On January 1, 2017 a set of amendments to the Russian Joint Stock Company Law (the "Law") will come into effect, implementing a comprehensive overhaul of the regulation of "major transactions" and "interested party transactions" of Russian joint stock companies. The existing regime, which requires prior approval of a wide range of transactions falling within an overly formalistic criteria of major and interested party transactions, results both in excessive regulation and diversion of attention of directors and shareholders as they are forced to analyze hundreds, if not thousands, of ordinary transactions. The overhaul should substantially reduce this administrative burden on companies, thereby ensuring that business transactions can be completed more easily and effectively while allowing directors and shareholders to focus their efforts on the review of the more significant transactions. Foreign banks, investors and minority shareholders should also benefit from the increased predictability, transparency and efficiency the new legislation should bring, as once these changes take effect, it will become possible to execute financing, capital markets and M&A transactions without unnecessary delay caused by protracted corporate approval procedures where no genuine issues arise for directors or shareholders.
Over the course of more than a year, Debevoise and Plimpton LLP played a leading role in developing and drafting these amendments as part of a working group of corporate law experts. This article highlights some of the changes that we consider of most interest to foreign lenders, investment banks, investors, independent directors and minority investors.
Under the amendments, transaction that involves an acquisition, disposal or a temporary transfer of possession or use (such as a lease or license) of assets representing 25% or more of the total book value of the assets of the company is considered a major transaction and requires a unanimous approval of the Board of Directors. If such approval cannot be obtained or if the value of the transaction exceeds 50% of the total book value of the assets of the company, then the transaction must be approved by the shareholders. Transactions entered into in the ordinary course of business are excluded from the definition of a "major transaction" and do not require such approval (although in certain cases they may still require approval under the provisions of the company's charter). The amendments now expressly authorize the subsequent approval of major transactions, which should facilitate timely execution of confidential and time-sensitive transactions and allow for ratification of any transactions for which approval may have been inadvertently overlooked.
Introduction of the definition of "ordinary course of business"
Previously, the concept of "ordinary course of business transactions" was not defined in the Law and the courts determined whether specific transactions belonged to this category on a case-by-case basis by considering the list of activities specified in the charter, as well as other factors. The lack of clear understanding of whether a particular transaction fell within the scope of "ordinary course of business" required banks and investors to insist on obtaining corporate approvals, including shareholder approvals, even for routine transactions. The definition was drafted in the amendments intentionally broadly to cover any transaction that does not result in the cessation of the company's business, a change in the type of business undertaken by the company, or a material change in the scale of the company's business.
Clarification of the criteria for testing whether or not a transaction qualifies as a major transaction
The amendments clarified the tests for determining whether the value of the transaction crosses the relevant threshold (25% or 50%) when compared against the book value of the company's assets. Depending on the nature of the transaction, the following criteria should be used to determine the value of such transaction:
- in respect of any disposal of an asset – the greater of: the book value of the asset being disposed of and the sale price of such asset (the current version of the Law refers only to the book value of the asset being disposed of);
- in respect of any acquisition of an asset – the purchase price of the asset (this criterion was not amended);
- in respect of a transfer of temporary possession and use (lease, license, etc.) of an asset – the book value of assets being transferred (the Law previously did not expressly address this issue and based on court cases, the valuation was usually determined by considering the amount of the usage fees (lease rent or license royalty), which can be substantially lower than the book value of the assets to be transferred);
- in respect of an acquisition of shares or securities convertible into shares of a public company where such acquisition would give rise to an obligation to make a mandatory tender offer – the price of all of the shares and securities convertible into shares which may be acquired, both as a result of the proposed transaction and such mandatory tender offer (for example, where 35% of ordinary shares of a public company are being acquired, valuation of the transaction will take into account the funds required for the acquisition of 100% of voting shares and securities convertible into the shares of such public company).
Board of Directors will issue opinions to shareholders
Where a major transaction requires the approval of the general shareholders' meeting, the Board of Directors is now required to provide a formal opinion on such transaction to the shareholders. The Board's opinion is a new requirement that previously did not exist either as a matter of Russian corporate law or as part of Russian court practice, with only the possible exception of a requirement to issue a recommendation to the shareholders when the company receives a mandatory or voluntary tender offer and a general requirement that approval of a major transaction was to be put to shareholder vote upon proposal by the Board. The Law now requires that the Board opinion must include, among other things, information on the likely impact of the transaction on the company's business and a determination as to whether or not such transaction is appropriate for the company. This requirement should strengthen the role of the entire Board, including the independent directors, in the consideration of major transactions, and is clearly aimed at placing increased emphasis on the substantive analysis to be undertaken by the Board as part of preparing and approving a formal opinion. The directors should consider engaging investment banking and legal advisers in the process of preparing such opinions. While the opinion itself is required to be endorsed by the Board and the directors voting in favor of such opinion will take responsibility for it, the directors should be able to establish evidence that they met the legal standard of acting in good faith and in the interests of the company if the Board opinion is supported by a fairness opinion or a detailed presentation issued by a reputable investment bank and legal advice provided by a reputable law firm. In the past, the directors could limit their liability for a major transaction falling within the 25-50% threshold by voting down such transaction at the Board meeting and referring it to the shareholders. The Board's responsibility in such case and in the case of any major transaction exceeding 50% of the company's total assets was limited only to the Board's determination of the value of the transaction. From January 1, 2017, the Board will have to take responsibility for any major transaction by either approving the transaction falling within the 25-50% threshold by unanimous vote or, if such approval is not obtained or the transaction value is in excess of 50% of the company's total assets, by issuing a formal opinion for the shareholders voting on such transaction. As a result of this amendment, the role of the Board in the review of major transactions will increase and minority shareholders will be able to make informed decisions when considering a major transaction.
Interested Party Transactions
Interested party transactions no longer require mandatory prior approval
As a result of this major legislative overhaul, interested party transactions (IPTs) no longer require a prior approval. An interested party transaction must be approved in advance by the Board of Directors or by the general shareholders' meeting only if such approval is requested by:
- the CEO, a member of the Board of Directors or the Management Committee ("Pravleniye"); or
- shareholder (or shareholders) holding at least 1% of the voting shares of the company.
As a result of these changes, the Board of Directors is called to take a more active role in the approval and review of the IPTs. However, a transaction that has not been approved can be subsequently challenged by the company, any Board member or a shareholder (or shareholders) holding at least 1% of the voting shares in the company, provided that the transaction in question was prejudicial to the interests of the company and the other party to the transaction knew that the transaction had not been approved. Shareholders and Board members may also demand formal evidence from the company that the IPT was in the interests of the company. Such information must be provided at the request of a member of the Board of Directors of the company or a shareholder (or shareholders) holding at least 1% of the company's voting shares within 20 days of request.
Increased Transparency: mandatory notice of IPTs
The company must give prior notice of an IPT at least 15 days prior to the date of the transaction to the following persons:
- members of the Board of Directors and Management Committee; and
- the company's shareholders, where:
- the company has no Board of Directors,
- all members of the Board of Directors are interested parties to the transaction, or
- where the company's charter contains an obligation to notify shareholders as well as members of the Board of Directors of any potential IPT.
Replacement of the "affiliation" test used to establish interest in a transaction with a "control" test
The replacement of a fairly loose and vague "affiliation" test with a test based on control substantially narrows the number of persons who can be considered to have an interest in a transaction, as well as the number of grounds on which such persons may be considered to have such an interest. Control is determined by reference to the ability to control more than 50% of the votes, or to appoint the CEO or more than 50% of the Board of Directors. The more substantive approach in the Law, coupled with more stringent disclosure requirements, should promote better corporate governance in Russian public companies.
Increase of the value threshold for approval of a transaction by the general shareholders' meeting
Approval of an IPT falls within the competence of the general shareholders' meeting if it involves assets with a value of 10% or more of the book value of the company's assets (previously it was 2%). Transactions involving assets with the value not exceeding 0.1% of the book value of the company's assets will not be subject to approval, as well as certain other transactions.
Reduction of the voting majority required for a general shareholders' meeting to approve an interested party transaction
Under amendments to the Law, a resolution to approve an interested party transaction is passed if the majority of all of the holders of the company's voting shares who took part in the voting, and who are not interested in the transaction, voted in favor of it. The current requirement of the Law that a transaction be approved by a majority of all of the holders of the company's voting shares who are not interested in the transaction (as opposed to only those shareholders who took part in the voting) meant in practice that public companies with a large number of minority shareholders were never able to approve interested party transactions because of the low turnout of such shareholders at general shareholders' meetings.
Stricter requirements for the provision of information by persons who may be deemed interested parties to a transaction
Members of the Board and Management Committee, the company's controlling persons, and persons who have the right to give binding instructions to the company must provide the company with information about the nature of their interest within two months from the day they became or should have become aware of circumstances by virtue of which they may be deemed to be interested parties. If such person breaches the duty to inform the company, such person is presumed liable for causing any loss suffered by the company as a result of IPT in which such person had an undisclosed interest.