SEB of Sweden, which recently received Finance and Capital Market Committee approval to "squeeze out" minority shareholders of Unibanka, has demonstrated what kind of fairness Latvian investors can expect from European corporate acquirers in the absence of a regulator determined to enforce the spirit, and not only the letter, of the law: virtually none. Shareholders should reject SEB's ridiculous offer and join Firebird's appeal to the court to review its fairness and the conflicted procedure by which the Supervisory Council ap-proved it.
SEB's bid is at one times Unibanka's book value, while comparable banks in Estonia, Poland and Hungary trade at an average of 2.6 times book. Unibanka is not inferior to these other banks; in fact, its growth and Latvia's excellent prospects place it at the higher end of the range. Moreover, in 2000, when SEB took its ownership up to 98 percent, it paid 1.9 times book value, almost twice the current bid, even though the bank's assets have more than doubled, profits have grown by 150 percent and the bank's and Latvia's credit ratings have been raised. The last major bank purchase in Latvia, which was in a private transaction, was at 1.4 times book value.
As for the second protection of the law - that the buyout price may not be lower than the average market price - SEB took care of this by delisting Unibanka's shares from the exchange several years ago, impeding the stock from trading.
Did Unibanka's Super-visory Council, including its majority of handpicked SEB members, appoint a special committee to review the deal? Was the council provided with any of the comparative data mentioned above? Were they informed that they had a fiduciary duty to consider the fairness of the squeezeout to minorities at all?
That SEB doesn't care for smaller Unibanka shareholders was already clear from its refusal for the last five years to pay dividends although the bank was becoming heavily overcapitalized, and though some of the minorities are pensioners who could have used the money badly. Perhaps SEB hoped that a squeeze-out law could be passed and only then, after the undeserving non-Swedes were extracted from the company, the wealth could be shared.
SEB is arrogant, true, but how did it think it could get away with the abuse of the current squeeze-out? Put it this way: SEB is giving the absolute minimum under a new law that "someone" in the EU proposed to Latvia. (Does anyone care to guess which EU member that was)?
So, now to the law, which was probably sold to Parliament as "harmonization" of the Latvian law with other EU members'. In these other countries, however, either a vigorous regulator or a body of corporate common law, or both, offers protection against squeeze-out abuses, whereas in Latvia neither of these exists.
First, the regulator seems to believe its job is to rubber-stamp any bid that meets the bare legal minimum. Second, Latvia doesn't yet have a body of common law that the courts can apply in interpreting the spirit of the law. For example, in the U.S.A. no court would allow SEB's offer to proceed on the current terms. When Firebird presents its claim against SEB in Latvia, we expect that the court will use its common sense and sense of natural fairness, and if necessary, make new law. We will ask it to appoint an auditor with experience in financial transactions, which can advise the court on the value (or lack thereof) of the proposed buyout price.
For me, as a lawyer who studied in school the cases that are the foundation of American corporate law, and most of which were decided before I was born, it is a challenge and something of an honor to be involved in the development of Latvia's common law. We hope that other Unibanka shareholders, for some of whom these shares may represent most of their net worth, will read this column and join us in seeking fairness from SEB.
More generally, Latvia's Parliament should amend the law to add the kind of "appraisal" right that is used in America and other countries. This would specify that, when any majority shareholder proposes to squeeze out the minorities, an independent appraiser must be appointed to value the company under the court's supervision.
In addition, the regulator and/or the courts should ensure that at least procedural fairness is observed when a supervisory council is in a conflict situation - as Unibanka's was. A special committee should be appointed so that the council remembers its fiduciary duty to all shareholders, not just those who pay their salaries.
While Latvia continues its macroeconomic achievements, its stock market remains almost nonexistent, in large part because of the shabby treatment given to minority shareholders and their lack of recourse to the regulator or the courts. Whether the perpetrators are local oligarchs or foreign strategic acquirers who are their moral equivalent, it is time for things to start changing.
Harvey Sawikin is a principal of New York-based Firebird Management LLC.
