Harvard will file a demand with the American Arbitration Association in New York on behalf of holders of American Depositary Receipts (ADRs) representing Surgut preferred shares. The demand specifically alleges that, for at least each of the last six years, Surgut has intentionally declared dividends far below the amount mandated by the company charter, as well as the prospectus used in offering its securities, by using an artificially low "net profit" figure that bears no relationship to the company's actual net profits that it recognizes and reports for tax and accounting purposes.
As a significant holder of ADRs, Harvard alone has been deprived of millions of dollars of cash dividends to which it is entitled. Damages to all Surgut preferred shareholders may total hundreds of millions of dollars.
Surgut management controls a substantial amount of the company's common shares. Retention by Surgut of virtually all the company's earnings benefits management at the expense of the company's preferred shareholders despite clear contractual obligations to this group of security holders.
Surprisingly, as Harvard's demand illustrates, Surgut management has expressly admitted its failure to distribute dividends to preferred shareholders, justifying this illegitimate action with the argument that payment of dividends to foreign preferred shareholders would be an inefficient use of capital.
Harvard's demand cites a February 2001 letter from the General Director of Surgut, V.L. Bogdanov, to Mikhail Kasyanov, then Prime Minister of the Russian Federation. In the letter, Mr. Bogdanov argues that the calculation of net profits as required by the charter "results in a considerable part of cash flow in the form of dividends leaving abroad to shareholders who are mostly registered in off-shore zones." This admission by Mr. Bogdanov supports Harvard's claim that Surgut intentionally undertook the improper calculation of preferred dividends in order to avoid payments to holders of the security.
Harvard has requested that Surgut pay the full amount of dividends owed to it and other class members for prior years. A panel in New York will arbitrate Harvard's claims. The panel's ruling will be enforceable in courts in the Russian Federation through an international treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Jeff Larson, Senior Vice President and International Equity Portfolio Manager for Harvard Management Company, said, "We are disappointed that our previous attempts to correct the obvious failure of Surgut to meet its obligations were unsuccessful, making this arbitration necessary. There are many preferred shareholders, who, like Harvard, simply want to receive the payments they are entitled to under Surgut's charter and prospectus."
Larson added, "In general, business relationships work only when companies fulfill their fundamental obligations to all shareholders -- including living up to the terms of their corporate charters, complying with basic accounting standards and providing appropriate levels of transparency."
Robert Skinner, a partner of Ropes & Gray LLP who represents Harvard in the arbitration, said, "Surgut's obligation to pay dividends to the preferred shareholder class members is clearly spelled out in Surgut's own documents, as is the required amount of those dividends. All previous attempts to communicate with Surgut management in order to address its misrepresentations, omissions and unfulfilled obligations have been met with inaction. Arbitration thus has become necessary to enforce these rights."
Harvard's investment in Surgut was made through its Harvard Management Company affiliate, the principal investment advisor to the Harvard University Endowment Fund.
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