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New Frontiers

By Stanislav Danilov
Posted: 19th May 2015 08:52
The Russian legislators have been actively updating the civil and corporate legislation for over 18 months.  The changes have concerned nearly all areas from general corporate areas and the legal capacity of the companies to such fine points as specifics of winding-up in case of lack of assets or particular responsibilities for support of unfair or unreasonable decisions of persons in the governing boards of companies.  However in the area of M&A one of the most important events is the easing of legal restrictions on the choice of corporate governance model.
Formerly the law has set strict guidelines for the powers of company governance bodies, the types of such bodies and even for the shareholders’ tools used to control the corporate management.  In fact, the shareholders had the power to choose a certain person to become a CEO or board members, while the powers of CEO and the board and the decision-making procedure were mostly fixed.  The status of a shareholder mostly remained that of an investor, with the sole interest in receiving profit from his investment.  The rights of a single member to participate in company management were inadequate and only the shareholder meeting could affect the corporate management in a perceivable way.
The shareholder agreement was a scheme regulating their relations, helping to arrange options, responsibilities for certain actions and to assume certain restrictions.  Still, such agreement could not have set the structure or powers of the governance bodies.
In an attempt to increase the flexibility of corporate management, some have tried to subject the shareholder agreement to other rights of the jurisdiction.  However these attempts received strong criticism from the supreme judicial authorities that deemed the shareholder agreements void due to contradiction with the personal law of the legal entity.
The lack of ways to subject the shareholder agreement to the other rights of the jurisdiction induced the shareholders to create complex corporate structures with the chains of persons each controlling the preceding one.  The last link of the chain was always under the offshore jurisdiction where the real beneficiaries were free to choose the model of corporate governance.  At the same time all the subsidiaries could not do anything without the resolution of the parent company and the powers of their bodies came down to executing the decisions taken by the parent company.
Still, such model had an evident shortcoming, as the beneficiary was defenceless against the violation of his rights in the parent company.  He undoubtedly could argue on the parent company decision in a BVI court.  However it is often not enough to contest the deal of a Russian subsidiary made for the purpose of such resolution.  The reason is that the Russian company being a subsidiary remains an independent legal person subject to the personal law and to contest its deals it is necessary to prove not only the violation of the deal approval procedure in the parent company, but a number of other circumstances, including the negligence of contractor in the contested deal.
Now the shareholders are freer in defining the ways to conduct their business.
Firstly, the shareholders may change the staff of the company governance bodies.  They may create extracurricular bodies and give them necessary powers given that they do not contradict the limited exclusive authorities of other governance bodies.
As according to the Russian legislation the board of directors is not an executive body, i.e. it has no right to make deals in the company’s name or represent its interests in dealing with the third persons, the possibility to name several CEOs simultaneously is an important novelty.  The shareholders may decide that several CEOs may act only jointly or that they must act separately according to their respective competences.  The shareholders may choose nay combinations of these methods as necessary.
Secondly, the approach to shareholder agreement has also changed.  The law still formally prohibits setting the structure or competence of the governance bodies in the shareholder agreements.  Still, the agreement may provide for the shareholder’s obligation to vote for the amending the company charter so that the structure or competence of the governance bodies is changed.
One of the shareholders may have an advantage over other shareholders in decisions on certain issues of corporate governance.  For example, the shareholder agreement may provide for the obligation to approve preliminary all the candidates to CEO or board of directors with one shareholder.
Moreover, the law now states that the violation of the shareholder agreement may be deemed grounds for the voidance of governance body decision at the suit of one of the parties to the shareholder agreement.
Lastly, the law stipulates that the parties to the shareholder agreement may not refer to the nullity of such agreement due to its inconsistency of the company charter.  To put it otherwise, the shareholders may agree on any procedure of exercise of rights to corporate management and later they will be able to force each other to meet the incurred liabilities, even if such procedure does not comply with the formal provisions of the charter.
One of the most drastic novelties is that the creditors of the company and other third parties may make agreements with the shareholders, under which the latter undertakes to exercise their corporate rights in a certain way or refrain (withdraw) from exercising them for the purpose of serving the interests of such creditors or third parties, including voting in a certain way for or against decisions, buy or sell shares on the certain price or upon certain circumstances etc.
Thus Russia demonstrates two pronounced trends: providing shareholders with more freedom in managing their business and elimination of tools that made withdrawal of real corporate governance to other jurisdictions efficient.  For instance, the Russian legislators consistently introduces institutes aimed at finding the real business beneficiaries such as piercing corporate veil, law on controlled foreign companies etc.
The authorities’ ambition to motivate the investors, including the foreign ones, to use the Russian law to build an efficient business in Russia may be valued variously.  Still, one thing is certain – these changes will have serious impact on the M&A market development in Russia.
Stanislav Danilov

Partner, Head of Corporate Practice.
Stanislav specialises in corporate law, advising Russian and international companies on matters of corporate structuring including establishment, reorganisation, and termination of business entities.  He has a great experience of participation in bankruptcy project management.
He consults on problems of asset protection from unfriendly acquisitions using corporate structuring and development of complex court defense strategies.
Address:197022, St. Petersburg, 20 Aptekarskaya emb. Business Center "Avenue", office 219
Tel:       +7 921 7965669

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