1. Until recently Russian law did not recognize shareholders’ agreements (“SHA”). The situation started improving at the end of 2008 when amendments to Federal Law “On Limited Liability Companies” (the “LLC Law Amendment”) were adopted (effective from1 July 2009) allowing SHAs in respect of Russian limited liability companies.
2. On 9 June 2009 Federal Law No. 115-FZ amending laws “On Joint-Stock Companies” and “On Securities Market” (the “JSC Law Amendment”) entered into force. The JSC Law Amendment recognizes SHAs in respect of Russian joint stock companies (“JSC”).
3. The JSC Law Amendment represents a helpful development. However, similarly to the LLC Law Amendment, recent amendments to the JSC Law are not likely to override the advantages of offshore companies in joint venture structuring. The new provisions are aimed at providing the possibility for parties who, for political or other considerations, would like to avoid using offshore vehicles to put in place a valid and enforceable SHA in respect of a Russian joint stock company.
Definition and scope of an SHA under the JSC law amendment
4. The JSC Law Amendment defines an SHA as “an agreement in respect of the exercise of rights certified by shares and (or) specific conditions of exercise of rights to shares”. Accordingly, an SHAmay include provisions covering: (i) corporate rights of shareholders, including voting rights; and (ii) transactions with shares including their transfer.
5. According to the JSC Law Amendment, an SHA may contain obligations of parties to exercise or refrain from exercising shareholder rights in a certain way. This new rule allows shareholders to waive their rights, something which was previously prohibited by the general restriction contained in the Russian Civil Code.
6. In particular the law provides that an SHAmay provide for the following obligations of its parties:
- to vote at the generalmeeting of shareholders in a certain way;
- to coordinate exercise of voting rights with other shareholders;
- to acquire or transfer shares at a pre-defined price and (or) when certain circumstances occur;
- to refrain fromtransferring shares until certain circumstances occur; and
- to performother coordinated actions in connection withmanaging the company, the company’s activities, reorganization and liquidation of the company.
7. This list is similar to the one provided in the LLC Law Amendment. It is still unclear how broadly the courts will interpret it.
8. As is the case with the LLC Law Amendment, the use of tag-along and drag-along provisions under the JSC Law Amendment will depend on the interpretation of certainmandatory provisions of the Russian Civil Code. There is an argument that the use of these instruments contradicts provisions of the Russian Civil Code requiring that contractsmay only be conditional on circumstances which are not under the control of parties to the contract.
9. The JSC Law Amendment explicitly prohibits providing in an SHA for an obligation of the parties to vote in accordance with instructions of managing bodies (eg the General Director/CEO) of the company. A query arises as to the interpretation of this restriction in the case when one of the individual shareholders being a party to the SHA acts as the General Director.
10. The JSC Law Amendment is silent as to whether the SHAmay be governed by foreign law. Although based on the Russian conflict of law rules there is an argument that foreign lawmay be elected if at least one of the shareholders is a non-Russian person, based on the current court practice we believe that it is likely that Russian courts will disallow application of foreign law to SHAs with respect to Russian joint stock companies.
Form of SHA and its parties
11. The JSC Law Amendment prescribes that an SHA must be concluded in the formof a single document signed by its parties, ie an SHAmay not be executed in formof counterparts. There is no requirement to execute the SHA in front of a notary or to register it with state authorities.
12. The JSC Law Amendment does not require that the charter of the Russian company should recognize the existence of an SHA or that provisions of SHA should be reflected in the charter. However, for the reasons discussed below, we believe that itmay be useful to amend the charter of the JSC in order to reflect, to the extent allowed by law, provisions of the SHA.
13. It is required that SHAs are concluded in respect of all shares held by each party to the agreement. However, we believe that an SHAmay be executed by only some of the shareholders.
14. A query arises as to whether the company itselfmay and should be a party to the SHA. The JSC Amendment Law does not prohibit this. In particular, it may be useful to prevent share transfers in breach of SHA through exercise of control over the register of shareholders. Notably, a company itselfmay maintain the register of shareholders if the number of shareholders does not exceed 50.
Rights of third parties
15. An SHA may bind only the shareholders, but not the General Director, Directors (members of the Board of Directors) ormembers of themanagement board.
16. The law provides that a contract entered into by a party to an SHA with a third party in breach of the SHA can be invalidated in court at the request of the other party to the SHA only if it is proven that the third party was aware or should have been aware of the restrictions contained in the SHA. Given that the terms of the SHA are generally not required to be publicly disclosed, thismay be difficult to prove.
17. The JSC Law Amendment provides that a breach of an SHA cannot serve as a ground for invalidation of decisions ofmanaging bodies of the company which issued the shares. Therefore if, for example, a party to an SHA votes at a generalmeeting contrary to what has been agreed in the SHA, the decision approved by the generalmeeting will remain in full force and effect and the non-breaching parties to the SHA will only have recourse to those contractual remedies set out in the SHA.
18. If aminority shareholder becomes aware that a majority shareholder has proposed an agenda itemfor the generalmeeting of shareholders in breach of the SHA to which they are both parties, theminority shareholder could ask a court for an interimrelief to prevent the vote frombeing taken on that agenda item. However, it is not clear whether such relief would be in fact granted. Again, only contractual remedies would be available for theminority shareholder in such situation.
19. As mentioned above, in most cases the law does not require disclosure to the public of the terms of SHA or the fact of its existence. As an exception, the SHA must be disclosed when entered into in respect of a company which has issued shares to the general public or to more than 500 subscribers and therefore was required to register a share prospectus. If a party to such SHA together with its affiliates acquires, pursuant to the terms of the SHA, the right to directly or indirectly control more than 5, 10, 15, 20, 25, 30, 50 or 75%of votes attached to issued ordinary shares of the company, such party should, within five days, notify the company of the acquisition of such right and the company will be required to disclose this information in accordance with securities market regulations.
20. The notification mentioned above should include, inter alia, information on the shares held by the parties to the SHA as of the date of the SHA and the votes controlled by the notifying party to the SHA.
21. Notifications delivered to the company in respect of the rights acquired pursuant to the SHA as described above and lists of parties to the SHA will be kept by the company andmade available to shareholders (regardless of the amount of shares they hold) upon request.
22. Pending receipt by the company of the notification mentioned above, the JSC Law Amendment restricts the voting rights of: (i) the party to an SHA who acquired the right to give voting instructions to other parties; and (ii) parties who will receive such instructions. Until the notification is delivered to the company, votes can be exercised only in respect of the amount of shares initially held by the party referred to in (i). It is not clear whether the voting restriction should apply if the right to control votes is acquired other than by way of the right to give voting instructions.
23. In any event, it appears that the widely used provisions of SHA providing for veto rights or reserved matters should not trigger the notification requirement and, depending on how the relevant provisions of the JSC Law Amendment are interpreted in court, careful drafting may allow for the avoidance of information disclosure in respect of SHA, even in respect of companies which have issued a share prospectus. General Director deadlock
24. The JSC Law Amendment introduced provisions whereby, in certain situations, shareholders of companies where election of the General Director would normally fall within the competence of the board of directors in certain situations may elect the General Director of the JSC by a simple majority vote of shareholders present in the general meeting. This right is triggered if the board of directors fails to elect the General Director in two consecutive meetings or within two months of expiry or termination of the powers of the previous General Director. The chairman of the board will, in such situations, act as the General Director until the appointment by the board of directors of an acting General Director who will then hold this position until the general meeting of shareholders elects the new General Director. This mechanism will only apply if the charter of the company does not provide for a different way of resolving the deadlock situation.
25. If an SHA prescribes the use of a deadlock resolution mechanism different from the one described above (eg, change of voting threshold at the board of directors level from75%to simple majority), appointment of the General Director in accordance with the JSC Law and the charter but in breach of the SHA will still be valid. The non-breaching parties to the SHA will not be able to invalidate it and will have the right to request damages as compensation or to use other legitimate remedies available to them in accordance with the SHA and the applicable law. It is important, therefore, to reflect in the charter the relevant provisions of the SHA.
Protection of rights of parties to SHA
26. Unless the relevant provisions of the SHA are incorporated in the charter of a company, breach of SHA will not constitute a basis for the invalidation of decisions of managing bodies of the company. Therefore, in most cases, shareholders will have to rely on contractual remedies only.
27. An SHA may provide for the use of various means to secure shareholders’ rights there under and for liability for non-performance or improper performance of obligations provided for in the SHA. The JSC Law Amendment mentions the right to claim damages, the payment of penalties and fines, the payment of compensation in pre-agreed amount or determined in accordance with the procedure described in the SHA (as a matter of Russian law it is not clear if this is different from a penalty) and indicates that other rights pursuant to an SHA should also be capable of protection through the courts.
28. We note that the amount of damages caused by breach of an SHA may be difficult to prove and, therefore, penalties may be considered a more efficient remedy. However, a Russian court may decrease the amount of a contractual penalty if it finds that the agreed amount is apparently incommensurate to the breach.
29. Pledges of shares in the company may be considered to secure obligations under an SHA. An issue in respect of share pledges is that, as a matter of Russian law, it cannot be used to directly secure obligations which have no monetary equivalent, eg, an obligation to vote in a certain manner. However, a pledge of shares may be used to secure the payment of penalty for breach of an SHA (to the extent such penalty may be reduced by a court). However, if the court significantly decreases the amount of the penalty, there is still a risk of a court considering the obligation secured by pledge of shares as not defined.
SHA and mandatory public offer
30. Entry into an SHA by itself should not trigger an obligation of the shareholder to make a mandatory offer regardless of the voting powers obtained by the shareholders.
Regulatory consents in respect of an SHA
31. Provided that the relevant asset and turnover thresholds are met, the shareholder(s)may be required to apply for consent from the Russian Federal Antimonopoly Service (“FAS”) if “the right to determine the terms of business activity” is acquired on the basis of the SHA.
32. A party to an SHA can, in accordance with its terms, acquire control over a Russian company operating in one of strategic business sectors such as natural resources, energy, weapons,massmedia, telecommunications and certain others. Such acquisition will require FAS consent to be obtained in accordance with Federal Law No. 57-FZ “On the procedure for effecting foreign investments in commercial entities that have strategic importance for the national defense and security of the state” (the “Strategic Investments Law”). The Strategic Investments Law provides a definition of control which includes the right to control more than 50%of voting shares, the right to appoint more than 50%of members of a managing body, the right to appoint the chief executive officer, etc. In respect of companies developing subsoil fields of federal significance there is a special control test in which the relevant thresholds are reduced to 10%.
33. Independently, based on Federal Law “On Foreign Investments in the Russian Federation”, FAS consent will also be required if a foreign state or an international organization (or a company controlled by either of them) acquires pursuant to an SHA the right to control directly or indirectly more than 25%of votes in any Russian company (regardless of asset or turnover thresholds) or the right to block decisions of its managing bodies.