Author of the VP Group structure: business must also be protected from its shareholders
The largest business group in Lithuania comprises many businesses and even more companies. A complex and multi-layered structure has been created in order to give protection from any attempts to undermine the companies, - says Mrs. Diana Dominienė. According to her, tax planning has never been the goal of the shareholders of the Vilniaus prekyba business group.
Mrs. Dominienė who had taken different positions at the group for over a decade became the Head of the Lithuanian Division of Cypriot company Bertona Holdings Limited this year. Its objective is to carry out negotiations in relation to the buyout of shares with minority shareholders. The transaction concluded last week with Žilvinas Marcinkevičius in connection with his 15% shareholding is, according to Mrs. Dominienė, probably the largest in her career; and there are likely to be more of such buyouts in the future.
The interviewee tells that a transaction is also possible with minority shareholder Mr. Mindaugas Marcinkevičius who had launched a fight against Mr. Nerijus Numavičius that controls the group. On the other hand, its price must be rational.
What motivates the majority shareholder to establish a unit that is engaged in the buyout of shares?
I should correct you here. This is not an initiative that has come from Nerijus. On the contrary, it is the minority shareholders’ initiative. They are the ones who are willing to sell rather than the majority shareholder is willing to buy. A stage has come where everyone must review their business. In Žilvinas’ case this is exactly what has happened. We received his offer.
Was it before the first stand against the Akropolis transaction by Mindaugas Marcinkevičius which sparked the conflict?
Yes, it was. At the time, we were not aware what Žilvinas’ initiative will turn into. The negotiations, so to say, were constructive, but difficult. The positions were different.
In general, initially we were talking not just about the leave. We were discussing business visions. You must be aware that Žilvinas has made a significant contribution to the creation of the group and has been a pro-active shareholder. He had many ideas as to how the group should go forward.
Over the year, we have reviewed much, including both his contribution and how he could stay active within the group. Finally, he made a statement that he would like to leave because he had other plans in life. We understood that we were able to find a consensus on this matter. The transaction might be beneficial to both him and us.
Should we understand that not only the purchase of shares was at stake, but also the apportionment of business?
If we looked at the stages of the negotiations, there were different views, various thoughts and various talks. You have to admit that a lot can happen in a year.
Are you in any talks with other minority shareholders, are you in the process of negotiating with them?
Up until today we have not received any more offers which would seem rational to us and which we would be willing to consider. This does not imply, though, that there have been no offers at all.
We have had an offer from Mindaugas. It was, however, made in a very bizarre way: the blocking of Akropolis transactions, the entire campaign as to the tax evasion that I call a defamation campaign and many other things. Half a year later in November, we received an offer. It was very detailed and for sure did not respect the market price. We said this. And we were told that there would be no more pressure if we agreed to pay the mentioned price. In other words, we should pay a ‘tranquillity fee’.
The negotiations were concluded quite quickly because we considered it to be racket and did not agree to it. We are of the view that the times of racketeering have long gone.
On the other hand, should other shareholders express their wish to sell their share, we would definitely consider it provided it met our expectations and we thought that it was a beneficial transaction. We would not initiate it ourselves, however.
In other words, there are no offers on the table at the moment.
Not at the moment. But I reckon there will be.
Over the period spanning more than a decade since you joined the group, it has developed much not only in terms of its content, but also its form. I imply that not only did the business grow, but many companies and a large controlling structure situated across different countries were established. My understanding is that you were one of the main people who created such a structure. What was and still is the purpose thereof?
Everyone who looks at it says ‘oh, it is very complicated, why do you need it?’ It is, indeed, a very large organisation. It is definitely too big for Lithuania. If we did not access foreign countries, the Competition Council would not let us do anything in Lithuania. We have slowed down all operations here. We no longer launch new businesses although we could. We do not do this on purpose. We are disliked here. They say that we are too powerful.
It has been clearly demonstrated with regards to our wish to access the electricity business. We were put on the spot firstly because we were too large, not because we were doing something wrong. If you look closely, at present we have an identical monster to the one that had been destroyed (state-controlled Lietuvos energija is implied here – the VŽ).
Business cannot stay the same without growing. Hence, it has been decided that we will go abroad. To this end, all structures were created. We have, indeed, launched relatively major operations abroad. Certainly, it does not happen as fast as we would like it to happen. But we have acquired retail chains in Poland and Spain and factories in Poland, Slovakia and Scandinavia. It did not seem optimal to manage all this from Lithuania.
When structuring the above, we have been attempting to manage many things, i.e. the geopolitical risk and security. No experienced businessman keeps all eggs in one basket. Likewise we split everything across many different jurisdictions. Certainly, we have selected those countries which are most favourable. But one should not expect that business will be inefficient.
We have chosen Holland because it is easy to manage the Real Estate business from there, i.e. all legal and tax basis has been adapted to this purpose. On the other hand, it is not optimal for financing structures, for example. Therefore, we chose to establish them elsewhere.
Hence, you have explained why controlling companies are in foreign states, i.e. Malta, Cyprus, Luxembourg, Holland, Estonia and others. However, for example, UAB Vilniaus prekyba itself is controlled by three Lithuanian companies which own 33% of shares each rather than the shareholders directly or their companies. Why did you need that?
They have been created for the purpose of security. And thank God they had been created. If not for them today, perhaps Maxima business would not have come to a halt, but people would be doing wrong work as opposed to what they should be doing.
We have a protective cushion everywhere which has the function of stopping any external underminers from impeding the businesses.
Including the shareholders if they become underminers. The ‘cushion’ indeed performs this function. It has been created in order to manage the risk and protect the business.
Like for Mindaugas Marcinkevičius, who is a direct shareholder, not disputing any decision in court?
Indeed. In terms of Leksita, he brought the board and the director to court regarding the transactions that they had not even entered into. They were concluded by the ‘bottom’ (a secondary company of Leksita, i.e. Luxembourgish company Megafin had granted a loan to another company Carson within the group – the VŽ). He did not succeed, however. At least in Lithuania, he was told to go to Luxembourg and there, as far as I am aware, he cannot lodge a complaint to the court.
The same situation happened in Malta. Mindaugas, being the shareholder of Relvit only, could not go as far as the Akropolis. Image if such structure did not exist, how much destruction the mentioned things could cause.
On the one hand, conflicts between shareholders can hinder the business. At present, as you say, business is protected. But if we were looking at the underlying rights of shareholders, in this respect you are building obstacles for the minority shareholders although in line with the law, but still in a rough manner to a certain extent.
Mindaugas has been either the manager of the company or a board member for a long period of time. It had access to all information required by the management. And he got used to receiving such information. There is a very big difference between what is intended for the management and what is intended for the shareholder. The company’s shareholders do not take decisions and are not generally entitled to interfere with the business. Mindaugas did not grow out of this situation. Up until these days he reckons he must receive information and may exert influence over the resolutions of the board.
Shareholders’ functions are very limited. And this information, although desired by the shareholder out of curiosity, is not needed. Annual statements are intended for him and he receives them. Mindaugas wants to get all transactions and everything from A to Z reported to him. This has not been provided for in the laws. Am I being mean by not giving what has been stipulated for?
Nonetheless, in this case there is an imbalance between the controlling shareholder who is able to receive this information one way or another and the minority shareholder.
This has been established in the laws as well. The majority shareholder is not competing against themselves. If you have control, you cannot compete against yourself, whereas the minority shareholder quite often is in competition because they have their own businesses. The case of Mindaugas is one of such examples. He is in direct competition with our businesses.
Let us talk about taxes. This year Vilnius Regional Administrative Court ruled that the shareholders of the Vilniaus prekyba Group created schemes to pay less tax. You represented Mr. Nerijus Numavičius in negotiations with the State Tax Inspectorate (STI) and are familiar with the cases what we are talking about. What do you think about the court judgments and the indirect allegation that all shareholders were operating and reaped the benefits together?
You know, the court is always right. On the other hand, it is right (or is not right) in respect of those who had lodged the complaint. They should make the decision on that. As regards Nerijus and other shareholders who had entered into settlements with the Tax Inspectorate, the court could not have ruled on this matter because it did not examine these cases.
The Tax Inspectorate enters into settlements only when it does not have sufficient evidence to support its position. If it has evidence, it does not conclude any settlements. In our case, the STI did not have anything to respond to our arguments. I am talking here not only about Nerijus because I also represented other shareholders. The situation is very easy to understand: if both sides do not have arguments, the only way forward, as per the law, is a settlement.
This implies that the shareholders’ side did not have sufficient evidence that there had been no tax evasion, doesn't it?
They questioned why we had lent funds with interest (to the companies within its own group – the VŽ). We said we had done it because of the changed circumstances as per the laws. They said no, the laws did not provide for that. What can I respond to this?
It has been said that Nerijus Numavičius sticks to the principle of not getting into disputes with the STI. What about other shareholders that you represented?
Others told me to take the decision appropriate in the circumstances. Frankly speaking, I do not know their true view as to this matter. I said there were talks about a settlement and the shareholders informed that they were satisfied with that.
What tax planning (I imply legal ways of paying less tax) was carried out at the Vilniaus prekyba Group (I mean other than shareholders)?
I will provide a response for the time period when I was managing Vilniaus prekyba (2004–2013 – the VŽ). When they attempted to headhunt me, I did not agree at the beginning. I have always feared, to be honest, to join them for the same reasons, i.e. taxes.
At that time you were an expert in this matter working for the advisory firm ‘PricewaterhouseCoopers’.
Yes, indeed. I was the Head of Tax Division.
The issues regarding the disabled (the story of the Spindulys Association where the group reclaimed LTL 76 million in VAT from the budget – the VŽ) had become notorious and I felt it was quite unsafe to come and join the group which had such a reputation. When I was invited and the talks got serious enough, I was plainly told: Diana, we do not need any tax evasion. When a person is hungry, they need it very much. But when they are no longer hungry, when they have not only butter, but also a cake, they start caring about different things, i.e. not about a second cake, but about their safety. These, in fact, were the words that came from Mr. Žilvinas Marcinkevičius. He explained to me what the gentlemen’s agreements were that we would not be carrying out any aggressive tax planning and that this was not expected of me.
When I joined the group, we would notify the Tax Inspectorate of all our steps. If they were unhappy with certain things, we would not proceed with them.
What is lawful and what is unlawful? If you are carrying out an operation for the sake of tax gain, it is tax evasion. If you carry it out for a reason other than tax gain and you would perform it anyway, then the laws give you an option to choose which way forward to take.
A simple example is our transfer of funds abroad when we created companies in Cyprus and elsewhere. We would have done it in any event. Certainly, one of the ways to implement this was to pay out dividends to everyone and then get these people to bring the dividends back to the business. Another option was to carry out a reorganisation or an international merger. My goal is to retain funds in the business as opposed to paying them out for a living. If the law says that I can choose both options, why should I pay the funds out and have them repaid back? Hence, we have considered tax implications and examined all possible options.
Shall we say that non-overpayment of tax was one of the goals?
It is not right. Had it been one of the underlying goals, we would not have franchise in Lithuania today, i.e. the system in respect of which Mindaugas had made his claims, because the launch of this franchise has brought tens of millions euros more in tax the Lithuanian budget.
What about the budgets of all countries where Maxima operates in general?
Same applies to them. We pay more taxes. In Estonia, if you do not pay any dividends, the corporate income tax is deferred or non-existent, but when paying dividends to us Maxima deducts 10% tax in Estonia. We are loss making in Bulgaria. Hence, we would not pay any corporate income tax there. But we pay the franchise and the tax accordingly.
At a conference held by the Verslo žinios in 2005 as the director of Vilniaus prekyba you told that the company had been exploring different jurisdictions and was searching for a more favourable one in terms of taxes. Hence, was there an objective of tax planning in the end?
There was an objective to avoid any nonsense when carrying out operations, i.e. abstain from making inefficient decisions in the business. If you are performing an operation, it must be right in its tax-related, legal and business sense. It is criminal to be ignorant of all aspects.
Indeed, we must be aware of how things work in certain countries. If I am doing this for the business, not for the purpose of reducing tax liabilities, it is normal.