Trick or treat

-- 23 June 2009 --
TEXT: S. Smirnov
PHOTO: diego cervo - Fotolia.com

 

New law on joint-stock companies: it talks about shareholders’ agreements; it tells how Russian law works.

Law is not omnipotent. It should accommodate reality, not fight it. Parties should be free to decide the terms of their relationship, and courts should uphold such agreements.

Reluctance of Russian courts to follow these simple truths did not bring much good to all, but to some. Joint ventures have become relatively unpopular. Those, who need local partners, tend to regulate their relationships offshore, bringing business to foreign specialists and leaving Russians with a vague idea about who owns their country.

The Federal Law No. 115-FZ “On Amendments to the Federal Law ‘On Joint-Stock Companies’ and Article 30 of the Federal Law ‘On Securities Market’”, (in force from June 9, 2009), like the Federal Law № 312-FZ “On Amendments to Part One of the Civil Code of the Russian Federation and other Legislative Acts of the Russian Federation” , aims to clear up the name of shareholders’ agreements and bring them back into corporate life.

Russian lawyers, as well as small and medium companies, will applaud. Larger ones, and those naive, who have been there and had their fingers burnt, will not.

 

What’s in a name?

According to the new law the shareholders’ agreement is a contract. This statement, obvious for some, has many important consequences.

The shareholder’s agreement brings in a ‘private element’ into the management of a company. It exists outside the company’s founding documents, and, generally speaking, the domestic company law.

As a private document, it does not need to be registered, and, thus, it is not open to the public or the state.

The shareholder’s agreement brings in a ‘private element’ into the management of a company.
 

It gives greater flexibility to shareholders than company’s articles, but it is not automatically binding to new members. A new member will not be bound by the agreement unless he assents to it, and that can be a difficult task to bring about. In effect, the shareholders’ agreement may end up binding some, but not all shareholders. Also, unlike company articles, the agreement cannot be altered by the majority, the consent of each member is necessary.

It is not yet clear whether the company itself can be a party to the agreement. Most probably, it cannot.

A shareholders’ agreement derives its legal force from contract law. It means that actions of a company or decisions of management cannot be avoided on the grounds of violation of the agreement, unless it is proved that the other party knew of the violation. The usual remedy, therefore, will not be the restoration of status quantum but paying damages.

As a contract, separate from the company’s founding documents, a shareholder’s agreement can be governed by foreign law, and disputes, arising from it, can be resolved outside Russian courts, by international or domestic arbitration.

 

Law is history.

Law is a living thing. It cannot be changed overnight by the act of Parliament. It lives in history and transcends where lawmakers have no control.

And the history is gloomy. The cornerstone case for shareholders’ agreements, the Megafon case, is an example of how the law can be bent for the benefit of one.

Megafon, a leading telecommunication company in Russia, was founded in 1993 by two Russian and three foreign companies: Telekominvest, Lensvyaz, Telecom Finland (Sonera), Telia (Sweeden) and Telenor (Norway), who later left the company.

In 2003 Alfa - Group announced that it bought 25.1% of Megafon through acquisition of LV Finance. IPOC, a Bermuda company - called a money laundering vehicle of the minister of telecommunications Leonid Reiman, claimed that it had a prior agreement with LV Finance and, therefore, should be the owner of the shares.

Law lives in history and transcends where the lawmakers have no control
 

The war that ensued was bizarre even by weathered Russian standards. It involved corruption, espionage, tampering with witnesses, and, possibly, murder. Five years later Leonid Rozhetskin, the lawyer who masterminded the deal and sold LV Finance to Alfa – Group, vanished from his luxury villa in Latvia.

The legal wrangles culminated in Arbitrazhniy Court of Khanty-Mansiyskiy Autonomous District, an obscure court in Siberia. It ruled in favour of Alfa-Group and declared the shareholders’ agreement of Megafon void.

The court’s ruling, confirmed in appeal and cassation, lies beyond criticism. Let us just say that according to the Siberian justice an agreement to arbitrate can be easily avoided and such claim can be brought by a shareholder of the party to the agreement. It follows that the parties to the agreement have no control in which Russian court a hearing will take place. It follows that the shareholders’ choice of applicable law or forum can be challenged on the grounds of public policy. It follows that party autonomy is dead.

It is not that the law changes that matters, it is how it changes that matters.

 

 

A GOOD BEGINNING IS HALF THE BATTLE

TEXT: T. Borisova

‘Most people are more comfortable with old problems,’ the old saying goes, ‘than with new solutions.’ Russia needed a proper and new, to some, instrument to formalize commitments between shareholders.

It needed it desperately because to foreigners it wasn’t new at all. They had got used to shareholders’ agreements at home and wanted them here, so their arrangements, behold, were valid and enforceable.

For years Russian lawyers had to find ways to get round the gap in legislation and meet their clients’ needs. They set up holding companies abroad or drafted joint-venture agreements. In any case, the result was neither easy nor straightforward.

The new law is not ideal and, clearly, needs tweaking. Yet, I strongly believe it will help joint ventures or venture funds to do business in Russia. At least, they can now cover losses or get penalties paid if shareholders’ commitments are not fulfilled.

Lawyers have many questions, the courts will need to speak.

 

 

New law on joint-stock companies: it talks about shareholders' agreements; it tells how Russian law works.
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