.66, which would value LGOK at $17bn, or more than Russian steel giant Severstal at the time.

The report was submitted to the leading Russian auditor Self-Regulatory Interregional Association of Appraisers as well as to international accountants KPMG, which tore the report apart. The consultants concluded that the valuation didn’t take into account LGOK funding and debt nor the cost of the land, distorted the valuation of buildings, and skipped over depreciation and many other aspects of valuing a business. KPMG also pointed out the research methodology was unreasonable.

KPMG then did its own valuation of the company based on the same material used by the minority shareholders’ report and came to a valuation of several magnitudes lower, according to LGOK.

In the end the minorities’ valuation report was irrelevant as the courts again threw the claim out, although they did decide to hear the case on its own merits. The courts again ruled that there had been no violation of the joint stock company law.

But that again did not stop the minorities. Over the next four years they continued to bring legal claims against LGOK and Metalloinvest seeking compensation – a total of 16 cases in all, and they lost every one of them.

Attempts to renew claims

In the absence of legal arguments, the minorities turned to the press. In Russia, shareholder disputes are often fought in the public eye as it is easy to place articles in Russia’s yellow press. Among other things, a letter was written to the former head of the British Foreign Office, Lord David Owen, in which representatives of the former minority shareholders threatened Metalloinvest with legal action should it try and list on the London Stock Exchange.

The campaign came to nothing, and things went quiet for the next few years. But now the activity of the former minority shareholders has a second wind. LGOK managers and shareholders have recently begun to receive letters demanding money as well as threatening to file new cases with various Russian and foreign government agencies, according to LGOK. However, the very fact that this has still not happened in so many years points to the emptiness of these claims, the company said.

A LGOK spokesman told bne IntelliNews that the company’s lawyers are “treating the letters and threats as a case of extortion.”

The public campaign has also restarted with what Metalloinvest claims are “slanderous accusations” on anonymous Telegram channels and on sites specialising in “kompromat”, damaging information that is often used in Russia and worldwide to extort money or used for political purposes among other things.

This activity intensified in the second half of 2021, when Metalloinvest indirectly admitted the possibility of an IPO on the Moscow Exchange.

The new publicity campaign centres on two main claims.

Firstly, that during the mandatory buyout in 2007, the valuation of LGOK didn’t include valuations of allegedly associated trading companies, BGMT and FMC, which supposedly would have substantially increased its value.

Secondly, it is claimed that there were actually two valuations of the enterprise: one for the buyout of shares at an artificially low price and a second one for external investors that gave a valuation that was three times higher.

There are two problems with these claims.

The FMC trading company was bought by Metalloinvest, not LGOK, and, moreover, the transaction was concluded in 2008, not 2007 – a year after the minorities had been bought out. According to documents reviewed by bne IntelliNews, FMC reported a small trading margin averaging at around 7.5%, and the consolidation of this business into the holding company would not have made a significant difference to the company’s overall valuation. As for BGMT, this company never had any relation to Metalloinvest shareholders. All trade relations with it ended in 2006, following the consolidation of the majority stake in LGOK.

Metalloinvest’s spokesman flatly denies there were two valuations of LGOK in 2007, pointing out that Gorislavtsev and Co. Appraisal is an independent auditor whose reliability has been confirmed by, among others, the Big Four company KPMG.

Finally, the price per share that was eventually chosen of RUB8,015.19 is the highest price at which the entity making the buyout request had purchased shares in the six months preceding the announcement of the buyout, and this is a matter of public record.

What next?

Since Metalloinvest first floated the possibility of holding an IPO in Moscow last summer with a valuation of around $20bn, the listing has still not happened. Since the war in Ukraine began, the IPO is now unlikely to happen in the near future. Russian companies have been cut off from international capital markets, while the domestic market has become very thin and volatile.

The company’s main shareholder Usmanov was sanctioned by the UK earlier this year, but the sanctions are individual and none of his companies have been sanctioned, including Metalloinvest, which continues to do business with foreign partners.

But the sanctions are causing Metalloinvest problems. In October the company said it would place “replacement bonds” that partially substitute a dollar-denominated Eurobond with a new ruble issue. Metalloinvest said it would partially replace outstanding Eurobonds worth $650mn, due in 2028 and with an annual coupon rate of 3.375%.

After extreme financial sanctions were placed on Russia, Russian companies have begun to issue replacement bonds for investors with equivalent issue sizes, coupons and maturities.

Nevertheless, the minority shareholders have apparently decided to take advantage of a time when anti-Russian sentiment is strong, and are determined to continue their campaign to get some “compensation” for shares that were sold 15 years ago.