October 2004

JUGOREMEDIJA ON STRIKE

INSIDE STORY

“BOUGHT BY THE MAFIA!”

Few days after The Share Fund of the Republic of Serbia sold 41,93 % of shares of a pharmaceutical factory from Zrenjanin “Jugoremedija” to a company “Jaka 80” from Radovis (Macedonia) at the auction on 10 September 2002, according to the testimony of the President of the Association of Jugoremedija’s small shareholders Mr. Zdravko Deuric, Director at that point, Mr. Srdjan Kamenkovic, who followed the auction and took an active part in the preparations for the sale of the factory shares, advised the workers to collect the majority package as soon as possible in order to protect themselves from the future events. The workers – shareholders of “Jugoremedija”, whose worker’s and owner’s rights are now, two years later, annulled by the state and a new co-owner, remember the fear of the former Director, who, in September 2002, said loud and clear – We were bought by the mafia! –

It is then that the workers – shareholders found out that the owner of “Jaka 80”, Mr. Jovica Stefavnovic – Nini, from Nis, a man to whom the state sold 41,93% of the factory shares, was on a wanted list, and not allowed to enter Serbia.

23 August 2004 (Blic) Destroying evidence The arrest of President of Jugoremedija’s small share holders, Mr. Zdravko Deuric, together with two other members of this Assocciation, suggests that Serbian authorithies are now covering up violations of law and privatization contracts, otherwise sanctioned at the politically suitable moment. We remind that Share Fund allowed the buyer of the 41,93 % of Jugoremedija’s shares, Jaka 80 from Radovis to take over the factory prior to the fulfilment of terms, and illegal increase of the capital fund by debt conversion, making Jaka the owner of 60 % of the shares. In view of such cirucumstances, which shareholders of Jugoremedija have been trying to prove for months, no one was taken into custody, not did the Government took time to check the allegations of money laundry and corruption in the process of buying and selling of the Jugoremedija’s shares. At one moment, the Government accepted the findings of the Anti-Corruption Council, Assembly’s Board for Privatization, and Securites and Exchange Commission that the procedure was illegal. Ministry for Economy performed a supervision and on 13 May instructed the Share Fund to cancel the contarct with company Jaka. Although the law stupulates that this Fund should act pursuant to the Ministry’s instructions withing the period of 30 days, it did not happen. When the shareholders saw that there were no reaction from the State they organized themselves, and now the State is arresting them in order to cover up the fact that the law was abandoned in favor of the idea of quick privatization. During months-long blocade of Jugoremedija, on several occasions, Jaka tried to enter the factory on force. Each time a fight between shareholders and private security broke up. Director brought 50 men from the same security who attacked the shareholders previously. When the incident occurred, the shareholders, deceived once again, blocked the factory. On Friday three members of the Association of the shareholders were taken into custody due to the breach of law. At the moment they are sentenced to solitary confinment. On the same day 26 workers who participated in the strike were fired. After the arrest of Jugoremedija’s shareholders, maybe the Anti- Corruption Council should invite citizens of Serbia to stop fighting against the corruption, unless they want to end up in a prison. Ms Verica Barac, President of the Council

Fortnight after the auction, at the invitation of Mr. Jovica Stefanovic, Mr. Kamenkovic travels to Skoplje. While he was away, the workers quickly collect authorizations in order to form the majority share package, and appoint Mr. Zdravko Deuric as their representative. Mr. Deuric makes an appointment with Director upon his return from Skoplje, to arrange further steps. Without an explanation, Mr. Kamenkovic informs him of his retirement. On 3 October, Director receives a fax from Skoplje suggesting new Management Board composed of seven members, should consist of four representatives from “Jaka”, and three representatives from other shareholders. Mr. Kamenkovic accepts and on 4 October, without consulting the workers, suggests three members of the MB on behalf of the small shareholders. A part of the story has been cut off obviously, both from Jugoremedija shareholders and public, which only testifies of lack of confidence in the work of the state institutions in Serbia, distrust in the protection of legality, and possibility to turn to the state in need for the protection against the violence.

The workers – shareholders are puzzled that “Jaka 80” has not yet registered its ownership in the Register of the Court of Commerce. To end the anticipation, Mr. Deuric tried to contact a new co-owner, and received the number of Mr. Stefanovic from the accounting department where Mr. Stefanovic already began with instructions issuing. In the midst of October, Mr. Stefanovic and Mr. Deuric arrange a meeting in Skoplje, because “Jaka 80’s” owner was not allowed to enter Serbia. Mr. Deuric, together with the President of the Jugoremedija’s Union, Mr. Vladimir Pecikoza, leaves on a trip with a business car from Jugoremedija. At the meeting in “Jaka 80’s” office in Skoplje, Mr. Stefanovic gives his assurance to respect the rights of other shareholders, and talks of factory future. Mr. Deuric, and Mr. Pecikoza return to Zrenjanin more or less pleased, except from a minor car accident, and the fact that Mr. Stefanovic refused to give them a tour of a pharmaceutical factory in Radovis, under excuse that it was too far away.
Till Jugoremedija Shareholder’s Meeting on 22 October 2002, small shareholders form a package of 41,83 % of Jugoremedija shares, little less than the share of “Jaka 80”. The workers- shareholders vote Mr. Zdravko Deuric, Ms Emilija Mihajlovic, Ms Olivera Zakic, Mr. Radovan Popov, Mr. Duda Radakovic as representatives at the Meeting. At the Meeting, “Jaka 80”, the major individual part-owner appoints four members of the Management Board and a new Director, Mr. Aleksandar Radovanovic from Nis. Instead of three members suggested by the former Director small shareholders choose their MB members, namely Mr. Srdjan Djujic (immediately appointed Director of Jugoremedija’s daughter company “Remevita”, at present Deputy of Jugoremedija’s Director), Ms Slavka Medjo (although a pharmacist, soon becomes a chief of “Jugoremedija’s” sale department, where she worked till supplies worth 11,5 million euros were sold, at present Director of the tablet department, which she tries to animate with new workers after 103 “Jugoremedija’s” workers – shareholders were dismissed), and Ms Olivera Grozdanovic (later suspended from work).

After promoting or suspending all three of them, there were no one to protect the interest of small shareholders in the Management Board.

Even after the Shareholder’s Meeting, “Jaka 80” still does not register “Jugoremedija’s” bought shares in the Register of the Court of Commerce, although it was obligatory according to the contract on share sale. It will turn out that it was one of the numerous reasons to break the contract, disregarded by The Share Fund.

HOW DID “JAKA 80” BECAME A MAJORITY OWNER?

After the first Shareholder’s Meeting the workers continue to collect authorization and collected 51 % of shares. Nevertheless, members of the Meeting Mr. Zakic, Mr. Popov, and Mr. Radakovic abandon the workers- shareholders soon, and Director Radanovic begins to threaten the workers collecting the authorizations with dismissals if they do not stop. Small shareholders are still not aware that “Jaka 80” failed to present a bank guarantee for the increase of capital fund, bound to by the contract on share sale, without which The Share Fund was not supposed to sign the contract. Even so, it will soon become clear that Mr. Stefanovic never intended to invest in “Jugoremedija”.

At the Shareholder’s Meeting that was not held ( it was allegedly held on 17 June 2003), “Jaka 80” reached a decision to increase the capital fund of “Jugoremedija”, trough conversion of “Jugoremedija’s” claims towards “Jaka 80” (made, according Ms Emilija Mihajlovic, after Mr. Radanovic came to “Jugoremedija”, by unnecessary debts, among other things in raw materials for the medicine “Viziren, which has a very poor sale on the market). Pursuant to this decision “Jaka 80” registered its equity of 61,02% of “Jugoremedija’s” shares in the Register of The Court of Commerce. Performed conversion, that is increase of capital stock, was formally legalized by “Jaka 80” trough Securities and Exchange Commission and Stock Exchange, and represented as an increase of capital fund (360 million dinars) from the sale contract.

The Court of Commerce, Share Fund, Securities and Exchange Commission, all the authorities able to prevent such violation of the law and contract allowed, however, such “increase of capital fund”.

Silent treatment of the media (an abstract from the article “Evil strikes rear their head again” by Mr. Nebojsa Popov, “Republic”340-341, 1 till 30 September) Reading today’s media, namely issues about strikes and strikers, may lead to the impression that, nowadays, they represent a sort of a bogey man of the socialism and self-management, hushing up the laziness and idleness, and other similar mischief, whereas they, “nip in the bud” the wheels of history, moving towards the unstoppable victory of the capitalism. Sometimes, even the journalists and the media with reputation of being serious , regard them as – Stalinist. We do not, however, deny the presence of us Stalinists, as well as members of other wicked ideologies, but if we do not talk about it analytically, factually and with arguments, we only repeat the ideological disqualifications and harm the clarification of the events and their possible outcomes. Ideological and promotional production of evil strikes and strikers is most obvious in hiding of the actual participants and subject of the dispute. It is best seen in the approach to strikes where participants, like in “Jugoremedija case” from Zrenjanin, are, on both sides, shareholders. Although the strikers represent a private owner, the name applies mostly to the majority share owner, or a pretendant to such position. Than, in the name of ‘’her holiness’’ the private ownership, one opens fire on strikers as the enemies of the private ownership, adversaries of the inevitable privatization and even more irrevocable capitalism, and by the hand of the lazy and idle persons, self- managers, defenders of the social ownership and other more or less scary ghosts and phantoms.

Conflict of the owners

Till April – May 2003 Mr. Radovanovic sells “Jugoremedija’s” stock supplies in the value of 11,5 million euros, found upon the entrance in the factory, and continues to bully the workers – shareholders. In December 2003, Mr. Deuric, Mr. Pecikoza and another member of the Union got sacked due to the car accident upon the return from the meeting with Mr. Stefanovic in Octorber 2002 in Skoplje, on account of damaging “Jugoremedija” for 30 thousands dinars, the cost of the car repair. As a sign of a protest, on 11 December 2003, 260 “Jugoremedija” workers went on strike. The Board of the strikers stipulates 12 demands of syndicate nature (increase of salary, then the same as before 10 September 2002, termination of the harassing of the workers- shareholders and so forth). In attempt to intimidate the workers, Mr. Radovanovic hands 120 warnings prior to the dismissal. Three dismissed workers chain themselves to the factory, and tomorrow another six colleagues join them. The Inspection from Zrenjanin returns the dismissed workers to work, and in early morning on 1 January, Mr. Jovica Stefanovic shows up for the second and the last time in “Jugoremedija” – with more than dozens members of the private security in jeeps, to negotiate with the strikers. “The negotiations” fail, and Mr. Stefanovic retreats with his army. Also, warnings are withdrawn, and on 6 January, with mediation of the President of Municipal Assembly, the strikers made an Agreement with the management, whose Director promised to fulfill all 12 strikers’ demands, thus ending the strike.

Due to the disrespect of the Agreement from January 2004, on 11 May “Jugoremedija’s” workers-shareholders initiated another strike. Director Mr. Radovanovic fails to forward the minimum of the working process, list and decisions applying for the workers to the Board of strikers, which he was obligated to do in the beginning of the strike on behalf of the employers, which is why even after 11 May the workers continued to work in full. Instead of determining the minimum of the working process, on 22 May, “Jugoremedija’s” Management Board stopped the production, informing the employees that, if they feel threatened, they should stop coming to work, for they would continue to receive salaries on a regular basis. During the strike, small shareholders initiate a legal suit with The Court of Commerce to erase the illegal registration of the increase of capital stock in the Register of the Court. The Court of Commerce in Zrenjanin and The Higher Court of Commerce in Belgrade reject the demand on account of pro forma reasons, hence, small shareholders ask for the revision by The Supreme Court. The Supreme Court has not yet ruled.

At the political rally in Zrenjanin held on 17 May, former Minister of Economy and candidate of the leading coalition for the President of Serbia Mr. Dragan Marsicanin, announced that Ministry of Economy would instruct the cancellation of the contract with “Jaka 80”.

Ministry of Economy, which in the meantime, from 8 April till 13 May conducted a supervision over the legality of the privatization procedure of “Jugoremedija”, reached a decision on 20 May, instructing The Share Fund to cancel the contract with “Jaka 80” regarding purchase and sale of 41, 93 % of “Jugoremedija’s” shares.

On 17 May, The Court of Commerce in Zrenjanin brings a temporary measure aiming to protect the shareholders capital within 60 days.

Till today, The Share Fund did not act by order of Ministry of Economy initiating cancellation of the contract with “Jaka 80”.

On 29 June, Director Radanovic makes a new attempt, together with fifty members of the private GPS security, to “invade” the factory. In early morning, the GPS security jumps over the fence into the factory walls and kicks out dozen strikers who were inside at the time. Mr. Radovanovic makes a public statement saying possible illegality in the increase of capital stock of “Jugoremedija” are insignificant, whereas the relevant issue is to restart the production in the factory. The radio B92 broadcast Mr. Radanovic’s statement that “ there is more to it on both sides. The fact is that the factory was not working for 40 days, that it was blocked for 30 days, the fact is, moreover, that there was a great danger of bankruptcy, because, according to the law, after 60 days of blockade The Court of Commerce initiates a bankruptcy procedure”.
Mr. Radovanovic, nevertheless, continues to avoid setting the minimum of working process, thus prolonging to blockade the company. On 29 June, in the afternoon, the security and Mr. Radanovic were again thrown out by the strikers.

The Share Fund does not initiate a legal suit for the cancellation of the contract, explaining that Foreign Trade Arbitration, a very expensive one, is in charge for the suit, and the Ministry does not explain who is to bear the expenses of the suit. On 16 July, the workers- shareholders came to Belgrade and block The Share Fund, demanding the fulfilling of the demand of the Ministry of Economy and initiation of the suit for the cancellation of the contract. In the meantime, however, “Jaka 80” pressed charges against The Share Fund with the Court of Commerce in Belgrade to cancel the Contract on investment, and, on Monday, 19 June The Share Fund responded with counterclaim for cancellation of the basic contract, thus avoiding the expanses of the foreign trade arbitration, but also, a proceeding by order of Ministry of Economy.

6 August 2004 (Blic) Private army as a substitute for the institutions The agreed working minimum in the company “Jugoremedija”, was used by the co-owner of the factory “Jaka 80” merely to get even with other co-owners, demanding the cancellation of the sales contract with “Jaka”, because it violated the investigation obligation. Immediately after entering the factory, “Jaka” brought private security provoking conflicts with the small shareholders during the period of two weeks, and using one incident to beat up the workers on 19 August. In the conflict where one co-owner leads a private army, the State took side of the stronger one. On 19 August, police faced the unarmed shareholders, while behind the back of the cordon “Jaka’s “ security were breaking into the warehouses of “Jugoremedija”. The police backup, emergency units from Belgrade, under the command of General Milivoje Mirkov, arrived and arrested three members of the Strike Board. Tomorrow, 26 workers and shareholders of “Jugoremedija” were dissmised by Director, and police detained the arrested stikers in the custody under the suspicion that they might influence the witneses. Eighteen shareholders went on hunger strike, still going on, demanding that 26 workers should be returned to work. The others continuned the stirke in the factory canteen, tailed by armed security. At the same time, “Jaka” is violating the working minimum agreed with the small shareholders, and under suspension threat, summons the workers among the strikers whose engagement was not agreed, to substitute the colleagues who were in the agreed minimum. The shareholders are suspecting that “Jugoremedija” is producing more drugs than agreed by the minimum, because the workers summoned to the factory work on jobs unnecessary for the minimum. The media in Serbia mostly reported lies regarding the true nature of the conflict. It was impossible to learn that the conflict in “Jugoremedija” was between co-owners, and small shareholders were regarded as former self-managers, followers of Staljin’s regime, inert, worshippers, while “Jaka” was reputed as the sole owner of the entire “Jugoremedija”, prohibited to enter property by the danagerous “elements” Since the beginning of the institutionalization promissed by the present Government in the election campaign, merely the authority protecting private property of only one owner remained, namely the one surrounded by the private army. If Mr. Jovica Stefanovic Nini, the owner of “Jaka”, wins “Jugoremedia” by fraud and force, and supported by authority, will he realize that the authority is obsolete and replacive by the private army? Ms Verica Barac, President of Council

“Mediation” of the State

During June 2004, Coordinator of the Ministry of Economy, Mr. Predrag Bubalo makes strong pressures on the strikers to return the management into the factory. Mr. Zdravko Deuric states that in those talks Minister had an almost identical point of view as “Jugoremedija’s” Director, Mr. Radanovic – that the fact that the increase of capital stock meant direct negation of the law was irrelevant, like the fact that the Shareholder’s Meeting did not decide on the increase of capital stock, instead it was a decision of one owner only, the relevant issue, however, is to initiate the minimum of working process. With the help of Minister Bubalo, on 5 August, the management forwards the Board of Strikers a suggestion for the minimum working process, which should employ 77 workers. The Board of Strikers accepts the suggestion, and the management returns to “Jugoremedija”. It will soon become obvious what Mr. Radanovic had in mind with initiation of the working process. Minister Bubalo protects one of the owners, namely the one already protected by the fact that he is the major individual owner, whereas management of the equity and protection of interest is much easier that in the case of the small shareholders, whose number surpasses three thousand. Instead of enabling the protection of small shareholder, Minister of the Government of Serbia, Mr. Predrag Bubalo fails to protect the principle of the protection of private ownership of each owner, interfering in the conflict between the two owners protecting only one of them – the one known for violation of the contract, determined by the Ministry of Economy in the supervision procedure.

On 6 August, Director Mr. Aleksandar Radanovic wrote a written reply to the demand of the Board of Strikers, giving, among other things, consent to their request that security measures should be performed by “Jugoremedija’s” workers, along with the employment of a new labor force trough Employment Bureau.

On 16 August, nevertheless, around hundered and twenty armed members of the private GPS security enter the factory and kick the members of the Board of Strikers, together with the strikers performing the doorman’s duty.

The police in Zrenjanin interfered immediately and the members of the Board of Strikers return to the factory on the same day. The police stands between the strikers and private GPS security, with purpose of disabling the physical contact and possible conflict. The Board of Strikers asks the police to check the members of the private GPS security, as well as the purpose of their presence, the police, nevertheless, disregards the request of the partial “Jugoremedija’s” owners to investigate the purpose of the private army in their factory.

The police maintained “ the border line” till 19 August, when a new incident occured. Someone of the members of the private GPS security activated a fire extinguisher against the police and strikers. The strikers break trough the police line and fight with the security. One of the strikers was badly injured, hit by the fire extinguisher on the head.

Late in the evening, on 19 August, after breaking trough the cordon, after private army and local police, the third army arrived – the units of the national police from Belgrade under the command of General Milivoje Mirkov. At first, General summons Mr. Zdravko Deuric and Mr. Vladimir Pecikoza and President of the Board of Stikers, Mr. Stevan Budisin for midnight “ talks”. Around two o’clock in the morning, on 20 August Mr. Mirkov informs the strikers that Home Affairs reached the Decision on ban of the public gathering, that in the future they are allowed to strike in the factory canteen only, within working hours, from six to two o’clock, and that he has a warrant to, peacefully or by force, throw out the strikers from the factory ground. The Government, again, more openly, took the side of one owner. Instead of maintaining peace, General Mirkov decides on the strike, rules in the conflict between two owners, threatening one of them, and protecting the other, shoulder to shoulder with his private army.

Although aware that the gathering of the strikers within the factory walls does not qualify as public gathering, and that the Decision of Home Affairs violates the Law on Strike heavily, the Board of Strikers makes a decision to leave the factory walls, preventing more brutal consequences.

Pure violence

On 20 august 23 dismissals were handed out to the workers gathered in the canteen.
The dismissals were given to all the members of the Board of Strikers, as well as the leaders of the Union and Association of the small shareholders. Three strikers, Mr. Zdravko Deuric, Mr.Stevan Budisin, and Mr.Stevan Djurisic, were arrested for violation of law and order, and detained in custody, in solitaries till 23 August (Mr. Djurisic till 26 August), to prevent their influence on the whiteness. They were given the notice of dismissal because they were prosecuted.

Director of “Jugoremedija”, Mr. Aleksandar Radovanovic was also prosecuted by Home Affairs, criminal proceeding number 756/2004 from 31 May 2004, due to a reasonable doubt that he committed a criminal act of abuse of authority.

Mr. Aleksandar Radovanovic was not sacked.

With the counterclaim, The Share Fund also asked for the issuing of the temporary measures identical to the temporary measure issued by the Court of Commerce in Zrenjanin. The Court of Commerce in Belgrade, nevertheless, did not rule in favor.

“Jaka 80” clears “Jugoeremedija’s” warehouses without any control by the other owner.

On 20 August, three arrested men started a hunger strike in the solitary. On 25 August, fifteen workers-shareholders joined the hunger strike, demanding the return of all 26 dismissed workers. While “Jugoeremedija’s” workers-shareholders were on hunger strike in the Union premises in Zrenjanin, no one, not even local politicians, doctors, priests, or human rights fighters came to visit them. Besides the inconspicuous individuals, like a local official from Mr. Karic’s party, who was persuading them to forget the ownership dispute, whereas Mr. Karic would persuade his friend Mr. Stefanovic to return the workers to work. On the other hand, the media broadcasted Mr. Radanovic’s statement that the other owner of “Jugoremedija”, as far as he is concerned, does not exist, and that the workers-shareholders may turn to the Local Community, like any other civilian in need, but they no longer represent the problem of “Jugoremedija”. A cynical point of view that the co-owner matters are solved by sacking the co-owner, is only the continuation of the state’s point of view that it makes no difference whether the increase of capital was performed pursuant to the law and contract, but that it is essential to start the minimum of the production process.

The Labor Inspection in Zrenjanin, did not have the time to write the decisions returning 26 dismissed strikers to work, when “Jugoeremedija’s” management sacked another 77 workers-shareholders. Hunger strike was ended on 6 September, after two weeks, because, according to the strikers’ statement, “during those two weeks not only that the state disregarded this scandal, but we heard statements from the two Ministers of the Republican Government, Mr. Bubalo and Mr. Lalovic, trying to minimize and hush the criminal operations following the privatization and fake increase of capital of ‘Jugoremedija”.

Less and less number of strikers, still employed, continues to strike in the canteen, controlled by Mr. Jovica Stefanovic’s private army. Armed guardians even followed the strikers to the bathroom, prohibited any contact with their colleagues at work. The dismissed strikers, 103 of them for now, continue to gather in the hall of the Municipal Assembly in Zrenjanin, holding meetings, and asking for the honoring of the Decisions of the Labor Inspection regarding their return to work, also, that the State should stop bankruptcy of “Jugoremedija” till the settlement of the legal suit, and that the President of the Government of Serbia, Mr. Vojislav Kostunica should visit and talk to the strikers regarding these issues.

Since the beginning of September, Mr. Radovanovic, contracted 86 workers in “Remevita”, daughter- company, which until then employed only 4 persons, who were then directed to work in “Jugoremedija, violating the agreed minimum of work process, and Law on strike.

On 17 September, the Anti-Corruption Council forwarded the “Jugoremedija” Report to the President of the Government of Serbia, Mr. Vojislav Kostunica and Coordinator of the Ministry of Economy, Mr. Predrag Bubalo suggesting enlisting on the time table of the next session of the Government.

We feel that the struggle of the “Jugoremedija’s “ shareholders to honor the law and privatization contract, up to now disclosed three major problems in Serbian society.

In the first place, the protection of small shareholders in Serbia is non existing, the state does not protect the institution of the private property, but only the property of certain owners.

Secondly, Serbian authorities do not support the anti-corruption initiative, instead they take side of the corrupted ones, busting and prosecuting the ones who protect right to their own private property, right to work and live as humans.

In the third place, solidarity and endurance of the people protecting their rights, that noble characteristic rarely found these days in Serbia, after all those years of poverty and fear, are not the value that our public recognizes as a foundation of democracy and development.

Ivan Zlatić

 

“If it does not matter how the shares of “Jugoremedija” were sold, but how to start the production, according to Minister Bubalo, then tell your Minister to get these people back to work, for WE ARE THE PRODUCTION!”

Mr. Zdravko Deuric, to the Serbian MP Sredoje Mihajlov,
who addressed the strikers in the

Municipal Assembly of Zrenjanin on September 12 2004

 

 

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

 

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac

The Anti-Corruption Council of the Government of Serbia

Report on “Jugoremedija”

Privatization procedure

On 10 September 2002, the Privatization Agency sold by auction the state-owned shares of “Jugoremedija” Pharmaceutical Factory from Zrenjanin, 41.93 % of the total company shares (Record from the auction).

The sale of 41.93% of “Jugoremedija” shares is the only case we are aware of in which the Agency used its legal authority to sell the shares by auction, dodging the stock exchange. The Agency prepared an auction dossier, conducted the bidding procedure, and chose the most favorable bidder, the Company ‘Jaka 80’ from Radovis, Former Yugoslav Republic of Macedonia, whose majority owner was Mr. Jovica Stefanovic – Nini. Nevertheless, since we are talking about the sale of the shares, a contract for the sale of shares and a contract for investments were concluded between the Shares Fund (not the Agency, which conducted the complete sales procedure), and the Buyer.

After the auction, the Shares Fund and the Macedonian Company “Jaka 80” concluded two contracts: for the sale of shares, and for investments.

1. The Contract for the sale of the 41.93 % shares was concluded on the same day when the auction was held. By signing this Contract the Buyer committed himself:

• to pay the sales price within five days from the day of the auction,

• to invest YUD 360,000,000 in “Jugoremedija” within thirty days from the day of the fulfillment of the terms, the Contract stipulates that the investments must be “made in cash or in other material assets in the form of a fully-paid capital increase amount, that the increase of the share capital be registered, and that all other members of the society be allowed to participate in accordance with the law”,

• to provide an unconditional bank guarantee, on account of the investment obligation.

2. The Contract for Investments was concluded on 2 October 2002. The Contract specifies in more details the manner and times of investments and stipulates that the Buyer commits himself to provide, on the occasion of the signing of this Contract, a bank guarantee as a security for the fulfillment of the his obligation (the Contract for Investments of 2 October 2002).

Who is the Buyer?

The Buyer is the Company “Jaka 80” from Radovis, Former Yugoslav Republic of Macedonia.

Data from the Register of the Commercial Court:

Pharmaceutical, Cosmetic, and Dietetic Industries, Joint Stock Company “Jaka 80”.

 Owners in 2002:

• minority shareholders and Mr. Jovica Stefanovic – Nini, 51.97% of the total shares,

• Pension and Disability Insurance Fund paid by “Demeno Trade”

“Demeno Trade” from Nicosia is registered for management services.

• The Company has three employees,

• The address is unknown,

• Original capital is USD 1000.

 The 2001 Balance Sheet of the Company “Jaka 80” shows that the Company’s profit was EUR 1.86 million (transcript from the Register of Companies of the Commercial Court in Stip).

 How was the Contract honoured?

In spite of the fact that the Buyer, “Jaka 80”, did not provide the bank guarantee, either after the purchase of the largest individual shares package of “Jugoremedija”, or on the occasion of the signing of both contracts (neither the first one, nor the second one) and though the terms and conditions had not been fulfilled, the Shares Fund handed over the Company to the Buyer “Jaka” to manage, and he appointed his own management team and security guards.
In the beginning, the cooperation between the shareholders was good; the workers-shareholders accepted the sale of the shares to the Company “Jaka” as a sound business action, trusting the Government authorities and the new co-owner.

Problems emerged when “Jaka”, as the owner of the largest individual shares package, began to violate the rights of the small shareholders. Meetings were called without ensuring proper conditions for the other party, the small shareholders to be represented at them, and the management threatened to dismiss those shareholders who collected shareholder’s authorizations for the formation of their own common shares package. Nevertheless, the Company “Jaka” violated most drastically the rights of the small shareholders when, instead of the increase of the capital, i.e. the recapitalization, bound by the Contract, it converted the debt into shares. 

Records of the Meetings held in this period, threats to the shareholders, replacement of management executives, where obedience to the management appointed by Mr. Jovica Stefanovic was given preference over the experience in the production of medicines, show, otherwise known syndrome in the privatized companies, that the one who buys the largest individual shares package becomes, practically, the exclusive owner. The other owners-shareholders, and at the same time the workers of the Company, were deprived of their rights by threatening with dismissals and by deceits, so that they had to fear for their shares and their jobs. After deceits, harassment, and drastic violation of the rights of the small shareholders, from their being thrown out of the factory to their detention in the factory building by the private army of the other co-owner, these co-owners (experienced pharmacists) have been recently assigned to work as gardeners and cleaners of the factory yard.

A statement made by the Deputy President of the Shareholders’ Meeting, a pharmacist herself, reveals that, while managing “Jugoremedija” through its newly-appointed management, on the eve of the controversial recapitalization, “Jaka”, indebted, unnecessarily, the Company “Jugoremedija” in favor of the Company “Jaka”, by buying large quantities of the medicine “Viziren”, which sells poorly on the market. The decision for the increase of the capital through the conversion of debts was not brought by the Shareholders’ Meeting, which can be seen from the minutes of the Meetings held on 4 February and 20 May 2002, and which was verified by the statement of the Deputy President of the Shareholders’ Meeting, Ms Emilija Mihajlovic, given in the investigation procedure at the Crime Investigation Police Office in Zrenjanin (Records from the hearing). 

The fact that the decision on the increase of capital by the conversion of debts was not brought at a Shareholders’ Meeting, and that it was not allowed by the Contracts signed with the Shares Fund, did not prevent the “Jugoremedija” management to sign the Contract with “Jaka” for conversion of debts into shares – a conditional increase of the original capital. According to this documentation, the Commercial Court of Zrenjanin registered “Jaka 80” as the owner of 61.02% of the total “Jugoremedija” capital. On 2 June, the representative of the small shareholders, Mr. Zdravko Deuric, submitted an initiative to the Commercial Court of Zrenjanin for the opening of an ex officio procedure for the annulment of the groundless registration in the Register of the Commercial Court in Zrenjanin.

Mr. Deuric submitted evidence that the stated Meeting of 17 June 2003, at which the decision on the increase of the capital was allegedly reached, had never been held. The Commercial Court of Zrenjanin and the Higher Commercial Court in Belgrade turned down Mr. Deuric’s Initiative because of some formal shortcomings, although the Initiative suggested that the Court should ex officio delete from the Court Register the registration of the increase of the capital. Instead of allowing some extra time to the small shareholders to rectify the formal shortcomings, the Court rejected their motion. On 28 June 2004, the small shareholders submitted an application for the revision of the procedure with the Supreme Court. A decision of the Supreme Court is still pending.

Confusing are also the data disclosed after the completed recapitalization in a memorandum submitted to the Shares Fund and to all relevant Government bodies by the Company “Smart Invest” from Belgrade, an authorized representative of the Company “Jaka 80”. They state that the Shares Fund cannot be blamed for the increase of the capital, because “Jaka”, as a minority shareholder could not make a decision on the recapitalization, which has to be a two-thirds decision, and they state this circumstance as a ground which renders the signed Contract null and void (Memorandum of the authorized representative)

Indeed, the Company “Jaka 80” filed a suit with the Commercial Court in Belgrade against the Shares Fund for the termination of the Contract for Investments and the cancellation of the clause on the issue of a bank guarantee.

The Shares Fund

Since the very beginning the signatory of the contracts for sale and investments, the Shares Fund, has never had any objections regarding the execution of the Contract, accepting the signing of the Contract without bank guarantees, thus altering the terms of the sale by auction, and the provisions of the Basic Contract. In the contract-honouring control procedure, the Shares Fund established that the Contract was fully executed.

When the Buyer violated the Contract on the obligatory increase of the capital, violating simultaneously both the Contract and the Enterprise Act, the Shares Fund took no action.

At this moment, 24 months have passed since the signing of the Contract on the Sale of Shares, which is the deadline by which the Buyer was obliged to invest YUD 180,000,000 and deposit a bank guarantee for another YUD 180,000,000. The Buyer has not yet deposited a bank guarantee for the first investment, nor has he made any investments in accordance with the Contract.

Following very pressing demands by the small shareholders for the introduction of supervision and protection measures because of the violation of the Contract, the Ministry of Economy responded after one year, and, in the supervision procedure, instructed the Shares Fund to initiate proceedings for the cancellation of both Contracts concluded with “Jaka 80” and to take other measures for the protection of the Company assets (Decision of the Ministry of Economy)

The Privatization Committee of the Serbian National Assembly also carried out a supervision of the privatization of “Jugoremedija” and accepted the information and explanation of the representative of the Ministry of Economy that the supervision over the work of the Shares Fund had been carried out and that the Shares Fund had been instructed to initiate the procedure for the cancellation of the Contract.

So far the Shares Fund has not initiated any procedure for the cancellation of the Contract, with an explanation that neither the Ministry of Economy nor the Ministry of Finance has provided necessary funds for the initiation of proceedings with the Foreign Trade Arbitration of the Chamber of Commerce.

The jurisdiction of the Foreign Trade Arbitration was contracted by the Contract for the Sale of Shares, but now the contractual obligations are not honoured by the Government authorities, and the Ministries. This is a clear message to other participants in the privatization process that the Government does not honour contracts it signs, and that such contracts can be breached without any consequences. This is a moment which influences possible corruption in the privatization process. The Government is responsible to ensure that contracts are based on the law and that they are the expression of mutually agreed will, and to prevent an approach of pro forma accepting of lots of obligations which one can get around, so that one, expected and not expressly contracted, could be realized and, first of all, it is responsible to ensure that contracts are honoured.

 

Recommendations to the Government

The Anti-Corruption Council believes that the actions of the participants in the privatization of “Jugoremedija”, both of the Government and the Buyer point to possible corruption. We recommend the Government to review this privatization procedure completely and establish the facts which seem to be disputable, and particularly the following ones:

• According to the statement of the shareholders and the records from the hearing of the Deputy President of the Shareholders’ Meeting in the investigation procedure, referring to the statement of the then Director, the Company had before the privatization approximately EUR 11,5 million in stocks which were not shown in the Balance Sheet of the Company.

• The fact that the Buyer, as well as the other participants in the auction, offered a price several times higher than the starting price indicates that the auction dossier was not well prepared, i.e. points to the possibility that the participants in the auction had acquired some information which was not in the auction dossier.

• The correspondence of the Company “Jaka 80” shows that they had an agreement with the Shares Fund not to provide a bank guarantee. The records of the Shares Fund contain a letter from “Jaka” requesting that they do not provide a bank guarantee, for it would be expensive, but they would certainly commit themselves to invest by a statement resembling a mere verbal assurance. There is no reply of the other party, but the Contract was signed without any bank guarantee. In this way all the provisions of the Contract referring to the authorization of the Shares Fund to take adequate measures if the Buyer does not honour the Contract are inapplicable because the Shares Fund has deprived itself of the possibility to act in case of default of the Contract.

• Neither the Shares Fund, nor the Ministry of Economy acted pursuant to the decision reached in the supervision procedure, and according to the recommendation of the Privatization Committee of the National Assembly. We believe that the Government is obliged to initiate procedures for establishing the responsibility of some Government ministers for the violation of the law and the Contract.

• As last year, following a complaint by the shareholders, the Council forwarded to the Office for the Prevention of Money Laundering some documentation pointing to money laundering, and has not received any reply so far. We were warned of certain facts related to money laundering by the Government Anti-Corruption Commission of the Former Yugoslav Republic of Macedonia. The same information was also forwarded to the Office for the Prevention of Money Laundering. The owner of the Company is a man who, at the time of the purchase, was on a police wanted list for smuggling medical drugs among other allegations.

• Who authorized Belgrade intervention police units, under the command of General Milivoje Mirkov, to interfere in the conflict between the two owners, and to take the leaders of the Strikers Committee and the Association of the Small Shareholders of “Jugoremedija” for questioning on August 19, after midnight? Instead of securing law and order, leaving the dispute between the owners to the court, the police and gendarmerie, with the private security guards, took the side of one of the factory owners, “Jaka 80”. They declared the strike of the workers-shareholders within the factory yard a public gathering, which they subsequently prohibited, thus violating the Law on Strike, and the property rights of the small shareholders of “Jugoremedija”. We recommend the Government to obtain the report on the conduct of the police forces and the private security guards on 19 and 20 August 2004 at “Jugoremedija” from the Ministry of Interior and present it to the public.

The privatization procedure of “Jugoremedija” is a most drastic example of the absence of the protection of minority shareholders in Serbia. Having no clear attitude regarding the principles underlying the privatization procedure that would make it lawful and successful, and in a procedure highly jeopardized by irresponsibility and corruption, the minority shareholders are sacrificed by the Government and treated as if they were not shareholders at all. The development of a market economy failing to provide clear and equal protection guarantees for each private property owner leads to conflicts and radicalization.

We recommend the Government to show, by insisting on the observance of the law and lawfully concluded contracts, clear respect for the principles of the protection of private property of all owners and to ensure a transformation of the ownership structure in a legal way and with the observance of the contractual obligations. The observance of the rights of minority shareholders proves the existence of respect for the principles of private property protection and the principles of legality in the transformation of the ownership structure. Legitimate contracts and their honouring are vital parts of the public interest, which is also cherished by a government seeking to create a law-abiding state.

In Belgrade, 

September, 16^th 2004 

PRESIDENT,
Verica Barac