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By John Helmer in Moscow

After weeks of fierce, behind the scenes campaigning for votes to boost Rusal’s takeover attempt against Norilsk Nickel, shareholders of the latter struck back at Monday’s Annual General Meeting, flooring Deripaska. Rusal has issued a statement promising a counter-attack at a proposed Extraordinary General Meeting of shareholders – if, within the 60 to 90-day interval before this can be held, Deripaska can rally enough votes to avoid another knock-down.

The Moscow investment banking houses and brokerages acknowledge that despite the ringside seats they have had, they had not been expecting the outcome. Unicredit Securities issued this analysis of what has happened:

“AGM results in UC Rusal’s position in Norilsk Nickel weakening, as Interros and top management take seven out of 13 seats on the board

Topic: Norilsk Nickel held its AGM yesterday, the results of which were a surprise to us, as Interros managed to elect both its agreed quota of four directors and a representative of VTB, while UC Rusal, which has the same quota for representation on the board, got only three seats, failing to elect the former Norilsk Nickel board chairman and VEB representative Alexander Voloshin. At the same time, we note that the company’s top management got a record three seats, equal the number of independent directors and UC Rusal representatives. Shareholders showed record attendance of 92%, which management explained by its active preparatory work with minorities.

“Following the announcement of the AGM results, UC Rusal issued a statement accusing Norilsk management of manipulating the company’s quasi-treasury shares, which account for 8.5% of total share capital. UC Rusal also announced that it would demand an EGM to reelect the board.

Our view: We see the news as negative for the stock, as it indicates a significant conflict between UC Rusal, one of Norilsk’s two key shareholders, and top management, which could hinder the normal development of the company and undermine its corporate governance (which we already see as poor).

The AGM demonstrated that Interros has much more voting power than UC Rusal, despite the rivals controlling equal stakes – Interros managed to elect five directors, and moreover, Norilsk CFO Dmitry Kostoyev was also elected as a director; he was previously employed by Interros and moved to the company in the interests of this shareholder, in our view.

We see the use of the quasi-treasury stake of 8.5% at the AGM as questionable, as such stakes are not usually used in voting and top management should not act as a shareholder, but rather in the best interests of shareholders. Moreover, we believe that a majority of minority shareholders would never support surplus management representation on the board, as there should be independent directors who would promote the interests of minorities.

We would not rule out the current board structure being very short-lived, as a new EGM may change the makeup of the board. However, we see the current board structure as a short-term opportunity for management and Interros to approve any corporate decisions that do not require shareholder approval (such as a share buyback) that UC Rusal otherwise would not support.

Conclusion: We see the news as negative for the stock, as a conflict between top management and one of the key shareholders could hinder the company’s normal development. However, we would not rule out UC Rusal shareholders seeking to increase their voting power in the future, which could result in speculative buying and a rally in the stock.”

Troika Dialog issued this table showing how the shareholder voting has changed the Norilsk Nickel board:

Troika Dialog reported to clients:

“Norilsk Nickel’s AGM brought several surprises despite tepid market expectations, highlighting that the company’s system of checks and balances is fully functional and the votes of minority shareholders play a critical role in the BoD composition.

Both UC RUSAL and Vladimir Potanin’s Interros hold 25% of the company, and the treasury shares controlled by the management amount to 8.5%. On the 13-seat board there were previously four spots apiece taken by UC RUSAL and Interros, one seat was held by CEO Vladimir Strzhalkovsky, one by Alexander Voloshin (Chairman), one by a Metalloinvest representative, and one by Vasily Titov, a representative of VTB.

It was reported that UC RUSAL was supporting Voloshin with its votes, while Interros was supporting Titov.

With unprecedented turnout of up to 92% (up from the usual 75%), raising the threshold of votes required to approve one candidate to around 6-7%, the meeting’s outcome was anything but predictable: Interros took its traditional four seats, UC RUSAL managed to take only three, the management obtained three, independents got two, and Titov was also elected. Importantly, Voloshin did not make it onto the BoD.

The reason for such peculiar results is apparently due to the fact that UC RUSAL’s votes were spread too thinly over five candidates (its own four plus Voloshin), while the record number of voting minority shareholders preferred to support independents, management representatives, or even Interros representatives. Both Interros and the management obviously supported their candidates with their own votes.

At the BoD meeting that followed, Titov was elected chairman as the only viable candidate. UC RUSAL already voiced its intention to seek an EGM to reelect the BoD, which should happen shortly. For now, the position of minority shareholders in Norilsk Nickel has been strengthened, since the management and independents now hold five seats, as opposed to the previous two. We regret that such a high-profile figure as Voloshin has (so far) not taken a seat on the board…”

Noone appears to have noticed that Alisher Usmanov’s representation on the Norilsk Nickel board – based on what has been rumored to be a stake of about 5% — has disappeared. Usmanov has either sold his stake or agreed to throw his votes behind Potanin and the Norilsk Nickel management.

Renaissance Capital, which is hosting Bill Clinton, a former military dictator of Nigeria, and Deripaska at an investor conference in Moscow, and which has been acting as book-runner for Deripaska’s share sales on the Hong Kong Exchange, did not report the Norilsk Nickel board vote.

The ouster of Voloshin is the most serious vote of no-confidence the former Yeltsin chief of staff has suffered since he was removed from the Kremlin by then President Vladimir Putin in October of 2003.

Uralsib Bank reported to clients this morning that “yesterday’s development suggests that the conflict of interest between Vladimir Potanin and Oleg Deripaska remains unresolved, despite the previously signed agreement. While the news is moderately negative for Norilsk from a fundamental point of view as the new phase of conflict creates significant risks for minority shareholders, however in the near-term the stock will be driven by forthcoming corporate events (EGM), which could be a short-term trigger, as core shareholders may start fighting for control of the company again.”

In fact, news of Rusal’s defeat lifted Norilsk Nickel’s share price in Russian market trading by 1.4% on the day, before London trading pushed it down. In Hong Kong, Rusal opened the day after with the share price heading downwards, despite the movement of the aluminium metal price in the opposite direction.

The FINAM brokerage told clients today that the news recommends a two-way bet. “It may be concluded,” reported FINAM, “that the conflict between Norilsk Nickel shareholders has entered a new phase, as is evidenced by discords on the company’s dividend policy and the entry of Mr. Deripaska into the board in violation of the informal agreement between Interros and RusAl. At the current stage, we do not see a tangible negative effect for company business; however, the standoff between the company’s key shareholders is unlikely to please investors and downward pressure on its shares is not ruled out. We reiterate out BUY rating for Norilsk Nickel common shares, with a target price of USD 168 per share at the end of 2010.” Norilsk Nickel’s current share price is $157.

The Blowberg financial news agency, which has been reporting a stream of positive news from Rusal headquarters, noted in its dispatch on the vote result: “RusAl previously sought to combine with Norilsk. Deripaska and Potanin ended a seven-month feud by agreeing in November 2008 to put merger plans on hold for three years and to avoid seeking board seats.”

Norilsk Nickel has yet to post its account of the AGM and board meeting on the company website. In its last release before Monday’s meeting, the company issued this report of a shareholder poll by RiskMetrics (Institutional Shareholder Services (ISS):

Moscow, June 9, 2010 – OJSC MMC Norilsk Nickel (hereinafter – MMC Norilsk Nickel or the Company) has been acknowledged that RiskMetrics Group ISS Proxy Advisory Services (RiskMetrics/ISS) released its analysis and voting recommendations for the Annual General Meeting (AGM) of MMC Norilsk Nickel shareholders, which will take place on 28 June 2010. RiskMetrics/ISS is the world’s leading independent corporate governance and proxy voting advisory service providing voting recommendations to over 1,700 major institutional funds, mutual funds and asset managers.

On Item 5 of the AGM’s agenda – the election of Directors to the Board, RiskMetrics/ISS recommended that shareholders cumulate all their votes for Independent Directors Bradford Alan Mills and John Gerard Holden and not vote for any other candidate. The RiskMetrics/ISS analysis states that “…they both would bring valuable experience to the company’s board, Mills as a mining executive, and Holden as a professional with both mining and finance expertise”. Once again RiskMetrics/ISS repeated high importance of election of independent non-executive directors, who are “most capable of making impartial decisions, taking into consideration first and foremost the rights and value of the company’s shareholders”.

On this item of the AGM agenda, RiskMetrics/ISS recommendations coincide with the recommendations of Company’s Board, acknowledging extensive experience, deep industry understanding and role in elaboration of strategic priorities of MMC Norilsk Nickel by independent non-executive directors.

RiskMetrics/ISS also recommended that MMC Norilsk Nickel shareholders approve Annual report of the Company (item 1), financial statements for 2009 (item 2), distribution of profit and losses for 2009 (item 3); adopt the decision to pay dividends in the amount of 210 RUR per ordinary share (item 4); approve Rosexpertisa as an auditor under Russian accounting standards (item 7). RiskMetrics/ISS recommended that shareholders vote for items from 9 to 12 related to Directors & Officers liability insurance, as well as to approve interested party transaction (item 13).

Rusal has issued two company releases. The first blames negative media coverage of the company’s standing with Norilsk Nickel shareholders on “fictitious statistics divorced from reality” and “unscrupulous competitors”:

“Recently, several online and printed media have run articles containing completely unfounded statements that UC RUSAL faces problems. In addition, last week, an analytical website of a doubtful reputation published an anonymous report allegedly based on a poll of US minority shareholders of MMC Norilsk Nickel, but in reality based on fictitious statistics divorced from reality. In the last three weeks, RUSAL has been actively covered by online media resources that have never previously expressed any interest in the company. However, during the last four weeks these sources have been publishing several “sensational” news items on RUSAL each day.

We believe that these articles are part of a negative PR campaign initiated by unscrupulous competitors. We ask you to treat such articles with caution and to verify the information by contacting the UC RUSAL press service.

RUSAL intends to bring to legal responsibility the media that are involved in publishing such misleading information.”

In the second release, Rusal charged that “the outcome of the elections to the Board of Directors of Norilsk Nickel that were held today disturb the balance between the shareholders of Norilsk Nickel. It was the result of manipulation of Norilsk Nickel shares belonging to the company. In particular, the company’s management transferred quasi-treasury shares to offshore companies and voted them against the election of Aleksandr Voloshin, whose candidacy had been agreed on by RUSAL and Interros and supported by the state. Instead, the management of the company used shares that had been transferred to offshore companies to contribute to the election of Norilsk Nickel managers who are subordinate to and report to the CEO of Norilsk Nickel.

In this regard, RUSAL intends to convene an extraordinary general meeting. We expect that this initiative will be supported by Interros, which has agreed with RUSAL to cooperate in matters concerning MMC Norilsk Nickel.

We consider such actions by a public company to be gross violations of corporate governance procedures, the principles of transparency and observance of the interests of all shareholders. We also intend to initiate legal action to contest the actions of Norilsk Nickel management connected with the transfer of shares to offshore structures and to uphold our interests as a minority shareholder.”

Note: On June 21, 1932, after Jack Sharkey (US) defeated Max Schmeling (Germany) for the World Heavyweight title on a split decision by the judges, Schmeling’s manager, Joe Jacobs (pictured), told the press: “We wuz robbed!” This is the first recorded use of the well-known expression.

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