The Shareholder Rights and Activism Review: Russia
Shareholder activism in the Western sense had relevance in Russia between 2000 and 2008. In the 1990s, some isolated issues, such as improving financial reporting, had been focused on by institutional investors. Since around 2008, shareholder activism has been dying down. In the first half of the 2010s, seemingly politically motivated disclosure of events linked to state companies occurred and, in the last years of that decade, some corporate conflicts gained very substantial attention. Though regulators occasionally voice concern about the lack of liquidity in capital markets, there are no legislative plans with notable practical implications aimed at satisfying private shareholders interest. Also, it has become commonplace that if disclosure of information could be useful to take action, then requirements that force disclosure are lifted, so that information concerning politically sensitive topics is not made available. Specifically, the risk of criminal procedures being started for seemingly insufficient reasons has increased.
Legal and regulatory framework
Companies with their main business in Russia frequently use foreign stock exchanges to attract investors. Sometimes, that is linked to foreign corporate vehicles being used for the listing.2 More frequently, however, the corporate forms used are in Russian. Sometimes, there is a conflict between the Russian and the listing rules.3 In the event of a conflict, the manner in which Russian law and practice treat questions and issues is likely to prevail because it will be difficult to implement any decision made under non-Russian law. Accordingly, the following discusses Russian law because it is Russian law that is relevant for companies with their main business in Russia. In addition to Russian corporate law, sometimes Russian rules on listing may be relevant to questions related to shareholder conflicts.
Under Russian joint stock law (only joint stock companies are entitled to list), each shareholder has the right to participate in the shareholders' meeting. The shareholders' meeting is to generally be held in person4 and deal with the main issues relating to the life of the company, such as annual reports, the approval of the activity of management, capital increases and transactions that exceed a certain value. Generally, decisions are to be made with a simple majority of votes, with some, such as an increase in charter capital, requiring a 75 per cent majority. Accordingly, activist shareholders could in general potentially influence decision-making. Anecdotal evidence, however, suggests that Russian listed companies are typically owned by a single or a few shareholders who are well represented at shareholders' meetings. As a consequence, it is unlikely that activist shareholders with a small shareholding in the company can obtain a majority at voting by other shareholders joining the activist shareholders' efforts. Also, decisions will be invalidated only if they would not have been made had it not been for the violation. Accordingly, the reversal of decisions of a shareholders' meeting is the exception rather than the rule. A certain protection of shareholders could be an emerging practice that seems to be based on the expansion of liability of indirect shareholders: the 'beneficiaries'5 Beneficiaries have in one case been allowed by the Supreme Court to reverse decisions of shareholders' meetings to reverse the shareholders' meeting's decisions6 and transactions7 by which assets were stripped. However, this theory seems to only be implemented by lower courts8 insofar as the standard for disclosure of the shareholding structure of an insolvent company is increased,9 and not be generally accepted by lower courts. This practice has been applied to majority shareholding, and it does not seem likely that it will be applied to minority shareholding. As a consequence of this all, not many substantive discussions take place at shareholders' meetings.10
For the election of the board of directors, shareholders have as many votes as directors are elected (see Article 66(4)(2) of the Joint Stock Law). In other words, minority shareholders, by putting all their votes on the few candidates they have preselected, can have their candidates elected even if the shareholders with controlling votes do not agree. In general terms, the German dual system of division of responsibilities applies to the governance of Russian joint stock companies and the board of directors has extensive supervisory power. As a consequence, and given the comparatively high importance that boards typically have in Russian companies, it would be possible to exert substantial influence by being a member of a board. Indeed, some hope has been put in independent directorship.11 In particular, from 2000 to 2004, some practices seemed to have changed through the activity of independent directors.12 Also, independent directorship had prominent and outspoken supporters, like Mr Boris Fyodorov.13 Recently, and in particular in the ESG context14 but also due to some large issuers undertaking efforts to lift Western sanctions,15 the number of independent directors and their importance seems to have increased. None of the independent board members, however, currently seem to have a focus on active minority shareholder representation. Significantly, where independent members of boards are mentioned, there is no focus on active representation of shareholders' interests.16
Shareholders have a right to dividends. Sometimes, this right has been violated and a few shareholder activists have focused on the implementation of this right.17
Furthermore, when purchasing 30 per cent or more of the total amount of the shares, the shareholder taking over must make an obligatory tender offer.18 Accordingly, shareholders could try, by being aggressive, to prompt such an offer by the majority shareholder buying shares in order to reach the thresholds. However, the number of related offers has been decreasing in recent years.19
Also, information rights for shareholders, which in the early days of joint stock law had been very broad, have been gradually reduced. Namely, in 2001, the law clarified that only shareholders with more than 25 per cent of shares are entitled to receive the accounting documents and minutes of the meetings of the collective executive body.20 Political tensions have been given as a reason for the proposal to declare further information as being confidential.21 Confidential information concerning politically exposed companies includes information on a company's direct and indirect shareholders, on the natural persons who are members of the management bodies, deputies of the sole executive body, the chief accountant and the chief accountant's deputies and the heads and chief accountants of the company's branches.22 Whenever the company, as a reaction to the specific request, decides to not disclose this information, the company must provide the Central Bank with the information not disclosed.23
Additional limitations on information rights have been introduced by court practice. For instance, a company was recognised as being entitled to limit the right of shareholders with less than 25 per cent of shares to get information on issues of extended competence, that is, the exclusive competence of the board of directors, as opposed to the competence of the executive bodies of the company.24 Additionally, court practice has allowed companies to refuse shareholders information in cases of lack of 'legitimate interest' to receive the requested information.25 Moreover, companies can refuse to provide information to their shareholders referring to commercial confidentiality, and sometimes companies use this right extensively.26
Key trends in shareholder activism
When market reforms began in the early 1990s, minority shareholders' rights, in a certain sense, were a key issue attracting the attention of the population at large. Because the main aim of market reforms was to distribute what was seen as being the people's wealth to the people, shares were distributed to the population at large through voucher auctions and, therefore, protection of the many recipients of these vouchers should have been a major concern.27 However, attention to the detail of implementation of these rights was low and no stable funds or associations to represent minority shareholders emerged.
In the early years of stabilisation (2000–2005),28 there were some signs that shareholder activism would play a major role going forward. In particular, some of the major corporates implemented major internal reforms, and some of those reforms were encouraged by pressure from shareholder activists. Also, part of some government programmes, such as electricity and pension reforms, was raising or investing in capital through stock exchanges.
Publicly, shareholder activism has for some time been associated with Mr Bill Browder.29 Mr Browder, after having maintained a high public profile for some time, came under attack from sources that must have been close to government, which culminated in accusations of brutality against the people involved on the side of Mr Browder,30 and in particular the United States imposing countersanctions against individuals allegedly involved.31 While not actually directly related to shareholder activism, procedures against Mr Calvey and his partners are likely to further discourage any action. They were started in 2019 and linked to a joint venture; ultimately, these procedures have also substantially increased the reluctance of investors to rely on the Russian legal system, and have rather strengthened the view that more influential parties have an ability to influence the outcome of legal procedures.32 The negative view of law implementation practice has further been exacerbated by criminal procedures related to the Russian Venture Capital Company.33
In sum,34 it appears that the mentioned cases have showcased that any action bears major risks. While previously there had been an interest in shareholder activism, where a political motive for the activism was at least likely and such shareholder activism was used for political or private interests,35 this type of politically motivated activism has not been seen in recent years. Furthermore, regulators tend to dislike controversy and misunderstand the value of controversy for corporate governance. In any instance, this difference of assessment does not make any difference to the result; namely that investors' rights are limited to an extent that does not seem to allow activist investment.
In addition, in parallel with the above, regulators appeared to be particularly concerned with inappropriate action of aggressive shareholders leading to a loss of assets.36 As a consequence, options for shareholders to act have substantially decreased over time.
Furthermore, and as mentioned before, majority ownership in listed companies has mostly been consolidated.
Recent shareholder activism campaigns
Technically, and for the reasons described, shareholder activism is limited to random phenomena like simple access to information37 or to a shareholders' meeting.38 Also, there has been some argument that shareholders have a right to correction of the accounts of companies.39 However, in the light of existing legislation there is little basis for such an argument and related lawsuits have been dismissed as would have been expected.
Some funds continue to be involved in asset tracing.40
There have been many changes in corporate law over the past few years and, similarly to what was concluded in another context,41 it is not always easy to determine what purpose the many changes in relevant laws have had.42 The author's impression is that even where it seems that options for minority shareholders are to be strengthened, the control of the management and majority shareholders over the procedure is increased.
However, though earlier privatisation attempts have not led to the expected results, in 2016 there was some hope that the difficulty with planned sales of Russian state assets and the concern with increasing the investor base43 would lead to more attention on, and openness to, shareholder activism, but this does not seem to have materialised.
There has not been much shareholder activism recently and it remains to be seen whether there will be in the future.
1 Max Gutbrod is a self-employed lawyer and Nikolay Budnetskiy is a senior lawyer at KPMG.
2 An interesting example is Veon, a company with a substantial percentage of revenues in Russia but resident in the Bermudas, see http://www.veon.com/media/1954/2018-agm-veon-ltd_secretarys-certificate_bye-laws_31july2018-veon-legal-re-formatted-for-company-website-1-august-2018-final.pdf (accessed on 31 July 2019).
3 In the public domain, a conflict between Kazakh and international listing and corporate rules has played some part, see: https://informburo.kz/novosti/protivostoyanie-kazmunaygaza-s-rd-kmg-mozhet-nanesti-udar-po-reputacii-kazahstana-inostrannye-smi.html (accessed on 5 September 2016). Most of the information here and in the following footnotes is general information that is in the public domain as there does not seem to be a consistent overview of shareholder activism in Russia.
4 As a response to the coronavirus pandemic, the requirement to hold a shareholders' meeting in person where the appointment of directors or auditors, annual reports, or annual financial statements are to be considered will not apply until 31 December 2021; see Federal Law of 24 February 2021, No. 17-FZ, Article 2.
5 See, for the context, Khlostov, in https://zakon.ru/blog/2016/06/01/verhovnyj_sud_otkryl_yaschik_pandory__pomimo_reshenij_obschego_sobraniya_konechnyj_beneficiar_mozhet (accessed on 4 June 2021).
6 Sent. 40 of Resolution of the Supreme Court dated 31 March 2016 on case No. 305-ES15-14197.
7 Sent. 36, 50 of Resolution of the Supreme Court dated 27 May 2016 No. 305-ES15-16796.
8 See sent. 46 of Resolution of the Arbitration Court of the Ural District dated 19 November 2019 No. F09-7274/19.
9 Sent. 67 of Resolution of the Tenth Arbitration Appeal Court dated 13 February 2020 No. 10АP-20918/2019.
10 As an example of a bigger issuer that might be seen characteristic, see http://www.e-disclosure.ru/portal/event.aspx?EventId=DW8pjssHfU65IWf4cPwyjg-B-B, http://www.sberbank.com/ru/investor-relations/corporate-governance/general-shareholders-meeting/annual-meeting-2016, http://www.nsd.ru/ru/db/news/ndcpress/?id36=669403 (accessed on 5 September 2016).
12 'Gazprom and Itera: A Case Study in Russian Corporate Misgovernance', Carnegie, 18 March 2002, https://carnegieendowment.org/2002/03/18/gazprom-and-itera-case-study-in-russian-corporate-misgovernance-event-468 (accessed on 5 September 2016).
13 'Менеджеры Творят Беспредел', Новая газета, https://www.novayagazeta.ru/articles/2001/01/22/12559-menedzhery-tvoryat-bespredel; 'Boris Fedorov', The Economist, 27 November 2008, http://www.economist.com/node/12675842 (accessed on 5 September 2016).
14 See in particular the work byhttps://cgi-russia.ru/climate-strategy/climate-forum-of-directors-has-started-its-work-eng/ (accessed on 4 June 2021).
15 See UC Rusal plc with an increase of the number of independent directors up to eight out of 14 following the terms of removal of UC Rusal plc from the SDN List, see https://home.treasury.gov/news/press-releases/sm592 (accessed on 3 June 2021).
16 Characteristic in this regard is board representation at Sberbank, including the independent board members having impressive careers as politicians, scientists and managers, but not having any track record as investors, and in some cases only having a relatively short term of office, http://www.sberbank.com/investor-relations/corporate-governance/supervisory-board (accessed on 20 June 2018).
18 Federal Law of 26 December 1995, No. 208-FZ on joint stock companies, Article 84.2.
19 Statistics regarding voluntary tender offers, mandatory tender offers and squeeze-out requests are available at http://www.e-disclosure.ru/poisk-po-soobshheniyam (accessed on June 2019) with the filter in the 'Выбрать тип сообщения' dropdown list to be set on 'Сведения о поступившем эмитенту (ОАО) добровольном или обязательном предложении' plus 'Сведения о поступившем эмитенту (ОАО) уведомлении о праве требовать выкупа или требовании о выкупе'. The accuracy of the numbers seems to be better for later years; 13 mandatory offers being mentioned from 16 June 2018 to 3 June 2019, but the system suggests that between 21 October 2013 and 20 June 2018 there was only one offer. There are again no entries in the period from 3 June 2019 to 3 June 2021.
20 See the Decision of the Constitutional Court of RF of 16 June 2004, No. 263-O, which considered this rule as being constitutional.
21 See the report at https://themoscowtimes.com/news/russia-dodge-sanctions-secret-contracts-61764 (accessed on 10 June 2021). Also see Federal Law of 26 December 1995, No. 208-FZ on joint stock companies, Article 92.2.
22 Government Regulation No. 400 dated 4 April 2019.
23 Central Bank Information Letter No. IN-06-28/79 dated 9 October 2019.
24 See Decision of the Constitutional Court of RF of 18 January 2011, No. 8-O-П.
25 See e.g., Decision of the Arbitrazh Court of the Central District of 30 June 2015, No. F10-1836/2015.
26 See e.g., Dan'shin A. 'Shareholders' rights to information about the activity of the company', Economics and Life, 2011. No. 6 (9372), http://www.eg-online.ru/article/126635 (accessed on 5 September 2016). See also similar limitations being turned into law by the Duma adopting Draft Law No. 558976-5 in the third reading on 19 July 2017.
27 Maxim Boycko, Andrei Shleifer, Robert W Vishny. 'Privatizing Russia', Brookings Papers on Economic Activity, 2:1993. p. 151, http://www.brookings.edu/wp-content/uploads/1993/06/1993b_bpea_boycko_shleifer_vishny_fischer_sachs.pdf (accessed on 5 September 2016).
28 See a brief account of economic history in Pekka Sutela. 'Russia's Economic Prospects', Getty, 28 March 2011, http://carnegieendowment.org/2011/03/28/russia-s-economic-prospects-pub-43290 (accessed on 5 September 2016).
29 See William Browder. 'Hermitage Capital, the Russian State and the Case of Sergei Magnitsky,' Chatham House, 15 December 2009, http://www.chathamhouse.org/sites/files/chathamhouse/public/Research/Russia%20and%20Eurasia/151209browder.pdf (accessed on 5 September 2016); and 'Gazprom and Itera: A Case Study in Russian Corporate Misgovernance', Carnegie, 18 March 2002, https://carnegieendowment.org/2002/03/18/gazprom-and-itera-case-study-in-russian-corporate-misgovernance-event-468.
30 See Lilia Shevtsova, David J Kramer. 'What the Magnitsky Act Means', The American Interest, 18 December 2012, http://www.the-american-interest.com/2012/12/18/what-the-magnitsky-act-means (accessed on 5 September 2016); Magnitsky Sanctions Listings, US Department on Treasury, http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20130412.aspx (accessed on 5 September 2016); and Tara McKelvey. 'William Browder: The man behind the Magnitsky List', BBC News Magazine, 10 December 2013, http://www.bbc.com/news/magazine-25190975 (accessed on 5 September 2016).
31 See 'Russia strikes back with Magnitsky list response', http://www.rt.com/news/anti-magnitsky-list-russia-799 (accessed on 5 September 2016).
32 See http://www.themoscowtimes.com/2019/05/28/arrested-us-investor-calvey-wants-to-go-to-putins-economic-forum-a65768 (accessed 3 June 2019).
34 A summary of controversial proceedings also in John Lough. 'End of an Era for BP in Russia', Chatham House, 7 June 2012, http://www.chathamhouse.org/media/comment/view/183859 (accessed on 5 September 2016).
35 On Mr Browder, see 'The Domestic Context of Russian Foreign Policy', http://www.brookings.edu/wp-content/uploads/2016/07/Chapter-One-12.pdf, p. 23 (accessed on 5 September 2016).
36 An examination of the practices that lead to such concern can be found in Philip Hanson. 'Reiderstvo: Asset-Grabbing in Russia, Russia and Eurasia PP 2014/03', http://www.chathamhouse.org/sites/files/chathamhouse/home/chatham/public_html/sites/default/files/20140300AssetGrabbingRussiaHanson1.pdf (accessed on 5 September 2016).
37 Peter B Maggs, Olga Schwartz, William Burnham. Law and Legal System of the Russian Federation. Juris Publishing, Sixth Edition, https://books.google.ru/books?id=J0jwCQAAQBAJ&pg-=PA428&lpg=PA428&dq=transneft+access+to+shareholders+meeting&source=bl&ots=uN-Vp7Km9J&sig=6H5g392kHiS6dE2aXAl18UgZvsI&hl=ru&sa=X&ved=0ahUKEwj-x5bV-evOAhVLKcAKHaeDBxEQ6AEILTAC#v=onepage&q=transneft%20access%20to%20shareholders%20meeting&f=false (accessed on 5 September 2016), in the cases reported, the interest appears mainly to be politically (as opposed to economically) caused.
38 Information about important act can be found at http://www.transneft.ru/u/important_fact_file/5902/15-08-2016.pdf (accessed on 5 September 2016).
39 Veronika Goryacheva. 'Auditors are brought into the court', Kommersant, 17 August 2016, http://www.kommersant.ru/doc/3065415 (accessed on 5 September 2016); Eugeny Kalyukov. 'The minority shareholder of “Gazprom” filed a claim against an auditor of the company', RBK, 17 August 2016, http://www.rbc.ru/business/17/08/2016/57b42a029a7947187007b011; 'Gazprom shareholders demand recognition of the FBK audit report as incorrect', Pravo.ru, 17 August 2016, https://pravo.ru/news/view/132602; The court confirmed dismissal of the claim to the auditor of Gazprom in relation to the report', RAPSI, 25 May 2017, http://rapsinews.ru/arbitration/20170525/278699933.html (all accessed on 30 June 2017). 'A claim of an offshore company to collect 217 million roubles from Deloitte & Touche CIS was dismissed', RAPSI, 25 January 2018, http://www.rapsinews.ru/arbitration/20180125/281738896.html (accessed on 22 June 2018).
40 See 'Prosperity Capital Management challenged a deal', http://www.arbitr.ru/press-centr/press_arb_sud/50188.html (accessed on 5 September 2016).
41 See 'Report on the Observance of Standards and Codes on IOSCO Objectives and Principles of Securities Regulation for the Russian Federation', July 2016, http://www.imf.org/external/pubs/ft/scr/2016/cr16233.pdf (accessed on 5 September 2016): 'While some have argued that the absence of overarching provisions is an inevitable consequence of the principles of Russian law, others have correctly pointed out that there are some overarching obligations already in the legal framework and steps are being taken to develop the approach to legislation on these lines.'
42 A different (more positive) assessment of the legal framework appears to be displayed relating to corporate governance at http://www.ebrd.com/documents/legal-reform/russia-country-law-assessment.pdf&usg=AFQjCNH0wixFsX_xzrjv9WD0R2TeCF0ulQ&sig2=NQ1Yu5bBARDclCFyUwNzXw&cad=rjt, 'Corporate governance assessment', EBRD, p. 14 (accessed on 5 September 2016).
43 While currently pension funds do not hold many shares, see Guidelines for the Development of the Russian Financial Market in 2016–2018, Bank of Russia, http://www.cbr.ru/StaticHtml/File/12158/DRFM_1618.pdf (accessed on 5 September 2016). An effort to increase investment abilities appears to be planned, see Alexey Lossan. 'Russia mulls investing pension funds in start-ups', Russia Beyond, 31 August 2016, http://in.rbth.com/economics/finance/2016/08/31/russia-mulls-investing-pension-funds-in-start-ups_625683 (accessed on 5 September 2016).