Corporate Governance and Directors' Duties: Russian Federation
A Q&A guide to corporate governance law in the Russian Federation.
The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
The Q&A is part of the Global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg.
Corporate governance trends
The main form of corporate entity for a private business is a limited liability company (private company). Joint-stock companies are also used and can be either private or public. Only public joint-stock companies can list their shares on a stock exchange.
A state corporation is a corporate entity used by the state to promote its projects, for example, in the atomic energy, technology and innovation sectors.
Corporate governance and directors' duties are regulated by:
The civil code.
Federal legislation on limited liability companies and joint-stock companies.
Central bank regulations on the issue of shares.
Tax and certain other state authorities enforce the regulation of corporate governance.
Registrars, stock exchanges and other professionals involved with the financial markets enforce good corporate governance through their own regulations.
The central bank of the Russian Federation approved the new version of the Corporate Governance Code (Code) on 21 March 2014. The Code is a set of voluntary principles and recommendations on corporate governance for public joint-stock companies (JSCs), primarily those whose shares are traded on stock exchanges.
Although compliance with the Code is not mandatory, a company that wishes to list on a stock exchange or be included on a quotation list, will usually need to comply with the Code. Few private JSCs and limited liability companies (LLCs) comply with the Code.
The Code regulates:
Shareholder rights and the fair treatment of shareholders.
The board of directors.
The corporate secretary.
Incentive arrangements (remunerations and payments to directors, the CEO and key management).
Risk management and internal controls.
Disclosure of information.
Certain important corporate actions, for example, material transactions, reorganisations, mergers and acquisitions, the listing and delisting of shares, and increases of share capital.
Public JSCs and some other companies that must publicly disclose business information must include information on how they comply with the Code in their quarterly reports.
The "comply or explain" principle does not apply, as compliance with the Code is voluntary. Stock exchanges and other organisations active in the financial markets largely determine how the Code applies.
Corporate social responsibility and reporting
Board composition and restrictions
In general, the corporate governance structure of a company comprises the general shareholders' meeting and the CEO. In addition:
Private companies can have a board of directors.
Public companies must have a board of directors.
In some companies, in addition to the CEO, a management board has charge of day-to-day management.
More than one person can act as CEO, but the CEO is the primary manager of the company. The CEO is usually referred to as the general director or the managing director.
Shareholder representatives usually sit on the board. It is customary to have management representatives on the board, but they must not comprise more than a quarter of the directors on the board. There are no mandatory rules requiring the CEO to sit on the board.
There are no general rules, requirements or restrictions on employees' representation on the board.
Number of directors or members
The minimum number of directors in a public company is five. There are no requirements for the number of directors in private companies.
Non-executive directors are recognised.
The Corporate Governance Code (Code) and stock exchange rules require the board of directors of publicly listed companies to include independent directors.
The Code recommends that at least one-third of the directors are independent and that the chairman is elected from among the independent directors. Stock exchanges may have their own individual requirements on the number of independent directors depending on where the shares are listed.
A director is independent if he has sufficient professional skills, experience, and independence to form his own opinion and make judgements objectively and in good faith. The director must make these judgements independent of the management bodies of the company, the company itself, shareholders, key counterparties, competitors and the state.
Appointment of directors
A resolution of the general shareholders' meeting appoints directors. Shareholders cast votes on a cumulative basis. Private companies may agree other procedures for director appointments.
Removal of directors
A resolution of the general shareholders' meeting can dismiss the entire board of directors. Private companies may agree other procedures to remove some or all of the board or stop the removal of directors.
Directors employed by the company
Board directors are not required to be employees of the company. The CEO and members of the management board are company employees.
By default, the shareholders' meeting has the right to agree any remuneration for directors and to decide on the salary of the CEO.
Determination of directors' remuneration
It is not mandatory to remunerate directors. Shareholders are free to determine the amount of any remuneration that is paid. The appointing body, which is either the shareholders or the board of directors, decides the remuneration of the CEO and members of the management board. The remuneration must not be less than the statutory minimum for all employees.
The annual report of a public company must contain information on the overall remuneration of the CEO, members of the management board and the board of directors. The disclosure can show either a total amount paid to members of the relevant corporate body or individual remuneration. Some state-owned companies are obliged to disclose information on the remuneration of their directors.
Shareholders determine directors' remuneration (see above, Determination of directors' remuneration).
General issues and trends
The Corporate Governance Code (Code) provides guidelines on directors' remuneration. As regards directors' remuneration, the Code suggests annual compensation instead of payments for attending each meeting and long-term, rather than short-term, compensation and incentive packages.
Management rules and authority
The company's charter usually determines the length of notice for a board meeting. The charter is an internal company document approved by shareholders. The charter also determines the quorum for board meetings, which is usually that more than half of directors are present, and any other voting requirements.
Most companies are managed by the CEO and the general shareholders' meetings. It is fairly rare for a company to have a board of directors and an overwhelming majority of companies do not have management board.
The CEO is the main operational manager of the company. There are no formal requirements for how the CEO makes decisions.
Company powers are exercised as follows, but the company charter may provide different rules:
Shareholders make the most important decisions, for example deciding to increase share capital, amending the charter, approving the internal documents, elections to management bodies and approving dividends and annual reports.
The board of directors controls the strategic direction of the company.
The CEO and any management board are responsible for the operational management of the company and any transactions.
In private companies, powers may be generally be reassigned among the various bodies of the company. The CEO's power to conclude deals is limited by law. For example, the CEO does not have the power to agree transactions that are large, with an interested party, outside their power or limited by the charter. The consequence of this is that special approval is required for these transactions.
The limits on the powers CEOs to agree transactions are enforceable against third parties provided the third party knew or must have known of the CEO's limited power.
The board may establish committees with responsibility for specific issues. However, the entire board may still be required to approve committee recommendations.
The Corporate Governance Code recommends that board committees resolve some issues, for example those relating to financial control and corporate governance.
Directors' duties and liabilities
Directors and the CEO bear criminal liability for theft, fraud and bribery, including commercial bribery. The company may incur administrative liability for bribery and commercial bribery committed by directors and the CEO.
Any fines paid by the company and any damages caused to the company by a director or the CEO may be claimed from the relevant director or the CEO.
The following principles apply:
Directors and the CEO bear criminal liability for insider trading.
The company and the CEO may be liable for breach of disclosure obligations.
The company may be liable to investors if they provide misleading information, including information contained in the offering memorandum.
The CEO and directors may be obliged to reimburse any damage to the company.
Directors are not generally liable under environmental and health and safety laws. The CEO is liable for breach of environment and health and safety legislation. The CEO may be subject to:
Administrative liability, which may mean incurring a fine.
Criminal liability, for example if an employee dies.
If the company suffers damage because of the CEO's actions or breach of regulations, the company (its shareholders) may claim damages from the CEO.
Directors are not generally liable under anti-trust laws.
The CEO is liable for breach of anti-trust laws. There may be administrative liabilities (fines) and criminal liability for cartel agreements.
The CEO may be required to pay damages to the company if her actions or breaches of regulations or law cause damage to the company, for example, if a fine is imposed.
Directors are not generally liable if the company breaches legislation.
Since a company cannot be criminally liable, the CEO bears the risk of criminal liability for any breach of the law by the company. For example, the CEO can be criminally liable for acts of tax evasion, bribery and fraud by the company.
The CEO also bears personal administrative liability for less publicly important offences. Personal administrative liability may entail fines or disqualification. If the company is fined or suffers other damage due to the CEO's actions or breach of the law, the company (its shareholders) may claim damages from the CEO.
In private companies, the company, the directors and the CEO may agree to limit civil liability for actions taken by the directors or the CEO that were unreasonable.
Public companies cannot limit the liability of directors or the CEO.
Neither private nor public companies can exempt the CEO or board members from liability for damages caused to the company by their wilful actions in bad faith.
A person who controls the company's operations carries civil liability to the company for damages caused by not acting in the company's interest. A controlling person can be a shareholder or beneficial owner.
A controlling person may incur secondary liabilities in the course of insolvency. The direct parent company may be jointly and severally liable for debts of the company under transactions undertaken at its instruction or to which it consented.
Transactions with directors and conflicts
Legislation and stock exchange regulations on disclosure and insider trading apply to listed public companies. Public companies must disclose information on connected persons, including information on the CEO's and directors' shareholdings. Breach of insider trading regulations may result in individual criminal liability.
Disclosure of information
Mandatory disclosure rules apply only to public companies. CEOs are obliged to disclose certain information, including details of connected persons, quarterly and annual reports and reports on significant events and facts.
In particular, the CEO must disclose information about shareholders' meetings, board meetings, controlling and controlled entities, the purchase of shares in the company or by the company and material claims against the company.
Every company must hold an annual shareholders' meeting.
The meeting of a limited liability company (LLC) must take place between two and four months after the end of the financial year.
The meeting of a joint-stock company (JSC) must take place between two and six months from the end of the financial year.
The main business of the annual shareholders' meetings is the approval of the previous year's financial results and the declaration of distributions or dividends. The shareholders meeting may also elect the board of directors and any internal or external auditors.
The required period of notice depends on the proposed agenda for the meeting. Periods of notice therefore vary from between 20 and 95 days from the date the board or CEO decides to convene the meeting.
The required quorum for most decisions is for more than 50% of the shareholders to be present or represented. Some decisions require the presence or representation of all shareholders.
Voting thresholds depend on the agenda for the meeting:
Most decisions, including the appointment of the CEO and the approval of the annual results require a simple majority.
Some other decisions, for example, to decrease share capital require a qualified majority of two-thirds in a limited company (LLC) and three-quarters in a joint-stock company (JSC).
Some decisions can only be passed by unanimous vote, for example converting the limited liability company to a joint-stock company or liquidating a limited liability company.
When calculating voting thresholds:
The votes of all shareholders of an LLC are counted.
Only the votes of those shareholders present at a meeting of a JSC are counted.
Shareholders can agree a convenient place for holding a shareholders' meeting. The meeting need not be on company premises.
The meeting may be held by ballot without personal presence of the shareholders.
Specific voting majorities are required for certain corporate actions (see Question 33).
Shareholders owning at least 10% of the shares can convene a special meeting.
Any shareholder of a limited liability company (LLC) can propose issues to be included on agenda, even if they did not convene the meeting.
Shareholders in joint-stock companies must own at least 2% of the share capital to propose a specific resolution.
Minority shareholder action
Generally, all shareholders have the right to:
Challenge the decisions of the company's governing bodies.
Claim damages from the management, board, or the controlling shareholders for damages they caused to the company.
In private companies, shareholders can call for the expulsion of a shareholder who harms the company and in some circumstances can have the right to force that shareholder to sell their shares.
Internal controls, accounts and audit
The CEO must ensure the company's accounts comply with applicable legislation. The consequences of breaching the law depend on the nature of the non-compliance. A breach may be categorised as:
An administrative offence (minor fine on the CEO).
A tax offence (fine imposed on the company).
A criminal offence (possible imprisonment of the CEO).
Shareholders may also claim damages from the CEO caused by accounting errors.
Only personal or corporate members of self-regulated organisations of auditors may audit a company's accounts. An auditor must hold an audit certificate. The auditor must be independent of the company being audited, its management and its shareholders. Legislation sets out nine criteria that must be met for an auditor to be considered independent. Each audit organisation is also governed by the professional ethics code, which further governs situations where a conflict of interest may arise.
An auditor that breaches audit requirements can be penalised by their governing body. Governing bodies may issue warnings, impose fines, suspend the operations of members and exclude members from the organisation. Excluding an auditor from the association would make it impossible for the excluded auditor to provide audit services.
Auditors have a civil liability to the audited company and potentially to the shareholders of the audited company for any damages caused by their audit. Auditors can limit their liability to their clients, but may not exclude liability for an intentional breach of requirements.
There is no corporate governance legislation that applies to a company secretary. However, the Corporate Governance Code has guidelines for company secretaries (see Question 4).
Consultant plus and GARANT
Description. Legislation in Russian may generally be obtained from various sources, including ministries and legal databases. Up-to-date legislation in English is not generally available free of charge and but may be purchased from legal databases. The links above lead to two Russian largest databases containing legal acts in Russian and English.
Evgenia Teterevkova, Specialist partner
Professional qualifications. St. Petersburg State University, Faculty of Law, Law Degree with honours, 1999
Areas of practice. M&A; corporate; commercial contracts. Head of M&A.
- Assisting a leading producer and supplier of energy in the Urals and North Siberia with the sale of a heating and power plant to a leading Russian gas processing and petrochemicals company.
- Assisted Palfinger (a world leader in crane manufacturing), with the acquisition in Russia of a lifting machines business, namely, procuring competition and strategic filings with the Federal Antimonopoly Service of the Russian Federation and with the establishment of two Russian JVs with KAMAZ, the largest automobile corporation in Russia. Transaction values of approximately EUR30 million.
Languages. Russian, English
Ilya Kotov, senior associate
Professional qualifications. St. Petersburg State University, Faculty of Law, Bachelor's Degree in Law, 2008; St. Petersburg State University, Faculty of Law, Master's Degree in Law 2010
Areas of practice. M&A; corporate; commercial contracts.
- Paroc Group Oy: advising Helsinki-based Paroc Group Oy on an offering of EUR 430 million high-yield notes to international investors as part of Paroc Group Oy's refinancing. Borenius acted as the Finnish, Russian and Lithuanian counsel to Paroc Group Oy.
- Nizhpharm (part of STADA group): providing full transaction including IP support to a leading pharmaceutical company in the acquisition of a pharmaceutical business in Russia
Languages. Russian, English