The securities accounting system was modified solely with regard to definition of the nature and volume of responsibility of the registrar and issuer for breaching the procedure of running the register and fixing ways of protection of the rights of owners of securities, the rights to which are proved by making an entry into the account in the event of an unpermitted write-off. At this point, likewise, numerous problems remained unresolved, including:
- Identification of the securities’ status;
- Insurance of the registrar’s professional responsibility;
- Exclusion of a possibility for withdrawal of original documents on accounting of rights to securities.
In the frame of the registration system of legal entities, requirements to the application forms for registration of legal entity were tightened slightly: now they should be certified by a notary. In addition, a new justification for refusal of public registration was introduced - namely, disqualification of an individual having the right to act on a legal entity’s behalf without the power of attorney (December 2008).
Regulation of commercial companies’ operations was modified by tightening requirements to disclosure of information (in December 20071 and in April 20092 -with regard to foreign investors), improvement of the institution of joint-stock agreements (in June 20093). Prior to Civil Code of RF; introduction of the parent company’s presumption of innocence with regard to a daughter one, provided the former has the right to control 50%-plus of the latter’s equity or shares, etc. As of March 2011, the bill failed to be signed into law.
Federal Act of 06.12.2007 ¹ 334-FZ “On introducing amendments to the Federal Act “On investment funds” and individual legislative acts of Russian Federation”.
Federal Act of 28.04.2009 ¹ 74-FZ “On introducing amendments to the Federal Act “On securities market” and art. 5 of the Federal Act “On protection of rights and legal interests of investors on the securities market”.
Federal Act of 03.06.2009 ¹ 115-FZ “On introducing amendments to the Federal Act “On joint-stock companies” and art. 30 of the Federal Act “On securities market”.
RUSSIAN ECONOMY IN trends and outlooks that (in July 20061), the Government imposed a ban on issuance by joint-stock companies of obligations in an amount exceeding their authorized capital in the event there are no external guarantees or a letter of comfort.
That the 2000s saw an objective trend towards a gradual improvement of corporate law, including certain aspects of corporate governance in a narrow sense of the word, to the benefit of a broad circle of agents concerned, cannot be challenged. That said, the government’s recent vigorous activity on the market for corporate control (in the form of obtaining control over the largest assets, establishment of public corporations, boosting state-owned equity) was unfolding in parallel with the stagnation in promoting the institution of property and corporate law.
The only exception became “S.W.A.T” measures aimed at preclusion of corporate conflicts – a new procedure of consideration of corporate disputes and some measures aimed at countering stripping bankrupt and indebted corporations of their assets, which – and this is typical of recent years, proved too late to implement. Adoption of systemic measures on a further development of the institution of property and corporate law was postponed.
Let us now more thoroughly consider typical novelties of the late 2000s.
The general public economic policy, one of manifestations of which since mid-2000s has been the state’s more pro-active direct intervention in the economy, emerged as the most significant factor that determined the nature of modifications in the corporate law (as the corporate governance’s regulative base) between 2006 and 2010. The corporate governance’s advancement in the period in question was to a significant extent determined by pursuance of tasks on securing the public and quasi-public interests on the market for corporate control.
All that lied at the core of establishment of a new legal base on reorganization of corporations in 2006, which to a significant extent helped amalgamate hundreds of companies into public corporations and a number of large holdings. The process had been complete by and large by 2008.
According to FAS’s assessments made in 2008, enjoying the political and administrative resources and greater financial capacity, public corporations can exert a critical influence on general conditions of circulation of goods on respective commodity markets. Threats to competition arising due to the rise of public corporations lie in mandating to them some public functions and powers in respect to pursuance of the public policy. Plus, the state created exclusive conditions for the public corporations’ economic operations, which makes it impossible for private corporations to compete with them. Finally, seeking collective domination, the public corporations are keen to create horizontally or vertically integrated structures2.
Inspections the legal enforcement agencies ran in 2009 afforded ground to conclude the public corporations failed to accomplish their functions and mandate; what’s more, their operations appeared inconsistent with objectives set in federal acts on their creation, and their Federal Act of 27.07.2009 ¹ 138-FZ “On introducing amendments to the Federal Act “On securities market” and some other legislative acts of Russian Federation.
To solve these challenges FAS believes it is appropriate to: 1) strengthen the anti-trust control over public corporations; 2) return to the state the public functions currently exercised by public corporations; 3) broaden the use by public corporations of tender-based mechanisms in the course of procurement of goods, works, services from private Russian companies; 4) secure transparency in the public corporations’ operations; 5) impose a moratorium on founding new public corporations; 6) exclude the possibility of a government’s permanent financial support of public corporations. See: Report of the RF Federal Anti-Monopoly Service “O sostoyanii konkurentsii”, www.fas.gov.ru.
Institutional Problems use of public assets and financial resources assigned to them was inappropriate or inefficient.
The examination of the public corporation’s operations resulted in filing more than 20 criminal cases; as well, the results became yet another argument in favor of their gradual reorganization and liquidation. The head of the presidential Control Department has reckoned recently that the Government was tasked to develop proposals until 1 March 201 on transformation of operating in the competitive environment public corporations into other organizational and legal forms, including, in particular, joint-stock companies.
In addition, as early as since 2004 the Government began undertaking legal measures aimed at protection, retention and simplification of tasks of consolidation of new assets. More specifically, such measures were undertaken in the areas of corporate regulation, bankruptcy, anti-monopoly law1. The problem of conflict of interests the government faced as the regulator and an active player on the M&A market became evident already in 2006-08. A greater attention to interests of public companies and backbone corporations (with the latter entities being a fuel for expansion of the former ones) entails the deterioration of the quality of the general state regulation of the corporate sphere, for narrow and bespoke provisions designated for servicing the public sector’s interests expanded to encompass all the economic agents.
The provision of the state relief to companies between late 2008 and early 2009 in the frame of the combat with effects of the financial crisis by loans-for-shares means demanded for creation of mechanisms which would enable one to easily acquire the companies in question and control them. That gave rise to new, more flexible levers of allocation and pawns involving shares in limited liability companies, changes in assignment of powers between the companies’ management bodies towards simplification of critical decisions concerning company management practices. For instance, Federal Act of 30 December 2008 ¹ 306-FZ “On introducing amendments to some legislative acts of RF in connection with improvement of the procedure for the levy of execution on pledged property” established a mechanism of the extrajudicial reassignment of rights to Russian corporations’ pledged stakes and other assets.
The procedure for, and conditions of, exit of participants from LLCs and/or pledging their shares were fundamentally modified, too. As well, one can reference to a much disputed bill “On financial rehabilitation” which in the first place was set to meet the interests of the largest groups that had amassed sizeable debts.
The need to secure interests of the banks that are mostly controlled by the state dictated unprecedented limitations of timelines for attempts to challenge decisions made by management bodies of economic companies and a drastic reduction of the list of rationales for filing respective suits, and of introduction of much-needed proceedings measures which help an efficient consideration of corporate disputes.
Against that background the government implemented measures developed and proposed back in 2008 in the Concept of development of corporate law through 2008. That said, while key players on the market for corporate control saw their interests be promoted quite flawlessly, the said measures had enjoyed no demand whatsoever until recently.
The acts adopted with regard to LLCs partly helped close the gap between the respective legislation and the urgent needs and the company legislation. Meanwhile, the introduction of See, for example: Radygin A., Entov R., Apevalova E. et al. Vnutrenniye mekhanizmy korporativnogo upravleniya: nekotorye prikladnye problem. M., IEPP, 2009; Apevalova E., Radygin A. Razvitiye institute bankrotstva.- V: Ekonomika perekhodnogo perioda: ocherki ekonomicheskoy politiki postkommunisticheskoy Rossii.
Ekonomichesky rost 2000-2007. M., Delo, 2008, p. 463-497.
RUSSIAN ECONOMY IN trends and outlooks simplified mechanisms of change of owners in the conditions of a limited access to financial resources and the “dictatorship” of banks, which was born by the state, constitutes an assets redistribution lever.
The government and the group of controlled by it banks’ active operations on the financial market between late 2008 and early 2009 were backed by measures on modification of circulation of marketable securities. Specifically, there arose and was legitimized a new concept of “qualified investors”. They became eligible for an access to a broader array of securities, while benefiting from more lenient requirements to transparency of such operations, for they no longer are subject to the concept of public offer and respective information disclosure requirements.
In anticipation of a rise in corporate raids in the regions against the backdrop of crisis and a drastic fall in costs of assets1, the government took a pro-active stance with regard to modifications of the law in the corporate disputes area. Made in July 20092, the most significant changes in this particular sphere determined:
a) Special procedures of consideration by arbitration courts of this particular category of cases, including such disputes being subject to exclusive locus standi of the court of law at a given legal entity’s location;
b) Special provisions that concern employment of interlocutory injunction, which is supposed to preclude the nuisance and collective lawsuits;
c) Obligation to disclose information oon the initiated dispute or preparations thereto;
d) The ban on extension of the limitation period with regard to suits on annulment of corporate acts.
That said, not adopted remained a string of modifications that concern the “healing” of the legal entity founded or reorganized in contravention of the law, the ban on extension of the period of limitations with regard to lawsuits on annulment of acts of the public registration of legal entities.
In 2009, arbitration courts witnessed a drastic growth in the number of cases on failure to honor obligations, which became one of the reasons behind the implementation in July of the act on mediation, which came into effect on 1 January 20113. The document provides for the possibility for a dispute regulation mechanism, with an independent entity playing a mediator. The procedure can be applied to disputes arising from civil relationships, including entrepreneurial or other economic activities, as well as to disputes engendered by labor of family legal relations. As to other categories of disputes, it can be applied only in the event the federal law provides for that.
The exercise of the mediation procedure is voluntary and confidential, and it is run on the basis of an agreement between the sides. It can be employed to a dispute that arose both prior Addressing the Collegiums of the Attorney General’s Office, Pres. Medvedev asserted that corporate raiding could spark social tensions in urban areas. Mr. V. Pligin, Chairman of the State Duma Committee for constitutional law and nation-building prognosticated a possible rise of the so called “raider captures” ( Rossiyskaya Biznes-gazeta, 09.12.2008) and by Yu. Korotky, the First Deputy Head of Rosfinmonitoring (Rossiyaskaya finansovaya razvedka opasayetsya vspleska reyderstva na fone krizisa, 14.4. 2009. – http://www.raudspb.ru/ node/45), ti name a few.
Federal Act of 19.07. 2009. ¹ 205-FZ “On introducing amendments to individual legislative acts of Russian Federation”. The amendments in question took effect on 21. 10.09.
Federal Act of 27.07. 2010. ¹ 193-FZ “On the alternative procedure for regulation of disputes with the participation of the intermediary (the procedure for mediation)”.