CIS Legal Update - September 2013: Changes to the Regulatory Framework for Dividend Payments in Russia

by Dechert LLP
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Beginning January 1, 2014, the regulatory framework for the payment of dividends in Russia will change considerably, which should result in more efficient and transparent distributions of dividends from Russian companies.

Federal Law No. 282-FZ “On Amending the Laws of the Russian Federation” (the “Law on Amendments”), which was signed by the President of the Russian Federation on December 29, 2012, will introduce a series of amendments (effective January 1, 2014) to key legislation, including, inter alia, provisions of the Federal Law “On Joint Stock Companies” and the Federal Law “On Securities Market” relating to payment of dividends by joint stock companies.  These amendments will introduce significant changes to the rules on payment of dividends and should improve the regulatory scheme governing the Russian securities market.

Key Changes 

Date of dividend payment

At present, dividends are payable to those shareholders of a Russian joint stock company (“JSC”) who are included on the list of eligible shareholders (“Shareholders List”) at the date on which the JSC decides to distribute dividends to its shareholders.  This  often creates a substantial gap between the moment when the right to receive dividends has been granted and the moment when the  dividends are actually paid out by a JSC. Consequently, a person may be entitled to receive dividends by virtue of having been included in the Shareholders List even if she is no longer a shareholder in a JSC when the dividends are finally distributed.  The Law on Amendments changes the existing rule by requiring the Shareholders List to be compiled no later than 20 calendar days following the date when the JSC resolved to distribute dividends. Moreover, in the event that the JSC’s shares are publicly traded, the Shareholders List can be compiled with an effective date (the date when the shareholders on the Shareholders List are finalized) that is not earlier than 10 days prior to the date when the JSC had adopted a decision to distribute dividends, and not later than 20 days following such decision.  The form of the Shareholders List is not proscribed by applicable law and JSCs are free to develop their own forms of Shareholders Lists.  

Requirements on deciding to effect dividends payments

Under the Law on Amendments, the decision on making dividends payments, which is adopted by the General Meeting of Shareholders (“GSM”) of a JSC, does not need to specify a time period within which the dividends must be distributed.  According to the Law on Amendments, the time period in which a JSC shall pay out the announced dividends has been reduced from 60 to 25 business days, and this period starts to run from the date on which the Shareholders List is compiled (and not from the date on which the GSM of a JSC had adopted its decision to distribute dividends).  

The amount of dividends intended for distribution, as specified in the GSM’s resolution, cannot exceed the amount recommended by the board of directors (supervisory board) of a JSC.

It is also important to note that the requirement for simultaneously paying dividends to all authorized shareholders has been removed by the Law on Amendments. 

Dividends payable through a nominee shareholder

Pursuant to current legislation, nominee shareholders (custodians) do not participate in the distribution of dividends – and are not included in the Shareholders List – except for disclosing to the JSC information regarding the beneficial owners of its shares.  Upon being disclosed, the beneficial shareholders are then included into the List of Shareholders, which entitles them to receive their dividends.

The Law on Amendments has taken into account the industry’s call to increase the confidentiality of securities owners who employee nominees. As such, the revised rules will allow for nominees to be included in the Shareholders List, which will afford them the right to receive dividends directly from the JSC. This will allow nominee shareholders to freely and confidentially distribute the dividends received from the JSC to their rightful beneficial shareholders.

Furthermore, the Law on Amendments has shortened the period within which the nominee must receive the dividends to 10 business days (as opposed to the 25-day period for distribution of dividends to “regular” shareholders discussed above). In turn, the nominees must transfer the dividends to their clients (i.e. beneficial shareholders) within 5 business days from the date on which the nominee received the dividends from the JSC.  

Conclusion

These recent amendments are aimed at remedying the deficiencies and loopholes in the current legislation and setting out more detailed standards, all of which should create a more stable and transparent environment for shareholders. However, as the Amendments will go into effect on January 1, 2014, their effect on Russian business practice is still yet to be seen.

*This article was written by Pavel Dunaev, a paralegal in the Moscow office.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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