FRANKFURT (Reuters) - Uniper's UN01.DE supervisory board on Wednesday urged shareholders to reject a motion by activist investor Elliott to launch a probe into whether management sought to block the sale of a major stake to Fortum FORTUM.HE, in a deal it opposes.

FILE PHOTO: A logo of German energy utility company Uniper SE is pictured in the company's headquarter in Duesseldorf, Germany, March 8, 2018. REUTERS/Thilo Schmuelgen/File Photo

The proposal, filed by Elliott-backed Cornwall Luxembourg S.a.r.l. earlier this month, has become a headache for Uniper boss Klaus Schaefer ahead of the group’s annual general meeting on June 6, as it could pave the way for a lengthy investigation.

Schaefer has repeatedly argued against a planned deal that will see former parent E.ON EONGn.DE selling its remaining 46.65 percent stake in Uniper to Finland's Fortum, calling it hostile and questioning the offer's strategic merit.

Elliott's motion was filed shortly after Fortum alleged in late April that Uniper had actively worked against the proposed deal in Russia, where it operates power plants and water-related activities through its subsidiary Unipro UPRO.MM.

The allegations came after Russian authorities approved Fortum’s purchase of up to, but not more than, 50 percent of Uniper, dealing a blow to hedge funds that have bought into the German company in hopes of a higher follow-up bid.

Cornwall argues that Unipro was registered as a natural monopoly in Russia in January 2018 - potentially derailing the entire deal under the terms of the Russian Strategic Investments Law - after operating without such registration for years.

STRATEGIC ENTERPRISE

Russia’s investment laws bar foreign states or state-owned entities from gaining control over assets deemed as strategic. Fortum is majority-owned by the Finnish state.

“In our view, there is no reason to support the application for a special audit,” Uniper Supervisory Board Chairman Bernhard Reutersberg said in a statement.

“I am very satisfied with the work of our Management Board and have no reason to doubt the integrity of its actions.”

Uniper management contacted Russia’s Federal Antimonopoly Service (FAS) about the fact that Unipro’s activities could be subject to the investment act only weeks after Fortum revealed its plan to take over the company in September 2017.

“There is reason to consider Uniper as an economic enterprise having strategic significance for the defense of the country and for state security,” Uniper said in a letter to FAS dated Oct. 6, 2017, that was obtained by Reuters.

Uniper said it contacted FAS to protect the interests of shareholders, fearing that a potential violation of the strategic investment law in relation to Fortum’s offer could trigger a de-facto expropriation in Russia.

It has denied any wrongdoing in relation to Fortum’s bid.

Whether or not Elliott’s motion succeeds next week will largely depend on how E.ON, which still holds the 46.65 percent stake, will vote. Should E.ON abstain it would significantly increase Elliott’s chances of getting it through.

E.ON Chief Financial Officer Marc Spieker sits on Uniper’s supervisory board. A Uniper spokesman declined to say whether the board’s decision to recommend the proposal be rejected was unanimous.

A spokesman for E.ON also declined to comment the decision.