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However, it is not rare for a general shareholders’meeting to be held without the knowledge of a signi cant number of shareholders:

A resolution to liquidate the company was taken at the shareholders’ meeting of a closed joint stock company with foreign participation. A foreign investor, who held 49% of the shares, brought an action, asking the court to declare the resolution void, since this foreign shareholder had not been noti ed of the shareholders’ meeting and the resolution adopted there. The rst instance court and the court of the appellate instance dismissed the claim on the ground that a representative of the foreign company was present at the meeting, and that the power of attorney had been properly prepared. However, the court of the cassation instance quashed the judgment and reversed it to the lower court. The court found that the information on the share holders’ meeting and its agenda were not properly sent to the foreign company but instead, were sent to a company representing this foreign company in Moscow in the name of a Russian individual. On the other hand, the Articles of Incorporation of the joint venture provided that a resolution of liquidation should be made with explicit agreement of the parties and should be notarised. At the shareholders’meeting, a Russian individual, who merely had the power to perform “commercial and representative functions”, was present. This person did not have the power to represent the foreign company in liquidating the joint venture.121

Various irregularities involving shareholders’meetings are reported:

Russia’s second largest oil company, Yukos, voted to cause a 194% share dilution of its subsidiary Yuganskneftegaz and also voted to seize oil revenues and assets belonging to this company. The largest minority shareholder of Yuganskneftegaz was barred from voting at the extraordinary shareholders’ meeting. After minority shareholders were denied entry, the shareholder’s meeting, dominated by Yukos, approved the massive additional share issue in a closed subscription to unknown companies for promissory notes which had not been independently valued.122

The most frequently quoted ground for actions by shareholders contesting the validity of the resolution are: breach of the procedure to convene and carry out the meeting; resolution without meeting the quorum; convocation of the meeting by a person who is not entitled to do so; absence of notice to shareholders. Often shareholders contend that the meeting had not taken place and the protocol had been falsi ed.123 Also delayed notice of the place and time of the general share-

121Item 8, Information Letter of the Presidium of the Supreme Commercial Court No.58 of January 18, 2001.

122Alexander’s Gas and Oil Companies, April 28, 1999.

123V.I.Dobrovol’skii, “Sudebnaia zashchita prav aktsionera (uchastnika) – vopros pravoprimeneniia”, VVAS 2005 No.4, pp.116-117.

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holders’meeting or the failure to send it, failure to provide the shareholders with the possibility to have access to the necessary information regarding the agenda can serve as grounds for such an action.124

The rights of shareholders to take part in the management of the company also include the right to elect and be elected to the board of directors and the audit committee.

(2)Access to information

In order to exercise their rights, shareholders need to have access to information. The general provision on disclosure simply states the following (Art.90):

Information concerning the company shall be provided in accordance with the present Law and other legislative acts of the Russian Federation.

Then, there is a provision on the access to information by the shareholders (Art.91), and another provision on the mandatory disclosure of information by companies (Art.92).

Documents available to the shareholders are listed in another provision (Art.89). This provision in fact lists the documents which are to be preserved by the company, and it is questionable whether or not this list should be used for disclosure purpose.

These documents include, inter alia, the following:

i) shareholders’ agreement; ii) Articles of Incorporation;

iii) documents which certify the right of ownership of the company over the assets on the balance sheet;

iv) “internal documents” of the company; v) annual report;

vi) accounting documents; vii) documents of audit reports;

viii) the list of those who are entitled to take part in the general shareholders’meeting and the list of those who are entitled to receive dividends;

ix) the protocol of the general shareholders’ meeting, meetings of the board of directors, the audit committee and the collective executive body;

x) list of af liated persons of the company;

124 Lomakin, supra, pp.172-173.

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xi) opinions of the audit committee and auditors as well as state and municipalnancial control agencies.

The 2001 amendment added a prospectus of the issuing of securities and the quarterly report to the above list. On the other hand, prior to the 2001 amendment, companies were under an obligation to disclose a list of persons af liated with the company along with the number and type of shares which belonged to this person. Now only the list of persons needs to be preserved and disclosed.

The Law also has a questionable provision on af liated persons. While it does not give a de nition of af liated persons, af liated persons are under an obligation to inform the company in writing of the number and category of shares which they hold within 10 days of their acquisition. If, due to fault on the par of an af liated person, such information is not provided, the person is liable for the loss caused to the company (Art.93).

Among the documents listed above, access to accounting documents and to the protocol of the management bodies is now restricted to shareholders with 25% or more of voting shares (Art.91, para.1).

In practice, companies are more than reluctant to disclose information to the shareholders, not to mention the general public. The problem is that there is no sanction against companies which fail to comply with the requirements, although this is regarded as a “serious violation of shareholder’s rights”.125

At Gazprom, representatives of minority shareholders raised the issue of the relationship of Gazprom with a company group called Itera (a group of more than 100 companies) and Stroitransgaz. The basic criticism was that the Gazprom management had transferred assets from Gazprom to companies af liated with them. However, information on the af liation of the Gazprom management with the Itera group was not made available to the shareholders.126

The extent of disclosure of information to the general public differs according to the type of companies. Open joint stock companies are under an obligation to publicise the annual report as well as the annual audit report, prospectus of the issuing of securities, and the information on the convocation of the general shareholders’ meeting.

There are also reinforced disclosure requirements introduced by the amendments to the Law on the Securities Market in 2002.

125G.S.Shapkina ed., supra, p.259.

126Radygin, supra, p.30.

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(3)Appraisal rights

Shareholders with votes also have the right to require the company to purchase their shares (appraisal right) in the following cases (Art.75, para.1):

i) Reorganisation of the company, or effecting of large transactions which require the approval of the shareholders’ meeting, in which the shareholder voted against the reorganisation or large transaction, or did not attend the shareholders’meeting;

ii) Changes, supplements to theArticles of Incorporation, or the adoption of a new version, which the shareholder voted against, or where the shareholder did not attend the shareholders’ meeting

These grounds are exhaustive. Changes to the Articles of Incorporation must be those restricting the rights of shareholders in order to trigger an appraisal right.127

A limited liability company, Vostok Invest, brought an action vis-à-vis a joint stock company, Primorskugol’, asking the court to obligate the defendant to purchase 1,153 ordinary shares and 1,799 preference shares of the defendant company from the plaintiff.

The rst instance court accepted the claim on the ground that the newly amended Articles of Incorporation of Primorskugol’ which had been approved by the general shareholders’meeting restricted the rights of shareholders. The plaintiff had voted against the amendment, and therefore, the plaintiff was entitled to an appraisal right. The value of the shares was determined on the basis of the opinion of an independent valuer commissioned by the court.

The decision was quashed by the appellate court on the ground that the company was not under an obligation to purchase the shares. The court also pointed out the fact that by another resolution of the general shareholders’ meeting afterwards, this particular provision was excluded from the Articles of Incorporation and thus, the shareholder’s right was restored.

The Law on Joint Stock Companies provides that a person, on his own or in conjunction with an af liated person, purchases 30% or more of the shares of a company with shareholders of more than 1,000, this person is under an obligation to offer other shareholders to purchase their shares at market price. This requirement can be removed by theArticles of Incorporation and Primorskugol’did remove this requirement via the resolution of the general shareholders’ meeting. Vostok-Invest was against this amendment.

127 Ibid., pp.244-245.

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The Supreme Commercial Court ruled that since the plaintiff voted against this amendment, it was entitled to require the company to purchase its shares. The conclusion of the lower courts which denied the existence of such an obligation on the part of the company was against the Law on Joint Stock Companies. The subsequent resolution of the general shareholders’ meeting does not deprive the plaintiff of the right which had emerged earlier.128

The company is under an obligation to inform shareholders of their right to have their shares purchased by the company, as well as of the price and the methods of exercising their rights. Shares are purchased at the price determined by the board of directors, but not lower than their market value which is determined by an independent valuer without taking into account the changes caused by the incidents which gave rise to the appraisal right (ibid., para.3).

(4)Remedies available to Shareholders

Shareholders have the right to take measures to rectify unlawful actions of the company and its bodies in court. Shareholders’ rights in this context include:

i) the right to contest the validity of a resolution of the general shareholders’ meeting which is against the law, or other legal acts as well as the Articles of Incorporation, provided that the shareholder voted against the resolution or was absent at the meeting, and that the resolution infringes the right and lawful interest of the shareholder (Art.49, para.7);

ii) the right to contest the lawfulness of a decision of the meeting of the board of directors and the executive bodies;

iii) the right to a shareholder's action in the interest of the company (Art.71)

(a) Shareholders’action to contest the validity of the resolution of the general shareholders’meeting

Shareholders often contest the validity of the resolution of the general shareholders’meeting.

In this regard, there is a conspicuous omission in the provisions on the procedure of corporate litigation. If, for instance, the validity of the resolution of the general shareholders’ meeting was denied, the effect of the decision should have an effect not only between the parties, but on everybody. Otherwise, there will be a number of actions involving the same resolution but resulting in different conclusions. The possibility of other shareholders joining in the action has to be addressed at the same time. These provisions are completely missing.

128Decision of the Presidium of the Supreme Commercial Court, December 14, 2004, Case 4149/04.

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The same applies to the shareholder’s action (see infra). By the 2001 amendment, a requirement that the action must be initiated within 6 months after the shareholder became aware, or should have become aware of the resolution, was introduced (Art.49, para.7).

The validity of the resolution of the general shareholder’s meeting is often contested in court. The most often encountered cases are those involving the breach of the procedure of convening and conducting the general shareholders’ meeting, the absence of quorum for the resolution, and the absence of appropriate notice to shareholders. The plaintiffshareholder often claims that the meeting did not take place at all, and that the minutes were simply falsi ed.129

The court is entitled to maintain the effect of the contested resolution by taking into account various circumstances if the vote of the shareholder/plaintiff would not have in uenced the resolution or the breach was not essential, and the resolution did not cause damage to the company (Art.49, para.7):

A shareholder who held 12% of the shares of Uralstal’ konstruktsiia brought an action against the company in the commercial court, asking the court to declare void the resolution of the shareholders’ meeting which took place without his participation. The shareholder was not informed of the date or agenda of the shareholders’ meeting. These facts were ascertained by the court. However, the court found the resolution to be valid, because the procedural aw could not have in uenced the outcome.130

There are many cases where the court opted for maintaining the validity of the resolution despite some aws.131 On the other hand, there is a judgment of the Supreme Commercial Court which ruled that the breach of the right of the shareholders to participate in the general shareholders’ meeting is “essential”.132

Aclosed joint stock company,Andreevskii Torgovyi Dom, brought an action against another closed joint stock company LDM, in which the plaintiff is a shareholder, claiming that the resolution of the general shareholders’meeting was adopted without its participation, and therefore, should be declared void. The defendant company argued that the plaintiff was not a shareholder, since the transfer of shares to the plaintiff which took place in 1992 was invalid. In fact, the plaintiff had taken part in the general shareholders’ meeting for several years, without any objection from the company until the general shareholders’ meeting in question. The commercial court of rst instance found the resolution to be void, since there was a breach of the

129Dobrovol’skii, supra, pp.116-117.

130Mateleva, supra, p.159.

131Lomakin, supra, pp.156-159.

132Decision of the Presidium of the Supreme Commercial Court of April 22, 1997, Case 2525/96.

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shareholder’s rights. In the appellate instance, judgment was reversed – the court ruled that the plaintiff was not a shareholder of the company. This was supported at the cassation instance. Finally, upon a protest from the rst deputy president of the Supreme Commercial Court, the Supreme Commercial Court quashed the judgment of the appellate instance and upheld the judgement of the rst instance court. In passing, the court ruled that the failure to notify the shareholder of the general shareholders’ meeting was an essential failure.

It should be noted that the court distinguishes between voidable resolutions and null and void resolutions. The Plenum of the Supreme Commercial Court pointed out that if a party to a dispute refers to a resolution of the general shareholders’ meeting and if the court establishes that the resolution was adopted in excess of the competence of the general shareholders’meeting without meeting the quorum, or the resolution was made on a matter which was not included in the agenda, the court shall regard such a resolution not to have any effect, regardless of whether or not the resolution is being disputed by a shareholder.133 Thus, these grounds do not require shareholders to initiate a speci c action to invalidate the resolution.

A shareholder of an agricultural joint stock company of an open type Razvitie and the chairman of the board of Razvitie brought an action to court against a closed joint stock company Volga-Kredit Holding for the recognition of the transfer of the company to the defendant as invalid. The Supreme Commercial Court found that this was a major transaction as provided by the Law on Joint Stock Companies, but nevertheless, an appropriate procedure, i.e. the approval of the general shareholders’ meeting, had not been followed.

In addition, the person who signed the agreement on behalf of Razvitie, the general director, was not really entitled to do so. By virtue of the decision of the court of general jurisdiction, the appointment of this person as the general director had been found to be invalid, since the general shareholders’ meeting which appointed this person had not met the quorum.134

The same applies to the resolution of the general shareholders’meeting which is in excess of its scope of competence.

Thus, the court has distinguished null and void resolutions from voidable resolutions despite the absence of explicit provisions to this effect. The difference between those two is that if the resolution is voidable, it has to wait for an action by a shareholder to deny its effect, whereas if the resolution is null and

133Item 26, of the Decision of the Plenum of the Supreme Commercial Court of November 18, 2003.

134Decision of the Supreme Commercial Court, July 20, 2004, No.3826/04.

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void, without any action by a shareholder, the resolution does not have any effect from the beginning.

There is a proposal that the Law should be amended to introduce a speci c list of breaches of law which make the resolution null and void. These are to include the absence of the quorum and the adoption of the resolution without notifying the shareholder who could have in uenced the resolution. If the breach is not on the list, it should be regarded as voidable. This arrangement will enable the court, for example, to deny the effect of a transaction concluded by the general director whose power is based upon a null and void resolution of the general shareholders’meeting without an action by a shareholder, but on the basis of an action by other interested parties.

If all resolutions are simply voidable, it will mean that until the court nds the given resolution invalid based upon an action by a shareholder, transactions by the general director disposing of the assets of the company will remain valid. By the time a shareholder takes an action and the resolution is found null and void, the assets will be unrecoverable.135

Acompany, Bolen Commercial Limited, brought an action against Rosneft’, asking for the contract of sale concluded between Rosneft’and Rosneft’-Purneft’gaz to be recognised as invalid. The company is a shareholder of the latter company. The rst instance court acknowledged the claim. This was upheld in the appellate and cassation instances. However, the Supreme Commercial Court quashed the decision of the lower court on the following grounds.

Rosneft’and Rosneft’-Purneft’gaz concluded a contract for the sale of oil to the amount of 9.3 million tons at the price of 1,110 rouble per ton. The plaintiff sought to invalidate this contract, since Rosneft’-Purneft’gaz, by this contract, disposed of its assets below the market price, which is against the provisions on interested party transactions in the Law. The lower courts based their opinion on the conclusion of an independent valuer who found that the price determined by the board of directors was substantially lower than the market price.

In this case, according to the Supreme Commercial Court, the plaintiff had failed to indicate speci cally how his right as a shareholder was infringed and what negative outcome this transaction entailed. The plaintiff has not explained how, by recognising a contract which has been performed to be null and void, his rights could be restored. The plaintiff also failed to specify the amount of loss. There was no evidence which demonstrated that the procedure of the transaction was breached. In the absence of such information, there is no need for the court to examine the problem of price in the transaction.

The case was remanded to the lower court.136

135Dobrovol’skii, supra, pp.138-139.

136Decision of the Presidium of the Supreme Commercial Court, November 12, 2002, Case 6288/02.

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(b)Shareholders’action contesting the validity of the decision of the board and other bodies

There is no explicit provision in the Law on Joint Stock Companies (unlike in the Law on Limited Liability Companies) which entitles shareholders to contest the validity of the decisions of the board and the executive body on general grounds. However, in the light of the “numerousness and complexity of the complaints of shareholders and other interested parties which reached the court”, the Supreme Commercial Court and the Supreme Court jointly issued a plenum decision in 1997 allowing this.137

The Law on Joint Stock Companies has provisions which allows shareholders to bring an action to court on separate occasions such as the refusal by the board of directors to convene an extraordinary shareholders’meeting. The joint decision went much further and allowed the shareholders to contest the validity of the decisions of the board of directors and executive bodies in all circumstances where the decision is against the law and infringes the rights and lawful interests of the shareholder. The Supreme Commercial Court also acknowledges that if the decisions are against the law or other normative acts and infringe the rights and lawful interests of a shareholder, these decisions can be contested in court.138

(c)Shareholders’derivative action

The company itself, or shareholders holding 1% or more of the issued ordinary shares, are entitled to bring an action against members of the board, the single executive body (director, general director), members of the collective executive body (management council, directorate) and others for compensation of loss caused to the company by their act in fault (Art.71, para.5). Presumably because the goal of this system is to ensure that the company recovers the loss from those people, there is not much incentive for shareholders to initiate this action. Such an action seems to be rare, but there have been some actions against the single executive body.139

7)The Management Structure

(1)General Shareholders’Meeting

The highest body of the company is the general shareholders’ meeting (Art.47, para.1). Companies are under an obligation to hold a general shareholders’ meeting at least once a year. The annual general shareholders’ meeting must be

137Krapivin and Vlasov, supra, pp.197-198. Item 10, Joint Decision, April 2, 1997.

138Decision of the Plenum of the Supreme Commercial Court No.19 of November 18, 2003.

139Lomakin, supra, p.236.

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convened more than 2 months but no later than 6 months after the end of thenancial year. At the annual meeting, members of the board of directors and the audit committee are elected, the auditor is con rmed, and the nancial reports as well as other documents are submitted by the board are discussed for approval.

The competence of the general shareholders’ meeting includes (Art.48, para.1):

i)changes and supplements to the Articles of Incorporation or adoption of new Articles of Incorporation;

ii)reorganisation of the company;

iii)liquidation of the company, appointment of the liquidation committee and approval of the interim and nal liquidation accounts;

iv)determination of the number of members of the board of directors, election of the members and the early termination of their power;

v)determination of the number, nominal value and types of declared shares;

vi)increase of capital by raising the nominal value of shares or issuing additional shares; in the latter case, only if the matter is not entrusted to the board of directors by Articles of Incorporation;

vii)decrease of capital by decreasing the nominal value of shares, or by share buy-back, and cancellation of shares;

viii)formation of the executive body and early termination of its power, provided that this power does not belong to the board of directors by Articles of Incorporation;

ix)election of the members of the audit committee and the early termination of their power, unless the power does not belong to the board of directors under the Articles of Incorporation;

x)approval of the auditor;

xi)approval of the annual report, balance sheet, pro t and loss report, and the proposal of the distribution of pro ts and loss;

xii)division and consolidation of shares;

xiii)approval of transactions with interested parties as provided by Article 83;

xiv)approval of major transactions in cases provided by articles 79;

xv)approval of share buy-back by the company;

xvi)approval of participation in a holding company group, nancial industrial group, associations etc;

xvii)adoption of internal rules which regulate the activities of corporate bodies.

Matters which fall within the competence of the general shareholders’ meeting cannot be delegated to the board of directors unless there are provisions to that effect in the Law on Joint Stock Companies. If the general shareholders’meeting adopts a resolution in excess of its competence, the court must regard this as null and void, regardless of whether a shareholder has contested its validity.140

140 Item 9, Joint Decision of the Plenums, supra, No.4/8.