Transactions of Russian joint stock companies and limited liability companies require the consent of the general meeting or the board of directors if they qualify as material or interested party transactions. The requirements should be observed not only by shareholders or members of the corporate bodies of the respective companies but also by persons who wish to enter into transactions with such companies as the non-observance of the requirements may be ground for contesting of the transactions.
Most Important Amendments
Starting from 2017, the provisions were substantially improved, mainly because:
- Many ambiguities of the previous laws were removed;
- Interested party transactions require approval only if such approval is demanded by the general director, a member of the collective executive body or of the board of directors or a shareholder holding at least 1% of the shares;
- Transactions belonging to the ordinary course of business of the company (which are exempted from the applicability of the requirements to interested party transactions and material transactions) were defined as transactions which belong to the activity of the respective company and other businesses conducting analogous types of activities, regardless of whether the company has executed such transactions previously, provided that the transactions do not lead to the termination, an amendment of the type or a substantial amendment of the scale of the company's activities;
- In contrast to previous laws, shareholders of a company may now by unanimous resolution exclude the provisions requiring prior approval of the interested party transactions from the charter or set an order for approval of such transactions that would be different from the procedure set forth in the applicable laws;
- At the same time, the approval requirement for material transactions cannot be excluded from the charter, which was previously possible.
Interested Party Transactions
An interested-party transaction is a transaction with any of the following persons:
- Sole executive body (General director(s));
- Member of a management board or of a board of directors, or
- A person controlling, or being entitled to give compulsory instructions to the company.
A controlling person is a person who has the right to:
- Directly or indirectly (through controlled entities) control more than 50% of the votes in the supreme governing body of the controlled entity; or
- Appoint or elect the sole executive body and/or more than 50% of the collective executive body of the controlled entity.
Transactions within the ordinary course of business are only exempted if within a longer period analogue transactions on similar conditions were performed.
Under the new laws, in joint stock companies, the approval must be granted by the non-interested shareholders of the general meeting of the joint stock company in the following cases:
- The subject of the transaction are assets with a value equal to or exceeding 10% of the balance value of the assets of the company;
- The subject of the transaction are 2% of the ordinary shares of the company or of privileged shares forming 2% of all shares of the company, unless a lower number of shares is provided by the by-laws;
- The board of directors cannot take a resolution on the consent as the number of non-interested directors is less than the quorum for conducting a meeting of the board of directors.
Otherwise, the approval will be granted by the board of directors of the joint stock company.
As previously, a transaction is material if subject is the acquisition or (potential) alienation of assets with a value of at least 25% of the balance value of the assets of the respective company as of the last accounting period. The new law clarifies that also the following transactions qualify as material:
- Loan, bank credit, pledge or suretyship agreements under which assets with a value of at least 25% of the balance value of the assets of the company will be acquired or (actually or potentially) alienated;
- Purchase of shares in a public joint stock company, as the result of which the company holds more than 30%, 50% or 75% of the shares in the public joint stock company and is, therefore, obliged to purchase their other shares, provided that the price for the other shares complies with the value of at least 25% of the assets of the company;
- Obligation to grant the temporary possession or use of assets, or a license to use an intellectual property right to a third person if the balance value of the assets or intellectual property rights is at least 25% of the assets of the company.
Under the new laws, regarding the acquisition of an asset the purchase price and regarding the alienation of an asset the higher of the sales price or the balance value of the asset will be taken into account.
As under the previous laws, the company's entering into a material transaction requires the approval of the general meeting, provided that in case of transactions on assets with a value of between 25 and 50% of the balance value of the assets of the company, the competence passes (in the joint stock company mandatorily and in the limited liability company if so provided by the by-laws) to the board of directors (if any).
In a joint stock company, the resolution on approval of a transaction, the value of which exceeds 50% of the balance value of the assets of the company falls into the exclusive competence of the general meeting and requires a majority of 75% of the votes of the shareholders present.
Protection Against Breaches
Under the new laws, if a company entered into a material or an
interested party transaction in breach of the above provisions,
such transaction may be declared invalid by a court upon a lawsuit
of the company, a member of the board of directors or a shareholder
holding not less than one per cent of the votes of all shareholders
if at the time of the court examination, in particular, evidence
has been provided that the other party of the transaction knew or
should have known of the breach of the above provisions.
As under the previous laws, the limitation period for a court action is one year from the day when the company/shareholder learned (or should have learned) of the transaction and the lack of approval.
Exemptions From Applicability
The law provides for certain exemptions from the applicability of the provisions on interested party transactions and material transactions. Exempted are, in particular, transactions of companies which are held by only one person being at the same time the general director.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.