Power Supplier Deal Challenged in Court

A Jersey-based fund said it had filed a lawsuit in Moscow against Russian firm KIT for refusing to buy out minority shareholders of the power supply company it came to control in March.

Former power monopoly Unified Energy System is auctioning off 52 of these supply firms, which serve the role of middlemen in the power sector, and their shareholders have often accused the new owners of not meeting legal obligations.

The sweeping reform of the sector, undertaken in 2003, will see UES sell off all of its assets this year, introducing a free power market with dozens of competing firms.

The newly liberalized climate, however, has brought with it disputes that were unheard of under the Soviet-era monolith.

Although its $800,000 investment in the supply business is small, the Greater Europe fund said it was fighting for fair treatment for all shareholders in a market plagued by ambiguous laws and murky chains of ownership.

KIT, or Kommunalniye Investitsii i Tekhnologii, won a 65.29 percent stake in Belgorod Supply at an auction for $37.5 million from UES in March, Denis Obukhov, portfolio adviser at Greater Europe, said last week.

Russian corporate law says a company that acquires more than 30 percent of another must make a buyout offer to all the minorities of the acquired company within 35 days.

But KIT did not make the offer, because it sold the supply company on to other investors within 30 days of buying it, said Alexei Karmakov, its deputy director.

"This was a strictly speculative move for us. We bought the company and immediately sold it on," Karmakov said.

It sold 24.77 percent to Agvares and 10.74 percent to PIRS, keeping just under 30 percent for itself, and so was not bound by the buyout obligation, Obukhov said.

But Greater Europe believes there are "relationships" between KIT and the two buying companies, he said.

The connections among such firms, however, and their ultimate beneficiaries, are notoriously difficult to track in Russia, let alone prove in a court of law, said a lawyer for another investment fund participating in this market.

"There are a lot of people with these complaints," he said, asking not to be identified because his firm is considering similar legal action.

"You buy a stake in this company in the hope of later being offered a buyout at a higher price, but I can't remember a case when someone has gotten it," he said.

The preliminary hearing for Greater Europe on Tuesday fixed the date of the first factual hearing for March 12, Obukhov said. But a victory will not guarantee change, because Russian law is not based on precedents.

Karmakov said he had not been served any papers on the case.

"But if someone wants to take us to court over this, that's their prerogative. ... We've dealt with a suit like this before," he said.