- On April 2, 2012, the Russian President introduced draft amendments to the Civil Code geared towards granting greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- New limited property rights will emerge addressing permanent landownership and development of land plots.
On April 2, 2012 the President introduced to the State Duma draft amendments to the Civil Code (the Draft) prepared jointly by representatives of both the legal and business communities.
The Draft is primarily geared to improve regulations and the business environment in Russia. It should be furthered by the proposed modifications and enhancements with regard to legal entities, transactions, agreements, and other provisions.
The following should be noted as key changes.
1. CORPORATE LAW
First, the new regulation will grant greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Public and private companies
A new classification of business entities will be introduced, so that they will fall into the categories of either public or private companies.
As opposed to members of public companies (joint stock companies, or “JSCs”, with shares traded in regulated markets), members of private companies may freely determine the management structure. For example, they may forego a governing body and change the way general members meetings are convened, prepared, and held.
- JSC – a unified form
The form of a JSC as a closed joint stock company (“CJSCs”) will cease to exist. Before July 1, 2013 CJSCs may, at their own discretion, either (1) change their company type to an LLC or production cooperative; or (2) retain their JSC status (this will not require any extra steps to be taken as the JSC will be the standard form “by default”).
- A Shareholders’ agreement may be entered into not only between a company’s shareholders but also between shareholders, company creditors, and any third parties.
- Reorganisation scheme will be made available in various forms, including involvement of more than two corporate entities of any form of incorporation.
Second, rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- Registered capital will from now on have to be paid for by cash only.
- Registration with the Uniform State Register of Legal Entities
Interested parties will be entitled to file their objections to amendments entered in the Uniform State Register of Legal Entities, and the registration authority will be bound to consider such objections and render its decision thereon.
- Shareholders agreement
Parties to a shareholders’ agreement will be obligated to notify the company as to its execution. If they fail to notify, they will be obliged to indemnify against any damages incurred by other company members.
Furthermore, information about shareholders’ agreements for public will be subject to mandatory disclosure.
Finally, resolutions of corporate governing bodies or transactions involving parties to shareholders’ agreements may be invalidated if such resolutions / terms of transactions contradict the shareholders’ agreement.
- Affiliation and control
Now the Russian Civil Code will define specific indicia of affiliation and control and the concept of controlling and controlled persons.
Furthermore, even if formal grounds are missing, a court may confirm actual affiliation upon an analysis of factual circumstances.
Liability of controlling entities will be strengthened. In certain cases, they will be liable jointly and severally together with controlled entities and responsible for any losses incurred by the latter and their members.
- Management liability
Management as well as those who have an actual possibility to give instructions to the company’s management will be liable for any losses incurred by the company through wrongful, unreasonable or unscrupulous acts. Those who actually determine a legal entity’s conduct, without having formal grounds for control, will be also liable.
2. TRANSACTIONS AND OBLIGATIONS
First, regulation as to invalidity of transactions will be clarified.
- Limitations on grounds for invalidation of voidable transactions
Only a voidable transaction which infringes upon the rights and interests of the contesting party may be invalidated. If a party approved a transaction or expressed its intention to uphold it, that party will not be able to later contest it.
- A presumption of voidability will be established in respect of: (1) resolutions passed by meetings; (2) transactions executed in breach of a law; (3) transactions executed without the required consent of a third party, corporate authority, government authority, local authority.
- The following matters will be regulated comprehensively: (1) invalidation of resolutions passed by meetings; (2) transactions void ab initio in respect of property whose disposal is restricted or limited; (3) invalidity of transactions executed in error.
- New opportunities
Business entities may independently determine the effect of the invalidity of voidable transactions.
A party to a transaction executed ultra vires may withdraw from such a transaction.
Second, parties will have more liberty in determining terms of their transactions, the principles of optionality and freedom of contract will have a broader application.
- Conditioned performance of obligations
Despite the restriction of entering into conditional transactions that depend exclusively or primarily on one of the parties, the performance of obligations, exercise, change or termination of rights under a contractual obligation may nonetheless be made conditional in any manner.
- Irrevocable power of attorney may be used in business relations.
- Creditor agreements
Creditors will be able to enter into agreements regarding their demands for a debtor to perform its obligations and the priority of such demands.
- Managing pledged assets
Several creditors will be able to appoint a representative – a manager of pledged assets (by analogy with securities trustee known in foreign law systems) exercising the pledge rights on their behalf and to their benefit.
- Good faith acquisition of right of pledge and pledged assets
If assets are pledged by an unauthorised person, the good faith acquisition of a right of the pledge will be possible.
Onerous acquisition of pledged assets by a party, which was not aware of and was not obliged to be aware of the pledge, will be considered a good faith acquisition of the pledged assets and in such a case the pledge will be released.
- Late fee
The court’s powers to reduce the amounts of late fee penalties will be limited in business relations.
Parties will be able to recover losses caused by false representations made prior to or following execution of an agreement.
In business relations parties will be able to provide for one of the parties’ right to demand indemnification from the other party for pecuniary losses incurred in connection with performance, amendment or termination of obligations, including misconduct by third parties. Indemnity—a concept that is quite common and widely applicable in large and complex structured deals abroad—would be permitted under Russian law.
- New types of agreements
New contractual structures will be introduced: (1) a framework agreement (agreement with open terms); (2) option agreement (agreement with unconditional right to enter into a specific agreement); (3) subscription agreement (agreement with performance on demand); (4) escrow agreement.
Third, measures to protect parties’ rights will be improved.
- Pre-contractual liability will be stipulated as liability for bad faith negotiations or termination of negotiations in respect of an agreement to be executed.
- The amount of losses must be set by the court even if they cannot be credibly determined.
3. PROPERTY LAW
First, the existing system of property rights will undergo a serious change.
Second, new limited property rights will emerge: (1) permanent landownership; (2) development of land plots; (3) personal usufruct; (4) preferential acquisition of immovable property; (4) pecuniary benefit; (5) limited title of owner of a building to the land plot under such building.
This review covers only some of the changes being introduced to the Civil Code. Generally, the Draft offers a comprehensive revision of the Civil Code. It combines both innovatory and conservative proposals. Generally, the changes covered by this review are progressive in nature. Many of them meet the needs of Russian business practice and create an environment for their long-term improvement. These amendments will be conducive to better corporate governance, increased transparency and a clampdown on abuse in corporate relations, practices to preserve validity of transactions, and growth in business activity in general.
- Global M&A volume in Q1 2012 was US$481 billion (US$1.9 trillion on an annualized basis), down 16% from Q4 2011.
- Many ingredients of an M&A resurgence are present, including would-be strategic and private equity acquirers’ considerable cash stockpiles and improving balance sheets, a historically low cost of debt financing for investment grade borrowers, rebounding equity markets, pent-up demand for resources, and attractive divestiture targets. However, continued stock market uncertainty, European economic woes, and antitrust, banking, and other regulatory pressures in the United States, Europe, and China continue to slow the pace of deals.
- M&A volume in Asia and North America declined in Q1, but European M&A notched gains for the second consecutive quarter. Europe contributed 29% of global M&A volume in Q1, eclipsing the United States (27%). Europe and the United States continued to drive global M&A volume, although to a lesser extent than in 2011, underscoring the important role of M&A in emerging markets.
- Cross-border deals accounted for 36% of global M&A volume in Q1, apace with 2010 and 2011 levels.
- Cross-border transactions have increased steadily since 2009, particularly in the Energy & Power, Materials, and High Technology sectors. The race to control natural resources continued to drive significant global M&A volume, with the Energy & Power sector producing nearly US$440 billion of global M&A and US$175 billion of cross-border M&A over the past 12 months. The Materials sector bucked broader M&A trends and produced more M&A volume in Q1 than in any of the previous three quarters. Deal volume in the Financial and Healthcare sectors, however, fell for the third consecutive quarter.
- Distressed deal volume has hit recent historic lows as the global economy continues to improve.
- “Mega deals” were notably absent in Q1, with just one deal exceeding US$10 billion in value.
- On 28 January 2012 a new law came into force relating to the merger and demerger procedure under Belgian law. The new law simplifies the existing procedure by reducing the administrative reporting and documentation requirements to an absolute minimum while safeguarding the interests of shareholders and other parties.
- This simplification implements the European Directive 2009/109/EG of the European Parliament and of the Council dated 16 September 2009, amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions.
- A company that wishes to absorb another company in which it holds at least 90% of the votes, may squeeze out the minority shareholders.
The Act of 8 January 2012 modifying the Belgian Companies’ Code (the “BCC”) concerning reporting and documentation requirements in mergers and demergers (the “Act”) came into force on 28 January 2012 and applies to mergers and demergers for which the proposals are filed with the Clerk’s office of the Commercial Court from that date. The Act implements the European Directive 2009/109/EG of the European Parliament and of the Council dated 16 September 2009 (the “Directive”), whose implementation deadline was 30 June 2011.
The main purpose of the Act is to reduce the administrative burden of Belgian companies involved in merger and demerger procedures by limiting paperwork to the minimum required to safeguard the interests of the shareholders and other parties. To this end, shareholders can, among other things, unanimously waive certain documentation and reporting requirements and/or consent to more flexible information requirements.
The new rules apply mutatis mutandis to mergers and demergers (splits or scissions). Our comments summarize the most important modifications to the merger procedure by way of an absorption (the most commonly used in reorganization or restructuring processes in Belgium).
Regrettably, the Act did not change the procedure for cross border mergers (regulated on the European level in the Directive 2005/56/EG and implemented into Belgian law by the Act of 8 June 2008), save for the filing and publication requirements. Therefore, the following overview only relates to Belgian domestic mergers.
New reporting, documentation, publication and information requirements
- New filing and publication requirements (Article 693 BCC)
- Before the Act: the merger proposal had to be filed at least six weeks (mandatory waiting period) before the date of the extra-ordinary shareholders’ meeting convened to decide on the merger and a notice of such filing had to be published in the Belgian Official Gazette.
- After the Act: the merger proposal has to be filed and published at least six weeks (mandatory waiting period) before the date of the extra-ordinary general meeting of shareholders convened to decide on the merger. Instead of a mere notice of filing, an extract from the merger proposal or a hyperlink to the company’s website on which the merger proposal has been made available has to be published.
- Comment: according to a strict interpretation of the current wording of this provision, the mandatory waiting period of six weeks has in practice been extended to at least eight weeks as the commencement date of the waiting period is deferred to the publication date instead of the filing date and there is a delay between filing and effective publication. This could not have been the intention as the six week period already included a safety margin of two weeks for the publication and therefore extended the four week period required by the Directive. However, until the Act is clarified on this point, this eight week period will have to be taken into account. The Act does not specify the content of the extract. It is assumed that the entire merger proposal or at least an extensive summary of it must be published.
- Possible waiver of certain reporting requirements (Article 694 and 695 BCC)
- Before the Act: the management bodies of the merging companies were required to draw up a special report in relation to the merger setting out, among other things, the status of the assets and liabilities, the rationale and implications of the merger, the valuation method and the proposed share exchange ratio. Moreover, the statutory auditor of each of the companies involved was required to draw up an audit report concerning the merger, setting out, among other things, an assessment of the proposed valuation method and the resulting share exchange ratio. Only the requirement for the statutory auditors’ reports could be unanimously waived by the shareholders of the respective merging companies.
- After the Act: the special management reports on the proposed merger are no longer required if all shareholders of the respective merging companies (and holders of other securities with voting rights) unanimously waive the requirement. If the shareholders of the merging companies (and holders of other securities with voting rights) unanimously decide to waive the requirement of the statutory auditors’ special reports on the merger, the absorbing company must comply with the particular reporting requirements concerning contributions in kind (i.e. a special report by the management body on the contribution and a valuation report by the statutory auditor).
- Comment: at least one report drawn up by an independent auditor will be required. This also applies to the special management report.
- Possible waiver of other requirements (Article 696 and 697 §2 BCC)
- Before the Act: the management body was required to: (i) inform both the shareholders’ meeting of its company and the management bod(y)(ies) of the other merging company(y)(ies) about any significant changes in the assets and liabilities after the date of the merger proposal, and (ii) draw up interim financial statements as per a date not earlier than three months before the date of the merger proposal, if the most recent annual accounts were closed more than six months before the date of the merger proposal.
- After the Act: these requirements no longer apply if they are unanimously waived by all holders of voting rights. An additional exemption to the obligation to draw up interim financial statements exists for companies who have published semi-annual financial reports pursuant to article 13 of the Royal Decree of 14 November 2007 (only for listed companies).
- Alternative method of informing shareholders (Article 697 BCC)
- Before the Act: the management body was required to (i) provide the shareholders with the merger proposal, management report and report of the statutory auditor, (ii) draw up a merger file at the merging company’s statutory office (containing among other things the annual accounts and related reports over the last three financial years, the merger reports and interim financial statements, if any, (iii) give the shareholders the opportunity to obtain copies of such documents free of charge.
- After the Act: the shareholders can agree to rece copies of the documents sub (i) and (ii) by e-mail. The management body may also make the documents sub (ii) available on the company’s website, without charge, for a period of one month before and after the extra-ordinary meeting of shareholders convened to decide on the merger.
- Exception to the exclusive authority of the general meeting of shareholders (Article 699 BCC)
- Before the Act: a merger had to be approved by an extra-ordinary shareholders’ meeting, taking into account the quorum and majority requirements as for a modification of the articles of association or the corporate purpose (if applicable).
- After the Act: if a limited liability company (“naamloze vennootschap” / “société anonyme”) holds at least 90% of the voting rights in another limited liability company, approval by an extra-ordinary shareholders’ meeting of the absorbing company is no longer required if prior information requirements have been fulfilled. Nevertheless, one or more shareholders of the absorbing company who jointly hold at least 5% of the shares have the right to request an extra-ordinary shareholders’ meeting to reach a resolution on the merger.
- Comment: the Act does not specify what procedure is to be followed if no shareholders’ meeting is convened. One should assume that the board of directors will be authorised to take a decision on the merger instead of the shareholders’ meeting. However, as the approval of a merger by acquisition also entails a capital increase with issuance of new shares, we believe that this exception can only apply if the acquiring company’s articles of association confer authority on the board of directors to increase the company’ share capital within the limits of the authorised capital. This is the only circumstance under which the BCC provides an exception to the exclusive authority of the shareholders’ meeting to increase the share capital and to issue new shares.
The new rules apply mutatis mutandis to demergers (scissions). The former demerger procedure already permitted waiver of the reporting requirements. The Act adds a new exemption for demergers by way of an incorporation of new companies, whereby the shares issued in the newly incorporated companies are allocated proportionally to the shareholdings in the demerging company. The following requirements no longer apply in such case: the special report of the management body, the special report of the statutory auditor, the obligation to provide information about important changes to the demerging company and the drawing-up of interim financial statements. Furthermore, the exception to the exclusive authority of the shareholders’ meeting will also apply in the case of demergers if the acquiring companies hold 100% of the voting rights in the company that will be split.
Squeeze-out procedure in the case of merger by absorption
Finally, in case of a merger by absorption intended by a limited liability company that holds at least 90% of the voting rights in a limited liability company to be absorbed, the Act provides the possibility for the majority shareholder (i.e., the prospective absorbing company) to squeeze-out the minority shareholder(s).
Belgian companies and legal practitioners have welcomed the Act as it simplifies the merger and demerger procedure under Belgian law and limits the paperwork involved. However, as some of the new provisions lack clarity and detail interpretation problems may arise. The expectation is, therefore, that the legislation will be clarified on particular points.
CHINESE UPDATE – Simpler Rules for Domestic Investment Procedures for Foreign-funded Investment Companies
In the past, when a foreign-funded investment company (“FIC”) established in China intends to invest its RMB income into another Chinese company, it would increase the registered capital by using such RMB income, and then use such newly converted registered capital to invest in other companies. In contrast, the new measures have simplified the procedures so that a FIC can make investment in other Chinese companies directly without having to convert the RMB income to its registered capital first.
Pursuant to the Supplementary Regulations on Establishment of Foreign-funded Investment Company (Decree No. 3 ) issued by the Ministry of Commerce of the PRC (the “MofCom”) and the Notice on Operational Guidelines for Issues Concerning Capital Verification Inquiry on FICs’ Reinvestment (Decree No. 7  of the SAFE) issued by the State Administration of Foreign Exchange (“SAFE”), where a FIC makes investment into Chinese companies with its lawful RMB income such as its operational profits and investment proceeds derived from capital decrease, liquidation, and transfer of equity interests, of its subsidiaries, it shall obtain an approval from the local counterpart of SAFE and MofCom to increase its registered capital by converting such RMB income into its registered capital (“Capital Increase Approval”). Subsequent to obtaining the Capital Increase Approval, the FIC is allowed to use the increased capital to make investments. In other words, a FIC must convert its lawful RMB income into its registered capital first and then use such increased capital to invest in other Chinese companies.
However, in accordance with the Notice on Further Improving the Administrative Measures for FICs (Decree No. 1078 ) jointly issued by MofCom and SAFE on December 8, 2011, the above described procedures have been simplified. A FIC may directly use its legitimate RMB income to invest in other Chinese companies upon an approval from local SAFE. The FIC does not have to convert its RMB income into its registered capital to increase its registered capital first.
Capital increase of a FIC requires approvals from both local SAFE and MofCom, as well as registration with the company registration authority, which may take at least one month. The new measures certainly have saved operational cost and shortened the time for FICs to make investment in China by trimming the capital increase step.
 A FIC means a foreign-invested company whose main business is to make direct investment in other Chinese companies. FIC may be able to provide value-added services to the companies it has invested, such as to purchase equipment, materials, parts and components and distribute products for, to balance the foreign exchange among, and to provide financing for, such invested companies. The foreign investor to a FIC must satisfy rather stringent requirements. For example, its total assets shall no less than USD 400 million and it has contributed more than USD 10 million to enterprises established in China; or it has set up more than 10 manufacturing or infrastructure companies in China with actually contributed capital being more than USD 30 million.
 “China” or “PRC” means the People’s Republic of China, which for the purposes of this article does not include Taiwan, Hong Kong Special Administrative Region and Macau Special Administrative Region.
UK UPDATE – UK Government Confirms Creation of Single UK Competition Authority: Merged Authority to Retain Voluntary Merger Regime
The U.K .government confirms the anticipated merger of the Competition Commission and the competition functions of the OFT into a single Competition and Markets Authority (“CMA”) to be effective by April 2014. The U.K. government has decided to retain the current voluntary regime of merger notifications, albeit with a tightening of administrative measures.