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The basic idea of adjustment of different interests within the frameworks of the board of directors should be supplemented by mechanisms which would prevent members of the board of directors from abusing their rights;

2) legislatively consolidate a provision under which controlling shareholders or a group of such shareholders are obligated to enter into such an agreement with minority shareholders as would make the former liable to buy sharers of the minority shareholders on their demand in specific cases. Such cases may include insufficient profit, such a change in the equity capital as would infringe the interests of minority shareholders and other;

3) for the purpose of fighting corrupt practices and raising efficiency of joint-stock companies controlled by the state (many of which are of strategic importance), it is necessary to introduce a ban on a simultaneous holding of a public office and an office in the governing bodies of a company whose equity is owned by the state or a state-controlled joint-stock company and legislatively consolidate a norm which would require members of governing bodies of such joint-stock companies to be independent directors.

It is important to establish specialized public control over both joint-stock companies with state participation and state-controlled joint-stock companies. At present, such companies cannot be controlled by authorities who set objectives to them because the same authorities take part in management of those companies. The existing system of relations is of an unofficial nature, so no actual supervision is exercised. Nor can it be carried out by the Auditing Chamber since such companies do not deal with budgetary funds.

It will not be easy to introduce and implement the above measures due to the fact that many Russian companies lack transparency and controlling owners, including the state are See in detail here and below: A. Radygin, R. Entov, E. Apevalova and other. Internal Mechanisms of Corporate Governance: Some Applied Issues. Moscow: IET, 2009.

Section Institutional Problems unwilling to provide information on their companys activities (the companys expenditure, counterparties and other). Efforts to be taken in that area mean direct infringement upon the private property. To do so, the government should ensure inviolability and protection of private property from, in particular, a discriminatory use of measures of criminal prosecution and corporate takeovers. At the same time, it means a principally different level of fighting the corrupt practices, including those at the higher level because discrimination in that area would bring all the bona fides intensions to naught.

Consequently, introduction of such norms should be well thought-out, gradual and, probably, tested first on a small number of companies and both in analyzing of problems that arise and in development of mechanisms of settlement thereof. In addition to the above, to effectively separate the management function from the supervision function in corporations it is important to make quality changes in protection of ownership rights and reduce the extent of corrupt practices, including those at the higher level.

5.5.3. Legal Entities: Establishment of a System or Redistribution of the Spheres of Interest The Concept provides for establishment of a slender system of organizational and legal forms of legal entities, simplification of the legislation on legal entities and, as far as possible, uniform regulation of the main aspects of their activities. All the legal entities are proposed to be divided into:

Corporations based on the principle of incorporation: economic entities (joint-stock companies and limited liability companies), partnerships, producers' cooperatives and most non-profit institutions;

Other unincorporated legal entities: unitary enterprises, foundations and institutions.

Meanwhile, effort is being made on the legislative level to bring entities activities into compliance with their legal status. Non-profit institutions activities presently called entrepreneurial activities will be renamed as activities bringing additional income. Such activities are to be auxiliary ones, and permitted types of such activities are to be listed in the entitys charter, while the charter capital in such a case is to be equal to that of a profit-making institution.

In addition to the above, it is proposed to consolidate legislatively the notion of a public company which acquires its public status from the date of state registration of its securities prospectus for unlimited public offering. The status of a public company suggests that such a company has a higher level of charter capital, independent directors and a specialized registrar who keeps the register and carries out duties of the auditing committee at shareholders meetings. Also, the company is liable to make its information public.

Furthermore, it is proposed to put an end to existence of closed joint-stock companies and state corporations and later, to unitary enterprises.

Closed joint-stock companies may become joint-stock companies (non-public) if they manage to increase their charter capital to two million rubles within a year or two, or be transformed into limited liability companies (with a charter capital of at least a million ruble) or, into producers' cooperatives.

Unitary enterprises which are authorized to deal in economic activities will be transformed into economic entities with the government holding a dominating interest in them. Such a situation will permit to influence the most important decisions those entities take. Only state RUSSIAN ECONOMY IN trends and outlooks run companies (not municipal ones) with the right of operating management are expected to remain.

It is proposed not to establish new state corporations in future while the existing ones are expected to be subsequently transformed, and the legal basis for creating of such legal entities will be eliminated. For that reason, Rosnanotekh, Rostekhnologii, Olimpstroi, Vneshekonombank and Deposit Insurance Agency are to become economic entities with 100% state participation. The Fund for Assistance in Development of Municipal Housing will be obligated to bring its founding documents in compliance with the requirements which are standard to all the funds, while Rosatom and Olimpstroi are to become the governments federal agencies1.

As an instrument of such a transformation, a reversal of restructuring (a reverse restructuring) is proposed. It permits to carry out in exceptional cases a mandatory restructuring on the basis of the courts decision (in case of an illegal merger of legal entities they will be split up, while in case of illegal break up they will be merged together and etc.) or in case the court has found that the company has failed to comply with its status (that is, the company has made serious violations which infringe upon the rights of participants in the restructured legal entity, for instance, in a situation where a corporate control over the legal entity has been lost).

Persons who have lost partially or completely their interest in the restructured legal entity as a result of illegal restructuring are provided an option to restore their lost corporate control. Persons who took advantage of such restructuring may be bound by the courts decision to give back the respective share of interest to the person whose rights have been infringed upon. Deals by legal entities which were established during restructuring that was later found illegal are, by general rule, valid, while legal entities which existed before the restructuring was found illegal are not. Invalid may be found only those deals which caused damage (or were designed to cause such damage) to the restructured legal entity provided that counterparties to such deals were found acting in bad faith.

Establishment of state corporations has provoked much debate as regards efficiency of their activities. It can be noted right now that state corporations have high resource potential while their place in realization of the government policy is not quite determined2; they have a considerable effect both on development of industries related to them and reduction of competition in such industries3; and they enjoy a privileged legal position which negatively affects interests of other market participants.

Consequently, the idea of transformation of state corporations and elimination of such organizational and legal forms is justified and can be reflected in the Civil Code of the Russian Federation. However, mechanisms of realization of the above idea (the reverse restructuring and a possibility of restoring the lost corporate control) are not to be adopted as general norms due to the following factors:

Increase in instability on the market for corporate control;

Reduction in protection of corporate proprietary rights;

The State Duma planned to develop and pass the draft Law on State Corporations. Its approach was based on the idea that state corporations had been established for a certain period of time to solve specific goals.

See in detail: A. Radygin, R. Entov, E. Apevalova and other. Internal Mechanisms of Corporate Governance:

Some Applied Issues. Moscow: IET, 2009.

The Federal Anti-Trust Service of Russia admits that abnormal growth in the number of large Russian companies poses a serious threat to competition. See in detail: the Report of the Federal Anti-Trust Service of Russia on the State of Competition in Russia (2007).

Section Institutional Problems Abuse of the rights of former shareholders whose approval was required for carrying out of restructuring (it does not refer to instances of administrative pressure or discriminatory use of criminal responsibility measures);

Creation of a new mechanism which can be used in corporate takeovers.

Furthermore, in the existing judicial system there is a high risk that exceptional cases whenever the reverse restructuring is possible may often be determined by administrative means and/or through corruption. In addition to the above, such formal legal approach to evaluation of evidence as is widely practiced in arbitration courts at present overlooks both the economic content of the deals and consequences of such deals which situation prevents the mechanism of the reverse restructuring from being effective.

It appears that legal norms which are not aimed at development of general or special legal regulation but at solution of specific political goals (even such important as redistribution of control over the most significant Russian assets) are not to become a component of Russias civil legislation basis1. Stagnation in development of the institutions of property, bankruptcy and etc. which situation is currently observed in civil regulation can be explained by use of the above approach.

Such legal norms included in the system of basic norms and aimed at solution of specific objectives:

are inefficient in regulation of the respective sphere as regards other participants;

cease to become topical once the specific problem has been solved;

result in inconsistent and patched legal regulation in future;

Provoke higher uncertainty about legal situation with a large number of people.

5.5.4. Raising of Responsibility of Managers and Founders of Legal Entities Another line of development of the legislation on legal entities pursues raising of the level of responsibility of mangers and founders. Such a need to heighten responsibility of mangers, founders (participants) and other persons and bodies of legal entities has become long overdue. It is proposed to carry out the following measures:

Introduce such property liability of members of the board of directors and other collegial executive bodies for the damage caused to the legal entity as provided for in respect of joint-stock companies (Article 71 (2) of the Federal Law on Joint-Stock Companies);

Legislatively consolidate a provision that persons may be brought to responsibility before the legal entity for actions committed with gross negligence (indiscretion) or unjustified risk. (For example, sale of the legal entitys property at a much lower price in case of a conflict of interests and a lack of due discretion in selection of counterparties and/or preparation of the deal.);

Annul a possibility of limitation or elimination of property liability of the body (manager) of the legal entity by means of an agreement between such a body and the legal entity (Article 53 (3) of the Civil Code of the Russian Federation);

Introduce a subsidiary (additional) property liability of founders/participants, beneficiaries and other persons who have an opportunity to determine decisions by the legal entity on deals with its counterparties;

Such objectives can be solved by means of legal documents of another level.

RUSSIAN ECONOMY IN trends and outlooks Introduce a subsidiary liability of the founder (participant) of a one-man company for debts (deals) in case he/she lacks property and if the deal was carried out on instructions of the sole participant;

Change the beginning of the limitation period as regards lawsuits brought by the legal entity against its former managers to the date new bodies of the legal entity learnt or were to learn about the respective damage, but it should not be in excess of the period set by the law (for example, 10 years).

However, it appears that the proposed measures cannot ensure more responsible behavior of the above persons for the following reasons:

1) such mechanisms of indirect lawsuits (Article 71 (2) of the Russian Law on Joint Stock Companies) as are proposed to be applied in respect of members of the board of directors and other executive bodies are rarely used in practice (only a dozen of such instance are known, and they mostly concerned managers of banks which were later found bankrupt);

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