Short-circuit risk in the General Shareholder Meeting of Electrica

The General Shareholder Meeting of Electrica set to take place today announces itself very interesting as, on the agenda, it includes the election of the members of the Board of Directors by applying the cumulative voting method, as well as approving the acquisition by Electrica of the stakes of the Proprietatea Fund (21% each) in the distribution subsidiaries of Muntenia Nord, Transilvania Nord, Transilvania Sud and Electrica Furnizare, for a price of 752,031,841 lei, a cost higher by 60 million for the company compared to the failed negotiation of March 2016. (See also www.bursa.ro).

The election of the members of the Board of Directors of Electrica has already created a major scandal in the energy market, revealed by BURSA first.

The management of Electrica accepted the applications of the government back candidates, respectively of Doina Dascălu, former vice-president of the Court of Auditors and of lawyer Ciprian Iacob, even though they had been submitted 8 minutes after the deadline in the convening notice and rejected those of Alexandru Botez and Gabriel Dumitraşcu.

The management of Electrica claimed the two applications from the government had been submitted within a reasonable delay.

Both Gabriel Dumitraşcu, shareholder in Electrica, as well as Alexandru Botez have submitted complaints with the ASF for the clarification of the situation.

Gabriel Dumitraşcu told us Wednesday: "I am waiting for the ASF to issue an opportune statement prior to a decision of the General Shareholder Meeting in relation to the illegality of the applications, so that it doesn't generate a lawsuit that would cause the instability of the Board of Directors and implicitly to cause the lack of trust among investors.

The ASF shouldn't forget that Electrica is also listed in London and any procedure declared illegal in the election of the directors will also be reflected in way London investors perceive the company. I hope that by tomorrow (ed. note: Thursday) at 10, the ASF will issue a message, otherwise it would mean Mircea Ursache (ed. note: vice-president of the ASF) is reckless".

When asked by BURSA about the notification submitted by Gabriel Dumitraşcu, the ASF officials gave us the following statement, on Wednesday: "The ASF does not comment on aspects that concern its current activities. Should the result of the analyses conducted result in measures which qualify as public information, it will be reported to investors appropriately".

Speaking about the transaction between Electrica and the Proprietatea Fund, Gabriel Dumitraşcu said that the price was too high without any justification: "On the other hand, rather than have Electrica keep its money in the bank, from an investor's point of view, I would rather have the money generate a higher return for the Electrica Group, than the one than that it can get by keeping it in the bank".

About the fact that Electrica is now willing to pay more money for the stakes of the Proprietatea Fund than it did in the previous years, Gabriel Dumitraşcu said: "There is pressure from investors concerning what's happening with their money, and on the other hand, I think it is also an inability of the majority shareholder to correctly perceive the market position of the stake offered by the Proprietatea Fund".

• PNL deputy Lucian Bode: "I've never seen a serious justification from Electrica for this transaction"

As for the acquisition by Electrica SA of the 22% stake held by the Proprietatea Fund in the four branches of Electrica, Lucian Bode, former minister of the Economy and current president of the Transports and Infrastructure commission, thinks that those who made the decision were too rash: "Honestly, I haven't seen a serious argumentation from Electrica for this transaction".

In his opinion, such a decision needs to be made taking into account several elements:

"1. I would have wanted to see an analysis proving the fact that during those years, the Proprietatea Fund has honored, according to the Government Decision by which it was set up, the objective for which it was created. Meaning, how many Romanians have been rewarded out of the shares they were compensated in various lawsuits on the issue of nationalized properties.

2. Also, out of this Government Decision it follows that the share capital increase is done with the amount which is being asked for the compensation of the potential beneficiaries. We don't know on what basis the Proprietatea Fund has increased its repeated holdings in the state companies.

3. From my point of view, even though there are specialists that claim the contrary, the par value of a share in the Proprietatea Fund was never been bought back by the Romanians who received shares in this Fund.

4. I think Electrica could have managed its cash-flow much better, but it chose to conclude this memorandum, instead of making the investments it had committed to, and allocate out of its budget the amount of 163 million Euros for this acquisition, perhaps out of the will to gain its decision independence".

Lucian Bode says he has doubts that the state will come out a winner out of the FP-Electrica transaction: "I am telling you openly that I doubt the state will come out a winner out of this deal and I don't think that this acquisition represents the most important thing for the company to do. On top of that, we have the number of individuals that held key positions in the Proprietatea Fund, to then find them in the same decision-making positions in state owned companies, switching sides, strictly out of personal interest, and nothing more.

It remains to be seen how Electrica will use this decisional independence and how it will succeed in consolidating its market position, how it will improve its services and how it will fulfill its obligations to consumers. I hope the price paid isn't too high, and the performances will match the financial effort".

In the opinion of Lucian Bode, lately, energy companies seem to be under assault by the government, through the Ministry of Energy. He explained: "Through the appointments made in the management structures of these companies, through the major decisions that do not express a strategic vision meant to guarantee the sustainable development of these companies, the Ministry of Energy serves interests that seem to have no connection to the main concern which ought to be ensuring a stable and professional framework for the manifestation of market players. Furthermore, the destabilization of this strategic sector through the decapitalization of state owned companies which have been forced to pay to the state budget 90% of their profit and the reserves, leads to their draining of financial resources and represents a threat to Romania's energy security".

• Piperea: "When you apply a double standard and especially if that comes from the state, you can't complain about others using a double standard themselves"

Exceeding the deadline for the submission of applications for the management of Electrica by 8 minutes seems to be an irregularity, but to claim that they are invalid because of that is a kind of formalism, said lawyer Gheorghe Piperea. He does say however, that not accepting the other two applications from candidates that weren't backed by the government, is wrong: "When you apply a double standard and especially if that comes from the state, you can't complain about others using a double standard themselves".

In the opinion of lawyer Piperea, the FP- Electrica transaction is part of a double process that FP has been subjected to over the last three years: the liquidation of the major holdings and the restitution to the shareholders of amounts as restitution of contributions to the share capital.

The lawyer say: "What is important is that these restitutions are barely legal, because, according to the international reporting standards, FP has losses, whereas according to the Romanian standards it has a profit. I think that the Tax Administration should check whether this isn't a kind of fiscal optimization that leans towards tax evasion, because these capital restitutions are not taxable".

The articles of incorporation of the "Proprietatea Fund" of November 24th, 2005 stipulated that "the main line of business of this fund is to manage its portfolio in order to grant the compensations pertaining to properties which may not be distributed in kind, through the free of charge transfer of shares to the ownership of the entitled individuals".

Lawyer Gheorghe Piperea said: "The line of business of the Proprietatea Fund changed in 2010, insidiously, gradually, without the people's knowledge. The line of business of the Proprietatea Fund is no longer to compensate its investors, instead it has been changed into an investment fund. There have been some lawsuits on the matter, but they have been done by somebody who did not have enough strength, (ed. note: lawyer Ioana Sfîrăială) and they have been dismissed. I think that the change of the line of business was done illegally.

Somebody could raise the issue of the absolute nullity of the articles of incorporation precisely because it clearly and blatantly violates the law which says that this fund is the only avenue of compensation. Besides, it is no longer the only one actually because honorable Victor Ponta had another law concerning the compensation put out, namely that stupid points-based system which will probably have the same fate and in another ten years we taxpayers will end owing more compensations.

Of course it is within their right, it's just that nothing was done here to solve all those losses. The Proprietatea Fund has been nothing but a mere mechanism, but an absolutely perfect one for draining public money to private pockets. And not just any kind of pockets, but those of people who traded information at a certain point". In the opinion of lawyer Gheoghe Piperea, for the FP-Electrica transaction a serious evaluation is needed, as the branches are not listed.