The rise of investor rights in Russia
New corporate governance rules could encourage foreign and local investors to boost their interest in the country
New corporate governance rules could encourage foreign and local investors to boost their interest in the country
The cornerstone of massive reform to the Russian Civil Code and related laws was laid in 2008. The reform, with its intended improvements to Russian civil legislation, has now been in process for nearly a decade. It came about owing to the need to reflect current realities and commercial and social developments in modern Russia.
That same year, as the global economic and financial crisis revealed that the Russian economy needed diversification, the Russian government launched this idea of creating an international financial centre in Moscow to facilitate the development of a competitive stock market in Russia.
Since then, a substantial number of specialised laws and regulations have been enacted. Intended to improve the Russian legal capital markets infrastructure, these new laws relate to the Central Depositary, insider trading and market manipulation, a new corporate governance code incorporating so-called western concepts and criteria for independent directors, plus new rules on disclosure as well as new listing rules.
In particular, corporate governance regulations have changed significantly, in a positive way. They now align Russia with the best international corporate governance standards and practices, and the listing rules of the Moscow Exchange have been revisited to implement key provisions of the new corporate governance code.
The regulations require Russian public companies with Level 1 (premium) and Level 2 (standard) listings on the Moscow Stock Exchange to have a certain number of elected independent directors on the board of directors and an audit committee headed by an independent director, established by the board of directors. Furthermore, the change in corporate governance regulations has resulted in a new definition of independent director introduced in Russia which is very similar to the UK Corporate Governance Code definition. By introducing these, and the above mentioned new laws and regulations, Russian public companies have become significantly more transparent to investors at home and abroad.
In February 2016, the Bank of Russia approved a paper titled ‘Principal directions for the development and procurement of the stable functioning of Russia’s capital markets in 2016-2018’ and reconfirmed the importance for the country to continue developing an internationally competitive financial industry.
There is little doubt that a move to a truly professional financial services market in Russia will increase the attractiveness of equity financing in Russian public companies through improved corporate governance and enhanced securities’ market regulation and through developing closer relations with other regulators and international regulatory organisations.
As a next step for improving Russia’s companies and securities laws, on June 29 2015 the federal law titled ‘On amendments to separate legislative Acts of the Russian Federation and invalidations of certain provisions of legislative acts of the Russian Federation’ (Law 210-FZ) was enacted. While certain provisions of Law 210-FZ entered into force in October 2015 and January 2016, the main and the most extensive part of the amendments will take effect on July 1 2016.
Firstly, Law 210-FZ is the law that introduced amendments, among others, to the Joint Stock Company Law and the Securities Market Law. This was to align these laws with recent changes in the Russian Civil Code, especially with respect to companies’ regulation and corporate governance. Secondly, it presented new provisions that are, inter alia, aimed at harmonising relations between an issuer, the owners of securities, a shareholders’ registrar, the Central Depositary and other securities market participants.
Expansion of shareholder rights
One of the most important changes introduced by Law 210-FZ was the new term of ‘persons exercising rights on shares’. The introduction of this term has a significant effect on the interpretation of various provisions of the Joint Stock Company Law and the Securities Market Law.
It expanded shareholder rights beyond the limited group of direct holders of shares to include those who, among others, hold or exercise rights in relation to Russian shares via nominees or who hold depositary receipts, representing rights to Russian shares. It also means that investors investing in depositary receipts may now enjoy shareholder rights that direct holders of shares enjoy.
In other words, while investors in depositary receipts are not included in the definition of ‘shareholders’, they are entitled to exercise the rights of shareholders.
Before these changes, there was a grey regulatory area in respect of the shareholder rights for all holders other than direct shareholders. Such holders were deemed not to be shareholders in a company, and they did not enjoy any direct share rights, except for the right to participate in shareholders’ meetings and the right to vote.
Such situations generally created risks for investors who invested in depositary receipts rather than shares. They had a lack of control and involvement in the Russian company’s corporate life as the law did not protect their rights as holders of ‘derivative’ product in relation to Russian shares.
In practice, to comply with international corporate governance best practice, some Russian public listed companies offered holders of depositary receipts the possibility of exercising share rights pari passu with direct shareholders. For example, when a company exercised a share buy-back in line with Article 72 of the Joint Stock Company Law, it established a similar, parallel procedure to buy back depositary receipts with a foreign depositary being involved. The new law has fixed this grey area by granting holders of depositary receipts the right to exercise shareholder rights that previously were only enjoyed by direct shareholders.
Besides the right to participate in the company’s share buy-backs, the new law also provides rules for those exercising their rights relating to shares (including depositary receipt holders) to vote at shareholders’ meetings, participate in voluntary and mandatory tender offers, exercise pre-emption rights in new share issuances and propose items for the agenda for shareholders’ meetings.
Depositary receipt holders holding in aggregate more than two percent of voting shares can propose candidates to the board of directors and other governing bodies of the company, and those holding in aggregate more than 10% of voting shares can call for the convocation of a shareholders’ meeting and other rights that previously were only enjoyed by direct shareholders.
Tender offer rules
The Russian legislator is currently working towards further improvement of the tender offer rules under the Russian Joint Stock Company Law. This proposed draft law envisages certain significant changes which may affect the balance of interests between minority and majority shareholders.
In particular, the draft law suggests that the tender offeror will not be able to enjoy voting rights with respect to all of its acquired shares until the offer period – which may take from 70 to 80 calendar days - is closed and the report on the results of the tender offer is submitted to the Russian regulator. The submission of the report must be done within 30 calendar days of the completion of the offer period.
In addition, within the said voting limitation period, the tender offeror will be able to vote only on that number of its voting shares which are equal to three sevenths of the total number of voting shares held by other shareholders, and the remaining voting shares of the tender offeror will not vote.
This means that minority shareholders, for a period of time, may have the majority of votes at shareholders’ meetings.
Furthermore, the draft law provides that if an acquiror does not submit a tender offer within the statutory term, other shareholders may demand the acquiror to buy back their shares at a minimum price within a year. In June 2016, this draft law was introduced for a first reading by the Russian State Duma.
Exercising shareholder rights
Notwithstanding that the persons exercising their rights in relation to shares are now considered pari passu with direct holders of shares, their participation in corporate events and procedures differs from their peers who hold full shares.
Law 210-FZ has established a cascade principle for communications between the issuer and the owners of the securities. It means that when exercising its share rights, the holder of depositary receipts must give instructions to a foreign depositary (the issuer of depositary receipts), which in its turn transmits these instructions to the Central Depositary via its local custodian. Thus, when exercising voting rights at a shareholders’ meeting, a holder of depositary receipts must give instructions to its foreign depositary (for example The Bank of New York Mellon, DBTCA, Citi or JP Morgan), which will, in turn, transfer instructions to the Central Depositary of Russia to record the voting according to such instructions at a shareholders’ meeting.
However, there is a key condition that applies to holders of depositary receipts if they want to exercise shareholder rights. The Joint Stock Company Law provides that only those who are recorded in the list as authorised to exercise their rights in relation to shares on a particular date may, for example, use their pre-emption rights in the case of new share issuance or sell its securities in the event of a company’s share buy-back. And in order to be included in such a list, the holder of depositary receipts must disclose their identity (name, address, state registration number) and the number of securities they hold.
In practice, owing to various reasons, perhaps the unwillingness of beneficial owners to disclose their identity or, in the absence of such information or the irrelevance of such information to the owner, their identity may not be properly proved. The net effect is that on the one hand, such owners of depositary receipts may not be able to exercise their rights in relation to the shares, and on the other hand it may cause difficulties for the issuer when determining a quorum for certain types of transaction (for example, related party transactions).
This issue on identity disclosure has been raised before with the Russian regulator and legislator a number of times. However, it remains in the law, and the person exercising rights on shares must comply with it. Unfortunately, with respect to recent convocations of annual general meetings, the experience of some Russian issuers in relation to this rule has been somewhat negative, and companies have encountered a lower level of participation by depositary receipt holders in such shareholders’ meetings than anticipated or hoped.
A boost in ‘Russia-related’ securities?
Each year the World Economic Forum calculates the Global Competitiveness Index. In 2015/6 Russia was in 45th out of 140, overall. This is a noticeably improved position on the table, as in previous years it was the 64th or lower in the ranking. However, when ranked by the ‘Development of the financial market’ measure – another ranking within the Global Competitiveness Index, Russia is in 95th place, out of 140, overall. However, even this is much improved since 2012-2013 when it was much lower down.
Due to the massive civil law reform and incorporation of various corporate and securities law institutions, the overall legal environment in Russia has improved significantly since 2008. However, there are other political and economic conditions that affect the investment mood of, particularly overseas, investors. Thus, once the economic and industry sector sanctions were applied to Russia in early 2014, the capital markets in Russia have stagnated for almost two years.
But in the first half of 2016, we have seen some movement on the Russian debt markets. A number of Russian companies (including Globalports, Gazprom and Renaissance Capital) have successfully placed eurobonds. These deals have shown that investors, both local and international, are starving for long-forgotten investment opportunities in the Russian market. Moreover, certain Russian issuers may launch an IPO later this year.
Notwithstanding that the Russian market remains an emerging market with its political, economic and regulatory risks and fears, it is making proactive steps to make itself more appealing. The market is adapting, there is now greater potential, and better protection, for investors.
By Olga Te, counsel, and Svetlana Volevich, partner, in Akin Gump Strauss Hauer & Feld’s Moscow office