On 23 July 2013 the President signed Federal Law No. 210-FZ amending Federal Law No. 39-FZ “On Securities Market” and certain other legislative acts of the Russian Federation.
The Law, among other things, introduces to the Securities Market Law new Articles 17.1 (Early Redemption of Bonds) and 17.2 (Acquisition of Bonds by the Issuer) and a new section 6.1 (Representative of Bondholders. General Meeting of Bondholders), together targeting the development of a mechanism for the protection of rights of the holders of bonds issued by Russian issuers.
Early Redemption of Bonds and the Acquisition of Bonds by the Issuer
The new Article 17.1 of the Securities Market Law establishes a procedure for the early redemption of bonds, either partial or full, at the issuer’s option or at the request of the bondholders.
In case of a material breach of the obligations under the bonds, bondholders have the right to demand early redemption of bonds before their stated maturity whether such right is provided for or not by the terms of the bond issue. Such material breaches include (i) delay in the payment of the coupon beyond the period of ten business days, unless a shorter period is provided for by the bond terms; (ii) in case the repayment of the bond principal is made in installments, delay in the partial repayment beyond the period of ten business days, unless a shorter period is provided for by the bond terms; (iii) in case the issuer’s obligation to acquire the bonds is provided for by the bond terms, delay in the performance of such obligation to acquire the bonds beyond the period of ten business days, unless a shorter period is provided for by the bond’s terms; and (iv) loss of security provided for with respect to the bonds or material deterioration of the terms of such security.
Pursuant to the new Article 17.2 of the Securities Market Law, the acquisition by the issuer of bonds of the same issue must be made on equal terms. The acquired bonds can be paid for with cash only and do not provide any rights to the issuer. The issuer can either redeem or sell such bonds before their stated maturity.
Representative of the Bondholders
The Law introduces to the Russian securities legislation the new concept of the bondholders’ representative (the “Representative”).
Pursuant to the new section 6.1 of the Securities Market Law, the issuer of the bonds is now required to appoint a special Representative in the following cases: (i) the bonds are being placed by open subscription or by closed subscription among more than 500 investors, excluding qualified investors, or(ii) the bonds are admitted to trading on a stock exchange, save for bonds intended for qualified investors only. The candidacy of the Representative appointed by the issuer of the bonds after their placement must be approved by a general meeting of bondholders, which also has the right to appoint another Representative at any time instead of the one appointed by the issuer of the bonds. The Representative is paid for its services by, and acts pursuant to an agreement with, the issuer of the bonds. The Representative can unilaterally terminate the agreement with the issuer by giving a three-month notice, unless a shorter term is provided for in the agreement.
The Law sets out in detail the rights and obligations of the Representative, mechanisms for the transfer of funds received by the Representative for bondholders, as well as the procedure for the appointment and replacement of the Representative.
Pursuant to the Law, the following persons can be appointed by the issuer of the bonds or by the general meeting of bondholders to act as Representatives:
- brokers, dealers, depositaries, securities managers, management companies of joint stock investment funds, mutual investment funds and non-governmental pension funds or credit institutions. Any of these entities can be appointed to act as Representative on the condition that it is included in an official list maintained by the securities market authority and published on its website on the Internet (the rules for the inclusion in and exclusion from such list are to be detailed in the legal acts of the securities market authority yet to be adopted); and
- other Russian legal entities being in existence for not less than three years.
The Law specifically mentions that the following persons cannot act as Representatives: (i) the issuer of the bonds, its controlling and controlled entities; (ii) the security provider, its controlling and controlled entities; (iii) persons providing services in connection with the placement of the bond issue, their controlling and controlled entities, unless appointed or approved by decision of the general meeting of bondholders; (iv) legal entities in which more than 50 percent of votes in the collective management body are controlled by any of the persons listed in (i)-(iii) above; and (v) legal entities which have any other conflicts of interest preventing them from acting as Representative.
General Meeting of Bondholders
The bondholders acquired the right by way of conducting a general meeting of bondholders (the “General Meeting”) to adopt certain decisions with respect to the bond issue, including: appointment of a Representative, approval of amendments to the issuance decision and the prospectus of the bonds (or granting the right to approve such amendments to the Representative), waiving the right to request an early redemption of the bonds or to file claims in court against the issuer of the bonds or the security provider, and approval of an agreement on the early termination of the bonds by way of novation or provision of substitute consideration (otstupnoye) from the issuer. The General Meeting cannot adopt decisions on matters which are beyond its competence pursuant to the Securities Market Law.
General Meetings can be held by the issuer of the bonds upon its decision, a request from the Representative or the holder(s) of not less than 10 percent of the bonds of a particular issue and can be conducted separately with respect of each issue of bonds. Each bond gives only one vote at the General Meeting. Decisions of the General Meeting are binding on all bondholders, including those who voted against the items of the agenda. Under the general rules, decisions of the General Meeting are adopted by majority vote; however, pursuant to the Law, some decisions require a super-majority of 3/4 or even 9/10 of all bondholders.
A bondholder has the right to challenge the General Meeting’s decisions in commercial courts, in case (i) he did not participate in the respective meeting, or (ii) voted against the decision in question, and the decision of the General Meeting violated his rights and legitimate interests. The limitation period for challenging the General Meeting’s decisions is three months from the day the claimant knew or should have known about the decision adopted by the General Meeting. The commercial court can uphold the decision of the General Meeting if it determines that the violation was immaterial and the voting of the claimant could not affect the results of voting.
The Law will enter into force on 1 July 2014, save for the provisions regarding mandatory appointment of Representatives, which will enter into force on 1 July 2016.
On 4 July 2013 the Federal Service for Financial Markets (the “FSFM”) issued Information Letter No. 13-DP-03/24677 on the entry into force of certain provisions of the Securities Market Law regulating the procedure for the issuance of securities.
The Letter clarifies certain provisions of the Securities Market Law introduced by Federal Law No. 282-FZ dated 29 December 2012 which entered into force on 2 July 2013.
In particular, the Letter contains the following clarifications from the FSFM. Article 22(1) of the Securities Market Law provides for a number of exceptions from the requirement of the state registration of a securities prospectus in the course of the issuance (additional issuance) of securities. The Letter clarifies that (i) compliance with any one of these exceptions can serve as a basis for the release from the obligation to prepare and register a securities prospectus, and (ii) it is recommended to the issuers to file a separate notice confirming compliance with the exceptions listed in Article 22(1) of the Securities Market Law along with other documents in connection with the state registration of the issuance of securities.
Pursuant to Article 22(3) of the Securities Market Law, the securities prospectus must include, inter alia, the consolidated financial statements of the issuer and the group of companies controlled by the issuer. The FSFM clarified that (i) such financial statements must be prepared based on the IFRS, and (ii) since the IFRS were recognized in the Russian Federation only in 2011, 2012 should be the first financial year which must be reflected in the financial statements included in a securities prospectus.
The FSFM further clarified that in case of the issuance of securities in the course of reorganization (merger, separation, division or transformation) of a legal entity, (i) the authorized body of the reorganized legal entity which is entitled to approve the decision on the issuance of securities is the board of directors (supervisory board) or other body which performs the duties of the board of directors (supervisory board) of the legal entity; and (ii) the report on the placement results must be filed for state registration no later than 30 days after the reorganization is complete (the reorganized entity is registered with the state authorities).
Pursuant to the Letter, the Standards for the Issue of Securities and Registration of Securities Prospectuses approved by the FSFM Order No. 07-4/pz-n dated 25 January 2007 apply to the extent they do not conflict with the new provisions of the Securities Market Law.
The Letter is addressed to the participants of the Russian securities market and will serve as guidelines for issuers of securities.
On 25 July 2013 the President issued Decree No. 645 abolishing the Federal Service for Financial Markets (FSFM).
Following the adoption of Federal Law No. 251-FZ on 23 July 2013 which establishes a “mega-regulator” of the financial markets (see below), the President issued the Decree abolishing the FSFM from 1 September 2013 and amending or annulling a number of earlier decrees. In accordance with the Decree, the Government is authorized to, inter alia, perform the required liquidation procedures with respect to the FSFM, ensure the continuity of Russian financial market regulation in the course of the FSFM’s liquidation and the delegation of its authority to the Central Bank, and the transfer of the FSFM’s property, including immovable property, to the Central Bank.
The Decree entered into force on 25 July 2013, save for certain provisions that entered into force on 1 September 2013.