Lentas shareholders are engaged in a hostile battle for power

Lenta's shareholders are engaged in a hostile battle for power

Russian grocery retailer Lenta, long a rumoured takeover target of Wal-Mart, is enjoying growing sales in Russia's emerging retail market but, as Petah Marian reports, in-fighting among shareholders could derail the business.

A meeting of the board of Russian retailer Lenta, set for Monday (16 August), looks set to be another tense day in what has been weeks of mud-slinging between the company's main investors.

The tension started on 27 May when US shareholder August Meyer, who through his company Svoboda owns 40% of Lenta, called for the removal of the company's CEO Jan Dunning. just-food understands that another shareholder, private-equity firm TPG, walked out of the meeting as the dismissal was put onto the meeting's agenda too late and because it did not see any reason for Dunning to be replaced.

An agreement was signed between Luna, through which TPG and state-owned Russian bank VTB own 30.8% of Lenta, and Svoboda in October 2009, which gave Svoboda the option to reappoint former CEO Sergei Yuschenko. However, there have been a series of court cases since to argue whether a quorum was reached when the vote was taken to appoint Yuschenko.

"There was no quorum at that meeting, so the decisions made at that meeting were not valid," insists Richard Wallis from the European Bank for Reconstruction and Redevelopment (EBRD), another shareholder in Lenta. "You can't run a company without a board. This is a completely original way of running a company."

Following the meeting where Svoboda dismissed Dunning, TPG initiated a case with the BBVI - the Russian crimes unit. This was followed by Svoboda then launching arbitration proceedings in the London International courts.

For his part, Yuschenko argues the meeting at which Dunning was dismissed was valid. "There are two court decisions and that's the best evidence that you can take," he tells just-food. Yuschenko claims that the judge in the first BBVI case said: "If you jump out of a window, is the meeting be inchoate?"

However, sources close to TPG come to a different conclusion after these events, saying that the court did not rule either way as to the meeting's validity.  The EBRD's Wallis supports this claim: "The BBVI did not rule, it refused to hear the case on a technicality," he says.

Further meetings in the London arbitration court found that Luna needed to ratify the appointment of Yuschenko and that any parties preventing his becoming CEO could be removed from Lenta's board.

Both sides agree they need to meet to ratify the agreement to appoint Yuschenko as interim CEO until 31 August and Wallis and TPG sources say they plan to do so at the board meeting on Monday.

Yet, Wallis says the EBRD is baffled as to why Svoboda opted to dismiss Dunning. "The EBRD thinks that the performance of Jan Dunning was outstanding and sees no reason whatever for the Svoboda group of directors trying to sack him," he explains.

"We can't understand why it's happened, its incredibly puzzling given that his performance has been outstanding and Lenta has performed better than any other retail group in the period. It really does stand out from the crowd. It's incomprehensible and makes no commercial sense whatsoever."

With Lenta's like-for-like sales up 18% in the first quarter and rising 22% in the second quarter, it's not hard to understand Wallis's argument. According to Planet Retail estimates, the retailer, which had 36 stores by the end of 2009, made RUB2.02bn in sales that year.

However, Yuschenko cites Lenta's lack of expansion as the reason behind Dunning's dismissal. "Russia is an emerging retail market and if you look at the history of Lenta, it was a fast growing company when I was CEO. We were opening 12 stores in one year and similar numbers in other years," Yuschenko says. "During the last year since the day Dunning has been here, there have been no acquisitions, there has not been a single outlet purchased and only one store that opened on a leased basis."

Yuschenko adds: "Lenta did not finish any construction during this time and it is very disappointing to see the development of a company stop. There's a whole department of people working for Lenta but no acquisitions were approved during this time, so Lenta wasted one year of development. That is the main criticism for Jan."

The appointment of Yuschenko and the dismissal of Dunning is not the only issue the board is facing. Yuschenko accuses TPG of illegally purchasing shares and votes on the board, while he also takes issue with the EBRD's appointment of Steven Johnson as an independent director.

Additionally, he has accused the private-equity fund of attempting a hostile takeover of Lenta. "If you ask me how I would describe a company that would violate shareholder agreements, articles of association, that is trying to get a controlling stake in the company, is getting a majority on the board of directors in a strange way, I would say it was a hostile takeover," Yuschenko insists. "In my opinion over the last weeks and months, TPG has been attempting a hostile takeover of Lenta, and unfortunately it has almost succeeded."

However, sources close to TPG describe Yuschenko's claims as being "ridiculous and completely untrue". 

According to Yuschenko, in the London arbitration court, TPG admitted to buying the votes of 10% of shareholders. "I can't sell shares to anyone," he says. "All shareholders have pre-emptive rights if it relates to the sale or transfer of any other title or rights on the shares."

However, the EBRD's Wallis has a different version of events. He says TPG admitted to having 53% of voter support for the board meeting it called for Monday and that some 10% of minority shareholders that agree with its decisions have given it their voting rights.

Additionally Yuschenko has accused the EBRD of nominating and electing a de-facto TPG person to the board in the form of Johnson. He says that in the Lenta's articles of association the EBRD can select an independent advisor with international retail experience. "Some time ago we suggested we would want a former board member and former Wal-Mart executive Bill Woodward to be on the board of directors. The EBRD said we couldn't do this because some time ago Bill Woodward provided us with some consultancy work and we gave him some money for it."

Wallis describes the issue with Woodward as a "red herring" and that Svoboda is attempting to take focus away from the real issue, which is its corporate governance. "The allegations are false, and if Svoboda was serious about the accusations, it wouldn't have registered him [Johnson] as a director," Wallis says.

Yuschenko, however, claims that Johnson has spent the last six months taking care of Lenta on behalf of TPG.

"He was in board meetings making presentations on behalf of TPG, he was interviewing some executive candidates on behalf of TPG, so was clearly getting money from TPG," Yuschenko argues.

"So this Steve Johnson does not have a TPG email address but he has been working for TPG for the past several months."

Speaking about what he expects from Monday's meeting, Wallis says: "Quite frankly, given what's happened so far, I'd rather not make any forecasts."

However, Yuschenko is less hesitant. "I don't think the board meeting can be valid if Steve Johnson will be participating," he said.

"All we're asking for is a board meeting to sit down and discuss the issues," Wallis replies. "If Svoboda does not turn up on Monday, nobody can be made director general and nobody can be sacked."

Regardless of what happens in the board meeting on Monday, the continued in-fighting will only hurt Lenta in the long term, scaring off potential investors and taking the focus away from developing what has been a strong performing chain.