The use of representations (“zavereniya ob obstoyatelstvakh”) has been a standard tool in structuring M&A transactions under Russian law since 2015 with the advent of Article 431.2* of the Russian Civil Code. However, Russian court practice has not yet established an approach on many aspects of the use of representations. One of the issues under discussion is the use of the disclosure mechanism to limit the liability of the person or entity who made the representations.

In this regard, of particular interest is the recent decision* of the Russian Supreme Court in case No. A50-29581/2020* in which the court confirmed the conclusions of the lower courts and established for the first time the legal status of a disclosure letter. It recognised that such a letter is in fact part of the main contract and that the scope of representations being provided should be adjusted or limited in light of the information contained in the disclosure letter. The Supreme Court also outlined some other important stances on the inaccuracy of representations and information disclosure in M&A transactions.

Thus, the Supreme Court confirmed the rule that representations (when inaccurate) protect only the recipient of the representations who did not know and should not have been aware that they were false.

In general, this rule has previously been applied based on a literal interpretation of Article 431.2 of the Civil Code, according to which liability for giving false representations arises if the person or entity who made the representations assumed or had reasonable grounds to assume that the recipient of the representations would rely on them. If the recipient of the representations knew or should have known that they were inaccurate, the recipient cannot be considered to have reasonably relied on them and is therefore not entitled to bring a claim for inaccuracy. The courts have repeatedly pointed this out in disputes arising from purchase agreements for shares or participatory interests. For example, in case No. A63-1976/2017*, the appellate court regarded the share purchaser’s claim to enforce a penalty clause due to the inaccuracy of representations, which the purchaser should have known in advance, as an abuse of right. Similarly, in case No. A27-8600/2015*, the court ruled that the purchaser of a limited liability company’s participatory interest, who had been given representations regarding the amount of indebtedness of the acquired company, should have requested relevant documents and independently analysed them to assess the risk of the company being liable for a penalty.

Thus, disclosing the inaccuracy of any representations in due time (i.e. before or at the same time as the representations are made) is effectively a way for the person or entity making such representations to limit its liability.

Based on established court practice, the parties to a transaction should bear in mind that disclosure of the inaccuracy of representations may be recognised, not only by the drafting and signing of a disclosure letter (either as a separate document or as a schedule to the underlying contract), but also in any other manner this information is communicated to the recipient of representations. In other words, it is no longer sufficient for the recipient of the representations to rely solely on the representations since it will be crucial for the recipient to be aware of the facts in relation to which the representations are provided.

Co-authored by Yuriy Nakul, Paralegal in Corporate/M&A.