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Commentary on the Model Law «On joint-stock companies» for CIS member states (as amended)* (CIS Inter-parliamentary Assembly. Standing Committee for Economy and Finance. October 2010)

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CIS Inter-parliamentary Assembly
Standing Committee for Economy and Finance

on the Model Law
«On joint-stock companies»
for cis member states
(as amended)*



* Translated by Ivan Doeski and William B. Simons.


Members of the Working Group for preparing a new version of the Model

Law for CIS Member States «On Joint-Stock Companies» and authors of the present Commentary:

Working Group Leader:

Professor Hans-Joachim Schramm (Germany) - Introduction, Chapters V, VI and XII;

Working Group Members:

Dr. Max Gutbrod (Germany/Russia) - Chapters I, II, III and IV;

Professor Lado Chanturiya (Georgia/Germany) - Chapter VII;

Professor Farkhad Karagusov (Kazakhstan) - Chapters VIII and IX;

Dr. Dmitrii Stepanov (Russia) - Chapter X; and

Professor Rolf Knieper (Germany) - Chapters XI and XIII.




In March 2005, the Standing Committee for Economy and Finance headed by Gagik E. Minasyan adopted a resolution to develop a new version of the Model Law «On Joint-Stock Companies» for CIS Member States. The European Bank for Reconstruction and Development supported this project, and an agreement was drawn up for joint implementation of the Model Law project. In April 2005, the Inter-Parliamentary Assembly of the Member States of the Commonwealth of Independent States (CIS IPA) adopted a resolution to include the project in the conceptual program of the CIS IPA legislative activity for 2005-2010. To implement this resolution, the CIS IPA established a Working Group headed by Mr. Minasyan. The Working Group members were subject-matter experts representing national parliaments, members of parliamentary committees and specialists from national ministries and governmental authorities. The Working Group has held numerous meetings in St. Petersburg and Yerevan, where its members discussed the drafts submitted and adopted resolutions on accepting or rejecting specific proposals. Drafts that were discussed at Working Group meetings were prepared by a Working Group subcommittee, which included specialists in the field of corporate law, from institutions of higher education and with legal practice in CIS member states and in Germany. The draft text of the Model Law, which was submitted to the IPA, is the result of the joint efforts of the Working Group and the Working Group subcommittee. In April 2010, it was approved by the Economy and Finance Committee headed by Vardan S. Ayvazyan.

Pursuant to the Statute «On the Development of Model Legislative Acts and Recommendations» (14 April 2005), the purpose of a CIS Model Law is to submit legislative proposals for consideration as regards:

- harmonizing the totality of legislative norms in CIS countries;

- improving existing legislation in order to resolve governance issues; and

- approximating international standards.

The draft Model Law «On Joint-Stock Companies»-which is presented to the reader in this publication-has been drafted in pursuance of the above aims. In addition, pursuant to the initial concept for developing the Model Law, the efforts of the Working Group have been based on the following assumptions.

1. Given the fact that laws on joint-stock companies exist in all the CIS countries, there has been no need to develop an absolutely new law «On Joint-Stock Companies». On the contrary, our goal has been to use the existing laws and the practice of their implementation as the basis for discussing ideas and innovations of the present Model Law-for developing a Model Law for all the Member States and applying the most detailed provisions is existence at the time of drafting these provisions. As can be seen from the contents and as described in more detail in this Commentary on the present Model Law, the Working Group has succeeded in achieving this goal. As an example, we would point to the decision which was made to abandon the distinction between open and closed joint-stock companies, now being introduced by an increasing number of countries in the CIS.

2. The Model Law «On Joint-Stock Companies» is linked to other Model Legislative Acts previously adopted by the CIS IPA. First of all, they include Part One of the 1994 Model Civil Code, the first version (1996) of the Model Law «On Joint-Stock Companies», the 2001 Model Law «On the Securities Market» and the 2005 Model Legislative Provisions «On Protection of Investor Rights on the Securities Market». The purpose of this new Model Law is to improve the first Model Law «On Joint-Stock Companies», and it contains further provisions that can be viewed as a supplement to the model provisions «On Protection of Investor Rights on the Securities Market». As far as the Model Law «On the Securities Market» on concerned, on the contrary, this contains clear distinctions.

3. Given the fact that, in a number of instances, legal norms concerning joint-stock companies in the CIS countries differ from one another on one and the same issue, it has been necessary to resolve the question as to whether-in such cases-preference should be given to one of these solutions. The Working Group opposed this view and, rather, proposes a number of alternative options. That is why, for example, Chapter VII of the present Model Law offers two alternative systems for management bodies of joint-stock companies. The Model Law also proposes options for selecting the structure of joint-stock companies which, however, are not intended for legislators but, rather, for the users of the Law.

4. Another task for the Working Group and the Working Group subcommittee was to develop solutions to existing loopholes in the legislation of CIS countries. In this respect, special attention shouldbe paid to Chapters XI and XII of the present Model Law. Chapter XI contains provisions on the reorganization of joint-stock companies. While we realize that such provisions already exist in the CIS countries, the present Model Law proposes a comprehensive regime, given the challenges currently existing in practice. The same holds true for Chapter XII, which deals with groups of enterprises. Such provisions do not currently exist in any of the CIS countries.

5. Finally, the goals of the Working Group and the Working Group subcommittee included identifying problems in the practice of implementing the law and, also, in making recommendations to resolve these problems within the framework of the Model Law. In this respect, special attention should be paid to the provisions on registration and on corporate management bodies. The draftspersons have made an effort to introduce specific proposals directed towards improving the legal framework in this field. Of major importance in this regard is the method which has been used to develop the proposals in question. This was based on the idea that one of the points of reference of the Working Group subcommittee is a certain level of knowledge of the legal norms of the European Union. However, this has not resulted in the unfettered adoption of European (or other) norms. On the contrary, specific models of legal norms have been used, including non-European ones.

6. The present Model Law is purely recommendatory in nature. This means that adoption of the Law in the CIS countries, in whole or in part-or with respect to particular rules and regulations-is possible only where the Model Law and the provisions thereof are convincing for national legislators. In this respect, the Working Group of the Model Law believes that it is necessary to provide an explanation of the draft law. It is for this very purpose that this Commentary has been developed: to explain why particular recommendations have been made. In this regard the Model Law-in combination with the Commentary-represents not just an incentive for national legislators but, also, a contribution to the scholarly debate in the CIS countries.



Chapter I. General Provisions


1. Structure of the Model Law


Article 1 of the present Model Law defines the scope of its implementation in the form that is typical of such legal definitions. Following Anglo-American practice, the key concepts are set forth (Art.2) and defined in detail in the appropriate chapters.


2. The Essence of a Joint- Stock Company


2.1. General Features

A joint-stock company is defined as a legal person (Art.3, Clause 2) which has certain rights (Art.3, Clause 2), which is regulated by civil legislation (Art.1, Clause 6), and which is a profit-making organization (Art.3, Clause 2).

2.2. Liability Limited to the Dominant Shareholder

A key feature of a joint-stock company is that its shareholders are not liable for the company's obligations (Art.3, Clauses 1 and 2). A shareholder will only be required to indemnify to a company for its losses if they were caused by such shareholder exercising influence upon the company and by pressuring its executives to perform certain acts that have inflicted losses upon the company (Art.43). Appropriate claims may also be presented to a shareholder by a company's creditors if their claims cannot be satisfied by the company itself (Art.43, Clause 4). The exercise of influence through the use of a voting right at a general shareholders' meeting does not give rise to an obligation to indemnify losses of the company (Art.43, Clause 5).


3. General and Industry- Specific Joint- Stock Company Legislation


After some debate, the drafters decided to not establish special industry-specific rules for different types of companies because acting in the framework of the present Model Law allows account to be taken of the particularities [osobennosti] of specific businesses; such specific regulations would, as a rule, demand from potential counterparties that they make themselves aware of such particularities, which can complicate trade and commerce. In addition, uniform court practice for all joint-stock companies is of major importance. For example, the right to participate in a capital increase depends on the registration of such capital increase, and the greater the number of various authorities involved such registration (in Russia, for example, the registration of banks is obtained through the Central Bank), the less unified court practice will be regarding the registration of a capital increase. Furthermore, court practice will depend for instance on specific restrictions upon the authority of managers of state-owned enterprises. This puts a burden of assessing the lawfulness of acts on prospective counterparties; it also means that different practices will emerge instead of a more unified picture. However, it is neither sensible nor realistic, within the framework of a single law-especially if it is a model law-to fundamentally change the interrelationships among various legislative acts. Therefore, references to other laws-including references to legal acts on privatization (Art.1, Clause 4), banking legislation (Art.1, Clause 3) and to legislation on state-owned companies (Art.1, Clause 5)-merely underscore the importance of those laws for joint-stock companies.


4.Consequences of the Failure to Obtain License


Pursuant to Article 3, Clause 3, failure to obtain a license does not affect the existence of a company but does limit its business activities.


5.The Accuracy of Corporate Identification Data


Identification of a company has been simplified by the rules relating to the name (Art.6, Clause 2, Art.6, Clause 3) and corporate location (Art.7).

Following the experience of western countries, specific sanctions for a violation of the rules mandating registration of an address are deemed sufficient. Thus, where documents are sent to (served at) the specified (registered) address at which a company is located, documents are deemed to have been duly served (Art.7, Clause 3); no additional verification of the right to use the address is required by the registering authorities. Provisions concerning the availability of information about the company in corporate correspondence (Art.8, Clause 1), and via a corporate website (Art.7, Clause 4) correspond to European rules.

The purpose of corporate identification rules is to simplify the identification of the counterparty in contractual relations. In practice, it is assumed in the CIS that-when there is uncertainty about the identity of a counterparty-the contract does not exist or is invalid. In Germany, to the contrary-in a similar fashion to the rule set forth in Article 183, Clause 1 of the Russian Civil Code-where there are doubts about a person's will (authority) to act on behalf of another (including a legal person), the person who is acting will be held liable. Likewise, such a stricter understanding of this civil-law principle is reflected in the provision governing the liability of managers for corporate identification in Article 8, Clause 2.



Chapter II. Corporate Formation


1. Corporate Registration


Registration, which presupposes publicity (Art.22, Clause 1), confirms the existence of a potential counterparty for third parties in the person of a company and, therefore, is the basis for legal consequences in forming (Art.10, Clause 2), reorganizing (Art.154) and in liquidating (Art.182, Clause 5) a company. The regulation of a state register of legal persons by way of a separate law (see Art.2, Subclause 17) is of special importance for those events as well as for other facts that must be recorded in the state register (e.g., the requirements of the present Model Law with respect to

the invalidity of a general shareholders' meeting (Art. 62) and changing the composition of a supervisory board (Art.107)). However, here, account needs to be taken of the interests of all parties in the process and of providing them with adequate possibilities for the protection of their rights. Since the interests of various parties are affected (in case of formation: the interests of shareholders; in case of reorganization: corporate shareholders and creditors; in case of liquidation: those of shareholders as well as those of creditors; in case of publication of resolutions of shareholders' meetings: those of shareholders), and since the timing of adopting resolutions may have different consequences (e.g., a quick increase in authorized capital usually is more important than are speedy liquidation proceedings), the introduction of different procedures is deemed to be warranted.


2.Authorized Capital


In preparing the rules and regulations governing payment of a company's authorized capital, an effort has been made to achieve a balance between a legislative diminution in creditor risk, on the one hand, with the flexibility necessary for competitiveness in international markets on the other. In particular, attention has been paid to the importance of speed and the cost of corporate procedures.


3. Monetary Investments


In registering a company, the monetary funds must be transferred to a corporate bank account, and the appropriate statement must be submitted to the registration authority (Art.17, Clause 2). The assumption is that corporate management should be free to use these funds and that the shareholders can instruct management only within the framework of their general authority. Prior to state registration, 50% of a monetary investment must be paid up (Art. 17, Clause 1) and all the non-monetary investments must be transferred in full to the company (Art.17, Clause 3). No shares of stock have voting rights until they have been paid up in full (Art. 17, Clause 4).


4. Non-Monetary Investments


Types of property that may and may not be used as an investment in the authorized capital of a joint-stock company are set forth in Article 14 (Clauses 2 and 4).

Non-monetary investments, the value of which is in excess of 10% of the authorized capital, must be valued by an auditor or a licensed appraiser (Art. 16, Clauses 1, 2 and 4). The same requirements also apply when a company purchases property from its founder within two years from the date on which the company was formed (Art.16, Clause 4).

The requirement that a founder must compile a corporate formation report (otchet ob uchrezhdenii obshchesvta)-together with a valuation of non-monetary investments (Art.15, Clause 2)-and submit the same to the registration authorities (Art. 15, Clause 3) provides the possibility for holding a founder liable for an improper valuation.

A waiver of the obligation to make an investment is not permitted (Art.40). A shareholder is liable for the untimely payment of its investment by making provision for a fine comprising 5% of the value of such investment (Art.39, Clause 2) or, alternatively, the amount specified in the company's articles of association (Art.39, Clause 3).

Although the Working Group has decided not to establish detailed rules and regulations governing the liability of shareholders for a reduction in corporate funds-as is the case, for example, in German court practice-they nevertheless have set forth a basis for courts to acknowledge such liability in prohibiting the return of investments (Art.41) and introducing a special provision on the indemnification of all benefits and income obtained in the course of corporate formation in the event of a failure to comply with the appropriate provisions of the present Model Law (Art.42).


5. Articles of Association


The articles of association are an all-encompassing document binding together corporate bodies and shareholders (Art.10, Clause 3). Requirements regarding the data that must be contained in the articles of association are in line with those recognized in European law (Art. 12, Clause 3). The significance of the articles of association is based on their content being reliable and accessible to third parties. Accordingly, by allowing the inclusion of additional provisions in articles of association, Article 12, Clause 4, can be used to attract corporate investors through special warranties and representations. For example, the articles of association may provide for the resolution of corporate disputes in private, commercial arbitration courts (treteiskie sudy) (Art.12, Clause 5). In general, the provisions of the present Model Law are directed at the streamlining of the articles of association.


6. Corporate Formation by a Sole Shareholder


The only specific feature in case of corporate formation by a sole shareholder (Art.11, Clause 3) is the mandatory requirement for the shareholder's resolution on corporate formation to be reduced to writing and stricter requirements for payment of authorized capital (Art.18).



Chapter III. Shares of Stock


1. Types of Shares of Stock


Pursuant to the present Model Law, companies may only issue registered (and not bearer) shares of stock (Art.24), including fractional, authorized and placed shares of stock (Art.25); they can be common and preferred shares of stock (Arts.29, 30) which maybe of different types (Art.31). Preferred shares of stock may be cumulative (Art.31), providing their holders with a right to receive all the dividends for a specific period of time (the details of which are contained in Art.31, Clause 4).

The terms and conditions for the distribution of income are to be contained in articles of association (Art.12) along with the restrictions which may be imposed upon shareholders' rights. So, the alienation of shares of stock maybe subject to a company's consent (Art.36), while the number of shares of stock directly or indirectly held by a shareholder also may be restricted (Art.34, Clause 6). As opposed to the trend in some Western countries to reduce the number of different types of shares, it has been assumed-for purposes of this Law-that a more important goal in CIS countries is providing for the possibility of individual solutions rather than ensuring the equality of shares of stock so as to enhance their tradability. It is impossible to make different provisions for the property rights of shareholders having similar rights as has been provided in Article 29, Clause 2, for common shares of stock.

The existence of provisions on no-par-value shares of stock (Art.26) in the present Model Law does not alter the principle of a fixed amount of authorized capital since the value of no-par-value shares of stock is based on the number of such shares of stock and their relation to the amount of authorized capital (Art.26).

Changing the legal status of any type of shares of stock (cf. the definitions of share types in Art.31) requires a resolution of ageneral shareholders' meeting adopted by at least a 75% majority of the votes of shareholders holding shares of stock ofthat type (Art.34, Clause 4).

Shareholders holding shares of stock without voting rights may, nevertheless, take part in shareholders' meetings regarding items on the agenda (Art.32, Clause 2) and receive appropriate information.


2.Authorized Shares of Stock and the Placement Thereof


The value of authorized shares of stock is set by a company's articles of association (Art.25, Clause 1); therefore, the issuing such shares is subject to a resolution of a general shareholders' meeting (Arts.55 and 58). The board of directors is authorized to place the shares of stock (Art.125).

The details of the procedure for placing shares of stock and the status of outstanding shares of stock are to be governed by securities markets legislation (Art.25, Clause 2).

In order to preserve the nominal capital, a company is prohibited from redeeming more than 25% of all the outstanding shares of stock (Art.48).


3. Transfer of Shares of Stock


The tradability of shares of stock is increased when the shares of any one type are identical. Unless otherwise established by the articles of association, the alienation of shares of stock must not subject to any kind of consent (Art.3).

As a rule, the preconditions for the transfer of shares of stock and the good faith acquisition thereof are set forth in securities legislation or civil legislation; however, they often lack the requisite clarity. For instance, Russian securities markets legislation regulates the possession (vladenie) of shares of stock;1 yet, from a civil-law standpoint, possession2 traditionally is a factual relationship3 which, in its direct sense, does not exist as regards registered securities. The term 'ownership' (sobsvtennost’) would have been more appropriate. Also, for example, Russian legislation and judicial practice fail to make clear whether making a simple entry in a register is sufficient to transfer ownership rights to shares of stock or, additionally, whether there is a requirement that the parties express their consent to the transfer in whole or in part. As a result, the following prerequisites are also unclear:

- for a cause of action (isk) by a former owner for the return of property pursuant to civil-law provisions on unjust enrichment and on the procedure for recovery in the event of multiple transfers;

- for a cause of action of an owner of shares of stock demanding the recovery of property from the unlawful possession of another (i.e., vindication), which probably would be interpreted as registration of shares of stock in the name of a person who is not the owner of such shares as infringement of ownership rights similar to unlawful possession;

- the good faith acquisition of shares of stock, especially those factors which an acquirer must verify during the course of such an acquisition.


1 See Art.8 of the 1996 RF Federal Law «O rynke tsennykh bumag» (22 April 1996) No.39 FZ (as amended), Sobranie Zakonodatel'stvaRF (1996) No.17 item 1918.

2 See Art.878 of the draft 1905 Russian Imperial Civil Code.

3 See, for example, Art.392 of the 1994 RF Civil Code, (as amended), Sobranie Zakonodatel'stva RF (1994) No.32 item 3301.


The elimination of such lack of clarity as referred to above-while beyond the scope of the present Model Law-is of particular significance, especially for the purpose of ensuring appropriate guarantees on securities markets and in the activities of depositaries and registrars.


4. Registration of Shares of Stock and Reliable Information on the Transfer Thereof


The Working Group discussions on the system of the present Model Law to be used in maintaining records on the rights to shares of stock were extensive and highlighted the need for reforms. The direction of such reforms is only partially reflected in the Law; since the situation in different countries is quite varied, the draftspersons have differing views, and most issues concerning the shareholder register and depositary functions are traditionally regulated by securities markets legislation and other laws and regulations rather than by legislation on joint-stock companies. Atypical form of fraud involving shares of stock and their registration is collusion between parties to one or more purchase/sale transactions (or other type of transfer) aimed at shifting as much responsibility as possible to the registrar, to the company or to good faith parties to the transaction. The more clearly responsibility is established and apportioned among the parties, the harder it will be to achieve such a result. Therefore, the thrust of rules and regulations must be to shift the risks onto the parties to transactions who might be involved in such fraudulent activities. Although an ordinary party to capital markets transactions should not be required to engage in a detailed verification of the lawfulness of the registration of previous transactions, as many opportunities as possible should be accorded to transactions aimed at eliminating previous defects. In line with this approach, the provisions on recourse (regress) (Art.32) provide the legal basis for the registrar to shift the liability for incorrect registration onto the parties to a purchase/sale contract. In order to implement this concept, it is desirable for there to be a possibility to identify each share of stock so as to improve the ability to track the consequences of each transaction.4 Nevertheless, stricter liability has been instituted for the registrar and the company for improperly maintaining the register (cf. Art.32, Clauses 7 and 8).

The reason for the attention accorded to the differences among the various situations is because improvement (sovershenstvovanie) of registration and depositary systems also depends on the proportionate and detailed apportionment of liability. To the contrary, without such apportionment, providing detailed obligations for registrars and depositaries, on which, e.g., the Russian regulator5 has focused its glaze, can only result in further bureaucratization, more delays and higher transaction costs.


4 See D. Stepanov, «Voprosy teorii i praktiki emissionnykh tsennykh bumag», Khoziaistvo i ekonomika (2002) No.3, 65ГҒ.

5 Ruling of the Federal Financial Markets Service (5 April 2007) No. 07-39/pz-n «Ob utverzhdenii Polosheniia o poriadke vnesenia izmeneniiv reestrvladel'stev imennykh tsennykh bumag i os-hchustvlenii depositarnogo ucheta v sluchaiakh vykupa aktsii aktsionernym obshchestvom po trebovaniiu altsionerov»; Ruling of the Federal Financial Markets Service (13 August 2009) No. 09-33/pz-n «Ob osobennostiakhporiadkavedeniie reestra imennykh tsennykh bumag imiten-tami imennykh tsennykh bumag»; Ruling of the Federal Financial Markets Service (7July2009) No. 09-25/pz-n «Ob osobennosti ucheta v reestre vladel'stev imennykh tsennykh bumag aktsii aktsionernykhobshchestv, prinadledzhashchikhnaprave sobstvennostiRossiiskoiFederatsii»; Ruling of the Federal Financial Markets Service (10 June 2009) No. 09-20/pz-n «Ob osobennosti provendeniia v reestre vladel'stev imennykh tsennykh bumag; operatsii po izmeneniiu informatsii, soderzhashcheisianalitsevom schete nominal'nogo derzhatelia i (ili) doveritel'nogo upravliaiushchego, v sviazi s reorganizatsei ukazannykh lits v forme preobrazovaniia»; Letter of the Federal Financial Market Service (29 June 2010) No. 10-VM-04/14817Ob utverzhdneii sistemy vedeniia reestra»; Letter of the Federal Financial Markets Service (11 February 2010) No.10-VM-02/2620 «O poriadke primeneniie PrikazaFSFRRossiiot 13.08.2009 No.09-33/pz-n 'Ob osobennostiakhporiadkavedeniie reestra imennykh tsennykh bumag imitentami imennykh tsennykh bumag'«; and Letter of the Federal Financial Markets Service (28 March 2008) No. 08-VM04-1/5750 «O primenenii reestroderzhateliami otdel'nykh trebovanii zakonodatel'stva Rossiiskoi Federatsii i tesennykh bumagakh».



Chapter IV. Rights and Obligations of Shareholders


1. No Discrimination


The basic principle of shareholding that is often mentioned only in legal theory, and is not reflected in the laws, is that of the equality of all shareholders as elaborated in Article 33, Clause 1. This principle does not have great importance in practice because it is repeated in the context of the definition of the rights of each type of shareholder. Nevertheless, it is appropriate to express this general principle by way of a law for a better understanding of specific provisions and of answers to unique questions.


2.The Methodology of Introducing Rights


To the extent possible, the rights of shareholders set out in Article 34, Clause 1 are introduced not only by according a right but, also, indirectly by self-enforcing rules. Such a mechanism is generally accepted in the case of a violation of the right to attend a shareholders' meeting (Art.34, Clause 1, providing in Art.98 that resolutions thereof are void ab initio) and of improper notice to a shareholder (Art.34, Clause 1, providing in Arts.98 and 100 that resolutions of a general shareholders' meeting are void ab initio [nichtozhnie] or voidable [osporimye]). Furthermore, according to the present Model Law, information which is wrongfully (nepravomerno) not made available constitutes grounds for appealing a resolution of a general shareholders' meeting (Art.99). Such provisions have been criticized in Germany because they can result in long, drawn-out shareholders' meetings taking. Nevertheless, they have been included in the Model Law because they can result in significant improvements in the information space; it is always difficult to enforce rules on provision-of-information requirements since, as a rule, the plaintiff is not in a position to independently assess the reliability of information which s/he has obtained while the courts-especially those in the CIS-will tend to protect the shareholder who controls an issuer and to assume that the requested information is of no particular importance. Only with respect to other violations may a court, according to Article 99, Clause 2, uphold the resolution which is being appealed, where the vote(s) cast by the shareholder who has filed the appeal would not have affected the voting outcome or where the violations which have occurred are not material and where implementing the resolution would not have resulted in losses being incurred by, or have other adverse impacts on, said shareholder.


3. Special Audit


Shareholders are granted the right to appoint special auditors-under a court judgment-without the involvement of interested shareholders or upon the application of a shareholder holding more than 1% of the shares of stock (Art.37, Clause 2). If, as is the case in German law,6 auditors are required to provide public notice of the fact that a company has refused to disclose information, the unlawfulness of such failure to disclose information will be apparent. The existence of this mechanism is especially effective in avoiding transactions aimed at providing unlawful benefits to shareholders or managers.


6 See Art.318 (7) of the German Handelsgesetzbuch, reproduced at <http://www.gesetze-im -internet. de/hgb/>.


4. Redemption


A shareholder may demand the redemption of shares of stock by the company in the event of a reorganization or a delisting or shareholder disapproval of the resolution of a general shareholders' meeting on the company's major transaction and/or on a transaction of the companywhere there is a conflict of interest which resolution was adopted according to the procedure established by this Law and the company's articles of association (Art.46, Clause 1).


5. Preventing Bad-Faith Conduct of Shareholders


To prevent bad-faith dealings or blackmail by shareholders, an obligation has been included for shareholders-when exercising their rights-to take into account the interests of the company and other shareholders (Art.33, Clause 2). While there is no such provision in German law, German courts have recognized a general principle of good-faith conduct as the basis for numerous judgments that are difficult to systematize and introduce into legislation because, in part, they depend on the procedural situation. Examples of acts that have been deemed to constitute abusive practices in Germany have included lawsuits seeking the invalidity of resolutions of general shareholders' meetings due to various alleged violations, obvious from the circumstances for example, directed at a financial settlement for withdrawing a claim, or acts of a controlling shareholder hindering a company from obtaining a license to particular mineral deposits. The goal of avoiding a detailed description of bad-faith practices in the present Model Law is to facilitate the development of court practice and to render it more difficult to evade the circumstances mentioned in the legislation by apparent compliance with its provisions.


6. Shareholder Agreements


Owing to numerous disputes over the possibility of concluding shareholders' agreement, Article 44 permits such agreements on a broad scale, including an agreement to refer disputes to commercial arbitration (Art.44, Clause 6). Except for the duty to vote on the proposals of corporate bodies (Art.44, Clause 3), a company may be a party to shareholders' agreements (Art.45). In certain circumstances, a shareholders' agreement must be provided to the company (Art.44, Clause 7).


Chapter V. Company Dividends


Chapter VI. Authorized Capital of a Company


1. Introduction


As a legal person, a joint-stock company may own property. A joint-stock company is liable for its obligations with all its property while the shareholders are not liable for corporate obligations (Art.3, Clause 1, andArt.4). On the one hand, this principle of the limitation of liability is reasonable in terms of economic relations; on the other hand, there can be risks both for creditors and shareholders in limiting liability. In the legislation of some countries-for example, in the laws on joint-stock companies of certain CIS countries-the limitation of liability is considered to have a special meaning and legislation, in turn, is supposed to provide for specific rules and regulations protecting shareholders and creditors with respect to corporate property. The appropriate provisions of the present Model Law are set out in Chapters V and VI.