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New details have emerged in the story of an attempt to challenge the fairness of the buyout of shares by Metalloinvest, which controls Lebedinsky GOK (LGOK) by its former minority shareholders.
As a reminder, several of the company's former minority shareholders have been trying to challenge the transaction for 15 years. It took place back in 2007, claiming that the payments they received were too small. Having been defeated in the courts, they have started trying different methods, from the estimate of “independent” experts to threats and blackmail. The Novye Izvestia editorial office received documents that prove that the alternative appraisal of the shares, appealed for by the former shareholders, did not meet legal requirements and contained multiple errors, while its author had been appraising the value of the shares... just once in his career as an appraiser.
Core of Conflict
As we mentioned earlier, Gazmetall and its legal successor Metalloinvest decided to merge all its assets into a holding in 2006. To do this it was necessary to buy out minority shareholders' shares. At that time, they amounted to 0.53% of the total equity. To purchase the securities at a fair price, an independent appraisal was ordered. It turned out that one registered share must be worth about $211 or 5,383 rubles at that year's exchange rate. Eventually, the shares were bought for almost twice as much, at $314 or 8,015 rubles per share. The deal took place in 2007, and all the money was paid to several thousand minority shareholders.
We have already calculated how much the minority shareholders really got. At a price of 8,015 rubles per share, the owner of, say, 300 shares earned 2,404,500 rubles on the deal. With this money one could buy a 50 square meter apartment or a couple of brand new Volkswagen Multivans. Some had smaller shareholdings, but some sold securities for even larger sums.
However, there was also a group of dissatisfied people who went to court to “compensate for lost profits” in 2008. The fact is that in that year (i.e., a year after the sale of the shares!) the world price of the ore, produced by the company, began to rise around the world. Unofficial estimates of LGOK's capitalization went up along with it. Fourteen years and 16 courts have passed since then. However, not a single one of them (including the Supreme Arbitration Court of the Russian Federation) recognized the claims of the former minority shareholders.
An alternative appraisal of LGOK's value commissioned by Belgorod appraiser Dmitry Khanzhonkov in 2009, two years after the deal, was the group's main and, in fact, only argument. According to this expert, the “fair” value of the share in 2007 should have been at least 26,972 rubles. How adequate are such calculations?
Experts’ Opinion
According to the documents, professional assessment experts believe that Khanzhonkov's valuation cannot be called correct. In 2022, the Self-Regulated Interregional Association of Appraisers analyzed Khanzhonkov's calculations and found that they were incorrect.
There were many mistakes in the report. For example, the appraiser, using a comparative approach with other companies, did not take into account the structure of LGOK's funding sources and the companies with which he compared LGOK. This means that the report did not pay any attention to the debt capital of the enterprise, which in this case was more than 65% while it was about 33% and 3% for those with whom he compared. When analyzing the costs, the appraiser distorted the evaluation of buildings and structures, did not take into account the costs of land plots and the physical depreciation of assets and their technical condition, and made many other inaccuracies in the calculations.
SMAO, the association that evaluated the report, is one of the largest associations of appraisers, which today includes more than 500 appraisal companies and about 3,000 appraisers across the country. The leaders of the organization are members of the Expert Advisory Council under the Ministry of Economic Development of Russia, from year to year develop new scientific methodological materials and standards.
Another review of the valuation report authored by Khanzhonkov was given by KPMG, one of the Big Four audit companies, in May 2022 (available to the editors of Novye Izvestia). The auditors concluded that Khanzhonkov's report did not comply with Federal Law No. 135 on Appraisal Activities and the federal appraisal standards, and that the calculations contained multiple errors.
Among other things, KPMG experts pointed to the unreasonableness of the choice of research methodology. By conducting an alternative analysis based on the same raw data that Khanzhonkov took into account, they came to the conclusion that the latter's estimate was overstated several times.
Who is Dmitry Khanzhonkov?
It seems that such grave mistakes were made in the calculations for a reason, and the qualification of the appraiser Dmitry Khanzhonkov is questionable. According to public sources, Dmitry Khanzhonkov apparently appraised the value of a company's shares only once, and this time on the order of former minority shareholders of LGOK. He usually specializes in valuation of small properties and cars. For example, as the chairman of the Belgorod regional public organization Society for the Protection of Motorists' Rights, he concluded 88 contracts for valuation in 2016-2018. There were 57 for land valuation, 13 for the valuation of cars and trucks, and 7 for the valuation of premises and buildings among them. All of the appraisals performed were for the market value of the property being appraised.
Some of Khanzhonkov's acquaintances, who had worked with him, also shared some information about him. For ethical reasons, we do not cite their names, but they all knew him as the co-founder of the Society for the Protection of Motorists' Rights, an organization that conducts car appraisals and real estate audits, but no one suspected that Khanzhonkov had any experience in valuing companies' shares.
Thus, a bankruptcy trustee in Belgorod said that Khanzhonkov “is responsible for preparing real estate appraisals for the courts.” According to a former lawyer of the Society for the Protection of Motorists' Rights, Khanzhonkov “has the right to conduct an independent technical examination of vehicles, but such examinations, as far as I know, he practically never conducted.” In addition, commenting on the estimates of the cost of repair of motor vehicles, the interviewed member of the Bar of the Belgorod region noted that “Khanzhonkov himself did not conduct such estimates, but only signed for them.” He also spoke about the Society for the Protection of Motorists' Rights, which, according to him, is a “pocket appraiser for insurers” who carry out “deliberate underestimation by the appraiser of the cost of car repairs after the accident to reduce insurance payments.”
There are doubts not only due to the fact that the valuation of the shares of the iron ore mining and beneficiation company was performed by an expert whose specialty is automobiles and real estate but also to the fact that Khanzhonkov was repeatedly brought to disciplinary responsibility for his actions as an appraiser. For example, in 2016-2018, four complaints were filed against Khanzhonkov about the appraiser's actions/inaction, three of which also resulted in disciplinary committee subpoenas.
Seven disciplinary actions were taken against Khanzhonkov by the Interregional Union of Appraisers Association between 2012 and 2018. Among other things, these included orders for a 2018 qualification certificate, which may indicate the absence of such a certificate during this period. In 2017, Khanzhonkov was involved in a lawsuit where he also failed to document his qualifications as an appraiser.
Another lawsuit once again demonstrated Khanzhonkov's insufficient qualification. During the proceedings between the Belgorod City Administration and the Society for the Protection of Motorists' Rights, it turned out that Khanzhonkov had made mistakes in appraisal. Moreover, they were related to performing mathematical actions, calculating the value-added tax.
Result
It comes that the claims of LGOK's ex-minority shareholders are based on an erroneous and invalid appraisal by an auto appraiser of questionable qualifications and reputation. There is no surprise that the former shareholders lost all of their disputes with such arguments. Meanwhile, it is known that Metalloinvest is defending its interests in court, just as it had announced. The company sued several websites and mass media outlets in Moscow Arbitration Court for protection of its business reputation and won the first case last week against the publications on the rucriminal.info website.
Original story: https://newizv.ru/article/general/17-05-2022/neud-otsenschiku-alternativnaya-otsenka-stoimosti-aktsiy-lgok-okazalas-fiktsiey