- the wording of the article on the specifics of legal status of OJSCs and LLCs whose shares, participatory interest in the charter capital are held by the Russian Federation, constituent territories of the Russian Federation or municipalities was rectified to refer to shares and participatory interest which are not assigned to state and municipal unitary enterprises and institutions;
- due to acceptance of engaging legal entities, apart from public authorities, in organizing sale of privatized property pursuant to the duly established procedure, an allowance is made for such sellers to sell in specific cases to exercise on behalf of the state some of the rights which the shareholders or members of LLCs are entitled to;
- with respect to OJSCs and LLCs with a 100% federal or municipal government ownership (100% participatory interest in the charter capital) are held by the state or a municipality it was ascertain that procedures for preparation and holding a general meeting of shareholders (members of a joint stock company) are not to be applicable, except for the provisions regarding the dates of an annual general meeting of shareholders, general meeting of the members of a joint stock company;
- the text of the law was supplemented with a provision on that OJSCs and LLCs established through privatization of unitary enterprises are to be entitled to conduct the types of activities provided for by their charters based on licenses and other permits issued to such unitary enterprises.
A series of amendments and updates were made in December 2011 to the applicable Federal Law “On Privatization” in the context of the development of the legislation on the protection of competition:
- the format of information support of privatization which after the amendments dated May 2010 must include, apart from having to be published in official printed publications, posting of relevant information on official websites, also supplemented with the official website of the Russian Federation for posting information on bidding as determined by the Government of Russia;
- the requirement for a period of acceptance of bids for auctions (at least 25 days) was supplemented with a rule specifying that such auctions must be held not less than 10 days from the date on which the bidders are accepted (the same rule is to be applicable to a special auction, tender, sale through public offering);
- second, (5 to 15 working days from the date of summing up the results of an auction) the term for concluding a purchase and sale agreement with the winner was extended (the same must be applicable to sale through public offering from the date of winner pronouncing notice);
- a duration applicable for auctions (tenders) was a bit shorter (10 to 15 working days);
- however, no agreement may be entered into on the basis of the results of auctions, sale through public offering, sale without specifying the price within less than 10 working Section Institutional Issues days from the date when a protocol containing the results of sale of privatized property is posted on websites;
- a new version of Article 22 of the applicable Federal Law “On Privatization” is to take effect next year (on January 1, 2013), which will regulate sale of OJSCs’ shares through a securities market operator, in which this notion and notions derived from this notion were replaced with the ‘exchange auction’, etc. with relevant drafting amendments.
The following should be highlighted in assessing numerous updates to the Federal Law “On Privatization”.
The duration of entering into a purchase and sale agreement with the winners of privatization procedures was extended; a regulation on the minimum time interval between the acknowledgement of bidders and the moment of conducting procedures themselves must raise the level of competition in the sale of privatized assets.
Improving information support of privatization by adding more channels of dissipation of relevant information through the official website of the Russian Federation together with the introduction of the minimum time interval between posting of a protocol of sale of public or municipal property on websites and conclusion of an agreement on the basis of such sale is intended to contribute to a more transparent privatization process as a whole thus counteracting corruption and organized crime.
The regulation on the right of OJSCs and LLCs which are established through privatization, to conduct activities on the basis of licenses and other permits issued to a relevant unitary enterprise is supposed to further strengthen the status of new owners and privatized enterprises themselves.
Changes in the procedure for reimbursing under invalid transactions of purchase and sale of public and municipal property, which prohibits the use for this purpose of the proceeds from sale of property to other buyers under other privatization transactions prior to allocation thereof, is likely to streamline the process of privatization.
The way of incorporation of unitary enterprises into LLCs seems to be ambiguous. On the one hand, many options of incorporation of business entities of this type can be made available by using this way together with the regulations set forth in the relevant special law1,2.
The formerly used type of incorporation of almost all3 unitary enterprises (including many small enterprises) into OJSCs with a 100% state-held interest was related to a formal necessity to incur expenses arising out of the requirements set forth in the laws on of joint stock companies and securities4 with questionable prospects of attracting investments through enlisting in the stock market, but a substantial increase in subsequent public expenses on representation of its interests (the need to increase the number of its representatives in the gov Federal Law No. 161-FZ, dd. November 14, 2001, “On Public and Municipal Unitary Enterprises” allows these to be transformed into public and municipal institutions and, based on the recent amendments, autonomous nonprofit organizations as well.
The procedure for participation of public representatives in the top management body of autonomous nonprofit organizations and the Procedure for Corporate Governance of LLCs with a State-Held Interest Established Through Privatization were approved by RF Government Regulations No. 33 and No. 34, dd. January 27, 2012.
Except for sale of the unitary enterprise property complex which was abolished on the basis of analysis of the amendments made to the Federal Law “On Privatization” in the summer of 2011.
The obligation to annually publish profit & loss reports, balance sheets, disclose information on general meetings of shareholders, the need to engage a special registrar in maintaining a register, etc.
RUSSIAN ECONOMY IN trends and outlooks erning bodies of OJSCs while having to maintain their qualification at an adequate level and adequately using corporate governance arrangements1).
On the other hand, there arises a certain contradiction with the orientation – which was typical of the entire period of reforms of ownership relations in Russia as early as the 1990s – of property management agencies towards minimization of public participation in the economy in any legal form which differs from OJSC because the latter is more transparent. However, this perspective should be accepted as realistic due to that an interest held by the state (municipality) in a LLC may not be bought in full at a time in the course of privatization. Furthermore, the use of criteria applicable to small businesses which provide for the possibility itself of incorporation of a part of unitary enterprises into LLCs, is not mandatory and diverse.
Enlarging the list of terms and conditions for sale during tenders (auctions) by restricting changes regarding the purpose of specific property assets used for scientific and/or research activities may have an adverse effect due to the threat of formal approach towards privatization without considering sector-related specifics, and the notorious problem of following up the observation of the terms and conditions of tenders (auctions).
It also is worth noting that there was a continued trend towards enlarging the already exclusive prerogatives of the government in the world of privatization without actual external control over privatization, as evidenced by a newly appeared regulation on the transfer of property of 15 categories which are not covered by the law, other federal laws and also other norms and regulations.
The update issued in 2010 – it still remains to be adequately formalized – allows other legal entities besides government authorities2 to be engaged in organizing sale of privatized property, was supplemented with the possibility in some cases for such legal entities to exercise on behalf of the state the specific rights to which LLC shareholders or interest holders are entitled, without defining any set of such rights and conditions under which they can be delegated.
Hence, summing up the results, one may say that the amendments and updates made to the Federal Law “On Privatization” in Russia in 2011 materialized the proposals of the Ministry of Economic Development and Trade of Russia and the Federal Agency for State Property Management which were prepared as early as 2005, on how to raise the level of effectiveness and enhance the mechanism of privatization process and optimize decisions on the management of state-owned property assets, followed the logic of the important updates included into the Law “On Privatization” in 2010.
However, the latter, being focused on a large-scale privatization of large aggregate of relatively small assets and expansion of the conditions, potential mechanisms of privatization of large and super large public companies, are imposed to a significant potential of risks related to poor transparency of sale of property to strategic investors, ill-defined reciprocal obligations of the state and buyers, unclear mechanisms of enforcement of such obligations. With regard to privatization of large companies, a special focus is placed on “individual” decisions, but even general frameworks of such decisions remain to be defined, while the powers of the The activity of the Board of Directors of OJSCs is a certain precondition for being subject to a strict control over management. However, lack of regular meetings and red tape cast some doubt on the effectiveness of incorporation of unitary enterprises.
A relevant mechanism should be developed on a competitive basis, which is not mentioned in the law, to create conditions for making decisions on engaging private sellers in selling privatized federal property. A list of such organizations, 23 legal entities, including Sberbank and VTB, was approved as early as 2010.
Section Institutional Issues Government of Russia in making such decisions were enhanced and their role made more important1.
The circumstances require that further efforts be made to create objective preconditions for strengthening the structural trend of privatization which require a significant progress in developing institutional environment, long-term and transparent “game rules” for interaction between the state and business community.
Among the applied regulations which have an effect on the privatization process, a special emphasis should be placed on Russian Government Regulation No. 71, dd. 12 February 2011, which specifies – as part of the implementation of the amendments adopted in 2010 to the Federal Law “On Privatization” – the rules for sale through public offering, establishes the transition to setting the initial sale price through market-driven mechanisms on the basis of the report made by an independent appraiser, updates the rules for submission of documents for bidding at privatized property sale auctions.
Order No. 208 which was issued by the Ministry of Economic Development and Trade of Russia on May 11, 2011, approved the Procedure for Disclosure of Information by OJSCs whose shares are held by the state or municipalities, and public (municipal) unitary enterprises since the moment of enlisting into the Forecast Plan (Program) for Federal Property Privatization. These rules are applicable at the federal, regional and municipal levels, save for FSUEs subject to transformation – based on decisions of the President and the Government of the Russian Federation – into OJSCs with a 100% federal government ownership and to be contributed to the charter capital of OJSC or a public corporation as an asset contribution from the state, as well as OJSCs whose shares are to be contributed to the charter capital of other OJSC on the basis of decisions made by the President and the Government of the Russian Federation.
In addition, Russian Government Order No. 1094, dd. December 22, 2011, approved the amendments to the Rules for the Development of the Forecast Plan (Program) for Federal Property Privatization issued at the end of 2005. The amendments regulate, in particular the procedure for delisting federal property from the privatization program, establish the procedure and terms within which the Ministry of Finance of Russia and the Federal Antimonopoly Service of the Russian Federation are to approve the proposals on delisting federal property from the privatization program which federal government executive bodies submit to the Federal Agency for State Property Management, as well as the procedure and terms within which discrepancies on this issue are to be considered. The foregoing procedure provides for the following. Federal property can be delisted from the privatization program on the basis of consideration at a meeting held by the Government. Provisions on privatization of a state-held interest in LLCs were also included into the Rules for the Development of the Forecast Plan (Program) for Federal Property Privatization.
6.1.4. Enhancing corporate governance of business entities with state participation A series of significant amendments were made during 2011 to the applicable regulations which regulate the corporate governance of business entities with state participation.
See Annual Review “Russian Economy in 2010. Trends and Outlooks (Issue 32)” issued by IET (P. 6.1.5. New Stage in the Implementation of National Policy on Privatization of State-Held Property: Key Priorities and Objectives, Actions and Risks, p. 426-459).
RUSSIAN ECONOMY IN trends and outlooks The amendments were made on the basis of Russian Government Regulation No. 1214, dd.
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