Issues of Preparation for and Conduct of the General Meeting of Shareholders
Question: Is it possible to set up in a joint-stock company such body as a registration committee?
Answer: The Federal Law On Joint-Stock Companies does not stipulate setting up such body as the registration committee and, hence, the committee’s activities and procedure of formation may be put to doubt. The above Federal Law does not stipulate, either, which body of a joint-stock company should check the authorities of persons attending the GMS, register them and hand out ballots. However, all these actions are performed in order to determine a quorum of the general meeting, which, in compliance with para 4, Article 65 of the above Federal Law, is determined by a returning board, and not by a registration committee. Subject to the above paragraph it is the returning board that ensures, in particular, the right of shareholders to participate in voting, which, first of all, includes registration (admission) of a shareholder for participation in the meeting.
It should be also noted that in compliance with the Federal Law members of the returning board are appointed by the GMS. This means that the legislator has determined that such matters as ensuring the shareholder’s right to vote and determination of the GMS quorum must be decided by the persons having respective authorities vested in them by the highest governing body of the company. Members of the registration committee may be appointed by the Board of Directors only, since the matter concerned is not attributed to the competence of the GMS.
In view of the above we deem it that the registration committee cannot be vested, inter alia, with the functions of the returning board. In this connection, it is our opinion that the registration committee can discharge only auxiliary functions of assistance to the returning board exercising its powers. It is the returning board that should check the authorities, register (or refuse to register, as the case may be) the shareholders and their proxies, as well as define the quorum of the GMS.
Question: What should be the period prior to the GMS when the shareholders can review the materials (information) subject to dissemination among shareholders in compliance with para 4, Article 52 of the Federal Law On Joint-Stock Companies? What are the consequences of the fact that the notice of the GMS scheduled for 10 April 2001 stipulates the shareholders’ right to review the materials pertaining to the meeting only from 1 April 2001?
Answer: The Federal Law does not specify the period for the shareholders to review the respective materials. The period concerned and the procedure of review should be defined, in our opinion, by the Board of Directors in such manner that every shareholder can have an opportunity to review the required materials. Simultaneously it should be noted that a number of shareholders can exercise their right to an absentee vote by mailing respective ballots, which must be delivered to the company at least two days before the meeting. A certain span of time (at least 3-5 days) will be needed for the mail to arrive.
With due regard for the foregoing, a 10-days period prior to the meeting specified for the shareholders to review the documents (materials) seems to be risky, though it is possible to prove that fixing of such period does not infringe the shareholders’ rights.
Subject to para 8 of the Resolution of a joint plenary session of the Supreme Court of RF and the High Arbitration Court of RF dated 2 April 1997, No. 4/8 On Certain Issues of Application of the Federal Law On Joint-Stock Companies the violations of the Law which may be the grounds for satisfying a shareholder’s claim seeking invalidity of the GMS resolution comprise, in particular, the failure to provide an opportunity to review the required information (materials) pertaining to the agenda of the GMS.
Question: What are the legal consequences of the shares attachment in the framework of a criminal case?
Answer: In compliance with Article 175 of the Criminal Procedure Code of RSFSR the property of the persons indicated in the article concerned is attached in order to secure a civil claim or possible seizure of property. In our opinion, this rule means that the purpose of attachment is to prohibit a respective person from alienation of the property attached. Consequently, since this is not expressly stipulated by law, attachment of shares in the framework of a criminal case does not mean that the owner of these shares is automatically deprived of the right to vote with these shares at the GMS.
At the same time, if the document prescribing the shares attachment expressly stipulates prohibition to vote with these shares, the voting cannot be exercised until the prohibition is cancelled, even if the prohibition concerned is later on recognized in a prescribed manner as illegal.
Subject to para 7.5 of the Regulations for Keeping the Register of the Securities Record Holders (approved by the Resolution of the Federal Commission of the Securities Market of Russia dated 2.10.1997, No. 27), operations with the personal account of a record holder can be blocked, in particular, pursuant to the investigator’s order. Blocking of operations with a record holder’s personal account is construed as an operation undertaken by the Registrar and intended for prevention of the securities transfer. Proceeding from the definition of the term «operation» given in section 2 of the above Regulations, blocking of operations with the personal account of a record holder means that the Registrar cannot undertake any actions which would result in modification of the information contained in the personal account.
Hence, blocking of operations with a record holder’s personal account does not mean per se the prohibition to vote with the shares belonging to the person concerned, unless the competent authorities’ document on blocking stipulates such prohibition.
Question: What is the procedure for exercising the authorities under a proxy issued directly to a legal entity without the right of substitution?
Answer: In case the proxy to vote at the GMS is issued to a legal entity (attorney) without the right of substitution, the authorities thereunder may be exercised by a sole executive body of the legal entity concerned (the general director, director, president, etc.) authorized by law and the Charter complying with law to act without a proxy on behalf of the legal entity in question. Such opinion is based, in particular, on the rules of para 2, Article 69 of the Federal Law On Joint-Stock Companies and para 3, Article 40 of the Federal Law On Limited Liability Companies wherein the competence of a sole executive body is defined.
In compliance with para 1, Article 187 of the Civil Code of RF a person to whom a proxy was issued may authorize substitution to perform the actions specified by the proxy, if so authorized by the proxy concerned or warranted by the circumstances in order to protect the interests of the proxy issuer. This means that in case the proxy does not provide for substitution, and respective circumstances warranting substitution are missing, the legal entity, to which the proxy has been issued, is not entitled to assign thereby granted authorities to another person (including the legal entity’s employees), if the person concerned has no right to act on behalf of the legal entity without a proxy.
With due regard for the foregoing, we deem it that an individual presenting a proxy to vote at the GMS issued to a legal entity (attorney) without the right of substitution should confirm that he has the right to act on behalf of the legal entity without a proxy. In confirmation of the above a document executed by the body entitled to appoint a sole executive body may be presented, which would verify such appointment.
Question: Who can be admitted to participate in the GMS in the following situation: the list of shareholders entitled to participate in the GMS includes a nominee shareholder. After the list is finalized, the contract with the nominee shareholder is terminated and the shares are returned to their beneficial owner who, in his turn, sells the shares to a new owner.
Answer: Applicable in the above situation should be the rule of para 2, Article 57 of the Federal Law On Joint-Stock Companies, in compliance with which the person included in the list of shareholders entitled to participate in the GMS, in the event the shares are transferred after compilation of the list and prior to the GMS, must issue to the buyer a proxy to vote or vote at the GMS pursuant to the instructions of the buyer of the shares. The rule concerned is also applicable to every subsequent transfer of the shares.
It is our opinion that the above rule is applicable not only to the sale of shares, but also to the transfer of shares by a nominee shareholder to a beneficial shareholder.
Therefore, in the case under review the nominee shareholder included in the above list must issue a proxy to vote. As a result, it is the person who is the owner of the shares at the time the GMS is convened that must receive, in our opinion, the right to participate in the meeting. The proxy to such owner may be issued by virtue of substitution (if so provided for by the principal proxy) by the previous owner who has received shares after termination of the contract with the nominee shareholder. The proxy may be also issued by the nominee shareholder directly to the new owner.
If the nominee shareholder included in the list of shareholders is going to participate in the meeting, he will vote according to the instructions of the person who is the owner of the shares at the time the GMS is convened, provided such owner confirms to the voter his title to the shares.
The situation when the shares are repeatedly sold after the list of the persons entitled to participate in the GMS has been compiled, should be dealt with similarly, i.e. either a person included in the list and voting pursuant to the shares owner’s instructions may participate in the meeting, or his representative acting by proxy (including the proxy issued by virtue of substitution).
In our opinion, a joint-stock company, when registering the participants of the meeting and handing over the ballots to them, is not obliged to trace the destiny of the shares, but only to register and hand over a ballot to the person included in the list, or to his proxy. Possible abuses which may take place in connection with the previous owners having several proxies, or the failure to follow the owners’ instructions regarding voting should be attributed to the problems in relations between these persons.
Question: A person who received proxies from many shareholders (100 and more) participates in the meeting. Is it lawful to deliver one set of ballots for the total votes of the shareholders represented by such person, or is it necessary to deliver separate ballots per each represented shareholder?
Answer: In our opinion, a person representing several shareholders must be given separate ballots per each shareholder. This opinion is based on the fact that if one set of ballots for the aggregate votes of all shareholders represented by the person is given to the latter, it will, in particular, be impossible for any of the shareholders who have issued a proxy to exercise his right to replace the representative at any time and to participate in the GMS personally. In this case the representative will be unable to hand over to such shareholder the ballots for votes belonging to the latter.
It can be also assumed that different proxies may contain different (not concurring) instructions of the principals as to how the representative must vote on those or other issues on the agenda. In case the representative is given a single set of ballots, he cannot follow instructions of some of the shareholders, and that will infringe the shareholders’ rights.
In view of the above, we recommend to deliver ballots to the representative per each represented shareholder.
At the same time, if there exists confidence that the shareholder’s above right to participate in the meeting personally will not be infringed (the above situation will not arise), and the proxies will not contain contradictory voting instructions, then, in our opinion, the representative voting with a single ballot for the aggregate votes of the represented shareholders cannot per se cause recognition of the GMS resolution as invalid.
Question: A shareholder’s representative has been registered and has received ballots, and thereafter one more representative with a proxy that was issued later applies for registration. Are there grounds to regard issuance of a proxy with a later date as the principal’s will to revoke the previously issued proxy?
Answer: In our opinion, issuance of a proxy with a later date does not mean that the principal purports to revoke the previously issued proxy, if the later issued proxy does not expressly specify revocation of previous proxies. The opinion is based on the fact that the law does not provide for tacit termination of a previous proxy in connection with a new proxy granting the same powers to another person, and the presence of several representatives with the same powers does not conflict with the law.
Question: Must a joint-stock company undertake any actions if after the shareholder’s representative by proxy has been registered for participation in the meeting and received ballots, the principal or his other representative applied to the returning board and presented a written notice of revocation of the proxy issued to the former representative?
Answer: In this case it is necessary to follow the rules of Art. 189 of the Civil Code of RF. Pursuant to para 1 of the article concerned the person who issued a proxy and later on revoked it must notify the revocation to the person to whom the proxy was issued, as well as to third parties known to him and for representation before whom the proxy was issued. Pursuant to para 2 of the same article the rights and obligations accrued as a result of actions of the person to whom the proxy was issued, preserve their validity for the proxy issuer and his assignees with respect to third parties until this person learns or should learn about its revocation. This rule is not applicable in case the third party is aware or should be aware that the proxy has been revoked.
In our opinion, if at the moment of registration and handing out of ballots the company was not aware of revocation of the proxy issued to the shareholder’s representative, then registration of the representative concerned for participation in the meeting and handing out the ballots to him should be considered lawful. Besides, the joint stock company should proceed from the fact if the representative still has the proxy, i.e. he has not returned it to the principal as provided for by para 3, Art. 189 of the CC RF, the proxy delivered has not been revoked.
In case revocation of the representative’s proxy was announced after the representative has been registered and the ballots have been handed over to him, the principal or his new representative must notify the former representative of his proxy revocation and request him to return the ballots. That is, if at the moment of registration the company was not aware of the first representative’s proxy revocation, it should not cancel registration of the first representative and hand out new ballots, otherwise in case the ballots are given for the second time the shareholder (his representatives) may turn out to hold two sets of ballots.
At the same time, it is possible and even desirable if the representative, whose proxy was duly revoked, hands over to the principal or his new representative a set of the ballots he has received, and the latter signs for receipt of the set of ballots in the presence of the returning board member.
Question: A shareholder has received a ballot for a whole stake of shares, including sold shares for which a proxy has been issued by the shareholder. Must the returning board, upon the request for registration made by the representative to whom the proxy has been issued and who at the time of the meeting owns the shares, cancel the registration that has taken place and effect a separate registration of the shareholder and the representative?
Answer: In our opinion, in such circumstances it would be reasonable, if the shareholder and the representative appear before the returning board, and a separate set of ballots for a respective number of votes is given to and signed for by each of them in exchange of the previously given set of ballots.
In case any of the above persons does not want the registration to be voluntarily altered, the joint-stock company may take a position on lawfulness of its actions with respect to the registration of the shareholder who has received the ballots including those for the sold stake. Such position of the company is explained by the fact that it must register the person entered into the list of persons entitled to participate in the GMS and give the ballots to him or his representative, upon delivery of the proxy, depending on who of them was the first to apply for registration and ballots.
A similar approach must be taken in the event the shareholder has sold his shares and issued a proxy to the acquirer, and upon the acquirer’s registration the shareholder announced his intention to vote at the meeting personally.
Question: Is it possible to deny a shareholder registration after the GMS opened on time and the shareholder arrived at the venue of the meeting before the registration is finished?
Answer: In this case the reason why the shareholder (his representative) who arrived at the meeting on time was not registered, is of great importance. If the reason is the failure on the part of the joint-stock company to ensure timely registration of the shareholders (for example, by reason of a large number of arriving persons or any technical failures), then the company must adjourn the GMS and thereby prolong the time for registration. Otherwise it may be proved that the company has not ensured the right of the shareholders to participate in the GMS. The opportunity to be registered must be given even to the shareholder (his representative) who arrives at the place of registration one minute before the registration is finished.
In case a shareholder or his representative had an opportunity to be registered for participation in the meeting within the prescribed time (and it would be proved that such opportunity was given by the company), but for any reason failed to do so, the denial to register him would be deemed lawful.
In our opinion, it would not be reasonable to deny admittance of a late-coming shareholder to the meeting, since the denial may serve as a formal ground to challenge the adopted resolutions.
Question: What are the consequences of non-election of the auditing committee at the annual meeting?
Answer: The issue is dealt with in the letter of the FCSM of Russia dated 28.02.2000, No. IK-07/883, where, with reference to para 1, Art. 47, subparagraph 9, Art. 48, paragraphs 4 and 5, Art. 53, and Art. 85 of the Law On Joint Stock Companies, it is concluded that the auditing committee must be re-elected every year at the AMS and, hence, the term of powers of the auditing committee expires on the day of the next AMS. If the committee was not re-elected at the AMS for some reason, the term of its powers is deemed to be expired and the company must convene an EMS to elect a new legitimate body. In case the provisions of the Charter or by-laws of the company related to the term of powers of the auditing committee run contrary to the rules of the Law, then, according to general regulations, respective rules of the Law must be applied.
Question: What kind of legal relations arise between a joint-stock company and the chairman of the auditing committee, provided a 3-year contract has been signed with the chairman and a certain remuneration is fixed for the latter? May amendment of the Statute of the Auditing Committee as regards the rate of remuneration be the ground for unilateral revision of the rate of remuneration payable to the chairman of the auditing committee?
Answer: In our opinion, relations between a joint-stock company and the chairman of the auditing committee with respect to discharge by the latter of his chairman’s duties are not labor relations, since members of the auditing committee must not necessarily be the employees of the joint-stock company, and their activities are not necessarily of a regular nature. In this connection, the rules of the labor law providing for the statutory prior notice to the employee of the change in material labor conditions should not be applicable.
As stated above, the relations between the company and members of the auditing committee are established till the next GMS. In this connection it is illegal to conclude a contract for three years. Therefore, in our opinion, the shareholders may resolve to introduce amendments related to the auditing committee chairman’s (other members’) remuneration rate into the by-laws of the company at the next AMS, and subsequently the parties should be governed by the GMS resolution, and not by the earlier contract.