Member Article

Dear Sirs,

We would like to draw your attention to the fact that the Ministry for Economic Development of the Russian Federation has drafted the Federal law “On amending the Civil Ñode of the Russian Federation, the Federal law “On joint stock companies” and some other legal acts of the Russian Federation” (hereafter – “the Draft law”). The Draft law guides the improvement of the institution of affiliates in Russian corporate law, the regulation of relations in the sphere of approval and commitment of major deals and related-party transactions (with conflict of interests), as well as determination of adequate controlling measures for commitment of transactions that may lead the company to disadvantage.

We would like to draw your attention to the essential provisions of the Draft law:

1.     The Draft law elaborates the notion of the affiliates. In compliance with the Draft law the affiliates include interdependent (controlling, controllable and subjected to general control) and related (directly or indirectly) parties.

1.1   Controlling is recognized as a party capable either directly or indirectly (through third parties), solely or jointly with its affiliates, to determine decisions (actions) of the company (controllable person), including giving instructions obligatory for the company, in compliance with the agreement, or according to foundation documents, or otherwise. In compliance with the Draft law there is a presumption of control of a person who is entitled to dispose of more than 50% of the total number of votes falling within the voting shares (participatory shares), constituting the charter capital of the controllable company.

1.2   Subjected to general control are recognized as two or more companies, controllable to another natural or corporate person. With that the corporate persons, subjected to general control of the Russian Federation, region of the Russian Federation or municipal unit, are not interdependent, if there are no other grounds for the interdependence rise.

1.3   Persons directly related with the company are recognized as a party exercising powers of the sole executive board of the company, members of boards of the company, manager (managing organization), exercising the functions of the sole executive board of the company, participant of the full partnership, participant of the business company, owning solely or jointly with his affiliates more than 20% of votes, falling within the shares (participatory shares), constituting the charter capital of the company.

1.4   Persons indirectly related with the company are recognized as spouses, parents, children, blood or non-blood brothers and sisters, adoptive parents and adopted children, fiduciaries, tutors and persons under care, grandfathers, grandmothers and grandchildren of natural persons controlling this company, and of natural persons directly related to this company. Also companies are recognized as directly related with each other if the controlling or directly related to the company person is simultaneously a related person to another company.

1.5   Related parties of a natural person include his spouse, parents, children, blood or non-blood brothers and sisters, adoptive parents and adopted children, fiduciaries, tutors and persons under care, grandfathers, grandmothers and grandchildren.

2.     The Draft law amends grounds for responsibility of a company and its affiliates. Participants (shareholders, members) of the controllable company or the controllable company itself are entitled to require the compensation by the controlling person of damages caused to the controllable company.

Thus, the Draft law proposes to amend Article 6 of the Federal law “On joint stock companies” and exclude “the non-influence presumption” of a holding company on actions of its affiliates. Presently the law states that a holding company is assumed as entitled to give to its affiliate obligatory instructions only in case it’s directly provided for by an agreement with an affiliate company or by a charter of an affiliate company.

Furthermore, participants (shareholders, members) of an affiliate company or an affiliate company itself will be entitled to recover compensation by a holding company of damages inflicted to an affiliate company.

3.     The Draft law proposes to exclude from the major deals approval procedure some additional types of deals, in particular:

A.      deals performed within the normal economic activity of a company[1] (the effective edition of the Federal law “On joint stock companies” contains such exclusion, and the Draft law proposes to elaborate the exclusion);

B.      deals performed along with placing of shares and equity securities convertible to shares;

C.      deals performed in fulfillment of decisions on reorganization of a company if the decision on the reorganization determines or allows to determine essential conditions of the corresponding deals;

D.      deals performance of which is obligatory for a company in compliance with the federal laws and (or) other legal acts of the Russian Federation and accounts on which are performed at fixed prices and rates stated by bodies authorized in the sphere of state prices and rates regulation;

E.      deals performed in fulfillment of a judicial act;

F.      deals of acquisition of an open joint stock company shares, performance of which is obligatory for a company in compliance with chapter XI.1 of the Federal law “On joint stock companies”;

G.     deals concluded at the equal with the preliminary agreement terms, if such an agreement contains all the information, provided by item 4 of Article 79 of the Federal law “On joint stock companies” and was approved in the order, provided by chapter X, administrative board of a company that is authorized to approval of the main agreement.

4.     The Draft law excludes from the deals with an interested party (deals with conflict of interests) approval procedure for some additional types of deals, in particular:

A.      deals performed within the normal economic activity of the company;

B.      deals on delegation of powers of the sole executive board to a managing company (manager);

C.      deals guiding the determination of an obligation of a company to include assets into the charter capital of a company along with its foundation, if the founding company results in possessing of 90% and more of voting shares (participatory shares) of a founded company;

D.      deals with an interest of a party owning solely or jointly with his affiliates 90% and more of the voting shares of a company if there is no conflict of interests of other parties;

E.      deals concluded at the equal with the preliminary agreement terms.

5.     The Draft law makes amendments to the order of approval of the deals with conflict of interests (the Draft law makes no difference between the terms of “deal with an interested party” and “deal with conflict of interests”) by the general meeting of the shareholders. Thus, the Draft law proposes to set that a deal is assumed as approved if the majority of non-interested in a deal shareholders owning voting shares participating in voting on this question voted for it (it will solve the problem of shareholders regularly missing general meetings). This order particularly will reduce expenses, including time span, on holding meetings, due to the needlessness of repeated meetings.

6.     The order of disclosure of information on interest (conflict of interests) is elaborated, which guides the correct provision of revelation of conflict of interests when deals are performed.

Thus, for example, persons directly related with a company, as well as a person controlling the company are obliged to notify a company with information on its affiliates, on the grounds of their affiliation, on change of the composition of affiliates, change of the information on them, on commitment or planning by such persons or their affiliates deals with a company, as well as other facts that may lead or have led to the rise of interest in commitment of a deal by a company. In case of non-performance or undue performance of the stated duties persons that made a fault are responsible before a company for the amount of damages inflicted.

7.     The majority of amendments into the Federal law “On joint stock companies” are proposed to be expanded also on limited liability companies.

It’s supposed that adoption of the Draft law will aid the provision of favorable conditions for the activity of companies and the advance of their investment attraction.

The Draft law is at the stage of confirmation at the moment and yet hasn’t been put to the State Duma’s consideration, so the present edition may be amended. We will keep you informed on the status of consideration of this document.

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We hope the information above is helpful for you.

For more information on ALRUD Corporate practice please visit our Web-site

or contact directly ALRUD Senior Partner Vassily Rudomino [email protected]

and Partner Alexander Zharskiy [email protected]

Kind regards,

ALRUD Law Firm

Please note: We would like to draw your attention to the informational purposes of this newsletter and to the fact that it cannot be a ground for making a decision in each particular case. When preparing this newsletter all the information was taken from open sources only.

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[1] Presently the notion of deals falling within normal course of business is not recognized by law: The Supreme Arbitrazh Court of the Russian Federation Plenum’s decision as of 18.11.2003 No. 19 “On some issues related to application of the Federal law “On joint stock companies” contains a tentative list of such deals

The Draft law proposes to define deals falling within normal course of business as deals committed by a company on a regular basis at a price that in comparable background is usually set for equal goods, work or services, and if there are similar agreements – on conditions comparable to the essential conditions of the named agreements concluded by a company.