RF Legislation on Corporate Governance
2009 – 2010 proved to be extremely fruitful in improvement of Russian corporate law: four new laws were adopted with serious amendments, and the fifth one took effect. Such hurried adoption of laws was partially due to the global financial crisis that necessitated prompt addressing of corporate law problems.
Anti-Raider Law. On October 21, 2009, large-scale amendments to the procedural law (Russian Administrative Procedure Code) and the Federal Limited Liability Companies Law and the Federal Joint-Stock Companies Law took effect. These amendments are aimed, first of all, at improving procedural mechanisms of settlement of corporate conflicts and at fighting raiders. The principal ideas of the anti-raider law were more efficient and transparent consideration of corporate disputes, adoption of non-controversial judicial acts by consolidation of requirements of all of the conflict participants in one judicial process.
To implement these ideas, the following key amendments were made to the Russian Administrative Procedure Code:
- A separate category of disputes appeared – corporate disputes that fall in the competence of arbitration courts and should be referred to the court at the location of the legal entity involved in the corporate conflict,
- The number of reasons for consolidation of several legal cases into one proceeding increased,
- The mechanism for access of all corporate conflict participants to information in legal proceedings created,
- The class action and collateral action institute appeared, and
- The regulation of security measures became more balanced, which enables to shift financial risks to the person applying for introduction of such measures.
The anti-raider law directly touched upon the corporate law. Amendments here are generally focused on repressing abuses by corporate dispute participants and on maintaining a stable business turnover:
- A limitation period for disputing resolutions of a company’s management bodies was fixed,
- Grounds for invalidating resolutions of the General Meeting of shareholders/ participants and the Board of Directors were taken from judicial practice to law;
- To maintain a stable business turnover, several grounds for denial by a court to invalidate major or related party deals were introduced; and
- Issuer’s and registrar’s joint liability for illegal debiting of shares was established.
Shareholders’ Agreements. The Russian business community needed a law on shareholders’ agreements long ago; however, the respective law was adopted as late as June 3, 2009. The reasons for legalization of shareholders’ agreements were both legal and political by nature. The need in more flexible contractual forms of business management, on the one hand, and the need to enhance competitiveness of the Russian business management model for attracting foreign investments, on the other hand, called this corporate law institute into being.
While providing a certain freedom of action to parties to a shareholders’ agreement, the law, at the same time, seeks to ensure stability of business turnover in general:
- An open list of legal remedies (including compensation of losses, collection of penalties, payment of indemnity) was envisaged;
- However, some limitations were expressly provided: one cannot recognize any resolutions of a company’s management bodies as invalid due to violation of the shareholders’ agreement, and a deal concluded in violation of a shareholders’ agreement may only be recognized as invalid, if it is proven that the other party to such deal knew of limitations envisaged in the shareholders’ agreement.
On Corporate Authorized Capital and Bond Issue. The Federal Law of December 27, 2009, introducing serious amendments to the corporate and stock market law, took effect on the last day of 2009. These amendments eliminated some unreasonable legal limitations on doing business and governed the bond issue procedure in a more balanced way.
Earlier the Russian Civil Code contained a prohibition on increase in the authorized capital of a joint stock company in order to cover losses incurred by it. It unreasonably obstructed debt restructuring for companies facing financial difficulties. Such ban is no longer in force. In addition, Russian companies now can convert debt into equity.
The law fixed a differentiated approach to the bond issue procedure, whereby application of stringent legal requirements will not cover mortgage bonds, issuers (or bonds) that meet the reliability criteria specified in the law, as well as bonds intended for qualified investors. The law also envisaged more severe requirements to a bond surety.
Amendments to Federal Limited Liability Companies Law (LLC Law). The Federal Law of December 30, 2008, made serious amendments to legal regulation of limited liability companies. These amendments are substantial and are aimed at addressing specific problems identified in the law enforcement practice.
Limitation of the participants’ right to withdraw from a company is, perhaps, the cornerstone of the amendments made to the LLC Law. The former version of the law set forth the unlimited right to withdrawal by selling a stake to the company, which often resulted in opportunist behavior of the company’s participants. Creation of ‘closed’ companies was necessitated by the practice itself; this issue was particularly topical in structuring venture projects.
According to the new version of the law, withdrawal of a participant by disposal of its stake to the company, irrespective of consent of its other participants or the company as a whole, is generally prohibited, unless such possibility is expressly stipulated in the company’s Articles of Association. The law also expressly provides that the last or the only participant must not withdraw from a company.
Moreover, a company’s participants can now exercise their right to purchase a stake not only at a price offered to a third party, but also at a price pre-determined in the company’s Articles of Association, which resembles, by its legal nature, the option. Advanced fixing of the purchase price for a stake in a company’s Articles of Association is a step forward that enables to guarantee to the company’s participants the fairness of the purchase price and to avoid possible abuse.
The procedure for making deals aimed at disposal of a stake in a company’s authorized capital was drastically revised in the new version of the Federal LLC Law in order to prevent numerous abuses in making such deals, for instance, entering into back-dated deals to hide stakes from creditors. In accordance with new requirements of the Federal LLC Law, a deal for disposal of a stake in a company’s authorized capital is subject to notarial certification as the general rule, and the stake passes to a new owner upon such certification. Non-compliance with the notarial form of the deal entails its invalidity. Otherwise threatened with invalidity, an agreement for pledge of a stake in a company’s authorized capital is also subject to notarial certification now.
An agreement for exercise of rights by a company’s participants, which is similar to a shareholders’ agreement, appeared in the new version of the Federal LLC Law.
On Criminal Liability for Offences on the Stock Market. The Federal Law of October 30, 2009, can be reasonably called the second stage in tightening penalties for offences on the Russian stock market, which occurred after the administrative liability in this field had become more stringent. New components of crime were included into the Russian Criminal Code by the new law:1) Violation of the procedure for accounting for rights to securities,
2) Manipulation of prices on the stock market,
3) Prevention to exercise or illegal limitation of rights of security holders.
Undoubtedly, these amendments are aimed to reduce the number of abuses on the stock market and to curtail the energy of unfair corporate conflict participants threatened with serious sanctions. Therefore, the above amendments demonstrate, on the one hand, the trend to a greater liberalization of the Russian corporate law so that it is more suitable for doing business, while, on the other hand, envisage more efficient tools for combating unfair business turnover participants. In introducing any particular legal provision, law-makers started to take into account business interests, rather than abstract political interests, more frequently.
On Inside Prevention. On July 27, 2010, President of the Russian Federation Dmitry Medvedev signed Federal Law on Combating Illegal Insider Information Use and Market Manipulation, which is, undoubtedly, one of the most relevant now. It is designed to reinforce market pricing arrangements on organized markets, improve investor confidence, ensure efficient development of the above mentioned markets and their international competitiveness.
The main idea of the law is to better protect investors by establishment of requirements to insider information disclosure and to create an efficient mechanism for detection and prevention of legal offence committed by using insider information and market manipulation. The law touches upon not only the financial market, but also the organized commodity market.
An important feature of the law is its focus on the experience of developed foreign legal systems, including taking into account EU Directive No. 2003/6 of January 28, 2003, on insider deals and market manipulation. Development of the regulatory framework for ensuring fair pricing, enhancing the principle of equal opportunities to investors, preventing of abuses on organized markets will, no doubt, contribute to improvement of the investment environment in Russia and development of its economy.
Besides adopted and enacted laws, a whole number of draft laws for improving Russian corporate governance is being developed.
On Establishment, Liquidation, State Registration and Liability for Violations in Registration of Legal Entities. The draft Federal Law on Making Amendments to Certain Laws to Improve Arrangements for Corporate Establishment and Liquidation envisages serious amendments to the procedure for state registration of companies at establishment, liquidation, and also specifies the provisions on liability for violations in corporate state registration. The proposed amendments are aimed at preventing abuse, both on the part of unfair founders and on the part of governmental agencies, and include the following:
- Expansion of the list of reasons for denial of state registration, with simultaneous limitation of the registration authority’s discretion,
- Mechanism for registration suspension,
- Improvement of the state registration procedure transparency using electronic mass media,
- Elaboration of duties of the persons making liquidation decisions and establishment of more strict penalties for neglect of such duties; and
- Expansion of the list of administrative components of violation of the corporate state registration law.
On Bondholder Rights Protection. The State Duma is considering the draft Federal Law on Making Amendments to the Federal Stock Market Law (as concerns establishment of mechanisms designed to protect bondholder rights). The urgency of the draft is caused by hasty growth of the corporate bond market and the need to enhance bondholder protection against potential defaults.
The draft envisages introduction of:
- the ‘bondholder representative’ institute intended to ensure proper control over fulfillment by a bond issuer of its obligations,
- the ‘General Meeting of bondholders’ institute designed to have bondholders elaborate a uniform resolution on issues concerning performance of bond-related obligations.
On Fiduciary Liability of Corporate Management Bodies. The draft Federal Law on Making Amendments to Certain Russian Laws (as concerns bringing of members of business companies’ management bodies to liability) that has not yet been submitted to the State Duma may become one of the most ‘high-profile’ and significant drafts of the current year.
The applicable law and legal practice do not contain clear-cut criteria and effective mechanisms for imposing liability on corporate top managers and criteria for relieving them of liability. Cases of collecting losses caused to the company or its shareholders from top managers are very rare. In this connection, the idea is to set more defined criteria for bringing top management and corporate directors to liability on the basis of the duty of care and the duty of loyalty used in foreign law. Additionally, it is proposed to increase liability of top managers for disclosure of corporate information. In view of greater risk in activities of corporate managers and directors, provisions on insurance of their liability were also included into the draft.
Among the drawbacks of this draft one can note that the idea is to increase liability of top managers of companies, without any changes to shareholder liability, even though managers often make decisions under the influence of these shareholders.
A general impression created by the proposed initiatives is commitment to have more detailed corporate law and securities law, to add actual procedural mechanisms to acts, principles and common provisions so that the former enable efficient practical implementation of the latter.