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. Last Updated: 07/27/2016

Civil Code Precedence Colors New Stock Law

On Jan. 1, 1996, the federal law "On Joint Stock Companies" took effect. The law has already occupied a place in the system of civil legislative acts regulating commercial activity. In many aspects, it develops the provisions of the Civil Code of the Russian Federation, sometimes proposing new approaches.

To place the law in the hierarchy of civil legislation and apply it properly, we must consider Article 3 of the Civil Code, which establishes the Code's priority among other rules of civil law.

It does not seem difficult to envisage the view of juridical and arbitration courts: If there is a contradiction between the Civil Code and the new law, they will be guided by the Code.

Among the law's key provisions for investors is one on liability of parent companies for obligations of subsidiary or dependent companies.

Both the Civil Code and the law state that a principal company incurs a joint liability for transactions of a subsidiary in the event the principal company is entitled to give mandatory instructions to the subsidiary.

In the Civil Code, legislators did not relate the origination of the right to give mandatory instructions with the obligation to be secured by a specific document. At present the law provides an exclusive list of guidelines to secure the right of the principal company to give mandatory instructions to the subsidiary. This right shall be reflected in an agreement with the subsidiary or in its charter.

It is difficult to predict how judicial interpretation will develop in this aspect because of a certain contradiction between the Civil Code and the law. Investors need to be cautious when including provisions in the charter of subsidiaries reflecting parental control.

Under the new law, investors who acquire 30 percent or more of the placed shares of common stock have a responsibility to make a proposal to existing shareholders to acquire their shares. Legal consequences for failing to do so are fairly serious: deprivation of the majority shareholders' right to cast a vote at the general meeting in excess of 30 percent of the voting stock of the company.

The law contains an interesting novelty on demarcation of powers between the shareholders' general meeting and the board of directors. It institutes an absolutely definite competence of the general meeting.

Under prior law, the shareholders' meeting had competence to consider and make resolutions regarding any matter connected with the activity of the company. Now, neither a joint stock company's charter nor an individual resolution of the shareholders' meeting may stipulate the extension of competence of the shareholders' meeting.

Tatyana Kovalyeva is a director of the law firm Steptoe & Johnson International and has been practicing law since 1990.