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Books by Grigory Yavlinsky
Economics and Politics in Russia
The Center for Economic and Political Research (EPIcenter)
Nizhni Novgorod-Moscow, 1992

4.1 Entrepreneurship and Property

4.1.3 From the Creation of Joint Stock Companies right up to the Alienation of Property Rights


Recommendations on the preparation of founding documents

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The privatisation plan formalises the joint decision of the work collective, regional property committee and property fund and their mutual rights and obligations.

The work collective of an enterprise reserves the right to choose one of the three scenarios for its receipt of privileges (in essence, the method of privatisation) at any time during the 12 months after registration of the joint stock company, on the ter ms stipulated by the legislation for 1992.

The property committee and fund assume obligations (via the approval of the corresponding privatisation plan) to commence the open sale of the shares transferred to them, including in exchange for privatisation vouchers, no earlier than 12 months after re gistration.

It is recommended that:

a) the work collective only make its privatisation choice, when it is transparently obvious who will hold the controlling interest and who will be the specific investors (the work collective itself, the investment fund, other major commercial structures, etc.);

b) the property committee and fund -- if the work collective chooses one of the privatisation scenarios without determining the potential investor -- should not sell its package of shares in small lots (up to 5-10%) until the controlling block has been so ld to a potential investor.

The statutory capital of the new joint stock companies should not be distributed among the owners at the first stage. Instead, common (joint) statutory capital is created, without any allocation of shares among owners. Councils of Directors (supervisory councils), entrusted with control of the most important management decisions, are created to handle the common (joint) capital of the joint stock company. At the second stage, the common (joint) statutory capital is distributed among the owners in accordan ce with the legislation on privatization.

One-hundred percent of the shares of the joint stock company created are declared to be the jointly controlled common property of the state (in the person of the property committee and fund) and the members of the work collective. The functions of the sha reholders' meeting will be entrusted to the Council of Directors (supervisory council) of the joint stock company, up until the actual privatisation. Composition of the Council of Directors (supervisory council): an odd number of members (usually from 11 to 21), including the General Director (Chairman of the Board); half of the directors are appointed by a joint decision of the regional (municipal) ad ministration and the council of people's deputies (representatives of the property committee and/or fund, the relevant bank, major suppliers and clients, and deputies); and half of the directors are elected at a meeting (conference) of the work collective.

The Council of Directors (supervisory council) does not have executive or administrative functions. The Chairman of the Board (General Director) and his or her deputies (within the limits of their authority) take all decisions on behalf of the joint stock company. The Chairman of the Board (General

Director) must obtain the consent of the Council of Directors for the adoption of decisions beyond the framework of the enterprise's usual economic activity (e.g., to obtain very large credits, sell fixed asse ts, dismiss a large number of employees, set up or liquidate subsidiaries, etc.). The list of decisions which require the consent of the Council of Directors (supervisory council) is fixed in the Charter of the joint stock company.

A working commission on privatisation continues its activity after the registration of the joint stock company, with the following goals:

- to provide an accurate appraisal of the value of the enterprise, with the assistance of auditing firms and specialists;

- to draft recommendations on reorganisation (of the staff structure, numbers of employees, and management); and

- to seek a purchaser of the controlling block of shares (institutional investor).



Shares are issued to the entire amount of statutory capital according to its book cost as of July 1, 1992. At the time of the joint stock company's registration, all shares are declared to be convertible, i.e., they may be transformed into any of the classes (ordinary, preferential type A, or preferential type B) stipulated by legislation. Conversion (i.e., d ivision of an entire package of shares into these classes) takes place after the work collective chooses one of the scenarios for the provision of privileges. The report on the meeting's decision and information on the allocation of the whole package of s hares (given in accordance with the standard privatisation plan) is sent to the regional financial administration and is one of the constituent documents of the joint stock company. Dividends on convertible shares are declared by the Council of Directors of the joint stock company, and are directed into thecompany's reserve funds up until the actual privatisation (allocation of the shares according to classes). The number of shares should be sufficient to provide at least one for each member of the work collective, if the first scenario for provision of privileges is chosen. In this case, we recommend that enterprises with comparatively high staffing levels and other individuals, entitled to to obtain shares preferentially or free of charge should set a low nominal value per share. Example: Lets consider a statutory capital of 108 million roubles and 1,000 employees. The value of preferential shares transferred for sale to the work collective amounts to 4 million roubles (5,400 times 1,000), or 5% of the statutory capital. The total number of shares issued should amount to at least 20,000 (1,000 divided by 0.05). In this case, the nominal value of one share is 5,400 roubles, which is extremely inconvenient, especially if one uses coefficients of "personal participation" for purposes of allocation of the entire preferential package of shares between individual employees. Therefore, in the given case it is advisable to set the nominal value of a share at 100 (or 200) rubles, and emit 1.8 million (or 540,000) shares in total.

The share in the statutory capital which is subject to preferential allocation (up to 10% using the first scenario, and up to 51% for the second) or allocation free of charge (up to 25%) is stipulated in the joint stock company's founding documents. If th e statutory capital or minimum wage is changed, the terms for providing free or preferential shares to the work collective may not be made less advantageous. Example:

1) Lets take a statutory capital of 100 million roubles and 1,000 employees. The share are stipulated in the statutory capital: 18% of the shares (18 million roubles, i.e., 20 times the minimum wage of 900 roubles, times 1,000 employees) are free of charge; up to 10% (up to 10 million roubles) are at a 30% discount; and up to 51% (up to 51 million roubles), with a coefficient of 1.7;

2) Once the actual privatisation scenario has been chosen and the shares have been distributed, the statutory capital is doubled (becomes 200 million roubles) and the minimum wage is tripled (to 2,700 roubles). In this case,18% of the shares (36 million roubles' worth, although 20 times the minimum wage of 2,700 roubles times 1,000 employees would come to 54 millio n roubles, which is more than 25% of the statutory capital) are transferred free of charge; and 10% of the shares are sold for 7 million roubles (considering the discount, although their value is 20 million). The similar procedure for the second scenario is that 51% of the shares are sold for 86.7 million roubles (considering the coefficient; the real value is 102 million). Within 15 days of the registration of the joint stock company, a decision on the criteria for allocation of preferential shares between the members of the work collective (by seniority, salary, etc.) for all three scenarios must be taken at a meeting of the work collective. A procedure is established to allocate shares to employees included on the list of individuals entitled to preferential shares and dismissed from the enterprise, before the decision is taken on the allocation of shares. (We also recom mend that a provision is made for the issue of payment to such individuals of a share of the dividends accumulated from the reserve funds). Payment instalments for the purchase of preferential shares (up to 1-3 years), stipulated by the legislation, are calculated from the time of registration of the joint stock company.


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