API: Some provisions of law on simplifying issuance of securities violate rights of minority shareholders

17-11-2017

November 17. FINMARKET.RU – According to experts of Russia’s Association of Institutional Investors (API), some provisions of the draft law on simplifying the issuance of securities passed this Thursday by the government of Russia violate the rights of minority shareholders.
The API sent a letter concerning certain provisions of the draft law “On amending certain legal acts of the Russian Federation to improve the legal regulation of securities issuance” (on simplifying issuance) to Russia’s first deputy Prime Minister Igor Shuvalov
The draft law (currently being prepared for submission to the State Duma) is aimed at streamlining the issuance procedure for securities and simplifying information disclosure by issuers.
According to the letter, the API supports the concept of the draft law and the vast majority of the proposed amendments. However, investors oppose two innovations brought to the law on the securities market considering them inappropriate: in their view, if adopted, they will negatively affect the positions of minority shareholders at Russian joint-stock companies.
In particular, the redrafted clause 1 of article 22 of the law cancels the requirement for an issuer with over 500 shareholders to register an equity issue together with the securities prospectus. The securities prospectus registration entails the obligation to disclose material facts and quarterly statements; without such a prospectus, the disclosure obligation is not applicable. According to API experts, this change is a step towards canceling the rule according to which such issuers were subject to the public disclosure obligation. This means that a joint-stock company with many investors (which essentially makes it a public company) will continue attracting investors even before it starts disclosing information of relevance to them. Besides, the draft law invalidates article 30.1 clause 1 sub-clause 4 of the securities market law, according to which issuers with more than 500 shareholders cannot currently refuse to publicly disclose information of importance to investors. Under the current legislation, even if the company had its shares delisted and ceased to be a public entity, the obligation to disclose information persists if it has more than 500 shareholders. The draft law proposes that the refusal from disclosure only require support from 95% of the shareholders and removal of the word “public” from the corporate name. There are issuers where majority shareholders hold 95% of shares, while the number of minority shareholders which own the remaining shares may reach several thousand. The amendments enable companies to renege on public disclosure without any trouble, regardless of the number of shareholders.
The law on information rights of shareholders passed in the summer has almost completely deprived minority shareholders of public companies of the right to receive information on the company’s activities upon request and limited this right for shareholders of non-public companies quite significantly, the Association reminded.
“The new legal changes were proposed almost immediately after the law on restricting information rights of minority shareholders took effect. Taken together, these innovations will give joint-stock companies with many shareholders an opportunity to almost entirely deprive shareholders of corporate information, including information subject to public disclosure. Furthermore, the public disclosure obligation applying to joint stock companies and the possible expansion of the scope of disclosure came to be a key argument at an early stage of the debate on the expediency of restricting shareholders’ access to corporate information. It was supposed that the restriction of the right to request information would be offset by its public disclosure. Now that shareholders actually end up fully deprived of the right to request information, easier avoidance of public disclosure for joint-stock companies with any number of shareholders comes on the agenda,” the API’s letter notes.
In view of minority investors, the refusal to publicly disclose information combined with the impossibility to request such information will become an effective way of driving them out of joint-stock companies, the Association’s experts emphasize.
The Association believes that the proposed regulatory changes will cause notable damage to the investment climate and corporate governance in Russia.
The API has therefore asked Russia’s first deputy Prime Minister Igor Shuvalov to exclude these innovations from the draft law.

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