Olga Erahtina General Director usually abuses his rights completing transactions that involve exceeding his authority, asset stripping and spending company’s funds.
7. The means of protection against abuse of rights on the side of management The issue of violating shareholders’ rights to participate in running the company has already been considered above. Now we proceed to the problem of selling assets by the company’s management. The legislation sets the minimum limitations aimed at preventing abusing rights by management when they make a transaction on behalf of the company. In particular, if the transaction exceeds 25 per cent of the book value of the company’s property estimated on the basis of the accounting data over the last reporting period, it should be completed only upon the prior approval of the Board of directors. Transactions that comprise 50 per cent and more of the book value of the company’s property estimated on the basis of the accounting data over the last reporting period should be approved of by the general meeting. Unfortunately, usually the owners of the company consider such measures to be enough and ignore those provisions of the law that state that there can be other cases when transactions completed on behalf of the company require prior approval. The following court case is illustrative of this issue. The company’s owners followed only provisions on completing major transactions. The General director within power entitled to him by law, made a transaction on alienation of a building belonging to the company. The value of the building did not exceed 25 per cent of the book value of the company’s property. However, the alienated building was one of the fixed assets of the company and its alienation made the company’s financial and economic activity significantly more difficult. Obviously, the law provision on major transactions can limit abuse of right only to a minimum extent. The company’s charter remains the main instrument of preventing such abuses (Figure 3). To prevent abuse of right on the part of a joint-stock company’s management, strong regulation of the activity of all management bodies of the company is necessary. The set of the documents regulating company’s management bodies is made up of constituent documents, company’s internal documents, including codes of governance; provisions such as provisions on the board of directors, corporate secretary; documents that regulate relationships between managing bodies of the company as well as relationships between managing bodies and company’s shareholders (Gololobov 2011).
Figure 3: The Preventive Means of Protection Against Abuse of Rights on the Side of Management.
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