New explanations of the plenum of Russian supreme court with respect to major transactions and interested-party transactions

Resolution No. 27 of the Plenum of the Russian Supreme Court dated 26 June 2018[1] was published with explanations of the rules for challenging major transactions and interested-party transactions. The previous explanations (Resolution No. 28 of the Plenum of the Russian Supreme Court dated 16 May 2014) have been updated, and a number of new significant provisions have been added.

The Plenum of the Russian Supreme Court took into account the regulation of these transactions provided for by Federal Law No. 343-FZ dated 3 July 2016 “On amending the Federal Law “On joint-stock companies” and the Federal Law “On limited liability companies” with regard to major transactions and interested-party transactions” (“Law No. 343-FZ”).

The new explanations provided for by the Resolution relate to the following key aspects.

I. GENERAL PROVISIONS AFFECTING BOTH MAJOR TRANSACTIONS AND INTERESTED-PARTY TRANSACTIONS

· Limitation period. The limitation period for claims to have a transaction invalidated when it was performed in violation of the process for its approval, according to the general rule, starts from the date when the company’s director became aware, or should have become aware, of such violations, including if it was the director who performed the transaction in question.

If the director was in collusion with the other party to the transaction, then the limitation period starts from the date when a director other than the director who performed the transaction became aware, or should have become aware, of the corresponding violations (for example, a new director or the second director if the company has more than one member in its executive bodies). For this purpose the fact that the previous director was in collusion with the other party to the transaction must be proved. Only if there is no such other director will the limitation period be calculated from the date when these violations became known to the member or member of the board of directors who raised the claim.

The Plenum of the Supreme Court, among other things, specifies the list of cases when a member is deemed to be informed of violations (for example, if the company discloses information publicly, it is considered that members of such company become aware of the disputed transaction from the date when the information about the transaction was disclosed).

• The burden of proving that a counterparty acted in bad faith. Aiming to protect good-faith counterparties from challenging transactions, the Plenum of the Supreme Court pays special attention to the distribution of the burden of proving the bad faith of another party to a transaction when such transaction is being challenged, namely:

• the claimant bears the burden of proof that the counterparty in the disputed transaction was aware or should have been aware that the transaction was a major one for the company or was an interested-party transaction, and that there was no appropriate approval;
• the party to the transaction is not obliged to review whether this transaction is a major transaction or a interested-party transaction for its counterparty and whether the transaction has been properly approved (this includes there being no requirement to review the counterparty’s accounting statements, the list of its affiliates, controlling parties and controlled parties, and its articles of association). At the same time the provision of a guarantee that all obligatory procedures have been complied with does not evidence the counterparty’s good faith;
• the counterparty’s prior awareness that the transaction is a major one for the company is presumed only when the counterparty, or its controlling party or a party controlled by it is a member (shareholder) of the company or of the controlling party of the company or is a member of bodies of the company or its controlling party; in interested-party transactions prior awareness is presumed if the counterparty itself or its representative, or their spouses or close relatives, are a related party.

II. MAJOR TRANSACTIONS

• Criteria for major transactions. The Plenum of the Supreme Court emphasises that to classify a transaction as a major transaction as of the date when it is consummated, the transaction must meet the following two criteria simultaneously:

• the quantity criterion (the price of the subject matter of the transaction is equal to or exceeds 25% of the balance sheet value of the company’s assets) and
• the quality criterion (the transaction is outside the limits of the company’s ordinary business activities).

Any transaction is presumed to be performed within the framework of ordinary business activities. The burden of the proof that the transaction falls ‘outside’ the limits of the ordinary business activities is imposed on the claimant. It should be taken into account that transactions outside the limits of a company’s ordinary business activities are, among others, transactions that may result in a significant change of the region of the company’s activity or market.

Also it is clarified that when estimating the price of transactions the conditions of which provide for periodical payments (for example, rent agreements, insurance agreements, and agreements for services), the amount of payments for the whole term of the agreement should be taken into account. For agreements with an indefinite term the amount of payments for one year should be taken into account, and if the amount of payments is not fixed, then the greatest amount of payments for one year should be taken into account.

• Departed members of the board of directors. The Resolution has significantly widened this term. Now not only is a deceased member of the board of directors classified as a departed member, but also a member of the board of directors whom the court has recognised as not having full legal capacity or not having legal capacity at all, or disqualified, and also a member of the board of directors who served a prior written notice of resignation on the company.

• Liability of members of the company’s management bodies for losses. The company’s board of directors, and if there is no board of directors, the single-member executive body, bears liability for the preparation of a legal opinion on a major transaction. Performing such a transaction in absence of a legal opinion is a violation of the approval procedure, although it may serve as a ground for recovering losses caused by the transaction from the parties who were obliged to prepare the legal opinion in question.

• Imperative nature of the rules for major transactions. The Supreme Court emphasises that the company’s articles of association cannot change or cancel the procedure for the approval of major transactions.

III. INTERESTED-PARTY TRANSACTIONS

• Specifics of approving interested-party transactions. The Plenum of the Supreme Court specifies that the requirement to obtain prior approval to enter into a interested-party transaction can be claimed by the corresponding persons listed in the law at any date (including before a notice of the consummation of such transaction was sent, and also after such transaction was consummated). It is also emphasised that an interested-party transaction can also be challenged even if approval was not requested. At the same time when voting with respect to the approval of such transaction, members that are legal entities and though not related parties are controlled by related parties (controlled organisations) are not entitled to participate in voting.

• Establishing another procedure for performing related party transactions in the articles of association/ specifying that provisions on related party transactions are not to be applied. By the articles of association of a non-public company, interested-party transactions can be covered by the general procedure provided for performing any other transactions, or other rules for performing such transactions that differ from those provided for by the law can be established (for example, prior approval of related party transactions, rules for sending notices about transactions, the persons to be notified, the procedure for requiring approval, refusal from the possibility to raise claims, etc. can be established by the articles of association). It can also be stated in the articles of association that the separate provisions of the law on interested-party transactions do not apply.

At the same time, the Plenum of the Supreme Court notes that in the articles of association it is not allowed to amend or cancel the conditions provided for by the law to invalidate interested-party transactions (in particular, the condition that damage caused to the company’s interests is a mandatory condition for invalidating a transaction).

What to think about and what to do

In connection with the above explanations of the Plenum of the Supreme Court, we recommend that companies and their members/shareholders acquaint themselves with the Resolution and, taking into account the legal positions specified in the Resolution, analyse the procedures and approaches to the process for approving major transactions and interested-party transactions (including those established by the company’s articles of association or enshrined in special internal documents) in terms of whether they are in line with the positions of the Plenum of the Supreme Court.

Help from your advisers

Pepeliaev Group’s lawyers are ready to provide support to companies on all issues arising in connection with the approval of as well as with challenges to major transactions and interested-party transactions.