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New legal positions with respect to applying legislation on business entities

17.02.2020
18 min read
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Pepeliaev Group draws your attention to the changes in the case law involving certain issues of corporate legislation.

On 25 December 2019, the Presidium of the Russian Supreme Court approved its “Overview of case law regarding certain issues of applying legislation on business entities” (the “Overview”), which formulates new positions and reconsiders the earlier practice of applying corporate legislation.

Below is a brief summary of what we view as the most important provisions of the Overview.

If an alternative way is chosen to confirm a resolution of the general meeting, certification by a notary is required

Let us remind you that, since 1 September 2014, the fact that a resolution has been adopted by the general meeting of a limited liability company and the number of participants that were present at the meeting must be confirmed by a notary, unless an alternative way has been prescribed by the charter of the company or by a unanimous resolution of all members[1]. In practice, the alternative way of confirming (if no such way is set out in the charter) used to be chosen directly at the general meeting by the relevant resolution, which was not subject to notarial certification. Such an approach was widely used and did not give rise to any questions on the part of state authorities, including in the course of registration procedures.

However, in clause 2 of the Overview the Supreme Court has expressed a position that the resolution of the general meeting on the choice of an alternative way requires notarial certification. A breach of this requirement results in the resolution of the general meeting being void[2]. Therefore, if the charter of the company does not provide for an alternative way of confirmation and the members do not want to invite a notary to each general meeting, it is required to establish that all resolutions of the general meeting will be subsequently confirmed in an alternative manner (for instance, by the signing of the minutes of a meeting by all the participants in the meeting) and by certifying it with the notary. If should be remembered that the new rules apply only to resolutions of general meetings adopted after 25 December 2019.[3]

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The Supreme Court’s position, although it changes the existing approach, remains in line with the rules of civil legislation. Yet, the new approach may turn out to be inconvenient for companies with foreign capital that are located outside Russia[4]. In our experience, foreign notaries do not perform such an action as confirming that a resolution has been adopted by the general meeting and affirming the number of participants present at the meeting. Therefore, a foreign notary’s certifying signature will not be recognised in Russia. By way of a solution under these circumstances, a power of attorney may be issued to representatives of foreign members in Russia to participate in the general meeting, with such a decision (involving amendments to the charter or an alternative method) being certified by a Russian notary.

A resolution of the sole member of a limited liability company also has to be certified by a notary

Based on article 67.1(3) of the Russian Civil Code (the “Civil Code”) whereby the “adoption by a general meeting of members... of a resolution” requires a confirmation, an opinion has evolved in practice that resolutions of the sole member of a business entity constitute an exception from this rule[5]. Consequently, the rule aimed at counteracting the forgery of resolutions of general meetings (of a sole member) has not been applied in practice to business entities with a sole member.

When commenting in the Overview on a ruling of a lower-level court, the Supreme Court confirmed that article 67.1(3) of the Civil Code is aimed at reducing the number of situations when resolutions of management bodies are forged, that the law does not contain exceptions for companies with the sole member and, therefore, that resolutions of the sole member of a limited liability company must also be certified by a notary[6].

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Although the Russian Supreme Court does not directly comment on whether this conclusion is applicable to non-public joint stock companies (whether their resolutions of general meetings must be confirmed by a notary or by a registrar), it appears that the legal position is equally applicable to them. As for public joint stock companies, taking account of the position of the Supreme Court on the purpose of the regulation of article 67.1(3) of the Civil Code, it is highly likely that the resolutions of its sole shareholder must be confirmed by the registrar.

In addition, the issue of choosing an alternative way of confirmation for limited liability companies (such as the simple signing of a resolution by the sole member) is becoming topical. Bearing in mind the argument of the Supreme Court that the law does not contain exceptions for companies with a sole member, it appears possible to choose an alternative way, and the resolution formalising this choice must be certified by a notary (unless an alternative way is specified in the charter).

Reconsideration of the practice of excluding a member of a limited liability company

A distinctive feature of a limited liability company is the institution of excluding members providing that it is possible for a member (members) holding a participation interest of at least 10% to demand the exclusion of another member whose action or omission constitutes a breach of such member’s corporate obligations making the company’s activity impossible or considerably obstructing it[7].

As court practice has shown, the exclusion of a member is often used as a tool for resolving corporate conflicts and seizing control over the company, rather than as a remedy for the members and the company. Proceeding from this the exclusion of a member from the company began to be regarded as an exceptional measure that may be applied only in extraordinary situations. Courts have developed a position whereby the exclusion of a member cannot be used as a tool for resolving a corporate conflict[8] or when the claimant and defendant hold equal participatory interests[9]. In fact it was prohibited to exclude a member whose participatory interest in the issued capital is more than 50%, if the charter of the company allowed withdrawal from the company[10].

The Supreme Court has reconsidered the above approaches. In clause 7 of the Overview the court has underlined that any dispute on a participant being excluded from the company stems from a corporate conflict. The parties go to court to resolve the conflict and, consequently, this may not restrict the application of the institution of excluding members. An even distribution of shares between the parties to a corporate conflict is not a ground for refusing to uphold a lawsuit on the exclusion of a member from the company.

Contrary to the earlier practice the Supreme Court specified that current legislation does not prohibit the exclusion of a member holding an interest of more than 50% of the issued capital, but in order to satisfy a similar claim the court must be provided with sufficient proof that it is possible to continue the company’s operations if the actual value of the member’s participatory interest is paid out.

In addition, according to the Supreme Court the exclusion of a member from the company is not an exceptional measure - it may be applied irrespective of whether the consequences of the member’s actions (omissions) may be eliminated without the infringer being cut off from the management of the company.

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We believe that a new outlook on how the institution of the exclusion of members is applied must be conducive to the effective resolution of corporate conflicts and the protection of members' rights from violations on the part of the other members, including those that use their dominant participation in the issued capital.

A claimant’s participatory interest (share) is not accounted for when a resolution of the general meeting is invalidated

In the practice of courts and administrative bodies the position used to exist that a resolution of the general meeting was not recognised invalid, if the participant (shareholder) appealing against the resolution had not been able to influence the voting results and the committed violations were immaterial[11]. In fact, courts disregarded material violations with respect to minority members of a business referring to the minimal amount of such members’ participation in the company.

In the Supreme Court’s opinion set out in clause 5 of the Overview, under the Law “On joint stock companies” (the “Law on JSC”) with regard to disputing resolutions of a general meeting[12] (specially for the relevant provisions of the Civil Code[13]) a disputed resolution may be left in force only if the violations were immaterial. Therefore, for the resolution to be invalidated courts must analyse not the amount of the member’s (shareholder’s) interest (share), but only the nature of the violations committed against such member or shareholder.

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This position of the Supreme Court appears contentious because, in accordance with article 49(7) of the Law “On joint stock companies”, there must be three grounds to leave the resolution of the meeting in force: “… the voting of this shareholder could not affect the voting results, the committed violations are not material and the resolution did not result in losses being caused to the shareholder”.

On the whole, the new approach of the Supreme Court should encourage improvements in the position of minority shareholders in Russia in a situation of non-scattered issued capital in business entities. There remains an open issue of how materiality of a violation should be determined. It is suggested in the Overview that the criterion should be the deprivation of a shareholder of its right to participate in the general meeting, specifically, by failing to send a notification of the meeting and a voting ballot. Yet, it remains unclear how courts will treat, for instance, an untimely notification or a notification in a manner that has not been established by the charter.

The court may refuse to recognise the invalidity of a void resolution of the general meeting, if it establishes that the member (which is the claimant) was acting in bad faith.

In clause 14 of the Overview the Supreme Court describes a case in which the court refused to invalidate a void resolution of the general meeting. For instance, at a general meeting a member of a limited liability company holding 60% of the votes adopted a resolution to elect a new CEO and to bring the charter into compliance with the law, although such resolutions required at least 2/3 of the votes of all members. The court disregarded the argument of the other member, the claimant, holding 40% of votes referring to article 10 of the Civil Code on the ground that the claimant systematically refused to participate in meetings and adopt resolutions required for the company thereby constraining the company’s operations. According to the Russian Supreme Court, if it is established that a member (the claimant) was acting in bad faith, the court may refuse to recognise the invalidity of a void resolution of the meeting.

At the same time, in its Overview the Supreme Court disregards the question of the consequences that the company may face owing to the disputed resolution being adopted without the necessary number of votes. Thus, it looks as though the Supreme Court recognised such resolutions as legally valid.

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The Supreme Court’s position may be viewed as allowing for a deviation, under certain circumstances, from the rules regarding the invalidity of resolutions of general meetings as stipulated by article 43(6) of the Law on Limited Liability Companies[14]. Such an approach will have a very negative effect on the market and on the practice of courts and administrative bodies, because a situation in which general meetings are not attended and significant resolutions are blocked is, unfortunately, standard practice in a corporate conflict, when the parties cannot agree on such matters as the candidacy of the CEO and the terms of conducting business. Current legislation provides for a sufficient number of tools for resolving a corporate conflict, such as excluding a member from the company and liquidating the company. We believe that the Supreme Court’s position that is being discussed gives rise to abuses (for instance, any member may adopt a resolution “required for the company’s operations” without due regard to the invalidity rules). Moreover, the circumstances of the case and the reasoning behind the ruling confirmed by the Supreme Court may set a trend for disregarding the rules on the quorum of a general meeting.

Other positions regarding the invalidity of resolutions of general meetings and transactions of the company

(1). Invalidating a resolution of the general meeting to increase the issued capital

The Supreme Court has specified that a resolution to increase the issued capital of a business entity by all members making contributions may be invalidated, if the court establishes that such an increase is not in pursuit of the company’s interests and results in the reduction of the share of members opposed to the increase. The company’s interests may include the need to raise considerable funding. At the same time, it must be proved that there are no other reasonable alternatives for acting in the interests of the company without an ‘erosion’ of the share of opposing member(s).

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In fact, the Supreme Court’s position repeats the approach of the Russian Constitutional Court[15] whereby an increase in the issued capital and ‘eroded’ shares of the opposing participants may be admissible if this is required for attaining the goals of the company’s operations and the members opposing the resolution are provided with efficient remedies to protect its rights.

(2). Invalidating a resolution of the general meeting adopted in the interests of some members (shareholders)

A resolution of a general meeting (shareholders) may be recognised invalid if it is adopted to the detriment of the company’s and/or member’s (shareholder’s) interests and, at the same time, the member (shareholder) that has facilitated the adoption of the resolution was acting for his/her/its own benefit and there is other evidence that he/she/it was acting in bad faith or unreasonably (for instance, the approved transaction was known to be unprofitable).

The Supreme Court considered that a resolution to approve a transaction involving a sale and purchase of the company’s property at a knock-down price or the payment of a bonus to the members of the board of directors was at variance with the interests of the company and had been adopted for the benefit of those members that voted for this resolution and that were also members of the board of directors. The Court invalidated the decision in dispute referring to article 10 of the Civil Code.

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Bearing in mind that in practice resolutions are quite often adopted only in the interests of a few members (shareholders) and that there are no grounds (such as a violation of the approval procedure) for disputing resolutions of this kind, the Supreme Court’s approach can only be welcomed. We believe that it will be a useful tool in a fight against bad faith members (shareholders) of a business entity.

(3). Invalidating a transaction performed at variance with the interests of several members (shareholders)

The Supreme Court points out that a transaction of a business entity may be invalidated even if it does not cause losses to the company, but is not reasonably necessary for the company and has been performed for the benefit of only a part of its members (shareholders) while causing damage to other members (shareholders) opposed to such transaction.

By way of an example the Supreme Court cites a case of the challenging of a loan agreement between a company and one of its members holding 60% participatory interest in the issued capital. The other member of the company holding a participatory interest of 40% challenged the transaction referring to the fact that it undermined the interests of the company, and that the profit is virtually distributed for the benefit of one member while the other is deprived of its right to the share of profits. The court established that the loan agreement had been concluded on arms-length terms and did not contradict the company’s interests and, therefore, the court dismissed the lawsuit. The higher-level court pointed out that a member’s interests are a part of the company’s interests and, therefore, the company’s interests have been compromised if a transaction, albeit harmless for the company itself, is not reasonably necessary for the company and has been performed in the interests of only a part of its members while causing unjustified damage to other members objecting to such transaction. The court acknowledged that the loan agreement concluded with the company had been a means of siphoning off money for the benefit of one member and to the detriment of the other, given that the latter did not receive any payments (including dividends) from the company’s profits.

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We believe that this legal position is state-of-the-art, given that the Supreme Court recognises the interests of a member to be a part of the company’s interests, which allows transactions to be challenged that, although formally not in breach of legislation, still entail a considerable detriment to the interests of minority shareholders.

What to think about and what to do

We recommend a detailed study of the Supreme Court’s legal positions outlined in the Overview and that they be borne in mind when the current activity is conducted and the relationship with partners is structured.

If there are disagreements with partners in corporations it is also important to analyse potential risks that they will apply the new positions of the Supreme Court to resolve conflicts.

Help from your advisers

Pepeliaev Group’s lawyers have extensive experience in advising on various aspects of corporate law, including on resolving corporate conflicts. We are ready to support you in conducting the requisite procedures and drafting documents and will be happy to advise you on matters of current concern.



[1] Article 67.1(3)(3) of the Civil Code.

[2] Clause 107 of Resolution No. 25 of the Plenum of the Supreme Court dated 23 June 2015 “On courts applying individual provisions of Section I, Part One of the Civil Code of the Russian Federation”.

[3] Ruling of the Russian Supreme Court dated 30 December 2019 on case No. А72-7041/2018.

[4] Unless previously adopted charters or resolutions of the general meeting provide for an alternative way of confirmation.

[5] For instance, “Overview of case law on applying legislation on legal entities (Chapter 4 of the Russian Civil Code)” (approved by the Presidium of the Commercial Court for the North Caucasian Circuit dated 6 July 2018); Resolution of the Commercial Court for the Volga Vyatka Circuit dated 21 March 2017 on case No. А39-3999/2016; Letter No. GD-4-14/25209@ of the Russian Federal Tax Service dated 28 December 2016 “On sending the ‘Overview of case law on disputes involving registration authorities’ No. 4 (2016)”; Letter No. 2405/03-16-3 of the Chamber of Notaries dated 1 September 2014 “On sending a guideline for a notary public certifying the adoption by the general meeting of members of a business entity and the number of members of such entity that were present during the adoption of such a resolution”; the Bank of Russia’s Letter No. 06-52/10054 dated 25 November 2015 “On certain issues of applying Federal Law No. 210-FZ dated 29 June 2015 ‘On amendments to certain items of Russian legislation and on invalidating specific provisions of items of Russian legislation”.

[6] The rules are applied for resolutions adopted after 25 December 2019 under the Ruling of the Supreme Court dated 30 December 2019 on case No. А72-7041/2018.

[7] Article 10 of Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies”.

[8] Ruling of the Supreme Court’s Board for Economic Disputes dated 8 October 2014 on case No. А06-2044/2013.

[9] Resolution of the Commercial Court for the Volga Circuit dated 1 September 2015 on case No. А55-27518/2014.

[10] Clause 11 of Information Letter No. 151 of the Presidium of the Supreme Commercial Court dated 24 May 2012.

[11] Such violations include, for instance, violations of the legal interests of a member or the company that may give rise, among other things, to losses, the revocation of the right to receive a benefit from the use of the company’s property, to the limitation or withdrawal of the member’s ability to take management decisions in future or exercise control over the company’s activity (clause 109 of Resolution No. 25 dated 23 June 2015 “On applying certain provisions of Section I, Part One of the Russian Civil Code”).

[12] Article 49(7) of Federal Law No. 208-FZ dated 26 December 1995 “On joint stock companies”.

[13] Article 181.4(4) of the Russian Civil Code.

[14] Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies”.

[15] The Constitutional Court’s Resolution No. 3-P dated 21 February 2014 “On the case of checking constitutionality of article 19(1) of the Federal Law ‘On limited liability companies’ further to a complaint of limited liability company Firma Rating”.

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