Oda Russian Commercial Law 2007-1

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Resolutions on matters such as ii), vi), xii) to xvii) above can be adopted only when proposed by the board.

While the resolution, as a rule, is adopted by a simple majority, items i) – iii), v), and xv) have to be adopted by a quali ed majority – three quarters of the shares with a vote who were present (Art.49, para.4).

As a rule, general shareholders’ meetings are convened upon the decision of the board. The notice of the general shareholders’ meeting should be given to the shareholders, in principle, at least 20 days before the meeting. Previously, the notice could be given either by sending shareholders a written notice by any means or by publication of such information. Sometimes, the notice was published in a regional newspaper which no one but those who lived there had access to. There was no minimum time associated with the notice. By the 2001 amendment, in principle, each shareholder has to be sent a notice by registered mail, but only insofar as the Articles of Incorporation do not provide otherwise. The notice can be delivered to the shareholders in exchange for a receipt. If the notice is to be published in the media, the medium has to be accessible to all and speci ed in the Articles of Incorporation (Art.52, para.1).

Together with the notice of the meeting, various materials need to be sent. These include the annual report of accounting including the opinion of the audit committee and the auditor, a draft resolution of the meeting, as well as information on candidates for the board and the audit committee (ibid., para.3).

An extraordinary shareholders’meeting can be convened by the decision of the board of directors on its own initiative, by request of the audit committee, the auditor, or a shareholder with more than 10% of shares. Extraordinary meetings requested by the audit committee, the auditor, or a shareholder have to be convened via the board. The board must convene an extraordinary shareholders’ meeting within 40 days of the request. The decision to convene or not to convene the meeting must be taken within 5 days of the request (Art.55, paras.1 and 6). The board may refuse the convocation of a meeting on the following grounds (ibid., para.6):

i) the procedure for submitting the request was not followed; ii) the shareholder is not entitled to the request;

iii) none of the issues proposed for discussion at the meeting fell within the competence of the shareholders' meeting or they were against the law.

These grounds are exhaustive.

In cases where the board has failed to convene an extraordinary shareholders’meeting within the above period or rejected the convocation of the meeting, the body or the person who requested the convocation is entitled to convene the meeting. In such cases, the body or the person is granted the same power to

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convene and conduct the meeting as that provided by the Law (Art.55, para.8). However, the costs of convening the general shareholders’ meeting (and the impossibility of having the cost reimbursed by the company) make it dif cult for shareholders to exercise this right.141 The decision of the board to refuse convocation of a shareholders’meeting can be appealed in court (ibid., para.7).

The agenda of the general shareholders’ meeting is set by the board. Shareholders with 2% or more of the voting shares are entitled to propose matters to be included in the agenda. They are also entitled to propose candidates for the board of directors, collective executive body, and the audit committee (Art.53, para.1). The board of directors is empowered to decide whether to accept or reject the proposal. The proposal can be rejected only on limited grounds on formalities (ibid., para.5). Shareholders may contest the decision of the board not to include the proposed item on the agenda, or the failure to make a decision in court (ibid., para.6).

However, in practice, the board of directors often infringes upon the rights of shareholders in this respect. This not only involves the agenda of the annual meeting, but also the agenda of extraordinary meetings.142 The board of directors, by resorting to various pretexts, refuses to put the proposed matter on the agenda.143

The quorum for the general shareholders’meeting is shareholders representing more than 50% of issued shares (Art.58, para.1). Shareholders who are on the list of shareholders are entitled to take part in the general shareholders’meeting. The list is compiled on the basis of the shareholders’ register at the time determined by the board of directors. This date cannot be earlier than the decision of the board to convene the general shareholders’meeting, and cannot be more than 60 days ahead of the meeting (Art.51, para.1).

Although it is rather unusual compared to other jurisdictions, the resolution of the shareholders’meeting does not have to be taken by holding an actual meeting. This is called a zaochnyi vote (Art.50). Reportedly, this has been practised since joint stock companies came into existence in the post-socialist period. By the 2001 amendments, this is not allowed for a general shareholders’ meeting which has the appointment of directors, approval of an auditor, approval ofnancial statements.

Shareholders may take part in the shareholders’ meeting personally, or “through a representative” (Art.57, para.1). Shareholders are free to select the representative. This right cannot be restricted by the Articles of Incorporation.

141Krapivin and Vlasov, supra, pp.206-207.

142Ibid., pp.197-198.

143Ibid., p.198.

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Provisions of the Civil Code on the power of attorney (Arts.185-187) are applicable here.

However, in the absence of detailed rules in the Law, shareholders’rights in this respect are infringed. Many companies require that the power of attorney be given to the members of the board, the collective executive body, or other shareholders. This is a practice which is against the law.144

The OECD White Paper points out as follows:

There have been numerous cases in Russia where procedural requirements for voting during the general meetings have not been observed and shareholders have been prevented from voting on various grounds.... Proxy voting is also quite rudimentary. For example, the Law provides that a proxy must contain the representative’s passport data. In practice, interpreting “passport data” arbitrarily and the requirement of cumbersome certi cation procedures have prevented some “unwelcome” shareholders from participating in meetings.145

The White Paper recommends the introduction of rules and procedures that would facilitate and encourage proxy voting as well as reduce abuse.

The Law explicitly provides that one voting share is entitled to one vote, except in cases of cumulative voting (Art.59). Multiple voting shares are not allowed under the Law.

It should be noted that under the Articles of Incorporation, it is possible to limit the maximum number of votes given to a single shareholder (Art.11, para.3). Incidentally, similar provisions can be found in German and French law.

(2)Management Bodies: Board of directors and executive bodies

(a)The structure of the management bodies

Generally, the system of corporate governance in the industrialised world can be divided into two types; a single tier system and a two tier system. In a single tier system, the management of the business and the supervision of implementation are both entrusted to a single body, i.e. the board of directors. In contrast, in a two tier system, these functions are separated; there is a board of directors which manages the business, and a supervisory board, which supervises the activities of the board of directors. InAnglo-American jurisdictions, the single tier system is adopted, while the two tier system is found in the Civil Law countries. However, in reality, the system varies from country to country. US companies are supposed

144Ibid., pp.210-211.

145OECD White Paper, supra, p.13.

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to be in the single tier group, but in fact, boards of directors in the United States tend to perform more supervisory functions than management, whereas the management function is carried out by executive of cers.

In the Tsarist period, Russian companies were run by the management council (pravlenie) whose members were called directors. There was no board of directors. The 1922 RSFSR Civil Code inherited this system of a management council. In contrast, the 1927 Statute on Joint Stock Companies provided for i) a pravlenie or a single director, and ii) a board (sovet), if theArticles of Incorporation provide for it. The pravlenie were to “manage all matters and assets of the company” and make transactions and operate in the name of the company and thus represent the company. The board (sovet) was set up for the “general direction of affairs and supervision over the activities of the pravlenie in accordance with the articles of incorporation”.146 In this sense, the board was closer to the supervisory board, rather than the board of directors.

In the present Law on Joint Stock Companies, the system is rather confusing. There is the board of directors as well as single and collective executive bodies. In the Law, the board of directors is referred to with “supervisory board” in brackets. This is confusing, since in Anglo-American countries, while there are boards of directors, there are no supervisory boards, and in Civil Law countries, the board of directors co-exists with the supervisory board. Czech, Hungarian and Polish company laws have both, although the supervisory board is not always mandatory. In the German Aktiengesetz, it is explicitly provided that the supervisory board is to oversee the management of business (Geschäftsführung).147 There is no jurisdiction where the board of directors is at the same time, the supervisory board. However, according to a commentary to the Law on Joint Stock Companies, the terms “board of directors” and “supervisory board” have the same meaning”.148

The confusion is compounded by the fact that under Russian law, a single executive body is called a director, or general director, and in their collective form, management councils or directorates. However, they are not necessarily members of the board of directors. In fact, the term general director seems to come from the socialist period when a single of cial ran the state enterprise on the basis of a “single responsibility (edinolichnost’)” system.

In a way, the Russian system is similar in substance to the US system where the board of directors play a supervisory role rather than an executive role, while

146SZ SSSR, 1927 No.49, item 500.

147Art.111, para.1, Aktiengesetz.

148Mozolin and Iudenkov, supra, p.293.

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the business is carried out by executive of cers. A Russian commentary admits that the Russian system is closer to the US system, but for a different reason:149

In the German variation (of corporate governance), the personal composition of the supervisory board and the executive body (pravlenie) is strictly segregated. In the US variation, the personal composition of both may overlap. The rst model is intended for a situation where shareholders are highly separated from professional managers and their function is to control the activities of the managers and receive dividends. The second model represents active participation on part of the shareholders who were appointed to the board of directors in the management of current activities of the company. The Russian model is close to the second model.

(b)Board of Directors

The board of directors determines the general orientation of corporate activities, except for matters reserved for the general shareholders’ meeting (Art.64, para.1). This is contrasted to the function of the executive bodies which manages the current affairs of the company.150 The board of directors is not mandatory in companies with less than 50 shareholders with a vote. In such companies, the function of the board can be substituted by the general shareholders’ meeting (ibid.).

Members of the board of directors are appointed by the general shareholders’ meeting. Shareholders who hold no less than 2% of voting shares are entitled to propose candidates for membership of the board (as well as of the collective executive body and the audit committee). The number of proposed candidates should not exceed the total number of directors (Art.53, para.1).

The competence of the board of directors includes the following (Art.65, para.2):

i)determination of the priority directions of the company’s activities;

ii)convocation of the annual and extraordinary shareholders’meeting;

iii)approval of the agenda of the general shareholders’ meeting;

iv)determination of the date of compilation of the list of shareholders who are entitled to take part in the general shareholders’ meeting;

v)increase of capital by additional issue of shares in cases where this power has been delegated by the Articles of Incorporation;

vi)issuing of bonds and other securities;

vii)determination of the value of assets, issuing and purchasing prices of shares and other securities in cases provided by the present Law;

149Ibid., p.301.

150Ibid., supra, p.294.

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viii)buy-back of shares, bonds and other securities in cases provided by the present Law;

ix)formation of the executive body of the company and its early termination if the Articles of Incorporation grant this power to the board;

x)recommendation as to the remuneration of audit committee members and the auditor;

xi)recommendation as to the amount of dividends and the method of their payment;

xii)use of the reserve fund and other funds;

xiii)approval of internal documents of the company except those documents which the general shareholders’meeting has the power to approve;

xiv)establishment of branches and representative of ces;

xv)endorsement of major transactions;

xvi)endorsement of transactions with interested parties;

xvii)approval of the share registrar and the determination of the terms of the contract, as well as the rescission of the contract.

The above matters, which fall within the exclusive competence of the board, cannot be delegated to the executive body (ibid.).

An open joint stock company Surugut Gas Re nery brought an action in the Moscow Commercial Court against a closed joint stock company UKBGI Bank, asking the court to declare void a contract for the acquisition of a share in the capital of the latter. The Re nery had acquired a share in the Bank when the Bank was a limited liability company. The Re nery argued that the contract had been signed by its general director without the consent of the board of directors, contrary to Article 65 of the Law on Joint Stock Companies [before the 2001 amendment], which provided that the decision on the participation of the company in other associations was the exclusive competence of the board.

The lower courts acknowledged the claim of the plaintiff. However, upon protest, the Supreme Commercial Court reversed the judgment. The Court ruled that the provision in question covered only the “participation” in another organisation, and did not extend to “withdrawal”. Since this provision contains an exhaustive list of matters which fall within the exclusive competence of the board, it should be interpreted literally, and such a broad interpretation should not be allowed.151

As a Russian commentary points out, the Law does not give a clear de nition of the board of directors. Therefore, its role can be drawn only from the list of powers and the scope of matters upon which it can decide in accordance with

151Decision of the Presidium of the Supreme Commercial Court, January 23, 2001, Case 6282/99.

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this provision.152 Judging from the competence of the board of directors as listed above, the board of directors primarily performs supervisory functions. This is demonstrated by their power to appoint and dismiss the executive bodies and approving major transactions and interested party transactions.

The number of board members for companies with more than one thousand shareholders with a vote has to be at least seven, while if the number of such shareholders is more than ten thousand, there have to be at least 9 members (Art.66, para.3). The maximum number of members is to be determined by the Articles of Incorporation.

There is no statutory requirement for the quali cation of a board member. It is left to the companies to determine the requirements via the Articles of Incorporation. For example, it is possible to stipulate that members can only be those shareholders who have more than 10% of the shares.153 There are some restrictions under other laws, such as the Law on the Fundamentals of Government Of cials which prohibits government of cials from becoming directors unless so entrusted by the government.154

Members of the board are appointed and dismissed by the general shareholders’ meeting. The term is one year, but the term can be renewed a number of times without any limit. Members of the board cannot, at the same time, be members of the audit committee.

Irregularities are often seen in the process of appointing board members:

A group of shareholders initiated an action at a district court in the City of Moscow asking the court to declare void a resolution of the general shareholders’meeting of a joint stock company SELP. In the shareholders’ meeting in 1994, selection of the board members was on the agenda, but none of the candidates obtained the required minimum number of votes. Therefore, it was resolved that a second shareholders’ meeting was to be held. However, not all shareholders received the notice for the second shareholders’ meeting. Shareholders who were previously members of the workers’collective and were later dismissed were not informed of the meeting; the total number of shares held by them exceeded 50%.

The executive body of the joint stock company SELP failed to include the candidates proposed by the shareholders who were suing the company in the list of candidates for the membership of the board, despite the fact that there were no aws in the procedure by which these candidates were put forward. The company claimed that the signatures on the proposal had been forged.155

152Krapivin and Vlasov, supra, pp.230-231.

153Shapkina, supra, p.188.

154Law No.154-FZ of August 28, 1995.

155Mateleva, supra, pp.164-165.

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Members of the board may be elected by cumulative voting. In a company with more than one thousand shareholders with a vote, cumulative voting is mandatory (ibid., para.4).

In a survey conducted between 1999 and 2001, the average number of the board of directors was 7.9. Largest groups represented on the board were the management (38.1%) and the workers’collective (20.7%) respectively.Another analysis of the composition of the board between 2002 and 2003 showed that large shareholders were represented (34% of the members) as well as the management and the employees (30%). On average, a quarter of the members were simultaneously members of the executive body.156

The chairman of the board of directors is elected by the members from among themselves by a majority vote. The chairman organises the work of the board, convenes the board and presides over it, and also presides over the general shareholders’meeting unless otherwise provided by theArticles of Incorporation (Art.67, paras.1 and 2).

The meeting of the board is convened by the chairman on his own initiative, but also upon request of the members of the board of directors, the audit committee, or the auditor, the executive body of the company and other persons designated by the Articles of Incorporation. The board meeting can be held without an actual meeting. The quorum can be set by the Articles of Incorporation, but cannot be less than 50% (Art.68, paras.1 and 2). The meeting should be held whenever it is necessary, but at least once a year.157 A 2002 survey of 400 major and medium-sized companies revealed that some of them had only 5 to 7 meetings in 2002. In the remaining companies, the frequency was 9 to 14 meetings per year.158

According to various surveys, the activities of the board of directors have a “formal nature”. One survey in 2001 suggests that members of the board of large companies spend little time discharging their duties – one to ve days a month. It is extremely rare for the board to determine the remuneration of the executives or of their own.159 The composition of the board suggests that the board of directors is in reality under the in uence of the management of the company.160

Some progress has been reported though. This progress is exempli ed by the introduction of independent directors. In one survey, 28% of the respondent companies had independent directors. However, it should be noted that 61% of

156OECD Obzor, supra, p.16.

157Krapivin and Vlasov, supra, p.241.

158OECD Obzor, supra, p.17.

159Ibid., p.16.

160Ibid.

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the respondents think that these independent directors are very likely to be “hidden interested persons”.161

(c)Executive Bodies

Current activities of the company are directed by a single executive body (director or general director) or a single executive body and a collective executive body (management council (pravlenie) or directorate (direktsiia)). Executive bodies of the company organise the implementation of resolutions of the general shareholders’ meeting and the decisions of the board of directors (Article 69, para.2). The executive bodies should not interfere with the exclusive competence of the general shareholders’meeting or the board of directors.

A single executive body is entitled to act on behalf of the company without power of attorney. More speci cally, the executive body is empowered to represent the interests of the company, effect transactions in the name of the company, approve the number of personnel, issue instructions and orders which are binding on all employees (ibid.).

Executive bodies are appointed and dismissed by the resolution of the general shareholders’ meeting, unless this power is given to the board of directors by the Articles of Incorporation (ibid., para.3).

Apart from the provision which de nes the function of the executive body to be the “directing of the current activities of the company”, there is no explicit provision on the power of the executive bodies. As a commentary puts it, the Law practically determines nothing about the activities of either the director or the management council, or their competence”.162 Details of the power of the executive bodies are left to the Articles of Incorporation.163

Typical issues which fall within the portfolio of an executive body include the following:

i) arrangement of an effective operational management of the current business of the company;

ii) arrangement for the conducting of the general shareholders’ meeting and the meeting of the board of directors;

iii) preparation and realisation of the company’s current business strategy for the purpose of increasing pro tability and competitiveness;

iv) preparation and submission to the board of directors of the business plan of the company, nancial documents, including the balance sheet and the pro t and loss report, and the proposal for the distribution of the pro t and loss;

161Ibid., p.17.

162Krapivin and Vlasov, supra, p.248.

163Sahpkina, supra, p.195.

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v) preparation and submission to the board of directors of draft internal rules and instructions.

If there are both single and collective executive bodies, the Articles of Incorporation must determine the scope of the power of each body. In such cases, the single executive body, i.e. the director or general director, also combines the function of the chairman of the collective executive body. By the resolution of the general shareholders’ meeting, the power of the executive body may be entrusted to a commercial management organisation or an individual entrepreneur by agreement (Art.69, para.1).

The relationship between the members of the executive body and the company is governed by a contract which is categorised as an employment contract. The contract is signed on behalf of the company by the chairman of the board or a person empowered to do so by the board. The general shareholders’ meeting may terminate this contract at any time (Art.69, paras.3 and 4). However, the court practice is that since labour law is applicable here, there has to be an appropriate ground for the termination under the Labour Code.164

Members of the collective executive body may not form a majority of the board of directors.Aperson who is the single executive body may not simultaneously be the chairman of the board of directors (Art.66, para.2).

In Gazprom, theArticles of Incorporation provide that members of the management council (pravlenie) can be dismissed by a unanimous vote of the board of directors. However, these people are simultaneously board members, and therefore, a unanimous vote is unlikely to be achieved. This arrangement was contested in the commercial court, which ruled this clause to be against the law. Gazprom reportedly intends to change it to a majority vote, but this will not change the situation, since six management council members occupy the 11 member board of directors.165

The actual arrangement of executive bodies differs from company to company. Lukoil has a president of the company, the management committee (pravlenie), and the board of directors. The management committee basically comprises heads of the administration. The board chairman is an outsider, but the president and the rst executive vice president are also members of the board. There are some outsiders on the board.166 In a leading steel company, Severstal’, there is a board of directors with ve independent directors out of the ten directors. The remaining directors are “executive directors”. On the other hand, the

164Krapivin and Vlasov, supra, pp.253-254.

165NG, June 20, 2000.

166www.lukoil.com