Head of the President’s Executive Office Sergey Ivanov has spoken out against the MIFC proposal to amend affiliation definition and criteria in Chapter Four, Part 1 of the Civil Code, say sources close to the Kremlin. The view is stated in Ivanov’s October 3 letter to the Deputy Prime Minister and Government Chief of Staff Sergey Prikhodko. The President’s press officer Dmitry Peskov was unavailable for comment yesterday.

Sergey Ivanov in fact backs the top 4 Russian oil & gas companies — Rosneft, Lukoil, Surgutneftegaz and Gazprom. In June, they pleaded with Putin to leave current norms intact. They pointed out that affiliated companies are already defined in the anti-monopoly laws. The proposed bill ‘bloats the definition’, leading to ‘artificial construction of infinite links’. Companies expect ‘mass abuse by minority shareholders of powers inadequate to their share and no liability whatsoever for their decisions and subsequent damages’. A source in one of the oil companies adds that ‘changes de facto stall management’. “The Board of Directors, the execs may lose all power, minority shareholders with small stakes could jeopardize the entire business”, he says. Besides, the bill vests courts with the right to establish affiliation at their own discretion, sources say, stripping companies of ‘defense mechanisms’.

The Civil Code amendments were initiated back in 2012, with the President’s Civil Law Codification Council formally in charge of the bill. After the first reading, the project included affiliation and liability of controllers (Articles 53.1-53.4). When amendments were debated for the second reading, these norms were omitted. The idea was opposed, say the oilers, by ‘instigating private investors of the MIFC group’. Sources specify that this is a reference to Prosperity Capital Fund, Director Alexander Branis an active member of one of the MIFC project groups. Finally, in March, First Deputy Prime Minister Igor Shuvalov ordered for the bill to be amended.

“The proposals do not sit well with companies that still play by the 90’s rules. It’s a different world today, a time to attract foreign investors”, a Government source says. “Changes will boost transparency and allow disclosure of beneficiaries. Management problems will arise due to the need to bring up to date the internal regulation base – a tough but vital process”. In June, Putin asked the Government and the Executive Office ‘to work out the approach in detail’, according to a Government source. In August, the Russian Union of Industrialists and Entrepreneurs sided with the oilers.

Igor Shuvalov’s rep told us yesterday that ‘First Deputy Prime Minister held meetings that resulted in a compromise that factors in the opinions of the business and the experts’. “Oil companies’ proposals are being studied by relevant ministries, however, the law must comply with accepted global practices”, he said. Independent legal advisors agree. Daria Ilyina of Egorov, Puginsky, Afanasiev and Partners says that today affiliation is regulated by a dated norm of the Soviet law that is easy to circumvent: long obsolete, it renders inter-company ties ‘non-trasparent’. “Expanding the circle of affiliation naturally leads to more interested party transactions, and there we can expose misconduct that takes place without being formally outlawed”, says the lawyer. She adds that Western Europe has had similar norms in place for a while and ‘the risk of possible abuse appear less substantial than the protection that these amendments offer”. Inside sources say that the Government opinion on the controversial issue will be presented to Putin by end-October, with the second reading of the bill due in November.

Corporate and contract law, Project Group №2