The year 2017 was marked by a number of changes in the regulation of corporate affairs, some of which may be quite significant for Russian companies in the future.
First of all, in 2017 Russian companies became able to enter into agreements to refer some corporate disputes to an arbitration (treteisky) tribunal (provided certain conditions are met). This broke the monopoly of the commercial (arbitrazh) courts over the resolution of such disputes.
Updates to a number of corporate procedures, including procedures related to holding a general meeting and entering into interested-party transactions, either were or will be introduced.
As part of implementing the policy of "de-offshorization" of the Russian economy, and given the noticeable cooling of relations with Western countries, lawmakers have taken certain steps toward enhancing protectionary measures in relation to foreign investment in Russia. This has been reflected in the establishment of new categories of persons who are prohibited from forming and participating in Russian companies (so-called "undesirable organizations") or from acquiring state and municipal property (this prohibition has affected offshore companies and their group companies).
These and other changes are considered in this overview.
I. Some corporate disputes may be referred to arbitration
Starting February 1, 2017,1 Russian law has made it possible to enter into agreements to refer certain categories of corporate disputes to arbitration (e.g., disputes related to the establishment, reorganization and liquidation of a legal entity; to the ownership of shares and participatory interests in the share capital of companies; disputes over compensation of losses caused to a legal entity; and the invalidity of transactions made by it). At the same time, a variety of corporate disputes (in particular, disputes over convening a general meeting of participants/shareholders; and removing participants of legal entities) continue to be non-arbitrable and must be resolved in a commercial court at the place where the company is located.
Corporate disputes which are arbitrable may be referred to arbitration if the company, all of its participants and other persons who are claimants or respondents in the dispute have entered into a written agreement to refer the dispute to arbitration, whether in the form of an arbitration clause or a separate arbitration agreement. The arbitration agreement may also be concluded by including it in the rules of organized trading or clearing rules that are registered in accordance with Russian law, and/or in the legal entity's charter unanimously adopted by all participants.2 That said, it is important to bear in mind that arbitration agreements that were concluded prior to February 1, 2017, are considered unenforceable. Thus, if an arbitration agreement (including an arbitration clause in a corporate agreement) was concluded before that date, it should be re-concluded in order to bring it into compliance with the new requirements.
A number of conditions will need to be met in order to refer a corporate dispute to arbitration.
Firstly, the arbitration must be conducted under the auspices of a permanent arbitration institution accredited by the RF Government. The following are currently permanent arbitration institutions accredited by the RF Government: the International Commercial Arbitration Court at the RF Chamber of Commerce and Industry; the Maritime Arbitration Commission at the RF Chamber of Commerce and Industry; the Arbitration Center at the Institute of Modern Arbitration; and the Arbitration Center at the Russian Union of Industrialists and Entrepreneurs. An award made by an institution that has not obtained the right to administer arbitration is now considered to be made in violation of the arbitration procedure provided for by law, which will serve as a basis for a Russian court to set aside that arbitral award or to refuse to issue a writ of execution for its enforcement.
Secondly, the arbitration institution is required to approve and publish rules for adjudicating corporate disputes on its website.
Thirdly, the seat of arbitration must be the Russian Federation.
Generally, most of the new developments can be seen as rather positive. The adoption of the amendments described above has largely put an end to the debate over the arbitrability of corporate disputes, and participants in corporate legal relationships are now able to avail themselves of additional forms of legal remedy that were previously unavailable to them. Often this is an important aspect for the parties to a dispute; after all, referring a corporate dispute to arbitration makes it possible to maintain confidentiality, and also to involve highly qualified specialists—which does not always include commercial court judges—in considering the case.
On the other hand, it seems doubtful that some of the new rules will have a positive effect on transactions to be concluded or already concluded between Russian and foreign companies (for example, limitation of the seat of arbitration to the Russian Federation). It should also be noted that to date not a single one of the widely recognized permanent arbitration centers that have already become popular among Russian companies and their foreign partners (e.g., the Singapore International Arbitration Center or SIAC) has been accredited by the RF Government as a permanent arbitration institution and, accordingly, cannot under Russian law consider corporate disputes in international investment projects.
II. Corporate governance issues
1. The concept of the controlling shareholder's liability for a subsidiary's losses has been developed in court practice
The year 2017 was marked by the high-profile case concerning the claim of Rosneft Oil Company, a new shareholder of Public Joint-Stock Oil Company Bashneft, against its previous shareholder Sistema Joint-Stock Financial Corporation, for recovery of losses totaling more than RUB 170 billion caused to Bashneft in the course of its reorganization, which was completed in 2014.3
Apart from the amount of the claims, which was practically unprecedented in Russian court practice, this case is noteworthy because it develops an approach previously adopted by lawmakers with respect to a majority shareholder's liability for losses that it causes the company. Russian civil law envisages the liability of persons capable of directing the actions of a legal entity, for culpably causing losses to the legal entity, where their conduct is in bad faith or is unreasonable. However, this provision is relatively new; the corresponding article was added to the Civil Code only in September 2014. The Bashneft case is one of the most interesting examples of liability being imposed on controlling shareholders on this basis.
The court deemed the reorganization of Bashneft carried out by Sistema to be loss-making and aimed at stripping assets and funds. In the court's opinion, Sistema, being entitled to give Bashneft binding instructions, knew in advance that the reorganization would result in major losses for Bashneft. The court also cited the provisions of the Civil Code requiring shareholders to act reasonably and in good faith in the legal entity's interests. In the court's opinion, the shareholder must take the interests of the company and the state into account, and not act solely in its own interest. The court also decided that the losses caused to Bashneft by the reorganization did not represent an ordinary business risk attributable to the company or the new shareholders.
Of course, it is still early to make conclusions about the impact the Bashneft case will have on the evolution of court practice on shareholders' liability. Nevertheless, when planning and carrying out corporate procedures it is necessary to carefully analyze whether they meet the company's interests and satisfy the criterion of "ordinary business risk." As the Bashneft case shows, this issue demands careful attention by controlling shareholders, given the potentially very serious negative consequences that may otherwise result.
2. Updates are proposed to the procedures for planning, convening and holding a general shareholder meeting
The Bank of Russia has developed an updated draft regulation setting forth additional requirements to the procedures for planning, convening and holding a general shareholders meeting (the "Draft"). It is anticipated that this regulation will replace Order No. 12-6/pz-n of the Federal Financial Markets Service of Russia dated February 2, 2012 (as amended), which currently regulates similar issues. However, as of the date of this alert, the updated regulation has not yet been adopted.
The planned changes provide, inter alia, for the possibility of posting on the company's Internet website materials to be provided to shareholders when preparing for the meeting, as well as online registration for the meeting and voting (if provided for by the company's charter). The draft of the updated regulation also purports to govern relations arising when rights to participate in a meeting are exercised by a nominee holder, including foreign nominee holders and foreign organizations entitled by their governing law to record rights to securities and transfer of rights to securities.
The Draft establishes how shareholders should act when they join forces to propose items for the agenda or requisition an extraordinary shareholder meeting (it will be possible to do both by serving a single document signed by the shareholders who have joined forces, or by serving several documents signed by the shareholders separately).
The Draft also makes it possible to specify in the charter of a non-public company procedures for planning, convening and holding the general meeting that differ from the requirements established by the Bank of Russia (however, such changes must be made to the charter by unanimous resolution of all shareholders and cannot deprive individuals entitled to participate in a general meeting of the right to participate in and receive information about the meeting).
If this regulation is approved by the Bank of Russia, it will be necessary to take its requirements into account when preparing for and holding general shareholders meetings or when making amendments to the charter of a non-public company that establish other requirements.
3. Shareholders' / participants' access to company information
Amendments made4 to the Federal Law on Joint-Stock Companies5 and the Federal Law on Limited Liability Companies6 have clarified the rights of shareholders and participants to access the company's information. The list of documents to which a company must give its shareholders and participants access upon request has been modified.
The scope of information that must be provided by a joint-stock company now differs depending on the number of voting shares held by a shareholder: a shareholder holding at least 25% of voting shares is provided with a greater scope of information, and is not required to indicate the business purpose for which the documents are requested; whereas a shareholder holding fewer than 25% of voting shares must indicate such purpose). It is worth noting that the business purpose must be reasonable; and the law sets forth a number of criteria indicating when a business purpose cannot be considered reasonable. If in the opinion of the company's management the business purpose is not reasonable, the company may refuse to provide the requested documents. It should be noted that the criteria for determining that a business purpose is unreasonable are quite vaguely worded in the law, so, in our opinion, there is a high likelihood of conflicts arising out of a refusal to provide documents. A refusal may be disputed in commercial court.
In addition, from now on the law also provides other grounds on which a company (being either a limited liability company or a joint-stock company) may refuse to provide access to documents and information.
It is recommended to take these amendments into consideration when requesting information from a company in order to avoid unnecessary delays or refusal (for example, if there is no mention of a business purpose for which the documents are requested when the business purpose must be stated).
III. Regulation of major and interested-party transactions
1. Thresholds for an interested-party transaction have been defined
Pursuant to the applicable company laws, the provisions on interested-party transactions do not apply to transactions involving property whose price or book value is not more than 0.1% of the book value of the company's assets (provided that the transaction amount does not exceed the thresholds set by the Bank of Russia).
The Bank of Russia has set transaction amount thresholds, effective since May 2017,7 above which a transaction may be deemed to be an interested-party transaction. Such thresholds are tied to the book value of the company's assets. For example, the threshold is RUB 20 million for companies with assets valued at not more than RUB 25 billion; the threshold is RUB 50 million for companies with assets valued at between RUB 25 billion and RUB 100 billion, and so forth.
Thus, even if the transaction value does not exceed 0.1% of the book value of the assets, but exceeds the thresholds set by the Bank of Russia, the transaction may require corporate approval as an interested-party transaction.
The above should be borne in mind when considering whether to approve an interested-party transaction.
2. Requirements established for the content of notifications of an interest in a transaction by a joint-stock company
According to applicable laws governing joint-stock companies, persons with an interest in a transaction that such a company is entering into must send the company a notification that complies with requirements set by the Bank of Russia.
Since July 2017,8 a procedure and form for such notifications established by the Bank of Russia have been in effect. Thus, when preparing for a general shareholders meeting to approve an interested-party transaction, it is now important to remember the need to send a notification of interest in accordance with the Bank of Russia requirements.
IV. Foreign investments: new tightening of legislation
The trend of increasing state control over foreign investment in Russian companies in general and in "strategic" businesses in particular continued in 2017.
1. Activities of "undesirable organizations"
Regulations on so-called "undesirable organizations" entered into force back in 20159 and imposed substantial restrictions on foreign and international nongovernmental organizations which are deemed to pose a threat to the foundations of the constitutional system of the Russian Federation, the country's defense capabilities or national security, and which are found to be undesirable within the territory of the Russian Federation. Such organizations have been prohibited from creating structural subdivisions and conducting any activity in Russia through them; distributing information materials created by them via the mass media and the Internet; and also from carrying out any programs or projects in Russia (for example, educational programs).
On April 8, 2017,10 the list of restrictive measures applicable to "undesirable organizations" was expanded to include a prohibition on establishing and participating in legal entities in the Russian Federation. Thus, organizations whose activities are deemed undesirable in the Russian Federation will not be able to create companies in Russia or to acquire participatory interests or shares in such companies.
Presently the list of "undesirable organizations" includes such organizations as The National Endowment for Democracy, the Media Development Investment Fund, Inc., and Open Russia.
We recommend reviewing this list when engaging in joint projects with any organizations that could potentially be categorized as "undesirable."
2. Investments in "strategic" companies
July 30, 2017 saw the entry into force of amendments11 substantially impacting the future of foreign investment in Russian companies.
A key new development is that the chairman of the Governmental Commission for Control over Foreign Investments in the Russian Federation has been given the authority to table for consideration by the Governmental Commission any transaction made by a foreign investor with respect to any Russian company. Previously only foreign investors' transactions involving "strategic" companies required the Governmental Commission's clearance.
The powers of the Governmental Commission were also expanded and now it has the right to impose on a foreign investor, as a condition to preliminary approval of a transaction, any obligations which it considers necessary for state defense and national security.
The range of categories of foreign investors has also been expanded; henceforth Russian citizens with a second citizenship and Russian organizations controlled by foreign investors are also considered foreign investors.
The list of types of activity of strategic significance for state defense and national security has also been updated and expanded. In particular, it now includes activity by a company that is the operator of an electronic trading platform in accordance with Russian Federation laws on contract systems for state and municipal procurement of goods, works and services.
Finally, failure of a foreign investor to comply with requirements to submit a notice of acquisition of 5% or more of the shares or participatory interests in a "strategic" company can now result in FAS petitioning a court to deprive the foreign investor of the right to vote at the general meeting of shareholders or participants. This sanction will apply until confirmation is received from FAS that the foreign investor has duly submitted the notice.
All of these restrictions should be borne in mind when structuring transactions involving foreign investors.
3. Foreign offshore company investors
On July 1, 2017,12 regulations entered into force establishing an additional category of persons who may not acquire state and municipal property. This restriction now also encompasses "offshore companies" and companies controlled by them. Offshore companies are defined as legal entities incorporated in a state or in a territory that provides a preferential tax regime and/or that do not require the disclosure and submission of information when conducting financial transactions. The list of such states and territories is approved by the Ministry of Finance of the Russian Federation13 and currently includes, inter alia, such jurisdictions as the British Virgin Islands, the Commonwealth of Dominica, the Principality of Liechtenstein, the Republic of Maldives, the Cayman Islands, the Republic of Seychelles and others.
Henceforth, offshore companies and the entities controlled by them (including those incorporated in Russia) are prohibited from concluding transactions that result in control being established over "strategic" companies of strategic significance for state defense and national security, and also transactions concerning the acquisition, holding or use of property relating to fixed production assets of "strategic" companies and whose value constitutes at least 25% of the book value of such companies' total assets. This prohibition does not extend to contractual relations that arose before July 1, 2017.
In addition, the maximum percentage of votes that offshore companies and entities controlled by them can (subject to preliminary approval) acquire in "strategic companies" has been reduced to the same percentage as is applicable to foreign states and international organizations.
It is evident that the changes described above are generally intended to implement the policy of de-offshorization of the Russian economy and to combat the use of offshore companies by Russian entrepreneurs. However, they will inevitably also affect decision-making by other foreign investors in the course of structuring transactions relating to "strategic" companies.
V. Information and record
1. It has become even easier to register an LLC
Limited liability companies with a sole participant can now be registered using an electronic service that can be accessed on the tax authority's website, obviating the need to spend time and money gathering and filing documents.
The new service makes it possible to automatically generate the documents needed for state registration based on the taxpayer's personal data (e.g. the resolution on incorporation, charter, payment order and application).
Users of the service need only sign the generated documents with an e-signature and send them using the same service. The result of state registration can be received both in digital form and hard copy.
Users who don't have an e-signature will be able to print out the documents and file them for registration as usual.
2. Maintaining the list of participants of LLCs can be transferred to a notary
A limited liability company must ensure that the list of its participants is kept as from the company's state registration. On July 1, 201714 amendments entered into force that enable limited liability companies to transfer the obligation to maintain and store their list of participants to a notary pursuant to a resolution of the general meeting of participants. Information transferred in this way will be reflected in the register of lists of participants of limited liability companies by the uniform notarial information system.
This development is intended to reduce the likelihood of inaccurate information being entered in the list, and also to help prevent and more effectively resolve corporate disputes.
3. The procedure for submitting information about beneficial owners has been updated
In December 2016,15 legal entities became obligated, at the request of the competent authorities, to submit information about their ultimate beneficial owners or about steps taken to identify them. It was difficult to fulfill this obligation in practice because there was no regulatory act governing the procedures and time periods for submitting the information.
Six months after that amendment the government of the Russian Federation issued a decree which approved the rules for submitting information about companies' beneficial owners and steps taken to identify them on request of competent governmental authorities (the "Rules").16
Presently, the Federal Tax Service and the Federal Service for
Financial Monitoring (Rosfinmonitoring) are authorities competent
to send such requests.
According to the Rules, documents are to be exchanged between the competent authorities and legal entities primarily in electronic form (however, information can also be exchanged in hard copy).
1 Federal Law No. 409-FZ on Amendments to Certain Legislative Acts of the Russian Federation and Repeal of Article 6(1)(3) of the Federal Law on Self-Regulating Organizations in connection with the adoption of the Federal Law on Arbitration (Arbitration Proceedings) in the Russian Federation dated December 29, 2015.
2 The exceptions are public joint-stock companies and companies with at least 1,000 shareholders holding voting shares.
3 The decision of the court of first instance awarding recovery of losses of more than RUB 136 billion was upheld without amendment by the appellate court. On December 26, 2017, the court approved a settlement agreement, pursuant to which Sistema undertook to pay Bashneft RUB 100 billion as damages.
4 The amendments were introduced by Federal Law No. 233-FZ on Amendments to the Federal Law on Joint-Stock Companies and Article 50 of the Federal Law on Limited Liability Companies dated July 29, 2017, which entered into force on July 30, 2017.
5 Federal Law No. 208-FZ on Joint-Stock Companies dated December 26, 1995.
6 Federal Law No. 14-FZ on Limited Liability Companies dated February 8, 1998.
7 Bank of Russia Directive No. 4335-U on Setting Thresholds for the Size of Transactions of Joint-Stock Companies and Limited Liability Companies beyond which Such Transactions May be Considered Interested-Party Transactions dated March 31, 2017.
8 Bank of Russia Directive No. 4338-U on the Requirements to the Procedure for Sending and the Form of Notifications of Persons Who May Be Deemed Interested in a Joint-Stock Company Making Transactions dated April 3, 2017.
9 Federal Law No. 129-FZ on Amendments to Certain Legislative Acts of the Russian Federation dated May 23, 2015.
10 The amendments were introduced by Federal Law No. 35-FZ on Amendment of Article 3.1 of the Federal Law on Measures of Influencing Persons Involved in Violations of Fundamental Human Rights and Freedoms and Rights and Freedoms of Citizens of the Russian Federation dated March 28, 2017.
11 Federal Law No. 165-FZ on Amendments to Article 6 of the Federal Law on Foreign Investments in the Russian Federation and the Federal Law on the Procedures for Foreign Investments in Business Entities of Strategic Significance for State Defense and National Security dated July 18, 2017.
12 Federal Law No. 155-FZ on Amendments to Article 5 of the Federal Law on Privatization of State and Municipal Property and the Federal Law on the Procedures for Foreign Investments in Business Entities of Strategic Significance for State Defense and National Security dated July 1, 2017.
13 Ministry of Finance of Russia Order No. 108n on Approval of the List of Countries and Territories That Provide a Preferential Tax Regime and/or Do Not Require the Disclosure and Submission of Information When Conducting Financial Transactions (Offshore Zones) dated November 13, 2007.
14 Federal Law No. 360-FZ on Amendments to Certain Legislative Acts of the Russian Federation dated July 3, 2016.
15 Federal Law No. 215-FZ on Amendments to the Federal Law on Countering the Legalization of Illegal Earnings (Money Laundering) and the Financing of Terrorism and the Russian Federation Code on Administrative Offenses dated June 23, 2016.
16 RF Government Decree No. 913 dated July 31, 2017.
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