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Evolving Corruption: Hostile Takeovers, Corporate Raiding, and Company Capture in Russia

Author of this article, Alexander Settles is a professor of corporate governance at the Faculty of Management, State University - Higher School of Economics in Moscow, Russia. Dr. Settles previously worked at the University of Delaware. He has been a consultant to the World Bank Institute, Center for International Private Enterprise (CIPE), and the Organisation for Economic Co-Operation and Development (OECD), and participated in the OECD Russian Roundtable for Corporate Governance.

Russian companies increasingly face the threat of “hostile” takeover, or company capture, which greatly increases the cost and uncertainty of conducting business.Hostile takeovers through illegal or illegitimate means stem from the weakness in Russian law and institutions and have grave political, social, and economic consequences. Reforms must include greater transparency and accountability of government officials as well as state and financial institutions.

Evolving Corruption

Hostile takeovers are unique in the Russian economy, varying greatly from those in developed market economies. Rarely do Russian hostile takeovers involve buying a controlling stake in a company in defiance of the negative vote on the buy-out offer by the targeted company’s board of directors. In fact, most Russian companies cannot be acquired through the purchase of their publicly traded shares. Out of more than a million open joint-stock companies, fewer than 200 are publicly traded, and almost no publicly listed company has a free float1 equal to a controlling stake above 50 percent or a blocking stake of over 25 percent.

Instead, a hostile takeover in Russia means the redistribution of a company’s ownership through a combination of legal, illegal, and illegitimate means, including forced bankruptcies, the use of administrative resources, raids by police, tax officers, or government inspectors, and even the violent seizure of documents, assets, offices, and places of business. Such hostile takeovers, also known as “company captures” or “corporate raiding” pose a constant threat to successful Russian entrepreneurs, who must expend a great deal of resources to defend their businesses. This often means relying on the protection of a krysha (a “roof”) provided either by government officials or criminal organizations, and of course, such protection is fraught with its own risks.

Over time, company captures in Russia have evolved. In the 1990s, forced bankruptcies were the primary path to taking over a company. After revisions in the bankruptcy code, shareholder takeovers became more common, with the use of minority positions as leverage. With the current financial crisis, company capture has been on the upswing, as financially vulnerable businesses are taken over by politically connected businesspeople.New takeover techniques may involve the use of insiders at banks and other financial institutions to gain control of financially unstable firms. Despite the introduction of laws that make raiding illegal, the practice continues, with serious repercussions for Russia’s further economic development.

Read the full article in PDF format here.

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