Corporate Governance – Important Changes to the Stock Companies and Securities Market Laws

September 2009

In June 2009, Russian President Dmitri Medvedev signed into law important amendments¹ to the Russian Stock Companies Law.² These amendments focus on four key issues:

(i)    Shareholders agreements;

(ii)   Voting at meetings of the board of directors;

(iii)  Resolution of deadlocks within the board of directors; and

(iv)  Increased public disclosure requirements.

Shareholders Agreements

For many years, there was great uncertainty about the legal status of shareholders agreements in connection with Russian stock companies. Many observers considered such agreements to be unenforceable and Russian court practice was generally not supportive of such agreements.

In contrast, shareholders in Russian stock companies are now expressly allowed to enter into shareholders agreements under Russian law. New Article 32¹ of the Stock Companies Law defines a “shareholders agreement” as an agreement relating to the exercise of rights arising from the ownership of shares, including limitations on the exercise of such rights. Such agreement may establish binding obligations of parties to vote in a certain manner at a general shareholders meeting; to acquire or dispose of shares at a predetermined price (thus facilitating “buy-sell” provisions); to restrict transfers of shares, in certain circumstances; and to cooperate in certain other matters connected with corporate governance, reorganization and/or liquidation of a stock company.

Additionally, a shareholders agreement may provide for collateral to secure the performance of such obligations, and may establish the liability of parties who breach the shareholders agreement. Rights under a shareholders agreement may now clearly be enforced by the Russian courts.

Certain Limitations

The amended Stock Companies Law places certain limitations on shareholders agreements. For example, shareholders agreements must be in writing and signed as a single document, and must relate to all of the shares owned by each of the parties.

Importantly, a shareholders agreement is only binding on those shareholders who are parties to the agreement. If a party to a shareholders agreement concludes another contract (such as an agreement to sell shares) with a third party in express violation of the shareholders agreement, the new contract may only be held invalid if the third party knew or ought to have known about the restrictions in the shareholders agreement. Further, a shareholders agreement does not override the decisions of the governing bodies of a stock company, such as the board of directors.

Required Notice of Acquisition of Rights

If as a result of entering into a shareholders agreement, a shareholder increases its powers to control voting shares (either alone or together with its affiliates) by more than certain thresholds (i.e., 5, 10, 15, 20, 25, 30, 50 or 75 percent of the issued ordinary shares of the stock company), such shareholder may be required to notify the stock company and the Federal Service on Financial Markets (the “FFMS”)³ of such acquisition within five days. The notification is required if the stock company has a registered prospectus (e.g., if the company has issued shares in an open subscription or a closed subscription to more than 500 persons).

Minimum Voting Requirements for Board of Directors

Article 68 of the Stock Companies Law governs decisions of the board of directors. Prior to the amendments, it was possible for the charter or internal regulations of a stock company to provide for the adoption of board decisions by less than a simple majority of all directors present at a meeting.

Amended Article 68 has tightened up these voting rules. Now, the charter or internal regulations of a stock company must provide that the board of directors adopts decisions by at least a simple majority of the directors present at a meeting. Of course, a higher majority may be specified if desired.

Resolution of Deadlocks on Election of Management

Prior to the amendments, there were no formal options for resolving deadlocks within the board of directors concerning the election of company management. To address this problem, amended Article 69 of the Stock Companies Law now states that if the board is deadlocked with respect to the appointment or termination of senior management (i.e. , the general director), then, in addition to other remedies available under a shareholders agreement (if any), the matter may be referred for resolution to the shareholders, unless the charter provides otherwise.

However, this procedure only applies if:

• The board of directors has failed to reach a decision within a certain period of time (after two consecutive meetings, or in the case of the election of new management and if the second meeting is not held within two months after the termination or expiration of the term of the previous management); and
  
• No decision was reached due to the absence of a quorum (so long as the quorum is more than half of the elected board members); and/or
  
• No decision was reached due to insufficient votes in favor (in circumstances where more than a simple majority of votes of the board members present is required).

The failure of the board of directors to decide on the election or early termination of management should be disclosed to the public, in accordance with the applicable disclosure rules for the Russian securities market. If the company is not subject to any public disclosure requirements, then the shareholders must be notified.

The shareholders thus notified may request that a shareholders meeting be convened to resolve the deadlock. The meeting must be convened if requested by shareholders owning at least 10 percent of voting shares.

Additional Disclosure Rules

Changes to Article 30 of the Securities Market Law⁴ have established new public disclosure requirements for stock companies with a registered prospectus, which include notification of the following events:

• Deadlocks with regard to appointment and termination of the senior management (as described above); and
  
• Acquisition by a shareholder (alone or with its affiliates), either directly or indirectly as the result of entering into a shareholders agreement, of more than 5, 10, 15, 20, 25, 30, 50 or 75 percent of voting shares or the power to control more than said percentages of shares.

The disclosures must be made by notice to the proper authority - generally, the FFMS - within five days.

This article is intended only as a general discussion of these issues. It is not considered to be legal advice.

© 2009 Dewey & LeBoeuf LLP. All rights reserved. No part of this publication may be reproduced, in whole or in part, in any form, without our prior written consent.

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¹ These changes were primarily set forth in Federal Law No.115-FZ dated June 3, 2009 “On Introduction of Amendments to Federal Law on Stock Companies.”
² Federal Law No.208-FZ dated December 26, 1995 “On Stock Companies.”
³ Article 30 of the Securities Market Law.
⁴ Federal Law No.39-FZ dated April 22, 1996 “On Securities Market.”