New Stock Law Would Spell Investors' Relief

If signed into law, a revolutionary bill on stock companies recently passed by the State Duma will finally lay the basis required for the Russian securities market to fully develop.

The draft law, approved by the Duma on Nov. 24, addresses some very basic concerns of investors relating to liability. With respect to stockholder liability, the bill limits the liability of controlling stockholders -- from the broad concepts contained in the Civil Code -- to acts which are undertaken with the knowledge that damages to the company would result. Members of the board of directors and executive officers would be required to act in the interests of the company and to fulfill their responsibilities reasonably and in good faith. The draft law also requires that in determining whether a director's or officer's actions met this test, consideration be given to common business practices -- something close to what is referred to as the "business judgment rule" in certain other countries.

The new law would also "liberate" the equity structure of stock companies, something that must be greeted with great relief by the sophisticated investor. One of the most inflexible aspects of Russian stock company law has been the lack of a concept of "authorized" capital. This allows stockholders to approve in advance the issuance of stock by establishing an amount of stock which the board may issue in the future to new investors or existing stockholders.

The draft law also introduces and deals specifically with the concept of convertible preferred stock and cumulative preferred stock, and provides for the issuance of different classes of voting stock.

Other changes to existing law would include: protection against hostile takeovers; the preemptive right of stockholders in closed stock companies to purchase stock being sold by other stockholders; the right of stockholders to include provisions limiting the aggregate voting rights of a single stockholder and the aggregate number of stocks held by a single stockholder; changes to management bodies by increasing the powers of the board of directors while adding protections for stockholders by requiring the vote of stockholders on "substantial transactions" as defined by the law; and adding the requirement that securities be sold at market value, but including a broad definition of "market value."

While this new law would inevitably introduce new questions of interpretation, it should be deemed a triumph for the Duma. Without the president's approval, however, the draft law will not come into force, leaving Russia without a law on stock companies for another year. But sources indicate that there is a good chance this law will be approved.

Maryann Gashi-Butler, resident partner at White & Case, Moscow, has been practicing law in Russia since 1991.