The Ministry of Economy proposes to simplify the replacement of retired members of company boards of directors
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The Ministry of Economy has prepared an updated version of the bill, which allows flexible replacement of retired members of the boards of directors of companies – early termination of their powers is possible both for objective reasons and by decision of the general meeting of shareholders. At the same time, in such a case, shareholders will be able to form a reserve list of candidates to promptly replace the “retired” and even appoint new ones automatically. Experts note that the changes are long overdue.
The Ministry of Economy has finalized the draft amendments to the law on joint stock companies, designed to increase corporate flexibility when forming boards of directors, in terms of replacing retired members. The department presented the first version last summer (see “Kommersant” dated June 22, 2023). Problems for companies arose, in particular, due to sanctions: work was paralyzed due to the departure of foreign members of the board of directors and the impossibility of quickly replacing them – for any change in the composition of the board of directors, a meeting of shareholders is required, where this body must be completely re-elected. As First Deputy Head of the Ministry of Economy Ilya Torosov explains, “flexible regulation of the recognition of individual members of the board of directors as retired and their prompt replacement is necessary to maintain the legitimacy of the management body and the stable operation of the company.”
When finalizing, the Ministry of Economy abandoned some concessions: the provisions on recognizing the board of directors as formed if there are fewer elected members than provided for in the charter (but not less than in the law) were excluded, as well as on the possibility of shareholders to vote again on the same agenda and with the same candidates , if it was not possible to form the composition the first time. Otherwise, the new edition retains the same approaches, but the innovations are spelled out in more detail. Thus, the law proposes to establish the grounds for recognizing a member of the board of directors as retired without a decision of the general meeting of shareholders in the event of death, limitation or deprivation of legal capacity, or impossibility of exercising powers by a court decision or at his own request. It is also possible to terminate the powers of an individual board member early by a unanimous decision of the general meeting of shareholders (if the remaining number of board members constitutes a quorum).
Shareholders will be able to elect a replacement for the outgoing director. Moreover, the company will be able to create a list of reserve candidates: if previously it was proposed to include in it those who received the largest number of votes after the formation of the board of directors, then in the revised version this requires a separate vote. The presence of a reserve simplifies the appointment of a “replacement” – it is possible without a decision of the general meeting of shareholders by unanimous decision of the board of directors or automatically (the one who received more votes when included in the reserve is appointed).
Experts generally call the changes long overdue. The reform, believes Nikita Grigoriev, a lawyer in the M&A and business restructuring practice at BGP Litigation, will be useful if a member of the board of directors deliberately does not take part in the management of the company, interfering with decision-making. Managing partner of PB Legal Alexander Panin notes that the amendments are relevant for companies facing difficulties due to foreign shareholders. However, Tatyana Selivanova, Deputy Director of the Operational Risks and Sustainable Development Group at Kept, considers the initiative “somewhat belated”: the companies faced the massive resignation of powers at the beginning of 2022 and “on the fly” invented procedures for urgently processing such decisions. According to her, it is important that many aspects “are left to the companies and the charter, without violating the company’s internal procedures.” However, Boris Fedosimov, vice-president of the association NP OPORA, draws attention to the fact that decisions on early termination of powers and the appointment of an individual board member are made unanimously by him – “this, to a certain extent, neutralizes the shortcomings.”
Experts on director mobility
As Kirill Manshin, a senior lawyer in the corporate law practice of Melling, Voitishkin and Partners, notes, in practice, the situation when a member of the board of directors actually leaves the board (and not only for objective reasons, but also of his own free will) is quite common, and Existing regulation creates unreasonable complications in the corporate governance procedure. This, adds Nikita Grigoriev, lawyer in the M&A and business restructuring practice at BGP Litigation, provokes the emergence of “deadlock situations” when individual shareholders can prevent the formation of a new board of directors. This situation is fraught with the fact that decisions of the board of directors within its competence cannot be adopted.
An undoubted advantage of the bill, according to the vice-president of the association NP “Opora” Boris Fedosimov, is the introduction of the institution of reserve members of the board of directors: on the one hand, this makes the management of the company much more transparent and predictable, on the other hand, it reduces the company’s costs for the necessary procedures associated with with the recruitment of a retired member of the board of directors. According to Tatyana Selivanova, deputy director of Kept’s operational risk and sustainability group, this partly formalizes the practice that many large companies already use – the formation of a “list of potential candidates” for board members in case of need for re-election in the new corporate year, which provides “the opportunity for more getting to know the candidate closely, assessing him and preparing him for the position.” The presence of an “official” reserve, she adds, will make it easier for companies to work in the current instability, which fits into the whole logic of updating the law. Alexander Panin also welcomes the new approach to its formation – the previously proposed procedure “allowed minority shareholders to obtain a majority on the board of directors if several of its members were replaced.”
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