Investor Protection in the CIS (Law in Eastern Europe)

Investor Protection in the CIS: Legal Reform and Voluntary Harmonization

Law in Eastern Europe A series 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 of Bolzano General Editor William Simons No. 57

Investor Protection in the CIS: Legal Reform and Voluntary Harmonization

Edited by Rilka Dragneva

Leiden • Boston

A C.I.P. record for this book is available from the Library of Congress.

Printed on acid-free paper.

ISSN 0075-823X ISBN-13: 978-90-04-15532-9 ISBN-10: 90-04-15532-5 © 2007 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishers, '"!.Q>HEODANO+=NPEJQO,EFDKɳ.Q>HEODANO=J@41. http://www.brill.nl All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, me?D=JE?=HLDKPK?KLUEJCIE?NK­HIEJCNA?KN@EJCKNKPDANSEOASEPDKQPSNEPPAJ permission from the Publisher. Authorization to photocopy items for internal or personal use is granted by Brill Academic Publishers provided that the appropriate fees are paid directly PK2DA!KLUNECDP!HA=N=J?A!AJPAN0KOASKK@"NERA1QEPA"=JRANO MA 01923, USA. Fees are subject to change.

Printed and bound in The Netherlands.

Contents Editor’s Foreword CIS Model Legislation and Its Contributions to Company-Law Reform and Harmonization Rilka Dragneva Legal Regulation of Shareholder Rights in the CIS Rilka Dragneva Cumulative Voting and the Protection of Minority Shareholders in the CIS Gregory F. Maassen and Rilka Dragneva

vii

1 45

85

Protection of Investors’ Rights in Special Circumstances Davit Karapetyan

105

Protection of Shareholders through the Regulation of Securities Markets Hans-Joachim Schramm and Andrei Bushev

149

The Investment Climate in the Commonwealth of Independent States Joop de Kort

193

Appendices “Civil Code”, Part I (excerpts), Model Recommended Legislation of the Commonwealth of Independent States

209

“On Joint Stock Companies”, Model Recommended Legislation of the Commonwealth of Independent States

233

“On Audit”, Model Recommended Legislation of the Commonwealth of Independent States

249

“On Securities Markets”, Model Recommended Legislation of the Commonwealth of Independent States

257

“On Protection of Investor Rights in Securities Markets”, Model Legislative Provisions of the Commonwealth of Independent States

291

About the Authors

333

Index

337

Editor’s Foreword

Building on the extensive interest in company law and corporate governance development in post-communist transformation, this volume examines the legal regime for protection of company investors in the Commonwealth of Independent States (CIS). We approach the subject in two principal ways. First, the discussion centers on the problems of domestic legal reform and the extent to which international legal stan@=N@O=J@>AOPLN=?PE?A=NANA®A?PA@EJPDALNK?AOO 2DA=EIDKSARAN is to go beyond the discourse of “compliance” which often dominates debates on legal reform in the transition economies of Eastern Europe. 5AKɳAN=JEJÎ@ALPD?KIL=N=PERAH=S=J=HUOEOKBEILKNP=JP=OLA?POKB investor protection, while pointing to the complex policy balance behind certain legal solutions to be made in any jurisdiction, but particularly in PDALKOPÎ1KREAP?KJPATP +KNAOLA?E­?=HHUPDABK?QOEOKJEJRAOPKNLNKPA?tion through the provision of basic shareholder rights (Rilka Dragneva), cumulative voting (Gregory Maassen and Rilka Dragneva), shareholder rights in special circumstances (Davit Karapetyan), and through securities markets regulation (Hans-Joachim Schramm and Andrei Bushev). The recognition of the complex socio-economic reality that domestic and foreign investors face has also led us to include a chapter on the investment climate in the CIS (Joop de Kort). Second, this volume seeks to highlight the contribution of model legislation adopted within the CIS framework for legal developments in KQN?DKOAJ­AH@ +K@AHH=SOKNKPDANBKNIOKB¢OKBP£D=NIKJEV=PEKJD=RA become a valuable ingredient of modern legal landscape—in the context of federal states (e.g., the US), regional economic organizations (e.g., the EU), or bodies pursuing international cooperation (e.g., UNCITRAL). Against this background, the CIS model legislation process serves as an important example of voluntary harmonization, but also of creating an institutional medium for supporting domestic legal reform. The general assessment of the process of adopting model legislation in the CIS is the OQ>FA?PKBPDA­NOP?D=LPANEJPDEO>KKGÓRilka Dragneva). The remaining chapters take stock of legal solutions proposed particularly by the Model Legislative Provisions on Investor Protection of 14 April 2005. The volume =HOKEJ?HQ@AOSD=PSA>AHEARAPK>APDA­NOP?KILNADAJOERA?KHHA?PEKJKB CIS model laws related to investor protection published in English. The contributions to this book have sought to analyze legal developments in all CIS member states—Armenia, Azerbaijan, Belarus, Georgia, Moldova, Kyrgyzstan, Kazakhstan, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. We are aware that Turkmenistan changed its CIS OP=PQOBNKI=BQHHIAI>ANPK=JK>OANRANEJQCQOP 7APSA­J@EP

viii

Investor Protection in the CIS: Legal Reform and Voluntary Harmonization

>AJA­?E=HSDANA=LLNKLNE=PAPK?KJOE@AN@ARAHKLIAJPOEJPD=P?KQJPNU too. Where a certain country has been excluded from the discussion of a L=NPE?QH=N?D=LPANÐAEPDAN@QAPKAILENE?=H@Eɹ?QHPEAOKN>A?=QOAEP@KAO not deal with a given issue—a respective disclaimer has been made. We D=RA=EIA@=PNA®A?PEJCPDAOP=PAKBH=S=OKBQCQOP  To paraphrase the famous sentence of John Donne, “No book is an island, entire of itself […]”.1 In this sense, the preparation of this volume is related to three principal impulses. First, in certain ways, the book NA®A?PO PDKQCDPO @ARAHKLA@ KQP KB PDA EJRKHRAIAJP KB PDA I=FKNEPU KB contributors in the drafting of the Model Legislative Provisions on Investor Protection for the Commonwealth of Independent States in the course of 2003-2004. This work was an exciting opportunity to delve into important issues of investor protection in the CIS, focus on the state of legal reform in the area, and gain insights into the working of the InterParliamentary Assembly of the CIS. For this opportunity, a special debt is owed to Alexei Zverev from the European Bank for Reconstruction and Development, Eric Vinken of the Dutch Center for International Legal Cooperation, and the leadership of the Inter-Parliamentary Assembly of the CIS, including that of its Permanent Commission on Economy and Finance. I am particularly thankful for having been able to work—both in the drafting of the model law and in the preparation of this book—with stimulating colleagues such as Gregory Maassen, Davit Karapetyan and Hans-Joachim Schramm. Second, at least as far as the contribution of this author is concerned, the book represents a fruition of a multi-year research project on the problems of legal harmonization and regional cooperation in the CIS. The work on this project, as well as the preparation of this book, was funded >U2DA ,APDANH=J@O -NC=JEV=PEKJ BKN 1?EAJPE­? 0AOA=N?D ÓNederlandse Organisatie voor Wetenschappelijk Onderzoek). A special debt of gratitude is owed to NWO, and particularly to drs. (sic) J.S. Voskuilen, for facilitating the publication of this book. ThirdPDALNAL=N=PEKJKBPDEORKHQIA>QEH@OQLKJPDALNEKNAɳKNPO and commitment of the members of the Institute of East European Law and Russian Studies (IEELRS), Faculty of Law, University of Leiden, The Netherlands, to the cause of legal development in the Commonwealth of Independent States. It has been the privilege of this author to belong to PDA'##*01OP=ɳOEJ?A 2DEOD=O>AAJ=SKJ@ANBQHKLLKNPQJEPUPK gain inspiration and grow in learning, but also on a more personal note, to make what I hope to be life-long friends and colleagues. In a similarly 1

Meditation XVII in J. Donne, Devotions Upon Emergent Occasions and Death’s Duel, New York and Toronto 1999.

Editor’s Foreword

ix

personal vein, for a Bulgarian force-fed with Russian or, rather, Soviet ideology, this involvement has made it possible to reconcile myself with the world beyond the Black Sea, and get to know its cultural and human richness in new and truer ways. It is in this sense that I wish to make a personal dedication to my colleagues at the IEELRS, and particularly to those with whom I have been able to work most closely, including Joop de Kort, Hans Oversloot, Ferdinand Feldbrugge, Ruben Verheul, Wim Timmermans, and the late Ger van den Berg. My gratitude and deep appreciation go especially to William Simons for his continuous support and encouragement, vision, and friendship. A special acknowledgement should be made of the competent and Aɹ?EAJP?KJPNE>QPEKJKB!QNPEO Q@@AJPKPDALNAL=N=PEKJKBPDEORKHume. He took upon himself most of the legal language editing and, where JAA@A@PDAPN=JOH=PEKJKBPDA@EɳANAJP?D=LPANO &EO?KJPNE>QPEKJS=O critical in preparing the CIS model laws for publication by revising prior English-language drafts and/or translating from the Russian language. Similarly, many thanks to Alice Engl from the European Academy in Bozen/Bolzano, Italy, for her invaluable help with the technical preparation of this volume. Finally, my warmest gratitude goes to my family for their support and interest in my work, and particularly to my husband, Alan Lewers, for his patience, faith in me, and readiness to help with whatever it takes.

CIS Model Legislation and its Contributions to Company-Law Reform and Harmonization Rilka Dragneva1 Large-scale legal reformD=O>AAJKJAKBPDA@A­JEJCAHAIAJPOKBOK?E=H life in Central and Eastern Europe in general, and in the Commonwealth KB'J@ALAJ@AJP1P=PAOÓ!'1ÔEJL=NPE?QH=NKRANPDAH=OP­BPAAJUA=NO 2DANA has barely been an area of law left untouched in a process underpinning the region’s move toward independent statehood, parliamentary democracy, a market economy, and the rule of law. A key place in this process was accorded to the revival of private law, particularly in relation to the legal framework for companies and other business operators. Deservedly, a great deal of attention was directed at domestic developments in the area of company-law reform by scholars and policy-makers both in the East and the West. Much of that attention focused particularly on the extent to which JASH=SONA®A?PA@IK@ANJinternational legal standards and paradigms developed in the area of company law and corporate governance.2 5D=PD=ONAI=EJA@EJOQɹ?EAJPHUOPQ@EA@DKSARANEOPDA?KJPNE>Qtion—actual and potential—to legal reform in the post-communist world of the process of voluntary harmonization through model laws undertaken within the CIS framework.3 The adoption of model legislation has been considered important enough to attract the support of major international donors.4 Yet the process has escaped the rigor of research and heat of de1

The author would like to thank William Simons and Hans Oversloot for their helpful comments. The research on which this article is based was funded by The ,APDANH=J@O-NC=JEO=PEKJBKN1?EAJPE­?0AOA=N?DÓNWO).

2

The reference here is predominantly to the standards and best practices incorporated in the following documents: OECD, Principles of Corporate Governance, Paris 2004, available online at , as well as a number of CIS-related documents recently developed on the basis of the OECD Principles, such as OECD, The White Paper on Corporate Governance in Russia, Paris 2002, available online at ; EBRD, Principles of Corporate Governance and Corporate Governance Checklist, London 2000, available online at ; OECD, Corporate Governance in Eurasia: A Comparative Overview, Paris 2004, available online at .

3



5ANABANPDANA=@ANPKLQ>HE?=PEKJOEJPDEO­AH@PD=PPDALNAOAJPSKNGSEHH>QEH@KJ W. Simons, “The Commonwealth of Independent States and Legal Reform: The Harmonization of Private Law”, Law in Transition Spring 2000, 14; R. Dragneva, ¢2DA0A=HEPUKB+K@AHO0A®A?PEKJOKJPDA!'1+K@AH*=SKJPDA*EIEPA@*E=>EHEPU Company”, 27 Review of Central and East European Law 2001 No.1, 113-131; Special Issue on “The Legal Regulation of Bankruptcy: Russian Legislation and Models for the CIS”, 25 Review of Central and East European Law 1999 Nos.1-2.

4

Such as the European Bank for Reconstruction and Development (EBRD), GTZ

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 1-44 © Koninklijke Brill NV, Leiden, 2007

2

Rilka Dragneva

bate accorded both to legal reform as such and to similar developments in pursuit of legal harmonization internationally or in other regional settings. Much of this neglect, we believe, is not necessarily deliberate but rather the result of general attitudes to regional cooperation in the post-Soviet space and the perceived—both in the East and the West— “grand failure” of the CIS formula in promoting new-style economic integration.5 As with other “soft” and “hard” instruments for harmonization,6 the use of model laws in the CIS can be discussed by reference to the advantages associated with legal uniformity, such as the creation of a regulatory level LH=UEJC­AH@PDANA@Q?PEKJKB?NKOOÎ>KN@ANPN=JO=?PEKJ?KOPOLNA@E?P=>EHEPU and the general promotion of economic integration.7 Another frequently mentioned purpose of harmonization is the improvement of domestic legal institutions, the presumption being that such an improvement is better done by a central legislator for a variety of reasons, such as economies of scale or the need to overcome domestic opposition to reform. We believe that CIS model legislation in the area of company law has a valuable role to play in both these directions and examine, in this work, (Gesellschaft für Technische Zusammenarbeit), the USAID/Rule of Law Consortium, PDA +EJEOPNU KB $KNAECJɳ=ENO KB2DA ,APDANH=J@O PDA !=J=@E=J 'JPANJ=PEKJ=H Development Agency, the Asian Development Bank. 5

6

7

See, for example, M. Brill Olcott, A. Aslund and S. Garnett, Getting It Wrong: Regional Cooperation and the Commonwealth of Independent States, Washington, DC 1999; I. Shishkov, Integratsionnye protsessy na poroge XXI veka, Moscow 2001. We also recognize that, BKNI=JUEPD=OOEILHU>AAJ@Eɹ?QHPPKBKHHKS!'1@ARAHKLIAJPO 2DEOEOL=NPE?QH=NHU so in view of the problems in obtaining reliable information and the confused and contradictory nature of CIS integration, poignantly described as “Byzantine” and needing non-standard analytical tools—like chaos theory or another post-modern PDAKNUÐPKDAHLMQ=HEBUEP 1AA) +=H®EAP¢2DA!KIIKJSA=HPDKB'J@ALAJ@AJP States: Towards Supranationalism?”, in F. Feldbrugge, ed., Law in Transition, The Hague 2002, 152. 

'JPDEOSKNGSAQOA¢D=NIKJEV=PEKJ£=O=CAJANE?PANIBKNAɳKNPO@ENA?PA@=P=CERAJ HARAHKBHAC=HQJEBKNIEPU $KN=IKNAOLA?E­?@EOPEJ?PEKJSANABANPK%  AJ=??DEK Diritto Privato della Comunità Europea. Fonti, modelli, regole, Cedam 2004, 11, who @A­JAO ÓÔ¢QJE­?=PEKJ£=OPDALNK?AOOSDANA>U=NQHAEOLNK@Q?A@>U=OEJCHAOQLN=J=PEKJ=H “legislator”, but is subject to interpretation and application by national courts; (2) “uniformization”, whereby a rule is produced by a supranational “legislator” as well as interpreted and applied by a single system of supranational courts; and (3) “harmonization”, whereby the “legislator” decides that a certain level of uniformity needs to be achieved, but single states retain some liberty in implementation. For a recent summary of the advantages (and disadvantages) typically associated with harmonization, see L. Enriques, “Company Law Harmonization Reconsidered: What Role for the EC?”, ECGI Working Paper 2005 No.53, available online at .

CIS Model Legislation

3

the main characteristics of the process of voluntary harmonization in the CIS with a view to showing this. Yet we take a special interest in the role of model laws particularly for the improvement of domestic legislation, representing a crucial element of post-communist legal reform.8 Thus, we start by providing a brief summary of some general problems of legal reform observed over the last decades, intended to serve as a background against which the CIS model-law process will be discussed. We then turn to legal harmonization in the CIS: its starting point, its legal mandate, the choice of harmonizing instruments, and the organization of the process. In doing so, the focus will be on model laws dealing with the regulation of joint-stock companies rather than with all forms of business associations. In addition to limitations of time and space, this choice is related to the challenges presented by the regulation of joint-stock companies, and investor protection in particular, in the CIS context.9+KNAOLA?E­?=HHUSANAREAS­RAIK@AH=?PO=@KLPA@SEPDEJPDA CIS framework:10 — Part I of the Model Civil Code of 29 October 1994 (MCC); — The Model Law on Joint-Stock Companies of 17 February 1996 (MLJSC); — The Model Law on Auditing of 8 June 1997 (MLA); — The Model Law on Securities Markets of 24 November 2001 (MLSM); — The Model Legislative Provisions on Investor Protection of 14 April 2005 (MLPIP). We conclude by assessing the contribution of model legislation, its potential, as well as the factors that would help “unlock” or “seal” this 8

In this sense, throughout this work we use the term “legal reform” primarily with reference to adopting new, or amending old, legislation. Yet we are very aware that, especially in the context of post-communist transformation, new laws are far from being the whole answer to the need for change. Many observers have pointed out the equal importance of other legal institutions, such as judicial bodies and enforcement agencies. Further, there is the role of “the culture of law, despite its ‘trickery’ and other drawbacks”, in the words of Professor Alekseev, particularly important in the CIS context. See S. Alekseev, “On Some Tendencies in World Legal Development and the Russian Legal System”, 27 Review of Central and East European Law 2001 No.4, 567-580, 576.

9

For more on the importance of investor protection in the CIS context, see R. Dragneva, “Legal Regulation of Shareholder Rights in the CIS”, in this book. It is because of the primary interest in investor protection that we also adopt a broad @A­JEPEKJKBFKEJPÎOPK?G?KIL=JUNACQH=PEKJPD=PEJ?HQ@AO=Q@EPEJC=J@securities law.

10

These documents are available online (in Russian) at . English translations are included in this book.

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Rilka Dragneva

potential. The idea is not to provide an exhaustive list of answers but rather to share thoughts and questions in the hope of contributing to the comprehensive discussion that the CIS model-law process deserves. A General Note on Legal Reform The process of post-communist legal transformation has provided abundant material for debates on the theory and practice of legal reform worldwide. To start with, the question is often raised about the sources of new legal norms, and particularly about the balance between home-grown and foreign solutions. In principle, there seems to be a discrete number of sources that can be used in drafting legislation: — Older domestic legislation; — Organically developed, new domestic solutions—through a dialogue =IKJCPDAR=NEKQO?KJOPEPQAJ?EAO=ɳA?PA@>UPDAHACEOH=PEKJ=J@ KN through scholarly contribution; — Foreign law solutions; — Solutions embodied in international legal standards and best practice. Domestic legal reform has made extensive use of the last two sources, or “legal transplants” as they are known.11 In principle, transplants have been a part of the legal development of many countries,12 and certainly of the Soviet Union and the Russian Empire before it.13 At this new historical juncture, however, the reliance on foreign sources (particularly in the area of company law) is even greater than before because of, among others: (1) The nature of the former Soviet countries’ legal heritage, as will be discussed below; ÓÔ 2DA?KJPATPKBEJPANJ=PEKJ=HKNC=JEV=PEKJO¥­J=J?E=H=OOEOP=J?A=J@ conditionality;14 and 11

G. Ajani, “By Chance and Prestige: Legal Transplants in Russia and Eastern Europe”, American Journal of Comparative Law 1995 No.43, 93-117; K. Pistor, “Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies”, 1 European Business Organization Law Review 2004 No.1, 59-110.

12

A. Watson, Legal Transplants: An Approach to Comparative Law, Athens and London 1993.

13

Ajani, op.cit. note 11.

14



2DA­J=J?E=H=OOEOP=J?AKBKNC=JEV=PEKJOOQ?D=OPDA'+$=J@PDA5KNH@ =JGEO frequently conditional on the adoption of a particular legal framework. Certainly, company law and corporate-governance reform have been high on the agenda of those organizations. In addition, the quality of adopted laws is often assessed by these organizations in terms of their compliance with international legal standards, as mentioned earlier. For more on the general problems of conditionality in the practice of the IMF and the World Bank, see J. Stiglitz, Globalization and Its Discontents, London 2002.

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(3) The desire of many CIS countries to demonstrate through law their wish to belong to the family of modern nations and to the global economy.15 In general, the acceptance of transplants in recipient countries is not without problems.16 Some of these problems relate to the contents of the respective rules, for example, the extent to which they correspond to the needs of the recipient countries.17 In this regard, Professor Pistor raises EILKNP=JPMQAOPEKJOOLA?E­?=HHU=>KQPPDA¢PN=JOLH=JP=>EHEPU£KBinternational legal standards.18 Other problems relate to the process through which foreign law and international legal standards are introduced in domestic H=SO 'PEOEJ@AA@PDAH=PPANPD=PKBPAJ?KILNKIEOAOPN=JOLH=JPO=ɳA?PO PDAENHACEPEI=?UEJNA?ELEAJP?KQJPNEAO=J@QHPEI=PAHU=ɳA?POPDAATPAJP to which new laws are implemented. Legal transplants can be introduced by various means. For the sake of simplicity, we note here two extreme situations. The ®NOP is when transplants are introduced entirely “from within” by means of reception. In this case, it is typically domestic lawyers who are placed fully in charge of the drafting process and who identify and transpose the selected legal solutions. At their best, these drafters are enlightened and very well informed about the foreign laws as such, as well as about their policy background and economic context. They have what has been described as the “knowledge of living law”.19 At the same time, they have a thorough understanding of the local legal tradition and economic relations, which helps them adapt foreign solutions, and they are able to ensure consistency with systemic legal principles and related areas of regulation. This method clearly has 15

This is certainly most visible with regard to the CIS member states aspiring to closer relations with the European Union, such as Ukraine, but also in the context of WTO accession. All CIS countries, except Turkmenistan, have applied for membership. Kyrgyzstan, Moldova, Georgia, and Armenia have already obtained it.

16

K. Pistor, Y. Keinan, J. Kleinheisterkamp and M. West, “The Evolution of Corporate Law: A Cross-Country Comparison”, 23 University of Pennsylvania Journal of International Economic Law 2003 No.4, 791-871.

17

Indeed, these are some of the questions Professor Ajani addresses in his article. Ajani, op.cit. note 11. An important and often debated issue in the CIS in this respect is the choice of transplants from civil-law or common-law systems. We choose not to deal with this issue not only because of a lack of space, but also out of a belief in PDABQJ?PEKJ=H?KJRANCAJ?AKBPDAOAPSKOUOPAIONA®A?PA@=HOKEJPDAB=?PPD=PEJ practice, CIS drafters have taken account of solutions envisaged in both. See the discussion on the sources of the Russian Civil Code further below.

18



19

) .EOPKN¢2DA1P=J@=N@EV=PEKJKB*=S=J@'PO#ɳA?PKJ"ARAHKLEJC#?KJKIEAO£ G-24 Discussion Paper June 2000 No.4, available online at . Ibid., 2

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many advantages, yet it requires a type of a legal elite (and/or the time and ?KJ@EPEKJOPK@ARAHKLKJAÔSDE?DBKN@EɳANAJPNA=OKJOÓe.g., the closeness of the Soviet system, the lack of hands-on experience with market relations, or the various pressures on legal reform), has not been widely available and equally distributed in the CIS countries. Indeed, many experienced Russian civilists have been considered by foreign observers and/or pro-reform politicians as not being up to the task of drafting new, market-oriented laws because of their strong association with Soviet legal scholarship. Second, at the other extreme,20 laws can be drafted (and legal transplants introduced) entirely “from without” by foreign experts and rubber-stamped by local parliaments. Unfortunately, the experience of legal PA?DJE?=H=OOEOP=J?AKRANPDAH=OP­BPAAJUA=NOD=OLNKRE@A@I=JUAT=ILHAO of such transplantation in Eastern Europe.21 This method of legal reform is certainly faster and cheaper to implement; it is also more likely (though not for certain) superior with regard to the foreign-law content of new laws. Yet practice has shown that it frequently results in a “hasty-transplant OUJ@NKIA£OUJKJUIKQOSEPDEJOQɹ?EAJP=@=LP=PEKJ=J@H=?GKB=OUOPAIE? approach to domestic legislation, donor-driven legislative agendas, and fast KQPLQPPKI=P?DLNKFA?P=J@­J=J?E=HB=?EHEPU?KJOPN=EJPO 22 With experience, adaptation to local circumstances and taking into account existing legal traditions have increasingly been recognized as crucial elements of sustainable legal reform.23 In fact, with very few extreme exceptions, most Western legal experts, when asked, are likely to say that they have taken local conditions into account when involved in drafting. Yet even a wellinformed and benevolent but external judgment cannot replace a process based on organic law- and policy-making. In this sense, we cannot agree more with Wade Channell, who notes: “The crux of the problem is not the origin of the law per se. […] Rather it lies in the pursuit of law reform processes that generally do not permit users to participate in adapting the draft—whatever its origin—to local conditions. […] Lack of local input, not transplantation is the problem.”24 20

Except for situations such as the automatic extension of the occupiers’ legal system to occupied lands, e.g., the application of German law to Poland during World War II.

21

W. Channell, “Lessons Not Learned About Legal Reform”, in T. Carothers, ed., Promoting the Rule of Law Abroad, Washington, DC 2006.

22

Ibid., 139.

23

C. Gray, “Reforming Legal Systems in Developing and Transition Countries”, Finance and Development September 1997, 14-16.

24

Channell, op.cit. note 21, 140.

CIS Model Legislation

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We recognize that there are many states between what we describe as transplantation from within and from without. Indeed, these seem to be the most interesting cases to observe. Equally applicable to all methods, however, is the need for openness and transparency of the process. The reference here is to avoiding an “ivory tower” approach to law-making, one that remains highly theoretical and abstract and largely separated from the lives of the end-users of laws: judges, businesses, interest groups, etc. OD=OKBPAJ>AAJOPNAOOA@H=SO=NASKNPDRANUHEPPHASEPDKQPNA®A?PEJC =LKHE?UÎI=GEJCLNK?AOOPD=PP=GAOEJPK=??KQJPPDA@EɳANAJPEJPANAOPO involved in the relationships being regulated and makes important social choices about priorities and distributions of gains and risks. The importance of such an inclusive process has been recognized as a problem area of legal reform; yet its achievement is far from becoming a reality.25 This brief review of issues does not at all exhaust the full range of questions and problems (many of them without black-and-white answers) of post-communist legal reform. Yet it allows us to establish the background that CIS model legislation can be placed against and to discuss its actual and potential ability to balance out many of the problems mentioned above.

Historical Background and Starting Conditions 2DA=@KLPEKJKBIK@AHHACEOH=PEKJEO=JATLNAOOEKJKBPDAAɳKNPPKLNKmote legal uniformity in the post-Soviet space in the new conditions of independent statehood and diverging economic and legal development trajectories. As it will be discussed further below, we place the start of !'1D=NIKJEV=PEKJAɳKNPOEJPDA­NOPD=HBKB 'PEOAOOAJPE=HBKNPDA subsequent analysis to provide the reader with a brief background to PDAOAAɳKNPO 1Q?D=JKRANREASEOEILKNP=JPEJKN@ANPK=IKJCKPDAN things, show the scale of the law-reform task in the area of company law, as well as the extent to which past home-grown legal solutions can be relied upon.

25

D. Bernstein, “Process Drives Success: Key Lessons from a Decade of Legal Reform”, Law in Transition Autumn 2002, 2-13. The author points to the reluctance of transition-country governments to open up the legislative process. Often, however, the problems are also linked to the time and money constraints of legal technical assistance projects. See Channell, op.cit. note 21. Bernstein also points to another important aspect of transparency, namely the fact that it reduces the possibility of particular corporate interests to “purchase” legislation in a political climate of corruption.

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Rilka Dragneva

Unity and Diversity in the Early 1990s 3JPEHPDA1KREAPBA@AN=PERANALQ>HE?O>AHKJCA@PKPDAQJE­A@HAC=HOL=?A of the USSR. In the area of civil law, uniformity was maintained through the adoption of Fundamentals of Legislation (Osnovy zakonodatel’stva) at the federal level, which were then incorporated in republican legislation. 2DA ­NOP $QJ@=IAJP=HO KB !EREH *ACEOH=PEKJ SANA =@KLPA@ EJ  =J@ were followed by the adoption of republican Civil Codes, e.g., in 1964 in the RSFSR.26 Thus, republican law-making was not made redundant,27 yet it certainly lost much of its EJ@ALAJ@AJPEILKNP=J?A O.NKBAOOKN'KɳA writes: “Republic civil law was subordinated to federal civil law, and the former could not contradict the latter, while the latter frequently invaded the realm of the former.”28 In addition to formal legal unity, there was the more real unity of the Soviet economic system based on central planning and state ownership. Civil law had very little relevance to the main tenet of Soviet economic life, the state enterprise (predpriiatie), which by its nature departed from the principles of separate legal personality and limited liability. In fact, the separate legal personality of state enterprises was proclaimed only in the 1961 USSR Fundamentals of Civil Legislation and then envisaged in the republican Civil Codes. Even then, however, these main principles of corporate personality had very little real meaning.29 26



2DAOANALQ>HE?=J!K@AO?=IAPKNALH=?A=­NOPCAJAN=PEKJKB!K@AO=@KLPA@EJPDA aftermath of the formation of the USSR in 1923, which were very much in conformity with the Russian Civil Code of 1922.

27



2DA¢1P=HEJ£!KJOPEPQPEKJKBPDA3110=PPAILPA@=PECDPANQJE­?=PEKJ=LLNK=?D and provided for the drafting of a Union Code to replace the republican ones. Yet this idea did not materialize.

28

- 'KɳA¢2DA1UOPAIKB!EREH*=SEJPDA,AS!KIIKJSA=HPD£EJ% %EJO>QNCO et al., eds., The Revival of Private Law in Central and Eastern Europe, Dordrecht 1996, 79.



29

Enterprises enjoyed a legal personality in the sense of having a name, designated property (separate balance and bank account), and distinct administration (appointed director). They did not, however, own their assets or have a right in rem over them. 2DAENNAH=PEKJPKLNKLANPUS=O@A­JA@=OKLAN=PERAI=J=CAIAJPÓoperativnoe upravlenieÔSEPDEJPDAHEIEPOKBPDAENA?KJKIE?LQNLKOA@A­JA@EJPDAENcharter (ustav). Art.50 of the 1964 RSFSR Civil Code, for example, proclaimed the invalidity of transactions concluded outside the purpose of the enterprise. It was only after the start of perestroika that the 1987 USSR Enterprise Law introduced “full economic ownership” and “operative management” as property rights in rem. Enterprises, however, still did not hold formal ownership titles. It was also proclaimed that enterprises would be liable for their obligations with the property designated to them and that the state would not be liable for the obligations of the enterprise. See Art.8 of the 1965 USSR Statute on the Socialist State Production Enterprise. This, however, did not have any real meaning within

CIS Model Legislation

9

The Soviet perestroika legislation adopted at the federal level introduced some major changes to the regulation of the enterprise. The 1990 USSR Law “On Ownership” departed from the principle of the monopoly of state ownership and placed it in parallel with individual and collective ownership. Importantly, joint-stock companies were mentioned as subjects of collective ownership.30 The 1990 USSR Law “On Enterprises” adopted soon thereafter provided some general rules for the formation, property, and management of enterprises (joint-stock companies among them) and their relation to the state.31 Regulation, however, was based on the generic ?KJ?ALPKBPDAAJPANLNEOA=O=JA?KJKIE?AJPEPUOPEHH@A­JA@RANUIQ?D in the spirit of reform socialism. It was a 1990 USSR Decree that dealt with joint-stock companies in particular.32As Professor Simons notes, while for some this was just a piece of secondary legislation providing more detail on one type of enterprise, EJAɳA?PEPNAEJPNK@Q?A@PDAI=EJLNEJ?ELHAOKBPDA?KNLKN=PABKNI 33 In addition to rules on formation, capital, and internal governance, it also envisaged some basic minority-shareholder rights and accountability requirements. A year later, the 1991 Fundamentals of Civil Legislation of the 3110=J@PDA0ALQ>HE?O?KJ­NIA@PDA@AL=NPQNABNKIPDA¢AJPANLNEOA£ paradigm to the “commercial legal persons” paradigm, with joint-stock companies being among the latter, yet it did not contain any detailed regulation on the subject.34 These documents were adopted before the formal break-up of the USSR in December 1991. Yet Soviet unity had already begun to shake with the declarations of sovereignty and independence of the republics issued throughout 1990 and 1991.35 Importantly, these declarations proclaimed the primacy of republican laws over the laws of the USSR. Despite the B=?PPD=P@EɳANAJPNALQ>HE?OPKKGPDAEN@A?H=N=PEKJOSEPD=@EɳANAJP@ACNAA of seriousness, the possibility for legal divergence emerged. While the republics adopted their own equivalents to the 1990 USSR Law “On Ownership” and Law “On Enterprises”, they increasingly the command economy where no hard budget constraints were enforced, assets could be transferred between enterprises with acts of the founding administrative organs, and enterprises could not go bankrupt. 30

Arts.4 (2) and 15 of the USSR Law No.1305-1, 6 March 1990, “On Ownership”.

31

USSR Law No.1529-I, 4 June 1990, “On Enterprises”.

32

Decree of the USSR Council of Ministers No.590, 19 June 1990, “On Joint-Stock Companies and Partnerships with Limited Liability”.

33

W. Simons, The Privatization of State Enterprises in Russia and Kazakhstan: A Milestone in the Introduction of Market-Type Reforms, Leiden 1997, 75.

34

Art.19 of the 1991 USSR Fundamentals of Civil Legislation.

35

E. Walker, Dissolution: Sovereignty and the Break-Up of the Soviet Union, Oxford 2003.

10

Rilka Dragneva

varied in their timing and the solutions envisaged. They began to diverge particularly in the way they moved beyond the enterprise paradigm, and AOLA?E=HHUEJPDALNKREOEKJKBOLA?E­?NQHAOKJFKEJPÎOPK?G?KIL=JEAO=O SAHH=OPDAATPAJPPKSDE?DPDAU@EɳANA@BNKIPDA3110"A?NAA 36 Some countries, like Russia, were quick to adopt their own substantially @EɳANAJPNACQH=PEKJOKJFKEJPÎOPK?G?KIL=JEAO>ABKNAPDAAJ@KB 37 -PDANO@E@JKP=@KLPOLA?E­?=?POQJPEHH=PAN 38 With time, new pressures for divergence came into play and determined the individual countries’ legal-reform trajectories, as it will be discussed further below. Importantly, PDEO­NOPCAJAN=PEKJKBH=SO?=J>A@AO?NE>A@=OIEJEI=H=J@?KJBQOEJC and particularly weak as far as shareholder rights were concerned.39 The Value of Home-Grown Solutions It has often been noted that, unlike the case of the countries of Central or South-East Europe, the newly independent CIS republics did not have an extensive or (more or less) modern, pre-communist tradition of company law to turn to as a source for legal reform. In the Russian Empire, a general 36

For a review of the early laws on commercial companies of the CIS countries and PDA OQ>OP=JPERA @EɳANAJ?AO =IKJC PDAI OAA #  1QGD=JKR ¢.N=RKRKA LKHKVDAJEA khoziaistvennykh obshchestv i tovarishchestv v stranakh SNG”, Pravovedenie 1994 No.1, 31-39.

37

See RSFSR Federal Law, 25 December 1990, “On Enterprises and Entrepreneurial Activity”, and RSFSR Decree of the Council of Ministers No.601, 25 December 1990, “On Joint-Stock Companies”. The 1990 RSFSR Enterprise Law incorporated a number of rules previously scattered in several USSR acts. Yet neither it nor the 1990 RSFSR Decree represented a substantive improvement on the USSR solutions. As Professor Simons puts it, “careful draftsmanship was not a hallmark of this new Russian legislation”. See Simons, op.cit. note 33, 80. Ukraine, for example, followed suit relatively soon and adopted its own Law “On Enterprises” of 1 March 1991, which was followed by a Law “On Commercial Companies” of 19 September 1991.

38

There are various examples that can be given. Belarus adopted its Law “On Enterprises” on 14 December 1990 and its Law “On Joint-Stock Companies, LimitedLiability Companies and Companies with Additional Liability” on 9 December 1992. Azerbaijan passed a Law “On Entrepreneurial Activity” in 1991 and Laws “On Enterprises” and “On Joint-Stock Companies” in 1994. Armenia passed a Law “On Enterprises and Entrepreneurial Activity” in 1992, which contained some rules on joint-stock companies, followed by a special Law “On Joint-Stock Companies” only in 1996.

39

For example, Professor Sukhanov comments on the 1990 RSFSR Decree “On JointStock Companies”, which constituted the principal regulation on such companies until the entry into force of the respective section of Part I of the Russian Civil Code in late 1994, that it “opened all thinkable and unthinkable stops to allow various kinds of abuse”. See “Materialy konferentsii ‘Iuridicheskie litsa: itogi i perspektivy GK@E­G=POEEEOKRANODAJOPRKR=JEE=V=GKJK@=PAH¥OPR=¥£Zhurnal Rossiiskogo Prava 1998 No.10/11, 7.

CIS Model Legislation

11

law on joint-stock companies was passed in 1836.40 Its general character, however, was largely negated by the preservation of the concessionary principle of incorporation, where every charter had the character of a law, and chartered corporations also enjoyed various economic privileges.41 A number of attempts were made throughout the second part of the nineteenth and the beginning of the twentieth centuries to reform the existing system. Most of the proposals, however, were unable to surpass the opposition of the Imperial bureaucracy and its distrust in free enterprise.42 -JA EJEPE=PERA PD=P @AOANRAO OLA?E­? IAJPEKJ EO PDA B=EHA@ O @N=BP ?EREHÎH=S?K@E­?=PEKJÓGrazhdanskoe ulozhenie), which dedicates a chapter PKPDA@EɳANAJP>QOEJAOOBKNIO=IKJCPDAIOPK?G?KIL=JEAOÓaktsionernoe tovarishchestvo), and envisages a somewhat liberalized, mixed formation system (iavochno-kontsessionnyi poriadok).43 After the 1917 Revolution, companies were nationalized and the reH=PEKJOPDAUATAILHE­A@SANA@AAIA@?KJPN=NUPKPDAJASLQ>HE?KN@AN  ,KJAPDAHAOO@AOLEPAPDA@A­JEPA>NA=GSEPD PDA L=OP NACEIA PD=P S=O sought, the period of the New Economic Policy (1921-1928) led to some revival of the corporate form, used particularly with the purpose of combining state with foreign private capital. The Russian Civil Code of 1922, following in many ways the solutions of the pre-revolutionary draft code, re-introduced the form of the joint-stock company (or partnership with shares) (aktsionernoe obshchestvo or paevoe tovarishchestvo).44 Similar to the 40



2DALNKREOEKJOKBPDAH=SSANAEJ?KNLKN=PA@EJPDAÎRKHQIA?K@E­?=PEKJKB Svod Zakonov, in a separate chapter. Limited liability in principle was granted to chartered corporations as early as 1805. A further Decree of 1807 distinguished OQ?D?KNLKN=PEKJOBNKI¢PN=@EJC­NIO£Ótorgovye doma), which took the form of a “full partnership” (polnoe tovarishchestvo) and “limited partnerships” (tovarishchestvo na vere), which were created only by registration with municipal clerks. The 1807 Decree refers to the corporation as a legal form to be used as an exception to serve important economic state tasks and leaves all aspects of its organization to individual charters. For more, see L. Shepelev, Aktsionernye Kompanii v Rossii, Leningrad 1973; T. Owen, The Corporation under Russian Law, 1800-1917, Cambridge 1991.

41

Every corporation’s charter had to be approved by a number of state agencies and ­J=HHUOECJA@>UPDA2O=N 2DAOUOPAIPKKG=L=NPE?QH=NHU=QPK?N=PE?BKNIBKNAT=ILHA ?D=NPANO?KQH@>ANABQOA@KJN=PDAN>NK=@HU@A­JA@CNKQJ@O 1AA-SAJibid.

42

Except for a 1901 Law dealing with the powers of the general assemblies and audit commissions. See Owen, op.cit. note 40.

43

The drafting commission was appointed in the 1880s and completed its work in 1905. The draft was published and underwent several discussions but was never adopted. See I. Tiutriumov, ed., Grazhdanskoe ulozhenie, Proekt, Vol. II-3, St. Petersburg 1910.

44

The continuity from the Imperial draft, the Grazhdanskoe ulozhenie, was greater in terms of the regulation of common partnerships and full and limited partnerships. This continuity was politically controlled, however, by the provision of Art.1 of the 1922 Civil Code, requiring in essence that civil rights be exercised in conformity with their “socio-economic purpose”.

12

Rilka Dragneva

Imperial regime, however, the concessionary principle of incorporation S=OLNAOANRA@=J@PDA?KIL=JUBKNIS=ONAOANRA@BKNQOAEJOLA?E­?OA?PKNOKBEJ@QOPNU *=PANEJ="A?NAALNKRE@A@QJE­A@NACQH=PEKJKB Soviet joint-stock companies, but in the 1930s, the use of this legal form was reconsidered and the existing companies gradually disappeared.45 A more careful study is needed to determine the extent to which these pre-enterprise legal norms were used in the joint-stock company regulation of the early 1990s. A brief comparison between the 1922 Russian Civil Code and the 1990 USSR Decree, for example, suggests some continuity.46 It is also known that the Imperial draft and the 1922 Russian Civil Code were taken into account by the drafters of both the 1991 Fundamentals of Civil Legislation and the new 1994 Russian Civil Code. Certainly, what is extremely revealing of such continuity is the whole language of “restoration” and “rebirth” used by the drafters.47 Nonetheless, we believe that, given the state of company regulation in the early 1900s and the dramatic and numerous changes in economic HEBAOEJ?A?KJPEJQEPUEJPDAOLA?E­?=NA=KB?KIL=JUH=SEO>KQJ@PK>A very limited. What needs to be emphasized, however, is the continuity with regard to the system of private law in general. Given that company law is never in a legal vacuum, the importance of the general pre-Soviet private-law tradition should not be underestimated.48

45

A small number of shareholding companies (vsesoiuznye aktsionernye obshchestva) remained, regulated by separate laws, with all their shares being held by the state. See G. Reghizzi, “Corporations”, in F. Feldbrugge, G. van den Berg and W. Simons, eds., Encyclopedia of Soviet Law, Dordrecht 1985.

46

For example, both acts grant the right to 20% of the shareholders to call an extraordinary meeting of shareholders. Similarly, both acts envisage a revision commission (revizionnaia komissiiaÔ =O = >K@U OLA?E=HEVEJC EJ PDA ­J=J?E=H ?KJPNKH KB ?KIL=JU =ɳ=ENO

47

See Professors A. Makovskii and E. Sukhanov regarding the 1991 USSR Fundamentals, quoted in W. Burnham and G. Danilenko, Law and Legal System of the Russian Federation, Huntington, NY 2000, 243: “to a certain degree the preparation of the 1991 Fundamentals was similar to the restoration of old paintings. Numerous norms and institutions lost in the thirties and sixties, norms indispensable to the functioning of a market economy, needed to be restored. The losses in particular concerned major actors of entrepreneurial activities—legal entities, such as commercial partnerships and societies.”

48

For a recent account of this tradition see, for example, W. Butler, Russian Law, Oxford 2003.

CIS Model Legislation

13

The Mandate for Harmonization The emergence of the CIS in December 1991 was more about the break-up of the old USSR than about the birth of a new organization, at least for many of the former Soviet republics.49 The disintegration processes that had started in the late 1980s and early 1990s culminated in the dissolution of the Union but did not stop there. They continued with regard to its legacy: its assets, as well as the institutions of the pre-existing common economic and legal space. The drive toward “nationalization” of law, in particular, and the accompanying process of reform (or abandonment) of legal institutions connected with the planned economy was fuelled by a number of factors, including: — The desire to assert a newly discovered (or revived) state identity; — The path of transition to a market economy undertaken to a greater or lesser degree by individual CIS member states; — The strong aversion to the centralizing tendencies of the old Union; and — The fear among many of the republics of the new dominance of a traditionally strong Russia. At the same time, however, there were voices coming from very diverse quarters and interests saying that the complete disintegration of the legal unity should be contained. Thus, the approximation (sblizhenie) or harmonization of domestic laws was gradually recognized as an important area of cooperation in the new landscape of the Commonwealth of Independent States.50 In what follows, we examine the “popular” mandate for harmonization, i.e.PDAFQOPE­?=PEKJOBKND=NIKJEV=PEKJLQPBKNS=N@ by various groups and interests. We continue by outlining the legal mandate for harmonization, while also emphasizing some of the factors that complicate the interpretation of this mandate. The Popular Mandate for Harmonization For some, the need for approximation of laws was determined by important practical concerns. In the economic sphere, for example, these concerns were dictated by the still heavy dependence of the republics on the system of mutual deliveries between enterprises situated across the former Union, 49

This was certainly the case with regard to the “architects” of the CIS, Russia, Belarus and Ukraine. See, for example, Walker, op.cit. note 35; A. Rahr, “Russia”, in V. Toltz and I. Elliot, eds., The Demise of the USSR: From Communism to Independence, London 1995; A. Tsyganko, Pathways After Empire, Oxford 2001.

50

As it will be seen further below, these terms are not clearly distinguished in CIS documents, and they are often used as synonyms, except for the general sense that “harmonization” goes beyond “approximation”.

14

Rilka Dragneva

and the continued role of the ruble as a common currency in the early 1990s.51 Similarly, there were practical legal problems created with the republics’ declarations of independence. As already mentioned, the laws of the USSR were not automatically valid and no longer took precedence. As a result, given that many general questions had been resolved at the federal level, substantial gaps in the laws of individual republics occurred.52 Some KBPDAOAC=LOSANA­HHA@>UPDA@A?EOEKJKB?ANP=EJ?KQJPNEAOPK?KJPEJQA the application of the 1991 USSR Fundamentals of Civil Legislation and other compatible federal legislation on their territories until the adoption of the relevant domestic legislation.53 Others were addressed by the conclusion of various inter-governmental agreements.54 Yet these remedies NAI=EJA@L=NPE=H=J@EJOQɹ?EAJP For others, at least in the early stage of the CIS, legal harmonization was an element of the bigger picture of trying to preserve the old unity, albeit in a reformed state. One can be reminded that the signing of the founding agreements of the CIS in December 1991 interrupted a process of negotiating a new union treaty, which had drawn support in a number of republics.55 Similarly, in the economic sphere, there had already been OECJA@ =J@ N=PE­A@ =2NA=PU KJ PDA #?KJKIE? !KIIQJEPU KB -?PK>AN 1991, which (despite being a framework agreement) provided for some role of a common “center”. The hopes of the “union reformers” did not disappear immediately, as the example of the chairperson of the Russian Supreme Soviet, Ruslan Khasbulatov, shows. In promoting the founding of a Parliamentary Assembly (Mezhparlamentskaia Assambleia) for the CIS in

51

52

For a discussion of the economic relations between the former Soviet republics in the period mentioned, see Olcott et al., op.cit. note 5; B. van Selm, The Economics of Soviet Break-up, London 1997. 

1AA'KɳAop.cit. note 28. Professor Tikhomirov points out, for example, that in the initial days of the CIS there was not a single act of transport legislation adopted at the republican level. See I. Tikhomirov, “Pravovye osnovy sotrudnichestva gosudarstvuchastnikov Sodruzhestva Nezavisimykh Gosudarstv”, Vestnik Mezhparlamentskoi Assamblei 1993, 16-24.

53

For example, Russia and Kazakhstan. The 1992 CIS Agreement on the Approximation of National Commercial Legislation also provided for the application of acts of the USSR by the eight CIS member states that signed it.

54

For example, agreements providing for uniform contract terms and dispute-resolution mechanisms for dealings between enterprises in realizing deliveries, such as the Agreement on the General Conditions of Supply of Goods Between CIS Organizations of 20 March 1992 or the Convention on Resolving Disputes Arising From Economic Activities of 20 March 1992.

55

See Walker, op.cit. note 35.

CIS Model Legislation

15

1992, he argued in this spirit that it marked “the beginning of the creation of a new confederation”.56 Further, there was (and still is) the view among members of the legal elite, in particular, and the wider population, in general, that unity, at least at some level, has a real and an intrinsic value, even if only determined by history and geography.57 Certainly, the argument has been made by both CIS and Western experts that the former republics should use this historic opportunity to maintain the closeness of their legal systems and move to reform in a coordinated fashion particularly in the area of private law.58 2DQOPDAUSEHH>A=>HAPK=?DEARASD=PNAI=EJO=@Eɹ?QHPCK=HPKNA=?D in both international and regional settings (e.g., the EU). For many, legal harmonization has a future-oriented role to play, one related to underpinning a new form of regional economic cooperation in the post-Soviet space. Moreover, there was (and still is) the view that any advanced economic integration along the example of the EU59 requires by necessity a highly uniform legal space, particularly in the areas of civil and commercial law. This position was embodied in the Treaty on the Economic Union of September 1993, which provided that “the economic union presupposes […] harmonized commercial [khoziaistvennoe] legislation of the negotiating states”,60 and has been recounted in numerous statements of CIS scholars and policy-makers. The strength of this conviction is also shown in the lack of (at least clearly discernible) CIS debates about the advantages or disadvantages of harmonization relative to regulatory competition.61 While there are many possible reasons behind this phenom56

Abstract 8.23, “Khasbulatov on New Confederation”, in Z. Brzezinski and P. Sullivan, Russia and the Commonwealth of Independent States, Armonk, NY and London 1997.

57

W. Simons writes about the views of the legal academic elite. See Simons, op.cit. note 3. Various popular surveys conducted since 1991 show that the population at large still places value on some form of unity, even in countries traditionally considered as “CIS skeptics” such as Ukraine. See “Ukraine’s European Integration in Popular Perceptions”, National Security & Defense 2005 No.7, 40.

58

See the statements of Justice W. Snijders and Professor A. Makovskii at the Conference on the Civil Codes of the CIS states, held in St. Petersburg, 19-20 March 1994 (the “1994 Conference”), “Materialy mezhdunarodnoi nauchno-prakticheskoi konferentsii ‘Grazhdanskie Kodeksy gosudarstv Sodruzhestva: Garmonizatsiia i modelirovanie’”, 19-20 March 1994, Vestnik Mezhparlamentskoi Assamblei 1994 No.2.

59

We note only in passing that the relevance of the example of the EU has not been QJ@EOLQPA@EJPDA!'1 -JPDAKJAD=J@EP?HA=NHUD=O=ɳA?PA@PDA@AOECJKBR=NEKQO institutional initiatives (e.g., the 1993 Treaty on the Economic Union) and has been a consistent reference point in debates. On the other hand, there has been a clear realization of the OLAPOE®G=ÓOLA?E­?EPUÔKBPDA!'1NACEKJ

60

Art.3 of the Treaty on the Economic Union.

61

Debates on the advantages and disadvantages of company-law harmonization have

16

Rilka Dragneva

enon, we will point to only one that links harmonization to legal reform in the CIS context: the view held among the Russian legal elite about the pivotal role of private law in economic life, as well as its intrinsic, or what one may even call “civilizing” or “enlightenment”, value.62 Finally, continuing from the above, legal harmonization in the area of civil law in particular was seen by some as being closely connected to market-oriented domestic legal reform. The fact that all ex-Soviet republics faced similar tasks in adopting modern domestic laws has been seen as a good reason to respond to this need by pooling legislative resources while also achieving a harmonized legal area.63 This view was nourished >UPDAEJEPE=HÓ>QPODKNPÎHERA@=OSASEHHJKPABQNPDAN>AHKSÔAɳKNPOKB CIS governments to adopt a coordinated approach to the transition to a market economy.64 As already mentioned, this complementarity between harmonization and legal reform was also perceived by major international organizations AJC=CA@EJ­J=J?E=H=J@PA?DJE?=H=OOEOP=J?AEJ#=OPANJ#QNKLA=J@OKIA Western government agencies, which became engaged in supporting the model-legislation process in the CIS. Yet, as it has been noted, this was not the universal spirit, especially in the beginning of the process.65 The fear was that harmonization would detract attention and scarce resources from domestic reform and would serve as a vehicle for promoting Russia’s EJ®QAJ?AEJPDALKOPÎ1KREAPSKNH@ 5ASEHH?KIA>=?GPKPDEO=NCQIAJP in the concluding part of this chapter.

been pronounced recently, particularly in the European Union. See Enriques, op.cit. note 7. 62

See, for example, as Professor S. Alekseev expressed it: “No real integration within the CIS will develop until one creates a common law of the Commonwealth in whose foundations lie civil, private law principles, which by their very nature bear an eternal and universal character.” See Alekseev, “Grazhdanskoe pravo kak osnova integratsii”, presentation at the 1994 Conference, op.cit. note 58, 69-70, author’s translation.

63

In fact, for some, the very “prevalence over the economic crisis and the fate of democratic reforms in the CIS member states depend on the results of integration”. See Shumeiko, chairperson of the Parliamentary Assembly, 29 October 1994, reported in Section 8.31 in Brzezinski and Sullivan, op.cit. note 56.

64

See the Treaty of the Economic Community of October 1991, as well as the Statement of Belarus, Ukraine, and the Russian Federation on Coordination of Economic Policy of 8 December 1991.

65

Simons, op.cit. note 3; P. Maggs, “The Civil Codes of Central Eurasia—A Comparison”, available online at .

17

CIS Model Legislation

The Legal Mandate for Harmonization For ease of discussion, we have summarized the CIS legal documents referring to approximation or harmonization in Table 1. What can be seen is that several international agreements (or decisions of the organizations’ bodies) were adopted in the period 1992-1995, which provide for =LLNKTEI=PEKJ=J@ KND=NIKJEV=PEKJKBH=SO 2DAOA=CNAAIAJPO@EɳANEJ the way they frame the task, the scope, and the instruments of harmoJEV=PEKJ 1KIAKBPDAOA@EɳANAJ?AO?=J>AATLH=EJA@>UPDAB=?PPD=PPDA conclusion of certain agreements was driven by parliaments (or Supreme Soviets as they were still called at the time), e.g., the 1992 Agreement on Inter-Parliamentary Cooperation in the Legal Sphere and the 1992 Agreement on the Parliamentary Assembly, while others were concluded by governments, e.g., the 1992 Agreement on the Principles of Approximation of Commercial Legislation.66-PDAN@EɳANAJ?AONA®A?PPDACN=@Q=H institutionalization of the CIS as an international organization,67 as well as the changes in its economic cooperation agenda, as will be discussed further below. Regardless of the reasons, however, the consequence of this fragmented mandate for harmonization is that it does not lend itself to easy and straightforward interpretation. Table 1: Mandate for Legal Harmonization in the CIS Date

Legal basis

Task of harmonization

Scope of harmonization

Harmonization method/ Organization in charge

27.02.92 Agreement on Inter-Parliamentary Cooperation in the Legal Sphere

“Approximation” of legislation with the purpose of “preventing and eliminating the AOOAJPE=H@EɳANAJ?AO in the legal regulation” (Art.4)

“questions representing common interest” (Art.4)

Procedural (exchange of drafts and laws, information, workinggroup formation, meetings, etc.)

27.03.92

,KOLA?E­?LNKREOEKJ

Areas of common interest (examples: international trade, customs, transport, ecological safety, etc. (Protocol to the Agreement)).

Substantive soft: Recommended legislative acts (Art.8); Parliamentary Assembly (PA) set up as a consultative body (Art.1)

Agreement on the PA

66

It is certainly well known that, in some countries, such as Russia, parliaments and presidents (governments) did not speak easily to each other in this period, see R. Service, Russia: Experiment with a People, Oxford 2002. This was repeated in 1996 when the Russian Duma voted to annul the founding agreements of the CIS of December 1991.

67

For a review of the institutional structure of the CIS as an international organization and its development, see R. Dragneva, “Is ‘Soft’ Beautiful? Another Perspective on Law, Institutions, and Integration in the CIS”, 29 Review of Central and East European Law 2004 No.3, 279-324.

18

Rilka Dragneva

9.10.92

Agreement on the Principles of Approximation of Commercial Legislation

“approximation of commercial legislation” with the purpose of “securing most favorable and equivalent conditions for the commercial activity in PDA@EɳANAJPIAI>AN states” (Preamble)

“areas of common interest”: long list, including civil law (related to regulation of commercial activity) and law on enterprises and entrepreneurial activity (Art.1)

Substantive international law: Negotiations to conclude agreements on approximation of laws in priority areas; Procedural: Consultations to AHEIEJ=PA?KJ®E?POÓArts.2 and 4); Legislative Consultative Council (Art.8)

23.01.93

CIS Charter

Cooperation directed at approximation of legislation (Art.20)

Broad areas of cooperation, including formation of a single economic space (Art.19)

Substantive international law: Conclusion of multilateral and bilateral agreements; Procedural: Consultations to AHEIEJ=PA?KJ®E?PEJC regulation in areas of common activity; ,KOLA?E­?>K@U entrusted with it; inter-parliamentary cooperation mentioned but outside the approximation context.

24.09.93 Treaty on the Economic Union

“the economic union pre-supposes […] harmonized commercial legislation of the negotiating states” (Art.3)

¢QJE­A@Õedinoobraznoe] regulation of economic relations” (Art.26)

Substantive soft and international law: Model legislation and norms of international law as the basis for coordination and approximation of national laws (Art.26); ,KOLA?E­?>K@U entrusted with it.

15.04.94 Agreement on the Creation of a Free Trade Area

“harmonization and/or QJE­?=PEKJKBH=S£ (Art.1)

“to the extent necessary for the proper functioning of the freetrade area” (Art.1)

15.04.94 Decision on the Formation of PDA1?EAJPE®?Ï Consultative Center for Private Law (SCCPL)

Approximation and harmonization of legislation in relation to the creation of a single economic space

Private law

Substantive soft: SCCPL set up with the task of preparing model laws and other recommendations; No mention of the PA.

26.05.95 Convention on the PA

Approximation of legislation to enhance PDAAɳA?PERAJAOOKB cooperation (Preamble)

,KOLA?E­?IAJPEKJ

Substantive soft: Adoption of recommendations on the approximation of national laws and model legislative acts (Art.4); PA recognized as an organ of the CIS (Art.1)

Source: Author’s compilation.

19

CIS Model Legislation

Table 2: Signatories of CIS Agreements Related to Legal Harmonization** Multilateral agreements

AM

AZ

BY

GE

KG

KZ

MD

RU

TJ

TM

UA

UZ

Agreement on Inter-parliamentary Cooperation in the Legal Sphere, 27 February 1992

—

—

—

-

—

—

-

—

—

—

—

-

Agreement on the PA, 27 March 1992

—

-

—

-

—

—

-

—

—

-

-

—

Agreement on the Principles of Approximation of Commercial Legislation, 9 October 1992

—

-

—

-

—

—

-

—

—

-

-

—

CIS Charter, 23 January 1993

—

—

—

—

—

—

—

—

—

-

-

—

Treaty on the Economic Union, 24 September 1993

—

—

—

—

—

—

—

—

—

—

-

—

Decision on the Formation of the 1?EAJPE®?Ï!KJOQHP=PERA Center for Private Law (SCCPL), 15 April 1994

-

—

-

—

—

—

—

—

-

-

—

-

Convention on the PA, 26 May 1995

—

—

—

—

—

—

—

—

—

-

—

-

* Acceded later. 3JBKNPQJ=PAHUSA@KJKPD=RA?KILHAPA@=P=KJPDAN=PE­?=PEKJKBPDKOA=CNAAIAJPOPD=PNAMQENAEP  Abbreviations as follows: AM—Armenia, AZ—Azerbaijan, BY—Belarus, GE—Georgia, MD—Moldova, KG—Kyrgyzstan, KZ—Kazakhstan, RU—Russian Federation, TJ—Tajikistan, TM—Turkmenistan, UA—Ukraine, UZ—Uzbekistan.

The picture is further complicated by the fact that not all agreements D=RA>AAJOECJA@=J@ KNN=PE­A@>U=HHÓKNPDAO=IAÔ!'1IAI>ANOP=PAO=O shown in Table 2. This is an expression of the “interested party” principle, characteristic of the institutional setup of the CIS.68 As a result, obtaining a clear picture of who is committed to harmonization, and to what extent, by means of international law is a mind-boggling exercise, which we will not QJ@ANP=GADANA 'POQɹ?AOPKI=GAOARAN=HK>OANR=PEKJO First, most of the CIS countries (except Uzbekistan and Turkmenistan) came ultimately to 68

Ibid.

20

Rilka Dragneva

support the work of the Parliamentary Assembly (PA) by signing or acceding to the 1995 Convention. This support has not been consistent, as most countries (except Kazakhstan, Kyrgyzstan, and Russia) participated quite selectively in agreements related to legal harmonization. Second, a review of individual countries’ legal development shows that formal participation in legal agreements is not necessarily indicative of their commitment to harmonization or at least of the extent to which CIS model laws have been taken into account in domestic legal developments. As will be noted later, Ukraine—a member of the PA—has @ERANCA@EJOECJE­?=JPS=UOEJ its domestic solutions, whereas Uzbekistan—not a member—has in fact used model legislation in aid of domestic legal reform. This brings forth another important aspect of post-Soviet processes, namely the complex mix between politically symbolic and legal elements in the new inter-state relations.69 In principle, most of the documents listed in Table 1 refer to approximation or harmonization in the sphere of “common interest” of the CIS member states. What this sphere encompasses, however, is not necessarily easy to establish. As Professor Tikhomirov notes, this is particularly @Eɹ?QHPEJREASKBPDALNK>HAIOEJPDAEJOPEPQPEKJ=HOAPQLKBPDAKNC=JO (instituty) of the CIS entrusted with the formulation of this common interest.70 According to some, it entails “merely eliminating contradictions with regard to the common infrastructure, the common ‘life-support systems’, and inter-regional deliveries”.71 According to others, it has a much wider reach, extending to the achievement of a common economic space.72 The latter view became more pronounced after the adoption of the 1993 Treaty on the Economic Union. Yet this Treaty did not eliminate the uncertainty 69

A good illustration of this unclear mix between legal and political belonging to a common entity is given by the former president of the Ukraine, Leonid Kravchuk, after declining to sign the 1993 Charter of the CIS: “The states, both those that signed and those that did not, are not burdened by any kind of consequences, that is, the CIS works, and we all are members of the CIS, actively participating in its improvement. This is very important. I would like you to pay attention to this because many thought that those that did not sign SANA=HNA=@UKQPOE@APDA!'1=J@PDQO=NAJKP=ɳA?PA@>U=JULKHEPE?=HA?KJKIE? or other factors.” Diplomaticheskii Vestnik 1993 No.3-4, 42, author’s translation.

70

Tikhomirov, op.cit. note 52.

71

R. Mukashev, member of Kazakhstan’s delegation at the December 1992 plenary meeting of PA, Section 8.27, in Brzezinski and Sullivan, op.cit. note 56.

72

See “Basic Guidelines for Rapprochement Between the National Legislation of the Commonwealth Member States”, signed by the chairman of the Council of the PA, Ruslan Khasbulatov, on 15 September 1992, in Section 8.25, Brzezinski and Sullivan, op. cit. note 56.

CIS Model Legislation

21

surrounding the concept, as will be discussed below. What seems to be consistent, however, is the position that private law (particularly commercial law) is central to the common interest of CIS member states, as evidenced in a range of initiatives and documents.73 It is evident that the common-interest formula makes the mandate for harmonization quite wide and allows for a great deal of discretion on the part of the institutions involved in the process. The PA, for example, acting as a result of this common-interest mandate, has taken the concept to its limit and passed acts in areas as diverse as civil and criminal law, trade, sport, and tourism.74 In doing so, the PA has ?ANP=EJHUNA®A?PA@PDA multi-purpose nature of the CIS as a regional organization with broad community objectives.75 Yet, as it has been argued, it has also often lost its sense of priority and even sight of the very “subject-matter of regulation” (ob”ekt reguliatsii).76 Complicating the Mandate: The Moving Target of Economic Integration The task of economic integration has undoubtedly been one of the key FQOPE­?=PEKJOBKNHAC=HD=NIKJEV=PEKJEJPDA!'1 7AP­J@EJC=?HA=NA?KJKIE?EJPACN=PEKJE@AJPEPUD=O>AAJ=J@NAI=EJO@Eɹ?QHPBKNPDA!'1 77 In its early days, the ambiguity was particularly strong. On the one hand, there was the declared goal that the inherited economic unity should be preserved. On the other hand, most actual initiatives in this respect failed, and the de facto motivation of many CIS countries was one of gradual disintegration.78 In 1993, the Russian proposal for the progressive creation of an EUstyle economic union was accepted and, as already mentioned, a Treaty on the Economic Union was passed. Yet the economic-union impulse, at least in its CIS-wide format, proved to be short-lived. Instead, the eco73

$KNAT=ILHA'KɳAop.cit, note 28. See, also, Khasbulatov’s “Basic Guidelines”, ibid., the 1992 Agreement on the Approximation of Commercial Legislation and the Decision on the 1994 Decision on the Formation of the SCCPL (Table 1).

74

For a full list of the acts passed by the PA, see .



75

This aspect of the CIS, for example, is clearly revealed in its 1993 Charter.

76

I. Tikhomirov, presentation at a round-table in St. Petersburg, 16 October 1997, “Sootnoshenie prava Sodruzhestva i sovremennogo mezhdunarodnogo prava”, Vestnik Mezhparlamentskoi Assamblei 1997 No.4, 153. On the issue of priority, see Makovskii, “Sozdanie modeli Grazhdanskogo Kodeksa—Vazhneishii shag k sblizheniiu zakonodatel’stva stran SNG”, presentation at the 1994 Conference, op.cit. 58, 74.

77

For more on the development of the economic agenda of the CIS and the position of EPO@EɳANAJPIAI>ANOP=PAOOAA0 "N=CJAR==J@( @A)KNP¢*AC=H0ACEIABKN$NAA Trade in the CIS”, International and Comparative Law Quarterly 2007 (forthcoming).

78

Ibid.

22

Rilka Dragneva

nomic agenda was mitigated to the achievement of a free-trade area for the CIS.79 The goal of achieving an economic union was left to be pursued in smaller, sub-regional formats. At present, two groupings refer to the attainment of a single economic space as one of their key objectives: the Eurasian Economic Community (between Russia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan) formed in 2000 on the basis of earlier customs-union agreements,80 and the Single Economic Space (between Russia, Belarus, Kazakhstan, and Ukraine) of 2003 (Table 3). Despite the revised course of economic cooperation, the actual LNKCNAOOKB!'1EJEPE=PERAOD=OJKP>AAJOECJE­?=JP 'JPANIOKBPDAK>FA?PERAKBAOP=>HEODEJC=BNAAÎPN=@A=NA=PDAAɳA?PERAJAOOKBPDAIQHPEH=PAN=H regime has proved to be limited; instead, overlapping bilateral agreements provide the bulk of the free-trade regime.81 Furthermore, the bilateral reCEIAO?KJP=EJJQIANKQOATAILPEKJO=J@OQɳANBNKIOANEKQOEJOPEPQPEKJ=H @A­?EAJ?EAO PPDAO=IAPEIASDEHAPDADKLAONAC=N@EJC@ARAHKLIAJPOEJ the sub-regional groupings were (and remain) high, to date they have not demonstrated any greater progress than steps to form free-trade areas. These developments are important in several ways. First, it can be OAAJPD=PPDA!'1A?KJKIE?=CAJ@=KRANPDAH=OP­BPAAJUA=NOD=OJKP shown a clear continuity, let alone the sense of irreversibility that the EJPACN=PEKJAɳKNPEJPDAEU, for example, seeks to engender. In addition PKPDABKNI=H?D=JCAOKB?KQNOAIAJPEKJA@=>KRA?KJ®E?PEJCIAOO=CAO continue to appear, thus adding to the uncertainty surrounding the economic integration project as such.82 This uncertainty has the potential to 79

Agreement on the Free-Trade Area of 15 April 1994, amended by a Protocol of 2 April 1999. One of the changes, for example, was repealing the provision describing the free-trade area as a transitional step to the achievement of a customs union. The change of strategy was also clearly shown in the 1997 Concept on the Development of Economic Integration in the CIS, adopted by the CIS Council of Heads of State.

80

There is a more complex genealogy involved here than the customs-union agreements mentioned. In 1994, Kazakhstan, Kyrgyzstan, and Uzbekistan set up a Central Asian Economic Union, which Tajikistan joined in 1998. In 1998, the organization was renamed the Central Asian Economic Cooperation Organization and, in 2002, the Central Asian Cooperation Organization (CACO). Russia joined CACO in 2004. CACO decided to merge with the Eurasian Economic Community in January 2006, thereby making Uzbekistan its sixth member.

81

Dragneva and de Kort, op.cit. note 77.

82

On the one hand, occasional documents continue to mention the objective of the single economic space even for the CIS, e.g., the Declaration of the Heads of State of 17 September 2003. On the other hand, there have been many occasions where one has been left doubting the real value of the commitments made even to the free-trade-area project. Such doubts were strongly fed by the statement of Russian President Vladimir Putin of 25 March 2005 that: “[…] the CIS never had any supertasks [sverkhzadachi] of an economic nature, any integration tasks in the sphere of

23

CIS Model Legislation

=ɳA?PPDA?KIIEPIAJPKBIAI>ANOP=PAOL=NPE?QH=NHUSEPDNAC=N@PKPDA implementation (or use) of the instruments of harmonization adopted. Indeed, in the complex world of legal reform in states in transition, domestic pressures could (and have) overridden the undertaking to pay more than lip service to the long-term goal of harmonization. Table 3: Economic Integration Initiatives in the CIS (1991-2006) Initiative

Participants*

Status

Economic Community (1991)

AM, BY, KZ, KG, RU, TJ, TM, UZ, and the USSR

Failed

Customs Union (1992)

KG, UZ, BY, TJ

Failed

Economic Union (1993)

CIS 11 (except UA)

Superseded

Free-Trade Area (1994, 1999)

CIS 10 (except RU, TM)

Active: selective application

Customs Union (1995)

RU and BY (1995), KZ (1995), KG (1997), TJ (1998)

Transformed: Eurasian Economic Community (2000)

Eurasian Economic Community (2000)

RU, BY, KZ, KG, TJ, UZ (2005)

Active: free trade with exemptions between some members, common ?QOPKIOÎP=NEɳJACKPE=PEKJEJ progress

Central Asian Economic Union (1994)

KZ, KG, UZ, TJ (1998)

Transformed: CACO

CACO

KZ, KG, UZ, TJ, RU (2004)

Merged into Eurasian Economic Community (2006)

GUUAM (1997)

GE, UA, UZ, AZ, MD

Active: basic free-trade agreement (2003), little progress

Single Economic Space (2003)

RU, BY, KZ, UA

Active: some progress in negotiating a package of agreements on free trade, important disagreements

??KN@EJCPKPDAN=PE­?=PEKJKBNAOLA?PERA=CNAAIAJPÓOÔ 

Second=>NEABNAREASKBPDA@EɳANAJPeconomic integration initiatives in the CIS (Table 3) shows that most CIS member states have been engaged in some way in a project related to advanced economic integration, regardless of the extent of its institutional or economic viability. Economic unions—be they between the twelve member states or between a smaller number of members—have been seen, at least on a politically symbolic level, as an attractive format for international cooperation. This symbolic image of economic unity adds, in our view, to the reasons why the mandate for legal harmonization in the CIS has been formulated quite broadly, perD=LOARAJ>NK=@ANPD=JEBOLA?E­?A?KJKIE?Ó?KOPÎ>AJA­PÔ?KJOE@AN=PEKJO had driven it. Indeed, even the acceptance of the goal of a free-trade area did little to narrow this mandate: As a number of documents show, the

economics”, reproduced at (author’s translation).

24

Rilka Dragneva

meaning of “necessary for the proper functioning of the free-trade area” in this context was again taken in its broadest sense.83 Complicating the Mandate: The Moving Target of Legal Reform We mentioned that harmonization was seen by many as able to aid domestic legal reform. We evaluate the extent to which the process of @N=BPEJCOLA?E­?model laws has contributed to domestic company-law reform later in this work. We also note how the institutional setup of the !'1D=NIKJEV=PEKJLNK?AOOD=O=ɳA?PA@EPO=>EHEPUPKNAOLKJ@PKPDAJAA@O of domestic legal reform with the speed and quality needed. It will be useful here, however, to spell out some general aspects of legal reform in PDALKOPÎ1KREAPOL=?APD=PI=GAEP@Eɹ?QHPPK¢LH=J£EPO?KILHAIAJP=NEPU with harmonization. First, legal reform in post-communist countries has hardly been a systematic, comprehensive process. This is particularly true in relation to company regulation, which exhibits a close relationship with privatizaPEKJ=J@­J=J?E=HÎOA?PKNNABKNI OEPD=OKBPAJ>AAJIAJPEKJA@>=?GEJ the early 1990s, no one in the East or the West had a blueprint of how to engineer the complex transformation from plan to market. Priority (at least as far as international policy-making was concerned) was given to privatization and liberalization, and less so to early investment in legal institutions.84 To our knowledge, it was only within the framework of the early dialogue between the former Soviet republics and the European Union that an attempt was made to develop a comprehensive approach to legal reform.85 Within the CIS, and Russia in particular, “planning” legal reform in the area of private law extended to discussing the need for, and the timing KB?EREHÎH=S?K@E­?=PEKJ O.NKBAOOKN'KɳAPAOPE­AOEJPDAA=NHUOPDA prevalent approach was one of reform through ad hoc legislation, followed 83

See, for example, the list of “Key documents regulating the functioning of the freetrade area”, reproduced at , which includes agreements dealing with the liberalization of national markets, as well as approximation of commercial legislation, protection of the rights of investors, and so on.

84

Much has been written on the subject. See, for example, Stiglitz, op.cit. note 14; B. Black, R. Kraakman and A. Tarassova, “Russian Privatization and Corporate Governance: What Went Wrong?”, 52 Stanford Law Review 2000, 1731-1808.

85

We refer here to the Report of the EC/IS (Independent States) Joint Task Force on Legal Reform in the Independent States “Shaping a Market-Economy Legal System”, European Economy 1993 No.2. The insights of this comprehensive document, unfortunately, were not taken forward as such at the level of the EU. Yet the impulse behind it was carried forward by individual member states, such as The Netherlands and Germany, in assisting market-oriented legal reform in the CIS.

CIS Model Legislation

25

only later by the more demanding adoption of civil codes.86 Nonetheless, the need for comprehensiveness in private-law reform and the value of A=NHUÓARAJEBEJ?KILHAPAÔ?K@E­?=PEKJS=ONA?KCJEVA@MQEPAA=NHU 87 Second, the CIS countries, as already noted, did not pursue a uniform and equally paced route to post-communist transformation. There has been, for example, a great deal of variation in the rigorousness with which market reforms have been pursued and private entrepreneurship encouraged.88N=JCAKB?KQJPNUÎOLA?E­?B=?PKNO=ɳA?PA@PDAOLAA@=J@ direction of legal reform.89 1EIEH=NHU @EɳANAJP Ó=P HA=OP KJ OKIA HARAHÔ legislative sources and legal expertise were used in drafting new laws.90 For countries intent on pursuing enhanced forms of cooperation with the European Union and intending to seek membership, such as Ukraine, European Union legislation is becoming an increasingly important reference point.912DAOA@ARAHKLIAJPO?ANP=EJHU=ɳA?PPDAEJPANAOPKBPDA!'1 member states in engaging in harmonization in particular areas, as well as in implementing elaborated harmonization measures. 86 87



1AAPDA@EO?QOOEKJEJ'KɳAop.cit. note 28.



JEILKNP=JPATLNAOOEKJKBPDEONA?KCJEPEKJS=OPDA?NA=PEKJKB=1?EAJPE­?!AJPAN for Private Law, directly subordinate to the Russian president. Resolution No.133-RP, "A?AI>AN¢-JPDA1?EAJPE­?!AJPANBKN.NER=PA*=S£ 1AA=HOKDPPL

SSS LNERH=S D NQ @K? ODPIH .NKBAOOKN'KɳANABANO=HOKPKOARAN=HEJEPE=PERAOÓÔPDAA=NHU draft of a +K@AH!EREH!K@ALNAL=NA@>UPDA!'11?EAJPE­?Î!KJOQHP=PERA!AJPAN for Private Law, and (2) a conference on the development of a new Civil Code in 3GN=EJAEJLNEH=PPAJ@A@>UO?DKH=NOBNKI@EɳANAJP!'1?KQJPNEAOOAAibid.

88

89

A standard reference to reveal many of these variations are the annual Transition Reports of the EBRD, see . 

.NKBAOOKN+=CCOLKEJPOBKNAT=ILHAPK@EɳANAJ?AOEJPDA=IKQJPKBHK?=H@N=BPEJC P=HAJP=PPEPQ@AOPKS=N@=I=NGAPA?KJKIU=J@PDAOQO?ALPE>EHEPUPKPDAEJ®QAJ?AKB foreign donors. See Maggs, op.cit. note 65. Other factors relate to debates in domestic legal communities, such as the long-lasting debate between tsivilisty (civil lawyers) and khoziaistvenniki (commercial or economic lawyers) in Ukraine leading to the adoption of a Civil and an Economic Code. See A. Dovgert, “The New Civil Code of 3GN=EJA+=EJ$A=PQNAO0KHAEJPDA+=NGAP#?KJKIU=J@!QNNAJP"Eɹ?QHPEAO in Implementation”, paper presented at a conference at the University of Illinois, 8-9 April 2005, .

90

Georgia and Turkmenistan, for example, primarily used German legislative models in drafting their Civil Codes, unlike Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, which followed more closely the Russian Civil Code and the CIS Model Civil Code. See Maggs, ibid.

91

See R. Dragneva and A. Dimitrova, “Patterns of Integration and Regime Compatibility: Ukraine Between the CIS and the #3£EJ) +=H®EAP* 4ANLKAOP=J@#  Vinokurov, eds., Russia and the Western Newly Independent States, Basingstoke, UK 2007 (forthcoming).

26

Rilka Dragneva

Instruments and Organization of the CIS Harmonization Process Hard vs. Soft Harmonization Some of the documents listed in Table 1 make reference to harmonization through substantive international laws. Indeed, it is primarily through international agreements—multilateral as well as bilateral—that the CIS operates.92 The international agreements or decisions are, in principle, legally binding “hard law” instruments. Nonetheless, the legal commitments undertaken in them have been successfully “softened” through a variety of mechanisms.93 We do not review such instruments, as they are less important in the area of company law than in customs law, for example. The CIS makes no use of harmonization through acts of its institutions, such as the community instruments adopted within the framework of the European Union. By comparison, the CIS exhibits a lower degree of institutionalization and does not have a permanent executive endowed with the wide powers of the European Commission.94 Some more ambitious institutional provisions have been made within the context of the sub-regional groupings of the CIS, which we only note in this work. Within the Eurasian Economic Community, for example, there has been an effort to provide for stronger—and perhaps more confederative—common institutions than in the CIS. Some of the early agreements of the customs union, e.g., the Treaty on Increasing Integration of 1996 or the Treaty on the Customs Union and the Single Economic Space of 1999, provided for direct implementation of the Council’s decisions. As it has become clear, however, “direct implementation” in this organization’s parlance means “through transformation into national legislation”.95 Finally, pursuant to its 2003 founding agreement, there is the possibility of passing binding acts within the Single Economic Space between Russia, Kazakhstan, Belarus, 92

Art.5 of the CIS Charter. Its Council of Heads of State and Government can issue decisions; any decisions with normative content, however, have also been treated as international agreements. See Dragneva, op.cit. note 67.

93

Ibid.

94

The Inter-state Economic Committee had some independent decision-making powers only in the period 1994-1999 in connection with the 1993 Economic Union project.

95

  ¢2N=JOBKNI=PEKJ£EJPDEOOAJOAEOEJPANLNAPA@=ON=PE­?=PEKJKNPDABQH­HHIAJPKB=Jother procedure for the “conversion” of an international instrument into domestic law.. See the Agreement on the Legal Guarantees for the Formation of a Customs Union and a Single Economic Space, adopted on 26 October 1991..

CIS Model Legislation

27

and Ukraine.96 Yet this provision is too general and too controversial (at the moment) to allow a more substantive discussion of its implications. Thus, the main instrument for harmonization selected in the CIS is one of soft (or voluntary) harmonization through model (recommended) legislative acts. As noted, the power to issue these acts was ultimately vested in a special organ, the Parliamentary Assembly of the CIS.97 According to many, softH=SO@KJKPKɳANPDA=@R=JP=CAOKBhard-law harmonization particularly in areas where advanced forms of economic integration are to be pursued. Partly acting out this view, the PA itself has tried to “harden” the reception of model legislation into domestic laws through various, mainly procedural, means.98 Yet soft documents have long (and increasingly) been used in international, regional, and national (federal) contexts.99 Their use is sometimes seen as a substitute to failed hard harIKJEV=PEKJ 7APNA?AJPNAOA=N?DODKSOPD=PPDAUKɳAN@A­JEPA=@R=JP=CAO in their own right.100 Furthermore, the degree to which a document is binding, one of the key indicators of softness, should not necessarily be confused with the degree of its authority.101 The quality of the output and a well-organized, inclusive, and authoritative process certainly contribute to the degree to which an instrument is taken into account.

96

Art.4.

97

Like the CIS PA, the PA of the Eurasian Economic Community can pass model laws (tipovye proekty). In addition, the Eurasian Economic Community refers to Fundamentals of Legislation as an instrument for harmonization. Yet the legal nature of this instrument is still not clear: Is it like its Soviet namesake or is it simply a regional international agreement containing a uniform substantive law?

98

The PA has recommended, for example, that national parliaments should envisage in their rules a special procedure for review of model legislation, analysis of its use domestically, and provision of feed-back to the PA. See, for example, Decree No.164 of PA, 9 December 2000; Statute on the Preparation of Model Legislation and Recommendations adopted by the PA on 14 April 2005.

99

See F. de Ly, “Uniform Commercial Law and International Self-Regulation”, in F. Ferrari, ed., 2DA3JE®?=PEKJKB'JPANJ=PEKJ=H!KIIAN?E=H*=S, Baden-Baden 1998. For a recent discussion of the importance of soft laws in various settings and areas of cooperation, see J. Kirton and M. Trebilcock, Hard Choices, Soft Law: Voluntary Standards in Global Trade, Environment and Social Governance, Aldershot, UK 2004.

100

K. Abbott and D. Snidal, “‘Hard’ and ‘Soft’ in International Governance”, International Organization 2000 No.3, 421-456.

101

As Professors Chayes and Chayes note in relation to international settlement of disputes, “on the whole, it has not seemed to matter whether the dispute settlement procedure is legally required or the decision is legally binding, so long as the outcome is treated as authoritative”. A. Chayes and A.H. Chayes, The New Sovereignty: Compliance with International Regulatory Agreements, Cambridge, MA 1995, 24.

28

Rilka Dragneva

We refer the reader to another work where the argument about the value of soft laws (relative to D=N@KJAOÔEOAT=IEJA@EJPDAOLA?E­??KJtext of the CIS.102 We would only note here that a key factor in opting for voluntary harmonization has been the desire to break with the centralizing tendencies of the Soviet past and the newly discovered sovereignty sensitivities of the CIS member states, already mentioned. The extent of the latter (undoubtedly symptomatic also of other problems) is revealed by the suggestions made by members of the Russian Duma that model H=SOODKQH@=HOK>APDAOQ>FA?PKBN=PE­?=PEKJ 103 The Institutional Setup of the Harmonization Process Reviewing the agreements in Table 1, one may become confused about the institution(s) entrusted with the process of harmonization. In the pre-1995 period, the mandate for harmonization was vested in the Legislative Consultative Council, an inter-governmental body representing the countries’ ministers of justice and chairpersons of economic courts.104 The CIS 1?EAJPE­?Î!KJOQHP=PERA!AJPANBKN.NER=PA*=S (SCCPL), founded in April 1994, was envisaged as the intellectual drafting power behind the project. In this period, the role of the PA was still =I>ECQKQONA®A?PEJC a degree of distrust on the part of CIS governments in “bringing back from the dead” a body even remotely resembling the USSR Supreme Soviet.105 For example, the Charter of the CIS recognizes the existence of the PA as a forum of inter-parliamentary cooperation but not as a focal LKEJPKBD=NIKJEV=PEKJAɳKNPO 'PEOKJHU=BPANPD=PPDA!'1IAIber states explicitly include the PA among its organs. This act has led to the consolidation of the task of voluntary harmonization in the hands of the PA. Still, no clear guidance regarding the relationships between

102

Dragneva, op.cit. note 67.

103

Tikhomirov 1997, op.cit. note 52, 153. Certainly, it is also known that the drafters of the 1993 CIS Charter considered including in it a section on “Acts of the Commonwealth” and envisaged the use of regulations as acts directly binding on the member states, but this proposal was not approved in the end. See V. Fisenko and I. Fisenko, “Khartiia sotrudnichestva v ramkakh SNG”, Moskovskii zhurnal mezhdunarodnogo prava 1993 No.3, 36-62.

104

 2DA­NOPIAAPEJCKBPDA*ACEOH=PERA!KJOQHP=PERA!KQJ?EHPKKGLH=?AKJHUEJ  3JBKNPQJ=PAHUSAD=RAJKARE@AJ?A=OPKPDAAɳA?PERAJAOOKBPDEO>K@U

105

Certainly, the most notable expression of the distrust between governments and the initiative of national parliaments (still elected as Supreme Soviets in 1990) toward the setting up of the PA was the relationship between Russian President Yeltsin =J@PDA­NOP?D=ENLANOKJKBPDAPA and chairperson of the Russian Supreme Soviet, Ruslan Khasbulatov. See footnote 66.

CIS Model Legislation

29

the bodies mentioned here has been provided.106 It can be argued that, to some extent, this problem has been compensated by common-sense communication. 'J LNEJ?ELHA PDA EJPANJ=H @K?QIAJPO KB PDA . @A­JA EPO rules of procedure in relation to its decision-making and the adoption of model legislation, in particular.107 Tables 4 and 5 will help the reader acquire some basic understanding of the structure of the PA, the PA bodies and other parties involved in the process of adoption of model legislation, and its main steps. An extensive discussion of the way the PA works is beyond PDAO?KLAKBPDEOOPQ@U 'POQɹ?AODANAPKJKPAFQOP=BASGAUBA=PQNAOKB the institutional setup of the model-legislation process, which will then >AEHHQOPN=PA@IKNAOLA?E­?=HHUEJPDANAREASKBPDAOAHA?PA@model laws. First, the initiative for drafting model laws is vested in a wide variety of parties, both at the national and the CIS level. The responsibility for the coordination of proposals (and preventing overlap of initiatives) is vested in the PA Permanent Commissions. With the same purpose, the PA adopts Prospective Plans (Perspektivnyi plan) for its activity. Second, the actual responsibility for drafting a model law is vested in a working group. The composition of the working group depends largely on the initiator of the model law.108De facto, there tends to be a smaller drafting group nominated, which presents drafts to the working group. Third, foreign experts can be involved in the process at two key stages: the drafting or the review. In terms of the drafting stage, this means that foreign experts can either be part of the working group or be principal drafters. In such a case, the “local content” or the adaptation to local conditions would be a matter of the contribution of the working group as a collective body, of the permanent commission approving the draft, and of the various parties who may take part in the review of the draft. 106

This is particularly problematic in view of the fact that coordination problems between CIS organs, overlap of tasks and output, have often been demonstrated. I. Tikhomirov, “Osnovnye pravovye problemy integratsii Gosudarstv-uchastnikov Sodruzhestva”, Vestnik Mezhparlamentskoi Assamblei 1996 No.3, 52-56.

107

See the Regulation of the PA of 15 September 1992, amended 29 December 1992 and 18 March 1994; Statute on the Permanent Commissions of the PA adopted on 23 May 1993, amended on 18 March 1994; and the Statute on the Preparation of Model Legislation and Recommendations adopted by the PA on 14 April 2005, all available online (in Russian) at .

108

 1AABKNAT=ILHAPDA@EɳANAJP@N=BPANOÓrazrabotchiki) mentioned in the latest 20052010 Prospective Plan of the PA at . Some of them represent a PA working group or are the responsibility of particular national parliaments or CIS institutions. Certainly, foreign donors aiding the adoption of particular IK@AHH=SO=NA=HOKHEGAHUPKEJ®QAJ?APDA?DKE?AKB@N=BPANO

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Rilka Dragneva

Fourth, in general, all PA bodies involved are composed on the principle KBJ=PEKJ=HNALNAOAJP=PEKJ=J@=@KLPPDAEN@A?EOEKJO>U?KJOAJOQO "EɳANent country representatives hold the chairmanship of certain permanent commissions on a national portfolio-allocation basis.109 While clearly some model laws are promoted by particular member states—indeed, most IK@AHH=SOEJPDA=NA=KBPDAA?KJKIU=J@­J=J?AHEOPA@EJPDAH=PAOP Prospective Plan were initiated by state bodies of the Russian Federation, followed by those of Kazakhstan—theoretically, there is the possibility of balancing out this country bias during the review of the model laws by the permanent commission. Fifth, in principle, the institutional setup of the model-law process allows for an openness of the process at least at the level of the review of the draft. Yet the holding of such a public consultation does not seem to be guaranteed (note the “if necessary” proviso in Table 4). It certainly will also depend on a variety of constraints, including time and money. Table 4: Procedure for Adoption of Model Legislation Within the PA Framework as Developed in the 2005 Statute Step

Body in Charge/Measures

Initiative

Vested in: xNational parliaments or chambers of national parliaments; xCIS bodies; xPA Council, permanent commissions, and individual deputies. Submitted to the Secretariat of the PA Council, which forwards it to a permanent commission

Acceptance of initiative

Decision taken by the respective PA permanent commission. If positive, the permanent commission recommends that the PA Council: xInclude the proposed model legislation in the Prospective Plan for Model Legislation and Approximation of Domestic Legislation; xAppoint a working group to draft the proposed model legislation.

Drafting

Carried out by working group, which can consist of: xDeputies of national parliaments; xRepresentatives of CIS bodies; xExperts from academic institutes, interested national bodies, lawyers, and experts from international organizations. Monitored by the respective PA permanent commission, which discusses drafts at its sessions and approves the preliminary draft.

Review of the draft

The draft is sent for review to: xRespective committees of national parliaments; xLegal experts appointed by the PA Secretariat, which evaluate the quality of the draft ¢EBJA?AOO=NU£ #TLANPO?=JEJ?HQ@ANALNAOAJP=PERAOKBIEJEOPNEAOO?EAJPE­?>QOEJAOO and other specialized bodies; and representatives of international organizations.

Adoption

PA Plenum

109

See the Statute on the Permanent Commissions of the PA, adopted on 23 May 1993. For example, the Permanent Commission on Economy and Finance, responsible for the adoption of the MLJSC, the MLA, the MSML, and the MLPIP, is currently chaired by the Armenian representative, G. Minasian. The Permanent Commission on Legal Questions, responsible for the adoption of the MCC, is currently chaired by the Tajik representative, Sh. Salimov.

31

CIS Model Legislation

In terms of several of the issues mentioned, such as ensuring local input, or balancing out a country’s dominance, the question clearly remains about the practical constraints on what a working group or a permanent commission can do. We are not able here to examine this issue any further, >QPOQɹ?APKO=UPD=PIQ?D@ALAJ@OKJB=?PKNOOQ?D=OPDABNAMQAJ?UKB meetings of these bodies, the continuity of their membership, the quality of preparation of meetings, and the extent to which they represent a political rather than an expert process. Table 5: Structure of the PA Body

Composition

Secretariat of the PA Council

Permanently functioning administrative body of the Council, headed by a secretary-general.

PA Council

Heads of national parliamentary delegations, who are the chairpersons of national parliaments. Headed by a chairperson.

PA (Plenum)

Representative of national parliaments (elected or appointed depending on domestic procedure)

Permanent Commissions

Bodies within the PA Plenum specializing in a particular issue. Currently 10 in number.

Output of the Harmonization of Company Law This section will provide an overview of the circumstances of adoption and the main features of the most important CIS model laws contributing to the regulation of joint-stock companies. The Model Civil Code Like many of the model laws in the area of private law, the Model Civil Code (MCC) was drafted by a working group of scholars from the SCCPL, under the chairmanship of Professor Aleksander Makovskii.110 Many of the Russian members of the MCC drafting team were also the lead drafters of the then-draft Russian Civil Code, which accounts for many of the similarities between the two Codes.111 As discussed in greater detail elsewhere, the drafting team also comprised leading (and some junior) academics from other CIS member states.112 A number of Western colleagues joined 110

In addition to the MCC and the MLSM, the SCCPL drafted the Model Law on Limited-Liability Companies, adopted on 2 November 1997, and the Model Law on Bankruptcy, adopted on 6 December 1997.

111

More structurally, the Russian members of the CIS SCCPL were also part of the Research Center for Private Law Under the President of the Russian Federation, created in December 1991, which was in charge of drafting the Russian Civil Code.

112

Simons, op.cit JKPA 'PODKQH@>AJKPA@DKSARANPD=P=@R=J?A@AɳKNPOPK@N=BPJAS Civil Codes were not underway in many countries. Kazakhstan is a notable excep-

32

Rilka Dragneva

the discussions at the working-group level and provided important input. 2DAOAAɳKNPOSANAH=NCAHUBQJ@A@>UEJPANJ=PEKJ=H@KJKNO 113 The result of the work, however, was a CIS product, where Russian solutions (in terms of methodological choices, structure of the act, and wording of provisions) were largely relied upon, but were not universally accepted.114 In the same vein, foreign advice was brought to the table but not imposed on the drafters.115 It should be pointed out that, like the RusOE=J!EREH!K@APDA+!!NA®A?PA@=SE@AN=JCAKB@KIAOPE?LNER=PAÎH=S sources (e.g., the Imperial draft, the 1922 Russian Civil Code, the 1991 Fundamentals), but also modern foreign solutions (e.g., from the Uniform Commercial Code, the Dutch Civil Code, the Civil Code of Quebec). The MCC, like the Russian Civil Code, was drafted in the spirit of the principles of the pandect system. Accordingly, the regulation of jointstock companies contained in it follows a strictly logical pattern. Thus, it comprises: — General provisions that contain rules applicable to all legal persons in relation to state registration, founding documents, management organs, liability, reorganization, and liquidation (Arts.61-82); — General provisions related to business partnerships and companies, such as rights and duties of participants and transformation of business partnerships and companies (Arts.83-85); Ð 1LA?E­?LNKREOEKJOKJFKEJPÎOPK?G?KIL=JEAOEJ?HQ@EJC=OQ>OA?PEKJ on subsidiary and dependent companies (Arts.119-130). tion, and indeed it adopted Part I of its Civil Code on 27 December 1994. Serious discussions were also underway in 3GN=EJAUAPPDAUPKKG=?KILHAPAHU@EɳANAJPPQNJ as a result of which a Civil Code was adopted only in 2003. See footnote 89. 113



.NEI=NEHUPDA+EJEOPNUKB$KNAECJɳ=ENOKB2DA,APDANH=J@O=J@PDA31'" 0QHA of Law Consortium. The technical-assistance project was coordinated by the Dutch Center for International Legal Cooperation (CILC).

114

A good illustration of the fact that the MCC is not identical to the Russian Civil Code is the departure from one of the most controversial provisions of the Russian Civil Code, Art.56 (3). The latter envisages the subsidiary liability of a company’s shareholders as well as “other persons who are entitled to issue binding instructions for this legal person or otherwise have the possibility to determine its acts” in the event of a company’s insolvency. The wording of Art.69 (3) of the MCC does not deal with all problems of the Russian provision, but it certainly avoids many of them by restricting the liability only to a company’s shareholders.

115

This working method was established with the drafting of the Russian Civil Code and was replicated in the drafting of the mentioned model laws. Indeed, the fact that the Russian Code was a “home-grown product” has been underlined by its drafters on numerous occasions. See A. Makovskii and S. Khokhlov, “Zhizn’ po novym pravilam”, Rossiiskaia gazeta 8 December 1994; V. Vitrianskii, “Novyi Grazhdanskii kodeks”, Ekonomika i zhizn’ 1994 No.50.

CIS Model Legislation

33

To these rules, we add the general provisions on securities and the NQHAOKJ>KJ@O=J@OD=NAO=OOLA?E­?PULAOKBsecurities (Arts.189-198). 2DAOLA?E­?LNKREOEKJOKJFKEJPÎOPK?G?KIL=JEAOI=GA=@EOPEJ?PEKJ between open and closed joint-stock companies and provide rules on their formation, charter capital, management, and reorganization. These provisions clearly do not provide exhaustive regulations on joint-stock companies, and they require the later adoption of special legislation. While the solution adopted has certainly allowed drafters to proceed SEPD=OLAA@N=NAHUGJKSJEJPDALN=?PE?AKB?K@E­?=PEKJEPD=O=HOK?NAated the possibility for inconsistencies between the Code and the special legislation. While this may not be such a huge problem as far as model legislation itself is concerned, as we argued earlier, it certainly creates I=JU@Eɹ?QHPEAO=PPDAHARAHKB@KIAOPE?H=S=OPDAAT=ILHAKBPDARussian Federation shows.116 Importantly, however, the MCC ?KJ­NIOPDA status of joint-stock companies as commercial legal entities, possessing the essential attributes of the corporate form. In this sense, it consolidates the move away from the “enterprise” concept initiated with the 1991 Fundamentals, and opens the way for the rebirth of a modern company law in the CIS member states. The Model Law on Joint-Stock Companies When the Model Law on Joint Stock Companies (MLJSC) was adopted in February 1996, as previously discussed, most CIS member states had =HNA=@U L=OOA@ SD=P ?KQH@ >A PANIA@ PDAEN ­NOP CAJAN=PEKJ KB H=SO ÓKN a decree in the case of Russia) regulating joint-stock companies, either separately (e.g., Tajikistan, Azerbaijan, Russia), together with other business companies (e.g., Ukraine, Belarus, Uzbekistan), or as a part of laws on entrepreneurs and/or entrepreneurial activity (e.g., Armenia, Moldova, Georgia). Despite the fact that these laws had already been the subject of important amendments, only Russia had adopted a new Law “On JointStock Companies” as a part of a post-new-civil-code generation of laws. It is also important to note that at the time none of the documents embodying international standards on company law and corporate governance we list in Table 6 were in existence, and the international community was still preoccupied with other reform issues, as previously discussed.117 The +*(1!OAAIOPKNA®A?PPDEOCAJAN=H@KIAOPE?=J@EJPANJ=PEKJ=H ?KJPATP=J@EJ?KNLKN=PAOOKHQPEKJOPULE?=HBKNPDA­NOPCAJAN=PEKJKB?KI116

For more on this problem, see Maggs, op.cit. note 65, and Alekseev, op.cit. note 8.

117

$KNAT=ILHAPDAATLANPCNKQLKJ@N=BPEJCSD=P>A?=IAPDAEJ®QAJPE=H1996 General Principles of Company Law for Transition Economies was set up only in September 1996.



34

Rilka Dragneva

pany laws.118 It is a very short law consisting of eleven articles. It revisits many of the provisions of the MCC regarding types of joint-stock companies, their legal status, founding, charter capital, organizational structure, =J@HEMQE@=PEKJ 'PQOAO=@EɳANAJPÓIKNAA?KJKIE?=H>QP?ANP=EJHUHAOO clear) organization of the articles. The model law also makes a number of substantive departures from the respective provisions of the MCC.119 Where this model law makes some contribution is in the provision of more detail in relation to the holding of annual and extraordinary meetings of shareholders, the composition and the competence of the other organs of the company, and rules on the reorganization of companies. 'JLNEJ?ELHAEJ@KEJCOKEPKɳANOOKIAIKNAOQ>OP=J?AKJOD=NADKH@ANO¥ rights than the MCC; yet it fails to address the breadth of regulatory issues envisaged in the 1995 Russian Law “On Joint-Stock Companies”. It ultimately remains minimal and falls short of setting up a comprehensive company-law framework.120 The Model Law on Audit The reform of the sphere of accounting and auditing in the CIS is in principle outside the focus of this work. Still, because of the important corporate-governance implications of external auditing for corporate accountability and transparency, we also take a brief look at the Model Law on Audit (MLA). The importance of the requirement of mandatory independent auditing of corporate activities was already recognized with the MCC and the MLJSC. It was also envisaged in most domestic company laws of the period. Similarly, many CIS member states had already passed special laws on auditing.121 The MLA adopted in June 1997 includes some standard rules on =Q@EPEJC?KJP=EJA@EJ@KIAOPE?H=SO=PPDAPEIA 'P@A­JAOPDA?KJ?ALP of auditing service and the types of auditing services, and provides some 118

We are not aware of the composition of the drafting team of the MLJSC, but have been informed that the model law was initiated by the Armenian parliamentary delegation in the PA.

119

To give the same example about shareholders’ extended liability in the event of the insolvency of a company, Art.1 (4) of the MLJSC goes back to the solutions of the Russian Art.56 (3).

120

It should be noted that the shortcomings of the MLJSC were soon recognized. A drafting group was set up within the SCCPL with assistance of international donors who supported the MCC work. According to the MCC drafting formula, Western specialists also contributed to some working sessions. The process produced a draft that did not result in a model law for a variety of reasons.

121

For example, Uzbekistan in 1992, Russia (a decree) in 1993, Azerbaijan and Belarus in 1994, Kazakhstan in 1995, Moldova and Turkmenistan in 1996.

CIS Model Legislation

35

basic conditions on the auditors (individuals or organizations), such as MQ=HE­?=PEKJEJ@ALAJ@AJ?AHE?AJOEJC=J@NACEOPN=PEKJ 'P=HOK?KJP=EJO some requirements as to the legal basis of the relations between audit organizations (auditors) and clients, their respective rights and duties, and some requirements as to the audit report as the outcome of the auditing process. A cursory review of the mentioned provisions, however, does not show that the drafters of the MLA have necessarily sought to achieve harmonization at the level of the maximum requirements contained in the then-existing domestic legislation.122 Certainly from the point of view KBPDA=?DEARAIAJPOKBLNAOAJPÎ@=UEJPANJ=PEKJ=HNQHAÎI=GEJCEJPDA­AH@ and the enhanced demands for investor protection worldwide,123 the MLA remains lacking. The Model Law on Securities Markets Like the MCC, the Model Law on the Securities Markets (MLSM) was drafted by the SCCPL, following the already described methodological approach. It was similarly funded through technical-assistance projects.124 The original intention of the drafters was to produce two model laws in the area of securities and securities markets.1252DA­NOPIK@AHH=S¢-J the Circulation of Investment Securities” was intended to contain norms of a private-law nature related to the concept and forms of investment securities, basic principles of transactions with securities, and the registration of the rights in investment securities. Admittedly, the drafting of this 122

Regarding the highly important issue of auditor independence, for example, the criteria envisaged in Art.9 of the MLA are certainly similar to those of the Art.11 of the Russian Temporary Rules on Auditing Activity, adopted by Edict of the President No.2263 of 22 December 1993, but they make some very critical omissions with the AɳA?PKBNAH=TEJCPDANAMQENAIAJPO 

123

We refer to the rules and standards embodied in documents such as: the US Sarbanes-Oxley Act; European Commission Recommendation of 16 May 2002 “On Statutory Auditor’s Independence in the EU”, available online at ; IOSCO, “Principles of Auditor Independence and the Role of Corporate Governance in Monitoring Auditor’s Independence”, Madrid 2002, available online at ; and the OECD Principles of Corporate Governance, op.cit. note 2.

124

The project coordinator was the CILC, with money from the EBRD (funded by The Netherlands) and GTZ. For more on GTZ’s contribution to the model-law process in general, see T. Mayer and H.-J. Schramm, “GTZ’s Assistance for Law Reform in Transition Countries”, Law in Transition Autumn 2000.

125

See Concept Paper “Fundamental Principles and Conceptions of the Model Legislation on Investment Securities for the Countries of the Commonwealth of Indepen@AJP1P=PAO£KJ­HASEPDPDA=QPDKNÓ¢MLSM Concept Paper”).

36

Rilka Dragneva

IK@AHH=SS=OOAAJ=OJA?AOO=NUPK­HHEJOKIAC=LOEJPDA+!!related to transactions with investment securities. The second model law “On the Securities Market” aimed at dealing with the public-law relations arising in the process of the issuance of securities, organization and operation of the securities market, the activities of professional participants in the securities market, and state supervision of the process of circulation of securities. Thus, the drafting was seen as a part of a logical construction, building on the solutions of the MCC and related to other laws and regulatory acts (e.g., on joint-stock companies). The outcome of the process, however, was a single law that incorporated elements that both model laws intended. Chapters 1 and 2 of the MLSM deal with the concept and forms of securities and the registration of rights relating to securities, whereas the remaining larger part covers the problems of the issuance of securities, disclosure of information, professional activities in securities markets, and the regulation of securities markets. The MLSM was adopted in a domestic and international context ?KJOE@AN=>HU@EɳANAJPBNKIPD=P?D=N=?PANEVEJCPDA=@KLPEKJKBPDAmodel laws previously mentioned. Important legislative learning had already been accumulated in many CIS countries. The legal framework of securitiesmarket regulation in many CIS countries had undergone several phases of development by 2001.126 Similarly, important advances had been made internationally in relation to securities-market regulation. This enabled the drafters to draw on a wide variety of sources. As the MSML Concept Paper reveals, the work on the model law started with an analysis of the laws on securities and securities markets of Armenia, Belarus, Kazakhstan, the Russian Federation, Ukraine, and Uzbekistan. Through the participation of Western lawyers in the discussions, the experience of countries such as Germany, The Netherlands, and the US was taken into account. Finally, documents adopted within the various international frameworks (e.g., IOSCO, EU, and the Group of Thirty) were used as benchmarks. The Model Legislative Provisions on Investor Protection The preparation of the Model Legislative Provisions on Investor Protection (MLPIP) was vested in a PA working group consisting of members of national parliaments, experts representing various government agencies, and other specialists.127 The principal drafting was done by a team consisting of CIS and international drafters, the latter chosen in view of 126

See H.-J. Schramm and A. Bushev, “Protection of Shareholders Through the Regulation of Securities Markets”, in this book.

127

For more, see A. Zverev, “Investor Protection in the Commonwealth of Independent States”, Law in Transition May 2006, 89-95, 89.

CIS Model Legislation

37

their experience in company-law and corporate-governance reform in the CIS.1281EIEH=NPKPDA+1+*PDAAɳKNPS=OOQLLKNPA@>UEJPANJ=PEKJ=H donors.129 As with the MLSM, the drafting of the MLPIP was preceded by a comparative analysis of the state of investor-protection-related legislation in the CIS in order to identify the areas requiring legislative attention. This analysis was helped by the fact that, at the time of the drafting, there had already been more than a decade of experience in the CIS in adopting and amending legislation, but also in judicial practice,130 scholarly research, and corporate practice.131 In this context, it was possible to take account of the legislative developments across the CIS, and particularly in ?KQJPNEAOSDANAOECJE­?=JPEILNKRAIAJPOEJEJRAOPKNÎLNKPA?PEKJNACEIAO were being introduced (e.g., Russia, Kazakhstan, Armenia, Moldova). The assessment was based on international benchmarks, such as the OECD and EBRD documents mentioned in Table 6, but was also supplemented by the results of a questionnaire sent out to all working-group members and other CIS country experts aiming to identify gaps and problem areas in investor-protection regulation and practice in respective countries. The analysis was followed by the adoption of a concept paper, on the basis of which the actual drafting was undertaken. A new approach in the conception of this law was the decision to draft it as a set of model provisions aiming to cover important aspects of investor protection. The main reason behind this proposal was the fact PD=PAɳA?PERAEJRAOPKNLNKPA?PEKJEO=?DEARA@PDNKQCD=?KI>EJ=PEKJKB JKNIOJKNI=HHUAJREO=CA@EJ@EɳANAJPLEA?AOKBHACEOH=PEKJ?KIL=JUH=SO security laws, auditing laws, etc.132$QNPDANIKNA@EɳANAJP!'1?KQJPNEAO=O =HNA=@UIAJPEKJA@D=@=@KLPA@H=SO>APDAU=P@EɳANAJPHARAHOKBI=PQNEPU in the mentioned areas. Thus, the idea was that domestic legislators would 128

Among them were some of the authors contributing to this book, namely D. Karapetyan, R. Dragneva, H.-J. Schramm and G. Maassen.

129

The EBRD (with money from the Dutch Technical Cooperation Fund) and, in small part, by GTZ, and coordinated by CILC.

130

Certainly, the decisions and decrees of the plenums of the Supreme Court and the Supreme Arbitrazh Court of the Russian Federation in the area of application of regulations on joint-stock companies.

131

A variety of surveys have provided important sources of information, such as the International Finance Corporation’s “A Survey of Corporate Governance Practices in Russia’s Regions”, 2003, available online at .

132

Countries like Russia, Uzbekistan, and Azerbaijan have adopted special laws on the protection of the rights of investors, although they do not exhaust the regulation EJPDA­AH@ 

38

Rilka Dragneva

>AJA­PIKNAEBCERAJPDALKOOE>EHEPUPKQOAPDAHACEOH=PERALNKREOEKJOPD=P are needed in their respective countries. At the same time, to facilitate this approach the MLPIP were drafted in the format of “black-letter” rules and commentary to each article.133 The intention in the commentary was to provide domestic users with information about the reasons for the respective recommendation (including why possible alternatives were not adopted) and possible variations to the rule depending on local economic circumstances or policy decisions. In terms of their structure, the MLPIP are divided in two major parts: “Investor Protection at the Level of Company Law” and “Protection of 'JRAOPKN0ECDPO"QNEJCPDA'OOQA=J@2N=@AKB1A?QNEPEAO£ 2DA­NOPL=NP deals with some basic shareholder rights, rights of the state as a shareholder, shareholder duties and limited-liability provisions, important aspects of the work of the general meeting of shareholders, duties and liabilities of directors and managers, shareholder rights in special circumstances, and ­J=J?E=H=??KQJP=>EHEPU 134 In doing so, it revises and/or complements many of the provisions of the MCC, the MLJSC, and the MLA, in light of new developments in the domestic and international arenas. The second part aims to complement some of the MLSM provisions in relation to the issuance of, and trade in, securities, but it also introduces the principles of regulation of investor compensation schemes.135 Finally, it should be noted that important contributions to the drafting of the law were made during the stage of its review by various international and CIS scholars and practitioners, including representatives of the SCCPL. It was regrettable in the view of this author, however, that, for a number of reasons, it was not possible to carry out an extensive and well-organized public consultation of the draft.136

133

This approach follows international practice, e.g., the OECD Principle of Corporate Governance.

134

For a comprehensive discussion of the provisions of the MLPIP in these areas, see Dragneva, op.cit. note 9; G. Maassen and R. Dragneva, “Cumulative Voting and the Protection of Minority Shareholders in the CIS”, in this book; D. Karapetyan, “Protection of shareholder Rights in Special Circumstances”, in this book.

135

See Schramm and Bushev, op.cit. note 127.

136

Certainly, it can be argued that in this age of greater use of electronic communication (even in the CIS), such consultations could and should be used more often. The issue of the input of wider constituencies in law-making in the European Union, for example, has not been resolved. Yet there has been an increase of public-consultation initiatives, particularly in the area of company-law harmonization.

CIS Model Legislation

39

Assessing the Model Legislation Process An important element of the process of drafting model laws is the extent to which the latter have been used by CIS member states as a source for drafting new or amending old legislation. In this sense, it is the Model Civil Code that seems to have received the most welcome reception in CIS members states so far. As various accounts show, the Civil Codes of Kazakhstan (adopted in 1994), Kyrgyzstan (1996), Uzbekistan (1996), Armenia (1998), and Tajikistan (1999) closely followed the MCC and its main source, the Russian Civil Code.1372DA+!!H=NCAHU=ɳA?PA@PDA?DKE?A of structure of the domestic codes, as well as the substance of the legal rules.138 As Professor Maggs argues, the high degree to which the MCC (and the Russian Civil Code) was used is evidenced in the extent to which many of its controversial or “bad” provisions were also incorporated.139 The domestic importance of the other model laws is less known.140 For laws such as the MLPIP adopted in 2005, in any event, such an assessment will be premature. In the beginning of this work, we noted several principal sources for drafting legislation, which can be placed in two main groups: home-grown versus foreign. We also pointed out some typical problems observed in the process of legal reform, particularly related to the way legal transplants are introduced in domestic laws. The question to be asked then is: What =@R=JP=CAO@KAOIK@AHHACEOH=PEKJKɳAN=O=OKQN?AKBH=S@ARAHKLA@=P the intermediary level of the CIS? We noted that model laws are soft laws and that there is no institutional obligation to adopt them domestically. In this sense, their position is similar to borrowing from foreign law and incorporating international legal standards and best practice. In fact, the latter can be “harder” than IK@AHH=SOSDAJEJ?HQ@A@EJ­J=J?E=HÎ=OOEOP=J?A 137

See the papers presented at the conference on “Results and Perspectives of Civil *=S!K@E­?=PEKJEJPDA!'1+AI>AN1P=PAO£DAH@KJÎ$A>NQ=NUEJ1P  .APANO>QNCKJ­HASEPDPDA=QPDKN+=CCOop.cit. note 65; R. Knieper, “Entwicklungslinien des Zivilrechts in der GUS”, October 2002, available online at .

138

For example, =HH­RA?KQJPNEAOIAJPEKJA@EJ?HQ@A=L=NPKJLNER=PAEJPANJ=PEKJ=HH=S  Ukraine also included it in Part X of its 1996 draft of the Civil Code, though it left EPKQPKBPDA­J=HRANOEKJ 1AA"KRCANPop.cit. note 89.

139

Professor Maggs gives a number of examples, among them the inclusion of the “public contract” concept or that of the “unitary enterprises”, op.cit. note 65.

140

Some examples of the use of the MLJSC are provided in Dragneva, op.cit. note 9. At the same time, we draw the reader’s attention to the larger methodological problem (encountered also in the #3ÔNAH=PA@PKPDAIA=OQNEJCKBPDAAɳA?PKBsoft laws. Due the lack of space, we are not able to take this question any further in this work..

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Rilka Dragneva

conditionality packages.141 Thus, it is important to assess the advantages and disadvantages of the model-legislation process that justify (or not) its use on its merits relative to other sources and approaches to reform. It should be recognized that merits and reality do not always coincide in the complex world of post-communist legal-reform politics and economics. Indeed, we have given a number of examples of this reality throughout the chapter. Yet it is one of the undoubted privileges and responsibilities of scholarship to recognize both. 2DA­NOPEOOQAPKLKEJPKQPNAH=PAOPKPDAS=U!'1IK@AHHACEOH=PEKJ and the process of its adoption deal with legal transplants. A review of the institutional setup of the process and the selected examples show that model laws (at least the MCC, the MSML, and the MLPIP) have integrated many solutions of foreign law and international legal standards. In doing so, the knowledge of foreign laws was derived not only by academic study but also by the contribution of specialists on foreign law, bringing not only the details of the law but also the policy, judicial, and corporate context behind it. At the same time, a discussion forum was created where many of the “transplantability” problems of international legal standards could be addressed, such as their generality, separation from a real economy context, and selection bias.142 The particular advantage of the model-legislation process in this respect has been in giving access to PDAOA>AJA­POPK!'1?KQJPNEAOSDE?DSKQH@JKPJA?AOO=NEHUD=RA>AAJ =>HAPKI=OPANPDAJA?AOO=NUDQI=J=J@­J=J?E=HNAOKQN?AO 2DANA?ANtainly has been an “economy of scale” consideration on the part of the EBRD and other international donors in assisting one process rather than twelve. We also postulate that, at the individual country level, there may be a greater conditionality pressure to adopt, for example, certain recommended international legal standards, without the time, the intellectual and bargaining power available to analyze and “unpack” them in a way that is suitable for domestic drafting. While ensuring access to foreign law and international legal standards, the CIS model-legislation process has avoided many of the disadvantages of what we described as legal reform from without. The preceding review ODKSA@OKIA@EɳANAJ?AEJ@N=BPEJC=LLNK=?DAOPDA+*.'.LNK?AOOEJvolved foreign drafters in the actual drafting unlike the case of the MCC and the MLSM, where the SCCPL S=OEJ?D=NCA 7APEJ=HH?=OAO=JAɳKNP S=OI=@APK=HHKSBKNLNA@KIEJ=JPHK?=HEJLQP=PPDA@EɳANAJPOP=CAOKB the model-legislation process (pre-drafting analysis, working-group ses141

7APPDAOLKJOKNODELKBPDA# 0"I=U?D=JCAPDAAɳA?PKB=PHA=OPPDAMLSM and the MLPIP in the same direction, insofar as the EBRD refers to them in its various domestic operations.

142

See Pistor, op.cit. note 11.



CIS Model Legislation

41

sions, permanent-commission sessions, and review of the draft prior to its adoption). This predominance of local input, it can be argued, provided important guarantees for taking account of domestic legal tradition (both companyH=SÎOLA?E­?=J@CAJAN=HLNER=PAÎH=SDANEP=CAÔ=OSAHH=O=@=LP=PEKJPKPDA new economic circumstances of the CIS. Clearly, being a harmonizing instrument, model laws to a large extent do not even purport to deal with the detail of certain rules, leaving that instead to national legislators. Similarly, on many occasions model laws simply embody an “agreement to disagree” by referring to national legislation for the regulation of particular issues. A more detailed analysis is needed to show the extent to which this approach is applied in the CIS relative to developments in other international or regional settings. Yet it could be argued that the methodology of the +*.'.KBKɳANEJC=?KIIAJP=NUEJ=@@EPEKJPK=¢>H=?GÎHAPPAN£ model act143 would allow for a more informed adaptation. Another important issue to consider is the ability of the model-law process to contribute to a systemic approach to legal reform. We noted PD=P=PHA=OPKJOKIAHARAHPDAAɳKNPS=OI=@APKI=EJP=EJ=QJE­A@ approach to drafting model legislation, at least through the initial idea of adopting a general model civil code and detailed model laws that were consistent with it (and with each other). Certainly, the reliance on the SCCPL for drafting a number of model laws (including the review of the MLPIP) provided the potential for conceptual unity. On the one hand, a ?KILNADAJOERA=LLNK=?DPKIK@AHHACEOH=PEKJI=UD=RA>AAJ>AJA­?E=H in aiding what we described as the largely unstructured (at least in the ­NOPD=HBKBPDAOÔ=LLNK=?DPK@KIAOPE?H=SNABKNI -JPDAKPDAN hand, given the dynamism of the domestic and international environment, this does not seem to have been a realistic expectation. We showed that IK@AHHACEOH=PEKJEJPDA=NA=KB?KIL=JUH=SNA®A?PA@PDA?D=JCAOEJPD=P AJRENKJIAJPSEPDPDAAɳA?PPD=PPDANACQH=PEKJ?KJP=EJA@EJOQ>OAMQAJP laws revisited and/or departed from prior solutions, thus providing several legislative models dealing with the same matter.144 In fact, it can be =NCQA@PD=PPDANAI=U>A=>AJA­PEJ?KJ?AEREJCKBPDAIK@AHÎHACEOH=PEKJ 143

Unfortunately, we are not familiar with whether this approach has been used in the drafting of other model laws. Similarly, we are unaware of the extent to which the MLSM Concept paper, which has the quality of a commentary, is available to domestic legislators and or other users.

144

For example, compare certain provisions of the MCC, MLJSC, the draft MLJSC prepared by the SCCPL, and the MLPIP. The EBRD has also announced that it is considering funding the drafting of a new Model Law on Joint-Stock Companies. See Zverev, op.cit. note 128. For examples related to limited-liability companies, see Dragneva, op.cit. note 3.

42

Rilka Dragneva

LNK?AOOEJ@AA@=O=¢LNK?AOO£NA®A?PEJCHA=NJEJCKRANPEIA 145 There may >A=CNA=PAN>AJA­PEJ=??ALPEJC=JATLHE?EPHU?KJPEJQKQOKN=PHA=OP=HKJCÎ term approach to model law-making in particular subject areas, instead of the default situation of little coordinated (despite the PA’s Prospective Plans) re-writing of laws. One of the thorny issues for observers of legal reform, as noted earlier, has been the possibility for Russia to use the model-legislation process to maximize its geopolitical agenda by promoting a Russian-law-based common space. Institutionally, for example, we noted the fact of the close relationship between the SCCPL and the Russian Research Center for .NER=PA*=S !KJ?ALPQ=HHU0QOOE=JHACEOH=PEKJD=O@A­JEPAHUEJ®QAJ?A@ model legislation. Yet we do not believe that the predictions of Russian @KIEJ=J?A=J@EPOJAC=PERAAɳA?PD=RA?KIAPNQA First, the overlap between Russian and model laws is not universal. It was pointed out that, particularly as far as the later model laws were concerned, Russian law was taken into account along with other countries’ domestic sources. Second, given the voluntary nature of harmonization, the overlap between model laws and domestic recipient laws is not automatic either, as discussed. 2DAEJOPNQIAJPKBIK@AHHACEOH=PEKJEOKB=JKJÎ>EJ@EJCJ=PQNA=J@KɳANO OQɹ?EAJP®ATE>EHEPUPKAJOQNAOKRANAECJH=SÎI=GEJC Third, leaving the complex geopolitical context aside, there are important advantages for PDANAOPKBPDA!'1EJ>AJA­PEJCBNKI0QOOE=¥OHAC=HDQI=J=J@­J=J?E=H resources. As it has been pointed out, relying on another country’s superior legal experience to foster domestic legal and economic development without necessarily compromising independence is not without a positive precedent in world history.146 Another problem issue of legal reform, as noted, is the degree to which it represents a transparent and inclusive process. Certainly at the level of domestic law-making, there may be the temptation of certain governments to resist this or, to the contrary, to allow the disproportionate involvement or favoritism of particular (corporate) constituencies.147 145

Examples of such processes are provided by the law restatements of the American Law Institute, or the periodic revisions of the Incoterms by the International Chamber of Commerce.

146

Professor Maggs notes that, after the American Revolution, the US continued using #JCHEODH=S=J@HAC=HNAOKQN?AOSDE?DD=@=>AJA­?E=HAɳA?PBKNLNKIKPEJCN=LE@ growth. See Maggs, op.cit. note 65; idem¢2DA.NK?AOOKB!K@E­?=PEKJEJRussia: Lessons Learned from the Uniform Commercial Code”, 44 McGill Law Journal 1999, 281-300.

147

See footnote 25. Certainly, much has become known of the lucrative “family businesses” of CIS presidents and other members of the governing elite. While this is not an exclusively CIS phenomenon, it can be argued that its expression in the CIS context is worsened by a number of systemic factors.

CIS Model Legislation

43

Arguably, this problem can be mitigated at the level of the CIS, even if only in comparison with the greater leverage various lobbies have over a domestic process. Inclusiveness can certainly be helped by improving the institutional setup of the model-law process and/or making it a critical condition for technical assistance, as discussed earlier. At the same time, it should be recognized that vesting law-making EJ =J EJPANJ=PEKJ=H >QNA=Q?N=?U ?KJP=EJO = @EɳANAJP GEJ@ KB =PP=?G KJ openness and transparency: that of bureaucratic entrenchment and lack of accountability. This is also a possibility in the CIS context (and one we do not perceive as being addressed in the CIS) particularly in view of the ambition the PA has shown in driving regional cooperation in a wide range of areas.148 5AD=RA=NCQA@PD=PPDA!'1IK@AHÎH=SLNK?AOOKɳANO=N=JCAKB advantages to domestic legislators both in terms of the method of reform =J@PDANAOKQN?AOÓHAC=H=J@­J=J?E=HÔEP?=JIK>EHEVA JKPDANQJ@KQ>PA@ advantage of the model-legislation process is its contribution to legal uniformity. For countries that had already advanced in the development of respective domestic legislation (and as such have provided drafting OKHQPEKJOBKNOLA?E­?IK@AH laws), such as Russia or Kazakhstan,149 this indeed may be of primary value. For others that are lagging behind in the provision of a robust institutional environment for joint-stock companies, such as Belarus or Tajikistan, model laws retain their dual importance as aids in legal reform and instruments for harmonization. Yet even in the case of the “front-runners”, the relevance of model laws as inspiration for legal development should not be excluded because of the changes in LNEKNEPEAO=J@>=H=J?AKBEJPANAOPO=ɳA?PEJCH=SÎI=GEJCKRANPEIA 150 While the focus of this work was on evaluating the model-legislation process in the context of legal reform, we would like to conclude by pointing out its importance on a purely intellectual level, as a forum for exchange and testing of ideas, and sharing experience. This, of course, is 148

This author is certainly reminded of the interview she had with the secretary-general of the PA, M. Krotov, in October 2002, during which he noted the fact that the PA had a legal personality of its own and stated that the PA did not have to die even if the CIS did.

149

 2DA?NKOOÎ?KQJPNU@EɳANAJ?AOSEPDNAC=N@PKOLA?E­??KIL=JUÎH=SEOOQAOSEHH>A subject to discussion in subsequent chapters of this book. For a general overview of their respective legal development, see EBRD, Country Law Assessments, available online at .

150

We do not exclude the possibility, for example, that Russia and Kazakhstan, which currently provide for mandatory cumulative voting for directors of all joint-stock companies, will recognize the problems of this procedure and return to the optional cumulative-voting principle, recommended by the MLPIP. See Maassen and Dragneva, op.cit. note 135.

44

Rilka Dragneva

=IKNALANOKJ=HLNK?AOO=J@EPOAɳA?POLKOOE>HUP=GAHKJCANPK>A?KIA visible. Yet the importance of such legislative networks is increasingly being recognized as a major organizing principle with great potential in international relations.151 Table 6: Chronology of Adoption of Key International Legal Standards and Initiatives in the Area of Investor Protection and of CIS Model Laws International Developments

Year

CIS Model Legislation

1994

Model Civil Code

General Principles of Company Law for Transition Economies (OECD)

1996

Model Law on Joint-Stock Companies

Sound Business Standards and Corporate Practices (EBRD)

1997

Model Law on Audit

Principles of Corporate Governance (OECD)

1999

Russian Corporate Governance Roundtable (OECD/ IFC/WB)

1999

Eurasian Corporate Governance Roundtable (OECD/ IFC/WB)

2000

Corporate Governance Checklist (EBRD)

2000 2001

White Paper on Corporate Governance in Russia (OECD)

2002

Principles and Objectives of Securities Markets Regulation (IOSCO)

2003

Principles of Corporate Governance (OECD)

2004

Improving Transparency of Related Party Transactions in Russia (OECD)

2005

151

Model Law on Securities Markets

Model Legislative Provisions on Investor Protection

A.-M. Slaughter, A New World Order, Princeton and Oxford 2004.

Legal Regulation of Shareholder Rights in the CIS Rilka Dragneva1 Introduction This chapter discusses how company law regulates some of the key rights of shareholders of joint-stock companies in the countries of the Commonwealth of Independent States (CIS). The regulation of shareholder rights has come to be widely seen as the area of primary importance in the development of corporate governance in the CIS. It has been argued, in fact, that investing in shareholder rights and equal treatment of shareholders should be viewed as a priority over other good-governance principles such as independent boards or disclosure and transparency.2 Several principal reasons stand behind this view. First, the emphasis on shareholder rights is necessitated by the outcome of the LNER=PEV=PEKJLNK?AOOEJ#=OPANJ#QNKLA "AOLEPAOKIA@EɳANences in the strategies adopted and the progress of privatization itself in PDA@EɳANAJP!'1?KQJPNEAO3 privatization has typically led to ownership structures characterized by the sizeable presence of insiders (managers and employees) as principal owners, with the remaining stakes dispersed widely among individuals. These individuals, unlike similar owners in the West, did not make cash contributions to purchase their shares; instead, they received them from the state. Combined with a non-existent shareDKH@AN?QHPQNAPDEO=NCQ=>HUD=O=JAC=PERAAɳA?PKJPDAENEJ?AJPERAO=J@ ability to exercise their rights. Similarly, insiders have often seen these “privatization-made” shareholders as lacking a real entitlement to “their” company. As has been widely pointed out, insiders have sought not only to concentrate their ownership stakes and/or dilute outside minority shareholders but also to inhibit the access of these shareholders to con1

The author is indebted to William Simons, Harry Rajak, Achim Schramm, and Alan Lewers for their helpful comments and suggestions. The research that this =NPE?HAEO>=OA@KJS=OBQJ@A@>U2DA,APDANH=J@O1?EAJPE­?0AOA=N?D-NC=JEV=PEKJ (NWO).

2

S. Nestor and F. Jesover, “OECD Principles of Corporate Governance on Shareholder Rights and Equitable Treatment: Their Relevance to the Russian Federation”, Paper for OECD/World Bank Corporate Governance Roundtable for Russia, 24-25 February 2000, available online at .

3

5A JKPA BKN AT=ILHA PDA SE@A @EɳANAJ?AO EJ PDA OEVA KB PDA LNER=PA OA?PKN KB individual CIS countries as a percentage of GDP at present. See EBRD, Transition Report 2005: Business in Transition, London 2005, available online at (“2005 EBRD Transition Report”).



Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 45-84 © Koninklijke Brill NV, Leiden, 2007

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Rilka Dragneva

trol through various (often rampant) violations of the law. Indeed, these companies have been appropriately called “quasi-public companies”, a NABANAJ?APKPDAEN>AEJCLQ>HE?EJHAC=HBKNISEPD=OECJE­?=JPJQI>ANKB minority shareholders but private in the orientation and actions of their controlling shareholders.4 The gravity of the problem is underscored by the limited liquidity of company shares. Given the state of securities markets in the CIS,5 minority or outside shareholders are unable to sell their shares easily or at a fair price. Thus, they remain “locked into” to the company, thereby =@@EJCATPN=QNCAJ?U=J@EILKNP=J?APKPDAJAA@BKNAɳA?PERAOD=NADKH@AN protection through company laws. Second, an argument for enhanced protection of shareholder rights has =HOK>AAJI=@AEJNAH=PEKJPKPDANAOPNE?PA@OKQN?AOKB?KNLKN=PA­J=J?AEJ #=OPANJ#QNKLA "AOLEPACN=@Q=HLNKCNAOOEJ>=JGEJCNABKNI>=JG­J=J?A has still not become a viable mechanism for funding the huge restructuring needs of old companies or the growth of new private business.6 For a variety of reasons, strategic foreign investment cannot be relied upon to the extent needed either.7,KN?=JOAHBέJ=J?EJCLH=U=OECJE­?=JPNKHA for the largest part of the economy at this stage.8 The most viable option left, then, it has been argued, is external AMQEPU­J=J?EJC 7APOQ?D ­J=J?EJC?=J>A=PPN=?PA@KJHUEBEJRAOPKNO¥EJPANAOPO=NALNKPA?PA@ÓKN=P least perceived to be so), including through ensuring the right to control a company in proportion to the cash contributions made. Third, EP?=J>A=NCQA@PD=PPDA=>KRAÎIAJPEKJA@!'1ÎOLA?E­?NA=sons for the prime focus on shareholder rights have been underpinned by some global processes and modern paradigms. To start with, there is the dominance of the “shareholder capitalism” paradigm, whose advantages

4

I. Belikov, “Corporate Governance Issues in Russian ‘Quasi-Public’ Non-Listed Companies”, available online at .

5

See H-J. Schramm and A. Bushev, “Protection of Shareholders Through the Regulation of Securities Markets”, in this book.

6

As the Acting Chief Economist of the EBRD shows in his presentation on the 2005 EBRD Transition Report, available online at =JGHK=JO=J@=P=DECDAN?KOPPD=J­NIOEJKPDAN CEE countries or mature economies.

7

Nestor and Jessover, op.cit. note 2, point to some political reasons. J. de Kort shows some of the economic reasons, J. de Kort, “The Investment Climate in the Commonwealth of Independent States”, in this book.

8



$EJ=J?EJC PDNKQCD NAP=EJA@ LNK­PO EO =NCQ=>HU >A?KIEJC IKNA KB =J KLPEKJ BKN companies engaged in natural-resources-related sectors.

Legal Regulation of Shareholder Rights in the CIS

47

over alternative state, family, or labor models have been widely discussed.9 Indeed, it has been argued that the success of the “shareholder model”, related to the liquid security markets typical of the Anglo-Saxon countries, can be correlated with the quality of investor protection ensured through law10 or self-regulation.11 Similarly, corporate-governance debates have gradually moved to focus not only on company boards and market discipline on managers but also on core issues of shareholder rights and accountability. This shift has been helped by the need to restore public ?KJ­@AJ?AEJIKNANK>QOPS=UOPD=J>ABKNAEJNAOLKJOAPKPDANA?AJP OQ??AOOEKJKBDECDÎLNK­HA?KNLKN=PAO?=J@=HOSKNH@SE@A 2DAOALNK?AOOAO D=RA>AAJNA®A?PA@=PPDAHARAHKBPDA#QNKLA=J3JEKJSDE?DD=ON=EOA@ shareholder rights to the top of its company-law modernization agenda in =JAɳKNPPKEJ?NA=OAEPO?KILAPEPERAJAOOEJPDACHK>=HA?KJKIU=J@=?DEARA progress in the development of a common market for capital.12 This AILD=OEOKJOD=NADKH@ANNECDPOÐEJCAJAN=H=J@OLA?E­?=HHUEJ Eastern Europe—has been accompanied by the development of a set of international legal standards for the quality of shareholder protection. These standards were most recently embodied in the 2004 OECD Principles of Corporate Governance (“2004 OECD Principles”)13 and a succession 9

H. Haansman and R. Kraakman, “The End of History for Corporate Law”, available online at ; see, also, R. Morck and L. Steier, “The Global History of Corporate Governance: An Introduction”, in R. Morck, ed., A History of Corporate Governance Around the World, Chicago, IL 2005.

10

R. La Porta, F. Lopez-de-Silanez, A. Shleifer and R. Vishny, “Legal Determinants of External Finance”, Journal of Finance 1997 No.52, 1131-1150.

11

( !KɳAA¢2DA0EOAKB"EOLANOA@-SJANODEL2DA0KHAKB*=SEJPDA1AL=N=PEKJ of Ownership and Control”, available online at .



12

See European Commission, “Fostering an Appropriate Regime for Shareholders’ Rights”, First Consultation Document of 16 September 2004 and Second Consultation Document of 15 May 2005; idem, Proposal for a Directive on the Exercise of Shareholders’ Voting Rights, COM(2005)685, all available at . We were unable in this work to examine PDA ATPAJP PK SDE?D @ARAHKLIAJPO EJ #3 HACEOH=PEKJ =ɳA?P PDA process of legal reform in the CIS; yet we note the importance of the Partnership and Cooperation Agreements concluded between the EU and individual CIS countries, which provide for voluntary approximation of the latter countries’ legislation to that of the EU. This relationship is particularly pronounced in countries aiming at enhanced cooperation with the EU, such as Ukraine. See R. Dragneva and A. Dimitrova, “Patterns of Integration and Regime Compatibility: Ukraine Between the CIS and the #3£EJ) +=H®EAP* 4ANLKAOP=J@# 4EJKGQNKRA@O Russia and the Western Newly Independent States, Basingstoke, UK 2007 (forthcoming).

13

OECD, Principles of Corporate Governance, Paris 2004, available online at
48

Rilka Dragneva

of CIS-related documents prepared on their basis under the auspices of the OECD, EBRD, and other international organizations.14 In this same spirit, the CIS Parliamentary Assembly has recognized the importance of investor rights and has produced, under the sponsorship of the EBRD, special Model Legislative Provisions on Investor Protection (MLPIP). In principle, the formulation of such general standards can be helpful in aiding legal reform in a number of ways: — They embody best practices, accumulated over many years of experience in mature economies; — They (at least the 2004 OECD Principles) are drafted with global business processes in mind thus facilitating the integration into the global economy of the countries that will adopt them; — They represent an important source of drafting in a context where domestic legal resources (certainly in many of the CIS countries) are scarce; Ð 5DAJHEJGA@PK­J=J?E=H?KJ@EPEKJ=HEPU=OPDALN=?PE?AKBI=JUEJternational institutions has been, they represent an important factor in overcoming domestic lobbies opposing reform. Indeed, it can be argued that the increased awareness of shareholder NECDPO=OSAHH=OPDANABANAJ?APKEJPANJ=PEKJ=H>AJ?DI=NGOEJPDA­AH@ has further helped legal reform in many CIS countries. Important amendments in relation to shareholder rights were recently introduced in the company laws of some countries (e.g., Russia, Moldova, Kyrgyzstan, Armenia and Uzbekistan); new laws were adopted in others (e.g., Kazakhstan).15 Indeed, the EBRD has described the extensiveness and progress in legal reform of the mentioned countries as either “high” or “medium” at least with reference to the laws on the books.16 Some developments are under way in the remaining CIS countries, too, be it in some limited and/or “soft-law” directions.17 oecd.org/dataoecd/32/18/31557724.pdf>. 14

OECD, The White Paper on Corporate Governance in Russia, Paris 2002, available online at ; EBRD, Principles of Corporate Governance and Corporate Governance Checklist, London 2000, available online at .

15

For an overview of key developments in the area of commercial law, see EBRD, Country Law Assessments, available online at .

16

See Annex 1.2 of the 2005 EBRD Transition Report, available at . For the 2003 and 2004 assessments, see the individual country reports available online at .

17

For example, Securities Commission of Ukraine, Ukrainian Corporate Governance Principles, Kyiv 2003, available online at (The “Ukrainian Code”).

Legal Regulation of Shareholder Rights in the CIS

49

While this progress is being increasingly discussed, the analysis of the outcomes of HAC=HNABKNIEJPDA­AH@KBOD=NADKH@ANNECDPOD=O>AAJ neither comprehensive nor rigorous, bearing in mind the comparative-law tradition. While undeniably important, the assessments of country legal developments undertaken by various international institutions remain of limited use.18 First, their focus—understandable in view of the mandate of these institutions—is on progress in promoting legal reform typically measured in compliance with the selected international standards or principles.19 These standards, by their nature, are non-exhaustive and rather general.20 Thus, the assessments remain partial: They fail to take account of important details as well as the way whole packages of (complementary) legal instruments are constructed. Second, the emphasis of the mentioned assessments tends to be on “compliance” with exogenously developed rules and standards. Regardless of the helpful nature of these standards, as mentioned above, they cannot be a healthy substitute for the output of a domestic process entailing LKHE?UBKNIQH=PEKJSEPDPDAEJLQPKB@EɳANAJP@KIAOPE??KJOPEPQAJ?EAO and social choices on the balance of their interests. When they do act as a substitute, a variety of problems of legitimacy and sustainability of legal regulation can occur.21 This concern is particularly pronounced in the 18

We refer here primarily to the already mentioned “checklist”, score-assignment approach of the EBRD. We note also the corporate-governance assessments based on the 2004 OECD Principles conducted by the World Bank for Armenia, Georgia, and Moldova, as part of its Reports on the Observance of Standards and Codes, available online at . More extended assessment reports have been published as a part of the OECD Corporate Governance Roundtables process, e.g., Standard & Poor’s, Analytical Assessment of the Progress in Implementing the Recommendations of the White Paper on Corporate Governance in Russia, available online at ; OECD, Corporate Governance in Eurasia: A Comparative Overview, Paris 2004, available online at .

19

It is beyond the scope of this work to examine the broader issues of the role of international institutions in promoting rule-of-law reform in the CIS. See W. Channell, “Lessons Not Learned About Legal Reform”, in T. Carothers, ed., Promoting the Rule of Law Abroad, Washington, DC 2006.

20

For more on the problems in the “transplantation” of the 2004 OECD Principles and other examples of international legal standards, see K. Pistor, “The Standardization of *=S=J@'PO#ɳA?PKJ"ARAHKLEJC#?KJKIEAO£G-24 Discussion Paper June 2000 No.4, available online at .

21

For more, see Channel, op.cit. note 19. For more on legal transplants in relation to company law, see K. Pistor, Y. Keinan, J. Kleinheisterkamp and M. West, “Evolution KB!KNLKN=PA*=S=J@PDA2N=JOLH=JP#ɳA?P*AOOKJO$NKI1ET!KQJPNEAO£ World Bank Research Observer 2003 No.18 (1), 89-112.

50

Rilka Dragneva

=NA=KB?KIL=JUHACEOH=PEKJSDANAPDALKOEPEKJOKB@EɳANAJP?KNLKN=PA EJPANAOPONAMQENA=­JA>=H=J?A  Thus, it will be the task of this chapter not only to discuss the progress of legal reform in the area of shareholder rights in the CIS but also to analyze in greater depth the nature of the legal solutions adopted. It will particularly endeavor to examine these solutions against the background of the complex policy balance that company law is called on to perform in socio-economic life. The focus will be on several key shareholder rights that demonstrate particular problems in Eastern Europe and that also represent important policy challenges. At the same time, in view of the objectives of economic integration and harmonization in the CIS, as discussed in Chapter 1 of this book, the goal will be to contribute to a picture of the degree of unity and diversity of legal solutions adopted in PDA!'1EJPDEO=NA=KBH=S ??KN@EJCHU=JAɳKNPEOI=@APKLKEJPPKPDA potential contribution of the MLPIP in particular for the modernization and harmonization of investor-related legislation. Finally, there are a few important disclaimers we need to make. First, the discussion in this work focuses primarily on the state of law on the books (company laws, in particular) rather than on the way laws are implemented. This approach recognizes the importance of having rigorous standards for shareholder rights envisaged in the law—both as mandatory and default rules. Good laws and clear standards have not only an important OECJ=HEJCBQJ?PEKJ>QP=HOK=NCQ=>HU=LKOEPERAAɳA?PKJHA=NJEJCEBJKP immediately on compliance. Second, we note the legal solutions adopted by the individual CIS countries. We were, however, unable to examine in this work the possible explanations for the diversity observed in some areas of company law. Finally, we recognize that many of the problems we are about to mention are not an exclusive CIS phenomenon. It is not the “Wild East” that invented many of the mechanisms for abusing shareholder rights. That said, our focus in this work is clearly the CIS, and comparisons (outside the mentioned framework of international standards) with other jurisdictions or historical times will be used to a limited extent.

Shares and Voting Rights One (Common) Share, One Vote The assignment of voting rights to shares represents a fundamental premise of shareholding. It is one of the main features that distinguishes it from @A>PEJRAOPIAJP=J@NA®A?POPDANEOGKB>AEJC=NAOE@Q=H?H=EI=JP 'J@AA@ the principle of “one (common) share, one vote” is increasingly seen as crucial to modern corporate governance. Deviations from the principle

Legal Regulation of Shareholder Rights in the CIS

51

in the form of non-voting common shares, multiple voting rights, votEJC ?=LO @ALKOEPKNU ?ANPE­?=PAO =J@ KPDANO =HHKS BKN = ?KJ?AJPN=PEKJ of control that is disproportionate to cash contributions. They make it possible for certain corporate constituencies, typically insiders, to retain control while raising new external capital without having to pay for it through the premium they would pay if, for example, privileged shares or bonds were issued. The persistence of instruments allowing for a deviation from the “one share, one vote” principle in many countries can be explained by historical tradition and/or the desire of corporate insiders to insulate themselves BNKIPDAEJ®QAJ?AKBJASI=FKNEPUEJRAOPKNO 22 In the age of global markets, these instruments are also becoming tools for the protection of certain national values, as demonstrated by the position of many Scandinavian countries in the EU takeover debate. Thus, despite being on the lobbying agenda of institutional investors and shareholder associations in many Western countries, the principle “one share, one vote” is not universally applied. Sensitive to the existing @EɳANAJ?AOPDAOECD Principles refrain from making a particular recommendation in this respect.23 Similarly, the EU remains cautious in introducing full-scale shareholder democracy.24 What is underscored, however, is the need for transparency of any deviations from the principle combined with active protection of minority shareholders and increased responsibility of controlling shareholders.25 Further, the OECD stresses the importance of equality of all shareholders of the same class, disclosure of the information on the voting rights attached to each share prior to its purchase, and the need for strict approval of changes in voting rights by shareholders themselves. In principle, all CIS jurisdictions envisage the rule of “one (common) share, one vote” in their company laws. This was also a recommendation made by the drafters of the 1996 “General Principles of Company Law for Transition Economies” (“1996 General Principles£ÔEJREASKBPDAOLA?E­? circumstances of Eastern Europe.261Q?D=LNKREOEKJEJAɳA?POAJ@O= 22

Indeed, it was the “one vote per shareholder” principle that characterized French and Dutch corporate development. See Morck and Steier, op.cit. note 9.

23

OECD, op.cit. note 13.

24

See, for example, European Commission, “Modernizing Company Law and Enhancing Corporate Governance in the EU—A Plan to Move Forward”, COM (2003) 284 ­J=H

25

Nestor and Jessover, op.cit. note 2. OECD, op.cit. note 13, Section II, Principle D states: “Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.”

26

G. Avilov et al., “The General Principles of Company Law for Transition Economies”,

52

Rilka Dragneva

LKSANBQH LKOEPERA OECJ=H PK ATPANJ=H EJRAOPKNO  1PEHH @EɳANAJP BKNIO KB @ARE=PEKJONAI=EJLKOOE>HA 2DAENL=NPE?QH=NHAC=HBKNIO=J@AɳA?PO=NA discussed below.27 Ownership and Voting Ceilings To start with, several CIS countries allow for the introduction of ownership ceilings in the form of limitations on the quantity or total nominal value of shares that can belong to one shareholder.28 Similarly, voting-right ceilings, or the maximum number of votes that can be exercised by one shareholder, can be introduced.29 Russia, Armenia, and Turkmenistan allow such ceilings to be introduced by the charter. This approach follows the solution of the Model Civil Code (MCC) of 1994.30 Kazakhstan is unique in that, in its new 2003 Law on Joint-Stock Companies, it requires that such limitations be introduced by law. The adoption of ownership ceilings prevents blockholding. This may D=RA=LKOEPERAAɳA?PEJPDA!'1?EN?QIOP=J?AOSDANAPDA@ARAHKLIAJPKB securities markets—associated with dispersed ownership structures—is deemed to be important. A judgment on the admissibility of voting caps, however, requires a more complex balance of various policy concerns. On Stanford Law School John M. Olin Program in Law and Economics, Working Paper No.165, 1999, available at . An exception to the principle is recommended by B. Black and A. Tarassova, “Model Law on Joint Stock Companies”, in B. Black, R. Kraakman and A. Tarassova, Guide to the Russian Law on Joint Stock Companies, The Hague 1998 (“Black-Tarassova Model Law”), Art.31, in relation to shares held by dependent companies to prevent circular voting. The recommendation relates to all questions subject to voting rather than KJHUPK?KJ®E?PÎKBÎEJPANAOPPN=JO=?PEKJO O" )=N=LAPU=J@EO?QOOAOEJPDA?D=LPAN “Protection of Shareholder Rights in Special Circumstances” of this book, many !'1H=SO@A=HSEPD@ALAJ@AJP?KIL=JEAO>U@A­JEJCPDAI=Orelated parties for the purposes of related-party transactions, e.g., Art.83 (4) of the Law of the Russian Federation No.208, 26 December 1995, “On Joint-Stock Companies” (the “Russian Law”). 27

5A@KJKPOLA?E­?=HHU@EO?QOOPDAEOOQAOKBdisclosure and controlling shareholders’ liability, for which we refer the reader to Karapetyan, ibid. and Schramm and Bushev, op.cit. note 5.

28

Art.31 (1) of the Law of Armenia, 25 September 2001, “On Joint-Stock Companies” (the “Armenian Law”); Art.25 (2) of the Russian Law; Art.9 (3) of the Law of Turkmenistan No.400-I, 23 November 1999, “On Joint-Stock Companies” (the “Turkmen Law”); Art.12 of the Law of Kazakhstan No.415-II of 13 May 2003 “On Joint-Stock Companies” (the “Kazakh Law”).

29

Art.31 (1) of the Armenian Law; Art.25 (2) of the Russian Law; Art.12 of the Kazakh Law.

30

Art.124 (5) of the MCC. Similarly, see, also, Art.31 (2) of the Black-Tarassova Model Law. According to the latter, however, such limitations should be introduced only when the company is formed and not through subsequent charter amendments.



Legal Regulation of Shareholder Rights in the CIS

53

the positive side, they may enable pioneering entrepreneurs to remain the driving force of a business, which may be particularly important in the growth stage of businesses (especially new private ones). On the negative side, however, they lead to the entrenchment of insiders and LNARAJPAɳA?PERArestructuring and innovation that are badly needed in Eastern Europe. Given the record of insiders in Eastern Europe, resulting not only in the abuse of minority rights but also poor restructuring performance,31 the MLPIP take the position that it is the latter concern that should be given priority in the CIS. Accordingly, while it provides for ownership caps, it takes a negative view of any other deviations like voting caps, shares with multiple voting rights, and non-voting shares.32 In addition, in line with the Kazakh approach, the MLPIP recommend the stipulation of ownership ceilings only by law, thus reserving their application for particular companies. Finally, in line with OECD recommendations, the commentary to the MLPIP (the “MLPIP Commentary”) underscores that such a limitation should apply equally to all shareholders holding common shares.33 Voting Agreements In principle, shareholder agreements can be an important instrument for collective action among shareholders. Yet they can also serve to separate control and cash rights. Problems occur particularly when agreements are concluded between shareholders and the company’s insiders with the AɳA?PPD=POD=NADKH@ANO=NA¢HK?GA@EJPK£=L=NPE?QH=NGEJ@KB>AD=REKN  They may be obliged, for example, to always vote in favor of proposals of a director or manager or to always follow instructions of the management in matters relating to essential shareholder rights (e.g., the right to sell shares and the right to receive dividends). Indeed, coercive practices with regard to voting behavior—particularly of employee shareholders—have been reported in the CIS. In the CIS, company laws do not deal with shareholder agreements. Such agreements are subject only to the general provisions envisaged in the relevant country’s civil code. It is because of the important corporategovernance implications of shareholder agreements, however, that the +*.'.NA?KIIAJ@OKIAOLA?E­?NACQH=PEKJ 'JL=NPE?QH=N=CNAAIAJPO 31

On the relation between ownership structure and enterprise restructuring, see S. Djankov, “Ownership Structure and Enterprise Restructuring in Six Newly Independent States”, World Bank Policy Research Working Paper 1999 No.2047, available online at .

32

Art.3 (2) of the MLPIP.

33

A similar requirement is contained in Art.32 (4) of the Armenian Law.

54

Rilka Dragneva

should not be allowed to require shareholders to always follow the instructions of the company or always approve its proposals, or to vote in a OLA?E­A@I=JJANEJAT?D=JCABKNK>P=EJEJCOLA?E=H=@R=JP=CAO 34 Furthermore, in line with international recommendations on the importance of transparency of corporate control, the MLPIP recommend some form of disclosure with regard to agreements between shareholders cumulatively owning more than 10% of voting shares.35 Finally, because of the civil-law nature of shareholder agreements, the validity of votes cast should not be EJ®QAJ?A@>U=OD=NADKH@AN¥O>NA=?DKBPDAOD=NADKH@AN=CNAAIAJP 2DQO in case of a breach of an agreement, the parties to the agreement will be entitled to seek remedies through civil law rather than company law. “Golden Shares” The mechanism of the “golden share£=ɳA?POPDA@EOPNE>QPEKJKB?KNLKN=PA power by granting disproportionate (to cash contributions) control rights to the state (central or local authorities). Although these shares are used in many Western European countries, they raise important questions about the role of the state in the economy,36 which is a particularly sensitive issue in the context of the CIS. In principle, state ownership in companies remains high even in countries where substantial progress with privatization has been made.37 2DEOEOAOLA?E=HHUPNQAEJ?KIL=JEAOKBOLA?E=HEILKNP=J?A=MQ=HE­ANPD=P is often interpreted in a fairly broad sense. One of the key challenges of the post-privatization period is removing the special, extra-legal status of the state as a shareholder and bringing it under the ambit of general company law. While it is crucial to recognize the perceived importance in these societies of continued state presence in some companies or sectors of the economy, it is also necessary to cater to the need of outside shareholders for transparency and fair play. This is particularly important given the violations of shareholder rights reported in some major companies SEPDOECJE­?=JPOP=PAKSJANODEL 38 34

Art.3 (4) of the MLPIP.

35

For more on disclosure, see Schramm and Bushev, op.cit. note 5.

36

Golden shares have been the subject of some recent controversy in the European Union and litigation in front of the European Court of Justice.

37

K. Pistor and J. Turkewitz, “Coping with Hydra—State Ownership After Privatization”, in R. Frydman, C. Gray and A. Rapaczynski, eds., Corporate Governance in Central Europe and Russia, Budapest, London, New York 1996.

38

See B. Fedorov, “The Fight for Shareholder Rights in Russia”, available online at . The author is an independent board member of the energy utilities RAO UES and Gazprom. He was also former Deputy Prime Minister and Minister of Finance of the Russian Federation, and a director of the EBRD.

Legal Regulation of Shareholder Rights in the CIS

55

Many CIS countries make a special provision in their company laws for the application of privatization legislation to the status of companies reorganized for the purpose of privatization.39 In the Russian Federation, for example, the status of the state as a shareholder (and the scope of its NECDPOÔEO@EɳANAJP@ALAJ@EJCKJPDAOEVAKBEPOOD=NAEJ=?KIL=JU=J@ the importance of that company. — Where the state holds more than 75% and/or a company is deemed to be “strategic”, a governance regime is put in place where the state’s consent is required for the conclusion of a number of share transactions and other key aspects of corporate governance;40 — Where state participation decreases below 75% or, regardless of the size of the state share, a company is excluded from the list of strategic companies, the state can introduce a golden share in companies where it is necessary to “guarantee the defense capability of a country and its security, to defend the morals, health, rights and legal interests of the citizens of the Russian Federation”. 41 In the latter case, it is LNER=PEV=PEKJHACEOH=PEKJPD=P@A­JAOPDANECDPO belonging to the golden share, namely: to appoint a representative to the board of directors and the revision commission (revizionnaia komissiia); to make proposals to the agenda of the general meeting of shareholders (GMS) to call an extraordinary meeting of shareholders; to veto decisions of the GMS regarding changes in the charter, reorganization, liquidation, changes in the charter capital, and the conclusion of major and relatedparty transactions.42 Kazakhstan stands out in its approach of envisaging a general provision on golden shares in its company law, i.e., outside the immediate context of privatization. It allows the general meeting of shareholders of a company to issue one such share.43 This share then does not entitle its holder to a dividend, but it gives it the right to veto decisions of the GMS and the >K=N@KJEOOQAO@A­JA@EJPDA?D=NPAN

39

Art.1 (5) of the Armenian Law; Art.1 (4) of the Law of Moldova No.1134-XIII, 2 April 1997, “On Joint-Stock Companies” (the “Moldovan Law”); Art.1 (2) of the Law of Uzbekistan No.223-I, 26 April 1996, “On Joint-Stock Companies and Protection of the Rights of Shareholders” (the “Uzbek Law”); Art.1 (5) of the Russian Law.

40

Art.9 (3) of the Law of the Russian Federation No.178, 21 December 2001, “On Privatization of State and Municipal Property” (the “Russian Privatization Law”); Decree of the Government of the Russian Federation No.738, 3 December 2004.

41

Art 38 (1 and 5) of the Russian Privatization Law.

42

Art.38 (3) of the Russian Privatization Law.

43

Art.13 (5) of the Kazakh Law.

56

Rilka Dragneva

The MLPIP assert the importance of the principle of equal treatment of shareholders regardless of their identity.44 Yet this document recognizes the need to give special rights to the state in certain companies. 'P@AAIOEPEILKNP=JPDKSARANPD=PPDAMQ=HE­AN¢OPN=PACE?EILKNP=J?A£ >A@A­JA@>UH=S 45 Further, the MLPIP Commentary recommends that the contents of golden-share rights be determined by company law and not by privatization law. Importantly, in the interest of outside investors, the MLPIP propose that the scope of these special rights be limited to the following circumstances: — Approval of major transactions; — Approval of GMS decisions on reorganization, liquidation, increase of charter capital; — Appointment of a member of the board of directors; — Veto of the acquisition of a controlling block of shares within one month after the notice of such acquisition. Given the level of corruption and other problems of public governance in the CIS,46PDA+*.'.OLA?E­?=HHUOPNAOOPD=PCKH@AJOD=NAOODKQH@KJHU be exercised “to protect the rights and legal interests of the state, national security, or the rights and interests of the public”.47 In addition, it grants a powerful remedy to companies, namely the right to challenge in court the way the state exercises the rights attached to the golden share. Such a remedy is clearly a test of the robustness and independence of the judicial system, and it may at this stage be met with skepticism by many. Yet it may serve as an important benchmark on the way. Voting Rights of Privileged Shares In all CIS jurisdictions, as elsewhere, companies are allowed to issue privileged shares. Most CIS countries restrict the issuance of privileged shares to a total nominal value of 25% of the charter capital.48 Such shares are 44

Art.11 (1) of the MLPIP. Similarly, Art.11 (2) of the Armenian Law.

45

Art.11 (2) of the MLPIP. An earlier draft of the MLPIP also provided that the golden OD=NAEPOAHBEOEJPNK@Q?A@KJHU>UH=SPDQOKɳANEJC=>NA=GBNKIPDALN=?PE?ASDANA>U such shares are introduced by ministerial acts.

46

Comparative information on the state of governance, rule of law, and corruption can be obtained from .

47

NP ÓÔKBPDA+*.'. 5A=NA=S=NADKSARANPD=PPDEO@A­JEPEKJ@KAOJKP=HHARE=PA potential problems in determining “public interest” encountered in this and other areas of law.



48

Except Art.19 (3) of the Uzbek Law, which restricts it to 20%; Art.18 (1) of the Turkmen Law and Art.10 of the Law of Tajikistan No.454, 23 December 1991, “On (KEJPÎ1PK?G!KIL=JEAO£ÓPDA¢2=FEG*=S£ÔNAOPNE?PEPPKÙ ,KOLA?E­?LNKREOEKJ was included in the Law of Ukraine No.1576-XII, 19 September 1991, “On Com-

Legal Regulation of Shareholder Rights in the CIS

57

REASA@LNEI=NEHU=O=­J=J?E=HEJOPNQIAJP=J@CN=JPPDAENDKH@ANOAJD=J?A@ cash rights compared to holders of common shares. These advantages =NAPULE?=HHUKɳOAP>UNA@Q?A@RKPEJCKNCKRANJ=J?ANECDPOKBLNEREHACA@ shareholders. Indeed, when voting privileged shares are allowed, there is the danger that their holders may use their voting power in a GMS to @ERANP>AJA­POBNKIDKH@ANOKB?KIIKJOD=NAO 49 Most CIS jurisdictions treat privileged shares as non-voting in prin?ELHA  #T?ALPEKJO =NA =HHKSA@ EJ PDA ?EN?QIOP=J?AO @A­JA@ >U H=S  'J some countries, however, the charter can also make such provisions with NAC=N@PKOLA?E­??=PACKNEAOKBLNEREHACA@OD=NAO 50 Armenia and Uzbekistan further specify that the charter can attach voting rights to privileged shares if it also attaches thereto the right to be converted into common shares or other types of privileged shares. The MLPIP take the position that a strict general prohibition on voting of privileged shares should be preferred for the reasons mentioned above and that exceptions should >AOLA?E­A@KJHU>UH=S 51 As far as the scope of exempted circumstances is concerned, all CIS countries distinguish between two situations: — When privileged shares with unpaid dividends are allowed to vote on all matters within the competence of the GMS;52 and — When all privileged shares are allowed to vote on particular key deciOEKJO=ɳA?PEJCPDANECDPOKBPDAENDKH@ANO  All CIS countries include company reorganization and liquidation in the scope of the latter key decisions. In addition, holders of privileged shares are allowed to vote on charter amendments that limit the rights of OD=NADKH@ANOKBPD=POLA?E­??H=OOKBLNEREHACA@DKH@ANO 1Q?D?=OAOPULE?=HHU include situations where there are changes in: the amount of dividend or liquidation value attached to privileged shares of other categories, or the LNEKNEPUSEPDSDE?DOQ?D>AJA­PO=NAL=E@  mercial Companies” (the “Ukrainian Law”). It was only Art.158 (1) of the Civil Code No.980-IV, 19 June 2003, which envisaged that privileged shares should represent no more than 25% of the charter capital. 49

Jurisdictions that allow them, e.g., Canada, seek to prevent possible abuse of this right through other legal mechanisms.

50

Art.38 (1) of the Armenian Law; Art.29 of the Uzbek Law; Art.26 (1) of the Law of Kyrgyzstan No.64, 27 March 2003, “On Joint-Stock Companies” (the “Kyrgyz Law”).

51

NP ÓÔKBPDA+*.'. 'JPDEOPDA+*.'.@EɳANBNKIPDANA?KIIAJ@=PEKJI=@A by Art.32 (4) of the Black-Tarassova Model Law, whereby additional key decisions that holders of privileged shares can vote on can be added by the charter.

52

Only the Turkmen Law does not mention this possibility.



58

Rilka Dragneva

The MLPIP include these circumstances but also recommend that voting on charter amendments should be valid only when a certain majorEPUKBPDA=ɳA?PA@?H=OOKBOD=NADKH@ANOEOLNAOAJPÓ¢?H=OORKPEJC£Ô 53 Until now, only the Russian Federation and Kazakhstan provide for class voting by a three-quarters majority.54 Another important issue is the number of votes that voting privileged shares should grant their holders. Most CIS laws remain silent on this issue. Armenia provides that privileged shares will carry one vote unless the charter provides otherwise.55 The MLPIP address the problem by recommending that privileged shares, which may have a nominal value @EɳANAJPBNKIPD=PKB?KIIKJOD=NAOODKQH@CN=JPPDAENDKH@ANRKPAOEJ proportion to the nominal value of common shares.56 Pre-emptive Rights Pre-emptive rights are an important vehicle for ensuring the equal treatment of all shareholders of the same class in circumstances when new shares are issued to increase a company’s charter capital.57 As such, preemptive rights ensure that shareholders are given the chance to maintain their share in the existing distribution of voting rights and avoid dilution. The inclusion of such rights in CIS legal systems has been deemed highly desirable.58 It is true that the exercise of pre-emptive rights may ultimately @ALAJ@KJPDA=R=EH=>EHEPUKBOQɹ?EAJPÓ?=ODÔNAOKQN?AO=IKJCATEOPEJC shareholders. Yet installing a robust regulation sends an important signal to investors. This is particularly valuable in view of the dominance of controlling shareholders and management in company relations. Indeed, reports on company practices show that allocation of shares is often sought primarily among insiders and that the enforcement of the rules on pre-emptive rights is problematic.59 This is also an area that early CIS model legislation sought to deal with. According to the MCC and the Model Law on Joint-Stock Compa53

Art.3 (6) of the MLPIP.

54

Art.32 (4) of the Russian Law; Art.13 (4) of the Kazakh Law.

55

Art.38 of the Armenian Law. In the same spirit is the recommendation of the BlackTarassova Model Law, Art.32 (4).

56

Art.3 (6) of the MLPIP.

57

We were unable to examine in this work other important mechanisms such as shareholder authorization of the shares to be issued, the requirement for issuance at market prices, or approval of large issuances. Furthermore, we do not review pre-emptive rights in the context of closed subscriptions or closed joint-stock companies.

58

EBRD, op.cit. note 14.

59

OECD, op.cit. note 18.

Legal Regulation of Shareholder Rights in the CIS

59

nies (MLJSC), pre-emptive rights can be granted to holders of ordinary or other voting shares in the circumstances provided by law or charter. 60 Yet their provisions remain minimal and somewhat ambiguous. !QNNAJPHU OLA?E­? LNKREOEKJO KJ LNAÎAILPERA NECDPO =NA ?KJP=EJA@ in the laws of most CIS countries.61 Nonetheless, there are important variations in the regulation. FirstPDANA=NA@EɳANAJ?AOEJPDAS=ULNAÎAILPERANECDPO?=J>AEJPNKduced. Half of the CIS countries provide for granting pre-emptive rights OQ>FA?PPK=OLA?E­??D=NPANLNKREOEKJPKPD=PAɳA?P 62 In the remaining countries, pre-emptive rights are granted by the law.63 Leaving this issue to the company charter arguably allows it to be tailored to the requirements of particular companies. Yet regardless of the relatively high voting majorities required for adopting or amending company charters,64 the rights of (particularly minority) shareholders remain in danger. Accordingly, the MLPIP take the view that pre-emptive rights are essential in the CIS context and recommend a legislative provision on pre-emptive rights.65 Second, on the issue of whether pre-emptive rights, granted either by law or charter, can be waived, a number of CIS countries, with the notable exceptions of Russia and Kazakhstan, take the approach that there should always be the possibility to waive pre-emptive rights. This may be necessary, for example, in order to attract strategic investors who seek a minimum controlling stake in a company. At the same time, although circumstances in the CIS may well demonstrate such a need, it remains important to guarantee that any waiver should be done on an ad hoc baOEO=BPANSAECDEJCPDAL=NPE?QH=N=NCQIAJPO=J@>U=OQɹ?EAJPI=FKNEPU of the shareholders themselves. Such a waiver possibility is provided by 60

Art.125 (3) of the MCC; Art.4 of the MLJSC. A similar recommendation is made by the 1996 General Principles, Section VII, 76, Avilov et al., op.cit. note 26.

61

Except Turkmenistan.

62

Art.40 of the Law of Belarus No.2020-XII, 9 December 1992, “On Joint-Stock Companies, Limited-Liability Companies and Companies with Supplementary Liability” (the “Belarusian Law”); Art.47 of the Armenian Law; Art.25 (10) of the Moldovan Law; Art.39 of the Uzbek Law; Arts.25 (1) and 29 of the Kyrgyz Law. Moldova also allows for the introduction of such rights with the decision to issue new shares.

63

Art.40 of the Russian Law; Art.59 (7) of the Law of Georgia, 28 October 1994, “On Entrepreneurs” (the “Georgian Law”); Art.38 of the Ukrainian Law; Art.14 (9) of the Kazakh Law.

64

For example, a voting majority of three-quarters is required by Art.68 (4) of the Armenian Law; Art.49 (4) of the Russian Law; Art.66 of the Uzbek Law. Two-thirds is the requirement of Art.9 (5) of the Turkmen Law; Art.61 (2) of the Moldovan Law; Art.39 (2) of the Kyrgyz Law.

65

Art.4 of the MLPIP.

60

Rilka Dragneva

Armenia, Uzbekistan, and Kyrgyzstan, which allow the general meeting of shareholders to waive the right granted by the charter for a certain period of time, which may not be longer than a year. Yet these countries require only a simple majority for such a decision to be taken. Georgia also allows the general meeting of shareholders to waive the right, but it requires 50% of all votes present. The MLPIP seek to strengthen the framework provided in these countries by introducing some of the solutions of the Second Company Law Directive of the EU.66 Thus, it contains a clear statement that no restrictions or waivers can be introduced in abstracto by the charter of a company.67 It further requires a higher majority for a respective decision of the general meeting of shareholders, namely two-thirds. It also OAAGOPKCQ=N=JPAAPD=POQ?D=@A?EOEKJEOP=GAJKJPDA>=OEOKBOQɹ?EAJP information, requiring the board of directors to submit a written report explaining the reasons for the restriction or withdrawal of pre-emptive rights and justifying the issue price, to be distributed together with the notice of the general meeting of shareholders.68 The MLPIP take the view that it would not be appropriate to introduce in the CIS context an exemption from the ad hoc approval contained in Article 29 (5) of the Second Company Law Directive, whereby the board of directors can restrict or waive the right of pre-emption when it has been granted the power to increase a company’s charter capital within a certain authorized limit. Most CIS countries also envisage a competence for the board of directors to increase a company’s charter capital69 but do not grant it an explicit right with regard to pre-emptive rights. In view of the lack of developed shareholder activism and robust judicial enforcement in the CIS, we believe that control by the general meeting of shareholders over such issues should be maintained.

66

Second Council Directive 77/91/EEC, 13 December 1976.

67

Art.4 (4) of the MLPIP.

68

The requirement for a written report was revisited in the proposal for an amended Second Directive as being “an undue procedural burden for companies where there exists a clear and unambiguous point of reference for the ‘fair price’ of shares to be issued”, such as when companies are listed in regulated markets. See European Commission, Explanation to the Proposal for Amended Second Company Law Directive, available online at . It can be argued, however, that, in view of the state of securities markets in the CIS, no waiver to the requirement for =SNEPPAJNALKNPODKQH@>AKɳANA@

69

Art.84 (1) of the Armenian Law; Art.65 (1) of the Russian Law; Art.49 (1) of the Turkmen Law; Art.65 (1) of the Moldovan Law; Art.82 of the Uzbek Law.

Legal Regulation of Shareholder Rights in the CIS

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Another important issue relates to whether special “exit” rights should be granted to shareholders who voted against the waiver of pre-emptive rights or were not able to vote at the respective GMS deciding on the issue. On the one hand, such shareholders may need extra protection; on the other hand, there are various policy concerns to take into account related to situations where companies are obliged to redeem shares (at no less than their market price).70 The CIS countries, with the exception of Armenia,71 do not envisage a redemption right in the circumstances of restriction or withdrawal of pre-emptive rights. The MLPIP, however, take the Armenian view and grant such rights to dissenting shareholders.72 Third, there are variations in the provision of procedural rules for the exercise of pre-emptive rights. The existence of such rules is important, as they provide practical guarantees for the exercise of pre-emptive rights. However, only a few countries (Russia, Kazakhstan, and Kyrgyzstan) contain relevant provisions in their company laws. In addition, Moldova and Kazakhstan refer to OA?QNEPEAOHACEOH=PEKJBKN@AP=EHO +KNAOLA?E­cally, 0QOOE=¥O?KIL=JUH=SNAMQENAOPD=POD=NADKH@ANO>AJKPE­A@KBPDAEN right within the period applied for JKPE­?=PEKJKBPDADKH@EJCKB=general meeting of shareholders, and it also includes the minimum contents to be provided in such a JKPE­?=PEKJ 73 According to the Kazakh Law, noti­?=PEKJJAA@OPK>ASEPDEJPAJ@=UO=??KN@EJCPKPDA)UNCUV*=SSEPDEJ twenty days.74 In this regard, the MLPIP take special consideration of the current legal situation in CIS states when the board of directors may be authorized by the company’s charter and/or a decision of the general meeting of shareholders to issue additional shares subject to certain conditions.75 In this case, it is particularly important to ensure that shareholders eligible to exercise pre-emptive rights are informed about the decision of the board 70

For more on redemption rights in the circumstances of major transactions, see Karapetyan, op.cit. note 26.

71

Art.57 of the Armenian Law.

72

Art.6 (1) of the MLPIP. It can be noted that the 1996 General Principles do not recommend including this situation as grounds for redemption rights, yet they mention another form of protection for dissenting shareholders (Section 77), namely granting “participation rights”, whereby shareholders would be allowed “to participate in a OD=NAKɳANEJC>ULQN?D=OEJC=@@EPEKJ=HOD=NAO=PPDAO=IALNE?A=PSDE?DOD=NAOSANA OKH@=PPDAI=EJKɳANEJC£ 1AAREHKRet al., op.cit. note 26.

73

Art.41 of the Russian Law. Notable improvements to the regime were introduced with the 2005 amendments.

74

Art.16 of the Kazakh Law; Art.29 of the Kyrgyz Law.

75

Art.4 (1) of the MLPIP.

62

Rilka Dragneva

to issue new shares. The model provisions recommend a short period of JKIKNAPD=J­RA@=UO=BPANPDA@A?EOEKJEOI=@A  Another important issue relates to the period within which a preemptive right can be exercised. According to the Russian Law, this period ?=JJKP>AHAOOPD=JBKNPUέRA@=UOBNKIPDAJKPE­?=PEKJ 76 Kazakhstan and Kyrgyzstan provide for shorter periods, thirty and forty days, respectively. The MLPIP recommend a period of at least twenty-one days unless the company charter provides for a longer period.77 Finally, as in other areas of shareholder protection, enforcement of the legal provisions on pre-emptive rights is a serious problem in the CIS. 1KIALNKPA?PEKJ?=J>A=ɳKN@A@PDNKQCDsecurities-market legislation, e.g., granting powers to the securities-market regulator to inspect whether pre-emptive rights have been observed by “reporting issuers” and to refuse registration of the issue when that is not the case. Nonetheless, in some jurisdictions, the regulator may not have such powers.78 In this regard, the MLPIP recommend that a share issue that is in violation of the rules on pre-emptive rights may not be registered by a securities-market regulator and, if it is registered, that shareholders should have the right to challenge the registration in the courts.79

Shareholders’ Meetings The granting of voting rights to shareholders has practical meaning only if the exercise of these rights is guaranteed through the regulation of the general meeting of shareholders. Traditionally, the GMS has been perceived as a forum of major importance for shareholders’ expression and control.80'JPDA!'1PDEOREASEONA®A?PA@EJ?KIL=JUHACEOH=PEKJ SDANA>UPDA%+1EO@A­JA@=OPDADECDAOPKNC=JKBCKRANJ=J?AÓupravlenie) within a company.81 Traditionally, also, the regime of the GMS is 76

Art.41 (2) of the Russian Law.

77

Art.4 (2) of the MLPIP recommends a longer period than that envisaged in the Second Company Law Directive, which provides for a minimum of fourteen days after the day of publication.

78

See Schramm and Bushev, op.cit. note 5.

79

Art.4 (5) of the MLPIP. In this and several other areas of shareholder protection, the MLPIP seem to accept the recommendation of the 1996 General Principles that remedies for breach should be included as far as possible in the company law. See Avilov et al., op.cit. note 26.

80

For more on the present-day role of the GMS and the challenges to that role in the U.S. and the #3OAA% +==OOAJ=J@"  NKSJ¢2DA#ɳA?PERAJAOOKB1D=NADKH@ers Meetings: An Overview of Recent Developments”, in P. Ali, G. Gregoriu, eds., International Corporate Governance After Sarbanes-Oxley, Hoboken, NJ 2006.

81

Art.66 (1) of the Armenian Law; Art.47 (1) of the Russian Law; Art.43 (1) of the Turk-

Legal Regulation of Shareholder Rights in the CIS

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characterized by an area of complicated and highly detailed regulation, PNA=@EJC=­JAHEJA>APSAAJPDAJAA@KJPDAKJAD=J@PK=ɳKN@BQHH=J@ meaningful participation of investors, and on the other hand, to avoid excessive bureaucracy and costs. In the CIS, the regulation and practice of general meetings of shareholders have revealed particular challenges that will be explored in the section below. The focus here will be on a number of selected issues, essential, in our view, to providing a robust and comprehensive regime in the law and one that takes action against the main violations revealed so far. Preparation for the GMS The timely JKPE­?=PEKJKBPDADKH@EJCKB=GMS and the provision of adequate information related thereto is one of the key practical guarantees for the exercise of shareholder rights. There is a general international consensus that the time, method, and contents of the JKPE­?=PEKJODKQH@ not only enable attendance by stating the place and time for holding the meeting but should also allow shareholders to prepare for it in a meaningful way and enable them to:82 — Make an informed judgment on the agenda items; — Ask questions of the directors in advance of the meeting; — Organize collective action with other shareholders to reach required voting majorities; — Table resolutions; — Exercise their right to vote in absentia or by proxy. Similarly, the JKPE­?=PEKJPEIAODKQH@AJ=>HAPDA?KIL=JUPK@EOPNE>ute any revisions to the agenda as a result of shareholder resolutions. At the same time, there is a concern that JKPE­?=PEKJNAMQENAIAJPOODKQH@ not excessively restrict companies in their ability to react dynamically to corporate events or make the holding of a shareholders meeting prohibitively costly. Given the generally poor shareholder culture and the only recent exposure to corporate life, it can be argued that the provisions on proper and timely JKPE­?=PEKJ=OOQIA=L=NPE?QH=NEILKNP=J?AEJPDA!'1 7AP they have proved to be one of the key problems in company practices. Pervasive violations have been widely reported, many of them on a very basic level, such as plain lack of JKPE­?=PEKJKB=CAJ@=EPAIO=J@KBPDA time and location of meetings.83 While some violations have been conmen Law; Art.41 (1) of the Ukrainian Law; Art.18 (1) of the Belarusian Law; Art.33 (1) of the Kazakh Law; Art.50 (1) of the Moldovan Law; Art.21 (1) of the Tajik Law; Art.64 (1) of the Uzbek Law; Art.37 (1) of the Kyrgyz Law. 82

OECD, op.cit. note 13; European Commission, op.cit. note 12.

83

See, for example, OECD, op.cit. note 18; Standard & Poor’s, op.cit. note 18; IFC, A

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nected to poor infrastructure, e.g., unreliable postal services, others result from insiders’ deliberate strategies, particularly when major corporate changes are at stake. Provisions on ,KPE­?=PEKJ First, there are issues related to the timing of the JKPE­?=PEKJ HH!'1 countries, with the exception of Uzbekistan,84 envisage a minimum period in advance of the GMS for notifying shareholders. While the length of this period clearly depends on a range of domestic considerations, such as the size of the country, the state of communications, the regional spread of shareholders, the trend has been to extend it. The least demanding requirements are made by Armenia and Kyrgyzstan. Armenia requires a JKPE­?=PEKJKBKJHU­BPAAJ@=UOEJ=@R=J?A>QPKJHUSEPDNAOLA?PPK?KIL=JEAOSEPDIKNAPD=J­BPUOD=NADKH@ANO 85 Kyrgyzstan provides for twenty days with regard to open joint-stock companies and only ten days with regard to closed companies.86 Twenty days is also the recommendation of the MLJSC and Georgia’s provision.87 Most other countries, however, provide for a minimum period of thirty days,88 with Ukraine requiring BKNPUέRA@=UO¥JKPE­?=PEKJ 89 Russia stands out from the approaches described above in that it =@KLPO=®ATE>HA=LLNK=?D'PLNAO?NE>AOPSAJPU@=UO¥JKPE­?=PEKJEJCAJAN=H and thirty days’ when issues of reorganization are on the agenda.90 This HAJCPDDKSARAND=O>AAJOAAJ=OEJOQɹ?EAJPAOLA?E=HHUEJREASKBPDA large geographical distances in Russia, but also in view of the increasing presence of holders of American Depositary Receipts.91 Thus, the Russian Federal Commission for Securities Markets (FCSM) has recommended that

Survey of Corporate Governance Practices in Russia’s Regions, Washington, DC 2003, available online at . 84

Art.69 of the Uzbek Law states that a company’s charter determines the minimum period for JKPE­?=PEKJ 

85

Art.71 (2) of the Armenian Law.

86

Art.42 (3) of the Kyrgyz Law.

87

Art.7 (1) of the MLJSC; Art.54 (2) of the Georgian Law.

88

Art.41 (1) of the Kazakh Law; Art.21 of the Tajik Law; Art.55 (5) of the Moldovan Law; Art.19 of the Belarusian Law; Art.45 (2) of the Turkmen Law. This is also the recommendation in OECD, op.cit. note 18.

89

Art.43 (1) of the Ukrainian Law.

90

Art.52 (1) of the Russian Law.

91

OECD, op.cit.JKPANA?KIIAJ@ORKHQJP=NUATPAJOEKJKBPDEOLANEK@PKBKNPUέRA days.

Legal Regulation of Shareholder Rights in the CIS

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thirty days’ JKPE­?=PEKJ>AEJPNK@Q?A@=OPDACAJAN=HNQHA 92 The MLPIP favor 0QOOE=¥O®ATE>HA=LLNK=?D=J@NA?KIIAJ@JKPE­?=PEKJKB=PHA=OP twenty-one days before a GMS and forty days in cases of reorganization, unless the law or the charter provides for a longer time.93 In addition, it provides that these periods can be reduced or cancelled if all shareholders express their consent in writing.94 Second, there are important issues related to the form of the JKPE­cation. This is particularly the case given the questionable reliability of postal services in the CIS; the characteristics of the print-media sector (e.g., the large number of publications to choose from and uncertain distribution); the large number of small shareholders, leading to a high cost of JKPE­?=PEKJ=J@PDANAH=PERAHUHKSHARAHKB=??AOOKBPDALKLQH=PEKJPK electronic forms of communication.95 In principle, most CIS countries require that a notice be published in the print media and/or through written JKPE­?=PEKJPKOD=NADKH@ANO 96 Still, two approaches can be distinguished. The use of both forms is clearly required by countries like Uzbekistan, Kyrgyzstan, and Ukraine.97 In other countries, such as Russia, Tajikistan, Turkmenistan, and Georgia, the print media can be used instead of written JKPE­?=PEKJ 98 In addition, all countries allow companies to use further forms of JKPE­?=PEKJPDNKQCDKPDANIA@E=  Only a few countries provide details in their company laws about the type of written JKPE­?=PEKJ=J@PDANAMQENAIAJPO=OPKPDALNEJPIA@E= to be used. Russia, for example, requires JKPE­?=PEKJPDNKQCDNACEOPANA@ mail, unless otherwise provided by the charter, or by hand delivery against 92

See Federal Commission for Security Markets, Code of Corporate Conduct, Moscow 2002, Chapter 2, Section 1.1.1, available online at <www.ecgi.org/codes/documents/ ­J=H;?K@A;AJCHEOD L@BÓPDA¢0QOOE=J!K@A£Ô 

93

Art.20 (1) of the MLPIP.

94

Art.20 (2) of the MLPIP.

95

See the indices compiled to evaluate the quality of communications in Eastern Europe in the 2005 EBRD Transition Report, op.cit. note 3.

96

Except Belarus, which leaves the form of JKPE­?=PEKJPK>A@APANIEJA@>UPDA?D=NPAN Art.19 of the Belarusian Law.

97

Art.69 of the Uzbek Law; Art.42 of the Kyrgyz Law; Art.43 of the Ukrainian Law. Art.71 of the Armenian Law provides that publication may be added to the written JKPE­?=PEKJOQ>FA?PPK?D=NPANLNKREOEKJO  KPDIAPDK@O=NA=HOKNAMQENA@>UNP  (7) of the MLJSC.

98

Art.52 of the Russian Law (subject to charter provisions); Art.21 of the Tajik Law (subject to GMS decision); Art.45 of the Turkmen Law (written JKPE­?=PEKJEONAMQENA@ KJHUEBPDAJQI>ANKBOD=NADKH@ANOEOBASANPD=J­BPUÔNP ÓÔKBPDA%AKNCE=J Law.

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Rilka Dragneva

a delivery receipt.99 Regarding publication in the print media, Ukraine requires publication in the local press (at the seat of the company) and in =JKɹ?E=HLQ>HE?=PEKJKBPDAL=NHE=IAJPCKRANJIAJPKNPDAsecurities commission.100 Moldova provides for publication twice: at the beginning and the end of a ten-day period.101 The argument can be made that these are matters best left to a particular company’s internal documents. Yet there is also the view that, EJPDA!'1?KJPATPPDAH=SJAA@OPK?KJP=EJOQɹ?EAJP@AP=EH=PHA=OP=O= default rule. Indeed, the EBRD recommends the publication of the notice in two national newspapers (in case of bearer shares), and the use of registered mail (in the case of registered or dematerialized shares).102 The position taken by the MLPIP is that the default rule (unless the charter LNKRE@AOKPDANSEOAÔJAA@OPK>ALQ>HE?=PEKJEJ=JKɹ?E=HC=VAPPA=OSAHH=O the use of registered mail.103'J!'1?KQJPNEAOSEPDKQP=JKɹ?E=HC=VAPPA print media with a certain minimum distribution and geographic reach should be required. Finally, all CIS laws contain some guidance as to the minimum contents of the notice for the GMS related to the time, date, and place of the meeting; the date on which the list of persons entitled to participate in the GMS is compiled; agenda items; and instructions on how to receive more information about them. The MLPIP make the important addition that the notice should also contain the wording of the decisions to be made.104 Provision of Relevant Information 2DALNKREOEKJKBOQɹ?EAJP=J@PEIAHUEJBKNI=PEKJEJ=@R=J?AKBPDA%+1 is crucial for the meaningful participation of shareholders. The majority of CIS countries make provisions in law (or securities-market regulation) for a minimum list of documents that should be made available to shareholders.105 This list typically includes the annual accounts, the auditor’s 99

Art.52 (1) of the Russian Law. This is also the default rule contained in Art.71 of the Armenian Law. Art.21 of the Tajik Law refers to registered mail. Art.21 of the Georgian Law requires that registered mail be sent to 1% or more of a company’s shareholders.

100

Art.43 of the Ukrainian Law.

101

Art.55 of the Moldovan Law.

102

EBRD, op.cit. note 14.

103

Art.20 (3) of the MLPIP.

104

Art.20 (4) of the MLPIP.

105

No such provision is made by the Tajik Law. Art.43 of the Ukrainian Law contains only a general provision regarding the duty to make available “the documents con-

Legal Regulation of Shareholder Rights in the CIS

67

report, draft charter amendments, draft GMS decisions, and information about any candidates for the company boards.106 Additional obligatory information may be envisaged by law, charter, or acts of the securitiesmarket regulator (e.g., in Russia107). Some Western observers have argued that the information generally LNKRE@A@OPEHHNAI=EJOEJOQɹ?EAJPL=NPE?QH=NHUBKNBKNAECJEJRAOPKNOe.g., =?KIL=JU¥O=??KQJPONA®A?PRussia’s accounting standards and not the International Financial Reporting Standards or the International Accounting Standards, or that no detailed biographies on candidates for directors are normally included.108 Not many CIS countries provide where the information should be made available.109 Such a provision is important, as it contains a practical guarantee for access to the necessary documents. The Russian Law, for example, requires that documents be made available at a company’s premEOAO=J@=P=JUKPDANHK?=PEKJOLA?E­A@EJPDAJKPE?A 110 The MLPIP seek to strengthen this rule by requiring the provision of these documents at least at a company’s premises and the location of the GMS, supplemented by any other place determined by the charter.111 Furthermore, the Russian Law provides that shareholders have the right to receive a copy of the mentioned documents against payment.112 nected with the agenda”. Art.45 (2) of the Turkmen Law leaves this matter to the company council’s discretion. We would also mention, without examining it any further, that about half of the CIS countries also contain some form of provisions related to asking questions in advance or at the GMS, as recommended by the 2004 OECD Principles and pursued by EU regulations. See Art.53 (3) of the Georgian Law; Art.43 of the Ukrainian Law; Art.14 (1) of the Kazakh Law; Art.52 of the Moldovan Law; Art.70 of the Uzbek Law; Art.43 (2) of the Kyrgyz Law. 106

In addition, Art.44 (1) of the Kazakh Law contains a general “catch-all” clause that PDAI=PANE=HOI=@A=R=EH=>HAODKQH@>AOQɹ?EAJPPKI=GA=NA=OKJA@FQ@CIAJPKJ each agenda item. In the same spirit is the provision of Art.20 (5) of the MLPIP.

107

 "A?NAA,K  LOKBPDA0QOOE=J$!1++=U¢-J!KJ­NI=PEKJKBPDA1P=PQPA on Additional Requirements for the Procedure for Preparing, Calling and Holding a General Meeting of Shareholders”, Section 3.2-3.5, (“Decree No.17/ps”).

108 109

110

Standard & Poor’s, op.cit. note 18.  $KNAT=ILHAJKHAC=HLNKREOEKJPKPDEOAɳA?PEO?KJP=EJA@EJPDA?KIL=JUH=SOKB Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Georgia, or Armenia. At the other extreme is the provision of Art.56 (1) of the Moldovan Law, according to which the documents could be sent to shareholders if the GMS adopts a decision to that AɳA?P Art.52 (3) of the Russian Law.

111

Art.20 (6) of the MLPIP.

112

Art.52 (3) of the Russian Law. According to Decree No.17/ps, Section 3.8, this needs PK>A@KJASEPDEJ=I=TEIQILANEK@KB­RA@=UO

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Rilka Dragneva

Furthermore, it is important to envisage when and for how long the documents should be available for inspection. Most CIS company laws, again, do not make such a provision. Kazakhstan and Moldova require that documents be made available at least ten days before the date of a meeting.113 Russia has the highest standard in this respect, requiring twenty days in addition to the time of the GMS and thirty days if reorganization is one of the agenda items.114 The MLPIP take a similar position and require twenty-one days and fourty days, respectively.115 Agenda Setting In principle, it is the board of directors that determines the agenda of an annual GMS. The submission of additional items for the agenda, however, has become an important shareholder right. Indeed, most CIS countries provide for it.116 The regulation of this right is subject to country variations in relation to the legal limitations to its exercise. Typically, countries envisage this right as a minority right of the holders of a certain percentage of a company’s shares. In principle, in this area, the international benchmarks recommend a higher percentage to prevent abuse of the right and ensure the proper operation of the GMS.117 Kyrgyzstan and Uzbekistan grant it to holders of 1% of ordinary shares.118 Armenia, Russia, and the MLJSC require 2%, whereas Moldova requires 5%.119 At the most restrictive end of the spectrum are Kazakhstan and Turkmenistan with 10%.120 Ukraine’s solution is interesting in that it grants the right to make proposals to every shareholder, and it makes their inclusion in the agenda obligatory if submitted by 10% of shareholders.121 Another limitation is related to the number of questions shareholders can propose. Russia, Moldova, Kazakhstan, and Uzbekistan, for example, impose no limits. Kyrgyzstan refers to one question, and the MLJSC and Armenia to two questions. Finally, countries envisage time limitations 113

Art.44 of the Kazakh Law; Art.56 (1) of the Moldovan Law.

114

Art.52 (3) of the Russian Law.

115

Art.20 (6) of the MLPIP.

116

Except for Belarus and Tajikistan.

117

EBRD, op.cit. note 14, recommends 10%; European Commission, Proposal for a Directive on the Exercise of Voting Rights, COM (2005)685, refers to 5% of the share capital or 10 million euros’ nominal value of capital held.

118

Art.43 of the Kyrgyz Law; Art.70 of the Uzbek Law.

119

Art.72 (1) of the Armenian Law; Art.53 (1) of the Russian Law; Art.7 (1) of the MLJSC; Arts.26 (1) and 52 (1) of the Moldovan Law.

120

Arts.14 (2) and 43 of the Kazakh Law; Art.45 (2) of the Turkmen Law.

121

Art.43 of the Ukrainian Law.

Legal Regulation of Shareholder Rights in the CIS

69

for making proposals. Most of the CIS countries provide that proposals ?=J>AI=@ASEPDEJPDENPU@=UOKBPDAAJ@KBPDA­J=J?E=HUA=N 122 Several @A­JAPDA@A=@HEJAEJPANIOKB=JQI>ANKB@=UO>ABKNAPDA@=PAKBPDA GMS.123 Voting at the GMS The right to vote lies at the heart of shareholder rights, and it is essential PD=P HACEOH=PEKJ KɳAN = R=NEAPU KB IA=JO KB L=NPE?EL=PEKJ EJ = %+1  'J principle, all CIS countries allow voting in person or through a representative (a proxy). Yet the regulation of proxy representation tends to be minimal and underdeveloped, which contributes to the frequent abuse of the system. An important aspect of the legal regulation of proxy voting relates to the requirements for validity of a proxy appointment. One of the concerns of regulation is the prevention of misuse of the proxy system by envisaging strict requirements regarding the form of proxies. As in other areas of company law, there is a thin line between prevention through NACQH=PEKJ=ɳA?PEJCPDAA=OASEPDSDE?DLNKTEAO?=J>AATA?QPA@KJPDA one hand, and the encouragement of proxy voting, on the other. All CIS countries require that proxies be executed in writing (with reference to paper rather than electronic media). In addition, they require the notarization of the signature of the shareholder.124 A few countries provide an =HPANJ=PERAPKJKP=NEV=PEKJ>QPEPEO@Eɹ?QHPPKAR=HQ=PADKSQOABQH=J@ AɳA?PERAOQ?D=HPANJ=PERAO=NA 125 These solutions have been criticized as too cumbersome.126 Still, as reviews of EU practices show, this is an area SDANA?KJOAJOQOEO@Eɹ?QHPPK=?DEARA=J@I=JU?KQJPNEAOOPEHHI=EJP=EJ 122

123

MLJSC, Russia, Kyrgyzstan, Uzbekistan, Armenia. +KH@KR=AJREO=CAO=­TA@@=PA 10 January.

 )=V=GDOP=JQLPK­BPAAJ@=UO>ABKNAPDA@=PAKBPDA%+1Ukraine: up to thirty days.

124

For example, Art.57 (1) of the Russian Law; Art.21 of the Tajik Law; Art.74 of the Uzbek Law. Others make a general reference to “the form required by law”, which often entails notarization. See Art.47 (1) of the Kazakh Law; Art.76 of the Armenian Law; Art.41 of the Ukrainian Law.

125

Art.57 (5) of the Moldovan Law refers to a role of the administrative organ at the place of residence or other engagement; Art.47 of the Kyrgyz Law, to an “independent registrar”; Art.4 of the Ukrainian Law says that a power of attorney can be certi­A@Ózaverena) by the registrar (no independence requirement), or the management (pravlenie) of a joint-stock company.

126

For example, OECD, Synthesis Report from the Corporate Governance Roundtable for Russia, 24-25 February 2000, available online at .

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notarization as a requirement.127 That is why the MLPIP refer to respecPERAJ=PEKJ=HLNK?A@QNAOEJOPA=@KB=@RK?=PEJC=OLA?E­?OUOPAI 128 Some company laws also include rules on the contents of the proxy appointment form (or the power of attorney).129 The proxy appointment form should include information on the shareholder as well as the proxy DKH@ANEJ?HQ@EJCL=OOLKNPJQI>AN=J@KPDANE@AJPE­?=PEKJ@AP=EHO 2DA latter requirement (e.g., the inclusion of passport data) has been criticized =OHA=@EJCPKQJJA?AOO=NU@Eɹ?QHPEAO130UAPEPOAAIOPK­PSEPDPDACAJAN=H culture of CIS societies. CIS company legislation remains silent, however, in terms of the voting instructions (and their nature) that a power of attorney should contain. 'JPDEONAC=N@PDA+*.'.OAAGPK­HHPDAC=L>ULNKRE@EJCPD=P=LNKTUEO obliged to vote according to the instructions of the shareholder as provided by the proxy form.1311EIEH=NHU!'1?KIL=JUH=SO@KJKP?KJP=EJOLA?E­? provisions (outside the general requirements contained in the countries’ civil codes) regarding the term for which a power of attorney is issued.132 Importantly, in all cases proxies are revocable, and the shareholder can always attend the GMS in person or appoint another representative. Finally, some countries prohibit company executives from serving as proxies.133 This requirement is important given the high degree of employee ownership in some countries and companies and the possibility of insiders to coerce employees.134 The MLPIP propose that no such limitations be 127

European Commission 2005, op.cit. note 12.

128

Art.19 (2) of the MLPIP refer to a “duly authorized power of attorney”.

129

Art.76 of the Armenian Law; Art.57 (1) of the Russian Law; Art.74 of the Uzbek Law; Art.47 of the Kyrgyz Law.

130

OECD, op.cit. note 14.

131

Art.19 (4) of the MLPIP.

132

Except for Art.21 of the Belarusian Law and Art.44 of the Ukrainian Law referring to a permanent representation or one of a particular period. Art.186 of the Russian Civil Code, for example, provides that powers of attorney cannot be issued for more PD=JPDNAAUA=NO 'BJK­J=H@=PAEO@APANIEJA@PDA@AB=QHPNQHAEOPD=P=LKSANKB attorney is valid for one year.

133

Art.47 of the Kazakh Law; Art.47 of the Kyrgyz Law; Art.25 (8) of the Moldovan *=S 2DAH=PPANLNKDE>EPOKɹ?ANOKB=?KIL=JUÓdolzhnostnye litsa), except for those who are board members. In addition, Arts.61 (6) and 86 (6) of the Moldovan Law make provisions for avoidance of ?KJ®E?POKBEJPANAOPSDAJPDAGMS discusses issues of remuneration of executive directors acting as proxies, or their liability, or the appointment of members of the revision commission.

134

Such practices are reported in J. Blasi and A. Shleifer, “Corporate Governance in Russia—An Initial Look”, in R. Frydman, C. Gray and A. Rapaczynski, eds., Corporate Governance in Central Europe and Russia, Vol. 2, Budapest 1996.

Legal Regulation of Shareholder Rights in the CIS

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EILKOA@EJKN@ANPK=HHKSCNA=PAN®ATE>EHEPU=J@Aɹ?EAJ?UKBNALNAOAJP=tion.135 Nonetheless, it attempts to address the issue by envisaging some minimum standards when representation is solicited by an executive member of a company or a person acting on behalf of a company.136 The LNKREOEKJ=LLHEAOSDAJ=OKHE?EP=PEKJKɳANEOI=@APKPDALQ>HE?KNPK= shareholder (or a group of shareholders) holding a certain percentage of shares.137 It provides for the minimum contents of the solicitation form, including a request by the shareholder for voting instructions or a proposed vote in the absence thereof. In addition to voting in person or through a representative, most countries allow voting in absentia (or by correspondence).138 Typically, the distinction is made between a GMS held with the physical presence of shareholders or entirely in absentia (zaochnoe sobranie) when voting is carried out exclusively through ballots. The form of the GMS is determined, in principle, when the decision to hold the GMS is taken. Typically, it is provided that a GMS in absentia cannot be held when certain agenda items are to be discussed.139 Voting in absentia at a GMS with physical participation is also possible in most countries. Turkmenistan and Moldova, for example, envisage mixed meetings as a special form of GMS.140 Other countries allow mixed voting, thus leaving shareholders to decide whether to post their ballots or attend the meeting in person or through a representative. In principle, voting by ballots in some countries is required for all companies; in other countries, whether or not voting by ballot is required depends on the number of shareholders.141 Finally, for posted ballots to 135

A similar argument is made by the 1996 General Principles, Section 110. See Avilov et al., op.cit. note 26. According to the authors, “excluding management from proxy representation might result in impasses due to lack of quorum”.

136

Art.19 (3) of the MLPIP.

137

The view is that this percentage should be connected to the one required for making a proposal to the agenda of the GMS.

138

Countries like Belarus, Georgia, and Tajikistan have no provisions or unclear provisions on voting in absentia. We do not discuss in this work the problems hindering electronic voting in the CIS.

139

Art.67 of the Uzbek Law allows only closed joint-stock companies to hold such meetings.

140

Art.50 of the Turkmen Law; Art.51 (2) of the Moldovan Law.

141

According to Art.60 of the Russian Law, voting through ballots is mandatory if a company has more than 100 shareholders. The same is the requirement of Art.77 (2) of the Uzbek Law. According to Art.79 of the Armenian Law, it is mandatory if a ?KIL=JUD=OIKNAPD=J­BPUOD=NADKH@ANO ??KN@EJCPKNP ÓÔKBPDA2QNGIAJ and Art.49 of the Kyrgyz Law, it is required in all circumstances.

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be taken into account, they need to arrive two days before the registration date according to the Russian Law, one day according to the Kyrgyz Law,142 or before the end of registration for participating in the meeting according to the Armenian Law. Right to Appeal Decisions of a GMS The right of shareholders to participate in, and vote at, shareholder meetings is also guaranteed by granting them the right to set aside or nullify decisions of the GMS taken in violation of the law. Such a right is extremely important for investor protection, particularly in contexts of widespread and persistent abuse of legal procedure. It gives teeth to shareholder complaints regarding violations by allowing an external party such as a court to invalidate decisions taken by the GMS. Such a powerful consequence, however, requires that the interests of the particular shareholders alleging the violation be weighed against the interests of the company as a whole and those of other shareholders. Importantly, it also gives rise to concerns about prevention of the abuse of this right. It should be noted that only a few of the CIS countries make detailed provisions on this issue both in terms of its representing an adequate guarantee of shareholder rights and of preventing possible abuses of this right.143 Some countries provide a very general right for shareholders to appeal decisions in court.144-PDANOEJ?HQ@AOKIAMQ=HE­?=PEKJOPKPDEO right yet remain minimal and unclear.145 In principle, the right to appeal the decisions of a GMS is exercised under the following grounds and constraints. FirstIKOP?KQJPNEAO@A­JAPDEONECDP=O=LNER=PANECDP>AHKJCEJCPK a shareholder or his representative. Kyrgyzstan represents an exception by also allowing interested state bodies to challenge decisions.146 Second, very few countries (Russian and 3V>AGEOP=JÔI=GAPDAMQ=HE­cation that the right belongs only to a shareholder who did not participate in a GMS or who voted against a particular decision. In addition, Russia requires that the rights and the legal interests of the particular shareholder ODKQH@D=RA>AAJ=ɳA?PA@ 147 Uzbekistan requires that a shareholder who 142

Art.58 (1) of the Russian Law; Art.48 (2) of the Kyrgyz Law; and Art.77 (2) of the Armenian Law.

143

No provision is made in Ukraine or Tajikistan.

144

Art.14 (1) of the Kazakh Law; Art.10 (2) of the Turkmen Law.

145

Art.19 of the Belarusian Law; Arts.15 (2) and 53 (3) of the Georgian Law.

146

Art.39 (9) of the Kyrgyz Law.

147

Art.49 (7) of the Russian Law. Art.59 (5) of the Moldovan Law contains a similar NAMQENAIAJPNABANNEJCPK=¢OECJE­?=JPAɳA?P£KJNECDPO>QP=O=J=HPANJ=PERA>=OEO for appeal.

Legal Regulation of Shareholder Rights in the CIS

73

has not participated in a GMS should have a valid reason for not having participated.1482DAREASPD=PPDEONECDPEO=OLA?E­?NAIA@USDAJ= shareholder (or his representative) has not been allowed to take part in a meeting or voting is particularly evident in Article 7 of the MLJSC. Third, most countries (Armenia, Russia, Belarus, )UNCUVOP=JÔ@A­JA the subject of appeal as decisions that contravene the requirements of the company law, other legislation, or the charter. Moldova is unique in providEJC=HEOPKBOLA?E­?REKH=PEKJOSEPD=?=P?DÎ=HHLDN=OA=PPDAAJ@ 149 Fourth, the actual remedy envisaged is the invalidation of the decision(s) of the GMS.150 Only a few countries (Russia, Armenia, and, to a certain extent, Moldova) allow courts to leave a decision in place despite violations if certain conditions exist. According to the Russian *=SPDEO?=J>A@KJABKNAT=ILHASDAJPDAREKH=PEKJO=NAEJOECJE­?=JP the interests of the appealing shareholder have not been harmed by the L=NPE?QH=N@A?EOEKJ=J@PDARKPAKBPDAOD=NADKH@AN?KQH@JKPD=RA=ɳA?PA@ the outcome of the voting.151 These conditions are envisaged as cumulative, which narrows the scope of the application of this exemption, which has been criticized.152 It is worth noting that the MLJSC also envisages a @EO?ELHEJ=NUNECDPPK@AI=J@PD=P=JUKɹ?E=HOEJ=?KIL=JU¥OI=J=CAIAJP organs who permitted such a violation be removed from their posts, which none of the CIS countries has adopted.153 Finally, a few countries envisage a period of limitations within which the right to appeal should be exercised. In Russia, this period is six months from the day when a shareholder learns or should have learned about the decision; in Georgia, it is a shorter period, namely two months from the date of the protocol of the GMS.154 The MLPIP aim to create a comprehensive provision that would KɳAN=@AMQ=PALNKPA?PEKJKBPDAEJPANAOPOKB=CCNEARA@OD=NADKH@ANO>QP 148

Art.66 of the Uzbek Law.

149

Art.59 (5) of the Moldovan Law.

150

It should be pointed out that the Plenum of the Russian Supreme Arbitrazh Court, in its Decree No.19 of 18 November 2003, “On Certain Issues of Application of the Law on Joint-Stock Companies”, Section 26, distinguishes between void and voidable decisions. When a decision has been adopted in violation of the competence of the GMS, without quorum, or on issues not included in the agenda for the meeting, a court dealing with a claim or appeal based on that decision should pronounce it as having no legal force regardless of whether or not the parties have challenged it.

151

Art.49 (7) of the Russian Law.

152

Black et al., op.cit. note 26, 322.

153

Art.7 (1) of the MLJSC.

154

Art.15 (2) of the Georgian Law.

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Rilka Dragneva

that would also minimize the potential abuse of this right.155'POLA?E­AO that only shareholders who did not attend a GMS or who voted against a particular decision have the right to appeal. It extends the scope of illegality by including decisions violating not only the legislation or charter but also other internal documents of a company. Such documents (or by-laws) may contain important provisions aimed at the protection of shareholder rights. At the same time, in the interest of commercial stability, the MLPIP provide that this right can be exercised only within two months of the time when the shareholder learns (or should have learned) =>KQPPDA=HHACA@HUEHHAC=H@A?EOEKJSEPD=?QPÎKɳLANEK@KBBKQNIKJPDO after the date of the GMS. Furthermore, it allows courts to leave the de?EOEKJEJP=?PEBPDAREKH=PEKJOSANAJKPOECJE­?=JP=J@EBPDAOD=NADKH@AN OQɳANA@JK@=I=CA=O=NAOQHPKBPDA@A?EOEKJ 'ILKNP=JPHUEPLNKLKOAO the possibility for a shareholder to compensate the company for the exLAJOAOEJ?QNNA@EBPD=POD=NADKH@AN­HA@=HAC=HHUQJBKQJ@A@?H=EI=J@ thus, misused this right.

Other Rights of Minority Shareholders Calling an Extraordinary Meeting of Shareholders The right of a shareholder or a group of shareholders to call an extraordinary meeting (EMS) is a powerful tool for shareholder action. It is particularly important in contexts with widespread violations of procedural rules for annual meetings of shareholders, or with pronounced ?KJ®E?POKB interest between minorities and insiders, such as in the CIS. At the same time, it is a form of interference (for good or for bad) in the running of a company, which is entrusted to the board of directors. Shareholders, for example, may call a meeting on matters that the directors would not be willing to see considered in such a setting. Similarly, such an action may set one group of shareholders against another. Finally, there may be the danger of abuse of this right and the calling of repetitive or unnecessary meetings. Thus, most legal systems seek to introduce some reasonable limits on this right. In principle, all CIS countries provide that a shareholder, or a group of shareholders, representing a certain amount of the voting capital has a right to call an EMS. Not all of them, however, provide extensive or comprehensive regulation in this area.156 Similarly, there are some variations in the solutions adopted. 155

Art.23 of the MLPIP.

156

The most extensive regulation is provided by Armenia, Russia, Kazakhstan, Moldova, Uzbekistan, and Kyrgyzstan; the least by Turkmenistan and Tajikistan. It should be

Legal Regulation of Shareholder Rights in the CIS

75

FirstPDANA=NA@EɳANAJ?AOEJPANIOKBPDA=IKQJPKBRKPEJC?=LEtal needed to trigger this right. The majority of countries adopt a 10% threshold.157 %AKNCE=D=O==@KLPA@=HKSAN­CQNAÙ 158 Indeed, it is the recommendation of the EBRD, the Model Civil Code, and the MLPIP that there be at least a 10% threshold.159 Several countries, however, prefer higher percentages: 20% in Kyrgyzstan and Belarus160 and 25% in Moldova.161 Clearly, these higher ceilings will tend to insulate management; whether they will disadvantage investors will depend on factors such as the ownership structure of the particular companies.162 SecondPDANA=NAOKIA@EɳANAJ?AOEJPDA?KJPAJPOKBPDA?KNNAOLKJ@ing duty of directors to act upon a request from shareholders. A number of countries provide an extensive regulation in this respect, envisaging a succession of deadlines within which directors need to: — Decide to accept or refuse the request of the shareholders: Russia @AI=J@OPDAB=OPAOP=?PEKJSEPDEJ­RA@=UOKBNA?AELPKBPDANAMQAOP Armenia, Moldova, Kazakhstan, Uzbekistan, and Kyrgyzstan provide for ten days; and +KH@KR=BKN­BPAAJ@=UO — Notify shareholders of their decision: Uzbekistan, Kyrgyzstan, and Russia grant three days within which the response needs to be sent; Kazakhstan and Moldova include it in the above period for issuing the decision; — Call the EMS: Armenia, Uzbekistan, and Kyrgyzstan require that PDAIAAPEJC>A?=HHA@SEPDEJBKNPUέRA@=UOKBSDAJPDANAMQAOPEO made. Russia determines this period depending on the agenda items to be discussed: The general term is forty days, and seventy days if directors are to be elected, unless the charter provides for a shorter period. noted, however, that Turkmenistan and Belarus refer to the ?D=NPANPK­HHEJPDA details. 157

Art.74 of the Armenian Law; Art.55 (1) of the Russian Law; Art.43 (4) of the Turkmen Law; Art.45 (4) of the Ukrainian Law; Art.14 (2) of the Kazakh Law; Art.21 of the Tajik Law; Art.72 of the Uzbek Law.

158

Art.53 (3) of the Georgian Law.

159

Art.7 (1) of the MLJSC and EBRD, op.cit. note 14. Art.9 (1) of the MLPIP provides BKN=ÙPDNAODKH@KN=HKSANLAN?AJP=CAEBOLA?E­A@>UPDA?D=NPAN

160

Art.45 of the Kyrgyz Law, Art.19 of the Belarusian Law. The latter also allows a lower ceiling if envisaged by the charter.

161

Art.26 (3) of the Moldovan Law.

162

It is worth noting, however, that in these countries a lower percentage (10%) can EJRKGA=JATPN=KN@EJ=NU­J=J?E=HNAREAS=O@EO?QOOA@EJPDAJATPOA?PEKJ=J@PDQO eventually reach an EMS.

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Other countries provide deadlines but do not seem to make the above distinctions. Ultimately, they require action by the board within twenty days (Ukraine and %AKNCE=Ô=J@PDENPUέRA@=UOÓBelarus). Clearly, most CIS countries have taken some care in providing procedural guarantees for the actual exercise of this right. The MLPIP seek to improve on these guarantees by recommending that the following detailed schedule be included in law:163 Ð 2DA>K=N@ODKQH@>ACERAJOQɹ?EAJPPEIAPK@A?E@AKJPDAOD=NADKH@ers’ request—within fourteen days; Ð 2DALANEK@SEPDEJSDE?DPDAIAAPEJCEODAH@ODKQH@>AOQɹ?EAJPHU long corresponding to the need, on the one hand, for urgent action, which normally leads to a request for an EMS, and on the other hand, CEREJCPDA>K=N@OQɹ?EAJPPEIAPKAJOQNAPD=P=HHHAC=HNAMQENAIAJPO for ensuring the meaningful participation of all shareholders in the EMS are met. The recommendation follows the Russian solution of taking into account the actual items to be put on the agenda: forty days after the receipt of the request in general, and sixty days if the election of directors is at stake; — The deadline for notifying shareholders should be judged, according to the MLPIP, in terms of the time it gives shareholders to prepare for the meeting (as with the annual GMS). Accordingly, the proposal EOPD=POD=NADKH@ANOODKQH@>AJKPE­A@JKH=PANPD=JBKQNPAAJ@=UO before the EMS. When the election of directors by cumulative voting is on the agenda, the period should be considerably longer (forty days) to enable additional nominations, as is discussed below, and the ?KIIQJE?=PEKJKBPDA­J=HHEOPKB?=J@E@=PAO Third, the countries that regulate the corresponding directors’ duty to act upon a request from shareholders also recognize that directors are only entitled to base their decision (whether or not to call an EMS) on whether the shareholders’ request has been made in accordance with the law. Thus, the directors cannot exercise a business judgment, e.g., as to the convenience of such a meeting. Furthermore, they cannot introduce any changes in the agenda or formulation of decisions proposed by the requesting shareholders. Interestingly, the Kazakh Law includes the explicit provision that directors have the discretion to add items to the agenda.164 The MLPIP also take the view that no changes to the agenda of the proposed EMS should be made without the consent of the requesting 163

Art.9 (3) of the MLPIP.

164

Art.38 of the Kazakh Law.

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77

shareholder(s).165 It distinguishes, however, the special case when the election of directors through cumulative voting is on the agenda.166 In this case, the holders of the same percentage required to make proposals for additional items to be included in the agenda of the GMS (e.g., 2%) should also be able to nominate candidates. If shareholders other than those requesting the EMS are not allowed to propose candidates, candidates proposed by the requesting shareholders will automatically be elected. In this regard, the MLPIP Commentary also recommends that the board should inform shareholders of the consequences if they do not nominate candidates. FourthEBJK@A?EOEKJEOI=@ASEPDEJPDALANEK@OLA?E­A@>UH=SKNEB the board refuses to call a meeting, shareholders have certain remedies. Most countries provide for the right of the requesting shareholders to summon the meetings themselves.167 Some of them also allow, as an alternative option, an appeal to the courts against the refusal of the board of directors.168 In principle, empowering shareholders to call a meeting themselves makes their right almost absolute, though it also creates the possibility for some forms of abuse. That is why some countries have preferred to make turning to the courts the only option available to requesting shareholders.169 Appealing to the courts makes the holding of an EMS a lengthier and costlier process. Nonetheless, it gives the courts the possibility to act in place of the board and to verify the existence of the legal requirements for granting the request of the appealing shareholders. In this spirit, the MLPIP give the court discretion to empower shareholders to call an EMS on behalf of the company or order the board to call it.170 Finally, there is the issue of who bears the expenses incurred by shareholders in calling an extraordinary meeting of shareholders after the board has refused or has not responded to the shareholders’ request. Most laws make no provision in this respect. Uzbekistan, Armenia, and Russia provide that shareholders are entitled to reimbursement from the company. Moldova is the only country that uses the issue of expenses to discourage abusive actions: It envisages that expenses be borne by shareholders themselves unless the EMS decides that the calling thereof 165

Art.9 (2) of the MLPIP.

166

See G. Maassen and R. Dragneva, “Cumulative Voting and the Protection of Minority Shareholders in the CIS”, in this book.

167

Armenia, Russia, Ukraine, Belarus, Moldova, Uzbekistan.

168

Moldova, Russia, Uzbekistan.

169

Georgia, Kazakhstan, and Kyrgyzstan.

170

Art.9 (6) of the MLPIP.

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S=OFQOPE­A@=J@PD=PPDAATLAJOAOODKQH@>ANAEI>QNOA@ 171 The MLPIP take the view that the shareholders’ right to call an EMS should not be inhibited by passing its costs on to them.172 Possible abuse, it is believed, ?KQH@>AOQɹ?EAJPHU@EO?KQN=CA@PDNKQCDKPDANIA=JO?KJP=EJA@EJPDA procedural rules for the exercise of the right. Right to Cause an Extraordinary Financial Review and/or Audit Every company law contains provisions for putting in place a system of ­J=J?E=H=J@A?KJKIE?=??KQJP=>EHEPU?KILNEOEJCNQHAOKJPDALNAL=N=PEKJKB=JJQ=H­J=J?E=HOP=PAIAJPO=J@PDA=LLKEJPIAJPKBindependent external auditors to verify the accounts, among others. Many of these mechanisms are triggered by (and with a view to) the annual general meeting of shareholders as a whole; furthermore, they normally require a simple majority of the votes present at the meeting. It is important, however, to make provisions for interim controls to be exercised by a shareholder or a group of shareholders. As with the right to call an EMS, this right needs to be balanced between considerations of strengthening accountability and protection of minority interests, on the one hand, and prevention of abuse and avoidance of the high costs that are typically involved, on the other. All CIS countries envisage some right of minority shareholders in this respect. Several approaches can be distinguished. The majority of the CIS countries allow shareholders to request an extraordinary review by a special body of the company: the revision commission.173 In addition, several countries grant a minority right to request an independent auditor to conduct an extraordinary audit.174 A minority of countries envisages only the latter right.175 Most countries grant the respective right(s) to the 171

Art.53 (13 and 14) of the Moldovan Law. It is interesting to note the proposal of Art.56 (5) of the Black-Tarassova Model Law, according to which the company bears the cost if the EMS so decides.

172

Art.9 (7) of the MLPIP.

173

Art.91 of the Armenian Law; Art.85 (3) of the Russian Law; Art.55 (3) of the Turkmen Law; Art.24 of the Tajik Law; Art.62 of the Kyrgyz Law; Art.110 of the Uzbek Law; Art.49 of the Ukrainian Law; Art.22 of the Belarusian Law; Art.71 of the Moldovan Law. This was also the recommendation of the MLJSC. Belarus represents an exception in the sense that it does not envisage a percentage but leaves it to the charter to determine.

174

Art.92 (1) of the Armenian Law; Art.103 (2) of the Russian Civil Code; Art.89 (2) of the Moldovan Law; Art.114 (5) of the Tajik Civil Code; Art.63 of the Kyrgyz Law.

175

Art.14 (2) of the Kazakh Law. Until 2003, Art.92 of the Civil Code of Kazakhstan provided for a right belonging to any shareholder; Art.53 (3) of the Georgian Law.

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holders of 10% of a company’s voting capital.176 Clearly, however, there =NAOKIA@EɳANAJ?AOEJPDACQ=N=JPAAOBKNEJRAOPKNLNKPA?PEKJKɳANA@>U the extraordinary review and extraordinary audit route. To start with, the revision commission is essentially an organ of the general meeting of shareholders—elected by it and responsible to it.177 As such, it allows for a separation of functions within the body of shareholders =J@=HHKSOOKIAKBPDAIPKOLA?E=HEVAEJ­J=J?E=H=J@A?KJKIE??KJPNKH  Although most countries envisage some requirement prohibiting directors and managers from being members of the commission,178 the standard for its independence is certainly much lower than the one typically applied to auditors. In addition, Armenia, Russia, and Uzbekistan declare any shares held by directors or managers as non-voting on the issue of electing (in Armenia, also discharging) members of the revision commission. Furthermore, unlike the professional requirements for auditors, members of the NAREOEKJ?KIIEOOEKJ@KJKPD=RAPKD=RAL=NPE?QH=N­J=J?E=HKN =??KQJPEJCMQ=HE­?=PEKJO -JHU+KH@KR= envisages a requirement in the law,179 while the others nonetheless allow the charter to stipulate further details as to the composition of the commission. Nor are the members of the revision commission subject to the set of duties and liabilities that typically apply to the audit profession. Thus, an extraordinary review remains a form of shareholder control. 'P KɳANO PDA =@R=JP=CAO KB CQ=N=JPAA@ =??AOO KB ?KIIEOOEKJ IAI>ANO PK­J=J?E=H=J@=??KQJPEJCEJBKNI=PEKJ 180 It certainly involves a lower 176

Except Art.92 (1) of the Armenian Law and Art.53 (3) of the Georgian Law envisage this right for a lower amount of a company’s voting capital: 5%.

177

Here we do not go into an examination of whether the revision commission is envisaged in law as an organ of the company or not. For a discussion of this issue in the context of the Russian Federation, see Black et al., op.cit. note 26. We also refer to a collective body, although in all of the jurisdictions discussed, a company can elect a single person to perform the function of the commission.

178

B. Black et al., ibid., criticize this solution as problematic for small companies where, for example, there may be only two shareholders, one of whom is a director and the other an accountant or book-keeper. Kyrgyzstan goes to the extent of prohibiting employees (rabotniki) of the company, Art.62 (5) of the Kyrgyz Law. The lowest standards can be found in Belarus, where the only people barred from membership are the general director and individuals whose actions are being examined, Art.22 of the Belarusian Law.

179

 ??KN@EJCPKNP ÓÔKBPDA+KH@KR=J*=SPDAMQ=HE­?=PEKJNAMQENAIAJPODKQH@ be applicable to at least one of the members.

180

 2DAI=J=CAIAJPEOPULE?=HHUNAMQENA@PK@EO?HKOA=HHJA?AOO=NU­J=J?E=H@K?QIAJPO and answer questions. This is not a right normally available to any shareholder. In Russia, for example, the right to access to a company’s accounting documents is granted to the holders of 25% of the company’s voting shares, Art.91 (1).

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cost to the shareholder than that of appointing an auditor, as in most jurisdictions the cost of an extraordinary audit is borne by the requesting shareholders themselves.181 In addition, the review could presumably be faster than the audit, bearing in mind that an auditor has to be appointed, whereas the commission is a permanent body. Finally, the provisions on extraordinary review allow the commission to take certain action if irregularities are found. In all countries, its most powerful tool is the ability to call an extraordinary meeting of shareholders. Turkmenistan, Ukraine, and Tajikistan require the commission to do so if the interests of the company are placed in danger. Despite possibly being a costlier or lengthier process, an extraor@EJ=NU=Q@EPKɳANOEILKNP=JP=@R=JP=CAOPKEJRAOPKNOSDE?DEOSDUPDA MLPIP propose that this right be introduced in all CIS countries.182 At the same time, given that such an extraordinary audit may have important implications for the company concerned, the MLPIP place two important conditions: Ð NAMQAOP?=J>AI=@AKJHUKJPDACNKQJ@OPD=PPDANAEO=¢OECJE­?=JP doubt” (sushchestvennoe somnenie) in the truthfulness of the results of the company audit; — The request should be directed to the board. 2DQOPDA+*.'.@EɳANBNKIPDANACQH=PEKJOKB?ANP=EJ?KQJPNEAO where an auditor can be appointed by the requesting shareholders themselves.183 In this case, the board is given the opportunity either to provide EJBKNI=PEKJPD=PEOOQɹ?EAJPPKO=PEOBUPDAJAA@BKNOQ?D=J=Q@EP or to explain why such an audit is not needed. In this case, however, it is important to envisage a set of procedural guarantees for timely action in response to a shareholders’ request, including the right to propose a particular auditor or to appeal the board’s choice thereof.184 Similarly, the timely JKPE­?=PEKJKBPDA=Q@EPKN¥ONALKNPPK=HHOD=NADKH@ANOEONAMQENA@  $EJ=HHUPDA+*.'.OAAGPK=ɹNIPDAEILKNP=J?AKBPDEOIEJKNEPUNECDP and to ensure that its exercise is not dependent on cost considerations. Thus, contrary to current CIS provisions, it recommends that the company should bear the costs associated with such an audit.185 181

Art.92 (1) of the Armenian Law, Art.14 (2) of the Kazakh Law, Art.63 of the Kyrgyz Law, and Art.89 (2) of the Moldovan Law provide the option for the GMS to decide otherwise.

182

Art.8 of the MLPIP.

183

Art.92 (3) of the Armenian Law; Art.78 (2) of the Kazakh Law. According to Art.53 (3) of the Georgian Law, the request is addressed to the board. If the board takes no action within 20 days, the shareholder can turn to the courts.

184

Art.8 (2) of the MLPIP.

185

Art.8 (3) of the MLPIP.

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Shareholder Suits The right of shareholders to sue directors and managers on behalf of the company for damages caused to it is a powerful tool for direct corporate control. On the one hand, it provides extra protection against the power of insiders who may wish to block the pursuit of liability by the company itself. On the other hand, it represents an exception to the principle of separation of powers between directors and shareholders, which is also the basis of the limited liability of shareholders in joint-stock companies. 1EIQHP=JAKQOHUEPLNAOAJPO=@=JCANKBJQEO=J?AOQEPO­HA@>UOD=NADKH@ANOSEPDPDAAɳA?PKB@EOPN=?PEJC@ENA?PKNOBNKIPDAENI=EJ@QPEAO 'P=HOK =ɳA?POPDA?KJ@EPEKJO=J@A=OASEPDSDE?DCKK@ÓL=NPE?QH=NHUKQPOE@AKN non-executive) directors can be attracted to serve the company. It is not surprising, then, that countries diverge in terms of the way they balance the above considerations. While most countries worldwide envisage in law and/or judicial practice a set of directors’ duties and liabilities, they @EɳANEJPDAEN=LLNK=?DAOPK@ANER=PERAOD=NADKH@ANOQEPO  It is not possible for the purpose of this publication to comprehensively discuss the way CIS countries address the important issue of ensuring the discipline and accountability of directors and managers by way of internal supervision or through regulations on directors’ duties and liabilities. In principle, most countries contain in their company legislation some general standard for the discharge of directors’ duties, which lies at the heart of company liability provisions.186 There are some @EɳANAJ?AOEJPDAHACEOH=PERA?KJPAJPKB@ENA?PKNO¥@QPEAOUAPPDAUPAJ@ PKNAI=EJB=ENHUIEJEI=HHU@A­JA@ 2DAH=SOKBArmenia, Russia, and Kazakhstan, for example, require directors and managers to act in good faith (dobrosovestno) and reasonably (razumno) in the interests of the company.187 Moldova and Uzbekistan refer to acting in the interests of the company;188 Turkmenistan, to acting in good faith.189 Perhaps the most comprehensive provision is contained in Article 9 (7) of the 1998 Georgian Law on the Securities Market, which reproduces § 8.30(a) of the 1984 American Model Business Corporation Act, according to which directors should act: (1) in 186

With the exceptions of Belarus, Tajikistan, and Ukraine. Art.58 (3) of the Kyrgyz Law refers to duties envisaged in a law, charter, or contract. In addition, a general standard for liability is envisaged in many civil codes, e.g., Art.401 (1) of the Russian !EREH!K@A 5A@KJKP@EO?QOODANAOKIAOLA?E­?@ENA?PKNO¥@QPEAOe.g., non-competiPEKJKN?KJ®E?PÎKBÎEJPANAOPPN=JO=?PEKJO

187

Art.90 of the Armenian Law, Art.71 of the Russian Law, and Art.62 of the Kazakh Law QOAPDAATLNAOOEKJ¢NA®A?PEJC=OIQ?D=OLKOOE>HAPDAEJPANAOPOKBPDA?KIL=JU£ 

188

Art.73 (3) of the Moldovan Law; Art.88 of the Uzbek Law.

189

Art.54 (4) of the Turkmen Law.

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Rilka Dragneva

good faith; (2) with the care that a person of ordinary prudence would exercise in similar circumstances; and (3) in a manner that they believe is in the best interests of the company.190 Thus, it should be noted that the traditional distinction in the West between care and loyalty is not clearly made in most CIS laws. A judicial standard of these duties will be slow to evolve in the CIS, particularly in view of the low level of litigiousness of these societies. In this case, a positive role can be performed by codes of corporate governance, such as the Russian Corporate Governance Code, which endeavors to provide more guidance on the contents of these duties.191 In a similar vein is the ?KILNADAJOERALNKREOEKJKBNPE?HAKBPDA+*.'.SDE?D@A­JAOPDA duty of care as “the duty to perform in good faith and in the reasonable belief that one is acting with the care and attention that a prudent person in a similar position would take under equal circumstances”, and the duty of loyalty as “the duty to act fairly and loyally to the company and to act in its best interest”. Only a limited number of CIS countries provide for the enforcement of directors’ and managers’ liability by shareholders. In Armenia, Russia, and Uzbekistan, this can be done by shareholders holding 1% of the ordinary shares of a company;192 Moldova grants this right to the holders of 10% of voting shares.193 In Kazakhstan, the law provides that the company ODKQH@­HA=OQEP>=OA@KJPDA@A?EOEKJKBPDA%+1 194 1EIEH=NHUPDANA=NA@EɳANAJ?AOEJPANIOKBPDACNKQJ@OBKNHE=>EHEPU 'J the Russian Federation, fault (both with intent and through negligence) in carrying out actions (or inaction) is required.195 The respective Armenian provision can be interpreted as covering actions not carried out in good faith, “good faith” being interpreted as descriptive of a case where a person did not know or could not have known that the action would result in damage to the company.196 Moldova seems to provide the highest threshold in covering only actions carried out with intent and representing a gross 190

Art.56 (4) of the Georgian Law provides only for acting diligently and in good faith.

191

The Russian Code, Chapter 3, Section 3. Similarly, the Ukrainian Code, Section 3 (3), provides for acting with due diligence and care in the best interests of the company.

192

Art.90 of the Armenian Law; Art.71 of the Russian Law; Art.88 of the Uzbek Law.

193

Art.26 (2) of the Moldovan Law.

194

Art.63 of the Kazakh Law.

195

Art.71 of the Russian Law.

196

Art.90 (4) of the Armenian Law.

Legal Regulation of Shareholder Rights in the CIS

83

violation of the law.197 In addition, Armenia and Russia require that the behavior of directors and managers be judged according to the customary business practice and other circumstances related to the case, thus providing for an objective standard in determining directors’ liability.198 Most of the countries mentioned provide for joint and several liability of directors. Armenia, Russia, and Uzbekistan exempt directors who were either not present at the meeting at which the action was taken and from which the damage to the company resulted or who voted against such action. Moldova provides only for the latter option and requires that the directors’ objection be recorded in a special opinion. The MLJSC contains a general provision granting the right to shareholders to appeal to court against the actions of a company’s executives =J@Kɹ?ANOPD=PSANA?=NNEA@KQPEJAT?AOOKBPDAENLKSANOKNEJREKH=PEKJ of the provisions of the law and the company’s charter.199 The MLPIP similarly refer to liability for actions carried out in violation of any obligations resulting from the law or the charter, yet it provides more comLNADAJOERAHE=>EHEPUNACQH=PEKJO +KOPEILKNP=JPHUEPMQ=HE­AOPDA=?PEKJO causing damage to a company that can lead to liability by reference to a US-style “business judgment rule”. Thus, a director or a manager should not be held liable for resulting losses if he: (1) Is not personally interested in the decision; and (2) Believes he is reasonably informed about the grounds of the decision; and (3) Has reasonable grounds to believe that the decision was made in the best interests of the company and its shareholders. Like the laws of Armenia, Russia, and Uzbekistan, the MLPIP provide PD=PDKH@ANOKBÙKBRKPEJCOD=NAOEJ=?KIL=JUD=RAPDANECDPPK­HA= suit on behalf of the company.200 Still, it recommends that a distinction should be made with regard to a derivative suit of shareholders against members of the board of directors and the members of the executive >K@EAO 'JPDAH=PPAN?=OAPDAOD=NADKH@ANOODKQH@NAMQAOP­NOPPD=PPDA >K=N@KB@ENA?PKNO­HAOQ?D=OQEP=J@?=J@KOKPDAIOAHRAOKJHUEBJK action is taken by the board within a six-month period from the date of this request. Furthermore, it attempts to discourage nuisance suits by 197

Art.26 (2) of the Moldovan Law. At the same time, Art.74 (2) contains a list of spe?E­?KɳAJOAOPD=P?=J>ALNKOA?QPA@ 2DA3V>AG=J@)=V=GD*=SO@KJKP?KJP=EJ =OLA?E­?NQHAEJPDEONAOLA?P

198

Art.71 (3) of the Russian Law; Art.90 (2) of the Armenian Law.

199

Art.8 (4) of the MLJSC.

200

Art.27 of the MLPIP.

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Rilka Dragneva

transferring the costs of the court action to the shareholder when a claim is held to be legally unfounded.

In Place of a Conclusion The above discussion reveals that in most CIS countries the law has been amended to include a wide package of shareholder governance rights. !HA=NHU=OECJE­?=JPAɳKNPD=O>AAJI=@AEJ=JQI>ANKB?KQJPNEAOPK reassure potential investors at least at the level of the law on the books. Even where such rights have been envisaged, however, a lot remains to be done to provide a comprehensive system of substantive and procedural guarantees to underpin those rights. The belief expressed here is that the solutions proposed by the MLPIP can play a role in the further development of the system of investor protection. 'PS=OJKPPDAOLA?E­?LQNLKOAKBPDEOSKNGPKAT=IEJAPDAATPAJP to which CIS model laws have been used until now. The analysis shows that their use has been selective rather than comprehensive. Certainly, it is possible to believe that some key principles of shareholder protection were embedded in early company legislation through the contribution of model laws, albeit without the required detail, as noted above. In addiPEKJEP?=J>AJKPA@PD=POECJE­?=JPHA=NJEJCD=OP=GAJLH=?A>UNABANAJ?A PKHAC=HOKHQPEKJO=@KLPA@EJ@EɳANAJP@KIAOPE?H=SOÓe.g., by Armenia, Kazakhstan, Kyrgyzstan, Uzbekistan). It was also our intention to show that, in this area of law, the bal=J?AKBEJPANAOPOEOL=NPE?QH=NHUEILKNP=JP 2DAHACEOH=PKNOEJPDA@EɳANAJP countries have attempted (in some countries more conscientiously than others) to achieve this balance. One of the challenges of the post-communist transition, however, is that, at the level of law-making, this balance has to be sought before the respective constituencies have actually matured in formulating or expressing these interests. Because of this, we expect that legal changes in the regulation of shareholder rights (and to a certain extent, the uncertainty that goes with it) persist for the foreseeable future.

Cumulative Voting and the Protection of Minority Shareholders in the CIS Gregory F. Maassen and Rilka Dragneva Introduction The election of board members through cumulative voting is a mechanism that allows minority-shareholder representation on company boards in situations where “straight voting” would have made that impossible. Hailed by many as a principal guarantee for investor protection, cumulative voting was introduced in the United States during the late nineteenth century as an outgrowth of political reforms.1 Although popular at the beginning of the twentieth century, the usage of the system in corporations has steadily declined since the 1950s. By 1992, only six US states maintained mandatory cumulative voting; 43 states and the District of Columbia made it optional; while one state, Massachusetts, prohibited cumulative voting.2 Currently, most jurisdictions—both Anglo-Saxon and Continental European countries—do not provide for mandatory cumulative voting.3 In contrast to this trend, policy- and legal-reform advisers in the Commonwealth of Independent States (CIS) have argued not only for the introduction of cumulative voting for board members of joint-stock companies but also that it should be mandatory.4 The arguments put forward relate to the dire need to protect minority shareholders in the context of powerful managers and controlling shareholders, weak non-legal constraints to act as default disciplining forces, and weak institutional capacity for enforcement. As will be discussed further below, these recommendations 1

$KNIKNAOAA% +==OOAJ=J@"  NKSJ¢2DA#ɳA?PERAJAOOKB1D=NADKH@ANO+AAPEJCO An Overview of Recent Developments”, in P. Ali and G. Gregoriu, eds., International Corporate Governance After Sarbanes-Oxley, Hoboken, NJ 2006; J. Gordon, “Institutions as Relational Investors: A New Look at Cumulative Voting”, Columbia Law Review 1994 No.94, 124-192.

2

Ibid. Some states permit the exclusion of the principle in the articles of incorporaPEKJÓ=J¢KLPÎKQP£AHA?PEKJÔSDEHAKPDANONAMQENAEPOOLA?E­?EJ?HQOEKJBKNEPPK=LLHU (an “opt-in” election). The “opt-in” is also the solution adopted by the 1984 Model Business Corporation Act.

3

R. La Porta, F. Lopez-de-Silanes, A. Shleifer and R. Vishny, “Investor Protection and Corporate Governance”, Journal of Financial Economics 2000 No.58, 3-27.

4

G. Avilov et al., “The General Principles of Company Law for Transition Economies”, Stanford Law School John M. Olin Program in Law and Economics, Working Paper No.165, 1999, available online at , Sections 14 and 118. The most forceful arguments have been made in the context of the “self-enforcement” doctrine, promoted by Professor B. Black; see B. Black, R. Kraakman and A. Tarassova, Guide to Russian Law on Joint-Stock Companies, The Hague 1998.

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 85-103 © Koninklijke Brill NV, Leiden, 2007

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have indeed been followed in a number of CIS countries. Furthermore, while the initial advice extended mandatory cumulative voting only to companies with a large number of shareholders, the trend of legal reform has been to introduce it for all (or a larger number of) companies. While undoubtedly valuable as a mechanism for minority-shareholder protection, cumulative voting has also given rise to some important concerns that have been voiced in relation to corporate developments in the West as well as in some emerging markets. In this chapter, we ask whether the adoption of cumulative voting as a mandatory rule can really I=GA=@EɳANAJ?AEJPANIOKBEJRAOPKNLNKPA?PEKJEJPDA!'1 5A>ACEJ>U >NEA®UNAREASEJCPDAOP=PQOKB?QIQH=PERARKPEJCEJ!'1HACEOH=PEKJ 5A then put forward a number of problematic issues related to cumulative voting and examine their manifestation in the CIS context. We conclude by calling for caution in the adoption of mandatory cumulative voting in Eastern Europe and draw attention to complementary legal and other socio-economic mechanisms that should be put in place to maximize the AɳA?PKBPDEOEJOPNQIAJP

Cumulative Voting in CIS Laws CIS company laws require joint-stock companies to set up a (supervisory) board of directors that is entrusted with strategic decision-making, management supervision, and other important functions. The majority of CIS countries allow smaller companies, e.g., those with fewer than 50 shareholders, to opt out of this obligation.5 The election of members of the board of directors lies within the powers of the general meeting of shareholders6 and represents an essential part of the shareholders’ ability PK=ɳA?PPDA@ENA?PEKJKBPDA?KIL=JU  Several approaches to the election of directors through cumulative voting can be distinguished in the CIS: 5

Art.83 (1) of the Law of Armenia, 25 September 2001, “On Joint-Stock Companies” (the “Armenian Law”); Art.64 (1) of the Law of the Russian Federation No.208, 26 December 1995, “On Joint-Stock Companies” (the “Russian Law”); Art.46 (2) of the Law of Ukraine No.1576-XII, 19 September 1991 “On Commercial Companies” (the “Ukrainian Law”); Art.36 (2) of the Law of the Kyrgyz Republic No.64, 27 March 2003 “On Joint-Stock Companies” (the “Kyrgyz Law”); Art.81 (2) of the Law of Uzbekistan No.223-I, 26 April 1996, “On Joint-Stock Companies and Protection of the Rights of Shareholders” (the “Uzbek Law”). The latter exempts companies with fewer than 30 shareholders. The same recommendation is made by Art.128 (2) of the Model Civil Code (MCC) and Art.7 (2) of the Model Law on Joint-Stock Companies (MLJSC).

6

$KN=?ANP=EJLANEK@KBPEIAEJ®QAJ?A@>UPDA%ANI=J?KÎ@APANIEJ=PEKJOUOPAI Art.55 (1) of the Law of Georgia, 28 October 1994, “On Entrepreneurs” (the “Georgian Law”) provided that the general meeting of shareholders would elect two-thirds of the board, with the other third being appointed by the company’s employees.

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— Some countries do not mention cumulative voting or make any provisions therefor; instead, they provide that the charter can determine how members of the company board will be elected.7 — Others provide for cumulative voting but make it optional. In Kyrgyzstan, for example, cumulative voting is the rule unless the company charter opts out of it.8 — Another set of countries make cumulative voting mandatory for companies with a certain number of shareholders: more than 500 in Armenia,9IKNAPD=J­BPUEJMoldova.10 In the case of Moldova, the number of shareholders was brought down from 300 with the amendments of 2000, thus making the rule applicable to more companies. In both cases, cumulative voting can be introduced voluntarily for smaller companies, subject to charter provisions. — Kazakhstan and Russia are the only countries that provide for mandatory cumulative voting for all companies regardless of their size.11 In the case of Russia, this is a change from the pre-2004 situation, when cumulative voting was mandatory for companies with more than 1,000 voting shareholders.

Cumulative Voting and the Need for Strategic Behavior Unlike straight voting based on the principle of “one share, one vote”, cumulative voting entails that shareholders have as many votes per share as there are directors to be elected. Under the straight voting arrangement, each director is elected separately by a simple majority vote of the shareholders present at the general meeting of shareholders. A majority shareholder with more than 50% of the company’s voting shares will always have more votes than the minority shareholders and can easily outvote them in the election of candidates. Under a cumulative voting system, however, minority shareholders get a chance to elect at least one of their candidates by voting strategically and in an organized manner. 7

Belarus, Tajikistan, Ukraine, and Turkmenistan.

8

Art.38 (6) of the Kyrgyz Law. Art.76 (1) of the Uzbek Law also refers to cumulative voting as a permissible exception to the principle of “one share, one vote”. Art.83 (8 and 9) provides for the use of some of the features of cumulative voting. Still, the nature of the requirement for cumulative voting remains unclear; our reading of it is that it is optional. Cumulative voting is also allowed in Georgia, Art.54 (8) of the Georgian Law.

9

Art.85 (3) of the Armenian Law.

10

Art.66 (7) of the Law of Moldova No.1134-XIII, 2 April 1997, “On Joint-Stock Companies” (the “Moldovan Law”).

11

Art.54 (2) of the Law of Kazakhstan No.415-II, 13 May 2003, “On Joint-Stock Companies” (the “Kazakh Law”) and Art.66 (4) of the Russian Law.

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In cumulative voting, the votes available to shareholders can be allocated to one or several candidates. This provides the possibility of developing complex strategies to achieve an optimum allocation of votes EJ=JAɳKNPPKAHA?PPDALNABANNA@?=J@E@=PAOPKPDA>K=N@ 2DABKHHKSEJC example serves to illustrate the cumulative voting mechanism, as well as some of the principal strategies available, respectively, to the majority shareholder and to minority shareholders.12 The agenda of the general meeting of shareholders indicates that shareholders will elect nine members to the board of directors. The company has 2,501 shareholders and has issued in total 15,000 common shares with voting rights. The company does not have preferred shares. 2SK PDKQO=J@ ­RA DQJ@NA@ IEJKNEPU OD=NADKH@ANO LKOOAOO ?KHHA?PERAHU 20% of the shares with voting rights (3,000 shares). The company also has one majority shareholder who owns 80% of the shares of the company (12,000 shares). The majority shareholder has proposed nine candidates; the minority shareholders, two. In the case of cumulative voting, the 2,500 shareholders of the company receive a total of 27,000 votes (3,000 shares multiplied by nine votes). The majority shareholder has 108,000 votes (12,000 shares multiplied by nine votes). The total number of votes that all 2,501 shareholders can use to elect the candidates to the board of directors is 135,000 (nine votes multiplied by 15,000 shares). The nine candidates that receive the most votes are elected to the board of directors. The strategic choices of the majority shareholder relate to whether to give all his candidates 12,000 votes each (108,000 votes divided by nine candidates) or to give some of them fewer or more votes. For that purpose, it is important to determine what the minimum number of votes is that will elect him the maximum number of directors given the total number of shares that can vote. A simple formula is used to help make this calculation: nS + 1 = Number of shares needed D+1 Where D = the number of directors to be elected (D = 9 in this example), S = number of outstanding voting shares (S = 15,000 in this example), and

12

See, also, IFC, The Russia Corporate Governance Manual, Moscow 2004, Part II, available online at .

Cumulative Voting and the Protection of Minority Shareholders

89

n = the total number of directors the respective shareholder wants to elect. By applying the formula, the majority shareholder can determine that he needs: — 13,501 shares to ensure that nine candidates are elected; — 12,001 shares for eight candidates; and — 10,501 shares for seven candidates. The formula shows that he will not be able to elect all nine candi@=PAO=ODEOOD=NAO=NAJKPOQɹ?EAJP 2DAUSEHH?HA=NHU>AAJKQCD however, for the election of seven directors. To determine whether he can get an additional (eighth) seat and what his vote allocation strategy should be, the majority shareholder would need to evaluate the options of the minority shareholders. In terms of the position of the minority shareholders, the formula can be used to show them that 13,509 votes (1,501 shares multiplied by nine votes) will secure one director on the board. They do not have to cast more votes for this candidate to ensure that he will be elected. In this case, they will have 1,499 shares left (3,000 minus 1,501 shares) to use strategically in competing for an additional director. The Results of the Election When the Majority Shareholder Votes for 8 Candidates Minority shareholders’ vote: Director A1: received 13,509 votes Director A2: received 13,491 votes Majority shareholder’s vote: Director B1: received 13,500 votes Director B2: received 13,500 votes Director B3: received 13,500 votes Director B4: received 13,500 votes Director B5: received 13,500 votes Director B6: received 13,500 votes Director B7: received 13,500 votes Director B8: received 13,500 votes Result: Directors A1 (proposed by the minority) and B1-B8 (proposed by the majority) are elected. (The nine candidates that receive the most votes are elected to the board of directors.)

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In this example, it is clear that both the majority shareholder and the 2,500 minority shareholders would be able to contest for an additional seat. The majority shareholder can determine that the minority shareholders have enough shares to elect one candidate to the board of directors but =JEJOQɹ?EAJPJQI>ANPKOA?QNA=OA?KJ@?=J@E@=PA 'JPDEO?=OADA?=J decide to use his 108,000 votes for eight candidates. Each of the majority shareholder’s candidates, then, will receive 13,500 votes, which is more than what the minority shareholder has available (13,491 votes, or 1,499 shares multiplied by nine votes). The potential outcome of such a strategy is illustrated in the table above It should be added that the level and sophistication of the voting strategies to be adopted depend on the number of cumulative votes that can be cast by each shareholder, as shown in the following table. How Cumulative Voting Works—Voting Strategies

The number of shares issued and outstanding: 15,000 (100%) The number of shares owned by a single majority shareholder: 12,000 (80%) The number of shares owned by 2,500 minority shareholders: 3,000 (20%) 3 directors will The majority shareholder has 36,000 votes be elected

(12,000 shares * 3 directors)

The minority shareholders have 9,000 votes (3,000 shares * 3 directors)

The majority shareholder can elect all three The minority shareholders cannot secure directors if each director receives 3,751 votes. the election of one director, because the The majority shareholder has 12,000 shares minimum number of shares needed to elect and needs 11,251 shares to elect all three one director is directors: 1 * 15,000 + 1 = 3,751 3 * 15,000 + 1 = 11,251

3+1

3+1 The minority shareholders have only 3,000 The majority shareholder needs to use 33,753 shares (9,000 votes). They need 11,252 votes to (11,251 * 3) votes out of 36,000 to secure the outvote the majority shareholder. The minorelection of three directors.

ity shareholders can elect one director if the majority shareholder gives fewer than 9,000 votes to one director.

Cumulative Voting and the Protection of Minority Shareholders

91

How Cumulative Voting Works—Voting Strategies

The number of shares issued and outstanding: 15,000 (100%) The number of shares owned by a single majority shareholder: 12,000 (80%) The number of shares owned by 2,500 minority shareholders: 3,000 (20%) 4 directors will The majority shareholder can elect three out The minority shareholders cannot ensure the be elected

of four directors:

election of one director:

3 * 15,000 + 1 = 9,001

1 * 15,000 + 1 = 3,001

4+1

4+1

The majority shareholder does not have As the majority shareholder does not have enough shares to elect all four directors:

enough shares to ensure all four seats on the board, the minority shareholders can vote for

4 * 15,000 + 1 = 12,001

one single candidate.

4+1

The majority shareholder has 12,000 shares and needs 12,001 shares to elect all four candidates.

5 directors will The majority shareholder can elect four out The minority shareholders can elect one be elected

KB­RA@ENA?PKNO

director:

4 * 15,000 + 1 = 10,001

1 * 15,000 + 1 = 2,501

5+1

5+1

6 directors will 2DA I=FKNEPU OD=NADKH@AN ?=J AHA?P ­RA KQP The minority shareholders can elect one be elected

of six directors:

director:

5 * 15,000 + 1 = 10,715

1 * 15,000 + 1 = 2,144

6+1

6+1

7 directors will The majority shareholder can elect six out of The minority shareholders can elect one be elected

seven directors:

director:

6 * 15,000 + 1 = 11,251

1 * 15,000 + 1 = 1,876

7+1

7+1

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Gregory F. Maassen and Rilka Dragneva How Cumulative Voting Works—Voting Strategies

The number of shares issued and outstanding: 15,000 (100%) The number of shares owned by a single majority shareholder: 12,000 (80%) The number of shares owned by 2,500 minority shareholders: 3,000 (20%) 8 directors will The majority shareholder can elect seven out The minority shareholders can elect one be elected

of eight directors:

director:

7 * 15,000 + 1 = 11,668

1 * 15,000 + 1 = 1,668

8+1

8+1

9 directors will The majority shareholder can elect seven out The minority shareholders can elect one be elected

of nine directors:

director:

7 * 15,000 + 1 = 10,501

1 * 15,000 + 1 = 1,501

9+1

9+1

The majority shareholder does not have The minority shareholders do not have enough enough shares to elect eight out of nine shares to elect two out of nine directors: directors: 2 * 15,000 + 1 = 3,001 8 * 15,000 + 1 = 12,001

9+1

9+1

In this case, there could be a contest for one additional seat on the board of directors. Either the majority shareholder or the minority shareholders can elect an additional candidate if they vote strategically. Neither has enough shares to ensure the additional seat on the board. It is therefore important to calculate the minimum number of shares that shareholders should allocate to each director.

10 directors will The majority shareholder can elect eight out The minority shareholders can elect two be elected

of ten directors:

directors:

8 * 15,000 + 1 = 10,910

2 * 15,000 + 1 = 2,728

10 + 1

10 + 1

Cumulative Voting and the Protection of Minority Shareholders

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How Cumulative Voting Works—Voting Strategies

The number of shares issued and outstanding: 15,000 (100%) The number of shares owned by a single majority shareholder: 12,000 (80%) The number of shares owned by 2,500 minority shareholders: 3,000 (20%) 11 directors will The majority shareholder can elect nine out The minority shareholders can elect two be elected

of eleven directors:

directors:

9 * 15,000 + 1 = 11,251

2 * 15,000 + 1 = 2,501

11 + 1

11 + 1

This example illustrates that, if minority shareholders vote strategically, they can elect one candidate to the board. It is clear, however, that, EJKN@ANPK>AJA­PBNKIPDAIA?D=JEOIKB?QIQH=PERARKPEJCPDAUJAA@PK develop voting strategies and make alternative calculations applicable to a large number of variable settings. Having more strategies grants them more chances. This implies, however, that two crucial preconditions are satis­A@PD=PIEJKNEPUOD=NADKH@ANO=?P?KHHA?PERAHU=J@PD=PPDAU=NA?=L=>HA of making the informed and complex judgments that are necessary.

The Problems of Informed Collective Action in the CIS OD=O>A?KIA?HA=NPDALKOEPERAAɳA?PKB?QIQH=PERARKPEJCBKNIEJKNEPU shareholders is premised on their willingness and ability to work as a block in voting for candidates for the board of directors.13 This requirement, however, is not feasible in emerging markets and in the CIS, in particular, for a variety of legal and extra-legal reasons. Legal Pre-Conditions for Collective Action For minority shareholders to be able to engage in collective action, they JAA@PKD=RAOQɹ?EAJPPEIAPKKNC=JEVAPDAIOAHRAOEJ=@R=J?AKBPDA@=PA of the general meeting of shareholders at which directors will be elected by cumulative voting.14 It is also important that shareholders have access to the list of shareholders eligible to participate in the shareholders meeting. The majority of the CIS countries, however, do not envisage such a right in their company 13

See, also, Maassen and Brown, op.cit. note 1.

14

For a discussion of the state of the legal regulations on JKPE­?=PEKJBKNCAJAN=H=J@ extraordinary meetings of shareholders and for a review of the common problems incurred in the CIS, see R. Dragneva, “Legal Regulation of Shareholder Rights in the CIS”, in this book.

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laws.15 Of those countries that do, Moldova makes the most generous provisions: The list of shareholders is a part of the materials that need to be made available to all shareholders in preparation for the meeting.16 In Russia, the right to view the shareholder list is an important minority right granted to the holders of 1% of voting shares.17 Armenia and Uzbekistan have opted for a higher threshold: 10% of voting shares.18 Mobilizing collective action for cumulative voting also depends on PDA =R=EH=>EHEPU KB OQɹ?EAJP information about the way the procedure works. Minority shareholders in the CIS tend to be individuals who have received their shares as a result of the privatization process, and are normally poorly informed about their rights and lack any form of education in corporate governance and corporate democracy. In principle, some CIS company laws require that voting ballots contain explanation about the nature of cumulative voting.19 Yet, (1) Not all company laws that allow or require cumulative voting envisage such a requirement; (2) It is doubtful how much of the nature of this complex process can be explained in the required format; (3) Not all companies use or are required to use voting ballots;20 and (4) The general requirement as to provision of information to shareholders in advance of the CAJAN=H IAAPEJC KB OD=NADKH@ANO OQɳAN BNKI EILKNP=JP@A­?EAJ?EAO 21 Finally, collective action is premised on all minority shareholders mobilized actually casting their votes at the shareholders meeting—either in person, by proxy, or as an absentee vote. Thus, it is important that company H=SOKɳANOQɹ?EAJPHU®ATE>HALKOOE>EHEPEAO=J@CQ=N=JPAAOBKNOD=NADKH@AN participation.22 As company practices in Eastern Europe have shown, however, this has been one of the areas where abuse by insiders has been 15

This right can certainly be provided by the charter, yet the support of a majority shareholder for its inclusion is questionable.

16

Art.56 (2) of the Moldovan Law.

17

Art.51 (4) of the Russian Law.

18

Art.70 (5) of the Armenian Law, Art.68 (6) of the Uzbek Law.

19

Art.60 (4) of the Russian Law; Art.79 (3) of the Armenian Law; Art.62 (2) of the Moldovan Law; Art.49 (5) of the Kazakh Law. The latter provision relates to all items included in the agenda rather than to cumulative voting only.

20

See Dragneva, op.cit. note 14.

21

Typically, companies are not obliged to submit information to shareholders as to how cumulative voting works as a part of the obligatory materials that should be made available for inspection in advance of a shareholders meeting. Ibid.

22

For a discussion of CIS company laws and practices, see ibid.

Cumulative Voting and the Protection of Minority Shareholders

95

most blatant, as minority shareholders have been frequently prevented from attending shareholders meetings and/or voting their shares through a variety of more or less sophisticated practices. Unfortunately, the experience of some other emerging markets, such as the Philippines, does not support an optimistic scenario. According to observers, the introduction of mandatory cumulative voting in the Philippines “did not result in greater representation of minority shareholders on boards of directors, because in most instances, the number of minority shareholders present and voting at the Annual General Meeting was EJOQɹ?EAJPPKSEJAJKQCDRKPAOKJKJA?=J@E@=PA£ 23 Extra-Legal Considerations As mentioned, minority shareholders in CIS markets are typically “privaPEV=PEKJÎI=@A£KSJANO +KOPKBPDAIB=?A?QHPQN=H=J@­J=J?E=H>=NNEANO to consolidating voting powerPD=P=NA@Eɹ?QHPPKKRAN?KIA !ANP=EJHU IKOPKBPDAI@KJKPD=RAPDA­J=J?E=HNAOKQN?AOJAA@A@PK?KJP=?PPDA large number of other individual shareholders or to obtain expert advice, or even to prepare for and attend the general meeting of shareholders itself.24 In this context, a prohibitive role is also played by the generally low level of communications infrastructure in these countries and of electronic means of communication, in particular.25 Because of these problems, when minority shareholders consist mainly of individuals, they may not be able to use the cumulative voting OUOPAIAɳA?PERAHU 2DA?D=J?ABKNinstitutional investorsPK>AJA­PBNKI the system is somewhat higher: They are fewer in number, easier to contact, have greater resources, are better informed, and normally have larger OP=GAOPD=JPDKOADAH@>UEJ@ERE@Q=HOSDANA>UPDA>AJA­PONA=HEVA@BNKI engaging in organized collective action may well outweigh their costs.26 23

O. Fremond and M. Capaul, “The State of Corporate Governance: Experience from Country Assessments”, World Bank Policy Research Working Paper 2858, June 2002, 11, available online at .

24

A telling picture is provided by the comparable example of Macedonia, where 25% of the country’s retail shareholders have a monthly household income of 100 euros or less.

25

See the indices compiled to evaluate the quality of communications in Eastern Europe in the 2005 EBRD Transition Report, London 2005, see .

26

Despite the arguments made for institutional investor activism in general, they have not proven to be active shareholders even in countries with highly developed shareholding cultures, such as the US and the UK See, for example, P. Davies, “Institutional Investors in the UK”, in D. Prentice and P. Holland, Contemporary Issues in Corporate Governance, Oxford 1993.

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Nonetheless, the ownership data available for selected CIS countries ODKSOPD=PPDAENLNAOAJ?AEOOPEHHJKPOECJE­?=JP 27 #ILHKUAAO=NA=JKPDANIEJKNEPUCNKQLPD=P?KQH@LKPAJPE=HHU>AJA­P from cumulative voting. Empirical studies show that employees have sizeable stakes in many Russian companies.28 Presumably, they also have easier means for collective action—at least in terms of proximity and ease of communication. Such shareholders, however, may be the subject of pressure to support the candidates of a controlling insider shareholder.

Cumulative Voting and Tie Votes 2DAAT=ILHA@EO?QOOA@EJPDEOSKNGATAILHE­AO=JKPDANEJPANAOPEJCLNK>lem in cumulative voting: the occurrence of tie votes.29 As the table below shows, if the majority shareholder had decided to distribute his 108,000 votes equally among nine candidates, each director would have received 12,000 votes. In such a situation, the minority shareholders would be able to elect both their candidates with 13,509 votes and 13,491 votes, respecPERAHU 2DAI=FKNEPUOD=NADKH@ANEOHABPSEPDOARAJOA=POPK­HH=OPDANA=NA only nine seats in total, and the minority shareholders’ candidates have clearly received the most votes for two seats. The problem, then, is to determine which seven out of the nine directors who have all received an equal number of 12,000 votes have been elected to the board.

27

C. Sprenger, “Ownership and Corporate Governance in Russian Industry: A Survey”, EBRD Working Paper No.70, January 2002. On Armenia, Georgia, and Moldova, see World Bank, Report on the Observance of Standards and Codes: Corporate Governance Country Assessment, available online at .

28

Ibid.

29

For more, see J. Kasdan, “Ties in Cumulative Voting”, Columbia Law School Center for Law and Economic Studies Working Paper 1993 No.98, available online at .

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The Results of the Election When the Majority Shareholder Votes for 9 Candidates

Minority shareholders’ vote: Director A1: received 13,509 votes Director A2: received 13,491 votes Majority shareholder’s vote: Director B1: received 12,000 votes Director B2: received 12,000 votes Director B3: received 12,000 votes Director B4: received 12,000 votes Director B5: received 12,000 votes Director B6: received 12,000 votes Director B7: received 12,000 votes Director B8: received 12,000 votes Director B9: received 12,000 votes Result: Directors A1-A2 and seven of the other nine directors (B1-B9) are elected.

The problem of tie votes raises questions that are often not addressed by legislation. In the CIS, only the Kazakh Law refers to such a scenario by providing that if some directors receive an equal number of votes, an additional vote should be carried out to decide among them.30 This can I=GA?QIQH=PERARKPEJCHAOOAɳA?PERAEJLNKPA?PEJCIEJKNEPUOD=NADKH@ANO since the system depends on a minimum number of directors (see below). The law provides no further guidance, however, with regard to what can be a very complex situation. One method of resolving tie votes would be to give the existing board of directors, in the bylaws of the company, the authority to call a new general meeting of shareholders to re-elect the board of directors. The bylaws may also authorize the general meeting of shareholders to break a tie vote with a NQJÎKɳRKPA at the same meeting. In any event, if a company’s shareholders opt for cumulative voting, it is essential that they address the problem of tie votes in the bylaws of the company. Other IAPDK@O KB NAOKHREJC = OP=J@Kɳ >APSAAJ ?=J@E@=PAO SKQH@ >A PK RKPA strategically (the majority shareholder can, as discussed earlier, decide to cast all his votes for seven candidates instead of nine candidates), or the majority shareholder can ask some of his candidates to resign voluntarily after the election takes place. 30

Art.54 (2) of the Kazakh Law.

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The Relationship Between Cumulative Voting and the Number of Directors Another characteristic of cumulative voting is the direct relationship >APSAAJEPOAɳA?PERAJAOO=J@PDAnumber of directors on the board: The more directors shareholders can elect during the general meeting of shareholders, the greater the opportunity for minority shareholders to elect representatives to the board of directors. This relationship is illustrated by the graph below. When the board of directors consists of nine directors, each shareholder or group of shareholders needs at least 10% of the shares with the right to vote for directors during the general meeting of shareholders to elect at least one director regardless of how other shareholders vote. This percentage increases dramatically when the number of directors that must be elected to the board decreases. Thus, cumulative RKPEJC EO AɳA?PERA I=EJHU SDAJ PDA >K=N@ ?KJOEOPO KB = NAH=PERAHU H=NCA number of directors, although this may increase the costs of the board KB@ENA?PKNO=J@NAJ@ANEPHAOOAɳA?PERA@QAPKEJ?NA=OA@>QNA=Q?N=?U=J@ slow decision-making. For cumulative voting to protect minority shareholders, the minimum number of directors to be elected should not be fewer than seven. This would give a group of minority shareholders who have succeeded in cumulating roughly 12.5% of voting shares the opportunity to elect one director during the general meeting of shareholders. Thus, if the law mandates cumulative voting or the charter opts for it, it is important to P=GAEJPK=??KQJPPDANAH=PEKJODEL>APSAAJ>K=N@OEVA=J@PDAAɳA?PERAness of cumulative voting. 'P EO SKNPD JKPEJC PD=P !'1 H=SO @EɳAN EJ PDAEN LNKREOEKJ KB PDA minimum number of directors to be elected. Armenia, Georgia, Kazakhstan, and Kyrgyzstan require that boards consist of no fewer than three members.312DEONQHAEP?=J>A=NCQA@EOJKPCKEJCPK>AOQɹ?EAJPPKDAHL minority shareholders in companies with a large number of shareholders in these countries. Greater guarantees are provided in Russia, Moldova, and 3V>AGEOP=JSDANA@EɳANAJPIEJEIQIO=NANAMQENA@@ALAJ@EJCKJ the number of shareholders in a company.32 In the remaining countries, minimums are a matter of internal company regulation. 31

32

Art.85 (4) of the Armenian Law; Art.55 (1) of the Georgian Law; Art.54 (5) of the Kazakh Law; Art.55 (3) of the Kyrgyz Law. These countries have followed the provision of Art.7 (2) of the MLJSC. 

NP ÓÔKBPDA0QOOE=J*=S 2DACAJAN=HIEJEIQIEO­RAIAI>ANOBKN?KIL=JEAO with more than 1,000 shareholders, there is a minimum of seven directors; with more than 10,000 nine directors. Art.66 (2) of the Moldovan Law: general minimum KBPDNAAEBIKNAPD=J­BPU­RAÓKNECEJ=HHUÔNP KBPDA3V>AG*=SEB minimum of seven; if 1,000, nine.

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Source: author’s compilation

Cumulative Voting and Board Decision-Making #RAJSDAJPDANAMQENAIAJPOBKNPDAAɳA?PERAJAOOKB?QIQH=PERARKPEJC are met, having one director on the board does not necessarily guarantee =JU>AJA­PBKNIEJKNEPUshareholders. It has been argued that such representation can help minority shareholders obtain information on the company’s business and can alert them to particular issues and problems under discussion.33 It is true that this information route may be superior to other mechanisms available to shareholders for obtaining information about the work of the board.34 Nonetheless, given the structural problems of communication and collective action, it is not at all certain that the problems observed will be communicated back to all of the minority shareholders on a timely basis. More important, it is doubtful whether, as a minority on the board, PDANALNAOAJP=PERASEHH>A=>HAPK=ɳA?PPDANAOKHQPEKJKBEOOQAOOECJE­?=JP for minority shareholders. Most board decisions require only a simple majority of directors present at the meeting, meaning that the minority’s director may be outvoted. This problem can be partly remedied with regard to certain key issues provided that the law, charter, or bylaws require the unanimous vote of all board members. In the Russian Federation, for 33

Avilov et al., op.cit. note 4, Section 119.

34

The reference here is to special provisions on shareholders’ right to information, such as Art.91 (2) of the Russian Law.

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example, the law requires board unanimity when the board decides on increasing the charter capital by issuing additional shares (when granted this authority)35 and for approving certain major transactions.36 The latter is also required by the laws of Armenia, Moldova, and Uzbekistan.37 There is another possibility for the minority’s director to play a more important role on the board in situations where certain board decisions must be made only by independent or disinterested directors in a particular issue. This, for example, is the case when related-party transactions need PK>A=LLNKRA@ 1PEHH!'1?KQJPNEAO@EɳANEJPDAOPNE?PJAOOKBPDEONQHA=J@ particularly in their “independence” requirements.38 It should be noted that all these actions are premised on the minority’s director being fully engaged and highly active as a director. The activism and competence of a director is not something that can be taken for granted in the West, let alone in the CIS.39 A more serious problem is presented by the fact that cumulative voting tends to result in board polarization, whereby directors elected by the majority and the minority act not as a whole in the interest of all shareholders but in the interest of their respective constituencies. Indeed, it has been observed that, in practice, directors owe allegiance to the group that nominated them.40 Thus, as it has been noted: “[t]he board members’ duty of loyalty to the company and all shareholders becomes more important, not less so, when cumulative voting or similar procedures are in place.”41 This concern can, in part, be seen as standing behind the 35

Art.28 (2) of the Russian Law.

36

Art.79 (2) of the Russian Law.

37

Art.61 (1) of the Armenian Law; Art.83 (1) of the Moldovan Law; Art.90 (1) of the 3V>AG*=S $KNIKNAKJPDAAɳA?PERAJAOOKBPDEONAMQENAIAJPOAA" )=N=LAPU=J “Protection of Shareholder Rights in Special Circumstances”, in this book.

38

For more on this matter, see the discussion in Karapetyan, ibid.

39

An overview of directors’ incentives and behavior in the US is contained in J. Lorsch, Pawns or Potentates: The Reality of America’s Corporate Boards, Cambridge, MA 1989.

40

OECD, White Paper on Corporate Governance in Russia, Paris 2002, Section 152, available online at ; Standard & Poor’s, Analytical Assessment of the Progress in Implementing the Recommendations of the White Paper on Corporate Governance in Russia, Sections 27 and 28, available online at . The problem exists in the context of developed markets, too, e.g., as has been documented in relation to the co-determination system in Germany, whereby boards of listed companies are divided into representatives of shareholders and employees, cumulative voting may polarize the board. See G. Gorton, F. Schmid, “Class Struggle Inside the Firm: A Study of German Co-determination”, NBER Working Paper 2000 No.7945, available online at DPPL

­? SD=NPKJ QLAJJ A@Q ­? L=LANO   L@B

41

OECD, Corporate Governance in Eurasia: A Comparative Overview, Paris 2004, 62, available online at .

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thrust of the OECD’s recommendations for fair and equitable treatment of all shareholders and their emphasis on the board members’ obligations in this respect.42 In principle, CIS laws contain an obligation for all shareholders of a certain class to be treated equally. In terms of the duties of directors, as was discussed earlier in this book, the majority of CIS countries envisage some rule requiring that they act in the best interest of the company.43 Yet, even where such a rule has been provided, it remains minimal and QJ@ANÎ@A­JA@ +KNAKRANPDANAEOJKATLHE?EPHAC=HK>HEC=PEKJBKN>K=N@ members to treat all shareholders fairly. The problem of board polarization, it has been argued, is potentially IKNAOANEKQOEJ?KQJPNEAOLNKRE@EJCBKN=ODKNPPANIEJKɹ?ABKN@ENA?tors.44 In most of the CIS countries, where this term is one year, directors are more likely to depend on their respective constituency for re-election and are thus more likely to act on behalf of the particular interests of that constituency.45

Cumulative Voting and Extraordinary Meetings of Shareholders Another complicating factor is the election of directors through cumulative voting during extraordinary meetings of shareholders. Company laws often allow a shareholder or a group of shareholders possessing at least 10% of a company’s voting shares to call an extraordinary meeting of shareholders.46 At the meeting, these shareholders can propose candidates for the board of directors. Shareholders who have not called the extraordinary meeting are normally not authorized by law to propose items for the agenda of the extraordinary meeting or to propose changes to the agenda without the consent of the requesting shareholders. Although the Model Legislative Provisions on Investor Protection (MLPIP), adopted within the CIS framework, provide that shareholders are not entitled to propose items for the agenda of an extraordinary meeting of shareholders that will be held upon the request of another shareholder or group of shareholders, an exception to this rule has been made for the election of members of the board of directors by cumulative 42

OECD, OECD Principles of Corporate Governance, Paris 2004, 18, Section VI, A and B, available online at .

43

See Dragneva, op. cit. note 14.

44

Standard & Poor’s, op.cit. note 37.

45

Art.63 (1) of the Russian Law.

46

For more on the regulation of extraordinary meetings of shareholders in the CIS and model legislation, see Dragneva, op.cit. note 14.

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voting.47 If other shareholders are not allowed to propose candidates to the board of directors, the candidates that are proposed by the requesting shareholder(s) are automatically elected to the board of directors since cumulative voting guarantees that the candidates who receive the most votes are elected. Although this provision grants additional safeguards for minority shareholders when cumulative voting is in place, it also complicates the organization of extraordinary meetings of shareholders by allowing holders of a certain minimum percentage of the voting shares to nominate candidates for the board of directors.

Cumulative Voting and Other Forms of Board Representation %ERAJPDA@EO=@R=JP=CAO=J@PDAQJ?ANP=EJ>AJA­POKB?QIQH=PERARKPEJC one could ask whether cumulative voting should be required in legal systems that envisage other minority rights to improve board representation. We refer, in particular, to the example of Armenia, where, as discussed above, cumulative voting is required for companies with more than 500 shareholders. Armenia also entitles a shareholder or a group of shareholders in possession of more than 10% of voting shares to nominate a representative to the board.48

Conclusions !QIQH=PERARKPEJCKɳANO?HA=N=@R=JP=CAOBKNPDALNKPA?PEKJKBPDAEJPANAOPO of minority shareholders in some circumstances. Nonetheless, as has been @EO?QOOA@EJPDEOSKNGEPEO=@Eɹ?QHPIA?D=JEOIPKQOAEJ=JAɳA?PERA I=JJAN 5DEHAEPOAɳA?PERAJAOO?=J>AEJ?NA=OA@>UPDAEJPNK@Q?PEKJKB certain supplementary rules (e.g., minimum number of directors, better @A­JEPEKJ KB @ENA?PKNO¥ @QPEAO NECDP PK EJOLA?P PDA list of shareholders eligible to participate in the general meeting of shareholders, developed proxy system), it remains uncertain in the absence of certain structural factors in society (e.g., improved communications, more mature shareDKH@AN?QHPQNAEILNKRA@­J=J?E=H=>EHEPUKBIEJKNEPUshareholders, greater OECJE­?=J?AKBEJOPEPQPEKJ=HOD=NADKH@ANOÔ  It has been argued, for similar reasons, that complex rules such as cumulative voting for minority shareholders are largely irrelevant for emerging markets.49 The practical experience that has been gained in 47

Art.9 (2) of the MLPIP.

48

Art.85 (2) of the Armenian Law.

49

M. Klein, M. Capaul, S. Djankov and T. Harford, “Proving Adam Smith Wrong”,

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terms of introducing mandatory cumulative voting in such circumstances OAAIOPK?KJ­NIPDEOREAS 50 That is why shareholders should have a choice of including cumulative voting requirements or provisions for electing directors by straight voting in the company’s bylaws. This is indeed the position that the Model Legislative Provisions on Investor Protection take as the most appropriate for the CIS circumstances at the moment.51

IFC, Washington, DC 2004, available online at . 50

As stated in World Bank, Report on the Observance of Standards and Codes: Corporate Governance Country Assessment, Republic of the Philippines, Washington, DC 2001, 15, available online at : “It appears PD=P?QIQH=PERARKPEJCD=OJKP>AAJ=>HAPKAɳA?PERAHULNKPA?PPDAIEJKNEPUOD=NADKH@ANO=OEPOAɳA?PERAJAOOQHPEI=PAHUNAOPOKJPDAJQI>ANKBOD=NAOPD=PPDAIEJKNEPU shareholders can actually cumulate and the number of seats in the board of directors available. Based on experience with several listed corporations, considering the concentrated ownership of shares in these companies and/or their ability to solicit OQɹ?EAJPLNKTURKPAOPDAcontrolling shareholders are able to elect into the board the entire slate of management nominees to the board. In this way, cumulative voting works for the controlling shareholders and against the minority shareholders.”

51

Art.10 of the MLPIP.

Protection of Investors’ Rights in Special Circumstances Davit Karapetyan Company laws, securities-market regulations, and other relevant legislation provide investors with rights that can help them protect their interests and investments in a company. Most of these rights—some of which have been discussed in earlier chapters—exist when a company is engaged in regular business activities and is in normal-operations mode. However, the life of a company is far from just a simple series of ordinary business operations. Depending on a multitude of internal and external factors, a company, from time to time, engages in various activities that go beyond its ordinary business life. Unlike ordinary circumstances, certain transactions undertaken by a company can be rather sophisticated and involve risks for investors and the company as a whole that are greater than those faced under ordinary circumstances. Takeovers, or acquisitions of control, major (or extraordinary) and related-party transactions, changes in the legal charter capital, corporate reorganizations, share consolidations and splits are some examples of such non-standard, or special, circumstances in the life of a company. 2DAOAOLA?E=H?EN?QIOP=J?AOLKOAOLA?E­?NEOGOBKNEJRAOPKNO>A?=QOA PN=JO=?PEKJO?KJ?HQ@A@QJ@ANOQ?D?EN?QIOP=J?AOI=UOECJE­?=JPHU=HPAN a company’s business and its ability to generate return on investment. Therefore, these special circumstances call for more stringent attention in legislation and careful scrutiny by the regulator to ensure that the rights of investors are properly observed. Through these mechanisms, controlling shareholders and other company insidersI=UOELDKJKɳ=?KIL=JU¥O=OOAPO into other structures that they control, thus leaving minority shareholders without proper assets to generate returns on their investment and creditors unprotected against the bankruptcy of the company. Furthermore, such transactions are a special concern in emerging (transition) economies such as those in the Commonwealth of Independent States (CIS). Due to the ownership structure of companies, the lack of proper governance structures and processes and of established checks and balances on managers, such as independent boards of directors and audit committees=J@>A?=QOAKBSA=GNACQH=PEKJ=J@EJAɹ?EAJPenforcement, controlling shareholders and insiders have many opportunities to abuse outside investors’ rights by employing various mechanisms to ATPN=?PLNER=PA>AJA­POKB?KJPNKH=J@JKPOD=NAPDA?KIL=JU¥OLNK­PO with these outside investors. These special circumstances are often cited by many corporate-governance researchers and policy advisers as the Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 105-147 © Koninklijke Brill NV, Leiden, 2007

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key area of concern for protection of investors’ rights, strengthening of regulation, and enforcement throughout the CIS countries, as they will be cited again in this chapter. This chapter will review the practices of CIS countries with respect to protecting investors’ (both shareholders’ and creditors’) rights when a company is engaged in acquisitions or disposals of a substantial amount of assets (major, or extraordinary, transactions) (Section 1) and self-dealEJC=J@KPDAN?KJ®E?PÎKBÎEJPANAOPOEPQ=PEKJOÓrelated-party transactions) (Section 2). In each of these sections, we will examine some of the most common abuses of investors’ rights and practical problems in the relevant area in the CIS countries, how these special circumstances are regulated from the perspective of investor protection, and we will identify regulatory shortcomings. All this will lead to a discussion of the regulatory solutions proposed by the Model Legislative Provisions on Investor Protection (MLPIPÔPK@A=HSEPDE@AJPE­A@LNK>HAIOKBEJRAOPKNLNKPA?PEKJEJOLA?E=H circumstances and why these may work for these emerging (transition) economies in the CIS countries. Section 3 will conclude.

Investor Protection in Major (Extraordinary) Transactions The importance of giving special treatment to investor protection when companies are engaged in major transactions is underscored by the 2004 OECD Principles of Corporate Governance (“2004 OECD Principles”), which recommend that shareholders have the right to participate in, and to be OQɹ?EAJPHUEJBKNIA@=>KQP@A?EOEKJO?KJ?ANJEJCBQJ@=IAJP=H?KNLKN=PA changes such as: “[…] 3) extraordinary transactions, including the transBANKB=HHKNOQ>OP=JPE=HHU=HH=OOAPOPD=PEJAɳA?PNAOQHPEJPDAO=HAKBPDA company.”1 The OECD Principles go further, stating that the rules and procedures governing extraordinary transactions such as sales of substantial portions of corporate assets should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. This focus on major transactions is also evident in the 1996 General Principles of Company Law for Transition Economies (“1996 General Principles”), where it is underscored that the protection of minority investors is key in any market economy and even more so in countries where companies are dominated by insiders.2 The growth of these companies will often require 1

OECD, Principles of Corporate Governance, Paris 2004, 18, available online at .

2

G. Avilov et al., “The General Principles of Company Law for Transition Economies”,

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external resources, including those in the form of investments by minority shareholders. To attract such resources, investors should be able to be ?KJ­@AJPPD=PPDAENEJRAOPIAJPSEHH>ALNKPA?PA@FQOP=OPDAEJRAOPIAJPKB controlling shareholders and that insiders will not use major transactions PK>AJA­PPDAIOAHRAO=PPDAATLAJOAKBKQPOE@AEJRAOPKNO Building on the importance of major transactions in terms of protecting the rights of existing investors and encouraging the integrity and development of capital markets in the CIS countries, we analyze below how these countries deal with major transactions in their legislation and practices based on a review of the most commonly observed problems in this area. Furthermore, relevant recommendations from the MLPIP to improve/reform regulation and address these practical problems are presented. Not All CIS Countries Have Rules Regulating Major Transactions The majority of the CIS countries have some sort of provisions regulating major transactions.3 Those rules most commonly deal with such issues as PDA@A­JEPEKJKBI=FKNPN=JO=?PEKJO=LLNKR=HIA?D=JEOIO=J@?KJOAMQAJ?AOBNKIJKPBKHHKSEJCOLA?E­A@LNK?A@QNAO 2DAEILKNP=J?AKBPDA proper regulation of major transactions in protecting investors’ rights on a country level in the CIS is evidenced by OECD policy papers such as Corporate Governance in Eurasia: A Comparative Overview (“2004 Corporate Governance in Eurasia”)4 and the White Paper on Corporate Governance in Russia (“2002 White Paper”).5 However, despite the importance of regulating major transactions in CAJAN=H=J@IKNAOLA?E­?=HHUEJAIANCEJCÓPN=JOEPEKJÔA?KJKIEAOJKP=HH CIS countries appear to do so. There are no regulations on major transactions in Azerbaijan, Belarus, or Tajikistan. The MLPIP could thus be a helpful starting point for these countries in their eventual regulation of I=FKNPN=JO=?PEKJO 2DA@EO?QOOEKJ>AHKSSEHHDAHLPDAIEJ­J@EJCPDA Stanford Law School John M. Olin Program in Law and Economics, Working Paper No.165, 1999, available online at . 3

In some jurisdictions, rules on major transactions can be found in legislation other than company laws, e.g., securities regulations, as well as accounting and anti-monopoly laws. For the purposes of this chapter, only provisions of company laws were studied.

4

OECD, Corporate Governance in Eurasia: A Comparative Overview, Paris 2004, available online at .

5

OECD, The White Paper on Corporate Governance in Russia, Paris 2002, 14, available online at .

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most suitable legislative solutions for their jurisdiction, capital markets, and culture. 2DA"A®JEPEKJKB+=FKN2N=JO=?PEKJO*A=RAO,QIANKQO*KKLDKHAOSDE?D Prevent Regulation from Runctioning Properly in Practice $KNPDALQNLKOAOKBNACQH=PEKJPDA­NOPOPALEOPK@A­JAmajor transactions. In order for a transaction to be considered major and, thus, require special =LLNKR=HLNK?A@QNAOEPODKQH@EJRKHRA=OOAPOPD=P=NAOECJE­?=JPPKPDA ?KIL=JU 2DEO¢OECJE­?=J?A£@EɳANOEJR=NEKQO?KIL=JEAO=J@?KQJPNEAO depending on such matters as ownership structure, strength of enforcement, and the level of shareholder activism. In particular, the 1996 General Principles stipulate that the type of transactions that fall within the class of major transactions depends on the legislator’s view, on the one hand, of the costs and delays of requiring a shareholder vote, and, on the other, of the increased shareholder protection resulting from shareholder review of very large transactions. In Western jurisdictions, e.g., the US, major transactions refer to the sale or disposal of “all or substantially all” of a company’s assets.6 In the CIS countries, however, the threshold for a major transaction is set at the level of 25% of a company’s assets. In addition to the similarity of economic structures and capital-market characteristics across most CIS countries, PDAOEIEH=NEPUKBPDA@A­JEPEKJKBPDAPDNAODKH@BKNI=FKNPN=JO=?PEKJO is also explained by the fact that the company laws of CIS countries are largely based on Article 78 (1) of the 1995 Russian Law on Joint-Stock Companies, which sets this threshold.7 It appears that the threshold is commonly accepted by all parties concerned, and, therefore, Article 29 (1) of the MLPIP recommends keeping the 25% threshold. At the same time, in some CIS countries (Kazakhstan, Russia, and Turkmenistan),8 company laws allow individual companies to lower this PDNAODKH@EJPDAEN?D=NPANOPKP=EHKNEPPKPDAOLA?E­??EN?QIOP=J?AOEJPDA ?KIL=JUOQ?D=OPDAJ=PQNAKBPDA>QOEJAOOKNPDAOECJE­?=J?AKBOLA?E=H 6



1AA+K@AH QOEJAOO!KNLKN=PEKJ?PÓÔ|  2DA-ɹ?E=H!KIIAJPKBPDEO provision refers to “all or nearly all” of the assets. Judicial practice, however, does not seem to have adopted this strict approach. See R. Hamilton, The Law of Corporations, St. Paul, MN 2000, 626.

7

Unfortunately, it is not possible for the purposes of this work to study how the Russian legislators came to accept the 25% threshold.

8

Art.68 (1) of the Law of Kazakhstan No.415-II, 13 May 2003, “On Joint-Stock Companies” (the “Kazakh Law”); Art.78 (1) of the Law of the Russian Federation No.208, 26 December 1995, “On Joint-Stock Companies” (the “Russian Law”); Art.34 (4) of the Law of Turkmenistan No.400-I, 23 November 1999, “On Joint-Stock Companies” (the “Turkmen Law”).

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assets to the success of the company. Such a provision does not exist in Armenia, Moldova, or Uzbekistan. This rule provides companies with ®ATE>EHEPU =J@ =HHKSO BKN EJ?NA=OA@ OD=NADKH@AN LNKPA?PEKJ 2DANABKNA the MLPIP recommend that all CIS countries introduce it.9 Moreover, the MLPIP provide that only the minimum threshold can be lowered, while other characteristics of major transactions cannot be changed. FurPDANIKNAEPEOLKOOE>HABKN?KIL=JEAOPK@A­JAKPDANPN=JO=?PEKJOPD=P D=RAPDAO=IAEILKNP=J?A=OHAC=HHU@A­JA@I=FKNPN=JO=?PEKJO=J@PD=P require that special approval procedures be followed. Examples of such transactions could be transactions with real estate, the sale of important production lines, transactions with assets of subsidiaries, etc.10 JKPDAN@A­JEPEKJ=H=OLA?PKBI=FKNPN=JO=?PEKJOEOPDALNKDE>EPEKJ on splitting a single transaction into smaller transactions in order to avoid the application of rules on the approval of major transactions. As it is provided in the 1996 General Principles, envisaging a threshold for approval of major transactions will not be useful if a company’s management is able to evade the intent of the law by splitting what is in substance one transaction into several parts, each of which individually falls below the threshold established in the law.11 To deal with this situation, all the countries that have provisions on major transactions also require that several interconnected transactions be treated as one transaction. Moreover, the Law on Joint-Stock Companies of )=V=GDOP=JCKAOEJPK@AP=EH>U@A­JEJCSDE?DPN=JO=?PEKJO=NA interconnected:12 “The following transactions shall be considered interconnected: 1) 1ARAN=HPN=JO=?PEKJO?=NNEA@KQP>UPDAO=IALANOKJKNLANOKJO=ɹHE=PA@SEPD that person and with regard to one and the same asset; 2) 1ARAN=H PN=JO=?PEKJO PD=P =NA OLA?E­A@ >U KJA KN OARAN=H EJPAN?KJJA?PA@ ?KJtracts; 3) Other transactions the interconnectivity of which is stipulated by the charter or decisions of the general meeting of shareholders.”

2DKQCDPDEOEO=JEJPANAOPEJC=LLNK=?DEJPD=PEPOLA?E­AOCQE@AHEJAO on when several transactions are interconnected, it leaves much room for 9

10

Art.29 (1) of the MLPIP. The company laws of Georgia, Kyrgizstan and Ukraine were not available for this review. 

+KNAOLA?E­?=HHUPDA0QOOE=J Code of Corporate Conduct recommends that procedures BKNAJPANEJCEJPKI=FKNPN=JO=?PEKJO=LLHUPKPN=JO=?PEKJOPD=PI=UD=RA=OECJE­?=JP AɳA?PKJPDA?KIL=JUARAJPDKQCDPDAU@KJKPB=HHQJ@ANPDAOP=PQPKNU@A­JEPEKJKB major transactions. See Federal Commission for Securities Markets, Code of Corporate Conduct+KO?KS=R=EH=>HAKJHEJA=PSSS A?CE KNC ?K@AO @K?QIAJPO ­nal_code_english.pdf>.

11

Avilov et al., op.cit. note 2, 19.

12

Art.68 of the Kazakh Law.

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Davit Karapetyan

maneuvering since it is not possible to provide an exhaustive list of all possible circumstances. For this reason, just like in Armenia, Moldova, Russia, and UzbekistanPDA+*.'.@KJKP@A­JAEJPAN?KJJA?PEREPU>QP leave it instead to be determined in individual instances. However, one could list the following criteria (in addition to what is provided under the )=V=GDH=SÔSDE?DSEHH=ɳA?PPDA@APANIEJ=PEKJKBPDAEJPAN?KJJA?PEREPU of transactions: transactions involving the same parties or the same assets, transactions separated by a relatively short period of time, etc. Ultimately, it will largely be left to judicial determination and interpretation, which SEHH>AOLA?E­?BKNA=?D?=OA 2DA @A­JEPEKJ KB major transactions also includes exceptions, i.e., transactions that formally meet the criteria for major transactions but where a company is not required to follow special approval procedures. These include transactions concluded in the ordinary course of a company’s business. This exception is provided in all countries that regulate major PN=JO=?PEKJO  QPEJJK?KQJPNU@KAOPDA?KIL=JUH=S@A­JASD=P¢the ordinary course of business”, which would help all parties involved to use and not abuse this exception. It must be mentioned that the MLPIP also @KJKP=PPAILPPK@A­JASD=PEOIA=JP>Uthe ordinary course of busiJAOO (QOPHEGASEPDPDA@A­JEPEKJKBEJPAN?KJJA?PEREPUKBPN=JO=?PEKJOPDEO I=PPANODKQH@>AHABPPKFQ@E?E=HEJPANLNAP=PEKJ !ANP=EJB=?PKNOSEHH=ɳA?P such a determination, e.g., whether a transaction is in the same area of the company’s business activities. -JA­J=HBA=PQNAKBPDA@A­JEPEKJKBI=FKNPN=JO=?PEKJOPK>A@EOcussed here is whether new share issuances above a certain threshold constitute major transactions. Apart from Russia, all CIS countries that have provisions on major transactions include new share issuances with a R=HQAKBIKNAPD=JÙKB=HNA=@UEOOQA@OD=NAOEJPDA@A­JEPEKJKBI=FKN transactions. In Russia, this is not included; however, there is a separate provision in the company law that requires the same approval mechanism BKNOECJE­?=JPOD=NAEOOQ=J?AO=OEJPDA?=OAKBI=FKNPN=JO=?PEKJOEJRKHRing assets.13 The +*.'.@KJKPEJ?HQ@AOECJE­?=JPOD=NAEOOQ=J?AOEJPDA @A­JEPEKJKBI=FKNPN=JO=?PEKJO>A?=QOAOD=NAEOOQ=J?AS=O>AUKJ@EPO scope, but we agree that these transactions should go through similar approval procedures.

13

Art.39 (3-4) of the Russian Law.

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The Valuation of Major Transactions Should be Improved to Cover All Major 2N=JO=?PEKJO=J@PK.NKLANHU#ɳA?PQ=PA2N=JO=?PEKJOSDE?D=NA AJA®?E=HPK Companies and all their Shareholders A proper valuation of major transactions is important for two reasons: (1) the determination of whether a transaction is major depends on meeting certain criteria with respect to the value of the assets involved in the transaction vis-à-vis the value of the company’s assets (what one may term PDA¢@A­JEPEKJ=H=OLA?P£KBI=FKNPN=JO=?PEKJOÔ=J@ÓÔKJ?AEPD=O>AAJ RANE­A@PD=P=PN=JO=?PEKJIAAPOPDA?NEPANE=BKNI=FKNPN=JO=?PEKJOPDA “fair value” of the transaction should be determined so that it makes business sense and is in the best interests of the company and its shareholders (“business-sense aspect” of major transactions). 2DA ­NOP L=NP KB PDA R=HQ=PEKJ QJ@AN PDA @A­JEPEKJ=H =OLA?P EO PK determine what value of a company’s assets should be used to verify whether a transaction meets the criteria for a major transaction. The CIS countries that have provisions on major transactions use the book-value test: Assets involved in a transaction should be not less than 25% of the book value of the company’s assets. The book value of a company’s assets EO@APANIEJA@@EɳANAJPHUEJPDA!'1?KQJPNEAO 2DAIKOP?KILNADAJOERA rules are provided in Russia’s company law, which stipulates that the book R=HQAKB=?KIL=JU¥O=OOAPOIQOP>AARE@AJ?A@>UPDA­J=J?E=HOP=PAIAJP of the company as of the most recent reporting period.14 In Moldova, the value of assets must be evidenced by the most recent balance sheet.15 It is not clear whether the law refers to the annual balance sheet for PDA LNAREKQO ­O?=H UA=N KN EJPANEI >=H=J?A ODAAP BKN PDA H=OP NALKNPEJC period. In Armenia16 and Uzbekistan,17 the company laws require that the determination of the book value of a company’s assets be carried out as of the moment when the decision on a major transaction is to be I=@A 'JAOOAJ?APDEOIA=JOPD=P=?KIL=JUD=OPK@N=SQL­J=J?E=H statements every time it is engaged in a major transaction. This makes the application of the provisions on major transactions with a value of around 25% of the book value of a company’s assets (so-called “borderline transactions”) almost impossible—to determine whether the transaction is a major one, a balance sheet should be drawn up, but this will be done 14

Art.78 (1) of the Russian Law.

15

Art.82 (1) of the Law of Moldova No.1134-XIII, 2 April 1997, “On Joint-Stock Companies” (the “Moldovan Law”).

16

Art.60 (1) of the Law of Armenia, 25 September 2001, “On Joint-Stock Companies” (the “Armenian Law”).

17

Art.89 (1) of the Law of Uzbekistan No.223-I, 26 April 1996, “On Joint-Stock Companies and Protection of the Rights of Shareholders” (the “Uzbek Law”).

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only if there is a suspicion that the transaction may be of such a size as PKIAAPPDA@A­JEPEKJKBmajor transactions. So only when a company’s board of directors becomes aware of transactions that it may reasonably think meet the criteria for major transactions will it be forced to draw up a balance sheet to verify the value of the transaction as compared to the book value of the company’s assets. It seems that the Russian provision is a better approach, and the MLPIP follow that rule by referring to “the >KKGR=HQAKBPDA?KIL=JU¥O=OOAPO=OOP=PA@EJPDAIKOPNA?AJP­J=J?E=H statement.”18 With this rule, it is always easy to compare the value of a transaction with the book value of a company’s assets by simply looking at the most recent balance sheet. #RAJ SEPD PDEO ?H=NE­?=PEKJ DKSARAN PDA NQHA EO JKP LANBA?P  'P EO heavily dependent on the quality of accounting standards in the country. In NA=HEPUPDA>KKGR=HQAKBI=JU=OOAPOEJPDA!'1?KQJPNEAOEOOECJE­?=JPHU lower that their fair market value. Because of this, certain transactions are JKP?KJOE@ANA@PK>AI=FKNARAJSDAJPDAUEJRKHRA=OECJE­?=JP=IKQJP of a company’s assets. 2DAOA?KJ@L=NPKBPDAR=HQ=PEKJEOOQAQJ@ANPDA@A­JEPEKJ=H=OLA?P is to determine what value of the assets involved in the transaction should be used to verify whether the transaction meets the criteria of a major transaction. The laws of the majority of the CIS countries refer to the market value of these assets. Such market value is subject to independent valuation and approval by a company’s board of directors. But in practice, this means that, for a company to sell any of its assets other than those that are obviously below the threshold, the management should ask the board to determine the market value of those assets. While, in general, this increases the chances of identifying a major transaction since the I=NGAPÎR=HQAPAOPEO=B=ENANNA®A?PEKJKBPDA=OOAPO¥PNQAR=HQAPD=JPDA book value, it may also unreasonably complicate the conduct of business operations. To tackle this issue, the MLPIP, similar to the solution provided in the Russian law,19 opt for the book-value test of assets involved in the transaction: — In cases where the transaction is a sale or the possibility of a sale of a company’s assets, the book value of the assets involved in the transaction is to be compared with the book value of the company’s assets; — In cases where the transaction is an acquisition, the acquisition price of the assets involved in the transaction is to be compared with the book value of the company’s assets. 18

Art.29 (1) of the MLPIP.

19

Art.78 (1) of the Russian Law.

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While this is not the best solution, it is obviously the most practical one since it is not feasible to involve independent appraisers in determining the market value of every transaction before it is determined that the PN=JO=?PEKJIAAPOPDA@A­JEPEKJKB=I=FKNPN=JO=?PEKJ The second aspect of valuation is the determination of the value that will make business sense for the company to be engaged in the transaction and will be in the best interests of the company and all its shareholders. 'J?KQJPNEAOPD=PQOAPDAI=NGAPÎR=HQAPAOPBKN@A­JEPEKJ=HLQNLKOAOPDEO step will not be necessary. Such valuation will be required for countries PD=PQOAPDA>KKGÎR=HQAPAOPBKN@A­JEPEKJ=HLQNLKOAO 2DANAMQENAIAJP of having independent appraisers determine the market value is provided for in almost all CIS jurisdictions. In all cases, the main problem in this area is the quality of the independent valuation: the real independence of appraisers and the low liquidity of capital markets in the CIS countries, which makes the concept of “market” value highly theoretical. While the MLPIP do not deal with these issues, the CIS countries should be AJ?KQN=CA@PK@AOECJOLA?E­?LNK?A@QNAOPKAJ=>HAPDAAɳA?PERAEJ@ALAJdence of appraisers and to improve the quality of their services. Indeed, an independent appraisal mechanism is a critical tool in ensuring that all shareholders are treated equitably during major transactions. One possible solution could be the introduction of the liability of the appraiser for a manifest miscalculation of the market (“fair”) value. The board of directors should also be held liable for relying on an expert where such NAHE=J?AEOJKPNA=OKJ=>HAKNEJCKK@B=EPDKNBKNNAHUEJCKJ=JQJMQ=HE­A@ or non-independent appraiser. Major Transactions which are Subject to Board Approval do not Protect the Interests of Minority Shareholders since Boards Rarely Include Minority Shareholder Representatives In almost all CIS countries that have rules on major transactions, the approval of such transactions is entrusted to the board and the shareholders. Distinctions are made on the basis of the size of major transactions, i.e., the assets involved therein. As such, transactions involving assets with a value of 25 to 50% of the value of a company’s assets are to be approved by the board of directors.20 Furthermore, the approval of major transactions involving assets with a value of more than 50% of the value of a company’s assets is the responsibility of the general meeting of shareholders.21 In 20

Art.61 (1) of the Armenian Law; Art.83 (1) of the Moldovan Law; Art.79 (2) of the Russian Law; Art.90 (1) of the Uzbek Law.

21

Art.61 (2) of the Armenian Law; Art.83 (2) of the Moldovan Law; Art.79 (3) of the Russian Law; Art.90 (3) of the Uzbek Law.

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addition, the general meeting of shareholders may also approve major transactions concerning which the board of directors could not make a decision if the board refers the transaction to shareholders for approval.22 In Kazakhstan, unlike the other CIS countries, the company law requires that all major transactions be approved by shareholders, while the decision to enter into a transaction is to be adopted by the board of directors.23 While the Kazakh rule increases protection of minority shareholders in major transactions, in practice it will undoubtedly result in increased transaction costs due to the requirement of holding general meetings of shareholders every time a company is engaged in a major transaction, regardless of its size. This rule appears to be a less favorable option since AT?AOOERAOD=NADKH@ANEJPANRAJPEKJI=U=ɳA?PPDA>QOEJAOOKLAN=PEKJOKB the company and thus yield lower returns for investors. Consequently, the MLPIP require that decisions on major transactions be approved by a unanimous decision of the board of directors,24 just like in Armenia, Moldova, Russia, and Uzbekistan. To approve a major transaction, unanimity of the board members is required. The aim of this rule is to protect minority shareholders against managers who would ordinarily make decisions to enter into transactions on a company’s behalf. However, the purpose of the rule is defeated in many instances due to the composition of boards of directors in the CIS countries. Boards are largely insider-dominated, where all the seats are ­HHA@>UNALNAOAJP=PERAOKBPDA?KJPNKHHEJCOD=NADKH@AN=J@I=J=CAIAJP 25 Only on rare occasions are there independent directors as representatives of minority shareholders on the board of directors. Therefore, those who are not supposed to be involved in decision-making are actually making decisions. The solution to the problem of insiders essentially approving transactions involving insiders is to provide rules for the composition of the board of directors in such a way as to ensure minority-shareholder representation or the presence of independent directors.26 22

Art.61 (1) of the Armenian Law; Art.83 (3) of the Moldovan Law; Art.79 (2) of the Russian Law; Art.90 (3) of the Uzbek Law.

23

Art.70 (1) of the Kazakh Law.

24

Art.29 (3) of the MLPIP.

25

IFC, A Survey of Corporate Governance Practices in the Russia Banking Sector, Moscow 2004, 26, available online at: ; IFC, Survey on Corporate Governance Practices in Russia’s Regions, Moscow 2003, Section 2.2.1, 21, available online at ; OECD, op.cit. note 4, 38.

26

The MLPIP do not deal with rules on the composition of the board of directors.

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115

The next discussion point concerns the procedures to be followed to approve transactions that are considered to be major in accordance with the provisions of a company’s charter. First, only Kazakhstan’s and 0QOOE=¥O?KIL=JUH=SOLANIEP?D=NPANOPKATL=J@PDA@A­JEPEKJKBI=FKN transactions and to include other transactions that do not fall under the HAC=H@A­JEPEKJ 1A?KJ@PDA)=V=GD?KIL=JUH=S@KAOJKPOLA?E­?=HHU address the approval rules for such transactions: as discussed above, decisions on all major transactions (supposedly also including ones that are major due to charter provisions) are to be adopted by the board of directors and approved by shareholders. Third, Russia’s company law goes a little further than the Kazakh rule by stating that transactions that are considered major according to charter provisions “must follow the same =LLNKR=HLNK?A@QNAO£=OHAC=HHU@A­JA@I=FKNPN=JO=?PEKJO 27 In practice, this means that an approval by the board of directors by a unanimous vote is required because the law is not clear on whether the term “approval procedures” includes only a reference to which body should approve the transaction or also the majority of votes required for the approval. 2DANABKNAOEJ?A?KIL=JEAO=NAJKPLNKDE>EPA@BNKIOPELQH=PEJCOLA?E­? voting requirements for these major transactions in their charters, absent =JUOLA?E­?IAJPEKJEJPDA?D=NPAN=unanimous vote will be the requirement. To avoid any ambiguity, the MLPIP clearly require that such major transactions be approved by the board unanimously.28 Finally, as stated above, relatively large major transactions (those involving assets with a value of more than 50% of the value of a company’s assets) require shareholder approval. This is explained by the frequent presence of certain ?KJ®E?POKBEJPANAOP in many major transactions, espe?E=HHUEJH=NCANKJAOARAJEBOQ?D?KJ®E?POKBEJPANAOPO@KJKPB=HHQJ@ANPDA @A­JEPEKJKBNAH=PA@ÎL=NPUPN=JO=?PEKJO=J@PDANAEOEJOQɹ?EAJPARE@AJ?A that such is the case.29 Together with the size of a transaction, which will AɳA?PERAHU@APANIEJAPDABQPQNAKB=?KIL=JUBNKIPDALKEJPKBREASKB shareholders’ investments, the legislator grants the right to approve such transactions exclusively to shareholders. 2KAJOQNAPD=PPDAIKOP>AJA­?E=H@A?EOEKJEONA=?DA@=J@PD=PPDA CKRANJEJC>K@EAOEJRKHRA@=NAEJ=LKOEPEKJPKBQH­HHPDAENHAC=HHU=OOECJA@ responsibilities, only the company law in )=V=GDOP=JOLA?E­?=HHUNAMQENAO that management submit all the information necessary for making a decision on the transaction.30 In Russia, ordinary rules for information to be 27

Art.78 (1) of the Russian Law.

28

Art.29 (3) of the MLPIP.

29

R. Kraakman et al., The Anatomy of Corporate Law, Oxford 2004, 132.

30

Art.70 (1) of the Kazakh Law.

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Davit Karapetyan

LNKRE@A@PKOD=NADKH@ANOKJ=CAJ@=EOOQAOSEHH>AEJAɳA?P 2DAMLPIP, unfortunately, are also silent on this issue, which falls short of what should be a proper rule aimed at shareholder protection. It is clear that a properly composed and functioning board of direcPKNOEOKJAKBPDAIKOPAɳA?PERAIA?D=JEOIOBKNOD=NADKH@ANLNKPA?PEKJ  Thus, it could be recommended that, for the approval of every major transaction by shareholders, the board of directors be obliged to submit its opinion to shareholders. Such an opinion should expressly specify the board’s view on the need for the company to enter into the proposed major transaction, the fairness of the transaction price, and whether the transaction is in the best interests of the company and its shareholders. This is not only in line with the directors’ duty of care and duty to act in the best interests of the company and all its shareholders, but it will =HOKBKNI=HEVAPDA=?PEKJOP=GAJ>UPDA@ENA?PKNOEJKN@ANPKBQH­HHPDAEN duties. Consequently, the expectation is that this will force the board to be more responsible due to the threat of potential litigation. Although we are not aware of any judicial claims brought against directors or senior managers for breach of their ­@Q?E=NU@QPEAO in the CIS countries, it is nevertheless a valid threat (particularly, in case of major scandals or special investigations by regulators). The Lack of Disclosure (Both Disclosure Requirements and the Enforcement 2DANAKBÕD=O=,AC=PERA'J¯QAJ?AKJHNA=@U%AJAN=HHU.KKNCompliance with the Rules on Major Transactions A lack of disclosure is a common problem in terms of shareholder protection in the CIS countries. This, in turn, translates into poor compliance with legal requirements. This is particularly true in instances of major transactions, where the possibility of abusing shareholder rights is greater than during a company’s normal operations. The fact that companies are not required to comply with requirements on disclosing information on major transactions (or, when required, they simply do not comply with regulations anyway) and that they are not properly sanctioned for this failure, “encourages” them to continue this practice. Furthermore, controlling shareholders and management often hope that minority shareholders =J@ KNI=NGAPNACQH=PKNOSEHHJKP­J@KQP=>KQPPN=JO=?PEKJOPD=PIAAPPDA criteria for major transactions. For this reason, the CIS countries should be encouraged to introduce disclosure requirements that are as robust and detailed as possible, and take all steps necessary to enforce strict compliance with these requirements. At the same time, unfortunately, capital I=NGAPO EJ PDA !'1 ?KQJPNEAO =NA JKP OQɹ?EAJPHU @ARAHKLA@ PK NAS=N@ proper disclosure and, in general, better corporate-governance practices by

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companies or to sanction misconduct. Thus, capital-market participants, =O=NQHA@KJKPCAP=­J=J?E=HNAPQNJBKNCKK@>AD=REKN Disclosure requirements are often included in company laws, securities-market regulations, and accounting legislation.31 Company laws in Kazakhstan and Russia contain some disclosure provisions that apply OLA?E­?=HHUPKmajor transactions. In other CIS countries, there are no disclosure rules for major transactions. Their company laws are even silent on the contents of decisions approving major transactions. In Kazakhstan, two provisions deal with disclosure of information on major transactions. First, the company law stipulates that a company shall inform all shareholders who did not attend the general meeting of shareholders that approved a major transaction and all its creditors about the approval of the transaction.32 Such disclosure must be carried out not H=PANPD=J­RA@=UO=BPANPDA@A?EOEKJEO=LLNKRA@>ULQ>HEODEJCinformation on the transaction in the print media. However, the law does not provide any details about what information must be published. Furthermore, the company is obliged to communicate to shareholders information on a major transaction that has already been concluded.33 Again, no additional details are provided as to the time, form, and contents of this JKPE­?=PEKJ 0QOOE=¥O?KIL=JUH=S@A­JAOPDAEJBKNI=PEKJPD=PPDAOD=NADKH@ANO or the board of directors must include in any decision approving a major transaction.34'POLA?E­?=HHUNAMQENAOPD=P=@A?EOEKJKJ=I=FKNPN=JO=?PEKJEJ?HQ@AEJBKNI=PEKJKJPDAL=NPEAO>AJA­?E=NEAOLNE?AK>FA?P=J@ KPDANOECJE­?=JPPANIOKBPDAPN=JO=?PEKJ $QNPDANIKNA?KIL=JEAO=NA required to disclose certain information on major transactions in their annual reports, which are accessible to all shareholders and, in case of publicly traded companies (or open joint-stock companies), to the general public:35 — A list of all major transactions concluded by the company during the reporting year; — A list of transactions that are considered major based on the criteria @A­JA@EJPDA?KIL=JUcharter; — Key terms of each major transaction; and 31

Securities regulations and accounting legislation have not been reviewed for the purposes of this chapter.

32

Art.72 (2) of the Kazakh Law.

33

Art.79 (1) of the Kazakh Law.

34

Art.79 (4) of the Russian Law.

35

Decree No.17/ps of the Federal Commission for the Securities Market of the Russian $A@AN=PEKJKB+=U¢-J!KJ­NI=PEKJKBPDA1P=PQPAKJ@@EPEKJ=H0AMQENAments for the Procedure for Preparing, Calling and Holding a General Meeting of Shareholders”, Section 3.6.

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Davit Karapetyan

— The governing body that approved each major transaction (the board of directors or the general meeting of shareholders). Companies must also disclose information on major transactions in their prospectuses and quarterly reports.36 The disclosure of additional information is required by securities-market and accounting legislation.37 The MLPIP seem to favor extensive disclosure. Therefore, it is advisable that a company’s annual report include, at a minimum, information on any major transaction the company has concluded during the reporting period related to the following: — The name and contact information of the parties involved in the transaction; — The governing body of the company that approved the transaction; — The reasons for concluding the transaction; — The value of the transaction as determined by the board of directors and an independent appraiser; — The name of the independent appraiser; and — Other material terms of the transaction that must be disclosed according to the charter of the company. The securities-market regulator is advised to take further measures to ensure that companies comply with this and any other disclosure requirements regarding major transactions, so as to punish any deviation from the law. Shareholders who Disagree with the Conclusion of Major Transactions by a Company are not always Granted the Right to Exit the Company on Fair Terms As discussed above under subsection 4 of this section, company laws in CIS countries (with the exception of Kazakhstan) and the MLPIP distinguish between two types of major transactions that shareholders might be called on to approve: (1) All major transactions involving assets with a value of more than 50% of the value of the company’s assets—shareholder approval is required; and (2) All other major transactions, including ones that are considered major according to the requirements of the company charter, that were 36

Order No.05-5/pz-n of the Federal Service for Financial Markets of the Russian $A@AN=PEKJKB+=N?D¢-J!KJ­NI=PEKJKBPDA1P=PQPAKJPDADisclosure of Information by Issuers of Securities”, Annex 9, Section 10.1.6 and Annex 11, Section 8.1.6.

37

Decree No.03-30/ps of the Federal Commission for the Securities Market of the Russian Federation of 18 June 2003, “On Standards for Issuing Securities and Registration of Securities Prospectuses”, Sections 2.4.7 and 6.5.1, Annex 9, Section 111.

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supposed to be approved by the board of directors but were referred for shareholder approval. Shareholder-approval requirements are an important tool for protectEJC=?KIL=JU¥O­J=J?E=H?KJPNE>QPKNO !KNLKN=PAinsiders might have their own interests (to a degree that does not reach the level of self-dealing as in the case of related-party transactions) in concluding certain major transactions. As a result, they might take certain measures to pressure shareholders to approve transactions that are favorable to them. One mechanism that can be used to free shareholders from such pressure is to grant those shareholders who disagree with the conclusion of a major transaction the right to exit the company. This right is particularly important in emerging (transition) economies for a number of reasons, including the generally low level of liquidity of capital markets, the small number of companies listed in organized markets, the small number of investors (especially retail investors), and the low level of protection of investors’ rights in general. Carefully designing the conditions and procedures for exiting a company, e.g., the exercise of redemption rights, is crucial for investor protection. As a matter of regulation, redemption rights in case of major transactions are not always provided in the CIS countries. Naturally, jurisdictions that do not have provisions on major transactions do not provide for such =JATEPNECDPÓOLA?E­?PKI=FKNPN=JO=?PEKJOÔ 'JKPDANOPDA?KJ@EPEKJO for exercising redemption rights are not always properly established in PDA?KIL=JUH=S=J@OQɳANBNKI?ANP=EJODKNP?KIEJCO $KNAT=ILHA=O a general rule, in all countries that have provisions on major transactions, the possibility of exercising NA@AILPEKJNECDPOEOHEIEPA@PKPDA­NOPCNKQL of transactions mentioned above.38 Other than Russia, there is no jurisdiction where redemption rights may be triggered by the second group of major transactions that shareholders might be asked to approve. This EO=OECJE­?=JPODKNP?KIEJC=J@HACEOH=PKNO=NA=@REOA@PKP=GANAHAR=JP actions to provide for redemption rights in all cases where shareholder approval is required. The situation in Russia is unique to some extent: the company law provides that redemption rights arise only in instances of major transactions involving assets with a value of 50% or less of the book value of a company’s assets.39 However, the Plenum of the Supreme Arbitrazh Court of Russia has interpreted this provision to also cover major transactions involving assets with a value of more than 50% of the book value of a company’s assets.40 38

Art.57 (1) of the Armenian Law; Art.44 (1) of the Uzbek Law.

39

Art.75 (1) of the Russian Law.

40

Decree No.19 of the Plenum of the Supreme Arbitrazh Court of the Russian Federa-

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Davit Karapetyan

The MLPIP propose that this gap be closed and that any decision on a major transaction requiring the approval of shareholders should trigger redemption rights for disagreeing shareholders. This approach is consistent with the rules in Moldova and Kazakhstan.41 After all, there is not IQ?D@EɳANAJ?A>APSAAJPN=JO=?PEKJOEJRKHREJC=OOAPOSEPD=R=HQAKBBKN example, 48% and 55%, which would be covered by the rule on redemption rights. This provision would allow shareholders to freely consider all the pros and cons of a proposed transaction and to reach a decision that is PDAIKOP>AJA­?E=HBKNPDA?KIL=JUSEPDKQPPDABA=NKB>AEJCHK?GA@EJ =?KIL=JUPD=PBKNAT=ILHAD=OFQOPOKH@OKIAKBEPOOECJE­?=JP=OOAPO The last issue regarding the exercise of redemption rights related to major transactions is determining which parties should have such rights. The company laws of CIS countries provide for three options. First, in Armenia, Russia, and Uzbekistan, any shareholder who votes against the approval of a major transaction or does not participate in the voting on the transaction has the right to request that his shares be fully or partly redeemed by the company.42 This is a pro-shareholder approach, and it is especially important in countries where company insiders commonly take measures to keep minority shareholders from attending general meetings. The MLPIP also follow this approach.43 Second, in Kazakhstan, only shareholders who explicitly vote against the approval of a major transaction have redemption rights.44 This approach is the strictest: it entails that shareholders will need to actively express their disagreement with a proposed major transaction. It appears that this rule is more appropriate since it takes into account not only the interests of minority shareholders but also of the company and other shareholders. Hopefully, the provisions of the Kazakh law dealing with CAJAN=HIAAPEJCO=NA>AEJCOQɹ?EAJPHUAJBKN?A@EJLN=?PE?A=J@PDANAEO no danger that shareholders will be illegally prevented from participating in general meetings. Third, the Moldovan provision falls somewhere in between these two options, i.e., if a shareholder votes against, or is illegally prevented from taking part in, the general meeting approving a major transaction.45 tion, 18 November 2003, “On Several Issues of the Application of the Federal Law ‘On Joint-Stock Companies’”, Section 29. 41

Art.79 (2) of the Moldovan Law; Art.70 (3) of the Kazakh Law.

42

Art.57 (1) of the Armenian Law; Art.75 (1) of the Russian Law; Art.44 (1) of the Uzbek Law.

43

Art.6 (1) of the MLPIP.

44

Art.27 (1) of the Kazakh Law.

45

Art.79 (3) of the Moldovan Law.

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Of these three options, we would consider the Moldovan approach to be the most appropriate. Consequently, the MLPIP could be improved by limiting redemption rights to shareholders who were illegally prevented from attending the general meeting approving a transaction and thus from expressing their opinion on the major transaction. Rules on Major Transactions in Many Cases do not Protect the Rights of the other Party(ies) in a Major Transaction by Allowing a Company to Demand the Invalidation of Major Transactions Concluded with Violations of the Approval Requirements Major transactions have implications not only for companies and their shareholders but also for other contracting parties involved in the transactions. It is important to remember that each party to a transaction should make a separate judgment as to whether the transaction meets the criteria for major transactions and then follow the approval procedures, if needed. This means that one and the same transaction may be major for one party in the transaction but not for the other. Such a determination is a matter of compliance with internal regulations for each company engaged in major transactions. The interests of the other parties involved in a major transaction are of particular concern when one party seeks the invalidation of the transaction because of violations in the approval process. For instance, a particular major transaction may be disadvantageous for one company >QP >AJA­?E=H BKN PDA KPDAN 2DEO I=U AJ?KQN=CA PDA ­NOP ?KIL=JU PK ­J@EJPANJ=HENNACQH=NEPEAOEJPDA=LLNKR=HLNK?AOOEJKN@ANPKEJR=HE@=PA the transaction. The second company may or may not have been aware of such irregularities (acting in good or bad faith). It is important to strike =>=H=J?A>APSAAJPDAEJPANAOPOKBPDA­NOP?KIL=JU=J@EPOOD=NADKH@ANO and those of the other company involved in a major transaction.46 The rules on invalidation of major transactions vary in the CIS countries. In Moldova and Uzbekistan, company laws provide for the invalida46

This point is further emphasized by the 1996 General Principles, which state that: “Another issue that arises for major transactions involves protection of the rights of third parties who conclude major transactions with a company. Third parties cannot be expected to know whether a transaction requires special approval based on the transaction’s size relative to the company’s assets. The law should protect PDANECDPOKB>KJ=­@APDEN@L=NPEAO 'B=?KIL=JU¥Oboard of directors fails to obtain shareholder approval, that is a matter of the internal governance of the company. In that case, shareholders will have a claim against the members of the board of directors.” However, the company should be able to seek to invalidate a transaction when the third party knew that the shareholder approval was required and not obtained. See Avilov et al., op.cit. note 2, 19.

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tion of major transactions that were approved in violation of the legally established procedures. In this case, the general provisions of civil codes dealing with the EJR=HE@=PEKJKBPN=JO=?PEKJOSKQH@?KIAEJPKAɳA?P 'J Russia, a company or any of its shareholders may seek the invalidation, through the courts, of any major transaction that was concluded with violations of the procedural requirements established in the company law.47 In Armenia, a breach of the requirements on major transactions shall not lead to the invalidation of the transaction if the other party in the transaction acted in good faith and could not have known that the company did not follow its internal procedures in approving the transaction.48 However, the law is silent about who has the right to seek the invalidation of the transaction. Finally, in Kazakhstan, any interested party may seek the invalidation of a major transaction that was concluded with violations of legal requirements.49 The Kazakh law goes further by OPELQH=PEJCPD=PPDKOAKɹ?ANOKBPDA?KIL=JUSDK?=QOA@@=I=CAPKPDA company due to non-observance of the requirements on major transacPEKJOOD=HH>ADAH@HE=>HA HOKPDA?KIL=JUH=SOLA?E­?=HHULNKDE>EPOPDA Kɹ?ANOKB=?KIL=JUSDK@AHE>AN=PAHU?=QOAPDA?KIL=JUJKPPKK>OANRA the requirements on major transactions from having the right to seek invalidation of a major transaction if their actions were self-interested or carried out with the purpose of avoiding liability. However, this seems to fall short of best practice as mentioned in the 1996 General Principles since the company law gives the other party to a transaction the right to appeal the major transaction even if such invalidation is motivated by bad faith. Lastly, joint and several liability is provided for cases where damages are caused by a decision of more than one party. Four issues come up when discussing the corresponding rules of the MLPIP50 that deal with the invalidation of major transactions that are concluded with procedural violations. Firstly, a company or its shareholders may seek the invalidation of a major transaction. This means that the other party in the transaction may not challenge the legality of the transaction through the courts by referring to irregularities in the approval process. Secondly, the MLPIP limit the right of shareholders to appeal major PN=JO=?PEKJOPKPDKOASDKD=RAOQɹ?EAJPEJPANAOPEJPDA?KIL=JUi.e., a relatively large stake. At the same time, the size of the holding should not >APKKH=NCAOK=OPKAɳA?PERAHUAT?HQ@Aminority shareholders from the possibility of challenging major transactions in practice. A shareholder, 47

Art.79 (6) of the Russian Law.

48

Art.61 (3) of the Armenian Law.

49

Art.74 of the Kazakh Law.

50

Art.29 (5) of the MLPIP.

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or a group of shareholders, owning at least 1% of voting shares is granted this right. Thirdly, an invalidation may be sought if the other party to the transaction knew or should have known about any procedural violations in the transaction’s approval. It will be up to the courts to determine, while reviewing the circumstances of individual cases, in which cases the other party knew or should have known about such violations. The mere fact that the other party is familiar with the charter of the company with which a major transaction is being concluded should not, however, be ?KJOE@ANA@OQɹ?EAJPCNKQJ@OBKN@APANIEJEJCPD=PPDEOL=NPUS=O=S=NA of such violations. Finally, the MLPIP provide that any party that violates the legal requirements on major transactions should be liable to the company to the extent of the losses that such transaction causes to the company. If several parties are liable, their liability to the company shall be joint and several. This latter rule is not stipulated in any of the CIS countries’ company laws (except in Kazakhstan). Presumably, however, general provisions dealing with the liability of a company’s directors and I=J=CANOBKN?=QOEJCHKOOAOPKPDA?KIL=JUSEHH>AEJAɳA?P

Investor Protection in Related-Party Transactions There is hardly a corporate-governance expert who would not mention related-party transactions as one of the key problems in the CIS countries. There is hardly an investor-protection advocate who would not underline the importance of properly regulating and enforcing related-party transactions to ensure that investor interests are properly protected. Transactions between a company and its insiders, i.e., major shareDKH@ANOKNKPDANOEJ=LKOEPEKJPKEJ®QAJ?A?KIL=JU@A?EOEKJO?=J>A HACEPEI=PA=J@ARAJ>AJA­?E=HPK=?KIL=JU¥O>QOEJAOO=OHKJC=OPDAU=NA consistent with corporate objectives and are subject to checks and balances. Such transactions are valid in many jurisdictions in order to permit ®ATE>EHEPU=J@PKI=GANKKIBKNLNER=PA?KJPN=?PQ=H=NN=JCAIAJPO=J@ AJPNALNAJAQNODEL 'JOKIAKBPDAOA?=OAO=?KIL=JU¥O­J=J?E=HOEPQ=PEKJ might preclude it from negotiating arm’s-length arrangements with third parties, e.g., a loan guarantee by a parent company or controlling shareholder. But related-party transactions also raise important concerns. A key problem with related-party transactions is that they can be unduly EJ®QAJ?A@>UPDANAH=PEKJODEL>APSAAJPDAPSKL=NPEAOPK=PN=JO=?PEKJ and not undertaken according to market prices. For both controlling shareholders and insiders such as managers, related-party transactions ?=J>A=IA?D=JEOIBKNATPN=?PEJCLNER=PA>AJA­PO=PPDA?KOPKBKPDAN investors. The limited ability of investors to protect themselves against wrongdoing by insiders and the high cost of regulating such transactions

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D=OEJ®QAJ?A@PDAOPN=PACEAOKBNACQH=PKNO=NKQJ@PDASKNH@BKN@A=HEJC with related-party transactions. Many reports and analytical documents on investor protection address related-party transactions as a key concern for ensuring the integrity of capital markets, including in the CIS countries. This is evidenced by the special attention given to the issue in several documents already mentioned (the 2004 OECD Principles, the 2002 White Paper, the 2004 Corporate Governance in Eurasia, and the 1996 General Principles) and some others, such as Improving Transparency of Related Party Transactions in Russia of 2005,51 the EBRD’s Corporate Governance Sector Assessment of 2004;52 and Standard & Poor’s Country Governance Study— Corporate Governance Infrastructure in Russia: The Lack of Rule of Law Is the Major Obstacle to Improvement of 2004.53 The situation in the CIS countries is marred by widespread violations of investors’ rights through related-party transactions.54 To improve EJRAOPKN?KJ­@AJ?A=J@HKSANPDA?KOPBKN?KIL=JEAOPK=??AOO?=LEP=H a key priority is improving the transparency of corporate ownership structures and clarifying the responsibility for disclosure of related-party transactions.55 Situations where ownership is concentrated in only a few hands or when ownership structures are complicated and unclear often lead to an abundance of tacit related-party transactions. This is further aggravated >UJ=NNKS@A­JEPEKJOKBrelated parties and related-party transactions. Moreover, even existing legislation is poorly enforced, which means that non-transparent related-party transactions often take place at non-marGAPLNE?AO O=NAOQHP=?KIL=JU¥O=OOAPOÓKB=HHEJRAOPKNOÔ=NAAɳA?PERAHU transferred to a particular group of inside stakeholders, i.e., the controlling shareholders and/or management. Thus, investors are exposed to considerable risks of dilution of the value of their investment. This risk is even higher in medium-size companies, in comparison with large companies 51

OECD, Improving Transparency of Related Party Transactions in Russia, Paris 2005, 7, available online at .

52

EBRD, Corporate Governance Sector Assessment Project: Russian Federation, Moscow 2004, available at .

53

Standard & Poor’s, Standard & Poor’s Country Governance Study – Corporate Governance Infrastructure in Russia: The Lack of Rule of Law Is the Major Obstacle to Improvement, New York 2004, available online at .

54

The 2004 Corporate Governance in Eurasia recognizes that: “A second set of widespread violations (after the violations related to general meetings of shareholders) include asset stripping, self-dealing and related party transactions.” See OECD, op.cit. note 4, 38.

55

OECD, op.cit. note 51.

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OAAGEJC=??AOOPKATPANJ=H­J=J?E=HNAOKQN?AO 5DEHAPDEOH=PPANCNKQLKB companies has an incentive to disclose more information (for investors to trust their funds to the company), small and medium-size companies are rarely interested in external investments; thus, they seek to disclose the least amount of information possible.56 Our further analysis of how the CIS countries protect investors’ rights in related-party transactions in their legislation and practices is based on the most commonly observed problems in this area. Furthermore, the relevant recommendations from the MLPIP for tackling these problems are introduced and discussed. Not all CIS Countries have Rules Regulating Related-Party Transactions While the majority of CIS countries have some rules dealing with relatedparty transactions, they are regulated most comprehensively in Armenia, Kazakhstan, Moldova, Russia, and Uzbekistan.57 There are some provisions dealing with certain aspects of related-party transactions in Azerbaijan, Georgia, and Kyrgyzstan. A third group of countries, which includes Belarus, Tajikistan, and Ukraine, does not regulate related-party transactions at all.58 To enhance the investment climate in the CIS, policy makers need to focus on ensuring market integrity and credible investor protection. Abuses can be particularly harmful in the absence of well-developed legal and enforcement frameworks. In terms of regulating NAH=PA@ÎL=NPUPN=JO=?PEKJO@EɳANAJPFQNEO@E?tions worldwide have come up with a variety of approaches,59 ranging 56

Standard & Poor’s, op.cit. note 53.

57

Arts.62-65 of the Armenian Law; Arts.71-74 of the Kazakh Law; Arts.85-86 of the Moldovan Law; Arts.81-84 of the Russian Law; Arts.91-94 of the Uzbek Law.

58

In some jurisdictions, rules on related-party transactions can be found in legislation other than company laws, e.g., securities regulations, accounting and anti-monopoly laws. For the purposes of this chapter, only provisions of company laws were studied. For more information on the regulation of related-party transactions, see EBRD, op.cit. note 52.

59

The 1996 General Principles state that three approaches are available. (1) A strict approach, adopted from company laws of the early twentieth century prohibits the completion of such transactions. While such an approach can be simple to apply, it may also create serious problems in the day-to-day management of the company, =OEPI=UNAJ@ANEHHAC=H=JQI>ANKBPN=JO=?PEKJO>AJA­?E=HPKPDA?KIL=JUAJPANA@ into by management. (2) A second approach would prohibit most transactions based KJ=¢>NECDPHEJA£LNKDE>EPEKJ>QPSKQH@=HOKLNKRE@AOKIA®ATE>EHEPU>ULANIEPPEJC =LLNKR=HKBOLA?E­?PULAOKBPN=JO=?PEKJO>UPDAJKJÎEJPANAOPA@IAI>ANOKBPDAboard of directors and by the non-interested shareholders. (3) A third option would simply NAMQENALNEKN=LLNKR=HKB=PN=JO=?PEKJEJRKHREJC=?KJ®E?PKBEJPANAOP>UPDA=>KRA non-interested parties. In the latter two cases, strict procedural requirements are

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from: (a) a strict prohibition of related-party transactions or at least certain types thereof; (b) regulating their approval procedure by requiring a decision-making procedure that would ensure that the transaction is fair and in the best interests of the company and all its shareholders and not only of the interested party; (c) requiring detailed disclosure of NAH=PA@ÎL=NPUPN=JO=?PEKJO=J@?KJ®E?POKBEJPANAOPO=J@PKÓ@ÔNAHUEJCKJ an ex-post judicial check of the fairness of the transaction. In many cases, these approaches co-exist. With respect to regulation in the CIS countries, PDAUH=NCAHUNAMQENA?ANP=EJ=LLNKR=HNACEIAOOKIA@EO?HKOQNAKB?KJ®E?PO of interests and of related-party transactions, and provide for a possibility of challenging related-party transactions but on the grounds of not following the required approval procedures rather than on the grounds of their unfairness. In none of the CIS jurisdictions examined are there related-party transactions that are expressly prohibited by legislation. As in the case of major transactions, the MLPIP, which follow the combination of approaches (b) and (c) discussed above, may be considered a useful starting point in the process of introducing or improving regulations on related-party transactions to meet the requirements of enhanced investor protection.60 2DA"A®JEPEKJKBRelated-Party Transactions is not Comprehensive and Leaves Much Room for Abuse and for Hiding such Transactions Before NAH=PA@ÎL=NPU PN=JO=?PEKJO ?=J >A NACQH=PA@ PDAU IQOP ­NOP >A @A­JA@ HH!'1?KQJPNEAOPD=PD=RANQHAOKJrelated-party transactions EJ PDAEN ?KIL=JU H=SO =PPAILP PK AH=>KN=PA = @A­JEPEKJ  'J Moldova, the company law stipulates that a transaction, or several interconnected PN=JO=?PEKJOEO?KJOE@ANA@PKEJRKHRA=?KJ®E?PKBEJPANAOPÓi.e., considered a related-party transactions) if related parties have the right to participate in decision-making concerning the transaction and at the same time may D=RALNKLNEAP=NUEJPANAOPOEJO=E@PN=JO=?PEKJPD=P=NA@EɳANAJPBNKIPDA interests of the company.612DEOEO=N=PDAN>NK=@@A­JEPEKJ>QPEPOAAIO not to cover situations where related parties do not have the direct right PKL=NPE?EL=PAEJ@A?EOEKJÎI=GEJC>QPD=RAKPDANKLLKNPQJEPEAOPKEJ®Qence the decision.62 needed, to reduce the risk that managers will arrange for approval of a transaction by friendly shareholders. See Avilov et al., op.cit. note 2, 28-29. 60

Art.30 of the MLPIP.

61

Art.85 (1) of the Moldovan Law.

62



JAT=ILHAKBOQ?D=OEPQ=PEKJEOPDALKOOE>EHEPUKB=IAI>ANKBPDA>K=N@EJ®QAJ?ing the decision on related-party transactions to be made by the general meeting of shareholders.

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In Armenia, Russia, and 3V>AGEOP=JPDA@A­JEPEKJKBrelated-party PN=JO=?PEKJOEOOEIEH=NÐEJ=HHHEGAHEDKK@PDANIAJE=J=J@3V>AG@A­JEPEKJO=NA>=OA@KJPDA0QOOE=J@A­JEPEKJOEJ?APDA?KIL=JUH=SOEJPDKOA countries were adopted after, and were based on, the Russian company law. For a transaction to be considered a related-party transaction, two elements should be present: there should be related parties (as listed in the law) that play a certain role in the transaction (again, as listed in the law). For example, the Russian law considers a related-party transaction to be a transaction in which related parties are involved in the transaction in one of the following capacities:63 Ð O=PN=JO=?PEJCL=NPU=>AJA­?E=NU=JEJPANIA@E=NUKN=J=CAJPEJ the transaction; — As an owner of at least 20% of the voting shares (participatory shares, units)64EJ=HAC=HAJPEPUPD=PEO=L=NPU>AJA­?E=NUEJPANIA@E=NUKN agent in the transaction; — As a member of a governing body of a legal entity that is a party, >AJA­?E=NUEJPANIA@E=NUKN=CAJPEJPDAPN=JO=?PEKJKN Ð -PDANEJOP=J?AO=OOLA?E­A@EJPDAcharter. Obviously, this list is not complete and does not cover all possible instances where transactions involve related parties and where there is =?KJ®E?PKBEJPANAOP $KNPDEONA=OKJPDA+*.'.chose not to provide =JATD=QOPERA@A­JEPEKJKBrelated-party transactions. Instead, they state PD=P=JUPN=JO=?PEKJEJSDE?D=NAH=PA@L=NPUÓ=OOLA?E­A@EJPDA+*.'.Ô is directly or indirectly interested is considered a related-party transaction and is subject to special approval procedures. This encompasses all NAH=PA@ÎL=NPUPN=JO=?PEKJO=J@I=GAOEP@Eɹ?QHPPK=RKE@PDA=LLHE?=PEKJ of approval procedures by devising transaction schemes under which there ?KQH@>A=?KJ®E?PKBEJPANAOP>QPSDANAPDA?EN?QIOP=J?AOHEOPA@EJPDA above example of Russia would not exist. The MLPIP also provide that =?KIL=JU¥O?D=NPANI=UAOP=>HEODOLA?E­?=@@EPEKJ=H?NEPANE=BKNrelatedparty transactions. 'PODKQH@>AIAJPEKJA@PD=PEJ=@@EPEKJPK@A­JEJCrelated-party transactions, the company laws of the CIS countries (with the exception of Armenia and 3V>AGEOP=JÔ=HOK@A­JAAT?ALPEKJOi.e., transactions that formally meet the criteria for related-party transactions but that do not 63



64

NP ÓÔKBPDA0QOOE=J*=S 'J=@@EPEKJPDA0QOOE=JH=SOLA?E­?=HHUHEOPOPULAOKB transactions that may be related-party transactions, e.g., credit, pledge, and guarantee PN=JO=?PEKJO 2DA KJHU @EɳANAJ?A >APSAAJ PDEO @A­JEPEKJ =J@ PDANIAJE=J =J@ Uzbek provisions is the possibility for companies to establish additional criteria for related-party transactions. Participatory shares refer to limited-liability companies, while units refer to cooperatives.

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NAMQENAOLA?E­?=LLNKR=HLNK?A@QNAO C=EJPDA0QOOE=JH=SLNKRE@AOPDA most comprehensive list of exceptions, such as when:65 — A transaction is executed by a company consisting of a single shareholder who is simultaneously the general director (or CEO); — All shareholders are related parties in the transaction; — A transaction is in exercise of pre-emptive rights by shareholders; — A transaction represents the acquisition or the redemption of shares; or — A transaction represents reorganization through merger (accession), and the entity participating in the merger (accession) owns more than 75% of the voting shares of the company being reorganized. In Kazakhstan, the requirements for related-party transactions are not applicable to transactions where a shareholder acquires shares or other securities in the company and in all cases of reorganization.66 In Moldova, exceptions include related-party transactions between parent and subsidiary companies carried out by the subsidiary on the basis of the I=J@=PKNUEJOPNQ?PEKJOKBPDAL=NAJP?KIL=JU=OOLA?E­A@>UH=S 67 Thus, legislation in CIS countries distinguishes between two types of related-party transactions: — Related-party transactions that need to follow special approval rules; and — Related-party transactions that do not have to follow such procedures.68 The MLPIP also do not categorize related-party transactions, but in NPE?HAÓÔPDAUOLA?E­?=HHU@EOPEJCQEODHK=JOKNKPDANBKNIOKB?NA@EP to members of the >K=N@KB@ENA?PKNOATA?QPERAKɹ?ANO=J@PDAEN?HKOA relatives/=ɹHE=PA@LANOKJO 2DANA=OKJBKNPDEOEOPDAB=?PPD=POQ?DPN=JO=?PEKJOL=NPE?QH=NHUBKNJKJέJ=J?E=HEJOPEPQPEKJO=NAK>REKQOHU>AUKJ@ PDAKN@EJ=NU>QOEJAOOKLAN=PEKJO=J@PDAEN>AJA­PPKPDA?KIL=JU=J@=HH 65

Art.81 (2) of the Russian Law.

66

Art.71 (2) of the Kazakh Law.

67

Art.86 (10) of the Moldovan Law.

68

For example, Professor Eddy Wymeersch of the University of Ghent, Belgium, in his article “Shareholders’ Rights in Cases of Related Parties Transactions”, Paris 2002, available online at , distinguishes four series of cases involving ?KJ®E?POKBEJPANAOP Ó=Ô 2DA?KJ®E?P>APSAAJ=@ENA?PKN=J@DEO?KIL=JU Ó>Ô !KJ®E?PO>APSAAJI=FKNEPU=J@minority shareholders; Ó?Ô !KJ®E?POEJCNKQLOKB?KIL=JEAO=J@ Ó@Ô !KJ®E?POEJOP=PAÎKSJA@­NIO Corresponding regulatory responses are discussed depending on the type of the ?KJ®E?PKBEJPANAOP 

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its shareholders can be highly suspect. Moreover, if loans to directors and managers are common and pose a threat to creating shareholder value in any of the CIS countries, then such transactions could even be prohibited. 'J=JU?=OAEPEO>AJA­?E=HBKNPDAHACEOH=PKNPKPDEJGOLA?E­?=HHU=>KQP these (and possibly some other types of) related-party transactions.69 2DA"A®JEPEKJKB0AH=PA@.=NPEAOEO$H=SA@=J@'J?KILHAPASDE?DEJ2QNJ +=GAOPDA"A®JEPEKJKBRelated-Party Transactions far from Perfect !NEPE?=HPKPDA@A­JEPEKJ=J@NACQH=PEKJKBrelated-party transactions is PDA@A­JEPEKJKBrelated parties. As mentioned above, apart from playing a ?ANP=EJNKHAEJPDAPN=JO=?PEKJPDA@A­JEPEKJKBrelated-party transactions requires the involvement of related parties or their =ɹHE=PA@L=NPEAOEJ the transaction. As a rule, related parties involve members of a company’s governing bodies: its board of directors (or supervisory board, in case of a two-tier board model) and key executives (or the management board, in ?=OAKB=PSKÎPEAN>K=N@IK@AHÔ 2DA0QOOE=JH=SEOPDAIKOPOLA?E­?EJ terms of this group of NAH=PA@L=NPEAOEJPD=PEP=HOKOLA?E­?=HHUEJ?HQ@AO the external managing organization and the external manager.70 In addiPEKJPKIAI>ANOKBPDACKRANJEJC>K@EAOPDA@A­JEPEKJKBrelated parties includes shareholders who own relatively large blocks of shares. The size KBPDAOD=NADKH@EJCOR=NEAOEJ@EɳANAJP!'1?KQJPNEAODKSARANEJIKOP cases it is 20% or 25% of a company’s voting shares.71 In addition to all these persons, who are considered related parties in Armenia, Moldova, Russia, and 3V>AGEOP=JPDA0QOOE=J@A­JEPEKJEJ?HQ@AOEJ@ERE@Q=HO=J@ legal entities that have the right to give instructions that are mandatory for the company (e.g., a parent company that can give mandatory instructions to its subsidiary).72 The MLPIP QOA=@A­JEPEKJKBrelated parties similar to the Russian @A­JEPEKJ 2DA+*.'.EILNKRAQLKJEP=J@OLA?E­?=HHUEJ?HQ@A¢OAJEKN I=J=CANO£OQ?D=O@ALQPUCAJAN=H@ENA?PKNOÓ@ALQPU?DEABATA?QPERAKɹ?AN?DEAB­J=J?E=HKɹ?AN?DEABKLAN=PEJCKɹ?ANAP? Ô?DEAB=??KQJP=JPO 69

This statement is in line with the recommendation of the 1996 General Principles, which state that, in any case, the law should ban two types of transactions for which PDANAEOJK>QOEJAOOFQOPE­?=PEKJ=J@=DECDNEOGKB=>QOAL=UIAJPOÓGE?G>=?GOÔ>U a third person to an insider in connection with a transaction between the company and the third person, and loans by the company to an insider without documentation or without the payment of a reasonable rate of interest. See Avilov et al., note 2, 29.

70

Art.81 (1) of the Russian Law.

71

The only deviation from the 20% rule is Moldova, which requires 25%. See Art.85 (2) of the Moldovan Law.

72

Art.81 (1) of the Russian Law.

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=J@@ENA?PKNOKBNALNAOAJP=PERAKɹ?AO=J@>N=J?DAOSDE?DPDA0QOOE=J @A­JEPEKJ@KAOJKP?KRANQJHAOOPDAUD=LLAJPK=HOKOEPKJPDAboard of directors (in case of one-tier boards) or management board (in case of two-tier boards). #RAJSEPDPDEO?D=JCADKSARANPDA@A­JEPEKJKBrelated parties in the MLPIP can be improved. For further guidance, the 2004 OECD Principles73 and International Accounting Standard (IAS) 24.974 could be considered. This recommendation is also in line with the OECD’s view of the situation on related-party transactions in Russia.75 73

The 2004 OECD Principles NA?KIIAJ@PD=PPDA@A­JEPEKJKBrelated parties include AJPEPEAOQJ@AN?KIIKJ?KJPNKHOECJE­?=JPOD=NADKH@ANOEJ?HQ@EJCIAI>ANOKBPDAEN families and business associates; and key management personnel. OECD, 2004, op.cit. note 1, 52.

74

'JPANJ=PEKJ=H??KQJPEJC1P=J@=N@Ó'1Ô LNKRE@AO=IKNA@AP=EHA@@A­JEPEKJ whereby parties are considered to be related if one party has the ability to control PDAKPDANL=NPUKNPKATAN?EOAOECJE­?=JPEJ®QAJ?AKNFKEJP?KJPNKHKRANPDAKPDAN L=NPUEJI=GEJC­J=J?E=H=J@KLAN=PEJC@A?EOEKJO L=NPUEONAH=PA@PK=JAJPEPUEB (1) Directly, or indirectly through one or more intermediaries, the party: — Controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries, and fellow subsidiaries); Ð  &=O=JEJPANAOPEJPDAAJPEPUPD=PCERAOEPOECJE­?=JPEJ®QAJ?AKRANPDAAJPEPU or — Has joint control over the entity; ÓÔ2DAL=NPUEO=J=OOK?E=PAÓ=O@A­JA@EJ'1'JRAOPIAJPOEJOOK?E=PAOÔKBPDA entity; (3) The party is a joint venture in which the entity is a venturer (see IAS 31 Interests in Joint Ventures); (4)The party is a member of the key management personnel of the entity or its parent; (5) The party is a close member of the family of any individual referred to in (1) or (4); ÓÔ2DAL=NPUEO=JAJPEPUPD=PEO?KJPNKHHA@FKEJPHU?KJPNKHHA@KNOECJE­?=JPHUEJ®QAJ?A@ >UKNBKNSDE?DOECJE­?=JPvoting power in such entity resides with, directly or indirectly, any individual referred to in (4) or (5); or ÓÔ2DAL=NPUEO=LKOPÎAILHKUIAJP>AJA­PLH=JBKNPDA>AJA­PKBemployees of the entity, or of any entity that is a related party of the entity. PPDAO=IAPEIA'1 OLA?E­AOSDE?DL=NPEAO=NAJKP@AAIA@NAH=PA@ — Two enterprises simply because they have a director or key manager in common; — Two venturers who share joint control over a joint venture; Ð  .NKRE@ANOKB­J=J?APN=@AQJEKJOLQ>HE?QPEHEPEAOCKRANJIAJP@AL=NPIAJPO and agencies in the course of their normal dealings with an enterprise; and — A single customer, supplier, franchiser, distributor, or general agent with whom =JAJPANLNEOAPN=JO=?PO=OECJE­?=JPRKHQIAKB>QOEJAOOIANAHU>URENPQAKBPDA resulting economic dependence. See the International Accounting Standard Board’s website .

75

Transparency of Related Party Transactions in RussiaOP=PAOPD=P¢>NK=@AN@A­JEPEKJ KBSD=P?KJOPEPQPAO=J¤EJPANAOPA@L=NPU¥EONAMQENA@ 2DAJAS@A­JEPEKJODKQH@AIphasize the ability to control the terms of the transaction and be consistent with IFRS.” See OECD, op.cit. note 51, 5.

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Furthermore, the list of related parties in all jurisdictions regulating related-party transaction includes “=ɹHE=PA@L=NPEAO” of related parties. This refers to two instances. First, a shareholder will be considered a related L=NPU EB DA KSJO = OLA?E­A@ JQI>AN KB OD=NAO EJ@ERE@Q=HHU KN PKCAPDAN SEPDDEO=ɹHE=PA@L=NPEAO 1A?KJ@PDAEJRKHRAIAJPKB=ɹHE=PA@L=NPEAOEJ a transaction makes it a related-party transaction and thus subject to all approval requirements. Only in Kazakhstan, however, does the company H=SOLA?E­?=HHU@A­JA=ɹHE=PA@L=NPEAO 76 The company laws in Armenia, Moldova, and 3V>AGEOP=J=NAOEHAJP=>KQPPDA@A­JEPEKJKB=ɹHE=PA@L=NPEAO  In Russia=ɹHE=PA@L=NPEAO=NA@A­JA@EJ=JPEÎIKJKLKHUHACEOH=PEKJ 77 Both of the above references are included in the MLPIP. 2DA@A­nition of =ɹHE=PA@L=NPEAOS=O?KJOE@ANA@PK>A>AUKJ@PDAO?KLAKBPDA MLPIP, however, and is not covered. The one recommendation that could >AI=@ABKNPDA!'1?KQJPNEAOEOPKAT=IEJAPDANAHAR=JP@A­JEPEKJOEJ EJPANJ=PEKJ=H OKQN?AO =J@ PK ?DA?G SDAPDAN PDAEN J=PEKJ=H @A­JEPEKJO meet the best standards. AJA®?E=H-SJANODELEOJKP*AC=HHU"A®JA@=J@JKP"EO?HKOA@PDNKQCDKQP PDA!'1SDE?D)AALO+=JU0AH=PA@Ï.=NPU2N=JO=?PEKJO3JE@AJPE®A@=J@JKP Covered by Legal Provisions Related-party transactions, as well as a number of other issues concerning corporate governance (e.g., takeover procedures), revolve around PDAMQAOPEKJKBSDKPDA>AJA­?E=NEAOKBOQ?DPN=JO=?PEKJO=?PQ=HHU=NA  +KNAOLA?E­?=HHUPKAJBKN?APDANQHAOKJrelated-party transactions, it is indispensable to know who the related parties in the transaction are.78 O @EO?QOOA@ EJ PDA LNAREKQO OQ>OA?PEKJ OECJE­?=JP OD=NADKH@ANO =NA EJ?HQ@A@EJPDA@A­JEPEKJKBrelated parties. But sometimes the names of shareholders recorded in a company’s shareholder register are simply PDAJ=IAOKBJKIEJ=HKSJANO=J@JKPKBPDA=?PQ=HÓ>AJA­?E=HÔDKH@ANOKB 76

Arts.64-65 of the Kazakh Law.

77

Art.4 of the Law on Competition and Limitation of Monopolistic Activities in Commodities Markets of the 0QOOE=J$A@AN=PEKJ@A­JAO=J=ɹHE=PA@LANOKJ=O=LDUOE?=H LANOKJKN=HAC=HAJPEPUPD=P?=JEJ®QAJ?APDA=?PEREPUKBHAC=HAJPEPEAO=J@ KNLDUOE?=HLANOKJOSDK=NAAJC=CA@EJAJPNALNAJAQNE=H=?PEREPU $KNIKNAKJPDA@A­JEPEKJ KB=ɹHE=PA@L=NPEAOOAA&Î( 1?DN=II=J@  QODAR¢.NKPA?PEKJKB1D=NADKH@ANO Through the Regulation of Securities Markets”, in this book.

78

The same idea as relevant to Russia is expressed in the 2002 White Paper according to which: “@EO?HKOQNAKBKSJANODEL=J@?KJPNKHOPNQ?PQNAOEOGAUEJKN@ANPKAɳA?PERAHU address abusive related party transactions, insider dealing and ?KJ®E?POKBEJPANAOP which are the most widespread and pernicious shareholder abuses. These abuses MQEPABNAMQAJPHUEJRKHRAPDAQOAKBKɳODKNA?KNLKN=PARADE?HAOKNDKH@EJCOPNQ?PQNAO controlled by management or controlling shareholders.” See OECD, op.cit. note 5, sec. 48, 14.

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OD=NAO 5DEHAPDAJKIEJ=HOD=NADKH@ANOI=UJKPD=RA?KJ®E?POKBEJPANAOPO in a particular transaction, the >AJA­?E=HKSJANOI=UOQ>OP=JPE=HHU>AJA­P BNKIPDAI=J@ KND=RAOECJE­?=JPLKSANOPKEJ®QAJ?A@A?EOEKJÎI=GEJC regarding the transactions. Therefore, a requirement should exist for the >AJA­?E=HKSJANOPK@EO?HKOAPDAENKSJANODEL>AUKJ@=?ANP=EJPDNAODKH@ and also for companies to disclose the major share ownership known to the company. Moreover, it is important to make sure that such a requirement will be implemented in practice and enforced by due sanctions and supervision, where needed. 'JPDA!'1?KQJPNEAOPDA@EO?HKOQNAKB>AJA­?E=HKSJANODELEOKJA of key problem areas of investor protection, especially in the context of NAH=PA@ÎL=NPUPN=JO=?PEKJO 2DEOD=O>AAJE@AJPE­A@=O=OANEKQO?KJ?ANJ=P least in Russia, as evidenced by the special task force set up by the OECD to scrutinize the issue and come up with recommendations for improving the situation.79 In contrast, there is no indication of problems arising in this respect in other CIS countries. In Ukraine, for example, there is a perception that compliance with this requirement is quite high.80 This is explained, to a great extent, by the vigilance of the securities commission, which claims not to accept annual reports lacking such information. While PDANAEOJK­NI@=P=PKPDA?KJPN=NUPDANA=NAOARAN=HNA=OKJOPK@EO=CNAA with the contention that the @EO?HKOQNAKB>AJA­?E=HKSJANODELEOJKP= problem in Ukraine. First, the economic situation in most CIS countries is similar to (and probably not better than) the situation in Russia. Second, all the countries under discussion have similar legislation in the relevant area and similar enforcement practices (which are far from satisfactory). Third, related-party transactions are considered to pose serious concerns BKNEJRAOPKNLNKPA?PEKJEJ=HH?KQJPNEAO J@­J=HHUPDA-#!"NALKNP¥O B=EHQNA PK IAJPEKJ PDA @EO?HKOQNA KB >AJA­?E=H KSJANODEL =O = ?KJ?ANJ may be due to the fact that the CIS countries are still facing other, more basic corporate-governance-related problems besides the disclosure of >AJA­?E=HKSJANODEL. At the regulatory level, there are several points to make regarding the NACQH=PEKJ=J@AJBKN?AIAJPKB>AJA­?E=HÎKSJANODEL@EO?HKOQNA Ð !KIL=JUH=SOEJPDA!'1?KQJPNEAO=NAOEHAJPKJPDA@A­JEPEKJKB “>AJA­?E=HKSJANODEL£ +KNAKRANSDEHAI=PPANONAC=N@EJCinformation disclosure are largely dealt with by securities-market regulation, SA=NAJKP=S=NAKB=JU?KQJPNUEJPDA!'1PD=P@A­JAOPDA?KJ?ALP KB>AJA­?E=HKSJANODEL 2DA!'1?KQJPNEAOODKQH@I=GAAɳKNPOPK 79

For more details, see OECD, op.cit. note 51, 20-26.

80

OECD, op.cit. note 4, 46.

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EJPNK@Q?APDA@A­JEPEKJKB>AJA­?E=HKSJANODELEJPKPDAENHACEOH=PEKJ particularly in company laws or securities legislation.81 — The CIS countries require that major share ownership be disclosed once certain control thresholds are crossed. For example, in Kyrgyzstan, Moldova, and Ukraine, annual reports should include a list of shareholders who own 5% and more of a company’s shares, whereas in Armenia this threshold is 10%, and in Azerbaijan all shareholders should be listed, indicating those with more than 25% of shares.82 In Russia, this threshold is set at the level of 5% of shares. All these requirements are set for disclosure by the company. However, instances are common where companies themselves do not know who their >AJA­?E=HKSJANO=NA 2DANABKNAHACEOH=PEKJODKQH@AOP=>HEODNAMQENAments for shareholders to provide information on their ownership beyond a certain threshold. For example, the Russian law requires disclosure by shareholders as soon as they reach the 20% threshold and then increase or decrease their ownership by an additional 5% (if the remaining stake is still more than 20%).83 Based on experiences 81



2DABKHHKSEJCEO=JAT=ILHAKB=@A­JEPEKJKB¢>AJA­?E=HKSJANODEL£=L=NPUSDK AJFKUOKND=OPDANECDPPKOA?QNA>AJA­POOQ>OP=JPE=HHUAMQER=HAJPPKPDKOAKBPDA ownership of securities, even though the securities are not registered in the party’s name. Examples of >AJA­?E=HKSJANODELEJ?HQ@AOA?QNEPEAODAH@BKNPDAL=NPU¥O>AJA­P in the name of others, such as nominees, custodians, brokers, trustees, executors, and KPDAN­@Q?E=NEAO=L=NPJANODELKBSDE?DPDALANOKJEO=L=NPJAN=J@=?KNLKN=PEKJ for which the party owns substantially all of the stock. Shares: (1) held (individually or EJ=­@Q?E=NU?=L=?EPUÔ>UPDAL=NPU¥OOLKQOAPDAL=NPU¥OKNDEOKNDANOLKQOA¥OIEJKN children or a relative of the party or his or her spouse who shares the same home with the party; or (2) as to which the party can vest or revest title in himself at once KN=POKIABQPQNAPEIA=NA=HOK?KJOE@ANA@=O>AEJC>AJA­?E=HHUKSJA@ 1AAIANE?=J 'JOPEPQPAKB!ANPE­A@.Q>HE???KQJP=JPO Accounting and Auditing for Related Parties and Related Party Transactions: A Toolkit for Accountants and Auditors, New York, NY 2001, 47, available online at .

82

OECD, op.cit. note 4, 46.

83

The legally required disclosure of =ɹHE=PA@L=NPEAO>U?KIL=JEAOEOHEIEPA@PKPDA ­NOP =J@ OKIAPEIAO OA?KJ@ HARAH KB =ɹHE=PEKJ SDE?D @KAO JKP DAHL EJ ?=OAO KB ownership structures employing multilayered shell companies or nominal owners. Nominal owners are not required to provide EJBKNI=PEKJKJPDA>AJA­?E=NEAOPDAU NALNAOAJP 'JBKNI=PEKJ=>KQPLNER=PAKSJANODELEO?KJOE@ANA@PK>A?KJ­@AJPE=H  2DANABKNASEPDJK?KJ?ALPKB>AJA­?E=HKSJANOSEPDEJPDA0QOOE=JH=SPDALNKREsions on ownership disclosure do not work adequately. As a result, many concerns arise relating to actual and potential ?KJ®E?POKBEJPANAOPE@AJPEBUEJCrelated-party PN=JO=?PEKJOP=GAKRANLNK?A@QNAOPDARANE­?=PEKJKB@ENA?PKNEJ@ALAJ@AJ?A=J@ so on. To improve transparency, it is necessary to introduce a requirement that OD=NADKH@ANO@EO?HKOA>AJA­?E=HKSJANODEL=JK>HEC=PEKJPD=P=?KIL=JU>K=N@KN regulator disenfranchise non-disclosed owners, and/or a legal requirement for nominal

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in developed markets and recommendations and standards set by the European Union in its directives and the '-1!-EJEPOJKJέJ=J?E=H disclosure standards,84 it could be recommended that the threshold be set at a level of 5-10%. However, the legislator should carefully ?KJOE@AN=HHNAHAR=JPB=?PKNOSAECDEJCLKPAJPE=H>AJA­PO=J@?KOPO (e.g., the level of ownership concentration in the country, the capacity of supervisory authorities to oversee proper disclosure and prosecute IEO>AD=REKNPDAQOAKBKɳÎODKNAOPNQ?PQNAOÔ — Enforcement of company laws is a major problem in the CIS, especially AJBKN?AIAJP KB @EO?HKOQNA KB >AJA­?E=H KSJANODEL SDANA many powerful personalities (“oligarchs”) have their own interests in keeping EJBKNI=PEKJ ?KJ­@AJPE=H 2DANABKNA PKCAPDAN SEPD PDA EJPNK@Q?PEKJKB=@A­JEPEKJKB>AJA­?E=HKSJANODEL=J@NAMQENAIAJPO for disclosing major share ownership, it is important to provide for sanctions in case of non-compliance. There are various sanctions used EJ@EɳANAJP?KQJPNEAOSKNH@SE@AEJ?HQ@EJC=@IEJEOPN=PERA?EREH=J@ criminal liability. A combination of these could be recommended for the CIS context. 0AH=PA@.=NPEAO0=NAHU!KILHUSEPDPDA0AMQENAIAJPPK"EO?HKOA!KJ¯E?POKB Interest which May not be Known to the Company JKPDANNAMQENAIAJPPD=PSKQH@AJ=>HAPDAE@AJPE­?=PEKJ=J@AJBKN?AIAJP of related-party transactions is the rule that related parties must disclose their interest in a company’s transactions. Often, a company does not only JKPGJKSPDAE@AJPEPUKB>AJA­?E=HKSJANO>QPEPEO=HOKQJ=S=NA=OPK whether the related parties are involved in other companies with which the company is carrying out transactions, be it as owners or members holders to disclose their clients. In this regard, it would be best if the law would recognize share ownership in public companies as a matter of public information. See Standard & Poor’s, op.cit. note 53; OECD, op.cit. note 51, 21-22. The securitiesmarket legislation of other CIS countries was not available for commenting. 84



2DA '-1!- JKJέJ=J?E=H @EO?HKOQNA OP=J@=N@O JKS QOA@ EJ PDA EU Prospectus Directive, require disclosure in a prospectus or listing particulars document of principal >AJA­?E=HKSJANOGJKSJPKPDA?KIL=JU 2DAEU Consolidated Admission and Reporting Directive’s disclosure requirements mandate that companies provide detailed information on: (1) the structure of their capital; (2) any restrictions on transfer of OA?QNEPEAOÓÔOECJE­?=JP@ENA?P=J@EJ@ENA?PDKH@EJCOKBsecurities; (4) the holders of any securities with special control rights; (5) the system of control of any employee share scheme in which the employees do not exercise control; (6) any restrictions on voting rights; (7) agreements between shareholders that are known; (8) the rules relating to appointment and replacement of board of directors; (9) the LKSANOKBPDA>K=N@L=NPE?QH=NHUSEPDNAC=N@PKOD=NA>QU>=?GO=J@ÓÔOECJE­?=JP shareholder agreements with other companies to which the company is a party. See OECD, op.cit. note 51, 22.

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KBCKRANJEJC>K@EAO $KNEJOP=J?A@ENA?PKNOKɹ?ANO=J@ KNOECJE­?=JP OD=NADKH@ANOIECDP>AEJ=LKOEPEKJPK>AJA­PBNKI=PN=JO=?PEKJLANOKJ=HHUEBPDAU=NA@ENA?PKNOKɹ?ANO=J@ KNOECJE­?=JPOD=NADKH@ANOKBPDA other transacting company. To avoid such situations, legislation in the CIS countries requires that related parties disclose their interest in a company’s transactions. In particular, the Armenian company law requires that related parties submit to the board of directors and the external auditor (also the revision commission) of the company information regarding:85 — Legal entities in which they independently or jointly with =ɹHE=PA@ persons hold 20% or more of the voting shares (or 20% or more share participatory shares or units); — Legal entities in which they hold a position on a governing body; and — Transactions known to them in which they have been or may be deemed to be an interested party. Similar provisions exist in Kazakhstan, Russia, and Uzbekistan, as well as in the MLPIP.86 In Moldova, the company law is more general in that it requires related parties to disclose to the board of directors in writing on =PHA=OP=J=JJQ=H>=OEOEJBKNI=PEKJPD=PEOOQɹ?EAJPPKE@AJPEBU?KJ®E?PO of interest in a company’s transactions.87 While in general this provision is broader and may cover situations that would not fall under any of the requirements of the Armenian law as stipulated above, at the same time it gives no guidance as to the type of information to be disclosed. Perhaps the best approach would be a combination of the two rules, whereby the above list would be supplemented with a catch-all requirement to disclose any other information that might be needed to identify related-party transactions. Obviously, the MLPIP could be improved in this respect. The Moldovan law goes even further and provides that related parties should disclose their ?KJ®E?POKBEJPANAOPEJSNEPEJCPKPDACKRANJEJC body of the company responsible for making the decision on related-party transactions before their conclusion.88 While other CIS countries (and the MLPIP) @KJKPD=RAOQ?DOLA?E­?NQHAOEPEO=JEILHE?EPL=NPKB@ENA?tors’ ­@Q?E=NU@QPEAO 89&KSARANEP?KQH@>A>AJA­?E=HPKEJ?HQ@AOQ?D= OLA?E­?NQHAEJHACEOH=PEKJ 85

Art.63 of the Armenian Law.

86

Art.72 of the Kazakh Law; Art.82 of the Russian Law; Art.92 of the Uzbek Law.

87

Art.85 (3) of the Moldovan Law.

88 89

Art.85 (4) of the Moldovan Law. 

$KNIKNAKJ@ENA?PKNO¥­@Q?E=NU@QPEAO=HOKOAA0 "N=CJAR=¢*AC=H0ACQH=PEKJKB Shareholder Rights in the CIS”, in this book.

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The Requirement for Boards of Directors to Approve Related-Party Transactions does not fully Serve the Purpose of Protecting Investors’ Rights Due to the Insider-Dominated Composition of Boards In general, company laws in the CIS countries distinguish between two types of related-party transactions in terms of their approval mechanism. As a default rule, all related-party transactions are subject to approval by the board of directors, while somePN=JO=?PEKJO=NAOLA?E­?=HHUNAOANRA@ for shareholder approval.90 In Kazakhstan, both the board and shareholders are involved in the approval process: the decision on all related-party transactions should be made by the board and approved by shareholders.91 The MLPIP BKHHKSPDA­NOP=LLNK=?DSDE?D@KAOJKP>QN@AJPDA?KIL=JU >UNAMQENEJCOD=NADKH@AN=LLNKR=HKBOECJE­?=JPÓI=PANE=HÔPN=JO=?PEKJO  At the same time, it could be recommended that even those related-party transactions that shareholders should approve be preliminarily approved by the board or that the board’s opinion be presented to shareholders.92 It should be mentioned as a positive aspect that additional requirements for approving related-party transactions can be established by relevant legislation and by company charters in Moldova93 or by the securitiesmarket regulator in Russia.94 It could be recommended that the laws of PDA!'1?KQJPNEAO=HOKLANIEPOQ?D®ATE>EHEPUAOLA?E=HHUSDAJEP?KIAO to giving companies the possibility of establishing additional rules for approving related-L=NPUPN=JO=?PEKJOPK­PPDAENL=NPE?QH=N?KIL=JUJAA@O or interests of their investors. The purpose of requiring special approval regulations for relatedparty transactions is to prevent insiders who have ?KJ®E?POKBEJPANAOPEJ a transaction from making decisions on such transactions. Therefore, the laws require that such transactions be approved by the board or shareholders and not be subject to managerial discretion. Also, related parties are prohibited from playing a role in making decisions on such transactions—CIS laws prescribe that only disinterested board members can vote on related-party transactions. This rule is stricter in Armenia and Russia where, depending on the number of shareholders in a company, related90

Art.64 (1-2) of the Armenian Law; Art.86 (3) of the Moldovan Law; Art.83 (2-3) of the Russian Law; Art.93 (1) of the Uzbek Law. Apart from this, legislation lists certain related-party transactions that could be approved only by general meetings of shareholders. The latter type of related-party transactions is discussed separately.

91

Art.73 of the Kazakh Law.

92

For more arguments on this issue, see Section I, Subsection 4 of this Chapter.

93

Art.86 (9) of the Moldovan Law.

94

Art.83 (8) of the Russian Law.

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party transactions must be approved either by disinterested directors or disinterested directors who are “independent” at the same time.95 To make board approvals of related-party transactions meaningful, it is necessary to ensure a proper composition of the board of directors that not be dominated by insiders: controlling shareholders and managers. From this perspective, in the majority of companies in the CIS countries, the composition of the board cannot be considered adequate.96 Furthermore, legislation in all CIS countries regulating related-party transactions allows for both one-tier and two-tier board models to co-exist. Companies are given an opportunity to choose their board structure and whether they want to have a single executive body—the CEO—or a collective executive body—the management (or executive) board. When the one-tier board model is chosen, the board in many companies is exclusively composed of insiders, i.e., controlling shareholders, senior managers, and their friends and families. It is doubtful that a controlling shareholder who will in some instances also be the chairman of the board (or the CEO and a member of the board) will not be in a position to induce the other board members to vote in favor of a related-party transaction favorable to the former. -JALKOOE>HAOKHQPEKJPKI=J=CAPDALKOOE>EHEPUKBEJBKNI=HEJ®QAJ?A in the decision-making process is the introduction of a two-tier board model. The company laws in the CIS countries that allow for a two-tier board model also impose a limitation on the number of executives who can be a member of the upper tier, i.e., the supervisory board. On average, the limit is set at the level of 25 or 50% of the total number of board members.97 In Kazakhstan, only the CEO is allowed to be a member of the supervisory board (but not a board chairman).98 In no CIS country is there a clear and full membership separation between the supervisory and management boards, as is the case in, for example, Germany. Again, SEPD=MQ=NPANKND=HBKBATA?QPERA@ENA?PKNOKJPDA>K=N@EPEO@Eɹ?QHP to be impartial.99 A better solution, therefore, would be to entrust the approval of material related-party transactions to independent directors. In fact, as already mentioned above, this is the case in Armenia and Russia. Their 95

Art.64 (1-2) of the Armenian Law; Art.83 (2-3) of the Russian Law.

96

IFC, 2003, op.cit. note 25, 26; OECD, op.cit. note 4, 58.

97

In Moldova, for example, the rule is 50%; see Art.66 (4) of the Moldovan Law. In Russia, it is 25%; see Art.66 (2) of the Russian Law.

98

Art.54 (4) of the Kazakh Law.

99

In both (one-tier and two-tier) board models, legislation should require directors to observe their ­@Q?E=NU@QPEAOSDE?DSKQH@NAEJBKN?Acompliance by the company with the rules on related-party transactions. See OECD, op.cit. note 51, 18-19.

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?KIL=JUH=SOARAJLNKRE@ABKNPDA@A­JEPEKJKB=J¢EJ@ALAJ@AJP@ENA?tor”, but only for the purposes of related-party transactions. In Russia, for example, an independent board member (or independent director) for the purposes of related-L=NPUPN=JO=?PEKJOEO@A­JA@=O=JEJ@ERE@Q=HSDKD=O not been in any of the following positions at the time of the approval of a business transaction or for one year immediately preceding the approval of such transaction:100 — The general director, the external manager, a member of the management board or a member of the governing bodies (board of directors, general director, and management board) of the external manager; or — A person whose spouse, parents, children, or siblings or step-siblings are the external manager or hold a position in the governing bodies of the external manager; or — A person whose adoptive parents or adopted children are the external manager or hold a position in the governing bodies or the managing organization of the company; or Ð J=ɹHE=PA@LANOKJKPDANPD=J=>K=N@IAI>ANKBPDA?KIL=JU ->REKQOHUPDEO@A­JEPEKJEOJ=NNKSANPD=JPDA@A­JEPEKJKB=JEJdependent director in general in Western Europe.101 Many directors that meet the criteria for legal independence for the purposes of related-party transactions are not independent in the broader sense. Moreover, companies may avoid delegating the approval of related-party transactions to “independent directors” if the company has no such directors. In this case, the shareholders will need to approve such a transaction. As a result, even though the company laws in CIS countries prohibit those with ?KJ®E?POKBEJPANAOPBNKIP=GEJCL=NPEJ@A?EOEKJÎI=GEJCNAgarding related-party transactions, the impartiality of the voting directors raises serious concerns due to the composition of the boards. Therefore, it could be recommended that legislators in the CIS countries introduce rules requiring approval by an independent director of certain related-party PN=JO=?PEKJO=J@PD=PPDA@A­JEPEKJKBEJ@ALAJ@AJ?A>AI=@A>NK=@AN 'P is worth noting that director independence was beyond the scope of the MLPIP and thus was not addressed there. One additional mechanism for overseeing how a company deals with related-party transactions that the CIS countries (especially listed companies in Russia) started to use more and more is the establishment of an audit committee under the board of directors. The rules on the composi100

Art.83 (3) of the Russian Law.

101

1AABKNAT=ILHAPDA@A­JEPEKJKB=JEJ@ALAJ@AJPJKJÎATA?QPERA@ENA?PKNEJThe Combined Code on Corporate Governance, London 2003, Section 1, A.3.1, available online at .



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PEKJKBOQ?D=J=Q@EP?KIIEPPAAÓLNEI=NEHUEJ@ALAJ@AJ?A=J@­J=J?E=H expertise) enable the board to better identify related-party transactions and make sure that they are in the best interests of the company and all its shareholders.102 Where audit committees—which usually have a minimum number of independent members—are used, they are frequently required to submit their opinion on the fairness of a particular transaction to the board and shareholders. As part of this process, they may also have the power to solicit an outside expert opinion on the transaction.103 Apart from Moldova, company laws in the CIS are silent as to what interested board members should do when the agenda of a board meeting includes the approval of a related-party transaction in which a director(s) is a related party. The Moldovan law provides a clear answer to this question: the related party shall not participate in the meeting.104 This means that he cannot even be present during discussions. All the related party can do is inform the board of his interest in the transaction and leave the room until the decision is made. While such conduct by directors is covered by the general concept of their ­@Q?E=NU@QPEAOEP?KQH@>ANA?KIIAJ@A@ that the rules of conduct of related parties be expressly stated in legislation to avoid problems in interpretation and enforcement. Practical problems regarding related-party transactions subject to shareholder approval are largely associated with poor disclosure by controlling shareholders of their ?KJ®E?POKBEJPANAOPÓ=J@>AJA­?E=HKSJANODELÔ thus giving themselves the opportunity to vote on related-party transactions (or hiding such transactions altogether). Moreover, obscure ownership structures are created to involve shareholders who do not formally IAAP PDA @A­JEPEKJ KB related parties but who are loyal to controlling shareholders, so that decision-making is not left in the hands of minority shareholders. This is a situation where proper disclosure requirements should protect the company and disinterested investors. Requiring shareholder approval of related-party transactions should be based on a reasonable balance between the protection of shareholders and PDA®ATE>EHEPU=J@?KOPÎAɳA?PERAJAOOKBAJPANEJCEJPKPN=JO=?PEKJOPD=P=NA >AJA­?E=HBKNPDA?KIL=JU 'JOKIAEJOP=J?AOBKNAT=ILHAPDAJ=PQNAKB= 102

Art.39 of the MLPIP addresses some issues regarding the composition and functions of =Q@EP?KIIEPPAAO &KSARANEP@KAOJKPOLA?E­?=HHUNAMQENAPD=P=Q@EP?KIIEPPAAO play a role in related-party transactions. In the UK, for example, this is considered a core committee function. For more information, see Audit Committees Combined Code Guidance: A Report and Proposed Guidance, by an FRC-appointed group chaired by Sir Robert Smith, London 2003, available online at .

103

OECD, op.cit. note 4, 62.

104

Art.86 (6) of the Moldovan Law.

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company’s business and the economic realities in the country are such that transactions between related parties are rather frequent and become part of the company’s ordinary business circumstances. If the general meeting of shareholders is called upon to approve every single related-party transacPEKJ>APSAAJPDAO=IAL=NPEAOPN=JO=?PEKJ?KOPOSEHHOECJE­?=JPHUEJ?NA=OA which can make the proposed transactions economically unfeasible, even though there could be no other alternatives available for carrying out the transactions. To tackle this problem, the Russian law, as well as the MLPIP, introduces the possibility of approving in advance a series of related-party transactions between the same parties for a maximum of one year.105 To avoid the possibility of abusing this provision, it is further required that the shareholders’ decision specify at least the maximum value of assets EJRKHRA@EJOQ?DPN=JO=?PEKJÓOÔ 2DEO@A?EOEKJSEHHNAI=EJEJAɳA?PQJPEH the next annual meeting. This approach could be very practical; however, strict disclosure provisions should be enforced, so that shareholders are aware of all the consequences of their decisions. Finally, it is possible to have instances where a related party emerges in a company engaged in regular transactions with the same party over a period of time before said party became a related party and, consequently, before these transactions formally became related-party transactions. If PDA?KJ@EPEKJO=J@KPDANPANIOKBPDAOAPN=JO=?PEKJO@KJKPOECJE­?=JPHU change, then there is no reason to require that such transactions be approved by shareholders. Again, this rule exists in Russia with the purpose of striking a balance between the interests of (minority) shareholders and the interests of the company (which are ultimately the interests of all shareholders).106 The MLPIP recommend the introduction of a similar rule in other CIS countries.107 Poor Compliance with Rules on Related-Party Transactions in the CIS Countries is Largely Due to Poor Disclosure of Information concerning these Transactions The disclosure of information on related-party transactions is one of the GAUOPKOQ??AOOBQHE@AJPE­?=PEKJKBOQ?DPN=JO=?PEKJO=J@enforcement of relevant procedures.108 The purpose of disclosure is to provide informa105

Art.83 (6) of the Russian Law.

106

Art.83 (5) of the Russian Law.

107

Art.30 (7) of the MLPIP.

108

The 2004 Corporate Governance in Eurasia concurs that related-party transactions are generally not disclosed, although @EO?HKOQNA ?KQH@ AɳA?PERAHU @APAN =>QOAO KB power by managers and major owners in pursuit of their personal interests at the expense of other shareholders. A fundamental problem lies in the fact that minority

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tion to (current and potential) investors about how their funds are being managed or will be managed. Disclosure practices in the CIS countries, both in general and with respect to related-party transactions in particular, are far from satisfactory. Many companies do not properly follow all the legal rules on related-party transactions, let alone disclose such transactions. Even companies in groups (holding structures) that are organized in such a way that related-party transactions are inevitable do not report such transactions.109 The importance of disclosing related-party transactions is underlined in the 2004 OECD Principles, which consider it essential for a company to fully disclose material related-party transactions to the market, either individually or on a group basis, including whether they have been executed at arm’s length and on normal market terms.110 The OECD also E@AJPE­AO LKKN disclosure of related-party transactions in Russia and other CIS countries as one of the key obstacles to the development of ?=LEP=HI=NGAPO=J@EJ?NA=OEJCEJRAOPKN?KJ­@AJ?APD=PPDAENNECDPO=NA adequately protected.111 Indeed, mandatory disclosure is one of the major LEHH=NOKBAɳA?PERANACQH=PEKJKBPN=JO=?PEKJOPD=PLKPAJPE=HHU?KJ®E?PSEPD the interests of companies and their shareholders.112 As for the substance of information on related parties to be disclosed, three components should be distinguished. First, as already discussed, shareholders are often not fully aware of their rights or willing to exercise them. See OECD, op.cit. note 4, 29. 109

In many instances, holding structures include raw-material producers, suppliers, and I=JQB=?PQNANOKB­J=HLNK@Q?PO

110

OECD, op.cit. note 1, 1.

111

OECD, op.cit. note 5, 14; OECD, op.cit. note 4, 29.

112

In many countries, public disclosure by a company is stringent and should lead to transparency of related-party transactions. For example, in the US, listed companies, registered investment companies, and other companies subject to the Securities and Exchange Commission reporting rules are required not only to publicly disclose all major transactions but also certain relationships and material transactions between companies and their managers and/or their families and their enterprises. Since 2005, EU companies listed in EU-regulated markets and reporting consolidated accounts have been required to disclose transactions according to IFRS. To give an indication of what is required, around one-third of US-listed companies report NAH=PA@ÎL=NPUPN=JO=?PEKJO 2DA­CQNABKN#QNKLASDE?DEOIKNA@Eɹ?QHPPK IA=OQNAEO=NKQJ@Ù>QPPDEO?ANP=EJHUNA®A?POSA=GNALKNPEJC?NEPANE=EJI=JU ?KQJPNEAOQLQJPEHJKS 1#!NQHAONAMQENA@EO?HKOQNASDAJOLA?E­A@I=J=CAIAJPEO involved, which includes any director, the CEO, and the next four highest-paid of­?ANO>AJA­?E=HKSJANOKBIKNAPD=JÙKB=?KIL=JU¥O=OOAPO=J@L=NPEAONAH=PA@ to, or controlled by, such parties. See OECD, op.cit. note 51, 12-13.

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information needs to be disclosed to make sure that related parties and related-partyPN=JO=?PEKJO=NALNKLANHUE@AJPE­A@ 113 Second, as part of the decision-making on related-party transactions, the board of directors and shareholders must have complete information in order to verify that the proposed transaction is in the best interests of the company. Only in Kazakhstan is this aspect of disclosure addressed OLA?E­?=HHUEJPDA?KIL=JUH=S #RAJPDANADKSARANPDALNKREOEKJEOJKP complete and only requires that complete information be provided to shareholders (the provision is silent as to information provision to the board).114 While, arguably, general provisions on information disclosure to the board and shareholders for the organization and conduct of board meetings and CAJAN=HIAAPEJCOKBOD=NADKH@ANOSEHH>AEJAɳA?PEP?KQH@JARANPDAHAOO >ANA?KIIAJ@A@PD=P?KIL=JUH=SOEJPNK@Q?AOLA?E­?LNKREOEKJOOEIEH=N to the Kazakh rule and extend it to cover information to be provided to the board. In addition, the Russian law stipulates that all decisions on related-party transactions should include certain minimum information OQ?D=OPDAL=NPEAOPDA>AJA­?E=NEAOPDALNE?A=J@KPDANI=PANE=HPANIO of the transaction.115 This requirement serves two purposes: (a) it focuses the board and shareholders’ discussion of the transaction by underlining the types of questions that they should answer, therefore helping them identify what information they need to get from management on the proposed transaction in advance; and (b) at a minimum, shareholders will D=RA=??AOOPK=HH@A?EOEKJOKBPDA>K=N@=J@>AJKPE­A@KB=HH@A?EOEKJO of the general meeting of shareholders. However, this type of indirect disclosure requires action by shareholders who might not even be aware that related-party transactions were discussed and decisions made. Third, all shareholders and other potential and existing investors should be provided with information about related-party transactions entered into by the company. Rules should be in place to ensure that companies disclose information on said transactions when approved (in the form of reports on material facts) and at least annually (in the annual report). In the CIS, company laws are silent about the disclosure of this latter type of information. This is mostly left to securities and accounting legislation. In Russia, for example, the securities regulator requires that companies’ annual reports include the following information regarding related-party transactions:116 113

For more on this issue, see Section II, Subsections 4-5 of this Chapter.

114

Art.73 of the Kazakh Law.

115

Art.83 (6) of the Russian Law.

116

Decree No.17/ps, op.cit. note 35, Section 3.6. Further requirements on information disclosure are included in securities legislation (see Decree No.03-30/ps, op.cit. note

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— A list of related-party transactions concluded by the company during the reporting year; Ð 1ECJE­?=JPPANIO=J@?KJ@EPEKJOKBA=?DNAH=PA@ÎL=NPUPN=JO=?PEKJ and — The governing body, i.e., the board or the general meeting, that approved the related-party transactions. The MLPIP recommend extending this list and ensuring that companies disclose at least the following information:117 — The name and contact information of the parties to the transaction; — The reasons for concluding the transaction; — The value of the transaction as determined by the board of directors and the independent appraiser(s), if invited; — The name of the independent appraiser(s), if invited; and — Other material terms of the transaction that shall be disclosed according to the charter of the company. It should be noted that implementation of International Financial Reporting Standards (IFRS) in the CIS countries will have an important positive impact on disclosure of related-party transactions. In addition, there is a variety of techniques to help identify the existence of relatedparty transactions and to facilitate their disclosure. When reporting the ­J=J?E=HLKOEPEKJKB=?KIL=JU=??KQJP=JPO=Q@EPKNO>K=N@IAI>ANO =J@NACQH=PKNOODKQH@>AAJ?KQN=CA@PKL=UOLA?E­?=PPAJPEKJPKEJ@E?=PKNO such as the existence of interest-free borrowing, asset sales that diverge from the appraisal value determined by an independent party, in-kind transactions, and loans without scheduled terms.118 37, Sections 2.4.7, 2.5.3, 6.4.7, 6.5.1; idem, Annex 9, Section 11) and accounting laws (see Decree No.5n of the Ministry of Finance of the Russian Federation, November ¢-JLLNKR=HKB0QHAOKJ??KQJPEJCÓ¢'JBKNI=PEKJKJɹHE=PA@.ANOKJO£Ô 11/2000”, Section 5). These rules require companies to disclose: — Copies of the minutes of the meeting of the approving body, including information on the quorum and the voting results, for the registration of a secured bond issue and the report on the results of said issue; Ð   HEOP KB LANOKJO SEPD SDKI PN=JO=?PEKJOI=U>AMQ=HE­A@=O related-party transactions, and a list of those persons with whom transactions have already been approved by the company, in case of an open subscription for securities; — Information on related parties before the placement starts, in case of open subscription through intermediaries; and — The prospectus and quarterly reports must provide information on relatedparty transactions. 117

Art.30 (11) of the MLPIP.

118

For more on disclosure, see OECD, op.cit. note 51, 13-15. See, also, American Institute KB!ANPE­A@.Q>HE???KQJP=JPO, op.cit. note 81.

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The Possibility to Seek Invalidation of Related-Party Transactions Concluded with Violations of Procedural Rules Gives Room to Dishonest Companies to Misuse the Provision to the Detriment of the other Parties in Transactions Just like major transactions, related-party transactions can be invalidated by the courts. Company laws in Armenia, Kazakhstan, Moldova, Russia, and Uzbekistan have certain rules dealing with the invalidation of relatedparty transactions that were not concluded in accordance with the legal requirements, as well as compensation for damages caused to the company.119 These rules prescribe who has the right to challenge the validity of a transaction and under which circumstances.120 In Kazakhstan, the right to challenge related-party transactions is ascribed to any interested party.121 This includes any shareholder, director, or manager of a company or of the other party to a transaction (the counterpart). In Russia, the group of persons who can challenge a transaction is rather narrow, limiting the right to the company (i.e., the general director (CEO) under Russian law) or any shareholder.122 The laws of Armenia, Moldova, and Uzbekistan are silent about who can challenge related-party transactions. Arguably, the CAJAN=HNQHAOKB?EREHLNK?A@QNAKJSDKD=OPDAOP=J@EJCPK­HAH=SOQEPOSEHH come into play. The MLPIP somewhat follow the Russian approach, albeit NA?KIIAJ@EJCPD=PKJHUOD=NADKH@ANOSEPD=N=PDANOECJE­?=JPÓ=HPDKQCD still minority) ownership interest be allowed to have said right. Obviously, PDEOKSJANODELPDNAODKH@ODKQH@JKP>APKKDECDOK=OPKAɳA?PERAHUAT?HQ@A many minority shareholders from the possibility of protecting their rights. If EJOE@ANO=NAPK>AJA­PBNKINAH=PA@ÎL=NPUtransactions, then the comL=JUÓPDNKQCDEPOKɹ?ANOÔSEHHD=N@HUATAN?EOAEPONECDPPK=LLA=H 2DQO= PDNAODKH@KBÙEOOLA?E­A@QJ@ANPDA+*.'. 2DACIS countries should carefully examine ownership patterns in the respective jurisdiction and set the threshold at such a level as to make sense for the country in question. Furthermore, the MLPIP could additionally specify which governing bodies of a company should have the right to challenge related-party transactions on behalf of the company. In any case, the board of directors (or the supervisory board under a two-tier board model) should have the HAC=HOP=J@EJCJA?AOO=NUPKBQH­HHEPOBQJ?PEKJKBLNKPA?PEJCOD=NADKH@ANO rights and overseeing executive performance. 119

Art.65 of the Armenian Law; Art.74 of the Kazakh Law; Art.86 (7 and 8) of the Moldovan Law; Art.84 of the Russian Law; Art.94 of the Uzbek Law.

120

For more information on available remedies in other jurisdictions, see OECD, op.cit. note 51, 16-17.

121

Art.74 (1) of the Kazakh Law.

122

Art.84 (1) of the Russian Law.

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In practice, primarily shareholders will act on related-party transactions concluded in violation of approval rules to protect their rights and the interests of the company, because the boards of the majority of companies in the CIS are insider-manager-dominated. A company, even SEPDPDA=>KRA?H=NE­?=PEKJPKAILKSANPDA>K=N@OSEHHIKOPHEGAHUJKP exercise its right. In some instances, however, a company might be interested in seeking the EJR=HE@=PEKJ KB = NAH=PA@ÎL=NPU PN=JO=?PEKJ EB EP ­J@O PDEO PK >A >AJA­?E=HPKPDA?KIL=JU@AOLEPAPDAB=?PPD=PPDEOIECDP?=QOA@=I=CAO to the counterpart. An example is the Moldovan company law, which provides that if the general meeting or the board do not have full information about proposed related-party transactions or if such transactions were concluded with violations of requirements of the company law on related-party transactions, then the general director (or CEO) can be asked to refrain from concluding such transactions or breach them.123 By this, OKIACKK@ÎB=EPD?KQJPANL=NPOI=UOQɳANHKOOAO>A?=QOAPDA?KIL=JU@E@ not follow its internal procedures for concluding the transaction. Thus, rules should be in place to protect the interests of the other party. As recommended by the MLPIP, a transaction could be invalidated if the counterpart in the transaction knew or should have known about any irregularity in the transaction.124 This same rule can also be found in the Armenian company law.125 It deserves a separate mention that all CIS countries lack rules en=>HEJCOD=NADKH@ANOPKAɳA?PERAHUQOA=J@ATAN?EOAPDAENNECDPPK?D=HHAJCA related-party transactions that are detrimental to the company’s interests. Unfortunately, the MLPIP also do not deal with this issue. It could be recommended that there be provisions on reimbursing shareholders’ legal expenses incurred while litigating on related-party transactions. An even better solution could be to require the company to step into the proceedings once a law suit is initiated to pick up the costs and the burden of litigation. At the same time, there should be rules to protect the interests of the company against frivolous law suits of shareholders seeking to abuse their right of appeal for personal interest. It is important to keep in mind that whatever the means chosen to challenge unapproved or inappropriately approved related-party transactions, the government 123

Art.86 (7) of the Moldovan Law.

124

This is in line with the recommendation of 1996 General Principles, which state: “The law should, however, limit the circumstances in which a transaction, completed in REKH=PEKJKBPDA?KJ®E?PKBEJPANAOPLNK?A@QNAOSEHH>AEJR=HE@=PA@EJKN@ANPKLNKtect the rights of third parties who conclude a transaction with a company in good faith.” See Avilov et al., op.cit. note 2, 29.

125

Art.65 (1) of the Armenian Law.

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would need to ensure that the transaction costs are not too high for the shareholders to enforce their claims.126 $EJ=HHU=HH­RA!'1?KQJPNEAOPD=PD=RALNKREOEKJOKJNAH=PA@ÎL=NPU transactions in their company laws provide for liability of those company directors and managers who cause damages to the company by not properly following procedures for related-party transactions.127

Conclusions In the preceding sections, we attempted to illustrate what the common practical problems in this area in the CIS countries are, the state of the art of regulation on major and related-party transactions, how investors’ rights are being violated, and what could be done to create an environment where investors’ rights are protected in major and related-party transactions. In summary: (a) In practice, major and related-party transactions (often in combination) are frequently used by insiders to enrich themselves at the expense of the company, minority shareholders, and other investors; (b) Major and related-party transactions are mentioned as a special concern at least in Russia, although the situation is similar (albeit on a more hidden level) in other CIS countries; (c) Not all CIS countries have even basic rules in their company laws that deal with major and related-party transactions. For these countries, legal reforms to introduce rules on major and related-party transactions should be a priority. The regulation in other countries EOJKPSEPDKQP@A­?EAJ?EAO=J@NAMQENAOEJOKIAEJOP=J?AOOECJE­?=JP improvements; (d) The MLPIP, developed with the participation of experts and politicians from many CIS countries, could serve as a useful reference document for initiating legal reforms in CIS countries with a view to creating proper regulations and taking relevant measures to enforce in practice such regulations on major and related-party transactions. It should also be noted that the MLPIP may also be further improved, =OOKIAEOOQAO=NAJKPKNJKPOQɹ?EAJPHUNACQH=PA@ÓBKNR=NEKQONA=sons); ÓAÔ $EJ=HHU IK@ANJ NACQH=PEKJO KJ OECJE­?=JP PN=JO=?PEKJO =NA =J EILKNP=JP>QPFQOPPDA­NOPOPALEJAJOQNEJCPD=PEJRAOPKNO¥NECDPO=NA protected in special circumstances. Securities-market regulators, judicial and administrative bodies, auditors, shareholders, and the 126

See, also, OECD, op.cit. note 51, 17.

127

Art.65 (2) of the Armenian Law; Art.74 (2) of the Kazakh Law; Art.86 (7) of the Moldovan Law; Art.84 (2) of the Russian Law; and Art.94 (2) of the Uzbek Law.

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>QOEJAOO?KIIQJEPU=PH=NCAODKQH@I=GAAɳKNPOPK=>E@A>UPDAOA rules, properly reward compliant companies, and sanction misbehavior in this area.

Protection of Shareholders through the Regulation of Securities Markets Hans-Joachim Schramm and Andrei Bushev General Remarks The development of the regulation of securities markets in the member OP=PAOKBPDA!KIIKJSA=HPDKB'J@ALAJ@AJP1P=PAOÓ!'1ÔD=O>AAJEJ®Qenced both by general economic factors characteristic of the majority of countries with transition economies1 and by OLA?E®? factors characteristic of securities markets around the world. Among the general features that =ɳA?PPDAinvestment climate in CIS countries on the whole, one could include the relative underdevelopment of production (the “real sector” of the economy), the slow development of economic and legal institutions in relation to the needs of an economy oriented towards a “free” market, =J@PDAB=EHQNAKBPDAOP=PAPKAJOQNAAɳA?PERALNKPA?PEKJKBPDANECDPO=J@ interests of private individuals. Among the OLA?E®? conditions characterizing the situation in securities markets, one should include the fact that ordinary citizens are not prepared to conduct independent operations in such markets, the lack of a tradition of investment in securities, the concentration of controlling stakes in the hands of a limited group of persons (most often in the management of companies), the prevalence KB?KJ®E?PO>APSAAJPDAEJPANAOPOKB?KIL=JEAO=J@PDAEN@ENA?PKNOPDA EJOQɹ?EAJP@ARAHKLIAJPKBPDAJA?AOO=NUEJBN=OPNQ?PQNA=J@PDANAH=PERA EJAɳA?PERAJAOOKBH=Senforcement.2 All of this results in a lack of trust on the part of the population and corporate investors in securities as an instrument for their investments. The state of the law is predetermined, to a large extent, by economic conditions. Securities law is one of a large number of institutions that regulate investment relations, representing a collection of rules of behavior, recognized and protected by the state, with respect to the issuance and circulation of securities. As one of the elements (or institutions) comprising the regulatory system of investment relations, securities law ­J@OEPOAHBJKPKJHUPECDPHU>KQJ@PKKPDANAHAIAJPOEJPDEOOUOPAI>QP also actively interacting with them. For that reason, the development and 1

For the general features of such economies, see E. Gaidar, Ekonomika perekhodnogo perioda, Moscow 1998, available online at .

2

I. Khashi, 8=GKJK@=PAH¦J=E=>=V=AɳAGPERJKCKGKNLKN=PERJKCKQLN=RHAJEE=ON=RJEPAH¦JUE=J=HEV opyta riada postsotsialisticheskikh stran, Warsaw 2004, available online at . For a comparison of protection of investors in more than 150 countries (including the CIS), see World Bank/IFC, Doing Business in 2006: Creating Jobs, Washington, DC 2006, available online at ..

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 149-192 © Koninklijke Brill NV, Leiden, 2007

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application of each element in the system regulating investment relations is dependent on interrelated institutions. It is clear, for example, that PDAP=TN=PAKJ@ERE@AJ@O=ɳA?POPDA?DKE?AI=@A>U=securities issuer of EPO@ERE@AJ@LKHE?U 2D=PLKHE?UEJPQNJEJ®QAJ?AOPDA?DKE?AKBPULAKB OA?QNEPEAOBKNPDALQNLKOAOKBEJRAOPIAJP 2DAIKOPOECJE­?=JPAHAIAJPO in the development of the institution of securities are investment law and the law of corporations and bankruptcy. In investment law, the regulator establishes for all forms of investment, including securities@A­JA@EJRAOPIAJPNACQH=PEKJO 3 Depending on the investment regulations chosen and actually being upheld, priorities are distributed among various groups of investors. For example, the provision by the legislator of particular means for the protection of the rights and interests of shareholders depends, to a large extent, on the legislator’s determination of the priority of interests both among various groups of shareholders (e.g., minority and large, strategic and institutional) and among various groups of investors (e.g., foreign and national, private and state, bondholders and shareholders). Enshrinement of the chosen priority in legal regulations manifests itself in terms of to whose advantage the legislator, in formulating rules of behavior, assigned the corresponding risks (returns and losses (costs)). This assignment of risks is achieved in law, inter alia, by placing more obligations on a particular party, by granting rights, and by assigning the burden of proof (e.g., establishment of LNAOQILPEKJHAC=H­?PEKJO=J@OLA?E=HOKQN?AOKBARE@AJ?AÔ There is also a clear connection between the institution of securities and the institutions of corporate law and bankruptcy. The institution of securities serves the circulation of investment rights (their acquisition and transfer), as well as proof of ownership and contents of investment rights in relations between securities holders (creditors), on the one hand, and issuers (debtors), on the other. The institutions of corporate law and bankruptcy are aimed at ensuring the actual enforcement of the investment rights attested to by the securities. An evaluation of the risk of exercising investment rights, and of a reasonable correlation of the exLAJ@EPQNAO=J@NARAJQAO=OOK?E=PA@PDANASEPDD=O=JEJ®QAJ?AKB?KQNOA on decisions regarding the acquisition of securities. At the same time, an evaluation of the correlation of expenditures and revenues deriving from the acquisition of securities, as well as from the use thereof as a source of ARE@AJ?ASEHHEJAREP=>HUD=RA=JEJ®QAJ?AKJPDA@A?EOEKJI=@A>UPDA 3

All CIS countries have adopted special investment laws that establish either a “naPEKJ=HNACEIA£KN=NACEIA¢JKHAOOB=RKN=>HAPD=JPD=PKɳANA@PKEJRAOPKNOBNKI= foreign country”. See M. Boguslavskii, “Pravovye aspekty sozdaniia investitsionnogo klimata v stranakh s perekhodnoi ekonomikoi”, available online at .

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investor regarding his or her entry into corporate relations (the choice between forms of investment). This interrelation between securities regulation and other bodies KBH=S=J@EPONAOQHPEJCAɳA?PKJA?KJKIE?NAH=PEKJO?=J>ABKQJ@EJ=JU securities market. Nonetheless, the same links between the same legal institutions, as well as between law and economics, do not lead to the same economic results. In Russia, as in many other CIS countries, for a number of political and economic reasons, securities law on the books ?=JOECJE­?=JPHU@EɳANBNKIPDAH=SEJLN=?PE?A 4 2DA?KQJPNEAOKBPDA!'1D=RAI=@ANALA=PA@AɳKNPOSEPDNAOLA?PPK convergence of their laws in all of the above-mentioned areas of regulation, including the regulation of activities in securities markets. The harmonization of the legal regulation of securities markets in CIS countries has been carried out in various forms. First, the CIS countries have concluded multilateral agreements, mainly in the framework of their participation in international economic organizations (both general and specialized). For example, Armenia (2003), Georgia (2000), Kyrgyzstan (1998), and Moldova (2001) are members of the World Trade Organization, and Azerbaijan, Belarus, Kazakhstan, Russia, Tajikistan, Ukraine, and Uzbekistan have observer status, and some of them have advanced in their accession negotiations. Importantly, WTO agreements encourage the formation of a common investment climate. Armenia, Kazakhstan, Kyrgyzstan, Russia, Ukraine, and Uzbekistan are also ordinary members of the specialized International Organization of Securities Commissions (IOSCO).5 Within the framework of the CIS, the most notable results of multiH=PAN=HAɳKNPOEJPDA=NA=KBNACQH=PEJCsecurities markets have been: (a) The Agreement on the Regulation of Interstate Securities Markets, of 1993 (which has not yet entered into force); (b) The Convention on the Protection of the Rights of Investors, of 1997 (which, at present, has entered into force for Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, and Tajikistan);6 and 4



2DAI=EJOEIEH=NEPEAO=J@@EɳANAJ?AOEJPDAH=SOKJPDA>KKGOEJ!'1?KQJPNEAOSEHH be discussed further. We will also outline certain economic and political reasons for @EɳANAJ?AOEJ!'1?KQJPNEAO¥H=SEJLN=?PE?AEJ?KIL=NEOKJSEPDKPDAN?KQJPNEAOPD=P have transition economies.

5

Those countries of the CIS that are located in Europe are not yet members of the specialized territorial grouping the Committee of European Securities Regulators (CESR); see .

6

This convention contains both general provisions concerning investment regulation =J@LNKREOEKJO@A=HEJCOLA?E­?=HHUSEPDsecurities.

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(c) The Convention on the Coordination of the Activities of Member States of the Commonwealth in Securities Markets, of 1998 (signed by Belarus, Kyrgyzstan, and Tajikistan; at present, has entered into force for Belarus and Tajikistan). Work is currently being carried out on preparation of a Convention on Integration of Securities Markets of the Countries of the CIS. !KKN@EJ=PEKJKBPDAAɳKNPOKB!'1IAI>ANOP=PAOSEPDNAOLA?PPKsecurities regulation has also been carried out within the framework of other regional organizations uniting selected CIS countries. For example, the member states of the Euro-Asian Economic Community, namely Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan, adopted in November 2002 a decision on the creation of a Council of Directors of Authorized Securities-Regulating Bodies, and, on 19 June 2004, signed the Agreement on Cooperation Between the Member States of the Eurasian Economic Community in Securities Markets.7 Second, harmonization has been carried out through model laws. While PDA=>KRAÎIAJPEKJA@IQHPEH=PAN=H@K?QIAJPO?DEA®U?KJP=EJLNKREOEKJO of a declarative nature, the will of states expressed therein regarding integration was a prerequisite for preparation by the permanent bodies of the CIS of IK@AHH=SO?KJP=EJEJCOLA?E­?IK@AHOKB>AD=REKNEJsecurities markets (institutions). The most noteworthy of these, on the strength of its targeted nature, is the Model Law on Securities Markets (MLSM).8 Model laws dealing with other issues related to the regulation of securities markets include the Model Civil Code (the concept of securities, the dematerialization of securities, transactions, etc.)9 and the Model Law on Joint-Stock Companies (shares, bonds).10 Of particular importance has also been the adoption of the Model Legislative Provisions on Investor 7

JKPDANÓPDKQCDJKPPDAH=OPÔAT=ILHAKB=J=PPAILPPK­J@?KIIKJCNKQJ@SEPD respect to economic questions of integration by individual member states of the CIS is the Yalta Agreement on the Formation of a Single Economic Space of 2003, signed by Belarus, Kazakhstan, Russia, and Ukraine. In this Agreement, the participating states committed to support each other’s investment activity, as well as to set up a governing body to which important decision-making power is to be delegated. It is likely that this body will pay particular attention to securities regulations.

8

Approved by Decree No.18-7 of the Parliamentary Assembly of the Member States of the CIS of 24 November 2001.

9

Part 1 of the Model Civil Code was adopted by a Decree of the Parliamentary Assembly of the Member States of the CIS of 29 October 1994; Part 2, 13 May 1995; Part 3, 17 February 1996. A new redaction of Section V of the Model Civil Code was adopted on 16 June 2003.

10

Approved by Decree No.10 of the Parliamentary Assembly of the Member States of the CIS of 17 February 1996.



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Protection (MLPIP)SDE?DSEHH>APDAOQ>FA?PKBOLA?E­?@EO?QOOEKJH=PAN in this work.11 Finally, certain CIS member states have also concluded bilateral agreements among themselves. Examples of the expression of intent with respect to the integration of securities markets in relations between two member states of the CIS include, among others: — Decree No.26 of the Council of Ministers of the Union State (of Russia and Belarus) of 21 December 2000 “On the Creation of a Securities Market of the Union State”; — Bilateral agreements on economic cooperation during the period 1998-2007, between Russia and, respectively, Kazakhstan, Ukraine, and Uzbekistan; and — The Agreement between Ukraine and Russia on the Promotion and Mutual Protection of Investments of 1988. 'J=@@EPEKJPKOP=PAO¥AɳKNPOPK?KKN@EJ=PA=J@ KND=NIKJEVAsecurities regulation, market intermediaries12 registered in the CIS have set up professional organizations to aid in the coordination of their activities. Thus, the Association of Eurasian Central Securities Depositories was established to work toward creating a common depository environment in the region.13 2DA D=NIKJEV=PEKJ =J@ KJ OKIA EOOQAO QJE­?=PEKJ KB securities law that is being pursued by the member states of the CIS is facilitated by their economic interdependence, which was established already in the Soviet period; by the political will of governments, expressed in the above-mentioned agreements; and by their common legal tradition. This PN=@EPEKJEO­NIHU>=OA@KJPDAL=J@A?POUOPAIKB!KJPEJAJP=HH=SSDE?D was adopted by the Soviet state and extended to all of the Soviet republics. Besides this, many contemporary politicians and legal scholars who are today determining the course of development of national law received their education in the period of the creation of this same Soviet pandect H=S ??KN@EJCHUPDEOATLANEAJ?AD=O>AAJNA®A?PA@EJPDABKNIQH=PEKJKB securities law, for example in: the distribution of regulations on securities among the many so-called branch codes (civil, economic (in Ukraine), criminal, tax), the establishment of a hierarchy of legal regulations, and 11

Approved by Decree No.25-7 of the Parliamentary Assembly of the Member States of the CIS of 14 April 2005.

12

See below.

13

See A. Grishchenko, “Foundation of the Association of Central Securities Depositories”, available online at
SSS J@? NQ ?KIIKJ EIC QLHK=@A@ ­HAO LQ>O GCR_Grischenko.pdf>. Some annual reports of the Association are available online at .

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the practice of not using judicial decisions as a source of law.14 Another manifestation of the pandect system is the formulation of general concepts, including the concept of securities. 0AC=N@HAOOKBPDAOA?KIIKJHAC=H?KJ@EPEKJOBKN=QJE­A@=LLNK=?D in terms of the law on the books in the CIS member states, in reality, a variety of legal solutions have been enshrined in the legislation of CIS member states both with respect to issues of the regulation of securities markets and with respect to issues of the regulation of other economic relations.15 Despite the relative similarity of the legal institutions inherited from Soviet times, and their general divergence from analogous institutions in many Western states, the institutions in question have been regulated @EɳANAJPHU >U PDA R=NEKQO !'1 ?KQJPNEAO 2DQO PDA CAJAN=H ?KJ?ALP KB OA?QNEPEAOBKNIQH=PA@EJ?K@E­A@=?POKBPDAIAI>ANOP=PAOKBPDA!'1D=O OECJE­?=JP@EɳANAJ?AOEJ?KIL=NEOKJSEPDPDAHAC=H?KJ?ALPKBPDAO=IA economic institution adopted in many other states. In the meantime, the common concept of a security itself has numerous variations among CIS countries.16 These internal variations can possibly be explained, to a large degree, not by reasons of economics or legal doctrine, but by reason of politics. In their attempts to achieve political independence, the former republics of the Soviet Union preferred to underline, also in their legislation, their dissociation (independence) from Russia, the former nucleus of the collapsed Soviet empire.17 A great many experts from the “far abroad” 14

Incidentally, the traditions of Continental law have also been changing in the member OP=PAOKBPDA!'1 2DA@A?EOEKJOKBFQ@E?E=H>K@EAO?DEA®UKB?KJOPEPQPEKJ=H?KQNPO and of the European Court of Human Rights, have been acquiring more and more OECJE­?=J?A=O=OKQN?AKBH=S 'J In =??KN@=J?A accordance SEPD with NP  Art.3 KB of PDA the !EREH Civil !K@A Code KB of Belarus, the decisions of the three highest judicial instances are sources of civil (commercial) legislation. In Russia, the Constitutional Court has expressed a position that clari­AOKJAKBPDALKOPQH=PAOKBPDAL=J@A?POUOPAIKJPDALNEKNEPUKBH=SO=>KRAKPDAN normative acts (Decision No.182-0 of 5 November 1999, Decree No.13-P of 29 June 2004).

15

See, for example, Institut problem informatsionnogo prava, “Zakonodatel’stvo o SMI v stranakh SNG i Pribaltiki”, Moscow 2005, available online at .

16

17



$KN=>NK=@AN@EO?QOOEKJKJPDA@A­JEPEKJKBsecurities, see note 30 below. See, also, A. Bushev, D. Khokhlov and O. Skvortsov, “The Theoretical Underpinnings of Commercial Law: A Russian View on Bankruptcy and Securities”, 30 Review of Central and East European Law 2005 No.2-4, 360-369. The role of similar political reasoning has been seen, not infrequently, before in world history, e.g., in the complete refusal of the Soviet state in the earliest stages of its development to adopt “foreign” institutions of capitalist law, and in one of the reasons for the EJ@ALAJ@AJP?K@E­?=PEKJKBLNER=PAH=SEJ%ANI=JUEJOPA=@KB adopting the existing French codes in the late nineteenth century.

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(dal’nego zarubezha) eagerly joined in the search for something besides what was found in the “fraternal republics”. As a result, the variety of legal approaches to the regulation of securities markets existing in world practice has been generously spread throughout the vast territories of the states of the former Soviet Union. It is likely that the eternal two-way movement for the majority of phenomena in the universe, between “centralization/unity/harmonization” and “decentralization/diversity”, has again in recent years turned in the direction of centralization. Having achieved the desired diversity in the law on the books, and thereby having emphasized their political independence from Russia, CIS countries are now—under the pressure of economic needs—turning to the harmonization of their securities legislation.

The Current Situation in CIS Countries18 As can be seen from the annual statistics compiled by the European Bank for Reconstruction and Development (EBRD), securities markets in CIS countries remain underdeveloped.19 By the end of 2004, for example, the market capitalization of Russian companies was about 44% relative to PDA ?KQJPNU¥O %". =J@ S=O ?KJOE@ANA@ ¢EJOECJE­?=JP£ SEPD NAOLA?P PK PDAP=OGKBAJPANLNEOA­J=J?EJC 20 The second-largest securities market in the CIS has evolved in Moldova (22%), followed by Ukraine (18%) and Kazakhstan (9%). At the end of 2004, stock markets in all other CIS countries were either non-existent (Uzbekistan) or at a very early stage of development (3.5% in Georgia). In addition, it should be noted that =OECJE­?=JPLKNPEKJKBsecurities are traded outside these countries as a result of programs involving American Depository Receipts (ADR) or Global Depository Receipts (GDR).21 For example, in 2004, of thirteen 18

Most of the legal acts cited below can be found in Russian on publicly accessible websites, especially on the pages of the respective securities-market commissions (regulators) as indicated below. Some of them are also available online at (which, however, has not been updated since 2004).

19

See EBRD, Transition Report 2005: Business in Transition, London 2005, Part III. See .

20

D. Tushunov, “Borrowing by Russian Enterprises”, 48 Problems of Economic Transition 2005 No.5, 7; idem, “Kreditnaia aktivnost’ rossiiskikh predpriiatii”, Voprosy Ekonomiki 2003 No.7, 78, 7. On the development of the Russian securities market at the earlier stages of transition (1991-2000), see the draft paper by D. Vasiliev, “Capital Market Development in Russia”, available online at .

21

According to a document prepared by the Russian securities-market regulator, the Federal Service for Financial Markets (FSFM), in 2004, 75% of contracts involving Russian shares were completed at foreign stock exchanges. FSFM, “Strategiia razvitiia ­J=JOKRKCKNUJG=0KOOEEOGKE$A@AN=POEEÓLNKAGPÔ£Ó"N=BP1PN=PACUBKNPDA"ARAHKLIAJP

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Hans-Joachim Schramm and Andrei Bushev

0QOOE=JEJEPE=HLQ>HE?KɳANEJCOPAJSANA?=NNEA@KQPEJ*KJ@KJ 22 These ­J@EJCOL=NPHU?KJPN=@E?PPDANAOQHPOKB=JKPDANEBRD study that assesses securities-market legislation in Eastern European and CIS countries. According to this study, the securities legislation of the majority of CIS countries was judged to be in “medium compliance” with international standards, whereas the laws of three countries were assessed as being in “very low compliance”.23 It is interesting to note that the country whose legislation was ranked the highest, 3V>AGEOP=JD=@EJAɳA?PJKsecurities market, while Moldova, whose legislation was deemed to be in “low compliance”, has a relatively active market. From this, it follows that securities legislation itself has only a limited impact on the development of securities markets, and the authors of the EBRD study admitted that they took into account only the “laws on the books”. Nonetheless, the impact of non-legal factors is of (at least) equal importance. For example, some Russian authors have pointed out that the process of “re-accumulation of share capital” following its dispersal through mass privatization into the hands of major shareholders has still not been completed.24 AEJC OPEHH EJRKHRA@ EJ PDA ¢­CDP BKN ?KNLKN=PA control”, company directors are not interested in attracting equity capital in order to avoid the risk of losing control of “their company”. This same notion has been expressed by some authors, who have pointed out that the issuance and trading of shares are often carried out not for the LQNLKOAOKB­J=J?EJC>QPEJKN@ANPK?D=JCAPDAKSJANODELOPNQ?PQNAKB a company.25 In addition, long-term investment policies have hardly been AH=>KN=PA@=J@ATEOPEJC­J=J?E=HEJBN=OPNQ?PQNAEOOPEHHIKNAOQEP=>HABKN >=JGO=OLNKRE@ANOKBKQPOE@A­J=J?AN=PDANPD=JBKN­J=J?EJCPDNKQCD shares and other securities. As has been noted: “While securities markets SANA AɳA?PERAHU JKJÎATEOPAJP =P PDA OP=NP KB PN=JOEPEKJ = NQ@EIAJP=NU of the Financial Market in the Russian Federation), available online at (“FSFM Draft Development Strategy”). 22

Interview (dated 1 March 2006) with the director of Russia’s FSFM, O.V. Viugin, with Forbes magazine, available online at .

23

EBRD, Report on the Quality of Securities Markets Legal Regimes in Early Transition Countries, London 2004, available online at .

24

I. Mirkin, Rynok tsennykh bumag Rossii, Moscow 2002, 118.

25

Share dilution and hostile takeovers (pogloshenie, or swallowing, in Russian) are comIKJPA?DJEMQAOEJPDA¢­CDPBKN?KNLKN=PA?KJPNKH£ 1AA4 4KHGKR¢&KOPEHA#JPANLNEOA Takeovers: Russia’s Economy in 1998-2002”, 29 Review of Central and East European Law 2004 No.4, 527-548.

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banking system was generally in place.”26 That is why all these factors are also taken into account in the following discussion of key issues of investor protection through securities regulation in the CIS. A Short Overview of Legal History27 Securities markets were intended to play a pivotal role in the privatization process conceived by international organizations and followed by countries in transition.28 It was recommended that shares in privatized companies >A®K=PA@KJPDAI=NGAPOKPD=PPDKOASEHHEJCPKL=UPDADECDAOPLNE?A =J@LNAOQIEJCPD=PPDAU?KQH@I=J=CAPDA?KIL=JUEJPDAIKOPLNK­Pable manner, could buy them. In theory, such an approach would have presupposed highly developed legislation on securities markets right from the start of privatization. For a long time, however, regulation remained fragmentary. 2DA­NOPHAC=H=?PEJPDEOOLDANASDE?DS=O=@KLPA@@QNEJCPDA1KREAP period, was the USSR Council of Ministers Regulation No.1195 on corporate securities.29 At this early stage, there was still no clear understanding of concepts like “shares” or “securities”, and any kind of company could issue documents referred to as “shares” that were in fact bonds.30 The next 26

K. Pistor, M. Raiser and S. Gelfer, “Law and Finance in Transition Economies”, 8 Economics of Transition 2000 No.2, 325-368.

27

Regarding Russia, see P. Thompson and R. Sharipov, “Securities Regulations in the Russian Federation”, 25 Denver Journal of International Law & Politics 1996, 95; W. White, “Taming the Market: The New Russian Securities Law and the Protection of Shareholders Rights”, 37 Columbia Journal of Transnational Law 1998, 125; W.E. Butler, Russian Law, Oxford 2003;; D. Vasiliev, “Capital Market Development In Russia”, available online at ; A. Bushev and I. Nikiforov, “The Russian Federation in International Securities Law”, in D. Campbell, ed., International Securities Law, BNA International 1998-2004, Looseleaf, London 1998.

28

A. Chubais, Privatizatsiia po-russkii, Moscow 1999, 290.

29

Regulation of the USSR Council of Ministers No.1195, 15 October 1988, “On the Issuance of Securities by Enterprises and Organizations”.

30

As mentioned above, the concept of securities in the majority of countries of the !'1@KAOJKP?KEJ?E@ASEPDPDAPN=@EPEKJ=H?KJ?ALPNA®A?PA@EJIKOPH=SOKB5AOPern countries. The general concept of tsennye bumagi (which is usually translated as securities) in laws of many CIS countries combines such instruments as bonds, shares, LNKIEOOKNU JKPAO >EHHO KB H=@EJC S=NADKQOA ?ANPE­?=PAO AJ?QI>N=J?AO AP?  i.e., investment instruments, documents of title, and transaction instruments all at the same time. A variety of groups of securities are distinguished, including emission (market-tradable, emissionnye) (Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Russia, etc.) and investment (investitsionnye) securities (Armenia, Azerbaijan, Georgia, etc.). Within the groups mentioned above are included those same (though not all) instruments that are included in traditional securities. However, the set of instru-

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notable step was the adoption of the USSR Council of Ministers Regulation No.590 “On Securities” in 1990.31 A Law “On the Securities Market and Stock Exchanges” was meant to follow and be heard by the USSR Parliament, but, as a result of the collapse of the Soviet Union, this draft was not adopted, nor did Regulation No.590 enter into force. Nonetheless, the basic features of these legal acts were reproduced EJPDA­NOPS=RAKBJ=PEKJ=HHACEOH=PEKJL=OOA@EJPDAJASHUindependent OP=PAO 2DA­NOPOQ?D?=OAS=O)=V=GDOP=JSDE?DL=OOA@PDAH=S¢-JPDA ments inserted by the legislator into these groups in the countries of the CIS does not coincide either, as the examples below show: — Market-tradable securities in Russia do not include such types of investment instruments as investment interest (investitsionnyi pai)—an —an an equivalent of unitPNQOPÐIKNPC=CA ÐIKNPC=CA IKNPC=CA?ANPE­?=PAOKBL=NPE?EL=PEKJ=Osecurities, ?ANPE­?=PAO KB L=NPE?EL=PEKJ =O as well as forwards, futures, warrants, any investment contracts, and any similar instruments. In Kyrgyzstan, investment interest is an emission security (Art.2 of the Law on Securities). The concept of an investment security closest to the traditional concept of securities has been formulated in Armenia and Azerbaijan; — In Russia, new types of securities may be established only through a legal act (Art.143 of the Civil Code); in Armenia, a document used as such in commercial transactions may be recognized as a security (Art.4 of the Securities Market Regulation Law); — In Kazakhstan, bills of lading and other documents embodying the right to dispose of goods (documents of title) may be traded in securities markets (Art.4 of the Law on the Securities Market), whereas in Russia bills of lading are traded in the commodities market, and their public trading is regulated by special legislation (Art.6 of Law No.2383-1, 20 February 1992, “On Commodities Exchanges and Trade”). In addition to this, there has been a trend in Russia to expand the list of emission securities by means of the “securitization” of a variety of rights of claim; see DPPL

SSS B?OI NQ @K?QIAJP =OLK>;JKLNEJP DPPL

SSS B?OI NQ @K?QIAJP =OLK>;JKLNEJP  *ACEOH=PERA *ACEOH=PERA ?KJ­NI=?KJ­NI=Î tion of this trend can be seen, in particular, in the federal law adopted in 2003 “On Mortgage Securities”, enshrining simultaneously both American and German models KB­J=J?EJC 'J=@@EPEKJPDA!KJ?ALPKBPDA$A@AN=H*=S¢-J"ANER=PERA$EJ=J?E=H 'JOPNQIAJPO£?KJ­NIA@>UPDA0QOOE=J%KRANJIAJP!KIIEOOEKJ-J*=SÎ"N=BPEJC Activities on 20 June 2005, proposes extending OA?QNEPEAONACQH=PEKJOPK@ANER=PERA­nancial instruments; see . On securitization in Russia, see, also, IFC, Securitization in Russia: Ways to Expand Markets and Reduce Borrowing Costs, Moscow 2005, available online at . Taking into account the above-mentioned variant readings, as well as many others, when determining what can be traded in securities markets in countries of the CIS, we understand by the term securities such instruments, the issue and trade of SDE?DNAC=N@HAOOKBPDAENCNKQL?H=OOE­?=PEKJ=NAEJ=HH?KQJPNEAOOQ>FA?PPKOLA?E=H legal regulations, the main elements of which are registration of issuance, public disclosure of information, participation of professional intermediaries, etc. 31

Regulation of the USSR Council of Ministers No.590, 19 July 1990, “On Securities”.

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Circulation of Securities and Stock Markets of the Kazakh SSR”,32 which was followed by Ukraine’s Law “On Securities and Stock Markets”33 and Russia’s Governmental Decree “On the Circulation of Securities and Stock Exchanges in the RSFSR”.34 Tajikistan and Belarus adopted laws in 1992, while Uzbekistan adopted a law in 1993.35 All of these regulations were based on the concept of state registration of the issuance of securities with the respective Ministries of Finance charged with the task of supervision. While provisions aimed to facilitate trade in securities, this generation KBHAC=H=?PO@E@JKPEJOPEPQPA=JUAɳA?PERA?KJPNKHKNO=J?PEKJEJCIA?D=JEOIO 'JPDABKHHKSEJCUA=NOOARAN=HI=FKN­J=J?E=HO?=J@=HOARKHRA@@QA to lack of control over securities markets, which provided the impetus for Kɹ?E=HOPKEILNKRAPDAHAC=HBN=IASKNG 2DA­NOPOPALOPKS=N@OPNAJCPDAJing enforcement were taken in Kazakhstan, where a Securities Commission was set up and tasked with the licensing of professional market participants, as well as with the monitoring of securities markets.36 Similarly, in Russia, a Securities Commission Under the President was established in 1993. However, a major leap forward took place only in November 1994, when the president issued Edict No.2063, extending the registration reMQENAIAJPPK=HHOA?QNEPEAOKɳANA@to the public, subjecting professional market participants to a licensing requirement, and establishing a regulator of a new kind: the Federal Commission for Securities Markets (FCSM).37 In Ukraine and Uzbekistan, comparable state bodies were established in 1995.38 In other CIS countries, supervisory bodies were established only on the basis of separate laws adopted at a later stage. 32

Law of the Republic of Kazakhstan, 11 June 1991, “On the Circulation of Securities and Stock Markets of the Kazakh SSR”. See, also, M. Suleimenov and F. Karagoussov, “The Legal Basis for the Securities Market in the Republic of Kazakhstan”, 24 Review of Central and East European Law 1998 No.5/6, 451-468.

33

Law of Ukraine No.1201, 18 June 1991, “On Securities and Stock Markets”.

34

Decree of the RSFSR Council of Ministers No.78, 28 December 1991, “On the Circulation of Securities and Stock Exchanges in the RSFSR”. Additional rules were established in the Regulation of the Finance Ministry “On the Issuance and Registration of Securities on the Territory of the RSFSR”, enacted by Letter No.3 of 3 March 1992.

35

Law of Tajikistan, 10 March 1992, “On Securities and Stock Exchanges”; Law of Belarus, 12 March 1992, “On Securities and Stock Exchanges”; Law of Uzbekistan, 2 September 1993, “On Securities and Stock Exchanges”.

36

Edict No.1613, 20 March 1994, “On the Formation of Securities Markets”.

37

Edict No.2063, 4 November 1994, “On Measures of State Regulation of Securities Markets in the Russian Federation”.

38

Edict of the President of Ukraine No.446, 12 September 1995, “On the State Commis-

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Starting with the adoption of the Russian Law “On the Securities Market” in April 1996,39 a second phase of regulatory activity began. In Russia, for PDA­NOPPEIAOA?QNEPEAOregulation was laid down by law. It stipulated more detailed rules on licensing of securities-market participants, on registration of the issuance and the circulation of securities, on disclosure, on self-regulatory bodies and on the FCSM, thus following the US approach to securities-market regulation providing for a strong securities-market supervisory body. Other countries that had not enacted an earlier law, such as Azerbaijan,40 Kyrgyzstan,41 Moldova,42 Georgia,43 and Armenia,44 followed Russia with the introduction of comparable concepts. Especially in the case of Moldova, Georgia, and ArmeniaPDAEJ®QAJ?A of foreign, especially US, advisers is palpable.45 In those countries that already had laws in place, like Ukraine and Uzbekistan, legislators tried PK­HHE@AJPE­A@C=LOEJPDA=NA=OKBEJBN=OPNQ?PQNA=J@OP=PAOQLANREOEKJ >U@N=BPEJCH=SOOLA?E­?=HHUBKNPDEOLQNLKOA 2DQOUzbekistan adopted several laws dealing with a variety of activities conducted by professional market participants,46 whereas the parliament in Kiev passed laws on state sion for Securities and Stock Markets”; Edict of the President of Uzbekistan No.1278, 7 September 1995, “On Additional Measures to Develop a Securities Market”. 39

Law of the Russian Federation No.39, 22 April 1996, “On the Securities Market” (the “Russian LSM”).

40

Law of Azerbaijan No.523, 14 July 1998, “On Securities” (the “Azeri LSM”).

41

Law of Kyrgyzstan No.95, 21 July 1998, “On the Securities Market” (the “Kyrgyz LSM”); Edict of the President No.291, 1 October 1998, “On the National Securities Market Commission Under the President of Kyrgyzstan”.

42

Law of Moldova, 18 November 1998, “On the Securities Market” (the “Moldovan LSM”); Law of Moldova, 12 November 1998, “On the National Securities Commission”.

43

Law of Georgia, 24 November 1998, “On the Securities Market” (the “Georgian LSM”).

44

Law of Armenia No.82, 28 July 2000, “On Regulation of the Securities Market” (the “Armenian LSM”)

45

Especially the Armenian LSM is highly sophisticated. It is the most complex law of all the CIS countries, covering all relevant issues in detail, including self-regulatory KNC=JEV=PEKJO=J@@EɳANAJPBKNIOKBHE=>EHEPUKBI=NGAPL=NPE?EL=JPO 2DAMQAOPEKJ remains, however, as to whether it meets the needs of the market. As the EBRD study shows, the Armenian securities market has not gained momentum even four years after the enactment of the law. In fact, stock-market capitalization sank from 1.3% (1999) to 0.5% of GDP (2004), EBRD, op.cit. note 19. This indicates that portfolio investors are not willing to invest, even though the legal framework is quite elaborate. An outcome could be to concentrate more on strategic investors.

46

Laws of Uzbekistan No.218, 25 April 1996, “On the Mechanism for the Functioning of Securities Markets” (the “Uzbek LSM”) and No.672, 29 August 1998, “On the Activities of Depositories in Securities Markets”.

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control and the circulation of securities.47 In )=V=GDOP=JPDA­NOPH=SBNKI 1991 was replaced by a completely new law “On the Securities Market”, SDEHA=JKPDANH=SS=O@ARKPA@OLA?E­?=HHUPKPDAEOOQAKBNACEOPN=PEKJKB securities holders.48 The third wave of securities-market regulation could be placed under the heading of “improving investor protection”. To this end, special laws on investor protection were enacted in Russia,49 Azerbaijan,50 and Uzbekistan,51 while Kazakhstan passed a regulation on the level of the Securities Commission’s rule.52 The main innovation of these documents was the introduction of liability for making false statements in prospectuses, as well as measures for improving transparency, increasing the authority of state supervisory bodies and self-regulatory bodies, and paving the way for the introduction of compensation schemes. With respect to recent legal developments, one should note the complete revision of the Kazakh Law “On the Securities Market”, of 2003.53 In addition to this, the former state supervisory bodies on securities markets, insurance services, and banks, which previously existed as separate bodies, were merged into a single agency.54 In Russia, on the other hand, the former State Commission, the FCSM, was transformed into the Federal Service for Financial Markets (FSFM), which was placed under the control of the government.55 47

Laws of Ukraine No.710, 10 December 1997, “On the National Depository System and 1LA?E­?OKB#HA?PNKJE?!EN?QH=PEKJKB1A?QNEPEAOEJUkraine” and No.448, 30 October 1998, “On State Regulation of the Securities Market” (the “Ukrainian LSM”).

48

Laws of Kazakhstan No.77, 5 March 1997, “On the Securities Market” and No.78 “On Registration of Contracts With Securities in the Republic of Kazakhstan”.

49

Law of the Russian Federation No.46, 5 March 1999, “On Protection of the Rights and Legal Interests of Investors in Securities Markets” (the “Russian Investor Protection Law”).

50

Law of Azerbaijan, 16 January 2000, “On the Protection of Investor Rights in Securities Markets” (the “Azeri Investor Protection Law”).

51

Law of Uzbekistan, 30 August 2001, “On the Protection of Investor Rights in Securities Markets” (the “Uzbek Investor Protection Law”).

52

Regulation of the Kazakh Securities Commission No.678, 10 December 2000, “On Several Measures on the Protection of the Rights and Legally Protected Interests of Investors in the Securities Market”.

53

Law of Kazakhstan No.461, 2 July 2003, “On the Securities Market” (the “Kazak LSM”).

54

Law of Kazakhstan, 4 July 2003, “On State Regulation and Supervision of Financial Markets and Financial Organizations”.

55

Edict of the President of the Russian Federation No.314 of 9 March 2004.

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Key Concepts of Securities-Market Regulation The three basic objectives of securities regulation =O @A­JA@ >U PDA IOSCO in its Objectives and Principles of Securities Regulation (“IOSCO Objectives and Principles”),56 are: — Protection of investors; Ð #JOQNEJCPD=PI=NGAPO=NAB=ENPN=JOL=NAJP=J@Aɹ?EAJP=J@ — Reduction of systemic risk. To achieve these objectives, IOSCO has formulated a set of principles covering several aspects of securities-market regulation, ranging from the state regulatory body and self-regulatory organizations to regulation of issuers, market intermediaries, and collective investment schemes, as well as the regulation of secondary markets and clearing and settlement. Even more aspects have been taken into consideration by Professors H=?G=J@!KɳAA57 who point to the pivotal role played by gatekeepers (especially auditors) and their independence, as well as to the role of an AɳA?PERAFQ@E?E=HOUOPAI 5EPDNAOLA?PPKPDAH=SO@AO?NE>A@DANASAOD=HH restrict ourselves to examining the implementation in the CIS of those recommendations that refer to market intermediaries, issuers, secondary markets, and state regulatory bodies. Regulation of Market Intermediaries As foreseen by the IOSCO Objectives and Principles, regulation should cover the entry of market participants, such as brokers and dealers, as well as the supervision of their activities in accordance with capital and other requirements. While all of the above-mentioned CIS laws deal with these EOOQAOPDAU@EɳANEJPANIOKBPDAATPAJPKBNACQH=PEKJ  Securities-market activities, which are subject to licensing in accor@=J?ASEPD=HHKBPDA=>KRAÎIAJPEKJA@H=SO=NA@A­JA@EJIKNAKNHAOO the same way. As a standard, one could take the Russian law, which covers the activities of brokers, dealers, portfolio managers, clearing agencies, depositories, shareholder registrars, and the organization of securities trading.58 The Kazakh law deviates only to the extent that it regulates “custodians” instead of “depositories”, contains a special provision for 56

IOSCO, Objectives and Principles of Securities Regulation, Madrid 2003, available online at .

57

B. Black, “The Legal and Institutional Preconditions for Strong Securities Markets”, 48 UCLA Law Review( !KɳAA¢1P=NPEJCBNKI1?N=P?D2DA*AC=H=J@ Institutional Steps to Viable Securities Markets in Transition Economies”, 27 Review of Central and East European Law 2001 No.1, 7.

58

Arts.3-9 of the Russian LSM.

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“transfer agents”, and refrains from regulating clearing activities.59 The Kyrgyz and the Ukrainian regulations are similar to the Russian one, despite the fact that Kyrgyzstan regulates the “activities of investment consultants” separately.60@EɳANAJP?KJ?ALP?=J>ABKQJ@EJGeorgia, where lawmakers preferred the idea of a general license for brokers. Apart from this, only central depositories, securities registrars, and stock exchanges are subject to a licensing requirement.61 Special rules on the licensing of market participants, as well as prudential regulations, are regularly established by the legal acts of competent supervisory bodies. In Russia, for example, details about the licensing procedure, as well as about the requirements to own funds, are stipulated in the relevant regulations of the FSFM.62 These regulations contain a number of requirements, personal as well as material, to be met before starting a business in the securities industry, and that are clearly borrowed from international standards. Especially with respect to capital requirements of market intermediaries, there is a clear tendency to bring national legislation in line with international standards.63 The same regulatory technique is also applied in the other countries in question.64 Registration of Share Issues HH !'1 ?KQJPNEAO D=RA =@KLPA@ PDA CAJAN=H ?KJ?ALPЭNOP EJPNK@Q?A@ EJPDA3JEPA@1P=PAOÐPD=P=JKɳANEJCKBOA?QNEPEAOPKPDAgeneral public NAMQENAONACEOPN=PEKJSEPDPDA?KILAPAJPOP=PA>K@ULNEKNPKPDAKɳANEJC and another registration prior to trading.65

59

Arts.63-90 of the Kazakh LSM. Since Kazakhstan has introduced a central depository, the law may restrict itself to “custodians”.

60

Arts.8-18 of the Kyrgyz LSM; Art.4 of the Ukrainian LSM.

61

Art.20 of the Georgian LSM.

62

0ACQH=PEKJKBLNEH¢-J1Qɹ?EAJ?UKB$QJ@OKB+=NGAP.=NPE?EL=JPO£0ACQlation of 16 March 2005 “On the Procedure for Licensing for Types of Professional Activities in the Securities Market”.

63

Thus, for example, minimum capital requirements range from 500,000 rubles for dealers (approximately 15,000 euros) to 30 million rubles for registrars and trade organizers (approximately 900,000 euros).

64

In Ukraine, see “Licensing Requirements for the Operation of Securities-Market Participants” of 6 April 2001; in Kazakhstan, see the Regulation of 4 March 1997 “On the Procedure and Requirements for Licensing of the Right to Conduct Professional Activities in the Securities Market”.

65

Section 5 of the US Securities Act of 1933, Section 12 of the US Securities Exchange Act of 1934; T. Hazen, Securities Regulation, St. Paul, MN 1996, 408.



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In Russia, the relevant regulations were adopted in 1991.66 Enforcement S=O KJHU I=@A AɳA?PERA DKSARAN >U IA=JO KB PSK LNAOE@AJPE=H edicts from June and November 1994 that established the FCSM as the competent state body and banned from the market all securities that had not been registered.67 This concept was enshrined in the Russian Law “On the Securities Market” of 1996, which states that securities may be LH=?A@KJHU=BPANOP=PANACEOPN=PEKJKBPDAKɳANEJC 68 Using the U.S. model as a starting point, the Russian law introduced a bi-level registration procedure. First, the issuer has to register the issuance of securities on the basis of a corresponding prospectus, which becomes obligatory as soon as securities are KɳANA@PKIKNAPD=JLANOKJO 69 For the second stage of registration, the results of the issuance have to be registered with the competent state body.70PPDEOÓH=PPANÔOP=CAPDAEOOQAND=OPK­HASEPD the FCSM a report stating how many shares have been issued, at what price, and the proceeds the issuer has derived from the issue. According to the law on investor protection, securities holders can dispose of their securities only following this second registration.71 In fact, a kind of state control of securities issues has been established whereby the FCSM has >AAJAILKSANA@­NOPPKAT=IEJASDAPDANPDALQ>HE?D=O>AAJLNKLANHU informed by the corresponding prospectus and, second, whether traded shares have been paid up. The law expressly states, however, that the FCSM is liable only for the completeness of the information gathered.72 Since the law foresees a two-week period to check whether requirements have been complied with, the FCSM is forced to conduct random checks with respect to the accuracy of the information provided. The details have >AAJOPELQH=PA@EJOLA?E­?=?POKBPDAOA?QNEPEAOÎI=NGAPOregulator.73 66

RSFSR Council of Ministers Regulation No.78 of 28 December 1991.

67

Edict No.1233, 11 June 1994, “On the Protection of Investors” and Edict No.2068, 4 November 1998, “On Measures for the State Regulation of the Securities Market in the Russian Federation”.

68

Art.24 of the Russian LSM.

69

Arts.19 and 20 of the Russian LSM.

70

There are, though, a few exemptions, recently introduced into the Russian law. Tht requirement on the obligatory registrations with the state both of the issuance and of the results of the issuance was softened to some securities traded through a stock exchange (Arts.19 25 (2) and 27 (5-2) of the Russian LSM).

71

Art.5 (2) of the Russian Investor Protection Law.

72

Arts.20 (5) and 25 of the Russian LSM.

73

See “Standards for the Issuance of Securities and the Registration of a Prospectus”, as adopted by the FSFM by Ordinance No.05-4/pz-n of 16 March 2005 (“FSFM Ordinance No.05-4/pz-n”).

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Comparable registration requirements exist in other CIS countries. For example, Ukraine’s 1991 Law “On Securities and Stock Exchanges” BKNAO=S NACEOPN=PEKJ SEPD PDA ¢?KILAPAJP ­J=J?E=H >K@U£ >QP KJHU EJ 1998 was this task transferred to the newly established State Securities Commission of Ukraine.74 Here, too, the details have been stipulated in a Commission regulation providing for a bi-level registration procedure.75 In Kazakhstan, more-detailed provisions are stipulated in the securitiesmarket law of 2003, which also provides for this regulatory concept.76 The same provisions are made in other CIS countries, although with varying degrees of complexity.77 Prospectus Requirements The concept of a prospectus that needs to be registered with a competent state body and subsequently published made its way to CIS countries in 1991 as well.78PPDEOA=NHUOP=CADKSARANAɳA?PERAenforcement was H=?GEJC 2DEOC=LS=O­HHA@>UEJOP=HHEJCOA?QNEPEAOcommissions that had PDA =QPDKNEPU PK NACEOPAN LNKOLA?PQOAO =J@ =P PDA O=IA PEIA PK @A­JA the required contents thereof. Today, relevant legislation is in place in PDEONAOLA?P@EɳANEJCKJHUSEPDNAC=N@PKPDAN=JCAKB?EN?QIOP=J?AOEJ which a prospectus is dispensable and to the extent of information to be disclosed. The basic concept in this respect is that a prospectus is required whenever market-tradable securities (emissionnye tsennye bumagiÔ=NAKɳANA@ to the public. In general, based on negative experiences at the beginning KBPDAOPDA@A­JEPEKJKBPDEOBKNIKBOA?QNEPUEO=O>NK=@=OLKOOE>HAEJKN@ANPK?KRAN=HHL=LANOKɳANA@KJPDAI=NGAP 79 With regard to 74

Art.22 of the Law of Ukraine, 18 June 1991, “On Securities and Stock Exchanges”; see, also, the Ukrainian LSM.

75

Commission Regulation No.18, 9 February 2001, “On the Registration Procedure of an Enterprise’s Shares and Bonds and on Information About the Issue Thereof ”.

76

Regulation of the Agency for Regulation and Supervision of the Financial Market and Financial Organizations (“Agency of Financial Supervision”) No.268, 30 July 2005, “On the Rules for the State Registration of the Issue of Authorized Shares, !KJ­NI=PEKJKBPDA0AOQHPOKB=.H=?AIAJP=J@JJQHIAJPKB=J'OOQA£Ó¢CAJ?U of Financial Supervision Regulation No.268”).

77

See the Armenian LSM, the Azeri LSM, the Kyrgyz LSM, and the Uzbek LSM.

78

See, for example, Regulation of the RSFSR Council of Ministers No.78, 28 December 1991, “On the Issue and Circulation of Securities in the RSFSR” and Letter of the Finance Ministry No.3, 3 November 1992, “On the Rules of Issuing and Registration of Securities on the Territory of the Russian Federation”.

79

See, for example, Art.1 of the Russian LSM: emissionnye tsennye bumagi =NA@A­JA@=O any security, including dematerialized ones, characterized at the same time by the following traits:

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shares, the relevant provisions in the laws on joint-stock companies have to be taken into account. The principle here is that any share issue has to be registered, but a prospectus has to be prepared only if shares are offered to a number of persons beyond a certain threshold. Thus, in Russia a shareEOOQANAMQENAO=LNKOLA?PQOEBOD=NAO=NAKɳANA@PKIKNAPD=J investors.80 In Ukraine, the same concept applies, but a “document on public information”, i.e.=LNKOLA?PQOAMQER=HAJPEONAMQENA@EB=JKɳANEO =@@NAOOA@PK=JQJ@A­JA@JQI>ANKBLANOKJO 81 In Kazakhstan and Georgia, the distinction between open and closed joint-stock companies has been dropped; thus, any joint-stock company is entitled to issue shares to the general public. In Georgia, a prospectus EONAMQENA@=OOKKJ=OOA?QNEPEAO=NAKɳANA@ to more than 50 investors, whereas in Kazakhstan, whenever a joint-stock company issues shares, the preparation of a prospectus is mandatory.82 Other countries maintain =@EOPEJ?PEKJ>APSAAJLQ>HE?=J@LNER=PAKɳANEJCONAMQENEJC=LNKOLA?PQO only in the latter case.83 The current debate in more-advanced countries is focused on the question of whether companies may be exempted from prospectus and reporting requirements, since they are regarded to be too burdensome. One aspect of this issue is whether particular rules should =LLHUPK¢MQ=HE­A@EJRAOPKNO£=@EO?QOOEKJPD=PEOKJPDA=CAJ@=EJ0QOsia.84 With respect to the content required by law, and compared to the most recent European regulations in this respect,85 it may be said that, Ð  2DAU­T=CNKQLKBLNKLANPU=J@JKJÎLNKLANPUNECDPO 2DAU­T=CNKQLKBLNKLANPU=J@JKJÎLNKLANPUNECDPO — They are placed in issues; and — They embody an identical number of rights with the same maturity within one issue independent of the time of acquisition. What seems to be lacking in this respect are provisions on exempt securities; only the Armenian law provides for this. See Art.6 of the Armenian LSM. 80

Art.19 (2) of the Russian LSM.

81

Arts.22 and 23 of the Ukrainian Law “On Securities and Stock Exchanges”; State Securities Commission of Ukraine Regulation No.18, 9 February 2001, “On the Procedure for the Registration of the Issue of Shares and Bonds and on Information About the Issue Thereof ”.

82

Agency of Financial 1QLANREOEKJ0ACQH=PEKJ,K  2DEO=LLNK=?DI=U>AFQOPE­A@>U PDAB=?PPD=PFKEJPÎOPK?G?KIL=JEAOEJ)=V=GDOP=J=NAMQEPAH=NCA>U@A­JEPEKJ 2DA Kazakh Law “On Joint-Stock Companies”, in the redaction of May 2003, stipulates a minimum charter capital equivalent to approximately 300,000 euros.

83

See, for example, Art.5 of the Armenian LSM, Art.12 (1) of Azeri LSM, and Art.40 of Kyrgyz LSM.

84

FSFM Draft Development Strategy, op.cit. note 21, 4.

85

EU Regulation No.809/2004 of 29 April 2004 “Implementing Directive 2003/71 as Regards Information Contained in Prospectuses”.

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although prospectuses in CIS countries are far less detailed, the general structure of information contained in such a document complies with international standards. The most detailed regulation at the moment can be found in Russia.86 Here, the prospectus covers 10 major topics, each of which includes several items.87 In Kazakhstan, the prospectus has eight OA?PEKJO=J@?KRANO­BPUÎKJAEPAIO 88 Laws of all other countries provide for the content of the required prospectus as well, though competence for the regulation of details is given to the relevant state body. At the moment, one of most disputed issues is the question of the way in which documents have to be disclosed. Whereas most countries require the use of print media, others are currently considering, with a view toward cost reduction, whether to use the Internet as the sole source of information. If a country decides to take such a course, then it must also decide whether information should be distributed through an authorized provider or whether the issuer should be able to do this itself. In Russia, private information agencies, selected by the FSFM, are entitled to be assigned by issuers the task of disclosing information.89 Kazakhstan has opted for the latter method, whereby companies disclose information on their own websites.90 Periodic Disclosure Requirements With respect to disclosure requirements, the obligation to submit periodic reports may be distinguished from current reports on material events. The most important issues here are the range of companies subject to the disclosure obligation, as well as the requirements regarding the periodicity and content of the reports. All CIS countries have adopted the concept of “reporting companies”, meaning that all companies whose securities have been KɳANA@PK=J QJ@A­JA@JQI>ANKBEJRAOPKNOKNPD=PD=RAIKNAPD=J=?ANP=EJJQI>AN of shareholders are subjected to periodic disclosure requirements as well 86

Art.22 of the Russian LSM and “Standards for the Issuance of Securities and the Registration of a Prospectus”, adopted by FSFM Ordinance No.05-4/pz-n.

87

The major topics are: members of managing bodies; shares to be issued; basic inBKNI=PEKJKJ­J=J?E=HOP=PQOEJBKNI=PEKJKJPDAEOOQAN­J=J?AÎEJ@QOPNU=?PEREPU detailed information on members of managing bodies; information on shareholders and ?KJ®E?POKBEJPANAOPannual reports; detailed information on issue procedures; and additional information.

88

See Art.9 of the Kazakh LSM, Appendix I of Agency of Financial Supervision Regulation No.268.

89

In Russia, for example, these are AK&M, , and Interfax, .

90

Agency of Financial Supervision Regulation No.3860 of 29 September 2005.

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as the obligation to disclose material events as they happen. Exemptions =LLHUKJHUPKOI=HHKɳANEJCOEJPANIOKBPDAJQI>ANKBEJRAOPKNO 91 The fact of being traded on an organized market, as foreseen in EU directives, is of minor importance. In Russia and Georgia, quarterly and semi-annual reports, respectively, are required from all companies, and annual reports have to be attached to those reports once a year.92 With respect to the information that is subject to disclosure, it is interesting to note that the relevant provisions are quite detailed.93 However, companies are entitled to withhold information that is considered to be a commercial secret. In Kazakhstan, public disclosure to investors is required only if the company is listed on the stock exchange.94 In Ukraine, the publication of annual reports and of special reports in case of material events is provided for in the law on securities and applies regardless of whether a company is listed or not.95 Quarterly reports are mandatory for companies in which the state has a holding of at least 10%.96 Finally, it should be mentioned that implementation of the International Accounting Standards and International Financial Reporting Standards (IAS/IFRS) has not yet been completed. In Russia, although national accounting standards are oriented toward international standards, their application is still not obligatory.97 Kazakhstan has developed an action plan in accordance with which IAS should have been introduced by the end of 2005;98 however, this aim has not been achieved. In Georgia, 91

In Russia, for example, a company must have at least 500 shareholders.

92

Art.30 of the Russian LSM; Art.11 of the Georgian LSM; see A. Bushev, “The Theory and Practice of Corporate Governance in Russia”, 27 Review of Central and East European Law 2001 No.1, 83-91.

93

For Russia, see “Regulation of Disclosure of Information by Issuers of Market-Tradable Securities”, adopted by the FSFM, Ordinance No.05-5/pz-n of 16 March 2005, especially Chapters V and VI.

94

See Art.102 of the Kazakh LSM; Arts.76 and 79 of the Kazakh Law “On Joint-Stock Companies”.

95

Arts.24 and 25 of the Ukrainian Law “On Securities and Stock Exchanges”, Securities Commission Regulation No.72 of 9 September 1998 (regular reports), Securities Commission Regulation No.2 of 10 February 2000 (special reports).

96

State Securities Commission Regulation No.248 of 4 September 2001.

97

FSFM Draft Development Strategy, op.cit. note 21, 47. For further information, see G. Preobragenskaya and R. McGee, “Converting the Accounting System of a Transition Country: A Case Study of Russia”, Andreas School of Business Working Paper, May 2003, available online at .

98

Decision of the Prime Minister of Kazakhstan No.88-r, 15 May 2003, “On the Plan of Measures for Transition to IAS in the Republic of Kazakhstan in the 2003-2005”.

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international accounting principles have been adopted, but the general level of accounting practice has been criticized.99 Fair Trading Regulations As foreseen by the IOSCO’s Objectives and Principles, regulation should be designed in such a way that it deters price manipulation and other unfair trading practices. With respect to market intermediaries, the Objectives and Principles also envisage rules aimed at the protection of investors by setting standards of conduct: intermediaries shall be obliged to act in the best interest of their clients and thus preserve market integrity. In this respect, several EU directives have been enacted100 that may serve at least as guidelines in this context. In CIS countries, fair trading regulations have been only partly implemented. As an example, the relevant articles of the Russian securities-market law may be cited.101 These prohibit the personal use of professional information and communication thereof to third parties. However, PDEO @A­JEPEKJ OP=NPO BNKI = LNKBAOOEKJ=H NAH=PEKJODEL PK PDA EOOQAN KJ the basis of which the information has been obtained. As a consequence, misuse by third parties is not covered. In comparison with EU law, this is a gap that the Russian legislator has yet to close.102 The issue of price manipulation was in the beginning essentially left to self-regulatory organizations (SRO), especially trade organizers.103 In 2002, however, the Russian Law “On the Securities Market” was amended by more-detailed provisions in this respect, now providing a list of operations constituting “manipulation of prices”.104 On the contrary, Russia’s securities-market law has stipulated basic standards of conduct for market participants since the beginning.105 But 99

C. Buckley, “Improving Corporate Governance in Georgia”, Georgian Economic Trends No.2 2005, 69.

100

EU Directive 93/22, 10 May 1993, “On Investment Services in the Securities Field”; EU Directive 2003/6, 28 January 2003, “On Insider Dealing and Market Manipulation”; EU Directive 2003/125, 22 December 2003, “As Regards the Fair Presentation of Investment Recommendations and the "EO?HKOQNAKB!KJ®E?POKB'JPANAOP£

101

Art.31 of the Russian LSM.

102

See Art.4 of EU Directive 2003/6, 28 January 2003, “On Insider Dealing and Market Manipulation”. In Russia, a draft law “On Insider Information” has been debated for a long time, though not yet adopted.

103

Art.9 of the Russian LSM.

104

Art.51 (2) of the Russian LSM.

105

SeeArt.3 on the activities of brokers. According to Section 2, brokers are obliged PK=?PEJCKK@B=EPD=J@BQH­HKN@ANOEJKN@ANKBLNEKNEPU 3J@EO?HKOA@?KJ®E?POKB interest entitle the client to compensation for damages in case of losses “according to civil legislation”.

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here, too, details were left to the regulatory power of SROs until 1999, when =HEOPKBOLA?E­?EJBKNI=PEKJPKLNKRE@APKEJRAOPKNOS=O@A­JA@>UPDA law on investor protection.106 Beyond the minimum standards established by the law on investor protection, the task of providing for appropriate rules and regulations is still delegated to SROs.107 More-detailed provisions have been established in the Armenian and the Georgian laws,108 though SEPDKQP=JUEJ®QAJ?AKJPDAHEMQE@EPUKBPDAI=NGAP=O­CQNAOKJI=NGAP capitalization show. State Supervision of Securities Markets Starting with the enactment of US securities regulations in the 1930s, state supervision of securities markets has become a major feature of securities regulation worldwide. Although the need for an independent regulator has been disputed in economic theory,109 at least legal history gives the impression that public supervision of securities markets is indispensable. Correspondingly, the IOSCO Objectives and Principles are devoted to this aspect in great detail, too. In particular, the Principles recommend that an independent state body be established that is charged with the task of supervision and vested with adequate rule-making and enforcement powers. In line with this recommendation, specialized state bodies have been established in all CIS countries: Armenia,110 Azerbaijan,111 Belarus,112 106

Art.6 of the Russian Investor Protection Law.

107

Art.50 of the Russian LSM.

108

Art.48 of the Armenian LSM; Art.44 of the Georgian LSM.

109

In a recent study based on empirical material from 49 developed countries, La Porta, Lopez-de-Silanes, and Shleifer concluded that “several aspects of public enforcement, such as having an independent and/or focused regulator or criminal sanctions, do not matter”. R. La Porta, F. Lopez-de-Silanes and A. Shleifer, “What Works in Securities Laws?”, Tuck School of Business Working Paper No.03-22, 2003, available online at . Russian legal hisPKNUEJL=NPE?QH=N@KAOJKPOQLLKNPPDEO­J@EJCOEJ?APDA0QOOE=Jsecurities market C=EJA@IKIAJPQIKJHUSDAJ=IKNAKNHAOOAɳA?PERAOP=PAOQLANREOKNU>K@US=O established. The need for a specialized state regulator, particularly, for the post-Soviet countries is widely supported in the Russian literature. See N. Kozlov, Formirovanie rynka tsennykh bumag v postsotsialisticheskikh stranakh, Moscow 2002, available online at <www.mirkin.ru/_docs/book0307_30.pdf>.

110

The Securities Commission of Armenia, Art.117 of the Armenian LSM. See .

111

The State Committee for Securities, “Resolution on the State Committee for Securities Under the President”, enacted by Edict of the President No.161 of 26 July 1999.

112

The Commission for Securities Under the Council of Ministers of the Republic of Belarus. See . Under Presidential

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Georgia,113 Kazakhstan,114 Kyrgyzstan,115 Moldova,116 the Russian Federation,117 Ukraine,118 and Uzbekistan.119 In the following sections, the most important questions as to regulation of supervisory bodies shall be examined in more detail. First, however, it is necessary to introduce some general observations on the type of state interference in securities markets. Some General Observations on State Intervention in the Corporate Sector in CIS Countries When evaluating the overall level of securities-market regulation and the role of the state therein, the general attitude toward interference in the corporate sector has to be taken into account. In this respect, it should be noted that, in CIS countries, especially with regard to so-called strategically important enterprises, state administrative bodies have not >AAJ=>HAPKNAOEOPPDAPAILP=PEKJPKPNUPKEJ®QAJ?APDAI=NGAPPDNKQCD formal legal means. Edict No.289 of 5 May 2006, the Commission will be reporting temporarily to the +EJEOPNUKB$EJ=J?A 1AASSS IEJ­J CKR >U 113

The National Securities Commission of Georgia, Arts.46-54 of the Georgian LSM. See . On the development of the Georgian securities market see, also, American Chamber of Commerce in Georgia, Investment Guide, Tbilisi 2005, available online at
114

Agency of Financial Supervision Law No.474, 4 July 2003, “On State Regulation and Supervision of Financial Markets and Financial Organizations”; “Statute of the Agency for Regulation and Supervision of the Financial Market and Financial Organizations”, adopted by Edict of the President No.1270 of 31 December 2003. See .

115

The National Commission on the Securities Market, Arts.3-7 of Law No.95 “On the Securities Market”; “Statute on the National Commission on the Securities Market Under the President”, enacted by Edict of the President No.291 of 1 October 1998. See .

116

The National Securities Commission, Law, 12 November 1998, “On the National Securities Commission”. It is likely that in 2007, the Commission may be restructured =J@IANCA@SEPDKPDAN=QPDKNEPEAONACQH=PEJCPDA­J=J?E=HI=NGAPÓAT?ALP>=JGEJCÔ  See .

117

The FSFM, Arts.40-47 of the Russian LSM. See .

118

The State Commission for Securities and Stock Markets. See the Ukrainian LSM, Edict of the President No.142, 14 February 1997, “Statute of the State Commission for Securities and Stock Markets”; also .

119

Center for Coordination and Control of the Functioning of the Securities Market, Art.20 of the Uzbek LSM, “Statute on the Center for Coordination and Control of the Functioning of the Securities Market”, enacted by Order of the Cabinet of Ministers No.126 of 30 March 1996. See .

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For example, after hearing the case of Gusinsky v. Russia (Application No.70275/01), the European Court of Human Rights noted in its decision of 19 May 2004 that public legal methods like opening a criminal case and =NNAOPODKQH@JKP>AQOA@=O=IA=JOKBATANPEJCEJ®QAJ?ASDAJ?KJ@Q?PEJC negotiations with regard to private-law transactions (Gazprom’s acquisition of shares in the closed joint-stock company Media Most).120 The very same court will consider the application of the oil company YUKOS in YUKOS v. Russia (No.14902/04). By deciding for the recovery from YUKOSKBOECJE­?=JPOQIOKBIKJAUEJB=RKNKBPDAOP=PAPDA0QOsian regional commercial arbitration court, contrary to existing judicial practice, did not apply the three-year statute of limitations established in Art.113 of the Russian Tax Code. As a result of such a payment to the state, the company was forced into bankruptcy, and in attempting to avoid this, 73)-1¥OOD=NAOSANAOKH@KɳPK?KIL=JEAO=ɹHE=PA@SEPDPDAOP=PA  The Russian Constitutional Court took a judicial stance justifying the possibility for the tax organs to ignore the statute of limitations despite the absence of legally established grounds for doing so.121 This legal position, =??KIL=JEA@>ULAPEPEKJOBNKIOARAN=HOP=PAKɹ?E=HOS=ONA®A?PA@PK= CNA=P@ACNAAEJPDA®Q?PQ=PEKJKBPDALNE?AKBYUKOS shares. Further, there are well-known cases where CIS states, contrary to international obligations, have interfered in legal disputes between commercial organizations of various countries. The Russian public company Sovtransavto Holding, controlling 49% of the shares in the Ukrainian company Sovtransavto*QC=JOGHKOP=P­NOP=L=NPKBEPOOD=NAL=?G=CA (from 49% to 20.7%) and then the entire package as a result of the adoption by other shareholders of the Ukrainian company of a variety of corporate decisions. The European Court of Human Rights, which considered in 2002 a petition from the Russian company, ruled as inadmissible, in L=NPE?QH=NLNAOOQNABNKI=OAJEKN3GN=EJE=JOP=PAKɹ?E=HKJPDAFQ@CAO considering the dispute.122 120

Documents from the European Court of Human Rights are available online at <www. echr.coe.int>.

121

Decision of the Constitutional Court of the Russian Federation No.9-P of 14 July 2005; Ruling of the Constitutional Court of the Russian Federation No.36-O of 18 January 2005. The approach taken by the Constitutional Court, which has perplexed many lawyers, can likely be explained by the following citation from the personal opinion of Justice A.L. Kononov of the Constitutional Court: “The application of PDEONACQH=PEKJÕNP KBPDA2=T*=SÖD=@JKP?=QOA@=JU@Eɹ?QHPEAOEJLN=?PE?A=O long as there had not arisen the clear need to circumvent the preclusive character of this period and justify a straightforward deviation from the law allegedly for public (state) interests.”

122

Sovtransavto Holding v. Ukraine (Application No.48553/99), judgment of 25 July 2002, available online at .

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Although the legal framework has improved in the meantime, it might be suspected that the Government’s attempts to interfere in the trading of large blocks of shares will continue, as soon as “national interests” are concerned. The main problem in this respect is the lack of clear =J@PN=JOL=NAJPNQHAO@A­JEJCPDAOP=PA¥OEJPANAOPO=J@PDAS=UOEJSDE?D it can realize them.123 Organizational Structure of State Regulatory Bodies With regard to the organizational structure of supervisory bodies, the pivotal question relates to their independence. For example, in Russia the corresponding state body entrusted with the task of supervising securities markets was established “under the president”, meaning that it was accountable directly to the head of state.124 In Kazakhstan, on the other hand, the National Bank was charged with the supervisory task from the beginning. In other countries, competent state bodies were established in an independent manner right from the beginning, which led to a compromise with respect to the state body to be vested with the power to appoint its members. Thus, in Ukraine, members of the Securities Commission have to be appointed by the president and approved by the parliament.125 In some countries, such as Moldova, members of the Commission are nominated and elected by the parliament.126 As to the territorial structure in Russia and Ukraine, supervisory functions at the local level are exercised by local branches, whereas in other countries these functions are concentrated in one centralized body. As mentioned earlier, in 1996, a Federal Commission was established in Russia and endowed with more independence and authority on the basis of the new Law “On the Securities Market”. Its head was given the status of a federal minister, and its organizational structure was completed by the establishment of a Committee of the Federal Commission and an Expert Council.127'POLKSANO=J@@QPEAOSANAOLA?E­A@EJ=J=IAJ@IAJPPKPDA Law of December 2002, yet the Commission’s status was reduced in 2004 to a Federal Service under the Government of the Russian Federation.128 123

According to press reports, national interests were at stake in the YUKOS case; the Government’s aim was to prevent foreign owners from gaining control of energy resources in Russia.

124

In Russia, see Edict of the President No.2063, 4 November 1994, “On Measures for the State Regulation of the Securities Market”, Section 6.

125

Art.6 of the Ukrainian LSM.

126

Art.11 of the Moldovan Law “On the National Securities Commission”.

127

Art.40 (Head of Commission); Art.41 (Committee); Art.45 (Expert Council) of the Russian LSM.

128

Art.40 of the Russian LSM, as of July 2004; “Statute of the Federal Service for Financial Markets”, enacted by Decree of the Government No.317 of 30 June 2004.

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The two additional bodies mentioned above were abolished, and the function of general leadership of the Service was given to the Government. Contrary to its name (Federal Service for Financial Markets), it does not have jurisdiction over insurance, banking, or auditing services. At the same time, the FSFM Draft Development Strategy proposes unifying all authority over the legal regulation, control, and monitoring KB=HHOA?PKNOKB­J=J?E=HI=NGAPOSEPDEJPDABN=IASKNGKB=OEJCHA>K@U along with the simultaneous creation of a National Council on Financial Markets to be a coordinating agency.129 )=V=GDOP=JD=OP=GAJ=@EɳANAJPL=PD 'JPDACAJ?UBKN$Enancial Supervision was detached from the Central Bank and granted the status of a state body directly responsible to the president. This agency is responsible for supervision of the securities market, as well as for the market for banking and insurance services and pension funds. It has a six-person board that is responsible for strategic and major decisions and a president who is in charge of its day-to-day business. This organizational structure—a commission (board) and a president who presides over the commission and is responsible for the execution of its decisions—which was also in place in Russia until 2004, can now be found in most CIS countries.130 Competencies and Powers With respect to the distribution of regulatory competence, the main question is whether to have a single regulator responsible for all kinds of ­J=J?E=HOANRE?AOKN=R=NEAPUKBOP=PA>K@EAOQOQ=HHU@ERE@A@=IKJCPDA banking sector, the securities market, and KPDAN­J=J?E=HOANRE?AOAOLAcially insurance. With the exception of Kazakhstan, which has installed a single body, all other CIS countries have opted to separate supervisory power between the Central Bank, a state body responsible for the securities market, and additional agencies.131 With respect to the powers of the state bodies responsible for supervision of the securities market, rule-making power can be distinguished from enforcement power. In those countries that have established a commission or a board, these are generally the competent rule-making 129

FSFM Draft Development Strategy, op.cit. note 21..

130

See Arts.48 and 50 of the Georgian LSM; Arts.10 and 25 of the Moldovan Law “On the National Securities Commission”; for Ukraine, see Edict of the President No.142, 14 February 1997, “Statute of the State Commission for Securities and Stock Markets”, Section 9.

131

The last country to move in this direction was Ukraine, which created a State Commission for Regulation of Financial Services through Law of Ukraine No.2664, 12 July 2001, “On Financial Services and State Regulation of Financial Services”.

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bodies, whereas the chairman of the commission is at the same time the head of the state body itself and thus responsible for enforcing the legal acts adopted by those bodies.132 As far as matters of enforcement are concerned, a distinction should be made between several aspects. First, supervisory bodies must have the necessary powers to conduct investigations. If a supervisory body establishes that a violation has taken place, then it must have the power to EILKOAAɳA?PERAO=J?PEKJOSDE?DI=UN=JCABNKINARKGEJCHE?AJOAO=J@ issuing cease-and-desist orders on the issuance and trading of securities to administrative and even criminal sanctions. One of the most powerful commissions in the CIS region appears to be the Georgian one. Its powers, including the authority to conduct inspections on the spot, are established in detail in the law, as is its authority to force individuals to undertake OLA?E­?IA=OQNAOPKNARKGAPDANACEOPN=PEKJKB=OA?QNEPEAOEOOQAPKvoid transactions in certain securities, to revoke licenses, and to impose penalties.133 It is interesting that the Georgian Commission is even entitled to remove company managers, as well as managers of market participants, from their posts and to seek judicial invalidation of transactions and compensation for losses incurred by a company or its security holders.134 Other countries have not gone so far. The Kazakh Agency for Financial Supervision is an example of a supervisory body with rather modest enforcement powers, which concentrate on rule-making and licensing, but not on enforcement.135 The commissions in other countries have powers that fall within this spectrum: The Ukrainian State Commission may be seen as a rather powerful body,136 whereas the Russian FSFM’s competencies are rather vague.137 It is worth mentioning that annulment of securities issues and imposition of penalties are the most relevant sanctions applied by securities commissions in CIS countries. In this respect, administrative-sanctions 132

A major exemption in this case is Russia, where the instalment of a collective body charged with rule-making functions is demanded by the FSFM. See FSFM Draft Development Strategy, op.cit. note 21, 63.

133

Arts.52 and 55 of the Georgian LSM. See, also, Arts.121 and 132 of the Armenian LSM.

134

Art.16 (5) of the Georgian LSM. In this and other respects, the Georgian Law closely follows the SEC as a model. See Hazen, op.cit. note 65, 420.

135

See the “Statute of the Agency for the Regulation and Supervision of the Financial Market and Financial Organizations” of 31 December 2003.

136

Art.8 of the Ukrainian LSM; “Statute of the State Commission for Securities and Stock Markets”, Section 5.

137

Art.44 of the Russian LSM; “Statute of the Federal Service for Financial Markets”, Section 6.

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codes deserve special consideration. For example, the corresponding Russian code stipulates as a sanction for violation of disclosure rules a penalty of up to 40-50 (for an individual) or 400-500 (for legal entities) monthly minimum wages,138SDE?DEOJKPOQɹ?EAJP 139 Criminal sanctions are even less developed.140

Basic Regulatory Problems When contemplating HAC=HNABKNIEJPDA­AH@KBOA?QNEPEAOÎI=NGAPlegislation in CIS countries, several reservations have to be made. First, there has been a considerable variety in the regulatory achievements in these countries. According to the results of the EBRD study mentioned earlier, in some countries, “legislation appears to be in its earliest stage of development”, while the most advanced are already in “medium compliance” with international legal standards.141 In referring to those medium-compliance countries, the authors of the study concluded that there is extensive legislation in place, though details related to market supervision and prudential regulation still have to be improved. It shows that a regulatory gap in KJA?KQJPNUIECDPD=RA=HNA=@U>AAJ­HHA@EJ=JKPDANBKNUA=NO 2DQO= KJAÎOEVAέPOÎ=HH=LLNK=?DEOJKPBA=OE>HA@QAPKPDA@EɳANAJPOP=CAOPD=P countries have reached in their legal development. More generally, one should keep in mind that no consensus has been reached on the role and function of securities markets in countries in transition. There is a large group of authors who have expressed the opinion that AMQEPU­J=J?EJCEOPDAKJHUS=UPK­J=J?AAJPANLNEOArestructuring by channeling private money via pension funds into securities markets.142 Others hold the view that, in fact, enterprises in the region are still not NA=@UBKNAMQEPU­J=J?EJC>QPN=PDANPD=PPDAUODKQH@NAOKNPPK@A>P­J=J?ing=J@EJRAOPEJCQJ@EOPNE>QPA@LNK­PO 143 In this respect, it is interesting to note that the enterprise bond market is the fastest-growing one in, for 138

Art.15: sections (17) (unfair securities issue) and (19) (violation of disclosure obligations) of the Russian Code of 20 December 2001 “On Violations of Administrative Law”.

139

See FSFM Draft Development Strategy, op.cit. note 21, 52: “Four hundred minimum IKJPDHUS=CAO=NA?HA=NHUEJOQɹ?EAJP £

140

In Russia, amendments to the Criminal Code were adopted in 2002, foreseeing penalties for false statements in prospectuses, securities issues without registration, and violations of disclosure obligations, Arts.185, 185-1 of the Russian Criminal Code.

141

EBRD, op.cit. note 19.

142

Black, op.cit JKPA!KɳAAop.cit. note 57.

143

G. Lumelsky, “Does Russia Need a Securities Law?”, 15 Northwestern Journal of International law and Business Fall 1997, 111.

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example, Russia,144 a sign that creditors are in fact more welcome than shareholders to company directors in transition economies. From a legal point of view, this discussion is important with respect to the question of which group of investors deserves greater attention: shareholders or creditors. Although it has been stated repeatedly that creditors do not need that much protection since they are in a position to defend their interests on their own, a comparison with other transition countries, especially in Eastern and Central Europe, shows that the MQAOPEKJEOJKPKJAKB¢AEPDAN KN£>QPKB­J@EJCPDANECDP>=H=J?A>APSAAJ creditors and shareholders.145 Returning to some of the prominent problems in the area of securities-market regulation, a review mainly of Russian literature146 shows that reliable registration of shareholder rights has been at the center of attention for a long time and still needs improvement. With respect to a more technical point of trade regulation, the introduction of central depositories is of primary importance. Keeping in mind that in CIS countries company groups are widespread and related-party transactions are still a major concern, @EO?HKOQNANACQH=PEKJ=O=­NOPOPALPKBQNPDAN control mechanisms deserves attention. These topics will be examined in the following sections. Registration of Shareholders One of the core principles of corporate governance stressed by the OECD is the right of shareholders to secure methods for registering their share ownership.147 The practical relevance of this principle became clear at the beginning of Russia’s transition process, when millions of people became shareholders through mass privatization; however, the necessary infrastructure for shareholder registration was lacking. Since printing such a DECDJQI>ANKBOD=NA?ANPE­?=PAOS=OAEPDANEILKOOE>HAKNPKKATLAJOERA companies resorted to shareholder registers. The shareholder register was, 144

I. Sizov, “Aktual’nye problemy razvitiia rossiiskogo fondovogo rynka”, Voprosy Ekonomiki 2003 No.7, 26: “Already today, corporate bonds are in fact the only instrument attracting investments into Russian industry through the securities market.”

145

K. Pistor, “Patterns of Legal Change: Shareholder and Creditor Rights in Transition Economies”, 1 European Business Organisation Law Review 2000 No.1, 59. According to A. Abramov, there is a tight “link between market capitalization and the amount of bank loans”; see A. Abramov, “Problemy konkurentosposobnosti rossiiskogo fondovogo rynka”, Voprosy Ekonomiki 2005 No.12, 32.

146

Mirkin, op.cit. note 24, 360; FSFM Draft Development Strategy, op.cit. note 21; Sizov, op.cit. note 144, 26.

147

OECD, Principles of Corporate Governance, Paris 2004, Principle II A, available online at .

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in fact, often just a simple sheet of paper where the names of shareholders and the number of their shares were recorded.148 Since company management itself was responsible for maintaining the registers, cases of misuse and manipulation inevitably emerged.149 Thus, legal developments in this ­AH@D=RA?KJ?AJPN=PA@KJAɳKNPOPKI=GANACEOPANOO=BA 150 The appropriate legal means of achieving this is to assign the task of shareholder registration to independent registrars and subject them to licensing requirements, as well as state supervision. This is generally the method all CIS countries have chosen. Most have opted in favor of registered shares, which means that share ownership is proven on the basis of an entry in the shareholder register. According to the legislation on jointstock companies in nearly all CIS countries, companies with more than a @A­JA@JQI>ANKBOD=NADKH@ANOD=RAPKCERAPDAP=OGKBI=EJP=EJEJCPDA register to an independent registrar.151 As experience in Russia has shown, however, EPEOJKPOQɹ?EAJPPK@AI=J@BKNI=HHUEJ@ALAJ@AJPNACEOPN=NO that are in fact owned by the company whose shares they administer (so?=HHA@LK?GAPNACEOPN=NOÔ 2DQOPDALNK>HAIKB@A­JEJCSD=PEOIA=JP by the term independent remains to be solved. For this purpose, licensing requirements have been established that require a minimum charter capital, as well as @EO?HKOQNAKBI=FKNDKH@EJCO=J@KPDAN=ɹHE=PEKJOSEPD the company. Another way to ensure the independence of registrars is to grant the power to choose the registrar to shareholders’ meetings. Although regulation of registration of share ownership seems simple, problems in this respect have not disappeared. There are still cases where the records of shareholders are erased from registers, either due to simple manipulation or through forged share transfer orders. Current debates surround the question of whether the acquirer should be protected because of his good faith or whether the actual owner is really safe. At this

148

In Russia, for example, the corresponding Regulation No.601 of 12 December 1990 declared that companies were only allowed to issue registered shares and obliged to take care of registration, Section 46.

149

OECD, White Paper on Corporate Governance in Russia, Paris 2002, Section 30, available online at .

150

It is interesting to note that, in the beginning, the argument was made that registered securities are less prone to machinations than bearer securities. Russian legal history does not support this idea.

151

See, for example, Art.44 of the Russian Law “On Joint-Stock Companies”; Art.19 of the Kazakh Law “On Joint-Stock Companies”; Art.9 of the Ukrainian Law “On the National Depository System”; see, also, OECD, Corporate Governance in Eurasia: A Comparative Overview, Paris 2004, 35, available online at .

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stage, Russian courts have tended to protect acquirers in good faith.152 Other problems occur because the system of shareholder registration is company-driven, not shareholder-driven. This means that contractual relations exist between the registrar and the company but not between the registrar and the shareholder. Problems ensue when directors use PDAEN EJ®QAJ?A PK D=NI PDA EJPANAOPO KB OD=NADKH@ANO e.g., cases have been reported where directors who were facing dismissal by new majority shareholders terminated the contract with the registrar and refused to hand over the necessary documents to the new owners.153 Another issue that needs additional consideration in CIS countries is related to the protection of investor rights when trading securities through nominal holders 'PEOOQɹ?EAJPPKJKPA=?=OABNKISDAJPDA0QOOE=J FCSM, in our view, mistakenly interpreted the law, expressing the opinion that registration of an investor with a nominal holder (who is registered with the issuer) is not enough to give rise to the right of ownership to a security.154 In our view, the regulator’s approach contradicts not only the applicable Russian legislation but also the fundamental ideas enshrined in the UNIDROIT Preliminary Draft Convention on Harmonized Substantive Rules Regarding Intermediated Securities (2005). The Russian regulator can see a change of this legal situation, in particular, through organizing the work of a central depository.155 At the same time, in addition to the central depository, the activities of which we shall touch upon later, the laws of CIS countries contain other examples that provide evidence of an attempt by national legislators to take into account trends in international law regarding regulation of the trade of securities through nominal holders. For example, Russian legislation on bankruptcy has established special rules for professional participants in securities markets (only they have the right to perform the function of nominal holder), in particular:156 (a) In case the demands of clients for the return of securities of one type (of one issuer, category, type, or series) belonging to them exceed the 152

A. Bushev, “Vindikatsiia bezdokumentarnykh tsennykh bumag. Teoriia i sudebnoarbitrazhnaia praktika”, Arbitrazhnye Spory 2003 No.2, 87.

153

V. I. Dobrovol’skii, Zashchita korporativnoi sobstvennosti v Arbitrazhnom Sude, Moscow 2006, 129.

154

Letter of the Federal Securities Commission No.IB-09/2176, IB-09/2176, 26 April 1999, “On On Carrying Out the Function of Nominal Holder by Professional Participants in the Securities Market”.

155

FSFM Draft Development Strategy, op.cit. note 21, Section IV.

156

Arts.187-189 of Federal Law No.127-FZ, 26 October 2002, “On Insolvency (Bankruptcy)”. See V. Popondopulo, ed., Kommentarii k Federal’nomu zakonu “O nesostoiatel’nosti (bankrotstve)”: Postateinyi nauchno-prakticheskii, Moscow 2004, 405-414.

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total of securities of the type in question at the disposal of the professional participant in the securities market, they shall be returned on a proportional basis in relation to the demands of the clients; Ó>Ô 2DAQJO=PEO­A@LKNPEKJKB?HEAJPO¥@AI=J@O=NANA?KCJEVA@=O­J=J?E=H obligations; (c) The securities of a nominal holder’s clients are separated from the bankruptcy estate of the intermediary.157 We should also note that not one of the CIS countries has yet signed The Hague Convention No.36 on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary. Central Depositories With respect to facilitating share trading, there are practical problems related to the absence of central depositories in the CIS. In Russia, for example, this has been highlighted as one of the major obstacles to market growth.1582DASKNGKB=?AJPN=H@ALKOEPKNUEO?QNNAJPHU@ERE@A@=IKJC­RA market participants despite a number of attempts at centralization.159 They have divided the market among them, which provides for some stability.160 One of the latest initiatives of the Russian FCSM was a proposal to adopt a federal law “On a Central Depository”. In the opinion of the FCSM, PDA=>OAJ?AKB=OUOPAIKB=?AJPN=H@ALKOEPKNUB=?EHEP=PAO=JKQP®KSKB Russian investment to foreign markets. It was proposed, in particular: (a) To limit the number of levels of nominal holders to no more than three (including the Central Depository); (b) To allow foreign central depositories to open “depo” accounts only in the Central Depository; (c) To grant the new organization a credit (clearing) function; and (d) To authorize the Central Depository to assign International SecuriPEAO'@AJPE­?=PEKJ,QI>ANOPKOA?QNEPEAO 161 In other ?KQJPNEAOAɳKNPOPKAOP=>HEODOQ?DEJOPEPQPEKJOD=RA>AAJ more successful. In Kazakhstan, for example, a Central Securities De157

It should be mentioned that the Model Law of the CIS “On Insolvency (Bankruptcy)”, adopted by Decree No.10-15 of the Parliamentary Assembly of 6 December 1997, does not contain similar provisions.

158

FSFM Draft Development Strategy, op.cit. note 21, 15.

159

The two biggest ones are the National Depository Center and the Depository Clearing Company.

160

In 1997, the president issued an edict demanding the then-Securities Commission to elaborate a plan or found a central depository. However, “market forces” are obviously still resisting these attempts.

161

Concept of the Federal Law “On a Central Depository”, .

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pository has been in existence since 1997, the majority of shares of which belong to the National Bank of Kazakhstan.162 Such depositories also exist in Georgia and Uzbekistan. In Ukraine, on the other hand, attempts to install a national depository began in 1998 but were unsuccessful. Like in Russia, certain private market forces that have installed their own depository system163 in Ukraine are unwilling to merge with a state-controlled organization. Disclosure of Ownership Structure Another major concern of investor protection in CIS countries is transparency with respect to a company’s ownership structure. Some laws provide shareholders with the right to inspect the list of shareholders to be invited to a general shareholders meeting.164 But such lists are relevant only for a particular date. Inspection rights regarding shareholder NACEOPANOPDAIOAHRAOOAAIIKNAAɳA?PERADKSARANKJHUOD=NADKH@ANO=NA entitled to look into registers, not third parties.165 And, in most cases, an examination of registers would reveal only nominal holders listed therein. Thus, disclosure rules are crucial. In European Union law, these issues are regulated by a special directive that has been incorporated into a more general directive on the admission of securities.166 According to this directive, the responsible securities-market supervisory body needs to be JKPE­A@KBARANU=?MQEOEPEKJKNO=HAKB=>HK?GKBOD=NAOPD=PLQPO=DKH@EJC above or below a certain threshold.167 More important, the directive covers not only direct holdings but also indirect holdings, e.g., via subsidiaries, and, under certain circumstances, it requires the addition of voting rights belonging to third parties when calculating a block of shares. Finally, the directive prescribes an “appropriate enforcement regulation” to be put into place by EU member states. To this end, German law, for example, foresees, on the one hand, far-reaching investigative powers on the part of the Securities Commission and, on the other hand, it provides for the

162

See .

163

Interregional Securities Union (MFS), .

164

See, for example, Art.51 (4) of the Russian Law “On Joint-Stock Companies”.

165

See, for example, Section 7 (9) of the “Statute on the Maintenance of Share Registers”, enacted by Order No.27 of the FCSM of the Russian Federation of 2 October 1997.

166

167



"ENA?PERA +=U¢-JPDA@IEOOEKJKB1A?QNEPEAOPK-ɹ?E=H1PK?GÎ Exchange Listing and Information to be Published on Those Securities”. Ibid., Art.89.

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JQHHE­?=PEKJKBARANURKPA=P=OD=NADKH@ANOIAAPEJCSDANA@EO?HKOQNANQHAO have not been complied with.168 There are no comparable rules in CIS countries. In Russia, for example, a securities holder is obliged to disclose his holding to the issuer (who himself reports to the Securities Commission) only if it exceeds the threshold of 20%.169 If somebody wants to conceal his holding, this rule @KAOJKPLNARAJPDEIBNKIATAN?EOEJC?KJPNKHRE==J=ɹHE=PA@LANOKJ 'J Kazakhstan, it is not the holder who is subjected to a disclosure obligation but the company.170 In Ukraine, major holdings do not have to be disclosed at all.171 However, the duty to disclose major holdings is partly covered by rules requiring the disclosure of “=ɹHE=PA@LANOKJO”. According to Russian HACEOH=PEKJKJFKEJPÎOPK?G?KIL=JEAOARANU=ɹHE=PA@LANOKJEOK>HECA@PK CERAJKPE?APKPDA?KIL=JUKBPDAB=?PKB=ɹHE=PEKJSDE?DBKNEPOL=NPD=O PK­HAPDEOinformation with the supervisory body.172 Comparable rules can be found in the Kazakh law173 and in Ukrainian accounting regulation.174 2DAI=EJLNK>HAIPKOKHRADANAEOPDA@A­JEPEKJKB=ɽHE=PEKJ. While in Kazakhstan the legislator has tried to answer this question, Russian comL=JUH=SNAI=EJOOEHAJP=J@=PPAILPOPK=@KLP=OLA?E=H*=S¢-JɹHE=PA@ Persons” have so far been unsuccessful.175 Meanwhile, Russian lawyers have >AAJ=LLHUEJCPDA@A­JEPEKJAOP=>HEODA@EJPDAJPEÎ+KJKLKHU*=SQJ@AN which shares held by private persons or non-commercial organizations are not considered when calculating a holding.176 Other questions also remain unresolved, including those concerning indirect holdings, whether or not to include state holdings, and in particular the problem of enforcement. 168

Arts.28 and 29 of the German Law “On Securities Trading”.

169

Art.30 of the Russian LSM.

170

Arts.102 (2) and 105 of the Kazakh LSM.

171

Arts.24 and 25 of the Ukrainian Law “On Securities and Stock Markets”.

172

Art.93 of the Russian Law “On Joint-Stock Companies”.

173

Art.67 of the Kazakh Law “On Joint-Stock Companies”.

174

Bookkeeping Standard No.23 “"EO?HKOQNA KB 'JBKNI=PEKJ KJ ɹHE=PA@ .=NPEAO£ enacted by the Finance Ministry on 18 June 2001.

175

Art.64 of the Kazakh Law “On Joint-Stock Companies”. In particular, every “major OD=NADKH@AN£@A­JA@=O=LANOKJDKH@EJC=HKJAKNPKCAPDANSEPDKPDANOÙKBPDA shares in a company, is obliged to disclose his holding. As regards Russia, see M. Telzhukina, Kommentarii k federal’nomu zakonu ob aktsionernykh obshchestvakh, Moscow 2005, Art.93.

176

FSFM Draft Development Strategy, op.cit. note 21, 45; see Art.4 of Russian Law No.948-1 “On Competition and the Restriction of Monopolistic Activities in Commodities Markets”.

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183

Insider Trading and Market Manipulation Except for the case of a few countries, regulations on insider trading and market manipulation are underdeveloped in the CIS,177 especially when compared to EU standards.178 For example, the Kazakh law limits itself to a simple prohibition on “manipulation of prices in securities markets”.179 Insider trading is not covered at all. In Ukraine, the law does not deal with insider trading either. Although, in January 2003, the Securities Commission adopted a concept “On Avoidance of Manipulation of the Securities Market, Unfair Trading Practices and Violations of Ethics in Professional Activities”, no further legislative measures followed. One country that devotes some regulations to “misuse of information obtained in the workplace” is Russia.180 These rules are incomplete, however, and appropriate means of enforcement are missing.181 The regulatory concept is apparently to task self-regulatory bodies, especially trade organizers such as stock exchanges, with supervising trade.182 But such an approach seems @ABA?PERAOEJ?AI=FKN@A=HO=NA?KJ?HQ@A@KQPOE@AKɹ?E=HPN=@EJCOUOPAIO  2K­HHPDEOC=L=@N=BPH=S¢-J'JOE@AN'JBKNI=PEKJ=J@+=JELQH=PEKJ KB.NE?AO£EOQJ@AN@EO?QOOEKJEJ0QOOE= &KSARAN=­NOPdraft was introduced in the Duma already in 2000 but still has not led to any results.183 2DANA=OKJOBKNPDEO@AH=U=NA@Eɹ?QHPPK@EO?ANJ 0AOEOP=J?ABNKIRAOPA@ interests has likely been playing a role, but it is possible that, in addition, no overall consensus has been achieved on the need for such regulation at the given stage of development. 177

The Georgian Rules “On Fraud and Manipulation”, as well as “On Inside Information and the Unfair Use Thereof ”, developed in consultation with US advisers, provide a concise set or rules based on Western examples; Arts.44 and 45 of the Georgian LSM. However, no information is available as to whether these rules are applied in practice. The Moldovan law may be cited here as well: see Arts.59 and 60 of the Moldovan LSM.

178

Directive 2003/6/EC, 28 January 2003, “On Insider Dealing and Market Manipulation (Market Abuse)”.

179

Art.56 (1) of the Kazakh LSM. However, according to the Kazakh Program “On the Development of the Securities Market in Kazakhstan in 2005 to 2007”, adopted by Government Decree No.1385 of 24 December 2004, appropriate amendments are planned for the near future.

180

Art.31 of the Russian LSM. In some countries, however, lawmakers have paid more attention to this aspect. See Art.49 of the Armenian Law “On Securities-Market Regulation”; Art.45 of the Georgian LSM.

181

Art.51 (2) of the Russian LSM. See the FSFM Draft Development Strategy, op.cit. note 21, 53.

182

Art.9 of the Russian LSM.

183

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Of course, clear rules enabling a distinct delimitation between “honest and legal” behavior and “dishonest and illegal” behavior that are known to participants beforehand should facilitate a decrease of corresponding HKOOAO &KSARAN=LKOEPERAAɳA?PEJPDABKNIKB=@A?NA=OAKBHKOOAOSEHH occur only if the rules are implemented. It is possible that yet another reason (a common one for all violations in securities markets) is that the state apparatus of criminal and administrative prosecution (prosecutors, LKHE?AAP? ÔEOJKPAɳA?PERAAJKQCDPKOP=ILKQPPDASE@AOLNA=@LN=?tices of using insider information, manipulation of information, and the =@KLPEKJKB@A?EOEKJOEJ?KJ®E?PÎKBÎEJPANAOPOEPQ=PEKJO 2DAindependent resources for reacting to all (or even the majority of) cases of similar vioH=PEKJO=R=EH=>HAPK=OLA?E=HEVA@1A?QNEPEAO!KIIEOOEKJ=NAEJOQɹ?EAJP  2DAFQ@E?E=NUEO=HOKJKPNA=@UPK=LLHU­J=J?E=HO=J?PEKJOEJOQ?D?=OAO NAC=N@HAOOKBPDALNAOAJ?AKBHAC=HCNKQJ@OSAPDEJG­NOP=J@BKNAIKOP because of the novelty and lack of clarity for many judges of the “nature” of such violations. Widespread illegality only strengthens the basis for this negative practice, undermining as a result the trust of investors in operations in the securities market. Protection From False Statements #ɳA?PERA?=LEP=HI=NGAPO=NA>QEHPQLKJNAHE=>HAEJBKNI=PEKJ 2DQOPNQPDBQH information from issuers is seminal to developing markets. However, correct information will only be disclosed by issuers if appropriate sanctions are applied in case of infringement. Nevertheless, CIS legislators have been very reluctant to penalize the spread of false information. Thus, in Edict of the Russian President No.1233, it was provided that a share issue could be canceled only in the case of “deliberate untrue information (given to) the public”.184 This rule had two major shortcomings. First, it required proof of deliberate action. Second, investors were entitled to sue only the company, but not its managers. In Russia, a new concept was introduced with the law “On Protection of Rights and Legally Protected Interests of Shareholders” in 1999. According to its Article 5 (5), individuals signing a prospectus may be held jointly liable for damages caused to investors as a result of false or misleading information. A comparable provision was introduced into the Russian Law “On the Securities Market” in 2002.185 .NK>HAIO=NEOABNKIPDAB=?PPD=PPDA­NOPNQHAS=ONAP=EJA@186 while the NQHAO@EɳAN=OPKPDAMQAOPEKJKBSDAPDANGJKSHA@CAEONAMQENA@KNJKP  184

Edict No.1233, 11 June 1994, “On the Protection of Investors”, Section 9.

185

Art.21 (1) of the Russian LSM.

186

Now Art.5 (4) of the Russian Investor Protection Law.

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It appears that no court decisions referring to these rules have been reported.187 Apart from Armenia and Georgia, where elaborate rules are in place,188 regulations in other countries are even less developed. The Uzbek law on investor protection contains a rule comparable to the Russian one, which, however, holds the company liable and not its managers.189 In Ukraine, rules of the Securities Commission stipulate that anyone signing a prospectus is liable for providing false information “according to general legislation”.190 'J!'1?KQJPNEAOIA=JOKBNA@NAOOKɳANA@>ULQ>HE?H=SOQ?D=O=Jnulment of an issue by way of a decision of the securities-market supervisory body or its right to raise a corresponding claim in court, are more important than private means of redress, such as claims for compensation of damages. Relations With Clients Finally, capital markets will not work if clients fear that other market participants will not act in those clients’ best interest.191 With the purpose of making securities markets more attractive for small investors, several countries have incorporated into legislation special provisions on information to be disclosed by professional market participants.192 The relevant laws contain lists of documents that market participants have to disclose to investors upon demand, and they also stipulate the duty to act in the best interest of the client. When comparing these duties with regulations established in corresponding EU directives,193 it appears that, in CIS 187

Tuktarov, in his report on the protection of investors when information is disclosed, does not even mention it, referring only to “stop orders” or the annulment of securities issues as means of protection. A. Tuktarov, “Zashchita investorov pri raskrytii informatsii (po materialam sudebno-arbitrazhnoi praktiki)”, Zhurnal Rossiiskogo Prava 2005 No.5, 60.

188

Art.13 of the Armenian LSM; Art.4 (13)-(15) of the Georgian LSM. However, information on implementation is not available.

189

Art.8 of the Uzbek Investor Protection Law.

190

Rule of the State Securities Commission No.18, 9 February 2001, “On the Procedure for the Registration of the Issue of Shares and Bonds and on Information About the Issue Thereof ”, Section 1.14. A comparable rule applies in Moldova: Arts.66-67 of the Moldovan LSM.

191

S. Mirkin, “Zashchita investorov: Granitsy vozmozhnogo i novye idei”, Rynok tsennykh bumag 2000 No.22.

192

Art.6 of the Russian Investor Protection Law; Art.6 of the Uzbek Investor Protection Law; Art.5 of the Azeri Investor Protection Law.

193

EU Directive 2004/39, 21 April 2004, “On Markets in Financial Instruments”, espe-

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countries, the obligations of market participants toward their clients are already regulated in ?KILHE=J?A=PHA=OPSEPD>=OE?OP=J@=N@O=O@A­JA@>U the Investment Services Directive.194 Nevertheless, the duties of market participants are often formulated in a reactive way, meaning that they have to provide information upon demand. The idea of a proactive information duty according to the needs of the client has not taken root yet. In addition, it has to be kept in mind that EU regulations are designed for organized markets, while trading in CIS countries takes place to a major extent over the counter. In this respect, it is worth citing a discussion that took place in Moldova where a rather detailed regulation on broker activity has been adopted.195 This regulation has been broadly criticized by practitioners for being too “complicated” and “bureaucratic” and thus deterring clients.196 Whether the argument is correct or not shall not be judged here. It shows, however, that market participants themselves are not convinced that binding professional standards will foster their business, because they only deal with sophisticated investors. Second, legal standards for the behavior of market participants are AɳA?PERAKJHUEBPDAREKH=PEKJPDANAKBAJP=EHOcivil liability for breach of contract. However, this issue has not yet been decided.197 Compensation Schemes To make securities markets attractive for small investors, EU law foresees the establishment of investor-compensation schemes.198. This idea was taken up by CIS countries at an early stage, e.g., in Russia in 1997 by a decree of the president establishing a Public State Fund for Protection of the Rights of Depositors and Shareholders.199 In 1999, the Russian law on cially Art.16, repealing EU Directive 93/22, 10 May 1993, “On Investment Services in the Securities Field”, especially Arts.10 and 11. See, also, Directive 2003/125, 22 December 2003, “As Regards the Fair Presentation of Investment Recommendations and the "EO?HKOQNAKB!KJ®E?POKB'JPANAOP£ 194

Art.5 of the Russian LSM; Art.33 of the Moldovan LSM; Art.64 of the Kazakh LSM.

195

Regulation of the Moldovan Securities Market Commission, 27 December 2002, “On Broker and Dealer Activities in the Securities Market”.

196

N. Fadeeva, “Corporate Governance: Securities Market in Moldova”, an independent study project for the Graduate School of Business at Central European University, Budapest 2004, 35, available online at
197

An exemption has to be made regarding Art.142 of the Armenian LSM.

198

EU Directive 97/9, 3 March 1997, “On Investor-Compensation Schemes”.

199

Edict of the President No.1157, 18 November 1995, “On Several Measures to Protect the Interests of Depositors and Shareholders”.

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investor protection called for a compensation scheme to be established for investors.200 In contrast to banking legislation,201 however, a functioning mechanism in the sphere of protecting security investors has not been created, although the task of an investor-protection scheme is partly covered by the Public State Fund. But there is no mandatory regulation in force concerning contributions from market participants or the conditions for, and content of, an investor’s compensation claim. In other CIS countries, the situation is similar. The overall policy seems to be to leave this issue to market participants.202

Model Legislative Provisions on Investor Protection (MLPIP) The MLPIP were intended to deal with some of the regulatory issues mentioned above in a way that was suitable for CIS countries in general. In particular, the model contained provisions regarding bondholders, professional standards for market participants, and on compensation schemes. The purpose was not to provide for state-of-the-art regulation but to establish basic legislative concepts and thus create a common foundation. Special Rights of Bondholders According to Western literature, especially large lenders have negotiating LKSANOPK@ABAJ@PDAENEJPANAOPOAɳA?PERAHUSEPDKQP=JUJAA@KBDAHLBNKI H=SI=GANO 2DEODKSARANEOPDA?QNNAJPOP=PAKB=ɳ=ENO 5DAJHKKGEJC >=?GPDNKQCDHAC=HDEOPKNUKJA­J@OPD=POLA?E=HNACQH=PEKJOLNKRE@EJC for some kind of protection of bondholders were common and are still in force.203 The basic concept of these rules involves guaranteeing equal treatment of bondholders, because creditors tend to use this bargaining power to get privileges, e.g., additional information. In Western markets, rules on periodic disclosure obligations provide for redress in this respect. In transition countries, however, disclosure of relevant information is still problematic as discussed above. In addition to this, the laws of several CIS

200

Art.19 of the Russian Investor Protection Law.

201

See Russian Law No.177, 23 December 2003, “On Deposit Insurance”.

202

For example, the Kazakh program for the development of securities markets provides BKNPDA¢OPEIQH=PEKJKBI=NGAPL=NPE?EL=JPOPKRKHQJP=NUEJOQN=J?AKBOLA?E­?NEOGO£ Section 3 (8).

203

For example, the German Law of December 1899 “On Common Rights of Bondholders”; Art.L228-46 of the French Code de Commerce.

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countries contain regulations restricting the issue of bonds in accordance with the amount of charter capital.204 The +*.'.LNKLKOA­NOPPKHEJGPDANECDPPKEOOQA>KJ@OPKPDALANEK@ of existence of the issuer, not to the amount of its charter capital.205 This is because the time of existence is a better indicator of the solvency of a company and it should be up to bondholders to decide whether to lend more money to a company than the amount of its charter capital. Second, the principle of equal treatment is established in a special provision, and bondholders are entitled to form a meeting and designate a representative.206 The purpose of this representative is, in particular, to guarantee equal access to information for all bondholders. There are additional provisions in the MLPIP dealing with secured bonds. To a Western observer, these provisions may look trivial, but they were judged necessary to deal with incidents that have occurred in practice. Professional Standards of Market Participants Chapter 11 of the MLPIP contains several provisions on professional standards of market participants and introduces the notion of a “retail investor”. The general concept is to distinguish between such retail investors and other market participants, especially sophisticated investors, and PKAOP=>HEODOLA?E­?@QPEAOSEPDNAOLA?PPKPDAH=PPAN 2DAI=EJ?D=JCA as proposed by the MLPIP is to give market participants the obligation to disclose information, not just the obligation to react to demands as provided by existing laws.207 The list of information to provide, especially with respect to the securities traded, remains restricted. An additional provision is devoted to particular standards of behavior.208 Comparable rules already exist in some securities laws. However, this special article was formulated in line with principles established in an EU directive of 1993.209

204

Art.33 (3) of the Russian Law “On Joint-Stock Companies”; Art.11 of the Ukrainian Law “On Securities and Stock Markets”.

205

Art.40 of the MLPIP.

206

Art.41 of the MLPIP.

207

Art.47 of the MLPIP.

208

Art.48 of the MLPIP.

209

EU Directive 2004/39, 21 April 2004, “On Markets in Financial Instruments”, Arts.19-22.

Protection of Shareholders through the Regulation of Securities Markets

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Compensation Schemes The last chapter of the MLPIP provides several basic rules that follow the corresponding EU directive.210 This, however, is not a complete set of rules; instead, it is only a collection of principles that may form the basis for a domestic compensation scheme. One of these principles, which follows the EU directive, is to make membership of market participants in such a investor compensation scheme obligatory.211 Mandatory membership is not regarded to be a violation of the freedom “not to associate” since the public interest requires the participation of all those who enter the market to make such a scheme work. The main question is, of course, the calculation of contributions. Since members are forced to pay, they should not be too high. For this purpose, it is crucial to limit the amount each investor is entitled to receive as compensation in the event of a market participant’s default.212 The MLPIP propose 5,000 euros, in contrast to PDAAQNKOBKNAOAAJ>UPDA#3@ENA?PERA  QP­J@EJCPDANECDP>=Hance between the interests of investors and those of market participants must be decided on the national level. Thus, determining the amount of contributions is left to the scheme but is submitted to the state supervisory body for approval.213 Starting from provisions in the US, the MLPIP also include investigative powers for the fund representing the scheme and the right to cancel membership, which, in fact, means an interdiction to continue activity as a market participant. Article 51 of the MLPIP provides guidelines for formulating rules on the claims of retail investors. The core provision in this respect is Section 2, which provides for the prerequisites of a compensation claim. The basic concept, taken again from EU law, is, on the one hand, not to wait until the initiation of bankruptcy proceedings and, on the other hand, PKNAMQENAOKIAGEJ@KBKɹ?E=H@A?EOEKJPD=PPDAI=NGAPL=NPE?EL=JPSEHH not be able to meet its obligations.

What Remains to Be Done? Legislation on securities markets and the practice of its application in CIS countries are in need of further improvement. In terms of the main tendencies in the development of securities-market regulation in CIS countries, we have noted the following, which have been enshrined in 210

EU Directive 97/9, 3 March 1997, “On Investor-Compensation Schemes”.

211

Art.50 of the MLPIP.

212

Art.51 (3) of the MLPIP.

213

Art.50 (2 and 3) of the MLPIP.

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the Convention on the Integration of Securities Markets in Countries of the CIS. (1) Legislation on securities markets should be based on the principle of the union of civil-law and public-law methods of regulating relations forming between the state, market professionals, securities issuers, and investors, depending on the nature of these relations and their subjects, i.e., regulation should proceed both from private individuals and from the state. ÓÔ 2DAOUOPAIBKN­TEJCÓNACEOPN=PEKJÔPDANECDPOKBKSJANO=J@DKH@ANO of securities should allow, regardless of the basis of the creation of NECDPOPKOA?QNEPEAOBKNPDA­T=PEKJKBPDAOLA?E­A@LNKLANPUNECDPO and should guarantee protection of the rights of the owners thereof by decreasing the risks associated with securities transactions. MoreKRAN­T=PEKJKBPDANECDPOPKOA?QNEPEAO?=J>A?=NNEA@KQPonly by securities-market professionals who are specially authorized to do so (depositories and registrars). (3) State regulation of securities markets should be conducted by means of legislative regulation, as well as by granting the state body responsible for overseeing securities markets special authority to perform the functions entrusted to it. (4) The state body that regulates securities markets should be functionally independent and should have resources corresponding with its authority and the opportunity to perform its functions. (5) The state bodies that regulate securities markets should have the right to provide state bodies of the member states of the ConvenPEKJSEPD>KPDLQ>HE?HU=??AOOE>HA=J@Kɹ?E=HEJBKNI=PEKJand lend them assistance in conducting necessary audits. The state bodies that regulate securities markets of member states to the Convention should work out mechanisms for exchanging information. (6) State regulation of securities markets should be combined with, or supplemented by, regulation on the part of market professionals, carried out through the transfer to self-regulating organizations of a certain amount of authority with respect to oversight and supervision of the activities of market participants. (7) Self-regulating organizations should operate on the principles of FQOPE?A=J@?KJ­@AJPE=HEPUSDAJATAN?EOEJCPDA=QPDKNEPUCN=JPA@PK them. (8) Self-regulating organizations should be monitored by the state body that regulates securities markets. (9) The rules for the disclosure of information on securities and on the activities of an issuer should ensure receipt by an investor and

Protection of Shareholders through the Regulation of Securities Markets

191

professional participants of the information required for them to make reasonable decisions when acquiring securities, as well as when exercising the rights attested to by those securities. (10) Issuers of countries whose securities will be acquired in = QJE­A@ market of the member states to the agreement should comply with the principles of corporate governance generally recognized in international law (equitable treatment of all shareholders, protection of their rights, ensuring timely and complete disclosure of information, as well =OAɳA?PERAI=J=CAIAJPKBPDA?KIL=JUEJ?HQ@EJC=??KQJP=>EHEPUKB the executive organs to the board of directors and to shareholders, respect for the rights of third parties—creditors, workers, etc.). ÓÔ'JBKNI=PEKJ@EO?HKOA@>U=JEOOQANODKQH@?KJ?ANJ­J=J?E=HNALKNPing, important corporate events held by the issuer, information on the ownership of large holdings of the issuer’s shares. (12) Financial information disclosed by issuers of securities should be based on international accounting and auditing standards. ÓÔ'PEOJA?AOO=NUPKAOP=>HEODQJE­A@IEJEIQINAMQENAIAJPOBKNLNKBAOsional participants in securities markets when they enter the market for such services. (14) Requirements for the activities and internal organization of professional participants/intermediaries in securities markets should guarantee protection of the property rights and interests of their clients from risks related to unfair practices of the intermediaries, with intermediaries acting in their own interests, or with the bankruptcy thereof. (15) The creation and functioning of a securities market is impossible SEPDKQPOLA?E=HOP=PANACQH=PEKJKBOQ?D=I=NGAPPD=PEOMQ=HE­A@PK ensure transparency of transactions involving securities; compliance with rules guaranteeing equality of all participants in the market, as well as supervision and oversight thereof; prevention of actions EJRKHREJCLNE?AέTEJC@A?NA=OEJCPDANEOGOKBJKJÎBQH­HHIAJPKBPDA obligations of market participants. (16) The creation of trading systems, including stock markets, should be carried out with the permission of, and under the supervision of, the state body regulating securities markets. (17) The system for clearing and settling accounts with respect to operations involving securities in an organized market should ensure observation of the rule of “delivery versus payment”, decrease systemic risks, and be under the supervision of a state body. These main principles of the development of securities markets in CIS countries, provided for in the Convention as directions for further

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development of securities law, are based, in our opinion, on the principles manifested in the IOSCO Objectives and Principles. Besides, as follows from the above discussions, the current CIS laws on securities already set out numerous legal institutions that support the main principles. In turn, these institutions vary throughout the CIS countries. There are variations in the laws on the books mostly for political reasons. In the meantime, CIS countries have a lot of economic, legal and cultural links that should drive governments to speed up the process of legal harmonization and creation of a common securities market. It is hardly possible to conclude what particular regime of securities-market regulations available in the West should be borrowed by CIS markets, as there is no ideal regulatory model. Every model, with its own set of legal institutions, has its pluses and minuses. Every model requires particular conditions, including in the ­NOPEJOP=J?Aenforcement, which is still lacking in most CIS countries, to I=GAPDA>KNNKSEJCKBHAC=H?KJOPNQ?POAɳA?PERAEJLN=?PE?A 'JPDEONAOLA?P the way to harmonize CIS securities law under international standards is PK=>OKN>PDA>AOPATLANEAJ?AKBPDA@EɳANAJPNACQH=PKNUIK@AHON=PDAN than choosing only one of them.

The Investment Climate in the Commonwealth of Independent States Joop de Kort1 Introduction The dissolution of the Soviet Union left the successor states with numerous economic problems. In comparison with other developed countries, the Soviet Union had a large industrial sector that was biased toward heavy industry. Light industry was relatively underdeveloped, while the service sector was virtually non-existent. Furthermore, the economic activities of the Soviet Union had developed with little reference to criteria of A?KJKIE?Aɹ?EAJ?U 2KB=?EHEP=PALH=JJEJCEJ@QOPNEAOSANAKBPAJDECDHU concentrated in a single area and were of a large scale. There were hardly any small and medium-sized enterprises. To settle the vast Siberian expanse and to put industries out of reach of German forces during World War II, heavy industries were often located east of the Ural Mountains. The light industries, producing consumer goods, were concentrated in the western parts of the empire. Washing machines for the entire Soviet Union, for example, were mostly produced in Belarus. The republics on the southern rim of the Soviet Union had relatively little industry. As transport and energy costs were kept low, this uneven economic structure could be sustained. 2DA>NA=GÎQLKBPDA1KREAP3JEKJOECJE­A@PDAAJ@KBcentral planning. 1QLLHU?D=EJOSANA>NKGAJ=J@AJPANLNEOAODAJ?ABKNPDD=@PK­J@PDAEN own suppliers and customers, and were confronted with (foreign) competitors. As the system of central planning had discouraged the introduction of technological progress, most production facilities were economically obsolete in the new market environment. Both heavy and light industry needed to be modernized to become competitive in the world market, and a service sector needed to be developed. The restructuring of the economies of the successor states to the Soviet Union required high levels of investment. However, the economic crisis that followed the dissolution of the Soviet Union wiped out the O=REJCOPD=P?KQH@D=RA>AAJQOA@PK­J=J?APDAOAEJRAOPIAJPO 2DACKRANJIAJPOKBPDA!'1?KQJPNEAO@E@JKPD=RAOQɹ?EAJPIA=JO=R=EH=>HAPK ?KILAJO=PABKNPDAH=?GKBO=REJCO>U­J=J?EJCEJRAOPIAJPOKQPKBPDAEN budgets.2+KNAKRANPDAJASKSJANOKBLNER=PEVA@­NIOLNKRA@PK>AIKNA 1



2

2DEOL=LAN>AJA­PA@BNKI?KIIAJPO>U&=JO-RANOHKKP=J@0EHG="N=CJAR= !QNPEO Budden greatly improved my English. The usual disclaimers apply. This paper will only discuss the situation in the successor states that formed the Commonwealth of Independent States (CIS): Armenia, Azerbaijan, Belarus, Georgia,

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 193-207 © Koninklijke Brill NV, Leiden, 2007

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Joop de Kort

creative in transferring capital out of the CIS than in raising and using ?=LEP=HPK­J=J?APDArestructuring of production processes. As a result, EJRAOPIAJPOEJ­TA@=OOAPONAI=EJA@HKSEJPDA!'1?KQJPNEAOPDNKQCDKQP PDA­NOP@A?=@A=J@=D=HB=BPANPDA@EOOKHQPEKJPDA1KREAP3JEKJ In this contribution, we will examine the investment climate of the successor states and discuss what is being done and what needs to be done to successfully attract investments to restructure these states’ economies. We will concentrate on the conditions for attracting foreign investment. An alternative route would be to study what needs to be @KJAPKLNARAJP?=LEP=HBNKI®KSEJCKQPKBPDA?KQJPNU  QP=NCQ=>HU if a country is attractive for foreign investment, it is also attractive for domestic investment. A practical argument is that conditions to attract foreign investment are more widely discussed in the literature than those for domestic investments. Furthermore, it is likely that domestic investment will increase before foreign investment, as domestic investors have better knowledge of the local situation and thus see opportunities before foreign investors do.3 'JPDA­NOPOA?PEKJSASEHH>NEA®UNAREASDKSDEOPKNE?=HHURussia KRAN?=IAPDAH=?GKB@KIAOPE?O=REJCOPK­J=J?AEJRAOPIAJPO OEOPDA case today, domestic savings in the 19th?AJPQNUSANAEJOQɹ?EAJPPK­J=J?A the required levels of investment, and Russia was critically dependent on foreign investment for its economic development. The tsarist regime, DKSARAN I=EJP=EJA@ = ­NI CNEL KJ A?KJKIE? @ARAHKLIAJP =J@ S=O reluctant to allow foreign ownership of the means of production. It did, however, attract foreign investments, mostly bonds, to Russia. During the communist regime, foreign investments were not solicited at all. 'J@QOPNE=HEV=PEKJS=O­J=J?A@>UOKÎ?=HHA@BKN?A@O=REJCO  This section will also discuss the present levels of foreign investments in the countries of the CIS. The second section will focus on the strategic factors that foreign investors distinguish in their investment decisions and will argue that most of the CIS countries do not meet these requirements. It can be argued that the CIS countries are not very attractive destinations for foreign investment and do not attract much of it. The third section expands on the actual investment climate and discusses, in more detail, what type of institutional environment investors encounter and what type of policy making investors have to deal with. This section Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. The Baltic states—Estonia, Latvia, and Lithuania—followed a markedly @EɳANAJPPN=?GBNKIPDAKPDANOP=PAO=J@=OLENA@PKS=N@EU membership, which they attained in 2004. 3

Another way of increasing domestic investment would be to close the border for ÓKQPCKEJCÔ?=LEP=H®KSO

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195

will also pay attention to the role that the break-up of the Soviet Union played in the establishment of the EJRAOPIAJP?HEI=PA 2DA­J=HOA?PEKJ will conclude.

The Need for Investments The humiliating loss of the Crimean War in 1856 convinced the tsarist regime of Alexander II of the military and economic backwardness of the Russian empire. The regime set out a course to close the economic gap between the Russian empire and European countries. An important part of that course was a policy to industrialize the country. To protect its domestic industry, the state raised trade barriers. But the state lacked PDANAOKQN?AOPK­J=J?AEPO=I>EPEKQOLH=JOPKOLAA@QLN=EHNK=@>QEH@EJC and to develop heavy industry.4 Because domestic savings were also insuf­?EAJPPDAOP=PAD=@PKEOOQA>KJ@O=J@OAHHPDAOAPKBKNAECJEJRAOPKNO  5EPDPDAEJ®KSKBforeign capital, Russia was indeed able to develop its heavy industry. Although foreigners did own some Russian enterprises, PDAOP=PAI=EJP=EJA@=H=NCAEJ®QAJ?AKRANeconomic development. This economic policy was relatively successful, and Russia’s national income almost quadrupled in the period between 1861 and 1913. However, growth was biased toward heavy industry. The production of crude steel (measured in thousands of metric tons) increased by 700 times between 1861 and 1913, the production of pig iron increased by fourteen times, and the LNK@Q?PEKJKB?K=H>UJEJAPUέRAPEIAO 'J=@@EPEKJPDAGEHKIAPANO of rail lines that existed in 1861 had increased to 70,000 by 1913. Due to the large population growth, income per capita did not quadruple but increased by two-thirds.5 World War I and the ensuing civil war undid most of the progress; industrial production in 1920 was at 20 percent of the 1913 level. Because the communists had nationalized the property of foreign owners and defaulted on Russia’s foreign debt, foreign investors SANAJKPSEHHEJCPK­J=J?ARussia’s recovery.6 5EPDPDAEJPNK@Q?PEKJKBPDA­NOP$ERAÎ7A=N.H=JEJPDA?KImunist regime embarked on a strategy of high growth. Capital investments increased considerably, with most investments being directed toward the 4

Between 1860 and 1905, the state commissioned the building of more than 50,000 kilometers of railroad. Railroad building was an industry in itself, but it also allowed for the development of other heavy industries.

5

P. Gregory, R. Stuart, Russian and Soviet Economic Performance and Structure, Boston, MA 2001, Tables 2.1. and 2.2. The increase in income per capita was somewhat lower than that of other European countries and the United States.

6

In 1922, the communist regime established the Union of Soviet Socialist Republics.

196

Joop de Kort

development of heavy industry. The costs of this so-called forced industrialization were very high indeed and had to be carried domestically. Savings were forced by keeping the production of consumption goods, and thus consumption levels, very low. Furthermore, agricultural output was exported to pay for the necessary imports of machinery and equipIAJP HPDKQCDI=JULAKLHA@EA@EJPDA­NOPUA=NOKBPDAEJ@QOPNE=HEV=PEKJ drive, the process was a success.7"QNEJCPDA­NOPPDNAA@A?=@AOKBcentral LH=JJEJCCNKSPDKB­TA@?=LEP=HS=OJA=NHULAN?AJP=JJQ=HHU  ACEJJEJC in the 1960s, investment growth slowed down somewhat but remained DECD=J@=>KRAPDACNKSPDKB­TA@?=LEP=HEJ=HIKOP=HHNE?D?KQJPNEAO until the end of the communist system.8 As in tsarist times, investments continued to be biased toward heavy industry. Even though the aim of Soviet developments was to catch up and overtake market economies, the Soviet authorities were unable to build a capital stock that was as productive as the one in market economies. The Soviet Union needed more capital to produce a unit of income than market-based countries. The planned economy proved unsuccessful in developing and introducing new technologies.9 There was a tendency to overinvest in existing technology to replace and expand (known) existing production capacity to facilitate PDABQH­HHIAJPKBLH=JO 2KS=N@PDAAJ@KBEPOATEOPAJ?APDA1KREAP3JEKJ was a highly industrialized country, although its industrial structure was biased toward heavy industry and its capital stock was obsolete. The successor states thus inherited an economy that was in great need of restructuring. The transition toward a market-based economic system S=OOQLLKOA@PK?NA=PAEJ?AJPERAOBKN­NIOPKNAOPNQ?PQNA=J@PKEJRAOP EJJAS=J@Aɹ?EAJP?=LEP=HOPK?G &KSARANEJRAOPIAJPHARAHONAI=EJA@ disappointing. Not only did investors not invest in the CIS countries, they actually moved capital out of the transition economies.10 The low 7

It was not just the industrialization drive but also the forced collectivization of agriculture that led to the famine of the 1930s. See, for instance, A. Nove, An Economic History of the USSR., London 1989.

8

Gregory and Stuart, op.cit. note 5, Tables 10.3 and 10.4.

9

On the failure of the Soviet economy to develop and introduce new technologies, see, among others, J. Berliner, The Innovation Decision in Soviet Industry, Cambridge, MA 1976; P. Desai, The Soviet Economy. Problems and Prospects, Oxford 1987; A. Nove, The Soviet Economic System, London 1977.

10



0QOOE=J=QPDKNEPEAOAOPEI=PA@PDA?=LEP=H®ECDPKQPKBRussia in the period 1992-1996 to be in the range of 50 billion-200 billion US dollars. See A. Abalkin and J. Whalley, “The Problem of Capital Flight in Russia”, 22 The World Economy 1999 No.3, 421-444. !=LEP=H®ECDPD=O=>=PA@OEJ?APDAJ>QPD=OJKPOPKLLA@ 1AA=HOK. *KQJC=JE=J@ P. Mauro, “Capital Flight from Russia”, IMF Policy Discussion Paper, PDP/00/06, Washington, DC 2000, available online at .

The Investment Climate in the Commonwealth of Independent States

197

investments may partly be explained by the profound economic crisis that hit the CIS countries. Gross capital formation continued to hover around 25 percent of GDP.11 Given the decline of income, this meant that investment also decreased. With the low levels of investment they had, the CIS countries had little hope of reconstructing their obsolete capital stock and becoming competitive in the world economy. Even though the private savings rate was relatively high, as people were recovering their lost O=REJCO=>OKHQPAO=REJCOSANAEJOQɹ?EAJPPK­J=J?APDANA?KJOPNQ?PEKJKB industry, so much the more so because new owners were often stripping the assets of their enterprises and exporting capital. An alternative source KB­J=J?A?KQH@D=RA>AAJforeign capital. However, foreign investment, too, remained low. As in the tsarist and the communist times, the governments of the CIS countries were reluctant to allow foreign ownership of production. Unlike tsarist times, governments could not issue bonds PK­J=J?AEJRAOPIAJPO=OPDAOP=PAJAA@A@PDAENIA=JOPKOP=>EHEVAPDA economy. Russia, for instance, borrowed considerable amounts from the International Monetary Fund (IMF) for that purpose. The states actually required so much credit that it was virtually impossible for private enterprises to attract any credits. There was little private borrowing to ­J=J?Arestructuring. Capital markets were underdeveloped, and neither foreign banks nor foreign investors built up a large portfolio of CIS asOAPO $QNPDANIKNABKNAECJ­NIO@E@JKPODKSIQ?DKB=J=LLAPEPABKN investing directly in the CIS countries, and if they did, they were often not permitted to take a (majority) share of privatized companies.12 This was mildly surprising, as the obsolete industrial structure of the CIS countries allowed for major improvements in the productivity of capital and thus for high returns on investment. The levels of foreign direct investment were smaller in the CIS than they were in the Central and Eastern European countries with which they share a past of central economic planning. The cumulative foreign direct investment in the CIS countries per capita is still less than 10 percent of that in Central and Eastern European countries. Of all the countries in transition, Hungary initially attracted the most foreign direct investment only to be surpassed 11

Calculated from Commonwealth of Independent States in 2002, Statistical Yearbook, Moscow 2003. We used the tables per country on the use of GDP.

12

Foreign direct investment is established when an investor acquires at least 10% of the ordinary shares or voting power of an enterprise abroad. Such an acquisition is OQLLKOA@PKOAPQL=HKJCÎPANINAH=PEKJODEL=J@CERAOPDAEJRAOPKN=JAɳA?PERAO=UEJ the management of the acquired enterprise. See IMF, “Foreign Direct Investment in Emerging Market Countries: Report of the Working Group of the Capital Markets Consultative Group”,Washington, DC 2003, available online at .

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Joop de Kort

by Poland in 1996, the Czech Republic in 1997, and Slovakia in 2000. Of the CIS countries, only Russia attracted more foreign direct investment than Hungary, in 1997 and 1998, but then fell behind again. Only in 2001 did Russia receive more foreign direct investment than Hungary did. Kazakhstan, also in 2001, started to attract more direct investment from abroad than Hungary. Of all the countries in the CIS, Russia has attracted the most foreign direct investment. Table 1: Net Foreign Direct Investment in the CIS (in millions of US dollars) CIS

1994

1996

1998

2000

2002

2004

Armenia

8

18

221

104

111

217

333

Azerbaijan

22

627

1023

149

1048

2351

1190

Belarus

11

105

201

119

453

168

218

Georgia

8

54

221

153

122

503

386

Kazakhstan

635

1137

1143

1278

2164

5548

1413

Kyrgyzstan

38

47

87

-7

5

131

112

Moldova

12

23

75

127

132

148

255

408

1656

1492

-463

-72

2132

54

Russia

89-04 per capita

Tajikistan

12

18

25

24

36

272

76

Turkmenistan

103

108

62

131

276

330

300

Ukraine

151

516

747

594

698

1711

168

Uzbekistan

73

90

140

75

65

187

42

1480

4399

5437

2284

5038

13699

203

4580

10023

15098

19689

21504

16288

2235

Total CEEB

Source: 2005 EBRD Transition Report, Table A.2.8, 55 (CEEB is the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia)

2DEOEOJKP?HA=NBNKI2=>HA=OPDEONALKNPOJAPEJ®KS 0QOOE=J­NIO however, are also directly investing abroad. In 2004, for example, Russia received 11.6 billion US dollars of foreign direct investment, while outward investment was 9.6 billion US dollars.130QOOE=J­NIOBKNEJOP=J?A=NA among the largest investors in other CIS countries.14

Markets and Resources The deep economic crisis and the slow progress of restructuring the productive base of the respective economies suggest that the CIS countries are in need of foreign investments. The importance of foreign investments 13

UNCTAD, World Investment Report 2005, Geneva 2005, Annex Table B.1.

14

K. Crane, D.J. Peterson and O. Oliker, “Russian Investment in the Commonwealth of Independent States”, 46 Eurasian Geography and Economics 2005 No.6, 405-444.

The Investment Climate in the Commonwealth of Independent States

199

would even go further than to close the investment gap due to a lack of savings. The externalities that are associated with foreign direct investments include the transfer of managerial expertise, technology, information processing, as well as sales and marketing knowledge.15 Investments EJ­J=J?E=HLKNPBKHEKOATAN?EOA=@EO?ELHEJEJCAɳA?PKJPDAKLAN=PEKJKB ­NIO >QP PDEO EJ®QAJ?A NAMQENAO SAHHÎBQJ?PEKJEJC ?=LEP=H I=NGAPO 5A will focus here on direct investments that have a greater and immediate AɳA?PKJPDANAOPNQ?PQNEJCKB­NIO=J@PDQOKJPDArestructuring of the economy as a whole. Firms have a number of motives to invest in foreign countries that can broadly be categorized as market-seeking or resource-seeking motives.16 An investment is considered market-seeking if the investor aims to service local and regional markets with his newly acquired or newly set-up production facilities. It is resource-seeking if the aim of the investment is to acquire natural resources, raw materials, or low-cost inputs, such as H=>KNPD=P=NAQJ=R=EH=>HAKNEJOQɹ?EAJPHU=R=EH=>HAEJPDAKPDAN?KQJPNEAO where the investor operates. The actual form and size of the investment @ALAJ@KJ=JQI>ANKBB=?PKNOPD=P@ALAJ@KJ­NIÎOLA?E­?=OSAHH=O ?KQJPNUÎOLA?E­?B=?PKNO  The abandonment of central planning opened up a market of 100 million consumers in Central and Eastern Europe and 300 million in the successor states to the Soviet Union. Russia is the most populated CIS country with 145 million people, but Ukraine, with almost 50 million inhabitants, and Uzbekistan, with 25 million, are also populous states. Most countries pursued a policy of free trade and allowed imports to satisfy domestic demand. As a result, imports from market economies skyrocketed in the early years of transition as consumers used their savings to buy Western products. However, the high EJ®=PEKJ and economic crisis that followed the transition wiped out savings and reduced incomes, and local consum15

16

Bessonova et al ?=H?QH=PA=LKOEPERAAɳA?PKJPDALNK@Q?PEREPUKB@KIAOPE?­NIO=O= result of trade openness and FDI. E. Bessonova, K. Kozlov and K. Yudaeva, “Trade Liberalization, Foreign Direct Investment, and the Productivity of Russian Firms”, paper for the CEFIR conference “Negotiating Russia’s WTO Accession: Strategic Lessons From Multilateral Trade Liberalization and Club Enlargement”, December 2002. 

"EɳANAJP=QPDKNOQOA@EɳANAJP?=PACKNEV=PEKJO )EJKODEP==J@!=ILKO=@@Aɹ?EAJ?UÎ seeking investments to market-seeking and resource-seeking, while in international business literature authors use a more detailed categorization. See Y. Kinoshita and N. Campos, “Why Does FDI Go Where It Goes? New Evidence from the Transition Countries”, William Davidson Institute Working Paper No. 573, June 2003, available online at . For the international business literature, see, e.g., R. Pye, “Foreign Direct Investment in Central Europe”, 16 European Management Journal 1998 No.4, 378-389.

200

Joop de Kort

ANO?KQH@JKHKJCAN=ɳKN@PK>QU5AOPANJLNK@Q?PO !KJOQIANOOSEP?DA@ back to locally produced output. In Central and Eastern Europe, foreign EJRAOPKNOD=@=?MQENA@HK?=H­NIO=J@SANAEJRAOPEJCEJPDArestructuring KBPDAOA­NIOPKQLCN=@APDAHK?=HKQPLQPSDE?DPDAUQOA@PKOANRAHK?=H markets. They were helped by the return to economic growth in 1993-1994 in these countries, which helped to sustain demand. Not only did the CIS ?KQJPNEAOOP=NPKɳSEPDHKSANEJ?KIAOLAN?=LEP=PD=JPDA?KQJPNEAOKB Central and Eastern Europe, but the decline in their income was bigger and the recovery set in later. Per capita income in these countries, therefore, is low. This explains why, despite the large number of consumers, the size of the CIS markets remained relatively small. These markets may still be attractive only for cheap products that people consume on a (near) daily basis. However, many of the CIS countries are also handicapped by their distance from major economic centers, most notably the countries of the European Union, and by their poor transport infrastructures. During Soviet PEIAOPN=JOLKNP?KOPOSANADAH@HKS=J@@E@JKPNA®A?PA?KJKIE??KOPO but nowadays transport costs have increased and put constraints on the supply of low-priced products especially. Only if a product can be made entirely with local supplies and for a local market can transport costs be avoided by producing and supplying locally. As this is a rare case, it has become unattractive to produce products with low added value in and for remote areas. Light manufacturing and agro-processing, for instance, have already disappeared in several Central Asian countries.17 Even if the successor states have tried to maintain, and at a later stage build, a free-trade area between them, the break-up of the Soviet Union introduced borders and fragmented its economic space.18 This process was aggravated by the introduction of 11 new currencies. All in all, market-seeking investments have not been very attractive in the CIS countries. Most foreign investment into the CIS has indeed been resource-seeking investment. Russia, Kazakhstan, and Azerbaijan are all well endowed with oil and gas and have attracted the most FDI of all the countries in the CIS.19 The development of oil production in and around the Caspian 17

G. Raballand, A. Kunth and R. Auty, “Central Asia’s Transport Cost Burden and its Impact on Trade”, 29 Economic Systems 2005 No.1, 6-31.

18

The Fergana Valley is an example where independence created trade impediments. Trade routes previously ran through it, unconcerned with the jagged borderlines of the Soviet republics in that area. With the creation of “real” borders, traders now incur costs to cross borders and sometimes have to take large detours to avoid these costs and to deliver their products.

19

Investments in energy resources often take the form of a product-sharing agreement, SDANA=5AOPANJ­NIEJRAOPOEJÓJASÔ?=L=?EPU=J@PDANARAJQAOKBPDAAJPANLNEOA are shared between the investor and the government.

The Investment Climate in the Commonwealth of Independent States

201

Sea is a major source of investment, as are the development of the gas ­AH@JA=N1=GD=HEJ'OH=J@=J@PDAKEH@ARAHKLIAJPLNKFA?POEJSAOPANJ Siberia. There seems to be little investment seeking the well-educated and relatively cheap labor resources that are available in the CIS. A noteworthy exception may be the hiring of computer engineers for programming LQNLKOAO C=EJDECDPN=JOLKNP?KOPOI=U>ANAOLKJOE>HABKNKɳOAPPEJC the advantages of low labor costs, but there may also be indirect costs of hiring labor in the CIS countries. The successor states inherited a social-security system that was built on direct payments out of company accounts. Companies often still pay for these services, which then form hidden labor and capital costs. A further point to note is that, although the labor force is technically and culturally well educated, it is much less OKEJA?KJKIE?=NA=OHEGA­J=J?A=??KQJPEJCI=NGAPEJC=J@I=J=CAment. Therefore, investments aimed at labor resources may not be as =PPN=?PERA=OPDAUOAAI=P­NOPOECDP 2DEOEOAOLA?E=HHUPDA?=OAOEJ?APDA NAOPNQ?PQNEJCKB­NIOPD=PEOHEGAHUPKBKHHKSPDA=?MQEOEPEKJKB=HK?=H­NI SEHHNAOQHPEJH=UKɳOSDE?DEOLKHEPE?=HHU=RANUOAJOEPERAEOOQA  Generally speaking, the CIS countries currently have small markets, and most of them lack natural resources. Although this puts them in a @Eɹ?QHPLKOEPEKJEJPANIOKB=PPN=?PEJCforeign investment, it does not mean that they could not be attractive for foreign investors at all. As mentioned above, Hungary attracted large amounts of foreign direct investment, yet Hungary, with a population of only eight million and a modest level of income per capita, also has a small market. And Hungary has no natural resources to speak of. It does, of course, share a common border with the EU, and the distance between the economic centers of Hungary and those of the EU is shorter, both in kilometers and in hours of transport time, than the distance between economic centers of CIS countries and those of the EU. But from the very beginning of its transition from a centrally planned economy toward a market economy, Hungary also welcomed foreign investors. They were, for instance, invited to buy &QJC=NE=J­NIOPD=PSANALNER=PEVA@=J@&QJC=NUEJPNK@Q?A@=JEJRAOPment-friendly regime.

The Investment Climate in the CIS Historically, the state has always played an important role in the economic development of Russia. During the tsarist days, the state controlled industrial developmentPDNKQCDEPOLKHE?UKBHE?AJOEJCLNKPA?PEJC=J@­J=J?EJC industries. In the communist era, the state was all-pervasive. The relatively poor results of the Soviet economy contributed to the discrediting of direct state involvement in the production of goods and services, and

202

Joop de Kort

the transition toward a market economy is very much about pushing back the state. In a market economy, the state is not supposed to interfere in the production of goods and services. This does not, however, imply that the state has to become invisible. The successor states, however, have to “reinvent” themselves and create favorable circumstances that attract EJRAOPKNO 2DAIK@AOPEJ®KSKBforeign investment is a good illustration PD=PPDQOB=NPDAUD=RAJKPOQ??AA@A@EJPDEO@Eɹ?QHPP=OG As we have indicated, most of the CIS countries do not have a good starting position for attracting FDI. They are small markets, and many of them do not have resources that attract investors. Furthermore, most of them are land-locked, with a poor and neglected transport infrastructure, thus adding to the production costs and reducing revenues. The location of the countries and the availability of resources, especially raw materials and energy, of course, cannot be helped, but an argument could be made for increasing the availability of an educated workforce. Furthermore, their markets need to expand, but for that to happen investments are needed, and to attract investments governments need to pursue investor-friendly policies and create a favorable investment climate. Several factors contribute to a country’s attractiveness for investors. Although PDANA=NAH=NCA@EɳANAJ?AOEJPDAOEVA=J@PDABKNIKBEJRAOPIAJPOPDANA is always a need for investors to commit resources to a project. To reduce the risk that their investment will lose value, investors appreciate a stable and sound macro-economic basis in a country. In the second half of the 1990s, the CIS countries started doing well in a macro-economic sense. As indicated above, after the dissolution of the Soviet Union, the CIS countries experienced an economic crisis, which reduced their income considerably. In 2004, income in the CIS as a whole had returned to 81 percent of the 1989 level. Russia’s income, in 2004, was at 82 percent of its 1989 level. Belarus, Kazakhstan, Turkmenistan, and Uzbekistan now have incomes that are higher than in Soviet times. Moldova and Ukraine were the last of the CIS countries, in 2000, to return to economic growth. The oil boom is noticeable in the growth rates of Azerbaijan, Kazakhstan, Russia, and Turkmenistan. Since 2001, growth rates in these countries have been close to, or even above, 10 percent annually, but growth rates in other countries of the CIS seem robust as well.20 Further success can >ANACEOPANA@EJPDA­CDP=C=EJOPEJ®=PEKJ BPANPDAEJEPE=HUA=NOKBDECD EJ®=PEKJ=HH?KQJPNEAOD=RAOQ??AA@A@EJ>NEJCEJCEJ®=PEKJ@KSJPKHARAHO of around 10 percent annually. They have also been successful in bringing their budgets under control. The oil-exporting countries even have budget surpluses. Of those, Russia registers the highest surplus at 7.6 percent. 20



HH­CQNAOBNKIEBRD Transition Report, London 2005; see , Table A.2.1, 48 (“2005 EBRD Transition Report”).

The Investment Climate in the Commonwealth of Independent States

203

2DADECDAOP@A­?EPEONA?KN@A@>U Kyrgyzstan, at 4.6 percent of GDP. With EJ®=PEKJ=J@>Q@CAP@A­?EPOEJPANAOPN=PAOD=RA@A?NA=OA@=OSAHH  It almost goes without saying that the oil-exporting countries also have current-account surpluses, although VAN>=EF=J =?PQ=HHU D=O OECJE­?=JP @A­?EPO 2DAIKOPHEGAHUATLH=J=PEKJBKNPDEOEOPD=PEJRAOPIAJPOEJPDA oil industry are in-kind, which requires products to cross borders. The current accounts of the CIS countries actually show mixed results, with OKIALKOEPERA=J@KPDANOJAC=PERA 2DANACEKJ=O=SDKHAD=O=OI=HH@A­?EP with the rest of the world. All have improved their external balances from the early years of transition, which has helped to stabilize their exchange rates. All these are positive signs for investors, who need not fear that their investments will lose value. Second, investors appreciate if their investments are not threatened or devalued as a result of policies that are directed at their activities. They do not want to run the risk that their assets will be expropriated. Countries that want to attract investments need to have a favorable institutional environment. Confusion may arise as to what is included in the institutional regime and what is not, but in most surveys on the issue, the results for the CIS countries are not very favorable. An important indicator, or rather a set of indicators, is published annually in the EBRD’s Transition Report. The share of the private sector in the economy is one of the criteria used. In Belarus and Turkmenistan, only 25 percent of GDP comes from the private sector, nor does Uzbekistan score very high on this criterion, with 45 percent. Russia’s private-sector share is actually declining. EBRD scores on both large-scale privatization and small-scale privatization can be found in Table 2. Budget constraints have remained rather soft, and there have been too few reforms to promote corporate governance. As a result, enterprise restructuring has not yet really set in. With respect to price liberalization and the trade and foreign-exchange system, the scores are higher and at the same level as those of other countries in transition. With respect to competition policy, no country in transition, according the EBRD, matches the criteria of a market economy, but the CIS is further from that target than the countries of Central and Eastern Europe.21 The @ARAHKLIAJPKBPDA­J=J?E=HOA?PKNHA=RAOIQ?DNKKIBKNEILNKRAIAJP  For banking reform and interest-rate liberalization, and for the securities I=NGAP=J@JKJÎ>=JG­J=J?E=HEJOPEPQPEKJOPDA!'1OP=PAOO?KNAHKSAN than their competitors. The indicator for infrastructure is a composite of factors, including electric power, railroads, roads, telecommunica21



2DA#=OPANJ#QNKLA=JOP=PAO=OSAHH=OPDA 2DA #=OPANJ #QNKLA=J OP=PAO =O SAHH =O PDA =HPE?OP=PAOCNA=PHU>AJA­PA@BNKI =HPE? OP=PAO CNA=PHU >AJA­PA@ BNKI accession to the European Union, which required them to adopt Union legislation. They still have to take actions to reduce the abuse of market power and to promote a competitive environment.

204

Joop de Kort

tions, and water and waste water.22 The focus is on administration and regulation of infrastructure, rather than on its physical quality. In electric power, for instance, a high score requires private-sector involvement in distribution and generation and an independent regulator. A large degree of decentralization and commercialization is mentioned both for roads and for water and waste water. Table 2: Transition Indicator Scores 2005 Large-

Small-

Governance

Price

Foreign

scale

scale

enterprise

liberali-

trade

sation

system

policy

privati- privati- restructuring

Com-

Bank

petition reform

Non-bank

Infra-

­J=J?E=H

structure

institu-

reform

zation

zation

Armenia

4-

4

2+

4+

4+

2+

3-

tions 2

Azerbaijan

2

4-

2+

4

4

2

2+

2-

2

Belarus

1

2+

1

3-

2+

2

2-

2

1+

Georgia

4-

4

2+

4+

4+

2

3-

2-

2+

Kazakhstan

3

4

2

4

3+

2

3

2+

2+

Kyrgyzstan

4-

4

2

4+

4+

2

2+

2

2-

Moldova

3

3+

2

4-

4+

2

3-

2

2+

Russia

3

4

2+

4

3+

2+

2+

3-

3-

Tajikistan

2+

4

2-

4-

3+

2-

2

1

1+

2+

Turkmenistan

1

2

1

3-

1

1

1

1

1

Ukraine

3

4

2

4

3+

2+

3-

2+

2

Uzbekistan

3-

3

2-

3-

2

2-

2-

2

2-

Source: 2005 EBRD Transition Report, Table 1.1, 4.

The above-discussed EBRD transition indicators describe the institutional environment at a relatively abstract level. Investors also take EJPK=??KQJPB=?PKNOPD=P@ENA?PHUEJ®QAJ?APDAEN>QOEJAOOKLAN=PEKJO ,KP only do the rules and regulations need to be clear, they also need to be enforced. There cannot be too much discretion in their application. This also puts demands on political and administrative execution. Property NECDPOODKQH@>ALNKPA?PA@PDA>QNA=Q?N=?UJAA@OPKKLAN=PAEJ=JAɹ?EAJP and transparent manner; the tax system needs to be transparent and to favor investment.23 Corruption is also a part of the institutional environment, as is racketeering. Rent seeking by public administrators or criminal 22

The infrastructure indicator is developed in 2004 EBRD Transition Report, London 2004, see (“2004 EBRD Transition Report”).

23

See, for example, IMF, op.cit. note 12.

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organizations is made easier in situations of weak public administration and low levels of compliance with commercial law. According to the legal indicator surveys that the EBRD also performs annually, the CIS countries fall short in their level of compliance with international insolvency standards and their level of compliance with international standards of corporate governance.24 These countries have also been criticized for their extensive government regulation in the form of capital controls, business HE?AJOEJCEJOLA?PEKJO=J@?ANPE­?=PEKJO=IKJCKPDANO 25 All this adds to the costs of doing business and creates uncertainty for investors. PDEN@B=?PKNPD=PEJ®QAJ?AOPDA=PPN=?PERAJAOOKBPDA!'1?KQJPNEAO as recipients of investment concerns the consequences of the break-up of the Soviet Union. A formerly single economic and legal space has been cut up into new jurisdictions with distinctive political, legal, and economic characteristics. Most countries have experienced some degree of political EJOP=>EHEPU 2DANAD=RA>AAJLNK>HAIOKBLKHEPE?=HOQ??AOOEKJKBH=NCAEJ®Qence on policy issues by particular interest groups and inconsistencies in regime building. In the process of privatization, all countries have allowed EJOE@ANOPKP=GALKOOAOOEKJKB­NIO 2DAJASKSJANOSANASAHHÎ?KJJA?PA@ to state authorities and have received implicit and explicit subsidies. The NACEIAOPD=PD=RA>AAJ>QEHP>UPDAEJ@ERE@Q=H!'1?KQJPNEAO@EɳANBNKI KJA=JKPDAN 2DAEJ@ERE@Q=H?KQJPNEAO=HOKD=RA=@EɳANAJPA?KJKIE?>=OEO  Some were highly industrialized and produced more than they could sell domestically, while others were much less industrialized and depended on imports for the supply of many products.26 Even though the CIS countries have concluded numerous agreements to reduce trade barriers, the single A?KJKIE? OL=?A D=O AɳA?PERAHU >NKGAJ QL SDE?D I=GAO EP @Eɹ?QHP PK service more countries from a single location using economies of scale to reduce production costs. All these factors resulted in barriers to entry into 24

See 2004 and 2005 EBRD Transition Report.

25

See, among others, C. Shiells, “FDI and the Investment Climate in the CIS Countries”, IMF Policy Discussion Paper/03/5, November 2003, available online at ; and N. Vandycke, “Economic Development and Private Sector Growth in the CIS-7 Countries: Challenges and Policy Implications”, in C. Shiells and S. Sattar, eds., The Low-Income Countries of the Commonwealth of Independent States, Washington, DC 2004.

26



CCHKIAN=PEKJ AɳA?PO =?PQ=HHU ?=QOA@ EJ@QOPNEAO PK HA=RA PDA HAOOÎEJ@QOPNE=HEVA@ NACEKJO 2DAOAAɳA?POD=RA=HOK>AAJDAH@NAOLKJOE>HABKNPDAB=?PPD=PIKNAPD=J half of all foreign direct investment in Russia goes to Moscow and Moscow Oblast’. See H. Broadman and F. Recanatini, “Where Has All The Foreign Investment Gone In Russia?”, World Bank Policy Research Working Paper 2640, Washington, DC 2001, available online at .

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markets and created uncertainties for business, which increased business costs and prevented increased earnings. The dissolution of the Soviet Union and the creation of separate institutional regimesD=@=@EO?KQN=CEJCAɳA?PKJforeign investment, but a distinction can be made between investments from one CIS country into another, which now registers as foreign investment, and investment from other non-CIS countries. As indicated above, Russia is both a recipient KBBKNAECJEJRAOPIAJP=J@=BKNAECJEJRAOPKN HPDKQCDEPEO@Eɹ?QHPPK determine the exact levels, Russia is an important investor in other CIS countries.27 The (poor) countries of the CIS also receive savings from friends and relatives working abroad, often in Russia, PK­J=J?APDAENEJvestments. Some of the investment from the rest of the world, for instance from Cyprus and the Virgin Islands, is actually capital that is returning to the CIS after being exported in the 1990s. The energy sector—oil and gas and electricity—attracts most investments, but Russian companies also EJRAOPEJ­J=J?E=HOANRE?AO=J@EJEJ@QOPNU  Investors from other CIS countries have several advantages over investors from the rest of the world. Among others, they have a better knowledge of local conditions. They have personal contacts with government authorities and know how the bureaucracies in these countries work. They also have a better understanding of the business culture. At the same PEIAPDAUKBPAJ@KJKPNAMQENAPDAO=IAGEJ@KBCQ=N=JPAAOPD=P­NIO from the rest of the world want before they commit their resources.28 Investment often brings back together the conglomerates that were disrupted by the dissolution of the Soviet Union, and investors are ready to deal with any sort of problem if and when it is presented.

Conclusion The CIS countries have thus far not attracted much foreign direct investment. Starting their transition later and from a lower level of income, they found themselves at a disadvantage in the competition for investments with the countries of Central and Eastern Europe. They were, and are, even more handicapped by their distance, measured in kilometers, time, and costs, from the economic centers of the European Union. Being land-locked, the only feasible means of transport is by road and rail. Low volumes travel over long distances, which adds to the costs of the output. 27

Crane et al., op.cit. note 14.

28

Crane et al., op.cit. note 14, point out that Russian investments in the CIS are also caused by excessive liquidity and the desire of investors to diversify their portfolio, given the Russian administration’s hostility toward some business circles.

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Transport regulations often add to the time it takes to bring products to their destination. Given the small size of their markets and, in many cases, the lack of natural resources, CIS countries are not likely to attract foreign direct investment in large quantities. But the CIS countries have made it more @Eɹ?QHPKJPDAIOAHRAO>UB=RKNEJCinsiders in the privatization of their A?KJKIEAOPDQO@ALNEREJCPDAIOAHRAOKBPDA>AJA­POKBBKNAECJ@ENA?P investment. Their scores on the transition indicators also leave room for improvement. The government should actively pursue a policy to improve those scores and at the same time restrain itself from active engagement in the operation of enterprises. The dissolution of the Soviet Union broke up a single market, ruled by a single institutional regime, into twelve separate markets with their own distinct regulatory regimes. Although the CIS countries continue to work together in several ways, the creation of multiple jurisdictions and political entities reduced the possibilities of creating economies of scale =J@I=@AEPHAOO=PPN=?PERABKN­NIOPK>A?KIA=?PERAEJPDA?KQJPNEAOKB the CIS. The CIS countries would be advised to work together to reduce the EJRAOPIAJP>=NNEANOPD=P=NEOABNKI@EɳANAJPEJRAOPIAJPNACEIAO 

Civil Code (Part I) Model Recommended Legislation of the Commonwealth of Independent States Adopted at the Fifth Plenary Session of the Parliamentary Assembly of the Member States of the Commonwealth of Independent States 29 October 1994 Informatsionnyi Biulleten’ MPA 1995 No.6 (Excerpt) SECTION 2. PERSONS Chapter 5. Legal Persons § 1. Basic Provisions Article 61. Concept of a Legal Person 1. An organization that has distinct property by way of ownership, economic ownership, or operative management and is liable for its obligations with this property, may in its own name acquire and exercise property =J@LANOKJ=HJKJÎLNKLANPUNECDPO>A=N@QPEAO=J@=LLA=N=O=LH=EJPEɳKN defendant in court, is recognized as a legal person. A legal person must have an independent balance-sheet or budget. 2. In connection with participating in the formation of the property of a legal person, its founders (participants) may have rights under an obligation as regards this legal person or rights in rem to its property. Business partnerships and companies, production and consumer cooperatives relate to legal persons with respect to which its participants have rights under an obligation. Unitary state and municipal enterprises, including subsidiary enterLNEOAO=OSAHH=OEJOPEPQPEKJO­J=J?A@>UPDAKSJANNAH=PAPKHAC=HLANOKJO with respect to the property of which its founders have a right of ownership or other right in rem. 3. Social and religious organizations (associations), philanthropic and other funds and associations of legal persons (assotsiatsii and unions) relate to legal persons with respect to which its founders (participants) do not have property rights.

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Article 62. Legal Capacity of a Legal Person 1. A legal person may have the civil rights that conform to the aims of its activity laid down in its founding documents, and may bear the duties connected with this activity. Commercial organizations, with the exception of unitary state and municipal enterprises, may enjoy the civil rights and bear the duties necessary for exercising any type of activity not prohibited by a law. A legal person may only engage in certain kinds of activity, a list of which is established by a law, on the basis of a special permit (a license). 2. A legal person may only be restricted in its rights in the instances and procedure provided for by a law. A legal person may bring an appeal in court against a decision to restrict its rights. 3. The legal capacity of a legal person originates as of the moment of its foundation (section 2 of Article 64) and terminates as of the moment of completion of its liquidation (section 8 of Article 76). The right of a legal person to carry out an activity, engaging in which requires obtaining a license (section 1 of this article), originates as of the IKIAJP KB K>P=EJEJC OQ?D HE?AJOA KN SEPDEJ PDA PEIA LANEK@ OLA?E­A@ therein and terminates upon the expiration of the time period of the validity thereof unless otherwise established by a law or other legal acts. Article 63. Commercial and Non-commercial Organizations  *AC=HLANOKJO?=J>AKNC=JEV=PEKJOPD=POAAGPK@ANERALNK­P=OPDA chief aim of their activity (commercial organizations) or that do not seek PK@ANERALNK­P=OOQ?D=EI=J@@KJKP@EOPNE>QPAA=NJA@LNK­PO=IKJC participants (non-commercial organizations). 2. Legal persons that are commercial organizations may be founded in the form of business partnerships and companies, production cooperatives, and unitary state and municipal enterprises. 3. Legal persons that are non-commercial organizations may be founded in the form of consumer cooperatives, social or religious organizaPEKJOÓ=OOK?E=PEKJOÔEJOPEPQPEKJO­J=J?A@>UPDAKSJANLDEH=JPDNKLE?=J@ other social funds, as well as in other forms provided for by a law. Non-commercial organizations may engage in entrepreneurial activity only insofar as this is necessary for the aims for which they were established. 4. The establishing of associations of commercial and/or non-commercial organizations in the form of assotsiatsii and unions is allowed.

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Article 64. State Registration of a Legal Person 1. A legal person is subject to state registration in justice agencies in the procedure determined by a law. For certain types of legal persons, the law may stipulate that registration be conducted by other state organs. The data of the state registration—and for commercial organizations also PDA­NIJ=IA—are included in the uniform state register of legal persons, which is open for public inspection. A violation of the procedure provided for by a law for establishing a legal person or the failure of its founding documents to conform to the law entails a denial of state registration of the legal person. The denial of registration for reasons of inexpediency of the establishment of the legal person is not allowed. An appeal may be brought in court against the refusal of state registration, as well as the evasion of such registration. 2. A legal person is deemed to be established as of the moment of its state registration. 3. Re-registration of a legal person shall be required only in cases established by a law. Article 65. Founding Documents of a Legal Person 1. A legal person acts on the basis of a charter, or a founding agreement and a charter, or only a founding agreement. In the instances provided for by a law, a legal person that is not a commercial organization may act on the basis of a general statute for organizations of the relevant type. The founding agreement of a legal person is concluded, and the ?D=NPAN?KJ­NIA@>UEPOBKQJ@ANOÓL=NPE?EL=JPOÔ A legal person that is established in accordance with this Code by one BKQJ@ANKLAN=PAOKJPDA>=OEOKB=?D=NPAN?KJ­NIA@>UPD=PBKQJ@AN 2. The name of a legal person, its seat, and the procedure for managing the activity of the legal person must be laid down in the founding documents of the legal person; they must also contain other information provided for by a law on legal persons of the relevant type. The founding documents of non-commercial organizations and unitary state and municipal enterprises, and also other commercial organizations in the instances provided for by a law, must set forth the object and aims of the activity of the legal person. The founding documents of other types of ?KIIAN?E=HKNC=JEV=PEKJOI=U=HOKOAPBKNPDPDAK>FA?P=J@@A­JA@=EIO of their activity. In the founding agreement, the founders oblige themselves to establish a legal person, and they determine the procedure of joint activity relating to the establishment and terms and conditions for transferring

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their property thereto and for participating in its activity. The agreement also lays down the terms and conditions and procedure of apportioning LNK­PO=J@HKOOAO=IKJCPDAL=NPE?EL=JPOI=J=CEJCPDA=?PEREPUKBPDA legal person, and withdrawing of the founders (participants) therefrom. With the consent of the founders, the founding agreement may also include other conditions. 3. Changes in the founding documents acquire force vis-à-vis third persons as of the moment of their state registration, and, in the instances AOP=>HEODA@>U=H=S=OKBPDAIKIAJPKBLNKRE@EJCJKPE­?=PEKJKBOQ?D changes to the agency carrying out state registration. However, legal persons and their founders (participants) are not entitled to refer to the lack of registration of such changes in relations with third persons who have acted while taking these changes into account. Article 66. Organs of a Legal Person 1. A legal person acquires civil rights and takes civil duties upon itself through its organs acting in accordance with a law, other legal acts, and the founding documents. The procedure of appointing or electing organs of a legal person is determined by a law and the founding documents. 2. In the instances provided for by a law, a legal person may acquire civil rights and take civil duties upon itself through its participants. 3. A person who acts in the name of a legal person—by force of a law or its founding documents—must act in good faith and reasonably in the interests of the legal person represented thereby. Upon demand of the founders (participants, members) of the legal person, it is required to indemnify the damages caused by it to the legal person unless otherwise provided for by a law or contract. Article 67. Name and Seat of a Legal Person 1. A legal person has its own name containing an indication of its organizational-legal form. The names of non-commercial organizations, as well as of unitary state and municipal enterprises, and also other commercial organizations, in the instances provided for by a law, must contain an indication of the nature of activity of the legal person. 'J?HQOEKJEJPDAJ=IAKB=HAC=HLANOKJKBNABANAJ?AOPKPDAKɹ?E=H full or abbreviated name [name of the state], or the inclusion of such names or elements of state symbols in documents or advertising materials of the legal person is permitted through a procedure established by the government (cabinet of ministers).

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2. The seat of a legal person is determined by the place of its state registration unless otherwise established in accordance with a law in the founding documents of the legal person. 3. The name and seat of a legal person are stated in its founding documents.  HAC=HLANOKJPD=PEO=?KIIAN?E=HKNC=JEV=PEKJIQOPD=RA=­NI name. HAC=HLANOKJPDA­NIJ=IAKBSDE?DD=O>AAJNACEOPANA@EJPDA established procedure, has an exclusive right to the use thereof. 2DALNK?A@QNAKBNACEOPANEJC=J@QOEJC­NIJ=IAOEO@APANIEJA@>U a law and other legal acts in accordance with this Code. LANOKJSDKSNKJCBQHHUQOAOPDANACEOPANA@­NIJ=IAKB=JKPDAN EONAMQENA@=PPDA@AI=J@KBPDADKH@ANKBPDANECDPPKPDA­NIJ=IAPK cease the use thereof and to indemnify the damages caused. Article 68. Representations and Branches 1. A representation is a distinct division of a legal person that is located outside the place of its seat, represents and protects the interests of the legal person, and concludes transactions and other legal actions in its name. 2. A branch is a distinct division of a legal person that is located outside the place of its seat and exercises all or a part of its functions, including the function of representation. 3. Representations and branches do not enjoy legal personality. They are endowed with property by the legal person that established them and KLAN=PAKJPDA>=OEOKBNACQH=PEKJO?KJ­NIA@PDANA>U The heads of representations and branches are appointed by a legal person and act on the basis of a power of attorney issued thereby. Representations and branches must be mentioned in the charter of the legal person that established them. Article 69. Liability of a Legal Person  *AC=HLANOKJOAT?ALPEJOPEPQPEKJO­J=J?A@>UPDAKSJAN=NAHE=>HA for their obligations with all property belonging to them.  JEJOPEPQPEKJ­J=J?A@>UPDAKSJANEOHE=>HABKNEPOK>HEC=PEKJO in the procedure and on the conditions established by Article 145 of this Code. 3. A founder (participant) of a legal person or the owner of its property is not liable for the obligations of the legal person, and the legal person is not liable for the obligations of the founder (participant) or owner except

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for the instances provided for by this Code or by the founding documents of the legal person. If the insolvency (bankruptcy) of a legal person has been brought about by the owner of the property of the legal person, subsidiary liability for its obligations may be imposed upon the owner where the property KBPDAHAC=HLANOKJEOEJOQɹ?EAJP Article 70. Reorganization of a Legal Person 1. The reorganization of a legal person (merger, accession, division, OAL=N=PEKJPN=JOBKNI=PEKJÔI=U>AAɳA?PA@>U=NAOKHQPEKJKBEPOBKQJ@ANO (participants) or a duly authorized organ under the founding documents of the legal person. 2. With the aim of restricting monopolistic activity, a law may establish instances and the procedure for the mandatory reorganization of commercial organizations upon a court decision. If the founders (participants) of a legal person, an organ that they have empowered, or the organ authorized by its founding documents to NAKNC=JEVAEPB=EHPKAɳA?PQ=PAPDANAKNC=JEV=PEKJKBPDAHAC=HLANOKJSEPDEJ the time period determined in the decision of a court, then the court shall appoint an external manager for the legal person and commission it to carry out the reorganization of this legal person. As of the moment of =LLKEJPIAJPKB=JATPANJ=HI=J=CANPDALKSANOPKI=J=CAPDA=ɳ=ENOKB the legal person pass thereto. An external manager acts in the name of the legal person in court, draws up a distribution balance-sheet and submits EPBKN?KJ­NI=PEKJPKPDA?KQNPPKCAPDANSEPDPDABKQJ@EJC@K?QIAJPO KBPDAHAC=HLANOKJONAOQHPEJCBNKIPDANAKNC=JEV=PEKJ 2DA?KJ­NI=PEKJ by a court of said documents are grounds for the state registration of the new legal persons. 3. In the instances established by a law, the reorganization of legal persons in the form of merger, accession, or transformation may be carried out only with the consent of duly authorized state bodies. 4. Except for instances of reorganization in the form of accession, a legal person is deemed to be reorganized as of the moment of state registration of the new legal persons. Where a legal person is reorganized by means of the accession thereto of another legal person, the former is deemed to be reorganized as of the moment that an entry is made in the state register of legal persons as to the termination of the activity of the acceding legal person.

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Article 71. Legal Succession in Cases of the Reorganization of Legal Persons 1. Where legal persons are merged, the rights and duties of each pass to the new legal person in accordance with the transfer act. 2. Where a legal person accedes to another legal person, the rights and duties of the acceding legal person pass to the latter in accordance with the transfer act. 3. Where a legal person is divided, its rights and duties pass to the new legal persons in accordance with the distribution balance-sheet. 4. Where one or several legal persons are separated from a legal person, the rights and duties of the reorganized legal person pass to each in accordance with the distribution balance-sheet. 5. Where a legal person is transformed from one type into a legal person of another type (a change in the organizational-legal form), the rights and duties of the reorganized legal person pass to the new legal person in accordance with the transfer act. Article 72. Transfer Act and Distribution Balance-Sheet 1. A transfer act and distribution balance-sheet must contain provisions on legal succession with regard to all the obligations of the reorganized legal person as concerns all its creditors and debtors, also including obligations contested by the parties.  PN=JOBAN=?P=J@@EOPNE>QPEKJ>=H=J?AÎODAAP=NA?KJ­NIA@>UPDA founders (participants) of a legal person or the organ that has adopted the resolution to reorganize the legal person and are submitted, together with the founding documents, for state registration of the new legal persons or the introduction of changes in the founding documents of the existing legal persons. Failure to submit the transfer act or distribution balance-sheet together with the founding documents, as well as the absence of provisions on legal succession with regard to the obligations of the reorganized legal person, result in the denial of state registration of the new legal persons. Article 73. Guarantees of the Rights of Creditors of a Legal Person in the Event of Its Reorganization 1. The founders (participants) of a legal person or the organ that has adopted a resolution to reorganize the legal person are required to inform the creditors of the legal person in reorganization in writing thereof.

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2. A creditor of a legal person in reorganization is entitled to demand the termination or premature performance of an obligation, under which PDEOHAC=HLANOKJEOPDA@A>PKN=J@PDAEJ@AIJE­?=PEKJKB@=I=CAO 3. If the distribution balance-sheet does not allow determination of the legal successor of the reorganized legal person, the new legal persons bear joint and several liability to its creditors for the obligations of a reorganized legal person. Article 74. Liquidation of a Legal Person 1. The liquidation of a legal person entails its termination without rights and duties passing to other persons by way of legal succession. 2. A legal person may be liquidated by: — a resolution of its founders (participants) or the organ of the legal person authorized by the founding documents, including in connection with the expiration of the time period for which the legal person was established or the achievement of the aims for which it was established, or a declaration by a court that the registration of the legal person is invalid due to a violation of a law or other legal acts, committed during its foundation if these violations are of an irreparable nature; — a court judgment in the event of engaging in activity without a proper permit (license), or an activity prohibited by a law, or other repeated or gross violations of a law or other legal acts, or systematically engaging in activity that is contrary to its charter aims, as well as in other instances provided for by this Code.  ?H=EIPKHEMQE@=PA=HAC=HLANOKJKJPDACNKQJ@OOLA?E­A@EJOA?tion 2 of this Article may be brought in court by a state body or a body of local self-government to which the right to bring such a claim has been accorded by a law. In its judgment to liquidate a legal person, a court may entrust the duty to carry out the liquidation of the legal person to its founders (participants) or the organ authorized by its founding documents to liquidate the legal person. 4. A legal person that is a commercial organization or acting in the form of a consumer cooperative, or a philanthropic fund, may also be liquidated in accordance with Article 81 of this Code as a result of its being declared to be insolvent (bankrupt). 'BPDAR=HQAKBPDALNKLANPUKBOQ?D=HAC=HLANOKJEOEJOQɹ?EAJPPK satisfy the claims of creditors, it may only be liquidated in the procedure established by Article 81 of this Code.

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The provisions on the liquidation of legal persons due to insolvency (bankruptcy) do not apply to institutions. Article 75. Duties of a Person Adopting a Decision to Liquidate a Legal Person 1. The founders (participants) of a legal person or the organ that has adopted a resolution to liquidate the legal person are required to promptly notify in writing the agency carrying out the state registration of legal persons, which includes information in the state register of legal persons that the legal person is in the process of liquidation. 2. The founders (participants) of a legal person or the organ that has adopted a resolution to liquidate the legal person appoint a liquidation commission (liquidator) and establish the procedure and time period of the liquidation in accordance with this Code. 3. From the moment the liquidation commission is appointed, the LKSANOPKI=J=CAPDA=ɳ=ENOKBPDAHAC=HLANOKJL=OOPDANAPK Inter alia, all actions of the organs of the legal person aimed at selling its property or extinguishing its debts may be performed only with the consent of the liquidation commission. Article 76. Procedure for the Liquidation of a Legal Person 1. The liquidation commission places a notice in the press in which data concerning the state registration of legal persons are published concerning its liquidation and the procedure of, and time period for, submitting claims by its creditors. This time period may not be less than two months from the moment of the publication concerning the liquidation. The liquidation commission takes measures to locate the creditors and to collect accounts receivable and informs creditors in writing concerning the liquidation of the legal person. 2. After the time period for the submission of claims by creditors has expired, the liquidation commission draws up an interim liquidation balance-sheet that contains data on the make-up of the property of the legal person in liquidation and a list of claims submitted by creditors, as well as the results of an examination thereof. 2DAEJPANEIHEMQE@=PEKJ>=H=J?AÎODAAPEO?KJ­NIA@>UPDABKQJ@ANO (participants) of the legal person or the organ that has adopted a resolution to liquidate the legal person.  'B=HAC=HLANOKJEJHEMQE@=PEKJÓAT?ALPEJOPEPQPEKJOÔD=OEJOQɹ?EAJP funds to satisfy the claims of creditors, the liquidation commission sells the property of the legal person at a public sale in the procedure established for the execution of court judgments.

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4. The payment of sums of money to creditors of a legal person in liquidation is carried out by the liquidation commission in the order of priority established by Article 77 of this Code and in accordance with the EJPANEIHEMQE@=PEKJ>=H=J?AÎODAAP>ACEJJEJC=OKBPDA@=UKBEPO?KJ­NI=PEKJAT?ALPBKN?NA@EPKNOKBPDA­BPDN=JGL=UIAJPOPKSDKI=NAI=@A QLKJPDAATLEN=PEKJKBKJAIKJPDBNKIPDA@=UKB?KJ­NI=PEKJKBPDA interim liquidation balance-sheet. 5. After completion of the settlement of accounts with creditors, the liquidation commission draws up the liquidation balance-sheet, which is ?KJ­NIA@>UPDAKSJANKBPDAHAC=HLANOKJ¥OLNKLANPUKNPDAKNC=JPD=P has adopted a resolution to liquidate the legal person.  5DANAPDABQJ@OKB=JEJOPEPQPEKJEJHEMQE@=PEKJ=NAEJOQɹ?EAJP to satisfy the claims of creditors, the latter are entitled to bring suit in court to satisfy the remaining portion of the claims at the expense of the owner of the property of this institution. 7. The property of a legal person remaining after satisfaction of the claims of creditors is transferred to its founders (participants) having rights in rem to this property or under an obligation with respect to this legal person unless otherwise provided for by a law or legal acts of the founding documents of the legal person. 8. The liquidation of a legal person is deemed to be completed and the legal person to have terminated its existence after an entry thereof is made in the state register of legal persons. Article 77. Satisfaction of the Claims of Creditors 1. Where a legal person is liquidated, the claims of its creditors are O=PEO­A@EJPDABKHHKSEJCKN@AN Ð ­NOPN=JG?H=EIOKB?EPEVAJOPKSDKIPDAHAC=HLANOKJEJHEMQE@=PEKJ is liable for causing harm to life or health by means of capitalization of the relevant period payments; — second rank: settlement of accounts for the payment of severance allowances and payment for labor to persons working under an employment agreement, but for a period not exceeding three months; — third rank: satisfaction of claims of creditors out of obligations secured by a pledge of property of the legal person in liquidation; — fourth rank: payment of indebtedness arising out of obligatory payments to the budget and extra-budgetary funds; Ð ­BPDN=JGOAPPHAIAJPKB=??KQJPOSEPDKPDAN?NA@EPKNOEJ=??KN@=J?A with a law.  2DA?H=EIOKBA=?DN=JG=NAO=PEO­A@=BPANPDABQHHO=PEOB=?PEKJKB claims of the preceding rank.

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 5DANAPDALNKLANPUKB=HAC=HLANOKJEJHEMQE@=PEKJEOEJOQɹ?EAJP it is divided among the creditors of the relevant rank proportionally to the amounts of claims subject to satisfaction unless otherwise provided for by a law. 4. In the event that the liquidation commission refuses to satisfy the claims of a creditor or does not consider them, the creditor is entitled to >NEJCOQEPEJ?KQNP=C=EJOPPDAHEMQE@=PEKJ?KIIEOOEKJLNEKNPK?KJ­NI=tion of the liquidation balance-sheet of the legal person. Under a court FQ@CIAJPPDA?H=EIOKB=?NA@EPKNI=U>AO=PEO­A@=PPDAATLAJOAKBPDA remaining property of the legal person in liquidation. 5. Claims of a creditor submitted after the expiration of the time period established by the liquidation commission for submitting claims >U?NA@EPKNO=NAO=PEO­A@KQPKBPDALNKLANPUKBPDAHAC=HLANOKJEJHEMQE@=tion remaining after the satisfaction of the claims of creditors submitted within said time period.  !H=EIOKB?NA@EPKNOJKPO=PEO­A@>A?=QOAKB=JEJOQɹ?EAJ?UKBPDA property of a legal person in liquidation are deemed to be extinguished except for the case stipulated in Article 82 of this Code. The claims of creditors not recognized by the liquidation commission, if the relevant creditor has not brought suit in court, as well as claims the satisfaction of which has been disallowed to the creditor under a court judgment, are likewise deemed to be extinguished. Article 82. Recovery of Property Belonging to a Legal Person Following Its Liquidation In the instance that, following the liquidation of a legal person, it will be proven that said legal person transferred, with the aim of avoiding liability to its creditors, to another legal person or in another manner intentionally hid even a portion of its property, then creditors who had not received complete satisfaction of their claims within the framework of the liquidation proceedings, are entitled to apply for recovery of this property in an amount equal to the portion of the debt that has not been extinguished. Moreover, the rules of Article 304 of this Code apply accordingly. The person to whom the property was transferred will be considered to have acted in bad faith if he knew or should have known about the intentions of the legal person to hide this property from its creditors.

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§ 2. Business Partnerships and Companies 1.General Provisions Article 83. Basic Principles on Business Partnerships and Companies 1. Business partnerships and companies are commercial organizations with a charter capital divided into shares (contributions) of the founders (participants). The property created from the contributions of the founders (participants) or from their acquisition of shares, as well as produced and acquired by the business partnership or company in the course of its activity, belongs to it by right of ownership. In the instances provided for by this Code, a business company may be founded by one person who becomes its sole participant. 2. Business partnerships and companies may be founded in the form of a full partnership, a mixed (commanditaire) partnership, a commanditaire company, a limited- or additional-liability company, or a joint-stock company. 3. Individual entrepreneurs and/or commercial organizations may be participants in a full partnership and full partners in a mixed partnership. State bodies and bodies of local self-government are not entitled to act as participants in business companies and contributors to mixed partnerships unless otherwise established by a law. 'JOPEPQPEKJO­J=J?A@>UPDAKSJANI=U>AL=NPE?EL=JPOEJ>QOEJAOO companies and contributors to mixed partnerships with the permission of the owner unless otherwise established by a law. The participation of certain categories of citizens in business partnerships and companies, except for open joint-stock companies, may be prohibited or restricted by a law. 4. Business partnerships and companies may be the founders (participants) of other business partnerships and companies except for instances provided for by this Code and other laws. 5. A contribution to the property of a business partnership or company may consist of money, securities, other things or property rights, or other alienable rights having a monetary value. The valuation of a contribution of a participant in a business company is made by agreement between the founders (participants) of the ?KIL=JU=J@EOOQ>FA?PPKEJ@ALAJ@AJPATLANPRANE­?=PEKJEJPDAEJOP=J?AO provided for by a law.

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6. Business partnerships, as well as limited-liability or additional-liability companies, are not entitled to issue shares of stock. Article 84. Rights and Duties of Participants of Business Partnerships or Companies 1. The participants in a business partnership or company are entitled: Ð PKL=NPE?EL=PAEJPDAI=J=CAIAJPKBPDA=ɳ=ENOKBPDAL=NPJANODEL or company except for instances provided for by section 2 of Article 102 of this Code and other laws; — to receive information concerning the activity of the partnership or company and familiarize themselves with its bookkeeping records and other documentation in the procedure established by the founding documents; Ð PKP=GAL=NPEJPDA@EOPNE>QPEKJKBLNK­P — to receive the remainder of the property or the value thereof in the event of liquidation of the partnership or company after settling accounts with creditors. The participants in a business partnership or company may also have other rights provided for by this Code, laws on business partnerships and companies, or the founding documents of the partnership or company. 2. The participants in a business partnership or company are required: — to make contributions in the procedure, amounts, means, and time periods provided for by the founding documents; Ð JKPPK@ERQHCA?KJ­@AJPE=HEJBKNI=PEKJ ?KJ?ANJEJC PDA =?PEREPU KB the partnership or company. The participants in a business partnership or company may also bear other duties provided for by its founding documents. Article 85. Transformation of Business Partnerships and Companies In the instances and procedure established by this Code, business partnerships and companies of one type may be transformed into business partnerships and companies of another type or into production cooperatives by a resolution of the general meeting of participants.

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7. Joint-Stock Company Article 119. Basic Provisions on Joint-Stock Companies 1. A company, the charter capital of which has been divided into =OLA?E­A@JQI>ANKBOD=NAOKBOPK?GEONA?KCJEVA@PK>A=FKEJPÎOPK?G company; the participants in a joint-stock company (shareholders) are not liable for its obligations and bear the risk of losses related to the activity of the company within the limits of the value of the shares of stock belonging thereto. Shareholders who have not fully paid up their shares of stock bear joint and several liability for the obligations of the joint-stock company within the limits of the unpaid portion of the value of the shares of the stock belonging thereto.  2DA­NIJ=IAKB=FKEJPÎOPK?G?KIL=JUIQOP?KJP=EJEPOJ=IA and an indication that it is a joint-stock company. 3. The legal status of a joint-stock company and the rights and duties of the shareholders are determined in accordance with this Code and laws on business partnerships and companies. The special features of the legal status of joint-stock companies established by means of the privatization of state enterprises are also determined by laws and other legal acts on the privatization of these enterprises. Article 120. Open Joint-Stock Company 1. A joint-stock company, the participants in which may alienate the shares of stock belonging thereto without the consent of the other shareholders, is recognized as an open joint-stock company. Such a joint-stock company is entitled to organize an open subscription for the shares of stock issued thereby and the free sale thereof upon the conditions established by a law and other legal acts. 2. An open joint-stock company is required to publish annually for public information a yearly report, a bookkeeping balance-sheet, and a LNK­PÎ=J@ÎHKOO=??KQJP Article 121. Closed Joint-Stock Company 1. A joint-stock company, the shares of stock of which are distributed KJHU=IKJCEPOBKQJ@ANOKNKPDANLNAREKQOHUOLA?E­A@CNKQLKBLANOKJO is recognized as a closed joint-stock company. Such a company is not entitled to conduct an open subscription for the shares of stock issued PDANA>UKNPKKPDANSEOAKɳANPDAIPK=JQJNAOPNE?PA@CNKQLKBLANOKJO for acquisition.

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2. The number of participants in a closed joint-stock company must not exceed the number established by a law on joint-stock companies; where the contrary is the case, it is subject to transformation into an open joint-stock company within a period of one year, and upon the expiration of this time period, to liquidation by a court unless the number of shareholders is reduced to the established limit. 3. In the instances provided for by a law, a closed joint-stock company I=U>ANAMQENA@PKLQ>HEODPDA@K?QIAJPOOLA?E­A@EJOA?PEKJKBNPE?HA 120 of this Code. Article 122. Transfer of Rights to Shares in a Closed Joint-Stock Company 1. The shareholders of a closed joint-stock company have a preferential right to acquire shares of stock sold by other shareholders of this company. 'BJKJAKBPDAOD=NADKH@ANOQOAPDAENLNABANAJPE=HNECDPSEPDEJÕ­RAÖ @=UOBNKIPDA@=PAKBJKPE­?=PEKJKNSEPDEJ=JKPDANPEIALANEK@AOP=>lished by the company’s charter, the joint-stock company itself shall be entitled to acquire these shares at a price agreed upon with the owner thereof. Upon refusal by the joint-stock company to acquire the shares or upon failure to reach an agreement on the price thereof, the shares may be sold to any third person. 2. If the shares of a closed joint-stock company are used as a pledge and the pledgeholder subsequently applies to recover said shares, then the rules of section 1 of this Article apply accordingly. However, the pledgeholder is entitled to retain the shares himself instead of selling them to a third person. 3. The shares of a closed joint-stock company are transferred to an individual’s legal heir or the legal successor of a legal person that is a shareholder unless the company charter establishes that such a transfer is permitted only with the consent of the company. In the latter instance, upon refusal of consent for the transfer of shares, said shares must be acquired by other shareholders or by the company itself in accordance with the rules of section 1 of this Article. However, the heirs (legal successors) are entitled to retain the shares themselves instead of selling them to third persons. Article 123. Founding of a Joint-Stock Company 1. The founders of a joint-stock company conclude an agreement among themselves, which determines the procedure for carrying out joint activity thereby to found the company, the amount of the charter

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capital of the company, the categories of shares of stock to be issued and the procedure for the placement thereof, as well as the other conditions provided for by a law. An agreement to establish a joint-stock company must be concluded in writing. 2. The founders of a joint-stock company bear joint and several liability for obligations originating prior to the registration of the company. The company bears liability for the obligations of the founders connected with its foundation only in the event of the subsequent approval of their acts by the general meeting of shareholders.  2DA?D=NPAN?KJ­NIA@>UPDABKQJ@ANOEOPDABKQJ@EJC@K?QIAJP of a joint-stock company. The charter of a joint-stock company must—in addition to the EJBKNI=PEKJOLA?E­A@EJOA?PEKJKBNPE?HAKBPDEO!K@A—contain: the conditions relating to the categories of shares of stock issued by the company, the nominal value and number thereof; the rights of shareholders; the amount of the charter capital of the company; the composition and powers of the management organs of the company and the procedure for adopting resolutions thereby, including as to questions with regard PKSDE?DNAOKHQPEKJO=NA=@KLPA@QJ=JEIKQOHUKN>U=MQ=HE­A@I=FKNEPU of votes. The charter of a joint-stock company must also contain other information provided for by a law. 4. The procedure for performing other acts to found a joint-stock company, including the procedure for holding a founding meeting and the powers thereof, is determined by a law. 5. A joint-stock company may be founded by one person or consist of one person in the event that a single shareholder acquires all the shares of stock of the company. Information thereon must be contained in the charter of the company, be registered, and be published for public information. A joint-stock company may not have another business company consisting of one participant as the sole participant. Article 124. The Charter Capital of a Joint-Stock Company 1. The charter capital of a joint-stock company is comprised of the value of shareholders’ contributions resulting from their acquisition of shares of stock of the company. The charter capital of the company determines the minimum amount of the property of the company guaranteeing the interests of its creditors. It is equal to the total nominal value of the shares issued by the company and may not be less than the amount provided for by a law.

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2. A shareholder may not be exempted from the duty to pay for the shares of stock of the company, including an exemption therefrom by IA=JOKBOAPPEJCKɳ?H=EIO=C=EJOPPDA?KIL=JU 3. An open subscription for shares of stock of a joint-stock company is not allowed until the charter capital is fully paid. When a joint-stock company is founded, all of its shares of stock must be distributed among the founders.  'B=PPDAAJ@KBPDAOA?KJ@=J@KBA=?DOQ>OAMQAJP­J=J?E=HUA=N the value of the net assets of the company proves to be less than the charter capital, the company is required to declare a reduction of its charter capital and to register the reduction of its charter capital in the established procedure. If the value of said assets of the company falls below the minimum amount of charter capital determined by a law (section 1 of this Article), the company must be liquidated. 5. Restrictions in the number, the total sum of the nominal value of the shares of stock, or the maximum number of votes belonging to one shareholder may be established by a law or the charter of the company. Article 125. Increase in the Charter Capital of a Joint-Stock Company 1. By a resolution of the general meeting of shareholders, a joint-stock company is entitled to increase the charter capital by increasing the nominal value of the shares of stock or issuing additional shares of stock. 2. An increase in the charter capital of a joint-stock company is allowed after it is paid up in full. An increase in the charter capital of the company in order to cover losses incurred thereby is not allowed. 3. In the instances provided for by a law or the charter of a company, a preferential right of shareholders who possess common (ordinary) or other voting shares of stock to purchase additional shares of stock issued by a company may be established. Article 126. Reduction in the Charter Capital of a Joint-Stock Company 1. By a resolution of the general meeting of shareholders, a joint-stock company is entitled to reduce the charter capital by reducing the nominal value of shares of stock or by purchasing a portion of the shares of stock in order to reduce the total number thereof. A reduction in the charter capital of a company is allowed after JKPE­?=PEKJPK=HHKBEPO?NA@EPKNOEJPDALNK?A@QNA@APANIEJA@>U=H=S  Furthermore, the creditors of a company are entitled to demand the

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premature termination or performance of relevant obligations of the ?KIL=JU=J@EJ@AIJE­?=PEKJKBPDAEN@=I=CAO 2. A reduction in the charter capital of a joint-stock company by means of purchasing and redeeming a portion of the shares of stock is allowed if such possibility has been provided for in the charter of the company. 3. A reduction in the charter capital of a joint-stock company to an amount lower than the minimum amount established by a law (section 1 of Article 124) shall entail liquidation of the company. Article 127. Restrictions on the Issuance of Securities and Payment of Dividends of a Joint-Stock Company 1. The share of preferred shares of stock in the total amount of the ?D=NPAN ?=LEP=H KB = FKEJPÎOPK?G ?KIL=JU IQOP JKP AT?AA@ PSAJPUέRA percent. 2. After the charter capital has been paid up in full, a joint-stock company is entitled to issue bonds up to an amount not exceeding the amount of the charter capital or the amount of a security interest accorded to the company for these purposes by third persons, not prior to the third year of the existence of the joint-stock company and upon the ?KJ@EPEKJKBPDALNKLAN?KJ­NI=PEKJKBPSK=JJQ=H>=H=J?AÎODAAPOKBPDA company by such time. 3. A joint-stock company is not entitled to announce and pay dividends: — prior to the payment of the charter capital in full; — if the value of the net assets of the joint-stock company is either less than its charter capital and reserve fund or would fall below this amount as a result of the payment of dividends. Article 128. Management in a Joint-Stock Company 1. The general meeting of shareholders of a joint-stock company is its highest management organ. The following are within the exclusive powers of a general meeting of shareholders: (1) altering the charter of the company, including changing the amount of its charter capital; (2) electing the members of the supervisory council (board of directors) =J@=Q@EP?KIIEOOEKJÓ=Q@EPKNÔKBPDA?KIL=JU=OSAHH=O­HHEJCPDA executive organs of the company mandate unless the resolution of these questions has been relegated to the powers of the supervisory council (board of directors);

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ÓÔ ?KJ­NIEJC PDA =JJQ=H NALKNPO >KKGGAALEJC >=H=J?AÎODAAPO =J@ LNK­PÎ=J@ÎHKOO=??KQJPOKBPDA?KIL=JU=J@=LLKNPEKJEJCPDALNK­PO and losses thereof; (4) deciding on the reorganization or liquidation of the company. The resolution of other questions may also be relegated to the exclusive powers of the general meeting of shareholders by a law. Questions relegated by a law to the exclusive powers of the general meeting of shareholders may not be transferred thereby to the executive organs of the company for resolution.   'J = ?KIL=JU SEPD IKNA PD=J ­BPU OD=NADKH@ANO = OQLANREOKNU council (board of directors) is created. In the event that a supervisory council is created, its exclusive powers must be determined by the charter of the company in accordance with a law or other legislative act. The questions relegated by the charter to the exclusive powers of the supervisory council may not be transferred thereby to the executive organs of the company for resolution. 3. The executive organ of a company may be collegial (management, directorate) and/or consist of one man (director, director-general). It exercises ongoing guidance over the activity of the company and is accountable to the supervisory council and the general meeting of shareholders. The resolution of all questions that are not within the exclusive powANOKBKPDANI=J=CAIAJPKNC=JOKBPDA?KIL=JU=OOLA?E­A@>U=H=SKN the charter of the company, are within the powers of the executive organ of the company. The mandate of the executive organ of a company may be transferred by contract to another commercial organization or individual entrepreneur (manager) by a resolution of a general meeting of shareholders. 4. The powers of the management organs of a joint-stock company, as well as the procedure for the adoption of resolutions thereby and of acting in the name of the company, are determined in accordance with this Code, by a law, and by the charter of the company. 5. A joint-stock company that is required to publish the documents OLA?E­A@EJOA?PEKJKBNPE?HAKBPDEO!K@ABKNLQ>HE?EJBKNI=PEKJ in accordance with this Code or another law must annually—in order to RANEBU=J@?KJ­NIPDA=??QN=?UKBPDAUA=NHU­J=J?E=HNALKNP—enlist the services of a professional auditor not connected by property interests with the company or its participants (independent audit). 2DA=Q@EPRANE­?=PEKJKBPDA=?PEREPUKB=FKEJPÎOPK?G?KIL=JUEJ?HQ@ing one that is not required to publish said documents for public information, must be conducted at any time upon the demand of shareholders,

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the total share of which comprises [ten] or more percent in the charter capital. The procedure for conducting audits of the activity of a joint-stock company is determined by a law and the charter of the company. Article 129. Reorganization and Liquidation of a Joint-Stock Company 1. A joint-stock company may be voluntarily reorganized or liquidated by a resolution of a general meeting of shareholders. Other grounds and the procedure for reorganization and liquidation of a joint-stock company are determined by this Code and other laws. 2. A joint-stock company is entitled to transform itself into a limitedliability company or production cooperative. 8. Subsidiary and Dependent Companies Article 130. Subsidiary Business Company 1. A business company is recognized as a subsidiary company if another (the parent) business company or partnership by virtue of a predominant participation in its charter capital, or in accordance with a contract concluded therebetween, or otherwise, has a possibility to direct decisions adopted by such company. A subsidiary company is a legal person. 2. A subsidiary company is not liable for the debts of its parent company (partnership). In the event of the insolvency (bankruptcy) of a subsidiary company by fault of the parent company (partnership), the latter bears subsidiary liability for its debts. 3. The participants (shareholders) in a subsidiary company are entitled PK@AI=J@EJ@AIJE­?=PEKJ>UPDAL=NAJP?KIL=JUÓL=NPJANODELÔKB@=Iages caused to the subsidiary by its fault unless otherwise established by a law. Article 131. Dependent Business Company 1. A business company is recognized as a dependent company if another participating company has more than [twenty] percent of its voting shares. A dependent business company is a legal person. 2. A participating company that has acquired the relevant portion of the charter capital of a dependent business company is immediately

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required to publish information thereon in the procedure established by a law. 3. The limits of the mutual participation of business companies in the charter capital of one another and the number of votes that one of such companies may use at the general meeting of participants or shareholders of the other company is determined by a law. SECTION 4. SECURITIES Chapter 9. General Provisions on Securities Article 189. Securities 1. A security is a document that—if the established form and obligatory requisites have been observed—?ANPE­AOLNKLANPUNECDPOPDAATAN?EOA or transfer of which are possible only when it is presented. 5DANA OA?QNEPEAO =NA PN=JOBANNA@ =HH PDA NECDPO PD=P =NA ?ANPE­A@ thereby pass in their totality.  'JKN@ANPKATAN?EOA=J@PN=JOBANPDANECDPO?ANPE­A@>U=OA?QNEPU ARE@AJ?AKBPDA­T=PEKJPDANAKBEJ=OLA?E=HNACEOPANÓKN@EJ=NUKN?KIputerized) of the person issuing the security in its own name and bearing HE=>EHEPUBKNPDAK>HEC=PEKJO=OOK?E=PA@PDANASEPDEOOQɹ?EAJP Article 190. Types of Securities 1A?QNEPEAO=NA>KJ@O>EHHOKBAT?D=JCA?DAMQAO>=JG?ANPE­?=PAO bank bearer savings books, bills of lading, shares of stock, and other documents that have been denominated as securities by a law or in the procedure established thereby. Article 191. Requirements for Securities  2DAPULAOKBNECDPOPD=P=NA?ANPE­A@>UOA?QNEPEAOPDAK>HEC=PKNU requisites of securities, the requirements for the form of securities, and other necessary requirements are established by a law or in the procedure established thereby. 2. The absence of the obligatory requisites of a security or the failure of a security to conform to the form established for securities results in its invalidity. Article 192. Transfer of the Rights Relating to Securities  2DANECDPO?ANPE­A@>U=OA?QNEPUI=U>AHKJC (1) to the bearer of the security (bearer security); (2) to the person named in the security (registered security);

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(3) to the person named in the security who may personally exercise these rights or appoint, through an instruction (order), another authorized person (order security); 2. The possibility of issuing a particular type of security in the form of registered securities or in the form of order securities or in the form of bearer securities may be prohibited by a law.  'JKN@ANPKPN=JOBANPK=JKPDANLANOKJPDANECDPO?ANPE­A@>U=>A=NAN OA?QNEPUEPEOOQɹ?EAJPPKD=J@KRANPDAOA?QNEPUPKPD=PLANOKJ  2DANECDPO?ANPE­A@>U=NACEOPANA@OA?QNEPU=NAPN=JOBANNA@EJPDA procedure established for the assignment of claims (cession). In accordance with Article 385 of this Code, a person who has transferred a right under a security bears only liability for the invalidity of the relevant claim, but not for the nonperformance thereof. 5. The rights under an order security are transferred by means of making an inscription of the transfer on this paper—an endorsement. The endorser bears liability not only for the existence of the right but also for the exercise thereof. JAJ@KNOAIAJPI=@AKJ=OA?QNEPUPN=JOBANO=HHNECDPO?ANPE­A@>U the security to the person to whom or to whose order the rights under the security are transferred—the endorsee. An endorsement may be in blank (without mentioning the person to whom performance must be made) or to order (mentioning the person to whom or to whose order performance must be made). An endorsement may be restricted only PKPDA?KIIEOOEKJPKATAN?EOAPDANECDPO?ANPE­A@>U=OA?QNEPUSEPDKQP transferring these rights to the endorsee (commission endorsement). In this case, the endorsee acts as a representative. Article 193. Performance Under Securities 1. A person who has issued a security and all the persons who have endorsed it are jointly and severally liable vis-à-vis its lawful possessor. In the event that a claim of the lawful possessor of a security to perform PDAK>HEC=PEKJ?ANPE­A@PDANA>UEOO=PEO­A@>UKJAKNOARAN=HLANOKJOBNKI among those who are obliged to do so under the security, they acquire a right of recovery (recourse) against the remaining persons who have obligated themselves under the security.  NABQO=HPKLANBKNI=JK>HEC=PEKJ?ANPE­A@>U=OA?QNEPU>UNABANNEJC to the absence of grounds for the obligation or to the invalidity thereof is not allowed. The possessor of a security who discovers a forgery or the counterfeit of a security is entitled to demand the proper performance of the obliga-

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PEKJ?ANPE­A@>UPDAOA?QNEPU=J@EJ@AIJE­?=PEKJKB@=I=CAOBNKIPDA person who transferred the security to him. Article 194. Paperless Securities 1. In the instances determined by a law or in the procedure established thereby, a depositary that has obtained a special license may, under an =CNAAIAJPSEPDPDAEOOQANÓ@ALKOEP=NU=CNAAIAJPÔP=GA?=NAKBPDA­T=tion of rights in a registered or order security, including those in a paperless form (with the assistance of electronic computer technology, etc.). The rules established by this Code or other laws for securities apply to PDEOBKNIKB­T=PEKJKBNECDPOQJHAOOKPDANSEOABKHHKSOBNKIPDAOLA?E=H BA=PQNAOKBPDA­T=PEKJ Fixation carried out at the request of the issuer or a person registered as the holder of the corresponding rights is equivalent to a security and is OQɹ?EAJPBKNPDAATAN?EOA=J@PN=JOBANKBPDANECDPONAH=PA@PKPDAOA?QNEPU  A depositary is required at the demand of the holder of the right to issue him a document attesting to the right. 2DANECDPO?ANPE­A@>U­T=PEKJEJ=@ALKOEP=NUPDALNK?A@QNABKNPDA activity of securities depositaries and for granting them licenses to conduct KLAN=PEKJOSEPDOA?QNEPEAOPDALNK?A@QNABKNPDAKɹ?E=H­T=PEKJKBNECDPO and the holders thereof by a depositary, the procedure for the documenP=NU?KJ­NI=PEKJKBPDAAJPNEAOEJPDA@ALKOEP=NU=J@PDALNK?A@QNABKN engaging in operations with paperless securities are established by a law or in the procedure established thereby. 2. Operations with paperless securities may only be performed by ad@NAOOEJCPDA@ALKOEP=NUPD=PKɹ?E=HHUI=GAOPDAAJPNUKBPDANECDPO 2DA ATAN?EOAPN=JOBANCN=JP=J@NAOPNE?PEKJKBNECDPOIQOP>AKɹ?E=HHU­TA@>U PDEO@ALKOEP=NUSDE?D>A=NOHE=>EHEPUBKNLNAOANREJCKɹ?E=HAJPNEAOAJOQNEJC PDAEN?KJ­@AJPE=HEPULNKRE@EJC?KNNA?P@=P=?KJ?ANJEJCOQ?DAJPNEAO=J@ I=GEJCKɹ?E=HAJPNEAO=OPKKLAN=PEKJOPD=PD=RAP=GAJLH=?A !D=LPAN 1LA?E®?2ULAOKB1A?QNEPEAO Article 195. Bonds >KJ@EO=OA?QNEPUPD=P?ANPE­AOPDANECDPKBPDADKH@ANPDANAKBPK receive from the person issuing the bond, in the time period provided for therein, the nominal value of the bond or other property equivalent. A >KJ@=HOKCN=JPOEPODKH@ANPDANECDPPKNA?AERAEJPANAOP=PPDAN=PA­TA@ therein, on the nominal value of the bond or other property rights. Bonds may be bearer or registered.

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Article 198. Shares of Stock  OD=NAKBOPK?GEO=OA?QNEPUPD=P?ANPE­AOPDANECDPKBEPODKH@AN ÓOD=NADKH@ANÔPKNA?AERA=LKNPEKJKBPDALNK­PKB=FKEJPÎOPK?G?KIL=JU EJPDABKNIKB@ERE@AJ@OPKL=NPE?EL=PAEJPDAI=J=CAIAJPKBPDA=ɳ=ENO of the joint-stock company, and to a portion of the property remaining after its liquidation. Shares of stock may be bearer or registered, freely traded or circulated within a limited group. 2. A joint-stock company is entitled to issue, within the limits established by a law or other legislative act, preferred shares that guarantee PDADKH@ANOPDANAKBPDANA?AELPKB@ERE@AJ@O=P=­TA@LAN?AJP=CA=O= rule, of the nominal value of the shares regardless of the results of the business activity of the joint-stock company. They also grant their holders a preferential right, in comparison with other shareholders, to receive a portion of the property remaining after the liquidation of the joint-stock company, and other rights provided for by the conditions of the issuance of such shares. Preferred shares do not give their holders the right to participate in PDAI=J=CAIAJPKBPDA=ɳ=ENOKB=FKEJPÎOPK?G?KIL=JUQJHAOOKPDANSEOA established by the company charter.

On Joint-Stock Companies Model Recommended Legislation of the Commonwealth of Independent States Adopted at the Ninth Plenary Session of the Parliamentary Assembly of CIS Member States 17 February 1996 Informatsionnyi Biulleten’ MPA 1996, No. 10 This recommended legislation contains the basic principles of an agreedupon legislative policy on joint-stock companies, including the creation, activities, and termination of activities thereof. Its aims are developing this organizational-legal form of business and strengthening protection of the interests of shareholders. It is intended to create standardized conditions, corresponding to global practice, for promoting market relations and international cooperation on the territory of the member states of the Commonwealth of Independent States (hereinafter referred to as a state). Article 1. Main Provisions on Joint-Stock Companies A joint-stock company is a company whose charter capital (fund) is formed from investments made by participants in the company (shareDKH@ANOÔ=J@EO@ERE@A@EJPK=OLA?E­?JQI>ANKBOD=NAO 5EPDA=?DOD=NA comes a corresponding obligation on the part of the company in relation to the participant purchasing the share. The participants in a joint-stock company (shareholders) may include any individuals or legal entities that found a company or that purchase shares therein through the legally established procedure. A company’s property is distinct from the property of its participants (shareholders); a company shall be liable for its own obligations within the limits of its own property and is not liable for the obligations of its participants. The participants in a joint-stock company (shareholders) shall not be liable for the company’s obligations and shall incur risk of loss in relation to the company’s activities within the limits of the value of their own shares, including unpaid portions thereof. If the insolvency (bankruptcy) of a company is caused by its shareholders or other persons that have the right to give instructions binding on the company or otherwise have the possibility to determine its actions (in accordance with the company’s charter or agreement on the creation of the company), then such persons may bear subsidiary liability for the ?KIL=JU¥OK>HEC=PEKJOEJPDAARAJPKBPDAEJOQɹ?EAJ?UKBPDALNKLANPU of the company.

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 233-248 © Koninklijke Brill NV, Leiden, 2007

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?KIL=JUI=U>AKLAJKN?HKOA@SDE?DOD=HH>ANA®A?PA@EJEPOJ=IA and charter. An open company is one in which a shareholder may dispose of his shares without the agreement of the other shareholders. A closed company is one in which shares are distributed only among its founders or another predetermined group of persons. Only an open joint-stock company shall have the right to organize an open subscription for the shares issued thereby in accordance with a law and other regulations. A closed joint-stock company in which there are more than 50 holders of ordinary (voting) shares as of a certain date shall, within 12 months from that moment, reregister as an open joint-stock company; otherwise, it shall be subject to liquidation through a judicial procedure unless the number of shareholders is reduced to the above-mentioned limit before the expiration of this period. Every year, an open joint-stock company shall be required to publish for public information an annual report, a balance sheet, and a statement KBLNK­PO=J@HKOOAO Article 2. Legal Status of a Joint-Stock Company A joint-stock company shall be considered a legal person from the moment of its state registration. A company’s founding document shall be its charter, which must contain the following information: — The type of company (open or closed); Ð 'PO 'PO­NI=J@KPDANKɹ?E=HJ=IAOSEPD=JEJ@E?=PEKJPD=PPDA?KIL=JU ­NI =J@ KPDAN Kɹ?E=H J=IAO SEPD =J EJ@E?=PEKJ PD=P PDA ?KIL=JU is a joint-stock company; its location; and the planned period of the company’s activities (if this was established upon its founding); — The amount of its charter capital; — The conditions relating to the categories of shares issued by the company, the nominal value and number thereof; — The rights of shareholders; — The structure, powers, and composition of the management organs; the procedure for the adoption of resolutions thereby (including a list KBEOOQAOPD=POD=HH>A@A?E@A@>U=QJ=JEIKQOKNMQ=HE­A@I=FKNEPU of votes); Ð 2DALNK?A@QNABKNPDA@EOPNE>QPEKJKBLNK­PO=J@EJ@AIJE­?=PEKJ 2DA LNK?A@QNA BKN PDA @EOPNE>QPEKJ KB LNK­PO =J@ EJ@AIJE­?=PEKJ for losses; — The procedure for the company to create funds; and — Conditions for the reorganization and liquidation of the company. In addition, a company’s charter may contain other provisions: the legal status of the joint-stock company, the rights and duties of shareholders, as well as other provisions that do not contradict national legislation.

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IAJ@IAJPO=J@=@@EPEKJOPK=?KIL=JU¥O?D=NPANKN?KJ­NI=PEKJ of a new edition of the charter, shall be adopted by the general meeting of shareholders with a two-thirds majority of voting shares and shall be subject to registration in accordance with the legally established procedure. AOE@AOEPO­NIJ=IA=FKEJPÎOPK?G?KIL=JUI=UD=RA=JKɹ?E=H abbreviation and a name in a foreign language. All of a company’s names IQOP>ANA®A?PA@EJEPO?D=NPAN ?KIL=JUOD=HHD=RA=?EN?QH=NOA=H?KJP=EJEJCEPOBQHH­NIJ=IAEJ the state language, as well as the name of the agency responsible for the state registration of the company. A company with foreign investment may be created by founding such a company or as result of the acquisition by foreign investors of shares in an existing company without foreign investment or the acquisition of such a company in its entirety, including through the process of privatization. The creation, operation, and liquidation of joint-stock companies that are founded by attracting the property of other states, international organizations, or foreign legal persons or individuals shall be governed by national legislation on joint-stock companies and on foreign investment, as well as by special agreements and treaties. The legal regulations governing foreign investment, as well as the activities of foreigners making investments, may not be less favorable than the regulations governing property, property rights, and investment activities of legal entities and citizens of the host country, with the exception of cases stipulated by legislation. 2DA OLA?E­?O KB PDA HAC=H OP=PQO KB FKEJPÎOPK?G ?KIL=JEAO ?NA=PA@ through the privatization of state enterprises shall be governed by the relevant national legislation on the privatization of such enterprises. Article 3. Founding a Joint-Stock Company A company may be founded by legal persons or individuals, including foreign entities and citizens, who conclude among themselves a written agreement on the creation of a company, approve its charter, submit an application for registration in accordance with the legally established procedure, and pay at the moment of state registration no less than 25 percent of the company’s charter capital. 2DA@A?EOEKJPKBKQJ@=?KIL=JU=J@?KJ­NIPDAIKJAP=NUAR=HQ=PEKJ of the property or property rights invested by the founders as payment for shares in the company shall be adopted unanimously by the founders. 'B=PPDAAJ@KBPDAOA?KJ@=J@A=?DOQ>OAMQAJP­J=J?E=HUA=NPDA value of the net assets of the company proves to be less than its charter capital, the company is required to declare a reduction of its charter capital

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and to register the reduction in accordance with the legally established procedure. If the value of said assets of the company falls bellows the legally determined minimum amount of charter capital (section 1 of this Article), then the company shall be subject to liquidation. A joint-stock company may be created by one person or consist of one person if one shareholder acquires all of a company’s shares. Such information must be contained in the company’s charter, be registered, and be published for public information. The procedure for holding a founding meeting and the powers thereof shall be determined by the national legislation of the member states of the Commonwealth of Independent States. A joint-stock company may not have, as its sole participant, another business company that consists of a single person. A company shall be considered to have been founded and shall acquire the rights of a legal person from the day of its state registration. The location of the company shall be determined by the place of its state registration. While taking into account the provisions of the recommended legislation “On general principles of the legal regulation of foreign investment in the member states of the Commonwealth of Independent States”, national legislation may grant tax, customs, and other incentives to foreign investors and joint-stock companies with foreign investment. In accordance with national legislation, a company shall have the right to create branches that have the rights of a legal person, as well as OQ>OE@E=NEAO=J@NALNAOAJP=PERAKɹ?AOPD=P=NAJKPHAC=HLANOKJO A company shall be considered to be a branch if another (parent) company, by virtue of its predominant participation in the branch company’s charter capital, or in accordance with an agreement concluded by both parties, or in another manner, has the possibility to determine the decisions adopted by that company. In the event that a branch company’s insolvency (bankruptcy) is caused by the parent company, then the latter shall bear subsidiary liability for the branch’s debts. The founders of a company shall be jointly and severally liable for obligations that arise prior to the company’s state registration or that result from the agreement on the creation of the company, in accordance with the procedure established by national legislation. Any founder declaring himself, in writing, to be against any obligation undertaken prior to state registration shall be relieved of liability. A company shall be liable for the obligations of its founders connected with the creation thereof only if the company agrees to incur

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such obligations in accordance with a resolution of the company’s board of directors. Article 4. Charter Capital A company’s charter capital shall be declared upon its founding or upon amendments to a previously declared amount of charter capital, and it shall be formed from the investments of its participants. A company’s charter capital shall determine the minimum amount of property guaranteeing the interests of its creditors. It shall be equal to the total nominal value of the shares issued by the company and shall consist of no less than 1,000 minimum monthly wages as stipulated by the legislation of the relevant states of the Commonwealth of Independent States. The structure of the charter capital (the ratio of shares of particular categories, classes, and nominal values) shall be determined by national legislation. Shareholders’ investments into the charter capital in the form of property and property rights (including the right to intellectual property) shall be evaluated by mutual agreement of the founders. If such an investment exceeds the value of 100 minimum monthly wages, as established by national legislation, then the evaluation thereof IQOP>A?KJ­NIA@>U=JEJ@ALAJ@AJP=Q@EPKN Property created with the investments of the founders (participants), as well as property produced and acquired by a joint-stock company while conducting its activities, shall belong to the company on the basis of the right of ownership. When a company is being founded, regardless of its type, all of its shares must be distributed entirely among its founders. A public placement of shares is not permitted when a company is being founded. A shareholder may not be exempted from the duty to pay for the shares of PDA?KIL=JUEJ?HQ@EJC=JATAILPEKJPDANABNKI>UIA=JOKBOAPPEJCKɳ claims against the company. The entire charter capital of a company must be paid up within the ­NOPUA=NKBEPO=?PEREPEAO 'BPDAAJPENA?D=NPAN?=LEP=HEOJKPL=E@QLSEPDEJ the course of a year, then the company’s general meeting of shareholders must, within three months, declare a reduction of the charter capital or liquidate the company. Shares that have not been paid for within the course of a year shall not have voting rights. If the value of a company’s shares falls below the minimum charter capital as determined by law (section 1 of this Article), then the company shall also be subject to liquidation.

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If 50 percent of a company’s charter capital is not paid up within the course of one month from the moment of its state registration, this shall be grounds to invalidate the decision on the company’s registration. In accordance with a resolution of the general meeting of shareholders, a joint-stock company is entitled to increase its charter capital either by increasing the nominal value of its shares or by issuing additional shares. An increase in the charter capital of a joint-stock company is allowed after it is paid up in full. An increase in the charter capital of the company in order to cover losses incurred thereby is not allowed. In the instances provided for by a law or the charter of the company, a preferential right of shareholders who possess common (ordinary) or other voting shares to additionally purchase shares issued by the company may be established by the charter of the company. By a resolution of the general meeting of shareholders, a joint-stock company is entitled to reduce the charter capital by reducing the nominal value of the shares or by purchasing a portion of the shares in order to reduce the total number thereof. A reduction in the charter capital of a company is allowed after JKPE­?=PEKJPK=HHKBEPO?NA@EPKNOEJPDALNK?A@QNA@APANIEJA@>U=H=S  Furthermore, the creditors of a company are entitled to demand the premature termination or performance of relevant obligations of the ?KIL=JU=J@EJ@AIJE­?=PEKJKBPDAEN@=I=CAO A reduction in the charter capital of a joint-stock company by means of purchasing and redeeming a portion of the shares is allowed if such a possibility has been provided for in the charter of the company. A reduction by a joint-stock company of its charter capital to a level below the minimum amount as determined by law shall lead to liquidation. Article 5. Shares and Bonds. The Rights of Shareholders 1. A company may issue ordinary and preferred shares that have an identical nominal value. An ordinary share shall grant the holder thereof the right to one vote at the general meeting of shareholders; the right to receive dividends from PDA?KIL=JU¥OLNK­POBKHHKSEJCPDANALHAJEODIAJPKBEPONAOANRABQJ@PK receive payments for bonds, and to receive payout of dividends for preferred shares; as well as the right, upon liquidation of the company, to a portion of its property once accounts are settled with creditors and the holders of preferred shares.

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No holder of ordinary shares shall have any rights or privileges other than those stipulated by the company’s charter for other holders of ordinary shares. A company may not promise or guarantee dividends for ordinary shares. A preferred share shall not grant the holder thereof the right to vote except in cases established by national legislation or by a company’s charter; however, it shall grant the right to priority ahead of holders of KN@EJ=NUOD=NAOQLKJPDA@EOPNE>QPEKJKBLNK­PO=OSAHH=OKBPDA?KIL=JU¥O property in the case of its liquidation. The share of a company’s charter capital represented by preferred shares may not exceed 25 percent. The shares in a joint-stock company may be registered (where the holders of such shares register them in a special registry that is maintained within the company) or bearer (if such a possibility is stipulated by national legislation). Upon a public placement of shares, the total nominal value of issued OD=NAOI=UJKPAT?AA@>UIKNAPD=J­RAPEIAOPDAR=HQAKBPDA?D=NPAN capital that has been paid up at the moment that the issue of additional shares is declared, unless a lesser amount is established by national legislation. A joint-stock company that has more than 1,000 registered shareholders shall be obliged to hire a special agency to administer its shareholder NACEOPNU 2D=P=CAJ?UOD=HH>A?ANPE­A@PK?KJ@Q?POQ?D=?PEREPEAOEJ=?cordance with national legislation. Proof of a shareholder’s holdings shall >ALNKRE@A@>U=OD=NA?ANPE­?=PAEOOQA@>UPDA?KIL=JU?H=EIO=C=EJOP which shall be established by national legislation on securities. A shareholder must inform the registry administrator in a timely manner of all changes to the information contained in the registry; otherwise, the company shall not be liable for damages caused to that shareholder by the company. 2. A company shall have the right to raise funds by issuing bonds once its charter capital has been paid up in full. The procedure and conditions for issuing bonds shall be established by the general meeting of shareholders. The amount of the fund created through the issuance of bonds may not exceed the value of the charter capital or the value of the collateral KɳANA@PKPDA?KIL=JUBKNPDEOLQNLKOA>UPDEN@L=NPEAOKJ?AEPO?D=NPAN capital has been paid up in full and not earlier than the third year of the company’s existence, on the condition that two of the company’s annual >=H=J?AODAAPOD=RA>AAJLNKLANHU?KJ­NIA@>ABKNAPDEOPEIA

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Bondholders shall have priority ahead of shareholders for the distri>QPEKJKBPDA?KIL=JU¥OLNK­PO=J@BKNPDA?KIL=JU¥O=OOAPOEJPDA?=OA of its liquidation. Bonds may be registered or bearer. The company shall maintain a registry of the holders of registered bonds. The holders of bearer bonds OD=HH>ACERAJ=?ANPE­?=PA=PPAOPEJCPKPDA=IKQJP=J@PULAÓOANEAOÔKB bonds belonging thereto. In the instance of the placement by a company of ordinary shares or options to acquire ordinary shares or securities convertible into ordinary shares, with payment in cash, the company shall be obliged to KɳAN OD=NADKH@ANO EJ LKOOAOOEKJ KB PDA ?KIL=JU¥O KN@EJ=NU OD=NAO PDA preferential right to acquire these securities or the right to participate in their acquisition. The procedure for issuing and placing shares, for claims made on ?ANPE­?=PAO=J@BKNPN=JO=?PEKJOEJRKHREJC=?KIL=JU¥OOD=NAO=J@>KJ@O and the administration of the shareholder registry shall be established by the joint-stock company in accordance with national legislation on securities, taking into account the requirements of the Model Civil Code for member states of the Commonwealth of Independent States. NPE?HA "EOPNE>QPEKJKB.NK®POÔ*KOOAOÕ>U=!KIL=JU ?KIL=JU¥OLNK­PO=J@HKOOAOOD=HH>A@APANIEJA@EJ=??KN@=J?ASEPD PDA=??KQJPEJCNACQH=PEKJOBKN­J=J?E=H=?PEREPEAOPD=P=NA=LLHE?=>HAKJ PDAPANNEPKNUKBPDANAHAR=JPOP=PA=J@OD=HH>ANA®A?PA@EJPDA?KIL=JU¥O balance sheet. 2DALKNPEKJKB=?KIL=JU¥OLNK­PNAI=EJEJC=BPANPDAL=UIAJPKB taxes and other mandatory bond payments and replenishment of reserve funds shall be distributed among the company’s shareholders. @ERE@AJ@EOPDALKNPEKJKB=?KIL=JU¥OLNK­P@EOPNE>QPA@=IKJC its shareholders per share. A company shall pay out dividends to holders of preferred shares before holders of ordinary shares. Reservations about the procedure for the payout of dividends for all types of shares may be made upon their issuance, and that procedure may be changed only in accordance with a resolution of the general meeting of shareholders with the participation of the holders of the shares of the category (series) in question. Dividends shall not be calculated for shares that have not been paid for in the established period or for shares on the company’s balance sheet. A company shall not have the right to pay out dividends before its charter capital is paid up in full or if the value of the net assets of the company is less than the total amount of its charter capital and reserve

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fund or if it would fall below that amount as a result of the payment of dividends. A company shall create a reserve fund with a value of at least 10 percent of its charter capital. The company’s charter shall establish the terms, rules of usage, and the amount of withholdings for the reserve fund. Article 7. A Company’s Management Organs 1. The general meeting of shareholders of a joint-stock company is its highest management organ. Every shareholder shall be entitled to participate in the general meeting of shareholders either directly or through an authorized representative regardless of the number of shares he owns, shall have the number of votes designated in the charter, and shall be entitled to be elected to the company’s management and oversight organs. Shareholders shall be EJREPA@PKPDACAJAN=HIAAPEJCKBOD=NADKH@ANO>USNEPPAJJKPE­?=PEKJJKP later than 20 days before the date of the meeting and by means of an announcement placed, in accordance with the requirements of the charter, in publicly accessible print media. The following materials shall be made available to shareholders: the company’s annual report; the conclusions of the review board (controller) KN=Q@EPKNNAC=N@EJCPDA=JJQ=H=Q@EPKBPDA?KIL=JU¥O­J=J?E=H=?PEREPEAO information about candidates for the company’s supervisory board (board of directors) and review board; draft amendments and additions to the company’s charter or a draft charter in a new edition; a ballot for voting; as well as other materials that shareholders need to make decisions on issues related to the agenda. 2DAJKPE­?=PEKJOD=HHEJ@E?=PAPDAPEIA@=PA=J@HK?=PEKJKBPDACAJeral meeting of shareholders, as well issues to be discussed (the agenda). There are both annual and extraordinary general meetings of shareholders. Extraordinary meetings may be called by the supervisory board (board of directors), at is own initiative, as well as upon the demand of the review board (auditor) or by shareholders who possess a combined total of not less than 10 percent of the voting shares. If the supervisory board (board of directors) refuses to call an extraordinary meeting upon the demand of shareholders, shareholders may call a meeting in accordance with the requirements for calling a meeting as established by the charter and legislation. The annual general meeting of shareholders shall be called within a period of two months after the determination of the annual balance sheet, and shall be considered authorized regardless of the number of

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shareholders present at the meeting, unless otherwise stipulated by the company’s charter. Any shareholder in a company who is in possession of no less than 2 percent of the company’s ordinary shares shall be entitled to submit, SEPDEJ@=UOBKHHKSEJCPDAAJ@KBPDA­J=J?E=HUA=NPSKLNKLKO=HOBKN the agenda of the annual general meeting of shareholders and to nominate candidates for the supervisory board (board of directors) and the review board. An extraordinary general meeting of shareholders shall be considered authorized if at least half of the shareholders or their representatives are present. Refusal of the right of a shareholder (or his representative) to participate in a general meeting of shareholders and to vote is not allowed. A shareholder (or his representative) who has not been allowed to participate in a meeting or to vote shall be entitled to demand the invalidation of the resolutions made at such a meeting and the legal actions taken on PDA>=OEOKBOQ?DNAOKHQPEKJO=OSAHH=OPK@AI=J@PD=P=JUKɹ?E=HOEJ the company’s management organs who permitted such a violation be removed from their posts. A resolution on the amendment of the charter or termination (liquidation or reorganization) of the company shall require a majority of threequarters of the votes present at the general meeting of shareholders. The following are within the exclusive powers of a general meeting of shareholders: — Altering the charter of the company, including changing the amount of its charter capital; — The consolidation and division of previously issued shares, the issuance of additional shares; Ð !KJ­NI=PEKJKBPDAR=HQAKB@ERE@AJ@OSEPDNAOLA?PPKKN@EJ=NUOD=NAO !KJ­NI=PEKJ KB PDA R=HQA KB @ERE@AJ@O SEPD NAOLA?P PK KN@EJ=NU OD=NAO on the basis of proposals made by the supervisory board (board of directors); — The procedure and conditions for issuing bonds; Ð 2DAKLAJEJC=J@?HKOEJCKB@EREOEKJO>N=J?DAONALNAOAJP=PERAKɹ?AO 2DA KLAJEJC =J@ ?HKOEJC KB @EREOEKJO >N=J?DAO NALNAOAJP=PERA Kɹ?AO and other standalone subdivisions of a company; Ð 2DA 2DA AHA?PEKJ AHA?PEKJ Ó=LLKEJPIAJP Ó=LLKEJPIAJP ?KJ­NI=PEKJÔ ?KJ­NI=PEKJÔ KB KB PDA PDA IAI>ANO IAI>ANO KB KB PDA PDA supervisory board (board of directors) and the general director (director) of a company, members of the review board and/or the company’s auditor, and the premature termination of their authority, as well as the amount of their remuneration; — The adoption of a code of conduct for the members of the supervisory >K=N@Ó>K=N@KB@ENA?PKNOÔ=J@BKNKPDANI=J=CAIAJPKɹ?E=HO

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Ð !KJ­NI=PEKJ !KJ­NI=PEKJKBPDA=JJQ=HNAOQHPOKB=?KIL=JU¥O=?PEREPEAOKB>=H=J?A KB PDA =JJQ=H NAOQHPO KB = ?KIL=JU¥O =?PEREPEAO KB >=H=J?A ODAAPOLNK­PO=J@HKOOAONALKNPOKBPDAOQLANREOKNU>K=N@Ó>K=N@KB directors), and conclusions of the review board, procedures for the @EOPNE>QPEKJKBLNK­PO=J@BKN?KRANEJCHKOOAO — The termination (reorganization or liquidation) of a company, appointIAJPKB=HEMQE@=PEKJ?KIIEOOEKJ?KJ­NI=PEKJKBPDAHEMQE@=PEKJ balance sheet; Ð !KJ­NI=PEKJKBPN=JO=?PEKJO=J@KPDAN=?PEKJOCEREJCNEOAPKK>HEC=!KJ­NI=PEKJ KB PN=JO=?PEKJO =J@ KPDAN =?PEKJO CEREJC NEOA PK K>HEC=Î tions in the name of the company that exceed the authority granted to the supervisory board (board of directors) or the general director. The general meeting of shareholders shall adopt resolutions only with respect to issues included in the agenda. The charter may stipulate stricter requirements for the quorum of the general meeting of shareholders with respect to certain issues. The resolution of questions attributed by legislation or a company’s charter to the exclusive powers of the general meeting of shareholders may not be assigned to any other of the company’s management organs. 2. In the period between general meetings of shareholders in a company with more than 50 shareholders, a supervisory board (board of directors) shall be created that shall supervise the activities of the company’s management organs. Members of the supervisory board (board of directors) shall not have the right to act in the name of the company. The supervisory board (board of directors) shall consist of no fewer than three members and shall adopt decisions based on a majority of votes of members present. Every member of the board shall have one vote. Issues considered by the charter to be within the exclusive powers of the supervisory board (board of directors) may not be transferred to the company’s management organs. 0ALNAOAJP=PERAO KB = FKEJPÎOPK?G ?KIL=JU¥O SKNGANO =J@ Kɹ?E=HO elected by the workforce, shall take part in the work of the supervisory board (board of directors), with the right to vote. The ratio of shareholders and employees in the supervisory board (board of directors) shall be determined by the company’s charter or collective bargaining agreement. 3. The following shall fall within the exclusive powers of the supervisory board (board of directors): Ð !KJ­NI=PEKJQLKJPDALNKLKO=HKBPDACAJAN=H@ENA?PKNÓ@ENA?PKNÔ !KJ­NI=PEKJ QLKJ PDA LNKLKO=H KB PDA CAJAN=H @ENA?PKN Ó@ENA?PKNÔ of the members of the company’s management; — Determination of a company’s priority activities; — The company’s participation in other commercial enterprises or associations, the creation of branch companies;

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— The company’s completion of transactions exceeding an amount @APANIEJA@>UEPO?D=NPANSEPDPDAOQ>OAMQAJP?KJ­NI=PEKJKBPDA decision by the general meeting of shareholders; — The acquisition and disposal of capital investments, the disposal of enterprises and termination of the activities thereof, as well as of other real estate and rights equivalent to property rights; — The issuance of bonds (through the procedure established by the general meeting of shareholders); — Exhaustion of a company’s reserve fund; — Determination of the amount of dividends recommended to declare to the general meeting of shareholders, and the procedure for the payout thereof; Ð "APANIEJ=PEKJKBPDALNEJ?ELHAOBKNPDA@EOPNE>QPEKJKBLNK­PO=IKJC "APANIEJ=PEKJ KB PDA LNEJ?ELHAO BKN PDA @EOPNE>QPEKJ KB LNK­PO =IKJC members of the management, as well as for their social security. The supervisory board (board of directors) shall decide on the nomination of candidates for the post of general director (director) of the company. The work of the supervisory board (board of directors) shall be organized by its chairperson, who shall be elected by the members of the supervisory board (board of directors) from among the members thereof. 4. A company’s executive body may be collegial (management, directorate) and/or consist of a single individual (general director, director). The executive body shall direct the company’s activities during the period between general meetings of shareholders and sessions of the supervisory board (board of directors), and it shall act on the basis of a statute approved by the supervisory board (board of directors). 2DACAJAN=H@ENA?PKNÓ@ENA?PKNÔOD=HH>A=LLKEJPA@Ó?KJ­NIA@Ô>UPDA general meeting of shareholders on the basis of a recommendation of the supervisory board (board of directors). He or she shall be a member of the supervisory board (board of directors) in terms of position and shall head the management. The company, in the person of the chairperson of the supervisory board (board of directors), shall conclude a contract with the general director (director), which shall set out his or her rights, obligations, and responsibilities. The contract shall establish, inter alia, the limits of the rights of the general director (director) with respect to disposal of the company’s property and liability for damages caused to the company, as well as the amount, method, and conditions for the payment of his or her remuneration. The general director (director) shall conclude contracts with the members of the management that set out their rights, obligations, and

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responsibility for the results of activities assigned to them, as well as liability for damages caused by them to the company, and the amount, method, and conditions for the payment of their remuneration. In accordance with a resolution of the supervisory board (board of directors), a company may conclude an agreement to transfer the authority of a company’s executive body to another commercial organization or an individual (manager). The procedure for the conduct of general meetings and the selection of members of the management of a company shall be determined by national legislation. NPE?HA *E=>EHEPUKB!KIL=JU-ɹ?E=HO In the event that a company’s management organ adopts a resolution that exceeds its authority and/or violates the law, then the company Kɹ?E=HO ÓIAI>ANO KB PDA OQLANREOKNU >K=N@ KN >K=N@ KB @ENA?PKNO PDA general director, and members of the management) that comprise the management organ shall bear joint and several liability to the company BKN=JU@=I=CAOOQɳANA@PDANA>U=J@OD=HH>A=NOQ>OE@E=NUHE=>EHEPU>ABKNA the company for damages caused thereby to third parties. !KIL=JUKɹ?E=HOOD=HHJKP>ANAHEARA@KBHE=>EHEPUEBPDA=?PEKJOAJtailing liability were taken by persons to whom they had delegated their decision-making rights. 'B=?PEKJOP=GAJ>U?KIL=JUKɹ?E=HOPD=PAT?AA@PDAEN=QPDKNEPUKN violate established procedures are subsequently approved by the company through a procedure established by law or its charter, then liability for these actions shall be wholly transferred to the company. Shareholders shall be entitled to appeal through the courts actions P=GAJ>UI=J=CAIAJPKNC=JOKN?KIL=JUKɹ?E=HOPD=PAT?AA@PDAEN=QPDKNity or violate procedures established by law or the company’s charter. The rules for administrative, property, and criminal liability of comL=JUKɹ?E=HOSDKREKH=PAHACEOH=PEKJKJFKEJPÎOPK?G?KIL=JEAOOD=HH>A established by national legislation, international agreements, and other types of agreements. Article 9. Reporting and Oversight 2DANACQH=N=JJQ=HNALKNPOKBLNK­PO=J@HKOOAO=J@>=H=J?AODAAPOKB a company that are presented to the general meeting of shareholders shall >ARANE­A@=J@?KJ­NIA@>UPDANAREAS>K=N@=J@=JATPANJ=H=Q@EPKN 2DA?KIL=JU=J@Kɹ?E=HOOD=HH>A@QHUNAOLKJOE>HABKNPDANAHE=>EHEPU of the information contained in the reports, as well as for the informa-

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tion presented to state bodies, shareholders, and published in publicly accessible print media. -RANOECDPKB=?KIL=JU¥O­J=J?E=H=?PEREPEAOOD=HH>A?=NNEA@KQP>U a review board at the request of the general meeting of shareholders or the supervisory board (board of directors), at its own initiative, or upon the request of shareholders in joint possession of no less than 10 percent of the shares in the company. 'JKN@ANPKRANEBU=J@?KJ­NIPDA=??QN=?UKBEPO=JJQ=H­J=J?E=H reporting, a joint-stock company shall hire a professional auditor that has no connection to any property interests in the company or to its participants (an independent audit). ?KIL=JU¥O=JJQ=HNALKNPKB­J=J?E=H=?PEREPEAO=J@EPO>=H=J?AODAAP shall be provided to the state tax authorities and the state statistics agencies in the location of the company’s registration. Article 10. Reorganization and Liquidation of a Company A company may be reorganized through a merger, accession, division, separation, or transformation. A resolution on reorganization shall be adopted by the general meeting of shareholders or by a court in cases stipulated by law. A merger is the formation of a new company by means of combining all of the assets and liabilities of two or more companies, with the termination of the activities of the former companies. A merger is conducted on the basis of a merger agreement, which is concluded between the companies engaged in the merger, which determines the procedure and conditions of the merger and the procedure for converting the shares of each company into shares or other securities of the new company or other property. The general meeting of shareholders of each company taking part in the merger shall adopt a resolution on reorganization in the form of a IANCAN=J@?KJ­NI=PEKJKBPDA?D=NPANKBPDAJASHUBKNIA@?KIL=JU>U= two-thirds majority of the votes of the shareholders with voting shares. Accession of a company involves the transfer of all the assets and liabilities of a company (the acceding company) to another company, with the termination of the activities of the acceding company. The acceding company and the company to which the accession is >AEJCAɳA?PQ=PA@OD=HH?KJ?HQ@A=J=CNAAIAJPKJ=??AOOEKJSDE?DOD=HH determine the procedure and conditions of the accession and the procedure for converting the shares of the acceding company into shares or other OA?QNEPEAOKBPDA?KIL=JUPKSDE?DPDA=??AOOEKJEO>AEJCAɳA?PQ=PA@ The general meeting of shareholders of the acceding company and KBPDA?KIL=JUPKSDE?DPDA=??AOOEKJEO>AEJCAɳA?PQ=PA@OD=HH=@KLP

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a resolution on reorganization in the form of accession by a two-thirds majority of the votes of the shareholders with voting shares. The division of a company involves the division of the assets and liabilities of a company between two or more newly created companies, with the termination of the activities of the divided company. The general meeting of shareholders of the company reorganized in the form of a division shall adopt a resolution on the reorganization =J@?NA=PEKJKBPDAJAS?KIL=JEAOKJ?KJ­NI=PEKJKBPDAEN?D=NPANO>U a majority of votes of shareholders with voting shares taking part in the meeting, and, if necessary, on the selection of boards of directors of the new companies. The separation of a company involves the separation of a portion of the assets and liabilities of a company’s balance sheet and transfer thereof to one or more newly created companies. The general meeting of shareholders of a company reorganized in the form of a separation shall adopt a resolution on reorganization by a majority of the votes of shareholders with voting shares taking part in the meeting. A joint-stock company shall have the right to transform itself into a limited-liability company or into a production cooperative. The general meeting of shareholders of the transformed company OD=HH=@KLP=NAOKHQPEKJKJPDAPN=JOBKNI=PEKJKJ?KJ­NI=PEKJKBPDA charter, and on the selection (appointment) of the management organs of the new limited-liability company or production cooperative by a twothirds majority of the votes of shareholders with voting shares. The rights of individual shareholders stipulated by the founding documents of the reorganized company may not be reduced or limited without a resolution of the general meeting of shareholders. A company may be liquidated: — By a resolution of the general meeting of shareholders; or — By a decision of a court or an arbitration court. The voluntary liquidation of a company shall be conducted by a liquidation commission appointed by the general meeting of shareholders. Mandatory liquidation shall be conducted by a liquidation commission appointed by a court in accordance with national legislation. The liquidation commission shall evaluate the company’s assets, ascertain its obligations and settle accounts with respect thereto, determine the liquidation balance sheet, and present this to the general meeting of OD=NADKH@ANOBKN?KJ­NI=PEKJ

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The liquidation commission shall act in the name of the company and shall be given the authority stipulated by the company’s charter for the company’s executive body and supervisory board (board of directors). Liquidation shall be considered complete and the company will no longer exist from the moment of its removal from the state registry. If the state has an investment in a company’s charter capital, then the liquidation commission shall include a representative of the relevant committee for property management or the property fund. Liquidation of a company with foreign investment shall be conducted in the instances and procedure established by the national legislation of the relevant member state of the Commonwealth of Independent States on the territory of which said company is located. Investment disputes over the amount, conditions, and procedure for paying compensation to foreign investors in the case of the liquidation of a joint-stock company or upon the application of other obligatory measures shall be resolved by an arbitration tribunal unless another procedure for resolving disputes has been established in an international agreement with the state of the investor or unless the parties to the dispute concluded an agreement on the transfer of disputes to a permanent arbitration tribunal created for hearing such disputes in accordance with the arbitration regulations of the United Nations Commission on International Trade Law (UNCITRAL). All other disputes involving a joint-stock company with foreign investment shall be considered in accordance with the applicable national legislation. Article 11. Implementing the Regulations Contained in this Recommended Legislation The regulations contained in this recommended legislation may be incorporated into existing national legislation on joint-stock companies or serve as the basis for developing such legislation in member states of the Parliamentary Assembly. In the case that international agreements to which a state is party establishes rules other than those contained in national legislative acts on joint-stock companies, then the rules of the international agreements shall apply. If subsequent legislative acts of a state shall worsen the conditions for investment in joint-stock companies, then the legislation in force at the moment when the investment was made shall apply to foreign investments for a period of 10 years.

On Audit Model Recommended Legislation of the Commonwealth of Independent States Adopted at the Ninth Plenary Session of the Parliamentary Assembly of CIS Member States 8 June 1997 Informatsionnyi Biulleten’ MPA 1997, No. 14 2DEO*=S@A­JAOPDAHAC=H>=OEOBKN?KJ@Q?PEJC=Q@EPEJC=?PEREPEAOKJPDA territory of a state,1 establishes the principal rules and procedures for the performance thereof, and regulates relations arising between companies, EJOPEPQPEKJO=J@KNC=JEV=PEKJO?=NNUEJCKQPEJ@ALAJ@AJP­J=J?E=H=?PEREPEAO regardless of the form of ownership or the kind of activity; state bodies; individual citizens (any of the aforementioned shall hereinafter be referred to as economic entities); and auditors and audit organizations. Chapter 1. General Provisions Article 1. The Concept of Auditing Activities Q@EPEJC =?PEREPEAO Ó=Q@EPÔ NABAN PK =J EJ@ALAJ@AJP RANE­?=PEKJ >U auditors or audit organizations of an economic entity’s accounting and ­J=J?E=HNA?KN@O=J@OQLLKNPEJC@K?QIAJP=PEKJSEPDPDA=EIKB=OOAOOEJC PDANAHE=>EHEPUKB?KILHAPA@­J=J?E=H=J@>QOEJAOOKLAN=PEKJO=J@PDAEN ?KILHE=J?ASEPDOP=PAHACEOH=PEKJ 2DEORANE­?=PEKJEO=EIA@=PLNKPA?PEJC the interests of owners; helping economic entities calculate their taxes, @QPEAO=J@KPDANOP=PAHE=>EHEPEAO=J@AJD=J?EJCPDAAɳA?PERAJAOOKBPDAEN activities. Auditing activities may be conducted either by an individual (auditor), who shall operate without forming a legal entity, or by a legal entity (an audit organization). Expenditures for conducting an audit fall under the cost of production of goods, works, or services and are considered material expenses. Article 2. Types of Auditing Services During the course of an audit, an audit report shall be compiled, which shall describe the following: Ó=Ô PDA OP=PQO =J@ OQ>OP=J?A KB =JJQ=H =??KQJPEJC =J@ ­J=J?E=H NAcords; (b) the reliability and completeness of annual balances of banks, funds, OPK?GO?KIL=JEAO­NIO=J@KPDANA?KJKIE?AJPEPEAONAC=N@HAOOKB the form of ownership or kind of activity; 1

Hereinafter, state shall refer to a member state of the CIS Parliamentary Assembly.

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(c) potential opportunities for economic entities in investment and innovative activities, possibilities to choose companies when determining the participants in innovative projects; (d) intended use of credits and investments; (e) whether the charter capital of an economic entity has been paid up on a timely basis, as well as the amount thereof; ÓBÔ PDA ­J=J?E=H OP=PQO KB OA?QNEPEAO EOOQANO OP=PAÎKSJA@ AJPANLNEOAO upon the disposal of property, the leasing thereof in the process of privatization; economic entities that have been declared insolvent (bankrupt). Auditors and audit organizations may provide other auditing services related to their professional activities: in the preparation and bookkeeping KB=??KQJPEJCNA?KN@OPDABKNIQH=PEKJKBEJ?KIA@A?H=N=PEKJO=J@­J=J?E=HOP=PAIAJPO=J=HUOEOKB­J=J?E=H=?PEREPEAOAR=HQ=PEKJKB=?KIL=JU¥O assets and liabilities; advisory services for clients; consulting on tax issues and state legislation related to business activities. Article 3. Types of Audit An audit may be either external or internal. An external audit is an independent form of audit; an internal audit is an in-house form of control. An internal audit is conducted upon the initiative of an economic entity and under the conditions established within its charter. It is under the economic entity’s control, and it may not replace an external audit since it is regulated by the economic entity itself. An audit may be mandatory or self-initiated. A mandatory audit shall be conducted in cases established by state legislation; a self-initiated audit shall be conducted at the discretion of an economic entity or its owner. Chapter 2. Auditors and Audit Organizations and Associations Article 4. Auditors Auditing activities may be conducted by individuals who hold a higher @ACNAAEJA?KJKIE?OKNH=S=J@SDKD=RA=HOKD=@JKHAOOPD=J­RAUA=NO of work experience in their area of specialization. An auditor shall have the right to conduct auditing activities as an individual or as an employee of an audit organization. To conduct =Q@EPOKJ=JEJ@ERE@Q=H>=OEO=J=Q@EPKNIQOP­NOPNA?AERA=HE?AJOABKN this purpose and be entered into the state registry of auditors and audit organizations.

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Auditors who have the right to conduct auditing activities in other countries and who wish to conduct auditing activities on the territory of a given state shall be subject to the requirements stipulated in this article. Article 5. Audit Organizations An audit organization is a legal entity created for the purpose of conducting auditing activities that may be in any organizational form foreseen by the legislation of the state, with the exception of an open joint-stock company. In order to conduct auditing activities, an audit organization must receive a license for this type of activity and be entered into the state registry of auditors and audit organizations. Only an auditor may be the director of an audit organization. Article 6. Limitations on the Right to Conduct Auditing and Other Types of Activities Auditors shall not be permitted to be directly involved in other forms of commercial activity, with the exception of teaching or academic work. Audit organizations shall not be permitted to conduct other activities. 'J@ERE@Q=HO?KJRE?PA@KBLAJ=HKN­J=J?E=H?NEIAOOD=HHJKPD=RAPDA right to conduct auditing activities. Article 7. Auditing Chamber and Auditors’ Associations QJE­A@OP=PA=Q@EPEJC?D=I>ANOD=HHAJOQNAPDA?KKN@EJ=PEKJKB=Qditing activities, the development of auditing methodology, the monitoring of compliance with state legislation on auditing activities, and measures directed at the development of independent professional auditing and enD=J?EJCPDAAɳA?PERAJAOOKB=Q@EPEJC=?PEREPEAO 'POD=HHQJEPA=HHKB=OP=PA¥O auditors and audit organizations on the basis of mandatory membership, =J@EPOD=HH>A­J=J?A@>UI=J@=PKNUIAI>ANODELL=UIAJPO 2DALNK?Adure for making membership payments and the amount thereof shall be determined by the governing body of the auditing chamber. The auditing chamber and its governing bodies shall be created at a state conference of auditors. Its activities shall be regulated by this Law and other legal acts of the state. The auditing chamber shall not have the right to conduct auditing activities or to create its own commercial enterprises. The activities of the auditing chamber may not be discontinued.

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The government of a state may support and lend necessary assistance to the auditing chamber with respect to its establishment, development, and activities. It shall have the right to make recommendations to the auditing chamber with respect to questions related to the improvement of auditing activities. The auditing chamber shall consider such recommendations within a period of two months. Decisions of the auditing chamber shall be obligatory for auditors and audit organizations. In order to achieve professional goals and protect their own interests, auditors may establish professional associations within the framework of the applicable legislation. Chapter 3. Conducting Auditing Activities Article 8. Legal Basis for the Conduct of Auditing Activities Auditing activities shall be conducted on the basis of this Law and other legislative acts of the state, and also in accordance with international and domestic auditing standards. When conducting auditing activities, auditors and audit organizations shall be governed by this Law, other legislative acts, auditing standards, and normative documents on accounting and control. Neither state bodies, nor audit clients, nor any other third party shall have the right to interfere in the professional activities of an auditor or audit organization. The independence of auditors and audit organizations shall be guaranteed in accordance with the legislation of the state. Upon the petition of an interested party, and at the cost of that party, the auditing chamber may initiate an appraisal of the quality of an audit report. The government of a state shall determine the organization of auditing activities, the procedure for certifying specialists and granting them licenses to conduct auditing activities, the licensing of audit organizations, the administration of the state registry of auditors and audit organizations, and other audit-related issues. Article 9. Agreement to Perform an Audit Relations between audit organizations (auditors) and clients shall be governed by an agreement. Audit organizations (auditors) shall register signed agreements.

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A company (client) shall have the right to select an audit organization (auditor) independently in order to conclude an agreement for the performance of an audit unless otherwise stipulated by law. Audit organizations (auditors) conducting an audit of banks must possess a license from the central bank of the state to conduct auditing activities in the banking sector. An audit may not be performed by: (a) auditors: who are the founders, owners, or shareholders of the economic entity being audited; who are close relations of the client either by blood or by marriage (parents, spouses, brothers, sisters, sons, daughters, as well as brothers, sisters, parents, or children of spouses); (b) an audit organization: of economic entities that are the founders, owners, shareholders, creditors, or insurers of the audit organization; or of economic entities in relation to which the audit organization is the founder, owner, or shareholder; of economic entities that are subsidiaries, branches, or representaPERAKɹ?AOKBPDA=Q@EPKNC=JEV=PEKJKNPD=PD=RAOD=NAOEJPDA=Q@EP organization among their capital holdings; (c) auditors or audit organizations that have performed for a given economic entity services with respect to the preparation and bookkeeping of accounting records. Article 10. Rights of Auditors and Audit Organizations Auditors and audit organizations shall have the right: Ó=Ô PK@APANIEJAPDABKNI=J@IAPDK@KBRANE­?=PEKJEJ@ALAJ@AJPHU (b) to verify all accounting records, receipts, and supporting documentaPEKJNAC=N@EJC­J=J?E=H=?PEREPEAO=OOAPO=J@K>HEC=PEKJOPDAATEOPAJ?A of cash holdings, securities, and other valuables, as well as their conformity with the information contained in their accounting and ­J=J?E=HOP=PAIAJPO (c) to receive from banks, tax agencies, and other third parties relevant EJBKNI=PEKJ?KJ?ANJEJCPDA­J=J?E=H=?PEREPEAOKBPDA?KIL=JU>AEJC audited that is necessary for the performance of the audit; (d) to hire various specialists on a contractual basis to take part in the audit, with the exception of persons mentioned in Articles 6 and 9 of this Law; (e) to refuse to conduct an audit in the case that the economic entity being audited fails to provide required documentation.

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Article 11. Duties of Auditors and Audit Organizations Auditors and audit organizations shall be required: (a) to inform a client that it is impossible to take part in the performance of an audit of an economic entity as a result of the circumstances stipulated in Article 9 of this Law; (b) to ensure the security of documents received from the economic entity being audited, as well as of any documents created by the auditor or audit organization during the course of the audit; Ó?Ô PKCQ=N=JPAAPDA?HEAJP?KJ­@AJPE=HEPUKB=JUEJBKNI=PEKJ=J@@=P= presented to the auditor or audit organization or uncovered during PDA?KQNOAKB=Q@EPEJCSKNGPDANAOQHPOKBPDA=Q@EP=J@PDA­J=J?E=H status of the client; (d) not to use for their own purposes or in the interest of third parties any information received as a result of an audit; (e) to inform the owners during the course of an audit, in writing, of any information evincing serious violations of the legislation of the state, as a result of which the company or the state has incurred, or may incur, damages. Article 12. Responsibilities of Auditors and Audit Organizations An audit organization (auditor) shall be liable for violations of the provisions of the applicable legislation of the state when conducting auditing activities. If, as a result of negligence or improper actions on the part of an auditor or audit organization, a company incurs material damages, then it shall be entitled to compensation by the audit organization (auditor) in accordance with the applicable legislation of the state and the conditions of the agreement. Article 13. Rights of the Client The client shall have the right to receive from the auditor full information about legislative requirements concerning the conduct of an audit, and about the regulations that will provide the basis for the auditor’s evidence and conclusions, and the auditor shall be required to provide the client with such information. Article 14. Duties of the Client The client shall be required: (a) to create for the auditor conditions for the timely and proper performance of an audit, to provide the auditor with all of the neces-

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sary documentation, and to provide the auditor, upon request, with ?H=NE­?=PEKJO=J@ATLH=J=PEKJOEJKN=HKNSNEPPAJBKNI (b) not to interfere in the activities of the auditor with the intention of HEIEPEJCPDAJQI>ANKBEOOQAOOQ>FA?PPKRANE­?=PEKJQJHAOOKPDANSEOA stipulated by the agreement; (c) to correct, on a timely basis, any violations uncovered by the auditor of legislation or of the established procedures for accounting and ­J=J?E=HNALKNPEJC 2DA?HEAJPOD=HH>ANAMQENA@PKBQH­HHPDA@AI=J@OKBPDA=Q@EPKNC=nization (auditor) stemming from the requirements of the agreement. Article 15. Responsibilities of the Client Clients shall be responsible for the completeness and reliability of @K?QIAJPO =J@ KPDAN EJBKNI=PEKJ LNKRE@A@ PK =J =Q@EPKN BKN RANE­?=tion. The performance of an audit shall not relieve an economic entity KBNAOLKJOE>EHEPUBKNREKH=PEKJOKBPDALNK?A@QNABKN?KJ@Q?PEJC­J=J?E=H =?PEREPEAOKNBKNPDAJKJÎ?KILHE=J?AKB=??KQJPEJC=J@­J=J?E=HNALKNPEJC with the legislation of the state. Article 16. Audit Report An audit shall result in a report by the audit organization (auditor). J=Q@EPNALKNPOD=HH?KJOEOPKBPSKL=NPO=J=HUOEO=J@­J@EJCO The analysis part of the report shall mention the client and the period of the company’s activities that was audited; shall present the results of PDARANE­?=PEKJKBPDAKNC=JEV=PEKJ¥O=??KQJPEJCEPO­J=J?E=HNALKNPEJC and the status of internal control; shall note the circumstances surrounding the failure to correct any violations of the established procedure for =??KQJPEJC=J@­J=J?E=HNALKNPEJCQJ?KRANA@@QNEJCPDA=Q@EP=OSAHH=O ?=OAOKBREKH=PEKJOKBPDAHACEOH=PEKJKBPDAOP=PASDAJ?KJ@Q?PEJC­J=J?E=H operations. 2DA­J@EJCOKBPDA=Q@EPNALKNPOD=HH?KJP=EJ=JKLEJEKJKJPDANAHE=>EHEPUKBPDA?KIL=JU¥O=??KQJPEJC=J@­J=J?E=HOP=PAIAJPO KPD PDA =J=HUOEO =J@ ­J@EJCO KB PDA =Q@EP NALKNP OD=HH >A OECJA@ separately by the auditor, and the report shall bear the stamp of the audit organization (auditor). The company shall be required to provide users of its accounting and ­J=J?E=HOP=PAIAJPOSEPDKJHUPDA­J@EJCOKBPDA=Q@EPNALKNP If, in the course of the performance of the audit, a company fails to ?KNNA?PREKH=PEKJOEJEPO=??KQJPEJCLN=?PE?AOEJEPO­J=J?E=HNALKNPEJC KNEJEPO?KILHE=J?ASEPDPDAHACEOH=PEKJKBPDAOP=PAPDAJPDA­J@EJCOKB

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the audit report shall include an opinion qualifying the accounting and ­J=J?E=HOP=PAIAJPO Furthermore, in order to substantiate the correction of violations JKPA@EJPDA=Q@EPNALKNPKNKPDANKɹ?E=H@K?QIAJPO=OA?KJ@=Q@EPOD=HH be performed in accordance with a new agreement between the company and the audit organization (auditor). Article 17. Handling of Complaints Complaints arising in the course of auditing activities shall be resolved in accordance with the agreement on the performance of an audit, or, in case such a resolution is not possible, through judicial procedures.

On Securities Markets Model Recommended Legislation of the Commonwealth of Independent States Adopted at the Ninth Plenary Session of the Parliamentary Assembly of CIS Member States 24 November 2001 Informatsionnyi Biulleten’ MPA 2002, No. 28

Chapter 1. General Provisions on Investment Securities Article 1. Relations Regulated by This Law 1. This Law regulates relations arising when investment securities are issued or circulated, as well as relations related to the performance of professional activities in securities markets, state regulation and supervision, and non-state regulation and oversight of securities markets, in order PK AJOQNA PDA O=BA KLAJ =J@ AɳA?PERA KLAN=PEKJ KB OA?QNEPEAO I=NGAPO and protection of the rights of investors and securities holders and fair competition by professional securities-markets participants. 2. The provisions of this Law shall not apply to relations arising when state securities are issued. Article 2. The Concept of Investment Securities Investment securities are securities that certify rights of participation and of debt obligations and other rights of claim, as well as other property and non-property rights, that certify the identical rights of the holders thereof within a single issue in relation to the person taking on the indicated obligations (“the issuer”). Article 3. Types of Investment Securities Investment securities (“securities”) are shares, bonds, and other types of securities, including derivative securities and debt securities, that are assigned by law to the category of investment securities. NPE?HA !ANPE®A@1A?QNEPEAO  ?ANPE­A@OA?QNEPUEO=SNEPPAJ@K?QIAJPEJL=LANBKNIPD=PSDAJ EPEOEJPDALNKLANBKNI=J@?KJP=EJOPDANAMQENA@EJBKNI=PEKJ?ANPE­AO the rights of the holder thereof, the exercise and transfer of which are possible only upon the presentation of the indicated document. The NAMQENAIAJPO BKN OA?QNEPEAO EOOQA@ EJ PDA BKNI KB = ?ANPE­?=PA OD=HH >A established by law. Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 257-289 © Koninklijke Brill NV, Leiden, 2007

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2DADKH@ANKB?ANPE­A@OA?QNEPEAOI=U>AEOOQA@=?ANPE­?=PABKNOARAN=H securities of a single issue or for an entire issue of securities with a single state registration number. The basic requirements for the transfer and reestablishment of rights, =OSAHH=OBKNPDALANBKNI=J?AKBK>HEC=PEKJONAH=PEJCPK?ANPE­A@OA?QNEPEAO shall be established by the Civil Code and by other laws. -JHU>A=NANOA?QNEPEAOI=U>AEOOQA@EJPDABKNIKB?ANPE­A@OA?QNEties.  !ANPE­A@OA?QNEPEAOI=U>AEIIK>EHEVA@>UPN=JOBANNEJCPDAIPK =?AJPN=H@ALKOEP=NUBKNOPKN=CA 0ECDPONAH=PEJCPKEIIK>EHEVA@?ANPE­A@ securities shall be evidenced and shall circulate according to the rules established by this Law for paperless securities. !ANPE­A@OA?QNEPEAOI=U>AEIIK>EHEVA@KJPDA>=OEOKB=?KJPN=?P between the central depositary and the issuer of the relevant securities if is stipulated by the conditions for the issue thereof. !ANPE­A@OA?QNEPEAOI=U>AEIIK>EHEVA@KJPDA>=OEOKB=?KJPN=?P between the holder thereof and the central depositary. !ANPE­A@OA?QNEPEAOOD=HH>A=@IEPPA@BKNPN=@EJCEJKNC=JEVA@OA?QNEties markets under the condition of their mandatory immobilization. 2DALNK?A@QNABKNEIIK>EHEVEJCBKNAECJ?ANPE­A@OA?QNEPEAO=@IEPted for trading in a national securities market shall be established by the authorized state body.  'IIK>EHEVA@?ANPE­A@OA?QNEPEAOOD=HH>AOPKNA@=PPDA?AJPN=H@ALKOEtary in a separate location from the property of the central depositary; in PDA?AJPN=H@ALKOEP=NU¥O­J=J?E=HNALKNPEJCEIIK>EHEVA@?ANPE­A@OA?QNEPEAO shall be listed separately from the assets of the central depositary. Other requirements for the storage of immobilized securities shall be established by the authorized state body. Article 5. Paperless Securities 1. Paperless securities are registered securities, the rights relating to SDE?D=NA?ANPE­A@>U=JKP=PEKJEJPDA=??KQJPEJPDANACEOPNUKBOA?QNEties holders or by a notation in the securities account at the depositary that is acting in the capacity of the nominal holder.  2DANECDPOKB=OA?QNEPEAODKH@ANI=UJKP>A?ANPE­A@OEIQHP=JAously by both a document and a notation in an account in a registry of securities holders or in a securities account at a depositary, or by both a notation in an account in a registry of securities holders and in a securities account at a depositary.

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Chapter 2. Registration of Rights Relating to Securities Article 6. Conditions and Procedure for the Registration of Rights Relating to Securities, and Restrictions on the Circulation and Exercise of These Rights 1. Rights relating to paperless securities originate from the moment PD=PPDANECDPOKBPDA­NOPDKH@ANOPDANAKB=NANACEOPANA@EJ=??KN@=J?A with this Law.  0ECDPONAH=PEJCPK?ANPE­A@>A=NANOA?QNEPEAO=NEOABNKIPDAIKIAJP PD=PPDAU=NAEOOQA@PKPDA­NOPDKH@ANOPDANAKB 2. Any origin, transfer, change, or termination of rights relating to paperless securities that results from a change of the holder thereof or of any other rightsholder in relation thereto, from any civil-law encumbrance on those rights, or from any transfer of securities to a nominal holder, shall be subject to registration. Public-law restrictions on the circulation or exercise of the rights relating to paperless securities (arrest, restriction on their disposal, etc.) that are ordered by a court or other duly authorized state body shall also be subject to registration. 3. The rights relating to paperless securities shall be registered by making a notation and/or amending an existing notation in a registry of securities holders or in a securities account at a depositary. 2K NACEOPAN NECDPO NAH=PEJC PK EIIK>EHEVA@ ?ANPE­A@ OA?QNEPEAO PDA central depositary shall open its securities accounts and enter a notation and/or amend an existing notation therein. 4. A notation in a registry of securities holders or a notation in a depositary’s securities accounts is evidence of the corresponding rights of the securities holders, as well as of other rightsholders and nominal holders of securities, and of the encumbrance of these rights or of restrictions on the circulation or exercise thereof. The required information for a notation in a registry of securities holders and in a depositary’s securities accounts, as well as the conditions and procedure for managing such registers and accounts, shall be established by this Law and by the duly authorized state body. Article 7. Registry of Securities Holders A registry of securities holders is the sum of ordered notations on securities holders (persons who hold the rights evidenced by securities, trust managers, pledgeholders, and other rightsholders relating to securities), as well as on nominal holders of securities, containing information that =HHKSOBKNPDAE@AJPE­?=PEKJKBDKH@ANO=J@JKIEJ=HDKH@ANOKBOA?QNEPEAO

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other rightsholders relating to securities, as well as the type of securities, their nominal value, and the number thereof; the type and nature of the registered rights relating to the securities; the nature of any registered restrictions on the circulation or exercise of rights relating to the securities; the name of the state body that ordered such restrictions; and other information stipulated by law. In the instances established by law, the registry administrator shall compile a list of the persons mentioned in the preceding paragraph of this article by a certain date and time. The registry administrator shall compile such a list of securities holders upon the instruction of the issuer, upon the demand of other persons in the instances established by law, and also upon the demand of state bodies in accordance with the law. The date by which the registry administrator must compile the list shall be determined in the instruction or demand. The registry administrator must compile the list within the period determined by the duly authorized state body. Article 8. Conditions and Procedure for Drawing Up and Managing a Registry of Securities Holders A registrar shall draw up and manage a registry of securities holders on the basis of a contract concluded with the securities issuer, or the issuer itself shall do this. In the case that a registrar manages the registry of securities holders, the issuer shall bear joint and several liability with PDANACEOPN=NBKNEJ@AIJE­?=PEKJKBHKOOAO?=QOA@>UPDANACEOPN=NPDNKQCD the improper performance of its legally established duties. The issuer and/or the person who, on the basis of a contract with the issuer, is responsible for the placement of the corresponding securities shall be liable for the accuracy and reliability of the information indicated in the ­NOPL=N=CN=LDKBNPE?HAKBPDEO*=SSDE?DEOLNKRE@A@PKPDANACEOPNU administrator for the purposes of drawing up and managing a registry. The conditions and procedure for drawing up and managing a registry, the conditions and procedure for storing the documents that are the basis for entering notations into the registry, and the form for excerpts from the registry, form for instructions for the transfer of securities, and a list of information to be indicated therein shall be established by the duly authorized state body while taking into account the requirements of legislation.

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Article 9. Contract on Management of a Registry of Securities Holders 1. A registry of securities holders shall be managed on the basis of a contract on the management of the registry of securities holders, concluded between the issuer and the registrar, with the exception of when it is managed by the securities issuer. In accordance with the contract on management of the registry, the registrar shall register the rights to securities, shall accept and deposit securities into accounts, and shall carry out the instructions of account holders on the transfer of securities and on other account operations. The issuer shall pay the registrar for managing the registry, the amount of which shall be determined by the contract and in accordance with the provisions of the duly authorized state body. A contract on management of a registry shall be concluded in the form of a single written document. 2. A contract on management of a registry may be unilaterally dissolved by the issuer at any time. Upon dissolution of the contract, the registrar shall transfer to another registrar named by the issuer the registry and other required documents, a list of which shall be established by the duly authorized state body, within the period stipulated in the contract, but not later than within 10 days from the date of receipt from the issuer KBJKPE­?=PEKJKBPDA=LLKEJPIAJPKB=JASNACEOPN=N 'J=@@EPEKJPDA contract shall be considered dissolved from the moment that the registrar transfers to the new registrar the registry and documents that formed the basis for the entry of notations into the registry. The issuer shall publish information on the replacement of the registrar or disclose it in another manner stipulated by the duly authorized state body. A contract on management of a registry may be dissolved by the registrar through a court procedure on the grounds stipulated by law or by the contract. In this case, the registrar shall continue to manage the registry until its transfer to a new registrar named by the issuer. If the issuer fails to name a new registrar within a reasonable period, then the registrar shall transfer the registry to a registrar named by the duly authorized state body. In this case, the registrar shall have the right to demand compensation from the issuer for expenses related to management of the registry, as well as remuneration until the registry is transferred to a new registrar. 3. If a registrar’s license is revoked by the duly authorized state body, then the contract on management of the registry shall be terminated. In order to transfer the registry and all of the documents that form the basis for the entry of notations therein to a new registrar, the authorized

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state body shall be entitled to appoint to an organization whose license has been revoked its own representative who will have the necessary authority to transfer the registry to another registrar. The registry shall be transferred to another registrar named by the issuer. If the issuer fails to name a new registrar within a reasonable period, then the registry shall be transferred to a registrar named by the duly authorized state body. All of the expenses connected with the transfer of the registry to another registrar shall be borne by the registrar whose license was revoked. 4. Information that a registrar’s license has been suspended or revoked shall be published by the duly authorized state body in its own publication or shall be publicly disclosed in another manner stipulated by the authorized state body. From the moment that a registrar learns or should have learned that its license has been suspended or revoked, it shall not be entitled to perform any operations related to the management of the registry except those that had not been completed prior to the suspension or revocation of the license, unless otherwise stipulated by a decision of the duly authorized state body. 5. A registrar shall bear civil-law liability before the issuer, securities holders, and nominal holders registered in the registry, as well as before other interested persons, in the procedure and under the conditions established by law and by the contract on management of the registry, for the nonperformance or improper performance of its duties as stipulated by law and by the contract. Article 10. Grounds for the Registration of Rights to Securities in a Registry of Securities Holders 1. A notation shall be entered in the registry of securities holders on the change, termination, transfer, or encumbrance of rights to securities either upon the instruction of the person indicated in the registry whose rights relating to the corresponding securities will, as a result of such a notation, be changed, terminated, transferred to another person, or encumbered by the rights of another person, or in accordance with a court decision. If a party in a civil-law transaction whose registered rights relating to securities are, as a result of the transaction, changed, terminated, transferred to another party in the transaction, or encumbered by the rights of this other party fails to instruct the registry administrator to make the corresponding notation in the registry of securities holders, then the other L=NPUEJPDAPN=JO=?PEKJOD=HHD=RAPDANECDPPK­HAOQEPEJ=?KQNPKJPDA registration of its rights relating to the securities.

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In the case that the change, termination, transfer, or encumbrance of the rights relating to securities results from a law, a judicial act, or an act of another state body, or through inheritance or the reorganization of a legal person, the corresponding notation shall be entered into the registry of securities holders on the basis of a petition of the person to whom the rights relating to the securities are transferred; whose rights are changed, terminated, or encumbered; or the person in whose interests these rights =NA ?D=JCA@ PANIEJ=PA@ KN AJ?QI>ANA@  "K?QIAJPO ?KJ­NIEJC PDA change, termination, transfer, or encumbrance of the rights relating to the securities shall be appended to the petition. 2. A notation shall be entered in the registry of securities holders on any restriction of the circulation of securities or of the exercise of the rights relating thereto on the basis of an act of the state body that ordered the corresponding restriction. 3. Documents that form the basis for a registry administrator’s enPNUKBJKP=PEKJOEJOA?QNEPEAO=??KQJPOOD=HH>AOPKNA@BKN=LANEK@KB­RA years. A registry administrator is not entitled to make independent notations in the registry or to make changes thereto in the absence of the grounds indicated in sections 1 and 2 of this article. A notation in a registry of securities holders may be challenged only through a court proceeding. Article 11. Form and Content of Instructions of a Securities Holder on Registration of Rights Relating to Securities An instruction on registration of rights relating to securities must be drawn up in written form, signed by the securities holder or his or her representative, and may be transferred in person, by hand, by regular mail KN>U=?KQNEANKN>UPAHATKNB=T=J@PDANAIQOP>AEIIA@E=PA?KJ­NI=tion of receipt of such an instruction. In the instances established by legislation or by a contract, an instruction on registration of rights relating to securities may be made orally or in writing in an electronic form that uses an electronic signature and that complies with regulations on the technical protection of information as established by legislation. The content of an instruction on registration of rights relating to securities, as well as the conditions and procedure for the registration of such instructions by a registry administrator, shall be determined by the duly authorized state body.

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Legislation may require the provision of additional documents for registration of rights relating to securities, and may also establish requirements for the form and content of such documents. Article 12. Time Frame for the Registration of Rights Relating to Securities in a Registry of Securities Holders, and Refusal of Registration 1. Rights relating to securities shall be registered by entering a notaPEKJEJ=NACEOPNUKN=SNEPPAJFQOPE­A@NABQO=HPKI=GAOQ?D=JKP=PEKJ shall be provided not later than three working days from the day that the registry administrator receives an instruction on the registration of rights relating to securities or an act of a state body and other documents stipulated by legislation. A registry administrator shall refuse to register the rights relating to securities if the instruction on the registration of the rights relating to securities, the act of the state body and other documents necessary for registration of the rights relating to securities do not comply with the requirements of this Law or the acts of the duly authorized state body. The refusal of a registry administrator to register rights relating to securities may be appealed through a court procedure. 2. Suspension of operations relating to accounts in a registry of securities holders or prohibition on their performance shall be permitted only in the instances established by legislation, on the basis of court decisions or decrees of bodies of inquiry and preliminary investigation or of another duly authorized state body. Article 13. Registration by a Depositary of Rights Relating to Securities 1. A depositary registers rights relating to securities by opening and managing accounts of securities holders. When a depositary registers rights relating to securities, the rules of Articles 10-12 of this Law shall apply. 2DA@QHU=QPDKNEVA@OP=PA>K@UOD=HHAOP=>HEODQJE­A@NQHAOBKNPDA registration by depositaries and by registry administrators of rights relating to securities. 2. When registering the rights of securities holders under the condition that these documents are registered in a registry of securities holders in the account of the given depositary or in its securities account with another depositary, the depositary acts in the capacity of a nominal holder of these securities. A depositary acting in the capacity of a nominal holder of securities shall perform its activity in the interests of the holder of these

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securities and/or in the interests of the depositaries-nominal holders of the securities that are the clients of the given depositary. Rights relating to securities for which a depositary is acting in the capacity of a nominal holder may be exercised thereby only on the basis of an instruction of the securities holder. 3. Claims for recovery in relation to a depositary’s debts may not be made against securities of which the depositary is the nominal holder, and these securities shall not be included in the bankruptcy estate in case of the bankruptcy of the depositary. Article 14. Depositary Contract 1. A depositary shall register rights relating to securities on the basis of a contract for the provision of depositary services (depositary contract), concluded with the depositors of the securities (securities holders, trust managers, pledgeholders, and other rightsholders whose rights relating to the securities are subject to registration, or other depositaries acting as nominal holders of securities). 2. The conclusion of a depositary contract shall not entail the transfer to the depositary of the rights relating to the depositor’s securities. A depositary shall not be entitled to dispose of the depositor’s securities or to perform other actions involving the securities in the name of the depositor except those performed under an instruction from the depositor in the instances stipulated in the depositary contract. Article 15. Excerpts From a Registry of Securities Holders and From Securities Accounts The existence in a registry of securities holders of a notation on securities holders and rights relating to securities belonging thereto, on the encumbrance or restriction of the circulation or exercise of these rights =P=L=NPE?QH=NIKIAJPEJPEIAOD=HH>A?KJ­NIA@>U=JAT?ANLPBNKIPDA registry issued by the registry administrator to the securities holder. Information on securities holders and their rights relating to these securities, and on the encumbrance or restriction of the circulation or exercise of these rights, that is contained in a depositary’s securities ac?KQJPO =P = L=NPE?QH=N PEIA OD=HH >A ?KJ­NIA@ >U =J AT?ANLP BNKI PDA account issued by the depositary to the securities holder. Excerpts from a registry of securities holders and from securities accounts are not securities, and their transfer from one person to another does not indicate the conclusion of a transaction involving the corresponding securities and does not entail the transfer of rights relating to these securities.

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Requirements for the form and content of excerpts from a registry of securities holders and from a depositary’s securities accounts shall be established by legislation. Article 16. Provision of Information on the Contents of Securities Registries and Accounts Information on the contents of registries of securities holders and on securities accounts, as well as information on those depositing securities at a depositary, is a commercial secret that is not subject to disclosure and is protected by law. The information indicated in this article may be disclosed to persons registered in a registry of securities holders or in a depositary’s securities accounts, and to courts, notaries, and persons conducting inheritance matters, as well as to other persons in the instances established by legislation. Chapter 3. Issue of Securities Article 17. The Concept of Issuing Securities 1. An issue [emissiia] of securities refers to the legally determined steps necessary to place securities. 2. Securities issuers are persons that issue securities in their own name and that bear the obligations stemming therefrom. Securities issuers may be legal persons that are commercial organizations, as well as other legal persons permitted by law. A law may stipulate that certain types of securities may be issued only by certain types of legal persons. 3. An issue [vypusk] of securities is the total of the securities of one issuer that confer upon their holders identical rights. 4. An issue [emissiia] of securities that involves placement among an undetermined group of persons (public placement), as well as an issue that involves placement among a known group of persons (private placement), shall include the following ordered stages: (1) Adoption by the issuer of a decision to place securities in accordance with legislation; (2) Registration of the securities issue by the duly authorized body; (3) Disclosure of the information contained in the prospectus for the issue; (4) Placement of the securities; (5) Disclosure of information on completion of the securities placement;

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(6) Registration of the results of the securities placement; (7) Disclosure of the information contained in the report on the results of the securities placement. 5. The requirements of subsection 3 of section 4 of this Article shall not apply in the case of a private placement of securities. Article 18. Registration of a Securities Issue 1. Registration of a securities issue shall be carried out by the duly authorized state body. 2. After receiving documents from an issuer for registration of a securities issue, the authorized state body shall, within 30 days, register the securities issue or refuse registration following the adoption of a FQOPE­A@@A?EOEKJ The list of documents necessary for the registration of a securities issue shall be established by the duly authorized state body. When registering a securities issue, the authorized state body shall be responsible only for the completeness of the information contained in the documents registered by it. 3. A decision of the duly authorized state body to register a securities issue may be appealed through the courts by persons whose rights were violated or may be violated as a result of the issue. A suit seeking to EJR=HE@=PA=OA?QNEPEAOEOOQAI=U>A­HA@LNEKNPKPDANACEOPN=PEKJKBPDA results of the placement of the securities. The suits indicated in this section shall be subject to a hearing in a court that has the competence to consider disputes, regardless of whether PDALH=EJPEɳEJOQ?D=OQEPEO=LDUOE?=HKNHAC=HLANOKJ 4. Upon registration of a securities issue, the issue shall be assigned an individual state registration number. In the event of future issues of additional securities that attest to identical rights as those attested to by the previous registered securities issue, each subsequent issue of such securities shall be assigned an individual state number consisting of the individual state number assigned PKPDA­NOPNACEOPANA@EOOQAKBOQ?DOA?QNEPEAO=J@EPOKSJEJ@ERE@Q=HOP=PA number. Following registration of the results of the placement of securities, the individual number for that issue shall be annulled.

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Article 19. Grounds for Refusal to Register a Securities Issue 1. The following are grounds for refusing to register a securities issue: (1) Noncompliance of the documents provided or the information contained therein with the requirements of law and acts of the duly authorized state body; (2) Entry into the prospectus for the issue or the decision on the placement of securities (or other documents that are the basis for the registration of a securities issue) of information that is not accurate; 2. An issuer may appeal a decision to refuse to register a securities issue in the courts. Article 20. General Requirements for the Prospectus for a Securities Issue 1. Upon a public placement of securities, the issuer shall disclose information on the securities issue by preparing a prospectus for the issue. 2. The prospectus for an issue must contain information on the isOQAN=J@EPO­J=J?E=HLKOEPEKJSDE?DEJRAOPKNONAMQENAEJKN@ANPKI=GA =JK>FA?PERA=OOAOOIAJPKBPDAEOOQAN¥O=OOAPO=J@HE=>EHEPEAO=J@LNK­PO and losses, as well as information on the rights relating to the securities to be issued and on the conditions of their placement. Information on PDAEOOQAN¥O­J=J?E=HLKOEPEKJOD=HHJKP>AEJ@E?=PA@EJPDALNKOLA?PQOBKN an issue if the law permits the public placement of shares of stock during the founding of a joint-stock company. Requirements for the prospectus for a securities issue (its form and content) shall be established by the duly authorized state body in accordance with this Law. 3. The prospectus for a securities issue must be signed by the person performing the functions of the issuer’s single-person executive body =J@ EPO ?DEAB ­J=J?E=H Kɹ?AN ÓKN =JKPDAN LANOKJ BQH­HHEJC PD=P BQJ?PEKJÔ PDANA>U ?KJ­NIEJC PDA =??QN=?U =J@ ?KILHAPAJAOO KB =HH KB PDA information contained in the prospectus, as well as by an auditor, and in the instances established by law by an independent appraiser, who shall ?KJ­NIPDA=??QN=?U=J@?KILHAPAJAOOKBPDAL=NPOKBPDALNKOLA?PQO indicated thereby. If a professional securities-market participant, acting on the basis of a contract concluded with the issuer on the placement of securities, participates in the placement of securities, the prospectus for the issue IQOP>AOECJA@>UPDAI=NGAPLNKBAOOEKJ=HPDANA>U?KJ­NIEJCPDA=?curacy and the completeness of all of the information contained in the prospectus.

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A prospectus for an issue may also be signed by other persons. A person signing the prospectus for an issue shall bear joint and several civil-law liability with other persons signing the prospectus and subsidiary liability with the issuer before securities holders for the completeness and accuracy of the information contained in the prospectus or in portions thereof. If the functions of the issuer’s single-person executive body and/or the ?DEAB­J=J?E=HKɹ?AN=NALANBKNIA@>U=HAC=HAJPEPUPDALNKOLA?PQOOD=HH be signed, in its name and also in the names of the auditor and the broker if they are legal entities, by the persons authorized to act in the name of the indicated legal entities, which shall bear liability for the completeness and accuracy of the information indicated in the prospectus. 4. The prospectus for a securities issue shall be registered by the duly authorized state body at the same time as the registration of the securities issue. Article 21. Information Disclosed by an Issuer on a Securities Issue 1. An issuer shall guarantee all interested persons access to the information contained in the prospectus for an issue by publishing the information in the mass media or publishing a notice on the procedure and means for the disclosure of such information not less than two weeks prior to the start of the securities placement. 2. An issuer, as well as securities-market professionals participating in the placement of securities, shall provide potential investors with an opportunity to examine the prospectus for an issue. 3. In the event of changes in the information contained in a prospecPQOPD=PIECDPEJ®QAJ?A=JEJRAOPKN¥O@A?EOEKJNAC=N@EJC=?MQEOEPEKJKB securities, the issuer shall immediately notify the authorized state body in writing about this and inform the same media outlets in which the LNKOLA?PQOKNPDAJKPE­?=PEKJKJPDALNK?A@QNA=J@IA=JOBKN@EO?HKOQNA of information was published. 4. The duly authorized state body shall establish, in accordance with HACEOH=PEKJ=HEOPKBEJBKNI=PEKJ=?D=JCAEJSDE?DI=UEJ®QAJ?APDA@A?Esion of potential investors regarding acquisition of securities. Article 22. Placement of Issued Securities  2DA NECDPO ?ANPE­A@ >U OA?QNEPEAO KNECEJ=PA BKN PDA ­NOP DKH@ANO thereof, on the basis of civil-law transactions, upon their placement. An issuer shall have the right to advertise and/or begin a placement of securities only after the registration of the issue thereof.

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2. State registration of shares of stock and other securities placed during the founding of a joint-stock company and during the reorganization of joint-stock companies and other legal persons, with the exception of reorganization in the form of accession, shall be carried out after the placement of the stated securities. Such securities shall be considered placed from the time of the registration of the legal entity. 3. The establishment of preferential rights to acquire securities for one investor in favor of others shall be prohibited, with the exception of instances of private placement, and also of instances where the preferential right to acquire such securities is established by law. 4. An issuer shall complete the placement of issued securities within the period stipulated by the decision on their placement (issue), but not later than one year from the date of the beginning of the placement. Article 23. Suspension of an Issue of Securities 1. Suspension of an issue of securities means that the issuer is prohibited from the further placement of securities and that any advertising for the placement of securities of the issue in question must be terminated. 2. The duly authorized state body shall be entitled to suspend an issue of securities in cases of: (1) Noncompliance of the actual conditions of the securities placement with the registered conditions for their placement or with the requirements of the law; (2) Disclosure of information on the securities issue containing data that is not consistent with the prospectus for the issue (or the registered conditions for the issue); (3) Placement of a greater number of securities than the registered issue; (4) Failure by the issuer to meet within the established time frame the demands of the duly authorized state body concerning the elimination of violations of legislation on securities revealed in the activities of the issuer that are not connected with the issue of the securities. The reason for the suspension of an issue of securities, as well as the time frame for the issuer to correct the problem, must be stated in the decision on the suspension of the issue. An issuer may appeal through the courts the decision of the duly authorized state body to suspend an issue within the period provided for the elimination of the violations. 3. An issuer shall suspend a securities issue from the moment it receives the corresponding decision of the duly authorized state body and shall eliminate the violations revealed within the time frame determined

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by the authorized state body. The period for the placement of securities shall be extended by the period of the suspension of the issue. 4. Once violations have been eliminated, the placement of securities shall be resumed by decision of the duly authorized state body. 5. During a public placement of securities, an issuer shall disclose information on the suspension of the placement, and, in the case of elimination of the reason for the suspension, on resumption of the placement, in the same procedure that was used for disclosing information contained in the prospectus for the issue of these securities. Article 24. Registration of the Results of a Securities Placement 1. An issuer shall provide a report on the results of a placement of securities to the duly authorized state body not later than 30 days after the disclosure of information on the completion of the securities placement. In the instances stipulated by section 2 of Article 22 of this Law, registration of the report on the results of a securities placement shall be carried out at the same time as the registration of the issue thereof. 2. The authorized state body shall register the report on the results KB=LH=?AIAJPKBOA?QNEPEAOKNI=GA=FQOPE­A@@A?EOEKJKJPDANABQO=HKB its registration within a two-week period from the time that the issuer provides all of the required documents. An issuer may appeal through the courts the decision of the duly authorized state body to refuse to register a report on the results of a securities placement during a period of one month from the date of the decision. 3. Following registration of the report on the results of a securities placement, any person whose rights were violated by the securities isOQAOD=HHKJHU>AAJPEPHA@PK­HA=OQEPEJ?KQNPOAAGEJCPKEJR=HE@=PAPDA securities issue. 4. The completion of transactions involving securities shall be prohibited prior to the registration of the report on the results of the placement thereof. Transactions completed involving securities prior to the registration of the report on the results of placement thereof shall be void. Article 25. Invalidation of a Securities Issue 1. Prior to the state registration of the report on the results of a securities placement, the authorized state body may invalidate the issue in the case of:

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(1) The uncovering, following the registration of a securities issue, of grounds indicated in Article 19 of this Law in accordance with which the registration of the issue should have been refused; (2) Failure of the issuer to eliminate within the established period violations that were the basis for the suspension of the securities issue; (3) Placement of fewer securities than is established by law or by the conditions for the placement thereof; (4) Failure of an issuer to provide within the period established by this Law a report on the results of a securities placement. 2. The duly authorized state body shall send its decision on invalidation of an issue to the issuer and shall publish it in its publication or disclose such information by another means envisioned by law. An issuer may appeal through the courts the decision of the authorized state body to invalidate an issue within a period of one month from the date of its publication. 3. In the case of invalidation of an issue by the duly authorized state body, all of the securities of that issue shall be annulled, and the property received by the issuer from the placement of the securities must be returned by the issuer to the securities holders within the period indicated in the decision to invalidate the issue. The period during which the issuer shall return the property it has received may not be more than three months from the day of the adoption of the decision on invalidation of the issue. In the case of an invalid issue of securities, if it is impossible to return to securities holders the property used to pay for the securities, the issuer shall pay each holder a monetary sum equal to the price of the placed securities. 4. In the case that a securities issue is declared invalid, securities DKH@ANOOD=HH>AAJPEPHA@PK@AI=J@EJ@AIJE­?=PEKJBNKIPDAEOOQANBKN losses incurred, except in the case that a securities issue is declared invalid as a result of the placement of fewer securities than is established by law or by the conditions for the placement thereof. Article 26. Challenging an Issue of Securities 1. The authorized state body shall be entitled to challenge an issue of securities through the courts if, following registration of the report on the results of a securities placement, any of the following violations are revealed: (1) Failure of the information indicated in the report on the results of the securities placement to correspond with the prospectus for the

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issue (the registered conditions for the issue) or with information on the actual placement of such an issue; (2) Revelation after registration of the report on the results of the securities placement of grounds on which the registration should have been refused. 2. Following registration of a report on the results of a securities placement, persons whose rights have been violated as a result of the issue of securities may challenge the issue through the courts. 3. A securities issue may be challenged through the courts within a period of three months from the date of the disclosure of information contained in the report on the results of the securities issue. The method for the disclosure of information shall be determined by the duly authorized state body. 4. If a court declares a securities issue invalid, the corresponding securities shall be withdrawn from circulation and annulled, and the property received by the issuer from the securities placement shall be returned to the persons holding these securities at the moment that the court decision invalidating the issue entered into force. If the securities of an invalid issue were paid for with in-kind contributions, the issuer shall pay the holders a monetary sum equal to the price of the placed securities. Persons holding securities at the moment that a court decision invalidating the issue thereof entered into force shall be entitled to demand BNKIPDAEOOQANEJ@AIJE­?=PEKJBKNHKOOAO?KJJA?PA@SEPDPDAEJR=HE@=PEKJ of the issue. Chapter 4. Circulation of Securities Article 27. Basis for the Circulation of Securities 1. The origin, transfer, change, encumbrance, and termination of rights relating to securities shall occur on the basis of civil-law transactions, as well as on other grounds as established by law. Restriction on the circulation and exercise of the rights relating to securities may be ordered by state bodies only in the instances and procedure established by legislation.  2DAPN=JOBANKBNECDPONAH=PEJCPK?ANPE­A@OA?QNEPEAOKJPDA>=OEOKB civil-law transactions shall occur at the moment of the transfer of these securities. The transfer of rights relating to paperless securities, as well as PDKOANAH=PEJCPKEIIK>EHEVA@?ANPE­A@OA?QNEPEAOKJPDA>=OEOKB?EREHÎH=S transactions shall occur from the moment of registration in accordance with the rules of this Law. Upon the transfer of rights relating to paper-

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HAOOOA?QNEPEAO=J@EIIK>EHEVA@?ANPE­A@OA?QNEPEAOPDANQHAOKJNAHA=OA of rights of claim (cession) shall not apply. Article 28. Transactions Involving Securities in Organized Markets 1. Transactions carried out in organized securities markets shall only EJRKHRA L=LANHAOO OA?QNEPEAO =J@ EIIK>EHEVA@ ?ANPE­A@ OA?QNEPEAO PD=P have been admitted to circulation in the corresponding organized market through the legally established procedure. 2. Transactions involving securities in organized securities markets shall be concluded by professional securities-market participants. 3. In an organized securities market, transactions shall be concluded with securities the rights of the holders or nominal holders of which are registered by the central depositary that serves as the organizer of trading. Transfer of securities in organized securities markets shall be carried out on the basis of transactions that are permitted by legislation. 4. The conditions and procedure for the conclusion of transactions involving securities, for the clearing and transfer of securities in the accounts of the central depositary serving as the organizer of trading shall be established by the rules of the organizer of trading in accordance with legislation. Transfer of securities in organized securities markets shall be carried out in accordance with the rules of the corresponding organizer of trading, adopted through the procedure established by legislation. 5. The mutual obligations of the parties to transactions involving securities in an organized securities market (clearing) shall be determined by the central depositary or a clearing organization. The conditions and procedure for clearing with respect to transactions involving securities in organized securities markets shall be established by acts of the duly authorized state body. Settlements with respect to transactions involving securities shall be made after the completion of clearing. The basis for settlements with respect to transactions involving securities in an organized market shall >APDAKɹ?E=HJKPE?AKBPDA?AJPN=H@ALKOEP=NUKNPDA?HA=NEJC@AL=NPIAJP of the organizer of trading on the completion of clearing. Monetary settlements with respect to transactions involving securities concluded in an organized market must be carried out at the same time as the transfer of the securities from the account of the seller to the account of the purchaser.

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6. Professional participants shall not be entitled to manipulate prices in securities markets. Price manipulation refers to actions, including placing orders, completing transactions, and disseminating false information, that create the appearance of, or cause an actual increase or decrease of, prices and/or of trading activity of investors and issuers in a securities market in relation to the level of price and/or liquidity of the market. If a securities-market professional commits any of the above-mentioned actions, this shall constitute grounds for the suspension or annulment of their permit, and they may bear liability as established by law. Article 29. Transactions Involving Securities outside an Organized Securities Market The conditions and procedure for the conclusion and execution of transactions involving securities that are completed outside an organized market shall be determined by the Civil Code, taking into account the points established by this and other laws. Chapter 5. Disclosure of Information Article 30. Forms of Disclosure of Information 1. Disclosure of information refers to the provision of access to such information to all persons interested therein, regardless of their purpose for receiving such information, through a procedure guaranteeing the location and receipt thereof. An issuer placing or having placed securities through a public placeIAJPOD=HH@EO?HKOAEJBKNI=PEKJKJEPOOA?QNEPEAO=J@EPO­J=J?E=H=?PEREPEAO in the following forms: — Composing a quarterly report on securities; Ð 0ALKNPEJCKJOECJE­?=JPARAJPO=J@=?PEKJO?KJ?ANJEJCPDA­J=J?E=H activities of the issuer. 2. A quarterly report on securities must contain the following information: (1) Information on the issuer; ÓÔ 'JBKNI=PEKJKJPDA­J=J?E=H=?PEREPEAOKBPDAEOOQAN (3) Information on the issuer’s securities; (4) Other information. A quarterly report shall be composed concerning the results of each completed quarter not later than 45 days after it has ended, in accordance with the requirements for quarterly reports established by the authorized state body.

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A quarterly report must be adopted by the authorized body of the issuer and presented to the authorized state body, and it must also be presented to the holders of the issuer’s securities upon the request thereby at a cost not exceeding the expenses for the reproduction thereof. 3. The duly authorized state body shall determine a list of informaPEKJBKNNALKNPOKJOECJE­?=JPARAJPO=J@=?PEKJO?KJ?ANJEJC=JEOOQAN¥O ­J=J?E=H=?PEREPEAO 0ALKNPO KJ OECJE­?=JP ARAJPO =J@ =?PEKJO ?KJ?ANJEJC PDA EOOQAN¥O ­J=J?E=H =?PEREPEAO IQOP >A OAJP >U PDA EOOQAN PK PDA =QPDKNEVA@ OP=PA body, as well as published by the issuer or disclosed in another manner AOP=>HEODA@>UPDA@QHU=QPDKNEVA@OP=PA>K@UJKPH=PANPD=J­RA@=UOBNKI the moment one of these events or actions occurs.  1A?QNEPEAOLH=?A@>UIA=JOKB=LNER=PALH=?AIAJPI=UJKP>AKɳANA@ for acquisition by an unlimited group of persons or be advertised until such time as the prospectus for the issue of such securities is registered. Special requirements for the prospectus for an issue of these securities (its form and content) shall be established by the duly authorized state body in accordance with this Law. An issuer of the securities indicated in this section shall disclose information in accordance with the rules established by this Law for issuers of securities being placed or already placed by means of public placement. 5. A quarterly report must be signed by the person performing the funcPEKJOKBPDAEOOQAN¥OOEJCHAÎLANOKJATA?QPERA>K@U=J@>UEPO?DEAB­J=J?E=H Kɹ?ANÓKN=JKPDANLANOKJBQH­HHEJCOQ?DBQJ?PEKJOÔPDANA>U?KJ­NIEJC the accuracy and completeness of all of the information contained in the report, and a report for the fourth quarter (annual report) must also be OECJA@>U=J=Q@EPKN?KJ­NIEJCPDA?KILHAPAJAOO=J@=??QN=?UKBPDA part of the report indicated thereby. Any person signing a quarterly report shall bear joint and several civil-law liability with other persons who signed the quarterly report or voted for its approval, and subsidiary civil-law liability with the issuer before securities holders for the completeness and accuracy of information included in the quarterly report or in portions thereof. If the functions of an issuer’s single-person executive body and/or of PDA?DEAB­J=J?E=HKɹ?AN=NALANBKNIA@>U=HAC=HAJPEPUPDAJPDAMQ=NPANHU report shall be signed in its name by the persons authorized to act in the name of the indicated legal entities, and liability for the completeness and accuracy of the information included in the quarterly report shall be borne by said legal entities.

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Article 31. Disclosure of Information on Holders of Large Blocks of Shares    LANOKJ =?MQENEJC EJ@ALAJ@AJPHU KN FKEJPHU SEPD =J =ɹHE=PA@ person(s) 5 percent or more of the voting shares in a company, as well as upon each subsequent acquisition or disposal thereby independently or FKEJPHUSEPD=J=ɹHE=PA@LANOKJÓOÔKBOQ?DOD=NAOOD=HHEJBKNIPDAEOOQAN of this fact not later than 10 days from the date of the entry of the corresponding notation into the registry or the account at the depositary. The obligation established by this point shall extend to a trust manager, nominal holder, or other person who, in accordance with the conditions of contracts concluded with shareholders, has the right to exercise the voting rights associated with the shares according to his or her own discretion. 3. An issuer of securities being placed or already placed publicly shall disclose information on the persons indicated in point 1 of this Article through the procedure established for the disclosure of information on OECJE­?=JPARAJPO=J@=?PEKJO?KJ?ANJEJCPDAEOOQAN¥O­J=J?E=H=?PEREPEAO JKPH=PANPD=J­RA@=UO=BPANPDANA?AELPKBPDA?KNNAOLKJ@EJCEJBKNI=PEKJ from the indicated persons or from the registry administrator. Article 32. Insider Information 1. Insider information is any undisclosed information about securities and operations therewith, as well as about the issuer of these securities and the activities conducted thereby, the disclosure of which may have =OECJE­?=JPEJ®QAJ?AKJPDAI=NGAPLNE?AKBPDAOAOA?QNEPEAOEJ?HQ@EJC information that, in accordance with this Law, is subject to disclosure to =JQJ@A­JA@CNKQLKBLANOKJOLNEKNPKPDAPEIAKBEPO@EO?HKOQNAPDNKQCD the legally established procedure. !KJ­@AJPE=HEJBKNI=PEKJ=??AOOPKSDE?DEONAOPNE?PA@EJ=??KN@=J?A with state laws, that is improperly published or otherwise disseminated among an undetermined group of persons, as well as information received on the basis of such information, including information containing appraisals and conclusions related to the value of securities and of the issuers thereof, is not insider information. 2. Persons with insider information include: ÓÔ -ɹ?E=HOKBPDAEOOQANEJ?HQ@EJCLANOKJOSDK=NAEJEPO?KHHACE=H>K@EAO of management; (2) Persons with access to such information as a result of their position, duties, or a civil-law contract concluded with the issuer, or as a result of supervisory, oversight, or other authority exercised thereby;

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(3) Other persons indicated in the law on transactions using insider information. 3. Insiders shall also include the spouses or close relatives of any of the persons listed in point 2 of this Article, as well as persons who either deliberately or through circumstances beyond their control received insider information, directly or indirectly, from the persons listed in point 2 of this Article, and knew or should have known the nature of the information received. 4. Persons with insider information shall not be entitled to use such information for their own purposes for the conclusion of transactions involving securities, or to transfer such information to third parties. Persons violating this requirement shall bear liability in accordance with the law. Chapter 6. Professional Activities in Securities Markets Article 33. Types of Professional Activities in Securities Markets 1. Professional activities in securities markets include the provision of services connected with the placement and circulation of securities that meets the qualifying requirements legally established for such activities. 2. Types of professional activities in securities markets include: (1) Brokerage activities; (2) Dealer activities; (3) Management of securities in trust; (4) Activities related to depositaries; (5) Managing registries of holders of registered securities; (6) Activities related to accounting of mutual obligations and/or settlements relating to transactions involving securities (clearing). 3. Professional activities in a securities market may be conducted only on the basis of a special permit (license), issued by the authorized state body. Article 34. Combination of Professional Activities in Securities Markets 1. The combination of professional activities in securities markets with other types of entrepreneurial activities shall be permitted except for instances stipulated by law. 2. Restrictions on the combination of professional activities in securities markets shall be established by law. 'JKN@ANPKLNARAJP?KJ®E?POKBEJPANAOPSDAJLNKBAOOEKJ=HOA?QNEties-market participants combine various types of professional activities,

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the authorized state body shall be entitled to establish requirements for participants combining various types of professional activities. Article 35. General Requirements of Professional SecuritiesMarket Participants 1. A professional securities-market participant may be a commercial organization and, in the instances established by this Law, an individual or a non-commercial organization. 2. Licensing requirements for professional securities-market participants, including requirements regarding the amount of personal capital =J@PDALNK?A@QNABKNPDA@APANIEJ=PEKJPDANAKB­J=J?E=HOP=>EHEPU=J@ employees of a professional securities-market participant shall be established by the duly authorized state body. 3. The requirements for conducting professional activities in securities markets shall be established by the duly authorized state body in accordance with the provisions of this Law. Article 36. Brokerage Activities 1. Brokerage activities are activities conducted by professional securities-market participants, called brokers, relating to the conclusion of transactions involving securities in the capacity of a representative, agent, or dealer acting on the basis of a contract for representation, an agency contract, or a commission contract. 2. In order to conduct brokerage activities, a broker shall open a separate bank account for the purpose of performing operations with funds belonging to his clients. A broker shall keep separate records of the funds deposited into the account for each client, and shall report to those clients on the use thereof. A broker shall be entitled to use the funds deposited into the special brokerage account if the broker has such a right in accordance with a contract with the client who owns the funds. The funds of clients who have given a broker the right to use their funds in the broker’s interests shall be kept in a separate bank account from the bank accounts in which the funds of other clients are deposited. Article 37. Dealer Activities 1. Dealer activities are activities conducted by professional securities-market participants, called dealers, relating to purchase-and-sale transactions involving securities that are carried out in his or her own name and at his or her own expense by means of publicly announcing the price for the purchase and/or sale of securities, with the obligation

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to purchase and/or sell these securities at the price previously announced by the person conducting such activity. 2. A dealer may be an individual. Article 38. Activities Relating to the Management of Securities in Trust 1. Activities relating to the management of securities in trust refer to activities conducted by professional securities-market professionals, called trust managers, in their own name and for remuneration and that are connected with management of securities in trust or funds intended for investment in securities that belong to another person and that are transferred to the trust manager for holding and disposal. 2. The rights of a trust manager to the securities transferred to him or her for management or received as a result of such management shall be accounted for by the registry administrator or the depositary according to the rules established for accounting for the rights of securities holders. Securities held in trust management shall not be accounted for by the registry administrator or the depositary in the accounts of the holder thereof, the founder of the trust. 3. Unless otherwise established by a trust-management contract or by a law determining the particular features of the management of securities in trust, a trust manager shall exercise, in relation to the securities transferred to him or her, all of the rights of the holders of these securities relating to the possession, use, and disposal thereof, and shall also exercise without a power of attorney or other authorizing document all KBPDANECDPO?ANPE­A@>UPDAOAOA?QNEPEAO Article 39. Activities Related to Managing a Registry of Holders of Registered Securities 1. Activities related to managing a registry of holders of registered securities refer to activities conducted by professional securities-market participants, called registrars, on the basis of a contract with an issuer of securities, involving the provision of services regarding the registration of the rights of the holders of securities of the given issuer, and in relation to securities transferred by the holders thereof to a depositary-nominal holder, regarding the registration of information on such securities and the depositary-nominal holder thereof. Only a registrar or, in the instances established by law, an issuer of securities may act in the capacity of a person managing a registry of securities holders, called a registry administrator. An issuer may manage

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a registry of holders of its own securities without a license from the authorized state body. 2. The registries of all securities of a single issuer must be managed by a single registry administrator. An issuer of securities, including one licensed as a professional securities-market participant to manage registries of securities holders, shall not be entitled to manage a registry of holders of its securities if the number of holders exceeds the number established by law. Violations of this requirement shall not be grounds to invalidate the operations of the issuer in managing the registry. Only a registrar may manage registries of securities holders of open FKEJPÎOPK?G?KIL=JEAO NACEOPN=NOD=HHJKP>A=J=ɹHE=PA@LANOKJKBPDA EOOQANKNKBEPOKɹ?E=HOKNOD=NADKH@ANOÓL=NPE?EL=JPOÔKBPDAEOOQANPD=P LKOOAOOEJ@ALAJ@AJPHUKNPKCAPDANSEPD=ɹHE=PA@LANOKJOLAN?AJPKN more of the voting shares (partnership interest) of the given issuer. 3. A registrar shall not be entitled to commission another person to manage a registry.  NACEOPNU=@IEJEOPN=PKNOD=HH?KJ­NINQHAOBKNI=J=CEJC=NACEOPNU of securities holders that contain conditions for performing operations involving the accounts of registered persons and the rights and duties of a registry administrator and of a registered person. The rules for managing a registry of securities holders must be available for any person to examine. 5. A registrar shall not be entitled to own and dispose of the securities of issuers whose registries he is managing. 6. Upon the demand of a securities holder or a person acting in the name thereof, or of a nominal holder, a registry administrator shall provide an excerpt from the registry concerning his or her account with a statement of the account, the number of securities of each issue in that account at the moment the excerpt is issued, whether they are encumbered by any obligations, as well as other information related to the securities. The person issuing such an excerpt shall be liable for the completeness and accuracy of the information contained therein. 7. A registry administrator shall guarantee the secrecy of accounts and of operations related thereto. A registry administrator shall provide information on accounts and related operations in the instances and the procedure established by legislation. Article 40. Depositary Activities 1. Depositary activities refer to the provision of services by a professional securities-market participant, called a depositary, related to the

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registration of rights to securities, of services related to the storage of these securities, or without the provision of such services, on the basis of a contract with the holders of these securities (a depositary contract). 2. A depositary shall disclose the conditions under which it conducts its activities, which shall make up an integral part of the depositary contract. 3. In the instance that it is necessary, for a securities holder to exAN?EOAPDANECDPO?ANPE­A@>UOA?QNEPEAOPKLNKRE@APDALANOKJI=J=CEJC the registry of holders of registered securities with information on the holders of such securities, a depositary shall provide a list of registered securities holders in relation to which it is acting as the nominal holder as of a particular date. Such a list shall not include securities holders who have not given the nominal holder the right to disclose the indicated information. In this case, the list shall include the nominal holder, who shall have only the right to receive incomes, including dividends, on such securities and moneys or other property paid in redemption of such securities, new securities received in the procedure of converting securities, and additional shares distributed among the shareholders. The nominal holder shall transfer the property received to the securities holder. A law may establish instances when a depositary, acting in the capacity of a nominal holder, shall be obliged to inform an issuer concerning changes in the holders of the issuer’s securities. Article 41. Central Depositary 1. The central depositary shall carry out: ÓÔ 'IIK>EHEV=PEKJ=J@OPKN=CAKBEIIK>EHEVA@?ANPE­A@OA?QNEPEAO (2) Registration of the rights relating to securities circulated in organized securities markets; (3) Clearing with respect to all transactions involving securities carried out in organized securities markets. The central depositary shall carry out the indicated activities in providing service for all transactions of all organizers of trading in securities markets. The central depositary may create branches to perform the function of accepting and transferring the orders of clients for the execution of transactions involving securities and for transferring other information, and it shall also be entitled, on the basis of agency agreements concluded with other professional securities-market participants, to transfer these functions thereto. 2. The central depositary shall not be entitled to conduct other types of professional activities in securities markets besides depositary and

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clearing activities, and it shall also not be entitled to undertake other entrepreneurial activities. The central depositary shall not be entitled to delegate to other persons the performance of its duties, as established by legislation and accepted under contract, unless otherwise permitted by this Law. 3. The central depositary shall not be entitled to be a participant in commercial organizations. Article 42. Clearing Activities (Activities Related to Accounting for Mutual Obligations) 1. Clearing activities (clearing) refer to the activities of a professional securities-market participant, called a clearing organization, related to the collection, summary, and correction of information concerning transactions involving securities and derivative instruments and the preparation of settlement documents therefor, as well as accounting for the provision of securities and settlements related thereto in accordance with the principle of “supply against payment”. A clearing organization shall maintain separate accounts of the obligations of each participant in the clearing. 2. A clearing organization shall store information on transactions for which it conducts clearing, as well as information on the results thereof, BKN=PHA=OP­RAUA=NO 3. To ensure the execution of transactions involving securities in relation to which clearing is carried out, and reduction of liquidity risks, systemic risks, and risks of nonexecution of transactions involving securities, an organization performing accounting shall create a guarantee fund and elaborate a system of measures for reducing the risks related to the conduct of its activities in accordance with the requirements of the authorized state body. The basic requirements for the creation and use of a guarantee fund, including its minimum size and the system of measures for reducing the risks associated with clearing activities shall be determined by the duly authorized state body.  ?HA=NEJCKNC=JEV=PEKJOD=HHAH=>KN=PA=J@?KJ­NIEJ=CNAAIAJP with the duly authorized state body, the conditions for conducting this type of activity. The conditions for conducting clearing activities shall form an integral part of contracts concluded by clearing organizations.

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Article 43. Activities Related to the Organization of Securities Trading 1. Activities related to the organization of securities trading in a securities market refers to activities conducted by a professional securities-market participant, called an organizer of trading, involving the provision of services facilitating the conclusion of civil-law transactions involving securities and derivative instruments between professional securities-market participants or with the participation thereof, by means of the organization and conduct of regular public auctions of securities in accordance with established rules. 2. Trading organizers include stock exchanges, as well as commodities, currency, and universal exchanges, where the structure thereof has a separate subdivision called a stock division (section), as well as organizers of non-exchange trading in securities markets. A trading organizer may receive the rights of a self-regulating organization through the procedure and under the conditions established by this Law. 3. A trading organizer in a securities market shall elaborate: (1) Rules for the trading of securities and derivative instruments; (2) A procedure for the admission of securities-market participants to auctions; (3) A procedure for the admission of securities to auctions; (4) A procedure for concluding and executing transactions; (5) Rules restricting the actions of auction participants related to price manipulation (including by making announcements, concluding transactions, distributing false information, etc., which creates the appearance of, or facilitates the actual increase or decrease of, prices and/or of trading activity in the securities market) that confuse participants in the securities market, investors, or issuers with respect to the level of prices and/or the liquidity of the market; (6) A procedure for consideration, within the framework of an arbitration tribunal, of disputes between auction participants, as well as between auction participants and a trading organizer. 2DA =>KRAÎIAJPEKJA@ @K?QIAJPO OD=HH >A ?KJ­NIA@ >U PDA @QHU authorized state body. A trading organizer shall provide the above-mentioned documents, as well as a list of securities and derivative instruments that have been admitted for trading, to any interested party for examination. 4. A trading organizer shall establish a procedure for inclusion in the list of securities and derivate instruments admitted for trading (listing) and for exclusion from such a list (delisting). Securities and derivative instru-

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ments not included in the list of those admitted for trading in an organized market may be the object of transactions in such a market through the procedure established in the internal documents of a trading organizer. 5. A trading organizer shall ensure that auctions are open and public by informing auction participants of the place and time of auctions, of the list of securities and derivative instruments admitted for trading, of price quotations, and of the results of trading sessions. A trading organizer shall also provide other information related to securities auctions. A trading organizer shall carry out the quotation of prices for securities. In order to reduce risks in securities markets, a trading organizer shall create and ensure the functioning of a system of control over transactions involving securities in order to uncover actions by professional participants that show evidence of price manipulation or of the use of insider information. Article 44. Stock Exchanges 1. Only an organizer of trading in securities markets that does not combine activities involved in the organization of securities trading with other types of activities, with the exception of depositary activities and activities related to the determination of mutual obligations (clearing) may be called a stock exchange. 2. A stock exchange shall organize regular auctions of securities and quotations of prices. 3. A stock exchange is a self-regulating organization, and its members may only be professional securities-market participants. A stock exchange shall independently determine the procedure for the inclusion of members, as well as for the withdrawal or exclusion of members, on the basis of its internal documents. 4. The employees of a stock exchange may not be the founders or participants of the stock exchange, and they may not independently participate in trading in the stock exchange. 5. A special permanent arbitration tribunal shall be created for the consideration of disputes between members of a stock exchange and between members of a stock exchange and its clients. Article 45. Liability of Securities-Market Participants 1. Persons violating securities legislation shall be liable in the instances and the procedure established by legislation.

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2. Losses caused as a result of violations of securities legislation shall >AOQ>FA?PPKEJ@AIJE­?=PEKJPDNKQCDPDALNK?A@QNAAOP=>HEODA@>U?EREH legislation. Chapter 7. Regulation of the Securities Market Article 46. State Body for the Regulation and Supervision of Securities Markets 1. State regulation and supervision of securities markets shall be carried out by the duly authorized state body. 2. The functions of the authorized state body shall be: ÓÔ 2DA AH=>KN=PEKJ =J@ =LLNKR=H KB QJE­A@ NAMQENAIAJPO ÓOP=J@=N@OÔ for the procedure and conditions for licensing and for conducting professional activities in securities markets; ÓÔ 2DAAH=>KN=PEKJ=J@=LLNKR=HKBQJE­A@NAMQENAIAJPOÓOP=J@=N@OÔBKN issuing securities; (3) The determination of requirements for self-regulating organizations for the provision thereto of the rights of self-regulating organizations, as stipulated by this Law, the procedure for the provision and termination of such rights, as well as the management of a registry of self-regulating organizations; (4) Oversight of compliance by professional securities-market participants and by issuers with the requirements of securities legislation; (5) Oversight of compliance with the requirements established by legislation for the disclosure of information on the securities market; (6) Determination of the conditions and procedure for the admission of securities of foreign issuers for circulation in a state’s securities markets, as well as the conditions and procedure for admission of securities of national issuers to the securities markets of a foreign state; (7) Ensuring the creation of a publicly accessible system for the disclosure of information concerning securities markets; (8) Managing a registry of professional securities-market participants, a registry of registered issuers of securities, and other registries ensuring the disclosure of information related to securities markets. A law may also require the performance of other functions by the duly authorized state body.

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Article 47. Authority of the State Body Regarding Compliance with Securities Legislation In order to perform the functions required of it, the authorized state body shall: (1) Register issues of securities and reports on the results of the placement of securities, suspend issues of securities and also declare issues invalid; (2) Issue written orders concerning the need for issuers and professional securities-market participants to eliminate violations of securities legislation, with an indication of the period for the elimination thereof. It shall also be entitled to demand therefrom the provision of documents required for the exercise of its authority; (3) Verify the compliance of issuers and of professional securities-market participants with securities legislation with respect to complaints made by legal entities and citizens or upon its own initiative; (4) Apply legally established measures of administrative liability to issuers and to professional securities-market participants and to their Kɹ?E=HOBKNREKH=PEKJOKBOA?QNEPEAOHACEOH=PEKJ (5) Be entitled to challenge securities issues through the courts, as well as suits seeking the mandatory liquidation of an organization conducting activity in a securities market without a special permit (license), and OD=HH=HOK>AAJPEPHA@PK­HAKPDANOQEPOEJPDAEJOP=J?AO=J@LNK?A@QNA established by law; (6) Issue orders for the termination of the activities of persons conducting such activities in a securities market without a special permit (license); (7) Issue, suspend, and withdraw special permits (licenses) for conducting professional activities in a securities market; (8) Establish requirements for the procedure for the conclusion by professional participants of transactions involving securities; ÓÔ "APANIEJANAMQENAIAJPOBKNPDAMQ=HE­?=PEKJOKBPDAAILHKUAAOKB professional securities-market participants; (10) Approve programs for the preparation of specialists of organizations conducting professional activities in a securities market and certify such specialists; (11) Establish a procedure for conducting transactions in non-exchange trading systems; (12) Exercise other authorities as envisioned by law.

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Article 48. Self-Regulating Organizations 1. A self-regulating organization is a legal entity founded by professional securities-market participants for the purposes of ensuring the conditions for the conduct of professional activities by its members, =J@ BKN PDA AOP=>HEODIAJP =J@ K>OANR=J?A KB QJE­A@ NQHAO KB ?KJ@Q?P and standards of professional ethics by members of the self-regulating organization. 2. An organization founded by not fewer than 25 professional securities-market participants shall be entitled to petition the authorized state body for the rights of a self-regulating organization. 3. A self-regulating organization shall provide the duly authorized state body with information about all changes made in the documents concerning its creation and in the statutes and rules adopted thereby. 4. A professional securities-market participant must be a member of a self-regulating organization. Membership in a self-regulating organization is a mandatory condition for the receipt of a special permit (license) for conducting professional activities in a securities market. Article 49. Authority of Self-Regulating Organizations in Securities Markets 1. A self-regulating organization shall be entitled: (1) To elaborate, on the basis of, and in accordance with, securities legisH=PEKJQJE­A@NQHAOBKNPDA=?PEREPEAOEBEPOL=NPE?EL=JPOEJ=OA?QNEPEAO market, as well as rules of professional ethics; (2) To verify the activities of its participants concerning compliance thereby with securities legislation, as well as with the rules of the self-regulating organization; ÓÔ 2KKɳANNA?KIIAJ@=PEKJOKJPDALKOOE>EHEPUKBEOOQEJC=OLA?E=HLANmit (license) for the conduct of professional activities in a securities market, and to petition for the withdrawal of such permits (licenses) in case of a violation of the mandatory rules of conduct in securities markets; (4) To develop programs for the preparation of specialists of organizations conducting professional activities in securities markets; (5) To establish rules for the resolution of disputes between members of the self-regulating organization. 2. The authorized state body may transfer to a self-regulating organization its authority with respect to the approval of programs for the preparation of specialists of organizations conducting professional activiPEAOEJOA?QNEPEAOI=NGAPO=J@SEPDNAOLA?PPKPDA?ANPE­?=PEKJPDANAKB=J@ PDAEOOQ=J?AKB?ANPE­?=PEKJ@K?QIAJPO

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3. If it is revealed that participants of a self-regulating organization violated securities legislation, the organization shall immediately inform the duly authorized state body about this. 4. The duly authorized state body may deprive a self-regulating organization of its status as a self-regulating organization in case of its failure to execute the duties envisioned in this Law.

On Protection of Investor Rights in Securities Markets Model Legislative Provisions of the Commonwealth of Independent States Adopted at the Twenty-Fifth Plenary Session of the Parliamentary Assembly of CIS Member States 14 April 2005 Informatsionnyi Biulleten’ MPA 2005 No. 36

Part I. General Provisions Article 1. Legal Status and Scope of the Model Provisions 1. The Model Legislative Provisions for CIS Member States on the Protection of Investor Rights in Securities Markets (hereinafter the “Model Provisions”) are nonbinding. Individual articles of the Model Provisions may be used for drafting or improving the relevant legislation in CIS countries. The Model Provisions apply to all types of joint-stock companies unless indicated otherwise in a particular article. 2. The Model Provisions regulate the following aspects of the protection of investors: 2.1. The rights and duties of shareholders, as well as the special rights of the state as a shareholder; 2.2. Protection of the rights of shareholders in General Meetings of Shareholders; 2.3. The duties and liabilities of directors and managers related to the protection of investors’ rights; 2.4. Investor protection in special circumstances;   #JOQNEJCPN=JOL=NAJ?UKB?KIL=JU=?PEREPEAOÓ­J=J?E=HNALKNPEJC and accounting requirements for the protection of investors); 2.6. The protection of the rights of security holders in securities markets; 2.7 Means of protecting investors’ rights during the issue of securities and during the market circulation thereof; 2.8. Standards of conduct for professional investors in securities markets in relations with retail investors; and 2.9. Use of compensation funds to ensure protection of the rights of retail investors.

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 291-331 © Koninklijke Brill NV, Leiden, 2007

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Article 2. Terms Used in the Model Provisions For the purposes of the Model Provisions, the following terms are @A­JA@   ɹHE=PA@.ANOKJOÓ=ɹHE=PAO=ɹHE=PA@L=NPEAOÔJEJ@ERE@Q=HKN= legal entity that directly or indirectly controls another entity, is controlled by another entity, or is under joint control along with another entity. 1.2. Annual Report: A document that shall be provided to the company’s shareholders and other interested parties and includes a bal=J?AODAAP=NALKNPÓ=??KQJPÔKBLNK­PO=J@HKOOAO=J@KPDAN­J=J?E=H statements in a manner required by accounting legislation. In addition to this information, it should also include a special section on the corporate governance standards that have been adopted by the company and the company’s plans for development. 1.3. Audit Committee: A committee of the Board of Directors that KRANOAAOPDA?KIL=JU¥O­J=J?E=HNALKNPEJCNEOGI=J=CAIAJP=J@EJPANJ=H audit processes. 1.4. Authorized Shares: The maximum number of shares of any type and class a company may issue in addition to already issued shares of that PULA=J@?H=OO 2DAJQI>ANKB=QPDKNEVA@OD=NAOOD=HH>AOLA?E­A@EJPDA charter of the company. 1.5. Board of Directors: The governing body of the company responsible for the overall (strategic) direction of the company and for overseeing the executive bodies. In the Model Provisions, the term “Board of Directors” is also used for a Supervisory Board in a two-tier system of board organization. 1.6. Book Value: The value of a company’s assets according to a company’s accounting records. 1.7. Charter Capital: The total nominal value of all shares issued by the company. 1.8. Class of Shares: A group of shares of the same issue that confer identical rights upon their holders. In the Model Provisions, it is proposed that classes of shares are used only with respect to preferred shares. 1.9. Joint-Stock Company (Company): A commercial legal entity whose ?D=NPAN?=LEP=HEO@ERE@A@EJPK=@A­JA@JQI>ANKBOD=NAO 1.10. Consolidation of Shares: The process of converting two or more shares of the same type and class into one share of that same type and class. 1.11. Control: Ability to oversee the day-to-day operations of a company, elect the majority of the members of the Board of Directors, or the direct or indirect possession of 30 percent or more of the voting shares of a company.

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1.12. Convertible Security: A bond, preferred share, or another company security that is exchangeable for a company share. 1.13. Cumulative Voting: Voting by which each voting share provides its holder with a number of votes equal to the number of members of the Board of Directors being elected. A shareholder has the right to give all of his votes to one candidate or to distribute them among a number of candidates at his own discretion. 1.14. Disclosure of Information: The methods used to ensure the access of all interested parties to information, irrespective of the purposes for obtaining such information, according to the procedure guaranteeing the location and receipt thereof.   "ERE@AJ@O2DALKNPEKJKB=?KIL=JU¥OJAPLNK­PPD=PEO@EOPNE>uted to shareholders in accordance with the rights set forth for each type and class of shares. 1.16. Executive Bodies: A single person (General Director, Director) or a collective body (Executive Board, Directorate) responsible for the day-to-day management of a company’s operations. 1.17. Market Value (of company securities and/or assets): The price that an informed buyer would pay and an informed seller would accept for securities or assets on the open market assuming a reasonable time for the transaction to take place. 1.18. Golden Share: A special right of the government to participate in the governance of a company. 1.19. Governing Bodies: The bodies of a company that are involved in the management of that company: the General Meeting of Shareholders, the Board of Directors, the General Director, and/or Executive Board. 1.20. Independent Director: A member of a company’s Board of Directors who has no business, family, or other relationship with the company, EPO?KJPNKHHEJCOD=NADKH@ANKNEPOI=J=CAIAJPNAOQHPEJCEJ=?KJ®E?PKB interest, e.g.D=REJC=JEJ®QAJ?AKJDEOBNAA@KIKBFQ@CIAJP 1.21. Investor: A creditor of a company and individuals or legal entities that invest in a company’s share capital (shareholders) or provide debt capital by acquiring securities in the securities market (bondholders). 1.22. Issue (language used in a Russian context): Legally determined steps necessary to place securities. 1.23. Issue (language used in a Russian context): The totality of securities of one issuer that confer upon their holders identical rights. 1.24. Nominal Value: The value of a share, bond, or any other security stipulated by that security. 1.25. Non-Executive Director: A member of a company’s Board of Directors who is not at the same time an employee of the company.

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1.26. Participating Shareholder: A shareholder with voting rights who is present at the General Meeting of Shareholders in person, through a representative or by sending a voting ballot. 1.27. Placement: Creation, on the basis of civil-law transactions, of NECDPO?ANPE­A@>UOA?QNEPEAO=IKJCPDAENEJEPE=HKSJANO 1.28. Power of attorney: A duly authorized document that gives a shareholder’s representative the right to participate in a General Meeting of Shareholders. 1.29. Pre-Emptive Rights: The right of shareholders to maintain their proportion of ownership in a company by buying additional shares =J@?KJRANPE>HAOA?QNEPEAOEJ=OD=NAEOOQA>ABKNAPDAU=NAKɳANA@PKPDEN@ parties. 1.30. Preferred Shares: As a rule, non-voting shares in a company PD=PAJPEPHAPDAENDKH@ANOPKOLA?E=HLNEREHACAOOQ?D=O=@A­JA@LNEKNEPU dividend and liquidation quota. 1.31. Quorum of the General Meeting of Shareholders: The minimum percentage of votes of shareholders present (or through a representative or by sending voting ballots) at a General Meeting of Shareholders must hold in order for the decisions of the General Meeting of Shareholders PK>AHAC=HHUAɳA?PERA 1.32. Quorum of the Meeting of the Board of Directors. The minimum number of directors that shall be present at a meeting of the Board of "ENA?PKNOEJKN@ANBKNEPO@A?EOEKJOPK>AHAC=HHUAɳA?PERA 1.33. Record Date: The date for determining the list of shareholders that have the right to vote at a General Meeting of Shareholders and/or receive dividends. 1.34. Redemption Rights: The right of a shareholder to request the company to repurchase his shares under particular circumstances. This EO @EɳANAJP BNKI = ?KIL=JU¥O RKHQJP=NU =?MQEOEPEKJ KB EPO KSJ EOOQA@ shares. 1.35. Representation: Transfer by a shareholder to another person of the rights to vote associated with his shares. 1.36. Share Buyback: The repurchase of a company’s own shares upon the company’s decision. 1.37. Shareholder List: A list of shareholders and other persons who have the right to participate in General Meetings of Shareholders or receive dividends Shareholder lists are compiled on the record date. 1.38. Split of Shares: The process of converting shares of the same type and class into a greater number of shares of the same type and class.

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1.39. Standard Voting: A method of shareholder voting in which shareholders cast all their votes for or against each item put to vote (e.g., an individual candidate nominated for the Board of Directors). 1.40. Subscription: An agreement to purchase newly issued securities (a step in the issue process). 1.41. Type of Shares: One of the ways of classifying shares with respect to the rights provided. There are two types of shares: common and preferred shares. 1.42. Voting Ballot: A document used to vote. 1.43. Voting Share: A share than grants its holder the right to vote during the General Meeting of Shareholders to decide issues foreseen by legislation or the company charter. Voting shares may be common shares and preferred shares when these shares provide voting rights on all agenda items (if dividends are not paid or not fully paid) or on certain items (e.g., the reorganization of the company). Part II. Investor Protection at the Level of Company Law Section 1. Shareholder Rights Article 3. Voting Rights 1. Each common share provides one vote to its holder. 2. Only law may stipulate the limitation on the maximum number of common shares that a single shareholder may own. 3. The rights attached to a share are indivisible. Any agreement providing solely for the transfer of a voting right, or any other right attached to a share, shall be void. 4. Shareholders may conclude agreements related to the exercise of the right to vote. Such agreements may not require the shareholder to vote in any of the following ways: 4.1. To always follow the instructions of the company or any of its governing bodies; 4.2. To always approve the proposals of the company or any of its governing bodies; and   2KRKPAEJ=OLA?E­A@I=JJANKN=>OP=EJBNKIRKPEJCEJAT?D=JCA for obtaining special advantages. Voting agreements between shareholders owning cumulatively more PD=JPAJLAN?AJPKBRKPEJCOD=NAOOD=HH>A@EO?HKOA@EJ=I=JJANOLA?E­A@ by the securities market regulator.

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Voting against the requirements of the voting agreements does not render the vote invalid. 5. Each share of a particular class and type confers upon its owner identical rights. 6. Preferred shares grant voting rights to their owners only in cases OLA?E­A@>UH=S .NABANNA@OD=NAOKB=OLA?E­??H=OOCN=JPRKPEJCNECDPOSDAJPDA%AJeral Meeting of Shareholders makes a decision on: 6.1. The reorganization of the company; 6.2. The liquidation of the company; and 6.3. Any amendments to the charter of the company that limit the NECDPOKBOD=NADKH@ANOKBPD=POLA?E­??H=OOKBLNABANNA@OD=NAO .NABANNA@OD=NAOKB=OLA?E­??H=OOCN=JPRKPEJCNECDPOKJ=HHEPAIO put to vote at the General Meeting of Shareholders following the annual Meeting that made the decision not to pay dividends or to pay partial dividends on preferred shares of that class. If the charter of the company provides for the accumulation of unpaid dividends on a class of preferred OD=NAOOQ?DLNABANNA@OD=NAOOD=HH>A@A­JA@=O?QIQH=PERA $KN?QIQH=tive preferred shares, the voting rights attached to these shares cease to exist from the moment when all accumulated dividends are fully paid. For non-cumulative preferred shares, the voting rights attached to these shares cease to exist from the moment a decision is made to pay dividends in full for the given year. 5DAJLNABANNA@OD=NAOKB=OLA?E­??H=OOCN=JPRKPEJCNECDPOA=?D preferred share grants its owner votes in proportion to the nominal value of a common share. 5DAJLNABANNA@OD=NAOKB=OLA?E­??H=OOCN=JPRKPEJCNECDPO=??KN@ing to Clause 6.3 of Article 31 of the Model Provisions, a decision of the General Meeting of Shareholders is valid only if the required majority for this class of shareholders has voted in favor of such a decision (“voting by class”). Article 4. Pre-emptive Rights 1.Whenever the company issues additional shares, shareholders are entitled to acquire these securities on a pre-emptive basis pro rata to the percentage of the charter capital represented by their shares. If the Board of Directors issues additional shares that have been authorized by the charter of the company, the persons included in the shareholder register as of the date of this decision shall have pre-emptive rights. The Board of Directors shall notify the persons in the shareholder 1

There seems to be an obvious mistake in the Russian text of this Article referring to Article 4 rather than 3, which we have corrected in this translation.

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NACEOPAN=>KQPPDAENLNAÎAILPERANECDPOJKPH=PANPD=J­RA@=UO=BPANPDA @A?EOEKJEOI=@AEJPDAO=IAI=JJAN=OPDAJKPE­?=PEKJBKNPDA%AJAN=H Meeting of Shareholders. 2. Shareholders shall be given a period of at least 21 days to exercise their pre-emptive rights unless the charter of the company provides for a longer period.  'BPDA?KIL=JUEOOQAO=@@EPEKJ=HLNABANNA@OD=NAOKB=OLA?E­??H=OO shareholders of this class shall be allowed to exercise their pre-emptive rights before other shareholders. 4. Pre-emptive rights may not be restricted or withdrawn by the charter of the company. However, the General Meeting of Shareholders I=U@A?E@APKNAOPNE?PLNAÎAILPERANECDPOBKNPDAOLA?E­?OD=NAEOOQA>U= three-quarters majority of outstanding voting shares. The Board of Directors shall be required to present to the General Meeting of Shareholders a written report indicating the reasons for the restriction or withdrawal of pre-emptive rights. 5. A share issue may not be registered by the securities market regulator if the provisions of Clauses 1-4 of this Article are not observed. When shareholders have not been properly informed of their pre-emptive rights or when shares are placed in violation of the pre-emptive right to acquisition, the registration of the share issue may be challenged in court. 6. Article 4 of the Model Provisions applies also to instances when convertible securities and options to acquire shares are issued. However, Clauses 1 to 5 of this Article are not applicable to instances of conversion of securities or the exercise of option rights. Article 5. Dividends 1. The Annual Meeting of Shareholders shall decide whether to declare (pay) annual dividends. The Board of Directors can declare (pay) interim dividends, on a quarterly or semi-annual basis, if the charter of the company provides this. 2. Shareholders who are included in the list of those entitled to participate in the Annual Meeting of Shareholders that declares a dividend shall have the right to receive annual dividends. For interim dividends, the record date shall be set by the Board of Directors and cannot be earlier than the date of the Board’s decision. The record date shall be disclosed as required by securities legislation. Shareholders who purchase shares after the record date but prior to the date when dividends are declared shall not be entitled to receive dividends unless otherwise stipulated by an agreement on the purchase and sale of shares.

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3. Annual dividends declared on common shares shall be paid only BNKIPDAJAPLNK­POBKNPDA­O?=HUA=NBKNSDE?DPDA@ERE@AJ@O=NA=?counted, and from any retained earnings from previous years. For interim dividends, the following conditions shall apply: 3.1. Interim accounts shall be drawn up that shall demonstrate that suf­?EAJPBQJ@O=NA=R=EH=>HABKNPDA@EOPNE>QPEKJKBEJPANEI@ERE@AJ@O=J@   2DA=IKQJPKBEJPANEI@ERE@AJ@OI=UJKPAT?AA@PDAJAPLNK­P I=@AOEJ?APDAAJ@KBPDAIKOPNA?AJP­O?=HUA=NBKNSDE?DPDA=JJQ=H accounts have been drawn up and the retained earnings from previous years. Dividends on preferred shares can also be paid out of special funds established by the company for the payment of dividends. 4. The amount of declared dividends may not exceed the amount recommended by the Board of Directors. 5. Declared dividends shall be paid not later than 60 days after their approval. 6. Dividends on common shares shall be approved only once dividends on preferred shares are paid. If the company has issued more than one class of preferred shares, the dividends shall be paid in accordance with the priority for the payment of dividends for each class of preferred OD=NAO=OOLA?E­A@>UPDA?D=NPANKBPDA?KIL=JU 7. The company may not declare (pay) dividends when: 7.1. The charter capital has not been fully paid; 7.2. The company has not redeemed all shares upon the request of shareholders; 7.3. The company is bankrupt or will become bankrupt as a result of the dividend payment by the company; and 7.4. The value of the net assets of the company is or, as a result of dividend payment, will become less than the sum of the charter capital, PDANAOANRABQJ@=J@PDALKOEPERA@EɳANAJ?A>APSAAJPDAHEMQE@=PEKJR=HQA and the nominal value of all classes of preferred shares.  "ERE@AJ@OPD=PD=RA>AAJL=E@?KJPN=NUPKPDANQHAOOLA?E­A@>U Article 5 of the Model Provisions have to be returned to the company by the shareholder when the company proves that the shareholder knew that he was not entitled to receive dividends or could not have been unaware thereof in view of the circumstances. Article 6. Redemption Rights 1. Shareholders have the right to request the redemption of their shares at a price determined by an independent appraiser if they vote

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against or do not take part in the voting on the following issues during a General Meeting of Shareholders: 1.1. Reorganization of the company; 1.2. Major transactions; 1.3. Amendments to the charter of the company that restrict the rights of shareholders; and 1.4. Restriction or withdrawal from pre-emptive rights. 2. When the agenda of the General Meeting of Shareholders includes one of the items listed in Clause 1 of Article 6 of the Model Provisions, OD=NADKH@ANOOD=HH>AJKPE­A@KBPDAENNA@AILPEKJNECDPSEPDPDAJKPE?A for the General Meeting of Shareholders. The notice shall also include the redemption price and the procedure for the redemption of shares. 3. The redemption price shall be determined by the Board of Directors and cannot be less than the market value of shares as determined by an independent appraiser. The shareholder requesting the redemption can appeal through the courts the decision of the Board of Directors on the determination of the price not later than three months following the decision that gave shareholders the right to exercise redemption rights. 4. Shareholders can exercise their redemption rights within a period that may not be less than 60 days following the decision of the General Meeting of Shareholders that give shareholders the right to exercise redemption rights. During this period, shareholders can send a written request to the company to have their shares redeemed. The company shall redeem the shares within 30 days after the end of the period during which shareholders could exercise redemption rights. 5. The company shall have no right to redeem shares when: 5.1. The nominal value of the outstanding shares after the redemption will be less than 90 percent of the charter capital; 5.2. The charter capital is not fully paid; 5.3. On the date that a decision is adopted that could give rise to redemption rights the company shows signs of insolvency (bankruptcy) in accordance with legislation or if such signs will appear as a result of the redemption; 5.4. On the date that a decision is adopted that could give rise to redemption rights the value of the net assets of the company is or, as a result of the redemption, will become less than the sum of the charter ?=LEP=HPDANAOANRABQJ@=J@PDALKOEPERA@EɳANAJ?A>APSAAJPDAHEMQEdation value and the nominal value of all classes of preferred shares, as determined by the charter.

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6. When more than ten percent of outstanding shares are submitted for redemption, the company should redeem the shares pro rata to the number of shares submitted for redemption by each shareholder. Article 7. Access to Information 1. Each shareholder shall be entitled to examine or obtain a copy of the documents to which shareholders have access by law during the business hours of the company in a manner stipulated by the charter of the company or its by-laws. The company shall not require any payments for documents in excess of the costs incurred by the company to produce these documents. 2. The company may require a shareholder to give advance notice for the inspection within a period that is not longer than three days prior to the date of the intended inspection. 3. The company shall provide a shareholder with the opportunity to examine or obtain a copy of the documents to which the shareholder has access by law or by the charter of the company within three days of the date the company received the request from the shareholder. 4. If the company does not allow the shareholder to examine the documents to which the shareholder has access by law or by the charter of the company, the shareholder may challenge the decision of the company in the courts. Article 8. Extraordinary Audit upon the Request of Shareholders 1. A shareholder (or group of shareholders) owning at least ten percent of voting shares of the company of the company or a smaller percentage OLA?E­A@>UPDA?D=NPANKBPDA?KIL=JUOD=HHD=RAPDANECDPPKNAMQAOP=J ATPN=KN@EJ=NU=Q@EPKBPDA­J=J?E=H=J@A?KJKIE?=?PEREPEAOKBPDA?KIL=JU by an independent auditor if the shareholder or group of shareholders has substantial doubts about the accuracy of the results of the audit of the ­J=J?E=H=J@A?KJKIE?=?PEREPEAOKBPDA?KIL=JU  3LKJPDASNEPPAJNAMQAOPKBOD=NADKH@ANOOLA?E­A@EJ!H=QOAKB Article 8 of the Model Provisions, the Board of Directors shall appoint an independent auditor within 60 days of the request or a shorter period OLA?E­A@>UPDA?D=NPANKBPDA?KIL=JU 'BPDA K=N@KB"ENA?PKNO@KAOJKP appoint an independent auditor within 60 days of the request, the shareholders can challenge the actions (failure to act) of the Board of Directors in the courts. The shareholders have the right to propose an independent auditor to the Board of Directors or to request that the courts appoint an auditor other than the one proposed by the Board of Directors.

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3. The company shall cover the costs for an extraordinary audit, as stipulated in Clauses 1-2 of Article 8 of the Model Provisions.  2DAEJ@ALAJ@AJP=Q@EPKNOD=HHNALKNPEPO­J@EJCOKBPDAATPN=KNdinary audit to the Board of Directors within 30 days after the start of the audit. The Board of Directors shall communicate the report of the independent auditor to all shareholders in the same manner as shareholders =NAJKPE­A@KBPDA%AJAN=H+AAPEJCKB1D=NADKH@ANO=J@JKPH=PANPD=J days after the Board of Directors has received the report. Article 9. Extraordinary Meeting of Shareholders upon the Request of Shareholders 1. A shareholder (or group of shareholders) owning at least ten percent KBRKPEJCOD=NAOKBPDA?KIL=JUKN=HKSANLAN?AJP=CAOLA?E­A@>UPDA charter of the company has the right to request the Board of Directors to hold an Extraordinary Meeting of Shareholders to discuss items that have been put forward by the requesting shareholder(s) that fall within the authority of the General Meeting of Shareholders. 2. The agenda of the Extraordinary Meeting of Shareholders cannot be changed without the consent of the requesting shareholder(s). When the agenda of the Extraordinary Meeting of Shareholders includes the election of members of the Board of Directors by cumulative voting, the holders of at least two percent of the voting shares shall have the right to nominate candidates for the Board of Directors. 3. The Board of Directors shall make the decision to hold the Extraordinary Meeting of Shareholders with the agenda proposed by the requesting shareholders within 14 days after the request. The Extraordinary Meeting of Shareholders shall be held not later than 40 days after the receipt of the request. If the agenda of the proposed Extraordinary Meeting of Shareholders includes the election of directors by cumulative voting, the Extraordinary Meeting of Shareholders shall be held not later than 60 days after the receipt of the request. The Board of Directors shall notify the shareholders entitled to participate in the Extraordinary Meeting of Shareholders in the same I=JJAN EJ SDE?D OD=NADKH@ANO =NA JKPE­A@ KB PDA %AJAN=H +AAPEJC KB Shareholders, and not later than 14 days before the Extraordinary Meeting of Shareholders is held. If the agenda of the Extraordinary Meeting of Shareholders includes the election of members of the Board of Directors by cumulative votEJCPDAOD=NADKH@ANOOD=HH>AJKPE­A@KBPDA#TPN=KN@EJ=NU+AAPEJCKB Shareholders not later than 40 days before the Meeting is held. During the 14 days after the receipt of the notice, any shareholder (or group of

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shareholders) owning at least two percent of voting shares shall have the right to nominate candidates for the Board of Directors. The procedure for the nomination of members of the Board of Directors to be elected during the Extraordinary Meeting of Shareholders shall be the same as the procedure for nominating candidates during the annual General Meeting of Shareholders. At least 14 days before the Extraordinary Meeting of Shareholders is held, the Board of Directors shall notify shareholders with the right to L=NPE?EL=PAEJPDA#TPN=KN@EJ=NU+AAPEJCKB1D=NADKH@ANOKBPDA­J=HHEOP of candidates for the Board of Directors. 4. The written request to hold an Extraordinary Meeting of Shareholders shall state the agenda items, the wording of the decisions proposed by the requesting shareholder(s) and be signed by the requesting shareholder(s). The request shall also specify the reasons for convening the Extraordinary Meeting of Shareholders. 5. The Board of Directors may refuse to hold an Extraordinary Meeting of Shareholders only if any of the following grounds exist: 5.1. The requesting shareholder(s) does not own the percentage of RKPEJCOD=NAOOLA?E­A@EJ!H=QOAKBNPE?HAKBPDA+K@AH.NKREOEKJO 5.2. None of the proposed agenda items falls under the authority of the General Meeting of Shareholders; 5.3. The written request to hold the Extraordinary Meeting of Shareholders does not meet the requirements of Clause 4 of Article 9 of the Model Provisions; and 5.4. The law or the charter of the company does not allow shareholdANOPKLNKLKOAPDAEPAIOOLA?E­A@EJPDANAMQAOPBKNPDA%AJAN=H+AAPEJC of Shareholders.  'BPDA K=N@KB"ENA?PKNOI=GAOJK@A?EOEKJSEPDEJPDAOLA?E­A@ period or does not hold the Extraordinary Meeting of Shareholders, the requesting shareholders can challenge the actions (failure to act) of the Board of Directors in the courts. A court may require that the Board of Directors hold the Extraordinary Meeting of Shareholders or may empower the requesting shareholder(s) to do so on behalf of the company. 7. The costs of the Extraordinary Meeting of Shareholders shall be borne by the company. Article 10. Cumulative Voting 1. The charter of the company may provide for cumulative voting to elect members of the Board of Directors of the company. If members of the Board of Directors are elected by cumulative voting, any decision of the General Meeting of Shareholders on the early termination of the

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directors’ authority may be approved only with regard to all members of the Board of Directors. 2. When cumulative voting is used, each voting share shall entitle the holder thereof to a number of votes equal to the number of members being elected to the Board of Directors. The shareholder may give all his votes to one candidate or may distribute them among the candidates. The election of all candidates shall be held simultaneously. The votes given to each candidate shall be calculated separately. The candidates who have received the greatest number of votes shall be deemed elected. Section 2. Rights of the State as a Shareholder Article 11. Rights of the State as a Shareholder 1. The state as a shareholder has the same rights as any other individual shareholder or legal entity owning the same types and classes of shares. 2. The state may hold a Golden Share in companies with strategic EILKNP=J?A=O@A­JA@>UH=S 3. Golden Shares may only provide for the following special rights:   2DANECDPPK=LLNKRAPN=JO=?PEKJO=O@A­JA@>UPDA?D=NPANKB the company except for transactions that are carried out in the ordinary course of business; 3.2. The right to approve the following decisions of the General Meeting of Shareholders: 3.2.1. Reorganization of the company; 3.2.2. Liquidation of the company; and 3.2.3. Increase of charter capital of the company; 3.3. The right to appoint a member of the Board of Directors; and 3.4. The right to stop the acquisition of a controlling block of shares within thirty days after the notice of such acquisition.  "A?EOEKJO=@KLPA@>U=?KIL=JUNAC=N@EJCPDAEPAIOOLA?E­A@EJ Clauses 3.1 and 3.2 of this Article shall not enter into force without the approval of the state body that is authorized to exercise the rights attached to Golden Shares. 5. Special rights attached to Golden Shares may only be exercised to protect the rights and legal interests of the state, national security, or the rights and legal interests of the public. The exercise by the state of the rights attached to Golden Shares may be challenged in the courts.

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Section 3. Shareholder Duties Article 12. Shareholders’ Limited Liability 1. A shareholder is not liable for the obligations of the company and he only bears the risk of losses related to the company’s activities to the extent of the nominal value of his shares.  -JHU=H=S?=JEJPNK@Q?AAT?ALPEKJOPKPDANQHAOLA?E­A@EJ!H=QOA 1 of Article 12 of the Model Provisions. 3. Shareholders who have not paid their shares in full bear joint and several liability for the obligations of the company to the extent of the unpaid part of their shares. Article 13. Duty to Pay Up Shares in Full 1. A shareholder is obliged to pay to the company the full consideration for the shares that were issued to him. A shareholder cannot be relieved of PDEOHE=>EHEPUEJ?HQ@EJCPDNKQCD=OAPÎKɳKBPDAR=HQASEPDPDA?KIL=JU 2. Shares can be paid in cash or in property, property rights, or other rights with a monetary equivalent (contribution in kind). Upon the founding of a company, the form in which the consideration shall be paid is determined by the founders’ agreement, or by the decision to place shares when additional shares are issued. A contribution in kind shall be subject to the appraisal regime established by Article 14 of the Model Provisions. 3. Upon the founding of a company, shareholders shall pay a minimum of 50 percent of the full amount of the cash consideration prior to the state registration of the company. Shareholders shall pay the remaining part within a period of not more than one year of the state registration of the company, unless the charter of the company provides a shorter period. When shares are placed when additional shares are issued, they shall be paid for in full prior to the registration of the results of the share issue. 4. Contributions in kind shall be paid in full prior to the registration of the company at its formation or at the registration of the results of a share issue in the case of an additional share issue. 5. Shares that are not paid in full do not grant voting rights to their holders unless otherwise provided by the charter of the company. The charter of the company may provide for fractional votes of partly paid shares. 6. If the shares are not paid in full within the period provided by Clause 3 of Article 13 of the Model Provisions, the right of ownership of the shares corresponding to the unpaid amount passes to the company. The company shall subsequently retire these shares from the account of the shareholder in accordance with legislation.

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7. The charter of the company or the founders’ agreement can authoNEVAPDA?KIL=JUPK?H=EIEJPANAOPÓ­JAOLAJ=HPEAOÔ=J@?KILAJO=PEKJBKN losses for the failure of a shareholder to pay for the shares. Article 14. Appraisal of Contributions in Kind 1. Contributions in kind shall be subject to a monetary appraisal carried out by the founders of the company at its formation, or by the Board of Directors when the company issues additional shares. 2. The appraisal shall determine the value of the contributions in kind during the six months preceding the share placement at the company formation, or as of the day of the placement, when the company issues additional shares. 3. The appraisal shall be accompanied by the report of an independent appraiser appointed by the founders at the company formation or the Board of Directors when the company issues additional shares. The independent appraiser’s report shall include: 3.1. The nominal value of shares that will be wholly or partly paid with the contributions in kind; 3.2. A description of the contributions in kind (including, when necessary, each of the assets it is comprised of and the amount to be paid in cash); 3.3. The method and the date of the appraisal of the contributions in kind; 3.4. A conclusion on how the appraised value and the nominal value of shares correspond; and 3.5. Information on the independent appraiser. 4. The monetary value resulting from the appraisal by the company’s founders at the company formation or the Board of Directors when the company issues additional shares cannot be higher than the value that is determined by the independent appraiser. 5. Information about the independent appraiser’s report and the independent appraiser shall be disclosed in accordance with legislation. 6. An independent appraiser’s report shall not be required when: 6.1. The value of the contribution in kind is below […]; and 6.2. The contribution in kind consists of shares or other securities ?KJRANPE>HA EJPK OD=NAO SDE?D D=RA >AAJ OQ>FA?P PK = LQ>HE? KɳANEJC and when these securities have been included in the price lists of stock exchanges. 7. The company founders at the company formation and the Board of Directors when the company issues additional shares, respectively, shall bear joint and several liability within a period of three years after the

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registration of the company or after registration of the results of a share EOOQASEPDEJPDAHEIEPOKBPDA@EɳANAJ?A>APSAAJPDA=?PQ=HR=HQAKBPDA contribution in kind and the appraised value. Article 15. Subsidiary Liability Upon Bankruptcy 1. If a company’s insolvency is intentionally caused by acts (or failure to act) of a shareholder or another person who has the right to give mandatory instructions to the company or otherwise has the opportunity to determine its actions, such shareholder or another person, if the company D=OEJOQɹ?EAJPLNKLANPUOD=HH>AOQ>FA?PPKOQ>OE@E=NUHE=>EHEPUBKNPDA company’s obligations. Article 16. Liability of a Parent Company 1. A parent company that has the right to give mandatory instructions to a subsidiary based on a contract with the subsidiary, or the charter of the subsidiary, shall be jointly and severally liable with the subsidiary for obligations following from the implementation of these instructions. 2. Shareholders of the subsidiary have the right to claim damages caused to the subsidiary by the fault of the parent company. Losses are considered to have been caused by the fault of the parent company only in instances when the parent company exercised its right and/or opportunity with the aim of having the subsidiary complete actions, while knowing that the consequences of this would cause damages to the subsidiary. Article 17. Duty to Disclose a Controlling Interest 1. When a natural person or legal entity directly or indirectly acquires or disposes of shares of a listed company and when, following that acquisition or disposal, the percentage of voting rights held by that person or legal entity in a listed company reaches, exceeds or falls below 10%, 20%, 33%, 50% and 66%, such person or legal entity shall notify the company and the securities market regulator within seven calendar days of the percentage of shares that that natural person or legal entity holds. 2. A person who is obliged to disclose his shareholdings in accordance with the requirements of Clause 1 of Article 17 of the Model Provisions can ATAN?EOAPDARKPEJCNECDPO=PP=?DA@PKPDAOAOD=NAOKJHUEBDAD=OBQH­HHA@ these disclosure requirements. Article 18. Other Shareholder Duties 1. A shareholder, having access by law, the charter or the by-laws of the ?KIL=JUPK?KJ­@AJPE=HEJBKNI=PEKJ=J@@K?QIAJPOOD=HHJKP@EO?HKOAPDA information and documents other than to exercise the rights to which he

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is entitled by law. If a shareholder violates this obligation and causes damages to the company, he shall be liable to the company for these damages in accordance with the procedure established by legislation. 2. Other duties may not be imposed upon shareholders by the company charter or other internal company documents. Section 4. General Meeting of Shareholders Article 19. Proxy Voting 1. Each owner of voting shares is entitled to participate in the General Meeting of Shareholders personally or through a representative. 2. The right of the shareholder representative to participate in General Meetings of Shareholders shall be accompanied by a duly authorized power of attorney. The power of attorney shall be in writing and shall be provided to the company at the time of registration for the General Meeting of Shareholders. The shareholder has the right to change his representative or cancel the power of attorney at any time and to participate in General Meetings of Shareholders in person. 3. When a member of the governing bodies of a company or any other LANOKJ=?PEJCKJ>AD=HBKBPDA?KIL=JUKɳANOEJLQ>HE?KNPK=OD=NAholder (or group of shareholders) holding at least 2% of voting shares, to be a shareholder’s representative, or invites shareholders to nominate a representative, the following rules shall apply: 3.1. The power of attorney shall be valid only for one General Meeting of Shareholders and any rescheduled or repeat meeting with the same agenda; 3.2. The power of attorney may be revoked at any time by the shareDKH@AN JU?D=JCAOEJPDALKSANKB=PPKNJAUOD=HH>AAɳA?PERA=OKBPDA IKIAJPPDA?KIL=JUEOJKPE­A@>UPDAOD=NADKH@AN 3.3. The invitation to grant the power of attorney shall be made in written form and shall include at least the following information: 3.3.1. The agenda of the General Meeting of Shareholders; 3.3.2. The decisions of the General Meeting of Shareholders as proposed by the governing bodies of the company; 3.3.3. The invitation to the shareholder to give voting instructions to the representative; and 3.3.4. Information on how the representative will vote if shareholders do not provide for voting instructions. The body responsible for registering shareholders and their representatives for the General Meeting of Shareholders shall verify whether

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PDANQHAOOLA?E­A@EJ!H=QOAKBNPE?HAKBPDA+K@AH.NKREOEKJO=NA observed. 4. The shareholder representative is obliged to vote according to the instructions of the shareholder as indicated in the power of attorney. 5. Any person with a dispositive capacity may be a shareholder representative at the General Meeting of Shareholders. Article 20. Notice to Shareholders of the Annual General Meeting of Shareholders  2DAOD=NADKH@ANOOD=HH>AJKPE­A@KBPDAJJQ=H+AAPEJCKB1D=NAholders at least 21 days before the Meeting unless the law or the charter of the company requires a longer period. When the agenda of the Meeting includes the reorganization of the company, the shareholders shall be JKPE­A@JKPBASANPD=J@=UOLNEKNPKPDA+AAPEJC  2DA LANEK@ @QNEJC SDE?D OD=NADKH@ANO OD=HH >A JKPE­A@ KB =JU particular Annual Meeting of Shareholders, as stipulated in Clause 1 of Article 20 of the Model Provisions, may be reduced or canceled if all of the shareholders inform the Board of Directors of their consent in writing. 3. The notice of the General Meeting of Shareholders shall be anJKQJ?A@EJ=JKɹ?E=HC=VAPPAPD=PLQ>HEODAOEJBKNI=PEKJ=>KQP?KIIAN?E=H legal entities and sent to shareholders by registered mail unless the charter KBPDA?KIL=JULNKRE@AOBKN=JKPDANIAPDK@KBJKPE­?=PEKJ 2DA?D=NPAN KBPDA?KIL=JUI=ULNKRE@ABKN=@@EPEKJ=HIAPDK@OKBJKPE­?=PEKJ 4. The notice of the General Meeting Shareholders shall include at least the following information: 4.1. Full name of the company; 4.2. Form of the General Meeting of Shareholders (physical presence or written consent); 4.3. Date, time and place of the General Meeting of Shareholders; 4.4. Agenda; 4.5. Draft wording of the decisions to be made; 4.6. Record date for shareholders to determine who has the right to participate in the General Meeting of Shareholders; and 4.7. A list of information and documents to be made available to all persons with a right to participate in the General Meeting of Shareholders, and the procedure for examining these documents. 5. The following information and documents shall be available to shareholders prior to and during the General Meeting of Shareholders:   2DA=JJQ=HNALKNP=J@=JJQ=H­J=J?E=HOP=PAIAJPO 5.2. Information on the candidates for the governing bodies if they are to be elected by the General Meeting of Shareholders; and

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5.3. Additional information required by law or the charter of the company. The company shall assure that shareholders receive full information regarding the agenda items.   2DAEJBKNI=PEKJ=J@@K?QIAJPOOLA?E­A@EJ!H=QOAKBNPE?HA 20 of the Model Provisions shall be available to shareholders at least 21 days before the General Meeting of Shareholders or 40 days if the agenda includes the reorganization of the company, unless the charter of the company provides for a longer period. The information and documents shall also be available during the General Meeting of Shareholders. All information shall be available at the premises of the company where the executive bodies of the company are located and at the location where the General Meeting of Shareholders is held. The charter of the company may provide that the information for the General Meeting of Shareholders also be available to shareholders in other locations. Article 21. Additional Information That Can Be Requested During the General Meeting of Shareholders 1. Any shareholder is entitled to request from members of the governing bodies of the company additional information during the General Meeting of Shareholders to make informed decisions on each agenda item. The charter of the company may provide that these requests must be addressed to the company in writing before the General Meeting of Shareholders. 2. Members of the governing bodies of the company can refuse to give the requested information only when: 2.1. Disclosure of such information may cause serious damage to the company; or   2DA?KIL=JUEOK>HECA@>UH=SPKGAALPDEOEJBKNI=PEKJ?KJ­dential. 3. The minutes of the General Meeting of Shareholders shall record whether the governing bodies have provided information to any requesting shareholder or on what grounds the information has not been provided. The shareholder may challenge the decision of the governing bodies in the courts within 30 days after the General Meeting of Shareholders. Information that has been provided to the requesting shareholder shall be available to all shareholders.

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Article 22. Location of General Meetings of Shareholders The General Meeting of Shareholders shall take place where the company’s executive bodies are located unless the charter of the company provides for another location. Article 23. Right to Appeal Decisions of General Meetings of Shareholders 1. Any decision of a General Meeting of Shareholders may be challenged in the courts by shareholders when the requirements of legislation or the charter and other internal documents of the company have been violated. 2. A shareholder who voted against a decision of the General Meeting of Shareholders or who did not participate in the General Meeting of Shareholders has the right to challenge the validity of that decision in the courts. 3. If a shareholder challenges a decision of the General Meeting of Shareholders in the courts, this shall be done within two months after the shareholder knew or should have known of the decision, but not longer than four months after the General Meeting of Shareholders. 4. Upon the request of the company, the courts may order the shareholder to compensate the company for expenses incurred in defending a legally unfounded claim by a shareholder. 5. The courts may leave intact a decision of the General Meeting of Shareholders that has been appealed in accordance with the requirements of Clause 1 of Article 23 of the Model Provisions if:   2DAREKH=PEKJO=NAJKPOECJE­?=JP=J@   2DA OD=NADKH@ANO OQɳANA@ JK @=I=CA =O = NAOQHP KB PDA @A?Esion. Section 5. Duties and Liabilities of Directors and Managers Article 24. Duties of Directors and Managers 1. A director or a manager of the company has a duty to perform his functions in good faith, in the reasonable belief that he is acting with the care and attention that a prudent person in a similar position would take under equal circumstances. 2. A director or a manager has a duty to act fairly and loyally to the company and to its shareholders and to act in their best interest.

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Article 25. Liability of Directors and Managers 1. A director or a manager of a company is liable for any losses caused to the company when he violates any obligation arising from law and the charter of the company. 2. A director or manager shall be relieved of liability if he: 2.1. Voted against the decision of the governing body that led to losses to the company; or 2.2. Did not take part in the voting of the governing body; or 2.3. In case of inaction, can prove that he made reasonable steps to initiate a decision of the governing body to prevent losses to the company. 3. A director or manager shall not be held personally liable for losses arising from making a business decision, if he: 3.1. Does not have a personal interest in the decision; and 3.2. Believes he is reasonably well informed about the grounds of a decision under the circumstances; and 3.3. Has reasonable grounds to believe that the decision is made in the best interest of the company and its shareholders. Article 26. Derivative Suits 1. A shareholder (or group of shareholders) owning at least one percent KBPDA?KIL=JU¥ORKPEJCOD=NAO=PPDAPEIAKB­HEJC=?H=EIEJPDA?KQNPO D=OPDANECDPPK­HAPDA?H=EIKJ>AD=HBKBPDA?KIL=JUPKOAAGPDAHE=>EHEPU of a member of the company’s Board of Directors as stipulated in Clause 1 of Article 25 of the Model Provisions. 2. A shareholder (or group of shareholders) owning at least one percent of the company’s voting shares at the time of submitting the request to the Board of Directors has the right to request the Board of Directors to seek compensation in the courts from the members of the company’s executive bodies if such managers can be held liable according to Clause KBNPE?HAKBPDA+K@AH.NKREOEKJO 2DAOD=NADKH@AN?=J­HA=?H=EI in the courts on behalf of the company when the Board of Directors @KAOJKP­HA=?H=EIEJPDA?KQNPOSEPDEJOETIKJPDO=BPANPDAOD=NADKH@AN submitted the request to the Board of Directors. 3. The company shall bear the costs of a court claim under Article 26 of the Model Provisions unless the courts determine that the claim of the shareholder(s) was legally unfounded and the claiming shareholder has acted in bad faith, in which case the costs shall be borne by the shareholder(s).

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Section 6. Protection of Investor Rights in Special Circumstances Article 27. Control Transactions 1. A shareholder shall be required to notify a listed company of his intention to acquire shares of the company when this acquisition added to any existing holdings of this shareholder and any persons acting in concert with him would result in controlling directly or indirectly 30 or more percent of the voting shares of the company. The company shall be JKPE­A@=PHA=OP@=UO>ABKNAPDA=?MQEOEPEKJ The Board of Directors shall notify all shareholders of the company SEPDEJPAJ@=UO=BPANPDA?KIL=JUD=O>AAJJKPE­A@>UPDAOD=NADKH@AN SDKOD=HH>A=NPDA?KOPOBKNPDAJKPE­?=PEKJKBPDAOD=NADKH@ANO 1D=NADKH@ANO=NAJKPE­A@BKHHKSEJCPDALNK?A@QNAOBKNJKPEBUEJCOD=NADKH@ANO of the General Meeting of Shareholders of the company. 2. A shareholder who has acquired control over the company in accordance with Clause 1 of Article 27 of the Model Provisions (“a controlHEJCOD=NADKH@AN£ÔOD=HH>ANAMQENA@PKKɳANPKLQN?D=OAPDAKQPOP=J@EJC ?KIIKJOD=NAOKBPDA?KIL=JU¥OOD=NADKH@ANOÓ¢=I=J@=PKNUKɳAN£ÔSEPDEJ 30 days of the acquisition for a price determined according to Clause 4 of Article 27 of the Model Provisions. A shareholder is entitled to accept = I=J@=PKNU KɳAN >U LNKRE@EJC SNEPPAJ ?KJ­NI=PEKJ KB PDEO EJPAJPEKJ SEPDEJ@=UOKBNA?AELPKBJKPE­?=PEKJKBPDAI=J@=PKNUKɳAN 3. When a controlling shareholder has acquired control over the ?KIL=JU=O=NAOQHPKB=LQ>HE?KɳANPD=PD=O=HNA=@U>AAJI=@APK=HH shareholders for all their common shares according to the requirements KB=H=SÓ¢=RKHQJP=NUKɳAN£ÔPDANAMQENAIAJPOKB!H=QOAKBNPE?HA of the Model Provisions shall not apply. 4. The highest price paid for the same securities by the controlling shareholder or by persons acting together with him over a period of six PKPSAHRAIKJPDOLNEKNPKPDAI=J@=PKNUKɳANNABANNA@PKEJ!H=QOAKB Article 27 of the Model Provisions shall be the equitable price.  2DA?KJPNKHHEJCOD=NADKH@ANI=UKɳANOA?QNEPEAO?=ODKN=?KIbination of both as payment for the acquired shares. However, when the ?KJOE@AN=PEKJKɳANA@>UPDA?KJPNKHHEJCOD=NADKH@AN@KAOJKP?KJOEOPKB liquid securities admitted to trading on a regulated market, it shall include a cash alternative. 'J=JUARAJPPDA?KJPNKHHEJCOD=NADKH@ANOD=HHKɳAN=?=OD?KJOE@ANation as an alternative where he or the persons acting together with him D=OLQN?D=OA@EJ?=ODOA?QNEPEAOSEPD­RALAN?AJPKNIKNAKBPDARKPEJC rights in the company in which a controlling position is being acquired during a period that starts six months prior to the acquisition of the

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controlling position in the company and that ends when the period for PDAI=J@=PKNUKɳANATLENAO  If a controlling shareholder has violated the requirements of Article 27 of the Model Provisions, the voting shares in excess of the control PDNAODKH@OLA?E­A@EJ!H=QOAKBNPE?HAKBPDA+K@AH.NKREOEKJOOD=HH JKP>A=NRKPEJCNECDPOQJPEH=I=J@=PKNUKɳANEOI=@A=OLNKRE@A@BKNEJ Clause 2 of Article 27 of the Model Provisions. Article 28. Sell-Out Right of Shareholders 1. When a person, acting individually or together with others, acquires 90 percent or more of the voting shares of the company through =JKɳANI=@APK=HHOD=NADKH@ANOBKN=HHPDAENOD=NAOEJ=??KN@=J?ASEPD the requirements of Clauses 2 and 3 of Article 27 of the Model Provisions, any shareholder shall have the right to sell his shares and convertible securities to such a person within three months after the voluntary or I=J@=PKNUKɳANATLENAO  2DAOAHHÎKQPLNE?AOD=HH>APDALNE?AOLA?E­A@EJ!H=QOAKBNPE?HA 27 of the Model Provisions. Article 29. Major Transactions 1. Any transaction or a group of connected transactions that directly or indirectly relate to the acquisition, sale or the possibility of a sale of assets with a value of at least 25 percent of the book value of the company’s =OOAPO=OOP=PA@EJPDAIKOPNA?AJP­J=J?E=HOP=PAIAJPKBPDA?KIL=JU shall be considered to be a major transaction. 2N=JO=?PEKJOPD=PB=HHQJ@ANPDEO@A­JEPEKJ=NAJKP?KJOE@ANA@PK>A= major transaction if they are carried out during the ordinary course of the company’s business or when they relate to the sale of company’s common shares or securities convertible into common shares. The charter of the company may stipulate other transactions that require the same approval procedure as major transactions. 2. When a transaction is an acquisition of assets, the acquisition price shall be compared with the book value of the company’s assets as OP=PA@EJPDAIKOPNA?AJP­J=J?E=HOP=PAIAJPKBPDA?KIL=JU 5DAJ= transaction is a sale or the possibility of a sale, the book value of assets subject to the major transaction shall be compared with the book value KBPDA?KIL=JU¥O=OOAPO=OOP=PA@EJPDAIKOPNA?AJP­J=J?E=HOP=PAIAJP of the company. The Board of Directors shall determine the market value of the assets or services subject to a major transaction based on an independent

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appraisal. The market value may not be less than the value determined by the appraiser. 3. Any major transaction with a value of at least 25 percent but less than 50 percent of the book value of the company assets and major trans=?PEKJOOLA?E­A@EJ.=N=CN=LDKB!H=QOAKBNPE?HAKBPDA+K@AH Provisions shall be approved by the unanimous vote of all members of the Board of Directors. The Board of Directors may decide with a simple majority vote of the members present at its meeting to have the General Meeting of Shareholders decide on the transaction when a unanimous vote has not been reached. A simple majority vote of participating shareholders in the General Meeting of Shareholders is required to decide on such a major transaction. 4. Any transaction with a value of 50 or more percent of the book value of the company’s assets shall be approved by a three-quarters majority of participating shareholders in the General Meeting of Shareholders. 5. A major transaction can be invalidated by a court following a petition by the company or a shareholder (or group of shareholders) owning at least 1 percent of voting shares of the company if the provisions of Article 29 of the Model Provisions were violated and if the other party to the transaction knew or should have known about any procedural violation in the transaction approval. 6. Any party who violated the requirements of Article 29 of the Model Provisions shall be liable to the company to the extent of the losses that such transaction causes to the company. If several parties are liable, their liability to the company shall be joint and several. 7. The provisions stipulated in Clauses 1 to 4 of Article 29 of the Model Provisions do not apply to transactions that are concluded by a company with a single shareholder who is the single-person executive body of the company and when the transaction is also a related-party transaction as @A­JA@EJNPE?HAKBPDA+K@AH.NKREOEKJO 8. The annual report of the company shall disclose any major transaction of the company concluded during the reporting period and shall include at least the following information for each major transaction: 8.1. The name and contact information of the parties in the transaction; 8.2. The governing body of the company that approved the transaction; 8.3. The reasons for concluding the transaction; 8.4.The value of the transaction as determined by the Board of Directors and the independent appraiser;

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8.5. The name of the independent appraiser; and 8.6. Other material terms of the transaction that shall be disclosed according to the charter of the company. Article 30. Related-Party Transactions 1. Any transaction in which a member of the Board of Directors, the General Director and members of the Executive Board, including the company’s external manager and members of the governing bodies of the external manager, or a shareholder of the company who, together with his =ɹHE=PAODKH@OKNIKNALAN?AJPKBPDA?KIL=JU¥ORKPEJCOD=NAOKN= person who has the authority to give binding instructions to the company, is directly or indirectly interested shall be a related-party transaction and be executed by the company in compliance with Article 30 of the Model Provisions. The law or the charter of the company may introduce additional NAMQENAIAJPOBKNPDA@A­JEPEKJKB=NAH=PA@ÎL=NPUPN=JO=?PEKJ  2. The company shall not provide loans or other forms of credit to members of the Board of Directors or managers or their close relatives/ =ɹHE=PA@LANOKJOQJHAOOPDEOEO=LLNKRA@EJ=??KN@=J?ASEPDPDANAMQENAments of Clauses 4 and 5 of Article 30 of the Model Provisions.  JUEJPANAOPA@L=NPUOLA?E­A@EJ!H=QOAKBNPE?HAKBPDA+K@AH Provisions shall submit to the Board of Directors and the external auditor of the company information regarding:   *AC=HAJPEPEAOEJSDE?DDAEJ@ALAJ@AJPHUKNFKEJPHUSEPD=ɹHE=PA@ persons holds 20 percent or more of the voting shares (or 20 percent or higher share or partnership interest); 3.2. Legal entities in which he holds a position in a governing body; and 3.3. Transactions known to him in which he has been or may be deemed to be an interested party. 3. The Board of Directors of the company shall approve any relatedparty transaction by a majority vote of disinterested directors. If all members of the Board of Directors of the company are interested parties, the General Meeting of Shareholders shall decide on the related-party transaction. If the number of disinterested directors is less than the quoNQINAMQENAIAJPBKN=IAAPEJCKBPDA K=N@KB"ENA?PKNO=OOLA?E­A@>U the charter of the company, the General Meeting of Shareholders shall decide on the related-party transaction. 4. A related-party transaction shall be approved by the General Meeting of Shareholders by a majority vote of all disinterested shareholders with voting rights when:

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4.1. The property involved in a related-party transaction or a number of connected transactions is valued at two or more percent of the book R=HQAKBPDA?KIL=JU¥O=OOAPO=OOP=PA@EJPDAIKOPNA?AJP­J=J?E=HOP=PAment of the company; 4.2. A related-party transaction or a number of connected transactions relates to the issue of shares through subscription or sale that represent more than two percent of the company’s already issued common shares and the common shares into which convertible securities issued earlier may be converted; or 4.3. A related-party transaction or a number of connected transactions relates to the issue of securities through subscription, which may be converted into common shares representing more than two percent of the company’s already issued common shares and common shares into which convertible securities issued earlier may be converted. 5. The General Meeting of Shareholders may approve future relatedparty transaction(s) between the company and an interested party that are concluded in the ordinary course of business. The decision of the General Meeting of Shareholders shall specify at least the maximum value of assets involved in such transaction(s). The decision of the General +AAPEJCKB1D=NADKH@ANOOD=HH>AAɳA?PERAQJPEHPDAJATPJJQ=H+AAPEJC of Shareholders. 6. Related-party transactions that would require the approval of the %AJAN=H+AAPEJCKB1D=NADKH@ANO=OOLA?E­A@EJ!H=QOAKBNPE?HAKB the Model Provisions and that are concluded between the company and a party after he became an interested party do not require the approval of the General Meeting of Shareholders if the terms and conditions of such transactions are materially the same as transactions between the company and the same person that were concluded in the ordinary course of business before the person became an interested party. The approval of the General Meeting of Shareholders is not required for such a relatedparty transaction when it is concluded prior to the next Annual Meeting of Shareholders. 7. A related-party transaction can be invalidated by the courts upon a petition by the company or a shareholder (or group of shareholders) owning at least 1 percent of voting shares of the company if the requirements of Article 30 of the Model Provisions are violated and if the other party in the transaction knew or should have known about any irregularity in the transaction. 8. Any related party who violated the requirements of Article 30 of the Model Provisions shall be liable to the company to the extent of the

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losses that such transaction causes to the company. If several parties are liable, their liability to the company shall be joint and several. 9. The provisions stipulated in Clauses 1 to 7 of Article 30 of the Model Provisions do not apply to related-party transactions: 9.1. That are concluded by a company with a single shareholder who is the General Director of the company; 9.2. If all shareholders of the company are interested parties in the transaction; 9.3. If the transaction is concluded to exercise shareholder’s preemptive rights; 9.4. That are concluded to redeem or buy back the company’s shares; or 9.5. If the company is reorganized by consolidation or merger and the other company that has been consolidated or merged holds more than 75 percent of all voting shares of the reorganized company. 10. The annual report of the company shall disclose any related-party transaction of the company that has been concluded during the reporting period and shall include at least the following information for each related-party transaction: 10.1. The name and contact information of the parties in the transaction; 10.2. The governing body of the company that approved the transaction; 10.3. The reasons for concluding the transaction; 10.4. The value of the transaction as determined by the Board of Directors and the independent appraiser, if invited; 10.5. The name of the independent appraiser(s), if invited; and 10.6. Other material terms of the transaction that shall be disclosed according to the charter of the company. Article 31. Investor Protection When Increasing the Charter Capital 1. The General Meeting of Shareholders shall approve any increase of the charter capital by a three-quarters-majority vote of participating shareholders. 2. The charter of the company may authorize the Board of Directors to issue shares within the limits of authorized shares and thus increase the charter capital by the unanimous vote of all directors. 3. If the charter capital of a company is increased through the capitalization of internal company resources (through an increase in the nominal value of previously issued shares or through the issue of additional shares

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without consideration among shareholders), all company shareholders must be guaranteed equal treatment. 4. If the charter capital of a company is increased through the capitalization of internal company resources (through an increase in the nominal value of previously issued shares or through the issue of additional shares without consideration among shareholders), the amount of the increase KB?D=NPAN?=LEP=HIQOPJKPAT?AA@PDA@EɳANAJ?A>APSAAJPDAR=HQAKB the company’s net assets and the amount of the company’s charter capital and reserve fund. 5. Shareholders shall be entitled to pre-emptive rights when the issue of additional shares with consideration increases the charter capital. Article 32. Investor Protection When Reducing the Charter Capital 1. The General Meeting of Shareholders shall approve any reduction of the charter capital by a three-quarters-majority vote of participating shareholders. 2. The charter capital may not be reduced below the minimum charter capital requirement set by legislation. 3. The charter capital shall be reduced to the value of the company’s net assets if at the end of the second and any following year the charter capital, according to the annual balance-sheet presented for approval by the company’s shareholders or according to the results of an audit, is lower than the value of the net assets of the company. 4. The company shall notify all known creditors in writing by regEOPANA@I=EH=J@LQ>HEOD=J=JJKQJ?AIAJPEJPDAKɹ?E=HC=VAPPASDANA information on commercial legal entities is published, about the decision to reduce the charter capital, and the new amount of the charter capital not later than 30 days after the decision of the General Meeting of Shareholders is adopted. 5. Any creditor of the company may, within 30 days after the deadline BKNPDAJKPE­?=PEKJKB?NA@EPKNONAMQAOPPDA?KIL=JUPK 5.1. Provide additional guarantees for the company’s obligations to the creditor; 5.2. Accelerate the performance of the company’s obligations to the creditor; and   $QH­HHPDA?KIL=JU¥OK>HEC=PEKJOPKPDA?NA@EPKN The creditor shall be entitled to a reimbursement of any losses caused to him as a result of the reduction of the charter capital.

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6. The state registration body shall register the reduction of the ?D=NPAN?=LEP=HKJHUEBLNKKBKB?NA@EPKNJKPE­?=PEKJ=J@O=PEOB=?PEKJKB creditors’ claims is provided by the company. Article 33. Investor Protection During Splitting and Consolidating Shares 1. Companies shall split or consolidate shares on the basis of a decision of a three-quarters majority of voting shares of the shareholders participating in the General Meeting of Shareholders. 2. Only the Board of Directors shall have the authority to propose a split or consolidation of shares to the agenda of the General Meeting of Shareholders, unless the charter of the company provides otherwise. The charter of the company can stipulate special voting requirements for the decision of the Board of Directors. The Board of Directors shall provide PDA%AJAN=H+AAPEJCKB1D=NADKH@ANOSEPDOQɹ?EAJPEJBKNI=PEKJKJPDA reasons and the terms of the split and consolidation of shares to enable the shareholders to decide on this matter in a manner that best meets their interests. 3. The decision to split or consolidate shares should include at least the following information: 3.1. The types and classes of shares to be split or consolidated; 3.2. The number of shares of each type and class that will be consolidated into one share of the same type and class (“the consolidation ratio”), or the number of shares of each type and class into which one issued share of the same type and class will be split (“the splitting ratio”); 3.3. The form of placement of shares upon the conversion of shares into shares of the same type and class but with a higher (consolidated) or lower (split) nominal value; 3.4. The date, or the procedure for determining the date, when the shares shall be converted; and   -PDANOECJE­?=JPPANIO=J@?KJ@EPEKJOBKNPDAOLHEPKN?KJOKHE@=tion of shares that shall be disclosed in accordance with the law and the charter of the company. 4. The consolidation and splitting ratios shall be a whole number. 5. If during the process of the consolidation of shares it is not possible for a shareholder to acquire a full number of shares, fractional shares shall be allowed. The owner of a fractional share of a particular type and class shall have the rights attached to shares of this type and class in proportion to the percentage of the share that the holder owns.2 2

This paragraph is numbered as number 6 in the Russian text, which we consider to be a technical mistake.

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Article 34. Investor Protection during Reorganization 1. Any decision on the reorganization of a company shall be approved by a three-quarters majority of each class of shareholders participating in the General Meeting of Shareholders. 2. The Board of Directors of the company shall draw up in writing the draft terms of the reorganization of the company, which shall specify: 2.1. The type of reorganization;   2DAJ=IA=J@PDANACEOPANA@Kɹ?AKBA=?D?KIL=JUL=NPE?EL=PEJC in the reorganization; 2.3. The share exchange ratio and the amount of any cash payment; 2.4. The terms of the placement of shares in the company(-ies) resulting from the reorganization; 2.5. The date from which ownership of shares in companies created as a result of reorganization shall entitle shareholders to participate in LNK­PO=OSAHH=O=JUOLA?E=H?KJ@EPEKJO=ɳA?PEJCPDEOAJPEPHAIAJP=J@    -PDAN OECJE­?=JP ?KJ@EPEKJO =J@ PANIO KB PDA NAKNC=JEV=PEKJ that shall be disclosed in accordance with the law and the charter of the company. The Board of Directors shall submit to the General Meeting of Shareholders an opinion on the draft terms of the reorganization by an independent expert. The draft terms of the reorganization shall be published in the manner EJSDE?DOD=NADKH@ANO=NAJKPE­A@KBPDA%AJAN=H+AAPEJCKB1D=NADKH@ANO and at least 40 days before the General Meeting of Shareholders that will decide on the reorganization. 3. The Board of Directors of the company shall draw up a detailed written report that explains the draft terms of the reorganization and that sets the legal and economic grounds for the reorganization and the OD=NAAT?D=JCAN=PEK 2DANALKNPOD=HH@AO?NE>A=JU@Eɹ?QHPEAOSEPDPDA appraisal when the share exchange ratio was set. 4. All shareholders shall be entitled to inspect at least the following documents at least 40 days before the General Meeting of Shareholders that will decide on the reorganization: 4.1. The draft terms of the reorganization; 4.2. The opinion of an independent expert on the terms of the reorganization; 4.3. The annual accounts and annual report of each company particiL=PEJCEJPDANAKNC=JEV=PEKJBKNPDALNA?A@EJCPDNAA­J=J?E=HUA=NO 4.4. An accounting statement that is drawn up not later than 90 days before the date of the draft terms of the reorganization, if the latest an-

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JQ=H=??KQJPONAH=PAPK=­J=J?E=HUA=NPD=PAJ@A@IKNAPD=JOETIKJPDO before that date;   2DANALKNPKBPDA K=N@KB"ENA?PKN=OOLA?E­A@EJ!H=QOAKB Article 34 of the Model Provisions; and 4.6. Any other documents required by a law or the company’s charter. 5. The company shall notify all known creditors whose claims precede the publication of the draft terms of the reorganization and that have not been settled at the time of the publication of the terms. The creditors OD=HH>AJKPE­A@EJSNEPEJC>UNACEOPANA@I=EHJKPH=PANPD=J@=UO=BPAN the General Meeting of Shareholders of the reorganizing company approved the decision on the reorganization. The company shall also publish =J=JJKQJ?AIAJPEJPDAKɹ?E=HC=VAPPAPD=PLQ>HEODAOEJBKNI=PEKJKJ commercial legal entities. 6. Any creditor of the company may, within 30 days after the deadline BKNPDAJKPE­?=PEKJKB?NA@EPKNONAMQAOPPDA?KIL=JUPK 6.1. Provide additional guarantees for the company’s obligations to the creditor; 6.2. Accelerate the performance of the company’s obligations to the creditor; and   $QH­HHPDAK>HEC=PEKJOPKPDA?NA@EPKN The creditor shall be entitled to reimbursement of any losses caused to the creditor as a result of the reorganization.3 The state registration body shall register the reorganization only EB=LNKKBKB?NA@EPKNJKPE­?=PEKJ=J@O=PEOB=?PEKJKB?NA@EPKNO¥?H=EIOEO provided by the company. 7. In the case of reorganization in the form of division of companies, the newly created companies shall be jointly and severally liable for all the debts of the divided company within a period of one year after the reorganization has been completed.  'JPDA?=OAKBNAKNC=JEV=PEKJEJPDABKNIKBOLEJÎKɳÓOAL=N=PEKJÔ of companies, the reorganized company and the newly created companies shall be jointly and severally liable for each other’s debts that have arisen prior to the completion of the reorganization within a period of one year after the reorganization has been completed. Article 35. Investor Protection During Voluntary Liquidation (Winding-Up) 1. A voluntary liquidation procedure shall be initiated: 1.1. According to provisions in the charter of the company; or 3

The Russian text refers to “as a result of the reduction of the company’s charter capital”, which we consider to be a technical mistake.

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1.2. Upon the decision of the General Meeting of Shareholders that is made by a three-quarters-majority vote of participating shareholders. 2. The initiation of a liquidation procedure on the grounds speci­A@EJ!H=QOAKBNPE?HAKBPDA+K@AH.NKREOEKJOOD=HH>ALQ>HE?HU disclosed without delay but not later than ten days after the decision has been made in accordance with national legislation for the registration of companies. During the liquidation of the company, an addendum shall be added to the company’s business name indicating that the company is in liquidation. 3. From the moment the liquidation procedure is initiated, the sole business purpose of the company is its liquidation. 4. The General Director and members of the Executive Board of the company shall be members of the Liquidation Commission (“liquidators”), unless the General Meeting of Shareholders decides otherwise by a three-quarters majority of all shareholders. The liquidators perform the functions of the executive bodies of the company.  2DA%AJAN=H+AAPEJCKB1D=NADKH@ANOI=UAHA?P@EɳANAJPHEMQEdators at any time. A shareholder (or group of shareholders) owning at least ten percent of voting shares may request the courts to appoint the liquidators. The courts shall appoint liquidators if serious doubts exist for the trustworthiness of the liquidators that have been appointed by the General Meeting of Shareholders. The liquidators that have been appointed by the courts shall receive a payment from the company as determined by the courts. 6. The liquidators shall prepare an initial liquidation balance sheet as soon as possible following their appointment. The Liquidation CommisOEKJOD=HHLNAL=NA=JEJPANEI>=H=J?AODAAP>=OA@KJNAOQHPOKBA=?D­O?=H year prior to the completion of the liquidation. An independent auditor shall audit the balance sheets. The General Meeting of Shareholders shall approve each interim balance sheet. If according to the initial liquidation balance sheet or any interim liquidation balance sheet the company meets the criteria for bankruptcy, the Liquidation Commission shall immediately start a bankruptcy procedure in accordance with bankruptcy legislation. 7. The company shall notify all its known creditors about its liquidation by registered mail. In addition, the Liquidation Commission shall LQ>HEOD=?KNNAOLKJ@EJCJKPAPSKPEIAOEJPDAKɹ?E=HC=VAPPAPD=PLQ>HEODAOEJBKNI=PEKJKJ?KIIAN?E=HHAC=HAJPEPEAO 2DAOAJKPE­?=PEKJOOD=HH be published sequentially with an interval of at least two months that OD=HHOP=NPSEPDPDA­NOPJKPE­?=PEKJ=OOLA?E­A@>U!H=QOAKBNPE?HA of the Model Provisions.

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8. The Liquidation Commission shall terminate the company’s activities, collect information on unpaid claims and sell the company’s assets. When the company’s assets are sold, the Liquidation Commission shall select a method that ensures that the highest price is paid for the assets. 9. The Liquidation Commission shall treat all shareholders equally. 5DAJPDA?KIL=JU¥O=OOAPO=NAKɳANA@PKOD=NADKH@ANOKNPDAEN=ɹHE=PA@ L=NPEAOPDAUOD=HH>AKɳANA@PK=HHOD=NADKH@ANOKJAMQ=HPANIO 10. The Liquidation Commission shall pay the company’s debts that are due and can deposit an amount that matches the unpaid claims of creditors in a banking account. When the creditor is also a shareholder owning at least ten percent of voting shares of the company, payments to that creditor-shareholder shall start only six months after the disclosure requirements of Clause 2 of Article 35 of the Model Provisions have been O=PEO­A@ J=IKQJPPD=PI=P?DAOPDA?H=EIOI=U>A@ALKOEPA@EJ=>=JGing account before the payment is made.  'B?NA@EPKNO@KJKP­HA?H=EIOPD=P=NANA?KN@A@EJPDA=??KQJPing books of the company, the Liquidation Commission shall deposit an amount that matches the claim in a banking account.  BPANPDA?KIL=JUD=OO=PEO­A@=HH?NA@EPKNO¥?H=EIOPDA?KIL=JU¥O remaining assets shall be distributed among shareholders. Payments or =JUKPDAN>AJA­POPKOD=NADKH@ANOOD=HH>ALNKRE@A@JKPA=NHEANPD=JJEJA months after the liquidation procedure has been initiated. 13. When the company’s assets that remain after the creditors’ claims D=RA>AAJO=PEO­A@=NAJKPOQɹ?EAJPPKO=PEOBU=HHOD=NADKH@AN?H=EIOL=Uments are made to holders of preferred shares according to the priority stipulated in the charter of the company before the holders of common shares are paid. Within any type or class of shares, payments shall be in proportion to the shareholder’s participation in the charter capital. 14. When the liquidation of assets and the distribution of proceeds to creditors and shareholders are completed, the Liquidation CommisOEKJOD=HHLNAL=NA=­J=HNALKNPSDE?DOD=HH>A=Q@EPA@>U=JEJ@ALAJdent auditor and be submitted for approval by the General Meeting of Shareholders. 15. The liquidators shall be jointly and severally liable to shareholders and creditors for any violation of Article 35 of the Model Provisions unless they prove that they acted in accordance with the requirements of Article 24 of the Model Provisions.

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Section 7. Financial Reporting and Accountability Article 36. Mandatory External Audit 2DA?KIL=JU¥O=JJQ=H­J=J?E=HOP=PAIAJPOOD=HH>AOQ>FA?PPK=I=Jdatory independent external audit. Article 37. Requirements for Auditor Independence  2DA=Q@EPKNÓ=JEJ@ERE@Q=HKN=J=Q@EP­NIÔOD=HH>ABNAAKB=JU EJ®QAJ?AEJPANAOPKNNAH=PEKJODELONAH=PA@PKPDA?KIL=JU>AEJC=Q@EPA@ that may pose a threat to his independence and that may impair his professional judgment or objectivity. 2. The company’s audit cannot be carried out by an auditor who:   &=O=JU=?PQ=HKNEILAJ@EJC@ENA?PKNEJ@ENA?P­J=J?E=HEJPANAOPEJPDA?KIL=JUKNEPO=ɹHE=PA@LANOKJOKPDANPD=JPDA=Q@EPKBPDA company; 2.2. Has any business relationships with the company that are beyond the ordinary course of business; 2.3. Has an employment or other contractual relationship with the company that may compromise the auditor’s independence, and the ability of directors, senior managers, accountants or other persons to be responOE>HABKNPDA=??KQJP=>EHEPU=J@­J=J?E=HNALKNPEJCSEPDEJPDA?KIL=JU 2.4. Has a close family relationship with directors, senior managers, accountants or other persons responsible for the accountability and ­J=J?E=HNALKNPEJCSEPDEJPDA?KIL=JUKN 2.5. As an auditor has performed audit services for the same company BKNIKNAPD=J­RA?KJOA?QPERAUA=NO  5DAJPDA=Q@EPKNKNEPO=ɹHE=PA@LANOKJOLNKRE@AJKJÎ=Q@EPOANRE?AO to the company, the auditor shall ensure that: 3.1. The individuals involved in providing non-audit services do not make decisions with respect to the audit on behalf of the auditor or its =ɹHE=PA@LANOKJO=J@ 3.2. The non-audit services do not compromise the independence of the auditor. 4. Auditors shall identify and evaluate all factors that may compromise their independence, including those arising from relationships with a company prior to the appointment as auditor of the company. 5. The appointment of the auditor shall be approved by the General Meeting of Shareholders by a simple majority of participating shareholders on the basis of full information regarding the guarantees for its independence and the main terms of the proposed contract with him. The Chairman of the Board of Directors shall sign the contract with the auditor.

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6. Listed companies shall be obliged to disclose information about the replacement of an auditor within […] days after the General Meeting of Shareholders that decided on the replacement. Article 38. Reporting Obligations of Parent Companies (Consolidated Accounts) 1. A company that is a parent company according to the law on […] OD=HH=PPDAAJ@KBPDA­J=J?E=HUA=NEJ=@@EPEKJPKLNAL=NEJCEJ@ERE@Q=H accounts, also prepare group accounts. 2. Group accounts are the consolidated accounts comprising a consoli@=PA@>=H=J?AODAAP@A=HEJCSEPDPDAOP=PAKB=ɳ=ENOKBPDAL=NAJP?KIL=JU =J@EPOOQ>OE@E=NEAO=J@=?KJOKHE@=PA@LNK­PÎ=J@ÎHKOO=??KQJP@A=HEJCSEPD PDALNK­P=J@HKOOKBPDAL=NAJP?KIL=JU=J@EPOOQ>OE@E=NEAO 3. The consolidated accounts shall comply with the form and the contents stipulated by law. 4. A company is exempted from preparing consolidated accounts when the company is a wholly owned subsidiary of another company. Article 39. Audit Committee of the Board of Directors 1. The Board of Directors can form an Audit Committee. The Audit Committee shall consist of at least three members of the Board of Directors. 2. The Audit Committee shall consist of non-executive directors and be chaired by an independent director. 3. The Audit Committee shall have the following functions: 3.1. Develop recommendations for the Board of Directors on the selection of the External Auditor and oversee the selection of the External Auditor; 3.2. Interact with the External Auditor to the degree necessary for the audit process;    1QLANREOA PDA ­J=J?E=H =J@ >QOEJAOO KLAN=PEKJO KB PDA ?KIpany; 3.4. Monitor the internal audit service; 3.5. Develop internal control and risk management procedures; and 3.6. Other functions as provided by the charter of the company.

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Section 8. Protection of the Rights of Holders of Other Securities Article 40. Protection of Corporate Bondholders 1. The Board of Directors shall have the authority to place bonds unless the charter of the company provides otherwise. 2. The General Meeting of Shareholders shall have the authority to place convertible bonds by a three-quarters-majority vote of participating shareholders. 3. A company may issue bonds only after its charter capital has been paid in full. 4. A company may issue bonds secured by a pledge, bonds with a guarantee by third parties and unsecured bonds. 5. Unsecured bonds may not be placed earlier than the third year of the company’s existence and after two annual balance sheets of the company have been approved by the General Meeting of Shareholders. Article 41. Rights of Corporate Bondholders 1. The company shall ensure that all bondholders of a particular type and issue are treated equally with respect to the rights attached to these bonds. 2. Each group of bondholders of a particular bond issue constitutes a General Meeting of Bondholders. The Board of Directors shall convene PDA­NOP%AJAN=H+AAPEJCKB KJ@DKH@ANOJKPH=PANPD=JKJAIKJPD=BPAN the registration of the results of the bond issue. The General Meeting of Bondholders shall be valid when at least one-tenth of the bond capital is present. 3. Each General Meeting of Bondholders elects its representatives and approves its internal rules. The representatives shall express and protect the interests of bondholders according to decisions of the General Meeting of Bondholders. 4. The General Meeting of Bondholders may be summoned by the representatives, by the holders of one-tenth of the bond capital of the particular issue or the Liquidation Commission of the company in case of the company’s liquidation. 5. The General Meeting of Bondholders shall be convened when the company decides on a major transaction, or the reorganization and the liquidation of the company, unless the internal rules on the General Meeting of Bondholders provide otherwise. 6. The representatives of bondholders can participate in the General Meeting of Shareholders in a consultative capacity and shall receive

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information from the company on the same terms as shareholders unless the charter of the company provides otherwise. 7. The General Meeting of Shareholders may take into consideration PDA@A?EOEKJOKBPDA%AJAN=H+AAPEJCKB KJ@DKH@ANOKJEOOQAOOLA?E­A@ in Clause 5 of Article 41 of the Model Provisions when it makes decisions on these issues. Article 42. Protection of Holders of Bonds That Have Been Secured by a Guarantee 1. The guarantee contract for the issue of secured bonds shall provide for a joint and several liability of the issuing company and the guarantor in case of default on the bond obligations. 2. A bank guarantee issued as a bond security cannot be revoked. The period for which the bank guarantee is provided shall exceed the bond redemption date by at least six months. 3. The guarantee contract shall be available to all subscribers of bonds. Article 43. Protection of Holders of Bonds That Have Been Secured by a Pledge 1. Only securities or immovable property can be subject to a pledge for the issue of secured bonds. 2. Bonds cannot be placed before the requirements for the state regisPN=PEKJKBPDALHA@CAKBEIIKR=>HALNKLANPU=NABQH­HHA@KNPDANACEOPN=PEKJ of the securities in the securities register has been completed. 3. An independent appraiser shall determine the market value of immovable property subject to the pledge contract. 4. The pledge contract shall be available to bond subscribers. Article 44. The Protection of Holders of Stock Options 1. Stock options can be issued only if: 1.1. The charter capital has been paid in full; and 1.2. The number of authorized shares is not fewer than the number of shares used for exercising the option rights. 2. The General Meeting of Shareholders has the authority to issue stock options by a three-quarters-majority vote of participating shareholders. 3. The Board of Directors submitting the proposal to issue stock options to the agenda of the General Meeting of Shareholders shall also submit a report on the purpose and the consequences of the stock-options issue. If stock options are issued as an incentive or for compensation to

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AILHKUAAO=J@Kɹ?ANOKBPDA?KIL=JUPDANALKNPOD=HH?KJP=EJ=?HA=N reference to the performance goals to be reached. 4. The number of shares that can be obtained when a stock option is exercised cannot exceed ten percent of the shares of this type and class issued at the date of the submission of documents for the state registration of the stock-options issue. Part III. Protection of Investor Rights During the Issue and Trade of Securities

Section 9. Protection of Investor Rights When Securities Are Issued Article 45. Shareholder Approval of a Securities Issue 1. The decision to issue securities shall be adopted by the Board of Directors on the basis of, and in compliance with, the decision to place securities as adopted by the following governing bodies: 1.1. The decision to place shares shall be approved by the General Meeting of Shareholders, or the Board of Directors if stipulated by the charter of the company; 1.2. The decision to place convertible bonds and stock options shall be approved by the General Meeting of Shareholders; and 1.3. The decision to place bonds shall be approved by the Board of Directors unless the charter of the company provides otherwise. 2. A decision to issue securities cannot be made later than six months after the decision to place securities is adopted according to Clause 1 of Article 45 of the Model Provisions. 3. The decision to issue securities shall in its form and contents comply with the requirements of securities legislation. Article 46. Issue Price of Securities 1. The issue price of securities is determined by the Board of Directors and may not be lower than the market value of issued securities. 2. The issue price of shares and convertible securities cannot be lower than the nominal value of issued shares or the shares into which the convertible securities will be converted. 3. Exceptions to the rule stipulated in Clause 1 of Article 46 of the Model Provisions are allowed only in the following cases:

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3.1. When shareholders exercise pre-emptive rights, the issue price for these shareholders cannot be lower than ten percent of the issue price for other investors; 3.2. When additional shares are placed through subscription, the remuneration of an intermediary cannot be more than ten percent of the issue price; and 3.3. When stock options are issued. Section 10. Protection of Investor Rights During the Circulation of Securities Article 47. Protection of the Rights of Retail Investors 1. A retail investor is an individual who is not registered in accordance with requirements of national legislation as an organization providing ­J=J?E=H=J@EJRAOPIAJPOANRE?AOÓ¢LNKBAOOEKJ=HEJRAOPKNO£Ô 2. Any professional investor providing investment services to retail investors shall provide retail investors with full, timely and comprehensive information on: 2.1. The identity of the professional investor and its representatives; 2.2. The nature of the investment advisory services provided to the retail investors; 2.3. The amount and terms of payment for the services provided; and 2.4. The investor’s rights when investment advisory services are provided. 3. Information shall be provided in a form that allows a retail investor to compare the investment services with those of other providers. 4. A contract for services provided to a retail investor without receivEJCPDAEJBKNI=PEKJOLA?E­A@EJ!H=QOAO=J@KBNPE?HAKBPDA+K@AH Provisions may be challenged in the courts by the investor. 5. A professional investor shall have an internal complaint procedure in place for retail investors. Article 48. Rules of Conduct of Professional Investors 1. In providing investment services, a professional investor shall act honestly, fairly and professionally in the best interests of its customers and the integrity of the market. 2. A professional investor shall take all steps necessary to avoid con®E?POKBEJPANAOPSEPD?QOPKIANO !KJ®E?POKBEJPANAOPOOD=HH>A@EO?HKOA@ to customers before investment services are provided.

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3. A professional investor providing investment services shall record, process, and execute customer orders in accordance with the customer’s instructions. Section 11. Investor Compensation Funds Article 49. Investor Compensation Funds 1. Investor compensation funds shall be created to protect retail investors (individuals) from the losses caused by professional investors who manage accounts or securities and moneys in the name of retail investors, in the event of the conditions described in Clause 2 of Article 51 of the Model Provisions. 2. Investor compensation funds shall be registered as non-commercial organizations according to the requirements of the law. 3. The securities market regulator manages the accounts of the investor compensation funds in accordance with the requirements of the law.  'JRAOPKN?KILAJO=PEKJBQJ@O=NA­J=J?A@PDNKQCD?KJPNE>QPEKJO by participants (members) of the funds. Article 50. Membership in Investor Compensation Funds 1. A professional investor shall be a member of an investor compensation fund. No professional investor shall be authorized to carry out investment activities unless it is a member of an investor compensation BQJ@ 2DANACQH=PKNOD=HH>AJKPE­A@EB=LNKBAOOEKJ=HEJRAOPKN@KAOJKP meet the requirements of a fund’s membership. 2. Each professional investor shall make an annual contribution to the investor compensation fund. The amount of annual membership contributions to investor compensation funds is determined by each fund’s internal rules, which shall be adopted by the fund’s supervisory body. Contributions are kept in an independent depositary and must be EJRAOPA@EJ=??KN@=J?ASEPDPDALNEJ?ELHAKB@ERANOE­?=PEKJKBNEOG 3. Compensation funds shall monitor the activity of their members, for the purposes of which funds have the right to request necessary information and to conduct inspections. If a member of a compensation fund does not meet the requirements provided for in Article 50 of the Model Provisions, the compensation fund may revoke its membership. Article 51. Compensation of Retail Investors 1. A compensation cover for each retail investor established by law shall be guaranteed by the fund in situations of the professional investor’s inability to:

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1.1. Repay investors’ money; or 1.2. Return to investors any securities belonging to them and held, administered or managed on their behalf. 2. A retail investor shall have the right to claim compensation from a compensation fund only if one of the following conditions occurs:   PDAKRANOECDP>K@U@APANIEJAOPD=P=PLNAOAJP=J@BKN­J=J?E=H reasons, the professional investor is unable to satisfy the investor’s claims and will not be able to in the near future; 2.2. a court decides that, under conditions directly related to the LNKBAOOEKJ=HEJRAOPKN¥O­J=J?E=HOP=PQO=??KN@EJCPKSDE?DPDALNKBAOOEKJ=H EJRAOPKNEOJKHKJCAN=>HAPKO=PEOBUPDA?H=EIOKBLH=EJPEɳO 3. The amount of compensation stipulated by Clause 1 of Article 51 of the Model Provisions to which a retail investor is entitled shall amount to 90 percent of the losses incurred, though the total compensation shall be no more than the equivalent of 5,000 euros. 4. The investor claim shall be calculated on the date of the occurrence of one of the conditions stipulated in Clause 2 of Article 51 of the Model Provisions, in accordance with the legal and contractual requirements for the appraisal of the market value of securities and the amount of money that belongs to the investor that the professional investor is unable to repay or return. 5. An investor seeking compensation shall submit his claim to the fund’s governing body not later than one year from the date on which one of the conditions stipulated in Clause 2 of Article 51 of the Model Provisions occurs. 6. A compensation fund shall have the right to take recourse against =LNKBAOOEKJ=HEJRAOPKNPKOAAGEJ@AIJE­?=PEKJBKN?KILAJO=PEKJL=E@PK a retail investor as a result of damages caused by the professional investor.

About the Authors Andrei Bushev holds an LLM and a doctorate degree (Candidate of Science); he is a lecturer (dotsent) at the Commercial Law Department of the St. Petersburg State University. For several years, he has combined his academic interest in law with a commercial practice: he was associated SEPD=JEJPANJ=PEKJ=HH=S­NIEJ1P .APANO>QNCÓÎÔ=?PA@=O= legal director and corporate secretary for a large international corporation with substantial production operations (1996-2002); was a team leader in the regional branch of the International Finance Corporation project on corporate governance (2003-2005); and he is currently a Senior Legal Counsel in the legal group of International Paper Inc. Furthermore, he is an arbiter with the Commercial Arbitration Tribunal of the St. Petersburg Chamber of Commerce and Industry. His recent publications in the Review of Central and East European Law, as a co-author include (i) “The Theoretical Underpinnings of Commercial Law: A Russian View on Bankruptcy and Securities” (Volume 30, Nos.2-4, 2005) and (ii) “On Striking the Balance of Shareholders Interests During the Consolidation of Shares” (Volume 31, No.3, 2006, 155-177). His special interests are in the area of securities, corporate governance, the law governing investments, and comparative law. Dr. Bushev is also presently engaged in doctoral research devoted to the subject of law and policy in PDA­AH@KBOA?QNEPEAONACQH=PEKJEJ0QOOE==J@PDA!'1 Rilka Dragneva CN=@Q=PA@EJH=SBNKIPDA3JERANOEPUKB1K­= QHC=NE= and holds a Masters’ and Doctorate degree from the University of Sussex, UK. In 1999, she joined the Institute of East European Law and Russian Studies, University of Leiden, The Netherlands. Dr. Dragneva has recently joined the School of Law at the University of Manchester, UK, while retaining her connection to Leiden as a visiting lecturer. Dr. Dragneva’s research interests cover the international and comparative aspects of company and commercial law, the law of (regional) economic integration, legal reform, legal institutions and development with a special reference to the countries of Central and Eastern Europe. 1DAEO?QNNAJPHU?KILHAPEJC=­RAÎUA=NNAOA=N?DLNKFA?PKJHAC=HD=NIKJEzation and economic integration in the CIS, funded by The Netherlands -NC=JEV=PEKJBKN1?EAJPE­?0AOA=N?DÓNederlandse Organisatie voor Wetenschappelijk Onderzoek). Her most recent publications include articles on the legal regime for free trade in the CIS, on contract law harmonization in the CIS, and on the compatibility of CIS and EU integration process in NAH=PEKJPK?KQJPNEAOOQ?D=OPDA3GN=EJA &ANPA=?DEJCLNK­HAD=OEJ?HQ@A@ courses on international/EU and comparative company and commercial law, corporate governance, and private law in Eastern Europe. She has Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 333-335 © Koninklijke Brill NV, Leiden, 2007

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also taken part in a number of international projects, such as drafting of the Russia Corporate Governance Manual and the CIS Model Legislative Provisions on Investor Protection. Gregory Maassen, Ph.D. is specialized in the implementation of economic reform programs in developing countries. Currently, he manages a large land titling and privatization program in Afghanistan. He is also an Adjunct Professor at Rotterdam School of Management, Erasmus University in The Netherlands where he teaches corporate governance and strategic management. He received a Fulbright scholarship from the US Department of State in 1998 and has authored more than forty publications including journal articles, surveys, OECD working papers, and books. "N +==OOAJS=O&A=@KB-ɹ?A=J@.NKFA?P+=J=CANBKNPDA'JPANnational Finance Corporation (IFC) of the World Bank Group in Armenia (three years) and corporate governance specialist for the IFC in Moscow (one year). He was the program director and senior expert of a threeyear corporate governance and commercial law project in Macedonia. The focus of much of his professional activities has been on commercial law reform and on drafting processes which emphasize dialogue and ?KKLAN=PEKJ=IKJCOP=GADKH@ANO=ɳA?PA@>UJASHACEOH=PEKJOAAwww. developmentwork.org>. Davit Karapetyan EO = !KNLKN=PA %KRANJ=J?A -ɹ?AN SEPD PDA !KNLKrate Governance Department (Investor & Corporate Practice) of the International Finance Corporation (IFC). Before joining the Corporate Governance Department, he was involved in implementing and managing corporate governance technical assistance projects for the IFC in Armenia and Russia since 2000. Mr. Karapetyan has been a member of the working group charged with developing a model investor protection law for the CIS countries. In 1995, Mr. Karapetyan graduated from the Faculty of Law of the Armenian Yerevan State University, where he was awarded a Ph.D. in law. He has also taught Civil Procedure and Corporate Governance courses there (1997-2002) as an Assistant Professor. He is currently engaged in research KJ=@K?PKN=H@EOOANP=PEKJEJPDA­AH@KB!KNLKN=PA%KRANJ=J?A Joop de Kort holds a Ph.D. from Tilburg University, The Netherlands; the subject of his dissertation was on the failure of central planning. He SKNGOEJPDA­AH@KBPN=JOEPEKJA?KJKIE?OSEPD=OLA?E=HEJPANAOPEJPDA relationship of Russia with its “near” (CIS) and its “far abroad”. He has LQ>HEODA@KJPKLE?OOQ?D=OAJPNALNAJAQNODELIKNAOLA?E­?=HHUKJ"QP?D direct investments in Hungary, and developments in the Russian aviation

About the Authors

335

sector (with Steven Kluiters). Recently, his work has focused on Russia’s membership in both the IMF and the WTO. Dr. de Kort has held positions at the Universities of Tilburg and Groningen, The Netherlands, before coming to Leiden in 1998 to teach international economics and Russian economic transition. Hans-Joachim Schramm is, at present, a civil and commercial law lecturer at the Faculty of Law of Bremen University, Germany. He has focused his research activities on the development of commercial law in CIS transition countries. In 1998 he was awarded a Doctorate Degree at the Institute for East European Law at the University of Cologne, Germany; his thesis was on Russian capital markets legislation. From 1997 to 1999, he worked as a legal consultant in Ukraine and continued his academic career in 2000 at Bremen University as a research assistant and member of the GTZ consulting project “Assistance to Legal Reform in Transition Countries”, headed by Professor Rolf Knieper. Within the framework of this project, he has taken part in numerous consulting projects in CIS countries, including the elaboration of CIS Model Laws on Securities Markets and on Investor Protection, as well as programs on judicial training. His publications are centered on legal issues which are topical in CIS transition countries, such as privatization, secured transactions, jointstock company law, and investment regulations in general. Dr. Schramm has just completed a major work on corporate law in the most important CIS countries; in the near future, he will be engaged in a research project on civil and commercial law in Caucasian and Central Asian states.

Index A =ɹHE=PA@L=NPEAO .................. 128,129-131 ................................................ 133,135,182 annual report ....................117,118,132,133, ....................................................142,167,168 Armenia ..... 5,10,19,25,30,33,34,36,37,39,48, ..........49,52,57,58,60,61,64,67-69,73,75,77,79, ...........81-84,86,87,94,96,98,100,102,109-111, ..............114,120,122,125,127,129,131,133,136,137, .......... 144,151,157,158,160,170,185,193,198,204 Azerbaijan ..............10,19,33,34,37,107,125, ............................. 133,151,157,158,160,161,170, ................................193,198,200,202,203,204 audit committee ...................... 105,138,139 B Belarus .................... 13,16,19,22,26,33,35,36, ................... 43,59,65,68,71,73,75,76,77,78,79,81, ......................87,107,125,151,152,153,154,157,159, ............................170,171,193,198,202,203,204 >AJA­?E=HKSJANODEL.....132-134,139,141 bilateral agreements ........... 18,22,26,153 board of directors, and board polarization ................... 100,101 cumulative voting ....................... 88-103 extraordinary audit ...........................80 extraordinary meeting of shareholders .....................................................74,76,77 “golden shares” ...............................55,56 major transactions ............... 109,112-121 pre-emptive rights ........................ 60,61 preparation of general meeting of shareholders .................................. 67,68 proxies ................................................ 70 related-party transactions ..126,128-130, ......................................... 134-139,142-145 security markets ................................191 shareholder suits .................................83 bondholders ......................... 150,187,188 book value ................................... 11-113,119 bylaws .................................97,98,100,102 C Central and Eastern European countries ..................................................197 central depository ............. 163,179,180 central planning ................8,193,196,199

Rilka Dragneva, ed. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization 337-340 © Koninklijke Brill NV, Leiden, 2007

charter ..............8,11,33,34,52,55-62,64-67, ............................. 73-76,78,79,81,83,87,94,98, .........................................99,105,109,115,117,118, ........................................123,127,143,166,178,188 CIS as an international organization 17 client, of professional market participants ............... 169,179,180,185,186,191 collective action ..........53,63,93-95,96,99 compensation schemes ............ 186,189 compliance, with domestic rules ........... 116,121,132, ............................ 134,137,140,186,191,205 with international standards ................. ....................................... 4,49,156,176,205 ?KJ®E?POKBEJPANAOP..... 70,74,115,128,131, .......................133,134,135,136,138,139,167,169 controlling shareholders ..... 46,51,52,58, ........... 86,103,105,107,116,123,124,131,137,139 corporate democracy .......................94 corporate governance .........1,4,33,34,37,45, ............................47,49,50,55,82,105,116,123, ..................................131,132,177,191,203,205 education ............................................94 cumulative voting ............. 43,76,85-87,91, ........................................ 96,98,99,101,102 D @A>P­J=J?EJC .........................................176 depositary receipts ............................64,155 directors directors’ duties .................38,81,82,101, .....................................103,116,135,137,139 directors’ liabilities ..........................81-83 election, of directors ......77,76,85-91, ......................................97,98,101,102 independent directors .. 45,100,105,114, ....................................................... 137,138 number of directors ......88,89,97,98,102 disclosure ..............36,45,51,52,54,116-118,124, ................126,131-134,139-143,158,160,167-169, ..........................176-178,181,182,186,187,190,191 District of Columbia ............................... 85 E EBRD .............1,25,35,37,39,40,41,43-46,48, ........................ 49,58,65,66,68,75,96,124,125, ..........................155,156,160,176,198,202-205

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economic crisis .............16,193,197-199,202 economic development .. 42,194,195,201 economic gap ................................ 195 economic integration ..... 2,15,21-23,27,50 employees .........45,70,79,87,96,101,130,134 EMS, see extraordinary meeting of shareholders enforcement ............... 3,58,60,62,82,85,86, ............ 105,106,108,116,125,132,134,139,140, .......... 149,150,159,165,170,174,175,181-183,192 equal treatment of shareholders ..45,56 equitable treatment ...................101,191 equity financing ......................... 46,176 EU ........... 15,21,22,24,25,26,35,36,37,39,47,51, .................... 60,62,67,69,134,141,166,168,169, .......................181,183,185,186,188,189,194,201 Eurasian Economic Community ..... 22, ..............................................23,26,27,152 European Court of Human Rights ...................................................154,172 extraordinary audit ......................78-80 extraordinary meetings of shareholders .................................................. 12,34 and cumulative voting ...............101-102 right to call ........................ 56, 74-78, 80 extraordinary review ............................78-80 F fair trading ........................................... 169 fair value .............................................111 false statements ...................................... 184 forced industrialization ...........................196 foreign capital ....................................195,197 foreign investment ..46,194,i97,200-202,206 G general director ........... 79,128,138,144,145 general meeting of shareholders, and golden share ................................... 55,56 as highest organ ................................. 62 election of directors 86-88,94,97,98,103 major transactions ....109,113,114,117,118 pre-emptive rights ........................ 60,61 preparation for ......................... 63-69,95 privileged shares .................................57 right to appeal its decisions ......... 72-74 related-party transactions .. 126,140,142 the revision commission ................... 79

shareholder suits ................................ 82 voting at ......................................... 69-71 Georgia .....................5,19,25,33,49,59,60,64, ...................... 65,67,71,74-77,86,87,96,98,109, .......................125,151,155,157,160,163,166,168, ..............................169,171,181,185,193,198,204 GMS, see general meeting of shareholders “golden share” ................................ 54-56 H harmonization .1,2,3,7,13-28,31,35,38,42,43, .......................................... 50,151-153,155,192 “hard” .................................2,26,27,28,40 “soft” ...................................2,26,27,28,39 heavy industry .............................. 193,195,196 I IAS, see International Accounting Standards IFC ............37, 44, 63, 88, 103, 114, 137, 149, 158 IFRS, see International Financial Reporting Standards independent appraiser ........... 113, 118, 143 liability, of .......................................... 113 inflation ............................. 199,202,203 information ..................... 2,17,36,37,38,51,56, ...........................60,63,66,67,70,80,94,95,99, ......................... 115-118,125,132-35,139-145,158, ............................. 164-170,182-188,190,191,199 insiders ............... 45,51,53,58,64,70,74,81,95, .................................. 105-107,114,119,120,123, ..................................136,137,144,146,205,207 institutional environment .. 43,194,203,204 institutional investors ...................... 51,96 institutional regimes .............................. 206 interconnected transactions .............. 109,126 International Accounting Standards 130,168 International Financial Reporting Standards............................................... 67,143,168 international law ................... 18,19,26,179,191 international legal standards .......1,4,5,39,40, ........................................................ 44,47,49,176 invalidation, of transactions .............121-123, ..........................................................144,145,175 investment climate .....................125,149,151, ....................................................... 194,195,202 IOSCO ................................35,36,44,134,151,169 Objectives and Principles ......162,170,191

Index K Kazakhstan .........14,19,20,22,25,26,30,31,34,36, ............................35-37,39,43,48,52,55,58,59,61,62, ........................67-69,75,77,78,81,82,84,87,98,108, ....................... 109,114,115,117,118,120,122,123,125, ........................128,131,135,136,137,142,144,151-153, ...................155,157-159,161,163,165-168,171,173, .................... 174,180-183,194,198,200,202,204 Kyrgyzstan ............5,19,20,22,25,39,48,57,60.........................62,64,65,67-69,72,73,75,79,84, ............................. 87,98,125,133,151,152,157,158, .............................160,163,171,194,198,202,204 L legal history ....................... 157,170,178,187 legal institutions 2,3,13,24,149,151,154,192 legal reform ........... 1-4,6,7,10,16,20,23,24, ............................ 25,39,40-44,47-50,86,176 legal tradition .......................... 5,6,41,153 legal transplants ..................4-6,39,40,49 list of shareholders ......... 94,103,133,181 M major transactions ................... 56,61,100, ..........................................106-123,126,141,144 management board ................129,130,138 market intermediaries, see also market participants ................. 153,162,163,169 market manipulation ............. 169,183 market participants ..........159,160,162, ...........................163,169,175,180,185-191 professional standards, of ........... 188 market value .............................. 112,113 Massachusetts ............................ 85,100 MLSM,, see Model Civil Code minority shareholders .............9,45,46,51, .........59,74,77,78,85,87-100,102,103,105,107, ...........113,114,116,120,122,128,139,140,144,146 MLA, see Model Law on Auditing MLJSC, see Model Law on Joint Stock Companies MLPIP, see Model Legislative Provisions on Investor Protection Model Civil Code .................. 3,25,30-36, ............................ 38-41,44,52,58,59,75,86,152 Model Law on Auditing ...... 3,30,34,35,38 Model Law on Joint-Stock Companies ...............3,30,33,34,38,39,41,44,58,59,64, ................. 65,68,69,73,75,78,83,86,98,152

339 Model Law on Securities Markets ........ 3, ..................................31,35-38,40,41,44,152,153 model laws ................1-3,18,20,24,27-32,36, ..................................................39-44,84,152 model legislation, see model laws Model Legislative Provisions on Investor Protection ............. 3,30,36-41,43,44,48, ......................50,53,54,56-62,65-68,70,71, ..............74-78,80,82-84,101,103,106-110, .......... 112-116,118,120-123,125-131,135,136, .................... 138-140,143-146,153,187-189 MLSM, see Model Law on Securities Markets Moldova ................5,19,33,34,37,48,49,55,59, .....................61,66,68,69,71,73,75,77,79,81-83, .....................87,94,96,98,100,109,110,111,114, ........................120,121,125,126,128,129,131,133,135, .......................136,137,139,144,151,155,156,160,171, ...............................173,185,186,194,198,202,204 multilateral agreements ........... 18,19,26, ........................................................151,152 N nominal holders .................... 134,179-181 JKPE­?=PEKJ.......................61-65,80,94,117 O OECD Principles of Corporate Governance .................................1,47,48,49,51,67, ...................................... 101,106,124,130,141 one share, one vote ................. 50,51,87 ordinary course of business ............... 110 ownership ceiling .............................52,53 P PA, see Parliamentary Assembly Parliamentary Assembly .........14,16,17,19, ..........................................27,48,152,153,180 pre-emptive rights ................. 58-62,128 price manipulation ........................ 169 privatization ..................45,54-56,94,95,156, ......................................... 157,177,203-205,207 prospectus ......................... 143,164,165,167 proxy voting ......................................69 R redemption rights .............. 61,119-121 registered shares ..............................178 registration ..........18,159,161,163-167,177,185 regulator ................ 62,67,105,118,134,136,

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....142,150,155,159,164,170,173,174,179,204 regulatory body, see regulator related-party transactions ...........52,55,100, ....................................105,106,115,119,123-132 related parties ... 52,124,126-136,139,140-143 reporting companies ..................... 167 restructuring ..................... 46,53,176,193, ................................. 194,196-201,203,204 retail investor .......................... 188,189 revision commission ..........12,55,70,78,79 NQJÎKɳRKPA ........................................ 97 Russia .......................1,4,9,10,13-17,19,20,22, ................... 24,26,30,31,33,35-38,42-45,48,49, ............... 52,54,55,58,59,61,64,65,67-69,71-73, .................. 75,77,79,81-83,86-88,94,98,99,107, ........... 108,110,111,114,115,117-120,122,124,125, ............. 127,129-133,135-138,140-144,146,151-161, ...............163-169,171-178,180-184,186,194-206 Russian Constitutional Court ........172 Russian Federation, see Russia S SCCPL, see Scientific-Consultative Center for Private Law Scientific-Consultative Center for Private Law .................. 18,19,21,28,31,34, ...................................................... 35,38,40-42 securities .........3,33,35,36,38,46,52,60-62,66, .................. 67,105,107,117,118,125,128,132-134, ................136,142,143,149,150-171,173-192,203 securities-market regulation ..........36,66, ................................132,160-162,171,177,189 securities markets ...........3,35,36,44,46,64, ........109,131,149,151,152,156,159-162,170,190 self-regulatory organization 160,162,169 shareholder agreements ..........53,54,134 shareholder approval .......... 115,118,119, ............................................... 121,136,139 shareholder suits ............................... 81 Single Economic Space ........22,23,26,152 Soviet Union ...............................4,154,155,158, ............................193-196,199,200,202,205-207 Sovtransavto ................................................172 SRO, see self-regulatory organization

straight voting ........................... 85,87,103 supervision .........161,165-167,170,171,174,175 supervisory board .................... 129,137,144 Supreme Arbitrazh Court of Russia ....................................................... 119 T tie votes .........................................96-98 transparency ................ 7,34,43,45,51,54,124, ........................................... 133,141,161,181,191 Turkmenistan ....................5,19,25,34,52,59, .................................. 65,67,68,71,75,80,81,87, ...............................108,194,198,202,203,204 U Ukraine ...........1,10,13,15,16,19,20,22,25,27, ............... 32,33,36,39,47,48,56,64-66,68,69, .............. 72,76,77,80,81,86,87,109,125,132,133, ...............151-153,155,159-161,163-166,168,171-174, .......................181-183,185,194,198,199,202,204 unanimity, of the board .... 100,114,115 Uzbekistan ...................19,20,22,25,33,34,36, ........... 37,39,48,55,57,60,64,65-69,72,73,75,77, .......... 79,81-84,86,94,99,100,109-111,114,120, ......... 121,125,127,129,131,135,144,151,153,155,156, .............. 159-161,171,181,194,198,199,202-204 V voting at the GMS ..........................69 voting ballots ...................................94,95 voting in absentia ............................. 71 voting in person .......................... 69,71 voting power .......................57,95,130,197 voting rights .....50,51,53,57,58,62,88,134,181 ceilings .............................................52 of privileged shares ........................ 56 voting strategies ........................... 90,93 W World Bank ................4, 45, 49, 53, 95, 96, .................................................103, 149, 205 Y YUKOS ....................................... 172,173

THE LAW IN EASTERN EUROPE SERIES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37.

No.1, Z. Szirmai, ed., 1958. No.2, Z. Szirmai, ed., 1958. The Federal Criminal Law of the Soviet Union, F.J. Feldbrugge, 1959. The Merchant Shipping Code of the Soviet Union, Z. Szirmai and J.D. Korevaar, 1960. The Law of Inheritance in Eastern Europe and in the People’s Republic of China, 1961 Studies in Polish Law, K. Grzybowski et al., 1962. Miscellanea: Articles and Texts, G. Ginsburgs et al., 1963. Introduction to Soviet Copyright Law, Serge L. Levitsky,1964. Soviet Criminal Law: General Part, F.J. Feldbrugge,1964. Soviet Private International Law, Kazimierz Grzybowski, 1965. The Civil Code and the Code of Civil Procedure of the RSFSR, 1964, A.K.R. Kiralfy, 1966. Soviet Insurance Law, Bernard Rudden, 1966. Legal Controls in the Soviet Union, Leon Boim, Glenn G. Morgan, Aleksander W. Rudzinski, 1966. Miscellanea II: Articles and Texts, Serge L. Levitsky et al., 1967. Soviet Citizenship Law, George Ginsburgs, 1968. Polish Family Law, Dominik Lasok, 1968. Governmental Tort Liability in the Soviet Union, Bulgaria, Czechoslovakia, Hungary, Poland, Roumania and Yugoslavia, Donald D. Barry et al., 1970. Polish Civil Law, D. Lasok, ed., 1973-1975. Codification in the Communist World: Symposium in Memory of Zsolt Szirmai (19031973), Donald D. Barry, F.J.M. Feldbrugge and Dominik Lasok, 1975. Soviet Law after Stalin, Donald D. Barry, George Ginsburgs and Peter B. Maggs, eds., 1977-1979. The Soviet Procuracy Protests, 1937-1973. A Collection of Translations, Leon Boim and Glenn G. Morgan,1978. Copyright, Defamation, and Privacy in Soviet Civil Law, Serge L. Levitsky,1979. The Soviet Codes of Law, William B. Simons, ed., 1980. Perspectives on Soviet Law for the 1980s, F.J.M. Feldbrugge and William B. Simons, eds., 1982. The Citizenship Law of the USSR, George Ginsburgs, 1983. The Soviet Law of Property, George M. Armstrong, Jr., 1983. The Party Statutes of the Communist World, William B. Simons and Stephen White, eds., 1984. Encyclopedia of Soviet Law, F.J.M. Feldbrugge, G.P. van den Berg, William B. Simons, eds., 1985. The Soviet System of Justice: Figures and Policy, Ger P. van den Berg, 1985. Soviet Law and Soviet Reality, Olimpiad S. Ioffe, 1985. Ruling Communist Parties and Their Status under Law, Dietrich André Loeber, ed., 1986. Soviet Law and Economy, Olimpiad S. Ioffe and Mark W. Janis, ed., 1986. A Calendar of Soviet Treaties, 1974-1980, George Ginsburgs, 1987. The Distinctiveness of Soviet Law, F.J.M. Feldbrugge, ed., 1987. Private International Law: The Soviet Approach, M.M. Boguslavskii, 1988. Soviet Civil Law, Olimpiad S. Ioffe, ed., 1988. Commentary on the Czechoslovak Civil Code, Th.J. Vondracek, 1988.

THE LAW IN EASTERN EUROPE SERIES 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

The Soviet Union and International Cooperation in Legal Matters, George Ginsburgs, 19881994. Law and the Gorbachev Era: Essays in Honor of Dietrich André Loeber, Donald D. Barry, ed., 1988. Soviet Administrative Law: Theory and Policy, George Ginsburgs, Gianmaria Ajani, Ger P. van den Berg, William B. Simons, eds., 1989. The Impact of Perestroika on Soviet Law, Albert J. Schmidt, ed., 1990. The Nuremberg Trial and International Law, George Ginsburgs and V.N. Kudriavtsev, eds., 1990. Carriage of Goods by Sea in the Practice of the USSR Maritime Arbitration Commission, Wim Albert Timmermans, 1990. The Emancipation of Soviet Law, F.J.M. Feldbrugge, ed., 1992. Russian Law: The End of the Soviet System and the Role of Law, F.J.M. Feldbrugge, 1993. The Revival of Private Law in Central and Eastern Europe: Essays in Honor of F.J.M. Feldbrugge, George Ginsburgs, Donald D. Barry, William B. Simons, eds., 1996. Moscow’s Road to Nuremberg: The Soviet Background to the Trial, George Ginsburgs, 1996. From Soviet to Russian International Law: Studies in Continuity and Change, George Ginsburgs, 1998. International and National Law in Russia and Eastern Europe: Essays in Honor of George Ginsburgs, Roger Clark, Ferdinand Feldbrugge, Stanislaw Pomorski, eds., 2001. Prospects for Constitutionalism in Post-Communist Countries, Levent Gönenc, 2002. Human Rights in Russia and Eastern Europe: Essays in Honor of Ger P. van den Berg, Ferdinand Feldbrugge & William B. Simons, eds., 2002. Law in Transition, Ferdinand Feldbrugge, ed., 2002. Copyright, Freedom of Speech, and Cultural Policy in the Russian Federation, Michiel Elst, 2004. Counsel in the Caucasus: Professionalization and Law in Georgia, Christopher P.M. Waters, 2004. Public Policy and Law in Russia: In Search of a Unified Legal and Political Space: Essays in Honor of Donald D. Barry, Ferdinand Feldbrugge and Robert Sharlet (Eds.), 2005. Russia, Europe, and the Rule of Law, Ferdinand J.M. Feldbrugge, ed., 2007. Investor Protection in the CIS: Legal Reform and Voluntary Harmonization, Rilka Dragneva, 2007.

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