Legal impact of the COVID-19 pandemic in Russia:

New simplified share buyback procedure for public joint-stock companies and extension of deadlines for corporate procedures in 2020

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On 7 April 2020 a law1 (Amendment Law) entered into force introducing, inter alia, a simplified share buyback procedure for public joint-stock companies and extending deadlines for certain corporate procedures, including general shareholder (or participant) meetings. These legislative measures should support Russian companies amid the restrictions imposed in response to the coronavirus COVID-19 pandemic.

Below we set out a brief summary of these measures.

1. Simplified Share Buyback Procedure

Public joint-stock companies may acquire their own issued shares on stock exchanges following a simplified procedure (Simplified Buyback Procedure) until 31 December 2020. Each of the following requirements must be met for the company to proceed with the Simplified Buyback Procedure:

i. the purpose of the buyback must not be to reduce the total number of shares as provided for under article 72(1) of Federal Law No. 208-FZ "On Joint-Stock Companies" dated 26 December 1995 (JSC Law);

ii. the buyback shares must be admitted to trading and purchased on a stock exchange by a broker acting on the instruction of a public joint-stock company and on the basis of "orders" addressed to the public, ie an unlimited number of trade participants;

iii. both (i) the average weighted price of the relevant shares and (ii) the main stock exchange index2  (in each case calculated for any three months starting from 1 March 2020) have decreased by at least 20%, as compared to the average weighted price of such shares and the value of such index, respectively, for the period from 1 October 2019 until 31 December 2019; and

iv. the Simplified Buyback Procedure must be carried out on the basis of a special resolution of the board of directors (supervisory board) (Board) of a public joint-stock company which determines: (i) the categories (types) of the buyback shares; (ii) the number of acquired shares of each category (type); and (iii) the term for acquiring the shares which must end no later than 31 December 2020.

This means, effectively, that the Simplified Buyback Procedure will only be possible starting from 1 June 2020, when three months starting from 1 March 2020 have passed.

How does it differ from the Default Share Buyback Procedure?

The Simplified Buyback Procedure is a new mechanism for acquiring a company's own issued shares which is different from the default procedure provided for by article 72 of the JSC Law. As opposed to the the default procedure, the Simplified Buyback Procedure allows for the acquisition of shares on the exchange via orders placed by the company's broker. Further, the company does not have to offer the buyback to all other holders of shares of that share category (type), as would be required under article 72 of the JSC Law.

The Amendment Law also states that certain provisions of the JSC Law relating to the acquisition by a company of its issued shares do not apply to the Simplified Buyback Procedure3. In particular:

  • there is no requirement to notify any other shareholders of the buyback; and
  • some terms and procedures of the buyback (including payment terms and reporting requirements) differ from the default buyback rules.

Restrictions on Share Buyback continue to apply

The Amendment Law does not exempt the Simplified Buyback Procedure from other restrictions concerning the acquisition by a company of its own shares. Therefore, a company still may not acquire its own shares:

  • until its entire charter capital has been paid in full;
  • if the nominal value of the outstanding company's shares would become less than 90% of the aggregate charter capital as a result of the acquisition;
  • if the company shows signs of insolvency (bankruptcy) at the date of their acquisition or would show such signs as a result of the acquisition; or
  • if at the date of the share acquisition the net asset value of the company is less than the aggregate amount of (i) its charter capital, (ii) its reserve fund, and (iii) the difference between the liquidation value of any issued preferred shares and their nominal value (or would become less as a result of the acquisition).

We note that the shares acquired in the course of a buyback do not confer voting rights and are not taken into account for the purposes of counting votes. Further, no dividends accrue on such shares.

Within one year from the completion of the buyback, the company must dispose of such buyback shares at a price no lower than their market value. Otherwise the company must reduce its charter capital by redeeming such shares.

Interplay between the Amendment Law and the company's charter

Pursuant to article 72 of the JSC Law (ie under the default buyback procedure) a company may only resolve to acquire its own issued shares if its charter expressly grants the company such right. However, the Amendment Law does not expressly state that only companies whose charter contains a provision allowing a share buyback (as is the case under the default buyback procedure) are entitled to use the Simplified Buyback Procedure.

Furthermore, the general shareholder meeting normally adopts a resolution on the buyback of shares, unless such right is given to the Board under the company's charter. However, the Amendment Law provides exclusive powers to the Board to launch the Simplified Share Buyback Procedure, and it does not make any reference to the company's charter.

It is not entirely clear to which extent the Amendment Law overrides the provisions of article 72 of the JSC Law. As a more specific law (lex specialis), one could argue that the Amendment Law prevails in case of contradictions with article 72 of the JSC Law. However, the Amendment Law explicitly excludes only specific provisions of article 72 of the JSC Law, but not the ones mentioned above. Therefore, it is likely that courts will interpret the Amendment Law in a way that it does not completely override article 72 of the JSC Law. Therefore, we believe that in order to benefit from the Simplified Buyback Procedure, the company's charter should in fact authorise (i) the company to repurchase its own shares and (ii) the Board to pass a resolution on the buyback.

Disclosure of information on the Buyback and notification of the CBR

The Board of a company may decide either not to disclose the share buyback under the Simplified Buyback Procedure as a "statement of a material fact" or to disclose this information within a different time period than provided by the law4.

A company that acquires its own shares under the Simplified Buyback Procedure must file with the regulator – the Bank of Russia (CBR) – a notice on the acquisition of its own shares and attach documents evidencing compliance with the requirements set out by the Amendment Law. The notice and accompanying documents are submitted to the CBR in an electronic form. The Amendment Law does not provide for a particular timeframe to make the filing, nor does it specify any other requirements applicable to the notice and the accompanying documents.

2. Extended timeframe for general meetings and certain corporate procedures

Extended deadline for holding general meetings

Under the JSC Law, the annual general shareholder meeting of a joint-stock company must generally be held no later than 30 June. Under Federal Law No. 14-FZ "On Limited Liability Companies", an ordinary participant meeting of a limited liability company to approve the annual results must be held no later than 30 April.

The Amendment Law now extends the deadline for holding both the annual general shareholder meeting of a joint-stock company and the ordinary participant meeting of a limited liability company to 30 September 2020. We note that the CBR has already recommended that financial organisations schedule their annual general meetings for the end of August or September 20205.

These measures should help shareholders obtain a more complete picture of the pandemic's impact on the company's business before making any key decisions.

As described in our earlier alert, in 2020 any shareholder meeting of a joint-stock company may be held in the form of an absentee meeting. However, certain resolutions of participants of limited liability companies still require a meeting to be held in person.

Extended deadline for presenting and disclosing financials

In accordance with article 4 of Federal Law No. 208-FZ "On Consolidated Financial Statements" dated 27 July 2010, certain legal entities6  must present their consolidated financial statements to their shareholders (or owners of the organisation's assets) and the CBR (as applicable) within the statutory timeframe. Issuers must also disclose their financial statements in accordance with article 30(12) of Federal Law No. 39-FZ "On the Securities Market" dated 22 April 1996.

The Amendment Law extends the deadlines for relevant companies to present consolidated financial statements and for issuers to disclose financial statements in 2020:

Financials General term Extended term under the Amendment Law
Presentation of consolidated financial statements by companies
annual consolidated financial statements no later than 120 days from the end of the reporting year no later than 180 days from the end of the reporting year
interim consolidated financial statements no later than 60 days from the end of the reporting period no later than 150 days from the end of the reporting period
Disclosure of financial statements by issuers
annual consolidated financial statements or annual financial statements for 2019, accompanied by an auditor's report
within three days following the date of an auditor's report, but no later than 120 days from the end of the relevant reporting year
within three days following the date of an auditor's report, but no later than 210 days from the end of the relevant reporting year
 interim consolidated financial statements or interim financial statements for the first six months of 2020, accompanied by an auditor's report (or another document prepared as a result of verifying such statements in accordance with audit standards)  within three days following the date of an auditor's report or other document, but no later than 60 days from the end of the relevant reporting period  within three days following the date of an auditor's report or other document, but no later than 180 days from the end of the relevant reporting period
 

Other deadline extensions

The Amendment Law postpones to 1 January 2021 the entry into force of previously adopted new provisions of the JSC Law, pursuant to which:

  • an audit committee must be formed within a Board of a public joint-stock company; and
  • a public joint-stock company must set up an internal audit system in order to assess the reliability and efficiency of risk management and the internal control system.

These new provisions were initially to become effective on 1 July 20207.

Companies referred to as "public joint-stock companies" in their charter and name but which do not meet the requisite criteria for public companies must either8 (i) apply for the registration of a share prospectus with CBR or (ii) amend their charter by removing the references to public status. The deadline for such actions has also been postponed from 1 July 20209  to 1 January 2021.

3. Liberalised requirements for the net asset value

As a rule, a company must decrease its charter capital or liquidate itself if its net asset value is below the amount of its charter capital for at least two subsequent years10.

In accordance with the Amendment Law, where a company's net asset value on 31 December 2020 falls below the amount of its charter capital, this shall not be taken into account for the purposes of a company’s obligations to:

  • include in the annual report of a joint-stock company a section devoted to the status of its net assets; or
  • adopt a resolution to (i) decrease the charter capital to an amount not exceeding the net asset value or (ii) liquidate the company.

We note that the Amendment Law does not change other implications of a decrease in the net asset value. In particular:

  • in cases provided for by the JSC Law, joint-stock companies will still be obliged to publish in the "Herald of State Registration" (in Russian: "Вестник государственной регистрации") a notice on the decrease of the net asset value of the company, and creditors will thereafter be entitled to demand the accelerated performance of the company's obligations; and
  • if after the end of the second or each subsequent financial year the net asset value of a company becomes less than the statutory minimum charter capital11, the company must be liquidated.

Federal Law No. 115-FZ "On Amending Certain Legislative Acts of the Russian Federation with regard to the Unification of Contents of Annual Reports of State Corporations (Companies), Companies of Public Law, as well as with regard to Introducing Special Aspects of Regulating Corporate Relations in 2020 and Suspending Application of Provisions of Certain Legislative Acts of the Russian Federation" dated 7 April 2020.
For the Moscow Exchange these are the MOEX Russia Index and the RTS Index.
Paragraphs 4, 5, 7 and 8 of article 72 of the JSC Law do not apply (in accordance with article 12(1) of the Amendment Law).
Regulations of the CBR No. 454-P "On Disclosure of Information by Issuers of Securities" dated 30 December 2014.
Letter of the CBR No. IN-06-28/54 "On Holding Annual General Meetings and Distribution of Profits in 2020" dated 9 April 2020 .
The relevant companies are listed in article 2 of Federal Law No. 208-FZ "On Consolidated Financial Statements" dated 27 July 2010 and include, inter alia, credit organisations, certain state-owned companies and companies whose securities are listed.
Federal Law No. 209-FZ "On Amending the Federal Law "On Joint-Stock Companies" dated 19 July 2018.
These criteria are set out in article 66.3(1) of the Civil Code.
Article 27(7) of Federal Law No. 210-FZ "On Amending Certain Legislative Acts of the Russian Federation and Repealing Certain Provisions of Legislative Acts of the Russian Federation" dated 29 June 2015.
10 Starting from the second financial year.
11 Currently RUB10,000 and 100,000 for limited liability companies and joint-stock companies, respectively.