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. Last Updated: 07/27/2016

Lawsuit, Probe Hang Over AvtoVAZ

Itar-TassWorkers assembling an AvtoVAZ Lada in Tolyatti, where the company's management has come under fire for its dividend policy.
AvtoVAZ is attempting to pay its way out of court -- not by bribing judges, but by paying its disgruntled shareholders large dividends.

Based on a recommendation from the flagship automaker itself, shareholders over the weekend approved a record payout of 31 percent of the company's 2002 profit. Ironically, however, they will not receive a kopek until a court case brought against the company by minority shareholders HQ Fonder Sverige and a Ukrainian man named Viktor Tsobenko is resolved.

The case was launched last year by minority shareholders, who claimed that a move approved by shareholders in a questionable vote to strike from the company charter a mandatory dividend payout of 10 percent of profits was illegal. At the time, senior managers, who own most of the company through a complex cross-ownership scheme, said they simply wanted to pay more than 10 percent of profit in dividends, while minority shareholders pointed out that it also gave the company the option not to pay at all.

Under corporate law, amendments to a company's charter need to be approved by more than 75 percent of common shareholders and preferred shareholders in seperate votes. Minority shareholders say AvtoVAZ broke this rule by combining the two votes into one to get above the 75 percent mark.

AvtoVAZ declined to comment, but board chairman Vladimir Kadannikov said in remarks posted on the company's web site www.vaz.ru: "The fixed sum of 10 percent as it stood in the former charter is [what should be] considered a limitation of the rights of minority shareholders, in AvtoVAZ's opinion. That's why AvtoVAZ has and will contest the court decision [not to strike the 10 percent requirement from the charter]."

Ahead of the vote, Kadannikov asked shareholders to vote for a payout of 17 rubles per preferred share and 5 rubles per common share, which comes to 31 percent of the company's total profit of $22 million.

The situation is a double-edged sword, Troika Dialog analyst Andrei Kormilitsin said: On one hand, AvtoVAZ has shown that it is willing to pay considerable dividends despite no longer being required to do so legally, but on the other hand "profits are much lower than expected."

"The generous payout looks suspiciously like an attempt to buy [shareholders'] consent, rather than a genuine intention to turn over a new page in the company's dividend history," Troika's corporate governance specialist Yelena Krasnitskaya wrote in a research note.

Based on company guidance, Troika expected the company to post a pretax profit of between $130 million and $160 million last year, but "the numbers imply that 85 percent of pretax earnings were consumed by ... unknown items."

The dividend vote, which shareholders approved at their annual meeting, included a condition that all pending legalities are sorted out before any payout is actually made.

Hans Hedstrom, CEO of HQ Fonder Sverige, a Swedish investment fund, said the company would "rather keep quiet" until the legal case is resolved.

Adding to the auto giant's woes, the State Duma's budgetary watchdog, the Audit Chamber, said last week that it had launched an investigation into the company's finances.

In 2001, the Federal Property Fund returned to AvtoVAZ a 51 percent stake in the company that it had held as collateral for the $900 million in loans and tax debt to the government. AvtoVAZ has yet to pay off the debt, which was rescheduled over 10 years. The chamber's mission is to find out whether that restructuring was conducted legally, and whether the government should still hold a 51 percent option on AvtoVAZ as collateral.

"The decision is unlikely to be revoked in view of the lobbying power of AvtoVAZ management and the fact that the company has thus far been on schedule in its restructured debt payments," Kormilitsin said.

But, he warned, the prospect that the option will be restored would mean "a huge hurdle on the road to international liquidity and a healthier image among investors."