CONTENTS OF LAST ISSUE
Should But Not Obliged
In the early 2000s, the so-called mandatory offer to purchase the remaining shares was introduced in the USA and many countries in Europe and Asia. According to this procedure, a potential investor who wants to purchase a significant block of shares of a joint stock company on the open securities market shall offer the other shareholders of this company to repurchase their shares at a market price (for different countries the percentage definition of a “significant block of shares” is different: in the US it is 35% + 1 share; in some Asian countries it is 50% + 1 share)
Due to the imperative norms of the Russian legislation, there are special corporate relations, which are implemented in the procedures and forms established by the norms of corporate law, between the subjects of the mandatory offer – the acquirer of 30 percent or more of the shares and the other shareholders of the public company. In this regard, the legal protection of legal rights and interests of addressees of a mandatory offer can be implemented only by means provided by law, which is due to the balance of interests of majority and minority corporations, the action of special corporate law norms that do not provide for the possibility of recovering damages in the event of non-direction of a mandatory offer.
A mandatory offer is a public offer addressed to shareholders – owners of shares of the respective categories (types), on the acquisition of their shares in an open company.
Mandatory proposal is addressed to anyone who responds to it. It is intended to protect the interests not of individual groups, but of all shareholders of the company. If the increase in corporate control rights on the part of the person who acquired a large block of shares does not meet the economic interests of minority shareholders, they have the opportunity to leave the company and return their investments through the acceptance of a public offer.
A person who has acquired more than 30 percent of the total number of shares of a public company within 35 days from the date of making the corresponding credit entry on the personal account shall send to shareholders – owners of the remaining shares of the respective categories (types) and holders of issued securities convertible into such shares, a public offer on the acquisition of such securities from them (mandatory offer)1.
At the same time, the legislator provides for certain thresholds of ownership, crossing over which changes the number of shares that a shareholder can vote (who has not fulfilled the obligation to make a mandatory offer to repurchase securities) – 30 percent, 50 percent and 75 percent, respectively.
Overcoming the threshold of 30 percent, but not reaching 50 percent, the shareholder, before sending the mandatory proposal, can vote only 30 percent of the shares.
Overcoming the threshold of 50, but not reaching 75 percent, the shareholder, before sending the mandatory proposal, can vote only 50 percent of the shares. A similar scheme applies when the 75 percent ownership threshold is exceeded.
The sequence of actions is as follows:
The conflict of interests between the shareholders and the investor occurs when the acquirer of shares does not fulfill the obligation to send a mandatory offer to the company if the number of securities acquired by him exceeds 30 percent of the company’s voting shares.
When the majority shareholder evades the direction of the mandatory offer, the minority shareholders cannot force him to buy back, since the Law does not provide for this. The purpose of the norm of art. 84.2 of the Law on Joint-Stock Companies consists in providing legal protection to minority shareholders in connection with the transfer of control over decision-making by authorized bodies of the joint-stock company to another independent person. Protecting the interests of minority shareholders is the legal uncertainty that the change of control over the company entails, in the form of a possible change in the strategy and main directions in the activity of the company. It follows from this that the obligation to submit a public offer is due to the increasing possibilities (change) of corporate control from the acquirer of a large block of shares in the form of a potential change in the strategy and main directions in the company’s activities. But the acquirer of a large block of shares can cause any changes in the company’s activities only by voting (taking appropriate corporate decisions) at general meetings of shareholders.
When the majority shareholder fails the submission of the mandatory offer, the minority shareholders cannot force him to repurchase, since the Law does not provide for this. The purpose of the norm of art. 84.2 of the Law On Joint-Stock Companies consists in providing legal protection to minority shareholders in connection with the transfer of control over decision-making by authorized bodies of the joint-stock company to another independent person. Protecting the interests of minority shareholders is in the legal uncertainty that the change of control over the company entails, in the form of a possible change in the strategy and main directions in the activity of the company. It follows that the obligation to submit a public offer is due to the increasing possibilities (change) of corporate control from the acquirer of a large block of shares in the form of a potential change in the strategy and main directions in the company’s activities. But the acquirer of a large block of shares can cause any changes in the company’s activities only by voting (taking appropriate corporate decisions) at general meetings of shareholders.
At the same time, with regard to a shareholder who has not sent a public offer, the Law explicitly provides for restrictions on the exercise of his company management rights (when voting at the general meeting of shareholders shares acquired by him are not taken into account). These restrictions block the growth of corporate control and deprive the acquirer of the opportunity to change the strategy and main directions in the activities of the company. However, the remaining shares owned by this person and its affiliates shall not be counted as voting shares and not be taken into account when determining the quorum.
Thus, the actual acquisition of a large block of shares and the failure to submit a public offer, if there are restrictions under the Law for exercising shareholder rights (hereinafter referred to as the “blocking mechanism”) and, accordingly, in the absence of an opportunity to change control over the company, cannot violate the rights of other shareholders. In these conditions, forcing the acquirer to submit a public offer imposes unreasonable obligations on the person who acquired the shares. Resolution of the Arbitration Court of Moscow District of 03.06.2016 in case No. A40-159967/2015 states:
“In the case of failure of submission of the mandatory offer to repurchase shares, the rights of other shareholders cannot be violated, since the restriction established by law directly preserves the status quo, and therefore the claimant’s requirement to oblige the defendant to send a mandatory offer cannot be attributed to methods of restoring any right violated (resolution of the Arbitration Court of Moscow District of 03.06.2016 in case No. A40-159967/2015)”.
As a legal consequence of failure of this obligation by a person who acquired more than 30% of the total number of shares of an open company, the Law On Joint-Stock Companies provides for limiting the number of shares by which such a person and his affiliated persons are entitled to vote before the date of submitting the mandatory offer (Part 6 of Art. 84.2 of the Law On JSCs). In addition, the law provides for administrative liability in the form of a fine for a violation by the person who has acquired more than 30% of shares of OJSC, of the rules for their acquisition (Article 15.28 of the Administrative Code of the Russian Federation).
To sum up, we can say that the problem of the lack of adequate means of forcing the offender to abide by the rules on the mandatory offer has become a genuine heel of Achilles of chapter XI.1 of the Law On JSCs. Judicial practice without any doubt comes from the fact that the only consequence of non-fulfillment of the obligation to submit a mandatory offer is the restriction on the number of shares that their buyer and his affiliates are entitled to vote before the date of the mandatory offer (cl. 6 of Article 84.2 of the Law On JSCs) and other consequences of non-fulfillment of the obligation, including the possibility of shareholders presenting the requirement of the obligation to send the offer, the current legislation does not provide, and therefore such requirements of shareholders are not subject to satisfaction.
- Clause 1 of Art. 84.2. of Federal Law On JSCs.
- The purchase price of shares shall be the same for all their owners. In addition, the price shall be justified. The price shall not be lower than the market value determined by the appraiser (paragraph 2, clause 4, article 84.2 of the Law On JSCs). The market value of one share is estimated without taking into account the size of the block in which it is located (paragraph 2 of clause 4 of article 84.2 of the Law On JSCs).
- Clause 1 of Article 84.9 of the Law On JSCs.
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