Surgut Neftegaz Tries Crashing MOL’S Doors

*Note to readers: the M:Communications company advises that Mr. Gennady Timchenko owned less than 0.1 percent of Surgut shares as of June 11

The Kremlin-connected oil company Surgut Neftegaz has launched judicial proceedings in Budapest’s metropolitan court against Hungarian MOL, the most successful private oil and gas company in Central Europe. The Russian company alleges that MOL refuses to register Surgut as a shareholder (Reuters, MTI, June 4).

Surgut had acquired 21.2 of MOL’s shares -the single largest stake in the company- on March 30 surreptitiously from Austria’s OMV. That transaction sparked a political scandal as well as marking a bold step in Russian expansion into the energy sector on European Union territory (EDM, April 3, 6).

Surgut’s move appeared designed to prepare a takeover of MOL by the cash-rich Surgut from inside, through accumulation of further shares and capture of seats on the board. The Russian company sought representation and voting rights at MOL’s annual general meeting (AGM) of shareholders on April 23 and claimed a right to nominate members of the board.

Under Hungarian law, however, the acquisition is subject to approval by the regulatory agency, the Hungarian Energy Office. The latter is entitled to ask and receive relevant information about any new foreign entrant that acquires 5 percent or more shares in a local company. It is only after the Energy Office’s approval that the new entrant may be included by the local company into its share register (Heti Vilaggazdasag, Nepszabadsag, Vedomosti, June 5).

Following the March 30 acquisition, Surgut has duly applied to the Hungarian Energy Office for approval. However, Surgut has apparently thus far failed to provide crucial information about the company. At least some of the undisclosed information is that pertaining to the company’s actual shareholders.

Surgut is deeply non-transparent even by Russian standards. According to "market rumors," the Russian Prime Minister Vladimir Putin is believed to hold a substantial share, directly or through intermediaries. Surgut’s ownership structure includes 42 percent in treasury shares held by an undisclosed entity or entities, with the remainder in an obscure system of cross-shareholdings. Surgut’s CEO Vladimir Bogdanov is a long-time Putin confidant. Bogdanov has recently been nominated to the board of the state-owned Rosneft under Deputy Prime Minister Igor Sechin’s chairmanship (Interfax, March 30; Wirtschaftsblatt, March 31; Vedomosti, Wall Street Journal, April 1).

Nor has Surgut explained why it paid OMV double the going price for MOL shares when it acquired the share package from the Austrian company. Unprecedented in itself, and stunning to market analysts, such overpayment could only be explained by strategic designs on the part of Surgut and possibly allied Russian companies to take over MOL and expand further into Central Europe

These and other questions that the Hungarian Energy Office presumably asked of Surgut remain unanswered thus far. Secrecy over ownership and concerns about how Surgut’s expansion could affect Hungary’s and the region’s energy security must be some of the causes for withholding regulatory approval of Surgut’s entry into MOL.

Initially, MOL had responded to Surgut’s move by announcing that the Russian company will be treated merely as a financial investor, as distinct from strategic investor; that is, Surgut could receive profit on that investment, but would not shape company policy and not sit on the board. Failing to meet legal and regulatory requirements, however, Surgut cannot qualify for entering MOL. Thus, for the time being at least, the Hungarian company does not have to make a decision on whether to include Surgut into MOL’s share register or not.

MOL adopts the position that Surgut’s acquisition is an unfriendly move, reflecting the Russian company’s intention to absorb MOL eventually through a process of vertical integration. Surgut’s own letter to MOL shareholders, issued on the eve of MOL’s annual general meeting of shareholders, had hinted at such a scenario.

At that AGM, shareholders introduced a set of corporate defenses, so as to prevent further encroachments on MOL by foreign state-connected, non-transparent foreign entities. Although expansion-bent Russian companies were not named, this is the source of concern in Hungary and throughout central and southeastern Europe. Without regulatory agency clearance and, therefore, without being entered into MOL’s share register, Surgut could not have been allowed to attend the AGM and indeed was not allowed in.

MOL shareholders approved changes to the Articles of Association, introducing more exigent criteria of transparency. Holders of more than 2 percent of MOL shares are now required to disclose the identity of the ultimate beneficiaries of their shares. To safeguard against hostile takeover attempts, 75 percent majorities shall henceforth be required for AGM approval of major decisions or removal of individual board members; and it shall not be possible to remove more than one board member at an AGM (MTI, Heti Vilaggazdasag, April 23, 24; Kommersant, Vedomosti, April 24).

These corporate defenses add to those adopted in 2007 and 2008 to forestall takeovers of MOL by Russian energy giants via third parties. MOL’s corporate defenses are buttressed by a national political consensus in Hungary to maintain this private company’s independence.