As a general rule, major transactions (i.e., transactions with the value exceeding certain threshold established by the law) and transactions between interested parties (interested party transactions) transactions require preliminary corporate approval of the authorized management bodies of the parties to such transactions. An assembly of Russia’s Highest Arbitration Court in its Decree No. 28 “On certain issues connected with the challenging of major and interested party transactions” (the Decree) ruled, inter alia, on new grounds for challenging such transactions.
As a result, the major/interested party transaction which was made to the detriment of a company’s own interests (Art. 174.2 of the Russian Civil Code) can be deemed invalid by the court even if there has been a decision by the general meeting of participants or shareholders on its approval. In order for the transaction to be deemed invalid, it must be proved that the counterparty knew or should have known about the obvious damage to the company, or other existing circumstances evidenced by the presence of secret agreements or other joint actions of the representative of the company or its management body and the counterparty to the transaction.
The “obvious damage” to a company is present when, for example, the transaction is made on the knowingly unfavourable terms, e.g. when the consideration received by the company is two or more times lower than the cost of the goods/benefits it has transferred to the counterparty, etc. The counterparty is deemed to have known about the existence of the obvious damage where such damage should have been clear to any ordinary reasonable counterparty at the moment of conclusion of the transaction.
Even if corporate approval for the major/interested party transaction was required but was not obtained, the transaction can still be deemed valid in court provided that certain circumstances exist, for example, where the counterparty to the transaction did not know and could not have known that its performance was in breach of legal requirements. However, the Decree specifies that one of the most commonly used contractual warranties - that is where a company’s representative represents that all corporate procedures have been complied with at the time of performance of the transaction - is an insufficient ground for concluding that the counterparty to the transaction was acting in good faith.
Finally, the Decree has touched upon the issue of the “transactions made in the course of ordinary business activities”. It is known that the corporate approval of the company’s management bodies for those transactions which are considered as being major or interested party transactions is generally not required. However, the Decree stipulates that the mere fact of that a company’s primary activity has been entered into the Unified State Register of Legal Entities or its charter or that a company has a licence to carry out that particular activity at the conclusion of a transaction is not enough to deem that transaction as one which was made in the ordinary course of business, and, therefore, is not enough to exclude the requirement to get corporate approval for such a transaction.
Note: We note that as a result of the recent merger of the Supreme Court with the Highest Arbitration Court of Russia the latter was abolished. However, all the decrees issued by the Highest Arbitration Court of Russia are valid until they are amended by the assembly of the Supreme Court of Russia.