2006 Law Update: Changes to corporate law on open joint stock co’s shares acquisitions
Russia has adopted legislation that will substantially change the requirements for the acquisition of large percentages of shares in open joint stock companies. The new legislation was enacted in Federal Law No. 7-FZ "On Amendments to the Federal Law ‘On Joint Stock Companies’ and to Certain Other Legislative Acts of the Russian Federation" dated January 5, 2006 ("Law No. 7-FZ") and will take effect on July 1, 2006.
The new rules have two important implications. First, each acquisition of more than 30, 50 or 75 percent of voting shares in an open joint stock company will trigger an obligation to make a public offer to acquire the remainder of the shares. Second, a person who has acquired more than 95% of an open joint stock company’s voting shares through a public offer (or who holds more than 95% of an open joint stock company’s voting shares before July 1, 2006) may force the minority shareholders to sell their shares.
VOLUNTARY AND MANDATORY OFFERS
Law No. 7-FZ stipulates that a person who together with its affiliated parties intends to acquire more than 30% of all the voting shares in an open joint stock company, may make a public offer to the owners of the company's outstanding shares (as well as of securities convertible into shares ("convertible securities")) to purchase their shares and convertible securities, or part thereof (a "Voluntary Offer").
A person who with its affiliated parties has already obtained more than 30%, 50 % or 75% of voting shares in an open joint stock company, is required to make a public offer to buy the rest of the company's shares (and convertible securities) (a "Mandatory Offer") within 35 days after its title to the shares has been recorded in the shareholders’ register.
The price offered in a Mandatory Offer for the securities may not be lower than the highest of the following values:
(a) the securities’ average weighted stock exchange price for the six months prior to the sending of the Mandatory Offer to the Federal Financial Markets Service (FSFR);
(b) the securities’ market value, as determined by an appraiser, if the securities are not quoted on a stock exchange or have been quoted there for less than six months;
(c) the maximum price at which the offerer agreed to purchase such securities during the six months that preceded the sending of the Mandatory Offer to the joint stock company whose shares are being purchased.
For both Voluntary and Mandatory Offers, payment for the securities must be secured by a bank guarantee.
Before making a Voluntary Offer or Mandatory Offer, the offerer must submit its offer for review to the FSFR. The FSFR will prescribe the offerer to amend the offer if it is inconsistent with the requirements of Law No. 7-FZ. If the FSFR does not respond within 15 days from the date the offer was submitted to the FSFR, the offerer may commence its
Voluntary or Mandatory Offer.
Potential buyers must present both Voluntary and Mandatory Offers through the open joint stock company itself. Upon receiving any such offer, the company’s board of directors must adopt recommendations for its shareholders, addressing: the fairness of the offered price; the prospects for changes of the securities’ value after the sale; and the offerer’s plans for the future of the company, including the company’s staff. The company’s board of directors must send the recommendations to the owners of securities along with the Voluntary Offer or Mandatory Offer. In order to accept an offer, the owner of a security should send a notice of sale to the offerer.
Law 7-FZ forbids a person who has made a Voluntary or Mandatory Offer to buy the voting shares and convertible securities offered for purchase on any other terms until the period reserved for the offer has expired. In addition, until and unless the Mandatory Offer is made as required by the new procedures, the majority shareholder (and its affiliates) may vote no more than 30% of voting shares held. A similar limitation applies to cases where the offerer seeks to obtain ownership of more than 50% or 75% of an open joint stock company’s shares (i.e. the acquirer may vote no more than 50 % or 75% of the shares until and unless it duly makes a law compliant Mandatory Offer).
COMPETING OFFERS
Once an open joint stock company has received a Voluntary Offer or Mandatory Offer, a competing offer may be submitted to the company, provided that the price offered for securities and the number sought by the alternative buyer are at least as high as those stated in the earlier bid.
ON BUYOUTS OF SECURITIES FROM MINORITY SHAREHOLDERS
a person who with its affiliated parties has acquired more than 95% of the total number of voting shares in an open joint stock company (the Dominant Shareholder) must notify the other owners of shares and convertible securities of their right to sell their shares and convertible securities to the Dominant Shareholder. The price offered for the securities may not be lower than the highest of the following values:
(a) the securities’ average weighted stock exchange price for the six months prior to the sending of the Mandatory Offer to the FSFR (this paragraph does not apply if more than 95% of the shares were acquired by means other than a Mandatory Offer);
(b) the securities’ market value, as determined by an appraiser, if the securities are not quoted on a stock exchange or have been quoted there for less than six months;
(c) the maximum price at which the Dominant Shareholder agreed to purchase such securities during the six months that preceded the sending of the Mandatory Offer to the joint stock company (this paragraph does not apply if more than 95 % of the shares were acquired by means other than a Mandatory Offer);
(d) the price paid by the Dominant Shareholder for any shareholding over 95% of the company's shares in Dominant Shareholder’s ownership, whether through a Voluntary Offer or Mandatory Offer; and
(e) the maximum price at which the Dominant Shareholder agreed to purchase such securities after the expiry of the period reserved for acceptance of an offer when subsequently buying more than 95% of the company's shares.
The Dominant Shareholder may also demand that the owners of the rest of the shares and convertible securities sell their shares and convertible securities to the Dominant Shareholder in a compulsory manner. The compulsory buyout rules aim to protect the interests of minority shareholders and of the owners of convertible securities (by envisaging a procedure for maintaining a certain minimum price, and certain other guarantees).
A written notification on the right of minority shareholders and of owners of convertible securities to sell their shares and convertible securities to the Dominant Shareholder and a Dominant Shareholder’s written demand for the buyout of the remaining shares and convertible securities are subject to preliminary review by the FSFR.
Those already owning more than 95% of voting shares in open joint stock companies by July 1, 2006 are subject to transitional regulations. Within 35 days of the date on which Article 7 of Law No. 7-FZ comes into force (see below regarding the time when Article 7 will enter into force), they must notify the minority shareholders and the owners of convertible securities of their right to require that the Dominant Shareholder buy out their shares and convertible securities. The obligation to send the notification is waived if the shareholders owning more than 95% of an open joint stock company’s shares require no later than one year after the effective date of Article 7 of Law No. 7-FZ that the minority shareholders and the owners of convertible securities sell to them the remaining shares and convertible securities.
The price offered for the securities may not be lower than the highest of the following values:
(a) the average weighted stock exchange price for the securities over the six months before sending the buyout demand;
(b) the value determination made by an appraiser; and
(c) the maximum price at which the Dominant Shareholder agreed to purchase such securities during the six months that preceded sending the buyout demand.
LIABILITY FOR BREACHES OF PROCEDURE WHEN PURCHASING MORE THAN 30% OF SHARES IN AN OPEN JOINT STOCK COMPANY
Additionally to the loss in voting rights mentioned above, Law 7-FZ provides for the civil liability of the offerer, of a Dominant Shareholder and of the target company’s governing bodies for breaches of the new procedures for the acquisition of open joint stock company’s shares. A company's governing bodies are liable for any losses caused to the company or its shareholders through their culpable failure to enforce the new major shareholding purchase procedures. A shareholder may require that the company's bodies reimburse the shareholder for the losses it suffered through any such failure, regardless of the size of its shareholding. The person submitting a Voluntary Offer or Mandatory Offer improperly is liable to the sellers of securities for their resulting losses. A Dominant Shareholder who failed to comply with the procedures for determining a price for the securities is also liable for losses incurred by the owners of the securities. Law No. 7-FZ does not state that a violation by the offerer or the Dominant Shareholder of the procedures for obtaining large blocks of shares in an open joint stock company invalidates a share purchase transaction.
In addition to civil liability, Law No. 7-FZ provides for administrative fines to be paid by legal entities, officials, and individuals in breach of procedures prescribed for the purchase of more than 30% of open joint stock company's shares.
ENTRY INTO FORCE
Law No. 7-FZ takes effect on July 1, 2006, with the exception of Article 7, which details transitional provisions for those having bought more than 95% of shares in joint stock companies prior to July 1, 2006. Article 7 will come into force upon the effective date of a law regulating the obligatory civil liability insurance coverage for appraisers, which is yet to be adopted. An appraiser’s obligatory civil liability insurance bill has not been introduced to the State Duma, Russia’s lower house of parliament. Therefore, currently it is not clear when Article 7 of Law No. 7-FZ will come into effect.
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