Major transactions: changes in legislation
Pepeliaev Group advises of changes in corporate legislation*
Amendments have been made to Federal Law No. 208-FZ dated 26 December 1995 “On joint-stock companies” (the “JSC Law”) and Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies” (the “LLC Law”). These mainly enshrine the established case law.
The amendments will take effect from 1 January 2017.
Below we outline the most important of the new provisions**.
Major transactions
The legislature has specified the criteria for a major transaction; extended the list of transactions which are excluded from the major transaction regime; changed the rules for challenging major transactions; established certain requirements for joint-stock companies (“JSCs”) to supply information about major transactions; and removed the opportunity for limited liability companies (“LLCs”) to exclude the requirement to approve major transactions by providing to this effect in their charters.
An expanded list of transactions that do not require consent or subsequent approval***
New exceptions have been added to the list of transactions which do not require approval. The following will not be treated as major transactions:
A resolution to consent to, or subsequently approve, a major transaction
A resolution giving consent to a major transaction may specify the price parameters of the transaction, alternative terms and conditions, consent to enter into a number of similar transactions, etc., as well as the period during which the consent will remain effective. This period is deemed to be one year, unless the resolution provides otherwise, or unless the essence and conditions of the transaction or the circumstances in which the consent was given suggest to the contrary.
New rules under which a major transaction can be held invalid
The rules for challenging major transactions have been brought into line with the general provision set out in article 173.1(1) of the Civil Code, which deals with the invalidity of transactions which were entered into without a consent which is required by law. Now, claims that involve a challenge to a major transaction may be dismissed only if:
PG comments: Given the position of the Russian Supreme Court, the violation of rights and legitimate interests lies in the fact that there was no consent to a transaction. No other circumstances need to be proven, including losses/unfavourable consequences for the company and/or a shareholder/participant****.
Now, a claim for a major transaction to be held invalid may be lodged not only by the company or a shareholder/participant of it, but also by a member of the board of directors. Further, claims for major transactions to be held invalid may be filed not by any shareholders/participants, but only by those holding at least 1% of shares/votes.
Interested party transactions
The legislature has rejected the term ‘an affiliate’ and mandatory preliminary approval of interested party transactions. It has extended the list of exceptions to which the regime of interested party transactions is not applicable, changed the procedure for challenging interested party transactions and established the rules for informing shareholders/participants of such transactions.
‘Controlling’ parties instead of ‘affiliates’
The legislation regarding interested party transactions will use the term ‘controlling party’ instead of the term ‘affiliate’. Under the general rule, a ‘controlling party’ is understood to be a person who has the right to directly or indirectly:
PG comments: We believe that the change in the approach to recognising parties as parties interested in a transaction will make it possible to avoid situations in which transactions formally required corporate approval, though they in fact did not create any conflict of interests.
An interested party transaction does not require any prior consent
It is no longer required that prior consent be given to interested party transactions.
The exclusive competence of the general meeting
There is an increase in the threshold of the value of the subject matter of transactions which only the general meeting may approve. The threshold will now be 10% of the balance sheet value of assets, instead of 2%, as set by the current versions of the JSC Law and of the LLC Law.
The rules have been changed for an interested party transaction to be held invalid
The rules for challenging interested party transactions have been brought into line with article 174(2) of the Civil Code, under which an interested party transaction may be held invalid if the following circumstances are proven:
A presumption of harm to company interests is being introduced. Harm is presumed when the following circumstances are in place at the same time: (i) there is no consent or subsequent approval, (ii) the company did not previously provide the information regarding the interested party transaction further to a request from the claimant.
The company, a member of the board of directors, as well as shareholders/participants holding at least a 1% share in company’s charter capital may now make a claim to have the transaction held invalid.
Exclusions from the regime of interested party transactions
The list of exclusions to which the interested party transaction regime is not applicable is similar to the list set out above (see the section “Major transactions”). In addition to the above transactions, the following transactions will fall within the exclusions:
A special procedure for approving interested party transactions
LLCs and non-public JSCs will be able to establish a special procedure for obtaining consent to interested party transactions or rule out such a requirement.
What to think about and what to do
With regard to the adoption of the above new amendments, we recommend that you review the modified rules for consenting and challenging major transactions and take account of the need to comply with additional obligations, including those relating to reporting such transactions.
Help from your adviser
Our lawyers will be more than happy to advise you on the issues that may arise in connection with the amendments reviewed and provide you with any assistance should disputes arise that involve challenging major transactions and interested party transactions.
***In accordance with the amendments to JSC Law and LLC Law, the term ‘consent, or subsequent approval’ of a transaction will be used instead of ‘approval’ of a transaction.
Amendments have been made to Federal Law No. 208-FZ dated 26 December 1995 “On joint-stock companies” (the “JSC Law”) and Federal Law No. 14-FZ dated 8 February 1998 “On limited liability companies” (the “LLC Law”). These mainly enshrine the established case law.
The amendments will take effect from 1 January 2017.
Below we outline the most important of the new provisions**.
Major transactions
The legislature has specified the criteria for a major transaction; extended the list of transactions which are excluded from the major transaction regime; changed the rules for challenging major transactions; established certain requirements for joint-stock companies (“JSCs”) to supply information about major transactions; and removed the opportunity for limited liability companies (“LLCs”) to exclude the requirement to approve major transactions by providing to this effect in their charters.
An expanded list of transactions that do not require consent or subsequent approval***
New exceptions have been added to the list of transactions which do not require approval. The following will not be treated as major transactions:
- transactions which are concluded on the same terms as a preliminary agreement that has been approved;
- transactions under which securities of a public company are acquired and which are entered into on the same terms as set out in a mandatory offer;
- a transfer of title to the property in the process a company being reorganised;
- other types of transactions.
A resolution giving consent to a major transaction may specify the price parameters of the transaction, alternative terms and conditions, consent to enter into a number of similar transactions, etc., as well as the period during which the consent will remain effective. This period is deemed to be one year, unless the resolution provides otherwise, or unless the essence and conditions of the transaction or the circumstances in which the consent was given suggest to the contrary.
New rules under which a major transaction can be held invalid
The rules for challenging major transactions have been brought into line with the general provision set out in article 173.1(1) of the Civil Code, which deals with the invalidity of transactions which were entered into without a consent which is required by law. Now, claims that involve a challenge to a major transaction may be dismissed only if:
- the necessary consent to the transaction was subsequently given;
- it was not proven that the other party to the transaction knew or should have known that the transaction was a major transaction for the company and/or that no valid consent was obtained.
A party seeking to challenge a transaction cannot be refused because of a lack of proof that losses were caused to the company and/or a shareholder/participant or because it was impossible for a shareholder/participant to influence the voting results.
PG comments: Given the position of the Russian Supreme Court, the violation of rights and legitimate interests lies in the fact that there was no consent to a transaction. No other circumstances need to be proven, including losses/unfavourable consequences for the company and/or a shareholder/participant****.
Now, a claim for a major transaction to be held invalid may be lodged not only by the company or a shareholder/participant of it, but also by a member of the board of directors. Further, claims for major transactions to be held invalid may be filed not by any shareholders/participants, but only by those holding at least 1% of shares/votes.
Interested party transactions
The legislature has rejected the term ‘an affiliate’ and mandatory preliminary approval of interested party transactions. It has extended the list of exceptions to which the regime of interested party transactions is not applicable, changed the procedure for challenging interested party transactions and established the rules for informing shareholders/participants of such transactions.
‘Controlling’ parties instead of ‘affiliates’
The legislation regarding interested party transactions will use the term ‘controlling party’ instead of the term ‘affiliate’. Under the general rule, a ‘controlling party’ is understood to be a person who has the right to directly or indirectly:
- appoint the sole executive body or more than 50% of the collective management body in a company it controls;
- have at its disposal more than 50% votes in the supreme management body of a company it controls.
An interested party transaction does not require any prior consent
It is no longer required that prior consent be given to interested party transactions.
The exclusive competence of the general meeting
There is an increase in the threshold of the value of the subject matter of transactions which only the general meeting may approve. The threshold will now be 10% of the balance sheet value of assets, instead of 2%, as set by the current versions of the JSC Law and of the LLC Law.
The rules have been changed for an interested party transaction to be held invalid
The rules for challenging interested party transactions have been brought into line with article 174(2) of the Civil Code, under which an interested party transaction may be held invalid if the following circumstances are proven:
- harm has been caused to company’s interests through such transaction being entered into;
- a counterparty knew or should have known that the transaction was an interested party transaction and/or that no consent had been obtained to enter into it.
The company, a member of the board of directors, as well as shareholders/participants holding at least a 1% share in company’s charter capital may now make a claim to have the transaction held invalid.
Exclusions from the regime of interested party transactions
The list of exclusions to which the interested party transaction regime is not applicable is similar to the list set out above (see the section “Major transactions”). In addition to the above transactions, the following transactions will fall within the exclusions:
- the value of the subject matter of the transaction is not more than 0.1% of the balance sheet value of assets;
- transactions entered into during public bidding processes or based on the results of such public bidding processes, if the board of directors/general meeting has approved the terms for holding of public bidding and participation in same.
LLCs and non-public JSCs will be able to establish a special procedure for obtaining consent to interested party transactions or rule out such a requirement.
What to think about and what to do
With regard to the adoption of the above new amendments, we recommend that you review the modified rules for consenting and challenging major transactions and take account of the need to comply with additional obligations, including those relating to reporting such transactions.
Help from your adviser
Our lawyers will be more than happy to advise you on the issues that may arise in connection with the amendments reviewed and provide you with any assistance should disputes arise that involve challenging major transactions and interested party transactions.
----
*Federal Law No. 343-FZ dated 3 July 2016 “On amending the Federal Law “On joint-stock companies” and the Federal Law “On limited liability companies” with regard to major transactions and interested party transactions” (the “Law”).
**Since the amendments made to JSC Law and LLC Law are identical, we will consider them together, unless we state otherwise in the text.
***In accordance with the amendments to JSC Law and LLC Law, the term ‘consent, or subsequent approval’ of a transaction will be used instead of ‘approval’ of a transaction.
****Clause 71 of Resolution No. 25 of the Plenum of the Russian Supreme Court dated 23 June 2015 “On the application by the courts of certain provisions of Section I, Part I of the Russian Civil Code”.