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. As the non-observance of the relevant requirements may be grounds for contesting these types of transaction, they should be observed not only by shareholders and members of the corporate bodies of the respective companies, but also by persons that wish to enter into such transactions with these companies.
In 2017 the laws governing interested party and material transactions were substantially improved. The key amendments are as follows:
- Many ambiguities created by the previous provisions were removed.
- Interested party transactions now require approval only if such approval is demanded by:
- the general director of the company;
- a member of the collective executive body or the board of directors; or
- a shareholder holding at least 1% of the shares in the company.
- Transactions belonging to a company's ordinary course of business (which are exempted from the applicability of the requirements to interested party and material transactions) have been defined as transactions which belong to the activity of the respective company and other businesses conducting analogous types of activity – regardless of whether the company has executed such transactions previously – provided that the transactions do not lead to the termination, amendment of the type or substantial amendment of the scale of the company's activities.
- In contrast to previous laws, shareholders may now, by unanimous resolution, exclude the provisions requiring prior approval of interested party transactions from the charter or set an order for approval of such transactions that differs from the procedure set out in the applicable laws.
- Simultaneously, the approval requirement for material transactions cannot be excluded from the charter, which was previously possible.
Definition An' interested party transaction' is a transaction with:
- a company's sole executive body (eg, general director);
- a member of the company's management board or 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:
- control, directly or indirectly (through controlled entities), more than 50% of the votes of the controlled entity's supreme governing body; or
- appoint or elect the sole executive body or more than 50% of the controlled entity's collective executive body.
Transactions within the ordinary course of business are exempted only if analogue transactions were performed in similar conditions during a longer period.
Approval requirements Under the new laws, the non-interested shareholders of a joint stock company's general meeting must approve a transaction if:
- the subject of the transaction is assets with a value equal to or exceeding 10% of the balance value of the company's assets;
- the subject of the transaction is 2% of the ordinary shares of the company or of privileged shares forming 2% of all of the company's shares, unless the bylaws provide for a lower number of shares;
- 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, approval must be granted by the joint stock company's board of directors.
Definition A transaction is 'material' if its subject is the acquisition or potential alienation of assets with a value of at least 25% of the balance value of the respective company's assets as of the last accounting period. The new laws clarify that the following transactions also qualify as material:
- loans, bank credits, pledges and suretyship agreements under which assets with a value of at least 25% of the balance value of the company's assets will be acquired or actually or potentially alienated;
- purchases of shares in a public joint stock company which result in the company holding more than 30%, 50% or 75% of the shares in the public joint stock company and therefore becoming obliged to purchase its other shares, provided that the price for the other shares complies with the value of at least 25% of the company's assets; and
- obligations to grant the temporary possession or use of assets, or a licence to use an IP right, to a third person if the balance value of the assets or IP right is at least 25% of the company's assets.
Under the new laws, the purchase price will be considered where a transaction involves the acquisition of an asset. Where a transaction involves the alienation of an asset, the higher of the sales price or the value of the asset will be considered.
Approval requirements As under the previous laws, companies entering into a material transaction must obtain the general meeting's approval, provided that – in case of transactions involving assets with a value of between 25% and 50% of the balance value of the company's assets – the competence passes (mandatorily for joint stock companies and if so provided by the bylaws for limited liability companies) to the board of directors, if any.
In case of a joint stock company, a resolution regarding the approval of a transaction whose value exceeds 50% of the balance value of the company's assets falls under the exclusive competence of the general meeting and requires a majority of 75% of the votes of the shareholders present.
Under the new laws, if a company enters into a material or an interested party transaction in breach of the above provisions, such transaction may be declared invalid by a court in a suit brought by the company, a member of the board of directors or a shareholder holding no less than 1% of the votes of all shareholders if the court is provided with evidence that the other party to 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 on which the company or shareholder learned (or should have learned) of the transaction and the lack of approval.
The new laws provide certain exemptions from the applicability of the provisions regarding interested party and material transactions. In particular, transactions of companies which are held by only one person who is the general director are exempt.
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