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WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK 6. Minority right to (+) Great Britain, Argentina, Brasil, Chile, Present compel the majority USA, Canada, Phillipine, Malaysia, shareholder to Japan, Germany Taiwan, Thailand, India, purchase his shares South Africa from him at an equitable price in case of large transactions, reorganization or changes in constitution 7. Percentage of The less the 1 USA 1 Chile shares needed to better 2 Japan 3 Taiwan convene an 5 - Canada and 5 South Africa, extraordinary Germany Greece, Argentina, shareholders 10 Great Brasil, Republic of meeting Britain and Korea, Portugal France 10 India, Malaysia, 20 Italy Indonesia, Turkey, Phillipine 20 Thailand 33 Mexico 8. Mandatory Compensation None Chile 30 % None payment of mechanisms in Greece 35 % dividends the countries of Brasil 50 % continental law Phillipine 50 % (+ for the latter) Portugal 50 % Sources: IKPU, 2001; La Porta, Lopez-de-Silanes, Shleifer, Vishny, 1997.

Undoubtedly, Russian company legislation (corporate lawl to be more precise) contains a considerable amount of borrowed English-American mechanisms of shareholder protection. It will be shown later that such borrowings resulted in more problems than produced positive effects. In a certain sense it would be proper to talk about the approach being absolutized (as a consequence of implementing the self-enforcement model) and its artificial transposition on the general evaluation of the national model of corporate governance. However, such a generalization would be wrong.

Common traditions of the European corporate law still dominate the scene which explains why the shareholder legislation in Russia is close to the EU acts standards by formal criteria reflected in the EU Regulations and Directives (Table 5). This equally applies to the standards developed by various European associations representing the private sector. Table 5. Availability and degree of development of basic legislative norms concerning companies in the Russian corporate law and EU acts (degree of development of the relevant provisions in the EU acts serves as the basis for the comparison) Russia * U** Rigid and detailed procedure of Available (CC, LC) Available (D 1, D 2), C. on establishing corporations EEIG 1985, and R on SE Rigid and detailed procedure of Available (LC, SML) Available (D 2) maintaining authorized capital Regulation on establishing Available (CC, LC) Minimum (D 11 in the area subsidiaries, representative offices of accountability) See: EASD, 2000; Euroshareholders, 2000. For detailed comparison of pan-European codes of corporate governance and the EU Member States codes see: Weil, Gotshal and Manges LLP (2002):

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK and other autonomous Main issue of reorganization Available (CC, LC) but Available (D 3, D 6, draft D provision of further detail is 10 on cross-border) needed for:

reorganization forms measures to protect rights of shareholders and creditors Control over economic Available (CLMA) but not R. on mergers, concentration efficient Possibility of a single-member Available (LC) Available (D 12) For company close/private companies Pre-emptive right of shareholders to Available (LC, Available (D 2) buy out shares Amendments of 2001) Choice between one-tier and two- Available (LC) Available as a compromise tier management systems on national models (draft D 5, R. and D. of 8 October 2001 on SE) Employee involvement in Not available Available as a compromise management on national models (draft D 5, R. and D. of 8 October 2001 on SE)) Stringent requirements towards Available (SML, LC, and Available (D 1, D 4, D 7 on financial reporting and audit others) but it is still consolidated financial necessary: to relate the reports, D 8 on audit, D 11) degree of toughness to the company size; to create conditions for switching over to international standards Takeovers and protection of Available (LC) but further General principles at the minority shareholders elaboration is needed discussion stage (draft D 13) due to conflicts of national approaches Company groups (groups of Minimum and contradictory Minimum (D 7 on enterprises) on subsidiaries and consolidated accounts, dependent companies (CC, social aspects, draft D 9 on LC), group of persons group behaviour) and affiliated persons (CLMA) Bankruptcy Available, but a radical Minimum (C. of 1995), modification of legislation mainly regulation of interis needed country collisions Insider deals Minimum, a special law is There is a direct ban and needed minimum standards(D.) Liquidation Available (CC, LC) Not available * LC law On Corporations, CC Civil Code of the RF, SML law On Securities Market, CLMA law On Competition and Limits to Monopolistic Activities on Commodity markets; ** D Directive, R regulation, C Convention.

No serious problems should be expected if there is a need formally bringing the Russian corporate legislation in line with the EU norms (if one leaves aside the political oppositions in Russia and the EU that use various excuses).

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK 3.2.2. Real criteria and recommendations for Russia A) Russian problems The following key features of development of the Russian model of corporate governance should be mentioned:

- permanent process of ownership redistribution in corporations;

- specific interests of many insiders (managers and big shareholders) related to control over financial flows and assets stripping;

- weak or untypical role of traditional external mechanisms of corporate governance (securities market, bankruptcies, corporate control market);

- substantial government stake in share capital and the ensuing problems of management and control;

- federal system of government and the active role played by regional authorities as independent subjects of corporate relations (the subject acting under the situation of conflict of interests as owner, regulator, business actor);

- ineffective or/and selective (politicized) law enforcement (with relatively well developed legislation on shareholder protection).

The above features have been given an extensive coverage by the domestic literature.55 At the same time, the very fact of a discussion about corporate governance at least when a large corporation is in question can be justified only if the processes providing its economic basis are in place:

separation of management from ownership; separation of finances (certain sources of finance) from management.

Besides, when discussing about what type of financial system should be favoured it makes sense to the discuss structure and the level of concentration of share capital which define the forms of exercising the right of control in a corporation. Some others take the view that under the modern conditions the legal approach (legislation and enforcement) is more suited for understanding corporate governance and its reforms than the conditional division of bank and market-oriented financial systems.56 Put differently, a question arises about the counter-effect of law on development of economic prerequisites of the emerging model of corporate governance.

The following processes of principal importance for the prospects of development of the Russian model of corporate governance can be identified57:

- latent situation with the process of division between ownership and management (merger of controlling shareholders and managers) will persist in the mid-term;

- probability of widening in the next few years of the external finance as the second prerequisite for effective management is extremely low;

- Russian financial system in its present indeterminate form does not allow making even a preliminary evaluation of to what extent the Russian system of corporate governance leans See papers by S. Aukutsionek, M. Afanasiev, I. Belikov, D. Vasiliev, T. Dolgopyatova, B Kuznetsov, R.

Kapelushnikov, A. Klepach, P. Kuznetsov, G. Malginov, Y. Mirkin, A. Muraviev, .Radygin, Y. Simachev, I.

Khabarov, R..Entv, A. Yakovlev et al.

See: La Porta, Lopez-de-Silanes, Shleifer, Vishny, 2000.

For more detail see Radygin, 2002.

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK to the classic models (first of all, to other - beside self-financing types of sources of finance and, consequently, control);

- nevertheless, concentration of share capital is an obvious process which covers not only consolidation of control, but also realization of the self-financing model of corporate governance (proposed for the transition economies in the mid-90s within the enforcement context);

- legislative innovations in the field of corporate legislation as such (shareholder protection) in a certain sense have reached their limits from the point of view of the existing conditions;

- methods of shareholder protection can not be developed further without adequate general measures in the area of enforcement;

- methods of monitoring managers will remain ineffective in the absence of a well-developed system of competitive commodities markets, capital and labour markets, bankruptcies.

Besides, in 2002, taking into account a long list of empirical and legal data, it is reasonable to talk about the stable and fundamental collision within the emerging system of corporate governance. It stems from the fact of coexistence of two contradictory approaches within the established system (Table 6):

- concentration of share capital that implies minimum of legal shareholder protection mechanisms;

- Anglo-Saxon legal tradition characterized by maximization of mechanisms of legal protection of minority shareholders (connected to a considerable extent to the designers ideology but adopted piecemeal because of the fierce opposition).

Table 6. Comparative characteristics of national models of shareholder protection * (1) German (2) Countries of (3) Countries of (4) Russia and common law French civil Scandinavian tradition (most model widely spread) Formal 34 On average - 43 54 By the 2001concentration of (Germany), (USA 20, 2002 data shares with 3 top 37 Great Britain, intermediary shareholders in 10 (Scandinavia) Australia between (1) and top private below 30) (2) corporations (average for countries - 46 %) Legal mechanism of Average Best Least effective Formally close investor protection to the common law countries Level of law Highest High Lowest Can not be enforcement compared Originally comparison was performed for (1), (2) and (3) without taking account Russia and other transition economies. High standards of accounting, legal mechanism of investor protection and enforcement level very negatively correlate with ownership concentration. Undoubtedly, certain limitations of the survey should be taken into consideration: only top 5-10 companies with the highest capitalization were reviewed in every country, only nominal ownership was considered (not the aggregate of control mechanisms), etc..

Sources: La Porta, Lopez-de-Silanes, Shleifer, Vishny, 1997, pp. 32-35, 40-43; for Russia the authors estimates.

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK Their combination resulted in a unique situation of mutual neutralizing:

- on the one hand, concentration of share capital and gradual crowding out of small shareholders in principle diminishes the importance legal mechanisms of share holder protection from the point of view of the corporate sector as a whole while the mechanisms themselves are being transformed into mechanisms of corporate blackmail;

- on the other hand, the development of a comprehensive network of shareholder protection impedes the process of share capital concentration (as a factor of a counter-effect of law on economic processes).

It should be taken into account that protection of interests through further concentration is the prerogative of large shareholders, their reaction to lack of legal mechanisms of protection and, first of all, to contract enforcement. This process is not directly related to the problems of minority shareholders who have neither consolidation means nor judicial privileges.

Surveys data show that the largest shareholders stake in Russian companies changed slightly in 1999-2001 and amounted to about 30-35 % while the stake of the 3 top shareholders to about 4045 %. It might be assumed that the average level of concentration has reached its formal threshold within the framework of the effective corporate legislation (corrected for the antimonopoly regulation and formal requirements towards takeovers).More optimistic interpretation shows that by 2002 a model balance was reached between the level of concentration (corrected for the relationship of affiliation and alliances) and a certain set of measures aimed to protect small shareholders. The element of optimism lies in the fact the system has reached a certain degree of stabilization. The problem is presented by the fact that it has begun to reproduce itself because of the mutual neutralizing of the key components described above.

Paradoxically, by virtue of this contradiction, within the framework of the discussion about convergence of the continental and English-American corporate models Russia finds itself in an advantageous position.

That is why the issue of availability of economic and institutional preconditions for gravitating to one of the classical models of corporate governance acquires great importance.

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