COVID-19: a simplified procedure of buying out the shares of a public joint stock company
Pepeliaev Group advises of changes to a number of legislative provisions that we expect to be adopted to regulate a simplified procedure for acquiring the placed shares of a public limited liability company during 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 the view to unifying the contents of annual reports filed by state corporations (companies) and public not-for-profit organisations and setting out the specifics of the regulation of corporate relationships in 2020, as well as on suspending the effect of individual provisions of Russian legislative acts (the “Law”). At the moment the Federation Council is examining the law, and it may be expected that the upper chamber of the parliament will adopt it and the President will sign it in the near future[1].
A simplified procedure for a purchase by a public joint stock company of its own shares
1. The conditions under which a company purchases its own shares
Under the Law[2], public joint stock companies may purchase the shares they have placed (unless the placed shares are acquired to reduce their total number) until 31 December 2020, inclusive of that date, provided that the following conditions are met in their totality:
- the purchased shares have been listed;
- the average weighted price of the shares being acquired for any three months starting from 1 March 2020 has reduced as compared with the average weighted price of such shares determined for three months starting from 1 October 2019 by 20 percent or more;
- the primary stock market index calculated by the market operator for any three months starting from 1 March 2020 has reduced as compared with the value of such index calculated by the market operator for three months starting from 1 October 2019 by 20 percent or more;
- the shares are purchased on exchange trading platforms based on orders addressed to an unlimited number of trading participants[3];
- Shares are acquired by a broker further to an instruction of the public joint stock company purchasing its own shares;
- the board of directors (supervisory board) of the joint stock company has adopted a resolution to acquire the shares placed by the company, provided that the company has determined: (1) the categories (types) of the shares being acquired, (2) how many shares of each category (type) are being acquired, (3) the period in which the acquisition of shares must take place and which must expire on or before 31 December 2020, (4) the period for disclosing information the public joint stock company's acquisition of its own shares, if the board of directors (supervisory board) has adopted a resolution to disclose such information.
Please note that a resolution of the board of directors (supervisory board) of a public joint stock company may stipulate that information relevant to the acquisition by a public joint stock company of its own shares is not to be disclosed in the form of a communication regarding a significant fact. In other words, a public joint stock company may refrain from disclosing information on the acquisition of its own shares, if a resolution of the board of directors (supervisory board) specifically so provides[4]. |
2. Notifying the regulator
A public joint stock company acquiring shares it has issued must notify the Bank of Russia of the acquisition of the shares with such notice being accompanied by the corresponding documents as evidence that the above conditions have been met.
3. How does this differ from the ‘usual’ procedure for buying out shares?
The law provides that, when a simplified procedure for buying out shares is applied, the provisions of parts 4, 5, 7 and 8 of article 72 of the Law on Joint Stock Companies[5] do not apply to the public joint stock companies in question. Specifically:
- shares are purchased under the trading rules of the stock exchange and not under the shareholders’ applications to sell;
- the purchase price of the shares is set at the stock exchange and not under the rules of article 77 of the Law on Joint Stock Companies;
- the following rules do not apply: (1) that shareholders must be notified of the buy-out of shares; (2) that shareholders have 30 days to adopt a resolution to sell shares; (3) that the public joint stock company has 15 days to pay for the acquired shares; (4) that the board of directors must approve the report on the outcomes of the filing of shareholders’ statements regarding the sale of their shares; (5) the procedure for settlements with respect to the shares. Other rules provided for by article 76 of the Law on Joint Stock Companies on implementing the acquisition of shares have also been excluded[6].
4. Issues requiring attention
- Shares are bought out in accordance with article 72(2) of the Law on Joint Stock Companies.
Article 72(2) of the Law on Joint Stock Companies provides that a joint stock company may acquire its own shares, if the Company’s charter stipulates such an opportunity. As the new Law does not stipulate any other regulation on this matter and nor does it affect the provisions of this rule[7], we believe that such a simplified procedure for buying out the shares may apply only if the charter of the public joint stock company contains a provision to this effect. |
- Pursuant to the new Law the resolution to buy out shares under the simplified procedure must be adopted by the board of directors (supervisory board) of the public joint stock company[8].
Article 72(2) of the Federal Law on joint stock companies establishes that a resolution to acquire the shares placed by a joint stock company is adopted by the general meeting of shareholders, or by the board of directors (supervisory board) if the company’s charter provides the board of directors (supervisory board) of the company with the right to adopt such a resolution. The provisions of the new Law on the simplified procedure for buying out shares directly provides that the resolution to buy out shares must be adopted only by the board of directors (supervisory board), but does not specify whether such a right to adopt the resolution in question must be directly provided for by the charter. May the simplified procedure be used if the charter of the public joint stock company does not provide that the board of directors (supervisory board) is entitled to adopt such a resolution? On the one hand, the new Law establishes an 'additional' procedure for buying out shares, which is in effect within an established period and does not rule out the general procedure, which exists in ‘parallel’. At the level of legislation, the issue of adopting a resolution for a simplified buy-out falls within the competence of a public joint stock company’s board of directors. On the other hand, we believe that in this case the new law merely specifies the management body of the joint stock company that decides on the simplified buy-out procedure, but does not introduce any other regulation requiring the charter to provide for the right of the board of directors (or supervisory board) to adopt such a resolution. In other words, the requirements provided for by article 72(2) of the Law on Limited Liability Companies must be fully complied with, including when the simplified procedure is used. We believe, therefore, that the simplified procedure for buying out shares may be used only in a situation when a public joint stock company establishes that the board of directors may adopt such a resolution. |
- The law does not stipulate any exceptions to article 73 of Federal Law on Joint Stock Companies with regard to restricting the acquisition by a public joint stock company of placed shares (in particular, it is prohibited to purchase shares if a public joint stock company demonstrates the signs of bankruptcy or the signs that the value of its net assets is ‘negative’).
- We also remind you that the acquired shares of a public joint stock company must be sold at least at their market value and no later than one year from the date on which they were acquired[9].
What to think about and what to do
To those public joint stock companies that wish to buy out their own shares under the simplified procedure, we recommend that they check whether the current charter stipulates that the public joint stock company has a right to purchase own shares, as well as the right of the board of directors (or supervisory board) to adopt a resolution to this effect. We suggest that the companies in question make the corresponding amendments if no such provisions are contained in their constituent documents.
Help from your adviser
Pepeliaev Group lawyers are keeping track of changes in corporate legislation and are ready to provide legal support with respect to corporate procedures in public joint stock companies and other organisations, as well as to comment on contentious matters connected with applying the new items of legislation that are being introduced within short timeframes in the current pandemic situation. Among other things, we will reach out to the Bank of Russia and other state authorities for official clarifications on issues stemming from performance of the regulatory acts regarding corporate relationships.[1] The Provisions of the Law will come into force on the date of its official publication.
[2] article 12(5) of the Law
[3] In other words, shares are bought out at the market price established under the trading rules of the stock exchange. We remind you that, under the standard procedure for joint stock companies to acquire their own shares, the price of the shares is established by the joint stock company’s board of directors, usually with an independent appraiser being involved (taking account of the requirements provided for by article 77 of Federal Law on Joint Stock Companies)
[4] Under the general rule a public joint stock company must disclose information on the acquisition of own shares in the form of significant facts (the Bank of Russia’s Regulation No. 454-P dated 30 December 2014 “On the disclosure of information by the issuers of issuable securities”, clause 12.7.2)
[5] Federal Law No. 208-FZ “On joint stock companies” dated 26 December 1995
[6] The provisions of article 76 of the Law on Joint Stock Companies apply to relationships connected with the acquisition by a joint stock company of its own shares and the exercise by shareholders of their right to sell the shares they own, insofar as these are not regulated by article 72 of the Law on Joint Stock Companies
[7] In other words, in making the simplified procedure exempt from other requirements of article 72 of the Law on Joint Stock Companies (such as the rules outlining the procedure and sequence of actions for buying out shares), the Law disregards the rule set out in part 2 of said article 72, which directly establishes the joint stock company’s right to buy out its own shares
[8] Article 12(5)(6) of the Law
[9] Article 72(3) of Federal Law No. 208-FZ On Joint Stock Companies dated 26 December 1995.