Market News
The Bank of Russia Reinstates the Obligation for Issuers to Register a Bond Prospectus Annually
On December 31, 2024, the period of suspension of Subclause 7, Article 22 of the Federal Law "On the Securities Market" regarding the requirement to register a prospectus for bonds expires.
Consequently, from January 1, 2025, it will once again be necessary to re-register a bond prospectus if they are placed under a bond program and one year has passed since the date of registration of the prospectus registered for said bond program.
Please note that from January 1, 2025, the placement period for securities for which a prospectus has been registered is again limited – to one year from the date of the prospectus's registration. If this deadline is missed, a new securities prospectus will need to be registered.
In accordance with Chapter 75 of the Regulation of the Bank of Russia No. 706-P dated December 19, 2019 (as amended on March 4, 2024) "On the Standards for the Issuance of Securities," the following documents must be submitted to the Bank of Russia or the exchange for the re-registration of a prospectus within a bond program:
Documents for the registration of a securities prospectus after the registration of an issue (additional issue) of securities or a bond program must be submitted to the Bank of Russia or the exchange no later than one month from the date of approval of the securities prospectus.
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Ecosystem News
Management Company FOCUS
Since 2022, a management company has been part of our ecosystem, allowing us to offer clients comprehensive, turnkey structured finance products.
UK FOCUS is a management company for specialized vehicles (SPVs), included in the register of the Bank of Russia. UK FOCUS manages over 45 SPVs with assets under management exceeding 2.5 trillion rubles.
UK FOCUS's portfolio includes over 50 completed deals based on our SPVs, with more than 30 currently in progress.
---
We Have Moved to a New Office
On November 1, 2024, the LECAP ecosystem announced its move to a new office. The new office is a stylish loft space created with all the conveniences and needs of the team in mind.
The office is located in the historical center of Moscow at Malaya Dmitrovka 16, building 6. We will be happy to welcome our guests in our new cozy and modern office.
---
Future Announcement
Development of a Concept for Unilateral Deeds
As the market transitions to a new qualitative level, there is a need to expand the toolkit available for structuring transactions. We see an objective need for the creation of harmonious regulation for unilateral deeds (analogous to deeds in the Anglo-Saxon legal system).
Such instruments could become an additional type of security for bonds (replacing the practice of announcing buyback offers) and could also serve as the basis for the legal formalization of obligations undertaken by controlling shareholders (e.g., for the purpose of implementing lock-up agreements in the IPO market).
We welcome public discussion of our initiative.
---
The Need for Corporate Governance Reform
The increase in initial public offering (IPO) deals for Russian issuers has once again focused the attention of the investment and legal world on the importance of corporate governance. Developed corporate governance is an important component of a company's investment attractiveness, whether it has already gone public or is only preparing to acquire public status.
However, the Russian corporate governance system is imperfect. In our opinion, the corporate governance standards reflected in the Corporate Governance Code require updating and detailing. In particular, public companies need to strengthen the role of independent directors, which would help solve the agency problem arising between minority and majority shareholders.
A common manifestation of strengthening the role of independent directors could be vesting the power to make certain decisions, falling within the competence of the board of directors, exclusively in independent directors.
Another vector of corporate governance development requiring greater regulation is the enhancement of control by a holding company over its subsidiaries to reduce the possibility of shareholders siphoning off assets through subsidiaries. Such enhanced control would provide greater comfort to minority shareholders, thereby securing their trust in the holding company.
---
Development of Proposals for Investors to Invest in Quasi-Equity Financing Instruments
Convertible financing instruments are a relatively young investment tool, with convertible bonds and convertible loans being the most in-demand.
However, classic convertible financing instruments are no longer sufficient – market needs have given rise to pre-IPO deals, targeted loans for conducting an IPO with a guaranteed level of allocation for the lender, and other instruments.
Our team is engaged in developing and advising on deals involving unique quasi-equity financing instruments based on best international practices, allowing issuers to attract financing in a high key rate environment, and investors to acquire shares of a promising issuer at a reduced price.
We are ready to share our developments of innovative mechanisms for convertible instruments upon your request.
---
Market Research
The Form of Dividend Payment as an Integral Part of the Right to Receive Dividends
Shareholders – owners of ordinary shares – have, among other rights, the right to receive dividends. Current legislation allows for two main forms of dividend payment: cash and non-cash (the latter must be stipulated in the company's charter).
However, can dividends be distributed in different forms to owners of shares of the same category?
In our opinion, the form of the dividend is an integral part of the shareholder's right to receive dividends. By virtue of the provisions of current civil legislation, the scope of rights of a share owner is proportional to the number of shares they own.
It seems that the principle of "proportionality" can also extend to the form of payment. A similar conclusion is presented in legal doctrine; in particular, G.V. Tsepov indicates that the decision on the form of dividend payment is also subject to the principle of proportionality: shareholders of the same class must receive dividends in the same form.
At the same time, domestic legislation contains an exception to the general rule. According to Article 66 of the Civil Code of the Russian Federation, in a non-public company, disproportionate distribution of rights may be provided for by the company's charter or a shareholders' agreement.
It is important to note that the form of dividend payment is established by a resolution of the general meeting of shareholders.
It appears that in the case of a direct indication in the company's charter of the possibility of a disproportionate distribution of dividends, owners of shares of the same category may receive dividends in different forms if the general meeting of shareholders adopts such a decision.
---
Contradictory Provisions in the Terms of the Bond Issue: How to Interpret Them to Avoid Disputes?
The resolution on the issuance of bonds contains a number of terms of the bond loan: the par value of the securities and the coupon income, the maturity date of the securities, the procedure for determining the redemption price and early redemption price.
One can imagine a situation where the provisions of the resolution on the issuance contain contradictory information, for example – a different amount of coupon income. How should the provisions of the resolution on the issuance be interpreted in such a situation?
Approach No. 1
According to the first approach, it is permissible to interpret the provisions of the resolution on the issuance of bonds through a systematic interpretation of the issuance documentation. In particular, the document containing the placement terms includes the procedure for determining the accrued coupon income on the bonds.
It seems that the procedure for determining the accrued coupon income must correspond to the procedure for determining the coupon. We proceed from the fact that the issuance documentation essentially constitutes a bond loan agreement concluded between the issuer and the bond owner.
By virtue of the provisions of Article 431 of the Civil Code of the Russian Federation, the literal meaning of the terms of a contract, if they are unclear, is established by comparing them with other terms and the meaning of the contract as a whole. It appears that the issuance documents are an integral part of the contract between the bond owner and the issuer and should be interpreted in systemic interconnection.
Approach No. 2
The second approach may be based on the *contra proferentem* rule and the principle of protecting the weaker party.
By virtue of the legal position set out in the Resolution of the Plenum of the Supreme Arbitrazh Court "On Freedom of Contract and its Limits," if the terms of a contract are unclear and it is impossible to establish the true common will of the parties considering the purpose of the contract based on its text, the terms of the contract should be interpreted in favor of the counterparty of the party that proposed the wording of the relevant term.
The issuance documentation is prepared by the issuer, which is why its provisions, in case of ambiguity, will be interpreted in favor of the bond owners. An additional argument in favor of interpretation for the owner is the principle of protecting the weaker party to the relationship. A vivid manifestation of this principle is the position of the Arbitrazh Court of the Ural District in case No. A60-54979/2016. The court indicated that the provisions of the contract should be interpreted in favor of the weaker party, which has essentially adhered to pre-defined contractual terms.
When purchasing bonds, the investor adheres to the terms of the contract without being able to influence the provisions of the issuance documentation. In this regard, the investor is in an unequal bargaining position, and contradictory terms of the bond loan should be interpreted in their favor.
Author's Position
Judicial practice has not yet developed a position that would allow for the interpretation of contradictory provisions of a resolution on issuance in one way or another.
In our opinion, the interpretation of the provisions of the resolution on issuance should be carried out in favor of the weaker party to the relationship, unless the specified contradiction arose due to a typo or other obvious "technical error."
Although investment activity is associated with significant risks, we believe that the list of such risks should not be supplemented by including the consequences of erroneous wording in the issuance documentation.
---
Protective Clauses in the Charters of Subsidiaries
A holding company strives to establish maximum control over other business units, including through legal constructs, in particular – by harmonizing charters within the holding. The essence of this construct is that the charters of controlled entities must contain an obligation for them to coordinate any actions on the most important issues with the board of directors of the parent company.
Based on this concept, the competence of the supreme management bodies of controlled organizations is formulated accordingly. The Moscow Exchange also draws attention to the need to apply the described legal construct and, according to our information, plans to include in the upcoming IPO Standards a recommendation on harmonizing charters within a holding in the event of an IPO by the group's holding company.
However, current legal regulation and relevant court practice indicate that a violation of the charter provisions, according to which a subsidiary cannot conclude certain transactions without the approval of the parent company, will not always entail negative consequences for the violators, which calls into question the effectiveness of this construct.
In this regard, we will elaborate on the features of the current legal situation in this context, as well as mechanisms that could potentially ensure the effectiveness of the studied construct and strengthen the parent company's control over decision-making within the holding.
Counterparties
If a subsidiary enters into a transaction for which the consent of the parent company was not obtained, as required by the charter, such a transaction is voidable under Article 174 of the Civil Code of the Russian Federation and can be declared invalid if it is proven that the counterparty knew or should have known about the need for such consent or if the transaction caused obvious damage to the subsidiary.
But must the counterparty know about the need to obtain the parent company's consent to conclude the transaction?
The problem of the presumption of knowledge of the charter by the counterparty is not new; it has been considered, among others, by the Supreme Court of the Russian Federation. In paragraph 25 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25 dated June 23, 2015, the court indicated that the law does not establish an obligation for a third party to check the constituent documents of a company to identify limitations and delineations of the powers of the sole executive body.
This conclusion was further confirmed in paragraph 6 of the "Review of Judicial Practice on Certain Issues of Applying Legislation on Business Entities," approved by the Presidium of the Supreme Court of the Russian Federation on December 25, 2019, which states that the publication of the charter itself does not create a presumption of knowledge of its content by the counterparty. Thus, to have the transaction declared invalid, it will be necessary to prove that the counterparty knew or should have known the charter of the subsidiary, which – in practice – is extremely difficult.
Management Bodies of the Company
As a means of protection, the holding company can seek recovery of losses from the management bodies of the company. Persons comprising the management bodies of a company bear fiduciary duties towards that company. Moreover, the General Director and members of the board of directors are required to know the constituent documents of the company.
Thus, if a transaction is concluded without obtaining the consent of the parent company required by the charter, under Article 53.1 of the Civil Code of the Russian Federation, liability in the form of damages may be imposed on the persons who concluded such a transaction.
However, such a legal remedy seems insufficient. How can the parent company and counterparties protect themselves? As a possible way to protect itself in case of a violation by the management bodies of the subsidiary of the charter provisions on the procedure for approving transactions, the parent company may provide for a representation and warranty from the counterparty stating that it has familiarized itself with the charter of the subsidiary in standard contract forms.
Such a representation can be designated as a fundamental term, which, under paragraph 2 of Article 431.2 of the Civil Code of the Russian Federation, would allow not only to demand compensation for losses or payment of a penalty from the counterparty but would also allow the subsidiary to withdraw from the contract.
The counterparty in a similar situation can protect itself in a similar way by obtaining representations and warranties from the parent company, according to which the conclusion and execution of the contract do not contradict the constituent documents of the subsidiary.
The Bank of Russia Reinstates the Obligation for Issuers to Register a Bond Prospectus Annually
On December 31, 2024, the period of suspension of Subclause 7, Article 22 of the Federal Law "On the Securities Market" regarding the requirement to register a prospectus for bonds expires.
Consequently, from January 1, 2025, it will once again be necessary to re-register a bond prospectus if they are placed under a bond program and one year has passed since the date of registration of the prospectus registered for said bond program.
Please note that from January 1, 2025, the placement period for securities for which a prospectus has been registered is again limited – to one year from the date of the prospectus's registration. If this deadline is missed, a new securities prospectus will need to be registered.
In accordance with Chapter 75 of the Regulation of the Bank of Russia No. 706-P dated December 19, 2019 (as amended on March 4, 2024) "On the Standards for the Issuance of Securities," the following documents must be submitted to the Bank of Russia or the exchange for the re-registration of a prospectus within a bond program:
- Securities prospectus
- A copy (extract from) the minutes of the meeting (session) (order, directive, or other document) of the issuer's authorized management body that made the decision to approve the securities prospectus, indicating, if the decision was made by a collegial management body, the quorum and voting results for its adoption
- A copy of the charter (issuers that are credit institutions or non-state pension funds provide this document only to the exchange)
- Application for registration of the securities prospectus
- Document confirming payment of the state duty
- Inventory of submitted documents
Documents for the registration of a securities prospectus after the registration of an issue (additional issue) of securities or a bond program must be submitted to the Bank of Russia or the exchange no later than one month from the date of approval of the securities prospectus.
---
Ecosystem News
Management Company FOCUS
Since 2022, a management company has been part of our ecosystem, allowing us to offer clients comprehensive, turnkey structured finance products.
UK FOCUS is a management company for specialized vehicles (SPVs), included in the register of the Bank of Russia. UK FOCUS manages over 45 SPVs with assets under management exceeding 2.5 trillion rubles.
UK FOCUS's portfolio includes over 50 completed deals based on our SPVs, with more than 30 currently in progress.
---
We Have Moved to a New Office
On November 1, 2024, the LECAP ecosystem announced its move to a new office. The new office is a stylish loft space created with all the conveniences and needs of the team in mind.
The office is located in the historical center of Moscow at Malaya Dmitrovka 16, building 6. We will be happy to welcome our guests in our new cozy and modern office.
---
Future Announcement
Development of a Concept for Unilateral Deeds
As the market transitions to a new qualitative level, there is a need to expand the toolkit available for structuring transactions. We see an objective need for the creation of harmonious regulation for unilateral deeds (analogous to deeds in the Anglo-Saxon legal system).
Such instruments could become an additional type of security for bonds (replacing the practice of announcing buyback offers) and could also serve as the basis for the legal formalization of obligations undertaken by controlling shareholders (e.g., for the purpose of implementing lock-up agreements in the IPO market).
We welcome public discussion of our initiative.
---
The Need for Corporate Governance Reform
The increase in initial public offering (IPO) deals for Russian issuers has once again focused the attention of the investment and legal world on the importance of corporate governance. Developed corporate governance is an important component of a company's investment attractiveness, whether it has already gone public or is only preparing to acquire public status.
However, the Russian corporate governance system is imperfect. In our opinion, the corporate governance standards reflected in the Corporate Governance Code require updating and detailing. In particular, public companies need to strengthen the role of independent directors, which would help solve the agency problem arising between minority and majority shareholders.
A common manifestation of strengthening the role of independent directors could be vesting the power to make certain decisions, falling within the competence of the board of directors, exclusively in independent directors.
Another vector of corporate governance development requiring greater regulation is the enhancement of control by a holding company over its subsidiaries to reduce the possibility of shareholders siphoning off assets through subsidiaries. Such enhanced control would provide greater comfort to minority shareholders, thereby securing their trust in the holding company.
---
Development of Proposals for Investors to Invest in Quasi-Equity Financing Instruments
Convertible financing instruments are a relatively young investment tool, with convertible bonds and convertible loans being the most in-demand.
However, classic convertible financing instruments are no longer sufficient – market needs have given rise to pre-IPO deals, targeted loans for conducting an IPO with a guaranteed level of allocation for the lender, and other instruments.
Our team is engaged in developing and advising on deals involving unique quasi-equity financing instruments based on best international practices, allowing issuers to attract financing in a high key rate environment, and investors to acquire shares of a promising issuer at a reduced price.
We are ready to share our developments of innovative mechanisms for convertible instruments upon your request.
---
Market Research
The Form of Dividend Payment as an Integral Part of the Right to Receive Dividends
Shareholders – owners of ordinary shares – have, among other rights, the right to receive dividends. Current legislation allows for two main forms of dividend payment: cash and non-cash (the latter must be stipulated in the company's charter).
However, can dividends be distributed in different forms to owners of shares of the same category?
In our opinion, the form of the dividend is an integral part of the shareholder's right to receive dividends. By virtue of the provisions of current civil legislation, the scope of rights of a share owner is proportional to the number of shares they own.
It seems that the principle of "proportionality" can also extend to the form of payment. A similar conclusion is presented in legal doctrine; in particular, G.V. Tsepov indicates that the decision on the form of dividend payment is also subject to the principle of proportionality: shareholders of the same class must receive dividends in the same form.
At the same time, domestic legislation contains an exception to the general rule. According to Article 66 of the Civil Code of the Russian Federation, in a non-public company, disproportionate distribution of rights may be provided for by the company's charter or a shareholders' agreement.
It is important to note that the form of dividend payment is established by a resolution of the general meeting of shareholders.
It appears that in the case of a direct indication in the company's charter of the possibility of a disproportionate distribution of dividends, owners of shares of the same category may receive dividends in different forms if the general meeting of shareholders adopts such a decision.
---
Contradictory Provisions in the Terms of the Bond Issue: How to Interpret Them to Avoid Disputes?
The resolution on the issuance of bonds contains a number of terms of the bond loan: the par value of the securities and the coupon income, the maturity date of the securities, the procedure for determining the redemption price and early redemption price.
One can imagine a situation where the provisions of the resolution on the issuance contain contradictory information, for example – a different amount of coupon income. How should the provisions of the resolution on the issuance be interpreted in such a situation?
Approach No. 1
According to the first approach, it is permissible to interpret the provisions of the resolution on the issuance of bonds through a systematic interpretation of the issuance documentation. In particular, the document containing the placement terms includes the procedure for determining the accrued coupon income on the bonds.
It seems that the procedure for determining the accrued coupon income must correspond to the procedure for determining the coupon. We proceed from the fact that the issuance documentation essentially constitutes a bond loan agreement concluded between the issuer and the bond owner.
By virtue of the provisions of Article 431 of the Civil Code of the Russian Federation, the literal meaning of the terms of a contract, if they are unclear, is established by comparing them with other terms and the meaning of the contract as a whole. It appears that the issuance documents are an integral part of the contract between the bond owner and the issuer and should be interpreted in systemic interconnection.
Approach No. 2
The second approach may be based on the *contra proferentem* rule and the principle of protecting the weaker party.
By virtue of the legal position set out in the Resolution of the Plenum of the Supreme Arbitrazh Court "On Freedom of Contract and its Limits," if the terms of a contract are unclear and it is impossible to establish the true common will of the parties considering the purpose of the contract based on its text, the terms of the contract should be interpreted in favor of the counterparty of the party that proposed the wording of the relevant term.
The issuance documentation is prepared by the issuer, which is why its provisions, in case of ambiguity, will be interpreted in favor of the bond owners. An additional argument in favor of interpretation for the owner is the principle of protecting the weaker party to the relationship. A vivid manifestation of this principle is the position of the Arbitrazh Court of the Ural District in case No. A60-54979/2016. The court indicated that the provisions of the contract should be interpreted in favor of the weaker party, which has essentially adhered to pre-defined contractual terms.
When purchasing bonds, the investor adheres to the terms of the contract without being able to influence the provisions of the issuance documentation. In this regard, the investor is in an unequal bargaining position, and contradictory terms of the bond loan should be interpreted in their favor.
Author's Position
Judicial practice has not yet developed a position that would allow for the interpretation of contradictory provisions of a resolution on issuance in one way or another.
In our opinion, the interpretation of the provisions of the resolution on issuance should be carried out in favor of the weaker party to the relationship, unless the specified contradiction arose due to a typo or other obvious "technical error."
Although investment activity is associated with significant risks, we believe that the list of such risks should not be supplemented by including the consequences of erroneous wording in the issuance documentation.
---
Protective Clauses in the Charters of Subsidiaries
A holding company strives to establish maximum control over other business units, including through legal constructs, in particular – by harmonizing charters within the holding. The essence of this construct is that the charters of controlled entities must contain an obligation for them to coordinate any actions on the most important issues with the board of directors of the parent company.
Based on this concept, the competence of the supreme management bodies of controlled organizations is formulated accordingly. The Moscow Exchange also draws attention to the need to apply the described legal construct and, according to our information, plans to include in the upcoming IPO Standards a recommendation on harmonizing charters within a holding in the event of an IPO by the group's holding company.
However, current legal regulation and relevant court practice indicate that a violation of the charter provisions, according to which a subsidiary cannot conclude certain transactions without the approval of the parent company, will not always entail negative consequences for the violators, which calls into question the effectiveness of this construct.
In this regard, we will elaborate on the features of the current legal situation in this context, as well as mechanisms that could potentially ensure the effectiveness of the studied construct and strengthen the parent company's control over decision-making within the holding.
Counterparties
If a subsidiary enters into a transaction for which the consent of the parent company was not obtained, as required by the charter, such a transaction is voidable under Article 174 of the Civil Code of the Russian Federation and can be declared invalid if it is proven that the counterparty knew or should have known about the need for such consent or if the transaction caused obvious damage to the subsidiary.
But must the counterparty know about the need to obtain the parent company's consent to conclude the transaction?
The problem of the presumption of knowledge of the charter by the counterparty is not new; it has been considered, among others, by the Supreme Court of the Russian Federation. In paragraph 25 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25 dated June 23, 2015, the court indicated that the law does not establish an obligation for a third party to check the constituent documents of a company to identify limitations and delineations of the powers of the sole executive body.
This conclusion was further confirmed in paragraph 6 of the "Review of Judicial Practice on Certain Issues of Applying Legislation on Business Entities," approved by the Presidium of the Supreme Court of the Russian Federation on December 25, 2019, which states that the publication of the charter itself does not create a presumption of knowledge of its content by the counterparty. Thus, to have the transaction declared invalid, it will be necessary to prove that the counterparty knew or should have known the charter of the subsidiary, which – in practice – is extremely difficult.
Management Bodies of the Company
As a means of protection, the holding company can seek recovery of losses from the management bodies of the company. Persons comprising the management bodies of a company bear fiduciary duties towards that company. Moreover, the General Director and members of the board of directors are required to know the constituent documents of the company.
Thus, if a transaction is concluded without obtaining the consent of the parent company required by the charter, under Article 53.1 of the Civil Code of the Russian Federation, liability in the form of damages may be imposed on the persons who concluded such a transaction.
However, such a legal remedy seems insufficient. How can the parent company and counterparties protect themselves? As a possible way to protect itself in case of a violation by the management bodies of the subsidiary of the charter provisions on the procedure for approving transactions, the parent company may provide for a representation and warranty from the counterparty stating that it has familiarized itself with the charter of the subsidiary in standard contract forms.
Such a representation can be designated as a fundamental term, which, under paragraph 2 of Article 431.2 of the Civil Code of the Russian Federation, would allow not only to demand compensation for losses or payment of a penalty from the counterparty but would also allow the subsidiary to withdraw from the contract.
The counterparty in a similar situation can protect itself in a similar way by obtaining representations and warranties from the parent company, according to which the conclusion and execution of the contract do not contradict the constituent documents of the subsidiary.