Challenging Transactions on Corporate Grounds

26 November 2018
Julia Korablyova
Arina Fetisova

On the June, 26th 2018 the Plenum of the Supreme Court of the Russian Federation adopted the Resolution No. 27 “On challenging of the major and interested party transactions” (hereinafter — The Resolution). The Resolution provides the unified practice applying of the legislation of the business entities. The Resolution touches on the issues regarding dispute resolutions arising from the major and interested party transactions (Sections XI and XI of the Federal Law No. 208-FZ “On Joint stock companies” dated 26.12.1995 and Articles 45 and 46 of the Federal Law No. № 14-FZ “On Limited Liability Companies” dated 08.02.1998).

The Resolution should settle down the arguments about applying of the legislation. The Supreme Court of the Russian Federation (hereinafter — The SCRF) clarifies what are the boarders of the ordinary business activity of the legal entity, whose votes are not counted in case of the major transaction, and when authorized persons are entitled to claim for approval of the interested party transaction.

The main provisions of the Resolution are as follows.

General provisions

The SCRF determines the rules on limitation period regarding non-approval transactions and major transactions in case, when the executive body of the legal entity is represented by several persons. If such a person (persons) was in collusion with other party of the transaction, then the limitation period is calculated from the moment when other person, who is an executive body as well, became aware or should have become aware of the transaction.

In case the executive body of the company is represented by one person, the limitation period is calculated from the moment when the shareholder (participant of the company) or the member of the board of directors became aware or should have become aware of the transaction. Moreover, the SCRF clarified the rules on limitation period for shareholders (participants of the company). If the claim is submitted by several shareholders, then the limitation period is not missed until one or more shareholders have not missed the time period. However, if the shareholder does not take participation in annual meeting of the shareholders and does not request the information about activity of the company, then the limitation period is regarded as missed and is not a subject to reinstatement under p. 4 art. 46 of LLC Law and p.6 art. 79 of the JSC Law. As usual, the transferring of the title on shares or interest has no effect on the limitation period calculation.

No changes in provisions of the future major transactions or interested transactions: they are regarded as separate transactions and are not required the approval. However, the Plenum of the SCRF does not mention the guide rules for approval of the transaction and the fact that the obviously profitable transaction for the entity is not required any approval.

Moreover, the Plenum of the SCRF spreads the rules on transaction approval on adoption of the claim and its renunciation. Previously, these rules were implicated only to voluntary settlement, while adoption of the claim and its renunciation can be argued only after their real execution.

Major transactions

Regarding the criteria of the major transactions determination the SCRF summarize the provisions of the previous Resolution of the Plenum of the HAC RF No. 28 dated 28. To determine the transaction as major the following criteria should be matched:

Quantitative criterion — the transaction of more than 25% of the assets balance value of the company, as it is determined in the financial statement on the last reporting date.

The agreements with periodical payments can be matched with the mentioned criterion if the sum of the payments for the terms of the agreements is more than 25% of the assets balance value. The agreements with unlimited term can be matched with the quantitative criterion if the sum of the payments for the period of the one year is more than 25% of the assets balance value.

If the transaction executed for failure to perform or improper performance, then the sum of the transaction may include the monetary claims of the applicant for failure to perform or improper performance of such agreement.

Qualitative criterion — the transaction should be out of the ordinary activity of the company and such transaction may cause the end of the activity of the company or the significant changes in the range of its activity. The mentioned criterion must exist at the moment of the transaction executing.

The SCRF provides the broad interpretation of the provisions regarding the transactions, which are of the ordinary activity of the company. For instance, the transactions may be regarded as the transactions out of the ordinary activity of the company if they cause the significant changes in territory of the activity or in sales markets of the product.

Generally all transaction is not regarded as out of the ordinary activity of the company, until otherwise is not proving. As a result, burden of proving of the mentioned criteria and the fact that the opponent became aware or should have become aware of the transaction lies on applicant. Within the opponent is regarded as conusant if the opponent or the controlling party or controlled party is a shareholder of the company, is in the bodies of the company

The SCRF verified the p. 2 art. 78 and p. 6.1 art. 79 of the JSC Laws and states that if the major transaction is required the approval of the general meeting of the shareholders under the resolution of the board of the directors (supervisors board), then the approval of such a transaction without the resolution is not the base for arguing the transaction as the transaction with the defect in the procedure of its approval. However, the claims for damages can be deed to persons, whose obligation was to provide this resolution.

Also, there was a practical problem with the determination of the shareholders, who are not allowed to vote during the major transaction approval (p. 2 art. 79 of the JSC Law). In addition to dead persons, legally incapacitated or legally incapable person, the SCRF clarifies that disqualified shareholders of the company, returned the seal members of the board of the director (supervisory board) are not allowed to vote as well. Despite the broading of the list of the persons, who are not allowed to vote during the major transaction approval, the SCRF does not provided the general criterion for determination of such persons.

Interested party transactions

Under p. 1 art. 83 of the JSC Law and p.4 art. 45 of the LLC Law the interested party transaction does not require any mandatory prevail approval. However, the interested parties must notify the company about such transaction within 2 months, calculated from the moment when they became aware or should have become aware of the conditions, which may lead to their interest in the transaction. The interest must exist at the moment of the transaction.

The mentioned approval can be claimed by the executive body of the company, member of the collective executive body, member of the board of the directors (supervision board) or the shareholder, who owns more the 1% of the voted shared. The SCRF clarifies the request on the general meeting of board of directors meeting can be sent in any moment (prior or post the transaction execution).

The Decision includes the clarifications on the situation when the shareholders (participants) of the company were notified about the interested party transaction, but the request on general meeting of the shareholders was not sent. Under these circumstances the executed transaction can be regarded as invalid. Also, the approved transaction is not a reason to reject the claim on invalidation of the transaction. However, the burden of proof of the damages for the company will lie on applicant.

One more practical problem was the uncertainty regarding the actions to take if all of the participants of the LLC are interested parties. The p. 1 art. 81 of the JSC Law should be implemented to such cases in LLC: all of the LLC participants are entitled to approve the transaction, no matter they have an interest or not.

The new Resolution also includes the possibility of changing the procedure of transactions approval in LLC and non-public JSC. Nevertheless, the provisions regarding invalid transactions should not be amended, and the provisions on damage to company should not be excluded. However, if the company set the broader list of the interested party transactions, then the transactions excluded from LLC Law and JSC Law can be regarded as invalid only on the basis of the p. 1 art. 174 of the Civil Code of the RF.

In case when the major transaction is an interested party transaction as well, then such a transaction should be approved by applying both rules on major and interested party transactions. Previously, only the rules on major transaction were applying for these transactions. However, The Decision does not include the clarification on the procedure of the claim of the transaction in case of applying only one of the rules.

The SCRF made a significant step up in resolving the practical controversies. However, some problems are only up to be solved. The new Resolution does not include some of the clarification of the Plenum of the High Arbitrazh Court of the Russian Federation regarding the proving process (conditions that are subject for applicant to prove). Special rules on claim rejection are also not included. The SCRF has established the presumption of transaction under the ordinary economic activity. At the same time there is no explanation on what transaction can be signed in the framework of the ordinary activity.

Due to the new Resolution No. 27 the Plenum of the Supreme Court of the Russian Federation of the the previous Resolution of the High Arbitrazh Court of the Russian Federation was completely terminated, excepting subclauses 1 and 3 of the clause 10. Nevertheless, the Resolution of the High Arbitrazh Court of the Russian Federation is still applicable to the transactions signed before 01.01.2017.