Russia’s Federal Law on Joint Stock Companies seems to undergo constant revision and this year has proved no exception. Of the changes being enacted, one particular set of amendments relating to “major transactions with interested parties” stands out as potentially reducing the rights of minority shareholders.
The newly revised law (“On Amendments to the Federal Law on Joint Stock Companies regarding major transactions and transactions with interested parties” (“FZ 343”)), due to come into force on January 1, 2017, is aimed at improving and unifying the regulation of major transactions and interested party transactions for joint stock companies, outlining the range of such transactions and rules for their approval.
While this aim seems desirable, for minority shareholders, the advantages of the law are not quite so obvious; in fact, FZ 343 appears to limit these shareholders’ rights by removing the requirement that such transactions are approved by shareholders, thereby allowing instead for complete board discretion.
Under the law as it stands, in order to carry out transactions with related parties, Russian companies are required to obtain approval from a majority of disinterested shareholders in the event that: a) the company has more than 1,000 shareholders; b) the company’s board consists solely of non-independent directors or directors who have a personal interest in the proposed transaction; and c) the proposed transaction or inter-related transactions involve assets that make up at least two percent of the book value of the company’s assets.
However, from 2017 onwards, such transactions will no longer need pre-approval unless the company’s sole executive body, a member of the management board or board of directors, or a shareholder owning at least 1% of a company’s voting shares, requests otherwise. Furthermore, and perhaps significantly, these criteria will not apply to major transactions worth more than 50% of the company’s assets, regardless of whether or not they have been carried out with related parties.
While FZ 343 does allow for shareholders holding more than 1% of voting capital to challenge a transaction, it does not appear to provide guidance surrounding the procedures for submission of such a challenge; rather, the law refers to the general rules surrounding the convocation of a general meeting, provisions which currently state that shareholders owning more than 10% of the share capital may request a meeting. As such, it remains to be seen how holders of less than 10% of the share capital will be able to submit a challenge, and holders of less than 1% appear to be shut out entirely.
Novatek OAO is one of the first companies to convene an extraordinary meeting to propose implementation of these changes. The meeting, scheduled for September 30, will see the company propose amendments to its articles of association, as well as other internal regulations, in order to include reference to the revised law, as well as remove current references to shareholders’ rights related to this matter.
Certainly, one may argue that—as it stands—many of the transactions which require shareholder approval could be interpreted as routine business transactions, and the requirement to seek shareholder approval of each and every transaction places somewhat of an administrative headache on companies at shareholder meetings (for example, Uralkaliy submitted a total of 56 related party transaction proposals at its 2016 AGM); however, on the other hand, and particularly for a market like Russia where a large number of listed companies are state-controlled, the removal of any shareholder rights sounds alarm bells. Such concerns may well be compounded by what appear to be relatively obscure rules surrounding the potential challenge of the transactions.
With the advent of the FZ 343 months away, and the focus on corporate governance throughout the world continuing to rise, it will be interesting to observe how Russian companies interpret and apply this amended law going forward, and whether the path taken serves to impede the relationships between minority shareholders and the companies they invest in.