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. Last Updated: 07/27/2016

Shareholders Should Demand An End to Company Secrecy

Corruption and deceit are bred in the dark, while sunshine is the best of disinfectants. Russia has made great strides in recent years to assimilate this wisdom borne of experience of functioning democracies and market economies.

Today no law or regulation comes into effect in Russia unless it has been published in the national press. This reverses the old Soviet practice of legislating by ambush, which permitted crucial regulations to be kept safe in a desk drawer, to be pulled out and made use of at bureaucrats' convenience.

Regrettably, the sanitizing effects of disclosure have not been felt in the public securities markets in Russia.

The obsession of Russian company managers with commercial secrecy often represents nothing more than a desire to conceal tawdry or fraudulent business practices and transactions. The necessity of public disclosure imposes a discipline on company managers, which, criminal and civil liability aside, would be felt most acutely in the decisions made by investors with respect to the company's securities.

Formally, a government regulation states that a founding document, such as a charter, cannot constitute a commercial secret, nor can a company's financial statements.

In practice, however, the Moscow Registration Chamber will not disclose more than a few skeletal details on companies registered in Moscow, so that the basic governing statutes of companies, including public ones, are inaccessible to potential investors. The existing joint stock company regulation requires that companies mail quarterly and annual balance sheets to their shareholders. This is, of course, an excessive and unworkable provision, which is not followed in practice.

Recent legislation adopted a more pragmatic approach to the disclosure of financial information to investors.

An unheralded instruction of the Ministry of Finance, issued in May 1994, requires companies with publicly issued securities to prepare an audited statement of all securities offerings completed by the company during the calendar year and to present the statement to shareholders for approval. A presidential decree issued in June 1994 requires companies with public shareholders to publish in special financial sections of publications with regional or national circulation the companies' quarterly and annual balance sheets and income statements.

The legislative improvements, however, are not matched by actions in practice. So, in this season of annual shareholder meetings, investors should breathe life into dormant provisions of law by insisting on disclosure of audited financial statements and statements of completed securities offerings.

Leonid Rozhetskin, a native of St. Petersburg and a graduate of Harvard Law School, is in private practice in Moscow.