Oda Russian Commercial Law 2007-1

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According to the Law on the Securities Market, in order to issue securities, when the decision to do so has been adopted by the issuing company, it is required to register the issue with the Federal Service for Securities Market (Art.20, para.1). If the securities are issued by public offer, or by a closed offer to a group of speci ed people of more than 500, a prospectus must be prepared and registered (Art.19, para.1).

Russian companies are allowed to issue securities including shares, abroad. For this, the approval of the Federal Services for the Securities Market is required. Securities in such cases are required to be listed in at least one of the stock exchanges in Russia.102

In order for the shareholders to exercise their rights, it is required that the shares are registered. The company is under an obligation to ensure the compilation and keeping of the register from the time of company registration (Art.44, para.2). Companies may entrust the keeping of the register to a “professional participant of the securities market” as de ned by the Law on the Securities market (Art.8).

The entry into the register should be effected within three days of the presentation of the necessary documents. Refusal to register is not allowed except for circumstances provided for by law. The grounds for refusal are listed in a statute enacted by the former Federal Commission on Financial Markets in 1997. The administrator of the register is obliged to give a reasoned noti cation of refusal to the applicant within ve days of the ling of the application. The refusal and failure to register can be contested in court (Art.45, para.2).103

This is an area where various abuses took place in the 1990s. Legitimate shareholders were refused registration by the company or the company’s “pocket registrar”. Shareholders were also struck off from the list without any justi able reason:

Irkutsk Mebel’ brought an action against a company, Primorsk, for the refusal to include the plaintiff in the shareholders’ register. A voucher investment fund, “Vozrozhdenie” acquired 2,400 shares of Primorsk at a share auction. The shares were sold to a company called “Rossiia” and then to the plaintiff, Irkutsk Mebel’. Primorsk refused the registration of shares held by the plaintiff, arguing that since Rossiia had not been registered as a shareholder, it therefore had no power to assign the shares to the plaintiff. Lower courts upheld the argument of the defendant, but the Supreme Commercial Court quashed the lower court’s decision. Primorsk was under an obligation to register the plaintiff, since documents supporting the title to the shares had been presented, and no request for further documents had been

102M.I.Petrov, Pravovoe regulirovanie rynka tsennykh bumag, Moscow 2005, pp.156-159.

103See also the Law on the Securities Market of April 22, 1996, Article 8.

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made, but nevertheless, Primorsk failed to register the plaintiff within three days as required by the statute.104

The Law on the Protection of Rights and Legal Interest of Investors in the Securities Market of 1999 introduced nes for breaches of regulations on the registration of shares. of up to 10,000 times the minimum wage, to the then Federal Commission on the Securities Market, but this was obviously insuf cient.105

In practice, in order to manipulate the register and eliminate “undesirable” shareholders, manipulation of the register often takes place:

Management company Sibirskii Variant brought an action against Kirovskii Shinnyi Zavod and the registrar of its shares, the Kirov branch of the Sberegatel’nyi Bank, asking the court to declare void the contract of sale of shares of the defendant company of March 25, 1997. The plaintiff was a shareholder of the defendant company until, under this agreement, the shares were sold to the defendant company. The plaintiff argued that this transaction was void, since the general director of the defendant company signed this agreement on behalf of the plaintiff as well as the defendant. Furthermore, the purchase of its own shares by the defendant company was effected in breach of the Law on Joint Stock Companies. The rst instance court dismissed the claim. This was supported at the appellate instance. Upon protest, the Supreme Commercial Court quashed the decision of the lower court, found the transaction to be void, and ordered the plaintiff company to be restored in the register.106

In another case, the Supreme Commercial Court found a removal from the share register by the registrar – a bank – without the entrustment and instruction of the shareholder, void.107

The independence of share registrars is said to be still problematic.108

In the past, cases of manipulation and fraud in company register were agrant, jeopardising effective ownership transfer. These included refusal to re-register ownership rights or to transfer shares, illegally striking off shares from registers,

104Decision of the Presidium of the Supreme Commercial Court, June 18, 1996 (cited in Bushev et al., supra, pp.135-137).

105Law No.46-FZ of March 5, 1999.

106Decision of the Presidium of the Supreme Commercial Court, January 27, 1998 (cited in Gubin, supra, pp.178-179).

107Decision of the Presidium of the Supreme Commercial Court, November 17, 1998, Case 2208/98.

108Sprenger, supra, p.9.

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changing share registration from common to preferred and accidental loss of records. Recently, the most frequent abuses have become less blatant and more typically concern refusal to give information to shareholders on companies or their ownership structures as well as improper handling of share transactions due to negligence. These problems are still occurring, especially in the regions.

Another novelty introduced by the 2001 amendment to the Law on Joint Stock Companies was that companies which have more than 50 shareholders with voting rights must entrust the compilation and maintenance of the register to a registrar licensed by the Federal Service for Financial Markets (ibid., para.3). This arrangement is intended to prevent abuses by the companies through their “pocket registrars”. Appointment of a registrar does not relieve the responsibility of the company regarding the compilation and maintenance of the register (ibid., para. 4).

While blatant refusal to register or striking off from the register has become less frequent, there are still problems. There are often cases where different registration agents administer the register; as a result, there are several registers and even general directors (the board, management council). This “leads to disorganised activities of the company by forceful takeover of company management with the participation of police, security companies, and bailiffs. When a controlling stake in a company changes hands, there may be a con ict between the new and previous shareholders. New shareholders appoint their general director, while the previous management refuses to hand over the register, stamp and all corporate documents. In most such cases, the newly appointed general director chooses to regard the old register to have lost effect and starts a new register!”109

(3)Consolidation and splitting of shares

By the resolution of the general shareholders’meeting, companies may consolidate or split the shares (Art.74). Together with dilution of shares, consolidation of shares was also used by the incumbent management of companies to exclude shareholders. Before the 2001 amendments, companies were under an obligation to purchase the odd shares which emerged as a result of consolidation at market price. Shareholders often caused the company to consolidate shares into a small number of high value shares in order to exclude other shareholders and take control. The rate of consolidation was sometimes so high that a majority of shareholders were unable to obtain even one consolidated share. As a result,

109 Dobrovol’skii, supra, pp.117-118.

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they became holders of odd shares and eventually, those shares were purchased by the company.

In one case which reached the commercial court, it was reported that as a result of consolidation of shares by the defendant company, 94% of the shareholders were deprived of their status as shareholders. The entire operation was carried out in the interest of 6% shareholders who held a large block of shares which enabled them to have such a bene cial resolution for them to be adopted.

In open joint stock company Sibneft’-Noiabrskneftegaz, the nominal value of the share was increased by more than 1,300,000 times. Shareholders who held even one share less than this number were forced to leave the company.

The most radical course of action was taken by the holder of a controlling stake of closed joint stock company, Torgobyi dom Kuntsevo, which managed to consolidate the shares and became a sole shareholder. The remaining 426 shareholders became holders of odd shares only and left the company. The number of such cases is not small.110

The part of this provision enabling the company to purchase odd shares was dropped in 2001 and instead, a new paragraph on odd shares was inserted in Article 25. Odd shares emerge not only as a result of consolidation, but also as a result of the exercise of pre-emption rights. These shares circulate in the same manner as full shares. If a person acquires several odd shares, he can combine these shares into full shares (Art.25, para.3).

(4)Transfer of shares

Shareholders have the right to withdraw from the company by disposing of the shares they hold. While in open joint stock companies, there is no restriction on this, in closed joint stock companies, other shareholders have a pre-emptive right to purchase shares offered for sale by a shareholder in proportion to the shares they hold. The terms of sale will be the same as the terms between the seller and a third party. A shareholder who intends to sell shares must inform the company and other shareholders of his intention, together with the price and other terms of transaction. If other shareholders do not fully exercise their pre-emption rights, the shareholder, after 2 months, may sell the shares to a third party at the same price and terms (Art.7).

110 G.Shapkina, “K voprosu o zashchite prav aktsionerov”, KhiP, 2004 No.12, p.3.

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(5)Acquisition of Shares

There are some regulations on the acquisition of substantial amounts of shares in the Law on Joint Stock Companies. This is part of the chapter on “major transactions” (Art.80):111

i) Aperson intending to acquire 30% or more of the issued ordinary shares by oneself or together with af liated persons must notify the company of his intention in writing not earlier than 90 days but not later than 30 days before the purchase, provided that the company has more than 1,000 holders of ordinary shares;

ii) A person who has acquired 30% or more of the issued ordinary shares of a company with more than 1,000 holders of ordinary shares by oneself or together with af liated persons is under an obligation to offer to purchase the shares of the shareholders, as well as securities convertible to ordinary shares, at market price, but not lower than the average price for the last 6 months preceding the date of the acquisition of those shares, within 30 days of their acquisition.

This obligation can be waived by the company by the Articles of Incorporation or the resolution of the general shareholders’meeting (Ibid., para.3). The resolution can be adopted by a simple majority vote of those who are present, but the person in question and his af liates are not entitled to vote.

The concept of af liated persons is not de ned in the Law on Joint Stock Companies, although there is a provision on the obligation of the “af liated persons” to inform the company in writing of the number and the category of shares which belong to him within 10 days (Art.93). There is a provision on this matter in the Law on the Protection of Competition.As a commentary suggests, “regrettably, no legislation, including the Law on Joint Stock Companies, provides for the procedure to acknowledge a person as af liated.”112 It should be added that the concept of af liated persons which appears in the Russian legislation is criticised for not covering all the grounds for af liation. In fact, the adoption of the Law on Af liated Persons has been proposed and a draft law has been in place for some years, but is yet to be adopted.113

By virtue of the Law on the Protection of Competition, with the exception of the founders at the time of the establishment of the company, prior consent of the Federal Anti-Monopoly Service is required for an acquisition of more than

111In general, see A.Bushev and O.Skvortsov, Aktsionernoe pravo, Moscow 1997, pp.44-52.

112O.M.Krapivin and V.I.Vlasov, Kommentarii k Federal’nomu zakonondatel’stvu Rossiskoi Federatsii ob aktionernykh obshchestvakh, Moscow 2002, pp.284-287.

113OECD, “Obzor tendentsii v oblasti korporativnogo upravleniia v Rossii; nastoiashchie prioritety i plany na budushchee”, 2003, pp.10-12.

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25% of the voting shares, but only when the total amount of assets of the acquirer exceeds six billion roubles and of the issuer exceeds fty million roubles (Art.28, para.1).

The Law on the Central Bank provides that if a person or a group of persons acquires more than 5% of the shares of a credit institution, the Bank of Russia has to be noti ed, and if the amount exceeds 29%, the central bank’s prior approval is needed. Companies which have acquired more than 20% of the shares of a joint stock company are under an obligation to publicise this fact without delay as determined by the Federal Commission on the Securities Market and theAntiMonopoly Agency.

(6)Share buy-back

The acquisition by a company of its own shares is subject to restrictions. Companies may acquire their own shares in order to reduce the capital by a resolution of the shareholders’meeting to this effect, insofar as theArticles of Incorporation provide for this (Art.72, para.1). The company may also acquire its own shares for other purposes if so provided by the Articles of Incorporation. This can be done either by the resolution of the general shareholders’ meeting or the decision of the board of directors, depending on the Articles of Incorporation (Ibid., para.2). However, this is not possible if the nominal value of the shares which are in circulation is less than 90% of the share capital.

The shares acquired for the purpose of capital reduction must be cancelled once they are acquired. Shares acquired by the company on general grounds must be sold within one year of acquisition at their market price; otherwise, the general shareholders’ meeting must adopt a resolution to reduce the capital by cancelling the shares or increase the nominal value of remaining shares and thus maintain the amount of capital (ibid., para.3).

The decision of the company to acquire its own shares must specify the types and the amount of shares to be acquired, the price of acquisition, the manner and date of payment, and the period during which shares will be acquired. This period must not be shorter than 30 days. Once the decision to acquire shares has been adopted, every shareholder is entitled to sell the shares to the company and the company is under obligation to purchase them. If the total amount of shares offered for sale by the shareholders exceeds the number of shares which the company may acquire, shares are purchased in proportion to the amount each shareholder has requested to be purchased (ibid., para.4).

However, companies may not acquire their own shares in the following cases (Art.73):

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i) when the capital has not been fully paid in;

ii) when, at the time of acquisition, there is a symptom of insolvency or where such a symptom will emerge upon acquisition;

iii) when, at the time of acquisition, net assets are less than the total of the capital, the reserve fund and the difference between the liquidation value of preferential shares and the nominal value.

It is important to note that shares acquired on general grounds do not accompany voting rights (ibid., para.3). The problem is that companies are not free to acquire their own shares, but they are free to acquire shares via the subsidiaries. Those shares held by subsidiaries have a vote. Thus, the company’s management is able to control the company via the subsidiaries which hold the parent company’s shares. This led to the shareholders’ action in Surugutneftegaz. The Company’s management was claimed to control 65% of the shares via subsidiaries, while the management held only several percent of the shares.

4)Bonds and other Securities

Joint stock companies may issue bonds and other securities by the decision of the board of directors, unless the Articles of Incorporation provide otherwise (Art.33, para.2). Bonds and other securities which are convertible to shares are issued upon either the decision of the board or the resolution of the general shareholders’meeting, if theArticles grant such a power to either of them (ibid.). The total nominal value of the issued bonds may not exceed the capital, or the maximum amount of security provided to a third party by the company for theotation of bonds. Bonds can be secured or non-secured. Non-secured bonds can be issued by companies not earlier than their third year in existence, and on the condition that by then, two annual balance sheets were duly approved. Bonds may be either nominal or bearers’(ibid., para.3).

5)Dividends

Dividends are paid out from the net pro t of the company. Dividends for preference shares may be paid out of a speci c fund designated for this purpose (Art.42, para. 2). The decision to pay the annual dividend, including its amount and the form of payment, of each category of shares is to be adopted by the general shareholders’ meeting. The amount of an annual dividend may not exceed the amount recommended by the board of directors (ibid., para.3). Dividends must be paid within the period set by the Articles of Incorporation or the resolu-

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tion. If there is no such period determined, dividends must be paid within 60 days after the resolution of the shareholders (Art.42, para.3).

Companies may not adopt a resolution to pay dividends (or payment shall not be announced) until the capital has been fully paid in, and the company has purchased all the shares from shareholders exercising their appraisal rights. Such a resolution may not be adopted also in cases where:

i) there is a symptom of insolvency on the day of the adoption of the resolution; ii) as a result of the dividend payment, there will be a symptom of insolvency; or iii) on the day of the resolution, the net value of assets is less than the capital, the reserve fund, and the difference between the liquidation value and the nominal value of preferential shares combined or becomes less as a result of such a

resolution.

The actual payment cannot be made either, if these circumstances exist on the day of payment (Art.43, paras 1 and 4).

In reality, far from all Russian companies pay dividends, ostensibly because of low pro tability or emergence of loss. As the OECD White Paper puts it, “until recently, Russian companies have seldom paid dividends to their shareholders”.114 “Almost no dividends were paid in the 1990s”.115 There are companies which manipulate circumstances in order to make no pro t, e.g. by transfer pricing, and therefore, pay no tax or dividend, and accumulate the pro t elsewhere by using various schemes including off-shore companies. Pro t from such a scheme goes only to the shareholder who has a controlling stake in the company. Others are not privy to this “extra-dividend income”.116

This represents one of the characteristics of the Russian corporate system.A Russian economist points out as follows:117

The most important and special characteristic of the Russian corporate governance system....is the obtaining of revenues from stock ownership not through pro ts (which is characteristic of the Anglo-Saxon model) but through control exercised by the dominant owner over the enterprise’s cash ow. Using transfer pricing mechanisms, pro ts of the head enterprise can be systematically transferred to companies af liated with the dominant shareholder or with top managers of the head enterprise.

114OECD Whitepaper, supra, p.14.

115Yakovlev, supra, p.394.

116Mateleva, supra, p.72.

117Yakovlev, supra, p.394.

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6)Shareholders’ Rights

Table 9 Shareholders’Rights

COMPANY LAW

1 Share	1%	1% plus	2% or	10% or	25% plus
	Share	1 Share	more	more	1 share
receive	Pursue	Receive	Proposing	Convene	Block
announcement	liability of	information	matters to	extra-	resolutions
for the GSM	directors,	from the	be included	ordinary	of the
(Art.52)	executive	register of	in the	share-	shareholders’
participate in	body etc.	shareholders	agenda of the	holders’	meeting
and vote at the	vis à vis	the name,	general share-	meeting	which
GSM (Art.31)	the company	quantity,	holders’	(Art.55,	requires
receive	in court	category	meeting	para.1)	a quali ed
dividends	(Art.71,	and nominal	(Art.53,	Demand	majority, e.g.
(Art.31)	para.5)	value of	para.1)	audit	amendments
receive assets	Obtain the	shares held	Proposing	of the	to theArticles
after liquidation	list of share-	by each	candidates	nancial-	of Incorpora-
(Art.23, para.1)	holders	shareholder	for various	economic	tion, reorgani-
receive a copy	(Art.51,	(7.9.1	bodies	state of the	sation/
of the share	para.4)	Polozhenie)	(Art.53,	company	liquidation of
register (Art.46)			para.1)	(Art.85,	the company
see also 7.9.1				para.3)	etc.
polozhenie
have access to the
documents listed
in Article 89,

para.1 (Article 91)contest the

validity of the resolution of the GSM (Art.49, para.7)

(1)The right to take part in the shareholders’meeting

The basic provision of the Law on Joint Stock Companies on shareholders’rights states the following (Art.31):

i)Each ordinary share of the company grants the shareholder – holder of the share

– the same range of rights;

ii)The shareholder-holder of ordinary shares, in accordance with the present Federal Law and the Articles of Incorporation, may take part in the general shareholders’ meeting with the right to vote on all matters within the competence of the meeting, and has the right to receive dividends and the right to receive part of the assets in case of liquidation.

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Shareholders have the right to take part in the management of the company. One of the most basic rights in this respect is the right to take part in the shareholders’ meeting and to vote. In reality, in Russia, it is not uncommon that even the right to participate in the shareholders’meeting is restricted or denied to some shareholders. Shareholders were often denied participation in the general shareholders’ meeting out of purely technical reasons such as the failure to present their passport. In some companies, employee shareholders, who left the job, were not allowed to take part in the shareholders’meeting.118

The Law on Joint Stock Companies provides that the list of shareholders who are entitled to take part in the general shareholders’meeting is to be prepared on the basis of the shareholders’register. The date of the preparation of the list must precede the date of the decision of the board to convene the general shareholders’ meeting, and must also fall 50 days before the meeting (Art.51, para.1).

Naturally, shareholders must be noti ed of the date and place of the general shareholders’ meeting at least 20 days before the meeting (in cases where the reorganisation of the company is to be discussed, this is extended to 30 days). Extraordinary meetings require 50 days’advance notice (Art.52, para.1).

As a result of the 2001 amendments to the Law on Joint Stock Companies, the provision on the information which is to be provided to the shareholders in advance of the general shareholders’ meeting has been substantially expanded. Shareholders are informed of the procedure to access the information (materials) in order to prepare for the meeting. The materials which are required to be provided to shareholders include:119

i) nancial documents (the balance sheet, pro t and loss report, proposal for the distribution of pro t including the proposal for dividends, or sharing of the loss;

ii) the opinion of the accountant on the result of the annual audit;

iii) the opinion of the audit committee on the result of the annual nancial documents;

iv) information on the candidates for the executive body, board of directors and audit committee.

In the notice of the convocation of the general shareholders’ meeting, the means of inspecting the documents which are required to be disclosed must be speci ed.120

118Institute of Corporate Law and Corporate Governance ed., supra, pp.5-6.

119Klapivin and Vlasov, supra, p.193.

120Lomakin, supra, p.175.