__________________________________________ 55 See Theodor Baums, “Aktienrecht für globalisierte Kapitalmarkte - Generalbericht» in Peter Hommelhoff, Marcus Lutter, Karsten Schmidt, Wolfgang Schön and Peter Ulmer (eds.), Corporate Governance (Gemeinschaftssymposion der Zeitschriften ZHR/ZGR), 71 ZHR (2002), 13-25; and Patrick C. Leyens, “Deutscher Aufsichtsrat und U.S.-Board: Ein oder zweistufiges Verwaltungssystem? Zum Stand der rechtsvergleichenden Corporate Governance-Debatte», 67 RabelsZeitschrift (2003), 57-105.
According to the present Model Law, the supervisory board is a supervisory (kontrol’) body and may not be engaged in the routine activities of the management board. Furthermore, the powers of the management board may not be delegated to the supervisory board. However, as the supervisory board is a body with wide-ranging powers, it may for instance, at any time, demand a report on corporate performance from members of the management board and-without a resolution adopted by the general meeting-may bring claims against members of the management board for the indemnification of losses inflicted upon the company as a result of their unlawful (neproavmernye) acts (Part 2, Art.102). A critical power of the supervisory board is that of appointing and dismissing from office members of the management board. Under a dualistic system, the supervisory board appoints and dismisses from office members of the management board, as opposed to the monistic system, where such members are appointed or dismissed by the general shareholders' meeting (Part 1, Art.103). On behalf of the company, the supervisory board enters into and terminates service agreements (corporate contracts) with members of the management board (Part 2, Art.103). While the delegation of managerial functions to the supervisory board is prohibited (Part 1, Art.104), the adoption of resolutions on specific matters requires consent of the supervisory board. Part 2, Article 104 of the present Model Law contains an exhaustive list of such matters. The supervisory board must be made up of at least three members (Part 1, Art.105), but the Law does not specify any maximum number of supervisory board members. In light of demands from representatives of trade unions in Russia and some other CIS countries, the present Model Law provides for a right for a company's works collective (trudovoi kollektiv) to appoint one-third of the supervisory board members. However, this requires the appropriate rule to be introduced in the articles of association or in a national law (Part 4, Art. 103). Thus, the Law does not directly grant this right to the works collective. The general meeting elects members of the supervisory board for a period of three years; members can only be natural persons. Such members may also be delegated by specific shareholders, entitled to do so under the articles of association of the company. Upon a motion of the management board of a company, a court may also appoint members of the supervisory board where no new member has been appointed within six months after a member of the supervisory board has resigned (or has been dismissed) from office, or where the number of members in the supervisory board is less than the number of members as established by the Law or by the articles of association or where members of the supervisory board have been appointed in violation of the Law. Members, who have been elected to the supervisory board, may be dismissed from office at any time by a resolution of the general meeting adopted by a simple majority of votes (Part 6, Art.105). The powers of a court-appointed member of a supervisory board terminate at the moment when the grounds for such court appointment cease to exist (Part 9, Art.105). The inadmissibility of simultaneous membership of the management board and supervisory board is an essential feature of the dualistic management system (Part 1, Art.106); where this prohibition has been violated, the management board immediately is required to raise the issue of eliminating this violation (Part 4, Art.106). The chairperson of the supervisory board is elected by the supervisory board from among its members for the term of the powers of the supervisory board and directs the work of the supervisory board (Part 1, Art.108). So as to ensure that members of the supervisory board act independently and to prevent their dependency on the respective joint-stock company, the present Model Law prohibits the company from establishing any employment relations with members of the supervisory board (Part 7, Art.108). However, this provision in the present Model Law is problematic where representatives of the works collective are members of the supervisory board. Despite the fact that the supervisory board is a supervisory body, the chairperson of the supervisory board is obliged to cooperate continuously with the management board-in particular with the chairperson of the management board and to discuss with him/her the strategy and development of corporate operations and the pertinent risks. In turn, the chairperson of the management board is required to notify the supervisory board of any significant events for the company. The chairperson of the supervisory board is also required to notify all other members of the supervisory board (Part 4, Art.108). In order to prevent its becoming passive, the present Model Law imposes upon the supervisory board certain obligations designed to ensure its efficiency For instance, meetings of the supervisory board must be held at least once every quarter; ensuring fulfilment of this requirement is within the competency of the chairperson of the supervisory board (Part 1, Art.109). In addition, any member of the supervisory board or the management board may convene a meeting of the supervisory board (Part 3, Art.109). The adoption of resolutions of the supervisory board requires a simple majority of votes provided that at least one-half of its members attend the meeting; a re-convened meeting does not require a quorum. Attendance at meetings of the supervisory board is obligatory for its members. Compensation is paid to the members of the supervisory board according to the articles of association and by virtue of a resolution adopted by the general shareholders' meeting. Such resolution expressly contains a precise specification of the compensation to be paid to the chairperson of the supervisory board and his/her deputy. On the one hand, the amount of compensation must be appropriate to the tasks performed by members of the supervisory board; on the other hand, it must be commensurate with the financial position of the company. Fulfilment thereof falls within the duties of the management board (Art.111). The duty to be loyal (true) to the company is one which is imposed upon members of the supervisory board. One of the manifestations of this duty is in the disclosure of conflicts of interest. In particular, each member of the supervisory board is required-both prior to being elected member of the board and during his/her term of office-to disclose and to submit to the board information regarding a conflict of interest that may arise out of cooperation or the holding of a official position (dolzhnostnoe polozhenie) with customers, suppliers, creditors or business partners of the company (Part 2, Art.113). In addition, all agreements between a member of the board and the company- including loan agreements or credit facilities-may only be concluded after approval thereof by the supervisory board.
4. The Management Board
The management board is a managerial body of a company responsible for the managing of the company at its sole discretion (Part 1, Art. 114). This means that it takes decisions at its sole discretion albeit solely in the interests of the company. The management board is not obliged to follow instructions given by the supervisory board, a general meeting or individual shareholders. However, the management board is required to fulfil resolutions adopted by these bodies within the scope of their competence (Parts 2, 4, Art. 114). Thus, the Law expressly distinguishes between the notions of 'instructions' and 'resolutions' (ukazaniia and resheniia respectively). The management board may be made up of one or more members who only may be natural persons. Certain persons are deprived of the right to be members of the management board; in particular, no one convicted and sentenced in criminal proceedings for property crimes may be appointed as a member of the management board unless the period of time which has elapsed after serving the sentence equals (or exceeds) five years. Furthermore, no one maybe a member of the management board who, by way of a court judgment or ruling of a competent governmental authority, has been prohibited from engaging in a specified profession or specified areas of activity or business activities during the period of time in which such prohibition remains in effect (Part 1-3, Art. 115). Members of the management board are appointed for a term of up to three years. After their appointment, members of the management board conclude a service agreement (corporate contract) signed by the chairperson of the supervisory on behalf of the company. Such contracts are regulated by the norms of the Civil Code on contracts. Service agreements (corporate contracts) are not employment agreements; therefore, labour law does not apply thereto (Parts 1,3, 4, Art.116). In certain instances-in particular where there is a delay in appointing a member of the management board-a member may be appointed by a court upon a motion filed by one of the members of the supervisory board (Part 6, Art.116). Where a management board is made up of several members, the supervisory board appoints one of the members as the chairperson of the management board who coordinates the work of the management board, chairs its meetings and represents it in relations with other bodies of the joint-stock company and with third parties (Part 2, Art.116). The supervisory body may dismiss from office, at any time, any member or the chairperson of the management board. A resolution to dismiss a member or chairperson from office constitutes grounds for terminating the service agreement. Thus, the Law distinguishes the notion of «a corporate legal document for appointing members of the management board”, regulated solely by this Law, and the service agreement (corporate contract) to which the norms of the Civil Code are applied. The corporate legal document of appointment may be revoked at any time, while a service agreement may only be terminated where there are grounds for the termination thereof. The management board is not only an in-house managerial body; it also represents the company in relations with third parties without a power of attorney (doverennost') (Part 1, Art.117). While the present Model Law provides that members of the management board only jointly represent the company before third parties, in order to conclude a transaction between third parties and the company, it is sufficient for a party to the transaction to express its will to one of the members of the management board (Part 2, Art. 117). To ensure stable civil commerce and trade, the Model Law provides that no restrictions may be imposed on the management board in representing the company with third parties (Part 5, Art. 117). Although members of the management board are required to comply with company management restrictions stipulated in the articles of association or imposed by corporate resolutions, a violation of such restrictions does not lead to the invalidity of transactions concluded on behalf of the company with third parties (Part 7, Art.117). In contrast to compensation of members of the supervisory board, which is determined by a general shareholders' meeting, the supervisory board establishes the amount and form of compensation to members of the management board. In this regard, the duty of reasonableness (razumnost') is imposed upon the supervisory board-in particular, such that while establishing the amounts, form and package of compensation for members of the management board, the supervisory board is required to ensure that the total amount being paid is reasonably consistent with the duties and responsibilities of the relevant member of the management board and the company's financial position (Part 3, Art.118). The Law consolidates the duty of loyalty (faithfulness) (loial'nost', vernost’) of members of the management board and specifies a number of obligations in relation to conflicts of interests. In particular, members of the management board are required to serve the lawful interests of the company and to perform their functions solely in the interests of the company. Members of the management board do not have the right to use business opportunities and proposals intended for the company in their own interests (Part 1, Art.119). In addition, a member of the management board does not-without the appropriate authorization from the supervisory board-have the right to conduct business and engage in transactions for its own account or the account of third parties within the sphere of corporate activity, or to become officers or insolvency receivers in other corporate entities or to become stakeholders in business companies or major shareholders in other companies (Part 3, Art.119). Each member of the management board is required to disclose and provide the supervisory board with information about the existence of a conflict of interest (Part 7, Art. 119). The Law separately establishes the duties of members of the management board vis-à-vis the supervisory board in the event of emergencies, i.e., an event where losses of the company are equal to one-half of the authorized capital or where a company becomes insolvent. In the first case, the management board immediately is required to convene a general meeting; in the second, to institute bankruptcy proceedings (Parts 1-2, Art.122). The concept of a dualistic system detailed in the present Model Law specifies the rights and duties of individual corporate bodies and must promote a clear delineation of powers between the management board, which is a managerial body, and the supervisory board, which is a supervisory body.
5. The Board of Directors
The present Model Law provides for a new interpretation of the board of directors and the executive body under monistic management system standards.56 The formation of an executive body-as provided for in the joint-stock-company laws of many CIS countries-is not required. However, while the board of directors may delegate its managerial powers to a sole or collegial executive body, the overall responsibility to the company continues to reside in the board of directors. _____________________________________ 56 See Franklin A. Gevurtz, Corporation Law (West Publishing, St. Paul, MN, 2000), i8ofF; and Melvin A. Eisenberg, Corporations and Other Business Organizations: Cases and Materials (Foundation Press, New York, NY, 8th ed. 2000), 203ff.
Similar to the management board, the board of directors is responsible for management and supervisory activities for which it bears its own liability. It adopts resolutions at its own discretion albeit solely in the interests of the company (Part 2, Art.124). With the exception of those matters the resolution of which is within the competence of the general shareholders' meeting or where the articles of association have delegated them to the executive body, the board of directors adopts resolutions on all other matters (these matters are referred to in Art.124 of the present Model Law). The general shareholders' meeting elects members of the board of directors for a period of up to three years, and they may be re-elected for several times. The general shareholders' meeting, at any time, may decide on the early termination of the term of office of all members of the board of directors (Part 3, Art.126). The first composition of the board of directors is nominated at the time of formation of the company, and the first composition must be entered in the corporate articles of association (Part 2, Art. 126). The number of members in the board of directors is established by the articles of association; however, in any case, it must be at least three (Part 5, Art.126). Since, unlike the dualistic management system, there is no independent supervisory body in the monistic system in the form of a supervisory board, the present Model Law requires that at least one-third of the members of the board of directors must be independent directors (Part 5, Art.126). Furthermore, the Law specifies the criteria for determining independence. In particular, a person is not-and may not be elected as-an independent director of the company where he/she: (a) is or was an officer of the joint-stock company for the last five years prior to being nominated for office as an independent director; or (b) is or was an employee of the joint-stock company or its affiliated person for the last three years prior to being nominated for office as an independent director; or (c) is a close relative of a major shareholder or an officer of the joint-stock company (a list of these criteria is set forth in Part 5, Art.126). As opposed to elections to the supervisory board and the management board, elections to the board of directors are made by way of cumulative voting. A shareholder in entitled to cast all of the votes flowing from the shares of stock held by him/her for one candidate or to distribute them among multiple candidates to the board of directors. The candidates with most votes are deemed to be elected to the board of directors. In the event of a tie vote between two or more candidates for one vacancy on the board of directors, additional voting is held. The chairperson of the board of directors is elected from among the members of the board of directors by the members by a majority of votes of the total number of board members, unless the company's articles of association require otherwise. Thus, the articles of association may provide for the election of the chairperson of the board of directors by the general shareholders' meeting. Although members or the head (rukovoditel’) of the executive body may be elected members of the board of directors (contrary to the dualistic management system), the head of the executive body (the sole executive body) may not be elected as chairperson of the board of directors (Part 2, Art.127). The board of directors, at any time, may re-elect its chairperson by a majority of the total number of votes cast by members of the board of directors, except in cases where the chairperson was elected by the general shareholders' meeting. Meetings of the board of directors are held at least quarterly. The chairperson of the board of directors is required to ensure that meetings of the supervisory board are held quarterly. The Law details the procedure for holding meetings of the board of directors and for recording its resolutions. This is an essential pre-requisite for the proper documentation of the work of the supervisory board. The board of directors may delegate management of current corporate operations to a sole executive body or to a collegial executive body. This is an internal matter of the company, and the procedure for delegation may be specified by the articles of association or by an appropriate resolution of the board of directors. A major innovation of the present Model Law is the delineation of functions between the supervisory board and the board of directors as well as the legal fixation of the names of officers. The goal of this approach is to ensure transparency and clarity of the names of officers in business relations. Business partners must knowwith whom they are communicating and engaging in business negotiations. For instance, the sole executive body or head of the collegial executive body is referred to as the company's general director. Depending on their spheres of work, members of the collegial executive are called directors-the financial director, marketing director, etc. (Part 1, Art.129). To this end, the company's general director and the chairperson of the board of directors may not be one and the same person. The board of directors appoints the general director or members of the collegial executive body (directors) from among the members of the board of directors or from among third parties. The general director and members of the collegial executive body (directors) conclude service agreements (corporate contracts) signed by the chairperson of the board of directors on behalf of the company. The board of directors may dismiss the general director and/or members of the collegial executive body from office at any time. The norms of the Civil Code on contracts are applied to a service agreement (corporate contract). The general director represents the company with third parties. No restrictions may be imposed on the general director's authority to represent the company with third parties (Part 6, Art.129). As prescribed by the company's articles of association or by regulations on the executive body, the general director apportions the functions among the members of the collegial executive body-directors of the company-and ensures that they properly perform their functions. In contrast to the dualistic management system where the supervisory board may not instruct the management board, under the monistic system the board of directors has a right to instruct the general director or members of the collegial executive body regarding the current operations of the company (Part 8, Art. 129). The lack of an independent supervisory body accounts for the need to establish another structure to exercise supervision over the company's financial and business operations. According to the Law, this structure is the internal accounting service which, in its work, is directly subordinate to the board of directors (Art.132). For the sake of true independence and neutrality, employees of the internal accounting service may not be elected as members of the board of directors or the executive body of the company. Similarly to members of the management boards, a duty of loyalty extends to members of the board of directors, general director and members of the executive body which is expressed first and foremost in the duty to avoid conflicts of interests (Art.133). To this extent, the present Model Law is in line with internationally recognized corporate governance standards. The present Model Law also specifies the duties which are imposed upon the board of directors in cases of emergency, which are deemed to be the company's insolvency or loss of one-half of its authorized capital.
6. The Liability of Corporate Officers
The present Model Law sets forth detailed rules and regulations on the property liability of corporate officers vis-à-vis the company. The prerequisites for civil-law liability of officers to the joint-stock company are: the subject of liability, a breach of duty, fault (vina) of the transgressor, damage (ushcherb) (losses [ubytki]) and a causal relationship between the act and the damage which has been inflicted. The legislator's main task is, on the one hand, to precisely specify the persons who are responsible for joint-stock company management and who are liable for any losses inflicted upon the company, and, on the other hand, to delegate specific and unambiguous powers thereto for the management of the joint-stock company. According to the present Model Law, the subjects of liability are the corporate officers: the members of the supervisory board, management board and board of directors. First of all, the present Model Law requires these officers reasonably (razumno) and in good faith (dobrosovestno) to perform the duties imposed upon them by a law, the company's articles of association or a service agreement in the interests of the company. The liability of officers arises only where they have been at fault in failing to properly perform their duties and where losses have been incurred by the company, i.e., damage has been caused (Part 2, Art.135). As this liability is directly related to a violation of specific duties, the present Model Law-as distinguished from joint-stock company laws operating in many CIS countries-provides a list of these duties (Part 5, Art.135) and personifies the addressees of these duties (Part 5, Art.135). This facilitates the identification, both of the responsible parties and the violated duties. It also is necessary to specify and identify management duties for the following reasons:_/zrjt/y, one of the functions of laws is not only to regulate relations but, also, to inform participants in relationships of their rights and duties. This function is extremely important for post-Soviet countries, which still lack a developed corporate law. The unambiguous definition of duties tends to promotes compliance by managers with their duties. Secondly-as opposed to the US where liability criteria are established by the courts-the courts in post-Soviet states have not yet built up a tradition of adjudicating corporate disputes. Therefore, one cannot reasonably or realistically expect that, in the near future, the judiciary in the post-Soviet legal space will establish standards of liability for corporate managers. It is just the other way round: judges need laws with specific regulations that will assist them in resolving specific issues. Managers of joint-stock companies are liable in the event of a breach of their duties through their fault. It remains to be defined as to what is understood by the concept of fault and how it ought to apply to the liability of managers of joint-stock companies. In this regard, the present Model Law contains a fairly unambiguous definition of fault of transgressors. Thus, a violation is deemed to be one accompanied by fault where corporate officers have not undertaken with due care (zabotlivost’) and diligence (osmotriteol'nost’) all necessary measures to prevent the occurrence of the violation (Part 3, Art.135). From the point of view of applying the concept of fault in practice, the objective theory of fault enshrined in the present Model Law deserves particular attention; in the event of a violation of duties provided for by a law, the company's articles of association or service agreement, the existence of fault is presupposed (Part 3, Art.135). The burden of proof of innocence, i.e., proof that officers have not violated their duties relating to company management, has been imposed upon the officers (Part 3, Art.135). This can be explained by the fact that all the corporate documents are at the disposal of its managers, and no one is in a better position to substantiate the correctness and lawfulness of their acts and decisions. At the same time, the burden of proof of the infliction of damage lies with the plaintiffs: they must prove the fact that damage has been inflicted upon the company. The Law provides for the principle of individual liability. While officers are members of the respective corporate body, liability is only imposed upon those who have violated their duties. If these duties have been violated as the result of acts or omissions of several officers, they are jointly liable to the company. Officers who have voted against a resolution which has led to losses or those who, for mitigating reasons, have not taken part in such voting are not liable to the company (Part 2, Art.135). The liability for joint-stock company managers is established by the Law. Neither the company's articles of association nor the service agreement may exempt them from such liability (Part 4, Art.135). On the other hand, the present Model Law provides for the principle applied in modern corporate law under which company managers are not held liable for business failures. Losses resulting from commercial business decisions may not be turned into the fault of the heads of companies. According to Part 6, Article 135, corporate officers are not required to indemnify losses incurred as a result of a commercial (business) decision where this decision was made in reliance on sufficient and proper information by impartial persons not personally interested in the decision, and where there is reason to believe that this decision would serve the interests of the company. In terms of corporate law, this rule is called the 'business judgment rule'. No matter how good regulations governing managers' liability may be or how detailed their obligations are, the mechanism of enforcing this liability is extremely important. To this end, the key question is as follows: Who has a right on behalf of the company to file claims against officers for indemnification of losses? Who is authorized to institute liability proceedings? The present Model Law contains the answers to all these questions. As a rule, the joint-stock company has the right to demand indemnification for losses inflicted upon the company. However, it must be specified as to who may or is required to file such claims on behalf of the company. Persons who represent the company under the Law and are charged with protecting corporate interests may themselves be in breach of these duties. The present Model Law provides for two ways to institute liability proceedings against managers of joint-stock companies. The first provides for filing indemnification claims byjoint-stock company bodies (Art.136); the second is for shareholders themselves to institute proceedings through so-called derivative (indirect) shareholder actions (proizvodnyie [kosvennye] iski) (Art.137). According to the present Model Law, corporate bodies not only have a right but, also, are required to demand the indemnification of damage inflicted upon the company as the result of a violation by corporate officers of their duties (Parts 2-4, Art.136). Moreover, the general shareholders' meeting may adopt a resolution requiring members of the management board and members of the supervisory board (members of the board of directors) to make demand upon corporate officers for indemnification of damages inflicted upon the company as result of their wrongful acts (Part 5, Art. 136). In addition to corporate managerial bodies, shareholders who jointly hold at least 1% of the company's voting shares of stock have a right to demand indemnification of losses. They are authorized to bring an action in court against the company's officers for the indemnification of losses inflicted upon the company as a result of the violation by these officers of their corporate managerial duties (Part 1, Art.137). However, such a shareholder action is subject to a number of prerequisites; in particular, a court will hear this action where: (1) the shareholders prove that they purchased their shares of stock prior to when they knew (or should have known) about the potential violations of managerial duties and losses incurred by the company as a result thereof; (2) the shareholders prove that they have already attempted to contact the relevant bodies of the company and have requested them to bring an action against those at fault but that such attempts have been unsuccessful; (3) there are circumstances that intensify the supposition that the company has incurred losses as a result of a violation of the Law or of the corporate articles of association; (4) satisfying the claim for damages will not harm the interests of the company.
Chapter VIII. Provisions on Corporate Transactions with Special Conditions
One of the principal purposes of modern corporate legislation is not only the regulation of the legal status of corporations (joint-stock or other companies) but, also, the most efficient, possible (balanced to one degree or another) governance of various conflicts of interest which are unavoidable in corporate activities. Examples of such conflict-of-interest regulations is the legislative embodiment of the terms and conditions applied to special types of transactions involving joint-stock companies. In particular, such transactions include: (a) transactions involving a conflict of interest arising from the personal interest of corporate officers or major shareholders; and (b) major transactions. The basis of the rules and regulations on transactions of the above-mentioned types is to be found in the need to minimize the adverse impact on parties to corporate relationships arising from conflicting interests such as: (a) the interests of the joint-stock company and the property interests of its major shareholders (or its officers) in concluding a transaction in which said shareholders (or officers) are personally interested; and (b) interests of the company and those of its shareholders where the company undertakes substantial (major) contractual obligations. The fact that regulations governing these two types of transactions by joint-stock companies are binding is characteristic of corporate legislation of most advanced countries.
1. Conflict-of-interest Transactions (Related- Party Transactions)
1.1. The Concept of Conflict-of-interest Transactions Special regulations established concerning conflict-of-interest transactions are intended to protect the property interests of a joint-stock company where the company may conclude a transaction with third parties in which any of its directors, officers or major shareholders-entitled to take part in adopting a resolution to conclude a transaction-has an interest in the matter. The present Model Law defines the notion of a conflict-of-interest transaction; this requires the simultaneous presence of two attributes for a transaction to be deemed as such (Art.138): 1) the respective director or any other officer or major shareholder is entitled (has the right) to take part in adopting the resolution to conclude such a transaction or in determining its terms and conditions; and 2) the property interests of parties, referred to in Subclause 1, in the transaction do not coincide with the interests of a joint-stock company. A general criterion for classifying a transaction as one containing a conflict-of-interest is that a conclusion can be drawn-based on an assessment of the facts or the existing circumstances-that the persons involved in adopting the resolution on transaction are not acting (or might not act) exclusively in the company's interests. However, the legislative embodiment of the requirement to conduct such an assessment of the facts and existing circumstances in each particular case with the aim of identifying the interests of officers or of major shareholders-which might compete with the company's property interests-would give rise to serious concerns about subjective assessments, would tend to obstruct the company's efficient activities and could destabilize internal corporate relationships.
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