It's a bitter pill to swallow - standing by a basic principle and sacrificing an important political and economic goal. Mikuláš Dzurinda's government now faces that dilemma, and it's still unclear whether it can stomach the bitter pill of supporting minority shareholder rights.
A deal struck with U.S Steel to save the ailing steel manufacturing monolith VSŽ has become mired in uncertainty as negotiators are barraged with accusations of riding roughshod over the rights and wishes of minority shareholders. The government will have to act quickly if it hopes to lay claim to the title of being a government of clarity and openness.
VSŽ was long the target of accusations of asset-stripping and tunnelling. Under the cleptocrat leadership of the Rezeš father and son combination (Alexander and Július), the company was driven into the ground and was only recently bailed out by the extended and seemingly benevolent hand of U.S. Steel.
In December 1998, the company was virtually bankrupt, the shareholders voted for a change, and Gabriel Eichler took the helm of the quickly sinking ship. The Rezeš men had plundered the firm, lock, stock and barrel, so the rumours had it - there were expensive villas built on the Spanish riviera and garages full of luxury cars - and the seemingly impregnable Slovak firm fell apart from the inside out.
News of the huge losses, which later were reported to be in excess of 11 billion crowns, began to filter out. The company was in trouble, it had defaulted on a $35 million loan from Merrill Lynch, and the accusations began to fly as the former backbone of the Slovak economy (at one time a provider of 25,000 jobs and accounting for 10% of the GDP) suffered through its financial fiasco. The old regime took the heat.
But now the tables are beginning to turn as the accusations fly the other way.
Eichler steered a deal with US Steel which on paper looked to have saved VSŽ. But not everyone is happy. US Steel has essentially been negotiating with VSŽ creditors and the government, swinging a deal in which US Steel would pay reportedly $60 million for what is to be called NewCo - a newly-created company that is in fact the healthy part of what is currently VSŽ (i.e. the steel-production arm of the firm).
Not surprisingly, the smaller shareholders, which lumped together hold 30% of VSŽ, are unhappy with the price and with the fact that NewCo, by its very creation, would dump less lucrative subsidiaries dead in the water.
The minority accuses the government and the VSŽ board of being utterly unconcerned with the fact that small shareholders have had little say in any of the dealings with US Steel so far. One lawyer owning VSŽ shares said that while the creation of the new company may not be illegal, the subsequent drop in share values could provoke a legal challenge.
The Penta group and the London-based Central Growth Fund Plc. that together hold 10% of shares have called for a meeting to discuss the US Steel deal. The ever-powerful Hutnik trade union group and its 10% stake is also reportedly unsatisfied with the deal.
Not only does the deal reap minimal fiscal gains for the 30%, the minority shareholders' basic rights were blatantly ignored in the signing of this memorandum.
The government, which holds its own 28% share in VSŽ, said the previous failings of the company were the result of non-transparent practices under the old management. While this point is clearly true, the deal with US Steel has since been cast in the same mould of non-transparent practices. By ignoring the rights of small shareholders, the government leaves itself in a disastrous situation - claiming to have an open and transparent corporate sector by eliminating the crooks at VSŽ, all the while giving tacit support to the continued disregard for minority shareholder rights by giving the shaft to 30% of those involved in the highest-profile company rescue the current government will ever have to perform.
Government action, in the form of unequivocal support for the rights of small shareholders, is needed. While the VSŽ deal would undoubtedly save a company vital to the Slovak economy, the rights of minority shareholders cannot be ignored as they were under the Mečiar government, which paid little attention to smaller stakeholders in firms. Dzurinda's government cannot afford to adopt that same tendency.
The government may have a bitter pill to swallow if the 30% minority bands together and pushes the VSŽ deal and its current terms off the rails. The government must accept that although the 30% may vote against them, as shareholders they do have a basic right to vote. The deal may end up back on the drawing board, but the government above all must distinguish itself from its predecessor and secure minority shareholder rights.