Shareholders' rights in private and public companies in the Russian Federation: overview

A Q&A guide to shareholders' rights in private and public companies law in the Russian Federation.

The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.

Contents

Types of limited companies and shares

1. What are the main types of companies with limited liability and shareholders? Which is the most common? Which type do foreign investors most commonly use?

There are two main types of commercial companies with limited liability in Russia:

  • Limited liability companies.

  • Joint stock companies.

Until 31 August 2014 joint stock companies were divided into open joint stock companies whose shares could be offered to an unlimited circle of persons, including placement on stock exchanges, and closed joint stock companies, whose shares could not be publicly offered and whose shareholders enjoyed the right of first refusal if any shareholder intended to sell their shares to a third party.

Due to amendments to the Civil Code of the Russian Federation which came into effect on 1 September 2014, companies are divided into public and non-public companies. Public companies are joint stock companies whose shares, and securities that are convertible into shares, are placed by public offering or are publicly traded in accordance with the conditions prescribed by securities laws. All other companies (including limited liability companies and joint stock companies whose shares and securities are not placed by public offering and are not publicly traded) are non-public. Relevant amendments must be made to company charters to reflect this when the respective company charter is presented next time for any amendment to the Russian legal entities' register (referred to in English as EGRUL).

Currently, open joint stock companies and closed joint stock companies still exist. They are governed not only by the new provisions of the Civil Code, but also by the provisions of the Law on Joint Stock Companies. There is some legal uncertainty, as the Law on Joint Stock Companies has not yet been amended in line with the changes to the Civil Code.

Both joint stock companies and limited liability companies are common and often used by foreign investors. A limited liability company is a simpler and more flexible corporate form, particularly in terms of its corporate governance. It is recommended for wholly-owned subsidiaries and closely held joint ventures. A joint stock company is more complicated and state-regulated, with many corporate procedures and formalities. This form is suitable for larger companies with potential for corporate conflict where a number of interests are present at shareholder (and management) level.

The capital of a joint stock company is split into shares, each of which (within the same category) confers on its holder the same number of rights. A joint stock company's shares are qualified as securities and are subject to registration with the Russian authorities for the securities market.

The capital of a limited liability company is not split into any units/stock. The share of each co-owner is determined by their individual ownership percentage of the company's capital with the relevant nominal value. The rights of the co-owners of a limited liability company may differ depending on the provisions of the company's charter.

Public joint stock companies must comply with certain legal requirements. In particular, they are subject to publication duties and must create a board of directors, (a corporate body that supervises the executive body (general director or collective executive body of the joint stock company)) which is responsible for the day-to-day business. The board of directors must consist of at least five members.

 
2. What are the minimum share capital requirements for companies?

The minimum share capital requirement for a limited liability company and (in the view of most commentators) for a closed joint stock company is RUB10,000 (about EUR170). The minimum share capital requirement for an open joint stock company and a public company is RUB100,000 (about EUR1,700).

 
3. Briefly set out the main types of shares typically issued by a company and the main rights they provide. Set out the other main financial instruments (for example, bonds) and participation instruments that can be issued by a company.

The share capital of a limited liability company is split into shares. The share is a certain percentage or fraction of the share capital. The amount of the share complies with the relation of the nominal value of the share to the amount of the share capital. A share in the capital of a limited liability company grants the following rights:

  • Participation and voting in the general meeting.

  • Obtaining a share of the profit of the limited liability company.

  • Obtaining a share in the assets remaining for distribution among the shareholders on liquidation of the limited liability company.

A joint stock company can issue two main types of shares:

  • Common shares.

  • Preferred shares.

Common shares give their holders, the rights granted by a share in a limited liability company.

Preferred shares (which cannot exceed 25% of the share capital of the relevant joint stock company) confer on their holders the right to dividends and shares in the assets distributed on liquidation of the joint stock company, but voting rights apply only in exceptional circumstances. A joint stock company can issue different types of preferred shares (for example, with different dividend entitlements), which must be provided for in its bye-laws. All preferred shares of the same type must have the same nominal value and must provide the same rights to their owners.

Preferred shares can give their owners preferential rights associated with the distribution of dividends, liquidation value of shares, and voting rights attached to shares under specific circumstances.

A joint stock company can issue bonds that are convertible into its stock and "issuer's options" (a financial instrument that gives its holder the right to buy joint stock company shares within a certain term and/or in certain circumstances at a pre- determined price).

 
4. What is the minimum number of shareholders in a company?

A company can have only one shareholder and still enjoy limited liability. However, there is a prohibition on the sole shareholder being a "one-man company" itself.

 

General shareholders' rights

5. What are the general rights of all shareholders? How can shareholders' rights be varied (for example, additional rights attaching to a class of shares, or limitations on shareholders' rights)? Are such variations generally provided in the company's bye-laws and shareholders' agreements?

The basic rights of all shareholders (except holders of preferred shares) are described in Question 3. The shareholders of a limited liability company and the holders of common shares in a joint stock company enjoy similar rights. The bye-laws of a limited liability company can provide for an odd distribution of votes. In a joint stock company each share confers one vote, although the charter can limit the maximum number of votes given to one shareholder.

The bye-laws of a limited liability company can grant additional rights to individual shareholders, while in a joint stock company the rights of each shareholder of a joint stock company are the same for the relevant category of shares. With regard to the rights of the holders of preferred shares in a joint stock company, see Question 3.

Shareholders' rights are generally provided for by law and in the company's bye-laws. Under Russian law shareholders' agreements can determine the way in which such rights should be exercised (see Questions 29 and 30).

 
6. Briefly set out the rights of minority shareholders and the shareholding required to exercise such rights.

The following rights are provided for minority shareholders in limited liability companies, each shareholder can:

  • Initiate court proceedings under which a court declares invalid an unlawful resolution of the general meeting (see Question 16) or the board of directors (see Question 18), or a transaction which is in breach of the provisions on interested parties (see Question 20) or large transactions (see Question 40).

  • Add items to the agenda of a general meeting.

  • Obtain information on the activities of the limited liability company and review the accounts and other documents of the limited liability company according to the procedures provided in the bye-laws of the limited liability company (see Question 25).

  • Block certain important decisions of a general meeting, particularly those that may affect their shareholding in the limited liability company (for example, liquidation or re-organisation of the limited liability company, granting of special rights to a shareholder, increase of the limited liability company's capital against a contribution of a certain shareholder or a third party).

Holders of at least 10% of the limited liability company's total votes can demand:

  • The convening of an extraordinary general meeting.

  • Through a court order, the expulsion of a shareholder who grossly violates their duties or whose behaviour substantially impedes the limited liability company's activities.

Holders of over one-third of the limited liability company's total votes can block other important decisions of a general meeting (for example, amendment of the charter, increase or decrease of the limited liability company's share capital).

The following rights are provided for minority shareholders in joint stock companies,

each shareholder is entitled to:

  • Initiate court procedures under which a court declares invalid an unlawful resolution of the general meeting (see Question 16) or the board of directors (see Question 18), or a transaction which is in breach of the provisions on interested parties (see Question 20) or large transactions (see Question 40).

  • Demand the re-purchase of their shares under certain circumstances (see Question 39).

  • Obtain a mandatory offer for the purchase of their shares from persons who together with their affiliated personas have acquired shares with the consequence that they hold more than 30%, 50%, 75% or 95% of all shares in the joint stock company.

  • Access important corporate documents of the joint stock company.

Holders of:

  • At least 1% of the shares can review the list of persons entitled to participate in the next general meeting and sue the joint stock company officers for compensation for damage to the company inflicted by their wrongful actions.

  • At least 2% of the shares can add items on certain issues to the agenda of a general meeting and nominate members of the executive body (general director or collective executive body of the joint stock company), the board of directors and other bodies.

  • At least 10% of the shares can demand the convening of an extraordinary general meeting, determine the agenda of such meeting and demand a revision of the joint stock company's financial activities.

  • More than 25% of the shares can block important decisions of a general meeting (for example, amendment of the joint stock company's charter, increase or decrease in the joint stock company's capital) and acquire access to the minutes of the executive body and the accounting documents of the joint stock company.

 
7. How influential are institutional investors and other shareholder groups in monitoring the company's actions (for example, corporate governance compliance)? List any such groups with significant influence in this area.

Although there are a large number of institutional investors, it cannot be said that they play a significant role in monitoring and enforcing good corporate governance. An exception is the European Bank for Reconstruction and Development (EBRD) which, regarding investments financed by it, has requested good corporate governance of the target company. Often the EBRD itself has made an equity investment in the target company. Note that due to the current political situation, the EBRD is not undertaking any new business in Russia.

 

General meeting of shareholders

Calling a general meeting

8. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved? Which decisions must be approved by the shareholders in a general meeting?

A company must hold an annual shareholders' meeting. For a limited liability company this must be between 1 March and 30 April and for a joint stock company between 1 March and 30 June.

The annual shareholders' meeting decides on the approval of the annual reports and the annual financial statements for the last year. In addition, the annual shareholders' meeting of a joint stock company decides on the following issues:

  • Election of members of the board of directors and the revision commission.

  • Approval of the auditor of the joint stock company.

The annual shareholders' meeting can decide on all other issues, which fall under the competence of the general meeting.

In particular, the following issues fall under the exclusive competence of the general meeting:

  • Determining the main type of activity of the company.

  • Amendment of the bye-laws (in particular, the share capital) of the company.

  • Appointment and early termination of office of the revision commission.

  • Appointment and early termination of office of the executive body (general director or collective executive body of the joint stock company) (unless the remit is shifted by the bye-laws of the company to the board of directors).

While the remit of the general meeting of a limited liability company can be extended by the bye-laws, the remit of the general meeting of a joint stock company is mandatorily fixed by law.

 
9. Can a general meeting be held by telecommunication means or written/electronic approval?

Generally, a general meeting can be held by absentee voting and by telecommunication in a limited liability company provided that the communication method allows a document exchange and ensures the authenticity of the messages sent and received.

However, absentee voting is not permitted for the approval of the annual reports and the annual financial statements. In a joint stock company absentee voting is also not permitted on the following issues:

  • Distribution of profits (except dividends based on the results of the first, second and third quarter of a calendar year) and losses of the joint stock company.

  • Appointing the board of directors, the audit commission and the external auditor.

 
10. What are the notice, information, and quorum requirements for holding general meetings and passing resolutions?

The notice period for the calling of a general meeting in a limited liability company is 30 days, unless the bye-laws provide for a shorter period. In a joint stock company the notice period is usually 20 days, provided that regarding general meetings in which a decision on a re-organisation is to be made, the notice period is 30 days and regarding extraordinary general meetings in which shareholders have the right to propose candidates for the board of directors a 70-day notice period applies.

The documents and information provided to the shareholders along with the invitation to the general meeting comprise the following:

  • Annual reports and annual financial statements.

  • Report of the auditors.

  • Information on proposed candidates for the board of directors.

  • Information on proposed candidates for the executive bodies of the company.

  • Draft of amendments to be introduced into the charter or draft of a new version of the charter.

  • Draft resolutions on each agenda item.

  • Documents and information to be provided according to the bye-laws.

  • Draft resolutions of the agenda items.

Upon request of a shareholder, the company must provide copies of the relevant documents.

The general meeting of a joint stock company has a quorum if more than 50% of the voting shares are present. If this quorum has not been reached in a general meeting, a subsequent general meeting with the same agenda can be called. The subsequent general meeting has a quorum if not less than 30% of the voting shares are present.

There is no quorum for the general meeting of a limited liability company as the majorities are counted from the total number of votes and not of the votes present.

 

Voting

11. What are the voting requirements for passing resolutions at general meetings?

Most resolutions of the general meeting of a joint stock company can be taken with the majority of the voting shares present and those of the general meeting of a limited liability company with the majority of the total number of votes. Regarding further voting requirements, see Question 12.

 
12. Are specific shareholder approvals/resolutions required by statute for certain corporate actions? What voting requirements and majorities apply?

In a joint stock company, taking resolutions, in particular, on any of the following issues requires a majority of three-quarters (75%) of the voting shares, are present in the general meeting:

  • Amendment of the bye-laws (in particular, of the share capital) of the joint stock company.

  • Reorganisation or liquidation of the joint stock company.

  • Determining the number, nominal value, category (type), and class of authorised shares and the rights represented by them.

The decision to reorganise the joint stock company into a non-commercial partnership must be approved unanimously by all voting shares of the joint stock company.

In a limited liability company, the following decisions must be approved by all votes of the shareholders unanimously:

  • Reorganisation or liquation of the limited liability company.

  • Granting of additional rights and obligations to shareholders.

  • Increase of the nominal value of the shares.

  • Increase of the share capital by issuing new shares for acquisition by certain shareholders or third parties.

In a limited liability company, a decision on the amendment of the bye-laws (in particular, of the share capital) must be approved by two-thirds of all votes of its shareholders.

 

Shareholder rights relating to general meetings

13. Can a shareholder require a general meeting to be called? What level of shareholding is required to do this? Can a shareholder ask a court or government body to call or intervene in a general meeting?

10% of the votes of the shareholders of a limited liability company and 10% of the voting shares of a joint stock company can request the relevant body of the company (the executive body in a limited liability company (general director or collective executive body) and the board of directors in a joint stock company) to call an extraordinary general meeting.

In limited liability companies and joint stock companies the respective corporate body must, within five days, take a decision on either calling the general meeting or refusing the request. If within the five-day period the request is refused or no decision is taken, in a limited liability company the shareholders can call the general meeting themselves and in a joint stock company, the shareholders can bring a lawsuit to the competent court requesting that the court order the joint stock company to conduct the extraordinary general meeting.

 
14. Can a shareholder require an issue to be included and voted on at a general meeting? What level of shareholding is required to do this? Can a shareholder require information from the board about the meeting's agenda?

Each shareholder of a limited liability company and at least 2% of the voting shares of a joint stock company can demand the addition of an item to the agenda of a general meeting. For information a shareholder can require from the board, see Question 10.

 
15. Do shareholders have a right to resolve in a general meeting on matters which are not on the agenda?

The shareholders of a limited liability company and a joint stock company can resolve on matters which are not on the agenda if all shareholders are present.

 
16. Can a shareholder challenge a resolution adopted by a general meeting? Is a certain shareholding level required to do this? What is the time limit and procedure to challenge a general meeting resolution?

Every shareholder of a limited liability company and a joint stock company can challenge a decision of the general meeting if the:

  • Decision is in breach of the relevant laws or the bye-laws of the respective company and violates the rights and lawful interests of the respective shareholder.

  • Respective shareholder has voted against the decision or has not taken part in the voting.

However, the court can allow an unlawful decision to stand if the:

  • Voting of the respective shareholder would have had no effect on the results of the voting.

  • Breach is not substantial.

  • Decision has not caused losses to the respective company.

The lawsuit must be filed with the relevant court within two months (for a limited liability company) or three months (for a joint stock company) from the date on which the shareholder became aware, or should have become aware, of the decision and the grounds for challenging it.

 

Shareholders' rights against directors

17. What is the procedure to appoint and remove a director?

Limited liability companies and joint stock companies can have directors who are members of the board of directors and directors who are members of the executive body (see Question 1).

The board of directors of a limited liability company is only formed if this is provided for in the bye-laws. A joint stock company usually has a board of directors, however, the board is not mandatory if there are less than 50 shareholders. The board of directors of a limited liability company and joint stock company are elected by the general meeting.

In a limited liability company the bye-laws must provide for the appointment and early termination procedure as well as for the term of office of the board of directors. Usually, appointment and early termination require the simple majority of all votes. The board of directors of a joint stock company is elected by cumulative voting (that is, the number of votes of each shareholder is multiplied by the number of directors to be elected, and each shareholder can attribute all votes to one candidate). This type of voting facilitates the election of a certain candidate by minority shareholders.

The executive body (general director or collective executive body) of a limited liability company is elected and its office can be prematurely terminated by the general meeting. If there is a board of directors, the bye-laws can provide for the election and early termination of the executive body by the board of directors. The executive body of a joint stock company is elected and its office can be prematurely terminated by the board of directors and, if there is no board of directors, by the general meeting.

 
18. Can shareholders challenge a resolution of the board of directors? Is there a minimum shareholding required to do this?

Every shareholder can challenge a resolution of the board of directors or of the executive body (general director or collective executive body) on the terms and conditions described in Question 16, provided that it is not required that the respective shareholder has voted against the resolution or not taken part in the voting.

 
19. Briefly set out the main directors' duties to the company and its shareholders. What is the potential liability of directors to the shareholders? Can their liability be limited or excluded? On what grounds can shareholders bring legal action against the directors?

Members of the board of directors and the executive body (general director or collective executive body) have fiduciary duties to the company and its share-holders, which includes using reasonable care and acting in good faith. The law sets out varying levels of liability for violating these fiduciary duties.

Members of the board of directors and the executive body are jointly and severally liable for losses incurred as a result of their faulty actions or inaction. A director is not liable if he voted against the relevant decision or abstained from the vote that approved the decision.

The members of the executive body and of the board of directors are liable to the company for the losses (including direct loss and loss of profits) incurred by the company as a result of their actions.

The liability of the members of the board of directors and of the executive body cannot be limited or excluded.

If a member of the board of directors or the executive body, by breaching its duties, causes losses to a company, every shareholder of a limited liability company and one or more shareholders of a joint stock company holding at least 1% of the joint stock company's voting shares can bring a legal action for compensation for losses against the respective member of the board of directors or the executive body.

 
20. Are directors subject to specific rules when they have a conflict of interest relating to the company? Are there restrictions on particular transactions between a company and its directors? Do shareholders have specific rights to bring an action against directors if they breach these rules?

A transaction where a member of the board of directors or the executive body (general director or collective executive body) has a conflict of interest requires prior approval by the board of directors or the general meeting. The approval of the general meeting is required if:

  • The company does not have a board of directors.

  • There is a board of directors, but the value of the transaction is 2% or more of the value of the assets of the company, unless (only in the event of a limited liability company) otherwise provided in the bye-laws.

Otherwise, the approval of the board of directors is required. If the conflict concerns a member of the board of directors, the interested member cannot vote.

A transaction not duly approved can be declared invalid by a court order upon a claim of the company or its shareholder. However, the court will reject the claim if:

  • Where a resolution of the general meeting was required, the vote of the relevant shareholder could not have affected the results of the vote at the general meeting that approved the transaction.

  • There is no evidence that the transaction has led to (or may lead to) losses or other negative consequences for the company or the shareholder.

  • It is proved that the other party to the transaction did not know and should not have known of the lack of due approval of the transaction.

The limitation period for a court action is one year from the day when the company/shareholder learned (or should have learned) of the transaction and the lack of approval.

 
21. Does the board have to include a certain number of non-executive, supervisory or independent directors?

There is no obligation to include a certain number of non-executive, supervisory or independent directors. However, the corporate governance code of the Central Bank of the Russian Federation (see Question 27) provides that boards of directors should include a sufficient number of independent directors. The corporate governance code states that an independent director is a person who has sufficient professionalism, experience and independence to form their own position, is able to make objective and honest opinions, is independent from the influence of the executive body (general director or collective executive body), separate groups of shareholders or other stakeholders. A candidate for election as an independent director must not be linked to the company, to its major shareholder or to the government/state. Some Russian companies follow the recommendations of the corporate governance code and elect independent directors to their boards of directors.

 
22. Do directors' remuneration and service contracts have to be disclosed? Is shareholder approval of directors' remuneration required?

The payment of remuneration to the directors of the board of directors of a company requires the approval of the general meeting. The remuneration of the members of the executive body (general director or collective executive body) is determined by the body found competent to appoint it (see Question 17).

The remuneration paid to directors of the board of directors and the executive body of a public joint stock company must be disclosed in the annual report of that joint stock company. There is no publication requirement regarding the remuneration of non-public joint stock companies and limited liability companies.

 

Shareholders' rights against the company's auditors

23. What is the procedure to appoint and remove the company's auditors? What restrictions and requirements apply to who can be the company's auditors?

The company's auditor is appointed by the annual general meeting for one year. The subsequent general meeting can appoint the same auditor. Compensation for the auditor must be approved in a limited liability company by the general meeting and in a joint stock company by the board of directors.

The auditor must:

  • Have received a certificate on its qualification as an auditor.

  • Be a member of a self-organised organisation of auditors.

  • Be registered in the register of organisations of auditors and audit companies.

The audit can only be conducted by an independent auditor.

 
24. What is the potential liability of auditors to the company and its shareholders if the audited accounts are inaccurate? Can their liability be limited or excluded?

Based on the services agreement entered into with the company, the auditor is responsible for the quality and correctness of the delivered report. If the report is not correct the auditor must compensate the company for the losses and damages suffered.

Liability under the agreement can be restricted and even excluded, provided that the report was not deliberately inaccurate. This ruling can be declared by a court upon the institution of a lawsuit by the company or every shareholder.

 

Disclosure of information to shareholders

25. What information about the company do the directors have to provide and disclose to its shareholders? What information and documents are shareholders entitled to receive?

The shareholders of a joint stock company and a limited liability company can request disclosure of the following documents and information:

  • General corporate documents.

  • Documents evidencing the rights of the company to its assets mentioned in the balance sheets.

  • Minutes of the meetings of the management bodies.

  • Judicial acts concerning disputes related to the company's establishment, its management or participation therein.

Shareholders holding not less than 25% of the shares in a joint stock company have the right of access to accounting documents and minutes of the meeting of the collective executive body.

The charter or internal documents of any company cannot limit the shareholders' right to information under statutory provisions. In addition, a shareholder can request the provision of information on the company's operation for time periods in which it was not a shareholder.

Shareholders can review the documents in the company's offices or at the shareholder's discretion, obtain copies of such documents. Shareholders do not have to disclose the aims and grounds of their interest in receiving information on the company. They are to indicate in the request only the list and type of information required. However, the level of detail of the shareholder's request is evaluated by the court considering the circumstances of a particular case and the necessity to ensure the actual exercisability by the shareholder of their right (for example, if the shareholder requests minutes of the general meetings of shareholders for a certain period, there is no need to indicate the exact dates of the minutes).

If the requested documents contain confidential information, this cannot constitute grounds for the company to deny the shareholder's request. However, the company can request the shareholder issue a certificate confirming their obligation to keep the information confidential. If the documents contain other statutorily protected information (including banking secrets), the company can provide the shareholder only with extracts from the relevant documents.

Generally, the right to information is terminated when a person ceases to be a shareholder. However, a shareholder who exits from the company is entitled to obtain information on the price to be paid by the company for their shares.

 
26. What information about the company do the directors have to disclose under securities laws (where applicable)?

Disclosure requirements under the Federal Law on the Securities Market, as well as legal acts of the Central Bank of the Russian Federation apply to open joint stock companies (that is, companies registered as open joint stock companies, regardless of whether they correspond to statutory criteria of public joint stock companies or not) and all other joint stock companies which are publicly offering bonds and other securities (de facto public joint stock companies).

The Federal Law on the Securities Market, provides for the following disclosure requirements:

  • Quarterly report of the issuer of serial securities (a quarterly report).

  • The issuer's consolidated financial reports/statements.

  • Reports on material facts.

The reports must include all facts, which might substantially affect the value of securities. The law and the relevant acts of the Central Bank of the Russian Federation contain a detailed list of such facts which include:

  • Holding of general meetings of shareholders/board of directors and certain decisions taken by the board of directors.

  • Existence of a legal entity controlling the issuer.

  • Introduction into the Russian legal entities' register (EGRUL) of information on reorganisation.

  • Liquidation of such entity.

  • Stages of securities issue.

  • Revenue from the securities.

  • Non-performance by the issuer of its obligations towards holders of its securities.

  • Facts which might influence the value of shares.

There are certain situations where additional disclosure obligations arise, namely:

  • Issue of securities (for example, in the course of an increase of the share capital).

  • Registration of securities issue/assignment of identification number to securities issue.

  • Public offering of securities.

  • Registration of report/notification on results of securities issue.

Upon the issuer's request, the Central Bank of the Russian Federation can release the issuer from disclosure obligations provided that certain conditions are met by the issuer (in particular, the issuer's securities are not admitted to organised trade, the issuer does not have any securities except for those registered in a way envisaged by applicable law or the number of shareholders does not exceed 500).

Previously there were certain rules regarding disclosure of information by closed joint stock companies regarding the maintenance of the shareholders' register. As all joint stock companies were obliged to transfer the maintenance of the register to an independent registry, those rules are no longer applicable.

 
27. Is there a corporate governance code in your jurisdiction? Do directors have to explain to shareholders in the company's annual report if they have not complied with it (comply or explain approach)?

In 2002 the Federal Commission on the Securities Market enacted a corporate governance code. An improved corporate governance code was approved by the Central Bank of the Russian Federation on 21 March 2014.

The corporate governance code contains a set of recommendations on best practice corporate governance, clarifying standards of respect for the rights of shareholders, promoting their implementation in practice, ensuring better management of the company, and long-term and sustainable development. Compliance with the corporate governance code is recommended but not mandatory.

The Central Bank of the Russian Federation recommends the implementation of the corporate governance code for joint stock companies whose securities are admitted to organised trade and to state-owned corporations. It is recommended that the companies report on their compliance with the corporate governance code in their annual reports.

Certain standards and recommendations of the corporate governance code have already been included in the new Listing Rules of the Moscow Exchange.

 
28. What information can shareholders request from the board about the company? On what grounds can disclosure of company information be refused? Are shareholders entitled to inspect the company's books and similar company documents?
 

Shareholders' agreements

29. Briefly set out the main provisions of a typical shareholders' agreement.

Since 2009 Russian law contains express provisions on shareholders' agreements. There are new provisions in the Civil Code, which came into effect on 1 September 2014.

According to the law, shareholders' agreements can oblige shareholders to:

  • Exercise their rights (in particular, their voting rights) in a certain way or to abstain from exercising such rights.

  • Acquire or alienate their shares at a certain price or upon the occurrence of certain circumstances or abstain from alienating shares until the occurrence of certain circumstances.

  • Take other agreed actions regarding the management of the company.

However, a shareholders' agreement cannot oblige the shareholders to vote in accordance with instructions of a corporate body of the company, or to determine the structure or the competence of the corporate bodies of the company.

To secure the performance of their rights, creditors of the company and any other third parties can enter into agreements with shareholders under which the shareholders take, or refrain from, certain corporate actions.

 
30. Are there circumstances where shareholders' agreements can be enforceable against third parties?

Under Russian law, shareholders' agreements are obligatory only for the parties to the agreement. Therefore, they are not enforceable against third parties.

The new provisions of the Civil Code state that the breach of a shareholders' agreement can serve as a basis for a court recognising a resolution of a management body of the company as invalid if all shareholders were parties to the shareholders' agreement. However, the invalidity of the resolution does not form a reason for the invalidity of a transaction with a third person, which was entered into on the basis of the resolution.

If an agreement entered into by a party to a shareholders' agreement is in breach of that shareholders' agreement, the agreement can be declared invalid by a court only if the other party to the agreement knew, or should have known, of such breach.

 
31. Do shareholders' agreements have to be publicly disclosed or registered?

The legal position under the provisions of the Civil Code (as effective since 1 September 2014) is that there are no registration requirements. There is no public disclosure requirement for non-public joint stock companies. Regarding public joint stock companies, information on shareholders' agreements must be disclosed to the extent provided in the Law on Joint Stock Companies. However, currently, the Law on Joint Stock Companies does not contain public disclosure requirements.

The parties to a shareholders' agreement must inform the relevant company of the fact that they have entered into a shareholders' agreement. However, they do not have to disclose its contents.

A shareholder in a public joint stock company must notify the joint stock company of certain details of the shareholders' agreement (for example, date of signing and of entering into effect, term of validity, number of shares of the respective shareholder) if:

  • In accordance with the shareholders' agreement, it acquires the right to determine the order of voting of shares of a company, the emission of securities of which was accompanied by the registration of their prospects.

  • As a result of such acquisition the shareholder and its affiliated persons directly or indirectly hold more than 10%, 15%, 20%, 25%, 30%, 50%, or 75% of the common shares of the respective company.

 

Dividends

32. How can dividends be paid to shareholders and what procedures and restrictions apply? Is it possible to exclude or limit the right of certain shareholders to dividends? Is the payment of interim dividends allowed?

Companies can distribute dividends if they have a net profit. A joint stock company can distribute dividends by the end of each calendar quarter and by the end of year.

A limited liability company can distribute profits once every quarter, every half-year or every year.

Dividends cannot be distributed if:

  • The company's capital has not been fully paid.

  • The company has not yet bought back the shares (in a joint stock company) or paid the value of the shares to the relevant shareholder (in a limited liability company) where it is obliged to do so (see Questions 38 and 39).

  • There are signs of the company's insolvency (bankruptcy).

  • The company's net assets are insufficient.

A joint stock company cannot distribute dividends to a group of shareholders until it has distributed the dividends to those who, holding preferred shares, have a preference on dividends.

In a joint stock company all shareholders holding the same type of shares have the same rights to dividends, which cannot be limited or excluded in relation to individual shareholders.

The charter of a limited liability company can provide for distribution of dividends that is disproportionate to the shareholding. Certain shareholders can have their rights to dividends limited or be fully excluded for a certain period of time and/or in certain circumstances. However, an absolute exclusion from dividend payments is questionable.

A joint stock company must maintain a reserve fund of at least 5% of the joint stock company's capital to cover its losses and, as the case may be, make other necessary payments. The joint stock company must make yearly payments into the reserve fund of at least 5% of its net profits until the fund reaches the necessary amount. The net profits required for the reserve fund cannot be distributed as dividends.

A limited liability company is not obliged to have a reserve fund.

Advances on dividends both in joint stock companies and limited liability companies are prohibited.

 

Financing and share interests

33. Can shareholders grant security interests over their shares?

Shareholders of a joint stock company can pledge their shares without restrictions. The share pledge agreement takes effect from the date of its registration in the shareholders' register of the respective joint stock company. Unless otherwise provided by the share pledge agreement, the shareholder continues exercising the rights certified by the pledged shares.

The shareholders of a limited liability company can pledge their shares for the benefit of other shareholders of the limited liability company. The pledge for the benefit of third persons is permitted, unless otherwise provided by the bye-laws of the limited liability company, but requires the consent of the general meeting. The resolution by which the consent is given requires the majority of the other shareholders of the limited liability company, unless a higher majority is required by the charter. The pledge agreement requires notarisation and registration at the Russian legal entities' register (EGRUL). Unless otherwise provided in the share pledge agreement, the pledgee can exercise the rights certified by the pledged shares.

 
34. Are there restrictions on financial assistance for the purchase of a company's shares?

There are currently no restrictions on financial assistance for the purchase of a company's shares.

 

Share transfers and exit

35. Are there any restrictions on the transfer of shares by law? Can the transfer of shares be restricted? What are the rights of shareholders in the case of an issue of new shares (pre-emption rights)?

In a public joint stock company and open joint stock company, stock is freely transferable subject to contractual limitations. In a limited liability company each shareholder and, if the bye-laws so provide, the respective company, enjoy the right of first refusal of the shares sold by other shareholders to third parties. The shareholders in a non-public joint stock company and closed joint stock company enjoy a right of first refusal if that right is provided in the bye-laws. The Law on Joint Stock Companies grants a right of first refusal to the shareholders in a closed joint stock company. However, as the provisions of the Law on Joint Stock Companies are overruled by the relevant provisions of the Civil Code of the Russian Federation (see Question 1), it is unclear if such right of first refusal applies.

In a limited liability company further limitations apply:

  • Shares can be transferred only to the part they are paid.

  • If shares are sold at public sales they do not pass to the acquirer until all the company's shareholders give their consent.

  • In the event of a charge on the shares, the company or the other shareholders can prevent the share transfer to a third party by paying out the actual value of such shares to the creditors.

  • The limited liability company's bye-laws can provide for further limitations (for example, prohibition of share transfers to third parties, requirement of a prior consent).

Limitations on share transfers, both in joint stock companies and limited liability companies, can be provided for in shareholders' agreements. As Russian law on shareholders' agreements is new, there is no practice and no certainty with how far the contractual limitations may go. It is understood that shareholders cannot completely waive their right to transfer shares.

Shares which are issued in the course of a share capital increase from the company's funds can be distributed only among the shareholders.

Regarding shares issued in the course of share capital increases from new shareholders' funds, the shareholders enjoy a pre-emption right. If the shares are to be distributed among a certain circle of persons, only shareholders who voted against the relevant resolution of the shareholders' meeting enjoy the pre-emption right.

Shareholders of open joint stock companies have further rights in offerings by open subscription.

 
36. Can minority shareholders alter or restrict changes to the company's share capital structure?

Minority shareholders of the company can restrict changes to the company's capital structure by:

  • Exercising their right of first refusal when shares are being sold to a third party (only in a limited liability company, non-public joint stock company or closed joint stock company) (see Question 35).

  • Refusing to consent to the sale of shares if the consent is required by the charter (only in a limited liability company).

  • Exercising their pre-emption rights granted during a capital increase (see Question 35).

  • Not approving a disproportionate sale of own shares of the company among its shareholders or sale of own shares of the company to third parties (only in a limited liability company).

 
37. When are shareholders required to notify changes to their shareholding to a regulatory authority?

Shareholders must notify the regulatory authority of changes to their shareholding in cases such as the following:

  • The acquisition of shares which leads to the acquirer holding directly or indirectly over 25%, 50% or 75% of the voting shares in a joint stock company or a third, half or two-thirds of the shares in a limited liability company may require the prior approval of, or notification to, the Russian anti-trust authority, depending on the scale of business of the acquirer and the target and their position in the Russian market.

  • The direct or indirect acquisition of shares in a strategic Russian company (that is, a company with strategic significance for the country's defence and state security) may require prior approval of, or notification to, the Russian competent authorities.

  • Each direct acquisition of more than 10% of the shares in a company by a person registered with the Russian tax authorities must be notified to the tax inspectorate (until 31 December 2014 the obligation applied to acquisition of shares regardless of the fraction in the share capital).

  • The Central Bank of the Russian Federation must be notified of the acquisition of 5% or more of the voting shares in a joint stock company and of each subsequent transaction under which the amount of shares passes any of the following thresholds; 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%.

 
38. Can companies buy back their shares? Which limitations apply?

A joint stock company can acquire its own shares if:

  • The general meeting has taken a decision on a decrease of the share capital by reducing the amount of shares, provided that such decrease is permitted by the bye-laws of the joint stock company and does not lead to a reduction of the share capital to less than the minimum share capital.

  • The general meeting or the board of directors has taken a decision on the re-purchase of shares, provided that the re-purchase is permitted by the bye-laws of the joint stock company and the nominal value of the shares will not be less than 90% of the share capital of the joint stock company.

  • A shareholder demands the acquisition (see Question 39).

However, the joint stock company can acquire shares only if the following conditions are met:

  • The joint stock company's share capital is fully paid.

  • There are no indications of an insolvency (bankruptcy) of the joint stock company and such indications will not be caused by the envisaged acquisition of its own shares.

  • The amount of the net assets is not less than the share capital and the reserve funds of the joint stock company and will not become less due to the envisaged acquisition of own shares.

  • There are no outstanding obligations to re-purchase own shares (see Question 39).

A limited liability company must re-purchase its own shares if the re-purchase is demanded by a shareholder (see Question 39).

 
39. What are the main ways for a shareholder to exit from the company? Can shareholders require their shares to be repurchased by the company? Can shareholders be required to exit the company in certain circumstances? How are the shares valued in this case?

The shareholder of a joint stock company can demand the re-purchase of its shares by the joint stock company if it has voted against or not participated in the voting on a decision of the general meeting on:

  • Entering into a large transaction (see Question 40).

  • Re-organisation of the joint stock company.

  • Amendment of the bye-laws of the joint stock company which restricts the respective shareholders' rights.

  • De-listing of shares or of securities convertible into shares.

The price for the re-purchase is determined by the board of directors, but cannot be less than the market value of the shares determined by an independent expert. In the event of a de-listing of shares or securities convertible into shares, the price should not be less than the average price in the organised trades of the last six months. The total price for all re-purchases, the right to which was caused by a decision of the general meeting, cannot exceed 10% of the net assets of the joint stock company.

The shareholder of a limited liability company can demand the re-purchase of their shares by the limited liability company if they:

  • Have exercised their right, provided in the bye-laws, to exit from the limited liability company (not being the sole shareholder of the limited liability company).

  • Cannot assign their shares to a third person because such assignment is prohibited by the bye-laws of the limited liability company and the other shareholders deny the acquisition, or according to the bye-laws of the limited liability company, the shareholder needs the consent of the limited liability company or other shareholders and such consent is denied.

  • Have voted against, or not participated in the voting on a decision of the general meeting to enter into a large transaction (see Question 40) or increase share capital.

  • Were expelled from the limited liability company due to a gross violation of their duties or obstruction of the limited liability company's activities.

The limited liability company must pay to the withdrawing shareholder the "actual" value of its share(s), in cash or in assets. The "actual" value is determined on the basis of the limited liability company's accounting reports for the last reporting period. However, payments can only be made from the net assets of the limited liability company and on the condition that there are no indications of insolvency (bankruptcy) of the limited liability company and such indications will not be caused by the payment.

 

Material transactions

40. What rights do shareholders have in the case of material transactions, such as a sale of all or substantially all of the company's assets, and a company reorganisation such as a merger or demerger?

The sale of all or a substantial amount of the company's assets qualifies as a "large" transaction under Russian law. Large transactions are transactions, the value of which exceeds 25% of the assets of the relevant company and which do not fall under the usual business activity of the company. Large transactions require the approval of the board of directors if their value is between 25% and 50% of the assets of the company and of the general meeting if their value exceeds 50% of the assets of the company. The bye-laws of a limited liability company can exclude or soften the requirements of the law.

If the company enters into a transaction in breach of the requirements of large transactions, the transaction can be declared invalid by a court upon demand of the respective company or any of its shareholders. A court will not declare the transaction invalid, if the other party did not know and should not have known of such breach or if the relevant transaction has not lead to loss or damage to the company.

Shareholders who have voted against, or not participated in the voting on the decision of the general meeting can demand the re-purchase of their shares by the company (see Question 39).

In the event of a merger or de-merger of a company, its shareholders have the right to:

  • Receive shares in the new company (or companies) in proportion to their current shares.

  • Be informed well in advance of the general meeting that will consider the merger/de-merger and make proposals on the general meeting's agenda.

  • Challenge the transactions and the relevant resolutions of the company's management bodies, which are in breach of the terms of the merger or de-merger.

In a limited liability company the decisions on a merger or de-merger are adopted by a resolution of the general meeting requiring a unanimous vote of all the shareholders, in a joint stock company the shareholders who voted against the motion or did not participate in the general meeting can demand the re-purchase of their shares by the joint stock company.

 
41. What rights do shareholders have if the company is converted into another type of company (consider if applicable, a European Company (SE))?

A company cannot be converted into a European Company (SE). Shareholders' rights in the event of a conversion of the company into a company of another type are essentially the same as in the event of a merger or de-merger (see Question 40).

 

Insolvency

42. What rights do shareholders have if the company is insolvent?

In the event of the company's liquidation, shareholders have the right to receive the part of the company's assets that have remained after settlement with creditors or its monetary equivalent, this is referred to as a "liquidation quote". The holders of a joint stock company's preferred shares are entitled to receive the "share liquidation values", which are determined by the bye-laws of the respective joint stock company.

 
43. Can shareholders put the company into liquidation? What is the procedure to do this?

Shareholders can put the company into liquidation by convening an extraordinary general meeting with the company's liquidation on the agenda. In a limited liability company, the general meeting must be convened by shareholders holding at least one-tenth of the total number of the shares. In a joint stock company, the general meeting must be convened by shareholders holding at least 10% of the voting shares.

The decision to liquidate the company must be adopted by the general meeting, requiring in a limited liability company a unanimous number of votes of all shareholders and in a joint stock company a three-quarters majority of the voting shares participating in the general meeting.

 

Corporate groups

44. Is the concept of a corporate group recognised under specific legislation?

Under Russian law companies belong to a "group" if they are related to each other by direct or indirect majority shareholding. The concept of a "group" is primarily used in Russian anti-trust law with regard to merger control, in order to determine market power. In Russian anti-trust law all companies belonging to one group are treated as one business unit, with the consequence that the market shares and assets of all companies belonging to a group are added up.

In addition, Russian law contains the concept of "affiliated persons". The affiliated persons of a company are its officers, as well as other companies of the same group and companies in which the company controls more than 20% of the votes or vice versa. The concept of affiliated persons is used to determine conflicts of interest within a company particularly in relation to the company's transactions. Transactions with affiliated persons (interested-party transactions) require corporate approval (see Question 20).

Limited liability company affiliated persons must inform the company of their acquisition of voting shares in it. If the notice is not duly served the affiliated person is liable to the company for any incurred damage.

Joint stock company affiliated persons must inform the board of directors, the revision commission and the auditor of the joint stock company of legal entities in which they and their affiliated persons hold 20% or more of the voting shares, the management bodies in which they hold positions and transactions in which they have an interest.

The company must store information on its affiliated persons and, where required by law, provide/disclose it to public authorities and/or the public (the disclosure requirement mostly applies to public companies).

The Russian Civil Code contains the following general provisions on holding companies (companies holding more than 50% of the shares in a subsidiary):

  • A holding company which has the right to give binding instructions to a subsidiary bears (together with the subsidiary) the joint liability for the obligations arising from all transactions into which the subsidiary enters upon the instruction or with the consent of the holding company.

  • In the event of the bankruptcy of the subsidiary being caused by the fault of the holding company, the holding company (together with the subsidiary) bears joint liability for the obligations of the subsidiary.

 
45. Does a controlling company have any duties and liability to the shareholders of the company it controls? What are the rights of company shareholders if the controlling company carries out actions that are prejudicial to the shareholders?

If the controlling company has caused losses to the subsidiary by action or non-action, the other shareholders of the subsidiary can claim compensation for the losses from the controlling company. Furthermore, the other shareholders have the right to:

  • Block resolutions of the general meeting, which require a qualified majority.

  • Bring a lawsuit against decisions of the general meeting if they do not comply with the law and if they have voted against it or have not participated in voting.

  • Bring a lawsuit against decisions of the board of directors if they do not comply with the law and if they infringe the rights and lawful interests of the shareholders.

  • Claim compensation for damages from the members of the board of directors or the executive body (general director or collective executive body of the joint stock company).

  • Demand from the company the re-purchase of their shares (see Question 39).

 
46. What are the limitations on owning reciprocal share interests in companies?

There are currently no limitations on owning reciprocal share interests in companies.

 

Online resources

European Bank for Reconstruction and Development (EBRD)

W www.ebrd.com/downloads/legal/corporate/russia_code.pdf

Description. Unofficial translation of Corporate Governance Code in English (translation is for guidance only).



Contributor profile

Dr Thomas Mundry, Partner

Noerr OOO

T +7 495 799 56 96
F +7 495 799 56 97
E thomas.mundry@noerr.com
W www.noerr.com

Professional qualifications. Rechtsanwalt (German Attorney), PhD in Law from Freie Universität Berlin, Germany

Areas of practice. M&A; joint ventures; corporate; real estate; international trade.

Recent transactions

  • Advising Knorr-Bremse, on the establishment of several joint ventures with Russian partners; with KAMAZ OAO, with a large Russian heavy engineering company and with the largest Russian railway company.
  • Advising Daimler AG, on the establishment of two joint ventures with a major Russian truck manufacturer for the production, distribution and servicing of heavy and light trucks.

Languages. German, English and Russian

Professional associations/memberships. German-Russian Chamber of Commerce,Association of European Business in Russia

Publications

  • Acquisition of state and municipal plots by private investors, Bona Fide Acquisition, in: International Law Office, 02/2015 (with Asia Tachtaeva).
  • Product Recall 2015, 2010 (coverage of Russian law), in: Getting the Deal Through (with Ekaterina Kalinina).
  • Direktinvestitionen in Russland, in: WIRO-Handbuch, 119, Ergänzungslieferung, 12/2014.

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