The Federal Statute of August 7, 2001 No 120 has introduced substantial amendments into Federal Statute “On Joint-Stock Companies” that has been an acting law since January 1, 1996. The indicated amendments have entered into force since January 1, 2002.

With the view to the joint-stock companies being the most popular legal form of organizing business in the Russian Federation and the importance of the new provisions for the economic activity of joint-stock companies, we would like to attract the readers’ attention to the following most important alterations of the Federal Statute “On Joint-Stock Companies” and their consequences for the practice.

The introduction of the amendments into the Statute “On Joint-Stock Companies” was aimed at achieving the following goals: filling the gaps in the legislation that became apparent in the practice of application of the Statute; increasing the level of protection afforded to the stockholders by means of introducing additional guaranties of practical realization of their rights; increasing the level of protection afforded to the creditors of the joint-stock company; insuring economic stability and credibility of joint-stock companies; achieving improved regulation of the internal corporate procedures related with the functioning and interrelation of the bodies of a joint-stock company.

Despite the general positive effect of the legislative amendments introduced by the Federal Statute of August 7, 2001 for the development of Russian company legislation, some novelties appear to be unfounded and insufficiently worked over and even leading to the undesirable consequences. The present analytical paper is limited to considering only the most important amendments to company legislation of the Russian Federation as introduced by the Statute of August 7, 2001.

An important novelty with regard to the closed joint-stock companies is the introduction of additional rules related to the exercise by the stockholders of their priority right to the acquisition of the shares of the company. The indicated right is provided for by Art. 97 of the Civil Code and paragraph 3 of Art. 7 of the Statute on Joint Stock Companies. According to the new provisions, the stockholders may avail themselves of the priority right to the acquisition of shares if they consent to the purchase of the whole block of shares offered for sale by the seller. Otherwise the seller is entitled to sell the shares to any third person. It is also established that the stockholders of the closed joint-stock company may enjoy the priority right of purchasing shares sold by other stockholders of the company in proportion to the number of shares belonging to each of them unless the charter of the company provides otherwise. This rule reflects an attempt not only to establish the principles of distribution of shares offered for sale among the stockholders, but is also aimed at preservation of the correlation of shares and, therefore, of the distribution of votes within the company. For the purpose of increasing the guarantees of the exercise of the priority right for purchasing shares, the Statute of August 7, 2001 introduces the rule on the possibility of protection of the indicated right by means of initiating by the interested person of judicial proceedings aimed at transfer upon him of the rights and duties of the buyer under the contract of purchase and sale of shares. The interested person may initiate such proceedings within three months from the moment when it knew or should have known of the respective violation of his rights. Despite the fact that the novelty in question is filling in the gap in the previous regulation, it at the same time destabilizes the position of bona fide purchasers of shares.

In general with regard to the closed joint-stock companies a number of civil law experts express a well founded opinion that the indicted organizational form of a legal person does not correspond to the legal nature of the joint-stock company as a mechanism of free accumulation and flow of capital. Respectively, it is regretted that this organizational form of a joint-stock company has been preserved in the Russian legislation (see, e.g. Avilov, Russian legislation on joint-stock companies and the problems of its developing. To the 5th year anniversary of the Statute on Joint-Stock Companies. - Vereinigung fuer deutsch-russisches Wirtschaftsrecht e. V., No 18-19, 2000).

Substantial amendments have been introduced into the provisions of the Statute on Joint-Stock Companies determining the procedure and conditions for forming up of a charter capital. According to the amended version of the Statute, the shares of the company which had been distributed upon its formation have to be fully paid for within one year from the moment of state registration of the company unless a shorter period has been established by the contract for the creation of a joint-stock company. In case of failure to effectuate full payment for the shares within the established time period the Statute provides for the passage of the right of ownership to shares the distribution price of which corresponds with the sum due to the company. At the same time the contract for the creation of the company may provide for the recovery of penalty for the nonperformance of an obligation to pay for the shares.

With regard to the shares the right of ownership to which has passed to the company it is provided in the Statute that the company is obliged to sell such shares at the price not lower than their nominal price and within one year following their acquisition by the company. The non-fulfillment of this requirement entails the respective reduction of the charter capital of the company. Failure to take a decision on the reduction of the charter capital of the company may serve as a ground for the competent body bringing a claim to the court for the liquidation of the company.

The Federal Statute of August 7, 2001 has amended the provisions on the initial amount of the charter capital. According to the previously existing rules, not less than 50 percent of the charter capital were to be paid for by the time of the registration of the company. The amended rules provide for the obligatory payment for not less than 50 percent of shares of the company distributed upon its foundation and not later than three moths from the moment of the state registration of the company. Thus, besides the changes as to the time period for payment the amended version of the Statute provides for the obligation to pay for not less than 50 percent of the distributed shares in full amount for each share while the previous version of the Statute provided for the obligation to cover 50 percent of the value of all the shares that had been distributed.

The Statute in its present wording has abolished the previously existing confiscatory measures that were provided for the case of a failure of a stockholder to pay for the shares within the specified period of time. The Statute does not contain anymore a provision that money and (or) other property deposited as a payment for the shares are not subject to return upon the expiration of the time period established by a statute.

An important alteration to the previous legislation concerns the new regulation of the consolidation of shares. According to Article 74, the general meeting of stockholders may entitle the company for the consolidation of distributed shares as a result of which two or more shares of the company are converted into a single share of stock of the same category (type). In such cases the respective alterations as to the nominal value and quantity of distributed and stated shares of the company are to be made in the charter capital. According to the previously existing regulation of consolidation, if consolidation resulted in the appearance of fractional shares the later were subject to compulsory purchase by the company at the market price to be determined by the board of directors. The indicated approach allowed the owners of large blocks of shares to get rid of minority stockholders by means of establishing an excessively high nominal price for consolidated shares which resulted in the shares of minority holders becoming one fractional share and subject to compulsory purchase by the company. In order to put an end to such practice para. 3 of Article 25 now allows the existence of fractional shares appearing as a result of consolidation while Article 77 abolished the previously existing rule as to the compulsory purchase of fractional shares by the company.

The Statue of August 7, 2001 established much stricter requirements to the keeping of the register of stockholders. According to the revised version of article 44, in the company with more than 50 stockholders the register should be kept by a professional recorder. At the same time the company where the register is kept by a professional recorder would still be liable jointly with the recorder for any claims related to improper keeping and storage of the register. Besides reducing the number of stockholders in the context of the indicated requirement from 500 to 50, the new version of the Statute on joint-stock companies includes in this number shareholders possessing any types of shares, and not just ordinary shares. The keeping of the registers of shareholders by professional recorders shall start as of July 1, 2002.

The most controversial provisions of the Statute of August 7, 2002 are those which relate to the procedure for the concluding of major and interested party transactions.

The purpose of special control over the conclusion of major transactions and transactions in the making of which there may be an interest of persons able to exercise the control over the decisions taken by the company is the exclusion of disadvantageous consequences for the company, maintenance of economic stability of the company, the protection of the interests of the stockholders as well as the interests of the good faith partners of the company. As it will be demonstrated below, despite the certain improvement of the regulatory mechanism, in existing form the rules of the Statue of Joint Stock Companies on major and interested party transactions may nevertheless lead to a result which is not compatible with the declared goals thus destabilizing the economic position of the company and violating the interests of its good faith partners. The new version of Article 78 of the Statute regards major transaction as a transaction (including contracts of loan, credit, pledge and suretyship) or several inter-linked transactions related to the acquisition, disposing of or the possibility to dispose directly or indirectly by the company of the property the value which amounts to 25% or more of the balance cost of the assets of the company determined on the basis of accounting reports on the last accounting date except for transactions concluded in the process of normal economic activities of the company, transactions related to the realization by means of subscription of ordinary shares, and transactions related to the realization of securities convertible into ordinary shares of the company. Transactions which fall into the category of major transactions are subject to approval by the board of directors or the general meeting of shareholders in accordance with Article 79 of the Statute.

A more detailed list of types of contracts that may be considered as major transactions is an important improvement of the text of the respective statutory provision. Despite the fact that the list included in Article 78 is not exhaustive it nevertheless allows to solve many problems as appearing in legal practice.

A substantial increase in the number of transactions that may fall into the category of major transactions results from the inclusion into para 2 of Article 78 of a mentioning of services which are rendered or received by the company in an amount meeting the requirements of the same article.

The rule of part 2 of paragraph 1 of Article 78 establishing different procedure for the comparison of the value of the property with the balance cost of assets in cases of, respectively, disposition or acquisition of property may me considered to be as not achieving the necessary results. In the first case the object of comparison is the cost of the property determined on the basis of accounting reports and in the second case – the market price of the property acquired. In its present form the rule would definitely allow the interested parties to evade control with regard to really major transactions with the view to the striking difference between the price of the property, especially of immovables, as determined on the basis of accounting reports and market price formation principles respectively.

Substantial uncertainty for the shareholders and the good faith partners of the company would result from the new provisions of the Statute which relate to the qualification of major transactions made with violation of requirements as to their approval. The previous text of the Statute did not contain any provisions expressly referring to the consequences of violation of the established procedure for the conclusion of a major transaction. Referring to Article 168 of the Civil Code, the judicial practice have regarded such transactions as void which resulted in considering them as invalid irrespective of the court judgement on the matter. In the new version of the Statute the transactions in question are considered as avoidable, i.e. that could be recognized as invalid upon the respective claim of a company or a stockholder. Respectively, according to the previous regulation a 10 year period of limitation of actions was applicable to the transactions in question which was provided for the void transactions, while according to the new approach the respective claims may brought only within one year, which substantially reduces the possibilities of the company to protect its respective interests.

Besides, the recognition of a major transaction made without the necessary approval as avoidable places the good faith partners of the company in an unstable position because in case of existence of the respective interest on the part of the company or the stockholder they may initiate an action in the court aimed at invalidating a transaction made without an approval. At the same time the company interested in preserving the validity of the similar transaction may avail itself of the right recognized in judicial practice to subsequent approval of the transaction by the board of directors or the general meeting of shareholders of the company. Paragraph 14 of the Decree of the Joint Plenary Sessions of the Supreme Court of the Russian Federation and the Supreme Arbitration Court of the Russian Federation of April 2, 1997 No 4/8 acknowledges the possibility of recognizing a transaction concluded by the general director without the necessary approval as valid if the court establishes the fact of a subsequent approval of the transaction by the board of directors or the general meeting of shareholders. In this regard one may regret that Article 79 of the Statute on Joint Stock Companies does not provide for the necessity of approving the major transaction before the moment of its conclusion.

The rule on the necessity of approving the transaction before the moment of its conclusion is established in the amended Statute only with regard to interested party transactions (Article 83). However, some commentators of the Statute on Joint Stock companies even with respect to these transactions suggest preserving the previously existing judicial practice of allowing the recognition of validity of subsequently approved transactions if the respective approval took place before the court considering the issue of the validity of the transaction in question (Shapkina, G.S., Novoe v rossiiskom akcionernom zakonodatelstve. Izmenenia i dopolnenia federalnogo zakona “Ob akcionernikh obshestvakh”. (New Developments in the Russian Law on Joint Stock Companies. Amendments to the Federal Statute “On Joint Stock Companies”), in Vestnik Visshego Arbitrazhnogo Suda RF, No 1, 2002, p. 103.).

One cannot but note an extreme danger stemming from Para 1 of Article 78, according to which the charter of the company may provide for other instances, in addition to those established in the Statute, where the approval requirement established by the Statute with regard to major transactions also becomes applicable to other transactions concluded by the company. Enabling the stockholders to expand at their discretion the list of transactions requiring a special procedure for their conclusion would inevitably threaten the interests of third parties and undermine the stability of economic relations to which joint stock companies are parties.

The limited boundaries of the present review did not allow to include into it the analysis of other important changes introduced into the Federal Statute on Joint Stock Companies by the Statute of August 7, 2001. These concerned the procedure and ways for increasing or decreasing the charter capital of a company; the procedure for creating, reorganizing and liquidating joint stock companies; the procedure for distributing and paying for shares and other securities; the requirements established with regard to the conduct of general meetings of shareholders as well as to the data contained in the charter capital, etc.

The nature and number of amendments introduced into the Federal Statute “On Joint Stock Companies” demonstrate the trend towards adopting a more modern and complex company legislation in the Russian Federation requiring professional approach to its application.

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