Comments made by lawyer Mikhail Ilyin to an article titled “Inquisitive shareholders expostulated by court” published by the Finans Magazine
Minority shareholders. Higher courts allowed companies to restrict the rights of shareholders which use their rights in an unfair way. Lawyers believe that this may lead to abusive practices of joint stock companies.
January, 18 can become a historic day for lawyers specializing in corporate disputes: two highest courts (the Supreme Arbitration Court and Constitutional court) have simultaneously decided (without prior arrangement) how to resolve conflicts arising from the issue of disclosure to shareholders. Experts already emphasize the fact that explanations contain internal contradictions, while many aspects remain unclear and can result in new conflicts.
Good and evil. The Supreme Arbitration Court of Russia (SAC) specified that shareholders (as well as LLC members) are not liable to disclose goals and motives on which they rely when they demand to provide information concerning the company. The Constitutional court of Russia is also committed to “inviolability” of transparency principle: “the right of shareholders for information about the joint stock companies is an element of legal status of joint stock company members in their relations with the company, provided by the Civil code of the Russian Federation attaching to members of business entity the right to acquire information about company’s activity.
At the same time, highest courts allow companies to deny provision of materials to shareholders caught in unfair use of their rights. For instance, if a holder of securities (which demands to disclose confidential information) is an actual competitor (or an affiliated person of the latter), and disclosure of such information can harm commercial interests of the joint stock company. Any member that has repeatedly demanded the disclosure of the same documents, and materials pertaining to previous periods, which “clearly hold no value in relation to analysis” shall be regarded by SAC as an unfair person.
The Сonstitutional court of Russia also stresses the need to provide the balance between legitimate interests of minority shareholders and the companies. That is why corporate management is entitled to oppose adherence to a shareholder’s requirements, should corporate management believe that nature and scope of information requested testifies to abuse of right for access to information, including “due to absence of legal interest” in acquisition of such information. Access may be prohibited also when other actual facts exist, which are indicative of unfairness. The body for constitutional supervision considers as abuse not only acting for the benefit of competitors, but also “intentional causing of objective difficulties” (for instance, when a large amount of copies is intentionally requested to complicate activity of a joint-stock company).
These explanations aim to protect companies from unfair persons who use the shareholder status to acquire the information to the benefit of competitors, traders, other unfair members, and, sometimes, to facilitate corporate raids. In this case a minuscule stock of shares (even a single share), is purchased. For INSTANCE, the Constitutional court of Russia has examined the issue upon the application of Neftyanaya kompaniya Rosneft OJCS which has legal proceedings with Aleksey Navalny - one of the most controversial shareholders, the leader of social movement dedicated to combating against corruption. Only the last year Aleksey Navalny (which was expelled from “Yabloko” for disgraceful behaviour) filed not less than six lawsuits against diverse joint stock companies (including Gazprom, Sberbank of Russia, etc.).
Crime and punishment. Experts lay special emphasis on ambiguity of wording in explanations given by the highest courts. “To prove abuse of right is a quite challenging task, arbitration courts very rarely substantiate their decisions by this underlying condition, – said Mikhail Boytsov, the managing partner of law company Rightmark group. –In general, the abuse of right is a judgemental category, i. e. the court analyses all the arguments and proofs presented by the parties based on inner conviction, with no clearly established criteria as to what is the abuse of right and what is not. Therefore it’s extremely difficult to protect a company from shareholders using information acquired from the company to the benefit of other persons. There is no working legal mechanics to be used for this purpose.”
According to Mikhail Boytsov, one may counter shareholder’s abuse with formally lawful actions – the company can deny him the access to information and propose him to seize the court: “In today’s context, legal investigation shall last not less than 3-5 months. Perhaps, during this period information will become obsolete and lose its value. A number of similar combat methods are also available”.
However, Mikhail Ilyin, a lawyer from the law firm S&K Vertical, warned about the risk incurred by companies and corporate management which deny shareholders access to information: “The list of actions which can be qualified as abusive is not an exhaustive one, therefore the joint-stock company shall substantiate the denial to provide access to information. But should the company fail to prove the fact of abuse, it shall incur grave administrative liability.” In accordance with the law, such offense shall result in a fine of 500- 700 thousands roubles imposed on the company, and CEO shall incur personal fine up to 30 thousands. Moreover, the top-manager can be disqualified for up to one year, i. e., fired from his position and included into the special “black list” of the Ministry of the Interior. Besides, he shall not be entitled to hold an executive post in any Russian organization.
They do not publish statistical data on legal investigations conducted by FFMS on the whole territory of Russia, however, last year in Northwestern Federal District alone there were over 300 violations of legislation norms pertaining to information disclosure by issuers with drawing up of reports on administrative offenses. The total amount of imposed penalties exceeded 50 million roubles.
Punctuality is the politeness of shareholders. Michael Ilyin recommends shareholders to specify the purpose the requested information shall be used for: “By all means the OJSC can deny provision of documents, having mentioned that this information holds no value for the shareholder. However, should the shareholder defend his rights in the arbitration court or the Federal Service for Financial Markets, the purpose indication in request shall significantly facilitate bringing the company to responsibility.”
Reporters who work using the shareholder’s status as a smear can also be considered unfair. “Such actions can cause damage to the company itself which is contrary to the purposes of this legal structure, as well as harm the essence of company - shareholder relationship”, – believes Mikhail Boytsov.
Companies also believe that explanations given by SAC are rather vague. According to Ella Tomilina, Deputy Director General - Corporate Affairs Officer of OJSC Severo-Zapadny Telekom (more than 30 thousand members), it would be impossible to determine how they shall affect relationship between the issuer and the minority shareholders: “Any kind of situations may arise. In addition, the letter contains no clear definition as to the kind of documents that can be acquired and conditions of request and delivery of these documents. The court will take a separate decision on each situation. The top-manager stated that judicial practice for resolving disputes sufficient to make correct evaluations shall be worked out for a long time.
The press-service of VTB bank (by results of IPO more than 120 thousand individuals and entities became shareholders of the bank in 2007) noted that disclosure of information pertaining to the company’s business activity primarily aims at allowing shareholders to assess the efficiency of their investments. Managers of the bank admitted that “At the same time, some minority shareholders are obviously abusing their rights for using acquired information”.
Conclusions made by SAC will help to protect honest shareholders from abuse on the part of companies. For instance, to restrict the right to ask requesting persons to be strictly accurate in their request, i. e., to make them indicate exact dates and numbers of required minutes or other documents. They may be unaware of these details, after all. Thus, Rosneft motivated their refusal to provide Mr. Navalny with a copy of records of proceedings of the board of directors for 2009 pretending that his request contained no complete requisites of these documents.
Provision of copies with no advance payment. Another explanation given by SAC is quite disputable: acknowledging the right of joint-stock companies to collect payment for making copies of requested documents, the highest courts emphasizes the illegal nature of linking provision (of these copies) with depositing of respective amount of money. Put this another way “Chairs in the evening, money in the morning” and should the shareholder fail to pay the money, “chairs” (i. e.) copies shall nevertheless be delivered. According to Mikhail Ilyin, a company can enforce recovery of such expenses from shareholders only through the courts, especially as there is no practice of debt offseting towards dividend payout. Mikhail Boytsov agreed with him: “One should understand that this amount is so small that no joint stock company shall litigate for it.”
However, SAC allows for an exception: the company statutes may stipulate that an advance payment shall be necessarily made to acquire copies. According to experts, this it is the most adequate method to ensure recovery of expenses, however, these provisions are already read in various ways. For example, the statutes of Severo-Zapadny Telekom contain a norm identical to the federal law which provides for shareholders’ right to “acquire copies of documents for a fee” but Ella Tomilina is convinced that it allows to require payment in advance. Statutes of Gazprom and Rosneft also contain a statement about “the fee charged for provision of copies”– i. e. there is no condition pertaining to payment in advance or the right not to deliver documents before payment. And the statutes of Transneft contain not a word about charging a fee.
The Supreme Arbitration Court of the RF also emphasized the right of shareholders to copy documents by themselves during inspection without prior notice or arrangements, including copying by means of personal devices (hand scanners, cameras, etc.). Till now employees of some companies put various obstacles in the way of people wishing to photograph materials open to inspection.
Finans Magazine no. 7-8 (386-387) February 28– March 13, 2011