On maximum figures for the values of business entities’ interested party transactions

Pepeliaev Group advises of the expected adoption, before the end of the final quarter of 2016, of the Bank of Russia’s Instruction "On maximum figures for the amount of business entities’ interested party transactions the price or balance-sheet value of property under which is no more than 0.1% of the balance sheet value of such business entities’ assets"* .

We remind the reader that the definition of an interested party transaction is enacted for joint-stock companies in chapter 11 of the JSC Law**  (article 81), while for limited liability companies it is in chapter 6 of the LLC Law***  (article 45).

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” in terms of the regulation of major transactions and interested party transactions’ (“Law No. 343-FZ”) made adjustments clarifying, among other things, the procedure for entering into and approving interested party transactions.

As a general rule, transactions that meet set criteria and are interested party transactions need to be approved by the relevant executive management body of a legal entity. However, there are exceptions to every rule.

In the versions of the above laws that are in effect at the time of writing, provision is made for various exceptions that allow the interested party provisions not to be applied. Further to the entry into force from 1 January 2017 of amendments to the above laws, the list of grounds for not applying the interested party provisions has been slightly amended and expanded.

The interested party provisions do not apply, among other grounds, to transactions the subject matter of which is property with a price or balance sheet value that constitutes a maximum of 0.1% of the balance sheet value of a company’s assets according to data from its accounts (financial statements) as at the last reporting date provided that the transaction amount under such transactions does not exceed maximum figures established by the Bank of Russia****.

At the time when Law No. 343-FZ was adopted, the Bank of Russia had not established the maximum figures. However, it was obvious that they needed to be available in order for the new developments coming into force on 1 January 2017 to be properly applied.

It follows from the Explanatory Note to the Bank of Russia’s draft Instructions that the maximum figures for the transaction amounts are expressed as monetary figures and that, if these figures are exceeded, the requirements of Russian law on interested party transactions will apply to such transactions.

The maximum figures proposed in the Bank of Russia’s draft Instruction depend on the amount of the balance sheet value of a business entity’s assets according to data from its accounts (financial statements) as at the last reporting date. At the stage when comments on the draft were collected, the threshold values were as follows:

Amount of balance sheet value of assets:	Maximum figures of amount of transactions:
	RUB 20 million	RUB 50 million	RUB 100 million
more than RUB 100 billion			ü
from RUB 25 billion to RUB 100 billion		ü
no more than RUB 25 billion	ü

The consummation of transactions that formally meet the criteria allowing interested party provisions not to be applied but without having regard to the maximum figures set by the Bank of Russia may lead to such transactions being held invalid*****.

To avoid situations in which it is possible for transactions to face challenges when the amount of such completed transactions does not exceed 0.1% of the balance sheet value of the assets of business entities, it is advisable for the persons responsible for overseeing and duly documenting corporate resolutions and actions also to prepare, in good time, short analytical statements. These should reflect information about the ratio of the transaction amounts against the balance sheet value of the assets, about the interested parties, about the grounds/purposes of the transaction and so on. It is compulsory for such a note to be kept along with the contract or other supporting documents for a particular transaction.

By exercising prior control over the threshold figures of transactions that are planned to be entered into and that fall under the interested party criteria but do not require approval, companies that are subject to information disclosure provisions (for example, regarding the approval of interested party transactions) will enable themselves not to disclose information about approval. However, it seems to us that the obligation to disclose that such a transaction has been consummated is preserved. In any case, a positive, albeit fairly insignificant, effect in this situation is that the administrative burden on the company has been reduced.

Our lawyers can advise you on a range of corporate issues as well as on ways to mitigate corporate risks.

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*The draft Instructions and the Explanatory Note to them were placed on the Bank of Russia’s official website on 21 November 2016 in the section ‘Draft regulatory acts of the Bank of Russia’. (https://www.cbr.ru/analytics/?PrtId=project&ch=1061#CheckedItem). Comments on the draft Instructions were collected until 4 December 2016. 

** Federal Law No. 208-FZ dated 26 December 1995 "On joint-stock companies" (the “JSC Law”).

*** Federal Law No. 14-FZ dated 8 February 1998 "On limited liability companies" (the “LLC Law”).

**** See article 81(2)(12) of the JSC Law and article 45(7) of the LLC Law.

***** See article 45 of the LLC Law and article 84 of the JSC Law, in each case as amended by Law No. 343-FZ.