CORPORATE LAW PROJECT JURISDICTION: Russian Federation FIRM: Clifford Chance LLP DATE: October 2010

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1 Mandate of the Special Representative of the Secretary- General (SRSG) on the Issue of Human Rights and Transnational Corporations and other Business Enterprises CORPORATE LAW PROJECT JURISDICTION: Russian Federation FIRM: Clifford Chance LLP DATE: October 2010 This survey is an independent submission to the SRSG s Corporate Law Project. It is the sole work of Clifford Chance LLP and the SRSG takes no position on any views expressed or implied in this report. More information about the Corporate Law Project is available at:

2 A NOTE FROM THE UN SPECIAL REPRESENTATIVE ON BUSINESS AND HUMAN RIGHTS September 2010 This survey is an independent submission to a project on corporate law and human rights under my mandate as Special Representative of the UN Secretary-General on Business and Human Rights: the Corporate Law Project. I am delighted that nineteen leading corporate law firms from around the world have agreed to make submissions to this project, and thank them for their engagement. The willingness of so many firms to provide their services pro bono in order to expand the common knowledge base indicates that corporate law firms worldwide appreciate that human rights are relevant to their clients needs. It is important at the outset to understand how this project fits into my wider work. I was appointed in 2005 by then UN Secretary-General Kofi Annan with a broad mandate to identify and clarify standards of corporate responsibility and accountability regarding human rights, including the role of states. In June 2008, after extensive global consultation with business, governments and civil society, I proposed a policy framework for managing business and human rights challenges to the United Nations Human Rights Council (Council). The Framework of Protect, Respect and Remedy rests on three differentiated yet complementary pillars: the state duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights, which in essence means to act with due diligence to avoid infringing on the rights of others; and greater access for victims to effective remedy, judicial and non-judicial. You can read more about the Framework in my 2008, 2009 and 2010 reports to the Council, available at my website: The Council unanimously welcomed what is now commonly referred to as the U.N. Framework and extended my mandate by another three years, tasking me with operationalizing the Framework that is, to provide practical recommendations and concrete guidance to states, businesses and others on the Framework s implementation. There has already been considerable uptake of the U.N. Framework by all relevant stakeholders. It has also enjoyed unanimous backing in the Council; strong endorsements by international business associations and individual companies; and positive statements from civil society. A key aspect of the first pillar, the state duty to protect, is that states should foster corporate cultures respectful of rights both at home and abroad, through all appropriate avenues. In particular, I have been exploring the opportunities and challenges that corporate and securities law can provide in this regard. Corporate law directly shapes what companies do and how they do it. Yet its implications for human rights remain poorly understood. The two have often been viewed as distinct legal and policy spheres, populated by different communities of practice. The Corporate Law Project will allow me to explore this area further by gaining knowledge from over 40 jurisdictions as to how national laws and policies dealing with incorporation and listing; directors duties; reporting; stakeholder engagement; and corporate governance more generally currently require, facilitate or discourage companies from respecting human rights. I am interested not only in what laws currently exist, but also how corporate regulators and courts apply the law to require or facilitate consideration by companies of their human rights impacts and preventative or remedial action where appropriate. The project thus formally comprises part of my work on the state duty to protect. It will assist me to understand whether and how national corporate law principles and practices currently encourage 2

3 companies to foster corporate cultures respectful of human rights. I will in turn consider what, if any, policy recommendations to make to states in this area, following consultation with all relevant stakeholders. However it is just one element of my work on the state duty to protect, which also looks at other areas of the law and national policies which might help states to encourage companies to respect human rights. The project will also support my work on the corporate responsibility to respect and access to effective remedy. In relation to the responsibility to respect, I have explained that in addition to compliance with national laws, the baseline responsibility of companies is to respect human rights. To discharge the responsibility, I have recommended that companies conduct ongoing human rights due diligence whereby they become aware of, prevent, and mitigate adverse human rights impacts. The responsibility exists even where national laws are absent or not enforced because respecting rights is the very foundation of a company s social license to operate. It is recognized as such by virtually every voluntary business initiative, including the UN Global Compact, and soft law instruments such as the International Labour Organization Tripartite Declaration and the OECD Guidelines on Multinational Enterprises. Nevertheless, an understanding of national laws, including corporate law, remains vital to ensure companies understand and comply with their national legal obligations. Moreover, as my 2010 report to the Council highlights, companies may face noncompliance with corporate and securities laws where they fail to adequately assess and aggregate stakeholder-related risks, including human rights risks, and may thus be less likely to effectively disclose and mitigate them, as may be required. The Corporate Law Project s website is There you will find the original press release for this project; the research template the firms have agreed to follow; summary reports from two consultations held to date on the project; an over-arching trends paper bringing together the main themes from the firms surveys; and all completed firm surveys. My thanks again to all stakeholders who have contributed to this project. John G. Ruggie Special Representative of the UN Secretary-General on Business and Human Rights 3

4 КЛИФФОРД ЧАНС СНГ ЛИМИТЕД CLIFFORD CHANCE CIS LIMITED CORPORATE LAW PROJECT - RUSSIA Executive summary (a) Setting the legal landscape (Question 1) The Russian Federation Constitution sets out an extensive list of human rights and declares human rights to be of the highest value. Russia is a party to major international and European human rights treaties. There is no comprehensive Russian legislative act that specifically governs issues of business impact on human rights or the relevant duties of companies. Various Russian laws regulating various spheres incorporate the principle of protection of human rights and require companies to assess the impact of their activities on human rights. Russian corporate/securities laws do not specifically address the issue of business impact on human rights. (b) Regulatory framework (Questions 2-5) The majority of state bodies in Russia regulate the activities of private and state-owned companies within their respective competences (e.g. finance, environmental protection, labor etc.). In general, all Russian state agencies issue binding regulations, arrange for inspections at companies, and may hold companies and their officers responsible for infringements, including for human rights related legal obligations. The main corporate regulators include the Ministry of Finance, the Ministry of Justice, the Federal Tax Service, the Central Bank, the Federal Service for Labor and Employment etc. The Federal Financial Markets Service ("FFMS") should be specifically mentioned, as it is especially active in developing principles of corporate governance and social responsibility of Russian companies. In 2002 the FFMS issued the Corporate Governance Code, which was drafted to establish progressive corporate governance standards. (c) Incorporation and listing (Questions 6-8) Incorporation of a company does not require any recognition of a duty to society. The applicable legislation provides only a set of purely formal requirements that must be met for a company to be incorporated. However, there is a general obligation for a corporate entity to comply with the Russian Federation Constitution and laws in the course of its incorporation and further operation. As regards listing, following issuance of the Corporate Governance Code leading Russian stock exchanges introduced a new listing requirement of compliance with certain corporate governance standards. The leading Russian stock exchanges do not have any responsible investment indices. 4

5 (d) Directors' duties (Questions 9-15) Russian law provides for a rather broad and non-specific description of directors' duties. Directors are responsible for the overall management of a company's ongoing activities reasonably, in good faith and in the best interests of the company. Directors should also comply with applicable laws (including human rights-related laws). These duties are owed to the company. A more detailed description of directors' obligations may nevertheless be found in a company's foundation documents, internal regulations and/or the directors' employment contracts (as applicable). In recent years given that more major Russian companies have started to focus on corporate responsibility, it may be that they will begin to incorporate relevant policies, including on human rights, into their constitutive or local (internal) documents. If a director fails to perform specific duties provided for in a company's internal documents and/or duties deriving from the general obligation to manage the company reasonably and in good faith and to pursue its interests, he/she is obliged to compensate damages caused to the company by his/her actions or omissions. (e) Reporting (Questions 16-18) Russian law provides for various reporting obligations which companies may need to follow, depending on their corporate form and type of activity. Furthermore, most Russian state bodies are empowered to conduct various inspections of companies with the purpose of monitoring compliance with the applicable laws. Companies may be required to disclose human rightsrelated impacts of their operations in their reports or in the course of inspections by state bodies. For example, following a general requirement to disclose significant pending litigations in a securities prospectus, a company would have to disclose any significant human rightsrelated litigations etc. (f) Stakeholder engagement (Questions 19-21) Russian law does not contain any specific rules or restrictions with regard to circulating and considering shareholder proposals which deal with impacts on non-shareholders. As a general rule, non-shareholders cannot attend and/or address companies' annual general meetings. As regards investment activities, the Russian legislation governing activities of investment funds and pension funds does not require them to consider human rights impacts when making their investment decisions. (g) Other issues of corporate governance (Questions 22-24) Since the early part of this decade Russian businesses have increasingly recognized the principle of social responsibility. Major Russian companies participate in international initiatives such as the Global Reporting Initiative, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, the UN Global Compact etc. We also note the Corporate Governance Code issued by the FFMS, which provides guidance for Russian companies in implementing good corporate governance policies. 5

6 Setting the legal landscape 1. Briefly explain the broader legal landscape regarding business and human rights. 1.1 The Russian Federation Constitution, adopted by national vote in 1993, sets out an extensive list of political, economic and social rights, including most of those proclaimed in the International Covenant on Civil and Political Rights (the "ICCPR") and the International Covenant on Economic, Social and Cultural Rights (the "ICESCR"). 1.2 The Constitution, including provisions on human rights, is directly applicable and serves as a basis for the activities of legislative, executive and judicial state bodies. Furthermore, not only state and municipal bodies and officials, but also Russian citizens and corporate entities are obliged to observe the Constitution and federal laws. 1.3 The Plenum of the Russian Federation Supreme Court (consisting of all judges of the Supreme Court) in its Decree No. 8 of 31 October 1995 (paragraph 2) emphasized that the Constitution is to be directly applied by courts whenever the circumstances of a case so require, in particular, (i) if its specific provisions do not require any additional implementation; (ii) if a federal law (adopted either before or after the entry into force of the Constitution) that is to be applied in adjudicating a case contradicts the Constitution; or (iii) if regional legislation that is to be applied contradicts the Constitution and there is no relevant applicable federal law. The above clarifications should be treated as guidance to the Russian courts rather than a limitation of the principle of direct application of the Constitution. The Russian courts are not precluded from citing the Constitution whenever they deem appropriate. 1.4 The Constitution is occasionally cited in court decisions. Usually it is cited in addition to references to other applicable laws, since the provisions of the Constitution are very broadly worded and detailed regulation is provided by other laws. 1.5 Russia has signed and ratified the core international human rights instruments which are relevant in the context of business impact on human rights, including the ICCPR, the ICESCR, the European Convention on Human Rights ("ECHR"), and more than 50 International Labor Organization Conventions (e.g., 1957 Abolition of Forced Labor Convention, 1958 Discrimination (Employment and Occupation) Convention, 1949 Protection of Wages Convention, 1981 Occupational Safety and Health Convention etc.). 1.6 Pursuant to the Constitution, international treaties that have been signed and ratified by Russia and customary norms of international law (for example, those norms generally agreed to be included from the Universal Declaration of Human Rights) are considered to be incorporated in the Russian legal system. This means that no specific laws implementing international treaties are adopted unless implementation is explicitly required by the relevant international treaties (e.g. certain criminal law conventions requiring that signatory states amend their national laws to make punishable and to establish their jurisdiction over certain crimes). 1.7 Russian courts occasionally directly refer to international treaties (in particular, the ECHR, the ICCPR and the ICESCR) in their decisions, usually together with references to applicable national laws. 6

7 1.8 As regards regulation of human rights at the national level, first of all, the competence of Russian authorities in this sphere should be briefly explained. Russia is a federal state. The Constitution establishes that certain areas (policies) are within the exclusive competence of federal authorities, while others may be regulated on both a federal and a regional level. The exclusive competence of regional authorities is based on the residual principle. Protection of human rights is regulated both federally and regionally. In general, all legislative and administrative measures adopted by the constituent entities of the Russian Federation in the field of human rights must comply with the general principles and standards established at the federal level. In practice, it is the legal nature of the specific human rights-related rights and obligations that would be decisive. For example, those relating to civil law, tax, financial laws and laws of procedure would be regulated federally, while labor, environmental, social security and health rights and obligations may be regulated on a regional level. 1.9 There is no comprehensive Russian legislative act that specifically governs issues of business impact on human rights or the relevant duties of companies. However, numerous laws deal in some way with protection of human rights against abuses by business and victims' access to effective remedies (including codified legislation and uncodified laws and regulations, as described in para below). Corporate/securities laws are, as a general rule, silent on the issue of the impact of business on human rights The following federal laws may be specifically mentioned among those which deal with the protection of human rights and which would most likely be applied in the case of abuses by business: The Russian Federation Civil Code: It consists of four parts, enacted separately over the years , codifying Russian civil law. Among other things, the Civil Code sets out general principles and rules of corporate/securities law, including forms of incorporation of corporate entities, management, rights and obligations of shareholders/participants, corporate responsibilities etc. It also governs property law, law of obligations, various types of contracts, succession law, intellectual property law and conflict of laws. Although it does not specifically address the issue of business impact on human rights, the Civil Code establishes the fundamental principles of Russian civil law, including the equality of parties, inviolability of property, freedom of contract, free exercise of civil law rights and protection against violations, including the availability of judicial remedies The Russian Federation Labor Code No. 197-FZ of 30 December 2001: It governs a wide range of labor law issues, including the rights, obligations and responsibilities of employers and employees The Russian Federation Administrative Offenses Code No. 195-FZ of 30 December 2001: This Code governs the administrative responsibility of companies and their officials for violations in various areas, including labor, antitrust, tax, environmental law etc The Russian Federation Criminal Code No. 63-FZ of 30 June 1996: It sets out general concepts and rules regarding crimes and applicable punishments, and also establishes specific criminal offenses and penalties. In Russia only natural persons may be held 7

8 criminally responsible. Corporate entities may not be held responsible for crimes. The Criminal Code provides for the responsibility of companies' directors and managers for certain crimes in the sphere of business, including abuse of powers, illegal business activities etc. The Criminal Code provides for the responsibility for certain international crimes (such as aggression, genocide and certain crimes against humanity) for which a natural person may be held responsible, although the list of crimes and their elements are yet to be brought into compliance with all international standards. (The Russian Federation has signed but not ratified the Rome Statute of the International Criminal Court, although it is a party to a number of international criminal law conventions such as, for example, the Convention on the Prevention and Punishment of the Crime of Genocide) The Federal Law On Environmental Protection No. 7-FZ of 10 January 2002: This is the main legislative act governing the competence of state bodies, rights and obligations of private persons, requirements applicable to various industries, regulatory control, and responsibility for violations in the sphere of environmental protection The Federation Law On Consumer Rights Protection No of 7 February 1992: This is a comprehensive law governing rights and obligations of producers and suppliers of goods and services, as well as consumers. The law provides for remedies available to consumers The Federal Law On Guarantees of the Rights of Indigenous Minorities of the Russian Federation No. 82-FZ of 30 April 1999: This law is aimed at ensuring the traditional way of life of indigenous peoples. It intends to protect the rights of indigenous peoples, including, in particular, the right to use and control the use of lands where they live, to participate in exercising control over environmental protection measures, to be represented in state and municipal bodies, to receive compensation for damages, including those caused to them and the areas where they live by the activities of companies and individuals, etc We would also mention the Corporate Governance Code of 5 April 2002 issued by the FFMS as guidance for companies wishing to implement good corporate governance policies. While the Corporate Governance Code is generally not binding, stock exchanges may require that listed companies (in particular, those whose securities are included in quotation list A, level 1, i.e. to whom the strictest fiscal requirements apply) comply with the Corporate Governance Code. Furthermore, joint stock companies are obliged to report on their compliance with the Code's recommendations in their annual reports (see also the answers to Questions 7, 10, 11, 15, 16 and 22 below) As regards the competence of state bodies with regard to regulation of business and protection of human rights, the overwhelming majority of the state bodies in Russia regulate the activities of private and state-owned companies within the respective competences of these state bodies (e.g. finance, environmental protection, labor etc.). In general, all of the Russian state agencies have the right to issue binding regulations, arrange for inspections at companies to determine compliance with the relevant legislation, and hold companies and their officers responsible for infringements (or report the latter to other competent bodies) including regarding human rights- 8

9 related laws. Thus, protection of human rights is either expressly or impliedly within the competence of most of the state bodies. Please see the answer to Question 4 for further details Finally, it should be noted that in recent years a growing number of major Russian companies, both private and state-owned, especially those operating internationally, has adopted corporate human rights policies and has started participating in voluntary initiatives promoting adherence by business to human rights-related principles (see the answer to Question 22 below). Regulatory Framework 2. To what legal tradition does the jurisdiction belong, i.e. civil/common law, mixed? 2.1 Generally speaking, Russia is a civil law country. Statutes are the main source of law in Russia, with the Constitution and constitutional laws (e.g. on the judicial system, on the Russian Federation government, on state symbols etc.) as the highest authority. Various decrees and regulations issued by competent state bodies should comply with the Constitution, constitutional laws, federal laws and, if applicable, laws of constituent entities of the Russian Federation. 2.2 As a general rule, decisions rendered by courts are not binding for other courts. However, the Supreme Court and the Supreme Arbitrazh [Commercial] Court may issue clarifications on issues of substantive and procedural law which are binding for lower courts (this right of the Supreme Arbitrazh Court was recently confirmed by the Constitutional Court in its Decree No. 1-P of 21 January 2010). In practice, the lower courts usually follow the established case law of the upper courts. 2.3 In addition, the Constitutional Court has the right to declare any laws that contravene the Constitution inoperative. The Constitutional Court's interpretation of the Constitution and other laws is binding for state bodies, companies and individuals. 3. Are corporate/securities laws regulated federally, provincially or both? 3.1 As was mentioned in paragraph 1.9 above, there are certain areas (policies) which may be regulated federally, regionally or both. Pursuant to Article 71 of the Russian Federation Constitution, corporate and securities laws are regulated federally. 4. Who are the government corporate/securities regulators and what are their respective powers? 4.1 The following state agencies should be mentioned as the main corporate regulators. 4.2 The Ministry of Finance coordinates financial and economic policy. The Federal Tax Service, which is subordinate to the Ministry of Finance, is responsible for taxation. It also carries out registration of Russian companies and individual entrepreneurs. 4.3 The Ministry of Justice is responsible for drafting the legislation in a number of fields of law and reviewing legislative acts drafted by other state bodies (e.g. by the FFMS) from a legal standpoint. It also carries out registration of non-profit companies. The Federal Registration Chamber, a federal state institution at the Ministry of Justice, carries out registration of foreign companies, their branches and representative offices which operate in Russia. 9

10 4.4 The FFMS controls and supervises financial markets, including stock exchanges, state and private pension funds, joint stock companies, and the issuance and circulation of securities. The FFSM also prepares draft federal laws and has significant powers with regard to the adoption of binding regulations in the sphere of its competence. The FFMS seeks to actively promote modern standards of corporate governance. In particular, it has coordinated work on drafting the Corporate Governance Code. The Expert Council for Corporate Governance at the FFMS is an advisory body which assists the FFMS in performing its functions by way of reviewing draft legislation connected with issues of corporate governance, preparing recommendations and arranging for discussions on further development of corporate governance. The FFMS is directly subordinate to the Russian Federation Government, i.e. it reports directly to the Government a state body comprising the Prime Minister, Deputy Prime Ministers and Federal Ministers rather than to the Ministry of Finance or any other ministries (in this sense the FFMS's status is on a par with any ministry that also reports to the Government). 4.5 The Central Bank, in cooperation with the Government, is responsible for Russian monetary policy. The Central Bank has extensive regulatory powers in relation to Russian banks and credit institutions. It seeks to actively use these powers to establish and promote modern standards of corporate governance at the companies and banks within the scope of its regulation. 4.6 The Federal Service for Labor and Employment, subordinate to the Ministry of Health and Social Development, is a government agency that has a number of important functions in the context of business impact on human rights. Among other things, it is responsible for state supervision of compliance by business with labor laws, occupational safety regulations and employee insurance, as well as assisting in resolving collective labor disputes, and holding companies and their officers responsible for violations of labor laws. 5. Does the jurisdiction have a stock exchange(s)? 5.1 Russia has a number of stock exchanges, the leading ones being the Russian Trading System (RTS) stock exchange and the Moscow Interbank Currency Exchange (MICEX). Incorporation and listing 6. Do the concepts of "limited liability" and "separate legal personality" exist? 6.1 The concept of "separate legal personality" does exist in Russian law. Natural persons and corporate entities are treated as separate legal entities or, literally, "subjects of law". All subjects of law have legal capacity (both passive and active), which generally means that they may exercise rights and assume obligations, on their own behalf or through representatives, and may bear responsibility. 6.2 The legal capacity of both natural persons and corporate entities is regulated in the Civil Code (Chapters 3 and 4). In addition to the general rules of the Civil Code, various issues connected with the legal capacity of corporate entities are regulated in the Federal Laws On State Registration of Corporate Entities and Individual Entrepreneurs No. 129-FZ of 8 August 2001, On Joint-Stock Companies No. 208-FZ of 26 December 1995 (the "JSC Law"), On Limited Liability Companies No. 14-FZ of 8 February 1998 (the "LLC Law"), On Non-Profit Companies No. 7-FZ of 12 January 1996 (the "Law on Non-Profit Companies"), On State 10

11 and Municipal Unitary Enterprises No. 161-FZ of 14 November 2002 (the "Law on Unitary Enterprises") and others. 6.3 The passive legal capacity of natural persons, which is acquired at the date of birth and ceases upon death, is unalienable. Active legal capacity is acquired in full at the age of 18, although minors have limited active legal capacity starting from the age of 6 (further broadening at the age of 14). The active legal capacity of adults may be limited, e.g. due to certain health reasons. 6.4 As a general rule, both passive and active legal capacities of corporate entities are acquired at the date of registration of a corporate entity's incorporation and cease to exist at the date of registration of its liquidation. 6.5 Private commercial companies have general legal capacity, which means that such companies may be involved in any lawful types of activity unless their capacity is limited by their shareholders/participants. 6.6 The legal capacity of non-profit companies and state/municipal unitary enterprises is of a special nature; these corporate entities may exercise rights and assume obligations as far as these rights and obligations serve the purposes for which the respective corporate entity has been established. In this sense, the legal capacity of these corporate entities is limited. 6.7 As a general rule, a company may be held responsible for a breach of law, but this would not entail limitation of its capacity. However, pursuant to Article 61(3) of the Civil Code, if a gross and irremediable breach of law or multiple violations are committed by a company (including in the course of the company's incorporation), a court may order that it be liquidated. A claim seeking that the company be liquidated may be brought by a competent state body (in particular, the tax authorities, which register companies' incorporation). 6.8 The Russian Federation Constitutional Court confirmed in its Decree No. 14-P of 18 July 2003 that the above-cited provision of the Civil Code does not contradict the Constitution. The Constitutional Court in said Decree and the Presidium of the Supreme Arbitrazh Court in its Information Letter No. 84 of 13 August 2004 clarified that the nature and duration of the violation and the proportionality of the sanction should be taken into consideration when deciding whether or not to liquidate a company. The mere fact that minor (although multiple) violations of law were committed is not a sufficient basis to order a company s liquidation, especially if all of the negative consequences of such violations were remedied. 6.9 Liquidation is a sanction that is rarely imposed by the courts. In a few published cases liquidation has been ordered inter alia in view of tax violations committed by a company, the failure of a company's founders to pay for their shares, or violations committed in the course of privatization. None of these cases were directly connected with any alleged human rights violations Other examples of limitation of legal capacity of a corporate entity are connected with the necessity to obtain a license for certain types of activities (e.g. connected with exploitation of hazardous production facilities etc.). If a license holder violates the license requirements and conditions it may be deprived of the license. Certain types of activities (e.g. in the defense industry) may be performed only by state-owned enterprises. 11

12 6.11 The concept of limited liability also exists in Russian law. As a general rule, shareholders/participants of corporate entities or the owners of their property (the latter being applicable for state/municipal unitary enterprises) are not responsible for the obligations of the companies Exceptions to the concept of limited liability may be provided for in the Russian Federation Civil Code or the foundation documents of the relevant corporate entity. For example, the participants in a so-called full partnership bear subsidiary liability for obligations of the partnership (Article 75 of the Civil Code). Another example is that shareholders/participants of a corporate entity or the owners of its property (for state or municipal enterprises) who have caused its bankruptcy may be held secondarily liable for its obligations (Article 56(3) of the Civil Code). 7. Did incorporation or listing historically, or does it today, require any recognition of a duty to society, including respect for human rights? 7.1 Incorporation of a company does not explicitly require any recognition of a duty to society. The applicable legislation provides only a set of purely formal requirements that must be met for a company to be incorporated. 7.2 However, there is a general obligation for a corporate entity to comply with the Russian Federation Constitution and laws in the course of its incorporation and further operation. 7.3 As was mentioned in paragraph 6.7 above, according to Article 61(3) of the Civil Code, a court may order that a corporate entity be liquidated if it has committed a serious and irremediable violation and/or multiple violations of law, including in the course of the company's incorporation (see also the answer to Question 6 (paras ) above). 7.4 As regards listing, following issuance of the Corporate Governance Code in 2002, leading Russian stock exchanges (including RTS and MICEX) introduced a new listing requirement of compliance with certain corporate governance standards. However, the checklists to be followed by companies applying for listing (including those of RTS and MICEX) are primarily focused on the composition of the supervisory board, internal audit and financial control, and strictly speaking do not have any specific emphasis on social responsibility, including protection and respect of human rights, though at the very least they do encourage good governance. 8. Do any stock exchanges have a responsible investment index, and is participation voluntary? (See e.g. the Johannesburg Stock Exchange's Socially Responsible Investment Index.) 8.1 The leading Russian stock exchanges do not have any responsible investment indices. It appears that no Russian companies are members of socially responsible investment indexes such as the Dow Jones Sustainability Index and the FTSE4Good. Directors' Duties 9. To whom are directors' duties generally owed (i.e. to the company, non-shareholders etc)? 9.1 According to the Russian Federation Civil Code (Article 53(3)) as well as laws on certain types of corporate entities (e.g. the JSC Law (Article 71), the LLC Law (Article 44), the Law On 12

13 Unitary Enterprises (Article 25)) a general director, members of the management board and members of the supervisory board (if any) are obliged to act reasonably, in good faith and in the best interests of the company. Thus, directors' duties are generally owed to the company. 9.2 The general director and the management board usually have reporting obligations to the company's higher management bodies (usually the general shareholders'/participants' meeting), which have the right to appoint and dismiss them. For example, in the case of joint stock companies, directors and members of the management board report to shareholders and supervisory boards and may be dismissed by the general shareholders' meeting (or the supervisory board, if authorized by the foundation documents). 9.3 In addition, a general director should be, and a member of the management board may be, employed by the company on the basis of an employment contract. The general director and members of the management board are thus also responsible to the company, as their employer, for the proper performance of their duties specified in the respective employment contract and applicable internal regulations of the company. This means that the contract and/or the regulations may impose further specific duties on the general director (and members of the management board, if the latter are employed on the basis of employment contracts) in addition to the general duty specified above. Employment contracts are not concluded with members of the supervisory board. 9.4 The JSC Law (Article 71) and the LLC Law (Article 44) provide that joint stock company shareholders that hold more than one percent of the allotted ordinary shares and any holders of a participatory interest in a limited liability company have a right of claim against the general director, member of the management board or member of the supervisory board in the event any of the latter persons causes the company to incur damages. However, the relevant claim may be submitted by a shareholder (or holder of a participatory interest) in the interest of the company only (i.e. any amounts would be awarded by the court to the company itself, not to the claimant). 9.5 Third parties which suffer losses as a result of a breach of directorial duty should bring an action against the company itself. The company may then proceed against the directors themselves to recover its own loss. 10. Are there duties to avoid legal risk and damage to the company's reputation? If so, are they duties in their own right or are they incorporated into other duties? 10.1 The Russian Federation Civil Code and the laws on certain types of corporate entities provide for a rather broad and non-specific description of directors' duties. Directors are responsible for the overall management of the company's ongoing activities. In performing their duties directors must act reasonably, in good faith and in the best interests of the company. The applicable laws do not provide for any specific duty on the part of directors to avoid legal risk and damage to the company's reputation. However, directors do have a general obligation to comply with applicable laws Specific lists of directors' duties and provisions allocating functions between the general director and the management board are usually contained in a company's foundation documents, internal regulations and employment contracts. Companies have considerable 13

14 freedom when determining the functions and duties of their executives. Therefore the question of whether or not directors have a specific duty to avoid legal risk and damage to the company's reputation will depend on whether or not such duties are stipulated in the above-mentioned internal documents of the respective company. If they do not contain any such specific provisions (which is not uncommon, especially in small or mid-sized companies), it may be argued that the duties in question derive from the directors' general obligation to manage the company and pursue its interests As follows from the available court practice, when considering claims against directors connected with the alleged breach of their duties, courts usually focus on the directors' compliance with the above-mentioned general obligation rather than with the specific obligations provided for in the companies' internal documents. In some cases this may be connected with the fact that the relevant specific provisions were lacking in the companies' internal documents. However, in at least one of the cases a court did consider in detail the issue of a director's compliance with the company's internal regulations (Decree of the Ninth Arbitrazh Appellate Court of 19 March 2010 in case No. A / ). In any event, the abovementioned court practice is connected with the review of business-related decisions of directors rather than the duty to avoid legal risk and damage to the company's reputation Russian banking law provides for more detailed regulation of risk management. For example, in accordance with the Federal Law On Banks and Banking Activity and a number of legislative acts issued by the Russian Federation Central Bank, banks are obliged to arrange internal control systems ensuring compliance with rules and standards of banking, risk management and prevention of banks' involvement in illegal activities, including money laundering and financing of terrorism. The organization of internal control is the duty of the banks themselves. The general director, members of the management board and members of the supervisory board are part of the internal control system, the functions of which include adoption of internal regulations, allocation of duties among the bank's departments and employees responsible for specific aspects of the internal control, consideration of reports on specific control activities etc In 2005 the Russian Federation Central Bank issued a letter advising banks on modern approaches to corporate governance in banking organizations. The letter is based on the OECD Principles of Corporate Governance and the guidelines Enhancing Corporate Governance for Banking Organizations of the Basel Committee on Banking Supervision, which sets out, among other things, recommendations on certain organizational measures to increase the effectiveness of banks' risk management systems Insurance and securities laws also establish certain risk management requirements, albeit less comprehensive and detailed than those provided for in banking law. 11. More generally, are directors required or permitted to consider the company's impacts on nonshareholders, including human rights impacts on the individuals and communities affected by the company's operations? Is the answer the same where the impacts occur outside the jurisdiction? Can or must directors consider such impacts by subsidiaries, suppliers and other business partners, whether occurring inside or outside the jurisdiction? (See e.g. s. 172 UK Companies Act 2006) 14

15 11.1 Russian law provides for a rather broad and non-specific description of directors' duties (see also the answer to Question 10 above). In particular, it is silent on the issue of directors' rights and obligations to consider the impacts of a company (and its subsidiaries, suppliers and other business partners) on non-shareholders, both within and outside the jurisdiction When managing a company, directors have a general duty to comply with applicable laws, including those mentioned in the answer to Question 1 above which deal with the issues of human rights protection. Thus, any potential negative impacts which amount to a violation of law should be avoided by the directors. A company and its directors may be held responsible for any such violation, including by imposition of administrative and/or criminal penalties (if applicable). It should be emphasized that most human rights violations would very likely entail responsibility under national law and should therefore be considered by the directors in the company's day-to-day activities Provisions specifically requiring directors to consider a company's impact on non-shareholders may nevertheless be found in the company's foundation documents, internal regulations and employment contracts between the company and its directors. In practice, such policies are likely to be set forth in the company s internal regulations, which are often not publicly available. Therefore, since it is not possible to arrange for a comprehensive review of such regulations of various companies, it is difficult to comment on whether the adoption of such policies is widespread among Russian companies and what specific obligations such internal regulations usually place on directors In recent years given that more major Russian companies have started to focus on corporate responsibility, it may be that they will begin to incorporate relevant policies, including on human rights, into their constitutive or local (internal) documents. (See also the answers to Questions 14, 16 and 22 below). This may be less likely concerning smaller companies conducting business in Russia only In any event, even if a company's internal documents do not provide for any such additional obligations of its directors, applicable laws do not prohibit the directors from voluntarily complying with any corporate responsibility standards they consider appropriate, provided that this does not contravene the director's duty to act in good faith and in the company's interests As a general rule, Russian law would not apply to impacts occurring outside the Russian jurisdiction. However, the general duty of a director to act in good faith and to the company's benefit would relate to any decision made by the director, including those affecting the company's activities outside Russia Russian law does not place an obligation on directors to consider human rights impacts by third parties (e.g. subsidiaries or business partners). Therefore, as a general rule, directors would be required to do so only to the extent that the consideration of those impacts falls within the general obligation to act in good faith and in the company's interests and/or to the extent that this is required pursuant to the company's internal documents. It is also unlikely that Russian companies could be held responsible for any violations committed by third parties, including subsidiaries and business partners. 15

16 11.8 In addition, the Corporate Governance Code, which applies to certain joint stock companies (see para above) but may also serve as a good practice guide for the other companies, recommends that a company's executive bodies and members of the supervisory board, when performing their duties, take into account the interests of third parties. Although the category of third parties is not specifically defined, it follows from the Code that it includes inter alia the company's employees, business partners, and state and municipal bodies. General directors and management bodies of large companies whose operations are of significant economic and social importance for a particular city or district (so-called "city-forming enterprises") are also advised to take into account the interests of the local population as well as the economic consequences of any decisions taken. Although neither legislation nor non-binding guidelines contain any further rules or recommendations regarding the decision-making process of directors of city-forming enterprises, major Russian companies (e.g. oil companies) whose enterprises or plants often fall within the category of city-forming enterprises often adopt policies aimed at promotion of socially responsible cooperation with local authorities and the local public, and also voluntarily contribute to the development of city infrastructure etc. 12. If directors are required or permitted to consider impacts on non-shareholders to what extent do they have discretion in determining how to do so? 12.1 Russian law does not provide for any detailed description of the procedures to be followed by directors in performing their duties Directors perform their duties, including those connected with consideration of the company's impacts on non-shareholders, at their own discretion to the extent they are not obliged to follow any binding internal procedures and to the extent their actions do not constitute a breach of the obligation to act in good faith and to pursue the company's interests In view of the lack of any specific legislative provisions, directors may take into account court practice. For example, when considering civil-law cases connected with the alleged breach of directorial duty, the courts assess whether or not, in view of the specific circumstances of the particular case, a director acted in good faith and with due care and whether he/she took all necessary measures to perform his/her duties properly. If the director's actions fall within the framework of reasonable business risk, he/she cannot be held liable. A director is liable only for wrongful acts/failure to act. In addition, generally the courts would grant a claim for recovery of damages caused by a director's alleged breach only if the claimant proves that the damages were actually incurred, the amount, and the causal link between the director's unlawful conduct and the damages (e.g. Decree of the Moscow District Federal Arbitrazh Court of 12 August 2008 in case No. A / ). 13. What are the legal consequences for failing to fulfill any duties described above; and who may take action to initiate them? What defenses are available? 13.1 The Russian Federation Civil Code and laws on certain types of corporate entities set forth the general rule that a director is obliged to compensate damages caused to the company by his/her actions or omissions. Similar provisions are contained in the Russian Federation Labor Code A claim seeking compensation of damages to the company may be brought against its director or a member of the management board by the company itself or its shareholder(s) holding more 16