- What happened?
- History of the issue
- Which entities are affected by the amendments?
- Holding annual general meetings of stockholders/shareholders of JSC/LLC
- Decrease in the net value of assets of JSC and LLC
- Internal audit conduct at PJSC
- Acquisition by a PJSC of its own shares (buy-back)
- Actual effect of adopted amendments
1. What has happened?
On April 07, 2020 Federal law dated April 07, 2020 No. 115-FZ “On introducing amendments to certain legislative acts of the Russian Federation in terms of unifying the content of annual reports of state corporations (companies) and public law companies, as well as establishing the specifics of regulating corporate relations in 2020 and suspending the provisions of certain legislative acts of the Russian Federation” (hereinafter – the “FZ No. 115”)[1], which in addition to adjusting the content of annual reports of state owned corporations (companies) and public law companies to unify them, provides important amendments to corporate legislation.
2. History of the issue
In the light of the difficult sanitary and epidemiological situation in the world and in the Russian Federation in connection with the spread of new coronavirus infection (COVID-19) and adopted Decree of the President of the Russian Federation dated April 02, 2020 No. 239 “On measures on ensuring sanitary and epidemiological welfare of the population on the territory of the Russian Federation in connection with the spread of new coronavirus infection (COVID-19)”[2] Russian commercial corporate legal entities were experiencing difficulties in terms of holding annual general meetings of shareholders.
This circumstance was complicated by the adoption by the Russian Government order to the Federal Air Transport Agency (Rosaviation) to provide for a suspension since 00:00 a.m. March 27, 2020 of scheduled and charter flights from Russian airports to foreign ones and back (excluding flights related to the removal of Russian citizens on the territory of the Russian Federation from foreign states in connection with the spread of the new coronavirus infection)[3]. Consequently, foreign stockholders/shareholders were not able to hold face-to-face general meetings of shareholders in Russian commercial corporate legal entities.
The first initiative to resolve the current situation dates back to April 03, 2020 and originates from the Central Bank of the Russian Federation (hereinafter – the “Central Bank”). The Central Bank issued a number of information letters[4],[5] in connection with the establishment of non–working days from April 04, 2020 up to April 30, 2020, providing for consequences for joint-stock companies (hereinafter – “JSC”). The Central Bank specifically:
· recommended the JSC to hold the general meeting of shareholders (stockholders) in 2020 in absentia (including the new permission provided for in art. 2 of the Federal law dated March 18, 2020 No. 50-FZ “On acquisition by the Government of the Russian Federation from Central Bank of the Russian Federation of ordinary shares of public joint stock company “Sberbank of Russia” and recognition as invalid of separate provisions of legislative acts of the Russian Federation” (hereinafter “FZ No. 50”);
· adjusted the deadlines for disclosure by JSC of the list of affiliates for the first quarter of 2020 and the annual accounting (financial) statements for 2019 to May 07, 2020 and May 12, 2020, respectively.
Meanwhile, the measures taken by the Central Bank were obviously not sufficient to offset the effect caused by the coronavirus pandemic (COVID-19) and the protective measures taken after it. For example, foreign shareholders (stockholders) were still restricted from holding / participating in an in-person general meeting of shareholders. Moreover, shareholders in limited liability companies (hereinafter – “LLC”) remained without preferential regulation or specific provisions unlike the JSC.
The State Duma, in order to correct the situation, promptly adopted, the Federation Council approved, and the President of the Russian Federation signed FZ No. 115.
3. Which entities are affected by the amendments?
FZ No. 115 provides amendments and adjustments to certain corporate legislation governing a number of issues for JSC and LLC, specifically:
· holding annual general meetings of stockholders/shareholders of JSC/LLC;
· decrease in the net value of assets of JSC and LLC;
· conducting internal audits in public joint-stock companies (hereinafter – “PJSC”);
· acquisition by PJSC of its own shares (buy-back).
4. Holding annual general meetings of stockholders/shareholders of JSC/LLC
FZ No. 115 provides for the following amendments (subpar. 1, 2 para. 4 art. of FZ No. 115):
“1) annual general meeting of stockholders in 2020 shall be held within the terms determined by the board of directors (supervisory board), but not earlier than two months and not later than nine months upon the end of the reporting year;
2) annual general meeting of shareholders of a limited liability company in 2020 shall be held no earlier than two months and no later than nine months upon the end of the financial year.”
Thus, the legislator shifted the maximum possible deadline for holding annual general meetings of stockholders/shareholders of JSC/LLC in 2020 from June 30 (April 30 – for LLC) to September 30 (art. 47 of Federal law dated December 26, 1995 No. 208-FZ “On joint stock companies” (hereinafter – “Law on JSC”) and art. 34 of Federal law dated February 08, 1998 No. 14-FZ “On limited liability companies” (hereinafter – “Law on LLC”). In this case, relevant provisions on the maximum possible terms of the Law on JSC and the Law on LLC suspend their force until December 31, 2020 (art. 11 of FZ No. 115).
5. Decrease in the net value of assets of JSC and LLC
According to para. 2 art. 12 of FZ No. 115 the decrease in net value of assets of JSC less than the amount of its charter capital after 2020 shall not be taken into account for the purposes of para. 4 and 6 art. 35 of the Law on JSC. Therefore, such decrease in the net value of assets will not be a basis for:
· the board of directors (supervisory board) of a JSC to include in the annual report of a JSC a section on the state of its net assets (para. 4 art. 35 of the Law on JSC);
· making a decision to reduce the authorized capital of a JSC to an amount not exceeding the net value of its assets, or to liquidate a JSC, no later than 6 months after the end of the corresponding reporting year.
However, in accordance with para. 3 art. 12 of FZ No. 115, a decrease in the net value of assets of an LLC less than the amount of its charter (authorized) capital in the end of 2020 shall not be taken into account for the purposes of applying para. 4 art. 30 of the Law on LLC. Therefore, this decrease in net asset value will not be a reason for:
· making a decision to reduce the authorized capital of an LLC to an amount not exceeding the net value of its assets, or to liquidate an LLC, no later than 6 months after the end of the corresponding reporting year.
6. Internal audit conduct at PJSC
Pursuant to the provisions of art. 10 of FZ No. 115, amendments were made to part 3 of art. 2 of Federal law dated July 19, 2018 No. 209-FZ “On amendments to the Federal law “On joint-stock companies”[6], specifically:
· the deadline calculating from which it is necessary to conduct internal audit in PJSC shifted from July 01, 2020 to January 01, 2021;
· the deadline for the board of directors (supervisory board) of PJSC to form an audit committee for preliminary consideration of issues related to the control of the company's financial and economic activities shifted from July 01, 2020 to January 01, 2021.
7. Acquisition by a PJSC of its own shares (buy-back)
According to para. 5 art. 12 of FZ No. 115 PJSC may purchase its allocated shares (except for the purchase of allocated shares in order to reduce their total number) in the period up to and including December 31, 2020 under the following terms:
· the purchased shares are admitted to organized trading (stock exchange);
· the average price of purchased shares determined for any 3 months starting from March 01, 2020 decreased by 20% or more compared to the average price of such shares determined for 3 months starting from October 01, 2019;
· the value of the main stock market index calculated by the trade organizer for any 3 months starting from March 01, 2020 decreased by 20% or more compared to the value of such index calculated by the trade organizer for 3 months starting from October 01, 2019;
· shares shall be purchased at organized auctions on the basis of applications addressed to an unlimited number of bidders;
· shares shall be purchased by a broker on behalf of PJSC;
· a board of directors (supervisory board) of a PJSC shall make a decision to purchase allocated shares, which will define the categories (types) of purchased shares, number of purchased shares of each category (type), the period during which acquisition of shares takes place and which shall expire no later than December 31, 2020.
Meanwhile, information related to the acquisition of PJSC’s own shares might not be disclosed in the form of a material fact notice, if this is provided for by the decision to purchase shares, or disclosed within the time period set by such decision.
It should be noted that PJSC shall send to the Central Bank notification of performing such share acquisition, together with documents confirming compliance with the terms stipulated in para. 5 art. 12 of FZ No. 115.
Moreover, the notification and attached documents shall be sent by PJSC to Central Bank in digital form through a personal account of the PJSC, the access to which is provided by the Central Bank in accordance with the requirements of the Instructions of the Central Bank dated December 19, 2019 No. 5361-У “On the procedure of interaction of Bank of Russia with credit organizations, non-bank financial institutions and other participants of information exchange while their use of information resources of the Bank of Russia, including a personal account”[7].
However, the requirements for mandatory redemption of shares offered by shareholders in accordance with the procedure provided for in para. 4, 5, 7, 8 art. 72 of the Law on JSC will not apply to those PJSC that will purchase their allocated shares in the above-mentioned manner.
8. Actual effect of adopted amendments
Thus, in connection with the adoption of the FZ No. 115, FZ No. 50 and by issuing informational letters of the Central Bank, Russian (domestic) corporate commercial organizations (joint stock companies and limited liability companies) were enabled to shift the dates of the annual (ordinary) general meetings of stockholders/shareholders of JSC/LLC from spring/summer 2020 to September 2020, and if such companies wish so, to hold meetings in absentia.
Hereby, the legislator and the competent authorities plan to neutralize the negative effect of the existing adverse sanitary and epidemiological situation caused by the pandemic of new coronavirus infection (COVID-19), which makes it difficult to hold face-to-face meetings of stockholders/shareholders of companies, especially if there are foreign members (shareholders).
Furthermore, practical (procedural) issues may arise when JSC and LLC implement the innovations and amendments mentioned in this review. Moscow law office “Kovalev, Tugushi and partners” has extensive experience and expertise in solving corporate issues at various levels and is ready to offer its clients a full range of services in support of any corporate procedures or assistance in solving any other issue.
Authors:
Ksenia Stepanischeva, Counsel
Igor Savryga, Junior Associate
[1] http://publication.pravo.gov.ru/Document/View/0001202004070019?index=0&rangeSize=1
[2] http://publication.pravo.gov.ru/Document/View/0001202004020025
[3] http://government.ru/orders/selection/401/39276/
[4] https://cbr.ru/StaticHtml/File/59420/20200403_in_06_28-48.pdf
[5] http://static.consultant.ru/obj/file/doc/cbr_press_osroke_raskrytiya.pdf
[6] http://www.consultant.ru/document/cons_doc_LAW_302836/b004fed0b70d0f223e4a81f8ad6cd92af90a7e3b/
[7] http://www.consultant.ru/document/cons_doc_LAW_347816/