The relatively young Russian corporate legislation has always failed to recognize one of the most popular instruments used by strategic investors to regulate their relations with respect to managing their joint ventures with Russian partners — the shareholders’ agreement. While Russian law generally supports the principle of freedom of contract and shareholders’ agreements have never been prohibited, their enforcement in Russia has proved to be highly improbable.¹ As a result, foreign investors having interests in Russian joint ventures were forced to either rely on the fairly inflexible Russian corporate legislation or establish a non-Russian holding company for the underlying Russian business and subject their relations to the legislation of the relevant jurisdiction.

Following years of discussion, this gap has been finally filled. On June 3, 2009, President Medvedyev signed Federal Law No. 115-FZ, “On Amending the Federal Law on Joint Stock Companies,”and Article 30 of the Federal Law“On Securities Market,” recognizing shareholders’ agreements with respect to joint stock companies.² The law was officially published and came into effect on June 10, 2009.

The law introduces article 32.1 “Shareholders’ Agreement” to the Federal Law “On Joint Stock Companies” (the JSC Law). The article defines a shareholders’ agreement as an agreement on the exercise of rights vested in shares and/or on the peculiarities of the exercise of rights to shares. According to the amended law, the parties to a shareholders’ agreement undertake to (i) exercise in a particular way the rights vested in shares and/or rights to shares and/or (ii) refrain from the execution of such rights. A shareholders’ agreement may provide for the obligation of its parties to vote in a particular way at general meetings of shareholders, to agree on a voting option with other shareholders, to acquire or dispose of shares at a pre-determined price and/or upon the occurrence of certain events, refrain from the disposal of shares until the occurrence of certain events in the future, as well as perform in a coordinated fashion other actions related to the management, operations, reorganization, and liquidation of the company.

Disclosure
A person who pursuant to a shareholders’ agreement, has acquired the right to determine the voting process at general meetings of shareholders on shares, the issue of which was accompanied by the registration of the prospectus, must notify the company about such acquisition if, as a result of such acquisition, the person alone or with its affiliates directly or indirectly acquires the ability to dispose of 5, 10, 15, 20, 25, 30, 50, or 75 percent of votes. Such notice must be sent within five days after the date the acquisition took place.

Until such notification, the person who must give notice and the persons who, pursuant to the shareholders’ agreement, must follow its voting instructions at general meetings may only vote the number of shares owned by such person before the obligation to make the notice arose, whereas all shares owned by such persons will count towards the quorum.

The information that must be made available to shareholders before the general meeting pursuant to the JSC Law now includes information on shareholders’ agreements concluded during the year preceding the date of the general meeting.

Liability 
According to the amended JSC Law, a shareholders’ agreement is binding only on its parties. A contract entered into by a party to a shareholders’ agreement in breach of that agreement can be invalidated by the court on the application of a party to the shareholders’ agreement only if it has been proved that the other party to the contract knew or should have known about restrictions imposed by the shareholders’ agreement. An important provision aimed at protecting the interests of the company and other shareholders who are not parties to a shareholders’ agreement is that a breach of a shareholders’ agreement cannot be the ground for invalidating resolutions of the company’s bodies.

According to clause 7 of article 32.1 of the JSC Law, a shareholders’ agreement can specify the remedies available in case of failure of a party to perform obligations arising out of the agreement. These can include payment of damages, penalties, compensation (fixed or calculated in accordance with the shareholders’ agreement), or other remedies.

It is noteworthy that the amended law lists compensation as an available remedy, in addition to penalty. The Russian Civil Code does not include compensation in the list of types of remedies but allows parties to agree on any remedies in contracts. It might be that by compensation the legislators had in mind the common law concept of liquidated damages.

Under article 333 of the Russian Civil Code, the court can decrease the penalty if its amount is clearly disproportional to the results of a breach. It is not clear whether the court can apply the same rule to compensation.

Conclusion
The adoption of the above amendments to the JSC Law is, without any doubt, a welcome development of Russian corporate law. However, a number of questions remain that will likely discourage investors from switching to shareholders’ agreements governed by Russian law right away.

Firstly, clause 1 of article 32.1 of the JSC Law lists the obligations that can be stipulated in a shareholders’ agreement. The list is technically exhaustive, but includes one provision that is of a general (non-exhaustive) nature: this is the obligation to “perform in a coordinated fashion other actions related to the management, operations, reorganization, and liquidation of the company." This provision covers only the operation of the company. The question remains whether a shareholders’ agreement can provide for obligations such as to refrain from the purchase of additional shares, to refrain from competing activities, to provide or guarantee financing, to refrain from bringing claims in court against the company or other parties, and many other obligations not entirely fitting into the description provided by the amended law, but found in many shareholders’ agreements governed by laws of other jurisdictions. Another question is whether the Russian court will recognize and fully enforce remedies provided in a shareholders’ agreement. These questions will not be answered until sufficient court practice is established. Until then, investors will not be able to safely subject their relations under shareholders’ agreements to the Russian jurisdiction.

For more information on this topic, please contact V&E Russia/CIS lawyer Natalya Morozova. Visit our website to learn more about V&E's Russia/CIS practice.   

¹ One of the most prominent examples of this is the Megafon case. The court ruled that a shareholders’ agreement entered into by the shareholders of OAO “Megafon” governed  by Swedish law was null and void as contradicting Russian public order and imperative provisions of Russian civil and corporate law (Decision of the Federal Arbitration Court of the North-Siberian Area dated March 31st, 2006).
²  Recent amendments to the Limited Liability Company Law, which take effect on July 1, 2009, also introduce the similar concept of the participants’ agreement.