Amendments to Federal Law "On joint stock companies" regarding improvement of corporate governance

Federal Law No.209-FZ dated 19.07.2018 “On introducing amendments to the Federal Law ‘On joint stock companies'” (the “Law”) took effect on July 19, 2018; it was adopted as part of the implementation of clauses 2, 9 and 16 of the Improvement of Corporate Governance road map.¹

The Law provides for significant amendments to Federal Law No.208-FZ "On joint stock companies" dated 26.12.1995 (the “JSC Law”), which take effect in several stages.

1. The following amendments to the JSC Law came into force on July 19, 2018:

-        Procedure for determining the amount of dividends and/or liquidation value paid to holders of preferred shares is clarified. Now it is possible to establish in the company charter the minimum amount of a dividend and/or liquidation value on preferred shares, including as a percentage of the company net profit.

-        Holders of preferred shares gain the right to vote on all issues the decision on which is to be taken unanimously by all shareholders of the company (for example, granting a pre-emptive right when placing additional shares, making a contribution to property, limiting the number of shares owned by one shareholder, etc.), as well as in case of amendments to the company's charter that could lead to infringement of the rights of such shareholders and/or to actual reduction of the dividend and/or liquidation value paid on preferred shares of the relevant type.

-        The internal audit committee becomes an exclusively collegial body; joint stock companies no longer have the right to appoint an internal auditor as a single-person control body.

-        Procedure for creating an internal audit committee is changed. An internal audit committee is not mandatory for a public joint-stock company and is created only if it is expressly provided for in the charter. An internal audit committee is mandatory for a non-public company, unless its absence is expressly provided for in the charter. Relevant amendments to a non-public company charter on creation or absence of the internal audit committee are to be adopted by all shareholders unanimously.

-        Board of directors is officially entitled to form committees for preliminary consideration of issues within its competence.

-        Competence of a board of directors includes determination of principles and approaches to the company’s risk management, internal control and internal audit.

-        Provisions concerning determination of a quorum of the shareholders meeting on the issue of approval of interested-party transactions are clarified: the meeting is deemed duly constituted regardless of the number of participating holders of voting shares who have no interest in the transaction.

2. The following amendments take effect on September 1, 2018:

-        Restriction of the board of directors’ right to nominate candidates to the company’s management bodies. The number of candidates proposed by the board of directors cannot exceed the number of members of the relevant management body.

-        Obligation of a public company to develop and approve the company's policy regarding organization of the risk management and internal control systems.

3. Final provisions of the amendments to the JSC Law will take effect on July 1, 2020:

-        Obligation of the board of directors of a public company to form an audit committee for preliminary consideration of issues related to control over the financial and economic activities of the public company.

Public company’s board of directors appointing an official responsible for organization and implementation of the internal audit.

[1] See the Russian Government Decree No.1315-r dated 25.06.2016 “On approval of Improvement of Corporate Governance action plan (road map)”.