Проект Кодекса корпоративного поведения (английская версия)
The definitive text of the draft Code of Corporate Conduct is the Russian text released for public comment on September 18, 2001 at the Third Session of the Corporate Governance Coordination Council in Moscow.
Table of Contents:
Introduction Chapter 1. Principles of Corporate Governance Chapter 2. General Shareholders' Meeting Chapter 3. Board of Directors of the Company Chapter 4. Executive Bodies of the Company Chapter 5. Secretary of the Company Chapter 6. Major Corporate Actions Chapter 7. Disclosure of Information about the Company Chapter 8. Supervision of Financial and Business Operations of the Company Chapter 9. Dividends Chapter 10. Resolution of Corporate Conflicts
INTRODUCTION
"Corporate Governance" is a broad term that encompasses activities connected with the management of joint stock companies. A company's corporate governance practices affect its performance and its ability to attract the capital required for economic growth. Enhancement of corporate governance in the Russian Federation is vital for increasing investment in all sectors of the Russian economy from both domestic sources and foreign investors.
The standards of corporate governance affect all economic entities, but are most important for joint stock companies. This is because it is in joint stock companies that the separation between ownership and management is the greatest, and thus conflicts between shareholders and managers are more likely.
The aim of corporate governance standards is the protection of the interests of shareholders, including minority shareholders. The greater the level of shareholders' protection achieved, the more investment there will be for Russian joint stock companies, which will favorably influence the Russian economy as a whole. Therefore, the Code is specifically aimed at the protection of corporate shareholders.
1. International Experience
Corporate governance codes emerged in early 1990 in countries with the most sophisticated capital markets such as the UK, the US and Canada. The codes regulated corporate governance practices, specifically, the issues of protecting shareholders' interests and the accountability of directors and management. Since then, governmental bodies and non-governmental agencies of many countries have introduced corporate governance codes, manuals and statements of recommended practice. Such codes exist in countries with the most developed capital markets, in transition economies such as Russia, and in developing countries.
As a reflection of the growing attention to corporate governance issues in many countries and the growing importance of cross-border capital markets investments, the Organization for Economic Cooperation and Development formed a commission with a mandate to develop "Principles of Corporate Governance" (the "OECD Principles") which were adopted by OECD Council in May 1999. The OECD Principles were developed based on comments and inquiries from a group of dominant US pension and investment funds concerned about the state of corporate governance in enterprises where they held interests. The OECD Principles bring together the best practice corporate governance standards that are commonly accepted and, since their adoption, have been influential in shaping corporate governance codes in other countries.
Some foreign corporate governance codes are linked to stock exchange listing rules or legally mandated disclosure requirements. Others are purely advisory.
While many corporate governance codes contain rules that restate the requirements of the corporations and securities law, they also incorporate principles, rules and best practice examples that are not legally binding. Normally, the law does not require compliance with the corporate governance code, though codes linked to stock exchange rules may become effectively binding by way of established market practices. For example, companies listed on the London and Toronto Stock Exchanges do not need to follow the recommendations set forth in their corporate governance codes (the London Combined Code and the Dey Report in Toronto), however, these companies must disclose information on their compliance with the recommendations set forth in these codes and explain any practices inconsistent with them. Such disclosure requirements are a powerful incentive to such companies' compliance with the code requirements, as they, inter alia, trigger "market forces", such as critical comments of shareholders, investment analysts and financial observers; competitive pressures exerted by peer companies; and, finally, stock values which are likely to be adversely affected by investor perceptions that corporate governance in a company is not up to the prevailing standards. The best practices code published by the Hong Kong Stock Exchange, the Malaysian Corporate Governance Code and the King Commission Report on Corporate Governance Practices in South Africa also provide for similar mandatory disclosure of compliance.
2. Legislative Rules and the Code
2.1. Russian law already incorporates the majority of the fundamental principles of corporate governance, however, in practice, their use, especially in court, and the corporate governance traditions, are still at the formative stage.
The Russian corporations law is constantly evolving. At present, the Russian corporations law already includes many generally accepted corporate governance principles.
The main problems in the corporate governance area arise from the lack of durable corporate governance practices rather than the quality of legislation, which is why corporate governance traditions are at the formative stage. Ignorance, in some cases, of laws and regulations and total neglect of their requirements, in other cases, have prevented a full implementation of the corporate governance standards that were to be established by such legislation.
2.2. Legislative provisions alone are insufficient to assure quality corporate governance, while any changes to the law always lag behind.
Obviously, laws and implementing acts fail, and are intrinsically unable, to regulate all issues related to governance of joint stock companies.
First, corporate law establishes and should establish only general mandatory rules. It cannot regulate, and it should not be made its purpose to regulate, in detail all matters of corporate operations. Excessive detail levels in legal standards would make it difficult for companies to function, as each company's business is unique and it would be impossible adequately to reflect such uniqueness in the law. That is why the law either avoids regulation of existing relationships (and absence of such regulation is often not at all a legislative weakness), or establishes a general rule leaving it to the parties involved in appropriate business relationships to choose a different line of behavior.
Second, many issues associated with corporate relationships lie outside the legal arena, in the moral domain where behavior is governed by ethical rather than legal standards. For these reasons, legislative provisions will never be sufficient per se to achieve good corporate governance.
Third, legislation is unable to react rapidly to changes in corporate governance practice. Keeping in mind the law-making procedure, it is important to remember that changes in laws and new regulations reflecting the changed perceptions of proper corporate governance will always lag behind.
2.3. The provisions of the Code are not obligatory, but outline best practice corporate governance standards, and it is recommended that companies with more than 1000 shareholders follow these standards.
The purpose of the Code is to establish best practice standards for use by companies. The Code is based on current legislative provisions, established corporate governance practices, and the specific needs and business environment of Russian companies and capital markets at the present stage of their development. The Code fits in a broader, international pattern, in which similar corporate governance codes have recently been adopted by many countries.
The purpose of the Code is to enhance good governance rules in Russian companies, including effective protection of shareholders’ rights and interests, equitable treatment of shareholders and transparency of decision-making; to underpin the professional and ethical responsibility of directors and other company officials and shareholders; to improve information disclosure; and to develop a comprehensive system of business ethics standards.
The Code deals with issues of which many are common to all business entities. At the same time, joint stock companies are potentially more vulnerable to conflicts than other business entities as their nature inevitably implies separation of management and ownership. Conflicts in the corporate management area involve large numbers of persons, which makes them as much of a social problem as an economic one. The Federal Commission for the Securities Market (FCSM) hopes that the Code will be followed by all companies with over one thousand (1000) shareholders.
The Code is a list of recommendations. The application of the Code should be voluntary for companies, and should be motivated by a desire to increase their attractiveness to present and potential investors.
2.4. FCSM will encourage companies to comply with the Code and disclose information on the extent to which their corporate governance practices are consistent with the recommendations of the Code.
FCSM will encourage companies to follow the Code as a model of proper corporate governance. Specifically, being authorized to set corporate disclosure requirements, FCSM intends to recommend to all companies addressed by the Code disclosure of information on the extent to which their corporate governance practices are consistent with the Code recommendations and if not, what specific recommendations they fail to follow, and why. It is contemplated that disclosure will be required from companies with more than one thousand (1000) shareholders as part of an annual Code Compliance Report in an FCSM-approved format. Such Code Compliance Report should be included in the annual report prepared for the annual general meetings of shareholders of all companies subject to the Code, and will be delivered to shareholders and, in some cases, to FCSM. Companies with less than one thousand (1000) shareholders may submit such annual Code Compliance Reports based on decisions of shareholders or boards of directors, whereby the Code provisions are made applicable to such companies.
These measures by FCSM are intended to encourage compliance with the Code recommendations by companies, and to create an attractive investment atmosphere for investors allowing them to make balanced decisions to buy or sell shares of respective companies.
The Code is to play a significant role in the areas of future development and enhancement of corporate governance practices in Russia. It is expected to be of educational significance in setting standards of management within Russian joint stock companies and in promoting further development of the Russian stock market.
3. Code Preparation
This Code is the result of an extensive consulting process organized by the FCSM that involves leading Russian and international corporate governance experts representing both the academic community and Russian issuers. FCSM has taken into account the inputs by all corporate governance stockholders, appropriate governmental authorities, representatives of stock exchanges, the academic community and interested non-governmental institutions.
The Code development process was preceded by a wide-scale public discussion of the idea of establishing a uniform code of corporate governance rules on the basis of best practices. Specifically, such discussion took place during several plenary sessions of the Corporate Governance Coordination Council. FCSM held regular consultations with representatives of various groups involved in corporate governance, such as managers, directors, shareholders, shareholders' rights protection organizations, professional players in the securities market, representatives of the Russian and foreign investment communities, the banking sector and governmental authorities.
Thus, creation of the Code was not solely the work of government representatives. On the contrary, the work involved many academic and practicing experts, drawing upon the experience of various expert groups and upon the assistance of the European Bank for Reconstruction and Development, the Government of Japan, the World Bank, the International Finance Corporation and other multinational organizations with extensive experience of private sector development and foreign investment in Russia and other developing countries.
The idea and concept underlying the Code were supported by the Chairman of the Russian Government, and adoption of the Code is seen as a priority by the Russian Government to promote investment in the Russian economy.
CHAPTER 1. PRINCIPLES OF CORPORATE GOVERNANCE
The Principles of Corporate Governance set forth in this Chapter are the basis for the detailed provisions of the Code set forth in the succeeding Chapters. They contain more detailed information on application of these Principles in each subject area.
These Principles of Corporate Governance have been formulated based on the OECD Principles of Corporate Governance, international practice, current provisions of Russian laws and regulations dealing with corporate governance, and on the experience gained in Russia since the adoption of the Joint Stock Company Law in 1996.
Russian companies should not interpret requirements of existing laws and regulations affecting corporate governance in a narrow and formal fashion. They need to interpret such requirements in the light of the objectives that such rules are intended to achieve. These Principles serve to elucidate those objectives, and to provide detailed guidance as to the best practices of corporate governance appropriate in the Russian context.
1. Trust Between Participants in Corporate Governance – the Basis for Structuring Internal Corporate Relations
Relations between shareholders, directors and members of executive bodies of the company should be based on mutual trust and respect. Mutual trust and respect between participants in corporate governance is possible when each of them exercises its rights and performs its obligations in good faith and without abuse, and is guided by the interests of the company and by the welfare of all shareholders.
The prerequisite for shareholders' trust in directors and members of executive bodies of the company is implementation by the company of a corporate governance framework which ensures equal treatment of all shareholders of the company and transparency of the corporate decision-making process, personal responsibility and accountability of directors and members of executive bodies to the company and its shareholders and, in the case of members of executive bodies, to the board of directors of the company.
2. Ethical Standards of Corporate Governance
2.1. Ethical business standards are the basis for the development of corporate governance policies.
In addition to compliance with laws and regulations in effect and best practices of corporate governance, Russian companies should adhere to certain standards of business ethics in their day-to-day operations. Adherence to business ethics is not only a moral imperative, it also protects the company from risks, supports long-term economic growth, and facilitates successful attainment of business objectives.
Ethical standards, along with laws and best practices of corporate governance, form the basis of a company's corporate governance policies. Such policies need to take into consideration the interests of shareholders and management of the company and should contribute to strengthening the company’s position and maximizing its profit.
2.2. Company officials should act in good faith, reasonably, with due diligence and care, and avoid conflicts with other officials and shareholders.
Directors, members of executive bodies and employees of the company alike should discharge their professional duties in good faith, reasonably, with due diligence and care, act in the best interests of the company and its shareholders, and avoid conflicts of interests. They should ensure that their actions fully conform not only to the formal requirements of laws and regulations in effect, but to the objectives and spirit of such laws and regulations, and are at all times in compliance with ethical standards and commonly accepted business practices.
Decision-making by shareholders, directors and members of executive bodies of the company should rest upon principles of transparency and adequacy, since a market economy is predicated on market participants exchanging reliable information in a prompt and confidential fashion. In the event of a corporate conflict, directors, members of executive bodies and employees of the company should seek to resolve such conflict through negotiation and mediation with a view to ensure effective protection of the rights of shareholders, and the interests and business reputation of the company.
3. Equitable Treatment of Shareholders
3.1. Corporate practice should be based upon equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
Directors and members of executive bodies of the company should manage its affairs for the benefit of all shareholders. Many of the most serious corporate governance abuses in Russia arise when companies are run for the benefit of the controlling shareholder or management, knowingly neglecting the rights and interests of minority shareholders.
4. Rights of Shareholders
4.1. Shareholders should be granted:
(1) secure and efficient methods of ownership registration, as well as an opportunity to efficiently and promptly sell their shares; (2) an effective right to participate in managing the affairs of a joint stock company by making decisions on major issues of the company's activities; (3) the right to share in the profits of the company; and (4) the right to receive regular, timely, accurate and complete information about the company.
4.1.1. Major corporate decisions are those requiring shareholder approval under the Joint Stock Company Law, as well as any other decisions that may lead to substantial changes in the nature of the company’s business or its financial position. One of the most widespread abusive practices involves breaking a corporate transaction down into a series of related smaller transactions to permit a narrow and formal interpretation of the requirement for shareholder approval of transactions of a certain size.
4.1.2. Abuses in the area of accrual and payment of dividends by Russian companies have become extremely common. The situation needs to be changed so that the basic right of shareholders to share in the profits of the company is respected.
5. Managing Bodies of the Company
5.1. The corporate governance framework should ensure that directors and members of executive bodies of the company at all times act in good faith, with due diligence and care, in compliance with applicable laws, and in the best interests of the company and all its shareholders. 5.2. In discharging their duties, members of executive bodies of the company should follow resolutions of, and policies approved by, the board of directors, avoid conflicts of interest, and be accountable to directors and shareholders of the company. 5.3. Remuneration of directors and members of executive bodies should depend on the operating results of the company. 5.4. Directors and members of executive bodies should be held responsible to the company for failure to properly discharge their duties.
6. Corporate Transactions
6.1. All corporate transactions should be executed in good faith, in the interests of the company, and for the benefit of all shareholders, and should be aimed at maximizing the profit of the company and increasing the value of its assets.
6.2. The procedure for consummating interested-party transactions should secure the interests of all shareholders.
Interested-party transactions should be entered into only on commercial terms consistent with the terms of transactions between disinterested parties; such transactions should be subject to approval by disinterested shareholders, directors or members of executive bodies of the company following prior full disclosure of such interest.
6.3. The procedure for reorganizations and acquisitions of the company should secure the interests of shareholders and offer effective opportunity for them to control the actions of executive bodies in the process of reorganization or acquisition.
7. Disclosure of Information
7.1. Directors, executive bodies and the members of executive bodies of the company: (1) shall ensure timely, full and accurate disclosure to the company, shareholders and each other of all information regarding performance, financial situation, corporate governance practices, capital structure and principal shareholders of the company, as well as any matters submitted for approval by shareholders; (2) shall not use confidential and other limited access information about the company in their own interests or in the interests of third parties, and shall take adequate measures to protect such information.
7.1.1. Companies should ensure such level of disclosure of information to shareholders and investors as to enable them to make informed decisions with respect to the sale or purchase of shares and other securities of the company. Greater openness of the companies to the investment community attracts investment capital and increases capitalization of the company. At the same time managing bodies of the company should establish disclosure limits, as disclosure of certain information in excess of mandatory disclosure requirements under laws and regulations in effect and the by-laws of the company may be contrary to the interests of the company and its shareholders.
7.1.2. The prerequisite for shareholders' trust in directors and members of executive bodies of the company is equal access of all shareholders to complete and reliable up-to-date information regarding performance and true financial situation of the company in a prompt and timely fashion. The company should not withhold negative information which shareholders and potential investors need to make informed investment decisions.
7.1.3. Information regarding capital structure and principal shareholders is required to enable shareholders and potential investors to make informed decisions and identify interested-party transactions. Such information should cover agreements between major shareholders with respect to the exercise of voting rights of shares held by them.
8. Ongoing Improvement of Corporate Governance Standards Is the Duty of Each Joint Stock Company
Russian joint stock companies should develop and improve corporate governance standards to ensure compliance with laws and regulations in effect and effective implementation of best practices of corporate governance and business ethical standards. In particular, companies should ensure that their directors, members of executive bodies, other officers and employees are familiar with corporate governance rules and introduce internal compliance controls. Thus conditions will be created conducive to implementation of best practices of corporate governance and corporate ethics.
CHAPTER 2. GENERAL SHAREHOLDERS' MEETING
Shareholders that participate in a company risk their capital invested in such company, and therefore they must be provided with an opportunity to receive detailed and reliable accounts of the policies pursued by the company from the board of directors and management bodies. The general shareholders' meeting provides the company with an opportunity annually to inform shareholders of its activities, achievements and plans, and to get them involved in the discussion and decision making on the most significant issues of the company operations. For a minority shareholder, the annual general meeting is often the only chance to obtain information on the company's operations and ask the company management questions regarding the company's administration. By participating in a general meeting, a shareholder exercises its right to be involved in the company's management.
The prerequisite for shareholders' trust in their company is facilitation of the annual meeting in a manner that assures the equitable treatment of all company shareholders, while not being overly expensive and complicated.
Any issues concerning convening and the procedures for the general meeting which are not covered by law, the charter or company by-laws should be resolved based on the need to assure the rights and interests of shareholders.
1. Convention of and Preparation for General Shareholders' Meeting
1.1. The general shareholders' meeting notice procedure must allow all shareholders to properly prepare for the meeting.
1.1.1. The general shareholders' meeting convening and preparation stage is very important, as it ensures that informed decisions are made. Therefore, the notice of the general meeting must be given to all shareholders so as to allow them sufficient time to formulate their position on the agenda items, to obtain information on persons authorized to participate in the general shareholders' meeting, and to contact other shareholders to discuss the agenda.
The law provides that, with exception of specific circumstances, the notice of the general shareholders' meeting must be given not later than 20 days before the meeting date. Considering the importance of a timely notice to shareholders of a general meeting, a company should give a 30-day notice of each meeting.
1.1.2. The notice of the general shareholders' meeting should contain sufficient information to enable shareholders to decide whether and how they will participate. While the law contains notice contents requirements, in addition to the legal requirements a notice of the general meeting held in person should state when the registration of participants starts and when it ends.
1.1.3. The law provides several options for notifying shareholders of the general shareholders' meetings (notification by mail, personal delivery, or notice publication), and does not prohibit combining various methods of notification. Considering specific options, the company should take into account the need to communicate the information to all shareholders. The company charter may permit electronic notices of general meetings provided that a shareholder has clearly expressed a preference for electronic notice.
1.1.4. Where the company charter identifies a periodical where general meeting notices will be published, the periodical must be freely accessible to most shareholders. If necessary, the charter should identify several periodicals for notice publication.
1.1.5. The law authorizes companies to notify shareholders of the general meeting via other mass media (such TV and radio broadcasting). Considering the need to inform all shareholders, it is recommended that companies make maximum use of various mass media, including Internet, giving their shareholders' a better opportunity to obtain general meeting information.
1.2. Companies should enable shareholders to familiarize themselves with lists of persons authorized to participate in general shareholders' meetings.
1.2.1. Being able to familiarize themselves with the list of persons authorized to participate in the general meeting permits the shareholders to analyze the relationships at the forthcoming meeting and to contact other shareholders, if necessary, informing them of their position on any of the agenda items and discussing possible voting options, as well as to consolidate their positions by appointing persons to represent their interests at the general meeting. Therefore, companies are encouraged to enable shareholders to study lists of persons authorized to participate at any time from the moment of notice and until a general meeting held in person is over, or, in the case of a general meeting held by means of absentee ballots, until the last date to send in voting ballots.
1.2.2. Under the law, companies are required to provide any applicant with an abstract from the list of persons authorized to participate in the general meeting, or a statement confirming that such person in not on the list. Shareholders thus obtain proof of their being included in the list and of the reliability of their personal data entered in such list, and therefore of the absence of any obstacles to their participation in the general meeting. In addition, a shareholder unreasonably excluded from the list or whose personal data is incorrect has the right to demand to be included or to have the personal data corrected. In this regard, it is recommended that companies enable shareholders to obtain abstracts from the lists of persons authorized to participate in the general meeting and statements confirming non-inclusion, starting from the date of the general meeting notice.
1.2.3. Obtaining the list of persons authorized to participate in the general shareholders' meeting should not be a money or time-consuming procedure. In this regard, it is recommended that companies enable shareholders to study the list and receive abstracts therefrom at the location where general meeting materials and documents are made available, as identified in the general meeting notice.
1.3. Information made available in connection with the preparation for the general meeting notice and the access to such information must enable shareholders to gain a full picture of the company's operations and make informed decisions on the agenda issues
1.3.1. The law and regulations issued by the FCSM prescribe the list of information to be made available to shareholders in connection with the preparation for a general meeting. This list may be expanded by a company charter.
Companies are encouraged to identify in their charter additional materials and documents to be made available to shareholders on a mandatory basis when preparing for a general meeting, whether annual or extraordinary. Such information in the company charter would promote shareholders' and potential investors' trust in the company which demonstrates its commitment to the transparency of its operations. Charters should specifically prescribe submission of the annual statements and the board reports to shareholders, to allow the company's performance indicators and growth prospects to be discussed at the general meeting, and to enable assessment by shareholders of the existing company management practices and the policies pursued by the board of directors and the management bodies. It is further recommended that the company's charter defines a list of materials to be made available to shareholders when the agenda includes issues of company reorganization (reasons for such reorganization, annual reports and annual balance sheets of all parties for the last three fiscal years).
1.3.2. The law does not prohibit the board of directors making available to shareholders other materials during the preparation for the meeting in addition to those listed in the charter. For example, to facilitate specific and productive discussions at the general shareholders' meeting, and to effectively increase shareholders' influence, companies should enable shareholders to use analyses and media publications that may contain critical views of the company’s operations. Use of these materials would permit shareholders to objectively evaluate the efficiency of corporate management.
1.3.3. To make decisions on the agenda items, shareholders need to comprehensively assess implications a decision may have for the company. Professional judgment of persons directly involved in the company management, i.e. the board of directors, plays a significant role in such an assessment. The board's position would allow a more balanced approach by shareholders towards decisions which are of significance to the company. In this regard, it is recommended that reports reflecting the board's position and any dissenting opinions of the directors on each agenda item are submitted to shareholders before each general meeting.
1.3.4. Materials made available before a general shareholders' meeting should be organized in a manner so as to allow an easy identification of such materials with specific agenda items. If there is no clear relationship between agenda items and corresponding materials, forming an objective opinion on such items and voting on them may become complicated. In this regard, it is recommended that reference to specific agenda items is made in the materials made available before a general shareholders' meeting.
1.3.5. General meeting-related information should be communicated to the shareholders in a manner allowing for their thorough review of the agenda items before the general meeting. Under the law, such information may be made available not only at the place where the company's executive management resides, but in other locations as well, with addresses stated in the general meeting notice. Considering that access to the general meeting-related information must be given to the maximum number of shareholders, companies are encouraged to make such information available in each area of prevalent residence of the company's shareholders.
1.3.6. Companies should endeavor to communicate the information made available before a general meeting to the largest possible number of shareholders. In this regard, it is recommended that shareholders are given the opportunity to access such information by electronic telecommunication means, including Internet, provided that the shareholder has indicated his wish to be so informed and the company has the ability to do so.
1.4. General shareholders' meeting agenda items must be clearly defined and precisely formulated, leaving no room for multiple interpretations.
1.4.1. The general meeting agenda is the only source of information for the shareholders on the issues proposed to be resolved at the general meeting, and it is these issues that are covered by the materials made available to the shareholders. A vague agenda means that issues may be brought before the general meeting on which no materials were made available to the shareholders and on which they were unable to make an informed decision. General shareholders' meeting agendas should, therefore, contain a list of all issues proposed to be resolved at the forthcoming meeting. It is not recommended that agenda issues be identified with such words as "other", "miscellaneous", or in any other way that does not clearly state what issue is proposed for discussion.
1.4.2. Information on the proponent of an agenda issue is important for allowing a shareholder to form an objective opinion on the issue. Such information allows a shareholder to gain a better view of the purposes underlying the presentation of the issue to the general meeting and hence of the possible ways of its resolution. It is, therefore, recommended that general meetings' agendas disclose proponents of each item included.
1.4.3. Preparation of the agenda should follow a common rule whereby each proposal on the agenda is included as a separate item. However, resolution of some issues is tied to decisions on other related issues. For example, a decision to spin-off may only be deemed made if the general meeting resolves positively approve a the following issues: the spin-off procedure and terms and conditions, establishment of the new companies, the procedure to convert the reorganized company shares into shares of the new companies, and approval of the spin-off balance sheet. To avoid any doubt as to whether the general meeting has actually resolved these issues, separate items of this kind should be combined on the agenda.
Combination of issues may be useful in other cases, too. Specifically, where separate agenda items cover early termination of the company's board of directors and election of a new board, deciding on the first issue in the affirmative and on the other in the negative will mean that the company is left without any active board of directors.
1.5. Rights of shareholders to call for general shareholders' meetings and propose agenda items should not require excessive proof.
A shareholder's right to be involved in the company management implies the right to propose agenda items, nominate candidates for election to the management bodies, and call for general meetings. The law sets certain requirements as to the number of shares to be held by a shareholder as of the moment when any of the above proposals is made. In Russia most shares are issued on a book-entry basis, and stock exchange regulations permit accounting of such shares either in the share register or on depot account with a depository; therefore, companies should acknowledge statements of appropriate depot accounts as sufficient proof of share ownership.
1.6. Easy access of shareholders must be the goal when the place, date and time for the general meeting are being selected.
1.6.1. It is recommended that annual general shareholders' meetings are held on weekends, not earlier than at 9 a.m. and not later than at 10 p.m. local time. Places and times that would make it difficult for the shareholders to participate in the meeting or would cause them to incur unnecessary expenses, should not be chosen for general meetings.
1.6.2. When premises are selected for the general meeting, such premises should be sufficient to accommodate all shareholders wishing to participate. Companies should determine in advance and as precisely as possible how many shareholders will participate, which is especially important to companies with many minority shareholders.
1.6.3. Shareholders should always be in a position to estimate the costs of their participation in a general meeting. It is, therefore, recommended that meetings are held in the location where the company operates or in the location expressly identified by the company charter as one for holding general meetings.
It is strongly recommended that charters of companies located in a place inaccessible by public transport or which is not freely accessible to all shareholders wishing to participate in the general meeting provide for another location within the Russian Federation accessible by public transport and freely accessible to the general public.
1.7. Each shareholder should be given the opportunity to exercise his voting rights in a simple and convenient way.
1.7.1. The law allows shareholders to participate in general meetings without being personally present. For this purpose, companies send absentee ballots to the shareholders. Given the rapid development of telecommunication technologies and the growing number of shareholders wishing to use the same, it is strongly recommended that companies use different means for sending blank ballots to and receiving completed ballots from shareholders.
In addition to the traditional way of sending voting ballots by registered mail, the law has authorized companies to define in their charters alternative ways to send ballots. Sending ballots by registered mail could be expensive for the company and timely receipt of the ballot is not guaranteed. Sometimes shareholders may not be able to exercise their voting rights, which makes this way of sending ballots a matter of mere formality. It is thus recommended that company charters provide for sending and receiving ballots by means of electronic telecommunications.
However, it should be kept in mind that the electronic document exchange system installed in a company should ensure that a completed ballot was sent in by a particular shareholder. This could be achieved, for example, by means of an electronic digital signature.
Equal treatment of all shareholders requires that each shareholder is given the right to select the voting form suitable for him based on his capabilities. Therefore, ballots may be sent to a shareholder using electronic telecommunications means only if the shareholder has indicated in writing his wish to receive ballots in this manner.
1.7.2. In some cases, it may be more convenient for shareholders to vote via proxy, who in such case must hold an instrument of proxy. The law sets forth formal requirements for a proxy such instrument which, if not followed, may result in it being invalidated. To avoid this, it is recommended that companies send, together with blank ballots, blank instruments of proxy with instructions on how to fill them out. If this recommendation is followed, the number of conflicts occurring as the result of improper proxy execution would be reduced.
2. General Meeting Procedures
2.1. At a general meeting, shareholders must be able to ask questions and receive answers from members of the management bodies, internal auditors and the independent auditor of the company.
2.1.1. Accountability of directors, general director and managers to the company's shareholders implies the right of shareholders to demand written reports and answers to questions regarding various aspects of the company's activities. The general shareholders' meeting is the only opportunity for many shareholders to receive competent answers to their questions directly from company officials. Therefore, it is extremely important that the general director, managers and company directors are present at the meeting, and companies should take all necessary steps to assure their presence.
Apparently, sometimes the presence of all company officials may not be possible. In such cases, the chairman of the meeting should inform the participants of the reasons for the absence of each officer as soon as the meeting begins.
2.1.2. The chairman of the meeting should try to have each question asked by shareholders answered directly at the general meeting. If a question is too complex to allow for immediate answer, it is recommended that the company give a written response after the general meeting as soon as may be practicable.
2.1.3. To assure that persons who are elected directors, members of executive bodies and the internal audit commission are trusted by shareholders, shareholders should be provided with all necessary information about the nominees.
Information about the nominees that should be disclosed to shareholders before a general meeting is contained in other chapters of this Code dealing with activities of boards of directors, executive bodies and internal audit commissions. However, shareholders may find such data insufficient for a decision as to which nominee to choose. Shareholders should, therefore, be allowed to question nominees directly, and for this purpose companies should assure that such nominees are present at the general meeting.
2.1.4. To promote shareholders' understanding of the company's financial and business operations, shareholders must have an opportunity to ask internal and external auditors questions regarding their opinions and to receive answers. Companies should, therefore, assure that internal and external auditors are present at the general shareholders' meetings.
2.2. The procedure used by the company to register general meeting participants must not prevent shareholders from participating.
2.2.1. The general shareholders' meeting participants registration procedure in itself is required only to determine whether or not the quorum is present at a meeting. To exclude any possibility of this procedure being used to prevent "unwanted" shareholders from participation in the general meeting, the registration procedure should be described in detail in the company by-laws and included in the general meeting notice.
2.2.2. When the registration procedure is being established, the goal is to permit participation in the meeting of each shareholder wishing to do so.
It is, therefore, recommended that registration of shareholders for participation in the general meeting is held on or near the same premises where the general meeting will be held and on the day proposed for the meeting.
Compliance with this recommendation by companies where the number of shareholders holding voting shares exceeds 500 thousand may cause excessive expense; therefore, these companies may wish to commence the registration procedure in advance. In any such case, however, registration should be held in a manner as would not cause any additional expense to shareholders. Specifically, companies should ensure that the company registrar provides enough personnel to register shareholders. In any case, registration of participants should not commence more than two days before the meeting.
2.2.3. The time period provided for registration should be sufficient for all shareholders wishing to participate in the meeting to get registered before the meeting starts.
2.3. General meeting procedures established by a company must enable all persons present at the meeting to express their opinion and ask questions that concern them.
2.3.1. General meetings should be held in a manner enabling all shareholders to make rational and informed decisions on all agenda items. For this purpose, the meeting procedure should allow reasonable time to speak on and discuss the agenda issues.
The chairman of the meeting plays an important role and must act in good faith and with due care, and avoid using his powers to limit shareholders' rights. For example, he should not interrupt a speaker unless the general meeting procedure or other procedural requirements are violated, or make comments about the speeches in any manner.
2.3.2. To provide the shareholders with the most complete and objective information about the company at the meeting, it is recommended that time is expressly reserved to give the floor to the chairmen of the various board of directors committees.
2.3.3. Companies should try to conclude general meetings on the same day to allow the participants to absorb the information required to make informed decisions and to save additional expenses for the shareholders. If a meeting objectively cannot be finished on the same day, the company should at least continue it on the following day. This will help shareholders to take into account all information relevant for their decision-making.
2.3.4. The procedure for counting votes should be transparent for shareholders and should preclude any possibility of figures being manipulated when vote results are taken. Companies, therefore, should enable the observers representing the shareholders to monitor the process of counting votes. In this regard, minority shareholders should be permitted to appoint an observer to represent their interests. Minutes of the voting results should incorporate all comments made by the observers.
2.3.5. It is strongly recommended that voting results are counted and announced before the end of the general meeting. Any doubts concerning voting results will thus be avoided, and shareholders’ confidence in the company enhanced.
CHAPTER 3. BOARD OF DIRECTORS OF THE COMPANY
Shareholders independently make decisions that are important in terms of operations and growth of the company, while decisions related to the day-to-day management of current operations of the company are made by the executive bodies of the company.
However, determination of the general strategy of the company and control over the executive bodies require qualification and efficiency. In this regard, the law requires that decisions on such issues are made by a special body of the company, which is created by shareholders – the board of directors.
1. Functions of the Board of Directors
The law requires creation in the company of a board of directors, charges it with a certain portion of responsibilities related to the general management of the company's affairs, and accords it an important role in securing the rights of shareholders of the company and ensuring the success of its financial and business operations and its continued growth.
In order to ensure the success of the company's financial and business operations and its continued growth in the long run, the board of directors assumes the responsibility to prepare the company's development strategy and to exercise an efficient supervision of its operations.
1.1. The Board of directors determines development strategy of the company.
The law charges the board of directors with the responsibility to determine the priority areas of the company's growth. In doing so, the board of directors defines major milestones in the company's long-term operations. At the same time, efficient attainment of approved strategic objectives is possible only if they are adjusted to the current market situation, the financial position of the company and other factors affecting its financial and business operations. Such adjustments should be made each year with the approval by the board of directors, based upon recommendations of the company's executive bodies. In annual financial and business plan should as a minimum give an estimate of the planned expenses and income in each area of the company's operations. It should be noted that the level of detail of such a financial and business plan should permit the company's executive bodies certain freedom of action in managing the current operations of the company.
1.2. The board of directors provides efficient supervision of operations of the company.
1.2.1. Supervision of the company's financial and economic operations ensures full implementation of its financial and business plan, compliance with established accounting procedures, and accuracy of financial information used by the company. Such supervision cannot be effective without creating within the company a special structural subdivision (appointment of an officer) responsible for development and enforcement of internal control procedures, while being independent from the executive bodies of the company. Considering this goal, it is critical that the board of directors directly control such structural subdivision. Therefore, responsibilities of the board of directors should include approval of procedures for conducting financial and business operations and ensuring compliance with such procedures, as well as appointment and dismissal of the head of the internal audit department (comptroller) and the determination of the amount of such person's remuneration.
1.2.2. The risks that the company faces in the course of its operations are ultimately borne by shareholders. Therefore, one of the important functions of the board of directors - the guarantor of the rights of shareholders - is establishment of a risk management mechanism that would enable the company to assess the risks it faces in the course of its operations and minimize their negative effect.
Therefore, the responsibilities of the board of directors should include approval of internal risk management procedures, ensuring compliance with such procedures, analysis of their efficiency, and their improvement. These procedures should provide for prompt notification to the board of directors of all substantial deficiencies in the risk management mechanisms.
When defining risk management procedures, the board of directors should seek to strike a balance between risks and rewards (profitability of the company's operations), as well as to provide the executive bodies of the company, its structural subdivisions and individual employees with adequate incentives.
1.3. The board of directors safeguards the rights of shareholders and facilitates resolution of corporate conflicts.
1.3.1. One of the most important functions of the board of directors is ensuring compliance with corporate procedures which provide the framework for exercising shareholder rights. To enable the board of directors to perform this function, its responsibilities should include appointment of the officer responsible for ensuring compliance with these procedures – the secretary of the company.
1.3.2. It is advisable that the board of directors takes all necessary steps to prevent and resolve conflicts that may arise between shareholders and the general director or members of the company's management.
1.4. The board of directors ensures efficient operation of executive bodies of the company.
1.4.1. The law requires that executive bodies are held accountable to shareholders and the board of directors. However, normally executive bodies report to shareholders only at the annual general meeting, which does not allow shareholders to control their operations effectively. Therefore, the board of directors is a major player in controlling the operations of executive bodies. This function implies that the board of directors should be able to suspend the general director appointed by the general meeting of shareholders. Therefore, if executive bodies of the company are appointed by the general meeting of shareholders, it is advisable that the responsibilities of the board of directors should include suspension of the person performing the functions of the executive body of the company.
1.4.2. Efficient operation of executive bodies of the company is largely dependent on the qualifications of the senior officers. Therefore, the company should seek to retain highly qualified experts for leading managerial positions. Among other things, the company should implement an appropriate policy for remuneration of the general director, members of the managerial board, and heads of major divisions. Since ensuring effectiveness of the company’s operations is one of the functions of the board of directors, it is advisable that development of this policy is included in its responsibilities.
1.4.3. The law does not specify who is responsible for defining the terms and conditions, including the amount of remuneration, of employment contracts between the company on the one hand and the general director and members of the managerial board on the other hand. This matter is not included in the responsibilities of the general meeting of shareholders and, evidently, may not be left to the discretion of executive bodies. Therefore, it is advisable that the charter of the company explicitly states that approval of the terms and conditions of such employment contracts, including those stipulating the amount of remuneration and other payments, is included into the responsibilities of the board of directors.
Inasmuch as officers of the company may serve as members of the board of directors, in order to avoid conflicts of interest, such members should refrain from voting on the terms and conditions of employment contracts pertaining to the general director and members of the managerial board.
1.5. The scope of authority of the board of directors should be clearly defined in the company's charter in a manner that is consistent with its functions.
The law identifies matters to be included into the responsibilities of the board of directors of the company. At the same time, it provides that additional responsibilities can be assigned to the board of directors. Such matters should be determined in accordance with functions of the board of directors to avoid ambiguity with respect to separation of powers among the board of directors, the collective executive body and the general meeting of shareholders. It should also be noted that the responsibilities of the board of directors should not include any matters directly related to the management of day-to-day business operations of the company.
2. Composition and Election of the Board of Directors
2.1. Composition of the board of directors should optimize the effectiveness of the board of directors.
2.1.1. The board of directors should enjoy the trust of shareholders. Otherwise, it will not be able to work and perform its functions effectively. The fact that a person was prosecuted for certain criminal or administrative offenses gives grounds for doubt about the ability of such person to discharge the duties of a member of the board of directors in good faith. Therefore, it is not advisable to elect to the board of directors persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or administrative offenses related to financial and stock market operations.
2.1.2. The fact that a member of the board of directors has a conflict of interests also gives grounds for doubts that he will at all times act in the best interests of the shareholders of the company. Thus, it is not advisable to elect to the board of directors a person who is a sole executive, a member of a collective executive body or an employee of the company's competitor.
2.1.3. If the board of directors is to properly discharge its duties and make a significant contribution to the management of the company’s affairs, its members should have the knowledge, skills and experience required for making decisions on matters habitually included in the scope of authority of the board of directors, and for performing efficiently the functions of the board of directors of a particular company. Therefore, it is advisable that the charter of the company explicitly sets forth specific criteria for members of the board of directors.
2.1.4. There is no "ideal" number of members of the board of directors that would be acceptable to all companies. The number of members of the board of directors can be affected by many factors. Therefore, when determining the number of members of the board of directors, companies should select a number that will enable the board of directors to hold productive and constructive discussions, make prompt and rational decisions, and organize efficiently the work of its board committees.
2.2. Composition of the board of directors should permit supervision of the operations of executive bodies.
The law places restrictions on participation of the general director and members of the managerial board in the board of directors of the company. Under the law, the number of members of the managerial board may not exceed one fourth of the total number of members of the board of directors, while its general director may not concurrently serve as the chairman of the board of directors of the company.
At the same time, the law does not prohibit participation in the board of directors of other officers and employees of the company that does not allow the board of directors sufficient independence from executive bodies of the company when it comes to making decisions on matters that require such independence. Such matters include, in particular, supervision of the operations of the executive bodies of the company, determination of the terms and conditions of employment agreements with the general director and members of the managerial board, determination of remuneration policy with respect to executive bodies, and approval of major and interested-party transactions.
Therefore, with a view to safeguard the interests of shareholders when making decisions bearing upon operations of executive bodies, it is advisable that the general director, members of the managerial board, other officers and employees of the company (executive directors) serving on the board of directors do not account for more than one fourth of the total number of its members.
2.3. The board of directors should include independent directors.
2.3.1. Efficient performance by the board of directors of its functions requires that at least some of its members are independent not only from the officers of the company, but from its principal shareholders and major business partners. Such independence of directors is needed to ensure objective evaluation of the operating results of the executive bodies of the company and to make informed decisions on those matters where the interests of the general director and members of the managerial board may differ from those of the company and its shareholders. Such matters include, for example, evaluation of the company's operating results and the amount of remuneration of the company's officers, election and dismissal of the general director and members of the managerial board, suspension of the general director, modification of internal control mechanisms, anti-takeover tactics, execution of major and interested-party transactions, independent audit, etc. Independent directors can also make substantial contribution into consideration and resolution of such matters as preparation of the company's development strategy, evaluation of executive bodies' performance in terms of implementation of such strategy, resolution of corporate conflicts that involve shareholders, and a number of other matters that may affect the interests of shareholders. Therefore, independent directors ensure that the board of directors forms an objective opinion on matters under discussion, which ultimately builds up investor confidence in the company.
In defining eligibility criteria for independent directors, the company should consider their ability to make independent judgments. This means that there should be no factors capable of affecting their position. The law identifies a formal list of grounds on which to base a finding that the director acts independently. However, this list is relevant only to interested-party transactions. Therefore, it is advisable that the company defines eligibility criteria for independent directors and incorporates them into by-laws that set forth procedures for election and operation of the board of directors.
When developing such criteria, the company should proceed from the assumption that independent directors are those who are capable of discharging their duties independently from the general director, members of the managerial board, principal shareholders or major business partners of the company. Therefore, it is advisable that independent director should be defined as a director who:
1) over the last three years, and is at the time of election to the board of directors, has not been an officer (manager) or employee of the company, or an officer or employee of the managing organization of the company;
2) is not a spouse, parent, child, brother (sister), adoptive parent or adopted child of an officer (manager) of the company or an officer of the managing organization of the company, nor a parent, brother (sister) of a spouse of an officer (manager) of the company or an officer of the managing organization of the company;
3) is not an affiliated person of the company;
4) is not bound by contractual relations with the company or its affiliated persons, whereby the person may acquire property (receive monies) with a value in excess of 10 percent of such person’s aggregate annual income, other than through receipt of remuneration for participation in the operations of the board of directors;
5) is not an affiliated person of a major business partner of the company (a business partner with an annual value of transactions with the company in excess of 10 percent of the asset value of the company); and
6) is not a representative of the government.
2.3.2. In order to enable independent directors to actively influence the decision-making process and ensure that the board of directors considers the widest possible spectrum of opinions on matters being discussed, the number of independent directors should comprise at least one fourth of the total number of members of the board of directors. In any event, the board of directors should incorporate at least three independent directors.
2.3.3. Independent directors should refrain from actions that may compromise their independent status. If after election of an independent director to the board of directors such person ceases to be independent due to any changes or new circumstances, such director should notify the board of directors accordingly, and give a detailed account of all such changes and new circumstances. Upon receipt of such notice, or if the board of directors becomes otherwise aware of such changes or new circumstances, the board of directors should notify shareholders accordingly and, if necessary, may call an extraordinary general meeting of shareholders to elect a new board of directors.
2.3.4. It is advisable that information about independent directors is disclosed in the annual report of the company.
2.4. Elections of the board of directors should be conducted in accordance with a transparent procedure that considers the diverse opinions held by shareholders, ensures that the composition of the board of directors is in compliance with statutory requirements, and allows to elect independent directors.
2.4.1. Taking into account the fact that the board of directors is accountable to shareholders and must be trusted by them, appointment of members of the board of directors should not be a simple formality. Shareholders should have an opportunity to receive maximum information about all candidates for members of the board of directors. In particular, shareholders should be provided with the following information: age, education of a candidate, positions held over the last five years, nature of relations with the company, membership in the boards of directors or official positions held with other legal persons, as well as nominations for membership in the boards of directors or nominations for election (appointment) to official positions with other legal persons, information on relations with affiliated persons; the nature of relations with major business partners of the company; as well as other information related to the proprietary status of the candidate or which may otherwise affect discharge by the person of the duties of a member of the board of directors of the company. Therefore, it is advisable that the company should, based upon specific eligibility criteria applicable to members of the board of directors, determine what information about candidates for the positions of members of the board of directors is subject to disclosure to shareholders. In addition, it is advisable that shareholders are also made aware of the fact that a candidate refused to disclose all or any portion of such information.
2.4.2. Opinions of all shareholders, including minority shareholders, should be taken into account in the election of members of the board of directors. This goal may be achieved only if members of the board of directors are elected by cumulative vote. It is this voting method that should be used for electing members of the board of directors in accordance with the existing legislation.
The law restricts participation of the general director or members of the managerial board of the company in the board of directors. However, it fails to provide procedures needed to enforce this restriction during the election of members of the board of directors. Moreover, there is no procedure to include the required number of independent directors into the board of directors. As a result a board of directors may be elected the composition of which does not comply with the requirements of the law or the recommendations of this Code. Therefore, the company should develop by-laws detailing the necessary steps in order to comply with statutory requirements and these recommendations. In particular, it is advisable to require that shareholders are informed of the statutory criteria applicable to the composition of the board of directors and of the consequences of failure to comply with such criteria before nomination of candidates for the positions of members of the board of directors begins. Moreover, it is advisable that the company indicates in the list of candidates for the positions of members of the board of directors whether each candidate is or will be at the time of election the general director, a member of the managerial board, an officer or employee of the company, and whether the candidate meets all eligibility criteria applicable to independent directors.
If the number of candidates for positions of members of the board of directors who are subject to restrictions exceeds the number of persons required to be elected under the law or recommendations of this Code, the board of directors together with the executive bodies of the company should determine which of the candidates is the most acceptable in terms of ability to properly discharge the duties of a member of the board of directors, and enjoys the most confidence among shareholders. The remaining candidates should be asked to withdraw their candidatures, and if they refuse to do so, the board of directors should communicate its voting recommendations to shareholders during the preparation and conduct of the general meeting.
3. Duties of Members of the Board of Directors
3.1. Members of the board of directors should discharge their duties reasonably and in good faith in the best interests of the company and all its shareholders.
3.1.1. The law requires that in exercising their rights and discharging their duties the members of the board of directors act in good faith, reasonably and in the best interests of the company.
Composition of shareholders of the company is rarely homogenous. Pursuing their interests, often conflicting, shareholders seek to elect their "lobbyists" into the board of directors. However, members of the board of directors should act in the interests of the entire company, i.e. taking into account the interests of all shareholders, regardless of which shareholders nominated them or voted for their election.
The duty of members of the board of directors to act reasonably and in good faith means that in exercising their rights and discharging their duties they should use care and prudence to the maximum extent that could be expected from a good manager.
Members of the board of directors are liable to the company, which imposes on them the duty to adhere to the main goals and objectives of the company and safeguard its interests in all decisions falling within the scope of authority of the board of directors. Furthermore, when making decisions within the scope of their authority, they should hold long-term plans above short-term interests.
3.1.2. Effectiveness of members of the board of directors (primarily those who are not the officers of the company) largely depends on the form, timeliness and quality of information available to them. If they rely solely on the information periodically furnished by executive bodies, they will not be able to properly discharge their duties.
Therefore, members of the board of directors not only may but, taking into consideration the need to act reasonably and in good faith, should demand additional information.
3.1.3. If members of the board of directors are to act in the best interests of the company, they need to be trusted by shareholders, which implies that they should not be subject to outside influences seeking to induce them to take actions or make decisions contrary to such interests. In this regard, it is necessary to exclude all situations that might expose members of the board of directors to such influences.
In particular, members of the board of directors should not accept gifts from persons who are interested in certain decisions for which the board of directors is responsible (with the exception of symbolic gifts given as a common courtesy, or souvenirs given during ceremonial events and similar official functions).
3.1.4. Members of the board of directors cannot efficiently discharge their duties if there is a conflict of interest between the company and the member of the board of directors personally. It particularly concerns independent directors, as they cannot maintain their independence in a conflict of interest situation. A conflict of interest may arise, for instance, upon entering into a transaction under the terms of which a member of the board of directors is interested, whether directly or indirectly, in acquisition of shares (units) of, or taking an official position with, legal entities competing with the company, or establishment of contractual relations with such legal entities. Therefore, members of the board of directors should refrain from actions that may result in a conflict between their own interests and the interests of the company and, if such conflict of interests does arise, they must disclose it to the shareholders.
3.2. Members of the board of directors must actively participate in meetings of the board of directors and committees of the board of directors.
3.2.1. In electing a member of the board of directors shareholders expect that the director will use his/her best personal and professional qualities for the benefit of the company. Therefore, each member of the board of directors should actively take part in the work of the board of directors and, in particular, take an active part in discussing and voting on matters on the agenda of meetings of the board of directors and participate in the work of committees established by the board of directors. It is advisable that members of the board of directors notify the board of directors of their inability to attend any meeting of the board of directors in advance, showing valid reasons for their failure to attend the meeting.
3.2.2. The law provides that any member of the board of directors may demand convocation of a meeting of the board of directors. Active participation in the work of the board of directors implies, among other things, that each member of the board of directors must demand that a meeting of the board of directors is called to discuss a matter that, in such opinion, requires prompt consideration and resolution by the board of directors in the best director’s interests of the company.
3.2.3. Members of the board of directors must have sufficient time to perform their functions. Therefore, the board of directors of the company needs to develop recommendations whereby participation of its members in the boards of directors of other companies is restricted. Members of the board of directors should give due consideration to these recommendations when nominating themselves or accept nominations for directorship with other companies.
3.3. Members of the board of directors should not disclose confidential information about the company or use such information in their personal interests or the interests of third parties.
Unauthorized use of confidential information about the company may undermine confidence in the company and inflict damage upon shareholders and creditors of the company. Therefore, members of the board of directors should take steps to protect such information. Moreover, members of the board of directors who have access to confidential information about the company should not disclose it to those who do not have such access, or use it in their own interests or in the interests of third parties.
In order to create an effective mechanism for prevention and identification of unauthorized use of confidential information, it is advisable that the company demands that members of the board of directors notify the board of directors in writing of their intention to enter transactions involving securities of the company or its subsidiary (controlled) companies, and disclose information about previous transactions with such securities in accordance with the procedure for disclosing material facts.
3.4. The duties of members of the board of directors should be clearly defined and incorporated into by-laws of the company.
To ensure effective operation of the board of directors, it is critical that each member of the board of directors is aware of a director’s duties and rights. Additionally, availability of a clear definition of the duties of members of the board of directors increases the chances of holding them accountable in situations stipulated by the existing legislation. Therefore, it is advisable that the company develops and incorporates into its by-laws a list of duties of the board of directors describing these duties fully and with maximum detail so that members of the board of directors may discharge them with utmost efficiency.
However, proper discharge of the duties imposed upon members of the board of directors is not possible without granting them appropriate rights. Therefore, the by-laws of the company should contain a list of rights granted to members of the board of directors, including, specifically, their right to demand information, to ask questions of members of executive bodies of the company and to receive full and accurate answers.
4. Operations of the Board of Directors
4.1. The chairman of the board of directors should ensure efficient organization of operations and interaction between the board of directors and other bodies of the company.
4.1.1. The board of directors is headed by the chairman whose main task is to ensure successful attainment of the objectives of the board of directors. The chairman of the board of directors should facilitate efficient resolution of the issues on the agenda of meetings of the board of directors and, if necessary, organize an open discussion of such issues in a friendly and constructive atmosphere. To this end it is advisable that by-laws of the company impose upon the chairman of the board of directors the responsibility to take steps to ensure that all members of the board of directors receive in a timely fashion all information required for resolution of the agenda issues, to encourage members of the board of directors to freely express their opinions on these issues and openly discuss them at the meeting, to initiate drafting of the resolutions, to hear proposals set forth by other members of the board of directors, and to make informed decisions on such proposals.
4.1.2. The chairman of the board of directors should take immediate steps to resolve any conflicts that may arise between members of the board of directors. In doing so, the chairman should take a firm position, and at all times be guided by the best interests of shareholders of the company.
4.1.3. The chairman of the board of directors should maintain ongoing contacts with the other bodies and officers of the company. Such contacts should not only facilitate receipt of full and accurate information on which the board of directors needs to make decisions, but also to ensure, where possible, effective cooperation of such bodies and officers among themselves and with third parties.
4.1.4. The chairman of the board of directors should efficiently organize the work of committees established by the board of directors, and in doing so take initiative in nominating members of the board of directors for positions in various committees based upon such members' professional and personal qualities, taking into account the views of members of the board of directors with respect to the creation of such committees, personally participate in the work of such committees, and, if necessary, submit matters considered by individual committees for consideration by the board of directors at plenary meetings. The chairman of the board of directors should also take all necessary administrative measures to ensure that committees of the board of directors operate in the most efficient manner possible.
4.1.5. The ability of the chairman of the board of directors to properly discharge such duties depends not only on the availability of all required powers (such powers should be fully defined by by-laws of the company), but also on the chairman's personal and professional qualities. The person acting as the chairman of the board of directors should have an impeccable professional reputation in the area of operations of the company and ample managerial experience. It should be a person of undisputed integrity, steadfastness and commitment to the interests of the company, enjoying the unconditional trust of shareholders and members of the board of directors.
4.2. Meetings of the board of directors should be conducted on a regular basis in accordance with an approved plan.
4.2.1. Operations of the board of directors should be organized in an efficient and rational manner within the framework of a streamlined managerial decision-making process in the best interests of the company and its shareholders. To attain this objective, it is important that meetings of the board of directors are conducted on a regular basis.
The meetings of the board of directors should be conducted when necessary, but in any event at least one time a month, in accordance with the plan approved by the board of directors. This plan should cover the term for which the board of directors was elected, and should contain a list of matters to be considered at the meetings of the board of directors during its term. The plan should be formed based on opinions of persons and bodies entitled to demand convocation of the meeting of the board of directors pursuant to the existing legislation and appropriate provisions of the company’s charter.
4.2.2. The first meeting of the newly-elected board of directors should be held not later than one month after the general meeting of shareholders which elected the board of directors. The first meeting of the board of directors should approve or adjust the list of priority areas for the board of directors, establish its committees and elect its chairmen, and resolve to commence work on development of the company's financial and business plan for the next fiscal year.
4.2.3. It is advisable that at least one time a year the board of directors reviews the company's strategy, the risks inherent in its operations, and the results of an evaluation of its internal control mechanisms.
In addition to that, the board of directors should evaluate previous strategies and objectives against the achieved results. This evaluation should be mentioned in the report of the board of directors incorporated into the annual report of the company. It should be noted that the board of directors is not obliged to disclose the content of discussions held in the course of this review.
4.2.4. In order to ensure that the board of directors operates in the most efficient manner, it is advisable that the company should develop and incorporate into its by-laws procedures for conducting meetings of the board of directors.
4.3. It should be possible to conduct meetings of the board of directors both in person and by absentee vote.
The best way to conduct of meetings of the board of directors is the face-to-face discussion that gives members of the board of directors an opportunity to consider issues of on the agenda. Such discussion is possible only if members of the board of directors are jointly present at the place where the meeting is conducted.
When resolutions of the board of directors are passed by personal vote, it is necessary to take into account written opinions of absent members. It should also be noted that absentee votes should not be counted towards the quorum required for transaction of business at the meeting of the board of directors.
Considering the need for expedient resolution of issues within the scope of authority of the board of directors, the charter or company by-laws should enable directors to pass resolutions by absentee vote. In this case it is necessary to develop procedures and determine the deadlines for delivery of an absentee ballot to each member of the board of directors and for receipt of completed ballots. These deadlines should give members of the board of directors enough time to receive the ballots and make decisions on all matters put to vote.
4.4. The format in which the meeting of the board of directors is held should be selected based on the importance of the matters on the agenda.
Considering that issues on the agenda can be properly discussed only when members of the board of directors meet in person, resolutions on the most important matters should be passed by personal vote.
Personal vote should be the preferred method for voting on the following matters:
(1) approval of priority areas of the company's operations and the company's financial and business plan;
(2) convening the annual general meeting of shareholders and resolution of issues related to its convocation and procedure;
(3) preliminary approval of the annual report of the company;
(4) convening or refusing a request to convene, an extraordinary general meeting of shareholders;
(5) election and reelection of the chairman of the board of directors;
(6) creation and early termination of executive bodies of the company;
(7) suspension of the person acting as the sole executive body of the company (general director, head of the managing organization) and appointment of the provisional sole executive body of the company (general director); and
(8) submittal for consideration by the general meeting of shareholders of proposals with respect to reorganization or liquidation of the company.
4.5. Procedures for convening and preparation for the meeting of the board of directors should give all members of the board of directors an opportunity to properly prepare for such meeting.
4.5.1. The stage of convocation and preparation for the meeting of the board of directors is important for informed decision making. Therefore, members of the board of directors should be notified of the convening of the meeting of the board of directors, its format and agenda well in advance, so as to allow them sufficient time to form their opinions with respect to the matters on the agenda.
4.5.2. It is not possible to make informed decisions on matters on the without prior review of reference materials related to the matters on the agenda on which members of the board of directors can base their opinions. Therefore, such materials should be delivered (provided) to members of the board of directors concurrently with the notice of the meeting.
Before discussing the matters that are subject to preliminary consideration by the committees of the board of directors, members of the board of directors should have an opportunity to review the findings of the appropriate committees in advance.
4.5.3. The by-laws of the company should determine the form of notice and the method of delivery (provision) of reference materials (including mail, telegraph, teletype, telephone, e-mail, etc.) that is the most convenient and acceptable to all members of the board of directors.
4.6. Members of the board of directors should have access to all information that they need to properly discharge their duties.
Inasmuch as the law imposes on members of the board of directors certain responsibility for their decisions, it is very important that the directors are properly informed. They can discharge their duties rationally and in good faith only if they have access to all necessary information, have an opportunity to request information from members of executive bodies and officers of the company, and receive full and accurate answers.
Therefore, it is necessary for the company to create a mechanism that will ensure the uninterrupted flow of information on the most important developments in financial and business life of the company, as well as any other developments that may have a bearing on the interests of shareholders.
In addition, employment contracts between the company on the one hand and the general director, members of the managerial board, and heads of major divisions of the company on the other hand, should provide that the aforementioned persons have a duty to promptly submit full and reliable information pertaining to all matters on the agenda of meetings of the board of directors and any other information as may be requested by members of the board of directors, and should provide penalties for failure to do so.
It should also be noted that executive bodies should provide information in accordance with approved internal procedures, for instance, through the secretary of the company (if the company has one).
4.7. The board of directors should create committees for preliminary consideration of the most important matters assigned to the scope of authority of the board of directors.
4.7.1. One of the conditions for effective performance by the board of directors of its functions is the creation of committees. Such committees should hold preliminary discussions on the most important matters within the scope of authority of the board of directors and issue recommendations based upon which the board of directors can make informed decisions on such matters. Considering the basic functions performed by the board of directors, it is advisable that it establishes a strategic planning committee, a human resources and remuneration committee, and a corporate conflicts resolution committee. If necessary, the board of directors may establish other committees.
Establishment of such committees staffed by members of the board of directors with experience and knowledge in the appropriate areas will enhance the efficiency and improve the quality of work performed by the board of directors and, as a result, will facilitate creation of effective control mechanisms to supervise the operation of executive bodies.
4.7.2. With a view to streamline the work of committees, it is desirable that they operate in accordance with by-laws of the company which are be approved by the board of directors and which prescribe procedures for the creation and operation of such committees.
It should also be provided that such committees are staffed only with members of the board of directors with sufficient knowledge and experience in the area of operations of each committee. If necessary, committees of the board of directors should employ the services of experts who have relevant professional knowledge.
The number of members in each committee should be determined with a view to enable the committee to review matters under consideration in the most comprehensive fashion and taking into account the opinions of all members.
Inasmuch as the work of a committee involves detailed review by members of the board of directors of each matter under consideration, it is necessary to restrict participation of members of the board of directors in multiple committees.
4.7.3. The chief role in organizing the work of a committee is played by its chairman, whose main task is to ensure objectivity of its recommendations issued to the board of directors. Therefore, committees of the board of directors should be headed by those members of the board of directors who do not hold official positions with the company.
4.8. The strategic planning committee contributes to enhanced efficiency of the company's operation over the long-term perspective.
The strategic planning committee should play the key role in defining the strategic goals and objectives of the company, determining the priority areas of its operations, developing recommendations on the dividend payment policy of the company, evaluation of the long-term productivity of the company's operations, and advising the board of directors on adjustments of the company's development policy based upon the need to enhance the efficiency of the company's operations taking into account commodity and capital market trends, the operating results of the company and its competitors, as well as other factors.
4.9. The human resources and remuneration committee deals with filling managerial positions with qualified specialists and providing adequate incentives for their successful work.
4.9.1. The functions of the human resources and remuneration committee should include the following:
(1) development of the company's remuneration policy that specifies basic principles and criteria for determining the amount of remuneration payable to the general director, members of the managerial board, and heads of major divisions of the company, as well as other benefits available to the aforementioned persons at the expense of the company (including life insurance, health insurance, non-governmental pension benefits), and criteria for evaluation of their performance;
(2) selection of eligibility criteria applicable to candidates for the positions of the general director, members of the managerial board, and heads of major divisions of the company;
(3) development of the terms and conditions of employment contracts between the company on the one hand and the general director and members of the managerial board on the other hand;
(4) preliminary assessment of candidates for the positions of the general director and members of the managerial board; and
(5) periodic performance evaluation of the general director and members of the managerial board, and preparation of recommendations for the board of directors with respect to reappointment of the aforementioned officers.
4.9.2. When selecting eligibility criteria applicable to candidates for the positions of general director, members of the managerial board, and heads of major divisions of the company, and developing the relevant remuneration policy, it is necessary to take into consideration the scope of their responsibilities, required type and level of qualification, experience, personal and business qualities of the candidates, typical level of remuneration in the company and in the industry in general, and the financial situation of the company. The human resources committee should continuously monitor conformity of the aforementioned criteria and remuneration policy to the company’s development strategy and financial situation, as well as to the current situation in the job market.
The committee prepares its proposals with respect to the amount of remuneration of the general director or a member of the managerial board in compliance with the company's remuneration and development policies and the interests of shareholders.
4.9.3. In order to ensure objectivity of the recommendations issued by the human resources and remuneration committee, it is advisable that it is staffed exclusively with independent directors. When objective circumstances make this impossible, the committee should be headed by an independent director and consist of those members of the board of directors who do not hold official positions with the company.
4.10. The corporate conflicts resolution committee contributes to prevention and effective resolution of disputes that involve shareholders of the company.
One of the important conditions of safeguarding the rights and interests of shareholders is the creation in the company of a mechanism for resolution of disputes arising out of internal corporate conflicts as well as between the company and its shareholders. The corporate conflicts resolution committee should play an essential role in settlement of such conflicts.
In order to ensure objective evaluation of corporate conflicts and their effective settlement, this committee should be staffed exclusively with independent directors. When objective circumstances make this impossible, the committee should be headed by an independent director and consist of those members of the board of directors who do not hold official positions with the company.
4.11. Shareholders of the company should have the right to demand convocation of a meeting of the board of directors.
When electing the board of directors, shareholders trust that its members possess adequate knowledge, and will discharge their duties in good faith. The board of directors is vested with the shareholders' confidence and should respect their interests. However, if shareholders find that the board of directors disregards their interests, they should be able to influence its operations. The law provides only one way to exercise of such influence, namely, reelection of the board of directors. However, even though this method is highly effective, it should not be used to the exclusion of others. In particular, shareholders should be given an opportunity to initiate consideration by the board of directors of matters that they regard as important to the company.
At the same time, the board of directors is an independent corporate body which should not be subjected to undue pressure on the part of other corporate bodies and shareholders. With this in mind, it is advisable that the charter or a company by-law governing the operation of the board of directors should provide for the right of shareholders holding two or more percent of voting shares to demand convocation of the meeting of the board of directors for consideration of certain issues (the list of such issues should also be incorporated into the charter or by-law of the company).
4.12. Qualified majority of elected members of the board of directors should attend meetings of the board of directors that pass resolutions on the most important matters of the company's business.
The law requires that the quorum for transaction of business at the meeting of the board of directors is to be specified in the company’s charter, but in any event should be not less than 1/2 of the number of elected members of the board of directors. With a view to ensure that opinions of all members of the board of directors on the most important matters affecting the operations of the company are taken into account in the most comprehensive fashion, it is advisable that the charter or company by-laws establish stricter quorum requirements. In particular, for approval of priority areas and the financial and business plan of the company, approval of the company’s dividend policy, submittal for consideration by the general meeting of shareholders of proposals with respect to reorganization or liquidation of the company, decrease (increase) of the charter capital of the company, and preparation of recommendations on the amount of annual dividends, the quorum should be represented by a qualified majority of two thirds of the number of elected members of the board of directors.
4.13. In order to implement effective measures of directors’ liability, it is necessary to keep detailed minutes of meetings of the board of directors.
4.13.1. The law provides that if a resolution passed by the board of directors results in the company incurring losses, only those members of the board of directors who voted for such resolution will be held liable. Therefore, it is important to keep detailed minutes of meetings of the board of directors containing an account of discussions held on each matter and a detailed description of all proposals and arguments presented by each member of the board of directors in the course of the meeting. In addition, it is necessary to ensure that the ballots used for voting on agenda issues at each meeting of the board of directors, as well as written opinions of members of the board of directors who were not able to attend any such meeting, are preserved together with the minutes of the meetings of the board of directors.
4.13.2. Each member of the board of directors should be given an opportunity to obtain full information on deliberations on agenda issues of the meetings of the board of directors in situations where such member did not attend such meeting. To do so, it is necessary to implement a procedure whereby all members of the board of directors are provided with copies of the minutes of meetings of the board of directors and reports detailing the outcome of the voting when it is conducted by absentee ballots.
5. Remuneration of Members of the Board of Directors
5.1. The amount of remuneration payable to members of the board of directors should be determined based upon evaluation of their performance.
5.1.1. The law provides that members of the board of directors may receive remuneration for their services and compensation for their expenses by resolution of the general meeting of shareholders. The amount of such remuneration should be pegged to the operating results of the company, while the amount of compensation should be sufficient to refund reasonable expenses attributable to discharge by members of the board of directors of their duties. With respect to members of the board of directors who do not hold official positions with the company, it is recommended that the company should not only refund expenses incurred by them in connection with the discharge of their duties, but also pay them regular salaries. These salaries will both serve as an incentive and provide grounds for demanding better performance.
The company should establish criteria for determining the amount of remuneration payable to members of the board of directors. When doing so, it should be borne in mind that directorial positions should be filled with qualified specialists who have the required knowledge and managerial experience, and that members of the board of directors should be encouraged to use their knowledge and abilities for the benefit of the company in the most efficient manner.
5.1.2. The operating results of the company and the contribution of each member of the board of directors to the company’s success should serve as the main criteria for determining the amount of remuneration payable to members of the board of directors.
Performance evaluation of the board of directors as a collective body should be based primarily upon its contribution to the operations of the company as a whole. In particular, it is necessary to determine how resolutions of the board of directors affected the operating results of the company, and how effectively the board of directors supervised operations of the company's executive bodies.
Performance evaluation of each individual member of the board of directors should be based primarily on such member's contribution to the work of the board of directors. The following factors should be considered: attendance at meetings of the board of directors; preparedness for, and participation in, such meetings; independence and objectivity of opinions; and compliance with ethical standards.
5.1.3. Criteria for determination of the amount of remuneration payable to members of the board of directors, as well as criteria for evaluation of performance of the board of directors and its individual members, should be developed by the human resources committee and approved by the board of directors. Inasmuch as these criteria may significantly affect the operations of the board of directors, they should be incorporated into by-laws governing these operations. This will result in creating a transparent mechanism enabling shareholders to exercise control over the quality of performance of members of the board of directors and the level of their remuneration.
5.1.4. The annual report of the company should reflect the results of the evaluation of the performance of the board of directors and each member of the board of directors, and contain information on the total amount of remuneration and/or compensation to members of the board of directors.
6. Liability of Members of the Board of Directors
6.1. Members of the board of directors should be held liable for improper discharge of their duties.
6.1.1. One of the most effective methods to ensure proper discharge by members of the board of directors of their duties is statutory liability to the company for the losses caused by their culpable actions. The company should be able to claim damages from members of the board of directors not only to compensate losses suffered thereby but also to encourage members of the board of directors to perform their duties in a proper way.
At the same time, it should be borne in mind that managing the affairs of the company is a complex process associated with a risk that decisions made by the board of directors acting reasonably and in good faith will ultimately prove wrong and entail adverse material consequences for the company.
Since one of the grounds for director's liability is culpability, holding a director liable depends on whether the director acted reasonably and in good faith, i.e. whether the director exercised diligence and care, which should be expected from a good manager, and whether the director took all steps to perform his/her functions properly. Thus, a board member cannot be held culpable if the director voted for a decision resulting in losses for the company, but was not personally interested in it and carefully studied the required information, on the accuracy of which it was reasonable to rely.
Compliance with this approach is extremely important, since otherwise the board of directors may lose initiative and become a hurdle for successful business of a joint stock company. In fact, in order to avoid liability, members of the board of directors might try to vote against or not take part in the vote on a large number of issues. Subject to the above, the company should abstain from filing suits for damages against members of the board of directors without being certain that their actions were culpable.
6.1.2. The amount of potential losses that may be inflicted upon the company by the actions of members of the board of directors increases as the company grows. Therefore, civil liability as a measure of damages becomes increasingly inefficient.
To enhance the efficiency of these remedies, it is advisable that the company should, at its own expense, obtain liability insurance for members of the board of directors, so that if their actions result in losses to the company or third parties, these losses could be compensated. At the same time, the company should not encourage members of the board of directors to make irresponsible decisions.
Not only will implementation of such a mechanism allow the company to use civil law remedies more productively, it will also help to employ services of competent specialists who otherwise would feel uneasy about the possibility of being sued for extensive damages.
CHAPTER 4. EXECUTIVE BODIES OF THE COMPANY
Executive bodies of the company, including the collective executive body (managerial board) and the sole executive body (general director) are key elements of the corporate governance structure. While the board of directors functions as a system of checks and balances with respect to executive bodies, the general director and members of the managerial board supervise middle managers operating in specific divisions of the company.
The law requires creation in the company of executive bodies charged with management of the company's current affairs, holding them responsible for attainment of the company's goals and objectives and implementation of the company's strategies and policies.
Executive bodies should safeguard the interests of the company and its shareholders in equal measure; in other words, they should manage the affairs of the company so as to balance both the need to pay dividends to shareholders and to stimulate growth of the company.
In order to achieve these objectives, executive bodies carry out the following tasks: they are responsible for implementation of the financial and business plan of the company, and to act timely, efficiently and in good faith to fulfill resolutions passed by the board of directors and the general meeting of shareholders.
To enable executive bodies to perform their functions, they are vested with considerable authority to dispose of the company's assets; therefore, the work of executive bodies should be organized so as to promote trust in them by shareholders. This trust should be earned both by application of strict eligibility criteria defining personal and professional qualities of the company's officers serving in executive bodies, and by implementation of procedures placing executive bodies under the effective control of shareholders.
1. Scope of Authority of Executive Bodies
1.1. Companies are advised to create a collective executive body authorized to resolve most complex matters dealing with management of the current affairs of the company.
1.1.1. The law permits creation of a collective executive body of the company (managerial board, directorate), leaving the matter of separation of powers between the sole and collective executive bodies at the company's discretion. This approach is based on the fact that management of the current affairs of the company implies the necessity to resolve some issues which by the deliberations of a group of people as opposed to the actions of an individual. These matters include both matters lying beyond the framework of customary business operations of the company, and matters that, although they can be characterized as customary, may have significant impact on the company.
Therefore, companies are advised to create a collective executive body authorized to resolve certain matters. The scope of authority of such collective executive body should be defined in the most comprehensive manner possible in order to avoid any ambiguity with respect to separation of powers between the sole and collective executive bodies.
1.1.2. The scope of authority of the collective executive body of the company should cover, first and foremost, development of the most important documents of the company (guidelines detailing priority areas of operations of the company and its financial and business plan) and approval of the company by-laws governing matters within the scope of authority of the executive bodies.
1.1.3. It is advisable that the collective executive body approves transactions of the company in excess of 5 percent of the value of the company's assets and resolve to file court suits on behalf of the company where the amount of claims is in excess of 5 percent of the value of the company's assets. It is also advisable to assign to the scope of authority of the collective executive body approval of real estate transactions and loans, provided that the company does not customarily engage in such transactions in the ordinary course of its business operations.
1.1.4. The company is advised to assign to the scope of authority of the collective executive body a number of matters related to the company's relations with its affiliates, representative offices, subsidiaries, and other organizations controlled by the company, including the following matters:
(1) appointment of heads of affiliates and representative offices of the company;
(2) approval of resolutions on matters on the agenda of general meetings of wholly-owned subsidiaries (supreme governing bodies of other wholly-owned entities), except cases when these matters are assigned to the scope of authority of the board of directors of the company;
(3) appointment of, and issuance of voting instructions to, persons representing the company at general meetings of wholly-owned subsidiaries (supreme governing bodies of other wholly-owned entities); and
(4) nomination of candidates for positions of sole executive bodies (managers, managing companies), members of collective executive bodies, members of boards of directors as well as candidates for positions in other governing bodies of entities in which the company has equity.
1.1.5. It is reasonable to delegate to the collective executive body such functions as approval of internal work schedules, job descriptions for all categories of the company's employees, internal regulations governing imposition of penalties and application of incentives, as well as consideration and approval of resolutions on execution of collective agreements and employment contracts.
1.2. Executive bodies should operate in accordance with provisions of the financial and business plan of the company.
The company operates in accordance with its financial and business plan annually approved by the board of directors. This document contains basic guidelines for the day-to-day operations of the company, and its implementation is the main criterion for evaluating the performance of executive bodies whose prime responsibility is to manage the current affairs of the company. The financial and business plan does not restrict the freedom of action of executive bodies; however, they should seek consent of the board of directors to take actions that are not covered by the plan.
Therefore, it is advisable that the company should develop by-laws detailing procedures for obtaining approval for operations lying outside the scope of the financial and business plan.
2. Composition and Creation of Executive Bodies
2.1. Composition of executive bodies of the company should provide for the most effective performance of functions vested in the executive bodies.
2.1.1. To discharge the duties of the general director and member of the managerial board of the company, an individual should have professional qualifications required for managing the current affairs of the company. It does not mean that the general director and all members of the managerial board should be experts in economic operations, however, it is desirable that a number of individuals with specialized knowledge in the area of the company's operations are included in the managerial board.
With respect to the general director, it is desirable that the individual appointed to this position have both specialized and managerial experience.
Specific eligibility criteria applicable to members of the managerial board and to the general director should be detailed in appropriate by-laws of the company.
2.1.2. The general director and members of the managerial board should safeguard the interests of the company. Therefore, it is necessary to avoid appointment (election) to these positions of individuals with respect to whom there are reasonable grounds to believe that they will not always act in the best interests of the company. This view applies, in particular, to individuals who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or administrative offenses related to financial and stock market operations.
It is not advisable to appoint to the positions of the general director and members of the managerial board individuals who occupied similar positions in other entities at the time when such entities were declared bankrupt.
2.1.3. The fact that members of the managerial board and the general director of the company have a conflict of interests due to their participation or membership in the governing bodies of, or holding official positions with, legal entities competing with the company constitutes grounds for doubts that they will act exclusively in the best interests of the company.
Therefore, individuals who are members, officers or employees of legal entities competing with the company should not be appointed (elected) to the positions of the general director or member of the managerial board of the company.
2.1.4. The general director is an individual to whom shareholders have entrusted with the management of the current affairs of the company, i.e. daily resolution of matters arising in the course of the company’s business operations. Resolution of these matters depends on the personal qualities and professional qualifications of the general director due to which he was appointed (elected) to his position.
However, trust requires a high level of accountability. Shareholders have the right to expect that the general director will make ample use of his personal qualities and professional qualifications in the day-to-day management of the company's affairs. Evidently, this may not happen if the general director occupies other positions and is engaged in other activities that take up considerable time and, therefore, prevent him from properly discharging his duties.
Therefore, it is advisable to ensure that the general director is not engaged in any activities other than the discharge of his duties related to the management of the current affairs of the company. The only exception to this rule is membership of the general director in the boards of directors of other legal entities in situations when it is necessary to safeguard the interests of the company, for instance, membership in the boards of directors of the company's subsidiaries. In any event, the general director should have sufficient time for the proper discharge of his managerial duties.
2.1.5. Members of the managerial board are individuals responsible for the management of the current affairs of the company. To fulfill this task effectively, they should be adequately informed of the current problems facing the company, and work directly with its middle management.
Therefore, it is advisable that members of the managerial board are responsible for organizing the operations of major divisions of the company. Each of them may supervise or directly manage the operations of a certain division assigned to him.
It is advisable to have the basic guidelines for creation of the managerial board of the company approved by the board of directors.
2.1.6. Pursuant to the law, the general meeting of shareholders may resolve to delegate the powers of the sole executive body to a professional manager or management company.
Proposing a professional management company for approval by the general meeting of shareholders, the board of directors should provide shareholders with complete information about the management company, including information about the risks associated with delegating authority to such company, and show the need for such delegation.
The general director and members of the managerial board of the management company or the company's manager should meet the minimum eligibility criteria set for members of the managerial board (general director) of the company. By-laws of the company may specify additional eligibility criteria.
3. Responsibilities of Executive Bodies
3.1. The sole executive body and members of a collective managerial body should act reasonably, in good faith and in the best interests the company and all of its shareholders.
3.1.1. The law requires that in exercising their rights and discharging their duties the general director (manager, managing company) and members of the managerial board act in good faith, reasonably and in the best interests of the company.
The obligation of the above-mentioned persons to act reasonably and in good faith means that in exercising their rights and performance of their responsibilities they should use due diligence and care that could be expected from a good manager.
3.1.2. If executive bodies are to act in the best interests of the company, they need to be trusted by shareholders, which means that the general director and members of the managerial board should not be subject to outside influences seeking to induce them to commit actions or make decisions contrary to such interests. In this regard, it is necessary to exclude all situations that might expose them to such influences.
In particular, the general director and members of the managerial board should not accept gifts from persons who are interested in certain decisions that they are authorized to make in the discharge of their duties (with the exception of symbolic gifts given as a common courtesy, or symbolic souvenirs given during ceremonial events and similar official functions).
3.2. Executive bodies should not disclose confidential information about the company or use such information in their personal interests and the interests of third parties.
Any information about the company is important for the company and its shareholders; it is the company's "property".
Unauthorized use of confidential information about the company may inflict substantial damage upon the company and its shareholders.
Therefore, executive bodies should take steps to protect such information. In particular, the general director and members of the managerial board who have access to confidential information about the company should not disclose it to those who do not have such access, or use it in their own interests or in the interests of third parties.
3.3. Executive bodies should take into account the interests of third parties to ensure the efficient operation of the company.
The main objective of executive bodies is to ensure efficient operation of the company. However, it would not be possible without taking into account the interests of other persons and entities, including the company's employees, business partners, government bodies and municipalities hosting the company or its separate divisions.
Executive bodies of the company that is the main enterprise in a certain locality, should take into account the impact of their decisions on the economy and welfare of the population in that locality.
3.4. Executive bodies should create an atmosphere in which the company's employees' are interested in the company's success.
Executive bodies should strive to create an environment in which employees value their employment with the company and recognize that their financial position depends on the company's general success.
Determination of the salary and other benefits should be based on productivity and other factors which influence compensation. The company should develop criteria for the salary determination, which should be regularly reevaluated based on general trends on the job market and revised if necessary.
It is advisable that the company facilitates conferences inviting both members of executive bodies and regular employees in cases when executive bodies prepare to make a decision that will directly affect the working conditions in the company. Such conferences will enable executive bodies to identify employees' position and incorporate it into the proposed resolution, thus effectively involving employees in the process of making decisions that directly bear upon their interests.
Executive bodies should promptly notify employees of all decisions that may affect the working conditions in the company.
In addition, executive bodies are responsible for implementing the company's policy aimed at preserving employees' health and providing adequate job safety. They should regularly review the implementation process and, if necessary, submit for approval by the board of directors measures aimed at improving this policy (if it requires the sanction of the board of directors).
4. Operations of Executive Bodies
4.1. Meetings of the collective executive body should be conducted in a manner that ensures its efficient operation.
4.1.1. Proper discharge by executive bodies of their duties is not possible without regular meetings that should be held at least once a week. In addition, inasmuch as the collective executive body is created for making decisions on current issues, any member of the collective executive body should be able to call extraordinary meetings of the collective executive body and propose matters that, in such member's opinion, should be discussed at such meetings.
4.1.2. The company should ensure that all members of the managerial board are given reasonable prior notice of the forthcoming meeting of the managerial board.
Such notice does not necessarily have to be in writing, but it should be delivered in advance of the appointed meeting to give members of the managerial board sufficient time to form their opinions with respect to the matters on the agenda.
4.1.3. The law does not require that members of the managerial board be informed about the topic of the meeting. However, preliminary review of matters on the agenda will make their resolution more efficient and, consequently, may significantly increase the effectiveness of the managerial board.
Therefore, it is advisable that the agenda of the meeting of the managerial board is furnished to its members concurrently with the notice of the meeting.
4.1.4. All members of the managerial board have access to all information they need to properly perform their functions, so that they may make informed decisions at the meeting of the managerial board. They may fully rely on such information, except when they have reasonable grounds to believe that it is inaccurate or deliberately misleading. Inasmuch as the time allocated for the meetings of the managerial board is limited, board members should be provided with complete and accurate information and given sufficient time to review it. If such information is not timely provided, and members of the managerial board are unable to review it due to the time constraints, it is recommended to postpone consideration of a particular matter until the next meeting, even if it entails convening a special meeting.
4.1.5. Minutes should be kept of all meetings of the managerial board of the company, which should be furnished to members of the board of directors, the audit commission, the audit firm (auditor), and the control and supervision department of the company at their request.
4.1.6. Meetings of the managerial board are conducted by the chairman of the managerial board who signs minutes of meetings of the managerial board of the company and all documents on behalf of the company, acts on behalf of the company without a power of attorney in accordance with the resolutions passed by the managerial board of the company within the scope of its authority. Delegation of voting rights by members of the managerial board of the company to any other person, including other members of the managerial board of the company, is not allowed.
5. Remuneration of Executive Bodies
5.1. Remuneration of the general director (manager) and members of the collective executive body should correspond with their skills and reflect their actual contribution to the success of the company's operations.
5.1.1. Determining the amount of remuneration, it is necessary to remember that "a good expert is an expensive commodity". Therefore, the amount of remuneration should be such that the general director (manager) or member of the managerial board does not seek other jobs due to dissatisfaction with the level of remuneration.
5.1.2. The amount of remuneration of the general director (manager, managing company), members of the managerial board should depend on final results of company's operation and a role of the said persons in their achievement. With regard to this matter the company should allow for increase (decrease) in their remuneration, as well as payment of a part of remuneration in the form of a bonus based on results of the year or in the form of long-term programs of incentive payments. The human resources committee of the board of directors should make sure that such long-term programs reflect the interests of both general director (manager, managing company), members of the managerial board, and shareholders, as well as to provide for realistic and promising indicators of operation, for which the bonus is to be paid.
5.1.3. Inasmuch the law provides for a possibility of early termination of the general director (manager, managing company) or a member of the managerial board, the contract with each of them should include a detailed provision on severance pay to which he will be entitled, except in the case of dismissal for wrongful behavior.
Moreover, in order to provide for the interests of the company, the contract with the general director (manager, managing company) or a member of the managerial board should set forth his obligation not to work in companies which compete with the company within a certain period of time after termination of such person’s services. In this regard, the company may assume an obligation to make certain payments to this person within the said period.
6. Liability of the sole executive body and members of the collective executive body
6.1. The sole executive body and members of the collective executive body should be held liable for improper discharge of their duties.
6.1.1. One of the most effective methods to ensure proper discharge by a person carrying out functions of the sole executive body and members of the managerial board of their duties is statutory liability to the company for the losses inflicted upon the company by their culpable actions. The company shall have a claim for damage against the said persons not only to compensate losses suffered thereby but also to encourage them to perform their duties in a proper way.
At the same time, as it was mentioned earlier, it should be borne in mind, that managing the affairs of the company is a complex process associated with a risk that decisions made by the general director (manager, managing company) or members of the managerial board while acting reasonably and in good faith will ultimately prove wrong and entail adverse material consequences for the company.
Since one of the grounds for liability of the general director (manager, managing company) or a member of the managerial board is culpability, holding liable the member of the board of directors depends on whether he acted reasonably and in good faith, i.e. exercised diligence and care, which should be expected from a good manager, and whether he took all steps to properly perform his functions. Thus, a board member cannot be held liable if he voted for a decision which resulted in losses to the company, but was not personally interested in it and carefully studied the required information, the accuracy of which could be relied on.
Compliance with this approach is extremely important, since otherwise the executive bodies may fear to display initiative and become a hurdle for successful business of a joint stock company. Considering this fact, the company should abstain from filing suits for damages against the general director (manager, managing company) or a member of the managerial board without being certain that their actions are culpable.
6.1.2. The amount of potential losses that may be inflicted upon the company by the actions of the general director (manager, managing company) or a member of the managerial board increases as the company grows. Therefore, the use of civil liability as a method to obtain compensation for such losses becomes increasingly inefficient.
To enhance the efficiency of these remedies, it is advisable that the company, at its own expense, provides liability insurance for the general director (manager, managing company) or a member of the managerial board, so that if their actions result in losses to the company or third parties, these losses could be compensated. At the same time, the company should not encourage the said persons to make irresponsible decisions.
Not only will implementation of such a mechanism allow the company to use the civil law remedies more efficiently, it will also help it enroll the services of competent specialists who otherwise would fear the risk of being sued for extensive damages.
CHAPTER 5. SECRETARY OF THE COMPANY
The company cannot exist without being trusted by its shareholders. When buying shares of the company and providing it with capital, shareholders authorize the company to dispose of their money in accordance with the goals and objectives declared by the company when it issued its shares. In doing so, shareholders trust that the officers of the company will act in the best interest of shareholders.
At the same time, this trust largely depends on the ability of shareholders to exercise their rights and have their interests safeguarded by the company. The higher the degree of transparency and efficiency of these mechanisms, the more intelligible and predictable the actions of the company's corporate bodies and officers, and the more effectively shareholders can control these actions.
Strict compliance of corporate bodies and officers with the procedures established by existing legislation, the charter and the company by-laws is a prerequisite for safeguarding the rights and interests of shareholders. Special importance should be attached to procedures related to preparation and holding the general meeting of shareholders, operations of the board of directors, storage, disclosure and dissemination of information about the company, and registration of shareholder rights, as the overwhelming majority of violations of the rights and interests of shareholders is the direct result of the company's failure to comply with these procedures.
Strict compliance with these procedures can be assured only by a full-time officer of the company who has the required professional qualifications and who is not charged with any other functions within the company. Existing corporate bodies and officers, including the board of directors and executive bodies, do not meet these criteria, and are not designed to carry out these tasks. Therefore, the company should appoint (elect) a special officer whose sole objective should be to ensure that corporate bodies and officers comply with procedural requirements safeguarding the rights and interests of the company's shareholders, namely, the secretary of the company.
1. Functions of the Company’s Secretary
1.1. The company's secretary is responsible for preparation and holding the general meeting of shareholders in accordance with the existing legislation, charter and the company by-laws, pursuant to the resolution to hold the general meeting of shareholders.
1.1.1. The secretary of the company plays an important role at all stages of preparation and holding of the general meeting of shareholders. In particular, the director takes all necessary steps to arrange the general meeting of shareholders in accordance with existing legislation, the charter and the company by-laws, pursuant to the resolution to hold the general meeting of shareholders.
1.1.2. The law stipulates that the general meeting of shareholders may be called by resolution not only of the board of directors, but also of other corporate bodies and other persons. The resolution to hold the general meeting of shareholders is binding upon the secretary of the company regardless of who passed such resolution.
1.1.3. The secretary of the company prepares the list of persons entitled to participate in the general meeting of shareholders. The secretary will be able to perform this responsibility, if accorded the right to direct the registrar of the company to compile such list.
1.1.4. The secretary of the company gives notice of the general meeting of shareholders to all persons entitled to participate in such meeting, prepares and sends (delivers) to them voting ballots, and gives notice of the general meeting of shareholders to all members of the board of directors, the sole executive body, members of the collective executive body, members of the audit commission (comptroller) of the company, and the auditor of the company.
1.1.5. The secretary of the company prepares reference materials which should be made available to the general meeting of shareholders, ensures unrestricted access to such materials, and certifies and issues copies of appropriate documents as directed by participants in the general meeting of shareholders.
1.1.6. The secretary of the company collects completed voting ballots received by the company and promptly forwards them to the registrar of the company acting in the capacity of the ballot committee.
1.1.7. The secretary of the company arranges registration of participants in the general meeting of shareholders, keeps the minutes of the general meeting of shareholders, keeps records of the voting results, and promptly sends reports on the outcome of voting at the general meeting of shareholders to all those included into the list of persons entitled to participate in the general meeting of shareholders.
1.1.8. The secretary of the company answers the questions of participants in the general meeting of shareholders, and takes steps to resolve conflicts arising in connection with the preparation and holding of the general meeting of shareholders.
1.2. The secretary of the company is responsible for preparation and holding meetings of the board of directors in accordance with the existing legislation, the charter and the company by-laws.
1.2.1. The secretary of the company plays an important role in creating and maintaining conditions necessary for effective operations of the board of directors of the company. Meetings of the board of directors are held by resolution of the chairman of the board of directors, with the secretary of the company being responsible for solving all administrative matters pertaining to preparation and holding of such meetings.
1.2.2. The secretary of the company gives notice of the meeting of the board of directors to all members of the board of directors and, whenever necessary, sends or delivers to them voting ballots, collects completed ballots and written opinions of members of the board of directors who did not attend the meeting, and forwards them to the chairman of the board of directors.
1.2.3. During meetings of the board of directors where members of the board of directors are present and personally vote on the matters on the agenda, the secretary of the company ensures strict compliance with procedures established for meetings of the board of directors. The secretary of the company keeps the minutes of the meetings of the board of directors.
1.3. The secretary of the company assists members of the board of directors in performance of their functions.
1.3.1. The secretary of the company assists members of the board of directors in obtaining the required information. In accordance with the information policy implemented by the company, the secretary provides access to minutes of the meetings of the collective executive body, orders issued by the sole executive body, other documents of executive bodies of the company, minutes of the meetings of, and reports prepared by, the audit commission and the auditor of the company, and – by special resolution of the chairman of the board of directors – primary accounting documents.
1.3.2. The secretary of the company briefs the newly-elected members of the board of directors on corporate procedures governing the operations of the board of directors of the company and other corporate bodies, organizational structure and officers of the company, the company by-laws, resolutions of the general meeting of shareholders and board of directors in effect, and provides them with other information as may be required for discharge by members of the board of directors of their duties.
1.3.3. The secretary of the company provides members of the board of directors with interpretations of the provisions of the existing legislation, the charter and the company by-laws that deal with procedural issues related to preparation and holding of the general meeting of shareholders, meetings of the board of directors, and disclosure (provision) of information about the company.
1.4. The secretary of the company ensures disclosure (provision) of information about the company and maintenance of corporate records.
1.4.1. The secretary of the company ensures compliance with those provisions of the existing legislation, the charter and the company by-laws that determine procedures for maintenance and disclosure (provision) of information about the company.
1.4.2. The secretary of the company supervises prompt disclosure by the company of information contained in securities registration prospectuses and it's the company's quarterly reports, and of material facts related to the financial and business operations of the company.
1.4.3. The law provides that the company should maintain certain records and provide them to shareholders at their request. The secretary of the company arranges maintenance of such records, ensures unrestricted access to, and issues copies of, such records. Copies of corporate records are certified by the secretary of the company.
1.5. The secretary of the company ensures due consideration by the company of shareholder petitions and resolution of conflicts arising out of violations of shareholder rights.
1.5.1. To ensure that the company maintains ongoing contacts with its shareholders, they should be able to direct inquires to the company. It is advisable that the secretary of the company is responsible for channeling inquiries for consideration by appropriate corporate bodies and divisions in accordance with established procedures.
1.5.2. The company should seek promptly and efficiently to resolve any conflicts, in particular those related to the maintenance of the register of shareholders. Therefore, it is recommended that the secretary of the company have the right to directly appeal to the registrar of the company regarding shareholder complaints. It is advisable that the duty of the registrar to give relevant explanations to the secretary should be provided under the terms and conditions of the agreement between the company and the registrar.
1.6. The secretary of the company should be vested with sufficient authority to perform the secretary's functions.
1.6.1. If the secretary of the company is to be able to efficiently perform the secretary's functions, the secretary should be vested with appropriate authority. It is advisable that the charter or the company by-laws should make the secretary's decisions, to the extent that they are related to performance of the secretary's functions, binding on all corporate bodies and officers.
1.6.2. With a view to ensure efficient discharge by the secretary of the company of its duties, companies with a large number of shareholders may establish an office of the secretary of the company. The composition, number of employees, organizational structure and responsibilities of the secretary’s office should be specified by appropriate company by-laws.
1.7. The secretary of the company notifies the chairman of the board of directors of all violations of corporate procedures, compliance with which must be ensured by the secretary.
The secretary of the company notifies the chairman of the board of directors of all violations of corporate procedures (acts or omissions of corporate officers and the registrar of the company, violations of procedures governing preparation and holding of the general meeting of shareholders, meetings of the board of directors, disclosure (provision) of information, etc.) within a reasonable time after such instances have been revealed.
2. Appointment and Termination of the Secretary of the Company
2.1. Appointment of the secretary of the company should be within the scope of authority of the board of directors.
The main role in safeguarding the rights and interests of shareholders is ultimately played by the board of directors. Therefore, the secretary of the company should be accountable to, and controlled by, the board of directors. Therefore, it is advisable that appointment of the secretary of the company is assigned to the scope of authority of the board of directors.
2.2. The secretary of the company should have appropriate knowledge as may be required for proper performance of the secretary's functions, and enjoy trust of the shareholders and members of the board of directors.
2.2.1. When appointing the secretary of the company, the board of directors should make a comprehensive assessment of the candidate's ability to perform the functions of the secretary of the company, including education, work experience and professional qualities. Therefore, it is advisable that the company establishes specific eligibility criteria applicable to candidates for the position of the secretary of the company, and first and foremost, with respect to such candidates' professional qualities.
2.2.2. The personal qualities of the secretary of the company should not give grounds to believe that such person will not always act in the best interests of the company. Therefore, it is not advisable to appoint to the position of the secretary of the company an individual who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or administrative offenses related to financial and stock market operations.
2.2.3. Issues arising in the course of discharge by the secretary of the company of the secretary's duties require the secretary to be able to make informed decisions in a prompt fashion, which means that the secretary of the company should be able to devote sufficient time to such work. In connection with this, it is not advisable to permit the secretary of the company to concurrently hold other positions with the company or another legal entity.
2.2.4. Situations when the nature of relations between the secretary and the company or its officers can affect performance of the secretary's functions may provoke a conflict of interests and give grounds to doubt that the secretary will act in the best interests of the company. Therefore, it is not advisable to appoint to the position of the secretary of the company a person who is an affiliated person of the company or its officers.
2.2.5. In order to make a full, comprehensive and unbiased judgment about the persons seeking appointment to the position of the secretary of the company, the board of directors should have sufficient information about such candidate. The candidate to the position of the secretary of the company should furnish the board of directors with sufficient factual information to assess such person's compliance with applicable eligibility criteria. If any of this information is subsequently changed in any way, the secretary of the company should immediately notify the board of directors of all such changes.
2.3. It is advisable to grant the board of directors the right to terminate the secretary of the company before the end of the secretary's term in office.
Keeping in mind that the board of directors is ultimately responsible for safeguarding the rights and interests of shareholders, it should have the right to terminate the secretary of the company before the end of the secretary's term in office. The possibility of such early termination should also be provided under the terms and conditions of the employment agreement between the company and the secretary of the company.
CHAPTER 6. MAJOR CORPORATE ACTIONS
A number of actions of the company (the so-called "major corporate actions") may result in fundamental corporate changes. Therefore, major corporate actions should be performed with utmost openness and transparency. When taking such actions, the company should be guided by the principles of trust and openness promoted by this Code.
First and foremost, major corporate actions include reorganization, takeover, and acquisition of a large block of shares of the company. These actions have a significant impact on the capital structure and financial situation of the company and, consequently, on the position of shareholders. Other major corporate actions are execution of major and interested-party transactions, increase or decrease of the company's charter capital, changes in the charter of the company, and a number of other matters whose resolution is critical for the company and its shareholders.
Considering the importance of major corporate actions, the company should enable shareholders to effectively influence their course and outcome. This objective is achieved through implementation of transparent and fair procedures based upon proper disclosure of information about the consequences that such actions may have on shareholders and the company.
1. Major Transactions and Other Transactions entered into in Accordance with the Procedure Provided for Major Transactions.
1.1. Procedures for entering into major transactions should apply to transactions that may have a significant effect on the company, even though they do not fall under the statutory definition of major transactions.
1.1.1. The definition of major transactions is provided by the existing legislation. A comparison of the book value or acquisition price of the property involved in the transaction against total book value of the company's assets is used to classify the transaction as a major one. At the same time, the law stipulates that the charter of the company may provide that the procedures for entering into major transactions may apply to other transactions, provided that the latter may have a significant effect on the company.
Inasmuch as the difference between the book value and the market value of property may be quite substantial, it is advisable to include in the charter of the company a provision whereby procedures for entering into major transactions apply to transactions that involve property, the market value of which is in excess of 25 percent of total book value of the company's assets, even though the book value of such property may be less than 25 percent.
1.1.2. It is advisable that joint stock companies with considerable assets apply procedures for entering into major transactions to transactions that involve property the value of which exceeds a certain absolute limit. In addition to that, it is advisable to apply procedures for entering into major transactions to transactions with certain types of the company's assets that have special significance for its business operations.
Depending on the value or significance of the property, transactions that involve such property may be subject to statutory procedures for approval of major transactions by the board of directors or the general meeting of shareholders.
1.2. Major transactions should be approved prior to their consummation.
The law does not exclude the possibility of major transactions being approved post factum. However, this practice should be avoided. Pursuant to the existing legislation, lack of approval of a major transaction makes it contestable, which gives rise to the risk of its invalidation and creates instability in relations between the company and its business partners.
It should be remembered that consummation of a major transaction by executive bodies without prior approval is hard to justify from the point of view of their duty to act reasonably and in good faith, as the value and significance of the property involved in a major transaction that is subject to approval by the board of directors – and especially by the general meeting of shareholders – may require extreme prudence in dealing with such property.
1.3. Major transactions should be executed with the participation of independent assessors.
The current law does not require the use of independent assessors to determine the market value of property involved in major transactions. As in other cases, determination of the price of property disposed of or acquired in a major transaction is assigned to the scope of authority of the board of directors of the company. Nevertheless, the board of directors should employ the services of an independent assessor to determine the value of property.
2. Takeovers
2.1. The board of directors has the right to communicate to shareholders its opinion with respect to the takeover.
Pursuant to the existing legislation, any person that intends, whether independently or together with its affiliated persons, to acquire 30 or more percent of the outstanding common stock of the company, or each 5 in excess of 30 per cent of outstanding common stock of the company, should notify the company of this intent in writing. This notice should be given no later than 30 days prior to the proposed date of acquisition. If such notice is received, the board of directors will have an important role in informing shareholders of the possible consequences of such acquisition of the company's shares.
The opinion of the board of directors with respect to the possible takeover may be communicated to shareholders in accordance with the procedure customarily used for giving notice of the general meeting of shareholders. This should occur prior to the proposed acquisition in order to enable shareholders to make informed decisions about whether or not they are willing to sell their shares if the buyer intends to offer to purchase. In addition, it is advisable that the board of directors invites an independent assessor to determine the current market value of the company's shares and how it could be affected by the takeover.
2.2. It is not recommended to take anti-takeover actions that are contrary to the interests of shareholders or may have a material adverse effect on the interests of the company and its shareholders.
Generally speaking, corporate takeovers can be characterized as means to increase the efficiency of corporate governance, which may be in the interests of shareholders. On the other hand, the interests of shareholders may be impaired as a result of a takeover. For instance, certain shareholders may lose their ability to influence the corporate decision-making process, while the liquidity and market value of shares may decline. Therefore, the use by the company of anti-takeover devices may be dictated by the desire to protect the interests of shareholders.
With regard to this matter, the company should refrain from actions that are aimed at protecting the interests of executive bodies (members of such bodies) and members of the board of directors, including offering them the so-called "golden parachutes", and which may result in weakening the position of shareholders. In any event, pending the expiration of the acquisition term the board of directors should refrain from issuing additional shares, convertible shares or securities that otherwise entitle their holders to purchase shares of the company, even if such issuance is authorized by the charter of the company.
2.3. It is not recommended to relieve the entity taking over the company of the responsibilities to offer shareholders to buy out their common stock (issuer's shares convertible into common stock).
Pursuant to existing legislation, the entity taking over the company may be relieved of its responsibility to offer shareholders to buy out their common stock (issuer's shares convertible into common stock) by resolution of the general meeting of shareholders or by the charter of the company.
The reasons that may induce the general meeting of shareholders to relieve the new owner of the company of its duty to buy out the remaining shares held by shareholders are not defined by law. One of the practical arguments in favor of such a decision is, for instance, the desire to attract a major investor by relieving it of the additional financial burden of the mandatory. However, this action may significantly impair the interests of minority shareholders. Therefore, in the majority of cases, relieving the entity taking over the company of the duty to offer to buy out the shares held by shareholders is undesirable.
2.4. The offer to buy off shares during a takeover may be made through the company.
The law provides that the entity taking over the company should offer all shareholders to buy out their common and convertible stock. Under the law, such offer should be made to all shareholders of the company in writing; however, the law prescribes no specific procedures. Therefore, it is advisable to make such offer through the company. The secretary of the company should ensure that the offer is forwarded to all shareholders of the company, using the procedures established for giving notice of the general meeting of shareholders.
3. Reorganization of the Company
3.1. The board of directors should actively participate in defining the terms and conditions of the company's reorganization.
The law provides that the issue of reorganization of the company should be submitted for consideration by the general meeting of shareholders at the initiative of the board of directors. The decision of the board of directors to submit this matter for consideration by the general meeting of shareholders should be made only if it concludes that reorganization is necessary, and if the terms and conditions negotiated by executive bodies of the legal entities involved in the proposed reorganization are found to be acceptable. It is recommended that before passing the resolution on reorganization, individual members of the board of directors should be able to participate in negotiations conducted by executive bodies, and discuss the course of these negotiations.
Before the board of directors resolves to submit the issue of reorganization for consideration by the general meeting of shareholders, it should be furnished with appropriate information and reference materials related to the proposed reorganization, including the following:
(1) draft agreement on merger (acquisition) or draft resolution on spilt-up (spin-off);
(2) draft charter documents of the legal entities to be established as a result of merger, spilt-up (spin-off) or transformation, or charter documents of the entity acquiring the company;
(3) annual reports and balance sheets of all entities participating in the merger (acquisition) for the last 3 fiscal years;
(4) quarterly reports prepared not later than six months before the date of the meeting at which the issue of reorganization is to be considered, if more than six months have passed since the end of the last fiscal year;
(5) the draft transfer resolution and separation balances; and
(6) reasons for the reorganization.
3.2. An independent accountant should be used for determination of the conversion value of shares after the reorganization.
Services of an independent accountant should be employed to determine the conversion value of shares, even though it is not required by the existing legislation.
3.3. The notice of joint general meeting should be given by each company participating in the merger (acquisition) in accordance with the procedure established for such company.
Under existing legislation, a joint general meeting of the companies participating in reorganization should be conducted if the form of reorganization is merger or acquisition. The notice of the joint general meeting should be given by each company participating in the merger (acquisition) in accordance with the procedure established for such company. The boards of directors of reorganized companies should hold a joint meeting in order to determine the date, place and time of the joint general meeting of shareholders, as well as the mailing address for shareholders to send completed voting ballots. It is important to ensure that resolutions passed by such joint meeting of the boards of directors take into account the interests of shareholders of all companies participating in the merger (acquisition).
3.4. Voting procedures at the joint general meeting of legal entities being reorganized should be consistent with voting procedures at the general meeting of the newly-established legal entity.
The law does not provide for the voting procedures at the joint general meeting of shareholders of the legal entities participating in the merger or acquisition, permitting them to specify these procedures in the merger (acquisition) agreement. When determining the voting procedures, it is advisable to use the procedures required by law for voting at the general meeting of the newly-established legal entity. In addition, the merger (acquisition) agreement should specify the persons who will perform the functions of the general meeting. It is advisable to select for these purposes those persons who perform appropriate functions in the legal entities participating in the merger (acquisition). Finally, the aforementioned agreement should specify the persons who will be in charge of voting results.
4. Liquidation of the Company
4.1. Eligibility criteria for the liquidator and members of the liquidation committee should be consistent with eligibility criteria applicable to executive bodies of the company.
The law provides that in the event of liquidation the company should appoint a liquidator and the liquidation committee which will be acting in the capacity of executive bodies of the company for the duration of the liquidation process. In this connection, eligibility criteria for the liquidator and members of the liquidation committee should be similar to those applicable to executive bodies of the company.
CHAPTER 7. DISCLOSURE OF INFORMATION ABOUT COMPANY
The disclosure of information is vitally important for evaluation of a company's progress by its shareholders and potential investors. The disclosure helps companies to attract investments and to remain trustworthy. Insufficient or inaccurate information about a company can hinder the successful development of its business.
One of the reasons why shareholders and investors require regular access to reliable information is that they need to control management bodies of the company and make informed decisions regarding the evaluation of its activities. On the other hand, it is very important to make sure that the information disclosure requirements are not against company’s interests and that confidential information is not disclosed, since it may harm the company’s interests. However, all restrictions related to disclosure must be subject to strict regulations.
The goal of disclosure is to provide sufficient information to all interested parties to enable them to make informed decisions regarding participation in the company or taking actions that can affect the company's financial and business transactions.
The main rules of disclosure include its availability on a regular and timely basis, accessibility to most shareholders and other interested parties, completeness and reliability, and the reasonable balance between the company's transparency and its interests.
An important element in protecting the rights and lawful interests of shareholders is establishment of such disclosure procedures that would guarantee that all shareholders have equal access to information and which would not be too complicated or too costly to comply with.
Information disclosed by a company must be well balanced. Companies should not avoid disclosing negative information.
Disclosed information should be neutral, i.e. the satisfaction of interests of certain groups of recipients in preference to other groups is unacceptable. Information is not neutral when its content or the form of its presentation is chosen in order to achieve certain results or consequences.
1. Company's Information Policy
1.1. Company's information policy should guarantee unhindered and low-cost access to information about the company.
1.1.1. A company's executive bodies are responsible for disclosure. Performing their duties pertinent to disclosure, executive bodies must follow the disclosure rules set forth by the company.
It is advisable that a company by-law which sets forth rules of and approaches to disclosure (Regulation on Information Policy) is approved by the board of directors. The information policy should contain a list of items subject to disclosure (in addition to those items required by law to be disclosed) as well as rules for their disclosure, including the mass media that should be used for disclosure and the regularity of disclosure. The information policy may include data on how often company officers speak in public or give interviews to mass media, how often conferences or other meetings with shareholders and potential investors are held, and procedures of answering questions from shareholders.
1.1.2. Selection of information distribution channels by a company is of great importance for obtaining information about the company on a timely basis. The information distribution channels should provide users with unhindered and low-cost access for persons interested in the disclosed information.
In addition to methods of disclosure prescribed by law, a company’s information policy should provide for disclosure through the company's web-site on the Internet.
Company financial statements are the principal documents from which shareholders and potential investors can obtain information about the company's financial position. Therefore, it is advisable that companies with shareholders or more publish their 10 thousand balance sheets in at least two periodicals with a circulation of at least 50,000 copies each, such periodicals being accessible to a majority of shareholders.
2. Forms of disclosure
2.1. Prospectuses should include all significant information about the company.
2.1.1. Information disclosed in a prospectus should not be limited to items required by law to be disclosed.
The law requires an issuer making a public offering to provide access to information included in the offering prospectus. The goal of disclosure is to enable potential buyers of the company's securities to evaluate its financial position and make a decision whether to buy securities based on this evaluation. Although the law contains requirements as to the content of prospectus, a company should seek to disclose all information that may be of importance for evaluation. Therefore, it is advisable to include in a prospectus information in addition to that prescribed by law.
2.1.2. In accordance with the statutory requirements, the company shall include in its prospectus information on the members of its board of directors, members of its collegial management body, and the individual management body.
At the same time, information on other company officers may be of interest to potential shareholders as well. Therefore, in addition to information about the board members, the members of the collegial management body, the sole management body and the sole executive body, it is advisable to disclose similar information about other officers, including the company’s deputy general directors and the chief accountant.
It is advisable that a company's information policy include a list of the officers, the information about whom is subject to disclosure.
2.1.3. One of the matters that is of a paramount importance for shareholders is receiving dividends. With regard to this matter, it is essential for shareholders to know answers to the following questions: how the company determines the portion of the profits to be paid out as dividends, on what conditions dividends are paid, what is the minimum amount of dividends for various categories (classes) of shares, what are the criteria and basic rules used by the board of directors when making decisions on payment of dividends and distribution of net profits and determining their amount, and what is the procedure for payment of dividends, including time, place and form of payment.
This information should be addressed in a company's dividend policy. It is advisable that companies describe their dividend policies in the offering prospectus.
2.1.4. Under the law, a company must disclose information about shareholders that own 20 or more percent of shares of the company. However, it may not be sufficient for forming an opinion about actual holdings in the company; therefore, the company should disclose information on shareholders that own five or more percent of shares in the company and identify their affiliates. Disclosure about direct holdings should include information on indirect holdings.
In order to influence a company's activities, groups of shareholders, whose individual shareholdings are relatively small, sometimes form voting trusts or agreements. It is advisable that information about such agreements is disclosed as well.
2.1.5. The information on how a company's assets are used and who are its business partners is of great importance for the company's shareholders and other interested parties. It is important that the interests of the company and its shareholders do not contradict those of the company's officers who are directly involved in the transactions.
Therefore, information about a company's transactions and its officials in accordance with the charter, as well as about transactions between the company and the entities in which the company's senior executives directly or indirectly own 20% of shares or more or which are otherwise subject to the influence of such executives, must be disclosed.
Additionally, transactions between a company and the entities that have direct or indirect control of the company, are controlled by the company, or are under common control, as well as transactions between the company and the individuals that are affiliates of the company or the company and relatives of such individuals, are of interest to shareholders. Information about such transactions should be disclosed as well.
A company's information policy may require the disclosure of information on other transactions that may have an effect on the shareholders' interests.
2.1.6. With regard to information about the company's securities offered for sale, both the shareholders and potential investors are interested in obtaining information about the reasons for issuance of new shares and the persons going to purchase new shares, including those who intend to purchase a large percentage of shares. Further, it is advisable to state whether the senior executives of the company will purchase shares offered.
2.1.7. Information on financial performance of a company is of the utmost importance both for potential investors and for the shareholders. Therefore, companies are encouraged to disclose more information on their financial position than that what is mandatory for disclosure in accordance with the law. For example, it is advisable to disclose not only the net profit of a company as a whole but also the net operating profit, the net profit per share, and the net operating profit per share.
Additionally, it is advisable to present such indicators as debt-to-equity ratio, estimate of change in assets composition and structure for the last three years, estimate of current and prospective liquidity of assets, profitability analysis, and yearly percentage ratio of export income to total income of a company.
Managers have the most detailed information on the company's financial position. Therefore, it is advisable to present management's estimate of the factors that could influence the company's financial position and the results of its financial operations for the last year and the factors and trends that will affect the company's financial position in the future.
2.2. Quarterly report for fourth quarter should disclose additional information.
2.2.1. A company's quarterly report must contain data about its financial and business operations as required by law.
However, under the law, annual financial statements for a closed fiscal year must be presented in the quarterly report for the fourth quarter of the current year. Therefore, it is advisable that the quarterly report for the fourth quarter include data about the company's financial and business operations for the entire previous fiscal year, rather than for the current quarter only.
2.2.2. Quarterly report for the first quarter must contain information about the incorporation of the Code of Corporate Conduct provisions into the company by-laws and on compliance with the Code, including:
(1) which provisions of the Code are included in company by-laws;
(2) which provisions of the Code are complied with by company;
(3) analysis of reasons for failure to comply with particular provisions of the Code; and
(4) procedures and plans for the next year regarding compliance with the Code.
2.3. Company should promptly disclose information about all factors that may be material for shareholders and investors.
The law requires that a company discloses information about material facts that affect its financial and business operations. These facts are listed in the statute. It is an open-ended list.
A company's information policy should provide a more detailed list of material facts to be disclosed, which should include the following:
(1) change of company's name;
(2) decision on increasing (decreasing) the stated capital;
(3) increase (decrease) in the company’s share price by at least 5 percent;
(4) transactions entered into by the company as specified in Para. 2.4. of this Chapter;
(5) discontinuation of manufacturing of goods the sales of which accounted for at least 10 percent of all previous-year sales revenues;
(6) change in the company’s areas of business;
(7) amendments to the company’s charter concerning issuance of preferred stock of a category different from the category of shares that were issued previously; and
(8) change of the company’s auditor, registrar or depository.
It should be taken into account that there is no need for an exhaustive list which would embrace all possible material facts. A company must disclose information about any material fact whether or not included in such list.
3. Provision of information to shareholders
3.1. Company should seek additional ways of furnishing information to shareholders.
A company should timely provide all necessary information to its shareholders on an equal basis without giving preference to certain shareholders by providing them with additional or confidential information.
Therefore, a company must make every effort to provide maximum information to all shareholders equally.
In particular, it is advisable to hold meetings at which shareholders who did not participate in the general meeting could obtain necessary information.
3.2. Secretary of company should provide shareholders with access to information about the company.
3.2.1. The law provides the list of information that a company must keep and furnish to its shareholders. It is the secretary of a company that should be responsible for access to such information.
The secretary should ensure that requested documents and/or their copies are provided within five business days of the relevant request being received by the company.
The Secretary of the company should provide accounting records and minutes of meetings of the collegial management body to the shareholders that own at least 25 percent of the voting stock in aggregate.
To protect the interests of minority shareholders in a company, it is advisable that the company’s information policy requires provision of accounting records and minutes of meetings of the collegial management body to shareholders that own at least 10 percent of the voting stock in aggregate.
3.2.2. Shareholders may familiarize themselves with the documents, which the company provides them, at a place where the company's management body is located or at another place specified in the company's charter, upon written request of a shareholder (shareholders) submitted to the company manager or secretary. Such request should specify the last name, first name and patronymic of the individual shareholder's name and location of the legal entity, quantity and category (class) of the shares held by such individual/entity, and the title of the requested document.
3.2.3. Before documents or their copies are provided, the secretary must verify the fact of the shareholder actually holding shares in the company.
An abstract from the register (statement of depot account) provided by the shareholder should be considered as sufficient verification.
3.3. During preparations for a general meeting of shareholders and in the course of such meeting shareholders should be provided with exhaustive information on each item of the agenda.
To be able to make informed decisions, taking into account the interests of both individual shareholders and the company as a whole, the shareholders need to have complete information on each question of the agenda set forth at the general shareholders' meeting.
Therefore, it is advisable that a company by-law on information policy contain the list of information, documents and materials to be furnished to the shareholders to enable them to make decisions regarding issues brought up at a general meeting.
Such list should include:
(1) company's annual statement;
(2) balance sheet and profit and loss statement;
(3) recommendations of the board of directors regarding distribution of company profits, including recommendations on payment of dividends, and reasons for each recommendation;
(4) opinion of the company's auditing committee;
(5) opinion of the company's auditor based on annual audit of the company's business and financial operations;
(6) information on candidates for the company's board of directors and auditing committee, information on candidates for the company’s collegial management body and a candidate for the position of the general director, information on commercial organization (management company) or a manager to whom the authority of the company's executive body can be delegated, if creation of the company's executive bodies is within the authority of the general meeting of shareholders, as well as draft agreements with such persons; and
(7) information on candidates for company auditor and the draft contract with company auditor.
If the question on a company's reorganization is on the agenda of an annual general meeting of shareholders, the following documents should be provided to the shareholders, in addition to the documents specified by law:
(1) reasons for the company reorganization;
(2) opinion of a professional securities market expert acting as financial consultant; and
(3) annual statements and annual balance sheets for last three fiscal years of all entities that take part in the reorganization.
If the agenda of an annual general shareholders' meeting includes issuance of new shares, the shareholders should be provided with the list of assets which can be used for the redemption of the securities, if the resolution on the issuance provides for non-cash payment.
3.4. Annual report for shareholders of the company should contain necessary information that would enable shareholders to evaluate the results of the company's operations for the year.
3.4.1. The annual report must primarily cover the general matters of the company's activities, such as the company's position in the industry, results achieved for the year, fulfillment of the company's strategic tasks, prospects of the company's development, and its relations with its competitors.
The section on the general matters should also describe the main areas of business of the company. Further, it is advisable that this section contains a review of the most significant transactions of the company for the previous year.
3.4.2. It is essential for the shareholders to be informed about securities issued by their company, including information about the offerings and annual capital flow (change in the list of shareholders that own at least five percent of shares in the company), about payment of dividends and the reasons for failure to pay dividends, if they were not paid.
This section of an annual report should also contain information about securities held by the board members, management members and the company's general director.
3.4.3. It is necessary to disclose information on the board members and members of the collegial management body and the individual management body, including their curricula vitae, size of their compensation, criteria for determining such compensation, and data on transactions between such persons and the company.
In addition, an annual report should specify, with respect to each board member, age, profession, principal place of work, citizenship, and other positions held, if this is of importance for the fulfillment of the director's duties. An annual report should state when the board member was first appointed and when such member was appointed to the current position.
3.4.4. The most important information that any shareholder should be able to obtain from an annual report is information about the company’s financial position. Therefore, the principal financial indicators should be contained in the company's annual report.
3.4.5. It is essential for a shareholder that the company in which it holds shares, follows best practice standards. Therefore, it is advisable to consider the report on compliance by the company with this Code as part of the annual report.
3.4.6. An annual statement should contain the report by the chairman of the board and the report prepared by the executive body, evaluating the company's performance for the year.
3.4.7. An annual report should be signed by a company's general director, its financial and accounting managers, and the members of the board of directors. If any of the aforesaid persons does not agree with the data included in the company's annual report, they must make every effort to correct inaccuracies in the company's annual statement. If it is impossible, the person that does not agree with the data in the annual statement should set out in writing such person's objections (dissenting opinion). Such special opinion should be presented to the shareholders along with the annual statement.
4. Information that constitutes trade or professional secret
4.1. Information that constitutes trade or professional secrets should be protected.
Information constitutes trade or professional secret when: it has actual or potential commercial value, it is not known to third parties, it is not accessible on a regular basis, and the owner of the information seeks to protect its confidentiality.
Information that constitutes trade or professional secrets, the terms on which such information may be accessed, as well as the possibility of its use should be determined, taking into account the necessity to maintain the balance between the company’s openness and the need to protect its interests.
Therefore, it is advisable for the board of directors of the company to pass a by-law on Information that Constitutes Trade or Professional Secrets, specifying the list of items that constitute trade or professional secrets and establishing the access procedure.
CHAPTER 8. SUPERVISION OF FINANCIAL AND BUSINESS OPERATIONS OF THE COMPANY
The system for supervision of the company's financial and business operations is designed to promote trust of investors in the company and its corporate management bodies. The main objective of this system is to protect shareholders' investments and the assets of the company.
These objectives may be attained by carrying out the following tasks:
(1) support of efforts aimed at successful implementation of the company's financial and business plan;
(2) implementation and enforcement of effective internal control procedures;
(3) implementation of an effective and transparent corporate management system, in particular, by prevention and minimizing abuse by the company's officers;
(4) identification, prevention and mitigation of financial and operating risks; and
(5) verification of the accuracy of financial information used or disclosed by the company.
Supervision of financial and business operations of the company is the responsibility of the audit commission of the company, the internal control department of the company, and the audit organization (auditor) of the company.
1. Internal Control System
1.1. The company should establish and implement an efficient internal control system.
1.1.1. The law requires each company to create a special body responsible for supervision of its financial and business operations – the audit commission. Pursuant to the existing legislation, external (independent) supervision of financial and business operations of the company is exercised by the audit organization (auditor).
However, efficient control requires daily internal supervision to ensure compliance with procedures established for conducting all business operations of the company. In most cases, such internal control system seeks to identify, prevent and mitigate financial and operating risks and possible abuse by company officials. The internal control system reduces the company's expenses and facilitates efficient management of its resources.
Therefore, it is advisable that the company establishes an internal control department (comptroller), a body responsible for enforcement of routine internal control procedures. The rights and responsibilities of the internal control department and procedures for its operations should be prescribed by the company by-laws.
1.1.2. Internal control is defined as a set of procedures governing the financial and business operations of the company. Internal control can be facilitated in a number of different ways, depending on the situation of each individual company. The internal control system incorporates financial and operating risk management.
Inasmuch as executive bodies may not wish to be controlled, it is advisable that internal control procedures are developed by the internal control department of the company, a body that is independent from executive bodies.
1.1.3. The company operates in accordance with its financial and business plan annually approved by the board of directors. Business operations should be conducted in strict compliance with the procedures designed to ensure exact implementation of the plan and to revise it as necessary.
Therefore, it is advisable that the board of directors approves procedures for certain business operations, including those not covered by the financial and business plan of the company.
1.1.4. No control system is capable of completely preventing events leading to unforeseen losses. At the same time, implementation of an efficient internal control system is one of the main elements of successful practices of corporate governance that may reduce the probability of unforeseen losses.
To increase the efficiency of internal control procedures and risk management systems, it is necessary to identify and remove "glitches" in these procedures and systems in order to improve them.
Therefore, it is recommended to separate responsibilities related to use and evaluation of the internal control system. The use of the internal control system should be the responsibility of executive bodies.
On the other hand, evaluation and development of proposals aimed at improvement of the internal control system should be entrusted to the audit commission of the company. In particular, on the basis of periodic reports of the company's internal control service, the audit commission should assess the efficiency of this system, prepare reports, and submit these reports to the board of directors.
2. Supervision of Business Operations
2.1. Financial and business operations of the company conducted within the framework of the financial and business plan are subject to follow-up control.
2.1.1. To ensure that each business operation is conducted in compliance with the established procedures, it is necessary to have sufficient information about such operation. Therefore, it is advisable that, within a reasonable time after each financial or business operation is performed, the company's internal control department is furnished with documents and materials that are necessary and sufficient to make a rational and unambiguous conclusion as to whether such operation conforms to the financial and business plan of the company, and whether it was conducted in accordance with established procedures. Deadlines for submittal of such materials and documents to the internal control department of the company, as well as the liability of the company's officers and employees for failure to meet such deadlines, should be stipulated in an appropriate by-law of the company.
2.1.2. The internal control department should review the documents and materials furnished to it in order to verify that they have all required signatures of heads of the company's divisions (if this is required by the established procedure), and that appropriate funds are allocated to finance the relevant business operation as indicated by the financial and business plan of the company.
Pursuant to the existing legislation, the audit commission is the only body of the company supervising its financial and business operations that is authorized to demand convocation of a meeting of the board of directors and of the general meeting of shareholders in connection with discharge of its duties, and all information with respect to deficiencies in the company's financial and business operations should be promptly forwarded to it.
Therefore, it is advisable that the company establishes procedures for notifying the audit commission of all deficiencies and abuses identified by the internal control department as soon as possible.
2.1.3. One of the objectives of supervision of the financial and business operations of the company is identification of the circumstances and the reasons for violations of the rules and regulations established by the company, and identification of the persons responsible for such violations.
Information furnished by the internal control department may prove insufficient to attain this objective. Therefore, its is advisable that the audit commission conducts audits of financial and business operations that would enable it to obtain relevant information. Responsibility for conducting such audits can be assigned to the internal control department of the company.
2.1.4. The board of directors of the company, the body authorized to approve the company’s financial and business plan and to supervise the operation of executive bodies of the company, should receive full and reliable information about all violations of the financial and business plan and of all instances of failure to comply with the established procedures in a timely manner. Therefore, it is advisable that the audit commission periodically (at least once a month) submits for consideration by the board of directors reports on violations revealed. Such reports, prepared on the basis of audit findings, should contain comprehensive information describing all such violations, including an indication of the persons responsible, the circumstances and the reasons for such violations. Reports of the company's internal control department may also provide recommendations as to the ways and methods of prevention of such violations in the future.
2.2.1. The financial and business plan is the basic operating document of the company, and all financial and business operations should be conducted in accordance with this plan. At the same time, in the course of its operations the company may need to enter into transactions lying beyond the scope of the financial and business plan of the company (extraordinary operations).
With regard to this matter, the financial and business plan of the company should unambiguously define which operations are allowed in each area of operations of the company, and what funding is allocated to finance operations in such areas. Correspondingly, all other operations that are not specifically in the financial and business plan are defined as extraordinary operations.
2.2.2. Special procedures should be established with respect to extraordinary operations that, in effect, do not comply with the provisions of the financial and business plan.
Inasmuch as operations lying beyond the scope of the financial and business plan do not comply with the basic operating document regulating the financial and business operations of the company, procedures for their transaction should be stricter as compared to procedures for operations that are provided for by the financial and business plan of the company.
First and foremost, it is necessary to determine why a given operation was not originally provided for in the financial and business plan, whether it is necessary to perform such operation, and whether it is possible to postpone its transaction. All arguments should be considered by disinterested persons who are not controlled by executive bodies, and are qualified to evaluate the appropriateness of such operation. Such persons should be employees of the internal control department of the company.
Therefore, nonstandard operations should be performed with prior approval of the internal control department of the company.
2.2.3. Upon receipt of the documents and materials related to a certain extraordinary operation, the internal control department should review them and arrive at a conclusion with respect to the appropriateness of such operation. If necessary, the internal control department may request that executive bodies provide additional explanations. If, following a thorough review of all documents and materials, the internal control department resolves that the extraordinary operation under consideration is inappropriate, it should prepare and submit to the relevant executive body a substantiated refusal to approve a nonstandard operation.
If the executive body insists on going ahead with such extraordinary operation, it is advisable to give it the right to “appeal” the veto imposed by the internal control department, and, after the internal control department declines to approve the operation, seek approval of the audit commission of the company.
The audit commission, being the company's governing body primarily responsible for supervision of its financial and business operations, is not bound by the opinion of the internal control department. It should arrive at its own conclusion with respect to the appropriateness of the extraordinary operation. To do this, the audit commission should review the operation in question, and either approve it or decline to do so with an explanations of reasons.
2.3. The audit commission should be furnished with all information about the financial and operating results of the company.
In the course of the company's financial and business operations, there may be deviations from the financial and business plan, in some cases as a result of extraordinary operations. Inasmuch as the audit commission is the chief governing body of the company responsible for supervision of financial and business operations of the company, it should review and analyze the reasons for, and the consequences of, such deviations. To do this, the audit commission should have full information about any deviations from the financial and business plan, their financial consequences, and measures taken to achieve the objectives specified in the financial and business plan of the company.
With regard to this matter, members of the audit commission must have unrestricted access to any information of the company that is the prerequisite for their operation.
The information needs of the audit commission may be largely satisfied by the internal control department that exercises daily control over the course of implementation of the financial and business plan. In addition to the personnel of the internal control department, information may also be obtained from other officers and employees of the company and from the audit organization (auditor) of the company.
With regard to this matter, it is advisable that the head of the internal control department presents a progress report detailing the course of implementation of, and any deviations from, the financial and business plan at each regular (and, where necessary, extraordinary) meeting of the audit commission. In addition to that, it is advisable to invite representatives of the audit organization and officers of the company to the meetings of the audit commission.
2.4. The company should exercise control over the use of insider information.
Insider information is defined as information about securities of the company being issued and transactions with such securities, the issuer of securities and its operations, which is not known to third parties, and disclosure of which may substantially affect the market value of such securities.
Illegal use of such information may inflict material damage on shareholders, the financial position of the company and its business reputation as well as to the Russian stock market in general.
In order to prevent illegal use of insider information, the company should develop and approve by-laws that provide rules of access to such insider information and ensure its confidentiality, thus removing the possibility of such information being used by potential insiders for personal gain to the detriment of the interests of the company and its customers. The internal control department of the company should monitor the officers of the company for compliance with applicable provisions of the existing legislation and special requirements imposed by their job descriptions with a view to prevent emergence of conflicts of interest, restrict exchange of insider information among the company's personnel and divisions, and ensure the legality of all operations with the company's securities in which they are engaged.
3. Audit
3.1. Audits should be conducted in a way that allows the company to have full and objective information about its operations and facilitates the remedying of all identified violations.
3.1.1. Shareholders of the company, potential investors and other stakeholders form their opinion about the company based upon information about its operations.
Reports prepared by the independent auditor organization (auditor) of the company are an important source of such information, including negative information. These reports should reveal deficiencies in the financial and business plan of the company. A favorable audit report undoubtedly increases the confidence of all stakeholders of the company in the credibility of its annual reports. Therefore, the thoroughness of the audit and exclusion of all situations where deficiencies identified by the auditors might be concealed are critical for the company.
With regard to this matter, professionalism of auditors, their responsibility and integrity should be mentioned as the basic principles to be followed by all audit organizations (auditors) in the course of their work.
Auditors should be objective and, consequently, should maintain independence in their relations with the management of the company. The practical implementation of this principle should be supported by applicable provisions of the existing legislation, auditing standards and codes of professional conduct.
In addition, inasmuch as during the audit of the financial and business plan of the company the audit organization (auditor) receives access to information the disclosure of which may have an adverse effect on the company, the confidentiality of such information should be described as yet another important ethical principle that should be strictly observed by the audit organization (auditor).
3.1.2. The audit commission, being the corporate body responsible for supervision of financial and business operations of the company, is directly interested in selecting an independent audit organization (auditor) capable of conducting an efficient and objective audit of the company's financial and business operations. In particular, the audit commission should play a key role in situations where audit organizations (auditors) offer their customers other services in addition to auditing their accounts. The audit commission should monitor the nature and volume of such services, and ensure that objectivity is not sacrificed for the sake of profit.
With regard to this matter, it is advisable that the audit commission should present its opinions on proposed audit organizations (auditors) to the general meeting of shareholders.
3.1.3. The audit commission is the corporate body primarily responsible for supervising financial and business operations of the company. This objective may be attained if the audit commission both conducts its own audits of the company's financial and business operations and reviews information received from the independent audit organization (auditor) of the company.
On the other hand, the audit commission should monitor results and the economic efficiency of audits. The audit commission should check the thoroughness and comprehensiveness of audits conducted by the audit organization (auditor).
With regard to this matter, it is advisable that the report prepared by the audit organization (auditor) is presented for evaluation to the audit commission of the company before it is submitted to the shareholders at the general meeting.
3.1.4. The audit of annual reports is one of the most important elements of proper corporate governance. The auditor's report is the chief source of information about the problems existing in the financial and business operations of the company. Following an analysis of reports submitted by the company's auditors, shareholders may have questions with respect to the financial and business operations of the company, and they need to have an opportunity to receive answers to these questions.
With regard to this matter, it is advisable that the audit organization (auditor) participates in the general meeting of shareholders, and answers any questions posed by shareholders in connection with the findings of the audit report.
3.1.5. In the course of the audit, the audit organization (auditor) should exert maximum efforts to identify any possible abuses and violations of the existing legislation by the company. This enhances the confidence of shareholders in the findings of the audit.
The audit organization (auditor) may identify deficiencies, but it cannot remedy them. If any deficiencies are identified in the course of the audit, executive bodies should take all appropriate steps as may be required to remedy such deficiencies and minimize their negative impact.
In addition, having identified any deficiencies, the audit organization should demand that necessary corrections and adjustments are made to the information included into the periodically disclosed progress reports of the company.
Ongoing supervision of the efforts aimed at remedying deficiencies identified by the audit organization (auditor) gives shareholders additional assurance that such deficiencies will be eventually remedied, and that the information about the company provided to them is reliable. It is advisable that such supervision is exercised by the audit commission of the company.
4. Establishment of the Audit Committee and Internal Control Department of the Company. Selection of the Audit Organization (Auditor) of the Company
4.1. The composition of the audit commission of the company should allow it to exercise efficient supervision of the financial and business operations of the company.
4.1.1. Proper supervision of the financial and business operations of the company requires special knowledge in such areas as accounting, finance reporting, and internal control systems. Therefore, at least one member of the audit commission should have professional auditing education.
The charter or the company by-laws should establish specific requirements applicable to the professional qualifications of members of the audit commission.
4.1.2. Members of the audit commission should safeguard the interests of the company. With regard to this matter, it is necessary to avoid election to the audit commission of individuals with respect to whom there are reasonable grounds to believe that they may not always act in the best interests of the company. This applies, in particular, to individuals who have committed economic crimes or crimes against the government, government authorities or local self-government, or administrative offenses related to financial and stock market operations.
4.1.3. The fact that members of the audit commission have a conflict of interests due to their participation or membership in the governing bodies of, or holding official positions with, other legal entities constitutes grounds for doubts that they will act exclusively in the best interests of the company. Therefore, members of the audit commission may not be persons holding official positions with companies or other legal entities competing with the company.
4.1.4. To ensure efficient supervision of the financial and business operations of the company, the audit commission should hold regular meetings.
The audit commission is charged with responsibilities that are extremely important for the operation of the company. To discharge these duties in a proper fashion, the audit commission should interact with other bodies and officers of the company, and with the audit organization conducting independent audits of the company. Efficient discharge of these duties is possible only when the work of the audit commission of the company is well organized.
To organize the work of the audit commission efficiently, it is advisable that regular meetings are held at least one time each two months. Officers of the company and representatives of the audit organization (auditor) should be invited to attend such meetings.
4.2. The internal control department should be capable of discharging its duties.
4.2.1. Efficient discharge by the personnel of the internal control department of their duties is not possible if they do not have relevant professional qualifications. When employees of the internal control department perform their official functions, these qualifications should enable them to evaluate documents submitted to them for review, including financial documents and agreements executed both within and outside the scope of the company’s financial and business plan.
Therefore, it is advisable that at least two thirds of the employees of the internal control department of the company, with the exception of the technical personnel, should have higher economic (financial) or legal education. In addition to that, the head of the internal control department of the company should have at least five years of work experience in his professional capacity.
4.2.2. Experts appointed to internal control positions should be independent from executive bodies of the company, otherwise they will be "under pressure", and will not be able to exercise effective supervision of business operations, including situations where they should verify the appropriateness of extraordinary operations and exercise follow-up control of standard business operations.
With a view to ensure independence of the internal control department from executive bodies and enable it to supervise their operations effectively, it is advisable that employment contracts with employees of the internal control department (comptroller) on behalf of the company are executed by the chairman of the board of directors.
The structure and composition of the internal control department of the company should be stipulated by the company by-law (By-law of the Internal Control Department) approved by the board of directors of the company.
4.3. The audit organization (auditor) of the company should be independent.
The law requires that audit organizations are independent. However, it is most important that audit organizations (auditors) themselves, being guided by their professional ethical standards, refrain from entering into audit agreements based on which it would be possible to come to a conclusion that the interests of the audit organizations (auditors) are actually or apparently interconnected with the interests of the company’s management or controlling shareholders.
External auditors cannot be considered independent, if they routinely prepare the company's accounting statements or consult the company on management or taxation issues. With regard to this matter, the law has established certain limitations for audit organizations (auditors). In particular, the audit organization (auditor) may not audit the company, if it has, for three years prior to the audit, provided the company with services related to maintenance of the company's accounts or preparation of the company's financial (accounting) reports.
By the same token, the stricter the requirements for the audit organization, the less grounds there are for questioning its independence.
Therefore, companies are advised to establish stricter requirements, applicable to the audit organizations (auditors) that prepare audits their accounts, than those provided by the existing legislation. For instance, it is advisable not to use audit organizations (auditors) that have been providing services to the company other than those directly related to the audit of the company’s accounts over the last 3 years.
In addition, despite the fact that any auditing firm has significant commercial incentives to establish and maintain an impeccable reputation as an independent enterprise, it may be tempted to sacrifice its reputation for independence in situations where a significant portion of its income comes from a single large customer. In order to avoid such situation, it is advisable that the company retains an audit organization (auditor) the income of which from servicing one customer does not exceed 10 per cent of its total income.
CHAPTER 9. DIVIDENDS
1. It is advisable that the company implements a transparent and easy-to-understand mechanism for determining the amount of dividends and their payment.
1.1. Information about the company's dividend determination and payment strategy is essential for objective assessment of its operations. Both existing and potential shareholders need this information, as it may have significant impact on their investment decisions with respect to the sale or purchase of the company's shares.
Investing money by purchasing shares of the company, shareholders expect a certain return on their investment. This return does not necessarily take the form of dividends, as net profit that is not distributed among shareholders in the form of dividends ultimately increases the value of the company's assets and, consequently, shareholders' wealth. Therefore, because the company's dividend policy directly bears on the interests of shareholders, it should be defined by the shareholders themselves.
With regard to this matter, it is advisable that the company develops and implements dividend payment guidelines for the board of directors. These guidelines should be articulated in the company by-laws (By-law on Dividend Policy) that should be developed by the board of directors and approved by the general meeting of shareholders.
1.2. Designing the By-law on Dividend Policy, the company should consider the need to ensure complete transparency of the dividend determination and payment process. Therefore, the By-law should state both the general objectives of the company with respect to increasing the wealth of shareholders and improving the capitalization of the company, and provide specific procedures dealing with computation of the company's net profit, determination of the portion of net profit to be directed towards the payment of dividends, the terms and conditions of dividend payments, determination of the amount of dividends payable on certain shares where this amount is not specified by the company's charter, the minimal amount of dividends payable on shares of various categories (types), and the rules for payment of dividends, including dividend payment schedule, place and method. The By-law should also provide procedures for determining the minimal portion of net profit of the company directed towards the payment of dividends, and circumstances under which dividends are not paid or paid only partially on preferred stock with respect to which the amount of dividends is provided by the charter of the company.
1.3. Taking into consideration the ability of the dividend policy to influence investment decisions, the company should make certain that shareholders and other stakeholders are aware of, and familiar with, this policy. Thus, it is advisable that the company publishes its dividend policy and all amendments to it in a periodic publication with a circulation of at least 50,000, and on the company’s website on the Internet.
2. The resolution to pay (declare) dividends should contain sufficient information to enable all interested parties to satisfy themselves as to the appropriateness of the proposed dividend payment, and to fully understand all relevant procedures.
2.1. The announcement of a dividend payment is important in terms of assessing the efficiency of the company's operations not only by shareholders, but also by society as a whole, including the investor community and the government. Therefore, dividend-related information released by the company must reflect its true financial situation. Misrepresentation of the real situation in the company may result from declaring dividends inappropriately, for instance, in violation of statutory restrictions. Information about the real financial situation of the company may also be misleading, when the company declares dividends on common shares in a situation where it ends the reporting year without net profit.
Therefore, it is not advisable that the company resolves to pay dividends, if such resolution, even though it may formally comply with the existing statutory restrictions, may send misleading signals about the operations of the company. Such situations may take place when the company declares dividends on common stock in the absence of net profit for the reporting year, or declares dividends on preferred stock when its net profit and/or the special funds created for the payment of dividends on preferred stock of a certain class are not sufficient for such payment.
2.2. The dividend payment resolution should enable shareholders to receive comprehensive information as to the amount of dividends and the appropriate payment procedures. Therefore, such resolution should indicate the amount of dividends payable on shares of each category (class), the method of payment (in cash and/or in kind), and the payment schedule.
3. Procedures for determining the amount of dividends should exclude the possibility of misleading shareholders as to the amount of annual dividends.
Pursuant to the law, dividends on common and preferred stock are paid out of net profit of the company. When determining the amount of net profit, the company should keep in mind that this amount must be the same for dividend payment purposes and for accounting purposes, because otherwise the amount of dividends will be based on either understated or overstated net profit, which will seriously impair the interests of shareholders. Therefore, it is strongly recommended that the company computes the amount of net profit in accordance with proper accounting procedures.
4. Dividend payment procedures should ensure that shareholders may fully exercise their right to receive dividends.
4.1. Shareholders have the right to rely on the declared amount of dividends. It is based on this amount that they form their opinion about the company's operations, as well as their view with respect to the company's growth prospects. Therefore, it is not advisable to pay dividends other than in cash because in this case it is extremely difficult to determine the actual amount of the dividend, as it depends on the liquidity of property used for payment in-kind. Besides, receipt of such property may be associated with shareholders having to assume additional obligations. Therefore, it is highly advisable that the company pays dividends in cash only.
4.2. In a number of cases it may be beneficial for the company to direct all or a portion of its net profit to issuance of additional shares and their offering to existing shareholders. However, receipt by shareholders of additional shares of the company is different from receipt of dividends because, taking into account such factors as liquidity and the market value of the additional shares, as well as the obligations attached to them, the receipt of such shares may not result in an increase of shareholders' wealth. Besides, in this case shareholders are essentially denied the right to make independent investment decisions. Therefore, the company should not equate resolution to direct funds earmarked for dividend payment to increasing the charter capital by issuance of additional shares and their offering to existing shareholders with the actual dividend payment.
4.3. The clarity of obligations and their timely fulfillment build up shareholder's trust in the company. Therefore, when setting out to pay declared dividends, the company should specify the payment procedures. Thus, it is advisable that the company establishes a deadline for payment of declared dividends, setting it not later than 60 days following the date of the declaration of dividend payment. It is preferable to fix this deadline in the charter of the company, thus indicating that it will remain stable over the long-term.
4.4. When determining the form of payment, the company should seek to select the method that is the most convenient for shareholders and complies with statutory requirements. With regard to this matter, payment of dividends to legal entities should be effected only by bank transfer.
Payment of dividends to natural persons may be effected, at their discretion, either in cash or by bank transfer. If dividends are paid by bank transfer, it is advisable that the company informs shareholders of their duty to notify the company of any changes in their bank requisites, and of the consequences of their failure to do so. In addition, the company should pay dividends in cash at the company's cash desk only upon receipt of an appropriate written request from the shareholder. Finally, the company's resolution on dividend payment may introduce limits on cash dividend payments to shareholders – natural persons.
5. The company should provide for penalties to be imposed on executive bodies in the event of failure to pay, or incomplete or delayed payment of, declared dividends.
Failure to discharge or improper discharge by the company of is duty to pay declared dividends constitutes a violation of existing legislation, and undermines the confidence of shareholders in the company. In this regard, the company should implement dividend payment procedures whereby the failure to comply with such procedures would give the board of directors and the audit commission of the company the right to reduce the amount of remuneration payable to the sole executive body of the company or to terminate the sole executive body.
CHAPTER 10. RESOLUTION OF CORPORATE CONFLICTS
A company can carry out business activities, solve problems and achieve goals set at the time of its creation only when conditions are established at the company under which corporate conflicts can be prevented and resolved.
Prevention and resolution of corporate conflicts makes it possible to safeguard the rights of shareholders and protect the property interests and the business reputation of the company. When the company follows the law rigidly and unconditionally and acts reasonably and in good faith in its relationships with the shareholders, the prevention and resolution of corporate conflicts is facilitated.
As the law does provide for mandatory compliance with any pre-trial procedures for resolving corporate conflicts, the application of such procedures depends to a great extent on the good will of a company itself. The relevant rules can be included in a company's charter or its by-laws.
1. General Provisions
1.1. To ensure effective prevention and resolution of corporate conflicts, any conflicts which have arisen or may arise, should be identified at a very early stage and actions of all the company’s bodies should be well coordinated.
1.1.1. Any controversy or dispute between a company and its shareholder that has arisen in connection with the shareholder's participation in the company or any identified contradiction between the business interests and other interests of a company and those of its shareholders (conflict of interests) is actually a corporate conflict, since it affects or may affect relationships within the company. Therefore, it is necessary to ensure that such conflicts are detected at a very early stage of their development and that the company and its officers and staff address them.
1.1.2. Identification and responsibility for corporate conflicts should be the duty of the secretary of the company. The secretary should record inquires, letters or demands filed by shareholders, make a preliminary review, and hand them over to a body whose authority includes resolution of a given corporate conflict.
The managers of the company's affiliates or representative offices should be assigned similar responsibilities. However, the company’s secretary should also have complete information on corporate conflicts that arise at the company's affiliates and representative offices.
1.2. Company's position in corporate conflict should be based on law.
1.2.1. Prevention or resolution of many corporate conflicts is facilitated to a great extent when the company has a clear and well-grounded position in the conflict and it is timely communicated to the shareholder. Further, if the company provides comprehensive information on the matter of the conflict to the shareholder, it makes it possible to prevent the shareholder from turning to the company again with the same request or demand and establishes the conditions that enable the shareholder to realize or protect his rights and interests. Therefore, a company should give a full and detailed answer to a request from a shareholder, and a denial of a shareholder's request should be well-founded and lawful.
1.2.2. The company's agreement to satisfy a shareholder's request may be conditioned on fulfillment of certain actions by the shareholder as provided by law, the company’s charter or its by-laws. In this case the company's answer to the shareholder should contain a comprehensive description of such conditions and include the information that is necessary for meeting the conditions (for instance, the fee for copying documents requested by the shareholder or the company's bank account numbers).
When the shareholder and the company have no dispute over the essence of their obligations, but disagree on the procedure for and time, manner and other conditions of their performance, the company should offer the shareholder to resolve the existing disagreements, specifying the terms on which the company is willing to satisfy the shareholder's demand.
1.2.3. The efficiency of the company's actions in prevention and resolution of corporate conflicts depends on how soon they are addressed. Therefore, the company should determine its position on the matter of the conflict, make a decision and notify the shareholder as soon as possible.
2. Corporate Conflict Resolution Procedures to be Followed by Company Bodies
2.1. The scope of authority of corporate bodies regarding the review and resolution of corporate conflicts should be clearly defined based on their authority to make decisions on particular matters.
The sole executive body of a company resolves corporate conflicts related to all matters, decisions on which are not within the authority of other company bodies.
The person that fulfills the duties of the sole executive body should independently determine the manner in which corporate conflict resolution work should be conducted.
2.1.2. A company's board of directors should resolve corporate conflicts related to issues which are within its authority. For this purpose, the board of directors may form from its members a corporate conflict resolution committee.
The board of directors or the committee formed by it should review the corporate conflicts that are within the authority of the sole executive body (for instance, when the matter of the conflict is action (failure to act) of that body or by-laws approved by it).
The order of formation and work of such conflict resolution committee should be determined by the board of directors.
2.1.3. The principal task to be fulfilled by the company's bodies when resolving a corporate conflict is to find a lawful and rational solution that would satisfy the interests of both the company and the shareholder. In accordance with the existing capabilities and subject to the actual circumstances, the company should cooperate with the shareholder when resolving a conflict by means of direct negotiations or correspondence with the shareholder.
If necessary, the company and the shareholder may sign an agreement to settle the corporate conflict. The decision on the resolution of a corporate conflict as agreed by the shareholder may be made and approved by the appropriate body of the company in the manner in which other decisions are made by such body.
Company's officials should act within their authority to assist in compliance with agreements that were signed on behalf of the company and should implement their decisions concerning the resolution of corporate conflicts.
2.2. In order to ensure objective evaluation of the corporate conflict and establish requirements for its effective resolution, persons whose interests are or may be affected by the conflict should not take part in its resolution.
2.2.1. A person whose interests are or may be affected by a conflict or whose interests may be affected in the process of or as a result of the conflict resolution should not take part in its resolution.
If the interests of the person who functions as a sole executive body are or may be affected by a conflict at any stage of its development, such conflict should be presented for resolution to the board of directors or the conflict resolution committee of the company. The board members whose interests are or may be affected by the conflict may not participate in the conflict resolution work.
2.2.2. A person that must take part in conflicts resolution in accordance with his duties must notify the company that a conflict affects or may affect his interests as soon as he becomes aware of that.
3. Participation of Company in Resolution of Corporate Conflicts between Shareholders
3.1. If the corporate conflict that may affect interests of company itself or other shareholders arises between company's shareholders, all necessary and possible steps should be taken by the company to resolve such conflict.
3.1.1. If a corporate conflict arises between a company's shareholders, the person who functions as a sole executive body may offer the shareholders that the company acts as an intermediary in the conflict resolution.
Subject to the consent of shareholders who are parties to a corporate conflict, the company's sole executive body, the board of directors or the committee formed by the board of directors may act as intermediary in the conflict resolution.
3.1.2. Subject to the consent of shareholders who are parties to the corporate conflict, the company's authorities bodies/their members may participate in negotiations between the shareholders, provide the shareholders with available information and documents related to the conflict, explain provisions of laws on joint-stock companies and the company by-laws, give advice and recommendations to the shareholders, prepare draft documents on the conflict resolution to be signed by the shareholders, and, on behalf of the company and within their authority, take responsibility to the extent that in can help resolve the conflict.
