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By John Helmer, Moscow

Oleg Deripaska will fail to swing Norilsk Nickel’s international shareholders into voting for his slate of candidates for the new board of directors at Norilsk, according to a report and proxy vote recommendation by Institutional Shareholder Services/Risk Metrics, a Washington, D.C.-based advisory specialist.

With just days left before Rusal’s board must decide whether to sell its 25% of Norilsk Nickel back to the latter, and a fortnight to go before the Norilsk Nickel shareholders must cast their votes for a new board at an Extraordinary General Meeting (EGM), there is new evidence of impatience and hostility on the part of the international investment market towards Rusal CEO Deripaska’s personal campaign against Norilsk Nickel; and towards his refusal to conclude it on terms now favoured by most institutions, as well as by Rusal shareholders.

“We do not support Rusal’s claims regarding wrongdoing at the company’s AGM [Annual General Meeting] or October 2010 EGM, and do not comment on their claims regarding management abuses,” ISS concludes. “We believe that Rusal’s adverse reaction to the balance of the board issue has been disproportionate. The majority of Rusal’s accusations at Norilsk Nickel, particularly prior to the October 2010 EGM, have been unsubstantiated, according to the courts and other authorities to which it appealed.”

During the Rusal roadshow early this month, an American source comments, Maxim Sokov led the Rusal team – he runs Rusal’s investment strategy and is also a Rusal representative on the Norilsk Nickel board. The source claims Sokov did a better presentation job than the rival Norilsk Nickel briefing team. US institutions holding Norilsk Nickel shares include BlackRock, Vanguard Capital, and State Street Global Advisors.

But the Rusal message remains as unpersuasive this month as it was last October. Reports ISS “the current EGM is the second meeting Rusal has called following the AGM to try to elect a new board. We believe that such frequent EGMs where a termination of the board is proposed hamper the work of the board and distract company management from strategic and operational issues.”

The ISS report also recommends that the international shareholders vote for the two incumbent independent directors, Gerard Holden and Bradford Mills; and against all candidates proposed for the board, including Deripaska and Andrei Bugrov, the chief representative of Interros, the holding of Vladimir Potanin, who remains locked in battle for control of the company with Deripaska.

The reasoning of the report is that following the October 21 EGM vote, the board membership has been unbalanced in relation to the shareholdings. One reason for this, according to sources in London and Moscow, is that Rusal mismanaged the voting process at the last EGM. ISS explains that “Russian board elections are quite different from board elections in other countries. Not only does Russian commercial law require cumulative voting for directors at all companies, but most firms further complicate the process with contested board seats, offering many more candidates than the size of the board allows. As for the mechanics of voting this item, each ordinary share represents the number of votes equal to the size of the board that will be elected (i.e., since the board will be composed of 13 directors, each company share will represent 13 director votes). These director votes may be apportioned equally among the 27 board candidates or, if a shareholder wishes to exclude some nominees, among the desired candidates that remain.”

The current shareholder lineup at Norislk Nickel must be calculated from unofficial and imprecise estimates. They suggest that Rusal holds 25.13% of the shares; Interros, owned by Vladimir Potanin, has 25%; Trafigura recently acquired 8%; management-controlled quasi-treasury shares, 7%; and Metalloinvest, controlled by Alisher Usmanov and two partners, 4%.

The remainder is a free float of about 30%. Of these shares, the international investors with the largest blocs of shares range from 0.28% held by Baring Asset Management (UK) to 0.02% held by Halbis Capital Management (UK). The other international shareholders with identifiable blocs are CDP Capital World Markets; Swedbank Robur Fonder; Templeton Asset Management; APG Asset Management; BNP Paribas Investment Partners (UK); FIL Investments International; PGGM Vermogensbeheer BV; BlackRock Fund Advisors; Handelsbanken Fonder; BlackRock Investment Management (UK); Vanguard Group; Clariden Leu; DWS Investment GmbH; Sinopia Asset Management; State Street Global Advisors; and Sydbank (Investment Management).

ISS calculates that effective control of the board is held by Interros with five board directors with ties to Potanin – Andrei Bugrov, Andrei Klishas, Boris Bakal, Marianna Zakharova, and Dmitry Kostoyev. Of the 13 directors on the board, that makes 35.8%. Rusal holds three seats, making 23.1% of the board; minority shareholders with an estimated 30% of the shares are represented by two independents, Gerard Holden (a resource banker from Barclays Capital until 2006) and Bradford Mills (a mining veteran from BHP and Lonmin), making 15.4%. The company management is represented on the board by CEO Strzhalkovsky and his first deputy Oleg Pivovarchuk.

According to ISS’s conclusion, “while it does not appear that this situation has resulted from any illegal actions by Interros or the company, this is nevertheless an unbalanced board.”

In October the international institutions appear to have largely abstained from casting their votes in favour of either of the major Russian shareholders; that gave additional weight to the government and to Interros to beat off Rusal’s candidates.

Examining the official vote counts which were announced after the EGM, Rusal appears to have voted its 25%, and added 13.4% of other shareholder votes to make the aggregate against the incumbent board of 37.88%. Opposed, Interros voted its 25%; the Norilsk Nickel management voted the 8% bloc of treasury shares; Metalloinvest voted its 4%; and the balance of the free-float made between 9% and 10% for the official aggregate in favour of preserving the incumbent board – 46.9%.

At the time, Rusal claimed there were more free-float votes in favour of Rusal than for Norilsk Nickel. However, only 151.7 million shares were counted in the EGM ballot out of a total issue of 190.6 million. This indicates the abstention of 38.9 million shares (half the free float), and the refusal of those free-float shareholders to support either Rusal or Norilsk Nickel.

Abstention may have meant a pox on both your houses, as some investment fund managers admit to thinking. But the practical effect, and thus the intention of those abstaining from the vote in October, was to support the incumbent board against Rusal. Counting this with the vote supporting the Norilsk Nickel position made 56.8 million share votes. That amounted to three-quarters of the total free-float – and also double the 25.5 million share votes from the free float in favour of Rusal.

The ISS report doesn’t report or analyze these data beyond concluding that in outcome for the current board, “one shareholder, Interros, exerts disproportionate influence.” ISS also counts the state appointees to the board – the two Norilsk Nickel managers, and Vasily Titov, the senior vice president of VTB, the state bank – to favour Interros. The ISS reports cites VTB’s $3.2 billion loan to Potanin in 2009, but omits to mention its backing for Rusal’s debts and its Hong Kong listing at the end of that year.

The most recent statement of the Russian government’s position indicates that the board’s current lineup reflects the government’s policy. Deputy Prime Minister Igor Sechin, who supervises the resource concessions and controls the oligarchs, answered questions from the Wall Street Journal about the oligarch conflict on the Norilsk Nickel board by saying: “The government does not intervene in corporate practices….The shareholders should take the appropriate decisions, most importantly that they [should be] civilized, in the framework of the existing legislation.”

This, too, is thumbs up for the status quo, thumbs down for Deripaska’s campaign. While some analysts believe Deripaska’s campaign amounts to greenmail, forcing Norilsk Nickel to raise its buyback offer and increase its debt in order to end the conflict, Sechin’s latest remark suggests that state interests will share in the rising premium.

In its recommendation to the foreign minority shareholders, ISS is also backing the status quo against Deripaska. “Based on the company’s ownership structure and the voting dynamics at previous general meetings, we strongly believe that minority shareholders would be best served by cumulating their votes for no more than two independent candidates. Cumulating for three or more nominees poses a significant risk of diluting the minority shareholder vote, resulting in fewer independent directors than would otherwise be possible.”

“While we recognize the qualifications of all the proposed candidates, including all seven nominees who meet ISS’ criteria for independence, we believe that minority shareholders would be best served by cumulating for the incumbent independent directors, Holden and Mills, at this EGM.”

Norilsk Nickel has issued a brief acknowledgement of the ISS report. Rusal has so far made no response.

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