After the notorious raider attacks on Moldovan banks in the summer of 2011, the government authorities decided to set up new legal mechanisms to protect investors from abusive takeovers. For this purpose, several packages of legal amendments have been approved over the past years.
Yet, new abusive takeovers have taken place following each set of amendments and the earlier initiated raider attacks have been carried out successfully. The obvious question is why, after four years of anti-raider crusade, the risks of abusive takeovers are just as high and the shareholders remain as vulnerable.
A wrong approach to fighting raiders
Moldova does not want cannot overcome its old deep-rooted complexes. It does not rely on the mechanism of the market economy and free economic initiative; it relies on the muscle of bureaucracy. As expected, the anti-raider laws have opted for this same long ingrained approach: using as many bans and restrictions for security trading, as much intervention and decision power from governmental authorities, as many approvals from regulatory bodies, and as much dependence on the willpower of certain civil servants as possible.
Basically, anti-raider laws refer to three main aspects:
- The law allows only sell/buy operations with shares of banks; any other types of operations with shares of banks are prohibited.
- Trading with securities is conducted under the rigid control of the market regulators and investors must comply with pre-reporting and post-reporting rules.
- Operations with more than 1% of the bank capital are to be preliminarily cleared with the NBM; in addition, a person that potentially has access to inside information can trade securities after the approval of the NCFM.
That is, mostly the state, rather than the shareholder or the new investor, decides when, in what manner, and in what circumstances shares of financial institutions are to be traded. Moldovan laws – and thereby the legal mechanisms for fighting raiders – rely on the idea that only the state is capable to protect investors, whereas investors could not have the mechanisms to protect their owns assets. The events of the past years clearly indicate that this thesis is wrong.
The law encourages raiders
The most serious problem is that the legislation in fact aids raiders with a couple of tools, allowing them to carry out abusive takeovers, while leaving the shareholders short in means to react. Some elements are essential in this regard:
The legal obligation to be a publicly traded company
Financial institutions – but also other categories of joint stock companies – are per se bound to be listed and trade publicly. Financial institutions are thereby required to publish internal corporate information, such as documentation for the general meeting of shareholders and decisions of the board. This allows raiders to get acquainted with the corporate matters of companies, follow the divergences between shareholders, monitor the activity of managing bodies, and use this information to develop raider strategies.
In addition, as soon as financial institutions were bound to be “publicly traded”, their shareholders lost the right of first refusal. The right of first refusal is a simple, but very efficient mechanism of ensuring the integrity of the shareholder structure. It allows existing shareholders to approve new shareholders and assess whether the latter have hostile interests. An uninspired decision of authorities repealed the right of first refusal and the “shifty guys” benefited.
Until the middle of 2000s, joint stock companies could opt for the closed form and their shareholders held the right of the first refusal. Afterwards, both the closed and open forms were repealed via legislation – with noble and correct intentions in fact. The idea was that all joint stock companies shall be treated as closed companies and a company would become “publicly traded” only if it carried out a public offering of securities and/or listed its securities – this is the usual and normal practice in other countries. Yet, when the reform was completed, it stipulated just the opposite: all joint stock companies were bound to become “publicly traded”, without the opportunity to transform into close companies. A gold mine for the raiders!
The obligation to trade securities at the stock exchange
Let’s assume a shareholder wants to sell his shares. Aware that the shares could fall into the hands of raiders and desiring to prevent this, the shareholder appeals to a serious investor or a foreign financial institution and offers them to buy his shares. Here comes another restriction: the law requires shareholders to sell their shares at the stock exchange and that the offer to be open to all potential buyers. That is, the shareholder cannot sell his shares to a reliable investor; he is required to sell shares on the stock exchange without knowing who might be the buyer. It is in this way that raiders succeed obtaining shares in certain companies and later initiate turbulences and take over the control in the companies. The obligation to trade at the stock exchange is an anomaly that does not exist in other countries. This obligation has existed in Moldova over the past fifteen years and it is being persistently maintained.
The ban for delisting
The legislation of a state with a capital market provides the delisting rules that allow companies to retrieve securities from public trading at the stock exchange. A separate element of these rules is the squeeze-out right, granted to major shareholders. This is not the case in Moldova: the Moldovan law requires banks, insurance companies and companies with more than 50 shareholders to list their shares at the stock exchange and the squeeze-out is not applicable to banks and insurance companies. Delisting is prohibited even if the company has one shareholder. Thereupon, companies are bound to maintain their shares at the stock exchange, where raiders hunt.
Risks related to independent registrars
To organize a raider, you need internal information: the evolution of the shareholder structure, data on shareholders, documentation of past trading, materials for general meetings of shareholders, etc. The internal information helps developing the strategy for a raider attack, identifying shareholders that could be deprived of shares and finding an adequate way of depriving them of the shares. Independent registrars perfectly (for the raiders) concentrate this information.
There have been discussions about the involvement of some registrars in raider attacks and about special relations between raiders and some registrars. One of the financial sector assessment reports of 2004, developed by specialized international institutions, recommended that the independent registrars be reorganized. Several other assessments further pointed out that keeping record of the security holders’ rights via independent registrars entailed high risks. There have been few initiatives to reform the institution of independent registrar over the past years and none of them has been carried out. Just like 4 years ago, raiders continue to have access to inside information and to apply it to take over companies.
Let’s summarize the aforesaid:
- Companies that are de facto private are bound to be “publicly traded”; respectively, they are required to disclose corporate internal information and raiders have the opportunity to learn what’s happening in a company internally.
- Companies are prohibited to grant the right of first refusal to their shareholders; in an unrestricted, shares are hunted and stolen by raiders.
- Companies are prohibited to delist their securities and shareholders are bound to trade securities at the stock exchange, even if they have a single shareholder; thereupon, raiders have the opportunity to take over companies due to the stock exchange trading requirement. Independent registrars concentrate the documentation about shareholders, trading history, materials for general meeting of shareholders and so on; accessing this information, raiders can develop effective strategies to take over the companies.
Nowadays, honest investors do not have elementary mechanisms to protect their shares, while raiders benefit from a range of facilities allowing them to carry out hostile takeovers.
Without limiting the right of state to supervise financial markets and to intervene, the law must offer investors mechanisms that would permit them to protect their rights. It is necessary therefore to implement the following measures:
- Companies shall not be treated as “publicly traded” per se; respectively, companies should become “publicly traded” only if they issue securities through public offers and/or list their securities at a stock exchange.
- Companies must have the right to delist and major shareholders must have the squeeze-out option; both rights must be applicable to financial institutions.
- The shareholders must have right of first refusal, if the companies (via general meetings of shareholders) decide so.
- The investors should not be required to trade securities at the stock exchange; investors should have the right to decide where to trade: on the stock exchange or OTC.
- The mechanism of keeping record of the securities holders’ rights must be reformed by eliminating the institution of independent registrars and creating a central securities depository.
Government authorities are faced with two options: either to implement the aforementioned measures and allow investors to protect their shares, or ignore these measures and allow the raider attacks to continue. Let’s see which course of action the decision-makers opt for.