Interview with the head of Gazprom Neft Corporate Governance Department Alexey Dvortsov
The proactive development of (and amendments to) the Civil Code of the Russian Federation is now into its third year. Reforms are impacting practically every aspect of the regulation of economic activity, with discussion, moreover, focussed not on superficial changes so much as adjustments to certain fundamental legal concepts. Sibirskaya Neft met with Gazprom Neft Head of Corporate Governance Alexey Dvortsov to discuss how these innovations will impact the business, and the steps being taken to further improve internal regulation within the company.
— The presidential decree on the reform of the Civil Code was signed in 2008. Are the changes really so significant as to require six years to be brought into effect?
— First of all, the decree was just a kick-off point. Almost two years were taken up in developing the concept of reform, and a further year on developing the draft law — which, incidentally, has given rise to a number of questions. Following the first reading in the State Duma of changes to civil legislation in force since 1994, it was decided that civil legislation would be developed in thematic blocks; these are being reviewed, adopted, and applied individually, with effect from 2012.
The public was also keen to see an approach of this kind and, it has to be said, these changes really are extremely extensive and, in many ways, revolutionary.
— In what way are they extensive, and in what respect revolutionary?
— Extensive in terms of the areas that will be impacted by them. This law — both for individuals and legal entities — is changing both contractual and “corporeal” law (property law, or law pertaining to “things”), as well as legislation governing contractual law in intellectual property. It is precisely the Civil Code that regulates practically all aspects of economic life, determining the rules for doing business. As regards the areas of reform, well look at how the economic situation in the country changed since the early 1990s — how many pitfalls (including those connected with the inadequacy of existing regulation) had to be faced in terms of the inter-relation of various business entities, both within the country and in establishing international business relationships. All of this, naturally, needed correcting.
—In which areas are reforms likely to be most significant, and how will they impact business for Gazprom Neft?
— Practically the whole code has been changed but, I suppose, the most fundamental conceptual changes have, as it happens, impacted corporate law.
In fact, whole sections of the code have been rewritten, governing the basis of the legal status and activities of legal entities, as well as property and contractual law. And, with effect from 1 September, new standards come into force, regulating the principle underpinning the formation of business structures in this country, per se. Not only were corporate structures such as the (as it happens, rarely used) superadded liability company consigned to the past, but also the widely used joint stock company. A further novelty introduced from 1 September, concerns the separate distinction of legal entities into those corporations in which participants have rights of participation and the right to form management or governing bodies, and “unified enterprises”, in which the founders do not become participants. The concept of an “affiliate” or “dependent” company has been abolished. New norms of joint and several liability on the part of a holding or parent company have been developed pertaining to the activities of a subsidiary, where the subsidiary’s acts have been approved by the parent company.
—So what’s left?
— The concept of the limited liability company has been retained; a distinction is now made between “small” and “medium-sized” businesses in Russia, and there is now a distinction between public and private joint stock companies. “Public companies”, accordingly, are those whose shares are traded freely on a stock exchange. Within the Gazprom Neft group, those companies meeting the definition of “public companies” include Gazprom Neft itself, the Gazprom Neft Moscow Refinery, and two companies within the Slavneft group — OAO Slavneft Megionneftegaz and OAO Slavneft-YaNOS; the remaining companies are non-public.
—And will the status quo for these companies remain unchanged in the future?
— It’s likely the status of the Moscow Refinery will change. The fact is, public companies have to meet stringent requirements regarding the disclosure of information, their management structure, and their adherence to corporate procedures. These additional complications are compensated for by the fact that such companies can raise finance from investors on the open market. But the procedure for buying out minority shareholders in the Moscow Refinery was completed in August, with the Gazprom Neft group’s holding in the company increasing to 100 percent; so there’s no longer any point in maintaining its status as a public company — the Gazprom Neft Moscow Refinery will be leaving the exchange. And, in general, groups of companies face a lot of work in implementing changes to their foundation documents (Articles of Association, etc.), because the designation as either a public or private company must now be reflected in the official name of each.
New regulation under the Civil Code now requires adjustments to companies’ charters; but as regards the relevant updated provisions of federal laws pertaining to joint stock companies (JSCs), LLCs, the state registration of legal entities, and the securities market — there is, so far, nothing: and this raises serious difficulties both for business, and for those government organisations responsible for registration activities.
— Are there any other changes in corporate law likely to cause complications in running a business?
— I wouldn’t say that changes to incorporating documents complicate the running of a business — it’s just extra work for people working in corporate governance. But this new provision — which permits granting authority of a sole executive body to several individuals, acting together, or constituting several sole executive bodies, acting independently of one another — will, on the other hand, be helpful to us. We will be able to use this provision in forming the management structures of joint ventures (of which Gazprom Neft has several), and in which the General Director represents one shareholder or another, in turn. We also plan to make active use of another innovation which allows the reorganisation of companies with mixed business incorporation structures. Now, for example, combining a JSC with a LLC can be done in a single step, resulting in shorter lead times and simpler procedures for optimising corporate structure. Up until now, however, such reorganisations have never been undertaken by anybody, and we will, in all likelihood, face problems arising from inadequate regulation and instructions, including in respect of the registration of share issue prospectuses.
But the reform of civil law (including corporate law) doesn’t just concern changes to the Civil Code. The entire legal environment here is being reformed. For example, the procedure for paying dividends was changed with effect from 1 January 2014. Now the register of those shareholders entitled to dividends is determined by the date set by the General Meeting of Shareholders, and not the Board of Directors, as was previously the case. Which has significantly reduced the lead-time for the payment of dividends, from 60 to 25 days following the adoption of such resolution.
— Obviously, this also means extra work ...
Yes, regarding the — to all appearances “worked-through” — question of paying dividends for 2013, we came up against a multitude of questions not regulated by law. For example, under cascading payments there is no concept of how to facilitate the return of unclaimed dividends to sub-nominee shareholders. These issues have to be addressed “by hand”, coming to an agreement with every deposit holder and registrar, individually.
— And how do shareholders themselves relate to all of these changes?
— It’s a problem. One striking example concerns the timing of dividend payments on depositary receipts for shares in Russian companies. About 2.5 percent of shareholder capital in Gazprom Neft is held abroad in the form of American Depositary Receipts (ADRs), the issuing bank for which is BNY Mellon. Now, in order to benefit from tax concessions, you have to disclose information about beneficiary holders. Those beneficiaries that do not disclose such information about themselves will be subject to tax at 30 percent. Disclosure of information about beneficiary holders of depositary receipts is necessary in order that their votes can be taken into account at shareholders meetings. The first General Meeting of Shareholders at which we tried this procedure took place in December last year, and the next in June this year.These meetings made clear the need for additional outreach to holders of ADRs. The loss of a potential deduction against an otherwise higher tax rate notwithstanding, shareholders are reluctant to disclose information about themselves.
— So innovations are, already, being implemented?
— Some things we are already making active use of, some things it is not yet possible to implement, in practice. For example, changes to the Law on Joint Stock Companies, adopted with effect from 1 August, allowing electronic voting at General Meetings of Shareholders. These procedures are widely adopted throughout the world. And we hope that electronic voting will lead to an increase in the percentage of shareholders doing so. At the moment, however, neither the Registrar, nor Central Securities Depositary are prepared to accept voting on that basis. I think we will be able to implement this provision, at best, at the 2015 Annual General Meeting of Shareholders.
— So, in summary — the main objective of these changes is to protect shareholders’ rights?
— Yes, shareholders’ rights, and business transparency. The investment climate largely depends on the level of corporate governance in the country, and that of the Russian “blue chips”, particularly the energy companies; recognising this, they are constantly improving the quality of corporate governance in their companies. This is one of the most important areas in our own activities. Good corporate governance makes it possible for us to attract investment on the market; all other things being equal, this makes our shares more attractive to investors, and allows us to organise work within the legal framework. In March this year the Board of Directors of Bank of Russia adopted the Corporate Governance Code for Russian companies. It consists of two parts: the first covering basic principles of corporate governance, and the second giving detailed recommendations to facilitate the practical implementation of these. The intention of those drafting the code was that companies should disclose, in more detail, information about the system and practice of their corporate governance — in particular, mandatorily disclosing which provisions of the code are applied in practice and which are not — and, moreover, giving the reasons for this. Bank of Russia plans to formulate its first presentation on the application of the principles and recommendations in the Corporate Governance Code for Russian public companies on the basis of issuers’ annual reports for 2015. In which context, it’s worth remembering that Gazprom Neft’s annual reports, year after year, receive high ratings in Russian and international awards; the most recent — for 2013 — having already received a gold medal in the League of American Communications Professionals’ (LACP) Vision Awards Annual Report Competition, in the “Energy — Oil/Gas/Power” category, as well as winning a silver in the ARC Awards, nominated in the “Non-English Annual Reports” section, for the “Oil & Gas Production Services” category. The ARC Awards are the most famous indicators of annual report quality in the world and, with the sole exception of Gazprom Neft, included just one other Russian company in the winners’ list — Norilsk Nickel, winning a bronze. And our annual reports are a genuine reflection not just of the business and its standing, but also its transparency and our relationships with our shareholders.
— The quality of an annual report might not be the key indicator of a company’s openness, much less its corporate governance systems ...
— Surely, we are concerned with the full and thorough-going evaluation of our corporate governance system in terms of compliance with both Russian and international best practice. Our main shareholder, Gazprom, also invests serious attention to this, with a full internal audit to evaluate corporate governance at Gazprom Neft being undertaken at the initiative of their Board of Directors. This, moreover, was undertaken by specialists at KPMG (who, together with Deloitte, Ernst & Young and PwC, are one of the “Big Four” audit firms). The results of this are already apparent, although we do not yet have any details, since the final version of the report is not yet ready. I can say, however, that Gazprom Neft is, objectively, a leader in corporate governance in Russia, although we did also see areas for improvement, which we are addressing through a programme of specific remedial initiatives. Doing this will allow us to establish the best possible conditions for work in regulation, improve the quality of internal communications in corporate governance, and instil confidence on the part of management and all interested parties, in this.
— What other changes in corporate law are likely in the foreseeable future?
— In this respect, 2014 is extremely tense. The end of the year will see further changes regarding the disclosure of information, on legislation governing joint stock companies, on limited liability companies, on registration activities, and on securities. And, as regards groups of companies, major work on integrating new reforms concerning internal documentation, organisational structure, and internal regulation.