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. Last Updated: 07/27/2016

OMZ Sets Minority Shareholder Precedent

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Machine builder OMZ's shareholder meeting Thursday marked a bold step for corporate governance after management transferred the right to vote unvoted shares held in American Depositary Receipts to an independent party.

"We believe a very important precedent is being set … . It indicates that corporate governance in Russia is not all that bad," said Alexander Ikonnikov, head of the Investor Protection Association, to which OMZ management transferred the right to vote. The IPA voted a 22 percent block, which counted for 28 percent in the meeting's quorum.

Until April 2001, Russian companies registered ADRs with discretionary proxies. If ADR holders do not vote the underlying shares, management may vote them as it wishes. In April, the Federal Securities Commission ruled not to register ADRs with such proxies.

OMZ, formerly Uralmash-Izhorsk, took the step to increase shareholder protection. "The shares belong to minority shareholders, so they should have their own representative at the shareholders meeting. It seems to me it will increase trust in the company," said Kakha Bendukidze, general director of OMZ. "In some cases they abstained where I would have preferred they voted in favor, but they have their own point of view."

The IPA abstained from the vote to reduce the board of directors from nine to seven members. Two independent directors were elected: Ivan Lazarko, who sits on Unified Energy Systems' board of directors, and Mark Winer, an expatriate businessman and former director of Moscow McDonald's.

OMZ, which produces heavy machinery for oil and gas, mining and metals companies and nuclear power plants, has benefited from the country's economic upswing. Riding on high commodities prices, companies have increased capital investments.

OMZ's net revenues reached $239 million in 2000, up 55 percent in dollar terms from 1999, according to the company's consolidated financial statements. Net profit was about $11 million.

Its order book swelled from about $402 million in 2000 to $760 million in 2001. Demand has been highest for drilling equipment, which accounts for 29 percent of orders, and nuclear power plant equipment, 24 percent.

One of OMZ's largest customers is Atomstroiexport, which supplies reactor blocks to Iran and China. OMZ estimates it has about 25 percent of the world NPP market and 90 percent of the domestic market.

Overall, exports accounted for about 20 percent of OMZ's sales in 2000, the same level as in 1999.

The company's investment program includes $140 million for equipment modernization and $50 million for acquisitions. OMZ plans to finance its investment program by issuing debt, increasing long-term borrowing and using retained earnings. Shareholders voted against paying dividends on common shares and approved a 12 percent dividend on privileged shares.

"Not paying dividends shows they prefer to use profit to reinvest and expand, shareholders are hanging on for capital gains rather than looking for dividends," said Kim Iskyan of Renaissance Capital.