MEMORANDUM June 29, 2009
Federal Law on Amendment of Certain Legislative Acts of the Russian Federation No. 205-FZ, adopted on July 19, 2009, has introduced changes in the laws and regulations on legal entities. The changes form the so-called “anti-raiding package” that will be broadened by further new amendments of legislation in the nearest future. The main provisions of the Law will come into force 90 days upon its promulgation. The purpose of the changes is to establish a balance between measures protecting the rights of shareholders/participants of legal entities and measures ensuring the stability of business. Important changes in the regulation include, inter alia: • A shortened (3-months) limitation period for shareholder/participant claims contesting corporate decisions; • Four grounds for dismissal of claims seeking invalidation of major transactions and interested-party transactions even where such transactions were made with violation of the procedures prescribed by corresponding laws; • A special procedural regulation of corporate disputes, referring them to the exclusive competence of local state commercial courts having jurisdiction over the company, requiring that such disputes be open, and obligating companies to disclose corresponding information to their shareholders; • Introduction of the class actions institute in the Code of Arbitration Procedure. This memorandum discusses the amendments of the following laws: I. The Federal Law on Joint Stock Companies Page 2 II. The Federal Law on Limited Liability Companies Page 4 III. The RF Code of Arbitration Procedure (a new section “Corporate Disputes”) Page 6 IV. The Federal Law on the Securities Market Page 7 V. The RF Code of Arbitration Procedure (amendment of the general part and a new section in the special part “Consideration of Claims for Protection of Rights and Lawful Interests of a Group of Persons”) Page 9 VI. The Federal Law on the Enforcement Process Page 11 I. Amendment of the Federal Law on Joint Stock Companies The changes are primarily aimed at limiting the possibility to contest corporate decisions and transactions of the company. 1. Joint and several liability of the company and the registrar The legal mechanism of the company’s and the registrar’s liability has been made more clear. The liability is joint and several now. The company and the registrar bear liability exclusively for a shareholder’s losses which the shareholder will be able to prove as having been caused to him due to improper compliance with the procedure for keeping the register of shareholders. Moreover, the company and the registrar will be relieved from liability if they prove that losses were caused by the shareholder’s actions (omissions), e.g., the shareholder failed to take reasonable measures to mitigate the losses. Regretfully, the legislative novel does not explain how liability should be shared in the event of reciprocal actions of the company (registrar) and the shareholder that lead to the losses. The standards of reasonableness of the shareholder’s actions have not been determined either. If losses are recovered from one of the debtors bearing joint and several liability, the debtor acquires the right of recourse against the other debtor, depending on the existence, absence or degree of their guilt. 2. Contestation of corporate decisions General meeting of shareholders The limitation period (time bar) for contesting resolutions of the general meeting of shareholders has been reduced from 6 to 3 months with no possibility of reinstatement (except where the shareholder was subjected to threats or violence). However, now, the limitation period begins from the time when the shareholder became aware or should have become aware of the resolution passed and of the circumstances serving as a ground for finding such resolution invalid. An important novel is the introduction of a provision stating that resolutions passed with gross violations of law (a resolution on the issue not included in the agenda, a resolution being beyond the competence of the general meeting, a resolution passed in the absence of a quorum or without the necessary number of votes) are void, irrespective of any claim seeking invalidation of such resolution by a court. Board of directors and a collective executive body The changes legislatively establish the shareholder’s right to challenge decisions of the board of directors on the same grounds as resolutions of the general meeting of shareholders, i.e., non-compliance with law or the charter and violation of the shareholder rights. A court may dismiss the claim seeking invalidation of a decision of the board of directors, if the decision did not cause losses to the company or the shareholder and the violations are not material. Same as with contestation of the general meeting resolutions, the limitation period for challenging a board decision is 3 months from the time the shareholder became aware or should have become aware of the decision passed and of the circumstances serving as a ground for deeming such decision invalid. Similarly, irrespective of contestation in court, void are decisions of the board of directors on issues being beyond the competence of the board and decisions passed in the absence of a quorum or without the required minimum of votes. The same procedure applies to the contestation of decisions of the company’s collective executive body. 3. Contestation of major transactions and interested-party transactions The changes make significantly more difficult the contestation of major transactions and interested-party transactions. It is not a secret that those transactions are often challenged not to safeguard the shareholders rights but rather in an attempt to protract performance by the company of its obligations and exert pressure on the counterpart. First, it is clarified that the invalidation of a corporate decision approving a major transaction or an interested-party transaction does not automatically entail invalidation of such transaction. Second, the limitation period for claims seeking invalidation of such decisions is not subject to reinstatement. Third, and the most important, even where a major transaction or an interested-party transaction was made with violation of law, a court can nevertheless dismiss the claim seeking invalidation of such transaction, if any of the following circumstances exists: • the plaintiff’s voting could not have influenced the passing of the resolution approving the transaction; • the plaintiff has failed to prove the existence or the possibility of losses (other unfavorable consequences) for the company or the shareholder; • a subsequent proper approval of the transactions has taken place; • it has been proved that the other party to the transaction was not and should not have been aware that the transaction was made with a violation of law. Undoubtedly, such broadened list of grounds for dismissal of claims seeking invalidation of transactions will lessen the number of contested transactions, which will make business more stable. To safeguard their rights, shareholders will be likely to pay more attention to indirect claims by which they can hold liable the members of the company’s executive bodies rather than intervene into the company’s relationships with third parties. 4. Holding of the shareholders meeting in case of the board’s refusal to convene it According to the rules effective previously, if the company’s board of directors did not convene the shareholders meeting despite the request of the company’s management bodies, shareholders or third parties, they were entitled to convene it themselves. Now, the procedure for such convocation of the shareholders meeting is controlled by a competent court which the interested persons must apply to with a claim to order the company to convene the meeting. The court may entrust the plaintiff and a certain management body of the company (except for the board of directors) with convocation and holding of the shareholders meeting. II. Amendment of the Law on Limited Liability Companies The changes have been made as a matter of clarification, significantly supplementing some of the provisions and excluding and putting out of effect other provisions. It should be noted that the new regulation will come into force stage by stage: part of the provisions – starting from the promulgation of Law No. 205-FZ, and the other part – upon expiration of 90 days from the date of its promulgation. Described below are the main changes in the Law on Limited Liability Companies introduced by Law No. 205-FZ. 1. Transfer of a share (part of a share) to the other participants and third parties Article 21(6) of the Law on Limited Liability Companies has been supplemented with a provision prescribing that the signature on the participant’s or the company’s written waiver of the preemptive right be attested by a notary. Previously, there were no requirements to formalization of such waivers. It should be noted that written wavers of participants are to be delivered to the company before expiration of the term for exercise of the preemptive right, and the company’s written waiver should be delivered to the selling participant within the term set in the charter. Notarization of a transaction for disposal of a share (part of a share) is not required any more where the preemptive right is exercised by giving the offer of share sale and its acceptance. Besides, introduced are the legal consequences of evasion from notarization of a share sale transaction, if the selling participant entered into an agreement obligating it to make such transaction upon occurrence of certain events or in return to a counter-obligation of the other party. According to the changes made in Article 333.25(1)(5) of the Tax Code, the charge for notarization of a share sale transaction depends on the price of the agreement indicated by the parties, which may not be lower than the nominal value of the share (part of the share). That provision will come into force upon expiration of one month from the promulgation of Law No.205-FZ. The provision requiring that a corresponding agreement or another document confirming the ground for the transfer of share be enclosed with the notary’s notification of the transaction to the Consolidated State Register of Legal Entities has been excluded. Similarly, the notary is not obligated any more to enclose the share disposal agreement with the notary’s notification to the company. 2. Pledge of shares There has been introduced a new provision stating that the record in the Consolidated State Register of Legal Entities regarding pledge of the share (part of the share) can be annulled based on a joint application of the pledgor and the pledgee or on the basis of an effective court decision. 3. Acquisition by the company of a share (part of a share) in its charter capital A share (part of a share) passes to the company, among other grounds, also as of the effective date of a court judgment rendered on a claim for transfer to the company of the rights and obligations of the buyer in the event that the share was sold in breach of the preemptive right. Besides, the company is now obligated to reinstate as a participant of the company the person (on his request) whose share passed to the company and transfer him back the corresponding share where, as stipulated by the Law, the company is not entitled to pay the actual value of the share. Previously, this was the right, not the obligation, of the company, and the provision in general applied to withdrawal from the company. 4. Competence of the general meeting of participants The list of issues that may not be referred by the company’s charter to the competence of the other management bodies of the company (exclusive competence) has been made a closed matter. It is also specified that the competence of the general meeting includes decision-making on other issues stipulated by the Law or the company’s charter. Thus, no longer possible is the construction of this law provision from different approaches as to whether or not it is proper for the company’s charter to refer to the competence of the general meeting issues other than those stipulated by law and as to the delegation of certain issues to the other management bodies for decision-making. 5. Contestation of corporate decisions The statutory limitation period (time bar) for challenging corporate decisions is not subject to reinstatement if missed, except where the participant challenging a corporate decision was forced not to do so by threats or violence. Besides, a court may dismiss the claim seeking invalidation of the board decision or the management body decision, if such decision was passed with an insignificant violation of law. Invalidation of a decision on convocation of the general meeting does not make the resolutions of the general meeting invalid, and invalidation of decisions approving major transactions or interested-party transactions does not make such transactions invalid, if those decisions are challenged separately from contestation of the corresponding transactions. The resolutions of the general meeting passed on the issues not included in the agenda (except where all participants are present at the meeting) or without the required quorum are void irrespective of whether or not they are challenged in court. 6. Interested party transactions, major transactions The limitation period (time bar) for claims seeking invalidation of a transaction is not subject to reinstatement if missed. A court may dismiss the claim for invalidation of a transaction, if any of the following circumstances exists: • the plaintiff’s voting could not have influenced the results of the voting on approval of the transaction; • it has not been proved that the transaction caused or can cause losses to or other unfavorable consequences for the company or the plaintiff; • the evidence of subsequent approval of the transaction has been provided by the time of consideration of the claim in court; • during the court proceedings it is proved that the other party to the transaction was not and should not have been aware of the transaction being made with violation of the Law. 7. Disclosure of information by the company A new provision obligates the company to allow its participant to familiarize himself with the documents being in the company’s safe keeping, in the premises of the company’s executive body within 3 days following the date of the participant’s request. The company is also obligated to provide the participant with copies of the said documents for a charge that many not be higher than the cost of the copies production. A term within which the copies should be provided to the participant is not defined. Article 50 is supplemented with a provision obligating the company to ensure for its participants access to all judicial acts relating to disputes over the establishment, management of or participation in the company. 8. Reorganization Changes have been introduced in the provisions regarding compliance with the set procedures after the resolution on reorganization of the company was passed. Now, the said provisions correspond to Article 60 of the Civil Code (in the wording of Federal Law No. 315-FZ of December 30, 2008) on guarantees of the rights of the creditors of the company undergoing reorganization. III. Amendment of the Code of Arbitration Procedure – Corporate Disputes The Code of Arbitration Procedure is supplemented with a new Article 28.1 “Consideration of Corporate Disputes”. Thus, the legislator has acknowledged the long ago ripe necessity to have a separate regulation of court proceedings in corporate disputes (disputes arising out of the relationship of a legal entity, its management bodies and participants). The special regulation applies to all disputes over the setting up of a company, its management and participation in it. The new article gives an exhaustive list of corporate disputes: • establishment, reorganization and liquidation of the company; • ownership of the right to participate in the company (disputes over recordation of rights to securities by a depositary are expressly excluded); • reimbursement of the company’s losses, invalidation of transactions; • election (appointment) of the company’s management bodies and termination of their powers; • issue of securities and recordation of title thereto; • contestation of corporate decisions, including convocation of the general meeting of participants/shareholders. It has been finally established that the exclusive competence to consider corporate disputes belongs to the local court having jurisdiction over the company in question. The Code now requires that the information about a corporate dispute be publicly available through the competent court’s official Internet site. The court notifies the company concerned about the corporate dispute and may obligate the company to notify third parties – the participants, registrar, members of the management bodies, etc. Besides, the requirements to injunctions in corporate disputes have been broadened. Apart from the general grounds (impossibility to enforce the court judgment or prevention of a considerable damage to the plaintiff), the Code prohibits injunctions that make it actually impossible for the company to carry on its business or significantly hamper the carrying on of the company’s business or lead to violations of law. Thus, courts have to act with caution when issuing injunctions in corporate disputes, which should result in a fewer number of injunction requests submitted exclusively for the sake of getting an injunction, blocking the operations of the company concerned and exerting pressure on it. The legislator also encourages courts to consider the matter of injunction in corporate disputes in a court hearing attended by all parties involved, especially in the absence of any security on the part of the plaintiff. The said changes are aimed at putting an end to “draconian” injunctions that used to stop the carryon on of business and were employed by unscrupulous persons for putting pressure. The Code makes more specific the procedure for consideration of indirect claims – shareholder/participant claims for damages. The Code has granted such shareholders/participants the status of a plaintiff and the right to claim enforcement of the rendered court judgment. Previously, there were problems with enforcement of that kind of court judgments, because the company controlled by the majority shareholder/participant often refused or was reluctant to enforce the court judgment against one of the members of its management body. IV. Amendment of the Federal Law on the Securities Marker Changes have been made in the Federal Law on the Securities Market, dated April 22, 1996, No. 39-FZ, (as amended) (the “Law”). Article 26 (Unfair Issue) has been completely replaced with a new Article 26 (Suspension of the Issue of Securities. Recognition of the Issue (Additional Issue) of Securities (hereinafter the “Securities Issue”) as Failed or Invalid). Among other things, the restated Article 26: 1. Makes more specific the period of time during which the issue of securities may be suspended – at any time during the issue process until state registration of the Securities Issue report or submission to the registering authority of a notification about the results of the Securities Issue. 2. Makes more specific one of the grounds for suspension of the issue of securities: the finding of untrue or misleading information in the documents on the basis of which the Securities Issue was registered. 3. Makes more specific the period of time during which the Securities Issue may be recognized as failed by the decision of the registering authority – before state registration of the Securities Issue report or submission to the registering authority of a notification about the results of the Securities Issue. 4. Makes more specific, concrete and broad the list of grounds for recognizing the Securities Issue as failed by the decision of the registering authority: (1) a violation of Russian law by the issuer in the course of the issue of securities, if such violation cannot be remedied otherwise than by withdrawal of the Securities Issue from the circulation of securities; (2) the finding of untrue or misleading information in the documents on the basis of which the Securities Issue was registered, if such information entailed a material violation of rights and (or) lawful interests of the investors or the holders of the issuer’s securities; (3) the failure by the issuer to submit to the registering authority the Securities Issue report or the notification about the Securities Issue results within the statutory term upon expiration of the securities offering period; (4) the refusal of the registering authority to register the Securities Issue report; (5) the issuer’s failure to place the portion of the Securities Issue indicated in the decision on the issue of securities, which entails recognition of the Securities Issue as failed; (6) the issuer’s failure to place any of securities from the Securities Issue; (7) the issuer’s failure to comply with the registering authority’s requirement to remedy the violations of law committed in the course of the issue of securities. 5. Specifies that the Securities Issue may be found invalid by a court judgment rendered on a claim of the registering authority and the authority conducting registration of legal entities, and on a claim of the issuer’s participant/shareholder or the holder of the issuer’s securities of the same type and category as the securities of the Securities Issue; makes more specific the list of grounds on which an interested person may bring a claim for invalidation of the Securities Issue: (1) a violation of Russian law by the issuer in the course of the issue of securities, if such violation cannot be remedied otherwise than by withdrawal of the Securities Issue from the circulation of securities; (2) the finding of untrue or misleading information in the documents on the basis of which the Securities Issue or the report on the Securities Issue was registered, or in the notification of the Securities Issue, if such information entailed a material violation of rights and (or) lawful interests of the investors or the holders of the issuer’s securities. 6. Specifies that the dismissal of the claim for invalidation of the Securities Issue does not deprive the plaintiff of the right to claim that losses caused by the said violations, including provision of untrue or misleading information, be recovered from the issuer or other persons. The holders of the issuer’s securities that sustained losses due to the Securities Issue being recognized as failed or invalid may claim damages from the issuer or third persons in accordance with the procedure stipulated by Russian laws. The list of material facts subject to disclosure in accordance with Article 30 of the Law (Disclosure of Information) has been supplemented with the information about the dispute over the setting up, management of and participation in the issuer, including information on the institution of arbitration proceedings in the case and acceptance of the statement of claim, change of the cause of action or the subject of the claim, injunctions, withdrawal of the claim, acknowledgement of the claim, voluntary settlement, rendering of a judicial act by which the arbitration proceedings in the court of fist instance are terminated. V. Amendment of the Code of Arbitration Procedure A number of changes and significant supplements have been made to the Code of Arbitration Procedure with the aim of making consideration of disputes more expeditious and effective, in particular: 1. The procedural terms and the manner of their calculation have been changed. Now, under the general rule, the term for consideration of a claim and rendering of a judgment by the court of first instance is three months from the date of filing of the statement of claim (the term set for preparation of the case for consideration has been excluded), and the term for consideration of an appeal paper has been increased to two months. 2. The legislator has obligated the defendant to submit to the court and deliver to the persons involved in the case a statement of defense with objections to each argument contained in the statement of claim. The defendant’s failure to submit the statement of defense does not preclude consideration of the case on the basis of available evidence, but may result in an award of legal costs against the defendant irrespective of the outcome of the proceedings. 3. Having given an exhaustive list of grounds for procedural participation, the legislator has set forth in detail its conditions. Besides, excluded from the list of grounds for dismissal of a claim has been the combination of several claims to one defendant or several defendants in one statement of claim. 4. The representative’s powers may now be expressed in an appropriate submission made in a court hearing, which fact is to be reflected in the minutes of the hearing. 5. The scope of matters on which the court renders rulings has been broadened, and the list of judicial acts that may be appealed has been supplemented. Changes have been made in the provisions on the procedure and terms for appealing from judicial acts, in particular, certain rulings (e.g., a ruling refusing involvement of a third person with independent claims in the case) may be appealed within a shorter (10-days) term. 6. Persons involved in the case are now obligated to notify the court of any change in their names. The involved person’s name, address and contact details should be indicated in a ruling or in the minutes of the hearing. 7. The Code has been supplemented with provisions on the amount and manner of payment of a compensation in connection with an injunctive order obtained by the plaintiff. Now, the defendant may claim such compensation instead of claiming damages. 8. Changes have been made in the provisions on the combination and separation of several claims. The legislator has actually indicated the risk of making contradicting judicial acts as a ground for the combination of cases and effective justice – as a possible reason for their separation. 9. We specifically note the appearance of two new separate categories of cases in the special part of the Code: (1) Corporate disputes – see section III above (2) Disputes concerning the rights and lawful interests of a group of persons The appearance of Chapter 28.2 “Consideration of Cases Concerning Protection of Rights and Lawful Interests of a Group of Persons” has become the second significant supplement to Section 4 of the Code. Having made, we believe, a new step towards the possibility of class action, the legislator has granted legal entities and individuals, being parties to the relationship out of which a dispute or claim arose, the right to apply to arbitration for protection of the violated or contested rights and lawful interests of the other persons being parties to the same relationship (“a group of persons”). Having indicated that corporate disputes and disputes connected with the activity of professionals in the securities market may be considered in accordance with Chapter 28.2, the legislator nevertheless has left the list of that category of disputes open. The specifics of process in the said category of cases are unquestionably significant. They concern the powers (termination of the powers) of the person seeking protection of the rights and lawful interests of a group of persons, special requirements to the statement of claim, and a special condition for taking such cases under consideration – at least 5 persons should have joined the plaintiff’s claim by the time of application to the court. Having stipulated a special procedure for preparation of the said category of cases for consideration (including, inter alia, invitation of other persons from the group of persons to join the claim, and the procedure for replacement of the plaintiff), the legislator has established a longer term for their consideration (up to five months from the date of the ruling on acceptance of the statement of claim (application) for process). The circumstances determined by an effective judgment in the claim for protection of the rights and lawful interests of a group of persons do not require proving in the consideration of another claim of a participant of the same group of persons to the same defendant. The court may obligate the defendant to disclose information about the judgment to all the parties to the relationship through mass media or otherwise. VI. Amendment of the Federal Law on Enforcement Process The amendment of the Federal Law on Enforcement Process, dated October 2, 2007, No. 229-FZ, concerns the particulars of enforcement process in respect of issued securities: 1. Execution of judicial acts by issuers and professionals carrying out recordation of rights to securities Same as for credit institutions, it has been established that a writ of execution, ordering that securities be written off the debtor’s personal account or depo account and recorded in the creditor’s personal account or depo account, may be delivered by the debtor directly to the issuer, if the issuer itself keeps the register of holders of such securities, or to the registrar keeping a register of securities holders at the issuers’ request, or to the depositary recording the debtor’s rights to securities, provided that the creditor has information about the debtor’s securities recorded in such accounts. 2. Specifics of the levy of execution on the debtor’s securities It is stipulated that where levy of execution is ordered against the property of the debtor-holder of registered securities and/or bearer securities subject to centralized safe keeping or deposited on other grounds with a depositary, such securities are to be arrested. Determined is a procedure for writing off securities in pursuance of the writ of execution. Issuers of securities and professional participants in the securities market are made administratively liable for non compliance with the requirements of writs of execution.
- MEMORANDUM June 29, 2009.pdf (83 Кб)