CIS Model Joint Stock Law and Commentary

Review of Central and East European LawVolume 36, 2011

Review of Central and East European LawA journal published in cooperation with the Institute of East European Law and Russian Studies of Leiden University, the Universities of Trento and Graz and the European Academy Bozen/Bolzano

Aims and ScopeReview of Central and East European Law critically examines issues of legal doctrine and practice in the CIS and CEE regions. An important aspect of this is, for example, the harmonization of legal principles and rules; another facet is the legal impact of the intertwining of domestic economies, on the one hand, with regional economies and the processes of international trade and investment on the other. RCEEL offers a forum for discussion of topical questions of public and private law.RCEEL encourages comparative research; it is hoped that, in this way, additional insights in legal developments can be communicated to those interested in questions, not only of law, but also of politics, economics, and of society of the CIS and CEE countries.

Editor Editor EmeritusWilliam Simons Ferdinand FeldbruggeUniversity of Leiden, Leiden, The Netherlands University of Leiden, Leiden, The NetherlandsEditorial BoardGianmaria Ajani (University of Torino, Torino, Italy), Rainer Arnold (University of Regensburg, Regensburg, Germany), Tomislav Borić (Karl-Franzens-Universität Graz, Graz, Austria), William Burnham (Wayne State University, Detroit, MI, USA), Bruno Dallago (University of Trento, Trento, Italy), Anatoliy Dovgert (Kyiv National University, Kyiv, Ukraine), Rilka Dragneva (University of Manchester, UK), George Ginsburgs (Rutgers University, Camden, N J, USA), Jane Henderson (King’s College London, London, UK), Kathryn Hendley (University of Wisconsin, Madison, WI, USA), Farkhad Karagussov (Kaspiiskii Obshchestvennyi Universitet, Almaty, Kazakhstan), Peter Krug (University of Oklahoma, Norman, OK, USA), David Lametti, (McGill University, Montreal, Quebec, Canada), Katlijn Malfliet (Catholic University of Leuven, Leuven, Belgium), Joseph Marko (Karl-Franzens-Universität Graz, Graz, Austria), Giuditta Cordero Moss (University of Oslo, Oslo, Norway), Scott Newton (School of Oriental and African Studies, London, UK), Sarah Reynolds (Reynolds Associates, Boston, MA, USA), Richard Sakwa (University of Kent at Canterbury, Canterbury, Kent, UK), Alexander Trunk (Christian-Albrechts-Universität zu Kiel, Kiel, Germany)

Assistant EditorAlice Engl, European Academy Bozen/Bolzano, Bozen/Bolzano, Italy

Book Review Editor Benedikt Harzl, European Academy Bozen/Bolzano, Bozen/Bolzano, Italy

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Prospective authors should submit their proposals and manuscripts by e-mail to: <[email protected]>.Review of Central and East European Law (ISSN 0925-9880, E-ISSN 1573-0352) is published four times a year by Martinus Nijhoff Publishers, an imprint of Koninklijke Brill NV, PO Box 9000, 2300 PA Leiden, The Netherlands.Tel .:+31/(0)71/535.3500, fax: +31/(0)71 531.7532, website: www.brill.nl

Harmonization of Corporate Law in the CIS. More Architecture of Choice

Volume 36, 2011A Review of Central and East European Law Special Issue

EditorWilliam Simons

Leiden • Boston

NOTES FOR CONTRIBUTORSSubmission of ManuscriptsRCEEL seeks to recruit its contributors from among those interested in the domestic legal systems of the region, as well from authors active in the fields of regional and international law (public and private). This implies a welcome to all serious and qualified authors, but especially to those from the countries of the area concerned.Articles should be submitted in English; they may also be accompanied by an original version in one of the major CIS/CEE languages for the purpose of clarifying questions of terminology or content. Works of a multidisciplinary nature may be considered for publication, provided they contribute in a meaningful way to the general aims of RCEEL.Manuscripts submitted to RCEEL must be the result of original research, not published or ac-cepted for publication elsewhere (in any language). Submissions will be subjected to a process of peer review. Authors may expect to be notified of the results of the initial review process within a period of two months. Footnotes and references should conform to the guidelines set forth in RCEEL’s Style Sheet, a copy of which can be obtained from RCEEL’s Editorial Office.

Prospective authors should submit their proposals and manuscripts by e-mail to: <[email protected]>.

Abstracting and IndexingReview of Central and East European Law is abstracted/indexed in: Bibliography of Asian StudiesCurrent Law Index Index to Foreign Legal Periodicals Index to Legal Periodicals & Books International Bibliography of Book Reviews of Scholarly Literature International Bibliography of the Social Sciences International Political Science Abstracts Journal Citation Reports/ Social Sciences EditionRussian Academy of Sciences BibliographiesSocial Sciences Citation Index Social Scisearch

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DOI: 10.1163/092598811X12960354395000© Koninklijke Brill NV, Leiden, 2011

Review of Central and East European Law 36 (2011) 211-313

CIS INTER-PARLIAMENTARY ASSEMBLYStanding Commission for Economy and Finance

COMMENTARY

ON THE 2010 MODEL LAW “ON JOINT-STOCK COMPANIES”

FOR CIS MEMBER STATES

(AS AMENDED)

October2010

212 Review of Central and East European Law 36 (2011)

The authors of the present Commentary, who were the core drafting team of the Working Group for the Model Law for CIS Member States “On Joint-Stock Companies”, are:

Working Group Drafting Team Leader:Dr. Hans-Joachim Schramm (Germany) – Introduction, Chapters V, VI and XII.

Working Group Drafting Team Members:Dr. Max Gutbrod (Germany/Russia) – Chapters I, II, III and IV;Professor Lado Chanturiia (Georgia/Germany) – Chapter VII;Professor Farkhad Karagussov (Kazakhstan) – Chapters VIII and IX;Dr. Dmitrii Stepanov (Russia) – Chapter X; andProfessor Rolf Knieper (Germany) – Chapters XI and XIII.

* * *Translators:Slovo-Delo (Moscow) and William B. Simons (of the Editorial Board).

Commentary on the CIS 2010 Model Law “On Joint-Stock Companies” 213

Contents

Introduction Chapter I. General Provisions 2171. Structure of the Present Model Law2. The Essence of a Joint-Stock Company 3. General and Industry-Specific Joint-Stock Company Legislation 4. Consequences of the Failure to Obtain a License 5. The Accuracy of Corporate Identification Data Chapter II. Corporate Formation 2191. Corporate Registration 2. Authorized Capital 3. Monetary Investments 4. Non-Monetary Investments 5. Articles of Association 6. Corporate Formation by a Sole Shareholder Chapter III. Shares of Stock 2221. Types of Shares of Stock 2. Authorized Shares of Stock and the Placement Thereof 3. Transfer of Shares of Stock 4. Registration of Shares of Stock and Reliable Information on the

Transfer Thereof Chapter IV. Rights and Obligations of Shareholders 2251. No Discrimination 2. The Methodology of Introducing Rights 3. Special Audit 4. Redemption 5. Preventing Bad-Faith Conduct of Shareholders 6. Shareholder Agreements Chapter V. Company Dividends 228Chapter VI. Authorized Capital of a Company 2281. Introduction 2. International Standards 3. Applicable Law of CIS Countries 4. Provisions of the Present Model Law Chapter VII. Corporate Bodies 2461. General Provisions 2. The General Shareholders’ Meeting 3. The Supervisory Board 4. The Management Board


5. The Board of Directors 6. The Liability of Corporate Officers Chapter VIII. Provisions on Corporate Transactions with

Special Conditions 2641. Conflict-of-Interest Transactions (Related-Party Transactions) 2. Major Transactions Chapter IX. Accounting, Reporting, Audit and Disclosure 2811. Key Requirements2. Audit 3. State Regulation of the Activity of Joint-Stock Companies 4. Public Availability of Data on Affiliated Persons 5. Public Availability of Company Reports and Accounts 6. Corporate Governance Codes Chapter X. Special Cases of Changes in the List of Shareholders 2891. General Thoughts 2. Redemption Price 3. Valuation Remedy 4. Filing Applications with a Guarantor or Majority Shareholder 5. Overall Assessments and Future Steps Chapter XI. Company Reorganization 2941. Mixed Reorganization 2. Balance of Interests of the Person Being Reorganized and of Creditors 3. Economic Substantiation for Reorganization 4. Contesting a Reorganization 5. Procedure and Specifics of a Reorganization Involving Legal Persons

with Different Organizational-Legal Forms 6. Valuation of Shares of Stock 7. Overall Assessments and Future Steps Chapter XII. Groups of Companies 3001. Introduction 2. The Need for Special Regulations for Groups of Companies 3. Tasks of Regulation and Opportunities for the Resolution ThereofChapter XIII. Liquidation of Companies 306


IntroductionIn March 2005, the Standing Commission of the Commonwealth of In-dependent States’ (CIS Inter-Parliamentary Assembly (IPA) for Economy and Finance headed by Gagik E. Minasian adopted a resolution to develop a new version of the Model Law “On Joint-Stock Companies” for CIS Member States. The European Bank for Reconstruction and Develop-ment supported this project, and an agreement was drawn up for joint implementation of the Model Law project. In April 2005, the IPA adopted a resolution to include the project in the conceptual program of the IPA’s legislative activity for 2005-2010. To implement this resolution, the IPA established a Working Group headed by Mr. Minasian. The Working Group members were subject-matter experts representing national parliaments, members of parliamentary commissions and specialists from national min-istries and governmental authorities. The Working Group has held several meetings in St. Petersburg and Erevan, where its members discussed the drafts submitted and adopted resolutions on accepting or rejecting specific proposals. Drafts that were discussed at Working Group meetings were prepared by a Working Group drafting team, which included specialists in the field of corporate law, from institutions of higher education and with legal practice in CIS member states and in Germany. The draft text of the Model Law, which was submitted to the IPA, is the result of the joint efforts of the Working Group and the Working Group drafting team. In April 2010, it was approved by the Economy and Finance Commission headed by Vardan S. Aivazian.

Pursuant to the Statute “On the Development of Model Legislative Acts and Recommendations” (14 April 2005), the purpose of a CIS Model Law is to submit legislative proposals for consideration as regards:

— harmonizing the totality of legislative norms in CIS countries;— improving existing legislation in order to resolve governance issues;

and— approximating international standards.

The 2010 Model Law “On Joint-Stock Companies”—which is presented to the reader in this publication—has been drafted in pursuance of the above aims. In addition, pursuant to the initial concept for developing the Model Law, the efforts of the Working Group have been based on the following assumptions.

1. Given the fact that laws on joint-stock companies exist in all the CIS countries, there has been no need to develop an absolutely new law “On Joint-Stock Companies”. On the contrary, our goal has been to use


the existing laws and the practice of their implementation as the basis for discussing ideas and innovations of the present Model Law—for develop-ing a Model Law for all the CIS Member States and applying the most detailed provisions is existence at the time of drafting these provisions. As can be seen from the contents and as described in more detail in this Commentary on the present Model Law, we believe that the Working Group has succeeded in achieving this goal. As an example, we would point to the decision which was made to abandon the distinction between open and closed joint-stock companies, now being introduced by an increasing number of countries in the CIS.

2. The Model Law “On Joint-Stock Companies” is linked to other Model Legislative Acts previously adopted by the CIS IPA. First of all, they include Part One of the 1994 Model Civil Code, the first version (1996) of the Model Law “On Joint-Stock Companies”, the 2001 Model Law “On the Securities Market” and the 2005 Model Legislative Provisions “On Protection of Investor Rights on the Securities Market”. The purpose of this new Model Law is to improve the first Model Law “On Joint-Stock Companies”, and it contains further provisions that can be viewed as a supplement to the model provisions “On Protection of Investor Rights on the Securities Market”. As far as the Model Law “On the Securities Market” is concerned, on the contrary, this contains clear distinctions.

3. Given the fact that, in a number of instances, legal norms concern-ing joint-stock companies in the CIS countries differ from one another on one and the same issue, it has been necessary to resolve the question as to whether—in such cases—preference should be given to one of these solutions. The Working Group opposed this view and, rather, decided to propose a number of alternative options. That is why, for example, Chapter VII of the present Model Law offers two alternative systems for management bodies of joint-stock companies. The Model Law also proposes options for selecting the structure of joint-stock companies which, however, are not intended not so much for legislators but, rather, more for the users of legislation enacted (amended) on the basis of the 2010 Model Law.

4. Another task for the Working Group and the Working Group drafting team was to craft solutions to plug loopholes in the existing leg-islation of CIS countries. In this respect, special attention should be paid to Chapters XI and XII of the present Model Law. Chapter XI contains provisions on the reorganization of joint-stock companies. While we re-alize that such provisions already exist in the CIS countries, the present Model Law proposes a comprehensive regime, given the challenges cur-rently existing in practice. The same holds true for Chapter XII, which


deals with groups of enterprises. Such provisions do not currently exist in any of the CIS countries.

5. Finally, the goals of the Working Group and the Working Group drafting team included identifying problems in the practice of imple-menting the law and, also, in making recommendations to resolve these problems within the framework of the Model Law. In this respect, special attention should be paid to the provisions on registration and on corporate management bodies. The draftspersons have made an effort to introduce specific proposals directed towards improving the legal framework in this field. Of major importance in this regard is the method which has been used to develop the proposals in question. This was based on the idea that one of the points of reference of the Working Group drafting team is a certain level of knowledge of the legal norms of the European Union. However, this has not resulted in the unfettered adoption of European (or other) norms. On the contrary, specific models of legal norms have been used, including non-European ones.

6. The present Model Law is purely recommendatory in nature. This means that adoption of the Law in the CIS countries, in whole or in part—or with respect to particular rules and regulations—is possible only where the Model Law and the provisions thereof are convincing for national legislators. In this respect, the Working Group believes that it is necessary to provide an explanation of the draft law. It is for this very purpose that this Commentary has been developed: to explain why particular recommendations have been made. In this regard the Model Law—in combination with the Commentary—represents not just an incentive for national legislators but, also, a contribution to the scholarly debate in the CIS countries.

Chapter I. General Provisions

1. Structure of the Model LawArticle 1 of the present Model Law defines the scope of its implementa-tion in the form that is typical of such legal definitions. Following Anglo-American practice, the key concepts are set forth (Art.2) and defined in detail in the appropriate chapters.


2. The Essence of a Joint-Stock Company

2.1. General FeaturesA joint-stock company is defined as a legal person (Art.3, Clause 2) which has certain rights (Art.3, Clause 2), which is regulated by civil legislation (Art.1, Clause 6), and which is a profit-making organization (Art.3, Clause 2).

2.2. Liability Limited to the Dominant Shareholder A key feature of a joint-stock company is that its shareholders are not li-able for the company’s obligations (Art.3, Clauses 1 and 2). A shareholder will only be required to indemnify a company for its losses if they were caused by such shareholder exercising influence upon the company and by pressuring its executives to perform certain acts that have inflicted losses upon the company (Art.43). Appropriate claims may also be presented to a shareholder by a company’s creditors if their claims cannot be satisfied by the company itself (Art.43, Clause 4). The exercise of influence through the use of a voting right at a general shareholders’ meeting does not give rise to an obligation to indemnify losses of the company (Art.43, Clause 5).

3. General and Industry-Specific Joint-Stock Company Legislation

After some debate, the Working Group decided to not establish special industry-specific rules for different types of companies because acting in the framework of the present Model Law allows account to be taken of the particularities [osobennosti] of specific businesses; such specific regulations would, as a rule, demand from potential counterparties that they make themselves aware of such particularities, which can complicate trade and commerce. In addition, uniform court practice for all joint-stock companies is of major importance. For example, the right to participate in a capital increase depends on the registration of such capital increase, and the greater the number of various authorities involved such registra-tion (in Russia, for example, the registration of banks is obtained through the Central Bank), the less unified court practice will be regarding the registration of a capital increase. Furthermore, court practice will depend for instance on specific restrictions upon the authority of managers of state-owned enterprises. This puts a burden of assessing the lawfulness of acts on prospective counterparties; it also means that different practices will emerge instead of a more unified picture. However, it is neither sen-sible nor realistic, within the framework of a single law—especially if it is a model law—to fundamentally change the interrelationships amongst


various legislative acts. Therefore, references to other laws—including references to legal acts on privatization (Art.1, Clause 4), banking legisla-tion (Art.1, Clause 3) and to legislation on state-owned companies (Art.1, Clause 5)—merely underscore the importance of those laws for joint-stock companies.

4. Consequences of the Failure to Obtain a LicensePursuant to Article 3, Clause 3, failure to obtain a license does not affect the existence of a company but does limit its business activities.

5. The Accuracy of Corporate Identification DataIdentification of a company has been simplified by the rules relating to the name (Art.6, Clause 2, Art.6, Clause 3) and corporate location (Art.7).

Following the experience of western countries, specific sanctions for a violation of the rules mandating registration of an address are deemed sufficient. Thus, where documents are sent to (served at) the specified (registered) address at which a company is located, documents are deemed to have been duly served (Art.7, Clause 3); no additional verification of the right to use the address is required by the registering authorities. Provi-sions concerning the availability of information about the company in corporate correspondence (Art.8, Clause 1), and via a corporate website (Art.7, Clause 4) correspond to European rules.

The purpose of corporate identification rules is to simplify the iden-tification of the counterparty in contractual relations. In practice, it is assumed in the CIS that—when there is uncertainty about the identity of a counterparty—the contract does not exist or is invalid. In Germany, to the contrary—based on a similar rule to the one set forth in Article 183, Clause 1 of the Russian Civil Code—where there are doubts about a person’s intention to act on behalf of another (including a legal person), the person who is acting will be held liable. Likewise, such a stricter understanding of this civil-law principle is reflected in the provision governing the liability of managers for corporate identification in Article 8, Clause 2.

Chapter II. Corporate Formation

1. Corporate RegistrationRegistration, which presupposes publicity (Art.22, Clause 1), confirms the existence of a potential counterparty for third parties in the person of a company and, therefore, is the basis for legal consequences in form-


ing (Art.10, Clause 2), reorganizing (Art.154) and in liquidating (Art.182, Clause 5) a company and, therefore, false reporting—which is a criminal offense (Art.184). The regulation of a state register of legal persons by way of a separate law (see Art.2, Subclause 17) is of special importance for those events as well as for other facts that must be recorded in the state register (e.g., the requirements of the present Model Law with respect to the invalidity of a general shareholders’ meeting (Art.62) and changing the composition of a supervisory board (Art.107)). In any event, here, account needs to be taken of the interests of all parties in the process and of providing them with adequate possibilities for the protection of their rights. Since the interests of the various parties involved differ (in case of formation: the interests of shareholders; in case of reorganization: corporate shareholders and creditors; in case of liquidation: those of share-holders as well as those of creditors; in case of publication of resolutions of shareholders’ meetings: those of shareholders), and since the timing of confirming resolutions after judicial proceedings may have different consequences (e.g., a quick increase in authorized capital usually is more important than are speedy liquidation proceedings), the introduction of different procedures is deemed to be warranted.

2. Authorized CapitalIn preparing the rules and regulations governing payment of a company’s authorized capital, an effort has been made to achieve a balance between a legislative diminution in creditor risk, on the one hand, with the flexibility necessary for competitiveness in international markets on the other. In particular, attention has been paid to the importance of speed and the cost of corporate procedures.

3. Monetary InvestmentsIn registering a company, the monetary funds must be transferred to a corporate bank account, and the appropriate statement must be submit-ted to the registration authority (Art.17, Clause 2). The assumption is that corporate management should be free to use these funds and that the shareholders can instruct management only within the framework of their general authority. Prior to state registration, 50% of a monetary investment must be paid up (Art.17, Clause 1) and all the non-monetary investments must be transferred in full to the company (Art.17, Clause 3). No shares of stock have voting rights until they have been paid up in full (Art.17, Clause 4).


4. Non-Monetary Investments Types of property that may and may not be used as an investment in the authorized capital of a joint-stock company are set forth in Article 14 (Clauses 2 and 4).

Non-monetary investments, the value of which is in excess of 10% of the authorized capital, must be valued by an auditor or a licensed appraiser (Art.16, Clauses 1, 2 and 4). The same requirements also apply when a company purchases property from its founder within two years from the date on which the company was formed (Art.16, Clause 4).

The requirement that a founder must compile a corporate forma-tion report (otchet ob uchrezhdenii obshchesvta)—together with a valuation of non-monetary investments (Art.15, Clause 2)—and submit the same to the registration authorities (Art.15, Clause 3) provides the possibility for holding a founder liable for an improper valuation.

A waiver of the obligation to make an investment is not permitted (Art.40). A shareholder is liable for the untimely payment of its invest-ment by making provision for a fine comprising 5% of the value of such investment (Art.39, Clause 2) or, alternatively, the amount specified in the company’s articles of association (Art.39, Clause 3).

Although the Working Group has decided not to establish detailed rules and regulations governing the liability of shareholders for a reduc-tion in corporate funds—as is the case, for example, in German court practice—they nevertheless have set forth a basis for courts to acknowl-edge such liability in prohibiting the return of investments (Art.41) and introducing a special provision on the indemnification of all benefits and income obtained in the course of corporate formation in the event of a failure to comply with the appropriate provisions of the present Model Law (Art.42).

5. Articles of AssociationThe articles of association are an all-encompassing document binding to-gether corporate bodies and shareholders (Art.10, Clause 3). Requirements regarding the data that must be contained in the articles of association are in line with those recognized in European law (Art.12, Clause 3). The significance of the articles of association is based on their content being reliable and accessible to third parties. Accordingly, by allowing the inclu-sion of additional provisions in articles of association, Article 12, Clause 4, corporate investors can be attracted through special warranties and representations. For example, the articles of association may provide for the resolution of corporate disputes in private, commercial arbitration


courts (treteiskie sudy) (Art.12, Clause 5). In general, the provisions of the present Model Law are directed at the streamlining of the articles of as-sociation.

6. Corporate Formation by a Sole ShareholderThe only specific feature in case of corporate formation by a sole share-holder (Art.11, Clause 3) is the mandatory requirement for the shareholder’s resolution on corporate formation to be reduced to writing and stricter requirements for payment of authorized capital (Art.18).

Chapter III. Shares of Stock

1. Types of Shares of StockPursuant to the present Model Law, companies may only issue registered (and not bearer) shares of stock (Art.24), including fractional, authorized and placed shares of stock (Art.25); they can be common and preferred shares of stock (Arts.29, 30) which may be of different types (Art.31). Pre-ferred shares of stock may be cumulative (Art.31), providing their holders with a right to receive all the dividends for a specific period of time (the details of which are contained in Art.31, Clause 4).

The terms and conditions for the distribution of income are to be con-tained in articles of association (Art.12) along with the restrictions which may be imposed upon shareholders’ rights. Accordingly, the alienation of shares of stock may be subject to a company’s consent (Art.36), while the number of shares of stock directly or indirectly held by a shareholder also may be restricted (Art.34, Clause 6). As opposed to the trend in some Western countries to reduce the number of different types of shares, it has been assumed—for purposes of this Law—that a more important goal in CIS countries is providing for the possibility of individual solutions rather than ensuring the equality of shares of stock so as to enhance their tradability. It is impossible to make different provisions for the property rights of shareholders having similar rights as has been provided in Article 29, Clause 2, for common shares of stock.

The existence of provisions on no-par-value shares of stock (Art.26) in the present Model Law does not alter the principle of a fixed amount of authorized capital since the value of no-par-value shares of stock is based on the number of such shares of stock and their relation to the amount of authorized capital (Art.26).


Changing the legal status of any type of shares of stock (cf. the defini-tions of share types in Art.31) requires a resolution of a general shareholders’ meeting adopted by at least a 75% majority of the votes of shareholders holding shares of stock of that type (Art.34, Clause 4).

Shareholders holding shares of stock without voting rights may, nevertheless, take part in shareholders’ meetings regarding items on the agenda (Art.32, Clause 2) and receive appropriate information.

2. Authorized Shares of Stock and the Placement ThereofThe value of authorized shares of stock is set by a company’s articles of association (Art.25, Clause 1); therefore, the issuing of such shares is subject to a resolution of a general shareholders’ meeting (Arts.55 and 58). The board of directors is authorized to place the shares of stock (Art.125).

The details of the procedure for placing shares of stock and the status of outstanding shares of stock are to be governed by securities markets legislation (Art.25, Clause 2).

In order to preserve the nominal capital, a company is prohibited from redeeming more than 25% of all the outstanding shares of stock (Art.48).

3. Transfer of Shares of Stock The tradability of shares of stock is increased when the shares of any one type are identical. Unless otherwise established by the articles of associa-tion, the alienation of shares of stock must not be subject to any kind of consent (Art.3).

As a rule, the preconditions for the transfer of shares of stock and the good faith acquisition thereof are set forth in securities legislation or civil legislation; however, they often lack the requisite clarity. For instance, Russian securities markets legislation regulates the possession (vladenie) of shares of stock;1 yet, from a civil-law standpoint, possession2 traditionally is a factual relationship3 which, in its direct sense, does not exist as re-gards registered securities. Accordingly, the term ‘ownership’ (sobsvtennost’) would have been more appropriate. Also, for example, Russian legislation and judicial practice fail to make clear whether making a simple entry in a register is sufficient to transfer ownership rights to shares of stock or, whether there is an additional requirement that the parties express their 1 See Art.8 of the 1996 RF Federal Law “O rynke tsennykh bumag” (22 April 1996) No.39 FZ (as

amended), Sobranie Zakonodatel’stva RF (1996) No.17 item 1918.2 See Art.878 of the draft 1905 Russian Imperial Civil Code.3 See, for example, Art.392 of the 1994 RF Civil Code, (as amended), Sobranie Zakonodatel’stva

RF (1994) No.32 item 3301.


consent to the transfer in whole or in part. As a result, prerequisites for the following are also unclear:

— for a cause of action (isk) by a former owner for the return of prop-erty pursuant to civil-law provisions on unjust enrichment and on the procedure for recovery in the event of multiple transfers;

— for a cause of action of an owner of shares of stock demanding the recovery of property from the unlawful possession of another (i.e., vindication), registration of shares of stock in the name of a person who is not the owner of such shares probably would be interpreted as an infringement of ownership rights similar to unlawful posses-sion;

— the good faith acquisition of shares of stock, especially those factors which an acquirer must verify during the course of such an acquisi-tion.

The elimination of such lack of clarity as referred to above—while beyond the scope of the present Model Law—is of particular significance, especially for the purpose of ensuring appropriate guarantees on securities markets and in the activities of depositaries and registrars.

4. Registration of Shares of Stock and Reliable Information on the Transfer Thereof

The Working Group discussions on the system of the present Model Law to be used in maintaining records on the rights to shares of stock were extensive and highlighted the need for reforms. The direction of such re-forms is only partially reflected in the Law since the situation in different countries is quite varied, the draftspersons have differing views, and most issues concerning the shareholder register and depositary functions are traditionally regulated by securities markets legislation and other laws and regulations rather than by legislation on joint-stock companies. A typical form of fraud involving shares of stock and their registration is collusion between parties to one or more purchase/sale transactions (or other type of transfer) aimed at shifting as much liability as possible to the registrar, to the company or to good faith parties to the transactions. The more clearly liability is established and apportioned amongst the parties, the harder it will be to achieve such a result. Therefore, the thrust of rules and regulations must be to shift the risks onto the parties to transactions who might be involved in such fraudulent activities. Although an ordinary party to capital markets transactions should not be required to engage in a detailed verification of the lawfulness of the registration of previous


transactions, as many opportunities as possible should be accorded to ac-tions aimed at uncovering bad-faith conduct. In line with this approach, the provisions on recourse (regress) (Art.32) provide the legal basis for the registrar to shift the liability for incorrect registration onto the parties to a purchase/sale contract. In order to implement this concept, it is desirable for there to be a possibility to identify each share of stock so as to improve the ability to track the consequences of each transaction.4 Furthermore, stricter liability has been instituted for the registrar and the company for improperly maintaining the register (cf. Art.32, Clauses 7 and 8).

The reason for the attention accorded to the differences amongst the various situations is because improvement (sovershenstvovanie) of registra-tion and depositary systems also depends on the proportionate and detailed apportionment of liability. To the contrary, without such apportionment, providing detailed obligations for registrars and depositaries, on which, e.g., the Russian regulator5 has focused its glaze, can only result in further bureaucratization, more delays and higher transaction costs.

Chapter IV. Rights and Obligations of Shareholders

1. No Discrimination The basic principle of shareholding that is often mentioned only in legal theory, and is not reflected in the laws, is that of the equality of all share-holders as elaborated in Article 33, Clause 1. This principle does not have 4 See D. Stepanov, “Voprosy teorii i praktiki emissionnykh tsennykh bumag”, Khoziaistvo i

ekonomika (2002) No.3, 65ff. 5 Ruling of the Federal Financial Markets Service (5 April 2007) No.07-39/pz-n “Ob utverzhdenii

Polozheniia o poriadke vnesenia izmenenii v reestr vladel’stev imennykh tsennykh bumag i oshchustvlenii depositarnogo ucheta v sluchaiakh vykupa aktsii aktsionernym obshchestvom po trebovaniiu aktsionerov”; Ruling of the Federal Financial Markets Service (13 August 2009) No.09-33/pz-n “Ob osobennostiakh poriadka vedeniie reestra imennykh tsennykh bumag imitentami imennykh tsennykh bumag”; Ruling of the Federal Financial Markets Service (7 July 2009) No.09-25/pz-n “Ob osobennosti ucheta v reestre vladel’stev imennykh tsennykh bumag aktsii aktsionernykh obshchestv, prinadledzhashchikh na prave sobstvennosti Rossiiskoi Federatsii”; Ruling of the Federal Financial Markets Service (10 June 2009) No.09-20/pz-n “Ob osobennosti provendeniia v reestre vladel’stev imennykh tsennykh bumag; operatsii po izmeneniiu informatsii, soderzhashcheisia na litsevom schete nominal’nogo derzhatelia i (ili) doveritel’nogo upravliaiushchego, v sviazi s reorganizatsei ukazannykh lits v forme preobra-zovaniia”; Letter of the Federal Financial Market Service (29 June 2010) No.10-VM-04/14817 “Ob utverzhdneii sistemy vedeniia reestra”; Letter of the Federal Financial Markets Service (11 February 2010) No.10-VM-02/2620 “O poriadke primeneniie Prikaza FSFR Rossii ot 13.08.2009 No.09-33/pz-n ‘Ob osobennostiakh poriadka vedeniie reestra imennykh tsennykh bumag imitentami imennykh tsennykh bumag’”; and Letter of the Federal Financial Markets Service (28 March 2008) No.08-VM04-1/5750 “O primenenii reestroderzhateliami otdel’nykh trebovanii zakonodatel’stva Rossiiskoi Federatsii o tsennykh bumagakh”.


great importance in practice because it is repeated in the context of the definition of the rights of each type of shareholder. Nevertheless, it is appropriate to express this general principle by way of a general provi-sion for a better understanding of specific provisions and of answers to unique questions.

2. The Methodology of Introducing RightsTo the extent possible, the rights of shareholders set out in Article 34, Clause 1 are introduced not only by according a right but, also, indirectly by self-enforcing rules. Such a mechanism is generally accepted in the case of a violation of the right to attend a shareholders’ meeting (Art.34, Clause 1, providing in Art.98 that resolutions thereof are void ab initio) and of improper notice to a shareholder (Art.34, Clause 1, providing in Arts.98 and 100 that resolutions of a general shareholders’ meeting are void ab initio [nichtozhnie] or voidable [osporimye]). Furthermore, according to the present Model Law, information which is wrongfully (nepravomerno) not made available constitutes grounds for appealing a resolution of a general shareholders’ meeting (Art.99). Such provisions have been criticized in Germany because they can result in long, drawn-out shareholders’ meet-ings. Nevertheless, they have been included in the Model Law because they can also result in significant improvements in the information space; it is always difficult to enforce rules on provision-of-information requirements since, as a rule, the plaintiff is not in a position to independently assess the reliability of information which s/he has obtained while the courts—especially those in the CIS—will tend to give preference to the shareholder who controls an issuer and to assume that the requested information is of no particular importance. Only with respect to other violations may a court, according to Article 99, Clause 2, uphold the resolution which is being appealed, where the vote(s) cast by the shareholder who has filed the appeal would not have affected the voting outcome or where the viola-tions which have occurred are not material and where implementing the resolution would not have resulted in losses being incurred by, or have other adverse impacts on, said shareholder.

3. Special AuditShareholders are granted the right to appoint special auditors—under a court judgment—without the involvement of interested shareholders or upon the application of a shareholder holding more than 1% of the shares of stock (Art.37, Clause 2). If, as is the case in German law,6 auditors are required to provide public notice of the fact that a company has refused

6 See Art.318 (7) of the German Handelsgesetzbuch, reproduced at <http://www.gesetze-im-internet.de/hgb/>.


to disclose information, the unlawfulness of such failure to disclose in-formation will be apparent. The existence of this mechanism is especially effective in avoiding transactions aimed at providing unlawful benefits to shareholders or managers.

4. RedemptionA shareholder may demand the redemption of shares of stock by the company in the event of a reorganization or a delisting or shareholder disapproval of the resolution of a general shareholders’ meeting on the company’s major transaction and/or on a transaction of the company where there is a conflict of interest which resolution was adopted according to the procedure established by this Law and the company’s articles of as-sociation (Art.46, Clause 1).

5. Preventing Bad-Faith Conduct of ShareholdersTo prevent bad-faith dealings or blackmail by shareholders, an obligation has been included for shareholders—when exercising their rights—to take into account the interests of the company and other shareholders (Art.33, Clause 2). While there is no such provision in German law, German courts have recognized a general principle of good-faith conduct by numerous judgments that are difficult to systematize and introduce into legislation because, in part, they depend on the procedural situation. Examples of acts that have been deemed to constitute abusive practices in Germany have included lawsuits seeking the invalidity of resolutions of general shareholders’ meetings due to various alleged violations, acts obvious from the circumstances, directed at a financial settlement for withdrawing a claim, or acts of a controlling shareholder hindering a company from obtaining a license to particular mineral deposits. The goal of avoiding a detailed description of bad-faith practices in the present Model Law is to facilitate the development of court practice and to render it more dif-ficult to evade the circumstances mentioned in the legislation by apparent compliance with its provisions.

6. Shareholder AgreementsOwing to numerous disputes over the possibility of concluding sharehold-ers’ agreement, Article 44 permits such agreements on a broad scale, in-cluding an agreement to refer disputes to commercial arbitration (Art.44, Clause 6). Except for the duty to vote on the proposals of corporate bodies (Art.44, Clause 3), a company may be a party to shareholders’ agreements (Art.45). In certain circumstances, a shareholders’ agreement must be provided to the company (Art.44, Clause 7).


Chapter V. Company Dividends Chapter VI. Authorized Capital of a Company

1. IntroductionAs a legal person, a joint-stock company may own property. A joint-stock company is liable for its obligations with all its property while the share-holders are not liable for obligations of the company (Art.3, Clause 1, and Art.4). On the one hand, this principle of the limitation of liability satisfies economic requirements. On the other hand, there can be risks both for creditors and shareholders in limiting liability. In the legislation of some countries—for example, in the laws on joint-stock companies of certain CIS countries—the limitation of liability is considered to have a particular relevance and legislation, in turn, is supposed to provide for specific rules and regulations protecting shareholders and creditors with respect to corporate property. The relevant provisions of the present Model Law are set out in Chapters V and VI.

2. International StandardsIn spite of the fact that the legislation of many countries contains similar rules and regulates governing issues of corporate property, some important differences of opinion still remain. The present Commentary sets forth several points of view. Some, mostly Anglo-Saxon, commentators believe in the proposition that legal norms governing corporate property are not always necessary; occasionally, they can even be superfluous.7 Below are the arguments in favour of this statement:

(a) The basis of a joint-stock company is the agreement amongst shareholders. In concluding this agreement with the company, the principle of freedom of choice should apply to the terms and conditions of such agreements, i.e., each shareholder is entitled to make its own proposals with respect to corporate property;

(b) Such freedom of choice is restricted where it affects the interests of creditors. The latter are also entitled to provide guarantees for themselves in the agreement since the goals of company law do not

7 See Bernard S. Black, Reiner H. Kraakman and Anna S. Tarassova [sic], Guide to the Russian Federal Law On Joint Stock Companies (Kluwer Law International. The Hague, 1998); also published as: Bernard Black, Reiner Kraakman and Anna Tarasova, Kommentarii Federal’nogo Zakona Ob Aktsionernykh Obshchestvakh (Labirint Press, Moscow, 1999) and reproduced at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670&http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 >.


encompass the protection of creditors’ interests; it is bankruptcy legislation which is called upon to protect creditors;

(c) Along with creditors, investors also need protection on securities markets. However, once again, this is not a goal of legislation govern-ing joint-stock companies; such issues are regulated by normative acts on securities markets;

(d) The number of insolvent companies in European countries sug-gests that special provisions for protecting corporate property are inadequate in dealing with the challenges which they are facing.

In their turn, authors of European legislation (except for the UK) offer the following counter-arguments—thus, supporting the need for provisions regulating matters dealing with corporate property:8

(a) The basis of a joint-stock company is not only on an agreement amongst shareholders because this organizational-legal form of legal persons presupposes a large number of small investors. The contractual model is unacceptable for this form of a company, and legislative regulation makes it possible to reduce transaction costs—in any event, those for small investors;

(b) The regulation of the issues related to corporate property requires specific provisions since they will also help to ensure enhanced guarantees for creditors. Unlike regulations governing relations between an insolvent debtor and a creditor that operate only when a company already has grounds to initiate bankruptcy proceedings (in a repressive manner), provisions aimed at protecting corporate property are designed to play a role at an earlier stage (in a preven-tive manner);

(c) Normative rules ensuring protection of corporate property provide guarantees directly to shareholders—especially those whose share in the company’s total capital is below 50%. This affords protec-tion from resolutions which are forced upon minority shareholders by majority shareholders regarding the management of corporate property. At the same time, normative rules are also required to regulate securities markets. However, their effect is insufficient to perform this function in full. In this regard, attention should be paid to American law, the development of which—having in mind the jurisdiction in this field is at the federal level—is limited to legislation regulating securities markets;

(d) Legal history shows that, in their early stages of development, all countries have had strict regulations governing issues of corporate

8 See Marcus Lutter (ed.), Legal Capital in Europe. European and Company Financial Law Review, Special Volume 1 (Berlin, Walter de Gruyter, 2006).


property. Only as time passed and additional institutions and pro-fessional groups appeared on the stage did the legislation become less strict. Countries which are in their early stages of development find it extremely hard to skip certain phases of development.

In the European Union, those who support stricter legal rules for the regulation of the issues connected with corporate property have embodied them in the principles of the 1976 Second EU Directive.9 More recently, this decision has been widely criticized in that the validity of the above argument has been questioned. A survey conducted on behalf of the Euro-pean Commission and published in 2008 examined whether or not there are alternatives to the provisions currently regulating issues connected with corporate property in EU Member States. The survey results suggest that the compliance costs resulting from the use of the European system to manage corporate capital are not much greater than those associated with legal regimes based on other systems.10 The survey’s authors believe this is at least one good reason against making any significant changes in the existing regime.

Thus, in drafting the present Model Law, account has been taken of the fact that some issues, for which international standards have not yet emerged, remain under discussion. Nevertheless, at least on some specific questions, legislators in most of the major jurisdictions have managed to devise solutions which are similar if not uniform; for example, this relates to the obligation of shareholders with respect to making contributions that lead to the formation of the company’s share capital (Art.38). How-ever, different approaches exist as to: (a) what kind of property may be invested (e.g., whether property rights or claims can be treated as permis-sible contributions to the capital of a company); (b) whether (and what kind of) a mechanism needs to be in place—where a company’s capital is formed as a one-time investment—to protect it from the encroachments of shareholders, such as those resulting from an increase in the amount of dividends paid out (capital-preservation principle). As yet, there is no clear, common position among legislators—in either the more developed 9 EU Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards

which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and altera-tion of their capital, with a view to making such safeguards equivalent, reproduced at <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31977l0091:EN:HTML>.

10 Feasibility Study on an Alternative to the Capital Maintenance Regime Established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an Examination of the Impact on Profit Distribution of the New EU Accounting Regime (KPMG, January 2008), reproduced at <http://ec.europa.eu/internal_market/company/capital/index_en.htm>.


countries or in the CIS region for example—as to whether restrictions should be established on dividend payouts to shareholders. This issue will be discussed later in the present Commentary.

The fundamental difference between the systems, above all, is to be seen in the following. One major, contentious issue is the requirement for a minimum amount of capital for forming a joint-stock company. According to Euro-pean law, from the moment of forming a joint-stock company, a statutory minimum amount of capital must be invested in the company; American law, on the other hand, has no such requirement.11 However, one needs to keep in mind that legal norms regulating activities on securities markets mandate a minimum amount of share capital prior to the distribution of shares of stock amongst the founders of the company.

There is no common position (or standard) reflected in the domestic legislation of either more developed or transition countries as to whether or not the amount of capital needs to be specified in the articles of as-sociation. For example, according to European law, the amount of capital must be specified in articles of association; US law, on the other hand, once again knows no such requirement. There is also fundamental difference as to the issue of the authority which must be granted to a shareholders’ meeting with respect to the management of a joint-stock company’s capi-tal. In European countries, the right to make such decisions is accorded by legislation to a general shareholders’ meeting; in other countries, such rights are regulated by the articles of association.

Opinions vary as to the consequences of reducing the value of the net assets (equity capital) of a joint-stock company. Under European law, the value of the capital depends on the amount of the ‘authorized capital’ specified in the articles of association; in other countries, the linkage of regulatory provisions to the relation between a random amount specified in articles of association and the value of the net assets (equity capital) is not yet considered to be wholly successful.

At the same time, there also are some points of convergence. First of all, it should be noted that neither the laws of the US states or of EU Member States contain any strict provisions as to whether a share must have a par value. For a long time, a share had to have some par value. At the same time, along with the notion of par-value shares of stock, there is now also the concept of a no-par-value share. Ultimately, it was decided that specific provisions should be established to provide guarantees to shareholders—in case of an issue of new shares of stock—and to creditors—in case of a reduction of the company’s capital.

11 The US Model Business Corporation Act (MBCA) has been used in this project although in general corporate law is regulated in the US at the state level (and there is no federal legislation on joint-stock companies). The MBCA is reproduced at <http://apps.americanbar.org/buslaw/committees/CL270000pub/nosearch/mbca/assembled/20051201000001.pdf>.


3. Applicable Law of the CIS CountriesLaw-making processes in the CIS countries have been influenced by both concepts. Thus, there are some authors of civil codes who have supported the system based on European law; this is evidenced by the fact that the first part of the 1994 CIS Model Civil Code12 (Arts.124–127) contains provisions on an ‘authorized fund’13 (ustavnyi fond) that are partially reflected in the national civil codes developed on the basis of the Model Civil Code.

Legal norms regulating issues connected with ‘authorized capital’ are contained in the first 1996 CIS Model Law “On Joint-Stock Companies”.14 Another point of view is seen in several national laws “On Joint-Stock Companies” based, to a certain degree, on the Black/Tarassova Model Law.15 As regards provisions regulating the company’s capital, these authors have tended to follow the Anglo-Saxon model.

Since the Working Group did not wish to neglect the rules and regu-lations of civil codes, they have taken the above-mentioned provisions into account although they have relaxed the requirements somewhat. An example is the framework for the minimum amount of stock capital; pursuant to these provisions, the minimum amount is so small that it loses its reason. Thus, the above-mentioned laws occasionally are referred to as ‘hybrid’ laws.

In developing its 2003 law on joint-stock companies, Kazakhstan has adopted the Anglo-Saxon concept. This is evidenced for example by the fact that in Kazakh law—despite use of the term ‘authorized capital’—there is no connection between the amount of capital specified in the articles of association and the net assets (equity capital) of a joint-stock company.16 The 1997 Moldovan law on joint-stock companies is based on European Union regulations. Here, the connection between the author-ized capital—the figure specified in the articles of association—and the equity capital of a joint-stock company is much more evident. In the Russian legislation, one can observe a certain inconsistence in using one

12 See 1994 CIS Model Civil Code (Part I) (29 October 1994), reproduced at <http://www.iacis.ru/html/?id=22&pag=29&nid=1>.

13 Using the notion of ‘authorized fund’ is not a best practice since it is associated with the regulation of state-owned enterprises. Therefore, it has been replaced by the term ‘authorized capital’.

14 See Art.4 of the CIS Model Law “Ob aktsionernykh obshchestvakh” (17 February 1996), re-produced at <http://www.iacis.ru/html/?id=22&pag=33&nid=1>.

15 See Black, Kraakman and Tarassova, note 7 supra.16 See Arts.10 and 11 of the 2003 Kazakh Law “Ob aktsionernykh obshchestvakh” (13 May 2003),

(as amended), reproduced at <http://www.pavlodar.com/zakon/?dok=02807&ogl=all> and (in English) at <http://www.ebrd.com/downloads/legal/securities/kazakhjs.pdf>.


and the other concept.17 In part, this is a function of the discord between some provisions of the 1995 Russian Law “On Joint-Stock Companies” and additional normative acts governing specific issues related to the un-derstanding of charter capital [ustavnyi kapital]. It should be furthermore noted that, at present, opinions continue to differ in Russia as to how further developments in this area should proceed.

Thus, for example, the authors of the 2005 Russian Concept for the Modernization of Corporate Legislation have proposed that the term ‘authorized capital’ (ustavnyi kapital)18 while the draftspersons of the 2009 Russian Concept for Legislation on Legal Persons have recommended that more attention be paid to guarantees and to enhancing the concept of legal persons.19 Normative provisions of other CIS countries—the last of which to be adopted was the 2008 Ukrainian Law “On Joint-Stock Companies”20—are quite similar to the legal provisions in effect in the Russian Federation since these countries have not yet elaborated an initial policy document. In light of the above, the conclusion can be drawn that no common standard has been developed in the national legislation of the CIS countries.

4. Provisions of the Present Model LawA more detailed discussion of the concepts and basic provisions of the present Model Law follows.

4.1. Various Options AvailableAs we have highlighted above, there are no clear standards which have been developed—either in the international arena or in the national legislation of the CIS countries. One can observe that both the Anglo-Saxon and European concepts have been utilized. As a consequence, the authors of the present Model Law have decided not to use any of these models as a basis. To the contrary, they offer national legislators the opportunity to make their own choice. Therefore, two options have been proposed: A

17 See Art.25 of the 1995 RF Law “Ob aktsionernykh obshchestvakh” (as amended), Sobranie Zakonodatel’stva RF (1996) No.1 item 1.

18 See Clause 30 of the 2005 “Kontseptsiia razvitiia koporativnogo zakonodatel’stva na period do 2008 goda”, Zakon (2006) No.9, 9-36, prepared by the RF Ministry of Economic Development; reproduced at <http://komitet2-5.km.duma.gov.ru/site.xp/051053051.html>.

19 See Clause 55 of the 2009 Draft “Kontseptsiia razvitiia zakonodatel’stva o iuridicheskykh litsakh”, prepared by the Council for Codification and Improvement of Civil Law under the President of the Russian Federation and published in the spring of 2009 for public discussion; reproduced at <http://www.privlaw.ru/vs_info2.html>.

20 2008 Law of Ukraine “Ob aktsionernykh obshchestvakh” (as amended), Vidomosti Verkhovnoi Radi Ukraini (2008) Nos.50-51 item 384, reproduced at <http://zakon.rada.gov.ua/cgi-bin/laws/main.cgi?nreg=514-17>.


and B. Option A of the present Model Law is based on the regime in force in the EU Member States, specifically the 1976 Second Directive.

The point of convergence between these provisions is the concept of authorized capital, which refers to a figure specified in the articles of association of a joint-stock company (Art.12, Clause 4, and Art.52). This concept needs to be distinguished from that of cash assets of a joint-stock company specified on the balance sheet in line-item ‘assets’ and ‘net assets’ of a joint-stock company. (Art.53).21

The concept of authorized capital is based on the notion that the figure specified in the articles of association represents the lower limit of the value of a joint-stock company’s net assets. Legislative provisions should clearly establish that where a joint-stock company is formed, the net-asset-value should not be less than the amount of authorized capital and that this value should not be reduced during the company’s lifetime. Where such a reduction does occur, the bodies of a joint-stock company are required to ensure protection of the rights and interests of creditors. This means that it is unnecessary to specify the ‘authorized capital’; rather, legal rules and regulation rules should provide for a link between the value of the net assets (equity capital) and the authorized capital.

Option B of the present Model Law is based on the model currently used in Kazakhstan. The key idea here is that the total amount of a company’s property is determined only as of the formation date of the joint-stock company. Therefore, in this alternative Option B, the concept of authorized capital has been abandoned and, instead, the concept of ‘starting capital’ (startovoi kapital) has been used. This was done in spite of the fact that—upon formation of a joint-stock company—its shareholders assume the obligation to pro-vide this amount as an investment. From this moment on, any changes in the amount of the net-asset-value of a joint-stock company only are reflected on its balance sheet and no longer depend on the value specified in the articles of association. Therefore, in this context, the provisions regulating the process of compiling financial reporting statements, as well as the contents and the form thereof, are particularly important. These reports, in turn, must contain a line-item for subscribed capital (in line

21 The term ‘net assets’ is used because it is widespread in CIS countries. European law uses the term ‘own capital’ [‘Eigenkapital’ = equity capital] that is not the direct equivalent of net assets. Pursuant to the provisions of European law, the term ‘own capital’ refers to the liabilities item on the balance sheet of a joint-stock company. It includes subscribed capital, additional paid-in capital, and various reserve funds, as per the EU “Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies”, reproduced at <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31978L0660:EN:NOT>.


with European terminology) by which the value of investments made by shareholders is specified.22

Actually, the difference between these two options is smaller than first might be expected. Both concepts are very similar: first of all, in establish-ing that the articles of association of a joint-stock company must set the amount to be invested upon formation. Formally, the concepts differ in the approach to the matter of whether the issuance of new shares of stock, i.e., an increase in capital or the cancellation of shares of stock, results in appropriate amendments to the articles of association. The provision mandating that appropriate amendments be made to the articles of association is available in option A only. Thus, in option A, a resolution to change the capital is within the prerogatives of the general shareholders’ meeting; under option B, this power is not reserved only to the general meeting. This is evidenced by the example of authorized shares of stock, i.e., the important thing here is not the shares of stock already in existence but, rather, the authority of management bodies to issue shares of stock in the future (Art.52 (3), Option B). Op-tion A does not employ the concept of authorized shares of stock, and the general shareholders’ meeting delegates the requisite authority to the management bodies (Art.58, Option B). Thus, exceptions have been made in Option A from the principle of the competence of the general shareholders’ meeting, while in option B the competence of the board of directors may be established in writing (Art.54, Option B).

The options differ significantly, however, as to the issue of which governmental agency has authority to perform regulatory functions. Option B grants the ex-clusive right to the governmental authority supervising securities markets. In Option A, in addition to a securities markets authority, a regulatory function is also performed by the body maintaining the state register of legal persons. The problem inherent in Option A is how to determine the scope of authority of each governmental agency. The practical experience of western countries demonstrates, however, that this challenge can be resolved. The advantage of this concept is that dividing the authority of governmental agencies into regulating securities markets and regulating the lawfulness of acts of legal persons promotes a system of clear sub-ordination similar to that used for supervising the activities of limited liability companies.

4.2. Transparency of Property RelationsWhen making a decision in favour of a certain option, one also needs to consider that the historical context of the concept of authorized capital is similar to the principle of transparency. The articles of association establish 22 In option B, the ‘subscribed capital’ line-item on the balance sheet is used to perform the same

function as that performed by ‘authorized capital’ in option A.


the amount of authorized capital which is publicly available information (Art.8). In this fashion, the transparency requirement is met. The fact that the transparency of property relations is currently ensured by an-other method, in part, by maintaining balance sheets, is confirmation of the proposition that it is unnecessary to fix the amount of capital in any other documents than the articles of association.

However, in view of the above, we are facing an issue of whether a concept offers sufficient guarantees where it is based only on the provi-sion of information to shareholders and investors in the form of reports. Given that the rules for maintaining balance sheets often can change, the answer will be a negative one. Therefore, additional guarantees should be provided to shareholders and creditors. To do this, special provisions need to be developed to regulate the raising of capital, and the amount thereof should be specified in a separate document. Within the framework of the present Model Law, an attempt has been made to develop rules and regulations that would—in addition to the observance of the transpar-ency requirement—provide for the protection of corporate property, thus providing guarantees to shareholders, investors and creditors.

4.3. Authorized Capital, Par Value of Shares of Stock and No-Par-Value Shares of Stock

All CIS countries, except for Kazakhstan, have regulations establishing that a company’s authorized capital consists of the par value of the com-pany’s shares of stock purchased by shareholders.23 Some of those laws contain a provision that the par value of all the issued shares of stock must be equal.24

Such provisions raise a number of issues, the key one of which is whether shares of stock should have any par value whatsoever. In Kazakhstan, the par value25 of shares of stock matters only when the initial capital of a company is formed by its founders at the stage of setting the company, while in Moldova the law-making authorities provide different options from which to choose.26 In other CIS countries, law-making authorities

23 For example, Art.25 (1) of the 1995 RF Law “Ob aktsionernykh obshchestvakh”, op.cit. note 17; and Art.40 of the 1997 Moldovan Law “Ob aktsionernykh obshchestvakh” (as amended), Moni-torul Oficial (12 June 1997) No.38-39, Part I, item 332, reproduced at <http://www.law-moldova.com/law_moldova_rus.html>.

24 For example, Art.25 (1) of the 1995 RF Law “Ob aktsionernykh obshchestvakh”, ibid.; and Art.12 of the 1997 Moldovan Law Joint-Stock Companies, ibid.

25 See Art.12 of the 2003 Kazakh Law “Ob aktsionernykh obshchestvakh”, op.cit. note 16.26 See. Art.12(6) of the Model Law.


require that the par value be established, which has recently been the subject of extensive debate in Russia.27

In this respect, the present Model Law provides an opportunity to choose between par-value shares of stock and no-par-value shares of stock (Art.26). The experience of western countries demonstrates that both concepts can be applied in practice despite the fact that, for a long time, the concept of par-value shares of stock in all countries has predominated and the practice has only been abandoned some three decades ago. Therefore, it is extremely important to determine the consequences which may result from the adoption or cancellation of par-value shares of stock.

The main problem is the scope of rights granted to shareholders. Consider the ‘one share – one vote’ principle which has arisen in the law of those states that have chosen to do without par value. No-par-value shares of stock provide equal rights. However, in the past, a different principle was followed virtually everywhere: the rights of shareholders depended on the par value of their shares of stock (equity stake [dolia]) in the total capital of a joint-stock company. The present Model Law also contains a provision that makes a voting right dependent on the par value of shares of stock (Art.88, Para. 3). Thus, the model whereby the amount a shareholder contributed to the authorized capital of a joint-stock company determines the scope of rights granted to such shareholder is as reasonable as is the concept of the formal equality of shares of stock according to the ‘one share – one vote’ principle.28

Some CIS countries have made an attempt to combine both principles within a provision mandating that all the shares of stock must have equal par value. While this is possible, in this case, the par value would again perform only a part of its functions, i.e., it may be economically feasible to issue shares of stock with different par values. The key argument in favour of a par-value share is its importance in protecting the rights and interests of shareholders. Where the legislation contains the appropriate provisions, such protection may promote the situation whereby par value will determine the minimum amount of an equity stake (participatory unit [pai]) and the scope of rights obtained during the acquisition of shares of stock.

27 See Clause 16, “Kontseptsiia”, op.cit. note 18; and Andrei Anatolievich Glushchetskii, “Nominal’naia stoimost’ aktsii islishnii rekvizit emissionnoi tsennoi bumagi ili vostrebovanii pravovoi institut?”, Zakon (2010) No.5, 119.

28 In this respect, we may face an objection, based on the fact that the market value of shares is often higher than their par value, which is quite right. However, in this situation it makes no difference since the market value only matters for a joint-stock company as of the date of a share issue; but, at that very moment, any par value may be set for the shares.


In this connection, special attention should be paid to Article 63 of the present Model Law Option A, prohibiting the issuance of shares of stock the value of which is below par value. This provision is warranted because par value is set for each share, and this par value is of special importance.29 At the same time, this Article also regulates the issuance of no-par-value shares of stock. In such a case, the price must not be lower than the nominal equity stake (participatory unit) in the amount by which the capital is being increased.30 Thus, even shares of stock with no-par-value are subject to a lower limit calculated from a mathematical perspective.

4.4. Minimum Basic Capital (Minimum Authorized Capital) Upon Formation of a Joint-Stock Company

A much debated issue is the notion of the minimum amount of authorized capital that the shareholders must invest when forming a joint-stock com-pany. The initial view which prevailed was that the minimum amount of basic capital must not be so large as to become an obstacle in the formation of a new company. As a result, many CIS countries established extremely low minimum amounts of basic capital.31 However, more and more support is being gained by the proposition that a legal form such as the joint-stock company has not been established solely to promote the creation of small businesses. This is rather one of the goals of the legislation on limited liability companies. A joint-stock company is a legal form that is intended for long-term oriented capital markets. This viewpoint has been used as the basis for the requirements that a company must have a significant amount of minimum starting capital in order to obtain a license for certain types of activity (e.g., banking, insurance, the securities markets). Accordingly, a higher minimum amount of basic capital needs to be invested in forming a joint-stock company. A similar provision is in force in Kazakhstan, where the minimum amount of basic capital (in US dollar terms) is approximately USD 300,000.32 The present Model Law does not establish any minimum amount of authorized capital of a joint-stock company owing to differences in the legislation of different CIS countries. Russian sources recommend following the European model.33

29 Art.26, para. 2 of the Model Law.30 Art.63 para. 2 of the Model Law.31 Art.26 of the 1995 RF Law “Ob aktsionernykh obshchestvakh”, op.cit. note 17; and Art.14, Clause

1 of the 2008 Law of Ukraine “Ob aktsionernykh obshchestvakh”, op.cit. note 20. 32 See Art.10 of the 2003 Kazakh Law “Ob aktsionernykh obshchestvakh”, op.cit. note 16. The

minimum amount of a company’s authorized capital is equal to 50,000 times the monthly specified rate set by the Kazakh Law.

33 See Andrei Anatolievich Glushchetskii, “Ustavnyi capital khoziaistvennogo obshchestva: Te-oreticheskie spory i prakticheskie aspekty”, Khoziaistvo i pravo (2010) No.5 (prilozhenie), 45.


4.5. Shareholders’ Rights during Dividend Payout, Issue/Cancellation of Shares of Stock

Shareholders’ rights with respect to management of a company’s capital are a key issue that is considered not only in the present Model Law. Pursuant to the Model Law, a resolution to pay out dividends is adopted by a general shareholders’ meeting (Art.46, Para.3). But in any case, a shareholders’ meeting is not entitled to pay out more than the amount which has been established by the board of directors or the supervisory board. As regards this issue, the Model Law is based on the experience of national legislation. Attention should be paid to Article 51 of the Model Law dedicated to the problem referred to in many countries as ‘squeezing out of shareholders’. If a shareholders’ meeting decides not to pay out dividends despite the fact that the joint-stock company has generated profits, such a resolution (to a certain degree) may be appealed in court. A shareholders’ meeting may also be convened in order to adopt a resolution to issue additional shares of stock (increase authorized capital) and to cancel shares of stock (reduce authorized capital).34 In this case, the two options contain totally differ-ent provisions. Thus, the starting point is that of the authorized shares of stock, mentioned in both options A35 and B.36 In Option A, the concept of authorized shares of stock is presented as follows: a shareholders’ meeting may delegate to the board of directors or the management the right to adopt a resolution on increasing the capital by issuing additional shares of stock within the limits of the declared capital of the company. Thus, the shareholders’ meeting reserves the right to set certain conditions. In addition, such authority is provided for a limited period. Pursuant to Option B, the board of directors may be accorded an unlimited right to adopt a resolution to issue additional shares of stock.

Apart from the authority of a general shareholders’ meeting, a deter-mination needs to be made of the minimum number of votes required for a general shareholders’ meeting to adopt valid resolutions. Generally, the rule of a qualified majority is used (2/3 or 3/4 of all votes). The present Model Law does not contain any general norms regulating such issues (Art.87); however, it proposes rules and regulations concerning some particular is-sues.37 Furthermore, those provisions have special importance pursuant to which the norms regulating these issues are established by a shareholders’

34 See Art.55, para. 2, Art.64, para. 2 of the Model law Option A, Art.54, 61, para. 4 of the Model Law Option B.

35 See Art.58 of the Model Law Option A.36 See Art.52, para. 3, Art.54 of the Model Law Option B.37 See Art.56, para. 1, Art.57, para. 1, Art.62, para. 1, Art.64, para. 4 of the Model Law Option A,

and Art.60, para. 1, Art.61, para. 4 of the Model Law Option B.


meeting.38 Thus, shareholders rights are not limited by the general right to vote; shareholders are authorized to adopt their own resolutions.

A key shareholder right is that of purchasing shares of stock in the event of a new issue or capital increase in an amount proportionate to their interest in the company’s total capital. The present Model Law also contains such norms.39 In this respect, one innovation of the Model Law is that by which it provides for the possibility to deprive shareholders of this right by a resolution adopted by a qualified majority of votes. From a financial point of view, this will be helpful to attract strategic investors. Thus, management bodies have a duty to motivate their acts, as described in the appropri-ate regulation. Since the right has been defined in more concrete terms, shareholders now have the possibility of exercising it in a specified fash-ion.40 This possibility is necessary so that even shareholders who lack the funds to purchase the proposed shares of stock themselves would be in a position to utilize the right accorded to them in their own interests.

There is no specific answer in the present Model Law to the ques-tion concerning the legal consequences which may arise from violations of shareholder rights. The legislative tools applicable in such cases are set forth in the regulations on maintaining registers, pursuant to which reg-istration is granted provided that the obligation to accord a pre-emptive right to purchase shares of stock has been fulfilled. In the event that the shareholders’ right to pre-emptive purchase is violated, the shareholders may only demand indemnification of expenses and losses from the com-pany’s management body.

4.6. The Efficient Capital Raising PrincipleAs has been mentioned in the introduction, it is a controversial issue as to the extent to which a law must establish that only such property which has a value may be invested in the company’s capital. In Articles 14 and 16 of the present Model Law, the Working Group has made an attempt to impose higher requirements on the quality of investments since, in the past, investments often were made up of property, claims or services that had no value and that brought no value to a joint-stock company.41

One challenge is whether raising capital by way of a set-off should be allowed. In western jurisdictions, this financing method is called a ‘debt-38 See Art.55, para. 3 of the Model Law Option B, Art.54, para. 2 of the Model Law Option B.39 See Arts.59, 60 of the Model Law Option A, Arts.57, 58 of the Model Law Option B.40 Art.60, para. 5 of the Model Law Option A, Art.58, para. 5 of the Model Law Option B.41 Art.14, para. 4 of the Model Law. The issue of whether a set-off is possible between company

and shareholders for the services which already have been provided remains unresolved.


equity swap’. Recently, this term also has begun to be used in Russian law.42 The present Model Law also provides for such a possibility (Art.14, Clause 3). The value of the claim in this case is calculated according to its market value—which may be quite low during a corporate crisis—rather than its book value. However, according to a number of sources in the lit-erature, civil codes contain a prohibition against set-offs with a joint-stock company.43 The same prohibition can be seen in Western law. This is not a particular problem since the essence of the prohibition is that a shareholder is not entitled to repay its debt by set-off to a joint-stock company with respect to outstanding investments, while the joint-stock company does have a right to set-off its obligations by transferring its shares of stock. This does not violate the provisions of Article 40 of the Model Law.

Apart from the obligation to make real investments to the capital of a joint-stock company, the present Model Law regulates two additional issues. The first one deals with governmental supervision of whether the in-vestments were really made by the shareholders themselves. In a system with clearly established authorized capital, such supervision is exercised by the authority that deals with registration of amendments to the articles of association.44 In a system where the issuance of shares of stock does not require amendments to the companies’ register (state register of legal persons), this function is performed by the authority dealing with supervi-sion of securities markets.45

The second issue concerns instances where an investment has been paid only in part. Article 19, clause 5, of the present Model Law provides for the responsibility of shareholders, upon formation of a joint-stock company, to invest capital the value of which should be at least equal to the amount of authorized capital. Article 184 of the Model Law proposes criminal liability for such acts.

4.7. Changing the Capital of a Joint-Stock CompanyAnother innovation proposed in the present Model Law is the differentiated processes resulting in issuing or cancelling shares of stock. The decisive point according to Option A is that the point of contact is seen in the provisions regulating the procedure for changing authorized capital. According to Article 56 of the present Model Law, authorized capital may be increased by issuing additional shares of stock, while Article 57 provides for the possibility of

42 Law No.352, 27 December 2009, Sobranie Zakonodatel’stva RF (2009) No.52 (Part I) item 6428.

43 Art.124, para. 2 of the 1994 CIS Model Civil Code; and Glushchetskii, op.cit. note 33, 14.44 Art.21 of the Model Law.45 Art.56 of the Model Law Option B.


such an increase by a change in the capital reserves of a company. This process is of great importance because this provision also deals with chang-ing the par value of shares of stock (a most complicated issue).46 On the one hand, it sets a strict requirement of equality for all shareholders. On the other hand, there is the interconnection with the provisions made on a company’s balance sheet. Both processes—albeit in simplified form—are also mentioned in Option B of the present Model Law.47 Since this option does not use the concept of authorized capital, it does not contain any provisions regulating the procedure for adopting a resolution to increase it. Instead, there is a link to accounting data. However, according to the rules and regulations of European law, the decisive factor is the line-item of a balance sheet dealing with subscribed capital;48 this tracks invest-ments which have been made by shareholders. In case of the issuance of additional shares of stock, the amount reflected in this line-item will increase, and the appropriate amount will be specified in the resolution on issuing new shares of stock.

The process of changing the capital of a joint-stock company de-scribed only in Option A of the present Model Law is that of an increase in authorized capital resulting from the issuance of authorized shares of stock (Art.58). As has been mentioned above, this creates a problem for the apportionment of authority between the shareholders’ meeting and the company’s management bodies. Option B of the present Model Law affords discretion to shareholders in this regard.

Another innovation is that which is set forth in Articles 61 and 62 of the present Model Law Option A (and in Articles 59 and 60 of the Model Law Option B) the goal of which is to regulate processes for the creation of debt instruments convertible into shares of stock or the right, at a later date, to purchase shares of stock at a reduced price. In the past, this occasionally has given rise to abuses. The starting point for this provision is the situation where shareholders enjoy extensive rights to take part in a company’s business, which is conditioned by the necessity for adopting a resolution of the shareholders’ meeting to change the capital. Such rights heighten the degree of transparency of relations and provide a possibility for bet-ter governmental supervision. Thus, the proposed provisions, in part, set forth detailed rules necessary for the adoption of such a resolution by the shareholders.

46 Glushchetskii, op.cit. note 33, 11.47 Arts.54, 55 of the Model Law Option B.48 Art.9 of the Fourth Council Directive 78/660/EEC of 25 July 1978, op.cit. note 21.


4.8. Dividend Payment and Capital-Preservation PrincipleOne of the basic shareholder rights is that of participating in a company’s profits. This right is provided for in Article 49 of the present Model Law by analogy with the laws on joint-stock companies of CIS countries with-out any modification. However, new provisions have been included in the present Model Law concerning the second principle set forth virtually in all the legal rules regulating formation, activities and liquidation of companies, although it is expressed with particular firmness in European law: the joint-stock company capital-preservation principle. This principle (Art.41) is incorporated in the regulations aimed at preventing the return of a joint-stock company’s capital to shareholders other than in the instances estab-lished for such matters. Note should be made of the fact that the provisions contained in Article 42 of the Model Law represent an innovation: on the basis thereof, a right of recourse arises for a joint-stock company to proceed against shareholders where the latter have unjustly [neobosnovanno] received an additional share in the company’s capital. In the legislation in force in CIS countries, an attempt has been made to resolve this issue by developing provisions regulating related-party transactions.

Article 42 of the present Model Law reflects a similar point of view. However, the appropriate norms are connected with simplified terms and conditions. In any event, this is not a question of possession of information. Each shareholder is required to return the financial benefits which it has obtained from the joint-stock company outside the framework of the Law. Further provisions connected with the capital-preservation principle are set out in Articles 28 and 48 of the present Model Law. Both are based on the standpoint that the acquisition of its own shares of stock by a joint-stock company is nothing but a return payment of investments to sharehold-ers. Therefore, Article 28 of the Model Law provides for restrictions on the purchase of own shares of stock. Article 48 of the Model Law does contain an exception, pursuant to which it is possible to acquire shares of stock in the course of satisfying shareholders’ claims. For the purposes of protecting shareholders’ interests, in the second case, the acquisition of a large quantity of shares is permitted.

Also, to protect the capital of a joint-stock company, Article 50 of the present Model Law provides for a limit on the payment of dividends. Similar provisions are also available in virtually all the laws of CIS countries. Those provisions are of interest because Article 50, Clause 3, combines both concepts practiced in Western countries. The law prohibits paying out dividends where such payment affects the solvency of a joint-stock company. This criterion is used in the concept of a ‘solvency test’ in Anglo-


Saxon law. Special attention here is paid to the requirements concerning the obligation to observe the interests of a counterparty in trade or commerce (due care [zabolivost’]). The obligations are deemed to be fulfilled where the auditor who performs an audit of the joint-stock company confirms that the company is not threatened by insolvency.

The present Model Law proposes the so-called ‘balance sheet audit’ test. A resolution to pay out dividends is made based on the results of such an audit. Thus, dividends may not be paid out when the net assets of a joint-stock company fall below the amount of the authorized or subscribed capital of the company (according to the appropriate line-item on the bal-ance sheet). In this case, the function of ‘authorized capital’ is particularlly clear since it is a measure of net assets, which determines whether or not the dividends may be paid out. In this regard, some members of the Working Group have questioned the operability of this mechanism since the reports submitted in CIS countries are not always reliable. Despite the above, the Model Law recommends using this criterion since the is-sue of unreliable information in the reports is a reason to improve rather than to revoke the norms based thereon. Also, mention should be made of the balance sheet item ‘reserve capital’, to which reference is made in this provision. The respective provision is contained in Article 68 of the Model Law Option A (and Article 71 of Option B). They establish a reserve capital equal to fifteen percent of authorized capital.

In conclusion, the question that needs to be answered is: what is the role of the company capital-preservation principle in case of a corporate reorganization? A proposal has been put forward in Article 161 of the present Model Law, according to which there must be a possibility—within the framework of a reorganization—to determine a company’s post-reorganization capital which differs from that prior to reorganization. Thus, in the event of reor-ganization, provisions protecting the rights and interests of creditors will apply, replacing the provisions on receiving part of the company’s capital during the course of a reorganization.

4.9. Reduction of Authorized Capital In the event of a reduction in the authorized capital or redemption by the company of its own shares of stock in order to withdraw them from circulation, attention needs to be paid to the following issues. Article 64 of the present Model Law Option A and Article 61 of Option B set out basic provisions regulating the appropriate procedures: the authority of the shareholders’ meeting and capital reduction limits. The Model Law utilizes only those provisions which have already been established in many laws of CIS countries. However, note should also be made of some specific features: first of all, Article 66 of the present Model Law Option


A and Article 62 of Option B, the purpose of which is to solve a problem that arises where a joint-stock company’s net-assets-value falls below the amount of its capital and where it is planning to issue new shares of stock. Since by that time, even the value of the old shares of stock already has been wiped out, there must at least be a possibility to maintain the capital below the minimum limit set for basic capital, so that thereafter it can be increased. The above-mentioned norms regulate such procedures.

Concluding provisions have been dedicated to the protection of rights and interests of creditors; these are not particularly strict when compared to those currently in effect. In particular, this concerns creditors who are not entitled to demand immediate satisfaction of their claims. The starting point of this regime is more a matter of the waiting period which may be avoided where a company provides guarantees to its creditors.

These provisions have been enhanced with the goal of indemnifying losses and, thus, affecting creditor’s rights to a lesser extent due to pay-ment cancellation.

4.10. Legal Consequences of the Loss of Joint-Stock Company Property Special risks arise for creditors of a joint-stock company where they find themselves in a situation when the company is experiencing a crisis and reducing its net assets. Pursuant to the present Model Law, if net assets are lower than authorized capital, the latter must be reduced no later than the second year. If the amount of net assets is less than the minimum equity capital, the joint-stock company is subject to liquidation.49 These provisions embody the principle of net authorized capital in its pure form—even if it is inconsistent, to a certain degree, with the principle of minimum authorized capital. Some authors have further developed this concept; others have questioned its efficiency.50 For example, in Kazakh-stan, the balance-sheet concept was rejected; as consequence, reductions in net assets are governed by legal norms regulating relations between an insolvent debtor and its creditor(s). Subsequently, there is no discussion about a company’s net assets; only about the solvency of a company.

In Article 69 Option A and Article 66 Option B, the authors of the present Model Law propose using the balance-sheet approach. Attention also needs to be paid to Articles 122 and 133 of the present Model Law which set out special obligations of management bodies, in particular those to initiate bankruptcy proceedings where net assets are negative. At the same time, the significance of insolvency has not been lessened. The Model Law Working Group is of the opinion that the balance-sheet approach should be utilized as an additional criterion to ensure protection for creditors. Experience 49 Art.124, para. 4 of the Model Law.50 See Gluschhetskii, op.cit. note 33, 28.


shows that insolvency is not a sufficient reason for liquidating a company which has a positive net-asset-value on its balance sheet.

Chapter VII. Corporate Bodies

1. General ProvisionsAccording to generally accepted principles of corporate governance, the property of a joint-stock company is in the hands of the managers of such company. They dispose of its property, and the commercial success of joint-stock companies depends on them, etc. Shareholders generally do not take part in the daily activities of management bodies. However, in line with good corporate governance practices, they must have guarantees that their investments will be used wisely (razumno) and with reasonable care (zabotlivo) by the managers of a joint-stock company for the benefit of the shareholders and the company itself.51 The task of any legislator—especially in the conditions of a transition from a planned (command) to a market economy—is to establish a clear and transparent structure for the management bodies of a joint-stock company based on principles of accountability. In this respect, the present Model Law on Joint-Stock Com-panies is consistent with current standards of corporate governance.

Depending on the framework for the in-house system of management and supervisory bodies of joint-stock companies, two corporate govern-ance systems can be distinguished in corporate law: the monistic and the dualistic system.52

In the monistic system, both company management and supervision are the preserve of a single body, generally called a board of directors (or a board). While, within this body, management and supervisory functions may be assigned to its different members, all the functions still remain within the same body.

Under a dualistic system, management and supervisory functions are apportioned between two independent bodies. One of them is generally called a ‘supervisory board’ and consists of the members who do not take

51 See Reinier Kraakman and Henry B. Hansmann, “Agency Problems and Legal Strategies” in Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry B. Hansmann, Gérard Hertig, Klaus J. Hopt, Hideki Kanda, and Edward B. Rock, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, Oxford, 2nd. ed. 2009), 35-54; and Paul Davies and Klaus J. Hopt, “Control Transactions”, ibid., 225-274.

52 See Klaus J. Hopt and Patrick C. Leyens, “Board Models in Europe. Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France and Italy”, in European Corporate Governance Institute, Law Working Paper (2004) No.18.


part in company management, but only supervise the activities of the management bodies.

The present Model Law provides for the right to choose between monistic and dualistic management systems (Part 1, Art.72).53 Thus, a company may have either of the above systems of management bodies; but mixing elements of these two systems is prohibited by law. After a company has chosen one of the management system options under the present Model Law, the provisions on the structure, name and scope of authority of the company’s bodies are imperative, and any other regula-tion in the company’s articles of association of the competence thereof is permitted only in the instances provided for by the Model Law.

The quantity and authority of corporate bodies depends on the governance model which has been chosen: under a monistic system, the company’s management bodies are represented by a general shareholders’ meeting and a board of directors; under a dualistic system, the bodies are the general shareholders’ meeting, a supervisory board and management board (Part 1, Art.72). The present Model Law prohibits the formation of any other corporate bodies on the basis of its articles of association or other constitutive documents. In addition, while the auditing committee is not a compulsory body of a joint-stock company according to the Model Law, it is a com-pulsory body for joint-stock companies in many CIS countries. Internal supervision is assigned to the management board or the board of directors, while verification on behalf of shareholders is made by having an audit performed either by an accounting firm or an auditor.

2. The General Shareholders’ Meeting

2.1. Thee General Shareholders’ Meeting in the Structure of Joint-Stock Company Bodies

The general shareholders’ meeting is the only joint-stock company body where shareholders have a possibility to adopt resolutions of importance for the company. According to the concept of the present Model Law, shareholders are not directly involved in the activities of other joint-stock company bodies. While the Model Law (Part 1, Art.73) states that the general shareholders’ meeting is the highest body of a company, its competence is regulated by law in an exhaustive rather than enumerative fashion; a widening of its competence by a company’s articles of association is permitted only where envisaged by a law (Part 1, Art.74). This means 53 Provision of the right to choose a corporate governance model is considered the current

international standard in the field of corporate governance. See Klaus J. Hopt, “Corporate Governance, Markt und Recht”, in Peter Hommelhoff, Klaus Hopt, Axel von Werder, Handbuch Corporate Governance (Verlag C.H. Beck, München 2nd ed. 2009), 45.


that the structure of joint-stock company bodies is based on the principle of the division of competence, rather than on the principle of supremacy (subordination) of joint-stock company bodies.

General shareholders’ meetings may be annual and extraordinary. An annual general shareholders’ meeting is mandatory; in the event that this mandatory requirement is not fulfilled, the managerial bodies of a company will be held liable (Part 2, Art.76).

An important issue to be addressed at the annual general sharehold-ers’ meeting is that of approving the work of the supervisory board or the board of directors (Art.75). Approval of the work of these bodies by the general shareholders’ meeting entails important legal consequences: e.g., releasing these bodies from their obligation to indemnify damages incurred by the company as a result of corporate management’s performance of its duties. However, a resolution on approval must be based on information which is sufficient to assess the lawfulness of management acts (Part 3, Art.75) and only regarding those fields of its work which have been included on the agenda of the general meeting (Part 4, Art.75).

2.2. Convening a General Shareholders’ MeetingAs the general shareholders’ meeting is the only body for the adoption of resolutions by shareholders as regards the company and the company’s activities, the Model Law provides detailed regulations for convening a general meeting and specifies the officers responsible for the observance of this procedure.

The management board (dualistic system) or the board of directors (monistic system) is responsible for convening both annual and extraordinary general meetings. Note that grounds for convening a general meeting are of no importance: the general meeting may be convened upon a demand of the shareholders (Art.77) or by virtue of a court judgment (Part 4, Art.76).

So-called ‘minority shareholders’ enjoy a right to convene an extraor-dinary general meeting; i.e., those shareholders jointly holding at least 5% of the total number of voting shares of stock. Where the management board or the board of directors fails to convene a general meeting upon a demand of such shareholders (not a rare event in practice), a court decides on the convening of the meeting. In this event, the court also appoints a person responsible for preparing and conducting the general meeting (from amongst the shareholder-claimants) and, also, the general meeting’s chairperson (Part 2, Art.77). This provision is aimed, on the one hand, at ensuring real and efficient protection for minority shareholders; on the other hand, it ensures exercise of the requisite state supervision. The practice of some CIS countries has shown that the so-called ‘Self-Enforcing


Model’—under which a general shareholders’ meeting is convened upon demand of the shareholders by shareholders themselves without any state intervention—has not proven to be a satisfactory one.54

According to the concept of the present Model Law, informa-tion on convening a general shareholders’ meeting must be accessible for all shareholders. This can be achieved through the detailed procedure for notifying shareholders of an upcoming shareholders’ meeting as follows: (1) notification to shareholders at least 30 days prior to the date of such meeting (Art.78); (2) publication of notice thereof in a periodical used for the company’s publications (Part 1, Art.80); (3) publication of the notice on the corporate web-site; (4) accessibility of the agenda of the general shareholders’ meeting for shareholders (Art.81).

As far as the agenda is concerned, the present Model Law contains a key provision according to which the management board and the super-visory board or the board of directors (depending on the management system) must specify their proposed resolutions, in the agenda notice, on each item of the agenda to be resolved by the general meeting, and explain why such proposed resolutions are necessary and warranted for the company (Part 3, Art.81).

The Law places special emphasis on publication of the agenda of the general meeting. It renders invalid all resolutions adopted on items on the agenda that have not been duly published (Part 5, Art.81). The agenda may be amended at the general meeting, provided that all the shareholders at-tend this general meeting either personally or by proxy (Part 8, Art.82).

2.3. Right to Participate in a General Shareholders’ Meeting A special feature of a joint-stock company (AO), by way of contrast to limited liability companies (OOO), is that legislation offers the possibility for a joint-stock company to change the composition of its shareholders in a quick and simplified manner. Therefore, an important, practical question is: which shareholders (and as of which moment in time) may take part in the general meeting? The Model Law specifies the terms and condi-tions and the periods of time for compiling a list of shareholders who are entitled to participate in the general meeting (Art.83). The management board or the board of directors is liable for the truth and accuracy of the list of shareholders (Part 7, Art.83).

54 For a description and analysis of this model, see “A Self-Enforcing Model of Company Law for Emerging Markets” in Black et al., op.cit. note 7, 14ff. For the negative effects of such a model in Russia, see Vladislav Ivanovich Dobrovol’skii, Zashchita korporativnoi sobstvennosti v arbitrazhnom sude (Wolters Kluwer, Moscow, 2006); and Lado Chanturia, “Chancen und Schatten des Self-Enforcing-Modells im postsowjetischen Aktienrecht”, WiRO – Wirtschaft und Recht in Osteuropa (2009) No.4, 97-103.


The issue of a quorum at the general meeting has been regulated anew. Practice shows that an unreasonably high quorum can paralyze the activi-ties of a joint-stock company because the absence of a quorum deprives the general meeting of the opportunity to adopt resolutions on matters of importance for the joint-stock company. The present Model Law proposes the following solution: where a general meeting has been adjourned due to the lack of a quorum where it is re-convened, it is competent to adopt resolutions regardless of the number of shareholders which has been registered to attend the re-convened general meeting either in person or by proxy (Part 2, Art.85).

The institution of an election committee has introduced in many CIS countries. Its functions include both ballot counting and maintaining the minutes of a general meeting. According to the present Model Law, the election committee is an optional body; the articles of association of a company may provide for forming such a body. In a company where there is no election committee, a notary (notarius) or corporate secretary performs its functions (Part 1, Art.86).

2.4. Resolutions Adopted By a General Shareholders’ MeetingThe general rule is that a general shareholders’ meeting adopts resolutions by a simple majority of votes cast by the holders of the company’s voting shares of stock who attend the meeting (Part 1, Art.87). The qualified ma-jority of 75% of votes is an exception and only is applied where required by the present Model Law.

A shareholder may exercise his/her/its voting right either personally or by a representative [proxy]. Since, in practice, financial institutions generally act as proxies for shareholders in large joint-stock companies, the Law sets forth new detailed regulations on their functions at the general meeting. According to the present Model Law, financial institutions are deemed to include organizations licensed to operate on securities markets, banks, investment companies, etc. (Part 1, Art.89). To this end, attention should be paid to the following issues: (1) a financial institution acting as a proxy for a shareholder only can take part in the general meeting by virtue of a power of attorney (doverennost’) granted by the shareholder, provided that the shareholder has provided it with explicit instructions on specific items on the agenda; (2) in exercising the voting right, where a financial institution deviates from the shareholder’s instructions or from a proposal which has been agreed upon with the shareholder prior to the meeting, it is required to notify the shareholder to this end specifying the relevant reasons for such deviation; (3) however, where a financial institution has deviated from the shareholder’s instructions in exercising the voting


right, this does not result in the invalidity of the resolutions adopted at the general shareholders’ meeting (Parts 2, 7 and 9, Art.89).

The Law emphasizes the fact that the voting right is exercised directly by shareholders at their own discretion and prohibits influence of any third parties, including joint-stock company management. Thus, any agreements or provisions contained in the corporate articles of association obliging a shareholder to exercise his/her/its voting right as instructed by the company, by the management board, supervisory board or by the board of directors is void ab initio (nichtozhnoe) (Part 1, Art.90).

In some CIS countries, a general shareholders’ meeting may be held by way of voting in absentia. The Working Group was against such type of a general meeting; nevertheless, it was decided to leave this decision to the discretion of national legislators in CIS countries who will need to resolve the issue of the appropriateness of permitting absentee voting in their laws.

2.5. Procedure for Holding a General Shareholders’ MeetingWhile Articles 92-97 of the present Model Law contain detailed proce-dures for holding a general shareholders’ meeting, special attention should be paid to the procedure for the exercise of a shareholder’s right to access information (Art.97). Instead of providing for the comprehensive right to access information that has been consolidated in the joint-stock company legislation of many CIS countries, the present Model Law has established completely new rules and regulations on such right: to access information about items on the agenda of a general shareholders’ meeting.

Joint-stock company information which is published in a normal fashion is thus accessible for all shareholders. It is not necessary to use an individual right to receive such information. Therefore, the Law specifies the scope of the right to information and establishes that—at a general shareholders’ meeting—a shareholder may demand any information re-quired “for proper consideration and assessment of any item on the agenda of a general shareholders’ meeting” from corporate management board or the board of directors (Part 1, Art.97). At the same time, the present Model Law ensures equal access to such information for all shareholders, specifying that if any information—including information made available prior to the holding of a general meeting—is provided to any shareholder, such information must be made available to all other shareholders at the general meeting (Part 4, Art.97). A shareholder to whom the provision of information has been refused may appeal such refusal in court (Part 6, Art.97).


2.6. Invalidity of Resolutions Adopted By a General Meeting. Appealing Resolutions Adopted By a General Meeting

In contrast to many joint-stock company laws adopted in CIS countries, the present Model Law places special emphasis on the resolutions adopted by general meetings being void ab initio and the procedure for appealing such resolutions.

To consider the concept ‘void ab initio’ (nichtozhnost’), one needs to turn to the concept of a transaction which is void ab initio. However, the civil law of some CIS countries does not recognize the concept of transactions ‘void ab initio’ and deems all invalid transactions as being ‘voidable’ (osporimyie). Therefore, here, a clear definition of invalidity is required. All resolutions adopted by joint-stock company bodies in breach of the requirements of the Law are deemed to be void ab initio; the Law expressly provides for the invalidity ab initio of resolutions resulting from such violations. Furthermore, such resolutions are void ab initio—as the term signifies—from the moment of their adoption regardless of whether or not they will be challenged.

Article 98 lists the events where resolutions adopted by a general meeting are void ab initio. For instance, a resolution is void ab initio where a general shareholders’ meeting has been convened in violation of Articles 76-84 of the present Model Law or where the resolution has not been duly recorded in the minutes, etc. This is not an exhaustive list, and various provisions of the present Model Law provide pre-requisites for the invalidity ab initio of individual resolutions.

However, the list of persons entitled to a right of appeal (challenge) against resolutions adopted by a general meeting—as established by the present Model Law—is an exhaustive one. First of all, these include shareholders attending the general meeting who have protested against (objected to) such resolutions as recorded in the minutes of the general meeting.

Shareholders who did not take part in the general meeting only enjoy a right of appeal (challenge) against resolutions adopted by the general meeting where they were unlawfully prevented from taking part in the general meeting or where the meeting has been convened in violation of the established rules for the convening thereof or where an item on the agenda has not been duly published (Part 1, Art.100).

Information about challenging a resolution adopted by a general meeting and about filing a lawsuit is subject to mandatory publication on the corporate website: the management board (or the board of directors) is required immediately to publish this information (Part 5, Art.100).


It is worth mentioning the legal consequences of rendering void ab initio a resolution adopted by the general meeting: the nullification thereof ad initio—except in those instances where, in reliance thereupon, agreements have been entered into with third parties and they (the third parties) did not know or could not have known about the grounds for the invalidity thereof (Part 4, Art.101).

3. The Supervisory Board The present Model Law has introduced completely new norms regarding the supervisory board and the management board; these are generally in line with the legal provisions established, for example, by German law for such bodies but, also, are based on the results of numerous discussions about those rules and regulations.55

According to the present Model Law, the supervisory board is a su-pervisory (kontrol’) body and may not be engaged in the routine activities of the management board. Furthermore, the powers of the management board may not be delegated to the supervisory board. However, as the supervisory board is a body with wide-ranging powers, it may for instance, at any time, demand a report on corporate performance from members of the management board and—without a resolution adopted by the general meeting—may bring claims against members of the management board for the indemnification of losses inflicted upon the company as a result of their unlawful (neproavmernye) acts (Part 2, Art.102).

A critical power of the supervisory board is that of appointing and dismissing from office members of the management board. Under a dualistic sys-tem, the supervisory board appoints and dismisses from office members of the management board, as opposed to the monistic system, where such members are appointed or dismissed by the general shareholders’ meet-ing (Part 1, Art.103). On behalf of the company, the supervisory board enters into and terminates service agreements (corporate contracts) with members of the management board (Part 2, Art.103).

While the delegation of managerial functions to the supervisory board is prohibited (Part 1, Art.104), the adoption of resolutions on specific mat-ters requires consent of the supervisory board. Part 2, Article 104 of the present Model Law contains an exhaustive list of such matters.

55 See Theodor Baums, “Aktienrecht für globalisierte Kapitalmarkte – Generalbericht” in Peter Hommelhoff, Marcus Lutter, Karsten Schmidt, Wolfgang Schön and Peter Ulmer (eds.), Cor-porate Governance (Gemeinschaftssymposion der Zeitschriften ZHR/ZGR), 71 ZHR (2002), 13-25; and Patrick C. Leyens, “Deutscher Aufsichtsrat und U.S.-Board: Ein oder zweistufiges Verwaltungssystem? Zum Stand der rechtsvergleichenden Corporate Governance-Debatte”, 67 RabelsZeitschrift (2003), 57-105.


The supervisory board must be made up of at least three members (Part 1, Art.105), but the Law does not specify any maximum number of supervisory board members. In light of demands from representatives of trade unions in Russia and some other CIS countries, the present Model Law provides for a right for a company’s works collective (trudovoi kollektiv) to appoint one-third of the supervisory board members. However, this requires the appropriate rule to be introduced in the articles of associa-tion or in a national law (Part 4, Art.103). Thus, the Law does not directly grant this right to the works collective.

The general meeting elects members of the supervisory board for a pe-riod of three years; members can only be natural persons. Such members may also be delegated by specific shareholders, entitled to do so under the articles of association of the company. Upon a motion of the management board of a company, a court may also appoint members of the supervisory board where no new member has been appointed within six months after a member of the supervisory board has resigned (or has been dismissed) from office, or where the number of members in the supervisory board is less than the number of members as established by the Law or by the articles of association or where members of the supervisory board have been appointed in violation of the Law.

Members, who have been elected to the supervisory board, may be dismissed from office at any time by a resolution of the general meeting adopted by a simple majority of votes (Part 6, Art.105). The powers of a court-appointed member of a supervisory board terminate at the mo-ment when the grounds for such court appointment cease to exist (Part 9, Art.105).

The inadmissibility of simultaneous membership of the management board and supervisory board is an essential feature of the dualistic management system (Part 1, Art.106); where this prohibition has been violated, the management board immediately is required to raise the issue of eliminat-ing this violation (Part 4, Art.106).

The chairperson of the supervisory board is elected by the supervisory board from amongst its members for the term of the powers of the supervisory board and directs the work of the supervisory board (Part 1, Art.108). So as to ensure that members of the supervisory board act independently and to prevent their dependency on the respective joint-stock company, the present Model Law prohibits the company from establishing any employment relations with members of the supervisory board (Part 7, Art.108). However, this provision in the present Model Law is problematic where representatives of the works collective are members of the supervisory board.


Despite the fact that the supervisory board is a supervisory body, the chairperson of the supervisory board is obliged to cooperate continu-ously with the management board—in particular with the chairperson of the management board and to discuss with him/her the strategy and development of corporate operations and the pertinent risks. In turn, the chairperson of the management board is required to notify the supervi-sory board of any significant events for the company. The chairperson of the supervisory board is also required to notify all other members of the supervisory board (Part 4, Art.108).

In order to prevent its becoming passive, the present Model Law imposes upon the supervisory board certain obligations designed to ensure its efficiency. For instance, meetings of the supervisory board must be held at least once every quarter; ensuring fulfilment of this requirement is within the competency of the chairperson of the supervisory board (Part 1, Art.109). In addition, any member of the supervisory board or the management board may convene a meeting of the supervisory board (Part 3, Art.109).

The adoption of resolutions of the supervisory board requires a simple majority of votes provided that at least one-half of its members attend the meeting; a re-convened meeting does not require a quorum. Attendance at meetings of the supervisory board is obligatory for its members.

Compensation is paid to the members of the supervisory board accord-ing to the articles of association and by virtue of a resolution adopted by the general shareholders’ meeting. Such resolution expressly contains a precise specification of the compensation to be paid to the chairperson of the supervisory board and his/her deputy. On the one hand, the amount of compensation must be appropriate to the tasks performed by members of the supervisory board; on the other hand, it must be commensurate with the financial position of the company. Fulfilment thereof falls within the duties of the management board (Art.111).

The duty to be loyal (true) to the company is one which is imposed upon members of the supervisory board. One of the manifestations of this duty is in the disclosure of conflicts of interest. In particular, each member of the supervisory board is required—both prior to being elected member of the board and during his/her term of office—to disclose and to submit to the board information regarding a conflict of interest that may arise out of cooperation or the holding of a official position (dolzh-nostnoe polozhenie) with customers, suppliers, creditors or business partners of the company (Part 2, Art.113). In addition, all agreements between a member of the board and the company—including loan agreements or


credit facilities—may only be concluded after approval thereof by the supervisory board.

4. The Management BoardThe management board is a managerial body of a company responsible for the managing of the company at its sole discretion (Part 1, Art.114). This means that it takes decisions at its sole discretion albeit solely in the interests of the company. The management board is not obliged to follow instructions given by the supervisory board, a general meeting or individual share-holders. However, the management board is required to fulfil resolutions adopted by these bodies within the scope of their competence (Parts 2, 4, Art.114). Thus, the Law expressly distinguishes between the notions of ‘instructions’ and ‘resolutions’ (ukazaniia and resheniia respectively).

The management board may be made up of one or more members who only may be natural persons. Certain persons are deprived of the right to be members of the management board; in particular, no one convicted and sentenced in criminal proceedings for property crimes may be appointed as a member of the management board unless the period of time which has elapsed after serving the sentence equals (or exceeds) five years. Furthermore, no one may be a member of the management board who, by way of a court judgment or ruling of a competent governmental authority, has been prohibited from engaging in a specified profession or specified areas of activity or business activities during the period of time in which such prohibition remains in effect (Part 1-3, Art.115).

Members of the management board are appointed for a term of up to three years. After their appointment, members of the management board conclude a service agreement (corporate contract) signed by the chair-person of the supervisory on behalf of the company. Such contracts are regulated by the norms of the Civil Code on contracts. Service agreements (corporate contracts) are not employment agreements; therefore, labour law does not apply thereto (Parts 1, 3, 4, Art.116). In certain instances—in particular where there is a delay in appointing a member of the manage-ment board—a member may be appointed by a court upon a motion filed by one of the members of the supervisory board (Part 6, Art.116).

Where a management board is made up of several members, the supervisory board appoints one of the members as the chairperson of the management board who coordinates the work of the management board, chairs its meetings and represents it in relations with other bodies of the joint-stock company and with third parties (Part 2, Art.116).

The supervisory body may dismiss from office, at any time, any member or the chairperson of the management board. A resolution to


dismiss a member or chairperson from office constitutes grounds for terminating the service agreement. Thus, the Law distinguishes the no-tion of “a corporate legal document for appointing members of the management board”, regulated solely by this Law, and the service agreement (corporate contract) to which the norms of the Civil Code are applied. The corpo-rate legal document of appointment may be revoked at any time, while a service agreement may only be terminated where there are grounds for the termination thereof.

The management board is not only an in-house managerial body; it also represents the company in relations with third parties without a power of attorney (doverennost’) (Part 1, Art.117). While the present Model Law provides that members of the management board only jointly represent the company before third parties, in order to conclude a transaction between third parties and the company, it is sufficient for a party to the transaction to express its will to one of the members of the management board (Part 2, Art.117).

To ensure stable civil commerce and trade, the Model Law provides that no restrictions may be imposed on the management board in represent-ing the company with third parties (Part 5, Art.117). Although members of the management board are required to comply with company manage-ment restrictions stipulated in the articles of association or imposed by corporate resolutions, a violation of such restrictions does not lead to the invalidity of transactions concluded on behalf of the company with third parties (Part 7, Art.117).

In contrast to compensation of members of the supervisory board, which is determined by a general shareholders’ meeting, the supervisory board establishes the amount and form of compensation to members of the management board. In this regard, the duty of reasonableness (razum-nost’) is imposed upon the supervisory board—in particular, such that while establishing the amounts, form and package of compensation for members of the management board, the supervisory board is required to ensure that the total amount being paid is reasonably consistent with the duties and responsibilities of the relevant member of the management board and the company’s financial position (Part 3, Art.118).

The Law consolidates the duty of loyalty (faithfulness) (loial’nost’, ver-nost’) of members of the management board and specifies a number of obligations in relation to conflicts of interests. In particular, members of the management board are required to serve the lawful interests of the company and to perform their functions solely in the interests of the company. Members of the management board do not have the right to use business opportunities and proposals intended for the company in


their own interests (Part 1, Art.119). In addition, a member of the man-agement board does not—without the appropriate authorization from the supervisory board—have the right to conduct business and engage in transactions for its own account or the account of third parties within the sphere of corporate activity, or to become officers or insolvency receivers in other corporate entities or to become stakeholders in business com-panies or major shareholders in other companies (Part 3, Art.119). Each member of the management board is required to disclose and provide the supervisory board with information about the existence of a conflict of interest (Part 7, Art.119).

The Law separately establishes the duties of members of the manage-ment board vis-à-vis the supervisory board in the event of emergencies, i.e., an event where losses of the company are equal to one-half of the authorized capital or where a company becomes insolvent. In the first case, the man-agement board immediately is required to convene a general meeting; in the second, to institute bankruptcy proceedings (Parts 1-2, Art.122).

The concept of a dualistic system detailed in the present Model Law specifies the rights and duties of individual corporate bodies and must promote a clear delineation of powers between the management board, which is a managerial body, and the supervisory board, which is a supervisory body.

5. The Board of DirectorsThe present Model Law provides for a new interpretation of the board of directors and the executive body under monistic management system standards.56 The formation of an executive body—as provided for in the joint-stock-company laws of many CIS countries—is not required. How-ever, while the board of directors may delegate its managerial powers to a sole or collegial executive body, the overall responsibility to the company continues to reside in the board of directors.

Similar to the management board, the board of directors is respon-sible for management and supervisory activities for which it bears its own liability. It adopts resolutions at its own discretion albeit solely in the interests of the company (Part 2, Art.124). With the exception of those matters the resolution of which is within the competence of the general shareholders’ meeting or where the articles of association have delegated them to the executive body, the board of directors adopts resolutions on

56 See Franklin A. Gevurtz, Corporation Law (West Publishing, St. Paul, MN, 2000), 180ff; and Melvin A. Eisenberg, Corporations and Other Business Organizations: Cases and Materials (Founda-tion Press, New York, NY, 8th ed. 2000), 203ff.


all other matters (these matters are referred to in Art.124 of the present Model Law).

The general shareholders’ meeting elects members of the board of directors for a period of up to three years, and they may be re-elected for several times. The general shareholders’ meeting, at any time, may decide on the early termination of the term of office of all members of the board of directors (Part 3, Art.126). The first composition of the board of directors is nominated at the time of formation of the company, and the first composition must be entered in the corporate articles of associa-tion (Part 2, Art.126). The number of members in the board of directors is established by the articles of association; however, in any case, it must be at least three (Part 5, Art.126).

Since, unlike the dualistic management system, there is no independ-ent supervisory body in the monistic system in the form of a supervisory board, the present Model Law requires that at least one-third of the members of the board of directors must be independent directors (Part 5, Art.126). Furthermore, the Law specifies the criteria for determining in-dependence. In particular, a person is not—and may not be elected as—an independent director of the company where he/she: (a) is or was an officer of the joint-stock company for the last five years prior to being nominated for office as an independent director; or (b) is or was an employee of the joint-stock company or its affiliated person for the last three years prior to being nominated for office as an independent director; or (c) is a close relative of a major shareholder or an officer of the joint-stock company (a list of these criteria is set forth in Part 5, Art.126).

As opposed to elections to the supervisory board and the management board, elections to the board of directors are made by way of cumulative voting. A shareholder in entitled to cast all of the votes flowing from the shares of stock held by him/her for one candidate or to distribute them amongst multiple candidates to the board of directors. The candidates with most votes are deemed to be elected to the board of directors. In the event of a tie vote between two or more candidates for one vacancy on the board of directors, additional voting is held.

The chairperson of the board of directors is elected from amongst the members of the board of directors by the members by a majority of votes of the total number of board members, unless the company’s articles of association require otherwise. Thus, the articles of association may pro-vide for the election of the chairperson of the board of directors by the general shareholders’ meeting. Although members or the head (rukovoditel’) of the executive body may be elected members of the board of directors (contrary to the dualistic management system), the head of the executive


body (the sole executive body) may not be elected as chairperson of the board of directors (Part 2, Art.127). The board of directors, at any time, may re-elect its chairperson by a majority of the total number of votes cast by members of the board of directors, except in cases where the chairperson was elected by the general shareholders’ meeting.

Meetings of the board of directors are held at least quarterly. The chair-person of the board of directors is required to ensure that meetings of the supervisory board are held quarterly. The Law details the procedure for holding meetings of the board of directors and for recording its resolu-tions. This is an essential pre-requisite for the proper documentation of the work of the supervisory board.

The board of directors may delegate management of current corporate operations to a sole executive body or to a collegial executive body. This is an internal matter of the company, and the procedure for delegation may be specified by the articles of association or by an appropriate resolution of the board of directors.

A major innovation of the present Model Law is the delineation of functions between the supervisory board and the board of directors as well as the legal fixation of the names of officers. The goal of this approach is to ensure transparency and clarity of the names of officers in business relations. Business partners must know with whom they are communicat-ing and engaging in business negotiations. For instance, the sole executive body or head of the collegial executive body is referred to as the company’s general director. Depending on their spheres of work, members of the collegial executive are called directors—the financial director, marketing director, etc. (Part 1, Art.129). To this end, the company’s general director and the chairperson of the board of directors may not be one and the same person. The board of directors appoints the general director or members of the collegial executive body (directors) from amongst the members of the board of directors or from amongst third parties. The general director and members of the collegial executive body (directors) conclude service agreements (corporate contracts) signed by the chairperson of the board of directors on behalf of the company.

The board of directors may dismiss the general director and/or members of the collegial executive body from office at any time. The norms of the Civil Code on contracts are applied to a service agreement (corporate contract).

The general director represents the company with third parties. No restric-tions may be imposed on the general director’s authority to represent the company with third parties (Part 6, Art.129). As prescribed by the company’s articles of association or by regulations on the executive body,


the general director apportions the functions amongst the members of the collegial executive body—directors of the company—and ensures that they properly perform their functions.

In contrast to the dualistic management system where the supervisory board may not instruct the management board, under the monistic system the board of directors has a right to instruct the general director or members of the collegial executive body regarding the current operations of the company (Part 8, Art.129).

The lack of an independent supervisory body accounts for the need to establish another structure to exercise supervision over the company’s financial and business operations. According to the Law, this structure is the internal accounting service which, in its work, is directly subordinate to the board of directors (Art.132). For the sake of true independence and neutrality, employees of the internal accounting service may not be elected as members of the board of directors or the executive body of the company.

Similarly to members of the management boards, a duty of loyalty ex-tends to members of the board of directors, general director and members of the executive body which is expressed first and foremost in the duty to avoid conflicts of interests (Art.133). To this extent, the present Model Law is in line with internationally recognized corporate governance standards. The present Model Law also specifies the duties which are imposed upon the board of directors in cases of emergency, which are deemed to be the company’s insolvency or loss of one-half of its authorized capital.

6. The Liability of Corporate OfficersThe present Model Law sets forth detailed rules and regulations on the property liability of corporate officers vis-à-vis the company. The prereq-uisites for civil-law liability of officers to the joint-stock company are: the subject of liability, a breach of duty, fault (vina) of the transgressor, damage (ushcherb) (losses [ubytki]) and a causal relationship between the act and the damage which has been inflicted.

The main task of a legislator in any jurisdiction is, on the one hand, to precisely specify the persons who are responsible for joint-stock com-pany management and who are liable for any losses inflicted upon the company, and, on the other hand, to delegate specific and unambiguous powers thereto for the management of the joint-stock company. Accord-ing to the present Model Law, the subjects of liability are the corporate officers: the members of the supervisory board, management board and board of directors.


First of all, the present Model Law requires these officers reasonably (razumno) and in good faith (dobrosovestno) to perform the duties imposed upon them by a law, the company’s articles of association or a service agreement in the interests of the company. The liability of officers arises only where they have been at fault in failing to properly perform their duties and where losses have been incurred by the company, i.e., damage has been caused (Part 2, Art.135). As this liability is directly related to a violation of specific duties, the present Model Law—as distinguished from joint-stock company laws operating in many CIS countries—provides a list of these duties (Part 5, Art.135) and personifies the addressees of these duties (Part 5, Art.135). This facilitates the identification, both of the responsible parties and the violated duties. It also is necessary to specify and identify management duties for the following reasons: firstly, one of the functions of laws is not only to regulate relations but, also, to inform participants in relationships of their rights and duties. This function is extremely important for post-Soviet countries, which still lack a developed corporate law. The unambiguous definition of duties tends to promote compliance by managers with their duties. Secondly—as opposed to the US where liability criteria are established by the courts—the courts in post-Soviet states have not yet built up a tradition of adjudicating cor-porate disputes. Therefore, one cannot reasonably or realistically expect that, in the near future, the judiciary in the post-Soviet legal space will establish standards of liability for corporate managers. It is just the other way round: judges need laws with specific regulations that will assist them in resolving specific issues.

Managers of joint-stock companies are liable in the event of a breach of their duties through their fault. It remains to be defined as to what is un-derstood by the concept of fault and how it ought to apply to the liability of managers of joint-stock companies. In this regard, the present Model Law contains a fairly unambiguous definition of fault of transgressors. Thus, a violation is deemed to be one accompanied by fault where corpo-rate officers have not undertaken with due care (zabotlivost’) and diligence (osmotriteol’nost’) all necessary measures to prevent the occurrence of the violation (Part 3, Art.135). From the point of view of applying the concept of fault in practice, the objective theory of fault enshrined in the present Model Law deserves particular attention; in the event of a violation of du-ties provided for by a law, the company’s articles of association or service agreement, the existence of fault is presupposed (Part 3, Art.135).

The burden of proof of innocence, i.e., proof that officers have not violated their duties relating to company management, has been imposed upon the officers (Part 3, Art.135). This can be explained by the fact that all the


corporate documents are at the disposal of its managers, and no one is in a better position to substantiate the correctness and lawfulness of their acts and decisions. At the same time, the burden of proof of the infliction of damage lies with the plaintiffs: they must prove the fact that damage has been inflicted upon the company.

The Law provides for the principle of individual liability. While officers are members of the respective corporate body, liability is only imposed upon those who have violated their duties. If these duties have been violated as the result of acts or omissions of several officers, they are jointly liable to the company. Officers who have voted against a resolution which has led to losses or those who, for mitigating reasons, have not taken part in such voting are not liable to the company (Part 2, Art.135).

The liability for joint-stock company managers is established by the Law. Nei-ther the company’s articles of association nor the service agreement may exempt them from such liability (Part 4, Art.135). On the other hand, the present Model Law provides for the principle applied in modern corporate law under which company managers are not held liable for business failures. Losses resulting from commercial business decisions may not be turned into the fault of the heads of companies. According to Part 6, Article 135, corporate officers are not required to indemnify losses incurred as a result of a commercial (business) decision where this decision was made in reliance on sufficient and proper information by impartial persons not personally interested in the decision, and where there is reason to believe that this decision would serve the interests of the company. In terms of corporate law, this rule is called the ‘business judgment rule’.

No matter how good regulations governing managers’ liability may be or how detailed their obligations are, the mechanism of enforcing this liability is extremely important. To this end, the key question is as follows: Who has a right on behalf of the company to file claims against officers for indemnification of losses? Who is authorized to institute liability proceedings? The present Model Law contains the answers to all these questions.

As a rule, the joint-stock company has the right to demand indemnification for losses inflicted upon the company. However, it must be specified as to who may or is required to file such claims on behalf of the company. Persons who represent the company under the Law and are charged with protecting corporate interests may themselves be in breach of these duties.

The present Model Law provides for two ways to institute liability proceedings against managers of joint-stock companies. The first provides for filing indemnification claims by joint-stock company bodies (Art.136); the second is for shareholders themselves to institute proceedings through


so-called derivative (indirect) shareholder actions (proizvodnyie [kosvennye] iski) (Art.137).

According to the present Model Law, corporate bodies not only have a right but, also, are required to demand the indemnification of damage in-flicted upon the company as the result of a violation by corporate officers of their duties (Parts 2-4, Art.136). Moreover, the general shareholders’ meeting may adopt a resolution requiring members of the management board and members of the supervisory board (members of the board of directors) to make demand upon corporate officers for indemnification of damages inflicted upon the company as as result of their wrongful acts (Part 5, Art.136).

In addition to corporate managerial bodies, shareholders who jointly hold at least 1% of the company’s voting shares of stock have a right to demand indemnification of losses. They are authorized to bring an action in court against the company’s officers for the indemnification of losses inflicted upon the company as a result of the violation by these officers of their corporate managerial duties (Part 1, Art.137). However, such a shareholder action is subject to a number of prerequisites; in particular, a court will hear this action where: (1) the shareholders prove that they purchased their shares of stock prior to when they knew (or should have known) about the potential violations of managerial duties and losses incurred by the company as a result thereof; (2) the shareholders prove that they have already attempted to contact the relevant bodies of the company and have requested them to bring an action against those at fault but that such attempts have been unsuccessful; (3) there are circumstances that intensify the supposition that the company has incurred losses as a result of a violation of the Law or of the corporate articles of associa-tion; (4) satisfying the claim for damages will not harm the interests of the company.

Chapter VIII. Provisions on Corporate Transactions with Special Conditions

One of the principal purposes of modern corporate legislation is not only the regulation of the legal status of corporations (joint-stock or other companies) but, also, the most efficient, possible (balanced to one degree or another) governance of various conflicts of interest which are unavoid-able in corporate activities.

Examples of such conflict-of-interest regulations is the legislative embodiment of the terms and conditions applied to special types of transactions involving joint-stock companies. In particular, such transac-


tions include: (a) transactions involving a conflict of interest arising from the personal interest of corporate officers or major shareholders; and (b) major transactions.

The basis of the rules and regulations on transactions of the above-mentioned types is to be found in the need to minimize the adverse impact on parties to corporate relationships arising from conflicting interests such as: (a) the interests of the joint-stock company and the property interests of its major shareholders (or its officers) in concluding a trans-action in which said shareholders (or officers) are personally interested; and (b) interests of the company and those of its shareholders where the company undertakes substantial (major) contractual obligations. The fact that regulations governing these two types of transactions by joint-stock companies are binding is characteristic of corporate legislation of most advanced countries.

1. Conflict-of-Interest Transactions (Related-Party Transactions)

1.1. The Concept of Conflict-of-Interest TransactionsSpecial regulations established concerning conflict-of-interest transactions are intended to protect the property interests of a joint-stock company where the company may conclude a transaction with third parties in which any of its directors, officers or major shareholders—entitled to take part in adopting a resolution to conclude a transaction—has an interest in the matter.

The present Model Law defines the notion of a conflict-of-interest transaction; this requires the simultaneous presence of two attributes for a transaction to be deemed as such (Art.138):

1) the respective director or any other officer or major shareholder is entitled (has the right) to take part in adopting the resolution to conclude such a transaction or in determining its terms and conditions; and

2) the property interests of parties, referred to in Subclause 1, in the transaction do not coincide with the interests of a joint-stock company.

A general criterion for classifying a transaction as one containing a conflict-of-interest is that a conclusion can be drawn—based on an assessment of the facts or the existing circumstances—that the persons involved in adopting the resolution on transaction are not acting (or might not act) exclusively in the company’s interests. However, the legislative embodi-ment of the requirement to conduct such an assessment of the facts and existing circumstances in each particular case with the aim of identifying the interests of officers or of major shareholders—which might compete


with the company’s property interests—would give rise to serious concerns about subjective assessments, would tend to obstruct the company’s ef-ficient activities and could destabilize internal corporate relationships.

Thus, the present Model Law establishes a presumption that interested persons—having property interests that compete with the interests of the joint-stock company—are those who participate in the adoption of a resolution for the company to conclude such transaction by virtue of the sole fact that they hold a position in the company or that they hold major blocks of voting shares of stock of the company.

1.2. Definition of Interested Persons (zainteresovannoe litso)Given the above presumption, one of the primary tasks to be addressed by the Model Law’s Working Group was to specify—as accurately as possible—persons having interests in transactions. As Article 138 of the present Model Law illustrates, an officer or major shareholder of a joint-stock company is a party having an interest in a transaction where such officer or shareholder acts as the company’s counterparty to the transaction or is an officer or a major shareholder of a counterparty or represents a counterparty on any other legal basis. An officer or a major shareholder of a company also is deemed to have an interest in a corporate transac-tion where an affiliated person of an officer or a major shareholder acts as the company’s counterparty to the transaction or is an officer or a major shareholder of the counterparty or lawfully represents the counterparty.

Pursuant to Article 2, Clause 8 of the present Model Law, officers of a joint-stock company (depending on the selected company management system, i.e., dualistic or monistic) are deemed to be members of the su-pervisory board and those of the management board or members of the board of directors and those of the executive body (or the person acting as the sole executive body) of a joint-stock company. Major shareholder status is characterized as the lawful exercise of the voting right to 10% or more of voting shares of stock of a joint-stock company.

In turn, the relevant subclauses of Article 2 of the present Model Law define the term ‘affiliated person’ (affiliirovannoe litso) which is based on legal or blood relations amongst market players effectively coordinating their will in the form of an association or a group of persons or promot-ing the dominant player’s intentions. This Article also specifies the circle of subjects (including related persons, immediate relatives, controlling and controlled legal persons, and legal persons along with corporations which are subject to common control) that are deemed to be affiliates of another person.

It should be noted the present Model Law provides that an officer of a corporation is deemed to have interest in a transaction where said officer


acts on his/her own as counterparty of the company or is a representative of a counterparty or an intermediate in such a transaction. To this end, it is worth mentioning that this provision of the present Model Law may only be applied in jurisdictions where a representative (who exercises authority by virtue of a power of attorney or on the basis of legislation, a court judgment or an administrative act) is not prohibited from conclud-ing a transaction on behalf of the person whom s/he represents either in his/her own person or in that of another person whose interests s/he is simultaneously representing. For instance, according to Kazakh legislation (where the relevant prohibition has been established in Art.163, Clause 3, of the Civil Code), an officer of a company (unless it is a commercial representative office regulated by Art.166 of the Kazakh Civil Code) may not represent a corporation in transactions which involve the officer him/herself or another organization represented by the officer by virtue of a law, articles of association or a power of attorney.

Furthermore, the present Model Law categorizes conflict-of-interest transactions not only as those which are separate and distinct but, also, those made up of a set of inter-related transactions (Art.138). In this connection, it is not unreasonable to view as a set of inter-related transactions those civil-law transactions aimed at reaching a common business goal, including (but not limited to) cases where one of the transactions is conditioned upon the achievement of the outcome of another, related transaction. This interpretation of inter-related transactions is set forth in Article 140 of the present Model Law, which defines major transactions. However, national legislation or internal documents of a particular corporation may provide for other attributes in the presence of which several transactions can be deemed to be inter-related.

1.3. Principle of TransparencyIn establishing special rules and regulations for transactions in which there is a conflict-of-interest, a legislator in a more developed country normally is not seeking to prevent a corporate officer who has an influence upon the process of corporate decision-making from receiving income from a source not related to the post held by the officer in the company—albeit from the use of corporate assets. Rather, the present Model Law contains specific articles (e.g., Arts.119 and 133) prohibiting members of the man-agement board, or the board of directors and the executive body from pursuing their own personal interests and basing the performance of their functions as an office of the joint-stock company on that personal interest. These Articles contain unequivocal references to such conflict-of-interest situations which are not permitted in the activities of corporate officers whatever the circumstances may be or which—in order to be permitted—


require special authorization from either the board of directors or the supervisory board.

In fact, the basic idea of these conflict-of-interest rules and regula-tions is to prevent the company from concluding transactions in which its officers or major shareholders have a personal interest under terms and conditions less favourable than those available to the company in engaging in a similar transaction in an open and competitive market.

Therefore, the present Model Law does not prohibit conflict-of-inter-est transactions. However, the issue itself of whether or not a joint-stock company may conclude a conflict-of-interest transaction is conditioned upon the requirement that the transaction price be in line with the mar-ket value of the property which is the subject of the transaction (Art.139, Clause 2). This fundamental concept is implemented through: (a) establish-ing regulations on centralizing timely information on all related persons; and (b) tightening the terms and conditions for adopting a resolution to conclude such transactions. This special regime is based on the principle that information on interests should be freely accessible and transparent and on the duty of corporate officers to duly act in the best interests of the company and to be loyal to the company.

Incentivizing officers to act properly and to prevent them from de-viating from the mandatory lines of this behaviour is a distinctive feature of these regulations. In particular, the present Model Law provides for a system to prevent uncontrolled conflict-of-interest transactions: it establishes conditions through which a joint-stock company may supervise the ob-servance of the duty of loyalty of its officers to the company.

In this case, the present Model Law assumes that a joint-stock com-pany must know that a person is (or could become) an interested person in civil-law transactions concluded by the company. To this end, the present Model Law establishes a procedure for notifying the company of a specific, impending related-party transaction. In particular, pursuant to Article 138, Clause 5, a person having an interest in the conclusion of a transaction by the company is required—prior to the conclusion of said transaction—to provide written notification to the corporate body, competent for conclud-ing such transactions, of its interest and of the conflict of interests. This duty is imposed upon every interested person—not just upon officers or major shareholders of the company. This provision promotes the observ-ance by corporate officers of their duties to be honest (chestnyi) and to act in good faith (dobrosovestnyi) as regards the company—to act in its best interests (the duty of loyalty).


1.4. Requirement for a Control SystemHowever, regardless of whether persons have notified the company in good faith of impending transactions in which they have a personal interest, the present Model Law establishes a number of requirements under which a company must implement a system of special measures to prevent its engaging in such a transaction to the prejudice of its own interests. For this purpose, according to Article 138, Clause 4:

“A person having an interest in transactions concluded by a company is required, not less than once a year, to submit information in writing to the company’s board of directors (supervisory board) sufficient for the timely identification of conflict-of-interest transactions of the company.”

This provision presumes that a joint-stock company provides for the col-lection and centralization of information on all persons who may have a personal interest in any civil-law transactions in the conclusion of which there might a divergence from (or conflict between) the company’s property interests and the interests of said persons. This provision also presumes that there will be a corporate control system in place to ensure that the list of interested persons is up-to-date and to mandatorily verify that no counterparty to any proposed transaction is on the list.

It is to be noted that the present Model Law does not set forth a de-tailed procedure on how a joint-stock company should collect and record such information; these matters can be regulated either by the company’s articles of association or by internal documents. However, of principal importance is the fact that the present Model Law requires every interested person to disclose information on potential conflicts of interest arising from transactions entered into by the company even though this person may not have an immediate relationship to the joint-stock company. This approach confirms the importance that Model Law’s Working Group has given to the detail of regulating the rights of participants in trade and commerce to maintain their own private interests, information about which is not subject to disclosure to the general public.

In particular, regulations on related-party transactions of a joint-stock company on conflicts of interests and the bases thereof (blood relation-ships, investments in the corporate capital, holding office or representing interests) relate solely to the interests of the joint-stock company. There-fore, such information must only be made disclosed to the company in the person of its bodies and shareholders—not to any other broad portion of the public. It is to be noted that, by default, interested persons are deemed to be those subjects who by virtue of various reasons are affiliated and who—often unwillingly, by virtue of circumstance—have become interested persons as regards this particular company. To this end, it is


important that a person disclosing a connection to the company or his/her/its affiliation to the company’s officers or major shareholders makes such a disclosure independently and willingly. This approach should prevent conflicts arising from unwarranted invasions of privacy.

Furthermore, the Model Law’s Working Group has addressed the dif-ficult problem of receiving full and accurate information from interested persons where the latter may have a right to refuse to disclose information about themselves while the company may not have substantial levers of pressure which can be brought to bear upon them. Therefore, it is entirely permissible for national legislation to require only shareholders and offic-ers to notify the company of their affiliated persons. For instance, Article 67 of the 2003 Kazakh Law “On Joint-Stock Companies” provides for the articles of association of a company to set forth the procedure for notifying a company about one’s affiliated persons only as regards shareholders and officers of the company. However, similarly to the present Model Law, this Article imposes an obligation on the appropriate natural and legal persons to notify a joint-stock company of their affiliation to the company and about their own affiliated persons immediately after such persons have become affiliated to the company.

Despite a certain inconsistency of this provision in the Kazakh law, the contents thereof do create a regime in which a company, in such cases, does not enter into relationships with all categories of interested persons (for instance, immediate relatives of its officers or organizations where such persons are major shareholders, etc.) but only collects the necessary information through its shareholders and officers. Although this procedure for collecting information on related persons seems more efficient, it remains legally flawed due to the obvious reasons against it being warranted to require the above-mentioned parties to disclose private information related to other subjects although they may be connected to officers or shareholders of the company.

1.5. Adopting Corporate Resolutions: Procedure and Conditions Having identified a conflict of interest in a proposed transaction, a joint-stock company is required to follow the procedure and conditions established by the Law for adopting a resolution to conclude (or to obviate) the transaction. It is to be noted that the company must observe the procedures and conditions regardless of the manner by which the company became aware of the conflict of interest in a proposed transaction: on the basis of a written notification from the appropriate related party or as a result of verifying its own lists or other databases on corporate affiliated persons and ana-lyzing the legal status of the proposed counterparty to the transaction


(identification of its major shareholders, officers, affiliated persons and representatives).

Amongst these conditions, the following are crucial: (a) the terms and conditions of the transaction must be commensurate with objective market indicators (see above regarding the importance of identifying the market value of a proposed conflict-of-interest transaction); (b) the adop-tion of a resolution to conclude the transaction must be only by a duly authorized body of a company; (c) there must be impartiality in consider-ing the appropriate matter (by way of forbidding a related person, i.e., a corporate officer or major shareholder, from taking part in debating and in adopting the resolution on the company’s concluding the transaction); and (d) there must be liability for adopting the corporate resolution to conclude the appropriate transaction.

Depending on the management system (dualistic or monistic) and the existing circumstances, either the board of directors or the general shareholders’ meeting of a company adopts a resolution on whether or not to conclude a conflict-of-interest transaction. In particular, the board of directors adopts a resolution under a monistic system where the mana-gerial body is the board of directors acting at its sole discretion (Art.124 of the present Model Law). It is to be noted that such a resolution must be adopted unanimously by the members of the board of directors who have no interest in the transaction to be concluded. Where over one-half of the elected members of the company’s board of directors have an interest in concluding a transaction, said transaction may only be concluded by virtue of a resolution adopted by the general shareholders’ meeting. Where a major shareholder of a company has an interest in a transaction or where, for any reason, the resolution on concluding a transaction has been raised to the level of the general shareholders’ meeting, said major shareholder may not take part in voting on the resolution.

Under the dualistic management system, where the management board is liable for managing the company and representing its interests in third-party transactions (Arts.114 and 117 of the present Model Law), resolutions to conclude a conflict-of-interest transaction are adopted only by a general shareholders’ meeting. In this case, where a major shareholder of the company has an interest in the transaction, the shareholder may not vote on the resolution pertaining to such transaction.

1.6. Consequences of Failing to Comply With the LawAdherence to the above-mentioned requirements of the present Model Law—intended to avoid the infliction of property damage upon a joint-stock company—is ensured by the negative legal consequences for par-ticipants in corporate relationships. In particular, the present Model Law


assumes that a conflict-of-interest transaction may not be concluded to the prejudice of the property interests of a joint-stock company. Above all, failure to comply with the present Model Law renders a transaction invalid (nedeistvitel’no). Thus, for instance, the company is entitled to demand that an appropriate trans-action be rendered invalid where: (a) at the moment of adopting the appro-priate corporate resolution, the board of directors (general shareholders’ meeting) had not been informed about all the circumstances related to the conclusions of the transaction but, thereafter, the circumstances be-came known to the company; and/or (b) the transaction was concluded in breach of other of the above-mentioned requirements established by the present Model Law.

Mention should be made of the fact that the present Model Law has an alternative for declaring a transaction invalid in the above cases: the company is entitled to request its counterparty to immediately and prematurely terminate the transaction and compensate the company for its damages (if any).

A transaction is rendered invalid or terminated early (with or without a claim for indemnification of damages) upon the demand of a joint-stock company. The executive body representing the company (monistic management system) or the management board (dualistic management system) must make demand upon the counterparty to have the transac-tion rendered invalid. The executive body/management board may act either at its own discretion or at the demand of the board of directors or the general shareholders’ meeting.

The present Model Law also ensures that the executive body (management board) of a joint-stock company will pursue the appropriate course of action so as to take the necessary steps, in such cases, for the interested party to indemnify the damages incurred by the company as a result of the conclusion of such a transaction. To this end, Article 135 of the present Model Law regulates the liability of directors and other corporate officers, mandating them to perform their duties reasonably and in good faith in the interests of the company under threat of indemnifying the company for damages sustained by the company as a result of their wrongful breach of such duty. Articles 136 and 137 of the present Model Law provide for detailed regulations on how the joint-stock company’s bodies or shareholders can hold corporate officers liable.

In addition to the possibility of rendering conflict-of-interest transac-tions invalid at the company’s demand, the present Model Law establishes that conflict-of-interest transactions are void ab initio where the transac-tions cause losses to the company but where corporate management board (board of directors) wilfully have acted to cause losses to the company,


of which the other party to the transaction knew or should have known (Art.139, Clause 9). In those jurisdictions where there are no regulations on void transactions (nichtozhnye sdelki) and where declaration of a transac-tion as invalid requires a challenge by interested persons (osparimye sdelki) (e.g., Kazakh legislation), a provision may be made for such transactions to be rendered invalid upon a lawsuit filed by an interested party. Regardless of whether a transaction is rendered invalid by virtue of it being void (nichtozhnaia) or voidable (osparimaia), all corporate officers who wilfully have acted to the prejudice of the company must bear financially liability vis-à-vis the company pursuant to the above-mentioned Articles 136 and 137 of the present Model Law.

It is to be noted that the present Model Law uniformly presumes the financial liability of related persons for failing to comply with the Model Law: should a company incur any losses arising from a transaction as a result of a breach of legal requirements for the disclosure of information regard-ing affiliation to the company, or an interest in a specific transaction, or about terms and conditions for calculating the transactional value or the procedures for adopting a resolution for concluding the transaction, the related persons are deemed to have wilfully acted to the prejudice of the company’s interests.

However, where the transaction resolution has been adopted fully pur-suant to the present Model Law’s requirements based on a comprehensive evaluation of all the terms and conditions of the transaction and where the value of the property which is the subject of the transaction corresponds to its fair market value, damages incurred by the company as a result of the transaction do not render the transaction invalid and the company’s officers—including related persons—are not liable to the company for the damages. However, this does not release corporate officers and bodies from their responsibility to take all acts to minimize such damage and to ensure that it is indemnified from other acceptable sources.

Finally, it should be noted that, for the purpose of a stable business environment, the present Model Law permits a corporate resolution—on the basis of which a related-party transaction has been concluded—to be challenged and rendered invalid without challenging and rendering invalid the underlying transaction. This preserves the commercial and overall business relations of a joint-stock company with its counterparties while the appropriate related party—at his/her/its own expense—indemnifies the company for any damage arising from said transaction based on the above presumption of financial liability to the company.

The requirements in the articles of the present Model Law which are the subject of these comments apply not only to conflict-of-interest


transactions but, also, to any changes or amendments which are made to such transactions.

Thus, in addition to the clearly established conditions and procedures for adopting resolutions on related-party transactions concluded by a joint-stock company, the present Model Law also provides for differentiated and efficient rules and regulations on the validity of such transactions, and on the conditions and the consequences of rendering such transactions invalid under various circumstances—where the company itself challenges such transactions or where such transactions are rendered invalid as the result of a lawsuit filed by interested subjects. Moreover, in establishing the regulations on corporate transactions of this category, the present Model Law consistently implements the concept that corporate officers are financially liable for the bad-faith performance of the duties incumbent on them under the Law, the articles of association, a service agreement (corporate contract) or a contract of employment with the company which result in damages to the interests of the company.

2. Major Transactions

2.1. Definition of a Major TransactionSince property and financial obligations must always adequately be secured by the appropriate assets of a debtor, the value of a joint-stock company burdened by high levels of debt may be considerably reduced and its development and the market quotations of its stock negatively affected, while the insolvency of a company may result from crystallization of the risk of its default on its debt. These circumstances are obviously of ma-jor importance for shareholders and creditors of a joint-stock company. Therefore, in numerous jurisdictions, modern corporate laws provide special regulations on concluding what are termed ‘major transactions’ by joint-stock companies.

The present Model Law—in a fairly traditionally fashion for modern corporate legislation—establishes that a major transaction is one involving the actual or potential acquisition or alienation of property, directly or indirectly by a company, the value of which exceeds the minimum threshold specified in the Model Law. According to the present Model Law, the definition of a major transaction is based on the following assumptions: (a) a major transaction is not a common business transaction for the company involved; (b) such a transaction does not involve the formation or maintenance of corporate capital by the placement of shares of stock or securities convertible into the company’s shares of stock; and (c) the transaction price correlates in a particular way to the value of the company’s assets (Art.140).


It is to be noted that the national legislation and the articles of as-sociation of a specific corporation may list additional transactions to be deemed (or not to be deemed) ‘major’ for joint-stock companies (or for a given joint-stock company). The present Model Law also permits the articles of association of a company to specify any other transactions requiring approval similar to that for major transactions provided for by the Model Law.

As in regulating the transactions of a joint-stock company in which there exists a conflict of interests, the present Model Law deems major transactions to be not only separate, independent transactions but, also, the aggregate of mutually linked transactions defined as the aggregate of civil-law transactions aimed at a common business goal including (but not limited to) cases where the possibility of engaging in one of the transac-tions is conditional upon the result of another transaction (Art.140). The possibility is kept open, however, for other indicia to also be provided by national legislation or the internal documents an specific corporation which, where these are present, may result in a number of transactions being deemed to be mutually linked.

It is to be noted that the present Model Law classifies not only the direct but, also, the indirect acquisition or alienation of corporate property as major transactions. This would be, for instance, where a corporate sub-sidiary pledges to any third party corporate property, the value of which constitutes a substantial part (25% or more) of the value of the company itself. The regulation of such ‘indirect’ transactions is directed not only securing the property interests of shareholders willing to preserve and increase the value of their investments but, also, is related to the present Model Law’s provisions on groups of companies (Chapter XII) which, on the one hand, are aimed at combating corporate raiding and abuses of market position and, on the other hand, in maintaining transparent business relations amongst market players.

2.2. Determining the Value of a Major TransactionIt is obvious that the valuation of property, which is the subject of the transaction and its comparison with the value and solvency of the company itself, is critical for classifying a transaction as major (in addition to its contents or sub-ject matter). It is known that various indicators may be used to value a company. For instance, the ‘solvency test’ is based on the current ability of a company to pay its debts. The ‘balance-sheet test’ is usually based on the value of corporate net assets used both to perform obligations and to develop business. Both approaches may be used in combination.

The Working Group proposes, as a starting point, the proposition that the value of a company must be supported by accounting statements


since focusing on the performance of current obligations might allow an increase in indebtedness to finance corporate business and a decrease in the company’s ability to service its debt in the immediate future. While the presence of corporate net assets does not always mean that they can be used to service debt or to develop business, valuation of the subject of a transaction—based on the book value of the company’s assets according to corporate accounting statements (as of the latest accounting date)—is the most objective and the soundest technique that provides for, in gen-eral, a combination of the above-mentioned indicators.

The present Model Law holds the supervisory board (the board of directors) (depending on the management system used) responsible for the proper valuation of the property (services) to be acquired or disposed of, regardless of whether a particular major transaction requires the approval of the above body of the company or the general shareholders’ meeting. As a consequence, this provision also implements the principle that officers of a joint-stock company are required to act in good faith in the interests of a company and that, as a matter of principle, it is the board of directors that manages the company at its own discretion (Art.124) under the monistic management system while the supervisory board exercises control over the management board (Art.102) under the dualistic management system.

2.3. Procedure for Concluding Major TransactionsClassifying a proposed transaction as a major transaction for a particular corporation automatically leads to the application of a special procedure for con-cluding the transaction. The scope of competence of the company’s manage-ment board or executive body may not, under any circumstances, include a resolution to conclude such a transaction. As the conclusion of major corporate transactions is critical for the company’s shareholders—and, in a number of instances, for its creditors—the competence for adopting the appropriate corporate resolution may only be with the shareholders themselves who interact with the company in the form, and within the framework, of general shareholders’ meetings or the corporate body directly constituted by its shareholders which is subordinate thereto.

Accordingly, the present Model Law proposes that the management board (executive body) or the board of directors be required to obtain the consent (approval) of the supervisory board (board of directors) or a general shareholders’ meeting (depending on the scope of competence of such bodies according to the company’s articles of association) prior to concluding a major transaction.

Similar to conflict-of-interest transactions, the present Model Law re-quires the unanimous resolution of all members of the supervisory board (board of directors) to conclude each major transaction since major transactions


are critical for the company’s financial position, business development and for maintaining the value of the investments of its shareholders. This should ensure that each corporate resolution adopted by responsible of-ficers of the company is well-balanced and should prevent the subsequent use of any clauses whatsoever that might waive the liability of a member of the appropriate body from indemnifying the company for damages inflicted upon the company arising from a major transaction which has been approved by the appropriate body of the company.

However, to promote business and cooperation amongst market players, the present Model Law permits a major transaction to be referred to the general shareholders’ meeting in those cases where the supervisory board (board of directors) has failed to adopt a unanimous resolution. It is to be noted that such matter may be referred to the shareholders only where there is no unanimity amongst the members of the company’s body: where the supervisory board (board of directors) unanimously has decided not to conclude a major transaction, the matter may not be referred to the company’s shareholders. Such regulations are designed to ensure a balance between business development and the basic assumption in corporate law that it is corporate bodies which are responsible for their acts and not the shareholders. Shareholders may not freely interfere with or put pres-sure on the corporate bodies when the latter exercise their discretionary powers to manage the company: the general shareholders’ meeting may not discuss matters which have been accorded to the competence of the company’s managerial and supervisory bodies unless expressly established by the Law.

The present Model Law proposes to differentiate between the major-transaction approval powers of a joint-stock company’s bodies and those of the general share-holders’ meeting depending on the value of property under a transaction. Thus, application of the major-transaction approval procedure—as described in the previous two paragraphs—is proposed where the value of the property under the transaction is not more than 50% of the book value of the com-pany’s assets. Where major-transaction approval procedure is required for a major transaction the object of which is property exceeding 50% of the book value of the company’s assets, the appropriate resolution only may be adopted by the general shareholders’ meeting. It is to be noted that in such an instance, where the value of property under the transaction is substantial (sushchestvenno), the present Model Law proposes a qualified majority of 75% of the votes cast by the holders of voting shares of stock attending the appropriate general shareholders’ meeting.

The present Model Law proposes the comprehensive consideration of an issue concerning a major transaction to be concluded by a company and the adop-


tion of the appropriate resolution be not only a formal one but, rather, be based on a consideration of all the essential terms and conditions of the major transaction. For this purpose, the Model Law requires that the resolution approving a major transaction specify the party (parties) to the transaction, the beneficiary (beneficiaries) and the transaction price as well as the subject-matter and other essential terms and conditions.

The present Model Law also regulates cases where a major transaction is simultaneously a conflict-of-interest transaction. In such an event, the proce-dure for concluding the transaction is governed by this Article along with Article 139 of the Model Law but only as regards that portion according to which persons having an interest in the transaction may not take part in adopting a resolution to conclude or to amend such transaction.

2.4. Consequences of Violating the Requirements of the LawThe present Model Law expressly specifies the consequences of a violation of the requirements for the conditions established thereby to determine the valua-tion of a property which is the subject of a transaction or of the requirements for the procedure for approving a major transaction. In particular, it is proposed to classify major transactions as voidable (osporimye) thereby allowing them to be rendered invalid upon a lawsuit brought by the company or its shareholder. The classification of a company’s transactions as voidable rather than void is directed at maintaining the stability of the activities and the business relations business connections of a joint-stock company, to prevent shareholders from abusing their status and to avoid the man-agement board (executive body) from abusing its powers as established by the articles of association.

According to the present Model Law, the only grounds for rendering a major transaction invalid is that where major transactions have been con-cluded in violation of the requirements for valuing the property under the transaction or the procedure for approving the transaction is (Art.141). In such an event, a transaction may be rendered invalid when a lawsuit is filed by a company or by a majority or minority shareholder.

The management board (executive body) of a company (depending on the management model) contests a company’s major transaction where: (a) the supervisory board (board of directors) has failed to reasonably value the property being acquired or being disposed of by the company (Art.140, Clause 2); (b) there has been a violation of the requirement for a unanimous resolution of the supervisory board (board of directors) to approve a major transaction involving property with the value of between 25% and 50% of the book value of the company’s assets without taking into account the votes of members who have resigned or have been re-moved from office (Art.141, Clause 1); or (c) there has been a violation


of the requirements for resolutions on concluding major transactions to be adopted by a general shareholders’ meeting as established by the Law (Art.141, Clauses 2 and 3). In such an event, the company’s shareholders may bring a lawsuit to have the major transaction declared invalid.

The supervisory board may require the management board to take measures to contest a major transaction on the company’s behalf where the management board has concluded the transaction without having it approved as required. Under the monistic management system, the board of directors acting as the company’s managerial body may—at its own discretion or upon request of the general shareholders’ meeting—contest a major transaction. In this event shareholders may, on their own behalf, contest the major transaction.

The present Model Law prohibits any other person from contesting a major transaction or bringing a lawsuit for rendering the transaction invalid based on the above grounds. This prohibition is based on the civil-law nature of relations created by concluding a business transaction. However, a major transaction also may be challenged on other grounds specified in the Civil Code (applicable, in this case, under the general provisions of the Civil Code governing civil-law transactions and contracts).

Moreover, Article 139, Clauses 7-10, of the present Model Law also regulate the validity, early termination, grounds and consequences of the declaration of invalidity of a major transaction which, at the same time, are deemed to be conflict-of-interest transactions. In that event, these transactions may be declared void ab initio (in jurisdictions permitting transactions void ab initio) or a lawsuit may be brought by other interested persons to have a voidable transaction declared invalid (see comments on conflict-of-interest transactions).

It is to be noted that the present Model Law provides that the statute of limitation for demands to have a major transaction declared invalid may not be extended. This provision protects the interests of a joint-stock company itself and its counterparties to major transactions, as it expressly establishes periods for the possible challenging of transactions without destabilizing the company’s activities and its business relations.

It is for the same reasons the present Model Law has established that a court must dismiss a demand for rendering invalid a major transaction, concluded in violation of the established requirements, where any one of the following circumstances exists:

— the vote cast by a shareholder demanding that a major transaction be declared invalid could not have affected the voting results even


where the shareholder would have taken part in voting on the par-ticular matter at the general shareholders’ meeting;

— there is no evidence that the concluded transaction entailed or might have entailed losses for the company, for the shareholder who has filed the lawsuit or have any other adverse consequences;

— there is evidence that the transaction was properly approved (ac-cording to the requirements established by the present Model Law) by the time of hearing the case in court;

— during the court proceedings, it has been proven that the other party to the transaction did not know and could not have known that the transaction violated the requirements set forth herein.

Thus, the major-transaction regime established by the present Model Law is based on the civil-law nature of the appropriate legal relationships which are critical for a joint-stock company and for its transactional counterparty, as players on the open market, and which substantially affect the interests of shareholders. The Model Law does not require the publication of in-formation on a major transaction (except for the mandatory publication of resolutions adopted by the general shareholders’ meeting as established in Art.81, Clause 5, and Art.95, Clause 6, of the present Model Law) since such data are deemed to be a part of the commercial information of a joint-stock company which is not presumed to be freely accessible by persons other than the company itself and its shareholders.

In this context, the present Model Law does not place extreme emphasis on the interests of all other creditors and potential investors of the company since it assumes that—in addition to any other legal remedies—these interests are observed through the proper perform-ance by corporate officers of their duty of loyalty to the company, by the liability of corporate bodies for conducting the affairs of the company and managing the property which is under its responsibility and by the good faith and diligent relationship of the company’s shareholders to it and to its activities. However, the present Model Law does not exclude the possibility that—at the level of national legislation—norms might be established reflecting priority for the interests of the company’s creditors and investors concerning free access to information about major corporate transactions and about their being deemed invalid under a lawsuit brought by persons other than the company itself or its shareholders.


Chapter IX. Accounting, Reporting, Audit and Disclosure With respect to regulating the accounting and financial reporting of a joint-stock company and the disclosing of essential information, the present Model Law is grounded in the basic principles of contemporary corporate law; these assume the lawfulness of a joint-stock company’s activities, the responsibility of its bodies for conducting the business and managing the company’s property, the transparency of corporate governance, the rights of shareholders and investors, and expediency (tselesoobraznost’) of state supervision over the operation of joint-stock companies.

1. Key Requirements The starting point in the present Model Law’s regulatory framework for corporate accounting, financial and other reporting issues is creating the required conditions to facilitate an assessment of how joint-stock companies are managing the assets of their shareholders and investors. The Model Law is spe-cifically focused on consolidating and ensuring two basic requirements:

— that joint-stock companies conduct accounting and generate their financial reporting in accordance with the requirements of legisla-tion; and

— that shareholders, investors and competent governmental authorities are provided with proper access to reporting and to the financial results of joint-stock companies.

Thus, Article 142 of the present Model Law provides for a joint-stock company to conduct its accounting and to generate its financial, statisti-cal and specialized reporting pursuant to the procedure established by legislation and the company’s internal documentation. Requirements are set forth related to the auditing of a company’s annual financial report and the receipt by the company of an opinion letter from an appropriate accounting firm. The Law additionally requires observance of the legally established timeframes for submitting financial reporting to the competent governmental authorities.

The critical importance of proper financial reporting—aimed at ensuring respect for the interests of the company’s shareholders—is reflected in the statutory prohibition for the supervisory board (board of direc-tors) and the annual general shareholders’ meeting of a company to approve annual reports, submitted by the management board (executive body) where such reports are not accompanied by the company’s annual financial report and an appropriate auditor’s opinion letter.


The present Model Law also requires that accounting and financial, statistical and other specialized reporting be compiled by a company on a good faith basis and that the submittal of such reporting to a company’s creditors and shareholders (or to the governmental authorities legally authorized to receive such reports) is timely and complete. In the event that such duties are violated or where the information published about a company’s activities is false or incomplete—as well as where the company avoids duly publishing such information—the Model Law requires that the company and its officers bear liability according to legislation. Such cases entail administrative liability; where the violations of such requirements result in significant consequences, criminal liability applies. The nature and specific measures of such liability is set out in national legislation. However, Articles 184 and 185 of the present Model Law propose that criminal liability be applied in case of an ‘incorrect report’ (nepravil’nyi otchet) or ‘inaccurate balance sheet’ (oshibochnyi balans). It is suggested that the liability be specifically imposed upon: (a) the joint-stock company’s officers for submitting reports that are materially untrue, incomplete or otherwise fail to comply materially with the existing requirements or factual circumstances as provided for by the present Model Law; and (b) persons who have prepared an inaccurate balance sheet or profit-and-loss statement for the purpose of receiving themselves or providing another person with a benefit, or harming the company or a third person.

It should be emphasized that the appropriate provisions of the present Model Law do not represent a set of legal standards to be applied separately from the others. The efficiency thereof is ensured by due implementation of multiple other requirements contained in the Model Law—especially of those supporting the functioning of a developed system of corporate governance (specifically provided for and regulated by the standards contained in Chapter VII); mandating self-auditing and self-supervision of the corporation when preparing its financial reporting, including during the formation and operation of the company’s internal accounting service (Art.132), regulating the reporting submitted by the management board to the supervisory board (Art.121), regulating the activities of corporate bodies in the event of an emergency (Arts.122, 134), etc.; providing for an institutional supervision system for the activities of a joint-stock company, etc.

2. AuditThe initial idea of the present Model Law with respect to regulating the external auditing of the financial reporting of joint-stock companies is that an audit enhances the protection of creditors and shareholders and guarantees implementation of standards for the transparent and full


disclosure of information on the financial state of a joint-stock company and its economic activities.

In establishing requirements for the auditing of the annual financial report and the receipt of an opinion letter from an accounting firm, the present Model Law is guided by the idea that an external audit subjects information, which must be disclosed to the public—including that pro-vided to the company’s shareholders and investors—to an independent and unbiased appraisal. This approach increases the reliability of the financial information being disclosed by corporations. In the event that the financial reporting deviates from the reporting standards applied in the appropriate jurisdiction, the auditors must draw the attention thereto of interested persons.

Article 144 requires an audit for the financial and economic performance of the company to be conducted on an annual basis. An extraordinary audit may be conducted at any time upon the demand of a shareholder of the company (at the expense of the shareholder) or pursuant to a court judgment.

Irrespective of the grounds for conducting the audit, the accounting firm is required to audit the reporting and accounting documentation of a company according to the accounting legislation and, also, to the agreement concluded between the accounting firm and the company. The accounting firm compiles a certificate of audit and bases its opinion letter on the audit’s findings. The present Model Law provides for the completeness of an audit by establishing the right of the accounting firm, under an audit agreement, to demand any necessary documents on the company’s operations from the company and its registrar.

The auditor’s independence from the company and the objectiveness of the outcome of the audit are ensured through the present Model Law’s prohibitions for accounting firms: (a) to act as affiliates of the audited company or its registrar; and (b) to sign agreements with the company other than the auditing agreement.

3. State Regulation of the Activity of Joint-Stock Companies

Mention has been made earlier of institutional supervision over the ac-tivities of joint-stock companies. It should be emphasized here that the question of whether governmental authorities should supervise joint-stock companies, and, if so, to what extent, is subject to serious debates in the overwhelming majority of jurisdictions. The question itself arises primarily due to the nature of joint-stock companies. For instance, regulating aspects of placing securities of a joint-stock company—such as the disclosure of information by the company and its placement methods—are, on the one


hand, aimed at preventing infringements of investor rights by mislead-ing investors (regarding the status of the issuing companies), and, on the other hand, at ensuring that securities markets perform their function of redistributing capital and promoting the proper assessment of market value attributable of the enterprises in which an investment has been made. Moreover, the Model Law Working Group believes that not only do investors need protection in the securities markets but, also—or even to a greater degree—shareholders, irrespective of whether the shares of stock of the company are traded on securities markets.

Since these objectives are of critical important for the efficient func-tioning of a national economy, there is no doubt about the need for the state regulation of activities conducted by joint-stock companies based on imperative norms of the Law mandating information disclosure, the transparency of corporate operations, the adoption of corporate resolutions, coopera-tion with regulators, and the application of strictly regulated securities placement methods, as well as state supervision over the activities of corporations and the administrative enforcement of proper observance of the requirements of the Law.

Considering the aforementioned, Article 145 of the present Model Law contains a general rule mandating state supervision over the activities of joint-stock companies to be performed by duly authorized governmental authorities according to procedures established by legislation. Moreover, two other important requirements are established, according to which: (a) this control must not impede the routine conduct of corporate business; and (b) shareholders must be aware of audits and the results thereof. According to the present Model Law, the second requirement is enforced by imposing upon the corporation’s supervisory board (board of directors) an obligation to inform the general shareholders’ meeting of the key provisions of audits and of rulings issued by governmental authorities supervising corporate activities.

4. Public Availability of Data on Affiliated PersonsThe issue of making data on a joint-stock company’s affiliated persons publicly available is another aspect mandating state supervision (kontrol’ or nadzor) over a company’s activities. The principle here is that a corporation must know about all of its affiliated persons and carry out its activities based on this knowledge without violating the Law or infringing any of the rights of its shareholders.

The term ‘affiliated person’ is defined in Article 2 of the Model Law which lists the persons (including related persons, close relatives, control-ling persons, dependent legal persons and legal persons under common third-party control with the corporation) recognized as affiliated persons


of another person. It should be emphasized that the term is defined so as to facilitate the identification of affiliated persons with respect not only to the com-pany itself but, also, with respect to any other subject entering into legal relations with the company on any grounds whatsoever. For instance, in regulating transactions involving the shares of stock of a joint-stock company for the purpose of preventing corporate raids or the infringement of the rights of other shareholders, the present Model Law treats a group of affiliated persons as one subject (see Art.148, Squeezing out of Shareholders).

The present Model Law contains several provisions under which a company is prohibited from engaging in certain operations or legal acts or where it is required to comply with special conditions. For instance, the company must keep track of its affiliated persons so as to ensure that they are not elected as its registrar, auditor, independent director, or as an appraiser of the company’s property; the appropriate prohibitions are set forth in norms of the Model Law.

Another important aspect—of critical importance for a joint-stock company—where the joint-stock company needs to monitor its affiliated persons is that of concluding transactions involving a conflict of interest. The special standards of the present Model Law govern conditions, ac-cording to which a company may enter into contractual relations with its affiliated persons as well as with affiliated persons of its affiliated persons (see the Comments to Arts.138 and 139 of the present Model Law). What is notable here is that the application of such standards requires the term ‘affiliated person’ be used not only with respect to the company’s affiliated persons but, also, with respect to a group of subjects affiliated to one other without being affiliated to the aforementioned company.

Thus, Article 143 of the present Model Law requires that a joint-stock company’s affiliated persons are required to notify the company of any affiliation to the company. The basis for this may include: the acquisition of shares of stock in the amount required to control the company; the ap-pointment (election) of a corporate officer; the occurrence of close familial relations, etc. Such notification must indicate the affiliation grounds as set forth in this Law, be executed in writing and sent to the company’s address within ten days after the occurrence of such grounds.

The present Model Law proposes that affiliated persons of a com-pany be liable for the failure to notify or for the delayed notification to the extent established by legislation. The Model Law does not indicate specific penalties for the aforementioned violation, leaving that decision to the discretion of national legislators.

At the same time, specific examples from national laws could be used. For instance, shareholders who have failed to provide information about


themselves and their affiliated persons can be subjected to the mechanism stipulated in the 1995 Kazakh Law “On Banks and Banking” (Art.17), whereby a shareholder who has failed to provide the aforementioned no-tification is banned from participating in a general shareholders’ meeting. And in the event that the information contained in the aforementioned notification is found to be false, a resolution of the general shareholders’ meeting is deemed to have been adopted excluding the votes cast by the shareholder, provided that the resolution was voted for by the majority of voting shares of stock (excluding the voting shares of stock of the shareholder who submitted a false notification). In the event that the vote cast by the shareholder is decisive, this constitutes sufficient grounds for declaring the resolution of the general shareholders’ meeting invalid upon a demand of the competent authorities or of other interested persons according to the procedure established by legislation. The officers of a joint-stock company may also be subjected to disciplinary penalties. In any case, priority should be accorded to private ownership and to avoiding the needless criminalization of this aspect. At the same time, is it reasonable to provide for administrative enforcement of compulsory measures to officers of a joint-stock company in the cases under consideration.

We should note, in addition, that since the uncontrolled use of affili-ated relationships—and, moreover, the abuse of such relationships—may result in the infringement of the rights of both the joint-stock company itself and its shareholders, information about affiliations with the joint-stock company, although intended for the company itself, must be made available to the company’s shareholders. Considering the aforementioned, Article 147 of the present Model Law requires a company to provide its shareholders and holders of other securities with lists of corporate affiliated persons indicating the affiliation grounds and the terms and conditions of the affiliation. And because a competent governmental authority is entitled to contest a number of the company’s transactions and to supervise the company’s performance of its statutory obligations under the several aspects of its activity governed by the Model Law, one of the corporate obligations is the regular submittal of reports on the company’s affiliated persons to this authority. The duty of corporate officers to duly submit such reports is ensured under the criminal liability proposed by the present Model Law as provided for by Article 184 (see above).

5. Public Availability of Company Reports and Accounts The interests of shareholders and investors (both current and future) of a joint-stock company and the fulfilment of a state’s regulatory functions are ensured through the legal establishment of a corporate duty to keep its


accounts and reports according to the procedure and within the periods of time established by legislation (Art.142, Clause 2). Furthermore, for a pe-riod of three years, a company must preserve such documentation as well as documents to which, by virtue of the Law, access must be ensured for corporate shareholders and creditors under securities issued by the com-pany (see below); they must be stored at the location of the company or at some other place indicated in the company’s articles of association.

In addition, public joint-stock companies (as defined in Art.2 of the present Model Law) are required to publish reports on the company’s operations in compliance with the Law, including compliance with normative legal acts on securities markets (Art.146). Furthermore, the articles of association of a company must specify a periodical in which publish reports must be published. In selecting the periodical, the company should be guided by the fact that it must be circulated across the entire country in which the public joint-stock company is registered.

Not only are the reports on a joint-stock company’s operations subject to compulsory publication but, also, any other information required by legislation—including that concerning the company’s branches registered in different states and the registration details of such branches (including their registration numbers and respective jurisdictions).

Article 147 of the present Model Law requires joint-stock companies to provide their shareholders and holders of bonds and other convertible securities with access to the documents listed in this Article since the content of these documents helps to form a substantiated opinion about the company’s legal and property status, its financial performance, quality of manage-ment and conduct of business, as well as its prospective activities and risks associated therewith. Amongst such documents, mention is made of the corporation’s constitutive documents, the minutes and other forms of corporate resolutions, agreements with the company’s registrar and auditor, financial and other reporting, annual reports of corporate bodies, inspection and revision certificates, communications with shareholders and other information about the business operations of the company, its business and affiliation ties, etc.

Access to the aforementioned documentation is made available at the place at which they are stored (see above). Moreover, according to the present Model Law, said shareholders and holders of other securities of the company are entitled to receive extracts from the documents or copies thereof. In regulating this issue, the Model Law maintains the required balance of interests of the company and its shareholders: the company must not incur excessive expenses in fulfilling the requests of the shareholders, even those which are lawful, but neither must it make


unreasonable profits upon such a request. This is why Article 147, Clause 3, legally establishes that the aforementioned extracts and copies—provided at a charge in response to the demand of an interested person—must not exceed the costs related to preparing and making available the extracts, or copying documents, and the dispatch thereof.

Moreover, in order to protect the lawful interests of a company, as well as to ensure the company’s lawful operation, the present Model Law provides grounds for rejecting a request to make available excerpts or copies of a document (however, not for refusing access to become familiar with such documentation) if the data contained therein constitutes a state or commercial secret.

6. Corporate Governance CodesThe present Model Law also considers recent practice, in accordance with which corporations have begun to adopt corporate governance codes based on a model or standard corporate governance codes that are recommended or prescribed by legislation. Work on the present Model Law has involved a separate discussion on the role and functions of a special corporate governance code (CGC), which has resulted in a deci-sion to establish a regime under which all the essential prescriptions and norms would be contained in the Law. It was also decided that it would not be expedient, at the level of a particular corporation, to leave the right to choose which ones to apply to the discretion of the joint-stock companies themselves.

Furthermore, the compulsory nature of such CGCs is viewed as gen-erally inappropriate even (and perhaps especially) for public joint-stock companies: the interests of public joint-stock companies, upon which there needs to be agreement, are subject to the necessity of regulating all essential corporate governance issues at the level of a law. However, there is no need to require that such a Code be adopted in order to regulate non-essential issues. Recent practice from several CIS countries, of which we are aware, shows that large corporations choose to formally adopt CGCs, with the content thereof varying only slightly from that of the standards prescribed by the Law and the company’s articles of association. The fact that there are CGCs in large joint-stock companies does not add value to these companies, does not prevent serious conflicts from arising or give them more ‘publicity’.

Considering the aforementioned, a recommendation has been in-cluded the present Model Law on developing a model corporate govern-ance code, and a duty has been imposed upon the management board (board of directors) (depending on the management model) of public joint-stock


companies to issue annual public statements on which recommendations of such model CGC have been deemed compulsory and which ones will not be applied. In the latter instance, the management board (board of directors) must explain the reasons.

Chapter X. Special Cases of Changes in the List of Shareholders

1. General Thoughts Special cases of changes in the list of shareholders mean instances where one or several shareholders are legally forced to sell their shares of stock or to purchase shares of stock owned by other shareholders irrespective of whether these shareholders wish to sell (purchase).

Following the 2004 EU Directive on Takeover Bids,57 the present Model Law contains references to two institutions: (a) the squeeze-out of minority shareholders; and (b) the right of minority shareholders to sell their shares of stock even where the controlling shareholder has not offered to purchase such shares of stock where such shareholder has exceeded the set threshold for concentration of corporate control (sell-out).

The key to understanding such institutions follows simple logic: after exceeding the accepted threshold for concentration of corporate owner-ship, the rights of minority shareholders turn into a kind of an illusion since their real influence on corporate governance disappears. The controlling shareholder, on the other hand—even if he/she/it does not own 100% of the shares of stock of a particular company— becomes in fact the only person who decides the fate of the company. In such cases, an effort to artificially support a situation in which the appearance is retained of the mutual participation of all the shareholders in the management of the joint-stock company not only fails to ensure the protection of sharehold-ers’ rights but, also, cements the situation by creating the illusion of legal intervention, while actually it has nothing to do with the true state of corporate affairs.

A solution to the problem can be found in a legal construct permit-ting shareholders amicably to ‘leave’ and to receive ‘compensation’ for terminating the ties which previously had been established with the corporation.

The ‘squeeze-out’ procedure envisages the active behaviour of the majority shareholder and the passive position of minority shareholders: 57 See Articles 15-16 of the Directive 2004/25/EC of the European Parliament and of the Council

of 21 April 2004 On Takeover Bids, OJ L 142, 30 April 2004, 12-23.


after reaching the threshold of over 95% of the total number of the com-pany’s voting shares of stock (including shares of stock held by the person and his/her/its affiliated persons), the majority shareholder acquires the right to redeem the voting shares of stock of the company and securities convertible into such voting shares of stock held by other shareholders. To complete the activities facilitating the squeeze-out procedure and as-signment of all the shares of stock to the majority shareholder, only the latter needs to express his/her/its desire to do so by forwarding a securities-redemption request addressed to the minority shareholders. The will of the shareholders being squeezed out is neither required nor considered in this case. The initiation of a squeeze-out—which eventually results in a majority shareholder being granted a number of benefits—also gener-ates a number of duties for the majority shareholder; more specifically, obligations related to payment for the securities being redeemed. Minority shareholders, on the other hand, are relieved of any obligations because the securities are assigned without their consent by an application of the majority shareholder to the keeper of the register of securities holders and the redeemed securities being mandatorily expunged from the personal accounts of their holders (or their nominal holders).

The Working Group’s idea (Art.148, Clause 4, Para. 5) is that, upon completion of a squeeze-out, the only remedy available to the squeezed-out minority shareholders is to bring an action for indemnification of damages which, in this case, would constitute the difference between the price at which a squeezed-out shareholder believes the shares of stock should have been redeemed and the price which actually was paid. The present Model Law deliberately fails to provide for any other remedies—including, for example, the restitution of redeemed shares of stock in kind; otherwise, a judicial decision in favour of even one lawsuit filed by a minority share-holder would entirely eliminate the legal effect of the squeeze-out.

The procedure for the redemption of shares of stock at the request of shareholders can be viewed as a kind of ‘counterbalance’ to the squeeze-out procedure and its mirror image: here, it is the minority shareholders who are active while the majority shareholders are passive.

The view of the Working Group is that the appearance in a company of a majority shareholder (holding over 95% of the authorized capital) symbolizes the loss of any possibility for minority shareholders to effec-tively influence the company’s management; sooner or later, this may lead to the majority shareholder abusing his/her/its rights. At the same time, it would be most convenient for the majority shareholder if a company had micro-minority shareholders; here, there would be no incentives for the majority shareholder to initiate the rather costly squeeze-out procedure


to get rid of bothersome minority shareholders (making exclusive use of the economic benefits offered by the company) or to offer the minority shareholders any kind of reasonable compensation for terminating their participation in the company. The mechanism for share redemption at the request of minority shareholders is established precisely for the purpose of protecting their interests and allowing them to leave the company, forcing the majority shareholder to return their investments to them.

2. Redemption PriceThe procedures for determining the redemption price is the same for both: at a price not lower than the market value of the redeemed securi-ties as determined by an independent appraiser. However, the price may not be lower than:

1) the price applicable to the purchase of the securities through a vol-untary or mandatory offer as a result of which the person (including his/her/its affiliated persons) holds over 95% of the overall number of the company’s shares of stock;

2) the highest price at which the majority holder or his/her/its affili-ated persons purchased or undertook to purchase these securities after the period for accepting the voluntary or mandatory offer has expired; as a result of this purchase, such person (together with his/her/its affiliated persons) holds over 95% of the overall number of the company’s shares of stock.

The present Model Law does not provide any details for determining the price of a joint-stock company’s shares of stock of which are floated in organized trading on securities markets. The independent appraiser plays the main role in determining the price of the securities being redeemed, irrespective of whether or not such securities are traded on stock mar-kets.

On the one hand, this approach is not totally successful. However, since there are no other efficient mechanisms for determining the market value of securities, in this case it is the only possible one. Furthermore, the two criteria outlined above are meant to prevent any abuse of power by the appraiser.

3. Valuation RemedyAs already has been mentioned, minority shareholders who are being squeezed out cannot challenge the redemption in order to have it de-clared invalid. The only remedy available to them is to bring an action


for indemnification of damages which they may have incurred as the result of an improper determination of the price for the securities being redeemed. This tool, which has been borrowed from American corporate law, is designed to ensure the economic stability of trade and commerce by moving from the declaration of invalidity of a transaction, corporate acts or other legal facts to a compensatory regime, i.e., the recovery of damages while retaining the legal force and effect of prior legal facts.

The statute of limitations for bringing an action for the indemnifica-tion of damages is limited to six months from the moment when the holder of the securities knew that they were expunged from his/her/its personal account (securities account). This provision is also aimed at promoting legal certainty in corporate relations after completion of a squeeze-out.

4. Filing Applications with a Guarantor or Majority Shareholder

It should be noted that the right of minority shareholders to demand re-demption arises only when the majority shareholder has fulfilled his duty of sending notification stating that they have such right. This notification must be forwarded to the company together with a bank guarantee as security for payment of the redemption price of the company’s securities to the respective holders.

In the event that the majority shareholder fails to notify the company within the established timeframe, the minority shareholders are accorded a right to file an application for redemption of securities held by the shareholder to which is attached a copy of the instruction—directed to the keeper of the corporate register—to transfer the redeemed securities to the majority shareholder. A minority shareholder may realize his/her/its right within one year after becoming aware of the arising of this right.

In the event that notification has been made but timely payment has not been made by the majority shareholder for the redeemed securities of the company, the former holder of securities at his/her/its own discretion is entitled either to demand that the guarantor who furnished the appro-priate banking guarantee make payment for the price of the redeemed securities or unilaterally terminate the securities purchase agreement and demand return of the securities.

5. Overall Assessments and Future StepsDespite the fairly detailed regulation of issues involving mandatory share redemption at the demand of majority—as well as of minority—share-holders, it is regrettable that the present Model Law has failed to address


what is termed a ‘takeover’ (pogloshchenie), i.e., the making of an offer: either a voluntary or mandatory offer for the acquisition of shares of stock (or other securities convertible into the company’s shares of stock) of the company being taken over, addressed to all the shareholders of the company that is being taken over. According to the general rule, the squeeze-out and redemption of shares of stock must take place at the demand of the remaining shareholders precisely after the takeover has been completed and has been completed successfully for the person making the takeover where the latter becomes a large majority shareholder. Indirectly, is pre-cisely this for which the present Model Law provides when referring to the price of the securities being redeemed which is calculated, inter alia, based on the price paid pursuant to a prior voluntary or mandatory offer (see Art.148, Clause 4, Para. 2 and Art.150, Para. 2). It is presumed that the norms for a takeover made pursuant to a prior voluntary or mandatory offer for share acquisition will be included in model legislation on securi-ties markets as a single, updated block. Thus, after said block is included into the model legislative acts on securities markets, the two blocks will be synchronized.

In further improving institutions dealing with squeeze-outs and with the redemption of shares of stock at the demand of shareholders—as well as in implementing the present Model Law in national legislation of the CIS states—attention should be focused on developing mechanisms which are as detailed as possible for calculating the price of securities being redeemed and for providing shareholders who have been squeezed out with effective remedies for determining the fair price of the redeemed securities. For this purpose, different timeframes (dates) could be envis-aged upon which such price would be determined, as would a financial and economic assessment for determining the price of shares of stock, during judicial proceedings, and preliminary judicial supervision over whether such price has been correctly determined (or whether the redemption of shares of stock at the demand of the majority shareholder has been lawfully performed). And, finally, in the future, efforts should be focused on a detailed consideration of the issue of the unlimited nature of said institutions not restricted by a specific timeframe (as so often is the case in national legal systems, although the present Model Law does not limit the term for initiating a squeeze-out) and on an assessment of whether a lowering of the threshold values below 95% should be allowed.


Chapter XI. Company Reorganization

1. Mixed ReorganizationThe present Model Law contains special rules and regulations for cases of what is termed a ‘mixed reorganization’. In this context, a mixed reor-ganization is understood in two ways: first, the possibility to combine the elements of several basic forms of reorganization (transformation, merger, takeover, spin-off, split-off) within one reorganizational procedure; and second, the possibility of a single reorganization (except for pure transfor-mation) involving two or more legal persons of different organizational-legal forms.

It is worth mentioning that in the majority of CIS national legisla-tion— including Russian corporate legislation—this issue has not yet been properly resolved; this creates numerous difficulties since, in practice, re-organization needs to be carried out in several stages (first transformation, then one or more of the four aforementioned forms). This significantly complicates the procedure and increases reorganization timeframes, caus-ing additional and unwarranted expense and risking the reorganization being rendered invalid. Yet, it has long been common practice in most developed legal systems to combine elements of the different basic forms of reorganization into one reorganizational procedure or for different types of legal persons to participate therein. 58

2. Balance of Interests of the Person Being Reorganized and of Creditors

The present Model Law proposes a fairly soft legal regime for joint-stock companies as regards mutual relationships with the creditors of organi-zations involved in a reorganization: if the rights of creditors would be accorded such importance that a legal person’s reorganization could ef-fectively be blocked by filing a demand for the performance of all (or for most of) the obligations of an organization involved in a reorganization, the creditors would be granted an economic right of veto over carrying

58 A good example here would be the civil law of Germany. According to the German Company Reorganization Act in force since 1994 (see Umwandlungsgesetz (Artikel 1 des Gesetzes zur Bereinigung des Umwandlungsrechts vom 28. Oktober 1994 (BGBl. I S. 3210)) <http://bun-desrecht.juris.de/bundesrecht/umwg_1995/gesamt.pdf> [11.01.2009]), all the various combined options of the different reorganization forms within one procedure are allowed. This is because the number of reorganization options resulting from combining the elements of ‘basic types’ is over one hundred; see M.I. Braginskii, T.M. Medvedeva, and A.V. Timofeev, Reorganizatsiia i likvidatsiia iuridicheskykh lits po zakonodatel’stvu Rossi i Zapadnoi Evropy (Iurist, Moscow, 2000), 71.


out the reorganization which they could exercise to the detriment of the business being reorganized.

However, while the present Model Law does not grant creditors an absolute right to demand early performance or termination of one or another obligation of a company being reorganized, it does accord them the right to file an appropriate demand with a court. Thus, it will be the court that decides whether a specific demand of a creditor is factually and legally warranted taking into account the particularities of the company and of the reorganization.

But, a court can refuse to grant such demands of creditors of the organization being reorganized who have filed a request for premature performance or termination of an obligation by a debtor in the following cases:

1) the organization being reorganized proves that, as a consequence of the reorganization, the rights and legal interests of creditors will not be violated;

2) the terms and conditions of the reorganization envisage that the organizations being incorporated (continuing to exist) as a result of the reorganization are jointly liable for the obligations of the organization being reorganized;

3) there is evidence of sufficient security for performance of the ap-propriate obligations.

In this case, the rights and legal interests of creditors of an organization being reorganized are subject to protection where this does not contradict the essence of the underlying obligation between the creditor and the debtor-organization which is being reorganized.

3. Economic Substantiation for ReorganizationThe present Model Law consolidates a number of legal guarantees of a primarily informational nature aimed at creating a mechanism for the disclosure of informa-tion about the reorganization which is being prepared.

For example, prior to adopting a resolution on reorganization, a profit-making company must prepare a written document containing a detailed explanation—as well as a legal and economic feasibility study—of the planned reorganization. This mechanism enables conditions to be created that prevent the abuse of the right to reorganization, including the unfair re-distribution of property and/or corporate control and, also, provides wide-ranging possibilities for interested persons (minority shareholders or creditors) to exercise their right to protection in court.


However, a company can still forego the fairly costly procedure of preparing an economic substantiation where all the members of the organizations, involved in the reorganization, have waived the written economic substantiation (as well as in other cases directly stipulated in the present Model Law).

A special article—containing an impressive list of documents that, within thirty days after adoption of a reorganization resolution, must be provided to the members of each organization involved in a reorganization—has also been dedicated to securing the rights of members to information.

4. Contesting a ReorganizationOne of the key ideas on reorganization procedures contained in the present Model Law can be summarized as follows: in principle, a reorganization, if completed, may not be annulled, and a reversal of the consequences of reorganiza-tion will be permitted only as an extraordinary remedy where all other remedies for protecting rights and legal interests have been exhausted.

In most cases, however, both the members of companies being reor-ganized and their creditors have other remedies available to them (insofar as from the moment of completion of the reorganization all the reasonable time periods have not expired), the primary one of which is an action for indemnification of damages. Thus, upon completion of a reorganization—taking into account the fact that a reorganization always entails the formation or modification of a legal subject, and not a separate object of rights—a reorganization should not be annulled either politically or legally where the rights of individual participants can be protected by specific legal means.

This approach is focused primarily on ensuring the stability of trade and commerce since if the subject of a right is forcibly removed, as having been created with gross violations of the Law, after a reorganization has been completed and all the reasonable time periods have expired, this would inevitably lead to a chain reaction of contesting (and annulling ) of everything which such subject had concluded during the time of its existence which, in turn, would lead to serious negative consequences for trade and commerce.

Therefore, primarily in the interests of stabilizing commerce and trade, the consequences of voiding certain legal facts, performed during the course of a reorgani-zation, have been softened somewhat and do not affect the reorganization itself:

— rendering invalid a reorganization resolution, merger (takeover) agreement, or the constitutive documents of an organization created


as a result of an reorganization (in whole or in part), or amendments thereto, does not entail the liquidation of said organization;

— rendering invalid a reorganization resolution (except for resolutions on forming a permanent executive body of an organization, created as a result of a reorganization, as well as of other bodies legally entitled to ratify transactions effected by the organization) does not entail rendering invalid transactions which have been concluded by said organization unless the aforementioned transactions contradict the norms of legislation governing the appropriate legal relationships.

The same purpose has been pursued in establishing a shortened period—three months after the date upon which the reorganization resolution was adopted—for bringing an action to render invalid a reorganization resolution or a merger (takeover) agreement.

The present Model Law also provides for a norm enabling the prevention of possible abuses by members who may deliberately involve the company in lawsuits related to formal and de minimis violations of the Law which allegedly have been committed during a reorganization. For example, a court hearing a case is entitled to uphold the validity of the challenged ruling on state regis-tration of organizations, created by way of a reorganization taking into account all the facts of the case, where the violations of a law or of other legal acts committed during the adoption of the ruling on state registra-tion are not deemed to be material or where they can be eliminated (or have already been eliminated).

5. Procedure and Specifics of a Reorganization Involving Legal Persons with Different Organizational-Legal Forms

The present Model Law provides regulations for a basic reorganization procedure applicable to all joint-stock companies consisting of the following stages:

1) conclusion, by authorized persons of organizations involved in the reorganization, of a merger (takeover) agreement in instances where the reorganization has the form of a takeover or a merger or split-up (spin-off) simultaneously associated with the merger (takeover);

2) adoption of a reorganization resolution and approval of a transfer act and, also, a merger (takeover) agreement by the members of an organization (or organizations) being reorganized, in instances where the reorganization has the form of a merger (takeover) or split-up (spin-off) simultaneously associated with the merger (takeover);


3) notification to the registering authority and creditors of all the organizations, involved in the reorganization, of the reorganization resolution;

4) the state registration of newly created successor organizations and/or the making of entries in the unified state register of legal persons certifying the termination of activities of the predecessor organi-zations and of entries of legal succession (in the event of split-up (spin-off) simultaneously associated with a merger (takeover).

A reorganization resolution or merger (takeover) agreement may provide a special procedure for concluding individual transactions and/or types of transactions by an organization being reorganized or prohibit the conclusions thereof from the moment that a reorganization resolution has been adopted until the reorganization has been completed. Violation of such procedure or prohibition may result in the invalidity of the transaction. However, a court may dismiss an action seeking declaration of the transaction as invalid where:

1) as a result of its performance, the challenged transaction would not inflict any damage to the organization being reorganized or to the claiming member (or, where, the challenged transaction has not yet been performed and, in the considered opinion of a court, it would not inflict any damage);

2) during the hearing of lawsuit brought by the organization being reorganized, it has not been proven that the other party knew or should have known about the conclusion of the transaction in viola-tion of the special requirements for the transaction.

Special articles of the present Model Law have been dedicated to the contents of merger (takeover) agreements and to the procedure for adopting reorganization resolutions for each form of reorganization. The specifics of the various forms of reorganization involving limited (addi-tional) liability companies and joint-stock companies are also described in separate articles.

6. Valuation of Shares of StockThe market value of shares of stock (equity stakes, participatory units) held by an organization involved in a reorganization, which is used to calculate the share-exchange ratio (equity stakes, participatory units), and the amount of compensation to be paid to the members of the or-ganization being reorganized as a result of the reorganization (adoption


of resolution on reorganization), are determined by an independent ap-praiser (appraisers).

However, the valuation procedure can be avoided in the following in-stances:

1) where all the members (shareholders) of the organizations involved in the reorganization have waived an appraisal;

2) where all shares of stock (equity stakes, participatory units) of the organization involved in a merger belong to the organization with which the merger is being made;

3) where all shares of stock (equity stakes, participatory units) of the organization being taken over belong to the organization making the takeover;

4) where the shares of stock of the company being reorganized are on a quotation list of an organizer of trading on securities markets (in this instance, the market value of the shares of stock may not be less than the weighted average price of the shares of stock deter-mined pursuant to the trading results of the organizer of trading on securities markets during the last six months).

7. Overall Assessments and Future StepsDespite the quite detailed regulation of procedural issues of conducting a reorganization, a number of aspects remain unregulated in the present Model Law which will require further study and revision. At the same time, the level of detail and revision with respect to specific institutions of reorganization can be viewed as a significant step forward as compared to the current status of this area of legislation in the overwhelming major-ity of the CIS states.

It is suggested that in further developing the legal rules and regula-tions involving reorganization—including those reorganizations involv-ing joint-stock companies or resulting in the formation of a joint-stock company, as well as the implementation of the present Model Law in the national system—focus be placed on the detailed consideration of disclo-sure mechanisms for information about conducting a reorganization, the state registration of legal persons created by way of a reorganization, the issuance and state registration of the issuance of securities during reor-ganization, and, finally, of the possibility to challenge (in whole or in part) the legal facts involved in a reorganization. Such steps require not only improvements in corporate legislation but, also, an overhaul of legislation on the state registration of legal persons and securities markets as well as


an improvement in valuation standards and detailed judicial practice for valuing businesses and shares of stock.

Chapter XII. Groups of Companies

1. IntroductionChapter XII of the Model law is dedicated to regulating groups of com-panies. The provisions contained in this Chapter represent significant innovatory ideas in the field of corporate law for the CIS states. True, some CIS states have specific laws on holding companies59 as well as on financial and industrial groups60 which cover many of the same basic issues. How-ever, they lack answers to the important issues of protecting the rights of minority shareholders on the one hand, and those of creditors, on the other. In this respect, the most notable are those provisions dealing with subsidiaries (Art.130) and dependent companies (Art.131) from the 1994 CIS Model Civil Code which have been included in the Civil Codes of some CIS states.61 Those norms, for the most part, only represent specific provisions dealing with some issues of liability but they fail to provide a solution to the primary problem: to what extent can a controlling share-holder engage in its leading functions with respect to the company which the shareholder controls?

One of the main reasons why the appropriate regulations are missing may lie in the lack of unity and agreement about the terms of a conceptual foundation. On the one hand, the authors of the 1998 Model Law “On Joint-Stock Com-panies” did manage to borrow provisions from the Model Civil Code and include them in their version of the Law “On Joint-Stock Companies”. On the other hand, they adopted these provisions only upon condition that—in order for them to be enforced—inter alia one needs proof of an

59 See Law of Ukraine of 15 March 2006 “O kholdingovykh kompaniiakh”, Svedeniia Verkhovnoi Rady Ukrainy (2006) No.34 item 291.

60 See Law of the Republic of Belarus of 4 June 1999 “O finansovo-promyshlennykh gruppakh” (as amended), reproduced at <http://www.levonevski.net/pravo/razdel2/num4/2d40.html>; Law of the Republic of Moldova of 14 December 2000 “O finansovo-promyshlennykh gruppakh”, Monitorul Oficial (2001) Nos.27-28 item 90, reproduced at <http://cis.gov.md/ru/content/277>; and Law of Ukraine of 21 November 1995 “O promyshlenno-finansovykh gruppakh v Ukraine”, Golos Ukrainy (21 May 1996) No.90.

61 See Arts.94 & 95 of the 1994 Kazakh Civil Code (Vedomosti Verkhovnogo Soveta Respubliki Ka-zakhstan (1994) No.23-24 (Part One)); Arts.150 & 151 of the 1996 Kirghiz Civil Code (Vedomosti Zhogorku Kenesha KR (1996) No.6 item 80 and Zhogorku Kenesha KR (1998) No.6 item 226), and Art.105 of the 1994 Russian Civil Code (Sobranie Zakonodatel’stva RF (1994) No.32 item 3301 (Part One)).


intentional act on the part of the shareholder.62 This can be explained by the fact that the draftspersons of the 1998 Model Law viewed the concept of limited liability as one of the most important for protecting shareholders and creditors; furthermore, they were concerned about providing judges multiple opportunities to violate the limited-liability principle.63

This concept—albeit in a softer form—continues to be seen in cur-rent CIS laws on joint-stock companies.64 This can be explained by the fact that the 1998 Model Law Working Group was guided primarily by the approach used in Anglo-Saxon countries according to which means other than the controlling shareholder’s liability must be used to protect the rights of minority shareholders and creditors. According to this concept, the preferred mechanism for protecting minority shareholders is the right to request a stock redemption.65 In other words, minority shareholders are granted the right to sell their shares of stock to the controlling share-holder and, thereby, to leave the joint-stock company. This concept has been used in Article 25 of the 2003 Law of Kazakhstan “On Joint-Stock Companies” and Article 84 (1) of the 1996 Law of the Russian Federa-tion “On Joint-Stock Companies”. However, in Russia, its application is restricted solely to ‘open joint-stock companies’.

This idea is reflected in the present Model Law to the extent that this provision is borrowed from the law and integrated into the law on securi-ties markets. Accordingly, it is suggested that the right of shareholders be limited to an offer of their shares of stock to the controlling shareholder of the company, the shares of stock of which are traded in the public mar-ket.66 Moreover, consideration needs to be given to the issue of creating special rules and regulations for groups of companies.

2. The Need for Special Regulations for Groups of Companies

Western countries do not share a uniform opinion of the need for estab-lishing special regulations with respect to groups of companies. On the one hand, advocates of the Anglo-Saxon approach to understanding the law believe that regulations with respect to the long-term debt market

62 See Art.6 of the Model Law; Black et al. op.cit. note 7.63 See Black et al. op.cit. note 7, 111ff.64 See Art.63 of the 1995 RF Law “Ob aktsionernykh obshchestvakh”, op.cit. note 17. 65 See Davis and Hopt, op.cit. note 51, 252. 66 This decision is compliant with the EU Directive on Takeover Bids of 21 April 2004, op.cit.

note 57.


and the right of shareholders to leave the company are sufficient.67 This approach has been rejected, however, by some European countries where—to a greater or lesser degree—there are rules and regulations governing groups of companies.68 Thus, there is no single set of European or other international standards on drafting and interpreting the law concerning groups of companies. What is interesting to note, however, is that some Middle Eastern and European countries have begun to include sections on groups of companies69 in their new legislation on companies and, also, that similar regulations are also contained in the acquis communautaire.70

A clearly defined set of standards regulating the status and activi-ties of concerns is especially well established in Germany. Nevertheless, opinions on the functional significance of such standards, here too, differ greatly. Continental Europe uses special legislation on groups of companies because, first of all, such groups of companies exist there; secondly, they are accorded a great deal of significance in practice. The legal problem here is that such groups of companies are economically viable only when distinct companies belonging to one group of companies have a more or less unified management. This economic principle contradicts the legal principle, according to which any natural or legal person is independent and may be managed only based on its own interests. If the aforementioned principle were consistently implemented, the unified management of a group of companies would not be possible.

Thus, a discussion of the laws on joint-stock companies currently in force in the CIS states can lead one to conclude that the legislation in force is grounded precisely in this basis. The most decisive factor here is the regime for concluding commercial transactions involving interested persons. This provides that, in the event that the conclusion of a particu-lar legal transaction constitutes an interest for a specific shareholder, the uninterested shareholders of the joint stock company must approve it.

In the context of regulating groups of companies, this rule would mean that a resolution on transactions concluded within the companies 67 See Andreas Cahn and David C. Donald, Comparative Company Law: Text and Cases on the Laws

Governing Corporations in Germany, the UK and the USA (Cambridge University Press, Cambridge, 2010), 681.

68 See Gérard Hertig and Hideki Kanda “Related Party Transactions”, p. 153 (176), in Kraakman et al., op.cit. note 51. See “Corporate Group Law for Europe: Forum Europaeum Corporate Group Law”, European Business Organization Law Review (2000) No.2, 165-264.

69 See Arts.55-64 of the Hungarian Act “A gazdasági társaságokról” of 4 January 2006, Magyar Közlöny (2006) No.1; and Arts.6-7 of the Polish “Kodeks spółek handlowych” of 15 September 2000 (as amended), Dziennik Ustaw (2000) No.94 item 1037.

70 See Janet Dine, Marios Koutsias and Michael Blecher, Company Law in the New Europe: The EU Acquis, Comparative Methodology and Model Law (Edward Elgar Publishing Ltd, Cheltenham, UK, 2007), 307ff.


owned by one group of companies would be adopted by the minority shareholders. For this reason, the single and unified management of a group of companies is made much more difficult—if not impossible.

The first objective of the legislation on groups of companies, therefore, should be to regulate the issue of whether a company can be managed, inter alia, in the interests of others and under what conditions this management could be possible. If this management is, in fact, allowed—and if it is warranted from an economic point of view—it will be necessary to regulate the issue of protecting interested persons. This raises the question of whether this protection could be secured other than by the right of shareholders to sell their shares of stock to a controlling shareholder.

On the one hand, this is hampered by the fact that the threshold values of equity interests—established for a block of shares of stock—are extremely unreliable since holding such equity interests easily can be concealed. On the other hand, the right of the shareholders to sell their shares of stock can significantly increase the price for an investor to ac-quire a controlling interest in a joint-stock company where the investor did not intend to acquire a number of shares of stock above the level deemed to constitute a controlling interest. These circumstances speak of the need to adopt special legislative norms allowing minority shareholders to remain members of a joint-stock company despite the acquisition by a shareholder of a controlling interest.

The inadequate number of regulations governing the activities of groups of companies has been noted in Russian legal literature. For ex-ample, the 2006 Concept for developing corporate legislation talks about regulating ‘integrated business-structures’.71 The discussions surrounding the project to improve the RF Civil Code have cited Articles 105 and 106 of the Russian Civil Code, proposing that measures be adopted to increase liability.72 And finally, a number of unresolved issues have been mentioned regarding the Russian economy.73 The development of the present Model Law has been an effort to introduce proposals to resolve several of the aforementioned problems.

71 See “Kontseptsiia razvitiia korporativnogo zakonodatel’stva”, op.cit. note 18, Section IV.72 See “Kontseptsiia razvitiia zakonodatel’stva o iuridicheskykh litsakh”, op.cit. note 19, Section

II.6 , paras. 1, 3.8.73 See Irina Sergeevna Shitkina, “Pravovoe regulirovania ekonomicheskoi zavisimosti”, Khoziaistvo

i Pravo (2010) No.8, 31.


3. Tasks of Regulation and Opportunities for the Resolution Thereof

The underlying issue is whether there is common agreement on special provisions on groups of companies. In this respect, consideration should be given to the issue of the possibility “to exercise a dominant influence upon a company” (Art.172 of the present Model Law). This starting point initially corresponds to the European interpretation of the law.74

Here, the core innovation is a new understanding of threshold values. Accord-ing to the proposed concept in the Model Law, the possibility to exercise a dominant influence is sufficient in itself, and holding a controlling block of shares of stock is no longer a necessary prerequisite. There is a shift in the notion of holding a controlling block of shares of stock: the burden of proof has been changed. Dependent companies, normally, have to prove the extent of the influence of a controlling organization. But, where the preconditions are present for considering a legal person as ‘controlling’ within the meaning of Article 2 of the present Model Law, the burden of proof shifts; now, it the controlling legal person who must prove that it did not exercise a dominant influence.

Article 173 of the present Model Law sets out special prescriptions as regards transparency and clarity. This is necessary—as are those prescrip-tions in the field of legislation on securities markets—because, in this case, the obligation to disclose information applies only to joint-stock companies, the shares of stock of which are traded in regulated markets. In one way or another, it should be clarified as whether there is any overlap with the appropriate national laws as concerns the disclosure of informa-tion about affiliated persons.

The concept of an agreement on delegating the management of a joint-stock company to a different company is set out in Article 174 of the present Model Law, which the Russian literature also proposes for inclusion.75 This provision is intended to provide members of groups of com-panies with an opportunity to regulate their relations on a contractual basis. On the one hand, what is important in this provision is that it describes the contents of said agreement which, mandatorily, must contain provisions protecting shareholders. On the other hand, mentioned should be made of the need for a qualified majority. The decisive legal consequence is for the controlling company justifiably and fairly to be able influence the dependent company. 74 See Art.1 of the Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article

54 (3) (g) of the Treaty on consolidated accounts, reproduced at <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31983L0349:en:HTML>.

75 See Shitkina, op.cit. note 73, 35.


The experience of Germany, where a similar provision currently is in force, shows—more than anything else—that only some companies make use of this opportunity. What most often happens in practice is that a dominant influence is exerted, in fact, without the signing of an appropriate agreement on the transfer of control over the joint-stock company to a different enterprise. Article 175 of the present Model Law contains an important prescription for resolving this conflict: it is strictly prohibited to exert a dominant influence to the detriment [ushcherb] of the de-pendent company.

However, there is an exception where there is a common business plan providing that the ‘pluses and minuses’ of companies, which belong to one group, are apportioned at least equally over a specified and foreseeable period of time.76 This business plan has primary significance since—by reference to it—the controlling company may exempt itself from liability. In the event that there is no business plan, the controlling company must indemnify the dependent joint-stock company for the damages which it has incurred.

Compared to the law currently in force, this provision eases somewhat the regulations in the following three aspects. First, there is no further dependence upon the activities of the controlling company. The company itself is primarily liable for damages incurred by the dependent company. The only thing which it has to prove is that this is a controlling company within the meaning of Article 172. Secondly, where the existence is assumed of a cause-and-effect relationship between exercising influence and causing damage to the company, the task of the controlling company is to prove that, in fact, there is no cause-and-effect relationship between exercising influence on the company and causing it damage.

Moreover, the Law introduces lighter conditions for proving the damage which is subject to indemnification. According to the aforementioned provision, the dependent company does not have to prove that it has in fact incurred specific damages. Moreover, the annual damage is defined as a rounded value of damage, including the appropriate profit. As for the appropriate profit, a recommended rule-of-thumb is to consider the amount of profit prior to the acquisition of a controlling block of shares of stock or the average amount for the given field.

At this point, it is appropriate to mention Article 43 of the present Model Law, which prescribes shareholder liability for indemnifying dam-ages where there is the presence of fault. However, in the case under consideration here—concerning the relationship between the controlling company liability and the dependent company—liability does not depend 76 This thought has been developed by French courts and has been reflected, primarily, in Hun-

garian legislation.


upon the amount of the shareholder’s participatory interest but, rather, upon the scale and extent of influence. Thus, the issue of fault does not play a role here. The only decisive fact is that management authority and liability are mutually dependent.

If the previous provision has principally been designed to protect the rights of minority shareholders, Article 176 of the present Model Law sets out standards for the further protection of both minority shareholders and creditors. Clause 1 establishes the rights of a shareholder to sell shares of stock in the company to a controlling shareholder in the event that the influence upon the company, exerted by such shareholder, inevitably inflicts damages upon the company. Clause 2 of the same Article requires that the controlling company bears subsidiary liability in the event of the dependent company’s bankruptcy. The key difference between the Model Law and the legislation currently in force lies in the fact that liability is not determined by the extent of fault of the controlling company but, rather, by negative influence and by the bankruptcy of the dependent company resulting from the exercise of negative influence by the control-ling company. Thus, the controlling company may protect itself by arguing that there was insufficient causation because the dependent company could have gone bankrupt without the exercise of such influence. But, the controlling company cannot base its argument on the fact that it did not intend to cause bankruptcy. What is important is that according to Article 176, Clause 3, the controlling company can protect the business plan of a group of companies from the liability imposed on the group of companies.

In Article 177, an attempt has been made to find a workable solution to the problem of mutual participation of shareholders. The decisive legal con-sequence is the limitation of the right to vote. This legal consequence primarily operates in relation to dependent and affiliated companies. This threshold is excessively high which is why national legislators are offered a choice and other, lower, thresholds.

Chapter XIII. Liquidation of CompaniesUnlike natural persons, legal persons are a product of a state’s legal system. For this reason, their formation—as with their liquidation—is subject to state regulation. In accordance with the requirements of legislative prac-tice, as well as those of international standards, the Model Law provides three ways for liquidation, all of which are used for different purposes and with different end results; viz., transformation, bankruptcy and voluntary liquidation pursuant to Chapter XIII of the Model Law.


Transformation is undertaken for the following purpose: to change the company’s form of incorporation while retaining its consolidated property. Previously, this was only possible through the liquidation of a previously existing company and the formation of a new one. The provisions on transformation from Chapter XI of the present Model Law make this complex and costly procedure an optional one, allowing changes in legal form while keeping separate and distinct property untouched.

Bankruptcy legislation is applied to a situation where a company is no longer able to participate in market relations due to net debt and/or insolvency (naplatezhesposobnost’) and where it must be forced to dissolve or sustain structural changes. This process is not regulated by company legislation; rather, it is procedural in nature and is regulated by special laws on bankruptcy proceedings.

In contrast to the aforementioned processes, liquidation proceedings within the narrower meaning of Chapter XIII of the present Model Law correspond to an independent decision to create a legal person, which is reflected in the articles of association or in a shareholders’ resolution. This process is also ‘voluntary’77 which is entirely different from the process of dissolution of a company through the collective mandatory enforcement of a bankruptcy judgment. On the other hand, liquidation proceedings are aimed at the total liquidation of distinct corporate property by way of settling claims with all creditors and dis-tributing remaining assets amongst the shareholders; in this way, it differs from the process of transformation.

The difference between the purposes and objectives pursued within the three processes makes it necessary to develop different avenues in relation to the processes involved; this makes it possible to take into account, in equal measure, the totally different interests of creditors, shareholders and the state. Moreover, it is expedient to separately regu-late these legal forms of dissolution: transformation and liquidation to be regulated by way of a law on joint-stock companies while bankruptcy proceedings, with their focus on forced dissolution—regulated by a special law within the sphere of civil procedure law or the law of enforcement. This was something that was not always successful in the first generation of the post-Soviet legislation—especially with respect to liquidation and bankruptcy proceedings.

The present Model Law provides for the realization of these vari-ous regulatory purposes and set forth a legal framework of liquidation that

77 The term ‘voluntary’, as used in the legislation, is figurative; it primarily reflects the independent and legal nature of liquidation. However, we should keep in mind that the liquidation process does not necessarily satisfy all the claims of shareholders in the situation set out by the Law. Moreover, where special considerations are present, liquidation may even occur where sup-ported by the minority against the will of the majority, but in this case, through a court.


meets the requirements of business relationships and is based upon internationally recognized principles. Important aspects are realized with its help which, in one way or another, must be considered by each legislative authority in developing a law on liquidation and which, to a degree, conflict with one another in the following: (a) the interests of creditors in the full settlement of their claims, (b) the interests of shareholders in receiving the maximum amount of property (in the form of monetary payments), and, finally, (c) the interests of the state and all market players in having the process of dissolution carried out with maximum transparency and the availability of legal guarantees.

The legal nature of liquidation is, for the most part, expressed in the fact that the process is initiated pursuant to the provisions contained in the company’s articles of association, for instance, within the period estab-lished thereby or according to the procedure for adopting resolutions by the appropriate corporate bodies. As a rule, such a resolution is adopted by a qualified majority of shareholders since liquidation proceedings, to a certain extent, represent the ultimatum form of amending the articles of association. Only in exceptional cases can the initiative come from a minority of shareholders where there are important intra-corporate grounds which—in turn on the basis of significant reasons—are subject to confirmation by way of judicial proceedings. Such mechanisms in their entirety are clearly regulated in Article 178.

It unequivocally follows from the material provisions contained in Article 179 that an important precondition for performing a lawful voluntary liquidation is the availability of property sufficient to settle the interests of all creditors. Liquidators need to register this property within a short period of time and to enter the appropriate information in the interim balance sheet (Part 3, Art.179). In the event that the avail-able property is insufficient, the liquidation proceedings must be transformed into bankruptcy proceedings because only this mandatory process makes it pos-sible to construct a hierarchy of creditors and to ensure the payment to creditors of the amounts which they are due based on their interests. In the event that the liquidators fail to perform this responsibility, they are subject to strict property liability.

An understanding of the structural interface between liquidation and bankruptcy proceedings makes it obvious as to why Article 179 is on solid ground in providing that the claims of creditors are settled as and when they submit the appropriate applications. This corresponds to the concept of the liquidation proceedings, according to which there is sufficient property to settle the claims of creditors. Here there is no need to form a hierarchy of a company’s creditors and classify their claims. The essence of the hierarchy


of claims, in different classes, is to find a solution to the problem and to ensure a socially commensurate (sotsial’no sorazmerno) distribution where it is obvious that there is insufficient property to settle all the claims of creditors in full. In this case, the Law requires that the liquidators promptly prepare a petition to initiate bankruptcy proceedings for the company; otherwise, they are subject to property liability (Art.179, Clause 5).

Thus, the constant economic contradiction between liquidation and bankruptcy proceedings can be summarized as follows: Liquidation is a proc-ess aimed at dissolving a company where there is sufficient property to satisfy the claims of creditors. In turn, bankruptcy is a process aimed at dissolving the company where the available property is insufficient. During the transition period in certain countries, the codification of the clear alternatives of this system was impeded by a number of laws from the moment of their adoption. Specifically, the 1994 CIS Model Civil Code and the subsequent national civil codes in the region did not provide for a distinction amongst the forms of company dissolution, and there was no definition of a system of priorities for settling the claims of creditors.

However, a situation could arise when neither bankruptcy nor liquida-tion could be implemented. This happens where a company has no property whatsoever. In such cases, liquidation is unreasonable since implementation itself assumes expenses. On the other hand, the market requires trans-parency and legal guarantees. In acknowledging this problem, Article 178 empowers a court to use its judicial powers to dissolve a legal person which has no property. Obviously, in this case, due to the far-reaching effects of dissolution, the court will be responsible for conducting a particularly thorough inspection—including one not only of the company’s property relationships but, also, of the history of the company.

A particularly difficult and extremely economically inconvenient situation arises where, even if a company has property, it might be insuf-ficient to cover the expenses of bankruptcy proceedings, i.e., at a very minimum, the court costs and expenses of the bankruptcy trustee and creditors’ committee. In this case, the court will deny an application for the institution of bankruptcy proceedings. Thus, as soon as it has become clear that a legal person is insolvent or in debt, the commonly recognized and economically justified principle of carrying out a lawful liquidation also cannot be realized.

To a certain extent, the law is rendered powerless: here, there are abnormal and unmanageable liquidation proceedings during the course of which is clear—right from the start—that the property is insufficient to settle all the claims of creditors and that the principles of equal treat-ment of creditors will not work. Since there is almost no chance to settle


the debt, virtually no one is prepared to act as a liquidator. Each credi-tor can rely only on his/her/its own means to achieve the satisfaction of its own claims during the course of the mandatory enforcement of the judgment.

However, in practice, a situation as serious as this can arise only where the shareholders have acted illegally because they failed to timely commence the company’s liquidation or to institute bankruptcy proceedings. Article 183 regulates this situation in an attempt to achieve a kind of balance: it establishes direct liability of shareholders vis-à-vis creditors. Thus, the sole liability of a legal person cancels out the core principle and affects the property of the shareholders where—when such a situation arises—they are at fault. This happens where the company’s inability to pay or the lack of property is a result of their instructions or acts, or where the personal property of shareholders has been comingled with corporate property. The situation where neither bankruptcy proceedings nor liquidation pro-ceedings of the company can properly be carried out is, to some extent, compensated by the existence of this liability. As a rule, the settlement of creditors’ claims arising from Article 183 will take place outside liquidation proceedings because such claims are directed not against the company but, rather, against its shareholders.

Such cases are usually transferred to the public prosecutor’s office because it is only logical that such a situation would occur only where acts punishable under criminal law have been committed as part of a declaration of bankruptcy.

Current experience shows that the liquidation proceedings, similar to the process of forming a company, cannot be accelerated and can often take no small amount of time. Due to economic factors, it is unacceptable to establish a general period by law for such proceedings. Thus, in general it is correct to state that the moment of the formation or liquidation of a legal person is the date of making the appropriate entries in the registry. However, there is also a need to regulate a phase of liquidation which is not terribly pressing. This has been omitted in many laws from the transition period which only provide for an entry on final liquidation to be made in the register. In contrast to the above, and pursuant to international practice, Article 179 provides for the registration of a liquidation order and for the relevant note to be made in the corporate name of and its business correspondence so as to ensure transparency for representatives of the business community. The process may be considered complete only after an entry of final liquidation has been made in the register.

This is consistent with the legal nature of liquidation expressed in the fact that usually the heads of active companies, advertised on the market,


are also appointed as liquidators. This is also the case in fact where such an appointment is agreed upon not by the general shareholders’ meeting but, rather, sanctioned by a court (Art.178 Clause 2). The fact of responsibility for state property is seen in the situation where, in liquidation proceedings for companies with state participation, a representative of an appropriate state institution must take part (Art.178 Clause 3). The fact that liquida-tors are equated to project managers in their rights and obligations is in accord with the aforementioned principles. They also bear liability where they are unable to cope with their obligations.

Article 179, Clause 4, states with sufficient clarity that the tasks of the liquidator are to alienate joint property, after which the general proceeds are used to pay the creditors and distributed amongst the shareholders. Moreover, the provision of general preferences remains in force (Art.181, Clauses 1 and 2). Thus, a shortcoming of the Model Civil Code, which found further reflec-tion in several national laws—seen in the fact that property could only be alienated where the funds available were insufficient to pay creditors—has been eliminated. This was caused by an inadequate understanding of the distinction between liquidation and bankruptcy proceedings and, also, by confusion regarding the guiding procedural principles.

Article 179, Clause 4, clearly states that the purpose of liquidation is the speedy, efficient and economically warranted dissolution of a company. This imposes a limitation on the powers of liquidators in managing the company. They are entitled—and, under the circumstances, even obliged—to continue the activities of the company and to enter into new transactions where, after conducting a financial valuation, this is deemed to be economically warranted. The question is whether the restricted internal powers of liquidators, to manage the company, would affect their external repre-sentative authority in only dissolving the company. Article 179, Clause 4, is not subject to such an interpretation. On the contrary, the provisions contained in Article 178, Clause 4—according to which the powers of liquidators are, with good reason, equated to those of project managers—state that there is no need to adopt more restrictions than those listed in the general summation of the guiding principles of joint-stock companies. This is modern and well-balanced regulation giving rise to trust amongst parties to an agreement who seek to conclude transactions with a company undergoing liquidation. They can rely on the fact that negotiations are held with the corporate bodies, the representative powers of which are not restricted by an internal and difficult-to-define framework.

In the context of chronology, the first objective of liquidation is the full settlement of creditors’ claims. To achieve this goal, uniform standards for the conduct of liquidators, during the proceedings, are envisaged in the


Law. They are required to immediately pay the amounts due to all known creditors; they also are required to take all reasonable measures to find all unknown creditors by way of establishing personal contacts, as well as through the multiple (triple at a minimum) transmittal of notifications and publication of notices in the mass media (Art.179, Clause 2); they may prematurely pay amounts that fall due; and in the event of contested claims, they are obliged to deposit the appropriate amounts until the dispute is resolved (Art.180). Finally, the remaining amount must be distributed amongst the shareholders at the expiration of one year after the third notice has been published in the mass media (Art.181, Clause 3).

All of the aforementioned rules and regulations are designed to protect the rights of creditors and must secure the settlement of their claims in full. However, their function is not to define the period of time within which creditors must appear. In contrast to some of the national laws from the transition period, it is with good reason that the Model Law does not set timeframes; otherwise, this would restrict the freedom of activity of the persons involved without any substantial economic or financial grounds for so doing.

These rules and regulations also protect the rights of liquidators. Where the liquidators follow the procedural law standards, they will not be held liable. And, finally, they protect shareholders: the proceedings are so costly and transparent that the calculation of the distributed amount is viewed as final. This amount is also not questioned where additional claims arise after the company has been dissolved (Art.182, Clause 3).

The remaining property is distributed amongst shareholders according to the hierarchy principles that are not associated with insufficient property but, rather, which correspond to the provisions on profit distribution in the joint-stock company involved. Thus, unlike the hierarchy principles applied to creditors, they are in accord with the system of a lawful liquidation (Art.181, Clauses 1 and 2).

Only upon the completion of the liquidation proceedings and pay-ment of all the costs related to the conduct of the proceedings will the entry on the company be deleted from the register at the request of the liquidator (Art.182 Clauses 1 and 5). In this case, deletion of the entry on the company from the register means the final termination of the com-pany’s existence. The regulations on maintaining the register expressly provide that an entry is to be deleted only after decisions have lawfully been made concerning the outstanding claims or after the appropriate amount has been deposited. However, for the purpose of performing additional obligations required by legislation, liquidators are required


to preserve the corporate accounting records for five additional years (Art.180, Clause 4).

At the same time, later familiarization with obligations does not bring into question the deletion of an entry about a legal person; where it becomes known that there is additional property, different rules will apply. In this case, it would be unreasonable to leave the property ownerless although most laws make no provision whatsoever for this situation. Yet the present Model Law does take this into account and is guided by the following considerations: the Law requires the ordered implementation of the proceedings for the purpose of lawfully distributing property amongst (former) shareholders. Thus, it has to be acknowledged that, despite be-ing deleted from the register, the company in a certain sense continues to exist where required for distribution of property discovered in the course of additional liquidation proceedings. In order to resolve this extremely peculiar situation, upon a petition, a court will initiate additional liquida-tion proceedings and appoint liquidators with limited authority as regards alienating and distributing the property according to the ratio established in Article 181 (Art.182, Clause 2). Thus, this provision of the Law—in an efficient and appropriate manner—eliminates the loopholes which still exist in most of the laws of the CIS states in this regard.

In general, the contents of Chapter XIII meet the requirements which should be addressed a modern liquidation law. By eliminating the loopholes that have existed in the earlier versions of legislation, the Model Law sat-isfies the basic interests of the various groups involved in the process of a lawful liquidation. First and foremost, it draws a systemic and accurate distinction between the two remedies—liquidation and bankruptcy—which makes its practical implementation efficient in practice.



CIS INTER-PARLIAMENTARY ASSEMBLYStanding Commission for Economy and Finance

THE CIS 2010 MODEL LAW “ON JOINT-STOCK COMPANIES”

FOR CIS MEMBER STATES

(AS AMENDED)

October2010


Contents

CHAPTER I. GENERAL 317CHAPTER II. FORMATION OF A COMPANY 325CHAPTER III. SHARES OF STOCK 333CHAPTER IV. RIGHTS AND DUTIES OF SHAREHOLDERS 339CHAPTER V. A COMPANY’S DIVIDENDS 349CHAPTER VI. THE CHARTER CAPITAL

OF A COMPANY (Version A) 351

CHAPTER VI. THE START-UP AND STATED CAPITAL OF A COMPANY (Version B) 366

CHAPTER VII. BODIES OF A COMPANY 379 I. General II. The General Shareholders’ Meeting III. The Supervisory Board IV. Management Committee V. Board of Directors VI. Liability of Corporate Officers CHAPTER VIII. CORPORATE TRANSACTIONS WITH

SPECIAL CONDITIONS 433 I. Transactions with Conflict of Interest II. Major Transactions CHAPTER IX. ACCOUNTING, REPORTING, AUDIT AND

DISCLOSURE 438CHAPTER X. CHANGE OF SHAREHOLDERS UNDER

SPECIAL CONDITIONS 442 I. Squeezing out Shareholders II. Redeeming Shares upon Demand of Shareholders CHAPTER XI. CORPORATE REORGANIZATION 448 I. Merger and Acquisition II. Split-up and Spin-off III. Transformation CHAPTER XII. A GROUP OF COMPANIES 480CHAPTER XIII. LIQUIDATION OF A COMPANY 483CHAPTER XIV. LIABILITY 488

CIS 2010 Model Law “On Joint-Stock Companies” 317

CIS 2010 Model Law “On Joint-Stock Companies” (As Amended)*

CHAPTER I. GENERAL

Article 1. Scope1. The present Law regulates the terms and conditions as well as the

procedure for the formation, activities, reorganization and liquidation of a joint-stock company; determines the legal status of a joint-stock com-pany and groups of joint-stock companies, the management bodies of a joint-stock company, the competence thereof, the authority and liability of corporate officers, and the rights and duties of shareholders, as well as measures to protect the rights and interests of shareholders.

2. The present Law applies to all joint-stock companies that have been or are being formed on the territory of the present state unless otherwise established by the present Law or by other legislative acts.

3. Particularities of the formation, activities, reorganization and liqui-dation of banks, insurance and investment companies that have the legal form of a joint-stock company may be established by separate laws.

4. Particularities of the formation of joint-stock companies through the privatization of state-owned and municipal enterprises are governed by normative legal acts dealing with privatization.

5. Until a separate law is promulgated, the creation and activities of public-interest joint-stock companies (i.e., in the capital of which the state is a participant) also are governed by the present Law.

6. All the property relations, to which a joint-stock company is a party, in connection with its property and its offering of emissive securi-ties [offerings],** not regulated by the present Law, are governed by the Civil Code.

Article 2. Key Terms Used in the Present Law***

The following terms are used in the present Law:1) “shareholder” is a person who is the owner of a share;

* Translators: Slovo-Delo (Moscow) and and William B. Simons (of the Editorial Board).** [Translator’s note: The square brackets (and the text encased therein) in Clause 6 of Art.1 appear

in the original Russian-language version of the Model Law.]*** [Translator’s note: These terms are in alphabetical order in the Russian-language original; that

order has been retained here so as to maintain the consistency of cross-references in the text of the Model Law.]


2) “share” means a security issued by a joint-stock company and certifying the shareholder’s rights which are based on an interest in the capital of said joint-stock company, including the right to participate in the management of the joint-stock company, to receive dividends as well as an appropriate portion of the company’s property if it is liquidated, and other rights provided by the present Law and by other legislative acts;

3) “affiliates” means persons that control, or are controlled by, a joint-stock company; legal persons under common control of a joint-stock company with a third-party, or related organizations of the joint-stock company;

4) “close relatives” means parents, children, full and half-blood broth-ers and sisters, adoptive parents and adopted children, legal guardians and persons under their care, as well as the spouse of a natural person;

5) “interdependent organizations” means legal persons that act as both controlling and controlled legal persons in relation to one other;

6) “voting shares” means outstanding common shares of stock and preferred shares of stock that provide a voting right in the cases estab-lished by the present Law;

7) “dividend” means a shareholder’s income paid out by a joint-stock company under the shares of that company belonging to the share-holder;

8) “executive” means a member of the supervisory board, member of the management committee of a joint-stock company, a member of the board of directors of a joint-stock company, a member of its executive body, or a person who acts as the sole executive body of a joint-stock company;

9) “qualified majority” means a majority of not less than 75% of the total number of a joint-stock company’s voting shares of stock;

10) “corporate governance code” means the internal [regulatory] docu-ment of a joint-stock company that governs the management relations of the joint-stock company, including relations between the shareholders’ and the bodies of the joint-stock company, as well as between the joint-stock company and third [interested] parties;*

11) “convertible security” means a security of a certain type issued by a joint-stock company which can be exchanged for a security of another type issued by that joint-stock company under the terms and conditions and subject to the procedure established by a resolution to issue securi-ties or by a prospectus;

12) “controlling person” means a natural or a legal person who directly, and/or indirectly, independently or jointly with its affiliates, can determine * [Translator’s note: The square brackets (and the text encased therein) in Clause 10 of Art.2 appear

in the original Russian-language version of the Model Law.]


[opredeliat’]* the resolutions (legal actions) of a controlled person, including the issuance of binding instructions to the controlled person pursuant to an agreement or on the basis of the articles of association, or on another lawful basis. Unless otherwise proven, a shareholder of a joint-stock com-pany is deemed to be a controlling person, where such shareholder:

a) holds more than 50% of voting shares in the joint-stock charter capital of the company; and/or

b) has the right to nominate (including, to elect or to appoint) a majority of the members of the board of directors; and/or

c) by virtue of a shareholders’ agreement has the right to cast the majority of votes for the shares of the joint-stock company which have been issued;

13) “major shareholder” means a shareholder holding ten or more per-cent of the voting shares of a joint-stock company, or several shareholders’ acting on the basis of an agreement between them, or otherwise lawfully able to coordinate their actions at a shareholders’ meeting (resolutions on items on the agenda of the general shareholders’ meeting), whose cumulative interest represents ten percent or more of the voting shares of a joint-stock company;

14) “cumulative voting” means a method of voting at a general share-holders’ meeting whereby each share represented at the meeting has the same number of votes as that of the members of the joint-stock company’s body being elected;

15) “independent director” means a member of the board of directors of a joint-stock company, who has (has had) no contractual or other legal relations with the company, a major shareholder or executive, including close relatives of the major shareholder or an executive of the joint-stock company, as of the date of his/her election as an independent director, and for five years prior to such election;

16) “outstanding shares” means the shares of a joint-stock company that have been paid-up in full by the founders or by the founders and investors;

17) “state register” means a unified state register of legal persons con-taining information on the state registration, re-registration, changes and amendments and/or additions to the articles of association of legal persons and data on forthcoming or completed instances of the reorganization or liquidation of legal persons and other legally important facts relating to the legal capacity of legal persons;

* [Translator’s note: Here and elsewhere in this translation, we are observing the customary prac-tice of the Review of Central and East European Law by offering the reader, in square brackets, the Russian word in transliteration in the hopes of making the translation as ‘user-friendly’ as possible.]


18) “registration authority” means the competent governmental au-thority that maintains the unified state register of legal persons;

19) “public company” means a joint-stock company, where:a) the shares of which have been accepted for trading on securities

markets and/or are quoted on a stock exchange; and[Domestic legislation may provide for an additional qualification require-

ment, such as:b) the amount of its own capital is not less than…]*

c) the number of shareholders’ is not less than [……….]** over the period of six consecutive months;

20) “corporate registrar” means an organization that is a professional participant of securities markets and that engages in the business of keep-ing a system of registers of holders of joint-stock company’s securities and that is not an affiliate of the joint-stock company;

21) “related persons” [sviazannye litsa] means persons who are directly connected with the joint-stock company, including its major shareholders and corporate officers or their close relatives;

22) “competent authority” means a governmental authority that regu-lates and supervises securities markets and the activities of professional participants of securities markets;

23) “joint-stock company in the public interest” [akstionernoe obshchestvo s publichnym interesom] means a joint-stock company the major shareholder of which, directly or indirectly, is the state which, in its turn, is represented by central or local governmental authorities or municipal authorities;

24) “controlled legal person” means a legal person the acts or resolu-tions of the bodies of which are determined by a controlling person who can legally issue binding instructions to the controlled person;

25) “persons under common control” means two or more legal per-sons who are controlled legal persons in relation to the same natural or legal person;

26) “corporate secretary” means an employee of a joint-stock company who is not a member of its supervisory board, management committee, or of the board of directors or executive body (a person who solely per-forms the functions of an executive body), and who does not perform the functions of a member of its supervisory board, management committee, board of directors or executive body, whose authority and legal status (including rights, duties and liability) are established in the articles of

* [Translator’s note: The square brackets (and the additional text encased therein) in Clause 19 (b) appear in the original Russian-language version of the Model Law.]

** [Translator’s note: The square brackets (and the blank line encased therein) in Clause 19 (c) of Art.2 appear in the original Russian-language version of the Model Law].


association of the company of that joint-stock company [and who meets the following requirements:*

a) has the qualification (diploma) of an accountant or a lawyer;b) has more than five years of experience in the field(s) related to its

professional qualification;c) is a member of an appropriate self-regulating organization; andd) for ten years, prior to the election (appointment) as corporate

secretary, has not been convicted of a crime involving property or of of-ficial malfeasance];

27) “merger” [sliianie] means a form of reorganization whereby a newly created organization assumes all the rights and obligations of the several predecessor companies that are being liquidated;

28) “acquisition” [prisoedinenie] means a form of reorganization whereby an existing organization assumes all the rights and liability of one or more predecessor companies that are being liquidated;

29) “split-up” [razdelenie] means a form of reorganization whereby all the rights and obligations of a predecessor organization pass to two or more newly created organizations, while the predecessor organization is liquidated;

30) “spin-off” [vydelenie] means a form of reorganization whereby a part of the rights and obligations of the predecessor organization specified in the transfer act [peredatochnyi akt] passes to one or more newly created organizations, and the predecessor organization is not liquidated;

31) “split-up accompanied by a merger (acquisition)” [razdelenie, osu-shchestvliaemoe odnovremenno so sliianiem (prisoedineniem)] means a form of reorganization representing a combination of the forms of reorganization, described in subparagraphs 27, 28 and 29 of the present Article 2, whereby all the rights and obligations of a predecessor organization pass to sev-eral newly created and/or existing organizations, while the predecessor organization is liquidated;

32) “spin-off accompanied by a merger (acquisition)” [vydelenie, osu-shchestvliaemoe odnovremenno so sliianiem (prisoedineniem)] means a form of reorganization representing a combination of the forms of reorganization, described in subparagraphs 27 and 30 of the present Article 2, whereby a part of the rights and obligations of a predecessor organization specified in the transfer act passes to one or more newly created and/or existing organizations, while the predecessor organization is not liquidated;

33) “transformation” [preobrazovanie] means a form of reorganization whereby all the rights and obligations of a legal person of one legal form pass to a newly created legal person of another organizational-legal form;

* [Translator’s note: The square brackets (and the text encased therein) in Clause 26 of Art.2 appear in the original Russian-language version of the Model Law.]


34) “compensation” (during the reorganization of legal persons) means payouts made in the instances provided for by legislation to shareholders under the shares of stock they hold that are redeemed by the company, or to members of partnerships [khoziaistvennye tovarishchestva] (compa-nies), when the shares of stock they hold in the capital of a partnership (company) pass to the partnership (company); and

35) “corporate website” means an electronic Internet website (an Internet page) of a joint-stock company which complies with the require-ments established by legislation.

Article 3. A Joint-Stock Company1. A joint-stock company (hereinafter “company”) is a commercial

organization, the charter capital [ustavnyi capital] of which is divided into a specific number of shares certifying the shareholders’ rights under the law of obligations [obiazatel’stvennoe pravo] with respect to the company’s property and their powers to participate in the company management.

Shareholders are not liable for a company’s obligations and bear the risk of losses in relation to its business up to the value of shares held by them unless otherwise established by the present Law [or: by legislation].*

Shareholders are entitled to alienate the shares they hold without the consent of other shareholders’ or of the company unless otherwise established by the present Law or by the articles of association of the company.

2. A company is a legal person. A company enjoys civil-law legal capacity and is entitled to engage in any business that is not prohibited by a law.

3. A company may engage in specific activities, a list of which is established by domestic legislation, only on the basis of a special permit (license).

4. A company is created for unlimited period unless otherwise estab-lished by its articles of association of the company.

Article 4. Corporate Liability1. A company is liable under its obligations with all its property.2. A company is not liable for the obligations of its shareholders.

Article 5. A Single Shareholder Company1. A company may be established by a single person, and all the

company’s shares may be acquired by a single person. In this case, the company’s sole shareholder exercises the powers of the shareholders’ meeting as established by the present Law.

* [Translator’s note: The square brackets (and the text encased therein) in Clause 1 of Art.3 appear in the original Russian-language text of the Model Law.]


2. Any agreements between a company and its sole shareholder are to be made in writing.

Article 6. Corporate Name1. A company must have a full business name in the [……….]* lan-

guage.2. A company’s full business name in the [……….] language must

contain the company’s full name, which includes the words “joint-stock company”.

3. A Company also is entitled to have a short business name, which includes the abbreviation “AO” [Joint Stock Company, JSC].**

Article 7. Corporate Seat1. A company’s seat is deemed to be the seat of its executive body

at the address specified in the corporate articles of association of the company.

2. A company must have an address. A company’s address is specified in the articles of association of the company and recorded in the corpo-rate register and in the state register during the process of obtaining state registration. Should a company’s registered address change, the record in the state register must also be changed. A company’s seat and any changes therein also must be recorded in the system of registers of the holders of securities (hereinafter “corporate register”). Notification of such change of a company’s seat must be transmitted by the company’s management committee/executive body to the corporate registrar immediately after such change.

3. Where it is impossible to serve documents upon a company at the address recorded in its articles of association of the company, in the corporate register, and in the state registrar, and where the actual seat of the company is unknown, public service [publichnaia dostavka] is utilized. In this event, a document is deemed to have been duly served upon the company if, on the basis of a duly submitted statement of the sender attesting to the fact that the document has to be delivered to the com-pany, a court issues a ruling [postanovlenie] which is subject to publication certifying the intent of the sender to duly serve the document upon the addressee. Should the addressee fail to appear within a period of two

* [Translator’s note: The square brackets (and the blank lines encased therein) in Art.6 appear in the original Russian-language version of the Model Law.]

** [Translator’s note: The square brackets (and the text encased therein) in Clause 3 of Art.6 adds to the Russian-language abbreviation that designation which is normally used in English for the benefit of the reader. However, the JSC abbreviation does not appear in the Russian-language original of the Model Law.]


months as of the date of such publication, the document is deemed to have been duly served.

4. A company is required to have an Internet page (corporate web-site).

Article 8. Information in Letters1. All letters, forms and other correspondence of the company issued

by the company in writing or in electronic form and addressed to third parties or specific persons must contain the following information:

1) the company’s business name;2) the name of the state registration authority that registered the

company (registration authority) and the registration number;3) the company’s address;4) the charter (declared) capital;5) the names of the members of the company’s supervisory board

and management committee, board of directors and executive body (the individual who solely performs the functions of an executive body); and

6) information on whether the company is subject to liquidation proceedings.2. The management committee (board of directors) is liable for providing accurate and complete information which is subject to display in letters, forms and other documents that were or are being issued by the company pursuant to clause 1 of the present Article.

Article 9. Corporate Branches and Representative Offices1. Unless otherwise established by the articles of association of the

company, a company’s management committee (board of directors) is entitled to establish branches and representative offices pursuant to the present Law and to other legislative acts.

2. The head of a branch or representative office acts under a regula-tion [polozhenie] on the branch or representative office approved by the company and, also, under a power of attorney [doverennost’] issued by the company.

3. Branches and representative offices are subject to state registration pursuant to a law [on the state registration of legal persons, their branches and representative offices].* The management committee (board of direc-tors) immediately notifies the corporate registrar of such registration of branches and representative offices.

* [Translator’s note: The square brackets (and the text encased therein) in Clause 3 of Art.9 appear in the original Russian-language version of the Model Law ]


CHAPTER II. FORMATION OF A COMPANY

Article 10. Formation of a Company1. A company may be established by way of forming it or by way of

reorganizing an existing legal person (merger, split-up, spin-off, transfor-mation).

2. A company is deemed to have been created as a legal person as of the date of state registration pursuant to the procedure established by a law.

3. Persons forming a company may conclude a memorandum of as-sociation [uchreditel’nyi dogovor]. Such memorandum of association creates rights and duties there under only as amongst the parties thereto.

Article 11. Corporate Founders1. The founders of a company are natural and/or legal persons who

have signed the articles of association [ustav] of the company.2. The state and governmental authorities are entitled to establish a

joint-stock company only in the instances established by a law.3. A company may be formed by a single person.

Article 12. The Articles of Association of a Company1. The articles of association of a company are a document establish-

ing that the company has the status of a legal person and constitutes the company’s sole constituent document.

2. Provisions of the articles of association of the company are binding upon all the company’s organs and its shareholders.

3. The articles of association of the company must contain the fol-lowing information:*

* Pursuant to the Second Council Directive 77/91/EEC of 13 December 1976, a joint-shares of stock company’s Articles of Association must contain the following information:

(Article 2) The statutes or the instrument of incorporation of the company shall always give at least the following

information: (a) the type and name of the company; (b) the objects of the company; (c) - when the company has no authorized capital, the amount of the subscribed capital, - when the company has an authorized capital, the amount thereof and also the amount of the capital

subscribed at the time the company is incorporated or is authorized to commence business, and at the time of any change in the authorized capital, without prejudice to Article 2 (1) (e) of Directive 68/151/EEC;

(d) in so far as they are not legally determined, the rules governing the number of and the procedure for appointing members of the bodies responsible for representing the company with regard to third parties, administration, management, supervision or control of the company and the allocation of powers among those bodies;

(e) the duration of the company, except where this is indefinite.


1) the company’s full and short business names;2) the company’s address;3) the rights of shareholders-holders of the shares of each category

(type);4) the company’s authorized (the amount of the initial) capital;5) the method of paying for shares;6) the types of entrepreneurial activity in which the company is

engaging;7) the terms and conditions and procedure for distributing the com-

pany’s revenues;8) the terms and conditions and procedure for creating the company’s

reserve fund;9) the number of, and the procedure for appointment (election) of,

the company’s corporate officers unless rules different from the non-mandatory ones, provided for by the present Law, are established by the articles of association of the company;

10) procedure for convening the general shareholders’ meeting and for adopting resolutions at such meeting which differs from the non-mandatory provisions of the present Law;

(Article 3) The following information at least must appear in either the statutes or the instrument of incorporation

or a separate document published in accordance with the procedure laid down in the laws of each Member State in accordance with Article 3 of Directive 68/151/EEC:

(a) the registered office; (b) the nominal value of the shares subscribed and, at least once a year, the number thereof; (c) the number of shares subscribed without stating the nominal value, where such shares may be issued

under national law; (d) the special conditions if any limiting the transfer of shares; (e) where there are several classes of shares, the information under (b), (c) and (d) for each class and the

rights attaching to the shares of each class; (f) whether the shares are registered or bearer, where national law provides for both types, and any provi-

sions relating to the conversion of such shares unless the procedure is laid down by law; (g) the amount of the subscribed capital paid up at the time the company is incorporated or is authorized

to commence business; (h) the nominal value of the shares or, where there is not nominal value, the number of shares issued for a

consideration other than in cash, together with the nature of the consideration and the name of the person providing this consideration;

(i) the identity of the natural or legal persons or companies or firms by whom or in whose name the statutes or the instrument of incorporation, or where the company was not formed at the same time, the drafts of these documents, have been signed;

(j) the total amount, or at least an estimate, of all the costs payable by the company or chargeable to it by reason of its formation and, where appropriate, before the company is authorized to commence business;

(k) any special advantage granted, at the time the company is formed or up to the time it receives authoriza-tion to commence business, to anyone who has taken part in the formation of the company or in transactions leading to the grant of such authorization.

[Translator’s note: The asterisk and the text which is reproduced in this footnote to Clause 3 of Art.12 appear in the original Russian-language version of the Model Law.]


11) the amount of penalties for delay in paying for a company’s shares of stock acquired from the company;

12) all special instances in which the transfer of the company’s shares of stock is limited or prohibited; and

13) other provisions of the present Law or of other national laws of the state.

4. In addition to the information provided for in the present Arti-cle, a company’s shareholders (founders) may, pursuant to the procedure established by the present Law, include other terms and conditions into the articles of association of the company provided they are pursuant to the present Law and with other laws.

5. In the articles of association of a company, shareholders may provide that disputes between the company and the shareholders must be resolved by a commercial arbitration court [treteiskii sud] or by an arbitration court [arbitrazhnyi sud].

6. The articles of association of a company must be signed either by the founders (a sole founder) or by their representatives (representative), except for a new version of the articles of association of the company (changes and amendments therein) of an existing joint-stock company, which is signed by a person duly authorized to make such a signing by the general shareholders’ meeting. The articles of association of the company and all changes and amendments thereto are subject to notarial authentication.

Article 13. Setting up the Bodies of a Company1. When forming a company, its founders set up the bodies of the

company and appoint its auditors. In this case, the resolution for forming the company must contain the results of the voting by the founders and the resolution on the number of, and on the individuals appointed to, the bodies of the company and approval of the corporate accountant.

2. In order to set up the bodies of the company and approve the corporate accountant, the founders elect the corporate officers and vote on approval of the corporate accountant by a 75% majority of the total number of votes of the company’s shares of stock subject to placement amongst the founders.

Article 14. Investments1. Forms of investments are established by the present Law, by the

articles of association of the company, the memorandum of association or by a resolution on additional share issue.

2. Investments may be represented by the following:1) money;


2) securities paid up in full; and3) other property, including property rights, which includes claims of

creditors against the company that can be valued in monetary terms.3. Changing the balance-sheet value of a company’s property pursuant

to legislation, including investments made to the charter capital, is not grounds to change the charter capital or equity stakes [dolia] of the share-holders therein unless otherwise established by legislation, the articles of association of the company or by a resolution of the general shareholders’ meeting. The structure and/or charter capital of joint-stock companies that are being reorganized is changed pursuant to a reorganization plan of the company.

4. Investments may not be:1) a monetary valuation of the founders’ efforts in creating the com-

pany or of the labour of shareholders working in the company;2) obligations (debts) of the company’s founders, shareholders or

other persons;3) unregistered moveable or immoveable property, including intel-

lectual property, which is subject to registration pursuant to legislation;4) property under economic ownership [khoziaistvennoe vedenie] or

operative management [operativnoe upravlenie];5) property, the economic circulation of which is limited or prohibited

by legislative acts.

Article 15. The Founders’ Report1. Prior to registering a company, the founders must compile a written

report on the formation of the company. 2. The report on the formation of the company must contain the

primary bases pursuant to which the value of non-monetary investments has been assessed, information on the acquisition by a member of the supervisory board or by a corporate officer of any number of the com-pany’s shares of stock, and also an indication either as to whether any special pre-emptive rights have been accorded to such corporate officer with respect to corporate shares of stock or to the company itself and whether or not reimbursement or compensation has been provided to such officer for his/her efforts in forming the company or in preparing for such formation.

3. The report on the formation of the company must be submitted to the registration authority along with the application for state registra-tion of the company.


Article 16. Non-Monetary Investments1. Non-monetary investments may be transferred to ownership of

the company or under rights for long-term use.2. The market value of the non-monetary assets provided to the

company for long-term use is determined with regard to the period for such use as established by the articles of association of the company, the memorandum of association or by a resolution of a general shareholders’ meeting.

3. The market value of non-monetary investments, including claims of creditors against the company, are approved by a resolution of the found-ers’ meeting or a general shareholders’ meeting based on the published rates of an organized market as of the date of such investments.

4. Where the amount of a non-monetary investment of a company’s founder or shareholder exceeds 10% of the charter capital of the com-pany, and where the property that constitutes the investment is not in circulation on an organized market, the valuation of such investment is approved on the basis of a valuation report of the non-monetary invest-ment prepared by an accountant or specialized licensed organization that is not an affiliate of the company. Such report must be submitted to the registration authority along with the application for state registration of the company.

Provisions of the present Article also apply when a company acquires property from its founder during a period of two years after formation.

5. In the event of the early termination of the right to use property constituting a non-monetary investment transferred to a company, the shareholders are required to indemnify the company in monetary form for the difference between the valuation of the investment and the cost of the right to use the property constituting the investment until termination of the appropriate right of use.

Article 17. Payment for and Transfer of Property Constituting Investments Prior to State Registration

1. Fifty per cent of any agreed monetary investment must be paid up prior to the state registration of a company. The remaining amount must be paid in full at any time prior to the expiration of one year following state registration of the company.

2. The payment of an amount invested in the charter capital of the company is made in the form of a wire transfer of the appropriate amount of money to the bank account specified in a resolution of the founders to form the company. A statement from the bank certifying payment of monetary investments is submitted to the registration authority along


with an application for registration. Corporate officers may utilize the funds contributed to the company within the limits of their authority only after state registration of the company.

3. Non-monetary investments must be transferred to a company in full prior to state registration of the company.

4. A share of stock held by a corporate founder may not provide a voting right until paid up in full unless otherwise established by the articles of association of the company.

Article 18. Payment for and Transfer of Property Constituting Investments Where a Company is Formed by Single Person

Where a company is formed by a sole founder, the founder is required to pay its monetary investment in full (transfer non-monetary investment in full) prior to state registration of the company.

Article 19. Conducting Business Prior to State Registration [(Company in Formation)]*

1. Prior to the state registration of a company, its founders may appoint representatives to act under a power of attorney, who will be authorized to perform legal acts on behalf of the founders connected with the forma-tion of the company.

[Alternative:**

1. From the moment of the signing and of the notarial authentica-tion of the articles of association of the company and during the forma-tion of the company, the company is entitled to engage in legal relations acting on its own behalf even where it has not yet been recorded in the state register. At this stage, the company’s business name must include the expression (phrase) “under formation” [v uchrezhdenii]. Prior to the notarial authentication of the articles of association of the company, acts on behalf of the company are not permitted.]

2. Founders [Alternative: founders and corporate officers]*** and their representatives bear unlimited joint liability under obligations to credi-tors that arose during the period of corporate formation prior to its state registration. Such liability of the founders and representatives [Alternative: founders and/or corporate officers] is preserved where a company has not

* [Translator’s note: The square brackets (and the text encased therein), immediately after the title to Art.19, appear in the original Russian-language text of the Model Law.]

** [Translator’s note: This alternative text for clause 1 of Art.19 appears in the original Russian-language version of the Model Law.]

*** [Translator’s note: The square brackets (and the texts encased therein) in Clause 2 of Art.19 ap-pear in the original Russian-language text of the Model Law.]


been registered and where attempts to obtain registration of the company have failed completely and have been discontinued.

3. At the moment of the state registration of a company, the rights and duties thereof that arose prior to state registration and connected with its formation pass to the company by force of law.

4. Persons who have acted on behalf of a company during its state registration are relieved of liability where they have acted reasonably [ra-zumno] in the interests of the company and with the requisite good faith [s neobkhodimoi dobrosovestnost’iu] for the conduct of business.

5. Where, as of the date of state registration, performance of the company’s obligations arising prior to registration have resulted in a reduction of the value of the company’s property below the minimum charter capital established in the articles of association of the company, the founders are required to make payment of the difference in propor-tion to the number of company’s shares of stock to which each of them is entitled. A company’s creditors also may make use of this right to bring a claim against the founders of the company. Making investments to the charter capital does not relieve the founders from liability where they have provided inaccurate data on the type and the valuation of their invest-ments, made for the purposes of forming the company, have resulted in damages to the company.

Article 20. Application for State Registration1. For the purpose of state registration of a company, an application

is submitted to a registration authority, which must be signed by all the corporate officers and must contain the following information:

1) the organizational-legal form of the company;2) the period of time for operation of the company if it has not been

established for an unlimited period;3) the company’s business name;4) the type of entrepreneurial activity of the company;5) the amount of the charter capital of the company;6) the names, last names, dates and places of birth and of residence

of the corporate officers; and7) documents evidencing the authority of the corporate officers to

file an application for state registration. 2. In addition to the application for state registration of the company,

the following documents must be submitted to the registration author-ity:

1) the articles of association of the company, notarially authenti-cated;

2) documents attesting to the election of the corporate officers;


3) a list of the members of the board of directors (supervisory board), including their last names, names, places of residence and profession;

4) the founders’ report on the formation of the company;5) the report of accountants or other, independent licensed organiza-

tion on the valuation of non-monetary investments to the charter capital (where necessary); and

6) certification from a bank that monetary investments have been made to the charter capital of the company.

3. Corporate officers and other corporate representatives acting un-der a power of attorney are required to submit notarially authenticated specimens of their signatures to the registration authority to be included in the corporate register.

4. Legislation may provide that all the data submitted to the registra-tion authority must be issued on, and accessible via, the company’s website after its state registration.

Article 21. Denial of State Registration 1. The registration authority is required to verify the accuracy of the

data that is submitted for state registration of the company. 2. The registration authority is required to deny the state registration

of a company where there have been violations of the legislative require-ments in the course of state registration or where the documents for state registration have not been duly filed and the shortcomings, which have been identified, cannot be remedied.

Article 22. Public Nature of the State Register1. The state register is public. 2. Any legally significant fact, which is subject to registration in the

state register, is subject to such registration. Where there has been such registration, any third party is deemed to be a person who must be aware of the fact of such record. This rule on accessibility also applies to legally significant acts relating to the legal capacity of a company (including any change in the company’s legal status) performed during the period after the submission of documents for publication of information about such legal act where a third party proves that s/he/it did not know and could not have known about said fact prior to the publication thereof.

3. If any legally significant fact, subject to publication or to registra-tion in the state register, has not been so published or recorded for any reason, a company may cite this fact in its relations with any third person where it has proof that the third party knew and/or should have known about such legally significant fact.


Article 23. State Registration of Shares Issued upon Formation of a Company. Entering Initial Records in the Company Register

1. Upon the formation of a company, all its shares must be issued as amongst its founders.

2. The procedure for, and the terms and conditions of, the state registration of share issues subject to placement upon the formation of a company are governed by securities legislation.

3. The initial records are entered in a company register on the basis of a ruling of a duly authorized agency for the state registration of the issue of shares subject to placement upon formation of the company and on a list of the founders of the company.

CHAPTER III. SHARES OF STOCK

Article 24. Shares of Stock1. A company is entitled to issue shares of stock pursuant to securi-

ties legislation. A company is entitled to issue registered shares of stock only.

2. Legislation may provide for the possibility to issue fractional shares of stock. One share of stock may be held by several persons subject to a right of joint ownership.

Article 25. Authorized and Issued Shares of Stock1. The number of authorized shares of stock must be determined

in articles of association of the company and must reflect the maximum number of shares of stock authorized for placement.

2. Shares of stock authorized for placement are deemed to be the shares of stock, the exact number of which is determined by a resolution of the competent corporate body and which are subject to placement and payment under the terms and conditions established by said placement resolution, to the extent already authorized but not yet issued.

3. Issued shares of stock are deemed to be the shares of stock, the issue of which has been registered by a competent authority and that have been paid up in full by the first acquirers recorded in the company register.

Article 26. Par Value of Shares of Stock and No-Par-Value Shares of Stock1. A company’s shares of stock may be issued as either shares of stock

with par value or no-par-value shares of stock (without par value). 2. Legislation may provide for a minimum par value requirement for

each share of stock.3. The par value of a company’s shares of stock of the same category

must be the same for all the shares of stock of [that] one category.


4. Par value of the shares of stock is specified in the articles of associa-tion of the company and reflects the portion of the charter capital of the company and property represented by a single issued share of stock.

5. No-par-value shares of stock also attest to a shareholder’s equity stakes in the charter capital of the company. An equity stake in the char-ter capital represented by no-par-value shares of stock is determined by the relation of the number thereof to the amount of the charter capital of the company.

6. Par-value shares of stock may not be issued at the price lower than their par value. No-par-value shares of stock may not be issued at a price lower than the minimum issue price determined by a body of the company within the limits of the authority thereof.

7. The price at which shares of stock are to be sold to the persons who exercise pre-emptive rights, to the shares of stock which are being issued, may be lower than the price at which the shares of stock are sold to other persons, but not by more than 10%. The amount of commission paid to an intermediary for participation in the placement of additional corporate shares of stock may not exceed 10% of the total share place-ment price.

8. Shares of stock may be issued at a price higher than their par value or the minimum issue price.

Article 27. Consolidation and Splitting of Shares of Stock1. Par-value shares of stock may be consolidated or split by changing

the par value of each share of stock. No-par-value shares of stock may be consolidated or split by changing the quantity thereof. A resolution to consolidate or split the shares of stock must be adopted by not less than 75% majority of the total number of voting shares of stock at a general shareholders’ meeting.

2. In the event of a splitting, the par value may not fall below the minimum par value where it is established by domestic legislation. Shares of stock may be consolidated or split upon condition that the list of com-pany’s shareholders and their equity stakes in the charter capital of the company do not change.

Article 28. Outstanding and Own Shares of Stock1. An outstanding share of stock is deemed to be an issued share of

stock that is held by a shareholder of the company.2. An own share of stock is deemed to be an issued company share that

subsequently was re-acquired from the shareholder by the company. 3. Unless otherwise established by legislation, own shares of stock

must be reflected on the company’s balance sheet.


4. Own shares of stock do not enjoy voting rights at a general share-holders’ meeting, rights to dividends, or rights to receive a part of the company’s property where of liquidation.

5. Own shares of stock acquired or redeemed by the company to reduce its charter capital are subject to cancellation pursuant to the procedure established by a law.

6. Own shares of stock acquired or redeemed for the purposes not connected with reducing the charter capital, as well as other issued shares of stock of the company accepted by the company as a pledge, must not exceed 10% of the total number of the issued shares of stock of the company.

7. Where there has been a failure to comply with the requirement contained in clause 6 of the present Article, the company is required, within one year, to the extent (in quantities) sufficient to ensure compliance with the requirement contained in that clause, to do the following:

1) alienate the own shares of stock, and/or2) cancel the own shares of stock resulting in a reduction of the total

number of authorized shares of stock and the amount of charter capital, or in preservation of the amount thereof by proportionately raising the par value of all the company’s issued shares of stock unless it is established in the articles of association of the company that the above increase in the value applies to shares of stock of one or several specific types.

Article 29. Share Categories. Common Shares of Stock1. A company is entitled to issue shares of two categories: common

shares of stock and preferred shares of stock.2. A common share of stock certifies the right of its holder to one

vote for the purposes of adopting resolutions at a general shareholders’ meeting, to receive one share of dividends, and the appropriate portion of the company’s property in the event of liquidation.

3. Property rights certified by common shares of stock may be exer-cised only after all the property rights of the holders of preferred shares of stock have been satisfied in full.

4. The articles of association of the company may provide for the possibility to issue common shares of stock of one or more types.

Article 30. Preferred Shares of Stock1. A preferred share of stock provides preferences to the owner thereof

as compared with the owners of common shares of stock concerning the amount of dividends, order of priority in receiving dividends and order


of priority in receiving a portion of the company’s property due to it [the owner] in the event of liquidation.

2. A preferred share of stock does not accord a voting right to the holder thereof except for those instances provided for by the present Law.

3. A preferred share of stock accords the holder thereof the right to receive a portion of the company’s property in the event of liquidation in an amount corresponding to the liquidation value of such share of stock.

4. The liquidation value of a preferred share of stock is determined in the articles of association of the company and may be higher than its par value. Where the articles of association of the company do contain any provisions under which the liquidation value of a share of stock is determined, the owner of such share of stock, upon liquidation of the company, is entitled to a portion of the company’s property correspond-ing to the par value of such share of stock.

5. The cumulative par value of the company’s preferred shares of stock must not exceed 25% of the charter capital of the company.

6. The articles of association of a company may provide for the pos-sibility to issue preferred shares of stock of one or more types.

Article 31. Types of Shares of Stock1. A type of common share of stock or preferred share of stock is

deemed to be the totality of shares of stock with the same type features, such as providing rights of a certain nature and scope, the same par value where it is determined, uniform terms and conditions of the circulation and uniform state registration number of the share issue.

2. The articles of association of the company may provide for the issue of various types of common shares of stock or preferred shares of stock.

3. A company is entitled to issue preferred shares of stock with a fixed or non-fixed dividend amount. Fixed dividends are established as a specific amount per share of stock or a specific percentage of the share par value. Preferred shares of stock with a fixed dividend amount may be cumulative, partially cumulative or non-cumulative. Preferred shares of stock with a fixed dividend are cumulative where it is established in the articles of association of the company that the unpaid dividend there un-der or a dividend not paid in full, the amount of which is set forth in the articles of association of the company, accumulates and is payable prior to the deadline established in the articles of association of the company. Where the articles of association of the company fail to establish such deadline, the preferred shares of stock are not cumulative.


4. Cumulative shares of stock provide to the owners thereof a right to receive all the dividends accumulated over a certain period in one pay-ment or the right to receive dividends in a subsequent period where the company has not paid them in a previous period.

5. Partially cumulative shares of stock provide a right to receive a part of the accumulated dividends in a subsequent period where the company has not paid them in a previous period and where such right is not provided to non-cumulative shares of stock.

6. A preferred share of stock with fixed dividend amount does not provide to the owner thereof a right to vote at a general shareholders’ meeting except for the instances where:

1) fixed dividends on cumulative or partially cumulative shares of stock have not been paid out during a period established by the articles of association of the company. In such case, the right to vote terminates after the accumulated dividends have been paid out in full; or

2) a general shareholders’ meeting has adopted a resolution to change the rights of the holders of preferred shares of stock due to a corporate reorganization or liquidation, the additional issue of preferred shares of stock of another type that provide to the owners thereof with additional rights compared to those provided to the owners of the outstanding pre-ferred shares of stock, or for any other reasons provided for by securities legislation or by the articles of association of the company.

7. Preferred shares of stock for which the dividend amount has not been fixed do not have a voting right except for the instances described in subparagraph 2) of clause 6 of the present Article.

8. If a company places shares of stock of two or more types, the articles of association thereof must provide for the order of priority in paying out dividends on, and the liquidation value of, preferred shares of stock of each type.

9. A company is entitled to place shares of stock of such types that may or must allow for the redemption or conversion thereof (exchange into other securities of the company) by the company, subject to the procedure established by the present Law and by other laws and by the articles of association of the company.

10. A competent governmental authority is entitled to set limitations on the issue and circulation of shares of stock of specific types.

Article 32. Corporate Register1. A company is required to ensure that the corporate register is kept

pursuant to the present Law and securities legislation. Only a person who is listed in the corporate register as its shareholder is deemed to be a shareholder of the company. Shareholder rights are exercised only on


the basis of a corporate shareholder register compiled by the corporate registrar.

2. A corporate register must contain the following:1) basic corporate information;2) the total amount of corporate securities;3) records of personal accounts of the persons (shareholders or

nominal holders of shares of stock) listed in the corporate register with an indication of the category, type and quantity of shares of stock held by them, the acquisition cost thereof, and any encumbrances on the rights to such shares of stock;

4) records about the transfer of rights to shares of stock; and5) other records and documents as provided by the present Law and

by securities legislation.3. A corporate register may be maintained by either the company

itself or by a registrar acting under an agreement to maintain the corpo-rate register.

4. If fewer than fifty persons are listed in the corporate register and the shares of stock do not circulate on organized markets, the company may keep its register by itself. Shareholders holding 10% or more of the company’s voting shares of stock are entitled to demand that the register be kept by a registrar.

5. Each shareholder is entitled to request data from the register relat-ing to the corporate shares of stock held by such shareholder.

6. The person who maintains a corporate register is required to enter records in the corporate register, issue extracts from the corporate register to shareholders and to the company, to verify with the company each month the information on the corporate share balance sheet and to perform such other duties as provided by the present Law and by securities legislation and by the agreement between the company and the registrar.

7. A registrar is liable for the damage to a holder or nominal holder of securities caused by the registrar’s failure to enter a record in the corporate register, the failure or unreasoned denial to enter a record in the corporate register or to issue an extract from the register, committing errors in the course of maintaining the register or under other circumstances provided by legislation.

8. A company and a registrar are jointly liable for the losses caused to a shareholder as the result of a failure comply with the procedure for keeping a register where it cannot be proven that proper compliance was impossible due to insuperable force or to an act (omission) of a shareholder who is claiming indemnification of loss, including as a result of the fact that the shareholder failed to take reasonable efforts to reduce such loss.


A debtor who is jointly liable is entitled to recourse against another debtor to the extent of the other debtor’s fault.

[9. Any legal fact that is subject to reflection (recording) in the cor-porate register is subject to such reflection (recording). Where any fact is so reflected (recorded) in the corporate register, any interested party is deemed to be a person who must be aware of such reflection (record).

10. Where any fact that is subject to reflection (recording) in the corporate register was not so reflected (recorded) for any reason whatsoever, a third party is deemed to be a person who knew (should have known) about that fact where there is evidence that such third knew and/or should have known about said fact.]*

CHAPTER IV. RIGHTS AND DUTIES OF SHAREHOLDERS

Article 33. General Provisions for Exercising Shareholder Rights1. Where the terms and conditions are equal, shareholders have equal

status and where the terms and conditions are equal, shareholders are to be treated in the same way.

2. When exercising the rights of a shareholder, it is necessary to take into account the interests of society and of the other shareholders.

Article 34. Rights of Shareholders1. Shareholders have a right to:1) participate in general shareholders’ meetings, elect and be elected

to bodies of the company;2) familiarize themselves with the agenda of the general sharehold-

ers’ meeting;3) familiarize themselves with and make copies of the company’s

documents, access to which is permitted by the present Law, by the ar-ticles of association of the company or by the internal documents of the company;

4) receive declared dividends pursuant to the category and type of shares of stock and in proportion to the quantity of shares of stock held by them;

* As a rule, claims with respect to the transfer of rights to shares and questions of the good faith acqui-sition thereof are governed by securities legislation and by the civil code. However, legislation often is ambiguous about such matters. Where the matters in question are duly regulated in the appropriate legislative acts, it is preferable to exclude clauses 9 and 10 of Article 32 from a domestic law on joint-shares of stock companies. [Translator’s note: The text reproduced in this footnote and the square brackets (and the text encased therein) in Clauses 9 & 10 of Art.32 appear in the original Russian-language version of the Model Law.]


5) alienate the shares of stock they hold, encumber them with third-party rights, use them as security or transfer them to trust management [doveritel’noe upravlenie];

6) demand that the company redeem the shares of stock they hold in the instances provided for by Article 46 of the present Law;

7) receive a portion of company’s property in the event of liquida-tion;

8) submit items to be included on the agenda of a general sharehold-ers’ meeting;

9) exercise other rights provided by the present Law or by the articles of association of the company.

2. A shareholder that owns the shares of stock without voting rights may participate in a general shareholders’ meeting concerning the items on the agenda.

3. Shareholders owning shares of stock without voting rights acquire a right to vote at a general shareholders’ meeting as regards specific or all the items on the agenda only in the instances provided by the Law or by the articles of association of the company.

4. The content and/or scope of the rights of shareholders, provided by holding shares of stock of any type, may be modified only by a resolu-tion of a general shareholders’ meeting. Such resolution is effective where shareholders, holding all the shares of stock of such type, have adopted a specific resolution by a 75% majority of votes provided by such shares of stock, and where appropriate changes and amendments have been made to the appropriate prospectus or to the terms and conditions of the issue pursuant to the established procedure.

5. A shareholder is not entitled to demand that the company acquire the shares of stock held by such shareholder except for the instances provided for by the present Law, other legislation or by the articles of association of the company.

6. The articles of association of a company may set limitations on the number of shares of stock directly or indirectly held by one shareholder, and on the cumulative par value of such shares of stock, as well as on the maximum number of votes which one shareholder may cast during voting at a general shareholders’ meeting. Shares of stock acquired by a shareholder that are in excess of such limitations do not accord her/him/it voting rights during the period when the limitation is in effect or when the number of shares of stock, which s/he/it holds, exceeds such limitation.

7. Where one share of stock is jointly held by several persons, such persons may exercise their rights under the share through an authorized representative duly appointed by them. However, they are jointly liable


for obligations connected with paying up the corporate shares of stock which belong to them by right of joint ownership.

Article 35. Additional Shareholder Rights1. Shareholders that hold not less than 5% of a company’s voting

shares of stock, in addition to the rights specified in Article 34 of the present Law, also are entitled to the rights, provided for by the present Law, other legislation and the articles of association of the company of the company:

1) to nominate (propose) candidates to the supervisory board (board of directors);

2) to demand that an extraordinary meeting of the supervisory board (board of directors) be convened;

3) to demand that an extraordinary general shareholders’ meeting be convened pursuant to the procedure established by the present Law.

2. The articles of association of a company may provide other ad-ditional rights to shareholders.

Article 36. Right to Alienate Shares of Stock1. Shareholders freely alienate their shares of stock unless otherwise

established by the articles of association of a company. The right to alien-ate shares of stock of a public company may not be limited.

2. The articles of association of a company may provide that disposi-tion by a shareholder of the shares of stock held by such shareholder is subject to the consent of the company represented by its executive body. However, the articles of association of the company may provide that a resolution expressing such consent is adopted by the board of directors or by a general shareholders’ meeting. The articles of association of the company may also establish the grounds upon which such consent may be denied.

3. The articles of association of a company may provide for a pre-emptive right of acquisition of shares of stock. In this event, a shareholder wishing to sell shares of stock belonging to her/him/it is required to trans-mit a written acquisition proposal to an executive body of the company specifying the terms and conditions of the proposed transaction.

4. Where the articles of association of a company provide for a pre-emptive right of acquisition of shares of stock, then, unless other shareholders of the company have exercised their pre-emptive right of acquisition of the shares of stock proposed by the person who is dispos-ing of them within one month from the date of receipt by the company of an offer from the shareholder, the company is entitled to acquire such shares of stock itself or to offer them to a third party.


5. Where, as provided for in clause 4 of the present Article, a company or a third party has failed to exercise the right of acquisition the shares of stock being disposed of during the second month as of the date of receipt by the company of an offer from the shareholder, the shareholder is enti-tled to sell the shares of stock to any person at a price not lower than the initial price offered to the other shareholders and to the company.

6. Where the articles of association of a company provide for a pre-emptive right of acquisition of shares of stock, the shares of stock of a shareholder may be sold to satisfy the claims of creditors against such shareholder under a court judgment only after the appropriate shares of stock have been offered to other the shareholders and to the company itself, and where within two months as of the date of such offer by said credi-tors neither the shareholders of the company nor the company itself has exercised the pre-emptive right of acquisition of such shares of stock.

Article 37. Function of Special Accountants1. On the basis of a motion or statement of an interested party or

upon the receipt of information from public sources, the general share-holders’ meeting may adopt a resolution to verify a certain circumstance that occurred during the formation of a company or in the course of its business and, for this, may appoint an accountant. Any shareholder whose interests are affected with respect to such circumstances may not vote on that matter.

2. Where a motion for appointment of special accountants to verify circumstances that occurred during the previous five years has been rejected by the general shareholders’ meeting, upon a petition filed by shareholders, whose cumulative interest reaches one-hundredth of all the voting shares of stock, a special accountant may be appointed by a court, where the court has reason to believe that there have been gross violations of a law or the articles of association of a company.

3. If special accountants are appointed by a court, the company bears all the expenses connected with such audit.

Article 38. Responsibilities of Shareholders1. A shareholder is required to:1) pay the company’s share issue price to the company or transfer

to the company appropriate property that constitutes the shareholder’s non-monetary investment using a method provided by the articles of as-sociation of the company for payment for the acquired corporate shares of stock;

2) inform the registrar and/or the company of any changes in data relating to her/him/it that has been entered in the corporate register;


3) notify in writing the company, the authorized agency or a gov-ernmental anti-monopoly authority of the acquisition and/or the intent to acquire corporate shares of stock in an amount exceeding the limits established by securities legislation or by other legislative acts;

4) perform other responsibilities as provided for by the present Law and by other legislative acts.

2. Shareholders who are corporate officers of a public company are required to notify in writing the company and the authorized agency of all their transactions with corporate shares of stock pursuant to the pro-cedure established by securities legislation.

3. Where a failure to perform or the improper performance of the requirements set forth in clause 1 and 2 of the present Article result in damage to the company, the shareholder is liable to the company for the amount of such damage. Where such failure to perform or to improper performance, in addition to the damage caused to company, results in damage to specific company shareholders, the shareholder also is liable to the appropriate shareholders for the amount of such damage.

Article 39. Consequences of Failure of Make Timely Payment for Shares of Stock1. A shareholder who has failed to make timely payment for corporate

shares of stock is liable as provided by the present Law, by other legislative acts or by the articles of association of the company.

2. In the event of the untimely transfer of monetary investments, a person is required to pay to the company 5% of the value of appropriate unpaid portion of the investment, as of the moment when the invest-ment should have been paid up in full. A company is entitled to provide an additional thirty-day period to such defaulting person for proper pay-ment of his investment. Where the person fails to observe that period, the company is entitled to declare that all the partial investments, made by that person, revert to the property of the company while the person loses the status of a company shareholder under the appropriate shares of stock, and the person’s right to demand transfer of shares from the company also ceases. In this event, the company must immediately sell the shares that were previously due to such person on organized securities markets at the prevailing price. However, if such sale on organized markets is impossible, the shares are sold through a public bidding process using the auction method or any other method provided by legislation.

3. The articles of association of a company may provide for other forms of the indemnification of damage to the company, compensation for its losses or other penalties in the event of an untimely payment for shares.


Article 40. No Disclaimer or Exemption from Liability to Make an Investment1. A company may not exempt a shareholder from an obligation to

make a monetary or non-monetary investment, as well as from other ob-ligations arising from the non-performance of the above obligations.

2. Shares of stock that are to be paid for in cash, pursuant to the terms and conditions of the issue, may not be paid for by setting off sharehold-ers’ claims towards the company.

3. Shareholders may be exempt from an obligation to make invest-ments only by a normal reduction of the capital pursuant to Article 64 or by a reduction of capital through the reacquisition of shares of stock by the company pursuant to Article 65 [Option B]* of the present Law.

Article 41. No Return of InvestmentsInvestments may not be returned to shareholders except as provided

by the present Law.

Article 42. Payment for Prohibited Benefits and Income1. Shareholders and their related parties are required to pay to a

company the value of all the pre-emptive rights with respect to the com-pany (e.g., company management rights), or of securities issued by the company and/or income generated as a result of a violation of provisions of the present Law.

2. A company’s claim pursuant to clause 1 of the present Article is exercisable pursuant to Articles 136 and 137 of the present Law.

Article 43. Obligation to Indemnify Losses1. A shareholder who deliberately uses her/his/its influence upon a

company to compel a corporate official to perform an act, which results in losses to the company, is required to indemnify the company for the losses resulting there from. The shareholder also is required to indemnify losses of other shareholders where such acts of compulsion have resulted in losses to shareholders in addition to the losses incurred by the company.

2. Corporate officers who have acted in violation of their responsibili-ties are jointly liable with the above-mentioned shareholder. In the event of a dispute, they bear the burden of proof that they have exercised due care of a decent [poriadochnyi] and good-faith manager. Corporate officers are not required to indemnify losses to a company or to shareholders where their acts were pursuant to a resolution of a general shareholders’ meeting * [Translator’s note: The square brackets (and the text encased therein) in Clause 3 of Art.40 ap-

pear in the original Russian-language version of the Model Law.]


adopted pursuant to a law. Approval of such acts of corporate officers by the supervisory board (board of directors) is not grounds for exemption from liability to indemnify losses established by the present Article.

3. A person who has obtained benefits from the acts resulting in dam-ages to a company is jointly liable with the above-mentioned corporate officers where such person intentionally compelled [umyshlenno prinuzhdalo] the shareholder to use her/his/its influence upon the company.

4. A demand for indemnification of losses also may be made to the shareholder by a company’s creditors where they are unable to have their claims satisfied by the company. A shareholder’s obligation to indem-nify losses of creditors may be not extinguished as the result of either a company’s waiver of the appropriate claim or of an amicable settlement agreement with such creditors, or as the result of referring to the fact that the act was pursuant to a resolution of a general shareholders’ meeting. Where insolvency proceedings have been instituted against a company, during the period of the proceedings, the rights of creditors are exercis-able by the receiver who is conducting the insolvency proceedings or by the competent authority.

5. These rules do not apply where the corporate officer had to perform the acts that resulted in damage as a result of exercising the following:

1) a voting right at a general shareholders’ meeting; or2) management powers pursuant to a subordination agreement [dog-

ovor o podchinenii].

Article 44. Shareholders’ Agreement 1. Shareholders and/or third parties are entitled to conclude an agree-

ment (agreements), whereby the parties thereto undertake to exercise, in a specific manner, the rights certified by the shares of stock and/or rights to shares of stock, and/or abstain from exercising said rights (hereinafter “a shareholders’ agreement”), including voting at a general shareholders’ meeting, coordinating voting with other shareholders, alienating shares of stock at a pre-determined price or abstaining from alienating shares of stock until the occurrence of conditions subsequent, etc.

2. A shareholders’ agreement does not require any special form. In the event of the alienation by a participant (party) to a shareholders’ agreement of the shares of stock belonging to her/him/it, as regards the holding of which [shares] a shareholders’ agreement has been concluded, the rights and duties under the shareholders’ agreement do not transfer to the acquirer of such shares unless otherwise expressly provided in such shareholders’ agreement and in the agreement between the alienator and the acquirer of such shares.


3. The subject-matter of a shareholders’ agreement may not include a shareholder’s obligation to vote pursuant to proposals made by bodies of the company, the shares of stock of which are subject to such agreement, or the setting terms and conditions which in bad faith [nedobrosovestno] limit the freedom of adopting resolutions of a general shareholders’ meeting in favour of certain persons who are members of the bodies of the company.

4. A shareholders’ agreement is only binding upon the parties thereto. However, a shareholder may not be denied the exercise of shareholder rights or rights to shares of stock due to his violation of the shareholders’ agreement. A violation of a shareholders’ agreement may not be a ground for declaring resolutions of bodies of the company to be invalid.

5. A shareholders’ agreement may provide for liability for failing to perform (the improper performance of) such obligations, provided that this does not contravene the general provisions of civil legislation.

6. Disputes arising in connection with the validity and/or performance of a shareholders’ agreement may be heard by a commercial arbitration court (non-state arbitration tribunal) pursuant to the terms and condi-tions of such agreement.

7. A person who pursuant to a shareholders’ agreement has acquired the right to determine the procedure for voting the shares of stock of a company at the general shareholders’ meeting, the issue of securities [of said company] which are subject to state registration, is required to notify the company of the acquisition of such a right where, as a result of the acquisition thereof, such person will be able, independently or jointly with its affiliates, to control more than [5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%]* of the votes under the issued, common shares of stock of the company.

Article 45. Company Acting as a Party to a Shareholders’ AgreementsA company is entitled to participate in (be a party to) a shareholders’

agreements unless otherwise established by legislation or by the articles of association of the company. Provisions contained in Article 138 and 139 of the present Law apply to the conclusion of such agreements. Where an agreement is concluded in violation of the aforementioned provisions, the shareholder who is a party to such agreement is deemed to have known about such violation.

* [Translator’s note: The square brackets (and the text encased therein) in Clause 7 of Art.45 appear in the original Russian-language version of the Model Law.]


Article 46. Redemption of Shares of Stock by Company upon Shareholders’ Demand

1. Shareholders holding voting shares of stock are entitled to demand that a company redeem all or part of the shares of stock of the company owned by such shareholders in the following instances:

1) the general shareholders’ meeting has adopted a resolution to reor-ganize the company (where the shareholder has taken part in the general shareholders’ meeting and has voted against the reorganization during the adoption of the appropriate resolution);

2) the general shareholders’ meeting has adopted a resolution to delist shares of stock of the company (where the shareholder has not taken part in the general shareholders’ meeting or where the shareholder has taken part in said meeting but has voted against such delisting);

3) a shareholder objects to a resolution of the general shareholders’ meeting on the conclusion of a major transaction by the company and/or with a resolution of the company to conclude [such] a transaction, where there is a conflict of interest, when such resolutions have been adopted pursuant to the procedure established by the present Law and in the articles of association of the company.

2. The list of the shareholders entitled to demand that a company redeem their shares of stock is compiled on the basis of the data contained in the corporate register as of the date of compiling the list of persons entitled to take part in a general shareholders’ meeting, the agenda for which includes items that, pursuant to the present Law, after a vote on them is taken, could lead to the shareholders becoming entitled to demand redemption of their shares of stock.

3. A company redeems the shares of stock at the price established by a company’s board of directors (supervisory board), such price not being lower than the market value which must determined by an independent valuator without regard to the change in such value caused by the com-pany’s activities resulting in accrual [by shareholders] of a right to demand valuation and redemption of shares.

Article 47. Right of Shareholders to Demand Redemption of Their Shares of Stock by a Company

1. A company is required to inform the shareholders of their right to demand redemption of their shares of stock by the company and, also, of the price of such redemption and the redemption procedure.

2. The notice forwarded to shareholders informing them of a general shareholders’ meeting, the agenda of which includes items that pursu-


ant to the present Law, after a vote on them is taken, could lead to the shareholders becoming entitled to demand redemption of their shares of stock by the company, must contain the data specified in Clause 1 of the present Article.

3. A demand of a shareholder for the redemption of her/his/its shares of stock is forwarded to a company, in writing, containing such shareholder’s address and the number of shares which such shareholder is demanding to be redeemed. The signature of the shareholder—a natural person or her/his/its representative—affixed to the shareholder’s demand for redemp-tion of her/her/its shares, as well as the revocation of such demand, is authenticated by a notary or by the corporate registrar.

Shareholder demands for redemption of her/his/its shares of stock by a company must be submitted to the company within 45 days after the appropriate resolution has been adopted by a general shareholders’ meeting.

A shareholder is not entitled to affect any transactions related to the alienation or encumbrance of such shares of stock in favour of third parties from the moment that a company has received the shareholder’s demand for redemption of her/his/its shares of stock until a record on the transfer of right to the shares of stock being redeemed by the company has been entered into the corporate register or until the shareholder revokes the demand for redemption of her/his/its shares of stock, an appropriate record of which is entered into the corporate register. A shareholder’s revocation of a demand for redemption of her/his/its shares of stock must be received by the company within the timeframes established in Paragraph 2 of this Clause.

4. A company is required to redeem the shares of stock held by the shareholders, who have submitted demands for the redemption thereof, within thirty days after expiration of the period established in Paragraph 2, Clause 3 of the present Article.

No later than fifty days after the appropriate resolution has been adopted by a general shareholders’ meeting, a company’s board of direc-tors (supervisory board) approves the report on the results of a demands of shareholders for redemption of their shares of stock.

The corporate registrar enters the record on the transfer of owner-ship rights to the shares of stock redeemed by a company in the corporate register based on the report on the results of a demand of shareholders for redemption of their shares of stock approved by the company’s board of directors (registrar). Such record is made based on a demand of share-holders for redemption of their shares of stock, as well as on the other documents certifying that the company has performed its obligation in


full to make payments to the appropriate shareholders who have submit-ted a demand for redemption of their shares of stock.

Article 48. Limitation on Redemption of Outstanding Shares of Stock by a Company

The number of outstanding shares of stock redeemed by a company must not exceed 25% of the total number of outstanding shares of stock, whereas the costs associated with the redemption of outstanding shares of stock must not exceed 10% of the company’s capital as of the date of redemption of outstanding shares of stock at a demand of a shareholder compiled as of the date of the general shareholders’ meeting which has adopted any one of the resolutions enumerated in Clause 1 of Article 46 of the present Law.

CHAPTER V. A COMPANY’S DIVIDENDS

Article 49. Payment of Dividends1. A company is entitled, following the results of the first quarter, six

months, nine months of the fiscal year and/or following the results of the entire fiscal year, to adopt a resolution (make a declaration) to pay dividends on outstanding shares unless otherwise required by the present Law.

[Alternative: 1. A resolution (declaration) on paying out dividends following the results of the first quarter, six months, or nine months of the fiscal year may be adopted within three months after the end of the appropriate period.]*

A company is required to pay all the dividends announced for each share class and/or type. The dividends are payable in money, and, in the instances permitted by a resolution on payment of dividends adopted by a general shareholders’ meeting—in other property established by such resolution, where the shareholder receiving such dividends has no objec-tions thereto.

2. Dividends are paid out from the after-tax income of a company (the company’s net income).

Where so stipulated in the articles of association of a company, the dividends on preferred shares of stock may be paid out from company’s special funds which have been created for such purposes.

3. Resolutions to pay out (declare) dividends, including resolutions on the amount of dividends and payment method for each share category and/or type, are adopted by a general shareholders’ meeting. The amount

* [Translator’s note: This alternative text for Clause 1 of Art.49 appears in the original Russian-language version of the Model Law.]


of dividends must not exceed the amount recommended by the board of directors (supervisory board) of a company.

4. The timeframes and procedure for paying out dividends are estab-lished in the articles of association of a company or by a resolution of the general shareholders’ meeting on paying dividends. Where the articles of association of the company fail to establish the timeframes for dividend payment, such period must not exceed 60 days from the adoption of the resolution (declaration) on dividend payment.

5. Any person indicated on the list of shareholders, who is entitled to part take in the general shareholders’ meeting, is entitled to dividends.

A list of persons entitled to dividends is compiled as of the day of compiling the list of persons, who are entitled to participate in the general shareholders’ meeting, during which the resolution on paying out the ap-propriate dividends is adopted. For compiling the list of persons entitled to dividends, a nominal shareholder is required to provide the registrar or the company (depending on who maintains the corporate register) with data about the persons in whose interests s/he/it holds the shares.

6. The dividends which have not been received by shareholders, who have been notified by the company about the need to receive dividends, are revoked three years after adoption of the appropriate dividend pay-ment resolution, and cannot be claimed from the company.

Article 50. Limitations on Dividend Payments1. A company is not entitled to adopt a resolution on (to declare)

payment of dividends (including those following the results of the first quarter, six months, nine months of the fiscal year) on common shares of stock and preferred shares of stock where the amount of dividend has not been determined unless a resolution on the payment of dividends in full (including those dividends accrued on cumulative preferred shares of stock) on all types of preferred shares of stock, for which the amount of dividends (including those following the results of the first quarter, six months, nine months of the fiscal year) is established by the articles of association of the company, has already been adopted.

2. A company is not entitled to adopt a resolution on (to declare) payment of dividends on preferred shares of stock of a specific type, the amount of the dividend for which is set by the articles of association of the company unless an appropriate resolution has been adopted on pay-ment of dividends in full (including those dividends accrued on cumulative preferred shares of stock) on all other types of preferred shares of stock that have priority in terms of the order of dividend payment.

3. A company is not entitled to pay the declared dividends on shares in the following instances:


1) where, as of the date such resolution is adopted, the company meets the indicia of insolvency (bankruptcy) as set forth in bankruptcy legislation, or where such indicia appear as a result of payments of dividends;

2) where, as of the date of payment, the value of the company’s net assets is less than the amount of its charter capital, reserve fund or paid-in surplus of the liquidation value of its issued preferred shares of stock as indicated in the articles of association of the company or where the value of the company’s net assets falls below the aforementioned total amount as the result of dividend payment; or

3) in other instances set forth in legislative acts.Upon cessation of the circumstances enumerated in this Clause,

the company is required to pay all the declared dividends in full to the shareholders.

Article 51. Contesting a Resolution on the Distribution of a Company’s Net Profit

A shareholder may contest a resolution on the distribution of a com-pany’s net profit where the general shareholders’ meeting has adopted a resolution to increase its reserve fund using such net profit or, for any other reason, refuses to pay dividends the right to which has not been limited by a law or the articles of association of the company, where based on a reasonable commercial valuation such refusal to pay dividends is not conditioned by the necessity to maintain the company’s viability and sustainability in the near future, which prevents the company from distributing its profit amongst the shareholders in the amount of 4% or more of the total amount of the charter capital of the company .

Version A. A Company with Charter Capital

CHAPTER VI. THE CHARTER CAPITAL OF A COMPANY

Article 52. Charter Capital1. The articles of association of a company establish the amount of

the charter capital of the company expressed in the national currency as a minimum amount required to secure the property interests of the company’s shareholders and creditors.

2. Where a share of stock has a par value, the charter capital is equal to the total par value of all the shares of stock issued.

3. Where a company issues shares of stock of no par value, each share of stock is deemed to constitute a portion of the charter capital of the


company, and the amount of such charter capital is equal to the book value of investments made to pay up the outstanding shares of stock.

4. Where the book value of investments made to pay up the shares of stock exceeds the par value of such shares of stock, such excess constitutes the company’s additional paid-in capital.

5. The amount of charter capital of a company that has issued par value shares of stock is set forth in the articles of association of the company, the balance sheet and in the register.

Article 53. Net AssetsA company’s net assets are determined pursuant to national account-

ing legislation.

Article 54. Minimum Charter CapitalThe charter capital of a company must constitute [……….].*

Article 55. Changing Charter Capital1. The amount of a charter capital of a company is changed through an

appropriate increase or reduction pursuant to the present Law, securities legislation, and the articles of association of the company.

2. A resolution to change the amount of the charter capital is adopted by a general shareholders’ meeting, and, in the instances set forth in Article 58 of the present Law, by the company’s board of directors (management committee).

3. A resolution to change the amount of the charter capital must specify the grounds and procedure for, and the amount of, the change in the amount of the charter capital, and provide information about the number of corporate shares of stock issued or revoked and their par value, if such has been determined.

4. A resolution to change the amount of a charter capital of a company must be reflected in the corporate register and published on the company’s website pursuant to the procedure established by a law. This requirement must be enforced by the executive body (the person performing the func-tions of the company’s sole executive body).

Article 56. Increasing the Charter Capital of a Company through an Additional Share Issue

1. A resolution to increase the charter capital of a company through an additional share issue is adopted at a general shareholders’ meeting by a majority of votes constituting not less than 75% of the total number of * [Translator’s note: The square brackets (and the blank line encased therein) in Art.54 appear in

the original Russian-language version of the Model Law.]


votes exercisable by the shareholders participating in said general share-holders’ meeting.

2. A resolution to increase the charter capital of a company through an additional share issue must indicate the number of additional shares of stock issued in each category and/or type, the method of issue, the minimum subscription price for the additional shares of stock, or the procedure for calculating such minimum price, including the minimum issue price or the procedure for calculating such price for the issue of additional shares of stock to persons exercising the pre-emptive right of acquisition of such issued shares of stock, and the payment methods for the additional shares of stock subscribed. Such resolution may also include other terms and conditions of the issue.

3. A company is not entitled to issue an order to record such shares of stock in the name of their buyer in the corporate register until the share of stock being offered is paid up in full.

Article 57. Increasing Charter Capital by Transformation of Reserve Fund and Capitalization of Retained Profits

1. After the annual balance sheet has been approved by the general shareholders’ meeting, the latter may adopt a resolution to increase the charter capital by transforming the reserve fund or allocating the retained profits to the charter capital where such resolution is adopted by a major-ity of votes constituting not less than 75% of the total number of votes exercisable by the shareholders participating in such general shareholders’ meeting.

2. The reserve fund and the retained profits cannot be transformed into the charter capital where the company has negative annual balance.

3. An increase in the charter capital may be used to issue and offer additional shares of stock. Alternatively, a company may raise more funds from the current shareholders by raising the par value of the shares of stock issued earlier. An issue of additional shares of stock, as well as an increase in the par value of shares of stock, is subject to registration with the competent authority.

4. Shareholders are entitled to acquire new shares of stock in propor-tion to the shares of stock already held by them. Any resolutions adopted by the shareholders’ meeting in violation of the aforementioned rule are void ab initio. The nature of the rights relating to shares of stock is affected by an increase in a charter capital of the company.

5. Corporate officers bear liability for ensuring that the shareholders and the rights thereof to the company’s shares of stock acquired through an increase in charter capital pursuant to the present Article are recorded in the corporate register. The rights of the shareholders arise upon regis-


tration of their rights to shares of stock unless otherwise provided by the appropriate resolution adopted by a general shareholders’ meeting.

Article 58. Increasing the Charter Capital of a Company by Issuing Authorized Shares

1. The articles of association of a company or any resolution adopted by a general shareholders’ meeting with respect to amending the articles of association of the company, may vest the management committee (board of directors) with a right to increase the charter capital of the company up to the established maximum amount (stated capital) for a maximum period of five years. The maximum amount, by which the charter capital may be increased using this method, may not exceed 50% of the charter capital. Where the right to such an increase of the charter capital is pro-vided for by an individual resolution adopted by a general shareholders’ meeting rather than by the articles of association of the company, such resolution must be published on the company’s website and reflected in its register pursuant to the procedure established by a law.

2. The articles of association of a company or a resolution of the general shareholders’ meeting must specify the number of additional common shares of stock and/or preferred shares of stock of each type within the issue. The minimum share issue price may also be established by the articles of association of the company.

3. Such resolution must grant the following rights to the management committee (board of directors):

1) to submit an application for registration of the authorized shares of stock pursuant to the articles of association of the company;

2) to decide on placement [of shares];3) to submit an application to the competent authority for registra-

tion of the shares issue;4) to submit an application for registration of shares issue in the

corporate register.4. A resolution to issue authorized shares of stock is adopted by the

company’s board of directors unanimously with all the board of directors present, but votes of the members of the board of directors, who have resigned or have been dismissed from office, are not counted.

Alternative:[4. A resolution to issue authorized shares of stock is adopted by the manage-

ment committee]*

* [Translator’s note: This alternative text for Clause 4 of Art.58 appears in the original Russian-language version of the Model Law.]


5. A company issues its additional shares of stock only in the quantity of authorized shares of stock established by the articles of association of the company.

Article 59. Pre-emptive Right of Acquisition of Shares of Stock 1. Each shareholder must be entitled, upon her/his/its demand, to

receive a portion of new shares of stock in proportion to her/his/its share in the former charter capital, with the rights attributable to such shares of stock to be the same [as those granted earlier]. Such pre-emptive right of the owners of common shares of stock applies to the acquisition of common shares of stock of any type issued by a company, as well as to that of any securities convertible into common shares of stock issued by the company. The minimum time period set for a shareholder to exercise her/his/its pre-emptive right is not less than two weeks.

2. The executive corporate body is required to publish the price of offered shares of stock or the principles used to calculate it, as well as the time period for purchasing such shares of stock, as indicated in Clause 1 of the present Article, in a periodical used for company’s publications. If provision is only made for the principles of price calculations, the offering price must also be published not less than three days prior to the expira-tion of the period established for acquisition of the shares of stock.

3. The pre-emptive right of acquisition of shares of stock may be re-voked in whole or in part only pursuant to a resolution on increasing the charter capital. In this case, the resolution, along with the requirements on increasing capital set forth in domestic legislation or in the articles of association of a company, must be adopted by a majority of shareholders’ votes at the time of resolution-making constituting not less than 75% of the total number of the company’s voting shares of stock. The articles of association of the company may establish other requirements and a greater number of votes for a qualified majority, as well as other requirements. The revocation of a pre-emptive right of acquisition of shares of stock is permitted when the increase in the charter capital achieved through monetary investments does not exceed 10% of the current amount of the charter capital, and the share offering price is not significantly lower than the market price.

4. A resolution revoking a pre-emptive right of acquisition of shares of stock in whole or in part may be adopted only where consideration thereof is clearly and duly included as an item on the agenda of the forthcoming general shareholders’ meeting that is subject to publication as required pursuant to the present Law. The management committee (board of direc-tors) must provide a report to the general shareholders’ meeting explaining the reasons for revocation in whole or in part of the pre-emptive right of


acquisition of shares of stock; the report contains substantiation of the suggested offering price of the shares of stock.

5. Where the resolution supporting the offering of additional shares of stock and/or securities convertible into shares of stock is adopted by a general shareholders’ meeting, the list of persons entitled to the pre-emptive right of acquisition of additional shares of stock and securities convertible into shares of stock is compiled based on the data in the cor-porate register as of the date of compiling the list of persons entitled to take part in such general shareholders’ meeting. In all the other instances, the list of persons entitled to the pre-emptive right of acquisition of ad-ditional shares of stock and securities convertible into shares of stock is compiled based on data in the corporate register as of the date of adopt-ing a resolution approving the offering of additional shares of stock and securities convertible into shares of stock. For purposes of compiling the list of persons entitled to the pre-emptive right of acquisition of additional shares of stock and securities convertible into shares of stock, a nominal shareholder provides the registrar or the company (depending on who maintains the corporate register) with data about persons, for whom s/he/it holds shares of stock.

Article 60. Exercising a Pre-emptive Right of Acquisition of Shares of Stock and Securities Convertible into Shares of Stock

1. Persons having a pre-emptive right of acquisition additional shares of stock and securities, convertible into shares of stock, must be notified of the opportunity to exercise the pre-emptive right of acquisition the shares of stock or of securities convertible into shares of stock, as provided for in Article 59 of the present Law, pursuant to the procedure as envisaged by the present Law for convening a general shareholders’ meeting.

Such notice must contain information about the number of offered shares of stock and securities convertible into shares of stock, the offer-ing price of such shares of stock or of such securities, the procedure for calculating such price (including about the offering price and the proce-dure for calculating such price where exercising the pre-emptive right of acquisition), the procedure for calculating the number of securities that may be acquired by any person having such a pre-emptive right of acqui-sition such securities, the procedure by which such individuals submit an application to the company for the acquisition of shares of stock and securities convertible into shares of stock, and the period within which such applications must be accepted by the company (hereinafter “the pre-emptive right term”).


2. The term of the pre-emptive right may not be less than fourty-five days after publication of the appropriate notice. A different period for exercising the aforementioned right may be set by legislation.

Where the procedure for calculating the offering price is established by the resolution authorizing the issue of additional shares of stock and securities convertible into shares of stock, and pursuant to such procedure the offering price is to be determined after the expiration of the pre-emptive right term, such term must not be less than twenty days after the appropriate notice has been duly published. In such instance, the notice must contain information about the period, within which the securities are to be paid up, and such period may not be less than five business days after the disclosure of information related to the offering price.

3. A person having a pre-emptive right of acquisition additional shares of stock, and securities convertible into shares of stock, is entitled to exercise her/his/its pre-emptive right in whole or in part by submitting a written application to a company for the acquisition of the appropri-ate shares of stock and securities convertible into shares of stock. Such application must contain the applicant’s name and indicate her/his/its place of residence (registered address) and the number of securities being acquired by such person.

An application for the acquisition of shares of stock and securities convertible into shares of stock must be submitted along with a docu-ment evidencing payment for such shares of stock and securities with the exception of the instances indicated in Paragraph 2 Clause 2 of the present Article.

Where the resolution, which is the basis for the issue of additional shares of stock and securities convertible into shares of stock, requires that payment therefor be made in kind, the persons exercising the pre-emptive right of acquisition of such securities are entitled make payment therefor in cash at their own discretion.

4. Until the expiration of the term of the pre-emptive right, a company is not entitled to offer additional shares of stock and securities convert-ible into shares of stock to persons not having a pre-emptive right of acquisition thereof.

5. The pre-emptive right of acquisition of shares of stock and securi-ties is an integral part of the totality of the rights of a shareholder related to her/his/its shares of stock, and it may not be alienated as an independ-ent legal power separated from the other legal powers based on holding shares of stock. However, where a pre-emptive right of acquisition has arisen with respect to a specific issue of shares of stock, a shareholder is entitled to freely alienate the pre-emptive right of acquisition, including


to alienate it to the benefit of other of the company’s shareholders or any other third party unless otherwise provided by the articles of association of the company upon the arising of such pre-emptive right of acquisition on the basis of a resolution on the issue of additional shares of stock.

Article 61. Increasing the Charter Capital of a Company for a Subsequent Offer at a Set Price (Conditional Increase of Charter Capital)

1. The general shareholders’ meeting of a company may adopt a reso-lution to increase the amount of the charter capital solely for the purpose of using a right of exchange or exercising a pre-emptive right of acquisi-tion granted by the company with respect to new shares of stock (shares of stock with a pre-emptive right of acquisition; conditional increase of charter capital).

2. A resolution to conditionally increase the charter capital may be adopted solely for the following purposes:

1) to grant the company’s creditors a right of exchange or a pre-emptive right of acquisition with respect to convertible bonds or other securities;

2) to prepare for a merger of the company with other legal persons;3) to grant the employees and/or members of the bodies of the com-

pany or its affiliated persons a pre-emptive right of acquisition of shares of stock pursuant to an appropriate resolution of a general shareholders’ meeting approving the activities or delegating powers to the bodies of the company.

3. The number of shares of stock for which the charter capital may be conditionally increased may not exceed 50% of the issued shares of stock of a company, whereas the nominal amount of such conditional in-crease of the charter capital, about which a resolution has been adopted pursuant to Subparagraph 3 Clause 2, must not exceed 10% of the charter capital formed as of the moment of adoption of the resolution on such increase.

Article 62. Requirements Related to a Resolution on a Conditional Increase of Charter Capital

1. A resolution on a conditional increase of the amount of the charter capital of a company must be adopted by a majority of votes constituting not less than 75% of the total number of votes exercisable by the share-holders’ participating in such general shareholders’ meeting. The articles of association of the company may provide that a greater number of voting shares is required for a qualified majority or other requirements.

2. A resolution on such conditional increase of the charter capital must specify the following:


1) the purpose of conditional increase of the charter capital;2) a list of persons having a pre-emptive right of acquisition of shares

of stock;3) the offering price of shares of stock and the calculation principles

thereof;4) apportionment of the pre-emptive right of acquisition amongst

the members of the bodies of the company and the company’s employees, the time periods for acquiring and exercising such rights, as well as the waiting period prior to the first exercise of such rights, which [period] may not be less than two years where the resolution is adopted for the purposes set forth in Subparagraph 3, Clause 2, of Article 61.

3. Information about the resolution on such conditional increase of the charter capital is reflected in the corporate register by the executive body (sole executive body) of the company.

4. The right of acquisition of the shares of stock of a company at the time of increasing the charter capital is exercised by the submittal of an appropriate application in writing by a person entitled in such instance to the pre-emptive right of acquisition of shares of stock (application for acquisition). The application for acquisition indicates the number, and, when involving par value shares of stock, the par value of shares of stock, as well as the class of the shares of stock, details of the applicant and the date of submittal of the application for acquisition where several classes of shares of stock are being issued.

5. Shares of stock of a company, issued within the framework of conditional increase of the amount of charter capital, may be offered solely for the purposes indicated in the resolution of the company on conditionally increasing the charter capital, and only after said shares of stock have been paid up in full pursuant to such resolution.

6. Shares of stock of a company issued within the framework of conditional increase of the charter capital may be offered in exchange for the company’s convertible bonds only Where the overall amount for the issued bonds is equal to the total minimum offering price of such shares of stock or exceeds such minimum price.

Article 63. Share Offering Price1. In the event of issuing par value shares of stock, the offering price

of shares of stock may not be less than par value with the exception of the instances described by the present Law. Where the offering price turns out to be higher than the par value of the share, the shareholder’s investment is the par value of the share, whereas the remainder of the


amount is regarded as a share premium reflected on a company’s balance sheet as additional capital.

2. In the event of issuing shares of stock without par value, the of-fering price of shares of stock may not be less than the proportional par value of such share of stock. The proportional par value is calculated by dividing the charter capital due for payment (the amount of the planned increase of the charter capital that is supposed to be achieved through the issue of no-par-value shares of stock) by the number of no-par-value shares of stock being issued.

Article 64. Decreasing the Amount of the Charter Capital of a Company 1. In the instances as envisaged by the present Law, a company is

entitled to reduce the amount of its charter capital.The amount of the charter capital of a company may be reduced by

lowering the par value of shares of stock or by reducing the number of shares of stock, including via the company’s redemption of a portion of its shares of stock offered earlier.

A resolution to reduce the amount of the charter capital of a com-pany and information on affecting such a reduction must be published as required pursuant to the present Law and recorded in the corporate register and in the state register.

2. A general shareholders’ meeting of a company adopts a resolution concerning a reduction of the charter capital by way of lowering the par value of shares of stock or by way of redeeming a portion of the shares of stock of the company to reduce the total number thereof.

3. A resolution on reducing the amount of the charter capital of a company by way of lowering the par value of shares of stock may provide that the company pays out money to all of its shareholders. In such cases, the appropriate resolution must indicate the following:

1) how much the amount of the charter capital of a company is being reduced;

2) the classes (types) of shares of stock, for which the par value is being reduced and the amount by which the par value of each share of stock has been reduced;

3) the par value of each class (type) of share of stock after the reduc-tion;

4) the amount to be paid to the shareholders of the company in re-ducing the par value of each share of stock.

4. A resolution on reducing the amount of the charter capital of a company through reducing the par value of the shares of stock of the company must be adopted by a majority of votes constituting not less than 75% of the total number of votes exercisable by the shareholders


participating in such general shareholders’ meeting. Such resolution may be adopted only where proposed by the company’s board of directors (supervisory board).

5. The list of persons entitled to receive money and/or securities from a company following a resolution to reduce the charter capital of a company, in the form of reducing the par value of its shares of stock, is compiled as of the date of the state registration of changes and amend-ments to the articles of association of the company related to the reduc-tion of the amount of its charter capital. For the purpose of compiling the aforementioned list of persons, a nominal shareholder is required to provide the registrar and/or the company with data about the persons for whom s/he/it holds shares of stock.

6. A company is not entitled to adopt a resolution on reducing the charter capital in the following cases:

1) prior to payment of the charter capital in full;2) prior to the redemption by the company of all the shares of stock

to be redeemed pursuant to Article 46 of the present Law; 3) where, as of the date such resolution is adopted, the company

meets the indicia of insolvency (bankruptcy) as set forth in bankruptcy legislation, or where such indicia appear as a result of payments and/or provision of other corporate securities to shareholders pursuant to the provisions set forth in Clause 3 of the present Article;

4) where, as of the day of the adoption of such resolution, the value of the company’s net assets constitutes less than the aggregate amount of its charter capital and of its reserve fund and the positive difference between the liquidation value of its issued preferred shares of stock, as determined by the articles of association of the company, and the nomi-nal value thereof, or where—as a result of payment to shareholders and/or transfer to them of other securities of the company pursuant to the provisions of the present Article—the value of the company’s net assets falls below the aggregate amount of its charter capital and of its reserve fund and the positive difference between the liquidation value of its issued preferred shares of stock, as determined by the articles of association of the company, and the nominal value thereof;

5) prior to distribution of the announced but unpaid dividends in full, including unpaid dividends accrued on cumulative preferred shares of stock;

6) in other instances set forth in legislative acts.7. In the instances enumerated in Clause 6 of the present Article,

a company’s board of directors (supervisory board) and/or the execu-tive body may not, in any way, compensate the shareholders or, in any


other way, distribute any funds amongst them due to a reduction in the company’s charter capital following a resolution to reduce the company’s charter capital so long as the circumstances enumerated in Clause 6 of the present Article continue.

Article 65. Reducing the Amount of the Charter Capital below the Minimum Amount of Charter Capital

1. The charter capital of a company may be reduced in such a way that it would constitute less than the minimum lawfully established amount of charter capital where the amount of the charter capital will reach such lawfully established minimum by way of an increase in the amount of the charter capital of the company following a resolution adopted simultane-ously with the resolution on reducing the amount of the charter capital of the company, which does not require any property investments by the shareholders. The resolutions on changing the amount of the charter capital, as envisaged in this Clause, must be registered in the state register at the same time only.

2. The resolutions mentioned in Clause 1 of the present Article are void ab initio where such resolutions and the appropriate increase in the amount of the charter capital of a company are not registered in the corporate register and in the state register within six months after the appropriate resolution has been adopted. Said term is suspended during the period of appealing the appropriate resolutions of the company as void ab initio in a court, as well as during the period of registering the appropriate change in the amount of the charter capital of company with the state.

Article 66. Securing the Rights of Creditors of a Company 1. The payment of dividends pursuant to the results of a fiscal year, or

any other reporting period established by a law and/or by the articles of association of a company, may be paid out no earlier than two years after an appropriate resolution on reducing the amount of the charter capital of a company has been adopted. This rule is not valid where the claims of creditors that have arisen prior to publishing information about the performed reduction of the amount of the charter capital of the company have been satisfied, or where the company has provided security to its creditors for the satisfaction of such claims. Such satisfaction or security for satisfaction of the claims of its creditors may be provided to credi-tors by the company where they have duly notified the company about themselves for this purpose within six months after the aforementioned publication, upon condition however that such creditors are entitled to demand provision to them of said security if they are unable to demand satisfaction of their claims from the company. Creditors must be notified


of such right by publishing information about the performed reduction of the charter capital of the company.

Creditors having a priority right with respect to the satisfaction of their claims in the event of bankruptcy proceedings by enforcement of a security interest, created pursuant to a law for their protection and con-trolled by the state, are not entitled to demand that a company provide them security for satisfaction of claims of creditors on the basis of this clause of the present Article.

2. As stipulated in the present Article, payments to shareholders in the event of a reduction of the amount of the charter capital of a company are permitted only six months after the information about the performed reduction of the amount of the charter capital has been published and after the claims of the creditors, who have duly notified the company about themselves, have been satisfied or appropriate security for satisfac-tion of such claims has been provided to them. After the aforementioned instances, the shareholders can also be relieved of liability for investing in the charter capital of a company but not before the claims of such creditors, who have notified the company about themselves, have been satisfied or have been provided appropriate security for satisfaction of their claims.

Article 67. Simplified Procedure to Cover Losses of a Company 1. A simplified procedure may be employed for reducing the amount

of the charter capital of a company to compensate for a reduction in the value of the company’s assets, to cover other losses and allocate certain sums to the reserve fund. In the resolution on capital reduction, it must be indicated that the reduction is for said purposes.

2. In this instance, the requirements of Articles of 64 and 65 on ordi-nary capital reduction are complied with regardless of the circumstances of an ordinary reduction in the amount of [the charter] capital. The provi-sions of Article 66 are not to be applied in this instance.

3. The amount obtained as a result of liquidation (reduction in the amount) of the reserve fund or the savings obtained from profits or from a reduction in the amount of the charter capital may not be employed for making payments to shareholders or relieving the shareholders from their obligations to make investments to the charter capital of the company.

Article 68. Reducing the Amount of the Charter Capital of a Company by way of Share Acquisition

1. A company is entitled to acquire issued shares of stock under a resolution of a general shareholders’ meeting to reduce amount of the charter capital of the company by purchasing part of the issued shares of


stock to reduce total number thereof where provided for by the articles of association of the company.

2. A company is not entitled to adopt a resolution on a reduction in the charter capital of the company by purchasing part of the issued shares of stock to reduce total number thereof where the amount of the charter capital of the company is lower than the amount of the minimum charter capital set by the present Law except where provided for by the present Law.

3. The shares of stock purchased by a company on the basis of a resolution to reduce the amount of the charter capital of the company by purchasing shares of stock to reduce the total number thereof are revoked when they have been acquired by the company.

4. A resolution on share acquisition must determine the categories (types) of the issued shares of stock, the number of shares of stock of each category (type) acquired by the company, the acquisition price, and the method and term of acquisition price payment, as well as the period during which the shares of stock are being acquired.

Unless otherwise provided for by the articles of association of a company, payment for shares of stock is made in cash. The minimum share acquisition period may not be less than thirty days.

Each holder of shares of stock of certain categories (types), a resolution for the acquisition of which has been adopted by a company, is entitled to sell said shares of stock and the company is required to purchase them. Where the total amount of applications received, for the purchase of shares of stock by the company, exceeds the amount of the shares of stock, which may be purchased by the company taking into ac-count the limitations imposed by the present Article, the shares of stock are purchased by the company from the shareholders proportionally to the demands which they have made.

5. Not less than thirty days prior to commencement of the period during which the shares of stock are being purchased, the company is required to notify the shareholders-holders of shares of stock of the ap-propriate categories (types), a resolution for the purchase of which has been adopted. The notification must contain the date specified in Paragraph one, Clause 4 of the present Article.

Article 69. The Consequences of a Reduction in the Value of the Assets of a Company below the Amount of the Charter Capital

1. Where, based on the results of the fiscal year, the net-asset value based on the given annual balance of a company is lower than the amount of the charter capital of the company, the general shareholders’ meeting is required to adopt a resolution to:


1) reduce the amount of the charter capital; and/or 2) increase the net-asset value by having the company’s shareholders

make additional investments pursuant to the procedure provided for by the articles of association of the company; or

3) liquidate the company.2. Where, based on the results of the fiscal year, the net-asset value

based on the annual balance of a company falls below the minimum amount of the charter capital stipulated by a law, the general shareholders’ meeting is required to adopt a resolution to:

1) increase the net-asset value having the company’s shareholders make additional investments pursuant to the procedure provided for by the articles of association of the company; or

2) liquidate the company.3. Failure to comply with the requirements of Clause 2 serves as a

basis for liquidating a company or initiating rehabilitation [sanatsiia] of the company pursuant to a court judgment. Any shareholder of the company, as well as an authorized agency, is entitled to file a motion with a court for the company’s liquidation or rehabilitation.

Article 70. Bonds and Other Securities Convertible into Shares of Stock1. The issue and offer of bonds convertible into shares of stock, or

of any other securities convertible into shares of stock, must be made pursuant to a resolution of a general shareholders’ meeting.

2. The articles of association of a company, or the resolution adopted by a general shareholders’ meeting, may provide for a right of the board of directors to adopt a resolution authorizing the company to issue and offer bonds convertible into shares of stock or any other securities convertible into shares of stock. Such right is effective for five years.

3. A company may not issue bonds, or any other securities convert-ible into the shares of stock of the company unless the number of the company’s authorized shares of stock of certain categories and types is less than the number of shares of stock of such classes and types with respect to which the buyer has the right to convert her/his/its bonds or any other securities convertible into the shares of stock of the company.

4. Shareholders have a pre-emptive right of acquisition of such securi-ties pursuant to Articles 59-60 of the present Law.

Article 71. Reserve Fund1. A company establishes a reserve fund the amount of which must

be set forth in the articles of association of the company and may not be less than 15% of the amount of the charter capital of the company. The


reserve fund must be established within [……….]* as of the date of the formation of the company.

2. The reserve fund is formed by annual deductions from a company’s net profits to maintain the amount set forth in the articles of association of the company. The amount of deductions is determined by a general shareholders’ meeting and must not be less than 5% of the company’s net profit.

3. A company’s reserve fund is designated to cover its losses, repay the company’s bonds and redeem its shares of stock when no other funds are available. The reserve fund may not be used for any other purposes.

4. The articles of association of a company may provide for a spe-cial employee share ownership fund established from the company’s net profit. This fund is paid down exclusively to pay for shares of stock of the company acquired from its shareholders for subsequent placement of such shares of stock amongst the company’s employees.

Version B. Company with Declared Number of Shares of Stock Specified in the Articles of Association of a Company

CHAPTER VI. THE START-UP AND STATED CAPITAL OF A COMPANY

Article 52. The Start-up Capital, Shares of Stock Declared for Placement1. The amount of the start-up capital and the number of the shares

of stock declared for placement are set forth in the articles of associa-tion of a company. However, the amount of the start-up capital may not be less than the minimum amount of charter capital stipulated by the present Law.

2. Where shares of stock have par value, the amount of the start-up capital is equal to the total amount of the par value of the shares of stock issued amongst the company’s founders. Where shares of stock do not have par value, the amount of the company’s start-up capital is equal to the total amount obtained by the company after placement of the shares of stock amongst the company’s investors.

3. The number of shares of stock declared for placement, as well as the timeframe during which such shares of stock must be placed, is specified in the articles of association of a company.

* [Translator’s note: The square brackets (and the blank line encased therein) in Clause 1 of Art.71 appear in the original Russian-language version of the Model Law.]


4. The amount of the start-up capital and declared capital paid by the shareholders is reflected in a company’s balance sheet pursuant to the requirements of a law.

Article 53. Start-up CapitalThe start-up capital, not lower than the amount of a company’s

minimum charter capital stipulated by a law, must be paid up in full by the founders within a thirty-day period starting from the day of the state registration of the company as a legal person.

Article 54. Increasing the Amount of the Charter Capital of a Company through an Additional Share Issue

1. A resolution to increase the amount of the charter capital of a company through an additional share issue within the limits set forth in the articles of association of the company is adopted by a general share-holders’ meeting (board of directors) of the company.

2. A resolution to increase the amount of the charter capital of a company through an additional share issue must indicate the number of common and (preferred) additional shares of stock issued in each category and/or type, the method of issue, the subscription price for additional shares of stock, or the procedure for calculating such price, including the minimum issue price or the procedure for calculating such price for an issue of additional shares of stock to persons exercising a pre-emptive right of acquisition of such issued shares of stock, the method of pay-ment for the additional shares of stock subscribed, and other terms and conditions of the issue.

3. A company is not entitled to issue an order to record such shares of stock in the name of their buyer in the corporate register (the accounting system of a nominal holder) until the shares of stock being offered have been paid up in full.

Article 55. Increasing the Amount of the Charter Capital of a Company by Transformation of Reserve Fund and Capitalization of Retained Profits 1. A general shareholders’ meeting may adopt a resolution to increase

the amount of the charter capital of a company by transforming the reserve fund (the funds of the reserve capital fund) or by transferring the retained profits to the charter capital.

2. The reserve fund and the retained profits may not be transformed to the charter capital where the annual balance of the company shows losses.

3. Where shares of stock have par value, upon an increase in the amount of the charter capital of a company, pursuant to the present Ar-


ticle, their par value is proportionately increased or new shares of stock are issued.

4. Corporate officers bear liability for ensuring that the shareholders, and their rights to shares of stock of the company acquired through an increase in the amount of the charter capital of the company, pursuant to the provisions of the present Article, are recorded in the corporate register. The rights of shareholders arise upon registration of rights to shares of stock unless otherwise provided by the appropriate resolution adopted by a general shareholders’ meeting of the company.

Article 56. Report on Placement Results of Shares of Stock of a Company 1. A company is required to submit reports on placement results of

its shares of stock every six months (within a one-month period after expiration of the six-month reporting period) to the authorized agency until the placement in full of the company’s declared shares of stock and after their placement in full.

2. The content and the submission procedure of the report on place-ment results of the shares of stock, as well as the procedure for considering and approving this report, is established by the competent authority.

Article 57. Pre-emptive Right of Acquisition of Shares of Stock of a Company1. Upon its demand, each shareholder must be allocated a block of

issued shares of stock so as to enable said shareholder to acquire the same in proportion to her/his/its equity stakes in the capital of a company. A period of not less than two weeks is established for the exercise of a pre-emptive right of acquisition.

2. The executive corporate body is responsible for publishing, in a periodical used for the company’s publications, the price of the offered shares of stock as well as the time period for exercising a pre-emptive right of acquisition of shareholders of the company for acquiring shares of stock.

3. A pre-emptive right of acquisition of shares of stock may be revoked in whole or in part only pursuant to a resolution of a general shareholders’ meeting of a company on increasing the amount of the charter capital thereof. In this event, the resolution, along with the requirements on in-creasing the amount of the charter capital set forth in a law and/or in the articles of association of the company, must be adopted by a majority of shareholders’ votes at the time of resolution-making which constitute not less than 75% of the total number of the company’s voting shares of stock. The articles of association of the company may provide for a higher number of votes for a qualified majority as well as for other requirements.


4. A resolution revoking a pre-emptive right of acquisition of shares of stock in whole or in part is lawful only where the resolution about such revocation is clearly and duly adopted and published. The management committee (board of directors) must provide the general shareholders’ meeting with a written substantiation of the reasons for revocation in whole or in part of a pre-emptive right of acquisition of shares of stock. This substantiation also must contain an elaboration of the suggested offering price of the shares of stock.

5. If a resolution, which is the basis for the offer of additional shares of stock and securities convertible into shares of stock, is adopted by a general shareholders’ meeting of a company, the list of persons having a pre-emptive right of acquisition of additional shares of stock and securities convertible into shares of stock is compiled on the basis of data contained in the corporate register as of the date of compiling the list of persons having a right to take part in such general shareholders’ meeting. In all the other instances, the list of persons having a pre-emptive right of acquisi-tion of additional shares of stock and securities convertible into shares of stock is compiled on the basis of data contained in the corporate register as of the date of adopting the resolution which is the basis for the offer of additional shares of stock and securities convertible into shares of stock. For the purpose of compiling the list of persons having a pre-emptive right of acquisition of additional shares of stock and securities convertible into shares of stock, a nominal shareholder must provide the registrar or the company (depending on who maintains the corporate register) with data about persons, for whom s/he/it holds shares of stock.

Article 58. Exercising the Pre-emptive Right of Acquisition of Shares of Stock and Securities Convertible into Shares of Stock

1. Persons having a pre-emptive right of acquisition of additional shares of stock or of securities, convertible into shares of stock, must be notified of the opportunity to exercise the pre-emptive right of acquisi-tion of the shares of stock or of securities convertible into shares of stock, pursuant to the procedure as envisaged by the present Law for convening a general shareholders’ meeting.

Such notice must contain information about the number of offered shares of stock or of securities convertible into shares of stock, the of-fering price of such shares of stock or of securities, the procedure for calculating the number of securities that may be acquired by any person having a pre-emptive right of acquisition of such securities, the procedure by which such individuals must submit an application to the company for the acquisition of shares of stock or of securities convertible into shares


of stock, and the period within which such applications must be accepted by the company.

2. A person having a pre-emptive right of acquisition of shares of stock or of securities convertible into shares of stock, is entitled to exer-cise her/his/its pre-emptive right in whole or in part by submitting to the company a written application for the acquisition of shares of stock or of securities convertible into shares of stock. Such application must contain the applicant’s name, and indicate her/his/its place of residence (registered address) and the number of securities being acquired by such person.

An application for the acquisition of shares of stock or of securities convertible into shares of stock must be submitted along with a document certifying payment thereof.

Where the resolution, which is the basis for the issue of additional shares of stock or of securities convertible into shares of stock, requires that payment therefor be made in kind, the persons exercising the pre-emptive right of acquisition of such [shares of stock or] securities are entitled to make payment therefor in cash at their own discretion.

3. Until the expiration of the term of the pre-emptive right, a company is not entitled to offer additional shares of stock and securities convert-ible into shares of stock to persons not having a pre-emptive right of acquisition thereof.

4. The pre-emptive right of acquisition of shares of stock and securities is an integral part of the totality of the rights of a shareholder related to her/his/its shares of stock, and it may not be alienated as an independent legal power separated from the other legal powers based on holding shares of stock. However, where a pre-emptive right of acquisition has arisen with respect to a specific issue of shares of stock, a shareholder is entitled to freely alienate the pre-emptive right of acquisition, including to alienate it to the benefit of other company’s shareholders or to any other third party, unless otherwise provided by the articles of association of the company, from the moment that such pre-emptive right of acquisition arises on the basis of a resolution to issue additional shares of stock.

Article 59. Conditional Increase in the Amount of the Charter Capital of a Company

1. A general shareholders’ meeting of a company may adopt a resolution to increase the amount of the capital of a company solely for the purpose of exercising the right of exchange or a pre-emptive right of acquisition granted by the company with respect to new shares of stock (shares of stock with a pre-emptive right of acquisition; a conditional increase of charter capital).


2. A resolution to conditionally increase the charter capital is adopted only for the following purposes:

1) to grant the company’s creditors a right of exchange or a pre-emptive of acquisition with respect to convertible bonds or other securities con-vertible into shares of stock;

2) to prepare for a merger of several companies;3) to grant the employees and/or corporate officers or its affiliated

person a pre-emptive right of acquisition of shares of stock pursuant to an appropriate resolution.

3. The total amount of issued shares of stock of a company for the purposes indicated Subparagraphs 1 and 2, Clause 2, of the present Article may not exceed 50% of the total number of offered shares of stock of the company, while for the purposes indicated in Subparagraph 3, Clause 2, may not exceed 10% total number of offered shares of stock of the company at the time of the adoption of the resolution on such increase.

Article 60. Requirements Related to a Resolution on the Conditional Increase the Amount of the Charter Capital of a Company

1. A resolution on a conditional increase of amount of the capital of a company must be adopted by a majority of votes constituting not less than 75% of the total number of votes exercisable by the shareholders participating in such general shareholders’ meeting. The articles of as-sociation of the company may provide that a higher number of votes is required for a qualified majority or for other requirements.

2. The resolution must set forth the following:1) the purpose of the conditional increase in the amount of the

charter capital;2) a list of persons who, within the limits of the appropriate resolu-

tion on the conditional increase in the amount of the charter capital of the company, have a pre-emptive right of acquisition;

3) the offering price of shares of stock;4) the apportionment of the pre-emptive right of acquisition amongst

the members of the bodies of the company and the company’s employees, the timeframes for acquiring and exercising such rights, as well as the waiting period prior to the exercise of such rights, which period may not being less than two years from the moment of adopting the appropriate resolution on capital increase where the resolution is adopted pursuant to in Subparagraph 3, Clause 2, of Article 59 of this Law.

3. The executive corporate body is responsible for notifying the reg-istrar and for entering the information on the resolution regarding such conditional increase of the amount of the charter capital in the corporate register.


4. The right of acquisition of shares of stock of a company pursuant to the provisions of the present Article is exercised by way of submitting a written application (acquisition application). The acquisition application indicates the number of shares being acquired, and, if several classes of shares of stock are being issued, the class of shares of stock, the property investment, and the date of adopting the resolution on the conditional increase of the capital.

5. An acquisition application for shares of stock pursuant to the provisions of the present Article has the same effect as an application for subscription.

6. A company is entitled to issue shares of stock with a pre-emptive right of acquisition only for achieving the purposes set forth in the resolu-tion on a conditional increase in charter capital, and only after said shares of stock have been paid up in full pursuant to the resolution on a conditional increase in the amount of the charter capital of the company.

7. A company is entitled to issue shares of stock in exchange for the company’s convertible bonds only where the difference between the amount of the issued bonds destined for exchange and the higher mini-mum offering price of such shares of stock, with a pre-emptive right of acquisition, is secured by other assets of the company where these assets may be used for said purpose or on account of additional payment by the person entitled to the exchange. This rule is not applied where the total issue price of the bonds has reached the minimum offering price of shares of stock with a pre-emptive right of acquisition or exceeds it.

Article 61. Reducing the Amount of Charter Capital of a Company 1. In the instances as envisaged by the present Law, a company is

required to reduce the amount of its charter capital. The amount of the charter capital of a company must be reduced by

lowering the par value of shares of stock or by lowering the number of shares of stock, including by way of the company’s redeeming part of its shares of stock offered earlier.

A resolution on reducing the amount of the charter capital of a company and the information on performing such reduction must be published pursuant to requirements of the present Law and recorded in the corporate register and in the state register.

2. A resolution on reducing the amount of the charter capital of a company by way of lowering the par value of shares of stock or by way of redeeming part of the shares of stock of the company, to reduce the total number thereof, is adopted by a general shareholders’ meeting of the company.


3. The resolution on reducing the amount of the charter capital of a company by way of lowering the par value of shares of stock may provide that the company pays out money to all of its shareholders. However, the appropriate resolution must indicate the following:

1) how much the amount of the charter capital of the company is being reduced;

2) the classes (types) of shares of stock, for which the par value is being reduced, and amount by which the par value of each share is reduced;

3) the par value of each class (type) of share after the reduction;4) the amount to be paid to the company’s shareholders in reducing

the par value of each share of stock.4. A resolution on reducing the amount of the charter capital of a

company by way of lowering the par value of the shares of stock of the company must be adopted by a majority of votes constituting not less than 75% of the total number of votes exercisable by the shareholders taking part in such general shareholders’ meeting. Such resolution may be adopted only where proposed by the company’s board of directors (supervisory board).

5. The list of persons having a right to receive money and/or securities from a company following a resolution to reduce the charter capital of the company in the form of lowering the par value of its shares of stock, is compiled as of the date of the state registration of changes and amend-ments and changes to the articles of association of the company arising from the appropriate reduction in the amount of its charter capital. For the purpose of compiling the aforementioned list of persons, a nominal shareholder is obliged to provide the registrar and/or the company with data about the persons, for whom s/he/it holds shares of stock.

6. A company is not entitled to adopt a resolution for reducing the amount of the charter capital in the following cases:

1) prior to full payment of charter capital of the company; 2) prior to the company’s redemption of all the shares of stock to be

redeemed pursuant to Article 46 of the present Law;3) where, as of the date such resolution is adopted, the company

meets the indicia of insolvency (bankruptcy), as set forth in insolvency (bankruptcy) legislation, or if such indicia appear as a result of payment and/or provision of other corporate securities to shareholders pursuant to the provisions set forth in Clause 3 of the present Article;

4) where, as of the day of the adoption of such resolution, the value of the company’s net assets constitutes less than the aggregate amount of its charter capital and of its reserve fund and the positive difference between the liquidation value of its issued preferred shares of stock, as


determined by the articles of association of the company, and the nomi-nal value thereof, or where—as a result of payment to shareholders and/or transfer to them of other securities of the company pursuant to the provisions of the present Article—the value of the company’s net assets falls below the aggregate amount of its charter capital and of its reserve fund and the positive difference between the liquidation value of its issued preferred shares of stock, as determined by the articles of association of the company, and the nominal value thereof;

5) prior to distribution in full of announced but unpaid dividends, including unpaid dividends accrued on cumulative preferred shares of stock;

6) in other instances set forth in legislative acts.7. In instances enumerated in Clause 6 of the present Article, a

company’s board of directors (supervisory board) and/or executive body may not, in any way, compensate the shareholders or distribute any funds amongst them due to a reduction in the amount of the charter capital of the company pursuant to a resolution to reduce the amount of the charter capital of the company as long as the circumstances enumerated in Clause 6 of the present Article continue.

Article 62. Reducing the Amount of Capital below the Minimum Level of Charter Capital

1. The capital of a company may be reduced in such a way that it would constitute less than the minimum lawfully established amount of charter capital, where the amount of the capital will reach such lawfully established minimum in the form of increasing the amount of the capi-tal of the company following a resolution adopted simultaneously with a resolution on reducing the charter capital of the company, which does not require any property investments by the shareholders. The resolutions on changing the capital, as envisaged in this Clause, must be registered in the state register at the same time only.

2. The resolutions mentioned in Clause 1 of the present Article are void ab initio where such resolutions and the appropriate increase in the amount of the charter capital of a company are not registered in the corporate register and in the state register within six months after the appropriate resolution has been adopted. Said term is suspended during the period of appealing the appropriate resolutions of the company as void ab initio in a court, as well as during the period of registering with the state the appropriate change in the amount of the charter capital of the company.


Article 63. Securing Rights of Creditors of a Company 1. The payment of dividends pursuant to the results of a fiscal year,

or any other reporting period lawfully established and/or by articles of association of a company, is permitted no earlier than two years after adoption of the appropriate resolution on reducing the amount of the charter capital of the company. This rule is not valid where the claims of creditors that have arisen prior to publishing the information about the performed reduction of the amount of the charter capital of the company have been satisfied, or where the company has provided its creditors security for satisfaction of such claims. Such satisfaction or security for satisfaction of claims of its creditors may be provided to the creditors by the company where they have duly notified the company about themselves for this purpose within six months after the aforementioned publication, upon condition however that such creditors are entitled to demand provi-sion to them of said security if they are unable to demand satisfaction of their claims from the company. Creditors must be notified of such right by publishing information about the performed reduction in the amount of the charter capital of the company.

Creditors having a priority right with respect to satisfaction of their claims in the event of bankruptcy proceedings by enforcement of a secu-rity interest created pursuant to a law for their protection and controlled by the state, are not entitled to demand that a company provide them security for satisfaction of claims of creditors on the basis of this clause of the present Article.

2. As stipulated in the present Article, payments to shareholders in the event of a reduction of the capital of a company are permitted only six months after the information about the performed reduction of the capital has been published and after the claims of the creditors, who have duly notified the company about themselves, have been satisfied or appropriate security of performance of such claims has been provided to them. Thereafter, the shareholders can also be relieved of the liability for investing in the charter capital of the company but not before the claims of such creditors, who have notified the company about themselves, have been satisfied or have been provided appropriate security for satisfaction of their claims to the company.

Article 64. Simplified Procedure to Cover Losses of a Company 1. A simplified procedure may be employed for reducing the amount

of the charter capital of a company to compensate for a reduction in the value of the company’s assets, to cover other losses and to allocate certain


sums to the reserve fund. In the resolution on capital reduction, it must be indicated that the reduction is for said purposes.

2. In this instance, the requirements of Articles of 61 and 62 on ordi-nary capital reduction are complied with regardless of circumstances of an ordinary reduction on the amount of charter capital. The provisions of Article 63 are not to be applied in this instance.

3. The amount obtained as a result of liquidation (reduction in the amount) of the reserve fund or savings obtained from profits or from a reduction in the amount of the charter capital may not be employed for making payments to shareholders or for relieving shareholders from their obligations to make investments in the charter capital of the company.

Article 65. Reducing the Capital of a Company by way of a Share Acquisition1. A company is entitled to acquire issued shares of stock under a

resolution of a general shareholders’ meeting to reduce the amount of the capital of a company by purchasing part of the issued shares of stock to reduce the total number thereof where provided for by the articles of association of the company.

2. A company is not entitled to adopt a resolution on reducing the amount of the capital of the company by purchasing part of the issued shares of stock to reduce the total number thereof where the amount of the capital of the company is lower than the minimum amount of the charter capital set by the present Law except where provided for by a law.

3. The shares of stock purchased by a company on the basis of a resolution to reduce the amount of the capital of the company by purchas-ing shares of stock to reduce the total number thereof are revoked when they have been acquired by the company.

4. A resolution on share acquisition must determine the categories (types) of the issued shares of stock, the number of shares of stock of each category (type) acquired by a company, the acquisition price, the method and term of acquisition price payment, as well as the period during which the shares of stock are being acquired.

Unless otherwise provided for by the articles of association of a company, payment for the shares of stock is made in cash. The minimum share acquisition period may not be less than thirty days.

Each holder of shares of stock of certain categories (types), a resolution for the acquisition of which has been adopted by a company, is entitled to sell said shares of stock and the company is required to purchase them. Where the total amount of applications received, for the purchase of shares of stock by the company, exceeds the amount of the shares of stock, which may be purchased by the company taking into ac-count the limitations imposed by the present Article, the shares of stock


are purchased by the company from the shareholders proportionally to the demands which they have made.

5. Not less than thirty days prior to commencement of the period during which the shares of stock are being purchased, a company is required to notify the shareholders-holders of shares of stock of the appropriate categories (types), a resolution for the purchase of which has been adopted. The notification must contain the date specified in Paragraph one, Clause 4, of the present Article.

Article 66. The Consequences of a Reduction in the Value of Assets of a Company below the Amount of the Capital

1. Where, based on the results of the fiscal year, the net-asset value based on said annual balance of a company is lower than the amount of the charter capital of the company, the general shareholders’ meeting is required to adopt a resolution to:

1) reduce the amount of the charter capital value; and/or 2) increase the net-asset value by having the company’s shareholders

make additional investments pursuant to the procedure provided for by the articles of association of the company; or

3) liquidate the company.2. Where, based on the results of the fiscal year, the net-asset value

based on the annual balance falls below the minimum amount of the charter capital stipulated by a law, the general shareholders’ meeting is required to adopt a resolution to:

1) increase the net-asset value by having the company’s shareholders make additional investments pursuant to the procedure provided for by the articles of association of the company; or

2) liquidate the company.3. Failure to comply with the requirements of Clause 2 serves as a

basis for liquidating a company or initiating rehabilitation of the company pursuant to the judgment of a court. Any shareholder of the company, as well as a competent agency, is entitled to file a motion in a court for the company’s liquidation or rehabilitation.

Article 67. Bonds and Other Securities Convertible into Shares of Stock1. The issue and offer of bonds convertible into shares of stock, or

of any other securities convertible into shares of stock, must be made pursuant to a resolution of the general meeting.

2. The articles of association, or a resolution adopted by a sharehold-ers’ meeting, may provide for a right of the board of directors to adopt a resolution authorizing a company to issue and offer bonds convertible into


shares of stock or any other securities convertible into shares of stock. Such right is effective for five years.

3. A company may not issue bonds, or any other securities convert-ible into the shares of stock of the company unless the number of the company’s authorized shares of stock of certain categories and types is less than the number of shares of stock of such classes and types with respect to which the buyer has the right to convert her/his/its bonds or any other securities convertible into the shares of stock of the company.

4. Shareholders have a pre-emptive right of acquisition of such securi-ties pursuant to Articles 57-58 of the present Law.

Article 68. Reserve Fund1. A company establishes a reserve fund the amount of which must

be set forth in the articles of association of the company and may not be less than 15% of the amount of the charter capital of the company. The reserve fund must be established within [……….]* of the date of formation of the company.

2. The reserve fund is formed by annual deductions from a company’s net profits to maintain the amount set forth in the articles of association of the company. The amount of deductions is determined by a general shareholders’ meeting and must not be less than 5% of the company’s net profit.

3. A company’s reserve fund is designated to cover its losses, repay the company’s bonds and redeem its shares of stock when no other funds are available. The reserve fund may not be used for any other purposes.

4. The articles of association of a company may provide for a special employee share ownership fund established from the company’s net profit. This fund is paid down exclusively to pay for the shares of stock of the company acquired from its shareholders for subsequent placement of such shares of stock amongst the company’s employees.[Articles 69-71 are not numbered; if Option B is selected, the numbering of the subsequent articles must be changed appropriately.]**

* [Translator’s note: The square brackets (and the blank line encased therein) in Clause 1 of Art.68 appear in the original Russian-language version of the Model Law.]

** [Translator’s note: The square brackets (and the text encased therein) at the end of Clause 4 of Art.68 appear in the original Russian-language version of the Model Law.]


CHAPTER VII. BODIES OF A COMPANY

I. General

Article 72. System of the Bodies of a Company1. Bodies of a company include either the general shareholders’ meet-

ing and the board of directors (where a monistic management system has been chosen) or the general shareholders’ meeting, a supervisory board and a management committee (where a dualistic management system has been chosen).

2. A company may have either a dualistic management system (the supervisory board and the management committee) or a monistic man-agement system (the board of directors). The founders select the com-pany’s management system at the time of the founding the company; the articles of association of the company specify such management system. The general shareholders’ meeting may adopt a resolution to change the management system during the lifetime of the company.

3. The provisions of the present Law on the structure, name and competence of the bodies of a company are imperative norms; the articles of association of a company may not otherwise regulate their competence except for the instances as envisaged by the present Law.

4. For specific types of activities (banking, insurance, pension funds, etc.), legislative acts regulating such fields of activity may establish regula-tions requiring the management of such companies using the model of the dualistic system.

II. The General Shareholders’ Meeting

1. General

Article 73. Annual and Extraordinary General Shareholders’ Meetings1. A general shareholders’ meeting is the highest corporate body the

competence of which is determined pursuant to the present Law. A company is required annually to hold an annual general sharehold-

ers’ meeting. Any other general shareholders’ meetings are extraordinary. The grounds and procedures for convening extraordinary general share-holders’ meetings are provided for by the present Law or by the articles of association of the company.

2. The annual general shareholders’ meeting is held within the time periods established by the articles of association of the company, however,


no earlier than two months after the end of the fiscal year and no later than six months after the end thereof.

3. The general shareholders’ meeting approves a company’s annual financial statements and establishes the procedures for distributing the company’s net profits received during the past fiscal year and the amount of dividends.

4. The annual general shareholders’ meeting adopts a resolution ap-proving the activities adopted by the management committee and the supervisory board (board of directors). The annual general shareholders’ meeting is entitled to address any other matters reserved to the compe-tence of the general shareholders’ meeting.

5. Where all the voting shares of stock or where all the shares of stock of a company are held by a sole shareholder, resolutions concerning all matters reserved to competence of the general shareholders’ meeting by the present Law or by the articles of association of the company are adopted solely by such shareholder and are set down in writing and no-tarially authenticated.

6. Resolutions adopted by a general shareholders’ meeting on any matters reserved to it are binding both on the company’s shareholders’ and corporate officers.

Article 74. Authority of a General Shareholders’ Meeting 1. A general shareholders’ meeting adopts resolutions upon matters

that are directly reserved to the competence of the general sharehold-ers’ meeting pursuant to the present Law. The articles of association of a company may widen the competence of the general shareholders’ meeting to the extent permitted pursuant to the present Law.

2. The competence of the general shareholders’ meeting includes adopting resolutions on the following matters:

1) amending the articles of association of the company or approving a new version of the articles of association of the company; changing the company’s governance model (from the dualistic system to the monistic one and vice versa);

2) reorganizing the company;3) liquidating the company, appointing a liquidation committee, and

approving an intermediate and the final liquidation balance sheets;4) determining how the company is to notify its shareholders of the

general shareholders’ meeting and deciding upon publishing such infor-mation in mass media;

5) specifying the number, par value, class (type) of shares of stock and rights attributable to such shares of stock;


6) increasing the amount of the charter capital of the company by raising the par value of shares of stock or by issuing additional shares of stock unless the articles of association of the company reserve such in-crease in the charter capital of the company by issuing additional shares of stock to the competence of the company’s management committee (board of directors);

7) reducing the amount of the charter capital of the company by lowering the par value of shares of stock or by way of purchasing some shares of stock by the company to reduce the total number thereof;

8) electing the supervisory board (where there is a dualistic manage-ment system), board of directors (where there is a monistic management system) and prematurely terminating their powers; determining the number of members of the supervisory board (board of directors); deter-mining the amount and conditions of compensation paid to the members of the supervisory board (board of directors), and, where established by the articles of association of the company, determining the amount and condi-tions of compensation paid to the management committee’s members;

9) approving the company’s accountant, selecting an auditing firm responsible for the company’s audit;

10) approving the company’s annual reports, annual accounting state-ments including profit-and-loss statements (profit-and-loss accounts) and distributing the company’s profit (including the approval of the amount and payment (declaration) of dividends save any profits distributed as dividends following the results of the first quarter, six months, nine months of the fiscal year) and losses pursuant to the results of the fiscal year;

11) determining the procedure for holding a general shareholders’ meeting, electing members of the election committee and prematurely terminating their powers where the articles of association of the company provide for the creation of such an election committee;

12) approving transactions in the instances established by the present Law unless this is within the competence of the supervisory board (board of directors);

13) approving internal documents regulating activities the bodies of the company;

14) approving a corporate governance code and any changes and amendments and additions thereto where the articles of association of the company provide for such a code;

15) the company’s participation in the founding or in the business of any other legal persons unless the articles of association of the company have delegated these matters to the supervisory board (board of direc-tors);


16) deciding to conduct a special review (special audit) of the com-pany.

3. Matters delegated to the competence of the general shareholders’ meeting may not be assigned to any other bodies of a company unless otherwise expressly established by the present Law.

A general shareholders’ meeting may not adopt a resolution upon any matters delegated pursuant to the present Law to the competence of any other bodies of a company unless otherwise established in the articles of association of the company with the exception of instances where other bodies of the companies fail to decide upon any matter delegated to them. In such instances, these bodies may petition a general shareholders’ meet-ing to adopt a resolution upon any matter; however, where such bodies fail to decide upon any matters that substantially impede [sushchestvenno oslozhniaetsia] or render impossible [stanovitsia nevozhmozhnoi] the com-pany’s operations, they are required to petition a general shareholders’ meeting to adopt a resolution upon such matters.

Article 75. Approving the Activities of Supervisory Board and Management Committee (Board of Directors)

1. The annual general shareholders’ meeting adopts a resolution to approve the work of the management committee and supervisory board (where there is a dualistic management system) and the board of directors (where there is a monistic management system). Such approval is made in the form of approving the annual report submitted by these bodies, and the annual accounting statements including a profit-and-loss statement (profit-and-loss account) of a company.

2. By adopting a resolution of approval, the general shareholders’ meeting acknowledges the management of a company by the manage-ment committee and supervisory board (board of directors) to have been satisfactory.

3. The approval by a general shareholders’ meeting of the work of the bodies of a company releases [the members thereof] from liability to indemnify damages suffered by the company as a result of performance of their corporate management duties where such resolution of approval is based on information sufficient to assess the validity of the acts adopted by the management bodies.

4. Such approval must apply only to the activities that were on the agenda of the general shareholders’ meeting.


2. Convening a General Shareholders’ Meeting

Article 76. Convening a General Shareholders’ Meeting1. A general shareholders’ meeting is convened in those instances

established by the present Law and/or by the articles of association of a company.

2. The management committee (where there is a dualistic management system) or the board of directors (where there is a monistic management system) convenes the annual general shareholders’ meeting upon a reso-lution adopted by a simple majority of votes cast by the members of the management committee (board of directors). A resolution to convene an annual general shareholders’ meeting is set forth in writing in the form of the minutes of the meeting; however, the right of other persons to convene a general shareholders’ meeting as envisaged by the present Law or the articles of association of a company may not be limited.

3. A company bears the costs related to the convening, preparing and holding a general shareholders’ meeting except for those instances established by the present Law.

4. A general shareholders’ meeting may be convened and held by virtue of a court judgment rendered in a lawsuit filed by any member of the supervisory board (board of directors) on behalf of a company or any shareholder in the event that the corporate bodies fail to convene a general shareholders’ meeting within the period of time established by the articles of association of the company pursuant to the present Law.

Article 77. An Extraordinary General Shareholders’ Meeting Convened upon Demand of Minority Shareholders

1. The management committee (board of directors) is required to con-vene a general shareholders’ meeting where shareholders’ jointly holding not less than 5% of the total number of a company’s voting shares of stock (hereinafter referred to as “minority shareholders”) demand a meeting in writing specifying its purpose and reasons. A demand to convene a general shareholders’ meeting is sent to the management committee (board of directors) which, within ten days after receiving such demand, must adopt a resolution to convene a general shareholders’ meeting. When conven-ing an extraordinary general shareholders’ meeting pursuant to a demand that has been made, the management committee (board of directors), at its discretion, is entitled to include any other matters, delegated to the competence of the general shareholders’ meeting, as items on the agenda of such convened general shareholders’ meeting.


2. Where the management committee (board of directors) fails to fulfil a demand of minority shareholders, the shareholders who have made such demand may convene the general shareholders’ meeting by virtue of a court judgment. Such court judgment appoints a person responsible for preparing and conducting the general shareholders’ meeting from amongst the plaintiff shareholders. Such court judgment also appoints the meeting’s chairperson.

3. A company bears the costs related to the convening of an extraor-dinary general shareholders’ meeting by virtue of the court judgment described in clause 2 of the present Article.

Article 78. Notice of a General Shareholders’ MeetingNotice of a general shareholders’ meeting must be made not less than

thirty days prior to the date of the holding thereof.

Article 79. Preparing a General Shareholders’ Meeting1. When preparing a general shareholders’ meeting, the management

committee (board of directors) determines:1) the form of the general shareholders’ meeting (a meeting or voting

in absentia where voting in absentia is permitted by domestic legislation);2) the date, venue and time of the general shareholders’ meeting or,

where a general shareholders’ meeting takes the form of voting in absentia, the final date of accepting voting ballots and the mailing address to which completed ballots should be sent;

3) the date of listing persons having a right to take part in the general shareholders’ meeting;

4) the agenda of the general shareholders’ meeting;5) the procedure for notifying shareholders of the general sharehold-

ers’ meeting;6) the list of information (materials) made available to shareholders

in preparing the general shareholders’ meeting and procedure for the submission thereof;

7) the form and the text of the voting ballot in the event of voting by ballots.

2. The agenda of the annual general shareholders’ meeting must in-clude all the matters to be addressed at the annual shareholders’ meeting as established by domestic legislation.

3. In addition to resolutions on the above-mentioned matters, reso-lutions must be adopted on determining the type (types) of preferred shares of stock the holders of which have the right to vote on matters on the agenda of the general meeting and, in preparing a general meeting,


held in the form of a meeting, also the time of the commencement of the registration of persons attending such general meeting.

Article 80. Information on a General Shareholders’ Meeting1. Notification about convening a general shareholders’ meeting is

published in the periodical used for a company’s publications Notification of convening a general shareholders’ meeting must be published on the company’s website. Legislation may provide for website content require-ments. A company’s management committee (board of directors) is liable for the correctness and accessibility of data published on the website.

2. A company is entitled to additionally inform its shareholders of a general shareholders’ meeting through other mass media (TV, radio).

3. Where the shareholders are known by name and where the number thereof does not exceed 100 shareholders, a general shareholders’ meet-ing may be convened by way of sending registered letters upon condition that no other rules for inviting shareholders have been provided for in the articles of association.

4. The notice of a general shareholders’ meeting must specify:1) the full business name of the company and the location of the

company;2) the form of such general shareholders’ meeting (a meeting or vot-

ing in absentia);3) the date, venue and time of such general shareholders’ meeting

or, where the general shareholders’ meeting takes the form of voting in absentia, the final date of accepting voting ballots and the mailing address to which completed ballots must be sent;

4) the date of compiling the list of persons having a right to take part in the general shareholders’ meeting;

5) the agenda of the general shareholders’ meeting;6) the procedure for reviewing information (materials) to be made

available in preparation for the general shareholders’ meeting and the address(es) at which this may be reviewed.

Article 81. Accessibility of Information about the Agenda of a General Shareholders’ Meeting

1. Materials about the agenda of a general shareholders’ meeting must contain information in that amount which is necessary for the adoption of well-founded resolutions on said matters.

2. If a general shareholders’ meeting must adopt a resolution to amend (add to) the articles of association of a company or to approve a company’s transaction that will become valid only after approval thereof by a general shareholders’ meeting, the text of the proposed changes and


amendments (additions) to the articles of association of the company and, also, the material terms and conditions of such transaction are subject to mandatory publication.

3. For every item on the agenda, for which the general shareholders’ meeting must adopt a resolution, the management committee and the supervisory board (where there is a dualistic management system), or the board of directors (where there is a monistic management system), are required, in publishing the agenda, to include their proposals for the adoption of resolutions. However, the reasons for adopting said resolu-tion and the necessity or practicality of the proposal for the company must be indicated.

4. Proposals for the nomination of candidates to the supervisory board (board of directors) as well as the auditing committee (accountant) must specify their names and surnames, profession, places of residence, education, places of employment and the positions which a candidate has occupied during the last three years.

5. Resolutions which have been adopted, concerning items on the agenda of a general shareholders’ meeting that have not been duly pub-lished, are void ab initio.

Article 82. Proposals of Items to Be Placed on the Agenda of a General Shareholders’ Meeting

1. Shareholders (a shareholder) jointly holding not less than 2% of a company’s voting shares of stock are (is) entitled to propose matters to the annual general shareholders’ meeting’s agenda and to nominate candidates to the company’s supervisory board (board of directors) or election com-mittee; however, the number of candidates may not exceed the number of members of the appropriate body. Such proposals must reach the company no later than thirty days after the end of a fiscal year unless the articles of association of the company have specified a later term.

2. Where the proposed agenda for an extraordinary general share-holders’ meeting provides for the election of members to the supervisory board (board of directors), a company’s shareholders (a shareholder) jointly holding not less than 2% of the company’s voting shares of stock are (is) entitled to propose candidates to the supervisory board (board of direc-tors), the number of which may not exceed the number of members of the supervisory board (board of directors). Such proposals must reach the company no later than thirty days prior to the date of such extraordinary general shareholders’ meeting unless the articles of association of the company have specified a later term.

3. Proposals to include items on the agenda of a general shareholders’ meetings and proposals of nominations of candidates to the management


committee (board of directors) are submitted in writing with an indication of the name (identification) of the shareholders (the shareholder) who have (has) proposed them, the number and class (type) of shares of stock held thereby and must be signed by the shareholders (the shareholder).

4. Proposals to include items on the agenda of a general shareholders’ meeting must specify the wording of each proposed item and proposals of nominations of candidates—the name and surname, the data of the document attesting to the person’s identity (series and/or number of the document, the date and place of the issuance thereof, the issuing authority) of each proposed candidate, the identification of the body to which such candidate is being nominated and other data about her/him as established by the articles of association of the company or by internal documents of the company. Proposals to include items on the agenda of a general shareholders’ meeting must specify the wording of the resolution on each proposed item where such resolution is being proposed.

5. A company’s management committee (board of directors) reviews submitted proposals and decides to include them in the general sharehold-ers’ meeting’s agenda or to reject them not later than five days after the expiration of the time periods specified in Clauses 1 and 2 of the present Article. A proposal by shareholders (a shareholder) is included on the agenda of a general shareholders’ meeting and nominated candidates are placed on the ballot for election to the appropriate corporate body except in instances where:

1) the time periods established in Clauses 1 and 2 of the present Article have not been observed by the shareholders (the shareholder);

2) shareholders (the shareholder) do (does) not hold the number of the company’s voting shares of stock as established in Clauses 1 and 2 of the present Article;

3) the proposal does not meet the requirements established in Clauses 3 and 4 of the present Article;

4) the item proposed for the inclusion on the agenda of the general shareholders’ meeting is not reserved to its competence and/or does not meet the requirements of the present Law.

Any resolution to include a proposed item on the agenda of a general shareholders’ meeting or to place nominated candidates on the ballot that has been adopted in violation of the above requirements is void ab initio.

6. A reasoned [motivirovannoe] resolution adopted by a company’s management committee or board of directors to refuse to include a proposed item on the agenda of the general shareholders’ meeting or to place a candidate on the ballot is communicated to the shareholders (the


shareholder), who proposed such item or nominated such candidate, no later than three days after the date of the adoption thereof. Such refusal may be appealed by the shareholders in a court. The court resolves the issue of whether the refusal to include a proposed item on the agenda of the general shareholders’ meeting or to place a nominated candidate on the ballot is lawful [pravomerno] and appoints a representative from amongst the shareholders-plaintiff who is authorized to proclaim the court judgment at the general shareholders’ meeting. The court must review the petition prior to such general shareholders’ meeting. The company bears the expenses related to hearing the lawsuit where the lawsuit, filed by shareholders, is sustained.

7. A company’s management committee (board of directors) is not entitled to amend the wording of items proposed for the agenda of a general shareholders’ meeting or the wording of resolutions proposed for such items.

8. The agenda of a general shareholders’ meeting may be amended or additions made thereto at a general shareholders’ meeting only where all the shareholders are in attendance or are represented.

3. Right to Take Part in a General Shareholders’ Meeting

Article 83. The List of Shareholders Entitled to Take Part in a General Shareholders’ Meeting

1. Persons having a right to take part in a general shareholders’ meet-ing are listed on the basis of data from the corporate register.

2. The date of compiling a list of persons having a right to take part in a general shareholders’ meeting may not be fixed prior to the date of adopting a resolution to hold a general shareholders’ meeting and it may not be more than fifty days prior to the date of such general sharehold-ers’ meeting.

3. For the purpose of compiling a list of the shareholders’ having a right to take part in a general shareholders’ meeting, a nominal shareholder submits to a company’s management committee (board of directors) information on the person in whose interests such nominee shareholder holds shares of stock as of the date of listing such shareholders. In failing to disclose this information, s/he/it forfeits the right to vote.

4. A list of the persons having a right to take part in a general share-holders’ meeting specifies the name (identification) of each such person, data necessary for her/his/its identification, data on the number and class (type) of shares of stock held by him/her/it and the voting rights attribut-able thereto, the mailing address to which notice must be sent of a general


shareholders’ meeting and the ballot for voting where voting is assumed by the transmittal of ballots for voting, the results of the voting.

5. Each shareholder has a right to be notified by a company of her/his/its inclusion into the list of participants of the meeting and the number of shares of stock held by such shareholder.

6. Changes and amendments may be made to the list of persons having a right to take part in a general shareholders’ meeting only in instance of remedying violations of the rights of persons who have not been included in said list as of the date of the compilation thereof or of correcting mistakes made in the compilation thereof.

7. The management committee (board of directors) is responsible for ensuring that the list of persons having a right to take part in a general shareholders’ meeting is true and correct.

Article 84. Shareholders Participation in a General Shareholders’ Meeting1. The right to take part in a general shareholders’ meeting may be ex-

ercised by a shareholder either personally or through its representative.2. The articles of association of a company specify the procedure for

acknowledging and proving representative powers. 3. Members of a company’s management committee (board of direc-

tors) do not a right to act as a representative of shareholders at a general shareholders’ meeting.

4. Article 89 of the present Law provides for the particulars of exer-cising representative powers by a financial institution.

Article 85. Quorum of a General Shareholders’ Meeting. Adjournment of a General Shareholders’ Meeting

1. A general shareholders’ meeting is duly authorized to adopt resolu-tions where shareholders jointly holding more than 50% of a company’s issued voting shares of stock attend such general shareholders’ meeting personally or through a representative unless the articles of association of the company establishes a higher quorum.

2. Where a general shareholders’ meeting is not duly authorized to adopt a resolution owing to the absence of a quorum, a second general shareholders’ meeting with the same agenda must be convened within the period of time established by the chairperson of the general shareholders’ meeting but not less than ten days after the adjournment of the general shareholders’ meeting; such second general shareholders’ meeting is duly authorized to adopt resolutions regardless of the number of holders of the company’s voting shares of stock attending such meeting personally or through a representative.

3. The agenda may not be amended if a meeting is re-convened.


4. Notification of the shareholders of a company about a second meeting is made in the procedure provided for convening a general share-holders’ meeting.

Article 86. Election Committee1. The articles of association of a company may provide for the forma-

tion of an election committee. In this instance, the general shareholders’ meeting elects an election committee.

A notary or the corporate secretary performs the functions of an election committee where no provision has been made for an election committee. A notary, who has authenticated the founding documents of the company, or the corporate secretary, performs the functions of an election committee at the first general shareholders’ meeting. The articles of association of the company specify the competence and legal status of the corporate secretary.

Under a resolution adopted by a general shareholders’ meeting, the functions of an election committee may be delegated to the corporate reg-istrar on the basis of an agreement of the company with such registrar.

2. An election committee must include not less than three persons. A corporate election committee may not include corporate officers.

Should any member of the election committee fail to attend a general shareholders’ meeting, the additional election of a member of the election committee is permitted during the conduct of the meeting.

3. An election committee counts the votes which have been cast on matters considered by the general shareholders’ meeting, totals the votes and submits these to the notary (corporate secretary, registrar) who keeps the minutes of said general shareholders’ meeting.

4. An election committee (or corporate secretary, registrar or notary performing the election committee functions) and each member of the election committee is responsible for observing the confidentiality of information contained in the ballots which have been completed at a general shareholders’ meeting.

4. Resolutions Adopted by a General Shareholders’ Meeting

Article 87. Simple Majority of Votes1. A general shareholders’ meeting adopts its resolutions by a simple

majority of votes cast by the holders of a company’s voting shares of stock attending the meeting unless the present Law or the articles of associa-


tion of the company provide for a vote by a qualified majority or impose other requirements.

2. The adoption of resolutions enumerated in […]* of the present Law requires a qualified majority of 75% of the votes unless the articles of as-sociation of a company provide for a higher resolution-making quorum.

3. The articles of association of a company regulate the adoption of resolutions on holding a general shareholders’ meeting.

4. Voting is carried out separately by classes (types) of shares of stock.

Article 88. A Shareholder’s Voting Right1. Except for those instances established by the present Law, the right

to vote on any matters put to a vote at a general shareholders’ meeting is vested in the holders of a company’s common shares of stock and, also, in the holders of the company’s preferred shares of stock in those instances as envisaged by the present Law.

2. If any person holds a multiple of a company’s voting shares of stock, in exercising the right to vote, shareholders have the right to divide their votes depending on the number of voting shares of stock held by such persons. They have a right to vote both “for” and “against”.

3. A right to vote is exercised based on the par value of shares of stock or, where there are no-par-value shares of stock, based on the number of shares of stock held by shareholders.

4. A right to vote arises from the moment of making an investment in full to the charter capital of a company. The articles of association of the company may provide that the voting right arises prior to the making of an investment in full, but not upon condition of making the minimal amount of an investment where such has been provided for by domestic legislation.

Article 89. The Exercise of a Voting Right by a Financial Institution Acting as a Representative

1. Financial institutions, i.e., organizations licensed to operate on securities markets, banks, investment companies, etc., may represent a shareholder in exercising the voting right.

2. A financial institution representing a shareholder may only exercise the voting right attributable to shares of stock not held by such institu-tion and where it is not registered as a holder of such shares of stock in the corporate register by virtue of a power of attorney granted by the shareholder and only where the shareholder has given express instructions * [Translator’s note: The square brackets (and the blank line encased therein) in Clause 2 of Art.87

appear in the original Russian-language version of the Model Law.]


to such institution regarding items on the agenda. The power of attorney (authorization) [doverennost’/polnomochie] may only contain provisions di-rectly relating to the exercise of the voting right. A company must keep a written power of attorney granted to the shareholder’s representative for a period of three years to ensure its possible verification.

3. A financial institution acting as a shareholder’s representative at a general shareholders’ meeting is required on an annual basis, and in a clear form, to notify the shareholder that s/he/it may at any time revoke the authorization (power of attorney).

4. The voting right granted to a financial institution may only be ex-ercised by employees of such financial institution. The assignation of the voting right to third parties is permitted where such possibility is provided for in the power of attorney along with observance of confidentially and loyalty to the shareholders.

5. In exercising the voting right, a financial institution representing a shareholder must declare the name of the shareholder on whose behalf such institution acts. The representative (financial institution) may act on its own behalf unless otherwise expressly specified in the power of attorney.

6 In exercising the voting right, where a financial institution represent-ing a shareholder has not been instructed by said shareholder, it exercises the voting right pursuant to its proposals which it communicates to the shareholder prior to the general shareholders’ meeting with the exception of those instances where the representative is aware of another opinion of the shareholder.

7. In exercising the voting right, where a financial institution repre-senting a shareholder deviates from the shareholder’s instructions or from its own proposals communicated to the shareholder prior to the general shareholders’ meeting, it is required to notify the shareholder specifying the reasons unless the shareholder has instructed it otherwise.

8. A financial institution is required to exercise the voting right at the general shareholders’ meeting as instructed by the shareholder where it keeps the shares of stock of a company held by such shareholder or where it is registered in the corporate register in place of the shareholder and has offered to the company’s shareholders to exercise the voting right on their behalf at the same meeting. Such duty does not arise where the financial institution has no branch at the place of conducting the general shareholders’ meeting and the shareholder has not authorized a transfer of the power of attorney or a transfer of authority to persons who are not employees of such financial institution.


9. The exercise of the voting right by a financial institution represent-ing a shareholder, contrary to the shareholder’s instruction, does not render invalid the resolutions adopted by a general shareholders’ meeting.

Article 90. Exercising a Voting Right Directly1. An agreement or an entry in the articles of association of a com-

pany on the basis of which a shareholder is obliged to exercise her/his/its voting right as instructed by the company, management committee or supervisory board (board of directors) is void ab initio. An agreement according to which a shareholder is obliged to vote in favour of certain proposals of the management committee or supervisory board (board of directors) also are void ab initio.

2. A shareholder does not have the right to exercise her/his/its voting right where a resolution is adopted on approving her/his/its acts, releasing him/her/it from duties or on whether the company must file a claim such shareholder. In such instances, no other person may exercise the voting right of such shareholder.

Article 91. A General Shareholders’ Meeting by Absentee Vote—Inquiry*

1. A general shareholders’ meeting may adopt a resolution without holding a meeting (i.e., without the collective attendance of the sharehold-ers to address items on the agenda and adopt resolutions on matters put to a vote) in the form of voting in absentia.

2. A general shareholders’ meeting, the agenda of which includes the election of members of the supervisory board (board of directors), approval of the company’s accountant or annual reports, annual accounting state-ments including profit-and-loss statements (profit-and-loss accounts) and profit distribution (including payment (declaration) of dividends following the results of the first quarter, six months, and nine months of the fiscal year) and losses of the company following the results of the fiscal year, may not be conducted using the form of voting in absentia.

Furthermore, the articles of association of a company may prohibit voting in absentia on all or on individual items on the agenda of a general shareholders’ meeting.

3. Any resolution of a meeting adopted in the form of voting in absen-tia is valid where over 75% of the persons holding the company’s voting shares of stock have cast their votes unless the articles of association of the company provide for a higher quorum.

* The Draft Model Law Working Group proposes that general shareholders’ meetings in the form of voting in absentia not be used. [Translator’s note: This footnote appears in the original Russian-language version of the Model Law.]


4. Voting ballots must be sent to persons on the list of sharehold-ers not later than 45 days prior to the date of the general shareholders’ meeting. If a general shareholders’ meeting takes the form of voting in absentia, a company having five hundred shareholders or more is required to publish in the mass media, as set forth in the articles of association of the company, a voting in absentia ballot along with the notice of the general shareholders’ meeting.

5. The voting in absentia ballot must specify:1) the full name and location of the executive body of the com-

pany;2) data about the person initiating the convening of the general

shareholders’ meeting;3) the final date of submitting voting in absentia ballots;4) the date of conducting the general shareholders’ meeting or the

date of counting the votes cast through voting in absentia;5) the agenda of the general shareholders’ meeting;6) the wording of items put to a vote;7) options for voting on each item on the agenda of the general share-

holders’ meeting expressed with the words “for” or “against”; 8) an explanation of how to cast votes (filling in the ballots) on each

item on the agenda.6. A voting in absentia ballot of a shareholder who is a natural person

must be signed by the shareholder with an indication of the data of his/her document attesting to the identity of said person.

A voting in absentia ballot of a corporate shareholder must bear the signature of its body (officer) authorized to act without a power of at-torney.

A voting ballot which lacks the signature of a shareholder who is a legal person or the chief of a corporate shareholder is deemed to be invalid.

In counting votes, only those votes are counted which are cast on matters for which the shareholder has observed the voting procedure as set forth in the voting ballot.

7. Where any shareholder who previously submitted a voting in ab-sentia ballot takes part in the voting at a general shareholders’ meeting where mixed voting takes place, her/his/its ballots will not be counted in the quorum of such general shareholders’ meeting and in calculating the votes cast on the items on the agenda.


5. Holding of General Shareholders’ Meetings

Article 92. Procedure for Holding a General Shareholders’ Meeting 1. The procedure for holding a general shareholders’ meeting is

governed by the provisions of the present Law, the articles of associa-tion of the company, and regulations on general shareholders’ meetings whenever such regulations are envisaged in the articles of association of the company.

2. A general shareholders’ meeting is chaired by the chairperson of the supervisory board (board of directors) of the company unless the articles of association of the company provide for another procedure for appoint-ment of the chairperson of the general shareholders’ meeting.

3. A notary or a corporate secretary fulfils the duties of the secretary of the general shareholders’ meeting.

4. The opening of a general shareholders’ meeting is preceded by registration of the shareholders (their representatives) who have arrived. The representative of a shareholder must produce an appropriate power of attorney in support of the authority vested in her/him/it to attend and to vote at the general shareholders’ meeting.

A shareholder (representative of a shareholder) who has not been registered is not counted in determining the presence of a quorum and is not entitled to vote.

A shareholder in a company who is the owner of preferred shares of stock is entitled to attend a general shareholders’ meeting held in praesentia and participate in discussions of matters dealt with [at such meetings].

5. A general shareholders’ meeting is opened at the declared time where a quorum is present. A general shareholders’ meeting may not be opened prior to the previously designated time other than in situations when all of the shareholders (their representatives) already have been registered, notified and have no objections to changing the time of the opening of the meeting.

6. A general shareholders’ meeting determines the form of voting i.e., open or secret vote (ballot vote). Unless the articles of association of a company require otherwise, when voting in the election of the chair-person (presidium) and the secretary of a general shareholders’ meeting, each shareholder is entitled to one vote, and the resolution is adopted by a simple majority of votes cast from amongst the attendees.

7. During a general shareholders’ meeting, the chairperson thereof is entitled to put to a vote a proposed closure of the debate on a matter and, also, to change the form of vote thereon.


The chairperson is not entitled to prevent persons having a right to take part in the discussions of items on the agenda from taking the floor unless it might result in a violation of order of the general shareholders’ meeting or when the debate on the subject matter is over.

8. A general shareholders’ meeting is entitled to adopt a resolution on the adjournment or extension of its work, including the postponement of consideration of items on the agenda of a general shareholders’ meeting, until the next day.

9. A general shareholders’ meeting may be adjourned only after all of the items on the agenda thereof have been reviewed and decided upon.

10. The notary or corporate secretary acting as the secretary of a gen-eral shareholders’ meeting is responsible for the completeness and accuracy of data appearing in the minutes of a general shareholders’ meeting.

Article 93. Voting at a General Shareholders’ Meetings. Voting Ballot 1. Whenever voting at a general shareholders’ meeting takes the form

of a secret vote, ballots for such vote (ballots for secret voting in person) must be available for each separate matter put to such secret vote.

2. The voting ballot must specify: 1) the full firm name of the company and the location thereof; 2) the form of holding a general shareholders’ meeting (a meeting

held in praesentia or in absentia); 3) the date, venue and time of the general shareholders’ meeting, and

when such general shareholders’ meeting is held in absentia, the deadline for acceptance of voting ballots and the postal address to which to send completed ballots;

4) the wording of each item on the meeting’s agenda and the number thereof; the wording of resolutions on each such item (names of all can-didate) voted upon as a result of such ballot;

5) voting options available for each item on the agenda taking the form of “for” and “against”; voting options with regard to each candidate for election to the bodies of the company;

6) the number of votes attributable to a shareholder.In the event of cumulative voting, the voting ballot must contain

an indication thereof and explain the procedure for holding cumulative voting.

3. The ballot for a secret vote in praesentia is not signed by the share-holder unless such shareholder herself/himself/itself has expressed intent to sign the ballot, including when s/he/it does so to demand redemption of her/his/its shares of stock by a company under the provisions of the present Law.


In calculating the votes cast in ballots for a secret vote in praesentia, votes are counted which have been cast on matters for which the voter has complied with the voting procedure as set forth in the ballot and has checked only one of the possible voting options.

4. Election of members of the supervisory board (board of directors) may use cumulative voting. In the event of cumulative voting, votes at-tributable by shares of stock may be cast by a shareholder in full for one candidate to the supervisory board (board of directors) or distributed amongst several candidates to the supervisory board (board of directors). Candidates for whom the most votes have been cast are deemed to be elected to the supervisory board (board of directors).

Article 94. Counting of Votes in Case of Voting by Ballot1. In voting by ballot, those votes are counted on matters for which the

voter chose only one of the possible voting options. Voting ballots com-pleted in violation of the foregoing requirement are deemed to be invalid and the votes cast on the matters set forth therein are not counted.

2. Where a voting ballot contains several matters which are put to vote, any failure to comply with the foregoing requirement with regard to one or several matters does not render the entire ballot invalid.

Article 95. Documentation of Voting Results 1. In compiling results of the voting, the election committee, notary,

registrar or corporate secretary compiles and signs the minutes of voting results. The minutes of a general shareholders’ meeting must be prepared and signed within three days following adjournment of such general shareholders’ meeting.

2. Whenever a shareholder has a dissenting opinion on any matter put to vote, the notary, registrar or corporate secretary, exercising the func-tions of the elections committee at such general shareholders’ meeting, is required to make an appropriate entry in the minutes.

3. After compiling and signing of the record of voting results, the ballots that have been completed for secret voting in praesentia and voting in absentia (including those ballots which have declared void), pursuant to which the minutes have been compiled, are bound together with the minutes and stored for safekeeping in the company’s archive.

4. The minutes of voting results are summarized in the minutes of the general shareholders’ meeting.

5. The voting results are read aloud at the general shareholders’ meet-ing during which such voting took place.

6. The results of voting taking place at a general shareholders’ meeting or those of voting in absentia is advised to the shareholders in the form of


publication thereof in the mass media or providing a written notice to each shareholder within ten days after adjournment of the appropriate general shareholders’ meeting.

The procedure for advising shareholders of the voting results is governed by the articles of association of a company. The voting results and resolutions adopted must be published on the joint-stock company’s website.

Article 96. Minutes of the General Shareholders’ Meeting 1. The minutes of a general shareholders’ meeting are compiled by a

notary (corporate secretary) who is required to attend the general meet-ing.

2. The minutes of a general shareholders’ meeting indicate: 1) the venue, date and time of the general meeting; 2) the name and surname of the notary (corporate secretary) who is

taking the minutes; 3) the total number of votes attributable to shareholders who are

holders of the company’s voting shares of stock; 4) the total number of votes attributable to the shareholders who are

attending the meeting; 5) the form of voting, voting results and the fact that the chairperson

read aloud the resolution taken.3. Documents attesting to the lawfulness of the convened meeting are

appended to the minutes where they are not reproduced in the minutes with an indication of the contents thereof.

4. The notary (corporate secretary), who has compiled them, signs the minutes and is liable for the accuracy and the completeness of the minutes.

5. Where the minutes of a general shareholders’ meeting are signed by the corporate secretary, her/his signature is verified by a notary.

Article 97. Shareholder Rights to Information 1. Each shareholder irrespective of the number of shares of stock in a

company held by her/him has the right to demand that the management committee (board of directors) provide her/him with information on the legal status, financial and business position and operations of the company, as well as on other company-related matters, where such information is required for proper consideration and assessment of any item on the agenda of a general shareholders’ meeting.

2. Information provided by a company upon demand of a shareholder must be complete and accurate.


3. The management committee (board of directors) has the right to refuse disclosure of such information to the shareholders:

1) where disclosure of the information being demanded may cause material damage to the company or its affiliates;

2) where disclosure of the information by the management committee (board of directors) would constitute an act punishable by criminal law.

Any other grounds for denying disclosure of information may be as envisaged only by a law.

4. If any information has been disclosed by a company to a shareholder, including prior to a the holding of a general meeting, such information must be disclosed to any other shareholder upon her/his/its demand at such general shareholders’ meeting, even where such information is not required for proper valuation of an appropriate item on the agenda of such general shareholders’ meeting.

5. Where a shareholder has been denied disclosure of information which she/her/it has demanded, s/he/it may demand that her/his/its mat-ter and the ground for such denial to disclose information be included in the minutes of the meeting.

6. A denial to disclose information to a shareholder may be appealed to a court at the place of a company’s registration.

7. Any shareholder who has been denied disclosure of demanded in-formation has a right to petition a court. If a resolution was adopted on an item on the agenda for which appropriate information was required, any shareholder attending such general shareholders’ meeting and filing an objection, which was included in the minutes of such general sharehold-ers’ meeting, has a right to petition a court. The petition (lawsuit) is filed within two weeks after the general meeting at which the shareholder(s) was (were) denied disclosure of such information.

8. Where the court grants a shareholder’s petition, the information must be disclosed to the shareholder outside of a general shareholders’ meeting. Information on the judgment and a summary of the essence of the case must be published on the company’s website. The court judg-ment in said matter is subject to mandatory enforcement in accord with procedural legislation.

9. In the event of a judicial demand for information, that for no valid ground was not disclosed to a shareholder, upon her/his/its demand, the duty to reimburse the judicial costs, including disbursements for payment for the services of a representative, are borne by the corporate officer who denied disclosure of the information.

10. A model procedure for, and the scope of disclosure of, information may be prescribed by a special document (a Model Corporate Govern-


ance Code) developed by representatives of issuers of shares of stock and investors and approved by the competent authority as a document recom-mended for adoption by each issuer. A company is required to have an internal document that defines the procedure for, and scope of disclosure of, information to the company’s shareholders, developed on the basis of recommendations set forth in a Corporate Governance Code.

11. Where a company disseminates information in any form on an event (fact, circumstance) (e.g., future profits, possible major transaction, etc.), it must disseminate information on the material changes of such event (material changes in forecasts, material changes in terms and condi-tions of transactions, etc).

12. A shareholder demanding disclosure of information may also demand that the lawfulness of his/her /its request be decided upon by an arbitrator, where the competent authority has approved a procedure for certification of arbitrators.

6. The Invalidity ab initio of Resolutions Adopted by a General Shareholders’ Meeting. Appealing Resolutions

Adopted by a General Shareholders’ Meeting

Article 98. Grounds for the Invalidity ab initio of Resolutions Adopted by a General Shareholders’ Meeting

1. In addition to the cases of the invalidity ab initio as envisaged in the present Law, a resolution adopted by a general shareholders’ meeting is void ab initio where it:

1) was adopted by a general meeting convened in violation of the rules for convening a general shareholders’ meetings set forth in Articles 76-84 of the present Law;

2) no minutes of the general meeting were compiled pursuant to the re-quirements for compiling minutes of a general shareholders’ meetings;

3) was declared void ab initio pursuant to a court judgment on the basis of a lawsuit disputing a resolution which has entered into legal force;

4) was adopted in the absence of a quorum as envisaged by the present Law or by an insufficient number of votes as established by domestic legislation or the articles of association of the company for the adoption of resolutions by a general shareholders’ meetings;

5) was adopted with regard to an item that was not included on the agenda of the general meeting pursuant to the present Law with the excep-tion of the instances where all the shareholders of the company attended the general shareholders’ meeting.


[2. A court may not declare a resolution void ab initio adopted by a general shareholders’ meeting where the registration authority, acting in pursuance of such resolution, has affected the registration of changes in the company’s legal status and where three or more years have passed since such registration.]*

Article 99. Grounds for Appealing (Contesting) Resolutions Adopted by a General Shareholders’ Meetings

1. A resolution of a general shareholders’ meeting may be appealed (contested) by way of a lawsuit where such resolution was adopted in violation of domestic legislation or the articles of association of the company.

Provision of inaccurate or incomplete information regarding the outcomes of a general shareholders’ meeting and resolutions adopted thereby, or a refusal to provide such information, may constitute grounds for contesting a resolution of a general meeting where such provision of information would have been material in terms of the exercise of a share-holder’s rights to take part in such general shareholders’ meeting as well as other rights of such shareholder.

2. Taking into account all the circumstances of the matter, a court is entitled to uphold a resolution which is being contested where the voting of such shareholder would not have affected the voting results, where the violations which were committed are not material and enforcement of the judgment would not have lead to damages for said shareholder or not have lead to other adverse effects.

3. A resolution may not be appealed (contested) on grounds that a shareholder’s representative has failed to advise the shareholder of the results of the general shareholders’ meeting and resolutions adopted thereat.

4. A resolution may not be appealed where the general shareholders’ meeting has confirmed its resolution by a new resolution adopted in the appropriate fashion.

Article 100. Right to Appeal (Contest) 1. The following have a right to appeal (contest) a resolution of a

general shareholders’ meeting: 1) any shareholder attending the general shareholders’ meeting where

s/he/it raised a protest (objection) that was included in the minutes of such general shareholders’ meeting, or has provided the court with satisfactory evidence that s/he/it made reasonable attempts to cause such protest to * [Translator’s note: The optional Clause 2 of Art.98 appears in the original Russian-language ver-

sion of the Model Law.]


be included in the minutes but the person, responsible for compiling the minutes, refused to accept such protest;

2) any shareholder failing to attend the general shareholders’ meeting where s/he/it was wrongfully denied access to such general shareholders’ meeting, or where such meeting was inappropriately convened, or where the matter being decided upon had not been published pursuant to the established procedure.

2. A lawsuit to appeal (contest) a resolution adopted by a general shareholders’ meeting must be filed within one month after the claim-ant knew or should have known about the adoption of such resolution, but in any event not later than three months after such resolution was adopted. Where the period of time for appealing a resolution of a general shareholders’ meeting, as envisaged by this Clause, has been exceeded, it is not subject to restoration.

3. A lawsuit is filed against a company in the person of its management committee and supervisory board (where there is a dualistic management system) or the board of directors (where there is a monistic management system).

4. A lawsuit is heard by a court of the jurisdiction in which a company is registered.

5. The management committee (board of directors) is required to immediately publish information on a lawsuit which is being filed against it and the date of the court proceedings in the periodical used to publish the company’s information and on the company’s website.

Article 101. Effects of Invalidating Resolutions of a General Shareholders’ Meeting

1. Where a resolution of a general shareholders’ meeting is declared by a court to be void ab initio, under a judgment which has taken legal effect, such court judgment has legal force for all shareholders and members of the management committee and the supervisory board (members of the board of directors) even where they have not been parties in the case.

2. The management committee (board of directors) is required to immediately transmit the court judgment to the corporate registrar. Where the registration authority acting in pursuance of the resolution of a general shareholders’ meeting that was declared by a court to be void ab initio previously has undertaken registration-related activities, such court judgment also immediately is transmitted to such registration authority for undertaking any required activities within its competence. Information on such court judgment and on acts undertaken by the company, the registrar or the registration authority in pursuance thereof are published by the


company in the same manner as that which is prescribed for information about an appropriate resolution of a general meeting.

3. Where a resolution of a general shareholders’ meeting concerns changes and amendments or modifications of the articles of association of the company, the entire articles of association of the company in the redaction which is pursuant to said court judgment, along with the court judgment, must be provided for state registration, as well as all previous redactions of the articles of association of the company and changes and amendments (additions) certified by a notary.

4. Declaring a resolution of the general shareholders’ meeting void ab initio results in the invalidity of all transactions concluded pursuant to this resolution with the exception of those instances where agreements have been concluded, pursuant to such resolution, with third parties where they did not know or could not have known about the reasons for its invalidity.

III. The Supervisory Board

Article 102. Competence of the Supervisory Board 1. The supervisory board supervises the work of the management

committee and interacts with it in developing and adopting resolutions that are important for the company.

2. To supervise the work of the management committee, the super-visory board has the right to:

1) demand and obtain from the members of the management com-mittee reports on the company’s performance at any time;

2) request, review, verify and study documents of the company, in-cluding its accounting records, the company’s property, the company’s cash and securities and goods which it has; and also entrust individual members of the supervisory board to do the same or to engage experts for the performance of particular tasks;

3) review the annual management committee’s reports, proposals regarding distribution of profits and information on the company’s per-formance and report this to the general meeting;

4) represent the company in concluding agreements between the company and members of the management committee;

5) appeal (contest) resolutions of the general shareholders’ meeting in the instances as envisaged by the present Law and the articles of as-sociation of the company;

6) file lawsuits against members of the management committee, without an appropriate authorization from the members of the general


shareholders’ meeting, for damages inflicted upon the company as a result of their wrongful acts and represent the company in judicial proceedings instituted in connection therewith.

3. The supervisory board of a company is required to convene a general shareholders’ meeting where this is in the best interests of the company. The resolution to convene such a general shareholders’ is adopted by a simple majority of votes cast by members of the supervisory board.

4. In reviewing reports and information regarding the company’s performance, the supervisory board, in its communications, is required to communicate the manner and scope of its review of the management committee’s work during the preceding fiscal year, the part of the annual statement it has reviewed, and whether or not such reviews have resulted in any material changes to the final report.

5. In the event of an occurrence of the prerequisites set forth in subparagraph 6, clause 2, of the present Article, the supervisory board is required, on behalf of the company, to file a lawsuit against members of the management committee for indemnification of damages.

Article 103. Competence to Elect and Dismiss Members of the Management Committee from Office

1. The supervisory board appoints and dismisses members of the management committee from office. It also appoints deputies to the members of the management committee in the instances set forth in the articles of association of the company.

2. On behalf of a company, the supervisory board concludes and terminates service agreements (corporate agreements) with the members of the management committee and deputies of members of the manage-ment committee.

3. The supervisory board has the right to vest the authority, in a special committee, to select candidates to the management committee and prepare their appointment, which at the same time must develop the basic terms and conditions of the service agreement, including the matter of compensation for members of the management committee.

4. The articles of association of a company [alternatively: domestic legislation] may provide for the right of the company’s personnel [tru-dovoi kollektiv] to appoint one-third of the members of the supervisory board.


Article 104. Approval by the Supervisory Board 1. The management committee may not transfer its functions regard-

ing management of a company to the supervisory board.2. The following are the matters to be decided upon by the manage-

ment committee subject only to the supervisory board’s approval: 1) acquire and alienate shares of stock (equity stakes) in other busi-

ness companies and partnerships, alienate or suspend activities of separate enterprises of the company;

2) acquire, alienate or encumber the company’s immoveable prop-erty;

3) open and close branch and representative offices of the company, approve regulations governing the operations thereof;

4) compile annual budgets of the company’s operations, including planned profits and investment plants and a valuation of liabilities arising under long-term relations;

5) make investments the amounts of which, both severally and aggre-gately during a given fiscal year, exceed 10% of the amount of the balance sheet of the previous fiscal year;

6) raise loans or credit facilities in excess of the limits established by the supervisory board;

7) grant loans or credit facilities where they do not relate to the scope of the normal business activity of the company;

8) engage in new, and terminate currently existing, types of commer-cial activity or production;

9) establish general principles and key areas of business policies; 10) establish the principles for participation of the company’s manage-

rial staff in the company’s profits or establish other benefits for them; 11) appoint and dismiss sales representatives of the company. 3. The provision of loans and credit facilities to members of the su-

pervisory board and management committee are allowed only with the approval of a general shareholders’ meeting.

4. The articles of association of a company may also provide for other resolutions requiring approval of the supervisory board.

Article 105. Composition and Election of Members of the Supervisory Board1. The supervisory board must be made up of not less than three

members. 2. A member of the supervisory board may only a natural person who

enjoys full legal capacity. 3. Members of the supervisory board are elected at a general sharehold-

ers’ meeting or such authority may be delegated to them in the manner


prescribed by the articles of association of the company. Members of the first composition of the supervisory board are elected by the company’s founders and specified in the documents that represent evidence of the transaction of the founders to create the company (foundation agreement, minutes of the founders’ meeting).

4. The right to delegate members to the supervisory board may only be as envisaged in the articles of association of the company and only for specific shareholders’ or holders of particular types of shares of stock. The number of members delegated to the supervisory board may not exceed one-third of the number of members of the supervisory board as envisaged by domestic legislation or by the articles of association of the company.

5. Each member of the supervisory board is elected for a period of up to three years. The authority of members of the supervisory board is automatically extended upon expiration of the above period until the convening of the next regular general shareholders’ meeting and election of new members thereat. Members of the supervisory board may be re-elected for a new term.

6. Elected members of the supervisory board may be dismissed from office by a resolution of a general shareholders’ meeting at any time. Such resolution is adopted by a simple majority of votes. The articles of as-sociation of a company may provide for another majority of votes or for additional requirements. Delegated members of the supervisory board may also be dismissed from office by a person authorized to delegate them and replace them by new members at any time. If grounds for exercise of the delegation right as envisaged in the articles of association of the company no longer exist, the general shareholders’ meeting may dismiss a delegated member from office by a simple majority of votes.

7. A member of the supervisory board may be dismissed from office by a court judgment upon a petition filed by the supervisory board where there exists a material circumstance associated with such person that pre-vents her/him from performing the duties of a member of the supervisory board. The supervisory board decides on such motion by a simple majority of votes. The member against whom such resolution has been adopted by the board may appeal such resolution of the supervisory board.

8. Any member of a supervisory board may resign at any time. If within six months after such resignation of a member of the supervisory board, a new member has not been elected, a court may appoint a new member upon a petition of the company’s management committee. The same rule applies where the number of members of the supervisory board is less than that required by domestic legislation or by the articles of association of the company, or where a member of the supervisory board is elected


in violation of the requirements of domestic legislation and more than six months remain prior to the general meeting. Only the management committee is authorized to petition a court to appoint a new member of the supervisory board.

9. The powers of a member of the supervisory board, appointed by a court, terminate at the moment the grounds for such court appointment cease to exist.

Article 106. Impermissibility of Simultaneous Membership in the Management Committee and Supervisory Board

1. A member of the supervisory board may not be simultaneously a member of the management committee or a deputy to a member of the management committee.

2. The articles of association of a company may list corporate officers who may not simultaneously be members of the supervisory board.

3. Members of the supervisory board do not have the right to be employed as officers by organizations that are a company’s competitors in terms of the content and/or nature of their activities, products produced, services rendered, or upon other grounds that result in competitive rela-tions there between, or to be employed as officers with affiliates of such organizations. Furthermore, members of the supervisory board do not have the right to render consultancy or other services to such competing organizations or to the affiliates thereof.

4. In the event of a violation of the provisions of the present Article, the management committee is obliged immediately to put before the supervisory board and/or a general shareholders’ meeting of the company the matter of eliminating such violation.

Article 107. Publication of Information Regarding Changes in Membership of the Supervisory Board

1. A company’s management committee immediately must use the company’s website or a periodical used for publishing the company’s com-munications, to publish information regarding any change in the member-ship of the supervisory board and to ensure the reflection (registration) of these changes in the corporate register and/or state register.

2. The management committee is required to publish information on the election of a chairperson of the supervisory board and to ensure the reflection (registration) of this information in the corporate register and/or state register

3. Where the management committee of a company believes that members of the supervisory board were elected in violation of the require-ments imposed by domestic legislation or by the articles of association of


the company, it is required promptly to publish a communication thereof on the company’s website or in a periodical used for publishing the com-pany’s communications. Such communication must specify the provisions of domestic legislation or the articles of association of the company which have been violated in electing members of the supervisory board.

Article 108. Chairperson of the Supervisory Board 1. The supervisory board elects from amongst its members, for the

term of its office, the chairperson of the supervisory board and one deputy chairperson unless the articles of association of the company provide for the election of a greater number of deputies.

2. Upon election of the chairperson and deputy chairpersons of the supervisory board, the management committee is required within one week to ensure the reflection (registration) of this fact in the corporate register and/or state register.

3. The chairperson of the supervisory board coordinates the activities of the board, chairs meetings thereof and represents the supervisory board before other bodies of the company, officers and personnel thereof.

4. The chairperson of the supervisory board is required to continu-ously cooperate with the management committee, in particular with the chief executive of the management committee, and discuss with her/him the strategy and development of the company’s operations and the risks thereof. The chief executive of the management committee is required to advise the chairperson of the supervisory committee of important events that are material in terms of the company’s operations and valuation of the company’s performance and development. The chairperson of the supervisory board is required to advise members of the supervisory board thereof and, where necessary, to convene a meeting of the supervisory board, including an extraordinary one.

5. The deputy chairperson of the supervisory board has the powers and duties of the chairperson only in the event of the occurrence of circum-stances preventing the chairperson from performing of his/her duties.

6. The articles of association of a company may provide for additional powers and duties of the chairperson of the supervisory board where they do not contravene the imperative norms of domestic legislation.

7. A company is not entitled enter into employment relations with a member of the supervisory board.


Article 109. Meetings of the Supervisory Board 1. Meetings of the supervisory board are held not less than once a

quarter. The chairperson of the supervisory board is required to ensure that meetings of the supervisory board are held quarterly.

2. Each member of the supervisory board or of the management com-mittee has the right to demand that the chairperson of the supervisory board immediately convene a meeting of the supervisory board. Such demand must specify the goals and reasons for convening an extraordinary meeting of the board. The chairperson of the board is required within two weeks, after an announcement that a meeting will be convened, to convene such meeting.

3. Where a demand to convene a meeting of the supervisory board is not granted, any member of the supervisory board or the management committee may convene a meeting of the supervisory board. It is manda-tory to indicate the purposes and reasons for such convening and to attach an agenda of the meeting.

4. Meetings of the supervisory board are chaired by the chairperson of the supervisory board. Minutes of the board’s meetings are kept by one of the members of the supervisory board and signed by the chairperson of the board. The chairperson of the board is responsible for the complete-ness and accuracy of the minutes.

5. The minutes of a meeting of the supervisory board specify the venue and date of such meeting, the attendees, and items on the agenda and resolutions of the supervisory board. A violation of the requirements for compiling the minutes does not render invalid resolutions which have been adopted, but does give a right to enter the appropriate changes and amendments and make changes to the minutes.

6. Upon demand, each member of the supervisory board must be provided with a copy of the minutes of a meeting.

7. Persons who are not members of either the supervisory board or the management committee must not attend meetings of the supervisory board. Experts and specialists may be involved to discuss specific mat-ters.

Article 110. Resolutions of the Supervisory Board 1. The supervisory board is authorized to adopt resolutions where a

meeting is attended by more than one-half of the members of the board unless the articles of association of the company provide for a higher quorum. Where the supervisory board is not authorized to adopt resolu-tions, the chairperson of the supervisory board, within one week but in any event no sooner than three days thereafter, is required to convene a


new meeting which will be authorized to adopt resolutions irrespective of the number of members attending. A violation of the duty to attend a meeting of the supervisory board, without mitigating reasons, constitutes a violation of the duties of a member of the supervisory board. If, during a fiscal year, a member of the supervisory board has failed to appear at more than one-half of the meetings of the supervisory board, this circumstance must be noted in a supervisory board report.

2. The supervisory board adopts resolutions by a majority of votes cast by the members attending it. Each member has one vote.

3. Members of the supervisory board who are not able to attend a meeting may take part in the resolution-making process by way of voting in writing. Votes in writing may be transmitted through other members of the supervisory board.

4. The adoption of resolutions by the supervisory board by written vote, phone or using other electronic communication means is permitted only upon condition that no member of the board has expressed opposi-tion thereto.

5. Resolutions of the supervisory board are fixed in writing.

Article 111. Compensation for Members of the Supervisory Board1. Members of the supervisory board must be compensated for their

duties. The amount of such compensation must be included in the articles of association of the company or approved by the general shareholders’ meeting. Whenever the amount of compensation payable to the mem-bers of the supervisory board is determined by the general shareholders’ meeting, the amount of compensation for the chairperson and deputy chairperson of the supervisory board is separately specified in an appro-priate resolution of such general shareholders’ meeting.

2. Amounts of compensation must be commensurate with the size of the task entrusted to the members of the supervisory board and the company’s financial position. In addition to the fixed rates of compen-sation due, members of the supervisory board may receive bonuses for successfully conducting the company’s business.

3. A resolution on compensating members of the supervisory board also must specify the benefits and allowances (i.e., company car, secretaries, reimbursement of any expenses etc.) which may be afforded to members of the board. Said resolution must specify whether or not an insurance agreement will be concluded for property liability of members of the supervisory board.


Articles 112. Committees and Commissions of the Supervisory Board1. From amongst its members, the supervisory board may create

one or several committees (commissions), the primary task of which is preparing for meetings and resolutions of the board and verifying the implementation of resolutions which have been adopted.

2. The chairpersons of individual committees (commissions) are required to regularly provide the supervisory board with information on the work of the committees (commissions).

3. The names and the numbers of such committees (commissions) are determined pursuant to the provisions of the articles of association of a company.

4. The right and duties of the supervisory board may not be trans-ferred to committees or commissions of the board.

Article 113. Conflict of Interest 1. Each member of the supervisory board is required to serve the

lawful interests of the company and perform its functions solely in the interest of the company. S/he does not have a right to pursue personal goals or make managerial decision based on personal interest, nor does s/he have a right to use business opportunities and proposals intended for the company in his/her own interests.

2. Each member of the supervisory board, both prior to being elected member of the board and during his/her term of office, must disclose to the board all information regarding a conflict of interest which may arise out of cooperation or the holding of an official position as a member of a supervisory board of customers, suppliers, creditors or business partners of the company.

3. The supervisory board is required to include, in its report to the general shareholders’ meeting, information on instances of conflicts of interest and on the measures which have been taken to eliminate them.

4. Where there is a material conflict of interest related to a specific member of the board that cannot be removed, such member of the board is required to resign.

5. All agreements between a member of the board and the company, including loans or credit facilities received from the company, may only be concluded after prior approval thereof by the supervisory board.


IV. Management Committee

Article 114. Competence of the Management Committee1. The management committee is the managerial corporate body

exercising the management of a company under its own responsibility.2. At its own discretion, the management committee adopts resolu-

tions on matters of managing the company, but solely in the interests of the company and its subsidiaries with the goal of ensuring the stability and continuously strengthening the economic position of the company.

3. The management committee develops strategic areas for the com-pany’s development and seeks their approval by the supervisory board and adopts resolutions on the implementation thereof.

4. In exercising its functions, the management committee is not required to follow instructions of the supervisory board, the general shareholders’ meeting or individual shareholders. In situations prescribed by domestic legislation or by the articles of association of the company, the management committee is required to have its resolutions approved by the supervisory board.

5. The management committee is required to ensure compliance with the requirements of legislation as regards the company, shareholders and bodies thereof. It is required to comply with resolutions of the general shareholders’ meeting and of the supervisory board adopted within the scope of their competence. The management committee is required to use its best efforts to ensure that a general shareholders’ meeting and the supervisory board adopt their resolutions in accordance with the provi-sions of domestic legislation and with the articles of association of the company.

6. The management committee is required to develop an appropriate and effective system of operational management of the company’s affairs and controlling its business risks. It is required to inform the supervisory board of the existence and operation of such system.

7. Upon demand of a general shareholders’ meeting, the manage-ment committee is required to prepare matters the resolution of which is within the competence of the general shareholders’ meeting. The same rule also applies to preparing and concluding agreements (transactions) which enter into force only after approval thereof by a general sharehold-ers’ meeting.

8. The management committee is required to ensure the implementa-tion of resolutions adopted by a general shareholders’ meeting within the scope of the meeting’s competence.


9. Representatives of employees of the joint-stock company, elected by its personnel [trudovoi kollektiv], may attend meetings of the manage-ment committee with an advisory vote. The procedure and conditions for representatives of the personnel (representatives of the employees) of the company to attend meetings of the management committee are established by the articles of association of the company or by a collective bargaining agreement.

Article 115. Composition and Internal Organization of the Management Committee

1. The management committee may be made up of one or several members.

2. A member of the management committee may only be a natural person who enjoys full legal capacity.

3. A person who has been convicted and sentenced in criminal proceedings for property crimes may not be appointed as member of a management committee unless five years have passed since the service of sentence thereby. A person who pursuant to a court judgment or a ruling of a competent authority has been prohibited from engaging in a particular activity or from holding a managerial positions in business and/or other organizations may not be appointed member of the management com-mittee for the period of time of such prohibition, where the scope of the company’s operations in whole or in part coincide with the subject-matter of such prohibition.

4. Where the management committee is made up of several persons, the members of the management committee are authorized only jointly to manage the company. Where there is a disagreement amongst the members of the management committee, a resolution is adopted by a simple majority of votes unless the articles of association of the company or regulations on the management committee provide for the existence a higher quorum for resolving on specific matters.

5. The articles of association of the company or regulations on the management committee may provide for a procedure for distributing func-tions amongst members of the management committee and a procedure for resolution-making.

6. The regulations on the management committee are adopted by the supervisory board at the proposal of the management committee.

7. In each case of a change in its composition, the management com-mittee is required to ensure the reflection (registration) of these changes in the corporate register and in the state register. Such change in the composition of the management committee has legal force only after registration thereof in the state register.


8. When being appointed or when their term of office is extended, members of the management committee are required to confirm that there are no circumstances preventing their appointment (election, em-ployment) as an officer of the management committee.

9. New members of the management committee provide specimens of their signatures, for inclusion in the corporate register [and state register],* which they will use to sign corporate business documents.

Article 116. Appointment and Dismissal from Office of Members of the Management Committee

1. Members of the management committee are appointed for a term of no more than three years. Re-appointment is permitted. This requires a new resolution of the supervisory board which may not be adopted more than one year prior to the expiration of such member’s term of office.

2. Where the management committee is made up of several members, the supervisory board appoints one of them to be the chief executive of-ficer of the management committee. The chief executive officer of the management committee heads the management committee as a collegial body, coordinates its activities and chairs meetings thereof. The articles of association of a company may delegate additional powers to the chief executive officer of the management committee; however, the articles of association of the company may not authorize him/her to issue instructions that are binding upon other members of the management committee.

3. Following his/her appointment, a member of the management committee concludes a service agreement (corporate agreement) the term of which must correspond to the term of office of such member. The chairperson of the supervisory board signs such service agreement (corporate agreement) on behalf of the company.

4. The supervisory board may dismiss a member as well as the chief executive officer, of the management committee from office (terminate his/her powers) at any time. The provisions of the Civil Code on contracts are applied to the service agreement (corporate agreement) concluded with members of the management committee. Termination of a service agreement is made pursuant to a resolution of the supervisory board to dismiss a member of the management committee from office (termina-tion of authority).

5. The management committee is required to publish information on the termination of the authority of a member of the management com-mittee and on the appointment of a new member of the management committee and, also, is required to ensure the reflection (registration) of * [Translator’s note: The square brackets (and the text encased therein) in Clause 9 of Art.115 ap-

pear in the original Russian-language version of the Model Law.]


changes in the composition of the management committee in the corpo-rate register and in the state register.

6. If there is a delay in appointing a member of the management committee without whom such management committee is not author-ized to adopt resolutions, any member of the supervisory board may file a motion for a court to appoint such member of the management com-mittee. The authority of such member of the management committee, appointed by a court, terminates where a member of the management committee is appointed by the supervisory board. A member of the man-agement committee, appointed by a court, is entitled to compensation for his/her work.

7. The articles of association of a company may provide for the posi-tion of a spokesperson for the management committee who makes public statements on behalf of the management committee.

Article 117. Representation1. The management committee represents the company in all matters,

including judicial and extrajudicial proceedings, and dealings with third parties without a power of attorney.

2. Where the management committee is made up of several persons, the members of the management committee may only represent the company jointly unless the articles of association of the company pro-vide otherwise. To conclude a transaction between third parties (parties to such transaction) and the company, it is sufficient for a party to the transaction to express its will to one of the members of the management committee.

3. The articles of association of a company may provide that specific members of the management committee are authorized to represent the company individually.

4. Members of the management committee, who are authorized to represent a company jointly, have the right to accord specific members of the management committee a right to conclude specific transactions.

5. No limitations may be imposed on the authority to of the manage-ment committee to represent the company with third parties.

6. Members of the management committee are required to return to the company all which they have received or acquired from third parties during their term of office for the performance by them of duties as mem-bers of the management committee, other than all types of compensation and the value of material and organizational support for their activities as envisaged in service agreements.

7. In dealings with a company, the members of the management com-mittee are required to observe the restrictions which are as envisaged by


the articles of association of the company or established by the supervisory board or the general shareholders’ meeting, and by the regulations on the management committee regarding management of the company.

A violation of such restrictions by a member of the management committee does not entail the invalidity of a transaction concluded by her/him on behalf of the company with third parties, other than when such member of the management committee and the other party to the transaction acted jointly and attempted to cause damage to the company or allowed it to happen. In such case, the supervisory board of the company may, within eighteen months as of the date of such transaction, petition a court demanding such transaction be declared invalid.

8. Information concerning the appointment and dismissal from office of members of the management committee is subject to reflection (regis-tration) in the corporate register and in the state register. The authority of members of the management committee in dealings with third parties remains unchanged until the appropriate registration has been made in the state register, other than when the company or another interested party proves that a third party knew of the dismissal from office of such member of the management committee .

Article 118. Compensation for Members of the Management Committee1. In pursuance of a resolution of the general shareholders’ meeting,

the supervisory board establishes the amount and form of compensation for members of the management committee.

2. The compensation for members of the management committee may take one or several forms (compensation package), e.g., a regular salary, commission fees, reimbursement of specific expenses, the participation of members of the management committee in pension plans and in the insurance of risk, the life or property of the members of the manage-ment committee, the provision of stock options or other securities of the company, etc.

3. In establishing the amounts, form(s) and package of compensation for members of the management committee, the supervisory board is re-quired to show care that the overall amount being paid is reasonably com-mensurate with the duties and the level of responsibilities of a member of the management committee and with the company’s financial position.

4. Where, after the amount and forms of compensation for members of the management committee have been established, a company’s financial position worsens to such a degree that the company is not in a position to effect payments of the established amounts and/or in the established form(s), the supervisory board has the right to appropriately reduce the amounts of such compensation and/or the forms thereof. If a member of


the management committee does not agree with such reduction in his/her compensation and/or the forms thereof, s/he has the right to terminate her/his service agreement concluded with the company by giving it two months’ prior notice.

5. Where there are ongoing bankruptcy proceedings against a com-pany, and the administrative receiver demands that the service agreement made with an appropriate member of the management committee be terminated, such member of the management committee may demand the indemnification of damages suffered by her/him as a result of such termination but not for more than twelve months after termination of the agreement.

6. The chairperson of the supervisory board is required to inform the general shareholders’ meeting of the principles for determining the compensation for members of the management committee.

Article 119. Conflict of Interest 1. Each member of the management committee is required to serve

the lawful interests of the company and perform its functions solely in the interests of the company. S/he does not have a right to pursue personal goals or make managerial decisions based on personal interest nor does s/he have a right to use business opportunities and proposals intended for the company in his/her own interests.

2. During his/her entire term of office, a member of the manage-ment committee is required to unwaveringly adhere to the principle of non-competition. Without the authorization of the supervisory board, a member of the management committee does not have the right to engage in commercial business and to conclude transitions for its own account or for the account of third parties in the line of the company’s business.

3. Without the authorization of the supervisory board, a member of the management committee does not have the right to become an officer or a bankruptcy receiver in another legal person, a participant of a busi-ness partnership or a major shareholder in other companies.

4. During his/her term of office, a member of the management com-mittee does not have the right to receive or to demand compensation or benefits from third parties, in connection with his/her work, for herself/himself or for other persons, or provide to third parties or to demand that they be provided with unwarranted benefits.

5. If a member of the management committee violates the prohibitions set forth in the present Article, the company may demand indemnification of damages or reformation of transactions concluded by such member of the management committee, or with his participation, in the name of the company and the transfer to the company of all amounts and objects


of compensation and/or other income derived from such transactions or assignment of the claims to receive such compensation.

Such claims of the company against a member of the management committee are made by the supervisory board.

6. The statute of limitations for such claims of a company is three months from the moment when the remaining members of the manage-ment committee and/or members of the supervisory board knew about the acts of a member of the management committee which required other corporate officers to take measures to indemnify the damage suffered by the company. The statute of limitations for such claims expires five years from the moment when they arose irrespective of whether information about such acts became available.

7. Each member of the management committee is required to disclose and provide the supervisory board with information about the circum-stances of a conflict of interest and to inform the other members of the management committee thereof.

8. Agreements between a company and members of the management committee must include special non-compete provisions, including a pro-hibition against engaging in the same activities as those of the company (engaging in individual business activities or holding managerial positions with competitor organizations, or having an interest in the capital or property of competitor organizations or in another form), for the entire term of office of the member of the management committee and, also, after expiration of such term of office of the member of the management committee. In the latter case, the period during which such a prohibition remains in effect may not exceed two years.

Article 120. Provision of Loans or Credit Facilities to Members of the Management Committee

1. A company has the right to grant loans or credit facilities to mem-bers of the management committee only on the basis of a resolution of the supervisory board.

2. Such resolution must envisage the payment of interest and repay-ment of the loan.

3. A resolution of the supervisory board is also required for the pro-vision of loans and credit facilities to close relatives of a member of the management committee.

Article 121. Relations with the Supervisory Board1. The management committee and the supervisory board are required

to cooperate closely with each other in the interests of the company.


2. The management committee agrees with the supervisory board the company’s strategic direction of business operations and regularly discusses with it measures for implementing such strategy.

3. The management committee is required to report to the supervi-sory board:

1) not less than once a year on the proposed strategic direction and other principal matters related to the company’s development and its operations (financial, investment planning and planning employment levels), including submission of information on deviations of the actual development process from the targets set forth in previous reports, and indicating the reasons for such deviations;

2) on the company’s profitability and raising of additional capital (at meetings of the supervisory board held to discuss the company’s annual report);

3) not less than once each quarter on the state of affairs, specifically on trade turnover and position of the company;

4) on transactions that may be material in terms of liquidity or profit-ability of the company, ensuring where appropriate that such information be made available to the supervisory board on a timely basis so that it can render its opinion prior to the conclusion of the transactions.

4. Reports of the management committee, intended for the super-visory board, must be in writing.

5. Proper provision of the supervisory board with appropriate infor-mation constitutes a general obligation of the management committee and the supervisory board.

6. The supervisory board may demand, at any time, that the man-agement committee and/or an individual member of the management committee provide a report on the company’s position and on its legal and business relations with its subsidiaries that may have a significant ef-fect on the company’s position. No individual member of the supervisory board has a right to demand that a member of the management committee provide such report.

7. Members of the management committee are liable for the accuracy and completeness of reports which have been prepared.

8. Each member of the supervisory board has the right to review the management committee’s reports.

Article 122. Obligations of the Management Committee in Case of Emergency1. The management committee is required to promptly convene a

general shareholders’ meeting where, in preparing an appropriate annual or interim balance sheet, it has been determined or one can reasonably


believe that the company has suffered losses of one-half of the charter capital of the company.

2. Where a company becomes insolvent or there is an excess of its liabilities over its assets, the management committee is required to apply for institution of bankruptcy proceedings against the company within three weeks after the company became insolvent or after such excess of liabilities over assets was identified.

3. After a company becomes insolvent or after excess of liabilities over assets was identified, no payments may be made or transactions concluded on behalf of the company, and it must act in strict compliance with the bankruptcy legislation.

Article 123. Deputy Members of the Management Committee1. Members of the management committee may have deputies.2. The rules governing the legal status of members of the manage-

ment committee also apply to deputy members of the management committee.

V. Board of Directors

Article 124. General 1. The board of directors is the management and supervisory body

of joint-stock companies that have neither a supervisory board nor a management committee (monistic management system).

2. The board of directors is responsible for management and supervi-sion activities. At its own discretion, it adopts resolutions albeit solely in the interests of the company and its subsidiaries with the goal of ensuring the stability and continuously improving the economic position of the company.

Article 125. Competence of the Board of Directors 1. Unless otherwise provided by the present Law and the articles of

association of a company, the scope of the exclusive competence of the board of directors includes the following:

1) determine the priority and strategic areas of the company’s opera-tions;

2) convene annual and extraordinary general shareholders’ meetings, approve the agendas of general shareholders’ meetings;

3) fix the date, make a list of persons entitled to attend the general shareholders’ meeting, and determine other matters within the compe-


tence of the board of directors in connection with preparations for and holding of general shareholders’ meetings;

4) increase the amount of the charter capital of the company through offering of additional shares of stock of the company with the limits of the number and categories (types) of authorized shares of stock where, pursuant to the present Law, the articles of association of the company stipulate that such matters are within its competence;

5) preliminary approval of the company’s annual financial state-ments;

6) recommendations regarding the amount of dividends for shares of stock and the procedures for distribution thereof;

7) the terms and conditions upon which the company’s bonds and derivative securities are issued;

8) the number of members and term of office of the executive body, elect its chief and members (person who is a sole executive body) and early termination of their authority;

9) salaries and terms and conditions of payment of compensation and bonuses to the chief and the members of the executive body (the person who is a sole executive body).

10) the procedure governing the work of the internal accounting serv-ice, and the size and terms and conditions of payment of compensation and bonuses to the personnel of the internal accounting service;

11) the fees of appraisers and corporate accountants; 12) documents that govern the company’s internal activities (other

than those adopted by the executive body to organize the company’s operations);

13) open and close branch and representative offices of the company and regulations governing their operations;

14) adopt resolutions on the participation of the company in creating and operating other organizations;

15) select the corporate registrar; 16) determine the information relating to the company or its opera-

tions constituting an commercial, trade or other secret protected by a law;

17) adopt resolutions on the conclusion of transactions as envisaged by the present Law or by the articles of association of the company;

18) other matters as envisaged by the present Law and the articles of association of the company that have not been delegated to the exclusive scope of the general shareholders’ meeting.

2. Matters enumerated in clause 1 of the present Article may not be referred for resolution to the executive body.


3. The board of directors is not entitled to decide on matters which, pursuant to the articles of association of a company, are within the com-petence of its executive body or to adopt resolutions that contravene those of the general shareholders’ meeting.

Article 126. Composition of the Board of Directors and Election of its Members1. The members of the board of directors are elected by the gen-

eral shareholders’ meeting pursuant to the procedure established by the present Law and the articles of association of a company for a period of up to three years and are re-elected at the annual general shareholders’ meeting that immediately follows the expiration of the term of office of such members of the board of directors, and authority of the board of directors lasts until a new board of directors is elected at an annual general shareholders’ meeting.

2. The first composition of the board of directors is appointed at the time of the formation of the company, and this first composition must be set down in the articles of association of the company.

3. Persons elected to the board of directors may be re-elected for an unlimited number of times. The general shareholders’ meeting may adopt a resolution on the early termination of the term of office of all members of the board of directors at any time.

4. Only a natural person may be a member of the board of directors. A shareholder of a company may not be a member of the board of direc-tors. The chief of the executive corporate body (the person who is a sole executive body) may be elected as a member of the board of directors.

5. The number of members in the board of directors is established by the articles of association of a company but may not be less than three. Not less than one-third of the number of the board of directors must be independent directors.

In electing an independent director, the shareholders who elect her/him must assess her/his independence of corporate officers, affiliates, and major counterparties of the company, and the absence of relationships with the company capable of affecting the unbiased nature of her/his opinions. A person is not and may not be elected as an independent director of the company when s/he:

a) is an officer of the joint-stock company or used to be an officer of such joint-stock company during the five years prior to her/his appoint-ment to the appropriate position; or

b) is an employee of the joint-stock company or an affiliate thereof or used to be such employee during the three years prior to her/his election as an independent director with the exception of the instances where s/he was not an employee of the joint-stock company or was elected to the


board of directors upon the motion of the employees (personnel [trudovoi kollektiv]) of such joint stock company; or

c) receives or used to receive during the five years prior to her/his election as an independent director, and at any time during her/his term of office as an independent director any form and/or type of compensa-tion from the company or its affiliate for the performance of the duties of a member of the board of directors of such company; or

d) during the five years prior to her/his election as an independent director and at any time during her/his term of office as an independent director, s/he represents or used to represent a major shareholder in the company under an agreement or upon any other legal basis; or

e) has or had, during one year prior to her/his election as an independ-ent director, any material business or other commercial relations with the company or any affiliate thereof;

f) is or was, during three years prior to her/his election as an inde-pendent director, a partner, officer or employee of the current or future external accountant of the company or other affiliate of such external accountant,

g) is a close relative of a major shareholder or officer of the com-pany.

6. Members of the board of directors are elected by a cumulative vote. A shareholder is entitled to cast all of his/her votes attributed to the shares of stock held by her/him for one candidate or distribute them amongst several candidates to the board of directors. The candidates with the most votes are deemed to be elected to the board of directors. Where there is a tie vote between two or more candidates for one vacancy on the board of directors, additional voting is held as regards these candidates.

7. The articles of association of a company [alternatively: domestic legislation]* may provide for the right of the company’s personnel to ap-point one-third of the members of the board of directors. Such election (appointment) of members of the board of directors by the company’s personnel is exercised pursuant to a collective bargaining agreement.

8. The executive corporate body is required to publish information on the dismissal from office of a member of the board of directors and the election of a new member of the board of directors, and to ensure the reflection (registration) of these changes in the composition of the board of directors in the corporate register and/or state register.

* [Translator’s note: The alternative text for Clause 7 of Art.126 appears in the original Russian-language text of the Model Law.]


Article 127. Chairperson of the Board of Directors 1. The chairperson of the board of directors is elected from amongst

the members of the board of directors by such members by a majority of votes of the total number of members of the board of directors unless the articles of association of a company require otherwise.

2. The chief of the executive body (the person fulfilling the functions of the sole executive body) may not be elected chairperson of the board of directors and may not act as the chairperson of the board of directors in her/his absence.

3. The board of directors is entitled to elect its chairperson, by a majority of votes of the total number of members constituting the board of directors, at any time unless the articles of association of the company require otherwise.

4. The chairperson of the board of directors organizes its work, convenes and chairs meetings of the board, organizes the compilation of the minutes at such meetings, and chairs general shareholders’ meetings unless the articles of association of the company require otherwise.

5. In the absence of the chairperson of the board of directors, his duties are performed by one of the members of the board of directors by a resolution of the board of directors of the company.

Article 128. Meetings of the Board of Directors 1. Meetings of the board of directors are held not less than once a

quarter. The chairperson of the board of directors is required to ensure that meetings of the supervisory board are held not less than once a quarter.

2. A meeting of the board of directors may be convened at the sole discretion of the chairperson of the board of directors of the company, upon demand of any member of the board of directors or executive body of the company as well as other persons as set forth in the articles of as-sociation of the company.

3. A demand to convene a meeting of the board of directors is submit-ted to the chairperson of the board of directors by giving an appropriate written notice containing the proposed agenda of such meeting of the board of directors.

Where the chairperson of the board of directors refuses to convene a meeting, the initiating party is entitled to file the aforementioned demand with the executive body, which is required to convene a meeting of the board of directors.

The chairperson of the board of directors or the chief of the executive body must convene a meeting of the board of directors not later than ten


days after the filing of a demand to convene such meeting unless the articles of association of the company provide for another period of time.

The person demanding a meeting of the board of directors must be invited to attend the meeting thereof.

4. Written notices of meetings of the board of directors being con-vened, with materials related to the agenda of such meetings being attached thereto, must be delivered to the members of the board of directors not later than three days prior to such meetings unless the articles of associa-tion of the company require otherwise.

A notice of a meeting of the board of directors must indicate the date, time and venue of such meeting and the agenda thereof.

5. A member of the board of directors is required to notify the execu-tive body in advance about the impossibility of her/his attending a meeting of the board of directors.

6. The existence of a quorum at a meeting of the board of directors is established pursuant to the articles of association of a company but must not be less than one-half of the number of members of the board of directors.

Where the total number of members of the board of directors is insuf-ficient for reaching a quorum as set forth in the articles of association of a company, the board of directors is required to convene an extraordinary general shareholders’ meeting to elect new members of the board of di-rectors. The remaining members of the board of directors are entitled to adopt a resolution solely about the convening of an extraordinary general shareholders’ meeting.

7. Each member of the board of directors has one vote. Resolutions of the board of directors are adopted by a simple majority of votes of the mem-bers of the board of directors attending such meeting unless the present Law or the articles of association of a company require otherwise.

The articles of association of a company may provide that, in the event of a tie vote, the chairperson or the person chairing a meeting of the board of directors has the decisive vote.

8. The articles of association of a company and/or a collective bargain-ing agreement may provide for representatives of the employees of the joint-stock company, who have been elected by the personnel [trudovoi kollektiv] pursuant to a collective bargaining agreement, to attend meet-ings of the board of directors with an advisory vote.

9. The board of directors is entitled to adopt a resolution on holding a closed meeting of the board which may only be attended by the members of the board of directors.


10. The articles of association of a company and/or the internal documents of the company may provide for the possibility for the board of directors to adopt resolutions on matters submitted for review by the board of directors by voting in absentia and the procedure for adopting such resolutions.

A resolution at a meeting in absentia is deemed to be adopted where there is a quorum amongst the ballots which are received in due time.

A resolution adopted by the board of directors in absentia must be put in writing and signed by the secretary and chairperson of the board of directors.

Within twenty days of its making, a resolution must be directed to the members of the board of directors along with the ballots as appendices on the basis of which such resolution was adopted.

11. Minutes are kept of a meeting of the board of directors. The minutes of a meeting of the board of directors of a company are compiled not later than three days after the holding thereof.

The minutes of a meeting must indicate: 1) the venue, date and time of such meeting; 2) the persons attending the meeting; 3) the agenda of the meeting; 4) the matters put to a vote and the outcomes of voting thereon;5) the resolutions which are adopted.The minutes of a meeting of the board of directors are signed by the

chairperson of the board of directors and, whenever s/he does not attend, by the person chairing such meeting who is responsible for the accuracy of compiling the minutes.

12. A member of the board of directors who did not take part in the voting or who voted against a resolution adopted by the board of directors in violation of the procedure established by the present Law or the articles of association of a company is entitled to appeal such resolution to a court where such resolution infringes her/his rights and lawful interests. Such claim must be filed with the court within one month following the day upon which the member of the board of directors knew or should have known about the resolution which had been adopted.

Article 129. Delegation of Functions to the Executive Body 1. The board of directors may delegate the direction of the company’s

current operations to the executive body or to a person performing the functions of sole executive body. The person who is the sole executive body or the director of the executive body is referred to as the company’s general director. Members of the executive body, depending on their sphere of activity, are referred to as directors—financial director, market-


ing director, etc. The procedure for the delegation of powers and the list of matters upon which the executive body adopts resolutions must be set forth in detail in the articles of association of the company.

2. The board of directors appoints the general director or members of the executive body (directors) from amongst the board of directors as well as from amongst third parties.

3. The general director and members of the executive body (directors) conclude service agreements (corporate agreements) which are signed by the chairperson of the board of directors on behalf of the company.

4. The board of directors may dismiss the general director and/or members of the executive body from office at any time. The provisions of the Civil Code on contracts are applied to the requirements set forth in a service agreement (corporate agreement). Termination of such agree-ment is made pursuant to a resolution to dismiss the general director or a member of the executive body from office.

5. The competencies of the executive body (or the person fulfilling the functions of the executive body) of the company may include all mat-ters related to the direction of the company’s current operations other than those falling within the competencies of the general shareholders’ meeting and the board of directors of the company.

6. No limitations may be imposed on a general director’s authority to represent the company before third parties.

7. In their dealings with a company, the general director and members of the executive body are required to observe the restrictions as envisaged in the articles of association of the company and as imposed by the board of directors and the general shareholders’ meeting and the regulations on the executive body on matters of managing the company.

A violation by the general director or by members of the executive body of such restrictions does not render any transaction invalid which s/he/they have concluded on behalf of the company with third parties with the exception of those instances when s/he/they and the other party to the transaction jointly sought to cause damage to the company. In this case, the board of directors of the company may declare the transaction invalid within eighteen months from the date of the conclusion thereof.

8. The board of directors has the right to issue instructions to the general director and members of the executive body on specific questions regarding the current operations of the company.


Article 130. Powers of the Chief of the Executive Body—General Director1. Where an executive body is formed to direct a company’s current

operations, the board of directors appoints the chief of such body—the general director.

2. The general director, pursuant to the articles of association of a company or the regulations on the executive body, apportions the func-tions amongst members of such executive body—the directors of the company—and ensures that they properly perform their functions.

3. The chief of the executive body:1) organizes the fulfilment of resolutions adopted by a general share-

holders’ meeting and the board of directors;2) issues powers of attorney to represent the company before third

parties; 3) employs, assigns and dismisses the company’s employees (except

for cases established by the present Law), provides incentives and imposes disciplinary penalties, establishes salaries of the company’s employees and personal bonuses paid in addition to salaries in accordance with the corporate organizational chart, determines amounts of premiums payable to the company’s employees except for employees who are part of the executive body and the company’s internal accounting service,

4) in her/his absence, imposes upon one of the members of the execu-tive body the performance of her/his duties;

5) assigns duties as well as the sphere of authority and responsibility amongst members of the executive body;

6) exercises other functions pursuant to the articles of association of the company and the resolutions of a general shareholders’ meeting and of the board of directors.

4. The appointment and the dismissal of the general director and members of the executive corporate body from office are reflected (regis-tered) in the corporate register and in the state register. The authority of the general director and members of the executive body of the company, in dealings with third parties remain unchanged, until the appropriate registration is made in the state register other than when the company or other interested party proves that a third party knew of the dismissal from office of the general director or member of the executive body.

Article 131. Compensation for the General Director and Members of the Executive Body

The general director and members of the executive corporate body are compensated in an amount and in the procedure pursuant to the


provisions of the company’s internal documents governing payment of compensation to the members of the management committee.

Article 132. Internal Accounting Service1. A company must have an internal accounting service to monitor

its financial and business performance. 2. Employees of the internal accounting service may not be elected

as members of the board of directors or of the executive body of the company.

3. The internal accounting service is directly subordinate to the board of directors regarding its work and reports thereto.

Article 133. Conflict of Interest 1. The chairperson and members of the board of directors, the gen-

eral director and members of the executive body are required to serve the lawful interests of the company and perform their functions solely in the interests of the company. They do not have a right to pursue personal goals or make managerial decision based on personal interest nor do they have a right to use business opportunities and proposals intended for the company in their own interests.

2. During their entire term of office, the chairperson and members of the board of directors, the general director and members of the ex-ecutive body are required to unwaveringly adhere to the principle of non-competition. Without the authorization of the board of directors, the general director and members of the executive body do not have the right to engage in commercial business and to conclude transitions for their own account or for the account of third parties in the line of the company’s business.

3. Without the authorization of the board of directors, the general director and members of the executive body do not have the right to be-come officers or bankruptcy receivers in another legal person, participants in a business partnership or major shareholders in other companies.

4. During their term of office, the chairperson and members of the board of directors, the general director and members of the executive body do not have the right to receive or to demand compensation or benefits from third parties, in connection with their work, for themselves or for other persons, or provide to third parties or to demand that they be provided with unwarranted benefits.

5. If the general director or members of the executive body fail to comply with the prohibitions set forth in the present Article, the company may demand indemnification of damages or reformation of transactions concluded by the general director and/or a member of the executive body


in the name of the company and the transfer to the company of all amounts and objects of compensation and/or other income from such transactions or may assign the claims to receive such compensation. Such demands of the company against the general director and members of the executive body are made by the board of directors.

6. The statute of limitations for such claims of the company is three months from the moment when the remaining members executive body and/or members of the board of directors knew about the acts of the general director or members of the executive body which required other corporate officers to take measures to indemnify the damage suffered by the company. The statute of limitations for such claims expires five years from the moment when they arose irrespective of whether information about such actions became available.

7. The general director and each member of the executive body are required to disclose and provide the board of directors with information about the circumstances of a conflict of interest and inform the other members of the executive body thereof.

8. Agreements between a company and the chairperson and members of the board of directors, the general director and members of the executive body must include special non-compete provisions, including a prohibition against engaging in the same activates as those of the company (engag-ing in individual business activities or holding managerial positions with competitor organizations, or having an interest in the capital or property of competitor organizations or in another form) during the entire term of office as corporate officers and, also, after expiration of such term of office as corporate officers. In the latter case, the period during which such a prohibition remains in effect may not exceed two years.

Article 134. Obligations of the Board of Directors in Cases of Emergency1. The board of directors is required to promptly convene a general

shareholders’ meeting where, in preparing an appropriate annual or interim balance sheet, it has been determined or one can reasonably believe that the company has suffered losses of one-half of the charter capital of the company.

2. Where a company becomes insolvent or there is an excess of its liabilities over its assets, the board of directors is required to apply for the institution of bankruptcy proceedings against the company within three weeks after the company became insolvent or after such excess of liabilities over assets was identified.

3. After a company becomes insolvent or after an excess of liabilities over assets was identified, no payments may be made or transactions


concluded on behalf of the company, and it must act in strict compliance with bankruptcy legislation.

VI. Liability of Corporate Officers

Article 135. Grounds for Liability 1. Corporate officers are required to act reasonably [razumno] and in

good faith [dobrosovestno] in the interests of the company and to perform their duties imposed upon them by domestic legislation, the articles of association of the company or by a service agreement.

2. They are required to indemnify the company for losses incurred by the company as a result of their wrongful failure to perform their du-ties referred to in Clause 1 of the present Article. Where the failure to perform duties results from the acts or omissions of several officers, they are jointly liable to the company. Officers voting against a resolution that has resulted in losses for the company, or those who did not take part in such voting for mitigating reasons, are not liable to the company. The burden of proof that the officers did not violate their duties in managing the company’s activities rests with such officers.

3. A violation is deemed to be wrongful [vinovnym] when corporate officers did not undertake, with a due level of care [zabotlivost’] and dili-gence [osmostritel’nost’], all the measures required to prevent the occurrence of such failure. Where there is a violation of duties, the presence of fault [vina] is assumed under domestic legislation, the articles of association of the company or a service agreement.

4. Neither the articles of association of a company nor a service agree-ment may exempt corporate officers from their liability to indemnify the company for losses where such losses were incurred as a result of their failure to perform their duties under the service agreement.

5. Corporate officers are liable to indemnify a company for losses regardless of their fault, where in violation of the requirements of the present Law:

1) shareholders’ investments [the amounts of such investments]* made to the charter capital were returned to them;

2) dividends were distributed amongst shareholders; 3) transactions were concluded which resulted in ownership of prop-

erty of the company being transferred to third parties; 4) loans or credit facilities were granted to the corporate officers.

* [Translator’s note: The square brackets (and the text encased therein) in Clause 5(1) of Art.135 appear in the original Russian-language version of the Model Law.]


6. Corporate officers are not required to indemnify the company for losses, incurred as a result of a commercial (business) resolution, where such resolution was adopted on the basis of sufficient and proper infor-mation by impartial persons who are not personally interested in such resolution and where there was a basis for believing that such resolution would serve the interests of the company.

7. The statute of limitations of claims made under the present Article is five years.

Article 136. Liability of Officers Initiated by the Bodies of a Company 1. A general shareholders’ meeting, the supervisory board and man-

agement committee (board of directors) and executive body (the person fulfilling the functions of the executive body) of the company within their competence, have the right to demand indemnification of losses incurred by the company as a result a failure of corporate officers to perform their duties under service agreements.

2. The management committee is required to demand that members of the supervisory board indemnify the company for losses incurred by the company as a result of their failure to perform their duties.

3. The supervisory board is required to demand that members of the management committee indemnify the company for losses incurred by the company as a result of their failure to perform their duties.

4. The board of directors has the right and is required to demand that members of the board of directors and executive body (the person fulfilling the functions of the executive body indemnify the company for] losses incurred by the company as a result of their failure to perform their duties. The members of the board of directors, against whom such demand must be made, do not participate in adopting the resolution holding them liable.

5. A general shareholders’ meeting may adopt resolution and require members of the management committee and members of the supervisory board (members of the board of directors) to demand that corporate offic-ers indemnify the company for losses incurred as a result of their wrongful acts. Such resolution is adopted by a simple majority of votes. The persons, as regards whom such resolution is being adopted, do not participate in the voting thereon. The resolution must be fulfilled within six months from the date of its adoption. A general shareholders’ meeting also may appoint a special representative who is required to bring the company’s appropriate claims against corporate officers.


Article 137. Liability of Officers Initiated by Company Shareholders1. A shareholder or shareholders who jointly own not less than 1% of

a company’s voting shares have a right to petition a court and file a law-suit against corporate officers for the indemnification of losses incurred by the company as a result of a failure of such officers to perform their duties to direct the company.

2. The court hears such an action where:1) the shareholders prove that they acquired their shares prior to

knowing or prior to when they should have known about possible viola-tions of managers’ duties and the losses incurred by the company as a result thereof;

2) the shareholders prove that they already have petitioned the bodies of the company to institute a lawsuit against those who are at fault but that such attempts have been unsuccessful;

3) there are circumstances intensifying a suspicion that the company suffered losses as a result of violations of domestic legislation or the articles of association of the company;

4) satisfying the lawsuit for indemnification of damages will not be injurious to the company’s interests.

3. Prior to deciding upon the admissibility of such lawsuit, the court is required to invite the defendant and to hear her/his arguments and objections against such an action.

4. A company represented by its bodies, at any time, has the right to replace its shareholders in such proceedings and to file a lawsuit for indemnification of losses itself. The court must invite the shareholders who are claimants to attend the hearings on this matter.

Where a court proceeds to hear the lawsuit filed by the shareholders, reimbursement for costs during this stage of the proceedings are imposed upon the company, and the company is required to reimburse legal costs regardless of the judgment rendered by the court in the shareholders’ lawsuit.

CHAPTER VIII. CORPORATE TRANSACTIONS WITH SPECIAL CONDITIONS

I. Transactions with Conflict of Interest

Article 138. Definition of a Corporate Conflict-of-Interest Transaction1. Corporate conflict-of-interest transactions are those transactions

where, given the available facts and/or the existing circumstances, there


are grounds to believe that parties to such transactions act or might act not only in the company’s interests. A corporate conflict-of-interest trans-action is specifically deemed to be a transaction or a number of related transactions in relation to which interested parties:

1) have the right to take part in adopting resolutions to conclude such transactions;

2) at the same time, may have a property interest in such transactions that do not coincide with the company’s interests.

2. The issue and offer of any additional shares by a company is not deemed to be a conflict-of-interest transaction.

3. A person having an interest in the conclusion by the company of a transaction is deemed to be a major shareholder or a corporate officer who simultaneously:

1) is a shareholder who solely or jointly with its affiliates holds over 10% of the voting shares, an equity stakes with a voting right in the capital of a counterparty of the company to such transaction or is the fully responsible member [uchastnik s polnoi otvestvennost’iu] of such counterparty; or

2) is a corporate officer of the counterparty to such transaction; or3) is the company’s counterparty in such transaction or in a number

of related transactions; or4) represents the company’s counterparty in such transaction or

in a number of related transactions or acts as an intermediary in such transactions;

5) is a person affiliated to persons set forth in Subparagraphs 1, 2, 3, 4, Clause 3 of the present Article.

4. A person having an interest in transactions concluded by a company is required, not less than once a year, to submit information in writing to the company’s board of directors (supervisory board) sufficient for the timely identification of corporate conflict-of-interest transactions.

5. A person having an interest in a transaction concluded by a company, prior to concluding such transaction, is required to notify the body of the company, in the competence of which is the adoption of resolutions to conclude such transactions, about its interest in the transaction and its conflict of interest.

Article 139. Resolutions to Conclude Conflict-of-Interest Transactions 1. A conflict-of-interest transaction may be concluded or amended

only upon a resolution adopted by the board of directors or by a general shareholders’ meeting as envisaged by the present Law and by the articles of association of the company.

2. Prior to concluding a conflict-of-interest transaction, a determina-tion must be made that the procedures have been observed for estimating


the market value of the property which is the object of the transaction. Unless otherwise specified in the articles of association of a company, the property’s market value is determined by a resolution adopted by the supervisory board (board of directors) pursuant to the opinion letter of an independent appraiser.

3. A resolution of the board of directors to conclude a conflict-of-interest transaction must be unanimously adopted by those members of the board of directors who are not interested persons in such transaction.

4. Where over one-half of the elected members of a company’s board of directors are interested persons in concluding a transaction, such transaction may only be concluded upon a resolution adopted by a general shareholders’ meeting.

5. A resolution of a general shareholders’ meeting concerning the conclusion of a conflict-of-interest transaction, pursuant to the present Law or to the articles of association of the company, is adopted by a majority of the votes cast by those who are not interested persons in the conclusions of such transaction.

6. An interested person in the conclusions of such transaction must temporarily leave the meeting of the board of directors or the general shareholders’ meeting where there is open voting about the conclusion of such transaction for the duration of such voting. The presence of such person at the meeting of the board of directors or at the general shareholders’ meeting, adopting the resolution about the conclusion of a conflict-of-interest transaction, is counted in determining a quorum, but such person does not participate in the voting.

7. Where the board of directors or the general shareholders’ meeting of a company did not know of all the circumstances associated with the conclusion of a conflict-of-interest transaction but, thereafter, knows of such circumstances and/or such transaction has been concluded in viola-tion of other provisions of the present Article, the board of directors or the general shareholders’ meeting is entitled to demand that the executive body of the company (management committee):

1) repudiate the conclusion of such transaction or demand that it immediately be terminated early; or

2) in the manner established by legislation, ensure that the interested person indemnify the company for the losses which it suffered as a result of the conclusion of such transaction.

8. A declaration of invalidity of resolutions adopted by a corporate body to approve (engage in) such transactions does not result in the in-validity of a transactions in which there is a conflict-of-interest provided


that such resolutions have been appealed separately from contesting the appropriate transactions of the company.

9. Conflict-of-interest transactions are void ab initio where, as a result thereof, damage is inflicted upon a company and where the corporate management committee (board of directors) wilfully acted to cause the damage to the company about which the other party to such transaction knew or should have known.

10. Where, in concluding a transaction in which there is a conflict of interest, the provisions of the present Article have been violated, it is presumed that interested persons of the company have acted wilfully to the damage the company’s property interests.

II. Major Transactions

Article 140. Major Transaction1. The management committee (executive body) or the board of

directors of a company, prior to the conclusion of a major transaction, is required to obtain consent of the supervisory board (board of direc-tors) or the general shareholders’ meeting (whichever body is competent to conclude such transactions under the articles of association of the company).

A major transaction is deemed to be a transaction or a number of transactions which are related by one purpose, or transactions character-ized by their successive nature connected with the acquisition or alienation, or the possibility of the acquisition of alienation, directly or indirectly of property the value of which is or exceeds 25% of the book value of a company’s assets calculated on the basis of its accounting statements of the most recent accounting data with the exception of transactions concluded in the course of the company’s ordinary business, transactions providing for subscribing (selling) a company’s common shares of stock, and transactions associated with an offer by the company of securities convertible into the company’s common shares of stock. The articles of association of the company may specify other instances in which, during the conclusion of a transaction, the procedure is applied for approving major transactions as envisaged by the present Law.

In the event of the alienation or the possible alienation of property, the book value of such property, determined according to accounting data, is juxtaposed with the book value of a company’s assets, and in the event of the acquisition property—the cost of acquisition thereof.

2. In order for the supervisory board (board of directors) or the general shareholders’ meeting of a company to adopt a resolution approving a major


transaction, the price of the acquired or alienated property (services) is set by the supervisory board (board of directors) of the company.

Article 141. Procedure for Approving a Major Transaction1. A resolution approving a major transaction the object of which is

property, the value of which ranges from 25% to 50% of the book value of a company’s assets, is adopted unanimously by all members of the su-pervisory board (board of directors) of a company; however, the votes of members the supervisory board (board of directors) who have retired or been dismissed from office are not counted

2. Where the supervisory board (board of directors) of a company is not unanimous in adopting a resolution to approve a major transaction, the matter of approving the major transaction may be referred to the general shareholders’ meeting by a resolution of the supervisory board (board of directors). In this case, a resolution approving the major transac-tion is adopted by the general shareholders’ meeting by a majority of the votes cast by the holders of voting shares of stock attending such general shareholders’ meeting.

3. A resolution approving a major transaction the object of which is property, the value of which exceeds 50% of the book value of a company’s assets, is adopted by a general shareholders’ meeting by a majority of 75% of the votes cast by the holders of voting shares of stock attending such general shareholders’ meeting.

4. A resolution approving a major transaction must specify the party (parties) to such transaction, the beneficiary (beneficiaries), the transaction price, the object and any other material terms and conditions thereof.

5. Where a major transaction is also a transaction the conclusion of which involves a conflict of interest, the procedure for the conclusion thereof is regulated by the present Article taking into account the require-ments of Article 139 of the present Law regarding the impermissibility of the participation, in adopting an appropriate resolution to conclude or to amend such transaction, of an interested person in the conclusion thereof.

6. A major transaction concluded in violation of the requirements, as envisaged by the present Law, regarding the terms and conditions for de-termining the value of property which is the object of a major transaction, or the procedure for the approval thereof, may be declared invalid upon the lawsuit of a company or of a major or minority shareholder thereof. Where the statute of limitations has expired, it may not be restored. A court dismisses a claim for rendering invalid a major transaction, in viola-tion of the requirements of the present Law, where any of the following circumstances exists:


— the vote cast by a shareholder who has petitioned the court to declare invalid a major transaction, approved by a resolution of a general shareholders’ meeting, although s/he/it took part in the voting, could not have affected the voting results;

— it has not been proven that the conclusion of such transaction has entailed or might entail losses for the company or for the shareholder who has petitioned the court or the occurrence of any other adverse consequences for them;

— there is evidence of the approval of said transaction pursuant to the present Law at the moment of the court’s consideration of the matter;

— during the court’s consideration of the matter, it is proven that the other party to such transaction did not know and could not have known that such transaction violated the requirements applicable thereto as envisaged by the present Law.

7. Where a major transaction is also a transaction the conclusion of which involves a conflict of interest, Article 139, Clauses 7-10, of the present Law also is applicable to questions of the validity, early termination, grounds for and consequences of a declaration of invalidity thereof.

CHAPTER IX. ACCOUNTING, REPORTING, AUDIT AND DISCLOSURE

Article 142. Accounting and Reporting1. A company keeps accounting records and compiles financial,

statistical and any other special reports pursuant to legislation and the company’s internal documents.

2. The annual financial report of a company must be verified and approved by an accounting firm within the period of time for submitting reports to competent financial authorities under accounting legislation.

3. The supervisory board (board of directors) and the general share-holders’ meeting of a company are not entitled to approve the annual reports submitted by the management committee (executive body) where such reports are submitted without the company’s annual financial report and an accountant’s opinion letter relating thereto.

4. A company is required to ensure that its accounts and reports are kept in such manner and within such time periods as are established by legislation.

5. A company and its officers are liable to the extent established by legislation for:


1) the bad-faith [nedobrosovestnoe] keeping of accounting records and compiling of financial, statistical and other special reports and, also, for including inaccurate or erroneous data therein;

2) failure to keep or the untimely submission of the above reports to the company’s creditors and shareholders or to governmental authorities lawfully authorized to receive such reports; and

3) publishing inaccurate information on the company’s operations or evading the publication of information as envisaged by the present Law.

Article 143. Information on Affiliated Persons1. Affiliated persons of a company are required to notify the company,

in writing, of their affiliation to the company within ten days after the grounds for such affiliation, pursuant to the present Law, have arisen (ac-quisition of shares of stock in a quantity required to control a company; appointment (election) of an officer of a company; the occurrence of close familial relationships, etc.).

2. Affiliated persons of a company are liable, under legislation, for failing to notify or for failing to notify on a timely basis under Cause 1.

Article 144. Audit1. A company must undergo an annual audit, the object of which is

disclosing the financial and economic performance thereof.2. An extraordinary audit is held:1) at any time upon demand of a shareholder of a company at the

cost of such shareholder; or2) according to a court judgment.3. An accounting firm inspects the bookkeeping accounts and reports

of a company pursuant to accounting legislation and an audit agreement. Based on the results of its audit, the accounting firm compiles an audit certificate and an opinion letter.

4. The accounting firm is entitled, under the audit agreement, to demand from the company, and from its registrar, documents connected with the company’s operations.

5. The accounting firm of a company may not be an affiliate of the company or of the registrar of the company.

6. The accounting firm of a company is not entitled to conclude other agreements with the company than the audit agreement.

Article 145. Governmental Supervision of Company Business1. Duly authorized governmental authorities exercise supervision

over a company’s operations as established by legislation.


2. Engaging in supervision must not impede the routine course of company’s business.

3. The basic provisions of an audit certificate and the rulings of governmental authorities, engaged in supervision of a company, must be brought to the general knowledge of the general shareholders’ meeting by the supervisory board (board of directors).

Article 146. Publishing Information of Corporate Business. The Corporate Governance Code

1. Public companies are required to publish reports on company’s operations pursuant to legislation including normative legal acts on se-curities markets.

2. A company is required to disclose information on its branches registered in other countries, the state registration numbers thereof and the countries in which such branches are registered.

3. The articles of association of a company must specify a hard-copy publication, which must be distributed across the entire territory of the country, in which the reports and information are published as set forth in Clauses 1 and 2 of the present Article or any other information on public companies as envisaged by the present Law.

4. The management committee (board of directors) of a public company annually announces which recommendations set forth in the Model Corporate Governance Code are ones which they have declared to be binding and ones which they will not apply. In the latter instance, the management committee (board of directors) must give an explanation of the reasons thereof.

Article 147. Access for Shareholders and Bondholders to Corporate Documents 1. A company is required to make available for review the following

documents to the holders of issued bonds, convertible securities and shareholders:

1) the memorandum of founding of a company, the articles of associa-tion of the company and all changes and additions thereto;

2) the certificate of registration of the company;3) the internal documents of the company and all changes and amend-

ments thereto;4) agreements between the company and its registrar and its ac-

counting firm;5) the minutes of general shareholders’ meeting and voting ballots;6) minutes of meetings of the supervisory board (board of directors)

of the company;


7) the list of members of the supervisory board (board of directors), the executive body or any other corporate officers;

8) the list of affiliated persons of the company specifying the basis for the affiliation of each one thereof;

9) the public offering prospectuses for securities of the company, all changes and amendments thereto and the final securities issue and offering reports;

10) data on the monthly volumes and the average prices of transac-tions registered in the corporate register;

11) financial, statistical and any other special statistics;12) opinions of the auditing committee, audit certificates and opinion

letters of accounting firms; inspection and audit certificates and rulings issued and adopted by governmental authorities exercising supervision over the operations of the company;

13) the annual reports submitted by the supervisory board (board of directors) and annual reports prepared by the corporate auditing com-mittee;

14) correspondence with shareholders;15) any other documents as established by the articles of association

or by the internal documents of the company.2. A company ensures the safekeeping of the documents enumerated

in Clause 1 of the present Articles for a period of three years at the of-fices of the company or at any other location specified in the articles of association of the company and, also, ensures accessibility thereto for the holders of bond convertible into securities and for shareholders.

3. Upon a demand of a holder of bonds convertible into securities or of a shareholder, a company is required to submit to her/him/it, for a fee, extracts from or copies of documents enumerated in Clause 1 of the present Article and any other documents specified in the articles of as-sociation or in the internal documents of the company with the exception of documents constituting a state or commercial secret. The company establishes the amount of the fee charged, but it must not exceed the costs related to making and dispatching extracts, copying documents and mailing costs.


CHAPTER X. CHANGE OF SHAREHOLDERS UNDER SPECIAL CONDITIONS

I. Squeezing out Shareholders

Article 148. Redeeming of Corporate Securities upon Demand of a Holder of over 95% of the Shares of Stock of a Company

1. A person holding more than 95% of the total number of outstand-ing voting shares of stock of a company, including shares of stock held by such persons and its affiliates, is entitled to redeem voting shares and securities convertible into the company’s voting shares from their holders under the terms and conditions set forth in the present Article.

2. The demands of a person for the redemption of such shares of stock and convertible securities, specified in Clause 1 of the present Ar-ticle, are forwarded to the company. Such demand for redemption of the securities must specify:

1) the name or designation of the person specified in Clause 1 of the present Article, the place of residence or location of such person and other information pursuant to domestic legislation;

2) the names or designation of the company’s shareholders that are affiliated to a person enumerated in Clause 1 of the present Article;

3) the number of the company’s shares of stock held by the person specified in Clause 1 of the present Article and its affiliates;

4) the class and types of redeemed securities;5) the price of the redeemed securities and data evidencing the con-

formity of the proposed price to Clause 4 of the present Article;6) the date upon which the listing of holders of redeemed securities

was compiled; this date may not be less than forty-five days and not more than sixty days after transmittal of the demand for securities redemption to the company;

7) the procedure of payment for the redeemed securities, including the date for the payment thereof, may not be more than twenty-five days after the date of compiling the list of holders of the redeemed securities or, where the redeemed securities have been subject to attachment [arest], this period commences as of the date when the person specified in Clause 1 of the present Article knew or should have known that the securities have been released from attachment;

8) the notary public to whose deposit account funds will be credited in the event specified in Clause 7 of the present Article.


The demand for redemption of securities must contain a notation, made by a duly authorized agency, as to the date when the preliminary notice pursuant to a law was submitted to it.

A copy of an independent appraiser’s report on the market value of the redeemed securities must be appended to the demand for redemp-tion of securities.

3. The demand for redemption of securities, received by a company, is forwarded to the holders of redeemed securities in the procedure es-tablished by a law.

Where a registrar maintains the corporate register, the company also forwards the above demand to such registrar.

Where the redeemed securities are the subject of a pledge or encum-brance, the company also forwards the demand for redemption of securi-ties to the holder of the pledge or encumbrance pursuant to information submitted by the registrar and by the nominal shareholders.

The costs incurred by the company and its registrar are reimbursed by the person specified in Clause 1 of the present Article.

4. Securities are redeemed at a price not lower that their market value which must be set by an independent appraiser. However, such price may not be lower than:

1) the price at which these securities were acquired through a volun-tary or mandatory offer as the result of which a person has become the possessor of more than 95% of the total number of the company’s shares of stock taking into account the shares of stock held by this person and her/his/its affiliates;

2) the highest price at which the person specified in Clause 1 of the present Article or her/his/its affiliates acquired or undertook to acquire these securities after expiration of the period for accepting a voluntary or mandatory offer, as the result of such acquisition the person has become the possessor of more than 95% of the total number of the company’s shares of stock taking into account the shares of stock held by such person and her/his/its affiliates.

Payment for redeemed securities is made only in cash.A holder of securities who has not accepted the price for the redeemed

securities has the right to file a lawsuit with a court for the indemnifica-tion of losses caused by the improper determination of the price of the redeemed securities. Such holder of securities may file a lawsuit within six months after learning that the redeemed securities were written off her/his/its personal account (securities account). A lawsuit filed with a court by the holder of securities constitutes grounds for suspending redemption of the securities or for declaring such redemption to be invalid.


5. Within fourteen days after compiling a list of the holders of the redeemed securities, a company is required to submit said list to the person specified in Clause 1 of the present Article.

The list of the holders of redeemed securities is compiled pursuant to the corporate register as of the date specified in the demand for redemp-tion of the securities. For the purpose of compiling the list of holders of securities, a nominal holder of securities submits data on the persons on whose behalf s/he/it holds such securities.

As of the date of compiling a list of the holders of redeemed securi-ties, the rights to the redeemed securities may not be assigned and the redeemed securities may not be encumbered. As of the date specified in the demand for redemption of the securities, all operations involving redeemed securities in the corporate register and appropriate securities accounts are blocked.

The restrictions imposed on disposal of redeemed securities are lifted in the event that the person enumerated in Clause 1 of the present Article does not submit documents, to the keeper of the corporate reg-ister, attesting to payment for the redeemed securities in the procedure established in the present Article.

6. The holder of redeemed securities is entitled to notify the person, specified in Clause 1 of the present Article, of the details of its banking account to which payment for the redeemed securities must be made or the address to which payment of the funds, by mail transfer, must be made for the redeemed securities. However, the application is deemed to have been sent on a timely basis where it is received by the person specified in Clause 1 of the present Article no later than the date upon which the list of the holders of redeemed securities was compiled and which [date] is specified in the demand for redemption of the securities.

7. The person specified in Clause 1 of the present Article is obliged to make payment for the redeemed securities to the banking details or the address as indicated in the application by holders of securities appearing on the list of holders of redeemed securities as of the date specified in the demand for redemption of the securities.

The person specified in Clause 1 of the present Article, who has not received, in due time, applications from said holders of the securities or where the necessary information on the banking details, or the address to which mail transfer of the monetary funds is to be made, is missing from these applications, is required to transfer money for the redeemed securities to a deposit account of a notary public at the company’s loca-tion. Where a nominal holder has failed to submit information on the persons on whose behalf s/he/it holds the securities, the person specified


in Clause 1 of the present Article is required to transfer money for the redeemed securities to such nominal holder. The transferred monetary funds to such nominal holder are deemed to be proper performance of the payment obligation.

8. Within three days after receiving evidence of payment for redeemed securities submitted by the person specified in Clause 1 of the present Article, the registrar is required to write off such redeemed securities from the personal accounts of the appropriate holders or nominal holders and to credit these to the personal account of the person specified in Clause 1 of the present Article. Writing off redeemed securities from a nominal holder’s personal account, in the procedure established in the Article, constitutes grounds for the nominal holder to make an entry of the termination of rights to the appropriate securities kept in the securities account of the client (depositor) without being instructed by the latter.

II. Redeeming Shares upon Demand of Shareholders

Article 149. Redeeming of Corporate Securities by a Holder of More than 95% of Shares of Stock in a Company upon Demand of Shareholders

1. A person holding more than 95% of the total number of company’s voting shares of stock taking into account shares of stock held by such person and her/his/its affiliates is required to redeem the remaining voting shares of the company held by other persons and securities convertible into such voting shares of stock upon demand of the holders thereof.

2. Within thirty-five days after acquiring the appropriate share of se-curities, the person specified in Clause 1 of the present Article is required to notify the shareholders and the holders of the appropriate convertible securities, who are entitled to demand the redemption of such securities, that they are entitled to demand the redemption thereof.

Such notice of the right to demand redemption of securities must specify:

1) the name or designation of the person specified in Clause 1 of the present Article and other information pursuant to domestic legislation as well as the place of residence or location of such person;

2) names or designation of the company’s shareholders who are affili-ated persons to the person specified in Clause 1 of the present Article;

3) the number of the company’s voting shares held by the person speci-fied in Clause 1 of the present Article and the affiliated persons thereof;

4) the price of the redeemed securities, or the procedure for the calculation thereof, and the substantiation thereof;

5) the procedure for making payment for the redeemed securities;


6) the mailing address to which demands for redemption of the se-curities must be sent;

7) information on the person specified in Clause 1 of the present Article subject to disclosure in the securities transfer order;

8) information on the guarantor who has provided a banking guar-antee pursuant to the Clause 3 of the present Article and the terms and conditions of the banking guarantee.

Where an independent appraiser appraises the market value of the redeemed securities, a copy of the report of the independent appraiser on the market value of the redeemed securities must be attached to no-tification of the right to demand redemption of the securities which is sent to the company.

Securities redeemed under the present Article must only be paid for in cash.

Notification of the right to demand redemption of the securities must contain a notation made by a duly authorized governmental authority as to the date when the notification was submitted to it.

Dispatch of the notification of the right to demand redemption of the securities is done through the company.

3. Prior to dispatching the notification set forth in Clause 2 of the present Article, the person specified in Clause 1 of the present Article must obtain a banking guarantee from a financial-credit institution hav-ing branches in more than two administrative-territorial participatory units as security of payment to the appropriate holders for the redeemed securities.

4. Demand of holders for redemption of the securities belonging to them may be made not later than six months after dispatch of notification of the right to demand redemption of securities by the company.

Demand of holders for redemption of the securities belonging to them is dispatched by the holders of these securities to the person speci-fied in Clause 1 of the present Article to which is attached evidence of the writing off of redeemed securities from the personal account (securi-ties account) of the appropriate holder of the securities to ensure their subsequent crediting to the personal account (securities account) of the person specified in Clause 1 of the present Article.

Demand of holders for redemption of the securities belonging to them must specify the class (type) and number of securities subject to redemption.

A holder of securities is required to transfer such securities free of any third party rights to such securities.


5. The person specified in Clause 1 of the present Article is required to pay for the securities redeemed under the present Article within fifteen days after receiving the documents enumerated in the present Article.

Article 150. Redemption PriceThe redemption of securities is made at the price determined in the

procedure required by domestic legislation. However, such price may not be lower than:

1) the price at which such securities were acquired through a voluntary or mandatory offer as the result of which a person, specified in Clause 1, Article 149 of the present Law, has become the possessor of more than 95% of the total number of a company’s voting shares of stock belonging to this person and her/his/its affiliates;

2) the highest price at which the person, specified in Clause 1, Arti-cle 149 of the present Law, or her/his/its affiliates acquired or undertook to acquire these securities after the period for accepting a voluntary or mandatory offer has expired, as the result of such acquisition the person, specified in Clause 1, Article 149 of the present Law, has become the possessor of more than 95% of the total number of the company’s voting shares of stock taking into account the shares of stock belonging to such person and her/his/its affiliates.

Article 151. Failure to Pay the Price for Corporate Redeemed Securities 1. Where the person specified in Clause 1 Article 149 of the present

Law fails to perform the duty to make timely payment of the price for the redeemed corporate securities, the former holder of securities may at her/his/its own discretion either make demand upon the guarantor that furnished the banking guarantee, under Clause 3, Article 149 of the present Lawn to make payment of the price of the redeemed securities, to which is attached evidence of the writing off the redeemed securities from the personal account (securities account) of the holder of these se-curities and for subsequent crediting to the personal account (securities account) of the person specified in Article 149, Clause 1, of the present Law, or unilaterally to terminate the securities acquisition agreement and demand return of said securities.

2. Where the person specified in Article 149, Clause 1, of the present Law fails to perform the duties to dispatch notification of the right to demand redemption of the securities, under Article 149, Clause 2, of the present Law, the holder of the securities to be redeemed is entitled to submit a demand for the redemption of the securities held by such holder to which is attached a copy of the transfer order, sent to the keeper of the corporate register, for the redeemed securities to the person specified in


Article 140, Clause 1, of the present Law. Such demand may be made within one year from the date upon which the holder of securities knew of such right to demand redemption of the securities but not before expiration of the period of time specified in Article 149, Clause 2.

3. From the moment the order of the holder of the securities to transfer the redeemed securities to the person, specified in Article 149, Clause 1, of the present Law, is submitted to the registrar, all operations involving the personal account of the securities holder are blocked until the payment by such person for these securities and submittal to the registrar of the documents of payment for the redeemed securities.

CHAPTER XI. CORPORATE REORGANIZATION

Article 152. Forms of Corporate Reorganization1. Reorganization of a company entails the transfer of rights and

duties from one or more commercial organizations (legal predecessors) by way of legal succession to one or more newly created and/or existing commercial organizations (legal successors) with or without liquidation of the organization-predecessor.

2. Companies may be reorganized pursuant to the present Law in the form of a merger, acquisition, split-up, split-up accompanied by a merger (acquisition), spin-off, spin-off accompanied by a merger (acquisition) or transformation.

Article 153. Organizations of Various Organizational-Legal Forms Involved in a Reorganization. Reorganization Resulting in the Creation of Organizations of

Different Organizational-Legal Forms1. Organizations of various organizational-legal forms, with the excep-

tion of state and municipal enterprises, may take part in one reorganization along with a joint-stock company pursuant to the restrictions set forth in the present Law.

2. As a result of a reorganization, organizations may be created with organizational-legal forms other than the organizations involved in the reorganization taking into account the restrictions imposed by domestic legislation.

Article 154. Reorganization and its Stages1. Unless otherwise established by legislation, reorganization includes

the following stages:1) conclusion by the authorized persons of the organizations involved

in a reorganization of a merger (acquisition) agreement where the reor-


ganization takes the form of a merger (acquisition) as well as a split-up (spin-off) associated with merger (acquisition);

2) adoption of a resolution on reorganization by the members and shareholders (general meeting of members or shareholders) of an or-ganization being reorganized (each of the organizations involved in the reorganization), including confirmation of the transfer act, as well as a merger (acquisition) agreement where the reorganization takes the form of a merger (acquisition) or split-up (spin-off) associated with merger (acquisition);

3) notification of the registration authority and creditors of all the organizations involved in the reorganization of such resolution on reor-ganization;

4) state registration of the newly created organizations-successors and/or the making of entries in the state register on the termination of the organizations-predecessors and entries of legal succession (in the event of split-up (spin-off) associated with merger (acquisition)).

2. The adoption of a resolution on reorganization by members or shareholders (general meeting of members or shareholders) of an or-ganization being reorganized (each of the organizations involved in the reorganization) or any other competent body of an organization being reorganized is made pursuant to the regulations and within the compe-tence established by a law for the appropriate organizational-legal form of an organization.

A resolution on reorganization may specify the period of time after the expiration of which such resolution may not be performed and the merger (acquisition) agreement, approved by such resolution, ceases to have effect.

Such period of time expires from the moment of:1) the state registration of one of the organizations newly created as

a result of a reorganization in the form of a split-up—for a resolution on reorganization in the form of a split-up;

2) the making of an entry in the state register on the termination of the activities of an organization (organizations) being acquired—for a resolution on reorganization in the form of a merger, or an entry of legal succession—for reorganization in the form of a split-up (spin-off) associ-ated with merger (acquisition);

3) the state registration of an organization newly created as a result of a reorganization—for a resolution on reorganization in the form of merger, spin-off or transformation.

A resolution on reorganization in the form of a spin-off may provide for a period of time after the expiration of which such resolution may not


be performed in relation to an organization (organizations) to be reorgan-ized that failed to be registered within such period of time. In this case, the reorganization through spin-off is deemed to have been completed upon the state registration of the last organization that was spun off within the period of time as envisaged by this Clause.

3. A resolution on reorganization or a merger (acquisition) agreement may provide for a special procedure for concluding individual transactions and/or types of transactions by an organization being reorganized or pro-hibit such transactions from the moment of adopting such resolution on reorganization until such reorganization has been completed.

Any transaction concluded in violation of such specified special procedure or prohibition may be declared invalid by a lawsuit brought by an organization (organizations) being reorganized or by a member or shareholder of an organization being reorganized who is such as of the moment of concluding such transaction.

A court dismisses demands to declare as invalid a transaction conclud-ed in violation of the requirements as envisaged by this Clause where:

1) as the result of performance of a challenged transaction, a resolution for the conclusion of which was adopted by another body or authorized person of the organization being organized, the organization being reor-ganized or member who has filed the lawsuit has not incurred damage or where the transaction has not been performed, such transaction will not, in substantiated view of a court, cause damage;

2) upon consideration of a lawsuit filed by an organization being reorganized, it has not been proven that the other party knew or should have known about the conclusion of the transaction in violation of the of requirements for a transaction as provided for in this Clause.

4. Reorganization is deemed to be completed and the appropriate organization deemed to be reorganized as of the moment of:

1) the state registration of an organization created as the result of a reorganization—where reorganization is in the form of a merger, split-up, spin-off, or transformation;

2) the making of an entry in the state register of the termination of the activities of a acquired organization—where reorganization is in the form of a acquisition, or of an entry in the state register of the legal succession—where reorganization is in the form of a split-up (spin-off) associated with a merger (acquisition).

5. As of the moment of completion of the reorganization, the mem-bers of organizations involved in a reorganization become members of the organization (organizations) created as the result of such reorganization


(continuing organization (organizations)) unless otherwise specified by the present Law or by other domestic legislation.

Article 155. Legal Succession after Reorganization. Transfer Act 1. In a merger, the rights and duties of each company involved are

deemed to be transferred to the newly created organization, by way of the procedure of universal legal succession, as of the moment of completion of the reorganization.

2. In a reorganization in the form of an acquisition, the rights and duties of the appropriate organization are deemed to be transferred to the organization performing the acquisition, by way of the procedure of universal legal succession, as of the moment of completion of the reor-ganization, which applies to each organization being acquired.

3. In a split-up, the rights and duties of the organization being split up are deemed to be transferred to other organizations as of the moment of completion of the reorganization, which applies to each organization (newly created or participating in the reorganization including other forms of reorganization apart from the split-up).

4. In a spin-off from an organization or from several organizations, the rights and duties of the organization being reorganized are deemed to be transferred as of the moment of completion of the reorganization, which applies to each organization (newly created or participating in the reorganization including other forms of reorganization apart from the spin-off).

5. In a transformation of a legal person from one organizational-legal form into a legal person of another organizational-legal form, the rights and duties of the reorganized organization are deemed to be transferred by way of the procedure of universal legal succession to the organization created as a result of the reorganization as of the moment of completion of the reorganization.

6. A transfer act is a document attesting to legal succession of rights and duties during a reorganization. It must contain provisions on legal succession for all obligations of the organization being reorganized with respect to all of its creditors and debtors, including obligations disputed by the parties. A transfer act is not obligatory in a reorganization in the form of a merger of legal persons as well as of an acquisition of one legal person by another or of a transformation of a legal person.

A transfer act, along with the aforementioned data, must specify the procedure to determine legal succession in relation to changes in property and obligations that may arise after the date of the transfer act with respect to business conducted by the organization being reorganized. However, said procedure may not permit a transfer of the competence to adopt


resolutions on amending the transfer act to a body of the organization being organized or to any other person.

7. A transfer act is approved at the same time as adopting a resolution on the reorganization of an organization made by its founder (members) or by a body authorized to decide on reorganization, and is submitted along with the documents required for state registration of the newly created organizations or for the amendment of the articles of association of the existing organizations.

Article 156. The Issue of Securities during Reorganization of Commercial Organizations

1. During a reorganization of commercial organizations, securities are issued pursuant to the law on securities markets and other normative-legal acts adopted pursuant thereto by a competent authority taking into account the specific requirements established in the present Article.

2. A resolution, to reorganize a commercial organization (organiza-tions) on the basis of which the company is created, means the resolution to offer securities of company created as the result of a reorganization.

The documents required for the state registration of the issue of corporate securities offered at the time of its creation, as the result of a reorganization, are submitted to the competent authority prior to the state registration of the company created as a result of a reorganization.

Where the competent authority decides to grant state registration for the issue of securities offered by a company at the time of its creation, as a result of a reorganization, the appropriate resolution enters into force as of the date of the state registration of the company created as a result of a reorganization.

3. The transfer of liabilities under bonds as the result of a reorganiza-tion to organizations as legal successors, which pursuant to a law are not entitled to issue bonds, is not permitted.

The liabilities under bonds of an organization being reorganized are transferred to the organizations as legal successors pursuant by way of the procedure of legal succession, and in the event of transformation—by way of the procedure of universal legal succession. However, liabilities under bonds within one issue are transferred only to one organization legal-successor.

From the moment of the state registration of an organization legal-successor, it stands in place of the reorganized organization being the initial bond issuer (replacement of the bond issuer) and assumes the bond liabilities on its behalf in the amount and pursuant to the terms and condi-tions that have existed prior to the state registration of the organization legal-successor. However, this does not involve the state registration of


the issue of bonds, the registration of a prospectus, the state registration of the final bond issue report, or submittal of notification on bond issue results.

Where the state registration of the issue of bonds of an organization being reorganized is combined with the registration of an appropriate prospectus, the successor organization acting as a new issuer of bonds, is required to disclose information in the procedure required by a law on securities markets for bond issuers with respect to the securities for which such prospectus is registered.

No later than ten days after the state registration of the organization legal-successor, it is required to submit a notice of replacing the bond issuer to the competent governmental authority. Requirements for the form of, and procedure for, submitting said notice are determined by normative-legal acts of the national executive authority on securities markets.

The organization legal-successor is required to amend the resolution to issue bonds of the reorganized organization where state registration of the issue of such bonds was accompanied by registration of the bond prospectus—and also the prospectus for such bonds in that part concerning replacement of the bond issuer. Such amendment is subject to registra-tion pursuant to the procedure established by a law on securities markets for registration of the issue of securities. Documents for registering an amendment to a resolution on the issue and the prospectus of reorganized organization are submitted to the authority performing state registration of securities issues no later than thirty days after the state registration of the organization-legal successor. Requirements for the contents and procedure of submitting the aforementioned documents are established by normative-legal acts of the national executive authority on securities markets.

Article 157. Grounds for Reorganization 1. Prior to the adoption of a resolution on reorganization, a com-

mercial company prepares a written document containing a detailed explanation as well as a legal and economic feasibility study of a draft resolution on reorganization, and where reorganization is in the form of a merger (acquisition)—a draft resolution of merger (acquisition), explana-tion of the exchange ratio (conversion) of shares of stock (equity stakes [dolia], participation unit [pai]), the amount of compensation, as well as a description of the consequences of the reorganization for members of each company involved in such reorganization (hereinafter “written sub-stantiation”). The written substantiation also must describe circumstances complicating the valuation of property of each organization involved in the reorganization.


A written substantiation, apart from the aforementioned, contains the following:

1) information about the members (shareholders) of the organization being reorganized holding not less than 5% of its charter capital and not less than 5% of its common shares of stock, including data about the eq-uity stakes in the charter capital belonging of each member (shareholder) of said organization being reorganized and the fractions of common shares of stock held by each such member (for the organization being reorganized—a company);

2) information about the equity stakes of the state or a municipal en-tity in the charter capital of the company being reorganized and whether there is a special right (“golden share”);

3) information on restrictions on participation in the charter capital of the organization being reorganized;

4) information about the amount of accounts payable and accounts re-ceivable of the organization being reorganized for the three last completed fiscal years, or for each completed fiscal year, where the organization being reorganized has existed for less than three years, including information broken down into creditors and debtors, whose debt constitutes not less than 10% of the total accounts payable and receivable, and the amount of accounts payable and receivable with respect to affiliates;

5) information about material transactions concluded by the organiza-tion being reorganized within the last three completed fiscal years, or for each completed fiscal year where the organization being reorganized has existed for less than three years where the liabilities under such material transactions constitute not less than 10% of the book value of the assets of the organization being reorganized pursuant to its accounting data for the appropriate completed reporting period;

6) information about the dividends announced and paid on shares of stock, about net profit distribution amongst the members of the organi-zation-economic company being reorganized, as well as about the income received under the bonds of the organization being reorganized within the last three completed fiscal years, or for each completed fiscal year where the organization being reorganized has existed for less than three years, including the procedure for paying dividends and other income;

7) information about the persons intending to provide security to the creditors of the organization being reorganized, as well as about the terms and conditions of securing the satisfaction of obligations of the organization being reorganized (if such persons exist).

2. The written feasibility study is not required where:


1) all the members of the organizations involved in the reorganization have waived their rights to a receive a written substantiation;

2) all the shares (equity stakes, participatory unit) of the organiza-tion involved in a merger belong to the organization with which former is being merged;

3) all the shares (equity stakes, participatory unit) of the organization being acquired belong to the organization performing the acquisition.

The declarations of natural persons-members of an organization be-ing reorganized on the waiver of receiving a written substantiation must be notarially authenticated.

Article 158. Appraiser1. The market value of shares (equity stakes, participatory unit) of

organizations involved in a reorganization, which is used to calculate the exchange ratio of shares of stock (equity stakes, participation unit) and, where set forth by domestic legislation, the amount of compensation to be paid as a result of the reorganization to members of the organization being reorganized are determined by an independent appraiser (appraisers).

2. The valuation required by Clause 1 of the present Article is not required where:

1) all the members of organizations involved in the reorganization have waived such valuation;

2) all the shares (equity stakes, participatory unit) of the organization involved in a merger belong to the organization with which the former is being merged;

3) all the shares (equity stakes, participatory unit) of the organization being acquired belong to the organization performing the acquisition;

4) the shares of the company being reorganized are on traders’ quota-tions lists on securities markets (taking in account the particulars defined by Clause 3 of the present Article).

The declarations of natural persons-members of an organization being reorganized on the waiver of conducting a valuation must be notarially authenticated.

3. Where the shares of stock of a company being reorganized are traded at an organization, permitted to do so, on securities markets, the market value of such shares used to determine the ratio of share (equity stakes, participation unit) conversion, distribution (exchange) may not be lower than the weighted average price of such shares determined pursuant to the trading results of a securities markets trader for the six months preceding the date of compiling the list of persons entitled to partici-pate in the general shareholder’s meeting, during which the appropriate resolution on reorganization is adopted. Where the shares of stock of an


organization being reorganized are traded at an organization, permitted to do so, on securities markets, the weighted average price of such shares is determined pursuant to the trading results of all the traders in securities markets, where said shares have been offered for six months or more.

4. Each organization involved in a reorganization appoints an inde-pendent appraiser.

The merger (acquisition) agreement may require the appointment of two or more appraisers for the purpose of verifying the market value of the shares of stock (equity stakes, participatory unit) of each organization involved in a merger (acquisition) or reorganization, where the merger (acquisition) is combined with other forms of a reorganization. In such case, the merger (acquisition) agreement must specify the procedure for calculating the price applied for the purposes set forth in Clause 1 of the present Article in the event that the valuation results differ.

5. Each appraiser involved in appraising the market value of shares of stock (equity stakes, participatory unit) of the organizations being reorganized pursuant to Paragraph 2 Clause 4 of the present Article is entitled to receive any information and documents required to determine the market value of the shares of stock (equity stakes, participatory unit) from any organization involved in a reorganization, as well as to conduct any inspections required for said purpose.

6. The appraiser and the organization being reorganized are jointly liable for damages incurred by the members of the organization being reorganized resulting from a violation of the regulations on the independ-ence of an appraiser contained in valuation legislation.

Article 159. Securing the Right to Information of the Members of an Organization Being Reorganized

1. The following documents must be provided for review to members of each organization being reorganized not less than thirty days prior to adoption of a resolution on reorganization:

1) the draft resolution on reorganization;2) the draft articles of association of the company (founding docu-

ments) of each organization created as a result of a reorganization, as well as the articles of association (articles of association) of the existing organizations which will continue their activities upon the completion of the reorganization, along with the proposed changes and amendments thereto (if such changes and amendments are necessary pursuant to the draft resolution on reorganization);

3) the transfer act with appendixes thereto;


4) the written feasibility study for all the organizations involved in the reorganization, where the organizations being reorganized are not exempt from the obligation to prepare such written feasibility study;

5) the report of the independent appraiser, pursuant to the present Law, on each organization involved in the reorganization, where the organizations being reorganized are not exempt from the obligation to perform such valuation pursuant to the present Law;

6) copies of the annual reports and annual accounting balance sheets for all the organizations involved in the reorganization for the three last completed fiscal years, or for each completed fiscal year, where the organi-zation being reorganized has existed for less than three years; as well as copies of quarterly accounting (financial) reports of the aforementioned organizations for the last completed quarter preceding the adoption of the resolution on reorganization;

7) a calculation of value of the net assets for each organization involved in the reorganization as of the last reporting date preceding the adoption of the resolution on reorganization.

2. The documents enumerated in Clause 1 of the present Article must be provided to each member of an organization involved in a reorganization within three days from the moment of petition for review in the offices of such organization’s executive body or pursuant to another procedure as envisaged by the articles of association. The organization is required to provide its member with copies of the aforementioned documents within three days from moment the petition for review. The fee charged by an organization for the provision of such copies may not exceed the cost of the preparation thereof.

The organizations involved in a reorganization are entitled to, and the companies, the securities of which are offered at an organized securities market are obliged to, disclose the information enumerated in Clause 1 of the present Article within the timeframes established by Clause 1 of the present Article pursuant to the procedure established by the authorized body. The aforementioned data must be made available to the sharehold-ers (members) of organizations being reorganized prior to the completion of the reorganization.

3. Organizations involved in a reorganization are required provide the members of all the organizations involved in a reorganization with access to information about material changes in the content and value of its property occurring after the adoption of a resolution on reorganization. The organization must provide the appropriate documents for review in the premises of the organization’s executive body within three days after an appropriate demand for review has been made. The organization is re-


quired to provide its member (founder, shareholder, member) with copies of the aforementioned documents within three days after an appropriate petition has been made. The fee for the provision of such copies may not exceed the cost of the preparation thereof.

The organizations involved in a reorganization are entitled to, and the companies, the securities of which are offered on organized securities markets are obliged to, disclose the information as envisaged by this Clause within three days after the changes in the content and value of the property of the organization being reorganized have taken place, pursuant to the procedure established by the authorized body. The aforementioned data must be made available to the shareholders (members) of organizations being reorganized prior to the completion of the reorganization.

Article 160. Notification of the Registration Authority. Protection of the Rights of Creditors of an Organization Being Reorganized

1. Within three days after the adoption of an appropriate resolution on its reorganization (or the adoption of a resolution on reorganization of the last organization participating in such reorganization), an organiza-tion is required to notify the registration authority in writing about the commencement of a reorganization procedure indicating the form of reorganization. On the basis of such notification, the registration author-ity makes an entry in the state register indicating that the organization is being reorganized.

2. After notification of commencement of a reorganization procedure has been provided to the registration authority, the organization being registered within five days informs all the creditors known to it in writing about the commencement of a reorganization or publishes notice of its reorganization three times, with a periodicity of once per month, in the printed periodicals in which information about the state registration of legal persons is published.

Such notice (notification) of reorganization contains:1) the full and abbreviated business name, information about the

location of each organization involved in the reorganization;2) the full and abbreviated business name, information about the

location of each organization being created (continuing its activities) as the result of the reorganization of organizations;

3) the form of reorganization, and in case of combining several forms of reorganization—a description of such reorganization procedure;

4) a description of the procedure and of the terms and conditions for creditors of each organization involved in a reorganization to assert their claims, including the location of a permanent executive body of the organization and additional addresses, at which such claims may be


asserted and means of communication (telephone numbers, fax numbers, e-mail addresses, corporate website, etc.);

5) information about the persons performing the functions of the sole executive body of each of the organizations involved in a reorganization, as well as of organizations created (continuing their activities) as a result of the reorganization.

Where the reorganization involves two organizations or more, the reorganization notice is published on behalf of all the organizations par-ticipating in such reorganization.

3. An organization involved in a reorganization is required to provide a creditor with the following documents for review within three days from the moment of making the appropriate petition:

1) a copy of the written feasibility study on reorganization with all the appendixes except for cases where the organization being reorganized is exempt from an obligation to prepare such feasibility study pursuant to the present Law;

2) a copy of the merger (acquisition) agreement and a copy of the resolution on reorganization;

3) a copy of the transfer act and, where such act contains appendixes, the possibility to review such appendixes;

4) copies of its annual reports and annual accounting balance sheets, as well as copies of the annual reports and annual accounting balance sheets for all the organizations involved in the reorganization for the three last completed fiscal years, or for each completed fiscal year, where the organization being reorganized has existed for less than three years; copies of quarterly accounting (financial) reports of the aforementioned organizations for the last completed quarter preceding adoption of a resolution on reorganization.

The documents enumerated in this Clause must be provided to any creditor for review in the premises of the executive body of the organiza-tion being reorganized. Upon demand of a creditor, such organization is required to provide her/him/it with copies of the aforementioned docu-ments within three days from the moment of such petition, and the fee charged by an organization for provision of such copies may not exceed the preparation costs thereof.

4. After adoption of a resolution on reorganization, but no later than thirty days as of the date upon which notice was sent or as of the date of the last publication of notice of the reorganization, creditors of an or-ganization being reorganized are entitled to file a motion with a court at the location of the debtor organization being reorganized with a demand for accelerated performance of the appropriate obligation by the debtor


and, should such acceleration be impossible, for termination of liability and indemnification of the losses incurred in relation thereto.

The court denies the aforementioned claims where:1) the organization being reorganized proves that, as a result of

such reorganization, the rights and lawful interests of creditors are not violated;

2) the terms and conditions of the reorganization envisage joint liabil-ity of the organizations being created (continuing to exist) as a result of the reorganization for obligations of the organization being reorganized;

3) evidence is submitted of sufficient security for satisfaction of the appropriate obligations pursuant to Clause 5 of the present Article.

Should the claim for accelerated performance (termination) of obli-gations and indemnification of losses after completion of reorganization be granted, a court imposes joint liability under the obligations of the organization being reorganized upon the organizations newly created (continuing their activities) as a result of a reorganization.

The rights and lawful interests of the creditors of an organization being reorganized are protected where this does not contravene the es-sence of the obligations between the creditor and the organization-debtor being reorganized.

5. The satisfaction of obligations to credit institutions by an organiza-tion being reorganized may be secured through pledge, bank guarantee, state or municipal guarantee, surety, or other methods that do not con-travene a law.

The satisfaction of the aforementioned obligations may not be se-cured by a withholding.

The performance of obligations of an organization being reorganized may be secured by such organization itself or its members as well as by third parties.

The rights and duties of the person or persons securing the perform-ance of obligations, of an organization being reorganized, flow from such security and arise as of the date upon which an arbitration court has rendered a ruling approving said security.

An agreement on securing obligations by an organization being re-organized is concluded in writing within fifteen days as of the date upon which an arbitration court has rendered a ruling on approving the security and is signed by the person or persons providing the security and by the creditors, who have filed a lawsuit with the court. The agreement on se-curing obligations of the organization being reorganized must submitted to a court not less than ten days after the signing thereof.


Upon the expiration of timeframes as envisaged by this Clause, a court renders a ruling dismissing the creditor’s (creditors’) lawsuit where the appropriate security has been provided to the creditors of the organiza-tion being reorganized.

6. A general meeting of the bond holders issued by an organization being reorganized may be convened after adoption of a resolution on re-organization but no later than thirty days as of the date upon which notice was sent or as of the date of the last publication on reorganization. Such general meeting of bond holders is entitled to replace the representative of the bond holders, authorized to represent the latter’s interests with respect to reorganization.

7. Where it is impossible to determine the legal successor of an organi-zation being reorganized to a specific obligation, the organizations-legal successor, as well as the organizations-legal predecessor (for reorganiza-tion in the form of a spin-off), are jointly liable to the creditors for such obligation. A demand to impose joint liability, as envisaged by this Clause, may be filed no later than three years after the reorganization has been completed.

Article 161. Requirements for the Amount of the Charter Capital of Organizations Being Reorganized

1. The amount of the charter capital of an organization created as a result of a reorganization may not constitute less than the minimum amount of charter capital established by a law for the organizations be-longing to the appropriate organizational-legal forms as of the date of the completion of the reorganization.

2. The amount of the charter capital of an organization created as a result of a reorganization may be less, equal to or greater than the charter capital of organizations participating in such reorganization, as well as less, equal to or greater than the authorized (subscribed) capital of the legal person that has been transformed into such organization.

3. Additional contributions and other payments for the purpose of forming the charter capital of an organization created as a result of a reorganization, including payments for securities issued during reorgani-zation, and those related to such issue, are not allowed except for those cases when an appropriate resolution on reorganization has been adopted unanimously by all the members of each organization participating in such reorganization. A law may establish other instances where additional contributions and payments for the purpose of forming the charter capital may be allowed during a reorganization.

4. The property of an organization created as a result of a reorganiza-tion may be formed only by the property of the organizations involved in


the reorganization except for those cases when an appropriate resolution on reorganization has been adopted unanimously by all the members of each organization participating in such reorganization.

5. The value of the net assets an organization-legal predecessor, con-tinuing its activities, as well as that of the organization-legal successor must not, as a result of a reorganization, turn out to be lower than the amount of the charter capital of the appropriate, and of each of these, organizations.

Article 162. Election of Bodies of a Company Created as a Result of a Reorganization

1. Proposals for the nomination of candidates for election to the bodies of each of the organizations being created as a result of a reorganization are made by members of each organization being reorganized pursuant to the procedure within the timeframes set forth in a law defining the legal status of legal persons of the same organizational-legal form in which the organization is created as a result of the reorganization.

2. Where the bodies of newly created organizations are elected by the members of several the organizations being reorganized, voting for the candidates to the bodies of each of the newly created organizations is pursuant to a single list unless otherwise provided by the present Law or by other domestic legislation.

3. Voting results on electing each body of an organization being cre-ated as a result of a reorganization are counted based on the votes of the members (shareholders) of all the organizations being reorganized for all the candidates to the appropriate management or supervisory body of the organization being created unless otherwise provided by the present Law or by other domestic laws.

Where a law or the articles of association (founding documents) of the organization being created as a result of a reorganization requires cumulative voting for electing a particular body, voting in the appropriate elections is conducted pursuant to cumulative voting regulations.

Article 163. Declaring Invalid a Resolution on Reorganization or Merger (Acquisition) Agreement and the Consequences of Such Invalidity

1. A resolution on reorganization or a merger (acquisition) agreement may be declared invalid according to a court judgment. A demand for declaring invalid a resolution on reorganization or a merger (acquisition) agreement may be filed with a court within three months from the mo-ment of adoption of the appropriate resolution on reorganization.

The satisfaction of demands that lead or may lead to the annulment of the legal consequences of a performed reorganization is permitted only


when a court, at the moment of consideration of the matter, has exhausted all the available legal remedies and cannot use any other legal remedies to secure the rights and legal interests of the claimant.

2. Demands for the declaration of invalidity of a merger (acquisition) agreement may be filed only together with an appeal of the resolution on reorganization, which approved such agreement, within the statute of limitations established by the present Law for the declaration of invalidity of the appropriate resolution on reorganization.

The court, in its proceedings in a matter on the declaration of invalid-ity of a resolution on reorganization, informs the registration authority about accepting the lawsuit on the declaration of invalidity of a resolu-tion on reorganization, about which such registration authority then makes an appropriate entry in the state register. Where the court decides to take injunctive measures by suspending the state registration of the organizations created as a result of a reorganization, the court informs the registration authority about the imposition of such measures, and the registration authority then makes an appropriate entry in the state register and/or suspends the state registration procedure.

3. A resolution on reorganization or merger (acquisition) agreement may not be declared invalid based on an allegation that the stock (equity stakes, participatory unit) conversion ratio, and/or on the amount of com-pensation to be paid to the members of the organization being reorganized due to such reorganization, is unjustified [neobosnovanno]. In this case, each member (shareholder) of an organization, involved in the reorganization, is entitled to demand indemnification of losses which s/he/it has suffered. However, the organizations created as a result of a split-up (spin-off) are jointly liable for such losses.

4. Demands for the declaration of invalidity of rulings on the state registration of organizations created as a result of a reorganization, as well as on the state registration of changes and amendments to articles of as-sociation of the organization, may be filed with a court by the interested parties within three months as of the date when the appropriate entry has been made in the state register by the registration authority. The period for filing claims related to changes and amendments to articles of association resulting in inclusion of unlawful provisions, or incorrect data, commence as of the day the appropriate entry has been made in the state register by the registration authority where said entry was initially made to register such changes and amendments containing the appropriate provisions and data. The aforementioned demands are filed with a court at the location of the appropriate organization.


Taking into account all the circumstances of the matter, in hearing a matter, a court is entitled to leave in force the challenged rulings on state registration where the violations of the law and other normative-legal acts committed, in adopting the ruling on state registration, are not material and either may be cured or have been cured.

The declaration of invalidity of a ruling on the state registration of organizations created as a result of a reorganization, as well as on the state registration of changes and amendments to the articles of association of the organization, do not entail liquidation of said organization unless otherwise established by a law.

The declaration of invalidity of a resolution on reorganization, a merger (acquisition) agreement, or articles of association of an organiza-tion created as a result of a reorganization (in whole or in part), as well as changes and amendments to such documents, do not entail liquidation of said organization.

The declaration of invalidity of a ruling on the state registration of organizations, created as a result of a reorganization, the state registra-tion of changes and amendments to the articles of association of the organization, a merger (acquisition) agreement, or an organization’s arti-cles of association (in whole or in part), do not entail the invalidity of the transactions concluded by such organizations unless the aforementioned transactions contravene the norms of legislation governing the relevant legal relations.

The declaration of invalidity of a resolution on reorganization, except for resolutions on forming a permanent executive body of an organiza-tion, created as the result of a reorganization (where such permanent executive body does not exist—any other body or person entitled to act on behalf of the legal person without a power of attorney), as well as of other bodies lawfully entitled to approve transactions concluded by the organization, do not entail the invalidity of the transactions unless the aforementioned transactions contravene the norms of legislation govern-ing the relevant legal relations. A declaration of invalidity of transactions concluded by organizations is rendered pursuant to the civil legislation for the appropriate transactions.

The regulations set forth in this Clause respectively apply to de-mands, the satisfaction of which leads or could lead to the invalidity of rulings of the state registration of organizations created as a result of a reorganization, the state registration of changes and amendments to the organization’s articles of association, resolutions on reorganization, merger (acquisition) agreements, an organization’s articles of association and changes and amendments thereto.


I. Merger and Acquisition

Article 164. Merger (Acquisition) Agreement, Resolution on Reorganization1. Reorganization in the form of a merger or acquisition, as well as

reorganization in the form of a split-up or spin-off, performed simultane-ously with such merger (acquisition), is performed pursuant to a merger or acquisition agreement respectively, with such agreements approved by resolutions on reorganization of all the organizations involved in the reorganization.

2. A merger (acquisition) agreement must be concluded in single writ-ten document signed by the parties. Failure to comply with the established form for the merger (acquisition) agreement results in its invalidity.

3. The terms and conditions and the entering into of a merger (acquisi-tion) agreement are to be agreed by authorized persons acting on behalf of all the organizations involved in a reorganization prior to the adoption of a resolution on reorganization. Unless otherwise required by a law, in all such cases, the persons authorized to approve the terms and conditions of, and to conclude, a merger (acquisition) agreement are deemed to be the appropriate bodies of organizations involved in a reorganization, which are lawfully entitled to convene a general shareholders’ meeting (or another highest managerial body) adopting the resolution on reorganization. The conclusion of a merger (acquisition) agreement gives rise to obligations associated with preparation for the reorganization as of the moment of the signing thereof. The provisions of the merger (acquisition) agreement defining the reorganization procedure enter into force as of the moment of adoption of the resolution on reorganization providing for approval of the merger (acquisition) agreement.

4. A merger (acquisition) agreement terminates where its confirmation [utverzhdenie] has not been obtained from all the organizations involved in the reorganization within one year after the signing thereof.

5. The merger agreement must specify:1) the name and location of each organization involved in the merger

or reorganization, where the merger (acquisition) is combined with another form of reorganization, as well as the name and location of the organiza-tion being created as a result of a reorganization;

2) the procedure and the terms and conditions of the merger or reorganization where the merger is combined with another form of re-organization;

3) the procedure for converting (exchanging) shares of stock (equity stakes, participatory unit) of each of the organizations involved in the reorganization into shares of stock (equity stakes, participatory unit) of


the organization being created (continuing its activities) as well as the conversion (exchange) ratio (factor);

4) the number of members on the board of directors (supervisory board), of the organization being created, elected by each organization involved in the merger where the articles of association (founding docu-ments) of the organization being created require that there be a board of directors (supervisory board) pursuant to a law;

5) the list of the auditing committee members or information on the accountant of the organization being created where a law requires the organization being created to have such bodies;

6) the list of members of the executive body of the organization be-ing created where the articles of association (founding documents) of the organization being created require that there be an executive body and where the formation thereof lies within the competence of the organiza-tion’s highest managerial body;

7) information about the organization solely exercising the functions of the executive body of the organization being created;

8) the name and location of the corporate registrar where the register of a company being created needs to be maintained by a registrar.

Specific provisions, as envisaged by this Clause, may be omitted from a merger agreement in the event of registration including a combination of merger and other forms of reorganization. In this case, the merger agreement must contain comments explaining the omission of such pro-visions there from.

The merger agreement may contain information about the account-ant of the organization created as a result of a reorganization, specify the procedure for delegating powers exercised by the organization solely exercising the functions of the executive body of the organization be-ing created to a management company or a manager, as well as provide other data of a factual nature and reorganization provisions which do not contravene a law.

6. An acquisition agreement must contain:1) the name and location of each organization involved in the acquisi-

tion or reorganization, where acquisition is combined with another form of reorganization, as well as the name and location of the organization performing the acquisition;

2) the procedure and the terms and conditions of the acquisition or reorganization where acquisition is combined with another form of reorganization;

3) the procedure for converting (exchanging) shares of stock (equity stakes, participatory unit) of each of the organizations involved in a reor-


ganization into shares of stock (equity stakes, participatory unit) of the or-ganization performing the acquisition, as well as the conversion (exchange) ratio (factor). Where all the shares of stock (equity stakes, participatory unit) of the organization being acquired belong to the organization per-forming the acquisition, the provisions on the exchange of shares of stock (equity stakes, participatory unit) are not to be included.

Specific provisions, as envisaged by this Clause, may be omitted from an acquisition agreement in the event of registration including a combi-nation of acquisition and other forms of reorganization. In this case, the acquisition agreement must contain comments explaining the omission of such provisions there from.

The acquisition agreement may contain a list of changes and amend-ments to the articles of association (articles of association) of the or-ganization performing the acquisition, other data of a factual nature and provisions on reorganization that do not contravene a law.

In the event of the confirmation of an acquisition agreement con-taining a list of changes and amendments to the articles of association (founding documents) of the organization performing the acquisition, such changes and amendments are made to the articles of association (founding documents) of said organization pursuant to the resolution on approval of the acquisition agreement adopted by the organization performing the acquisition.

7. The organizations participating in a merger (turnover) or reor-ganization, where the merger (turnover) is combined with other forms of reorganization, immediately must provide each other with information about the material changes in the content and value of their property resulting from the conclusion of the merger (turnover) agreement.

8. The resolution on reorganization in the form of a merger (acqui-sition) or reorganization, where such merger (acquisition) is combined with other forms of reorganization, confirms the merger (acquisition) agreement, the transfer act (when preparation of such transfer act is required by a law or a resolution of the authorized bodies involved in the reorganization of legal persons), the articles of association of an organi-zation being created as a result of a merger (changes and amendments to the articles of association of the organization performing the acquisi-tion or any other organization involved in a reorganization, where such merger (acquisition) is combined with other forms of reorganization, if such changes and amendments are required), is used to elect the bodies of the organization being created as a result of said merger and, where the acquisition agreement provides for the early termination of powers exercised by the bodies of the organization performing the acquisition


(organization involved in a reorganization, where such merger (acquisi-tion) is combined with other forms of reorganization), and forms the appropriate bodies of such organization.

Article 165. Specifics of a Merger (Acquisition) Involving Limited (Additional) Liability Companies

1. A general shareholders’ meeting of each limited (additional) liability company involved in a reorganization in the form of a merger (acquisition) or reorganization, where such merger (acquisition) is combined with other forms of reorganization, adopts a resolution on reorganization of each such company, including a resolution to confirm the merger (acquisition) agree-ment, transfer act and the articles of association (founding documents) of the organization, created by way of reorganization in the form of a merger, and also adopts a resolution upon the election of the board of directors (supervisory board) of the organization being created with the number of members of the aforementioned bodies to be established by the appropri-ate merger (acquisition) agreement for each of the organizations involved in such merger (acquisition), where the articles of association (articles of association) of the organization being created require the formation of a board of directors (supervisory board) pursuant to a law.

2. The ratio of the number of members elected to the board of directors (supervisory board) of the organization being created by each organization involved in a merger to the total number of members elected to the board of directors (supervisory board) must be proportionate to the ratio of the amount of equity stakes (shares of stock, participatory unit) of the organization being created that result from conversion of the equity stakes (shares of stock, participatory unit) held by the members of the appropriate organization involved in a reorganization to the total amount of equity stakes (shares of stock, participatory unit) of the organization being created. The number of members elected to the board of directors (supervisory board) of the organization being created by each organization involved in a merger, calculated pursuant to this Clause, is rounded to the nearest integer pursuant to the rounding procedure in force. Where the members of the board of directors (supervisory board) of the organiza-tion being created are elected through cumulative voting, the number of votes exercisable by each member may be distributed amongst several candidates in integers and fractions.

The regulations, as envisaged by this Clause, apply respectively to mergers and reorganization where the merger (acquisition) is combined with other forms of reorganization.

3. Where a limited (additional) liability company is involved in a merger or reorganization, where the merger is combined with other forms of re-


organization, the equity stakes within the charter capital of such limited (additional) liability company that is held by another economic company [khoziaistvennoe obshchestvo] involved in the merger, as well as the equity stakes of such limited (additional) liability company, is extinguished.

4. Where a limited (additional) liability company is involved in a reorganization in the form of an acquisition or reorganization, where the acquisition is combined with other forms of reorganization, the following are extinguished:

1) the equity stakes held by the economic company being acquired;2) the equity stakes of the economic company being acquired held

by the economic company performing the acquisition; 3) the equity stakes of the economic company performing the acquisi-

tion held by the economic company being acquired where this is set forth in the acquisition agreement.

Where the equity stake (part of the equity stakes) is not subject to redemption pursuant to Subparagraph 3 of this Clause, it is transferred to the economic company performing the acquisition and sold by such economic company pursuant to the procedure, and within the timeframes, established by legislation on limited (additional) liability companies.

Article 166. Specifics of Merger (Acquisition) Involving Joint-Stock Companies1. The board of directors (supervisory board) of each of the companies

involved in a reorganization in the form of a merger or reorganization, where such merger is combined with other types of reorganization, puts to the vote of the general shareholders’ meeting of each such company the matter of reorganization and, also, the election of members to the board of directors (supervisory board) and/or management committee of the organization being created as a result of a merger.

A general shareholders’ meeting of each company involved in a reor-ganization in the form of a merger or reorganization, where such merger is combined with other forms of reorganization, adopts a resolution on reorganization of each such company, including that on confirming the merger agreement, the transfer act and the articles of association (articles of association) of the organization being created as a result of a merger and, also, adopts a resolution upon the election of the board of directors (supervisory board) and/or the management committee of the organiza-tion being created with the number of members of the aforementioned bodies to be established by the appropriate draft merger agreement for each of the organizations involved in the reorganization where, pursuant to a law, the articles of association (founding documents) of the organiza-tion being created do not envisage the functions of the board of directors


(supervisory board) being exercised by the highest managerial body of such organization.

2. The board of directors (supervisory board) of each of the companies involved in a reorganization in the form of an acquisition or reorganization, where such acquisition is combined with other forms of reorganization, puts the matter of reorganization to a vote of the general shareholders’ meeting of each such company. The board of directors (supervisory board) of the company, performing the acquisition, also puts other matters to a vote of the general shareholders’ meeting of such company where this is required by the acquisition agreement.

The general shareholders’ meeting of each company involved in a reorganization in the form of an acquisition or reorganization, where such acquisition is combined with other forms of reorganization, adopts a resolution on the company’s reorganization, including confirmation of the acquisition agreement and of the transfer act. Such general shareholders’ meeting additionally adopts a resolution upon other matters (including upon amending the articles of association of the company) where this is required by the acquisition agreement.

3. The ratio of the number of members elected to the board of direc-tors (supervisory board) and/or management committee of an organiza-tion being created (continuing its activities) by each company involved in a reorganization, respectively, is calculated pursuant to the regulations contained in Clause 2, Article 165 of the present Law.

4. Where a company is involved in a merger, or reorganization com-bining merger with other types of reorganization, the shares of stock of the company held by the other economic company participating in the merger, as well as the shares of stock of the company involved in the merger, are extinguished.

5. Where a company is involved in a reorganization in the form of an acquisition or reorganization, where such acquisition is combined with other forms of reorganization, the following are extinguished:

1) the own shares of stock held by the company being acquired;2) the shares of stock of the company being acquired, belonging to

the organization performing the acquisition;3) the shares of the company performing the acquisition belonging

to the company being acquired where this is set forth in the acquisition agreement.

Where the own shares of stock held by the company, performing the acquisition, are not extinguished, pursuant to the subparagraph 3 of this Clause, these shares of stock do not grant the right to vote, are not be considered in a vote count, and do not entitle their holders to dividends.


A company must sell these shares at a price set no lower than their mar-ket value and not later than one year after the acquisition thereof by the company; otherwise, the company is required to decide upon reducing the amount of its charter capital by way of cancelling such shares.

6. Should one company take over another company (organization), the shares of stock (equity stakes, participatory unit) may be converted (exchanged) into either the additional shares of stock offered by such company or into the shares of stock held by such company.

7. From the moment of the state registration of a company created as a merger (from the moment that the company which has been acquired is stricken from the state register), the shares of stock of the company created as a result of the merger (additional shares of the company per-forming the acquisition), into which the shares of stock (equity stakes, participatory unit) of the company involved in the reorganization are be-ing converted (exchanged), are deemed to be issued pursuant to the ratio (factor) provided for in the resolution on reorganization or the merger (acquisition) agreement.

II. Split-up and Spin-off

Article 167. Resolution on Reorganization in the Form of Split-up (Spin-off)1. Reorganization in the form of split-up or spin-off takes place on the

basis of a resolution on reorganization in the form split-up and resolution on reorganization in the form spin-off respectively.

2. A resolution on reorganization in the form of split-up must specify:

1) an indication of the name and location of each organization being created by way of a reorganization in the form of a split-up and the name and location of the organization being reorganized in the form split-up;

2) the procedure of such split-up and the terms and conditions thereof;

3) the procedure for converting (exchanging) shares of stock (equity stakes, participatory units) of the organization being reorganized into shares of stock (equity stakes, participatory units) of the organization being created as a result of the reorganization of an organization and the conversion (exchange) ratio (factor) applicable to the shares of stock (equity stakes, participatory units) of such organizations;

4) information on confirmation of the transfer act with such transfer act being attached thereto;

5) information on confirmation of the articles of association (found-ing documents) of each organization being created with the articles of


association (founding documents) of each such organization being at-tached thereto;

6) an indication of the number of members of the board of direc-tors (supervisory board) of each organization, being created as a result of the reorganization thereof, where the articles of association (founding documents) of such organization being created, pursuant to domestic legislation, require that such organization have a board of directors (su-pervisory board);

7) list members of the auditing committee and specify the account-ant of each organization being created as a result of reorganizing the organization where domestic legislation requires that the organization being created have such bodies;

8) list members of the executive body of each organization being cre-ated as a result of a reorganization of the organization, where the articles of association of the company (founding documents) of the organization being created require that it have a executive body, and the formation thereof falls within the competence of such organization’s highest mana-gerial body;

9) specify the person acting as the organization solely exercising the functions of the executive body of the organization being created as a result of such reorganization.

Specific provisions, as envisaged by this Clause, may be omitted from a resolution on reorganization in the form of a split-up where the reor-ganization taking place is combined with other forms of reorganization. In this case, the resolution on reorganization must contain comments explaining the omission of such provisions there from.

A resolution on reorganization in the form of split-up may specify the accountant of the organization being created as a result of a reorganiza-tion, the registrar of the company being created, indicate the assignment of powers exercised by the organization solely exercising the functions of the executive body of the organization being created, to a management organization or to a manager, and contain other factual information and re-organization provisions which do not contravene domestic legislation.

3. Any resolution on reorganization in the form of spin-off must contain:

1) an indication of the name and location of each organization being created as a result of a reorganization in the form spin-off and the name and location of the organization continuing its operations;

2) the procedure of such spin-off and the terms and conditions thereof;


3) the procedure for converting, or exchanging or acquiring shares of stock (equity stakes, participatory units) of the organization being reorganized into shares of stock (equity stakes, participatory units) of the organization being created, as well as the conversion (exchange) ratio (factor) applicable to the shares of stock (equity stakes, participatory units) of such organizations;

4) information on confirmation of the transfer act with such transfer act being attached thereto;

5) information on confirmation of the articles of association (found-ing documents) of each organization being created with the articles of association (founding documents) of each such organization being at-tached thereto;

6) an indication of changes and amendments to the articles of as-sociation (founding documents) of each existing organization with such changes and amendments to the articles of association (founding docu-ments) attached thereto or with the new version of the articles of asso-ciation (founding documents) attached thereto where such changes and amendments have been made;

7) an indication of the number of members of the board of direc-tors (supervisory board) of each organization being created as a result of the reorganization thereof where, pursuant to domestic legislation, the articles of association (founding documents) of such organization being created require that such organization have a board of directors (super-visory board);

8) a list of the members of the auditing committee and specification of the accountant of each organization being created as a result of reor-ganizing the organization where, pursuant to domestic legislation, the creation of such bodies is required;

9) a list of the members of the executive body of each organization being created as a result of a reorganization of the organization, where the articles of association (founding documents) of the organization being created require that there be an executive body, and the forma-tion thereof falls within the competence of such organization’s highest managerial body;

10) an indication of the person acting as the organization solely exercising the functions of the executive body of the organization being created as a result of the reorganization of the organization.

A resolution on reorganization in the form of spin-off may specify the accountant of the organization being created as a result of a reorganiza-tion, the registrar of the company being created (existing organization), indicate the assignment of powers exercised by the organization solely


exercising the functions of the executive body of the organization being created (existing organization), to a management organization or to a manager, and contain other factual information and reorganization provi-sions which do not contravene the present Law.

4. Specific provisions, as envisaged by Clause 3 of the present Article, may be omitted from a resolution on reorganization in the form of spin-off where the reorganization taking place is combined with other forms of reorganization. In this case, the resolution on reorganization must contain comments explaining the omission of such provisions there from.

In the event of reorganization in the form of spin-off, the transfer act may provide that the organization being created as a result of such spin-off is the legal successor not only to specific rights and duties of the organization legal-predecessor, referred to in the transfer act but, also, to all other rights and duties of the organization legal-predecessor which such legal predecessor does not reserve to itself, with such legal predecessor retaining only the rights and duties as set forth in the transfer act.

In the event spin-off is combined with merger (acquisition), the transfer act may contemplate that the newly created or existing organiza-tion is a legal successor not only to a portion of the rights and duties of the legal predecessor set forth in such transfer act but, also, to all other rights and duties of such legal predecessor that such predecessor does to reserve to itself.

Article 168. Specifics of Split-ups (Spin-offs) Involving Limited (Additional) Liability Companies

1. A general shareholders’ meeting of each limited (additional) liability company involved in a reorganization in the form of a split-up (spin-off) adopts a resolution on reorganization of the company and, also, on the election of the board of directors (supervisory board) of each organiza-tion being created as a result of such reorganization where, pursuant to a law, the articles of association (founding documents) of an organization being created provide for formation of a board of directors (supervisory board).

2. Where the articles of association (founding documents) of an organi-zation being created as a result of a reorganization provide for formation of a board of directors (supervisory board) and election of the board of directors (supervisory board) of the limited (additional) liability company being reorganized by the members of the reorganized organization, the equity stakes held by them, pursuant to the resolution on reorganization, are exchanged for equity stakes (shares of stock, participatory units) of the appropriate organization being created.


Where, pursuant to the resolution on reorganization of a limited (additional) liability company in the form of spin-off, the sole member of the organization being created is the company being reorganized, all members of such company being reorganized elect the members of the board of directors (supervisory board) of such company being created.

3. The general shareholders’ meeting of a limited (additional) liability company being reorganized in the form of spin-off that has adopted a resolution on such reorganization, in determining the procedure for the exchange of equity stakes for shares of stock (equity stakes, participatory units) of each organization being created as a result of such reorganization and the exchange ratio (factor), must establish: the manner in which such equity stakes (shares of stock, participatory units) of the organization being created are offered (the procedure for exchange of equity stakes in the company being reorganized for equity stakes (shares of stock, participatory units) in the organization being created (existing organiza-tion) or the distribution of equity stakes (shares of stock, participatory units) in the organization being created (existing organization) amongst members of the company being reorganized or acquisition of the entire equity stakes (all shares of stock) constituting the charter capital of the economic company being created (existing company) by the company being reorganized), the procedure of such offering, and in the event of exchange and distribution of equity stakes—the coefficient (factor) of such exchange and the terms and conditions upon which the equity stakes in such companies is distributed.

Article 169. Specifics of Split-ups (Spin-offs) Involving Joint-Stock Companies1. The board of directors (supervisory board) of a company being re-

organized in the form of a split-up (spin-off) puts to a vote of the general shareholders’ meeting of such company the matter of the reorganization of the company and, also, the election of members of the board of direc-tors (supervisory board) and management committee of each organization being created as a result of the reorganization where, pursuant to a law, the articles of association (founding documents) of the organization being created do not provide for the formation of a highest management body of such organization to perform the functions of the board of directors (supervisory board).

2. The election of the board of directors (supervisory board) of an organization being created as a result of a reorganization (or of an exist-ing organization in the event of the re-election of the board of directors (supervisory board) and/or management committee of such organization) is by the shareholders of the company being reorganized amongst which, pursuant to the resolution on reorganization, the common shares of stock


(equity stakes, participatory units) in such created (existing) organiza-tion must be distributed, and shareholders who are holders of preferred shares of stock in the company being reorganized (which, at the time the reorganization of the company is decided upon, are voting shares pursuant to the present Law), amongst which pursuant to the resolution on reorganization of the company, the shares of stock (equity stakes, par-ticipatory units) in the organization being created (existing organization) must be distributed.

If, pursuant to a resolution on reorganization of a company in the form of spin-off, the sole member of the organization being created is a joint-stock company being reorganized, the shareholders of such joint-stock company being reorganized elect the members of the board of directors (supervisory board) of such organization.

3. The general shareholders’ meeting of a company being reorgan-ized in the form of split-up that adopts a resolution for reorganization, in determining the procedure for conversion (exchange) of shares of stock into shares of stock (equity stakes, participatory units) of each organiza-tion being created as a result of such reorganization and the ratio (factor) of conversion and distribution (exchange), must establish: the manner in which such shares of stock of each joint-stock company being created are distributed (the conversion of shares of stock into shares of stock or distribution of shares of stock in the joint-stock company being created (existing joint-stock company) amongst the shareholders of the joint-stock company being reorganized) or the exchange of shares for equity stakes or participatory units in each organization being created as a result of such reorganization (existing organization)) and the ratio (factor) of such conversion and distribution (exchange) applicable to shares of stock (equity stakes, participatory units) of such organizations. However, the conversion of shares of stock into shares of stock of joint-stock companies being created must be made upon terms and conditions that are identical for all holders of shares of stock in the company being reorganized that belong to the same category (class).

4. The general shareholders’ meeting of a company being reorgan-ized in the form of spin-off that adopts a resolution for reorganization, in determining the procedure for conversion or distribution or acquisition (exchange) of shares of stock (equity stakes, participatory units) of the joint-stock company being reorganized and the ratio (factor) of conver-sion (exchange) of shares of stock (equity stakes, participatory units), must establish: the manner in which shares of stock are distributed (the conversion of shares of stock into shares of stock or distribution of shares of stock in the company being created (existing company)) amongst


shareholders of the company being reorganized or the acquisition of all shares of stock in the joint-stock company being created by the joint-stock company being reorganized) or the exchange of shares of stock for equity stakes or participatory units (acquisition of the entire equity stakes) in each organization being created as a result of such reorganization (existing organization) and the ratio (factor) of such conversion and distribution (exchange) applicable to shares of stock (equity stakes, participatory units) of such organizations. However, the conversion of shares of stock into shares of stock of the companies being created, and the distribution of shares of stock of the company being created amongst the shareholders of the joint-stock company being reorganized must be made upon terms and conditions that are identical for all holders of shares of stock in the company being reorganized that belong to the same category (class).

5. Each shareholder of a company being reorganized who voted against the resolution on reorganization of the company or failed to take part in the voting on reorganization of the company must receive shares of stock of each company created by way of reorganization in the form of a split-up which vest in her/him/it the same rights as her/his/its shares of stock of the company being reorganized, proportionate to the number thereof. The provisions of this clause apply to reorganizations that com-bine split-up with other forms of reorganizations and to reorganizations that involve and/or result in the creation of other organizations with other organizational-legal forms. In such case, a shareholder in a company being reorganized must receive an equity stake (participatory units) proportion-ate to the number of shares of stock in the company being reorganized held by him/her/it.

6. If a resolution on reorganization of a company in the form of spin-off provides for the conversion of the shares of stock of such company that is subject to reorganization into shares of stock of company being created or the distribution of the shares of stock of such company being created amongst members of the company being reorganized (exchange of shares of stock of the joint-stock company being reorganized for an equity stake or participatory units in another organization), each shareholder of the company being reorganized who voted against the resolution on reorganization of the company or who failed to take part in the voting on reorganization of the company, must receive shares of stock of each company being created which vest in him/her/it the same rights as her/his/its shares of stock of the company being reorganized, proportionate to the number thereof. The provisions of this clause apply to reorganizations that combine spin-offs with other forms of reorganizations, and reorgani-zations that involve and/or result in the creation of other organizations


with other organizational-legal forms. In such case, a shareholder in the company being reorganized must receive an equity stake (participatory units) proportionate to the number of shares of stock in the joint-stock company being reorganized held by him/her/it.

7. As of the moment of completion of reorganization in the form of a split-up (spin-off), the shares of stock of the joint-stock company created as a result of such split-up (spin-off), into which shares of stock (equity stakes, participatory units) of the reorganized legal person are converted/exchanged, are deemed to be distributed applying the ratio (factor) of conversion (exchange) set forth in the resolution on reorganization.

III. Transformation

Article 170. Resolution on Reorganization in the Form of Transformation1. Reorganization in the form of transformation takes place in pursu-

ance of a resolution on reorganization in the form of transformation.2. Such resolution on reorganization in the form of transformation

must specify:1) an indication of the name and location of the legal person being

created as a result of a reorganization in the form of transformation; 2) the procedure of such transformation and the terms and condi-

tions thereof; 3) the procedure for the exchange of shares of stock (equity stakes in

the charter capital and participatory units held by members of a production cooperative) for an equity stake in the charter capital in the organization being reorganized (shares of stock, participatory units held by members of a production cooperative) and the ratio (factor) of such exchange;

4) confirmation of the transfer act with such transfer act being at-tached thereto where the organization being reorganized has decided to compile such a transfer act;

5) information about confirmation of the articles of association (found-ing documents) of each organization being created with the articles of association of the company (founding documents) of such organization being attached thereto;

6) an indication of the number of members of the board of directors (supervisory board) and/or management committee of the organization being created where, pursuant to a law, the articles of association of the company (founding documents) of such organization being created require that such organization have a board of directors (supervisory board);

7) a list of the members of the auditing committee or specification of the accountant of the organization being created as a result of a reor-


ganization, where a law requires that the organization being created have such bodies;

8) a list of the members of the executive body of an organization being created as a result of a reorganization, where the articles of association of the company (founding documents) of the organization being created require that it have a executive body and where the formation thereof falls within the competence of such organization’s highest management body;

9) a specification of the person who acts as the organization solely exercising the functions of the executive body being created as a result of such corporate reorganization.

Specific provisions, as envisaged by Clause, may be omitted from resolutions on reorganization in the form of transformation where the reorganization taking place is combined with other forms of reorganiza-tion. In this case, the resolution on reorganization must contain comments explaining the omission of such provisions there from.

A resolution on reorganization in the form of transformation may specify the accountant of the organization being created as a result of the reorganization, the registrar of the company being created, indicate the transfer of powers exercised by the organization solely exercising the functions of the executive body of the organization being created to a management organization or manager, and contain other factual infor-mation and reorganization provisions which do not contravene domestic legislation.

Article 171. Specifics Pertaining to Transformation of Joint-Stock Companies1. The board of directors (supervisory board) of a company being

reorganized in the form of transformation puts to a vote of the general shareholders’ meeting of such company the matter of the reorganization of such company in the form of transformation and, also, the election of members of the board of directors (supervisory board) and management committee of the organization being created as a result of a reorganization where, pursuant to a law, the articles of association (founding documents) of the organization being created do not provide for formation of a high-est management body of such organization to perform the functions of the board of directors (supervisory board).

2. Members of the board of directors (supervisory board) of a company being created as a result of a reorganization are elected by the sharehold-ers of such company being reorganized amongst which, pursuant to the resolution on reorganization, equity stakes or participatory units in such organization being created, must be distributed, and the shareholders who are holders of preferred shares of stock in the company being reorganized


(which at the time the reorganization of the company is decided upon are voting shares of stock pursuant to the present Law), amongst which pursuant to the resolution on reorganization of the company, the equity stakes or participatory units in the organization being created must be distributed.

CHAPTER XII. A GROUP OF COMPANIES

Article 172. Controlling Organization and Dependent Company1. A company is deemed to be dependent when any other person

engaging in entrepreneurial activity (a controlling organization) has the possibility to directly or indirectly exercise a dominant influence over such company in the conduct of its affairs and the exercise of its activities.

2. A controlling person is deemed to be a controlling organization unless it proves that it does not exercise a dominant influence over a dependent company.

Article 173. Notice of Share OwnershipA shareholder who directly or as a controlling organization holds more

than 10% [alternative options: 20%, 25%, 50% or 75%]* (ten [alternative options: twenty, twenty five, fifty or seventy five per cent]) of the voting shares of stock is required immediately to notify the company. Until such notification has been made, such shareholder may not exercise any rights attributable to such shares of stock in respect to the company. Any use of a voting right in violation of this provision may be appealed to a court by interested persons.

Article 174. Agreements amongst Companies1. A company may, by virtue of an agreement, be controlled by another

organization and delegate management functions to such organization (“a control agreement” [dogovor o podchinenii]) or lease its property to another organization (hereinafter “agreement amongst organizations”). An agree-ment amongst organizations is valid only where the general shareholders’ meeting of a company has approved it by a majority constituting 75% of the votes cast by the shareholders attending such meeting.

2. A draft agreement amongst organizations, accompanied by an opinion letter of an independent accountant, must be made available for review of the shareholders or, upon their demand, must sent to shareholders

* [Translator’s note: The alternative text in Art.173 appears in the original Russian-language version of the Model Law.]


four weeks prior to such general shareholders’ meeting. The accountant’s opinion letter, referred to above, must contain a conclusion on whether or not the indemnification or compensation proposed to a shareholder are adequate. An agreement amongst organizations must contain the following provisions:

— the amount of compensation or indemnification proposed to share-holders who have voted against the appropriate agreement amongst organizations to cover losses incurred by such shareholders as a result of such agreement amongst organizations;

— on the right of shareholders who have voted against such agreement amongst organizations to offer a controlling person (shareholder) to acquire her/his/its shares of stock, and on the procedure for such acquisition and determination of the price for such shares of stock.

3. An agreement amongst organizations is registered with the au-thority empowered to perform state registration of legal persons [rights to immoveable property].* An agreement is deemed to be valid from the moment of its registration.

4. A controlling organization may give instructions binding to a de-pendent company under a control agreement.

5. A controlling organization is required to indemnify the losses in-curred of a dependent company caused by such controlling organization during the term of a control agreement. A dependent company may not waive such indemnification of losses unless shareholders of the dependent company who previously voted against the appropriate control agreement have approved such waiver of indemnification of losses as the result of a separate voting held at a general shareholders’ meeting.

Article 175. Actual Control1. Where there is no control agreement, a controlling organization

may not use its managerial influence to influence a dependent company to conclude an unfavourable transaction or undertake or fail to undertake acts to the damage of its interests unless there will be compensation for the resulting damages.

This provision does not apply where a controlling organization and a dependent company interact on the basis of general business plan and where there is a guarantee that the benefits and the losses arising from such interaction will be apportioned in a calculated and balanced manner.* [Translator’s note: The square brackets (and the text encased therein) in Clause 3 of Art.174



2. Upon the motion of a person having a legal interest, a court must determine whether or not such interaction between a controlling organiza-tion and a dependent company meets the requirements set forth in Clause 1 of the present Article. A controlling organization must prove that such interaction meets such requirements.

3. Where a court determines that a controlling organization has abused its managerial influence and has damaged a dependent company, such controlling organization must indemnify the dependent company for the amount of damages incurred at the end of the current fiscal year unless the court has established a longer period of time. The indemni-fied damages must, at a minimum, compensate the losses incurred by the dependent company and an appropriate amount for lost income except for such damage which did not result from managerial influence of the controlling organization. In this case, the controlling organization must prove the absence of managerial influence.

Article 176. Continuous or Long-Term Loss-Making Management1. Where a controlling person exercises management supervision

over a company in such a way that the company engages in loss-making business activities for a long period of time, i.e., at a minimum for one year, the shareholders of such company are entitled to demand that the controlling person redeem the company’s shares of stock held by them. In this case, the redemption price must correspond to the highest price for the company’s shares of stock for the period of six months prior to the actual control by the controlling company plus a penalty on such price in an amount calculated pursuant to the regulations of the Civil Code for calculation of penalty under monetary obligations. The determination of the highest price for the shares of stock is made by applying quotations from appropriate, organized securities markets, and where this is impos-sible by employing an independent professional appraiser at the expense of the controlling person.

2. Where the dependent company continuously engages in loss-making business as a result of the influence of a parent or controlling company which results in the insolvency (bankruptcy) of such dependent company, depending on the situation, such parent or controlling company is liable for the debts of such dependent company where it has failed to satisfy the claims in full of creditors of such dependent company during bankruptcy proceedings.

3. Such parent or controlling company may be released from liability where a court has established the circumstances set forth in Part II, Clause 1, of Article 175 of the present Law.


Article 177. Interdependent Companies1. Where a company and another organization are interdependent,

they immediately are required to notify each other in writing of the amount of their participation and of any changes therein.

2. Where organizations are interdependent and they are aware thereof, rights to take part in the management of one them owned by the other interdependent organization may only be exercised by the latter within the limits of 25% of its equity stake (voting shares of stock) held in the first organization and vice versa. This provision does not apply to the pre-emptive right to shares of stock where the charter capital is increased at the company’s expense.

CHAPTER XIII. LIQUIDATION OF A COMPANY

Article 178. The Liquidation of a Company1. A company is subject to liquidation: 1) upon expiration of the period of time for which it was founded

where the articles of association of a company provide for such period of time;

2) in pursuance to an appropriate resolution of the general sharehold-ers’ meeting as proposed by the board of directors (supervisory board) or management committee, adopted by a majority of the votes required to amend the articles of association of the company;

3) according to a court judgment rendered on the basis of a petition filed by shareholders, cumulatively holding not less than 10% of the shares of stock, where there are important grounds for liquidating the company based upon relations amongst the shareholders;

4) according to a court judgment where the articles of association of the company are found not to comply with current legislation upon a petition filed by the board of directors (supervisory board) or manage-ment committee or governmental bodies authorized to perform the state registration of legal persons.

If a company’s property is insufficient to cover the liquidation costs, the registration of the company may be revoked by a court judgment without conducting liquidation proceedings.

2. In the event of the voluntary liquidation of a company, the board of directors (supervisory board) of the company under liquidation submits a resolution to the general shareholders’ meeting about liquidating the company and setting up a liquidation committee.


The general shareholders’ meeting of a company, being subject to voluntary liquidation, adopts a resolution on liquidating the company and setting up a liquidation committee.

Where liquidation is carried out according to a court judgment, the court decides the number of members and the composition of the liquidation committee. The members of the liquidation committee may be replaced by other persons in a procedure identical to that for appoint-ments to the liquidation committee.

3. Where a shareholder of company under liquidation is the state or a municipal entity, holding at least 10% of the voting shares of stock of the company, the liquidation committee includes a representative of an appropriate committee for property management or a property fund or an appropriate body of a municipal entity.

4. All duties for managing the company’s property and its operations, envisaged by a law for corporate officers, are imposed upon members of the liquidation committee, and in the event of a violation of these du-ties, members of the liquidation committee are required to indemnify the company for damages on the basis of the norms of the present Law governing acts of corporate officers.

Article 179. The Voluntary Liquidation of a Company1. From the moment of selection of a liquidation committee, it is

required to promptly file a statement with the appropriate registration authority containing information about the liquidation of the company. As of the date of submission of such statement until the liquidation of the company is completed, all legal documents and business correspondence, including the exchange of information by means of electronic communi-cations, must show the company’s firm name accompanied by the phrase “in liquidation” [v protsesse likvidatsii].

2. The liquidation committee must use an appropriate periodical not less than three times to publish information on liquidation of the company, liquidation proceedings and the terms and conditions upon which claims of creditors are satisfied. It also must seek to identify the company’s credi-tors and to notify them about the liquidation of the company.

3. Within one month after its appointment, the committee must develop and provide the general shareholders’ meeting of the company under liquidation with an interim balance sheet which must contain infor-mation on the property of the company under liquidation, the claims of its creditors and the results of the verification of the merits thereof. The interim liquidation balance sheet is approved by the general shareholders’


meeting of the company. Prior to the end of each fiscal year of a company under liquidation, the liquidation committee also is required to compile liquidation balance sheets and liquidation progress reports.

4. The liquidation committee procures the economically sound, effi-cient, cost effective and prompt sale of all property required for repayment of the company’s debts and distribution of the remaining property under the provisions of the present Law. To this end, the liquidation committee is entitled to conclude new transactions for and on behalf of the company and, also, to support the company’s active operations for a certain period of time where this is necessary in order to generate additional income in the course of liquidation. Members of the liquidation committee represent the company in all respects related to the liquidation thereof, participate in legal proceedings and may enter into amicable agreements unless this is not as envisaged by domestic legislation.

Article 180. The Satisfaction of Claims of Creditors against Companies under Liquidation

1. The claims of creditors that are subject to satisfaction are satisfied in the order of the filing thereof. The claims of creditors that are subject to satisfaction are [not]* satisfied without registering an appropriate ap-plication in the register of the company’s creditors. Where the liquidation committee fails to recognize a creditor’s claim, it is entitled to bring a lawsuit for satisfaction thereof in compulsory proceedings. Prior to the resolution of such dispute by a court, the company represented by its liquidation committee must deposit with the court a sum of money equal to the amount of the claim. Claims that have not matured, at the discre-tion of the liquidation committee, may be subject to early satisfaction, or the amount required for satisfaction thereof must be deposited by the liquidation committee pursuant to the provisions of legislation.

2. Where, in the course of liquidation, it is discovered that a company’s property is not sufficient to satisfy claims of all the creditors, the liquida-tion committee immediately must initiate proceedings in bankruptcy. For failing to perform this duty, members of the liquidation committee bear liability for indemnifying the company’s creditors for their damages.

Article 181. Distribution of Property of a Company under Liquidation amongst its Shareholders

1. The property of a company under liquidation, remaining after completion of settlements with creditors, is distributed by the liquidation committee amongst its shareholders in the following order of priority: * [Translator’s note: The square brackets (and the text encased therein) in Clause 1 of Art.180



1) first priority is for payments upon shares of stock which must be redeemed pursuant to the provisions of the present Law;

2) second priority is for payments of accrued but non-paid dividends on preferred shares of stock and payments of the liquidation value on preferred shares of stock;

3) third priority is for distribution of property of the company under liquidation amongst its shareholders holding common shares of stock and all types of preferred shares of stock.

2. Distribution of property amongst shareholders of each subsequent order of priority takes place only upon the distribution in full of property amongst all shareholders of the previous order of priority. Payment of the liquidation value on a particular type of preferred shares of stock, as set forth in the articles of association of the company, only takes place after payment in full of the liquidation value on preferred shares of stock held by shareholders of the previous order of priority as set forth in the articles of association of the company.

Where a company’s property is insufficient for the distribution of dividends that have accrued but have not been paid, and for the liquidation value as set forth in the articles of association of the company, amongst all shareholders who are holders of preferred shares of stock of the same type, such property is distributed amongst the shareholders who are hold-ers of such type of preferred shares of stock in proportion to the number of shares of such type held by them.

3. Distribution of property of a company under liquidation, amongst its shareholders, only takes place after the expiration of one year follow-ing the third publication of information on liquidation of the company. During this time, the liquidation committee must deposit funds, subject to distribution amongst the company’s shareholders’, into a special ac-count pursuant to legislation. If a dispute arises amongst the shareholders regarding the distribution of property of a company under liquidation, the liquidation committee must suspend the distribution of such property until an appropriate court judgment is rendered and only proceed with such distribution pursuant to the court judgment after it enters into legal force.

Article 182. Completion of Liquidation1. As of the moment of completion of distribution of a company’s

property, a closing (liquidation) balance-sheet is compiled. The liquida-tion committee advises the registration authority of completion of the company’s liquidation so that an entry of this fact is made in the state register.


2. Where, after the registration of completion of a company’s liqui-dation, property other property belonging to the company is discovered, upon the motion of an interested party or by virtue of a law, a court must resume liquidation and appoint a liquidation committee. The sole task of the liquidation committee in this case is to sell such discovered property and distribute the proceeds there from amongst the shareholders in ac-cord with the distribution rules as envisaged by the present Law and the articles of association of the company. For such purposes, a legal person is deemed to have resumed its operations with restrictions upon the rights thereof to engage in business with the exception of its legal capacity to sell such discovered property and distribute the proceeds there from amongst its shareholders.

3. The discovery of new creditor claims does not result in resumption of the liquidation process.

4. The liquidation committee is required to keep books, docu-ments and other information carriers of the liquidated company for five years following the liquidation of such company. Upon expiration of the aforementioned period, it has the right to destroy them pursuant to data protection legislation.

5. Liquidation of a company is deemed to be completed and the company is deemed to cease to exist from the moment the registration authority makes an appropriate entry in the state register.

Article 183. Liability of Shareholders1. If a company under liquidation does not have sufficient property

to satisfy all the claim of creditors, its shareholders are personally liability without limitation for such debts of the company where the shareholder have unlawfully abused the limitations of their liability for the company’s obligations to the detriment [v ubytkok] of its creditors.

2. A shareholder may, pursuant to clause 1 of the present Article, also be held liable if:

— they used property of the company as though it were their own property;

— they gave instructions that accounting records of the company be maintained so as to make it impossible or difficult to categorize such property as that of the company or the shareholders;

— they reduced the amount of property of the company for their own benefit or for the benefit of third persons such that they knew or must have known the company subsequently would be unable to repay its debts to its creditors.


CHAPTER XIV. LIABILITY*

Article 184. False Reporting A founder, shareholder or corporate officer bears criminal liability

where they submit reports, as envisaged by the present Law, which are materially untrue, incomplete and otherwise fail to materially comply with the existing requirements or factual circumstances.

Article 185. False Balance Sheet A person preparing a false balance sheet or profit-and-loss statement,

or falsely determining profits or losses of a shareholder so as to itself make or to enable a third party to derive profits or adversely impact the company or a third party, bears criminal liability.

Article 186. Liability for Evasion of Declaring BankruptcyCorporate officers bear criminal liability for failing to institute or

for evading the institution of bankruptcy proceedings after the company has become insolvent.

* These are recommendations that are subject to inclusion into the Criminal Code. {Translator’s note: This footnote to the heading of Chapter XIV appears in the original Russian-language version of the Model Law.]

Annex A

Decree of the Inter-Parliamentary Assembly of the

Commonwealth of Independent States Standing Commission for Economy and Finance*

Proposals to the Plan for Drafting Work of the IPA [Inter-Parliamentary Assembly] of the CIS [Commonwealth of

Independent States] for the Period until 2010

The Commission decrees:

(1) To approve the primary drafters and the terms for submitting drafts of model laws to the Standing Commission for Economy and Fi-nance of the IPA of the CIS for the period until 2010 in accordance with the appendix hereto.

(2) To request the Council of the IPA of the CIS to include the pro-posals of the Standing Commission for Economy and Finance in the Plan for Drafting Work of the IPA of the CIS for the Period until 2010.

Chairperson of the Commission, G.E. Minasian

St. Petersburg,

30 March 2005No.8

* Translator: William B. Simons (of the Editorial Board).


Appendix to the Decree of the Standing Commission for Economy and Finance, No.8, 30 March 2005

The Primary Drafters and the Terms for Submitting Drafts of Model Laws to the Secretariat of the Council of the IPA of the CIS Included in the Work Plan of the Standing Commission for Economy and Finance for the Period until 2010

Model Law (Recommended)

Primary Drafters Term for Submitting to the Secretariat of the Council of the IPA

1 “On Banks and Bank-ing Activities”

Federal Assembly of the Russian Federa-tion

2006

2 “On Foreign Economic Activity”

Parliament of the Re-public of Kazakhstan

2008

3 “On Transportation by Air”

Federal Assembly of the Russian Federation

2007

4 “On Bookkeeping and Accounting (New Redaction)”

Coordinating Council for Bookkeeping attached to the Executive Committee of the CIS

2006

5 “Model Tax Code: Special Part”


2007

6 “On Mutual Insurance Companies”


2006

7 “On Joint-Stock Companies (New Redaction)”

Working Group of the IPA of the CIS

2007

8 “On a State Material Reserve”


2005

9 “Banking Code” Federal Assembly of the Russian Federation

2009

Annex B

Decree of the Inter-Parliamentary Assembly of the

Commonwealth of Independent State* “On the New Redaction of the Model Law ‘On Joint-Stock Companies’”

Having examined the draft of a new redaction of the Model Law “On Joint-Stock Companies” submitted by the IPA of the CIS Standing Commission for Economy and Finance, the Inter-Parliamentary Assembly decrees:

(1) To adopt the Model Law “On Joint-Stock Companies” in its new redactions (attached).

(2) To transmit the above-referenced Model Law and the Commentary thereto to the parliaments of the member-states in the Inter-Parliamentary Assembly of the Commonwealth of Independent States and recommend its use in national legislation.

(3) To recommend the use of the prior version of Model Law “On Joint-Stock Companies” (adopted by IPA of the CIS decree of 17 February 1996 No.7-8) insofar as it does not contradict the present Model Law.

Chairperson of the Council of the Assembly, S.M. Mironov

St. Petersburg,

28 October 2010No.35-13


Annex C

Appendix to the Decree of the Council of the IPA of the CIS No.35-13, 28 October 2010*

Explanatory Note and Alphabetical List of Respondents:

2010 Model Law “On Joint-Stock Companies” for CIS Member States (As Amended)

The draft of the Model Law ‘On Joint-Stock Companies” (New Redaction) and the Commentary thereto has been prepared by a Working Group of the Inter-Parliamentary Assembly of the member-states of the Common-wealth of Independent States with the technical assistance of the European Bank for Reconstruction and Development within the framework of a joint project of the IPA of the CIS and the EBRD.

The documents were considered during sessions of the IPA of the CIS Working Group preparing the above-referenced draft held on: 23-23 April 2008, 2-4 October 2008, 21-22 April 2009, 14-16 October 2009 and meetings of the core drafting team held one: 4-7 November 2008, 28-30 May 2009, 17-20 February 2010 and 2-5 June 2010.

The draft of the Model Law ‘On Joint-Stock Companies” (New Redac-tion) was discussed at sessions of the IPA of the CIS Standing Commission for Economy and Finance held on: 22-23 April 2008, 3-4 October4 2008, 22 April 2009, and 16 October 2009. At its session on 22 April 2010, the IPA of the CIS Standing Commission for Economy and Finance recom-mended to the plenary session of the CIS Inter-Parliamentary Assembly that it consider the draft.

During work on the text of the draft, comments and proposals were received from:

Ministry of Finance and Economy, Republic of ArmeniaMilli Meclis (National Assembly), Republic of AzerbaijanCouncil of the Republic, National Assembly of the Republic of BelarusHouse of Representatives, National Assembly of the Republic of Belarus


493

Ministry of Finance, Republic of BelarusAgency of the Republic of Kazakhstan for Regulating and Supervising Financial Markets and Financial OrganizationsMajilis, Parliament of the Republic of Kazakhstan Senate, Parliament of the Republic of Kazakhstan Ministry of Economic Development and Trade of the Republic of KyrgyzstanMinistry of Economic Development, Russian Federation Majlisi namoyandagon, Majlisi Oli, (Parliament of Tajikistan), Republic of TajikistanMinistry of the Economy of Ukraine General Confederation of Trade UnionsInternational Association of Exchanges of Countries of the CIS Countries

Secretariat,

Council of the Inter-Parliamentary Assembly, Commonwealth of Independent States


Annex D

Working Group Members, 2010 Model Law “On Joint-Stock Companies” For CIS Member States

(As Amended)

1 G.E Minasian, Chairperson of the Permanent Finance and Credit Committee of the National Assembly of the Republic of Arme-nia

2 A. Mnatsakanian, Chief of the Legal Directorate, Ministry of Finance and Economy, Republic of Armenia

3 R.Sh. Gadzhiev, Head of the Legislative Department, Milli Meclis (National Assembly), Republic of Azerbaijan

4 D.Z. Khawlilov, Parliamentary Deputy, Milli Meclis (National As-sembly), Republic of Azerbaijan

5 L.P. Levkovits, Consultant to the Directorate for the Improvement of Organizational Forms, Ministry of the Economy, Republic of Belarus

6 E.A. Martynenko, Consultant to the Legal Directorate for Civil and Environmental Affairs, Licensing and Foreign Trade, Ministry of Justice, Republic of Belarus

7 O.V. Zinov’ev, Director, Republican Unitary Enterprise “National Investment Agency”, Republic of Belarus

8 K.A. Aitakhanov, Secretary, Committee of the Senate of the Re-public of Kazawkhstan for Agrarian Matters and Protection of the Environment

9 S.A. Erseitova, Chief of Department, Ministry of Justice of the Republic of Kazakhstan

10 N.V. Kadiukov, Deputy Director of the Committee for State Prop-erty and Privatization of the Ministry of Finance of the Republic of Kazakhstan

Annex D 495

11 S.T. Kakimova, Deputy Director of the Planning Department of the Ministry of Economics and Budget of the Republic of Kazakhstan

12 S.N. Sabil’ianov, Member of the Finance and Budget Committee of the Majilis, Parliament of the Republic of Kazakhstan

13 I. Suanbekova, Chief of the Department of Registration of Finan-

cial Instruments, Department of Licensing, Agency of the Republic of Kazakhstan for Regulating and Supervising Financial Markets and Financial Organizations

14 S.A. Batyrbekova, Chief Specialist of the Directorate for Invest-ment Policy of the Ministry of Economic Development and Trade of the Republic of Kyrgyzstan

15 V.A. Kuchuk, Executive Director of the Center for Business De-velopment, Republic of Moldova

16 N.S. Bondar’, Chief Consultant, Corporate Legislation, Depart-ment of Corporate Management, Ministry of Economic Develop-ment, Russian Federation

17 A-M.N. Gudieva, Referent, Corporate Legislation, Department of Corporate Management, Ministry of Economic Development, Russian Federation

18 R.A. Kokorev, Deputy Director, Department of Corporate Man-agement, Ministry of Economic Development, Russian Federa-tion

19 S.N. Tsyganov, Chief of Section, Corporate Legislation, Depart-ment of Corporate Management, Ministry of Economic Develop-ment, Russian Federation

20 G.T. Bozorova, Chairperson, Economic and Budget Committee, Majlisi namoyandagon, Majlisi Oli, (Parliament of Tajikistan), Re-public of Tajikistan

21 I.R. Kachur, Deputy Head, Secretariat of the Taxation and Tax Policy Committee, Verkhovna Rada (Parliament) of Ukraine


22 N.Iu. Stognienko, Head of Department of Property Rights Reform, Ministry of Economics of Ukraine

23 V.P. Shevchenko, Deputy Director, Department of Cooperation with the CIS and the Russian Federation of the Ministry of the Economy of Ukraine

24 V.K. Gutsuliak, Consultant of the Department for Defending the Social-Economic Interests of Workers, General Confederation of Trade Unions, Moscow

25 A.I. Kuprin, Executive Director, International Association of Exchanges of Countries of the CIS Countries, Deputy Direc-tor of International Cooperation, Moscow Inter-Bank Currency Exchange

26 Alexei A. Zverev, Senior Counsel, European Bank for Reconstruc-tion and Development, London

Core Drafting Team Members

27 Dr. Lado Chanturiia, Professor, Faculty of Law, University of Kiel, FRG

28 Dr. Max Gutbrod, partner, Baker & McKenzie, Moscow

29 Dr. Farkhad Karagussov, Professor of Law, Republic of Kazakh-stan

30 Dr. Rolf Knieper, Professor, Faculty of Law, University of Bre-men, FRG

31 Dr. Hans-Joachim Schramm, (team leader), Faculty of Law, Uni-versity of Bremen, FRG

32 Dr. Dmitrii Stepanov, partner, Egorov Puginsky Afanasiev & Partners, Moscow



Afterword: The Inter-Parliamentary Assembly of the Commonwealth of Independent States and the 2010 CIS Model Joint-Stock Companies Law*

M.I. Krotov Secretary General, Inter-Parliamentary Assembly,

Commonwealth of Independent States

The primary task of the Inter-Parliamentary Assembly (IPA) of the Commonwealth of Independent States (CIS) is the approximation and harmonization of legislation of the member states of the CIS. The results of this work are model acts and recommendations adopted by the IPA during the drafting of which the experience of the national legislatures of the CIS member states is taken into account; this also includes that of international (parliamentary) organizations. These IPA model laws encom-pass the adaption of international legal standards—primarily those from elsewhere in the European legal space—to the conditions of the CIS. In this way, IPA model legislation not only promotes the approximation and harmonization of the national laws among CIS member states—which are adopted on the basis of IPA models—but also facilitates the conformity of these national CIS laws with the best practices of international and European law.

In light of the crucial importance which the appropriate legal forms normally represent for entrepreneurs in developing economies, the IPA places special emphasis on the development and adoption of the most common forms of legal persons. Thus, it adopted the first 1996 Model Law on Joint-Stock Companies which contained—in its eleven articles—the basic principles of a coordinated policy for the establishment, operation and liquidation of the activity of joint-stock companies in the interests of further developing this form within the CIS legal space and, in particular, of protecting the interests of stockholders. As stated in the preamble to that act, it was

“directed towards creating conditions which would be unified and also conform to world practices so as to stimulate market relations and international cooperation on the territories of the member states of the Commonwealth of Independent States”.



Since the time of the adoption of the first CIS Model Companies Law, international standards within the field of corporate governance have been substantially refined in light of the demands of economic develop-ment and of the security of economic systems for more stringent rules regarding inter alia the activities of joint-stock companies. With this in mind, the IPA made a decision in the mid-2000s to begin work on a new redaction of the Model Companies Law. With the broad support of the European Bank for Reconstruction and Development and the Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, a two-year intensive period of drafting resulted in the adoption by the IPA, on 28 October 2010, of a new version of the CIS Model Law on Joint-Stock Companies.

This new model act—which numbers 186 articles and contains several alternative versions for regulating various aspects of corporate governance—represents an up-to-date model for regulating the terms and conditions for the creation, operation, reorganization and liquidation of joint-stock companies (JSC); the legal position of joint-stock companies (and groups thereof); the system of corporate JSC bodies and the author-ity thereof; and the powers and liability of corporate officers, the rights and duties of JSC shareholders and measures for protecting their rights and lawful interests. The 2010 Model Law has been drafted with a view towards the best world practices of corporate governance—in particular, with an eye on Directives of the European Union and, also, the experi-ence which has been accumulated in the CIS as well as trends in further refining corporate law (both in the CIS and in jurisdictions with fully developed market economies).

The core of the drafting team of the IPA’s Model Companies Law Working Group that has produced the new JSC Model Law has been comprised of lawyers from Russia, Germany, Kazakhstan and Georgia—experienced in academic work as well as in legal drafting and conversant with the practical aspects of applying corporate legislation. Furthermore, during the process of drafting and fine-tuning the text of the model law, members of the IPA’s Standing Commission for Economy and Finance have played an active role together with members of national parliaments, government and other state agencies of CIS member states and represen-tatives from trade unions and employers’ associations. This has helped to make the CIS Model JSC Law both a relevant and useful document; one which rests on a strong theoretical base and, also, which reflects current state-of-affairs and trends of socio-economic development in the region. In addition, it recommends itself as a model conforming to best world practices of the legal craft for adoption by national parliaments of the CIS member states.

Afterword: GIZ and Developing Legal Systems 499

One special feature of this Model Law can be seen in the following: the core of the Working Group’s drafting team has prepared a Commen-tary consisting of 14 chapters. This reflects the theories and practical considerations which are at the basis of the majority of the Model Law’s provisions and, also, the rationale of the drafting team for many of the rules and regulations which they have agreed to include in the Model Law (as well as those which they have chosen not to include). The reader should find of particular interest the annotations to several of the discus-sions which took place during the drafting of the Model Law—and which are reflected in the Commentary—and the various techniques which the draftspersons have employed in resolving their diverging positions in regard to several corporate-governance issues.

The adoption of a Model Law accompanied by a Commentary is a new form of IPA endeavor in the approximation and harmonization of the laws of the member states of the CIS. Its use in the future should further facilitate achievement of the goals of the Model Law. It is thus that the Council of the IPA has accepted, with pleasure, the suggestion of the Editorial Board of an authoritative journal such as the Review of Central and East European Law to devote a special issue to the publication of the 2010 Model Law and Commentary.

The appearance in print of this special issue will not only enlighten the scholarly community, on a global scale, of the rapid degree of approxima-tion and harmonization of law in the CIS but, also, should enable foreign lawyers and others to become acquainted with further developments in scholarly and practical thinking in the CIS concerning key issues of cor-porate governance.



Afterword: EBRD Support for CIS Model Laws

Alexei Zverev1

Senior Counsel, European Bank for Reconstruction and Development

For the past twelve years, the European Bank for Reconstruction and Development (the “EBRD”) has been cooperating with the Inter-Par-liamentary Assembly of the Commonwealth of Independent States (the “CIS IPA”) on the development of certain key CIS model laws.2 These are instruments of harmonisation and integration based on international best practice that have a non-binding nature of guidance.

According to the 14 April 2005 Resolution of the CIS IPA,3 model laws are aimed at harmonising legislation amongst CIS countries; improv-ing current laws for resolving regulatory problems and tasks; and bringing these laws closer to international standards of best practice. This is done by developing non-binding model laws based on international principles of best standards which are then recommended for use in the national legislation of the CIS member states. The Commonwealth of Independent States (CIS) is made up of eleven member states: Armenia, Azerbaijan, Belarus, Kazakhstan, the Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Turkmenistan and Uzbekistan, however, are not part of the CIS IPA.

The model laws allow the EBRD to reach out within a single Technical Cooperation project to a number of countries with more or less similar legal systems, thus making technical cooperation more cost-effective.

To date, the EBRD has provided technical assistance for four model laws, all of which have been approved by the CIS IPA and recommended for implementation in national legislation. These are the Model Securities Law (approved in 2001),4 the Model Investor Protection Law (approved

1 The views expressed in this article are those of the author; these may not coincide with and should not be regarded as the views of the EBRD.

2 For more information, see the CIS IPA and EBRD websites <www.iacis.ru> and <www.ebrd.com/law>, respectively.

3 Polozhenie “O razrabotke model’nykh zakonodatel’nykh aktakh i rekomendatsii Mezhpar-lamentskoi Assemblei gosudarstv – uchastnikov Sodruzhestva Nezavisimykh Gosudarstv”; reproduced at <http://www.iacis.ru/html/?id=21>.

4 Model Law “O tsennykh bumagakh” of 24 November 2001; reproduced at <http://www.iacis.ru/html/?id=22&pag=127&nid=1>.


in 2005),5 the Model Banks Insolvency Law (approved in 2005),6 and, most recently, the Model Company Law to which this Special Issue is devoted.

With this most recent law, the EBRD and CIS IPA have completed an upgrade of CIS corporate-sector model legislation. This represents the logical conclusion to the series of model laws governing the corporate sector.

On 28 October 2010, the EBRD-sponsored Model Company Law was presented at and successfully approved by at the Plenary Session of the CIS Inter-Parliamentary Assembly in the presence of speakers from the national parliaments of member countries.7

The model law was developed with technical and financial support from the European Bank for Reconstruction and Development secured with grant funding provided by the Government of the Federal Republic of Germany.8

This present publication presents the text of the Model Law together with a Commentary discussing many of the key issues and novelties, which significantly upgrades the old CIS Model Company law approved in 1996.9 The new model law provides for a modern regime taking into account post-Enron corporate regulation and governance developments and trends thereby assuring enhanced protection of both shareholders’ rights and other stakeholders’ interests.

In addition, the EBRD and the CIS IPA will soon publish the results of an assessment of how and to what extent the corporate sector model laws have been implemented in national legislation by member states. So as to offer the readers of this publication a rough preview of the more detailed evaluation, one conclusion is that on average over two-thirds of the principles and provisions of the 2001 Model Securities Law and the 2005 Model Law on Protection of Investors in Securities Markets have been followed by, and implemented in, national legislation.

5 “Model’nye zakonodatel’nye polozheniia dlia gosudarstv – uchastnikov SNG o zashchite prav investorov na rynke tsennykh bumag” of 14 April 2005; reproduced at <http://www.iacis.ru/html/?id=22&pag=191&nid=1>.

6 Model Law “O brankrotstve bankov” of 8 June 1997; reproduced at <http://www.iacis.ru/html/?id=22&pag=52&nid=1> (earlier version); the most recent redaction is “O bankrotstve bank-ov” of 18 November 2005; reproduced at <http://www.iacis.ru/html/?id=22&pag=584&nid=1>.

7 The official Russian-language text of the 2010 Model Law is reproduced at <http://www.iacis.ru/data/prdoc/13a-2010-2.doc>.

8 The project was administered by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH (formerly GTZ).

9 Model Law “Ob aktsionernykh obshchestvakh” of 17 February 1996; reproduced at <http://www.iacis.ru/html/?id=22&pag=33&nid=1>.

Afterword: EBRD Support for CIS Model Laws 503

CIS Model Company LawIn April 2005, the CIS IPA’s Council compiled a legislative activity plan for 2005 – 2010. This included the CIS Model Joint-Stock Companies Law. A Working Group composed of representatives of national parlia-ments, ministries and legal experts was formed to elaborate the draft law and associated documents.

In the course of the project implementation, the Working Group and its drafting team—comprising academics and practicing lawyers who are prominent experts in corporate law from Germany and CIS countries—undertook a consultation process within the CIS countries and benefited from numerous commentaries from various officials, experts and stakeholders groups. The following grounds were established by the WG at the outset, and these features of the Model Company Law are worth noting.

Due to the fact that all CIS countries have joint-stock company laws, there was no need to develop an entirely new law “On Joint-Stock Companies”. Rather, the task was to synthesise current laws and best practices of their use together with the recent global trends as the basis of the Model Law. A notable example is the lifting of the distinction in regulating open and closed joint-stock companies, which is being imple-mented in a growing number of CIS countries.

The Model Company Law is closely connected with other model CIS legislative acts, notably, the CIS Model Civil Code and corporate sector model laws. Against the background of the fact that the joint-stock com-pany laws in the CIS countries already exist and differ from each other, the Working Group decided to provide for alternative options in the present Law where an issue relates to policy as opposed to a technical solution. For example, Chapter V of the Model Law offers two alternatives for a company’s governance and management structures.

One more challenge for the Working Group was to develop solutions to issues where currently there are legislative gaps including certain obvi-ous situations that are not regulated in any CIS country. From this point of view, one can take particular note of the provisions of Chapter XII relating to groups of companies—a concept not yet sufficiently recognised in all the CIS countries.

Since a model law is merely a recommendation by its nature, it was deemed necessary to provide a set of explanations to accompany the present Model Law. These have been compiled in a Commentary the ob-jective of which is to justify the proposed specific recommendations; to provide legislatures with background information and food for thought; to help make a clear distinction between fundamental principles and technical solutions (in particular, where such principle points as opposed


to the whole text would be considered for implementation); to specify grounds for alternative provisions and to facilitate making a choice for this or that option.

Importantly, the policy variations behind a particular rule or princi-ple are explained. Often in this area of regulation, there is a fine balance between the interests of shareholders, creditors, directors, employee, etc. This balance is made on the basis of various factors—strategic, economic and cultural—in addition to those pertaining purely to law. In this sense, the Model Law and the Commentary represent an incentive for, and contribution to, further academic debate in the CIS countries and also, for example, in the wider spaces of the European Legal Space.



Afterword: GIZ: Developing Legal Systems and the 2010 CIS Model Company Law

Julia GrishchenkovaRegional Director Russia, Eastern Europe and Central Asia GIZ IS

GIZ in the Field of Developing Legal Systems As one of the world’s leading providers of international cooperation ser-vices for sustainable development, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH offers its partners, existing and potential, extensive experience in the field of governance and the development of legal systems

Since its creation in 1975, GIZ has assisted countries in reforming their legal systems, helping them to create environments conducive to economic growth and investment. When the Soviet Union collapsed, the transition countries of Eastern Europe and Central Asia quickly became a focus region for GIZ assistance in developing and modernizing legal systems.

During the past decades, the countries in this region have demon-strated tremendous efforts in promoting democratization and free market economies. This naturally had entailed fundamental reforms of the existing legal systems and carried with it the necessity to strengthen/create binding legal frameworks. As a precondition for sound economic development and growth, the modernization of civil and commercial law has been one of the priority areas for virtually all of the countries in the region.

Consequently, reform of commercial law has also been one of the focal points for GIZ activities amongst the countries of Eastern Europe and Central Asia. For the last two decades, GIZ has engineered legal consultancy services for a multitude of legal modernization projects, sup-porting the development of up-to-date commercial legislation and aligning it with European and international standards. Thus, two key aspects of our advisory work can be seen in assisting in the drafting of up-to-date legislation and promoting regional legislative harmonization.


GIZ Support to the Drafting of the 2010 CIS Model Company Law

As a result of its expertise in the field and in the region, the participation of GIZ in the CIS Model Company Law project sponsored by the Euro-pean Bank for Reconstruction and Development (EBRD) seemed only natural. As the business division of GIZ which is engaged on behalf of international organisations, governments, foundations and companies, GIZ International Services (GIZ IS) gladly took up the assignment to support the Inter-Parliamentary Assembly of the Commonwealth of Independent States (CIS IPA) in drafting this new Model Law. Based on a network of highly qualified experts and regional experience in the CIS, GIZ IS was able to make available the necessary expertise for this task and ensure an outcome of the required level of quality.

Under the auspices of the CIS IPA, a working group was formed in early 2008; this was made up of experts from CIS countries, including experts from Ministries and other relevant state authorities. The working group developed a concept paper containing the basic ideas and structures for the new version of this piece of model legislation and mandated the core drafting team to prepare a draft Model Law. This drafting team con-sisted of carefully selected experts from both academia and legal practice of various national backgrounds, which has helped to ensure that valuable perspectives and experiences from differing jurisdictions have been duly considered during the drafting stage.

In the course of more than two years’ work, the drafting team con-tinuously elaborated the draft text, integrating feedback from the CIS IPA. When the text was close to finalization, a Commentary was also prepared in order to facilitate understanding of the basic strategies and policy choices which were elaborated and chosen in the drafting process, thereby hopefully facility the application of the Model Law in domestic legislation of states in the CIS region.

The draft law was presented to the Plenary Session of CIS IPA in October 2010 and the Model Law was adopted by the Inter-Parliamentary Assembly on 28 October 2010 in the version which the reader finds in translation in this Special Issue of the Review of Central and East European Law.

Thereafter, GIZ is promoting the timely publication of the Model Company Law and Commentary and, also, is supporting the CIS IPA in assessing implementation of other CIS Model Laws in the member states’ domestic legislation to which Mr. Zverev likewise has made reference in his contribution to this Special Issue.

Afterword: GIZ and Developing Legal Systems 507

We very much appreciate the publication of the translation of the CIS Model Company Law and Commentary in this Special Issue of the Review of Central and East European Law and—in particular—hope and trust that the results of this forthcoming assessment project will further enlighten academics, practitioners and other commentators and policy makers about the subject, and also promote the goal, of legal harmoniza-tion in the CIS.


Contents – Volume 36, 2011 Review of Central and East European Law

Articles Issue Page

Eisele, Katharina and Wiesbrock, Anja, Enhancing Mobil-ity in the European Neighborhood Policy? The Cases of Moldova and Georgia 2 127-155

Maggs, Peter B., Islamic Banking in Kazakhstan Law 1 1-32

Norros, Merja, What’s New in Legal Cooperation in Criminal Matters with Russia since 2004? 2 91-125

Riekkinen, Mariya, Assisting the Elderly in Remaining Politically Active: A Focus on Russia and its International Legal Obligations 2 157-195

Wiesbrock, Anja see Eisele, Katharina

Williams, Kieran, When a Constitutional Amendment Violates the “Substantive Core”: The Czech Constitutional Court’s September 2009 Early Elections Decision 1 33-51

Essay

Harzl, Benedikt, Nationalism and Politics of the Past: The Cases of Kosovo and Abkhazia 1 53-77

Special Issue: Harmonization of Corporate Law in the CIS. More Architecture of Choice

Chanturiia, Lado, Gutbrod, Max, Karagussov, Farkhad, Knieper, Rolf, Schramm, Hans-Joachim, and Stepanov, Dmitrii, Commentary on the 2010 Model Law “On Joint-Stock Companies” for CIS Member States 3 211-313


The CIS 2010 Model Law “On Joint-Stock Companies” for CIS Member States 3 315-488

Annex A: 2005 Decree of the Inter-Parliamentary Assembly of the Commonwealth of Independent States Stand-ing Commission for Economy and Finance: Proposals to the Plan for Drafting Work of the IPA of the CIS for the Period until 2010 3 489-490

Annex B: 2010 Decree of the Inter-Parliamentary As-sembly of the Commonwealth of Independent States “On the New Redaction of the Model Law ‘On Joint-Stock Companies’” 3 491

Annex C: 2010 Model Law: Explanatory Note and Alpha-betical List of Respondents 3 492-493

Annex D: 2010 Model Law: Working Group Members 3 494-496

Krotov, M.I., The Inter-Parliamentary Assembly of the Commonwealth of Independent States and the 2010 CIS Model Joint-Stock Companies Law 3 497-499

Zverev, Alexei, EBRD Support for CIS Model Laws 3 501-504

Grishchenkova, Julia, GIZ: Developing Legal Systems and the 2010 CIS Model Company Law 3 505-507

Book Reviews

Brückner, Ulrich, Peter van Elsuwege, From Soviet Republics to EU Member States. A Legal and Political Assessment of the Baltic States’ Accession to the EU 2 203-206

Kort, de, Joop, Ioannis Glinavos, Neoliberalism and the Law in Post Communist Transition: The Evolving Role of Law in Russia’s Transition to Capitalism 2 197-202

Oversloot, Hans, John F. Young (ed.), Federalism, Power, and the North: Governmental Reforms in Russia and Canada 1 79-81

Contents - Volume 36 511

Nystén-Haarala, Soili, Merja Norros, Judicial Coopera-tion in Civil Matters with Russia and Methods of Evaluation 1 83-85

CIS Model Joint Stock Law and Commentary

Documents

Transcript of CIS Model Joint Stock Law and Commentary