1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?
COVID-19 lockdown restrictions in Russia will be lifted in phases, taking into account regional differences. Directors and boards of directors are to take decisions based both on federal laws and, to a greater extent, regional laws, which reflect the specifics of the epidemiological situation in the particular region.
Changes to certain corporate procedures
Corporate procedure requirements in 2020 are as follows:
- The period for holding the mandatory general meetings of shareholders in joint-stock companies and limited liability companies has been extended until 30 September 2020.
- Any shareholder meeting in 2020 may be held without holding a physical meeting, via an absentee voting procedure; however, certain types of resolutions of participants of limited liability companies still require that a physical meeting be held.
- The due dates for 2020 for filing consolidated financial statements by entities required to make such filings (e.g. credit institutions) and the deadlines for financial statement disclosures by issuers have been postponed (for more details, see our legal update).
- The entry into force has been postponed until 1 January 2021 for new legislative provisions requiring:
- the creation of an audit committee at boards of directors of public joint stock companies; and
- the implementation of an internal audit to assess the reliability and efficiency of risk management and internal control at public joint stock companies.
Obtaining governmental exemptions or preferences
We recommend conducting an analysis of the current laws as to whether it is possible to obtain any exemptions or preferences from the state that were put in place to deal with COVID-19. At present, such exemptions and preferences are provided primarily for:
- small to medium-sized businesses;
- companies operating in the affected sectors of the economy (e.g. air transport, catering, services industry); and
- so-called system-forming (backbone) companies vital for the state's economy and included in the relevant list of the Russian government.
The measures taken by the state are designed to reduce the tax and regulatory burden and provide direct subsidies as employment support measures and soft loans. The list of applicable exemptions and preferences is unique in each specific case.
Performance of obligations
We recommend assessing the risks of a company failing to meet its lockdown obligations:
- in relation to duties owed to the state to pay taxes and other mandatory payments, and the performance of obligations under state contracts, taking into account the existing exemptions and preferences; and
- in relation to counterparties, taking into account the provisions of contracts and laws on force majeure, material change of circumstances and inability to perform. According to the clarifications of the Supreme Court of the Russian Federation, the spread of COVID-19 is not a universal force majeure event and, in determining whether this theory may be used for a release from liability, one should rely on the circumstances of the case at hand (for more details, see our legal update).
Ensuring employees' health and safety
One should follow Rospotrebnadzor's recommendations on the organisation of the work of companies in the context of the spread of COVID-19. It is recommended, in particular, to transfer as many employees as possible to remote work, to conclude regular medical check-ups for employees, and to disinfect workplaces.
In some cases, regional laws envisage employers' obligations in this area. For example, in Moscow, employers whose activities have not been suspended are required to ensure social distancing at workplaces (1.5 m), use of personal protective equipment by employees, and medical tests conducted on 10% of their employees every 15 days.
2. Should boards adopt particular governance practices in this context?
Russian laws do not impose any requirements on companies to adopt any additional decisions or any other acts in connection with the spread of COVID-19. However, we believe company managers should adopt an act covering the specifics of the working regime under the existing conditions.
It is recommended that the act addresses:
- the procedure for adopting corporate resolutions in a situation when most participants or shareholders of the company are working remotely;
- the procedure for organising the company's electronic document interchange, including proof of authority and use of electronic digital signatures;
- matters of labour law relating to employees' transition to remote work; and
- the company's policy on employees' health.
3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?
Company managers should rethink corporate values in the post-pandemic context and in light of the key trends anticipated in the professional media. These trends include:
- the broad use of remote work which will drive the development of remote corporate procedures;
- the digitisation of work processes and the broad use of electronic document interchange;
- working capital being reserved in order to set up a "rainy day fund" in case of a new crisis, which would enable the company to fulfil its main obligations owed to employees and counterparties for several months;
- insurance against business risks relating to lockdown measures being imposed during pandemics and epidemics; and
- measures to combat the unauthorised distribution of confidential information and personal data (this risk increases as remote work becomes more widespread).
4. Your company is facing liquidity issues as a result of COVID-19:
a. What are the repercussions for continuing to operate your company?
A shortage of liquidity can result in the following negative scenarios:
- initiation of the bankruptcy proceedings; or
- liquidation of the company.
b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
A company may, and in certain cases must, file for insolvency as set out in the bankruptcy legislation. In particular, the CEO is required to file a bankruptcy petition within one month of becoming aware of:
- satisfaction of claims of one creditor would make it impossible to satisfy claims of other creditors;
- potential enforcement of security (i.e. pledge) provided over the company's assets would create difficulties for, or prevent the company from, conducting its business operations;
- the company is generally unable to pay its debts as they fall due (i.e. stops performing its payment obligations due to a shortage of liquidity); or
- the company admits insufficiency of assets to satisfy its payment obligations (i.e. the aggregate value of the company’s assets is lower than aggregate the amount of its payment obligations).
c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
Under Russian law, transactions entered into by a company's CEO may be challenged:
- on general grounds set out in the Russian Civil Code; and
- the ones applicable in an insolvency scenario.
The Russian Civil Code contemplates grounds for challenging transactions in court made by the CEO. In particular, transactions may be challenged where:
- a transaction is made without third party's consent required by law;
- the transaction is made beyond the CEO's authorities (ultra vires) which are limited by the constitutional documents of the company (e.g. without requisite corporate authorisation by the board or shareholders) or any other document binding upon it; or
- the transaction is made to the detriment of the company's interest.
Therefore, while considering the transaction, the CEO should check whether:
- any corporate authorisation or other third-party consent is required to enter into the transaction;
- there is any other limitation of authority to enter into transaction; or
- the entry into transaction would be contrary to the company’s interest.
Russian law provides for certain bankruptcy-specific grounds for challenging transactions which may apply to virtually any contract (including any performance under the contract) to which such company is a party. In particular, certain transactions made, or certain actions taken, by a debtor within a certain period up to three years before commencement of the bankruptcy proceedings may be challenged on the following grounds.
- Undervalue transactions: transactions where the consideration received or to be received by a debtor from its counterparty is not of fair value.
- Preferential treatment transactions: transactions or actions which result or may potentially result in a preferential treatment of the claims of one or more creditor over other creditors.
d. Will your company be wound up if you fail to make payments when due?
Russian law contemplates general bankruptcy tests, being the inability to pay debts during at least three months from their due date and the amount of debt exceeding RUB300,000. In addition to the general bankruptcy tests, Russian law provides for certain requirements as to sufficiency of net assets of any Russian company (i.e. the difference between the company’s assets and liabilities). Net asset value is calculated according to the method established by the Russian government.
Russian law requires the value of net assets to be at least equal to the amount of the company's charter capital from the end of the second fiscal year after its incorporation and for every subsequent fiscal year. If the net assets of the company fall below its charter capital, the company is required to either:
- reduce its charter capital (if possible, taking into account the minimum charter capital prescribed by the law); or
- liquidate the company.