Changes in regulation of buyback of shares and certain corporate matters of Russian companies in light of the COVID-19 pandemic
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On 7 April 2020, Federal Law No. 115-FZ1 was published and entered into force. Law No. 115-FZ introduces a number of provisions aimed at simplifying the buybacks of shares in Russian public joint stock companies as well as relaxation of disclosure and reporting requirements and extending deadlines for certain corporate actions, the most important of which are discussed below.
Simplified share buyback procedure
Law No. 115-FZ introduces a simplified procedure for buybacks by public joint stock companies of their shares on a stock exchange. Until 31 December 2020, such companies may acquire their own shares (except for the purpose of reducing the total number of shares) subject to meeting each of the following conditions2:
- the acquired shares are admitted to trading on a stock exchange;
- the volume-weighted average price of the acquired shares, determined for any three months starting from 1 March 2020, decreased by 20% or more as compared to the three-month volume-weighted average price of such shares starting from 1 October 2019;
- the main securities market index calculated by the stock exchange for any three months starting from 1 March 2020 decreased by 20% or more as compared to such index calculated by the stock exchange for the three months starting from 1 October 2019;
- the shares are acquired on organised trades on the basis or orders addressed to an unlimited number of trade participants;
- the shares are acquired by a broker upon the issuer’s instruction; and
- the board of directors (supervisory board) of the issuer has adopted a decision on the acquisition of shares under a simplified procedure, specifying the categories (types) and number of shares of each type to be acquired, as well as the period for the acquisition, which must expire not later than by 31 December 2020.
Notification and disclosure requirements
A public joint stock company conducting a buyback of shares under the procedure described above is required to send a notification to the Central Bank of Russia (CBR) in respect of the buyback procedure along with documents confirming that the criteria set out above have been satisfied in electronic form via the company’s personal page on the CBR website.3
The decision of the board of directors of the issuer authorizing the buyback may provide that information relating to the buyback will not be disclosed in the form of a material fact notice under the disclosure rules generally applicable to public joint stock companies, or specify a later time for disclosure.4
New rules in comparison with standard buyback procedure
Law No. 115-FZ envisages that certain provisions applicable to share buybacks generally under the JSC Law will not apply to share buybacks conducted under the simplified procedure, in particular:5
- the standard requirements to the time periods for (i) notification of shareholders on buybacks (not later than 20 days before commencement of the time period for accepting the tenders on the sale of shares) and (ii) accepting the offers for the sale of shares by the shareholders (not fewer than 30 days) do not apply to buybacks carried out via the simplified procedure;
- under the simplified procedure, the shares will be acquired under the rules of organized trades on a stock exchange rather than pursuant to the shareholders’ instructions to sell their shares;
- the purchase price is determined in the process of exchange trades rather than under the rules set out in Article 77 of the JSC Law;
- the 15-day period during which the issuer has to pay for the repurchased shares does not apply; and
- a report on the results of submission of applications by shareholders to sell their shares does not have to be approved by the issuer’s board of directors.
At the same time, certain provisions of the JSC Law continue to apply to buybacks conducted via the simplified procedure, including the following:
- in order for a company to launch the simplified buyback procedure, the company’s right to repurchase its own shares must be expressly provided for in such company’s charter;6
- a company can repurchase only up to 10% of its shares while shares representing not less than 90% of the company’s charter capital must remain outstanding following the completion of a buyback;7
- the acquired shares do not grant voting rights, are not taken into account for the purposes of voting at a general shareholders meeting and do not accumulate dividends;8
- a company may not carry out a buyback in case it meets insolvency criteria or has a negative value of net assets;9 and
- the acquired shares must be disposed of (e.g., sold in the market) within one year from the acquisition date at a price not less than their market value.10
Notably, restrictions existing under the Insider Trading Law11 and regulations subordinate to it continue to apply to buybacks carried out under the simplified procedure. In particular, it will be necessary to ensure that the relevant issuer is not in possession of insider information when the instruction to the broker on the acquisition of shares is made.
Non-application of consequences of reduction in the value of net assets below the charter capital
Law No. 115-FZ provides that the reduction in the value of net assets of a joint stock company below its charter capital as at the end of 2020 will not be taken into account for the purposes of assessing a company’s compliance with the ratio of the value of the company’s net assets to its charter capital. Therefore, in case the value of a joint stock company’s net assets is at a level below the value of its charter capital as at the end of 2020, such company will not have to adopt one of the following decisions which are generally required in such circumstances under the JSC Law: (i) on the reduction of the charter capital to the amount not exceeding the value of the company’s net assets; or (ii) on liquidation of the company. The same exemption is envisaged for limited liability companies.12
Extended deadlines for presentation and disclosure of financial statements
Law No. 115-FZ extends the deadlines for presentation and disclosure of financial statements by companies in 2020 as follows:13
- timeline for presentation of consolidated financial statements: annual consolidated financial statements must be presented not later than 180 days after the end of the reporting year (as opposed to not later than 120 days as a general rule14), and interim consolidated financial statements must be presented not later than 150 days after the end of the respective reporting period (as opposed to not later than 60 days as a general rule15); and
- timeline for disclosure of issuers’ financial statements: annual (consolidated) financial statements of an issuer for 2019 must be disclosed within three days after the preparation of the auditors’ report, but not later than 210 days after the end of 2019 (as opposed to not later than 120 days as a general rule16), and interim (consolidated) financial statements of an issuer must be disclosed within three days after the preparation of the auditors’ report or an equivalent document, but not later than 180 days after the end of the reporting period (as opposed to not later than 60 days as a general rule17).
Relaxation of requirements applicable to the procedure and deadlines for holding of general shareholders meetings
Law No. 115-FZ provides that in 2020 annual general shareholders meetings and general meetings of participants of a limited liability company may be conducted not later than 30 September18 (rather than not later than 30 June for joint stock companies19 and not later than 30 April for limited liability companies20 as envisaged in the JSC Law and the LLC Law, respectively).
Furthermore, Law No. 115-FZ envisages the temporary lifting of the restriction on the absentee voting at a general shareholders meeting if the agenda includes the following matters : (i) election of the board of directors (supervisory board) of the company, (ii) election of the company’s internal audit commission, (iii) approval of the company’s auditor, (iv) approval of the company’s annual report and annual financial statements.21
Extension of deadlines for certain corporate actions of public companies
Law No. 115-FZ provides that the following requirements applicable generally to public joint stock companies will enter into force on 1 January 2021 instead of 1 July 2020:22
- requirement to establish an audit committee of the board of directors for the purposes of exercising control over the financial and business activity of the company, assessing the independence of the auditor of the company, and assessing the quality of the audit of the financial statements of the company; and
- requirement for a public joint stock company to conduct an internal audit, as well as to arrange for the adoption of relevant internal documents and appointment of an officer responsible for the company’s internal audit function.
Potential extension of deadlines for disclosure of information by financial organizations
Law No. 115-FZ provides that the Board of Directors of the CBR may extend the deadlines for disclosure of information by credit and non-credit financial organizations in 2020, in particular the following:23
- deadlines for disclosure of information in the form of an issuer’s report, issuer’s accounting (financial) statements and lists of affiliated persons;
- deadlines for preparing and submitting financial statements (with possible changes to the related procedures); and
- deadlines for preparing and submitting other information envisaged by federal laws.
If adopted, the relevant decisions of the Board of Directors of the CBR must be officially published within 10 days of the date of their adoption.
Other notable developments – moratorium on initiation of bankruptcy
On 1 April 2020, Federal Law No. 98-FZ24 came into effect allowing the Government of the Russian Federation to introduce moratorium for initiation of insolvency proceedings upon creditors’ petitions. The Government has already adopted the Resolution No. 428 of 3 April 2020 introducing the moratorium, which came into effect on the date of its adoption. The moratorium relates to several categories: (i) companies and individual entrepreneurs operating in sectors that to the largest extent suffered from the current situation (including airlines, airports, auto transport, culture, tourism, catering, etc.), (ii) companies included in the list of systemically important companies (which includes more than 600 companies from various spheres – from oil and gas, metal industry and transport to retail); as well as (iii) those included in the relevant lists of strategic entities. We note that the above lists are subject to expansion further to adoption of relevant resolutions by the Government.25
The above lists of sectors and companies as they currently stand are available on the website of the Federal Tax Service, which also contains a special service allowing to check whether a specific company or entrepreneur is subject to the moratorium: https://www.nalog.ru/rn77/news/activities_fts/9713703/ (in Russian).
The moratorium may be an important factor in the context of potential forthcoming restructuring of indebtedness of many Russian companies.
As far as we are aware, a number of other initiatives to amend the regulatory framework in response to the COVID-19 outbreak are being discussed and other changes aimed at relaxation of the legal regime for Russian companies may follow. We will keep you updated on any significant developments.
1 Federal Law No. 115-FZ “On Introducing Amendments to Certain Legislative Acts of the Russian Federation as regards the Unification of Contents of Annual Reports of State Corporations (Companies), Public Law Companies, as well as Establishing Specifics of Regulation of Corporate Relations in 2020 and on the Suspension of Provisions of Certain Legislative Acts of the Russian Federation” dated 7 April 2020 (“Law No. 115-FZ”).
2 Law No. 115-FZ, Article 12(5).
3 Law No. 115-FZ, Article 12(6).
4 Law No. 115-FZ, Article 12(5)(6).
5 Law No. 115-FZ, Article 12(1).
6 Federal Law No. 208-FZ “On Joint Stock Companies” dated 26 December 1995 (as amended) (the “JSC Law”), Article 72(2).
7 JSC Law, Article 72(2).
8 JSC Law, Article 72(3).
9 JSC Law, Article 73(1).
10 JSC Law, Article 72(3).
11 Federal Law No. 224-FZ “On Countering the Unlawful Use of Inside Information and Market Manipulation and on Amending Certain Legislative Acts of the Russian Federation” dated 27 July 2010 (as amended) (the “Insider Trading Law”).
12 Law No. 115-FZ, Article 12(2)(3).
13 Law No. 115-FZ, Article 12(7).
14 Federal Law No. 208-FZ “On Consolidated Financial Statements” dated 27 July 2010 (as amended) (the “FS Law”), Article 4(7).
15 FS Law, Article 4(7).
16 Federal Law No. 39-FZ “On Securities Market” dated 22 April 1996 (as amended) (the “Securities Market Law”), Article 30(12).
17 Securities Market Law, Article 30(12).
18 Law No. 115-FZ, Article 12(4).
19 JSC Law, Article 47(1).
20 Federal Law No. 14 “On Limited Liability Companies” dated 8 February 1998 (as amended) (the “LLC Law”), Article 34.
21 Law No. 115-FZ, Article 11. Pursuant to Federal Law No. 50-FZ “On Acquisition by the Government of the Russian Federation of Ordinary Shares of Public Joint Stock Company “Sberbank of Russia” from the Central Bank of the Russian Federation and the Recognition as Invalid of Certain Provisions of Legislative Acts of the Russian Federation” dated 18 March 2020 and as clarified in Information Letter of the CBR dated 3 April 2020 No. IN-06-28/48 “On Conducting General Shareholders Meetings in 2020”, starting from 18 March 2020, joint stock companies are allowed to conduct any general shareholders meeting (including annual general shareholders meetings) in 2020 in the form of absentee voting.
22 Law No. 115-FZ, Article 10.
23 Law No. 115-FZ, Article 12(8).
24 Federal Law No. 98-FZ “On Introducing Amendments to Certain Legislative Acts of the Russian Federation on Matters relating to Prevention and Liquidation of Emergencies” dated 1 April 2020.
25 On 10 April 2020, the Government of the Russian Federation adopted Resolution No. 479, which expands the list of industries that to the largest extent suffered from the current situation to include cinemas and dental practices.
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