Russian Note Trustee (a Bondholders’ Representative) and Other Changes in Corporate Bond Regulations

by Orrick, Herrington & Sutcliffe LLP

This law alert relates to the changes made in the Russian securities law by Federal Law No. 210-FZ dated July 23, 2013 (On Amendments to the Federal Law on the Securities Market and to Certain Russian Laws and Regulations).  Specifically, said Law has introduced the concept of a bondholders' representative and expanded the concept of a general meeting of bondholders.  The new amendments also set out in more detail how to redeem or repurchase Russian bonds before maturity.  Orrick has actively assisted the Association of Russian Regional Banks in the drafting and promotion of the new law.

1.         Bondholders' representative

Appointment.  A bondholders' representative may be appointed by an issuer or a general meeting of bondholders.  A bondholder must be appointed if the bonds are issued by public offering or by private placement involving more than 500 investors other than qualified investors or if the bonds are admitted to trading on a regulated market and are not restricted to qualified investors only.

Eligibility.  A Russian legal entity can act as a bondholders' representative provided that it has been in existence for more than three years, has no conflict of interest and is on the relevant register of bondholders published by a regulator.  None of the following persons may act as a bondholders' representative with respect to bonds: (i) the issuer of such bonds, (ii) a third party security provider or (iii) a person controlled by or controlling either the issuer or a third party security provider.  An arranger of an offering or a person controlled by or controlling such arranger may only be appointed as a bondholders' representative with the consent of a general meeting of bondholders of such bonds.  A specialized depository may be appointed as a bondholders' representative with respect to Russian mortgage-backed bonds.

Powers.  A bondholders' representative appointed with respect to a bond issue will ensure proper supervision of compliance by the issuer with its obligations, inform the bondholders of certain matters related to the protection of their interests and represent the bondholders in relations with the issuer and before courts and other government authorities.  A bondholder will be entitled on behalf of the bondholders to, among other things, (a) give its consent to amendments to be made by the issuer to the resolution to issue the bonds or to the prospectus for the bonds, (b) request information from the issuer, a third party security provider, and any relevant auditor or valuator, and (c) act as a pledgee, beneficiary or creditor under a guarantee.  No action that falls within the exclusive authority of a bondholders' representative under the relevant Federal Law may be taken by the bondholders themselves.

Commingling Risk.  Bondholders' funds will be required to be kept segregated from the property of the bondholders' representative by being held in a dedicated bondholders' representative bank account.  In no event may an obligation of the bondholders' representative be satisfied out of money owned by bondholders and held in such dedicated bank account.

Representative's Liability.  If a bondholder incurs losses caused by the bondholders' representative the bondholders' representative must compensate such losses at the request of the bondholder.  The liability of a bondholders' representative for losses resulting from a negligent act or omission may be limited to a specific amount of at least ten times the bondholders' representative's annual fee.

Existing Bond Issue.  The new regulation on bondholders' representatives is likely to be applicable to offerings registered before the effective date of the new law.

2.         General Meeting of Bondholders

New important rules have been added to the legal regulation of the concept of a general meeting of bondholders.  Specifically, the new law (a) clarifies the authority of a general meeting of bondholders and how it should be convened and held, (b) provides that any resolution of a general meeting of bondholders will be binding on all bondholders, whether or not they vote for such resolution, and (c) provides that a general meeting of bondholders may take action by  written consent rather than by voting at the meeting.

3.         Redemption and Buy-Back of Bonds Before Maturity

The new law also sets out in detail the procedures for the early redemption of bonds, whether voluntary or upon a default, and for the buy-back of bonds by the issuer.

Most of the above amendments will be effective from July 1, 2014 and some of them will take effect on July 1, 2016.  The original Russian text of the law is available here.

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We will continue to keep an eye on changes in law and will inform you of any material changes.

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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Orrick, Herrington & Sutcliffe LLP

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