Ripping Off the Shareholders

Ever since communism collapsed, European and U.S. experts have been lecturing Eastern Europeans on the need to protect shareholder rights. It's quite a turnabout, therefore, that the biggest threat to minority shareholders in the region comes not from unscrupulous local managers but from Western companies that have bought majority stakes in privatized local businesses. Take, for example, the situation at Romania's Automobile Dacia. In July, 1999, France's Renault bought a 51% stake in the carmaker, and since then minority shareholders have been complaining vehemently. They claim that Renault is using transfer-pricing techniques to make Dacia less profitable.

Minority shareholders also accuse Renault of forcing through controversial capital increases to which they were unable to subscribe. They say Renault has thereby boosted its stake to 80%. Renault has just announced another capital increase that will raise its stake to 93%. New Century Holdings IX (NCH ), a U.S. investment fund, had a stake in Dacia that has been whittled from 9.5% to 6.1% . It could go lower, to a mere 2%. NCH insists it has tried to work constructively with Renault but says Renault has refused to negotiate.

The courts will decide. NCH is taking legal action against Renault in both France and Romania. But whatever the verdict, it's time for Renault and the other majority shareholders to mend their ways. Their behavior hurts many small local shareholders, as well as foreign investment funds. It also slows the development of an equity culture in the region. In the meantime, countries across the region need to review the legislation that is meant to protect shareholders. That is nowhere more urgent than in Romania, where most abuses are currently taking place.

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