Bill Proposes Making Execs Liable for Losses

The Federal Service for Financial Markets has proposed legal changes that would allow shareholders to punish a company’s management for unreasonable or unfair actions and legalize so-called golden parachutes for executives who have left.

There have only been a handful of cases where managers have been sued in Russian courts for losses brought upon companies or shareholders, said Dmitry Stepanov, a partner at Egorov Puginsky Afanasiev & Partners. The law on joint-stock companies allows for such lawsuits, but it does not give specific conditions for a claim or means for calculating damages.

The service has published a bill on its web site that would help solve at least one of the problems: What would qualify as causing a loss. The bill proposes to hold executives accountable for unreasonable or unfair actions.

A manager who does not use information that was available or who failed to seek out information could be sued for acting unreasonably. There are four different actions that could be classified as unfair, from acting in one’s personal interest while voting to knowingly acting against the company’s interests.

The rules would introduce a presumption of guilt for executives, who would be required to prove that they acted reasonably and fairly. Under the proposed changes, shareholders with at least 1 percent of voting shares can file a complaint to the Federal Service for Financial Markets.

The service is also widening the list of conditions, to six from just one, according to which managers can be sued along with the company. Among them are violations related to paying dividends, redeeming bonds or determining the price for a share buyback.

Board members who vote for the disputed action can also be liable.

“The bill’s concept has been approved by the relevant government bodies, and we’re going to refine the wording,” said Vladimir Milovidov, the service’s chief. Changes making bank directors accountable during bankruptcy took effect in June.

The Economic Development Ministry supports the idea, but it needs to be revised, said Dmitry Skripichnikov, deputy head of the ministry’s corporate management department.

Shareholders with high-value stakes — even if they are less than 1 percent of voting shares — should be allowed to file claims, said Stepanov, from Egorov Puginsky Afanasiev & Partners.

Magnit owner Sergei Galitsky said it was important that the understanding of unreasonable and unfair not be too wide, as shareholders could abuse their rights. The courts will determine whether the new rules will be allowed to become a blackmail tool for minority shareholders, said Andrei Sharonov, managing director at Troika Dialog.

The breadth of the formulations will allow them to take into account a wide array of circumstances, and they will become more concrete through the courts, said Milovidov, the service’s head.

The proposed changes would also add an amendment to the law on joint-stock companies that would allow for chief executives and board directors to be compensated, even if they no longer hold the positions.

Currently, the law only says compensation for the board of directors must be approved by shareholders, Stepanov said. It is unclear whether a former director can be paid, and legal practice on the matter has been contradictory, although most often the problem is the size of the parachute.

The economic crisis has led to an increase of conflicts over such payments. Earlier this month, Kores Invest — part of Sintez Group, which owns about 45 percent of TGK-2 — filed a suit in the Moscow Arbitration Court against TGK-2, its former chief Andrei Vagner and another six defendants for breaking contracts under which the directors received parachutes of nearly 100 million rubles ($3.16 million). The defendants earlier demonstrated their right to receive the payments in court.

Gazprom is trying to get back 446.5 million rubles that were paid to former OGK-2 directors in 2008. In July, the Stavropol Region Arbitration Court turned down two suits by Gazprom units seeking to recover the entire sum from former OGK-2 chief executive Mikhail Kuzichev.