Introduction of amendments to the corporate legislation: declaring a JSC or LLC board member as a removed one

Current corporate legislation does not provide a definitive list of circumstances and grounds in which a member of the board of directors is considered to be removed. Consequently, companies – particularly those that have the board of directors under the charter – face a practical question: how should a member who has removed be accounted for when determining the composition, quorum and validity of resolutions of the board of directors?

In the event of an early departure of a single member of the board of directors, the company has to convene an extraordinary general meeting to re-elect the entire board, although only one vacancy needs to be filled. This results in additional expenses and may hinder the current work of the board of directors. 

The Law establishes a list of grounds in which the powers of a member of the board of directors are terminated early, resulting in such member being deemed to be removed. The new rules apply to companies that have an established board of directors (supervisory board).

Such grounds include: 

• Death of a member of the board of directors;
• Entry into force of a court ruling declaring an individual fully or partially incapacitated, missing or deceased;
• Entry into force of a sentence or court ruling prohibiting an individual from holding a seat on the board of directors;
• Disqualification;
• Receipt by the company of a written notice of early termination from the member of the board of directors;
• Other circumstances set out in Russian legislation.

The powers of a member of the board of directors will terminate on the date when the corresponding circumstance occurs or when the court ruling takes effect. This will allow companies to accurately track the composition of the board of directors, thereby reducing the risk of board resolutions (taken with or without the participation of a removed member) being challenged in the future. 

The single member election mechanism will not apply automatically. To replace a removed member without re-electing the entire board of directors, the respective provisions must be added to the charter and, where necessary, formalized in the company’s by-laws.

A limitation is imposed on public companies: the new election mechanism will not apply if the removed member was an independent director. 

• Check if the company’s charter and by-laws allow for the election of one or several members of the board of directors (supervisory board) to replace removed members. If not, assess whether it would be practical to make the respective amendments.
• Formalize the procedure for the receipt, registration and keeping of notices of early termination from members of the board of directors.
• For public companies drafting amendments to the charter and by-laws – specify a procedure to be followed when an independent director is removed, as the single member election mechanism does not apply in this case.