1 Setting the Scene – Sources and Overview
1.1 What are the main corporate entities to be discussed?
At present, there are two main types of legal entities in Russia: Limited Liability Company (LLC) and Joint-Stock Company (JSC). LLCs' authorized capital is divided into a specified number of participation interests, which are not securities under the Russian law. Consequently, LLCs are exempt from securities market regulations. The maximum number of participants in an LLC is 50.
JSCs are divided into “open” (OJSC) and “closed” (CJSC) ones. Shares in an OJSC are freely transferable and can be traded at a stock exchange. As to a CJSC, shares in it belong to its founders and shareholders, their transfers are restricted and other shareholders have pre-emption rights. There is no maximum limit for the number of shareholders in an OJSC but it cannot exceed 50 for a CJSC. Shares are treated as securities under Russian law, and JSCs are, therefore, subject to securities market regulations.
Established in 1995, the Russian Trading System Stock Exchange (RTS) is one of the main stock markets in Russia. Russia’s other leading stock exchange is the Moscow Interbank Currency Exchange (MICEX). The MICEX Stock Exchange organizes daily trading in securities of 760 Russian issuers, including Gazprom, RAO UES, Sberbank, Norilsk Nickel, LUKoil.
This article will focus on OJSCs.
1.2 What are the main legislative, regulatory and other corporate governance sources?
Russia’s legal and regulatory framework for corporate governance includes:
(i) Russian legal acts, including, among others, the Civil Code 1995, which cover all types of companies, the JSCs Law 1995, the Securities Market Law 1996, which governs, amongst other things, procedures for issuing and trading in securities, disclosures by issuers and their other duties, the Law “On the Protection of Investors’ Rights and Legal Interests on the Securities Market” 1999, which provides for a mechanism to penalize entities found in breach of disclosure rules. The above list is as of April 15, 2008. It is not comprehensive. Moreover, Russian legislation governing, amongst other things, corporate governance continues to develop;
(ii) Regulations introduced by Russia’s Federal Commission for Securities Market (FCSM), including the Regulation on Disclosure of Information by Securities Issuers 2006, and the Code of Corporate Conduct 2002, which do not have legal force and are not binding; yet such Russian stock exchanges as the RTS and the MICEX require that some listed companies confirm their compliance with the FCSM Code of Corporate Conduct recommendations;
(iii) The Russian Stock Exchanges rules such as the RTS or the MICEX rules that govern trading in OJSC securities at these stock exchanges;
(iv) Constitutional documents of OJSCs, including their Articles of Association, which specify the governing bodies of the company, the division of powers between them and other aspects concerning the governance of the company; and other internal rules of a company such as Regulations on Holding Shareholders’ Meetings and Regulations on the Supervisory Board.
1.3 What are the current topical issues and trends in corporate governance?
Corporate governance is so far at the development stage in Russia, and investors operating in Russia may face the following problems:
(i) as regards relations with majority shareholder relationships, there may occur such violations of minority shareholder rights as dilutions of shareholders’ stocks through stock issues, violations of disclosure requirements, delays in dividend payments etc.;
(ii) as regards relations with management bodies, there may occur such violations as conclusion of transactions involving the company’s core assets or related party transactions without approval of the shareholders’ meeting or the supervisory board, provision of insufficient information on the management body’s activities to shareholders.
Such problems result in numerous corporate conflicts between minority and controlling shareholders and between shareholders and executives.
There are several ways to resolve the above mentioned problems:
(i) At the national level, certain amendments into Russian laws and the FCSM regulations are needed;
(ii) At the corporate level, adherence to good international corporate governance standards, adoption of internal rules ensuring, amongst other things, transparency of management bodies’ activities to be achieved through the establishment of information procedures, and effective internal controls, and observance of these rules by all interested parties are needed.
2 Shareholders
2.1 What rights and powers do shareholders have in the operation and management of the corporate entity/entities?
Generally, OJSCs shareholders do not conduct management of their companies and delegate it to the Supervisory and Management boards including a General Director (CEO). However, the Russian law on JSCs 1995 reserves some rights to shareholders such as:
- Revision of company’s Articles of Association;
- Reorganizing and liquidating the company;
- Appointment the company’s Boards of Directors (Supervisory and Management boards) and terminating their powers;
- Approval for substantial property transactions and related-party transactions;
- Approval of the annual reports and annual financial statements.
Shareholders exercise rights primarily through participation in General Shareholders’ Meetings. Shareholders may attend General Shareholders’ Meetings and vote on any matters in its competence.
The General Meeting of Shareholders is a company's supreme authority.
The General Shareholders’ Meeting may not, however, consider and decide on any matters that are outside its competence as per the Russian law on JSCs 1995.
Shareholders are also entitled to receive information about the company’s activities. A company is obliged to ensure that its shareholders have access to its internal documents. Accounting documents and minutes of meetings of a company’s collegial executive body are accessible to a shareholder (shareholders) owning in the aggregate at least 25 percent of the company’s voting stock.
2.2 Do indirect shareholders (e.g. beneficial shareholders who hold through nominees), have direct rights in relation to the corporate entity/entities?
A beneficial shareholder represented by a nominee has all the same rights in respect of the company as other shareholders but exercises them indirectly, through the nominee.
A nominee is obliged to transfer the shares to the beneficial shareholder, if so requested by the latter.
2.3 Are there any limitations on, and disclosures required, in relation to interests in securities by shareholders?
In general, there are no limitations on the number of shares which a shareholder can hold. However, Russian laws impose certain restrictions on foreign ownership of banking, insurance, mass media, etc. companies.
In addition, in certain cases a shareholder buying shares is obliged:
- to obtain a prior consent of or to notify the antimonopoly authority;
- to make a mandatory offer or request to all other shareholders.
Information about shareholders holding more than five percent in a company is disclosed in its reporting. It is also shown in tag-along offers and requests.
2.4 What shareholder meetings are commonly held?
A company needs to hold an annual General Shareholders’ Meeting. In addition to such an annual General Shareholders’ Meeting, extraordinary General Shareholders’ Meetings may be held.
An annual General Shareholders’ Meeting must be held within the time-limits envisaged in the company’s Articles of Association but in any case no earlier that two months and no later than six month after the end of the preceding financial year. The following matters are obligatory on the agenda of an annual General Shareholders’ Meeting:
- appointment of the company’s Boards of Directors (Supervisory and Management boards);
- appointment of the Company’s auditing commission;
- approving annual reports and annual financial statements;
- distributing the financial year’s dividends.
An extraordinary General Shareholders’ Meeting may be held by decision of the company’s Supervisory Board on its own initiative or on request from the company’s Auditing Commission, Auditor or shareholder (shareholders) owning at least 10 (ten) percent of the company’s voting stock.
Each shareholder should be notified of a General Shareholders’ Meeting no later than 20 days prior to the scheduled date. A General Shareholders’ Meeting is announced at least 30 or 70 days prior to the date of the Meeting if the company’s reorganization or elections to the Supervisory Board, respectively, are among the items on the agenda of the Meeting.
Said notice is delivered by registered mail or by hand against the signature of the recipient or published in the printed mass medium accessible for all of the company’s shareholders and designated for this purpose in the Articles of Association of the company.
A shareholder (shareholders) owning in the aggregate at least 2 percent of the company's voting shares are entitled to propose items to the agenda of an annual General Shareholders’ Meeting or members for the company's Supervisory Board or Management Board or Auditing Commission.
A General Shareholders’ Meeting is competent (has quorum) if it is attended by shareholders representing in the aggregate more than half the votes granted by the company’s outstanding voting shares.
A General Shareholder’s Meeting makes decisions by majority of votes of shareholders owning the company’s voting stock and attending the meeting. Decisions on some key matters (such as introducing amendments into the Articles of Association, reorganizing or liquidating the company) are made by a majority of three fourths of shareholders owning voting stock and attending the meeting.
A General Shareholders’ Meeting may decide on some matters by mail vote, without holding a meeting (to be understood as a co-attendance by the company’s shareholders).
2.5 Can shareholders call shareholder meetings or put resolutions?
Shareholders are not entitled to pass any management governance decisions but may require an Extraordinary General Shareholders’ Meeting to be held and to propose items to the agenda of an annual General Shareholders’ Meeting as mentioned in clause 2.4 above.
Shareholders may themselves conduct an extraordinary General Shareholders’ Meeting if the Supervisory Board fails to respond their request for such a meeting within the prescribed time.
Where all voting shares are held by one shareholder, the sole shareholder alone makes decisions on issues falling within the competence of the General Shareholders’ Meeting and drafts them in writing.
2.6 Is electronic communication to or by shareholders possible?
Current Russian laws do not provide for electronic communication to or by shareholders. The Russian JSCs law prescribes a limited choice of information exchange methods for some corporate procedures. Thus, notices of General Shareholders’ Meetings are required to be sent by registered mail, delivered by hand (against the signature of the recipient) or published in a printed mass medium.
Electronic communications may be used as additional means of near real-time information exchange but in this case copies of electronic messages are required to be sent by traditional means.
2.7 Can shareholders be liable for acts or omissions of the corporate entity/entities?
In general, shareholders are not liable for any acts or omissions of their company. Shareholders bear responsibility for losses occurred in connection with the company's operations within the value of shares in their holding.
Shareholders who failed to pay up the shares in full bear joint and several responsibility in relation to the company's liabilities within the outstanding portion of the value of the shares in their holding.
If the company’s insolvency (bankruptcy) is due to its shareholders’ acts (omissions), such shareholders may be held secondarily liable for the company’s liabilities if the company’s assets are not sufficient to settle them.
2.8 Can shareholders be disenfranchised?
In general, under Russian laws is that a shareholder may not be deprived of his rights.
There are, however, certain exceptions. Such cases include a mandatory buy-out of a company’s shareholder by someone who has more than 95% in the same company.
In some cases, the court may prohibit the General Shareholders Meeting from deciding on certain matters included on the agenda if such matters constitute or are directly associated with subjects of disputes, or prohibit a joint-stock company, its bodies or shareholders from implementing a decision of the General Shareholders’ Meeting on a certain issue.
2.9 Can shareholders seek enforcement action against members of the management body?
Russian laws allow a shareholder or shareholders owning in the aggregate at least one percent of the company’s outstanding stock to bring actions against any member of the company’s Supervisory Board, Management Board, a General Director (CEO) for damages caused to the company by their guilty acts (omissions).
3 Management Body and Management
3.1 Who manages the corporate entity/entities and how?
A company’s governing bodies include, in addition to its General Shareholders’ Meeting:
- a Supervisory Board;
- executive bodies: sole executive body (CEO, or in Russian - General Director) and /or collegial executive body (Management Board).
A Supervisory Board is compulsory in companies where more than fifty shareholders hold voting stock. Members are elected to the Supervisory Board by a General Shareholders' Meeting but are officially independent and are not obliged to follow shareholders’ instructions in deciding on matters within their terms of reference.
A company's Supervisory Board is competent to decide on matters of general management of the company's operations, except for those referred to the terms of reference of the General Shareholders’ Meeting. The Supervisory Board determines priority areas for the company’s operations, convenes General Shareholders' Meetings, approves transactions where so required by law or by company’s Articles of Association. Where allowed by the company’s Articles of Association, the Supervisory Board may also restrict the competence of the General Director to conclude certain transactions, such as real estate ones.
Day-to-day operations of the Company are managed by the sole executive body of a company (General Director). A company’s Articles of Association may also provide for a collegial executive body to be set up in the form of a Management Board. The terms of reference of the Management Board are determined by the company’s Articles of Association. Executive bodies report to the company’s Supervisory Board and the General Shareholders Meeting.
A General Director is authorized to act on behalf of his company without a power of attorney, including representing its interest, concluding transactions on its behalf, reviewing and approving, where appropriate, staff appointments, issuing orders and directives binding on all of its employees.
By resolution of the General Shareholders' Meeting, the powers of the sole executive body may be delegated under an agreement with a management company.
3.2 How are members of the management body appointed and removed?
A Supervisory Board of a JSC consists of at least five members.
Members are elected to the Supervisory Board by cumulative voting of the company’s shareholders at the General Shareholders' Meeting. In cumulative voting, the number of votes held by each shareholder is multiplied by the number of seats on the Supervisory Board, and voter may cast all their votes for one nominee or distribute them between several nominees. Nominees who receive the most votes are deemed elected to the Supervisory Board.
Only an individual may be elected to a company’s Supervisory Board.
Members of the Supervisory Board are elected for a period until the next annual General Shareholders’ Meeting. If the annual General Shareholders’ Meeting is not held within the prescribed time, the powers of the Supervisory Board are terminated, with the exception of the power to prepare, convene and hold the annual General Shareholders’ Meeting.
A decision of the General Shareholders’ Meeting terminating the powers of the Supervisory Board may be passed only in respect of all members of the Supervisory Board.
A company’s General Director and members of its Management Board are elected and removed from office by decision of its General Shareholders’ Meeting, unless this matter falls within the competence of the company’s Supervisory Board pursuant to its Articles of Association.
3.3 What are the main legislative, regulatory and other sources impacting on directors' contracts and remuneration?
Directors' contracts and remuneration are regulated on two levels:
- legislatively: the JSCs Law 1995 and the Labor Code of the Russian Federation (2001);
- locally: constitutional and internal documents of a company and employment contract.
The following matters are subject to legislative regulation:
- election of the Supervisory Board, General Director and Management Board;
- conclusion of an employment contract with the General Director;
- possibility of remuneration payments to members of the Supervisory Board;
- employment of the General Director and the Management Board members on a multiple-job basis;
- grounds for terminating the employment of the General Director or a member of the Management Board;
- guarantees in the event of termination of the General Director’s or a Management Board member’s employment contract.
The following are established locally:
- procedures to be completed prior to concluding employment contracts with the General Director and the Management Board members;
- the amount of remuneration payable to the General Director and members of the Supervisory Board;
- additional grounds for terminating the employment of the General Director or a Management Board member.
Certain provisions are contained in the voluntary FSFM Corporate Conduct Code (2002) designed for joint-stock companies.
3.4 What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body?
The company directors are allowed to own shares in company managed by them and there is no limitation on the number of shares, which they may hold.
The members of the Supervisory board, Management board and General Director shall notify the Supervisory Board, audit commission (or internal auditor) and the auditor about legal entities in which they possess separately or jointly with their affiliated person(s) 20 percent or more of the voting shares.
Information in relation to interests in securities held by members of the management body is disclosed in a company’s annual report, which is required to contain:
- information about equity stakes and percentages of common shares held by members of the Supervisory Board, the General Director, and members of the Management Board;
- data about transactions concluded by said persons to buy or sell the company’s shares;
- information about interests held by members of the company’s governing bodies in its subsidiaries and affiliates.
In addition, information about shareholdings of members of the Supervisory Board is disclosed as part of information that may have a significant impact on the value of the company’s stock (for example, when a general director is to be elected or a conflict-of-interest deal concluded, etc.).
3.5 What is the process for meetings of members of the management body?
Meetings of a Supervisory Board are convened when necessary. Such a meeting may be convened by the Chairman of the Supervisory Board on his own initiative or on request from a Board member or the company's Auditing Commission, Auditor, or General Director.
The procedure for convening and holding meetings of the Supervisory Board is determined by the articles of association or an internal document of the company on such regulation of Supervisory Board.
The quorum for a Supervisory Board meeting is determined by the company’s Articles of Association but may not be less than half the number of elected Board members.
Decisions at a Supervisory Board meeting are passed by simple majority of votes of all the Board members attending the meeting, except where otherwise envisaged by the company’s Articles of Association.
The Articles of Association may provide that in the event of a tied vote at a Supervisory Board meeting the Chairman of the Supervisory Board shall have a casting vote.
3.6 What are the principal general legal duties and liabilities of members of the management body?
The principal duty of the Supervisory Board is to make sure that the company operates in line with the policy determined by its shareholders. In exercising their rights and performing their duties, members of the Supervisory Board are required to act in the best interests of the company and to exercise their rights and perform their duties in respect of the Company reasonably and in good faith. The Supervisory Board reports to the General Shareholders’ Meeting.
The General Director is required to manage the company's day-to-day operations implementing resolutions of the General Shareholders’ Meeting and the Supervisory Board and to act in the company’s interests in a professional, reasonable and faithful manner. The General Director reports to the General Shareholders’ Meeting and the Supervisory Board.
3.7 What are the main specific corporate governance responsibilities/functions of members of the management body?
Current legislation does not prescribe any specific functions for members of the Supervisory Board. Such functions may, however, be envisaged in the company’s articles of association or internal documents.
The voluntary FCSM Corporate Conduct Code provides fro the following functions of the Supervisory Board:
- to determine the company development strategy and to adopt annual financial and business plans;
- to ensure efficient control of the company’s financial and business operations;
- to ensure the exercise and protection of the shareholders’ rights and to facilitate resolution of corporate conflicts;
- to ensure efficient performance of the company’s executive bodies, including by controlling their operations.
3.8 What public disclosures concerning management body practices are required?
A joint-stock company is required to disclose information about resolutions passed by its Supervisory Board, including on the following matters:
- convocation of an annual or extraordinary General Shareholders’ Meeting;
- appointment or formation and early termination of powers of the General Director or the Management Board;
- dividend-related recommendations;
- inclusion of the company’s liquidation in the agenda of a General Shareholders’ Meeting;
- approval of a major transaction;
- confirmation of the company’s registrar appointment and the terms of contract with it;
- repurchase of the company’s outstanding shares, bonds and other securities;
- creation and liquidation of branches and representative offices.
3.9 Are indemnities, or insurance, permitted in relation to members of the management body and others?
Liability insurance is optional for members of the Supervisory Board and the General Director.
The Corporate Conduct Code recommends that companies should maintain such insurance for members of the Supervisory Board, so that if the latter cause losses to the company or third parties, such losses are paid by the insurance company.
4 Corporate Social Responsibility
4.1 What, if any, is the law, regulation and practice concerning corporate social responsibility?
As to corporate social responsibility (“CSR”), it is not subject to any special legal regulation in Russia. In practice, however, leading Russian companies, such as the United Company Russian Aluminum, the Russian Railways, the Interros Group, Renova, Sistema and the Russian Union of Industrialists and Entrepreneurs (RSPP), are already involved in CSR activities. “The priority task of Russian business is to gain a solid position in national and global economies through improving its competitiveness based on responsible business practices”, Head of the RSPP Alexander Shohin stated at his meeting with the UN Secretary-General in Moscow, 10 April, 2008.
As regards small and medium-size Russian companies, their CSR-related efforts are not sufficient.
4.2 What, if any, is the role of employees in corporate governance?
In generally, employees do not play any important role in corporate governance in Russia. There are no regulatory requirements as to employees’ representation on management bodies.
5 Transparency
5.1 Who is responsible for disclosure and transparency?
The General Director of a company is responsible for the following disclosure aspects:
- organizing the maintenance and the state and reliability of accounts;
- timely submission of annual reports and other accounts to competent authorities;
- providing shareholders, creditors and mass media with details of the company’s activities.
5.2 What corporate governance related disclosures are required?
Disclosure requirements are set forth in the FCSM Regulation on Information Disclosures by Securities Issuers.
Current legislation requires the following information to be disclosed:
- annual reports and accounts, articles of association and other internal documents governing the operation of companies’ bodies;
- information about securities issues;
- information about material facts (such as an increase or reduction in the company’s asset value by more than 10%, a one-time increase or reduction in the company’s net profits or losses by more than 10%, transactions for a value of 10 or more percent of the company’s asset value);
- details of the company’s affiliates;
- information that may have a significant impact on the value of the company’s securities (information about resolutions passed by the Supervisory Board, conflict-of-interest transactions approved, bankruptcy proceedings instituted by the court, etc.).
The above information is disclosed by a company in the form of annual and quarterly reports and announcements in online news resources with a real-time update feature provided by information agencies and on the company’s website.
5.3 What is the role of audit and auditors in such disclosures?
The Auditor performs an independent audit of the company’s financial and business operations, in particular, its accounting books and financial statements. Such audits are intended to check auditees for reliability of their financial statements and compliance with the accounting requirements of the Russian legislation.
Open joint-stock companies are required to be audited on an annual basis.
5.4 What corporate governance information should be published on websites?
Current legislation requires companies to disclose the information mentioned in clause 5.2 of this article, including by publishing it in news resources as well as on the Internet.
E. Medeyko. Corporate Governance in Russia
This article appeared in the 1st edition of The International Comparative Legal Guide to: Corporate Governance 2008, published by Global Legal Group Ltd, London, www.iclg.co.uk.