COVID-19: the timeframes for holding annual general meetings of JSCs AND LLCs; regulating matters concerning the value of JSCs’ and LLCs’ net assets based on the results of 2020

Pepeliaev Group advises about the changes to a number of legislative provisions to be adopted that stipulate the specifics of the regulation of corporate relationships of business companies in the situation of the COVID-19 pandemic

On 1 April 2020 the Russian State Duma (the lower chamber of Russia's Parliament) adopted in the third reading the Federal Law “On amending individual items of Russian legislation with respect to the unification of the contents of annual reports of state corporations (companies) and public companies and with respect to establishing the specifics of the regulation of corporate relations in 2020, and on suspending the effect of the provisions of individual items of Russian legislation (the “Law”). In the near future the Law is expected to be approved by the Federation Council (the upper chamber of Parliament) and signed by the Russian President [1].

The Law provides for the following key changes in the regulation of the activity of business companies (JSCs and LLCs):

1. The timeframes for holding annual general meetings of JSCs and LLCs

In accordance with the provisions of the Law:

• the annual general meeting of shareholders in 2020 may be held within the timeframes determined by the board of directors (the supervisory board), but no earlier than two months and no later than nine months from the end of the reporting period[2] (i.e. the annual general meeting should be held no later than 30 September 2020);
• the ordinary (annual) general meeting of an LLC’s members in 2020 will be held no earlier than two months and no later than nine months from the end of the financial year[3] (i.e. the ordinary general meeting should be held no later than 30 September 2020);

Owing to the above changes being introduced, the Law suspends until 31 December 2020 the effect of the relevant provisions of the Federal Laws on JSCs[4] and LLCs[5] according to which the annual meetings of JSCs and LLCs should be held within the timeframes set out in the charter of the relevant company, but no later than: six months (for JSCs) and four months (for LLCs) after the end of the financial year.

Please note that from the time when the Law comes into force the provisions of the current charters of JSCs and LLCs regarding the timeframes for the holding of annual meetings (even if such provisions duplicate the provision of the relevant corporate law and do not determine any other timeframes) will formally cease to be in line with the new provisions of the Law, which will not apply retroactively. Taking account of the current epidemiological situation, we believe that it does not appear to be prudent or expedient for all business companies to bring their charters in line with the provisions of the new Law and this is unlikely to be performed in the current conditions. The Law does not contain any provisions to this effect[6]. We believe that the above situation in itself will not cause any serious adverse consequences owing to the following. On 20 March 2020 the Bank of Russia issued a press release advising that the Bank of Russia has decided to implement a set of measures to support the citizens, economy and financial sector for the period of the COVID-19 pandemic[7]. The list of the specified measures includes proposals to decrease the pressure on the Russian joint stock companies that subsequently became a basis for the amendments set out in the Law. Since the Bank of Russia has initiated amendments to extend the timeframes for holding the corporate procedures within JSCs and LLCs, we believe that the risk of sanctions from the Bank of Russia (if the Bank of Russia interprets the above situation as a ground for imposing administrative liability on JSCs and LLCs as well as on their officers[8]) appears to be a theoretical possibility. please be reminded that in the event of a conflict between the provisions of the charter and the legislation when a dispute is examined by the court, the latter prevail[9].

2. The form in which general meetings at JSCs are to be held

The Law also suspends until 31 December 2020 the effect of the provision of the Federal Law on JSCs according to which, if the agenda of the general meeting of shareholders includes matters concerning the election of a JSC’s board of directors (supervisory board) or of a JSC’s audit commission, as well as matters relating to the approval of an auditor, of the annual report and of the annual financial statements of a JSC, and if, under the company’s charter, such matters are not within the competence of the JSC’s board of directors (supervisory board), such general meeting of the shareholders may not be held in the form of absentee voting.

Please be reminded that previously Federal Law No. 50[10] introduced a new rule that a general meeting of the shareholders may, when the agenda includes the matters set out above, be held in 2020 in the form of an absentee voting if the board of directors (the supervisory board) so decides. More details on the matter are available in the Pepeliaev Group’s alert dated 25 March 2020.

Please note that at a general meeting of an LLC's members, resolutions cannot be passed regarding the approval of annual reports and annual financial statements by holding absentee voting (by poll). The Law to be adopted does not contain any amendments or rules concerning the regulation of this matter. Therefore, the annual general meetings of an LLC’s members under current legislation may be held only if the members are jointly present at the meeting (i.e. votes must be cast in person).

3. The value of the net assets of JSCs and LLCs based on the results of 2020

The Law introduces new provisions according to which the reduction in the value of the net assets of a JSC to a level below the amount of its issued capital at the end of 2020 will not be taken into account for the purposes of article 35 (4 and 6) of the Law on JSCs. In other words, in the event of such a reduction in the net asset value:

• when preparing for the annual general meeting of shareholders, the board of directors (the supervisory board) of a JSC[11] will not be obliged to include a section on the state of the JSC’s net assets in the JSC’s annual report; and
• JSCs[12] will be released from the obligation to pass one of the following resolutions: (1) to reduce the issued capital to an amount not exceeding the JSC’s net assets value, or (2) to wind up the JSC.

The Law establishes a similar rule with regard to LLCs[13]. The reduction in an LLC’s net asset value below the amount of such LLC’s issued capital at the end of 2020 will not be taken into account for the purposes of article 30(4) of the Law on LLCs and therefore, will not entail the LLC becoming obliged to pass one of the following resolutions: (1) to reduce the issued capital to an amount not exceeding the LLC’s net assets value, or (2) to wind up the LLC[14].

Please note that the Law does not release companies from the above obligations to pass the relevant corporate resolutions if such obligations arose based on the results of earlier periods (2019 and earlier).

What to think about and what to do

In the existing conditions, we recommend that JSCs hold any general meetings of shareholders (including annual meetings) in the form of absentee voting. It would be expedient for LLCs to consider holding the annual general meeting and other meetings the holding of which should be notarised[15] under Russian legislation with the minimum number of persons present in a single premises (e.g. by issuing to several LLC members a power of attorney for one person to attend the meeting, etc.).

We also recommend bringing a company's charter in line with the provisions of the new Law with respect to changing the timeframe for holding the annual general meeting, subject to all the factors of the current epidemiological situation.

Help from your adviser

Pepeliaev Group’s specialists are closely following the changes in the corporate legislation arising from the current situation and are ready to provide any type of assistance in holding the annual general meetings of JSCs and LLCs. Pepeliaev Group’s specialists are also ready to provide recommendations on how to choose the most appropriate options for business with respect to any issues of corporate law, including those that arise in the implementation of corporate procedures in the existing epidemiological situation and to request the Bank of Russia and the state authorities to provide official explanations regarding any issues concerning the application of the provisions of corporate legislation.