The government has proposed a way to expand the investment potential of joint-stock companies

The White House is seeking a balance between regulatory flexibility to attract investment in high-tech companies and protecting the rights of startup founders. The draft amendments to the federal law on joint stock companies, developed by the Ministry of Economy, will make it possible to raise capital without losing control over the company. To this end, all Russian non-public joint-stock companies will be able to issue multi-voting preferred shares, and fast-growing technological and high-tech companies, becoming public, will be able to retain such securities. The White House will determine requirements for technology companies.

The Ministry of Economy has developed a draft amendment to the law “On Joint-Stock Companies”, allowing all non-public Russian joint-stock companies to issue one or more types of polyvocal (their owner is given the right to several votes at a meeting of shareholders) preferred shares (Kommersant has the document). Now the issue of such shares is allowed in special administrative regions – their residents (only non-public joint stock companies) were allowed to issue multi-voting shares in the summer of 2022. In addition, this practice exists in other countries, but Russian law on many issues of corporate status is inferior in flexibility to foreign law. For example, multi-voting shares are issued by Yandex, registered in the Netherlands.

The Ministry of Economy project was developed in pursuance of clause 1 of the “road map” for the formation of accessible finance for investment projects, approved by First Deputy Prime Minister Andrei Belousov and the head of the Central Bank Elvira Nabiullina in May 2021. According to it, non-public joint-stock companies will be able to convert multi-voted “prefs” into ordinary ones (the procedure and conditions will be determined by the charter of the non-public company). At the same time, fast-growing technological and high-tech companies, when they acquire public status, will be able to retain previously issued polyphonic “prefs” if the companies meet the requirements for technology companies – they will be determined by the government. According to the authorities, this will support the development of “sovereign” technologies in the Russian Federation by expanding the circle of potential investors and flexible forms of their participation in the authorized capital of the joint-stock company, the explanatory note says. The initiative can come into force one year after adoption.

The bill is borrowing the experience of venture financing of technology startups in other countries, explains Andrei I, managing partner of the law firm Bendersky and Partners. According to him, multi-voting shares are needed for startup founders to retain corporate control when fast-growing high-tech companies attract cheap financing. Such papers are distributed among the co-founders and protect them from hostile takeovers, he says. At the same time, this instrument may infringe on the interests of minority shareholders, which is why it is proposed that public companies limit its use only to the high-tech sector.

“Russian technology companies have often registered holding companies abroad to gain access to flexible corporate governance mechanisms,” points out Forward Legal lawyer Maxim Ignatov. In his opinion, the bill will allow the use of the mechanism of multi-voting shares, avoiding additional sanctions risks associated with running a business from “unfriendly” jurisdictions.

As Dmitry Borodin, head of corporate projects at the Vegas Lex law firm, notes, the proposed mechanism is a standard for jurisdictions with a developed stock market, as it gives companies additional flexibility when attracting investments. Unlike similar innovations adopted in the summer of 2022 for residents of the SAR, which were relevant precisely in the context of redomiciliation, the initiative of the Ministry of Economy can hardly be called relevant today, he believes. “In our opinion, it is unlikely to solve any pressing problem with attracting investment right now. However, in general, such an initiative is perceived positively among experts,” says the lawyer.

Let us recall that in May 2021, the White House and the Bank of Russia agreed to reconfigure the financial market in order to ensure an influx of investment into the economy. To achieve this, the authorities intend to create new financing instruments and adjust investment regimes to attract a wide pool of investors – in total, the “road map” to increase the availability of financing contained more than 30 measures until 2024 (see Kommersant, May 17, 2021). After the departure of foreign investors due to the military actions of the Russian Federation in Ukraine, the task became more urgent; the government’s priorities include the development of the high-tech sector of the economy.

Venera Petrova