· Draft law on cancellation of mandatory audit requirements in non-public joint-stock companies;
· Draft law on holding general meetings of shareholders remotely without specifying their place of meeting;
· Central Bank recommendations on risk management, internal control, internal audit; functioning of the Board of Directors’ (Supervisory Board) Committee on audit in PJSC.
Draft law on cancellation of mandatory audit requirements in non-public joint-stock companies
The Draft law № 02/04/10-20/00109210 “On the introduction of amendments to the Federal law “On joint-stock companies” and article 5 of the Federal law “On audit activity” (hereafter – “the Draft law № 1”) was published on web portal for drafts of legislative acts.Under the amendments included in para. 1 art. 47 of the Federal law № 208-FZ “On joint-stock companies” dated December 26, 1995 (hereafter – “the Law on JSC”) the issue of appointment of an audit company shall be resolved at the annual meeting of shareholders given that:
1. the JSC is obliged to carry out mandatory audit or
2. the company decides on carrying out the audit.
The Board of Directors of non-public JSC resolves on recommendations for the general meeting of shareholders. These recommendations concern necessity or absence of necessity of conducting audit. The legal nature of such recommendations of the Board of Directors under the Draft Law № 1 has not been clarified yet. Does that mean that if there are no such recommendations the audit cannot be held by analogy with recommendations of the Board of Directors on the amount of shareholders’ dividends? In our opinion, from the perspective of the essence of regulation of non-public JSC and the nature of the amendments, the shareholders are not bound by resolution of the Board of Directors when deciding on carrying out the audit.
New grounds for holding mandatory audit are included in para. 1 art. 5 of the Federal law № 307-FZ “On audit activity” dated December 30, 2008. The mandatory audit shall be carried, inter alia, in the following cases:
1. annual financial accounting is included in prospectus of the securities issuer;
2. Russian Federation, constituent entity of the Russian Federation, municipality has participation interest in share capital of a joint-stock company.
The ground for mandatory audit provided in subpara. 1 para. 1 art. 5 of the Federal law № 307-FZ “On audit activity” dated December 30, 2008 was also amended. The ground “if the company is a joint-stock company” is replaced with “if the company is a public joint-stock company”. This means that the Federal law № 307-FZ “On audit activity” dated December 30, 2008 is respectively amended to cancel mandatory audit in non-public joint-stock companies.
It should also be noted that these amendments will mostly relate to medium and holding joint-stock companies. Under subpara.4 (subpara. 6 under Draft law № 1) art. 5 of the Federal law № 307-FZ “On audit activity” dated December 30, 2008 a company is subject to mandatory audit if the total amount of profit from sale of products for the year previous to the reporting year exceeds 400 million rubles or the amount of balance sheet assets as at the end of the year previous to the reporting year exceeds 60 million rubles. Other grounds for mandatory audit have not been cancelled either.
Adoption of Draft law № 1 will allow shareholders to determine whether the audit is required upon their own discretion if that is necessary from a practical standpoint. The latter reflects the nature of a non-public joint-stock company where shareholders have considerable self-regulating powers and autonomy in regulating their relations among each other. Herewith, the Draft law № 1 ensures transparent activity of a JSC with government (municipal) participation by including rules on mandatory audit of such JSC. Similarly, investors in the financial market are protected by the provision on mandatory audit of issuers in the registration of securities prospectus.
Draft law № 1 has not been introduced in State Duma and is subject to public debate at the moment.
The Draft law on holding general meetings of shareholders remotely without specification of meeting place
The Draft law № 02/04/09-20/00107789 “On the introduction of amendments to the Federal law “On joint-stock companies” with respect to the opportunity for holding general meetings of shareholders by means of joint remote presence to discuss issues on the agenda and resolve on the issues submitted to vote, using information and telecommunication technologies without specification of meeting place (hereafter – “Draft law № 2”) was published on web portal for drafts of legislative acts.The general meeting of shareholders can be held by joint remote presence under para. 11 art. 49 of the Law on JSC. Herewith, the place of remote meeting shall not be specified, in-person presence is not required.
Shareholders can be notified of general meeting by sending “registered letters” under para. 1.1. of art. 52 of the Law on JSC as amended by the Draft law №2. Registered letters imply “letters received form the sender with issuance of receipts that are delivered to the addressee with acknowledgement of receipt”. The Ministry of Communication of Russia is expected to set the requirements to such letters. We expect that these registered letters will be subject to specific protection in order to record due will expressed by shareholders.
Under para. 2 art. 52 of the Law on JSC as amended by the Draft law № 2 the notification of remote general meeting shall contain information on informational and telecommunication technologies which provide joint remote presence for discussing the agenda and adopting resolutions. However, the message shall not contain information on place of meeting.
Familiarization with information (materials) that shall be provided during preparation for the general meeting of shareholders can be conducted on the Internet (para.2 art. 52 of the Law on JSC as amended by the Draft law № 2).
The remote general meeting is supposed to be carried out taking into account the following specific features:
· shareholders can forward filled ballots to the email and/or fill in the electronic form of the ballot on company’s website;
· the registrar of the company exercises functions of an audit commission;
· shareholders can only vote by ballots.
The Draft law № 2 addresses the key problem of holding remote general meeting of shareholders (inter alia, with the use of informational technologies) – at the moment such meetings cannot be held completely remotely since shareholders are still entitled to take part in the general meeting in person in any case.
Given the deteriorating epidemiological situation many joint-stock companies, especially public ones, encountered impossibility to carry out remote meeting due to restrictive sanitary and epidemiological measures. Such situation occurred because under current regulation conduction of a general meeting with the use of informational technologies does not deprive the shareholder of his right to be present at the general meeting in person. This means that remote meeting could be held because some shareholders in the company simply do not support the holding of meeting in such format.
Therefore, the Draft law № 2 provides that shareholders can be notified of the general meeting in the electronic form, familiarize with the agenda and materials in the electronic form and vote remotely; herewith, the shareholders do not have to arrive to a specific place in person to take part in the general meeting.
The Draft law № 2 has not been introduced to the State Duma yet and is currently subject to public debate.
Central Bank recommendations on risk management, internal control, internal audit; functioning of the Board of Directors’ Committee on audit in PJSC
The Bank of Russia published Information letter of the Bank of Russia № ИН-06-28/143 dated October 01, 2020 “On recommendations on risk management, internal control, internal audit, functioning of the Board of Directors’ Committee on audit in public joint-stock companies (hereafter – “Recommendations”).The above recommendations were adopted due to the following:
1. risk management and internal control shall be organized in public joint-stock companies since September 1, 2018 (para. 1 art. 87 of the Law on JSC);
2. internal audit shall be carried out in public joint-stock companies since January 1, 2021 (para.2 art. 87.1 of the Law on JSC, para. 3 art. 2 of the Federal law № 209-FZ dated July 19, 2018 “On the introduction of amendments to the Federal law “On joint-stock companies”;
3. the Board of Directors’ Committee on audit shall be formed in public joint-stock companies since January 1, 2021 (para. 3 art. 64 of the Law on JSC, para. 3 art. 2 of the Federal law № 209-FZ dated July 19, 2018 “On the introduction of amendments to the Federal law “On joint-stock companies”).
Public joint-stock companies had a little more than 2 years to form the Board of Directors’ Committee on audit and prepare procedures for internal audit (with the 1 year shift deferral under the Federal law № 115-FZ dated April 7, 2020 (art.10)).
Due to the imminent entry of provisions on internal audit and directors’ committee on audit into force the Bank of Russia prepared Recommendations relying on the code of corporate governance (approved by the Central Bank letter № 06-52/2463 dated April 10, 2014), methodological recommendations and international acts (including OECD acts).
Recommendations contain provisions on components of risk management and internal control, provisions on risk-culture and risk appetite, certain recommendations for holding companies, liabilities and procedure for internal audit, role, goals and objections of forming audit committee.
Consequently, detailed Recommendations of the Bank of Russia will allow public joint-stock companies to work out relevant procedure or modernize them to comply with the requirements to risk management, internal control, internal audit and formation of directors’ committee on audit.
Therefore, the adoption of the Draft law № 1 and Draft law № 2 will allow to simplify the activity of numerous corporations. Recommendations adopted are to provide guidelines for PJSC during the internal audit and formation of the Board of Directors’ Committee on audit which is supposed to improve corporate governance in public companies.
Authors:
Ksenia Stepanischeva – Counsel
Sergey Truschin – Associate