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. Last Updated: 07/27/2016

Carmaker GAZ Throws Out Share Dilution Rule




Automaker GAZ announced over the weekend that it was shaking up its charter by eliminating a rule that allowed the board of directors to dilute the company's shares without notice.


The Nizhny Novgorod-based carmaker also will pay out an immediate dividend of 12 rubles on preferred shares and a delayed one of 3 rubles on common shares after net earnings of $1.7 billion last year, officials said after the company's annual shareholders' meeting Saturday.


The company charter calls for a dividend on preferred shares of 10 percent of net earnings.


Changing the charter will strengthen the position of minority shareholders, said Erik Wigertz, an analyst with Brunswick Warburg who was present at the meeting.


The change calls for the elimination of the 6.2 million authorized shares held by the board of directors that could be released at any time. Shareholders had previously given the directors control of the authorized shares, which dwarfed the 4.425 million ordinary and 1.475 million preferred shares already issued.


"If there are no authorized shares, no new shares can be issued and you don't have to go around and worry about your stake in the company suddenly being diluted," Wigertz said.


Before the change, an investor with a controlling 50.1 percent stake could have seen it reduced to less than a blocking stake of 25 percent overnight.


The dividend payouts on preferred shares will be made this summer and on common ones in 2002, a delay shareholders agreed on in order to pave the way for a debt restructuring deal with the European Bank of Reconstruction and Development, the carmaker's main creditor. The extra funds will be sunk into building GAZ's new car, the Volga 3111 model.


"Most holders of ordinary shares were OK with the fact that this dividend will not be paid out until 2002 since there is much more value in having the EBRD debt restructured," Wigertz said.


GAZ owes $82 million to foreign creditors. The ruble's crash and subsequent economic turmoil is digging deeply into its profit margins, making it impossible to repay the debts and invest in much-needed new product lines at the same time.


Even so, analysts said that given the current difficulties GAZ posted respectable numbers for 1998. According to Brunswick Warburg, production rose 6.4 percent to 225,500 vehicles, but net sales last year were only $1.7 billion, down 21 percent from 1997. The carmaker turned a profit of 1.4 billion rubles compared to 1.38 billion rubles the previous year.


GAZ chief Nikolai Pugin has announced that the carmaker plans to boost automobile exports to 30 percent over three years as a way of increasing hard currency earnings needed for investment and debt payments. But this will be a difficult task, analysts said, as current exports amount to just 3 percent of GAZ's total production.