Our progress / Hot Topics

Corporate and contract law


Back to Media

Russia to Ban Popular Management Scheme

05.08.2015 12:00 / RBC

Treasury stock, or company shares owned by subsidiaries, will cease to vote, states a reform proposal by the Ministry for Economic Development, amending Article 49 of the Joint-Stock Companies Act (“GSM Decision”). According to the new version of the Article, shares owned by controlled companies as per the Joint-Stock Companies Act will not vote or be counted.

The bill aims to harmonize Section 4 of the Civil Code (“Companies”) with the existing Joint-Stock and Limited Companies Acts. The ministries back the bill, slated for introduction to the Government by end-August, a source at the Ministry for Economic Development told RBC.

Treasury stock neither votes nor is counted (Joint-Stock Companies Act, Paragraph 3 Article 72), otherwise the company would be de facto acquiring these shares with shareholders’ money, while the management decides how to vote, says Corporate Governance Director at Prosperity Capital, MIFC Taskforce expert Denis Spirin. The restriction is easy to bypass — a subsidiary buys the stock (“quasi-treasury shares”), and managers tell the subsidiary how to vote, says Spirin.

Quasi-treasury shares is an old trick, and reactions to it around the globe run the gamut from stifled criticism to outright negativity, says a Ministry for Economic Development source. “These shares sometimes pay dividends, whereas voting is definitely out of the question”, he asserts.

Quasi-treasury shares are used to approve lossy interested party transactions, to elect the ‘right Board candidates’ and to push other decisions that minority shareholders disapprove of, says Spirin. “Voting with quasi-treasury shares is clearly a malfeasance, banned in most OECD countries”, he adds.

Major business opposes the bill. The new rule ‘restricts the right of the shareholder to take part in the management of the company, including voting’, warns RSPP President Alexander Shokhin.

“These limitations will further narrow the choice of quality investment instruments, while institutional and private investors may face problems with stock market investment”, he argues, calling for another round of debates for the bill.

“Following OECD Corporate Governance Principles and our own Corporate Governance Code, we should ban these schemes. We seriously doubt the ‘quality’ of quasi-treasury stock as an investment instrument”, counters the Ministry for Economic Development source.

According to him, the matter was debated with Minfin, the Ministry of Justice, the Central Bank, MIFC Taskforce, and “companies agreed that this practice is faulty, even outdated. The technical issue is that companies should be given a grace period to bring their capital structure up to date with the new law. We offered a compromise — a transitional period of two years, which everybody was happy with”, he claims.

Institutional and private investors fiercely oppose voting with quasi-treasury shares, and will support the ban, says Spirin. “Companies will have two years to transfer the shares to shareholders who will be able to vote, or cancel the shares. At the end of the day, they can leave everything as it is, since there is no ban on ownership and dividends”, he points out.

Corporate and contract lawImprovement of corporate governanceProject Group №2