On 21 October 2009 amendments made to the Russian Arbitrazh Procedure Code (the “APC”) on 19 July 2009 became effective. These amendments are the most significant changes to Russian commercial procedure since the adoption of the new APC in 2002. Commentators have dubbed them “anti-corporate raid” amendments as they provide rules for the conduct of corporate disputes, the consolidation of claims and the introduction of class actions. The main changes are summarized below.
While corporate disputes are not a new feature in Russia, this is the first time they have been legally defined. The definition of a “corporate dispute” in the amended APC includes a dispute related to the establishment of, management or participation in commercial and certain non-profit legal entities. The definition is widely drafted to cover a broad range of situations including disputes among shareholders, invalidation of corporate decisions and shareholders’ claims for recovery of damages suffered by the company, etc.
Corporate disputes must now be considered by the arbitrazh court with territorial jurisdiction over the place of incorporation of the relevant legal entity, as indicated on the state register. This is aimed at putting an end to the practice of jurisdictional manipulation effected by bringing proceedings in different courts across Russia and sometimes in the courts of general jurisdiction thus creating multiple proceedings in several courts. It will remain important, however, when investing, to bear in mind where the investee is incorporated as recourse opportunities will vary from region to region.
Corporate disputes should still remain arbitrable if the parties to the dispute wish to provide for arbitration. Nevertheless, those matters dealing with for example, the establishment and status of corporate entities remain within the exclusive jurisdiction of the state courts and are not arbitrable.
The arbitrazh court is obliged to provide the company subject to a corporate dispute with all relevant court rulings made in relation to it, even if the company is not joined to the proceedings. The arbitrazh court can order that the legal entity notify its shareholders, management and registrar of the existence of a corporate dispute. These new requirements are aimed at ensuring transparency and making the company aware of shareholder disputes so that the company can avoid or at least be forewarned of possible court orders which have in the past been used to paralyze the company’s business.
Additional grounds for resisting applications for interim measures in corporate disputes have been introduced. The arbitrazh courts are now prohibited from granting interim measures that would: (i) make it impossible or substantially more difficult for the company to carry on its day-to-day activities; or (ii) result in a breach of Russian law. In relation to the latter it will be a matter for the court’s discretion in what circumstances a particular order would result in a breach of Russian law. An order that has already been described as falling into this category would be an order forbidding the holding of a general shareholders’ meeting.
When an application for interim measures is made in connection with a corporate dispute the court can either consider the application without a hearing (as was the case previously) or schedule a hearing to consider the application if explanations from the parties are considered necessary. If this discretional power is exercised, the hearing must be held within 15 days from the date the application for interim relief is filed.
The amendments also provide for certain reduced procedural timeframes for disputes relating to the calling of general shareholders’ meetings. Such claims must be considered within one month of filing the claim (as opposed to the usual timeframe of three months). Further, first instance court decisions relating to the calling of general shareholders’ meetings can be appealed within 10 days of the full written judgment being rendered instead of the usual one month period for lodging appeals.
With respect to shareholders’ claims against a company’s management or shareholders who control the company for recovery of damages caused to the company, the amendments clarify various ambiguous issues that previously resulted in differing court practices and impediments to the defense of shareholders’ rights. Previously, procedural law did not provide a detailed mechanism for such claims. The APC now specifies that a shareholder is entitled to bring a claim in its own name for the benefit of the company (although the shareholder is not the creditor since damages, if any, will only be awarded to the company) and, if the shareholder is successful in the proceedings, the company is now vested with the rights of a creditor in enforcement proceedings. Although the shareholder is not deemed a creditor, it can itself seek enforcement of the judgment for the benefit of the company.
Class actions are a further category of dispute that has been added to the APC. The purpose of introducing this new category of claim was to minimize the number of court proceedings that are similar by granting companies and individuals the right to combine their claims into a single case. Now, if companies or individuals are participants in the same legal relationship, they may defend their rights and legal interests jointly in one court proceeding.
In order to qualify as a class action a claim must be supported by at least five companies or individuals engaged in the same legal relationship. Identification of these legal entities or individuals is made by the judge at the preliminary stage. Following such identification, the initial claimant must invite other interested parties in the same legal relationship to join the claim.
The initial claimant must act in the best interests of all other claimants who have joined the claim. If the initial claimant fails to do so and the majority of the claimants file a relevant petition, the court may order that the group should be represented by a different claimant.
Class action rules apply to (i) corporate disputes; and (ii) disputes related to the activity of professional participants in the securities market. Class actions must be considered by the arbitrazh courts within five months from the date of filing the claim (as opposed to the usual three months).
Prevention of parallel proceedings
Several amendments have been made to the rules on consolidating court proceedings. They are aimed at avoiding contradictory judgments being rendered in relation to the same case, especially in different arbitrazh courts.
Now, arbitrazh courts must consolidate interrelated cases into a single proceeding if such proceedings are brought in the same court. A consolidated case must be heard by the judge first seized of a claim. If one of the other related cases is being heard by a different arbitrazh court, either court can suspend the proceedings pending the outcome of the case in the other court.
Furthermore, claims which are deemed the “initial claim” and “counter claim” must now be joined by the arbitrazh court in one set of proceedings. This amendment is in response to the widely used post-crisis practice where proceedings are brought to recover a debt under a loan agreement and the debtor files separate proceedings claiming invalidity of the loan agreement such that the court seized with the original debt claim must stay proceedings until the validity of the loan agreement is determined.
Prior to the amendments to the APC, arbitrazh courts of all instances were obliged to consider applications for interim measures within one business day of receiving an application. The amendments introduce an exception to this general rule providing that should an earlier ruling regarding interim measures be challenged in a court of a higher instance, that court must consider the new application for interim measures simultaneously with the relevant appeal, thus providing a longer period for determining such applications.
Previously under the APC, a respondent who had won a case but suffered damage as a result of an application for interim measures could seek recovery of damages by filing a separate claim. This provision was rarely implemented because a party who had suffered damages usually failed to prove the amount of such damages. The amendments to the APC provide that instead of damages, a party may now claim for “compensation” not exceeding 1 million rubles (about US$33,500 as of October 2009) awarded at the court’s discretion. In claiming compensation, a party is not obliged to prove that it has suffered damages nor the amount of such damages.
Statement of defense
The amendments have rendered the submission of a statement of defense by the respondent an obligation as opposed to a right. If the respondent fails to file a defense by the date set by the judge, the arbitrazh court may order that the respondent bear all the claimant’s costs, irrespective of the outcome of the case. This is a legislative response to the widely spread practice by recalcitrant respondents of delaying the submission of a statement of defense and filing it on the actual hearing date, or not filing it at all.
The above and other procedural changes are a welcome legislative development. However, it remains to be seen how they will work in practice.