Amendments planned for the management bodies of Russian companies

On 5 October 2010, in order to strengthen and unify the laws regulating the activity of joint-stock companies and limited liability companies, the State Duma passed the draft law on management bodies in the first reading. The draft law, which we reviewed in Legal Alerts in December 2009 and June 2010, is intended to regulate in greater detail the rights and obligations of company directors and officers, and, in particular, introduces a new type of director and officer liability.

Holding management bodies liable
Current legislation provides that directors and officers are liable only to the company for their “guilty” actions. In contrast, the draft law, in certain circumstances, imposes liability on the directors and officers (together with the company) to the company’s participants/shareholders for any losses caused by their “guilty” actions.
In relation to the sole executive body of a company only (the “Company Manager”), the draft law further establishes that he/she is deemed “guilty” if he/she has acted unreasonably and/or in bad faith. It also sets out examples of a Company Manager’s unreasonable and bad-faith conduct, in particular:

The draft law does not expressly give examples of what constitutes “guilty” actions on the part of other members of management bodies.

In addition, the draft law introduces two types of insurance agreements associated with director and officer liability. Under these agreements, a company will be entitled to insure: 
-- the risk of loss by the company connected with indemnifying its directors and officers for court and other expenses relating to the latter having been held liable for negligence; and
-- director and officer liability for having negligently caused losses to the company, its participants/shareholders and other persons. 

Types of agreements signed with directors and officers
The draft law does not change the legal status of a Company Manager. He/she is still required to sign an employment agreement but what is new is that until such an agreement is signed, a Company Manager is considered to be acting on the basis of an unremunerated civil-law services contract.

Unlike a Company Manager, other members of management bodies do not conclude employment agreements, but only enter into civil-law services contracts, and the draft law includes a list of grounds for terminating these contracts.

Contractual arrangements will have to take into account: 
-- a newly introduced list of rights and obligations of directors and officers; and 
-- criteria with which candidates for director and officer appointments must comply.

Temporary replacement of Company Manager
According to the draft law, the concept of a temporary Company Manager is introduced in limited liability companies by analogy with that already existing in joint-stock companies.

However, the draft law differentiates between: 
-- a temporary Company Manager who is appointed by the board of directors/supervisory board; and 
-- a temporary acting Company Manager (the “Acting Company Manager”) who is appointed by the Company Manager.

The differences between the two are as follows: 

In resolving a longstanding debate on whether an Acting Company Manager should be given a power of attorney to act on behalf of the company, the draft law envisages that an Acting Company Manager can act on behalf of a company without a power of attorney.

If a Company Manager’s powers are delegated to a management company (the “ManagementCo”, upravlyaiushaya organisatsiya in Russian), only the manager of the ManagementCo will be entitled to represent the company. He/she will be liable (together with the ManagementCo) for his/her activities. It is noteworthy that the draft law prohibits insuring against the risk of responsibility of a ManagementCo or a professional manager (upravlyaiushiiy in Russian), to either of which/whom the Company Manager’s authority has been delegated.

Comments
The passing of the draft law in the first reading certainly demonstrates a positive development in legislative initiatives to regulate the rights and obligations of directors and officers.

Interestingly, when preparing the draft law, the Duma has taken into consideration the experience of various Western legal systems in developing this aspect of corporate law. We do not exclude the possibility that the draft law may be further amended.

We will continue to monitor the progress of this draft law and report on any developments in our client publications.

[Draft Federal Law No. 394587-5 “On Amending Separate Legislative Acts of the Russian Federation to Hold the Members of Corporate Management Bodies Liable”]

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