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MIFC Taskforce Statement on Shareholders’ Rights to Corporate Information.

03.07.2011 / MIFC

We wholeheartedly support the bill on Improved Enforcement of Shareholders Rights to Corporate Information, passed in the first reading by the State Duma on June 28.

Upholding investors’ rights to information and improving the transparency of Russian companies has been discussed at several sessions of the Corporate Law and Governance project group, acting as part of the MIFC Taskforce with the support of various experts and best global practice. The sessions resulted in a series of amendments and norms drafted by the project group to improve the current legislation, serving as the basis for the bill. These norms include advanced disclosure of registrar closing date and recommended dividend, shareholder meeting announcements, access to GM documents that have not been provided to shareholder in advance, access to subsidiaries’ documents and business sensitive information.

In our opinion, improving corporate information access for investors and transparency of Russian companies is a major contribution to the Russian corporate law, and given the possibility of introducing amendments to the draft prior to the second reading, we feel obliged to comment on several aspects of this bill.

We generally support the concept of the bill and see the amendments as supportive to the Russian companies investors’ rights and corporate governance standards.

However, we are also of the opinion that the bill drafted by the Ministry for Economic Development requires considerable improvement on several counts.

First, the bill fails to incorporate part of the Project group recommendations. We firmly believe that the bill should solve all of the current disclosure and transparency problems, and propose the following issues to be included in the bill prior to the second reading:

1. Board of Directors and executive body members are as equally entitled to access company documents as shareholders.

The current law does not stipulate this right, which affects the status of executive body members, prevents them from obtaining decision-critical information, undermines the effectiveness of independent directors on the Board, hinders the work of minority shareholders representatives on the Board of Directors, incites corporate conflicts.

2. Introduce in the Joint-Stock Companies Act the notion of unconditional right of shareholders/ Board of Directors/ executive body members to request corporate documents.

This is aimed at preventing the company from using various subjective criteria (such as the relevance of requested documents for analysis) in deciding to provide the shareholder with requested documents, as the possibility of subjective judgment essentially voids the right of the shareholder to access corporate documents.

It should also be noted that the proposal does not in any way infringe rights abuse prevention, an objective measure against the misuse of shareholder’s access to documents (such as multiple requests of the same documents without proper motivation).

3. Introducing legal norms to improve the effectiveness of mandatory consolidated IFRS reporting for selected entities.

The Project Group proposes to include in the draft the following stipulations:

- shortening the term for publishing audited consolidated yearly reports (to 4 months following the accounting year),

- shortening the term for publishing consolidated half-year reports (no later than 2 months following the accounting half-year),

- establishing administrative responsibility for breach of obligation to compile and publish consolidated financial IFRS reports, as well as failure to provide accurate and complete reports,

- mandatory consolidated IFRS reports from all joint-stock companies with over 500 shareholders.

Secondly, several norms, which generally reflect the project group recommendations, require amendment to apply them efficiently.

1. The Project group recommends stipulating in the Joint-Stock Companies Act that the confidential information in the documents (including sensitive information) does not provide sufficient grounds for refusal in providing such documents to a shareholder. They also proposed specifying that the company may ask a shareholder to sign a Non-Disclosure Agreement, where he states that he is aware of the confidential nature of the information and is obliged to non-disclosure. Full protection of banking and State secrets is guaranteed by a special norm which prohibits the provision of such information to shareholders.

The Project group proposal was directed at creating a reasonable balance between the availability of documents and confidential information protection.

The bill regulates only the situation when the requested documents contain sensitive information. However, it is not taken into account that sensitive information is only one of the confidential information types under the Russian Law. It is also overlooked that the legislative norms on confidential information are often interpreted in such a manner that confidential information may exist outside of all of the legally defined types. There is a high probability that in order to refuse to provide information to shareholders, Joint-Stock companies will introduce their own custom-made confidential information regulations and thus not treating information as a commercial secret, making it exempt from disclosure altogether.

Therefore the Project group proposal appears more balanced and motivated, covering all the practical issues of the application of this concept. It should be noted that the Project group proposal is partly based on the statement on disclosure procedures by the Supreme Arbitration Court.

2. The Project group recommended amending the JSC Act with a mandatory norm for companies to provide shareholders with documents in advance of the general shareholders` meeting, even if the shareholders’ meeting has already taken place.

The basis for the recommendation is the loophole in the current regulation practice, which is supported by the FSFM and the courts, allowing companies to delay the process of disclosure for the general shareholders meeting, and refuse disclosure after the meeting on the grounds that the meeting has already taken place.

This situation is regulated in the Ministry for Economic Development bill only to the extent when the timeframe for disclosure expires after the date of the meeting, but does not cover the described above issuer abuse, the possibility for which is still kept.

3. Also the Project group recommended to bring in the JSC Law the regulation that company has to provide a shareholder (as well as The Board of Directors members and members of the collective executive body) with the documents of all legal entities, which are to be included into consolidated statements, or if there are no such statements, all the companies controlled by the JSC, as determined by the securities market legislation. In the Project group recommendation the deadline of such obligation is determined by the date of the related shareholder`s request.

The grounds for the proposal was that the business activities of the company are often conducted through the legal entities under its control, where an abuse such as assets stripping frequently exists, and the shareholders of the company can neither control it, nor obtain information about it.

The Project group recommendation was accepted by the Ministry for Economic Development and according to the Ministry for Economic Development bill, a company has to provide shareholders’ access to the documents of the business entities under its direct or indirect control. However, the bill does not contain any defining criteria for direct or indirect control, nor any reference to similar criteria in other regulatory legal acts, rendering the norm inapplicable.

Besides, the bill obliges a company to request documents for disclosure from the entity under its control. Such detailed regulation of the company actions appears excessive. The company and its controlled entities can develop a collaborative mechanism at management level by themselves; this will ensure more rapid provision of the requested documents within the legal time frames.

Moreover, in the Ministry for Economic Development bill the period for provision of controlled entities, is set at 7 days from the date of receiving the documents from the controlled entity. This means that the deadline for performing the company’s obligation depends on the controlled entity actions, which allows the company to arrange a non-approachable deadline.

Finally, the norms of the Ministry for Economic Development bill are applicable only to business entities under the company control.

Thus, the Ministry for Economic Development norms are not viable as opposed to the Project group proposals.

4. The Project group recommends establishing the procedure for GSM cut-off date determination, which will enable disclosure of such date in advance; also establishing the procedure for cut-off date determination for the GSM featuring the Board of Directors dividend amount announcement, which will enable disclosure of such date in advance.

The regulations were reflected in the Ministry for Economic Development bill, but no procedures were set (except the already existing administrative liability for non-disclosure of the information), which ensure that the norm is unconditionally applied.

In the Project group opinion, in order to ensure the norms effective execution, it is essential to establish a presumption of materiality for the related violation during the preparation for the general shareholders meeting.

5. The Project group has also recommended complementing the existing Securities Market Act norms on the disclosure of controllers and introducing mandatory disclosure of stake for all bodies, directly or indirectly (including through the third parties, on the basis of trust agreement, etc.) holding more than 5% of the voting shares, no later than December 31, 2011.

The Project group recommendation was to amend the disclosure of controllers regulation with a transitory norm which establishes the mandatory nature of such disclosure.

The amendment concept was accepted by the Ministry for Economic Development, but transitory norm was omitted, with no other direct norm suggested instead to establish mandatory disclosure.

Thirdly, the Project group considers the bill in need of further amendment due to the norms which contradict both Project group recommendations and defeat the general purpose of the bill, affecting the information rights of shareholders.

Specifically, the bill reduces the list of documents available to the shareholders. In the Project group opinion, such reduction is inadmissible. However, if it is preserved in the bill, then it is all the more necessary to a) consider extending the list of available documents in the bill; b) legally establish the shareholders’ unconditional right to access company documents.

In conclusion, we would like to point out that we consider the bill generally positive, although passing it in the current version will neither be effective, nor will solve all the key existing disclosure and transparency problems; some of the regulations will have a negative effect on shareholders’ ability to exercise their right to access corporate information, which contradicts the idea of establishing the International Financial Centre in Moscow, and defeats the purpose of the bill. We hope that all the listed shortcomings will be amended prior to the second reading. In this case, the bill will be given full support by the Project group.

Improvement of corporate governance