de la Breteche:
By : Michael Leville
For the past year, French tire giant Michelin Group, the majority owner of Stomil Olsztyn, has been embroiled in a legal tug of war with Stomil's minority shareholders over information access and the French investor's alleged funneling of profits from Poland through high license fees and transfer pricing.
Benoit de la Breteche, president of Stomil Olsztyn.
In March, a Polish court found Stomil's 46-year-old president, Benoit de la Breteche, guilty of impeding access to the company's financial records and fined him zl. 10,000. While the ruling has been viewed as a victory for increased corporate transparency in Poland, Michelin responded by threatening to sue minority investors for defamation. In another move raising the hackles of investors, Stomil selected the company's regular auditor, Arthur Andersen, to audit the firm's books rather than going with a less controversial choice such as BDO Poland. That decision prompted another lawsuit against the company. Miffed by the choice, after the report was published minority investors refused to discuss it at a general shareholders meeting in May, even though PricewaterhouseCoopers called the audit acceptable. The plot thickened by last week's general shareholders meeting in Warsaw, when Stomil's management offered minority investors two options for settling the dispute: a new audit by BDO Poland, or a review of the Arthur Andersen report by BDO Poland. However, both were rejected by minority investors who said they would rather wait for the court's decision.
Witold Jurcewicz, Stomil Olszytn board member and partner with White & Case.
Prior to last week's meeting, de la Breteche and Stomil Olsztyn supervisory board member Witold Jurcewicz met with the WBJ's Michael Leville to talk about the conflict, possible resolutions for it, and its impact on the bottom line. The following is an edited version of their conversation.
Q: Is there any substance to the minority shareholders' allegations that Michelin extracted profits from Stomil through high license fees and transfer pricing?
de la Breteche: For me it's clear there is nothing to that, and this was clearly demonstrated in the report. I think that as a strategic investor, which is in charge of the company and decided five years ago to invest in it, we have the responsibility not only to make money, but to build the company and to ensure work for its people. On the other side we have minority investors financial investors who may tomorrow sell our shares and buy some shares in yogurt or sugar. They're not interested in what's happening to the company and its people. You cannot directly compare the two. The second thing is that Michelin has two main functions in Stomil. The first one is as a shareholder, which has 60% of the capital and is entitled to 60% of the dividends, that's clear. Secondly, Michelin is a provider of know-how and services, and for that Michelin is paid through royalties, license fees or services. So again, you cannot compare (the two types of investors). And if we look at the effect of (our efforts), if you look at the company five years ago and how it is today, everything has changed; the company has doubled (in size). In terms of the range of products, we have expanded them. A typical example is the truck tire. Five years ago, 100% of our production was of old-fashioned non-steel tires. In 1996, we were the first company to produce steel tires in Poland, meaning that without the strategic decision five years ago, and without buying the know-how from Michelin, today our truck tire factory would be 25% of what it is. Our exports have also increased.
When we compare the two types of investors, we cannot expect that they will be treated in the same way. After that, whether the license fees should be 2% or 2.5%, OK, we can discuss that for hours, but the basic principle is that if we accept these elements, there shouldn't be any conflict.
Q: What is the status of the conflict?
de la Breteche: Today I would say we have two main problems with minority shareholders. The first concerns Mr. (Waldemar) Siwak (a member of the supervisory board delegated by 12 shareholders to execute independent control over the company). You know, to protect the company and its secrets in a very competitive world we asked him to sign a non-competition clause because he would have access to all company information and we believed it would be good to formalize this. Siwak didn't agree to that and went to court; the court ruled against us; we appealed and unfortunately the court confirmed its earlier decision. So we immediately informed Siwak that we are at his disposal to give him all the information he would require. We now consider that this subject should be closed.
The second issue concerns the ad hoc audit that was decided on at the March 7 shareholders meeting. The meeting decided that we should have an audit and selected Arthur Andersen, and asked the audit to be done in 45 days. So it was done in 45 days and was published. The report didn't show any discrimination against Stomil by the Michelin Group; it confirmed that everything is correct in the way the company is run, that everything is clear, we have contracts and nothing is wrong. After that, we had the judge's decision, which stopped the resolution of the shareholders meeting. So we're in a strange situation because on one side the report has been published; it exists and there's no problem. On the other hand, the report has been stopped by the judge. It's been suspended.
At the last shareholders meeting on May 28, as the main shareholder, we tried to discuss this report because it was a general shareholders meeting and it was one of the points of the agenda. The majority shareholder saw that it would be good to discuss this report because the report exists. It gives information, so it was interesting to have an exchange of ideas about how this report was performed. Unfortunately, the minority shareholders decided not to speak about this subject.
Q: They simply refused to talk about the findings of the audit?
de la Breteche: Yes, they refused. Eventually we agreed to a break in the shareholders meeting and the next meeting will take place on July 2. So we'll see what happens.
Q: When do you expect the conflict to be resolved?
de la Breteche: As president of the board, I hope it will (be resolved) as soon as possible because the conflict is bad for the company; it's starting to affect business.
Q: How?
de la Breteche: It's difficult to measure but we've seen some signals. Customers are starting to ask questions such as: Are you still going to produce tires in Olsztyn? Are we going to get our deliveries? Is this going to affect prices? While there has been no direct affect on sales, (customers) are asking what's going on and they're afraid that something drastic will happen. And more practically, myself and part of the company's management are doing nothing but working on this conflict. I've spent more than 80% of my time dealing with this during the last 12 months. When we're working on this conflict we're not working for the company, so that's why I hope it will be resolved as soon as possible. But to resolve a problem you need both sides and while I see goodwill from the majority shareholder to solve the problem, there is a wall on the other side. And until there is willingness to really come to an agreement, I may be pessimistic about how quickly we can solve the conflict.
Q: Poland has had a lot of conflicts between foreign strategic investors and minority shareholders over corporate governance. Why? What role should minority investors have in the running of a company?
de la Breteche: Their major role is to provide financing for the company, so as a financial partner they are entitled to financial information, to get some benefits, of course, but also to give financial stability to the operation.
Jurcewicz: They should have all the rights that the law provides for minority shareholders, as well as influence as is provided by the law. But there is a great difference in the philosophy of the approach of investors like Michelin and financial investors because they see only one thing when looking at a company: how to get the best return on their investment. They don't feel responsible for the growth of the company; for its people, but rather they look at the company from the standpoint of their own interests. Of course, they're entitled to do this, but they should not forget that the company has other responsibilities. I don't think anybody wants to deprive them of their rights, but what they really want is to have more influence. But they're using their rights, which are granted by the law, not within the purpose for which these rights were counted together for the shareholders.
Q: A Polish court ruled in March that minority investors had been deprived of access to financial information a ruling that cost you, Mr. de la Breteche, zl. 10,000 in fines. Michelin responded to the court's decision by threatening to sue minority investors for slander. Have you gone ahead with this?
Jurcewicz: Michelin sued (minority investors) for defamation, and this (case) is in court. We're waiting for the outcome.
Q: At the May 28 shareholders meeting, Michelin reportedly proposed a non-public buyout of selected minority stakeholders. What is the status of this and which shareholders would you buy out?
de la Breteche: I would not call it a non-public buyout, but if you look at the capital structure of Stomil-Olsztyn, nearly 60% belongs to Michelin. Then you have about 5% belonging to individual investors, about 4% by the state treasury, then you have a group of minority shareholders representing about 25%, and another 5% belonging to other investors. This means the liquidity of the shares on the stock market is zero. If one of the shareholders, whoever it is, wants to sell his shares because he's fed up with this conflict and he thinks that after destroying the company someone will have to pay, today there is no possibility (for him to sell). Michelin wanted to say to whoever is interested in selling his shares in the company because of this conflict that we are prepared to consider a discussion with them. It's not a buyout, it's just about providing some opportunities for liquidity to people who are really stuck because of the present system. This is still valid.
Jurcewicz: And there has been an investment bank (HSBC Holdings) appointed to do some research on what the position is of the minority shareholders and based on this there will be a decision made.
Q: Are there any negotiations going on right now with minority shareholders?
Jurcewicz: I understand there are some discussions (going on), but I don't think there are any negotiations.
Q: What share price would you be willing to pay to satisfy those who want out?
de la Breteche: Over the last 12 months, I've seen figures from zl. 30 to zl. 60 (per share) as the value of the company. So we can discuss for hours what the real value of the company is.
Jurcewicz: I think it's too early to speak about the figures, but I can repeat what was said earlier: Michelin's position is that it would be prepared to provide liquidity at a price that is reasonable and based on the fundamental value of this business, rather than on speculation because if you speculate, if you want to blackmail someone and say, 'Either you buy or I will do you harm,' then, of course, the price will be different.
Q: Has anyone threatened to strong-arm the company in this way?
Jurcewicz: Nobody is doing it directly, of course. But when I look at this conflict, I have a strong feeling that the minority shareholders want to keep the conflict going because if they were more interested in information about the company they have had quite a few opportunities to get it. But, instead, they prefer to stay away and keep this conflict going.
Q: Which investors are doing this and why?
Jurcewicz: A quite good example is the position of the representative of the supervisory board, Mr. Siwak. It's true that we've asked him to sign this confidentiality and non-competition agreement, and his reaction was that he will not sign because there is no such requirement in the law and of course the law is not very well developed here. We could at least say that there should be a standard of good practice that if someone has full access to information then he should (sign such an agreement). He refused to do this, and when the court fined Mr. de La Breteche, he was offered the chance to sign the confidentiality agreement again but he said he didn't see any reason to do this, and that he would wait for the court's decision. Had he signed this, he would have had access to all information.
Another problem was with the audit. What happened was that we accepted the scope of the (proposed) audit, but we changed (some things) and they claimed this was inappropriate, which of course they had the right to do. But to make the audit more objective, the management board asked two other auditors to verify the one made by Arthur Andersen. These auditors said what was done by Arthur Andersen was not unreasonable. And (minority shareholders) still rejected its discussion, so our view is that they just want to keep this conflict going.
Q: What do minority investors gain by dragging this out?
de la Breteche: I call it harassment. I have the feeling that the object is to put us in such a difficult position that there will be no other possibility than a buyout; and a buyout on their terms. This is some sort of blackmail, although the word is a bit strong.
Q: Has Michelin had any previous desire to up its stake in Stomil?
Jurcewicz: I understand there was no clear desire to increase. However, what was publicly said was that if somebody is not happy with this company, then Michelin will be prepared to buy these shares from such an investor and let him leave the company. The only question is price.
Q: Will buying out disgruntled investors end the conflict?
de la Breteche: Of course.
Q: How have poor car sales affected Stomil?
de la Breteche: Car sales, of course, are down, but the direct effect on the company has been relatively small because in terms of turnover it represents no more than 5% of sales. The indirect effect is much bigger. Why is there a drop in car sales? Because there is no more money in Poland. If there is no more money to buy cars, there is no more money to buy tires; they use their tires as long as they can, so it's really an economic signal. The tire business in 2001 will be much more difficult than 2000. If you take the U.S. as an example, the drop in truck tire sales has already been 30-40%. How soon before that will come to Europe remains to be seen. But certainly Poland has its specific problems (September's) elections, the artificially high zloty which is not good for exports, but by being a member of the Michelin Group we have access to the export market. More and more we produce tires for the group. It's true that today, if I were chairman of Stomil without a strategic investor I would have less hair on my head. We would be in a very difficult situation.
