Oda Russian Commercial Law 2007-1

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6JOINT STOCK COMPANIES

1)Procedure of Establishment

Joint stock companies may be created by setting them up anew as well as by “reorganisation”, i.e. by merger, absorption, division, spin-off, and conversion (JSCL Art.8). Division (razdelenie) means the termination of a company with the transfer of rights and obligations of that company to several new companies (Art.18), whereas in spin-off (vydelenie), the company remains, but one or several companies are created and part of the rights and obligations of the company is transferred to them (Art.19). Joint stock companies may also be founded by conversion from another type of company, such as a limited liability company.

Companies are set up by the resolution of the founders adopted at the founders’ meeting. Companies can be founded by a single person, and in such cases, naturally this person can take his own decision. Physical persons as well as juridical persons can be founders of a joint-stock company. However, if there is only one founder, this person may not be another commercial organisation with a single founder. The number of founders is not limited for open joint stock companies, but for closed joint stock companies, the number may not exceedfty (Art.10, para.2).

State and municipal agencies may not be a founders of a joint stock company, unless it is allowed by Federal law. On the other hand, they may take part in a company as a shareholder. On one occasion, the City of Moscow’s participation in a joint stock company was found to be lawful by the Supreme Court. However, in order to contribute state or municipal property to the capital, the procedure for privatisation needs to be followed.83

The founders conclude a shareholders’ agreement which determines, inter alia, the procedure for the joint activities regarding the establishment of the company, the amount of capital, the categories and types of shares to be issued, the amount and method of its payment, and the rights and duties of the founders in setting up the company.

When approving the Articles of Incorporation and the value of contribution in kind, i.e. securities, other things as well as proprietary rights and other rights, the resolution of founders must be made by a unanimous vote. Members of the management bodies must be elected by a three-quarter majority (JSCL Art.9, paras.3 and 4).

83 Lomakin, supra, p.51.

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In principle, joint stock companies with foreign participation are set up in the same manner as other joint stock companies. There may be exceptional requirements, but these have to be provided for by Federal law.

Founders bear joint and several liability for the debt related to the establishment and state registration of the company up to the moment of registration. The company is liable for the founders’debt related to the company’s establishment, only when the company has subsequently approved the founders’ act at the shareholders’meeting (JSCLArt.10, para.3).

Joint stock companies issue ordinary shares and may also issue several types of preference shares. Issued preference shares may not exceed 25% of the capital. Shares must be nominal – no bearers’ shares are allowed (Art.25, para.2). Pre-ference shares, in general, do not have a vote, but instead, the holders enjoy preferential rights in receiving dividends and in the distribution of assets at the time of liquidation.

At the time of establishment, all shares must be issued to the founders. This means that at this stage, there is no difference between open and closed joint stock companies. Public offer of shares is allowed only when the capital has been fully paid in, and within the framework of the increase of capital.84

In the process of establishment, full amount of contribution does not have to be paid in straight away, but it is suf cient if they are paid in by the founders within a period less than a year determined by the Articles of Incorporation from the time of registration. A minimum of 50% has to be paid in within three month after the registration (Art.34, para.1). This period has been extended by the 2001 amendments (before the amendments, at least 50% had to be paid in before the registration). If the shares are not paid, these shares are transferred to the company. Such shares do not have a vote.

Shares (initial allotment among the founders as well as subsequent offers) can be paid in by money as well as securities, movables or immovables, or proprietary rights and other rights which have monetary value (Art.34, para.2). Although this provision seemingly allows the contribution of intellectual property rights, the decision of the Plenums of the Supreme Commercial Court and the Supreme Court of the Russian Federation denies this. “Shares cannot be paid by objects of intellectual property (patent, copyright including rights on computer programmes) and know-how”.85 Only the right to use these rights under license can be contributed. Presumably, this is intended to ensure that the contribution can be objectively valued.

84V.P.Mozolin and A.P.Iudenkov, Kommentarii k Federal’nomu zakonu “ob aktsionernom obshchestve”, 2nd edition, Moscow 2003, pp.121-122.

85Item 17, Joint decision of the Plenums of the Supreme Commercial Court and the Supreme Court of July 1, 1996 No.6/8. See also Mozolin and Iudenkov, supra, p.177.

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In kind contribution at the time of establishment is to be valued by agreement of the founders. In such cases, an independent valuer has to be brought in (Art.34, para.3). Previously, this requirement was applicable only in cases where the payment exceeded 200 times the minimum wage, but this threshold was removed by the 2001 amendment. The valuation by the valuer does not mean that the value is determined by the valuer; it means that the company cannot set the value of contribution above the valuation. The value of in-kind contribution must be determined unanimously (Art.11).

Payment in kind for additional issue of shares is to be valued by the board of directors in accordance with Art.77 of the Law.

2)Articles of Incorporation

Joint stock companies operate on the basis ofArticles of Incorporation. The Civil Code has general provisions on Articles of Incorporation for juridical persons. The Law on Joint Stock companies provides for mandatory items of theArticles of Incorporation for joint stock companies (Art.11):

i) full and abridged name of the company; ii) location of the company;

iii) type of company (closed or open);

iv) total amount, nominal value, category of shares (ordinary or privileged) and types of preferential shares issued by the company;

v) rights of shareholders of each category of shares; vi) share capital of the company;

vii) structure and competence of the company management bodies and the procedure of adopting decisions;

viii) procedure of preparation and conducting of general shareholders' meeting including the list of matters which require quali ed majority or unanimous vote;

ix) information concerning branches and representative of ces; x) other information provided by the present Law.

In the Articles of Incorporation, the company may set a ceiling to the number of shares a single shareholder may hold and their total nominal value, as well as the maximum number of votes to be granted to a single shareholder (Art.11, para.3). This was supposedly meant to prevent concentration of excess power in a small number of shareholders.86 The ceiling can be very low. Thus, in the oil and gas

86 G.S.Shapkina ed., supra, p.53.

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upstream company Surgutneftegaz, the maximum a single shareholder can hold is set at 1% by the Articles of Incorporation. In Nizhneenergo, it is 0.5%. In this way, “undesirable outsiders” can be prevented from holding signi cant block of shares.87

The Law refers to golden shares which are granted to the government of the Russian Federation, subjects of the Federation, or municipalities at the time of privatisation of unitary enterprises when the government holding falls under 75%. Information regarding the special participatory rights of these entities in the management of the company must be entered in theArticles of Incorporation on the basis of the respective decision of these entities (Art.12, para.4). This corresponds to a provision in the Law on Privatisation (Art.5). Those entities which hold golden shares are entitled to send one representative to the board of directors and the audit committee without the approval of the shareholders. These representatives must be government of cials. Representatives of those entities take part in the general shareholders’ meeting with veto rights on matters such as the amendment of the Articles of Incorporation, reorganisation or liquidation of the company etc.88

There are more than 1,600 companies in which these entities have golden shares.89 As of 2001, the Russian Federation holds a golden share in 542 companies.90

In the light of the past history of Soviet civil codes which were strict on ultra vires, conspicuous omissions from this list as provided in the Law on Joint Stock Companies are the purpose of the company and the scope of its activities. The Civil Code provides that the name, location, procedure of administration, and other matters required by the law on the respective type of juridical person are mandatory in theArticles of Incorporation. The purposes of commercial organisations are a mandatory component of the Articles of Incorporation only when required by law (Art.52, para.2). This should be read in conjunction with the provision in the Civil Code on the legal capability of juridical persons. Commercial organisations, other than unitary enterprises and other types of organisations provided by law, have rights and bear the duties needed to perform any kind of business which is not prohibited by law (Art.49, para.1).

It is possible to limit the capacity to act of a juridical person by the founding documents, which, in the case of joint stock companies, is the Articles of Incorporation. However, the excess of the scope of capability is not null and void as it used to be before. It is simply voidable by virtue of the Civil Code (Art.173).

87Gubin, supra, pp.113-114.

88Mozolin and Iudenkov, supra, pp.8-9; Murav’ev, supra, p.110.

89Radygin et als., The Problem...., supra, p.50.

90Murav’ev, supra, p.107.

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Changes to the Articles of Incorporation must be approved by the shareholders’ meeting. As a rule, such changes require a quali ed majority vote of shareholders, i.e. three quarters of the votes present at the meeting (Art.49, para.4) and registered (Art.14, para.1).

3)The Capital and Shares

(1)The Capital

The share capital (ustavnyi kapital) comprises the total amount of nominal value of shares acquired by shareholders. The capital determines the minimum amount of assets which serve as “a security of the interest of creditors” (Art.25). The minimum amount of capital for joint stock companies is set at 1,000 times the minimum monthly wage (approximately 4,000 USD) for open type joint stock companies and 100 times for closed type joint stock companies (Art.26).

The Law refers to “declared shares”. The Articles of Incorporation may determine the number of such shares, their nominal value, category of shares, and the rights granted to the holders of such shares which the company is entitled to issue in addition to the already issued shares (Art.27, para.1). There is no limit to the number of shares which can be issued in this way, insofar as the number of newly issued shares is within the number of the declared shares as stated in the Articles of Incorporation (Art.28, para.3). This means that if the company intends to issue shares above the number of declared shares, it has to amend its Articles of Incorporation. However, the resolution of the shareholders to amend the Articles of Incorporation and the resolution to issue shares can be adopted on the same occasion.

If the company is to issue securities convertible to shares, the number of declared shares must not be less than the number of shares needed for the conversion.

The capital can be increased by increasing the nominal value of shares or issuing additional shares. Capital increase by raising the nominal value of the share requires a resolution of the shareholders’ meeting. Capital increase by issuing additional shares may require a resolution of the general shareholders’ meeting or a decision of the board of directors, depending on the provisions of the Articles of Incorporation. In the latter case, a unanimous vote is required (Art.28, paras.1 and 2).

Before the 2001 amendment, although there was no explicit provision, it was understood that the company could increase capital out of the distributable

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pro ts, although there was an opposing view.91 The 2001 amendment introduced a provision to the effect that the increase of capital by issuing additional shares can be nanced from the company’s assets. The amount of increase cannot exceed the difference between the net assets and the capital. Increase of capital by increasing the nominal value of the shares can only be effected out of the company’s assets. If the additional issue of shares is nanced from the assets, the shares must be distributed to all existing shareholders (ibid., para.5).

In issuing additional shares, while open joint stock companies are entitled to issue shares by way of public offer as well as closed offer, closed joint stock companies may not offer its shares to an unlimited scope of people (Art.39, para.2).

Additional issue of shares has often been abused by the incumbent management to dilute the share of existing shareholders:

Novolipetskii Metallurgical Kombinat is regarded as a leading company in the eld. Around 60% of the shares are consolidated in a company founded by the chairman of the board of directors and 34% belonged to an offshore company TWG. Then, Norilisk Nickel, which is under the holding company Interros, acquired 9% of the shares. The board of the Kombinat decided to issue additional shares which would double the capital and proposed this at the extraordinary shareholders’ meeting. Such a new share issue was ostensibly needed to repay the Kombinat’s debt to one of its shareholders. Interros claims that there was no legitimate board meeting to propose this to the shareholders’meeting because the quorum was not met.92

In fact, as a Russian specialist pointed out, dilution of shares by additional shares has become the most popular way of changing the corporate structure and violating shareholders’rights.93 In 1998, as a result of an additional issue of shares by Saianskii Aliuminievyi Zavod, the foreign investors’ share fell from 37,8% to 15%, and the share of the State Property Fund from 15% to 6,15%. In another case, the share of a bank was reduced to one-sixth. The Bank brought the case to the court which annulled the additional issue.94

Even in cases where the decision to issue additional shares falls under the competence of the general shareholders’ meeting, there were still many cases where the increase of capital by the additional issue of shares took place without informing shareholders:

91M.Tikhomirov ed., supra, p.150. Iu.A.Meteleva, Pravovoe polozhenie aktionera v aktsionernom obshchestve, Moscow 1999, p.110.

92Izvestiia, May 30, 2000.

93E.Torkanovskii, “Predela aktsionernoi sobstvennosti”, KhiP, 1999 No.4, p.32.

94Ibid.

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In a company called A.Liur’ka Saturn, two days before the shareholders’ meeting, there was an of cial notice in the press regarding the additional issue of shares (9 million shares), as a result of which the capital was to be increased by 10 times. Although the agenda of the shareholders’ meeting included the additional issue of shares, in fact, shareholders were asked by the board to vote on a matter which had already been decided and publicised.95

Additional shares are often issued and offered to a closed group of people. Even if it is supposed to be a public offer, the company requires that the payment be made in kind, which most existing shareholders may not have, and thus turns the offer into a de facto closed offer. In one case, the additional issue of shares by Joint Stock Company Nost was found void because of the disproportionate distribution of newly issued shares among the shareholders.96 After the 1998 nancial crisis, it was reported that the number of closed offers of shares doubled, while the number of public offers has decreased to one-seventh. This is said to demonstrate the process of the “consolidation of shareholders’ assets”.97

If the issuing of additional shares was left to the competence of the general shareholders’meeting, the resolution could be adopted by a simple majority. The 1999 Law on the Protection of the Rights of Shareholders introduced a requirement of a two-thirds majority vote of shareholders in cases of closed offers.

The 2001 amendment to the Joint Stock Company Law has introduced signi cant changes in order to prevent such abuses. First, in cases where the board of directors has the power to make a decision to issue additional shares, a unanimous vote of the board members is required.

Secondly, in cases where the power to approve increase of capital belongs to the general shareholders’ meeting, a mere majority vote is still suf cient. However, there are important exceptions in that:

i)for a closed offer of shares and securities convertible to shares, approval by three-fourth of the votes of shareholders present at the shareholders’meeting is required;

ii)for a public offer of ordinary shares and securities convertible to shares, if the number of shares to be issued exceeds 25% of the already issued shares, the same majority is required (Art.39, para.3 and 4).

However, ii) covers only ordinary shares.

95Mateleva, supra, pp.134-135.

96Torkanovskii, supra, p.33.

97Institute of Economy in Transition, supra, p.151.

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Thirdly, existing shareholders are to be granted a right of pre-emption to purchase the newly issued shares or securities convertible to shares. Previously, only shareholders of closed joint stock companies were granted such a right; for open joint stock companies, this was not mandatory.

Under the amended Law (Art.40, para.1);

i)shareholders of an open joint stock company are given a pre-emption right for the newly issued shares and convertible bonds in cases of public offer of additional shares;

ii)shareholders of a company who voted against or did not take part in the voting for the resolution of issuing shares or convertible bonds by closed offer are entitled to a pre-emption right for the newly issued shares or convertible bonds in proportion to the number of the same category of shares which belong to him.

ii)does not apply if the shares are issued only to the existing shareholders.

Fourthly, when exercising the pre-emption right, even if the resolution to issue additional shares provides for payment in kind, shareholders may, by their discretion, pay by money (Art.1, para.2). Before the amendment, companies often required the payment to be made in a speci c item which was possible only for a limited number of investors, thus effectively excluding the exercise of pre-emption rights.

Thus, it was not an exaggeration when a Russian commentator pointed out that:

For the rst time ever upon the period of incorporation and mass privatisation of the early 1990s there appeared mechanisms introduced by legal means that counteracted the most notorious way of abusing stockholders’rights over the 1990s, that is, diluting outsiders’shares via new issues.98

Shareholders are entitled to bring an action contesting the validity of the resolution of the general shareholders’ meeting (Art.49, para.7). This includes resolutions on the additional issue of shares;

Open joint stock company Transneft brought an action against a closed joint stock company “Natsional’noe perestrakhovochnoe obshchestvo”, asking the court to declare void the decision of its board of June 10, 1998 on the additional issue of shares by a closed offer.

The Commercial Court of the City of Moscow rejected the claim; this was supported at the appellate instance. At the instance of cassation, part of the original

98 Radygin et als., The Problem...., supra, p.66.

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judgment which had held valid the offer of shares to a UK company, Holbrook Insurance Brokers Limited, was quashed.

Upon protest, the Supreme Commercial Court revoked the decision of the cassation instance. The Court found that the board had lawfully adopted the decision, including the allocation of shares to the UK company without having an actual meeting and that the allegation of the plaintiff that there was no board decision was groundless.

By the Articles of Incorporation, shareholders had been given a pre-emptive right to subscribe to newly issued shares. The plaintiff argued that the new shares were also offered to a third party, the UK company, who was not a shareholder and therefore, infringed the right of the plaintiff as a shareholder. However, the Court referred to the provision of the Law on Joint Stock Company which stated that shares of a closed joint stock company could be distributed among other persons whose scope is determined in advance. At the shareholders’meeting of April 27, 1998, the UK company in question had been chosen as a potential investor. Furthermore, the plaintiff had been offered the opportunity to exercise its right of pre-emption, but failed to do so, and did not oppose the acquisition of shares by other shareholders and third parties. The plaintiff even offered to sell shares to the above rm. At the subsequent general shareholders’ meeting of the defendant company, a resolution was passed to the effect that the new shares be allocated to the above UK rm.

The Court upheld the decision of the rst instance and appellate instance court[s] which had found that the plaintiff’s rights had not been infringed.99

As a rule, the price of shares to be issued is to be determined by the board of directors in accordance with Article 77, i.e. it is to be based upon market value. In cases where the shareholders exercise their pre-emptive rights, the price for them can be lower than for others, but not more than 10% lower (Art.36).

The capital can be decreased by the reduction of the nominal value of the shares or the reduction of the number of shares. Purchasing by the company of its own shares is one of the alternative ways of effecting the latter. Decrease of capital can also be effected by redemption of shares insofar as the Articles of Incorporation provide for this. The decisions to decrease the capital and to change the Articles of Incorporation have to be adopted by the general shareholders’ meeting (Art.29). Creditors must be informed; they are entitled to terminate the obligation or accelerate the maturity of the claim within thirty days of the notice (Art.30).

99Decision of the Presidium of the Supreme Commercial Court, March 21, 2000, Case 1539/99.

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(2)Shares – general

Joint stock companies may issue both ordinary shares and preference shares. Preference shares may not exceed 25% of the capital. Securities convertible to shares can also be issued (Art.25, para.2).

Issuing of shares and other securities is regulated by the Law on the Securities Marketof1996.100 TheagencyinchargeoftheimplementationofthisLawwasthe FederalCommissionontheSecuritiesMarket,butbyamajoramendmenttotheLaw in 2004, this body was reorganised into the Federal Service for Financial Markets.

Issuing of shares and other securities are subject to registration with the Federal Service for Financial Markets (Art.20). There is an exhaustive list of grounds on which registration can be refused (Art.21). Issuing of shares may be found by the court to be invalid, if the issuing company gave erroneous information and report to the registration agency.

A closed joint stock company Firma Link and a limited liability company Titan brought an action against an open joint stock company Ogneupory and the administration of the Sverdrovsk province, asking, inter alia, the recognition of the resolution of the general shareholders’ meeting of Ogneupory approving the issue of additional shares and the prospectus as invalid.

The rst instance court dismissed the claim on the ground of lack of jurisdiction, since prospectus was not an “act” of the executive body, but was merely for information. This was supported by the appellate and cassation instances. Upon protest, the Supreme Commercial Court quashed the judgment of the lower court and remanded the case to the rst instance.

The Court ruled that the action brought by the plaintiffs was in substance a request for the recognition of the part of the resolution of the general shareholders’ meeting which approved the prospectus for the issue of shares as well as the share issue to be invalid. The increase of capital and the approval of the prospectus were on the agenda. In the resolution, the shareholders agreed to the proposal of an expert on the increase of capital and entrusted the board to determine the nominal price and the number of shares to be issued. The prospectus was registered with the provincial government. In the process of registration, reference was made to the resolution of the general shareholders’meeting of April 21.

However, the resolution was awed.Although theArticles of Incorporation had made the increase of capital to be a matter which falls within the exclusive competence of the general shareholders’ meeting, the above resolution did not actually cover this decision.101

100Law No.39-FZ of April 22, 1996.

101Decision of the Presidium of Supreme Commercial Court, March 31, 1998, No.138/98.