Recommendations on how to avoid difficulties with absentee voting of an LLC's members

FAO legal departments and corporate secretaries of companies operating as limited liability companies

Pepeliaev Group has drafted a list of key questions that companies registered as limited liability companies should focus on when they plan to hold a general meeting of members in absentia, i.e. using what is known as the 'absentee voting' procedure. Further, we propose for consideration some recommendations that will help you to avoid any potential adverse effects, including the invalidation of resolutions adopted using absentee voting.

With the spread of the coronavirus infection COVID-19 and the introduction of a regime of self-isolation for individuals, companies are more frequently using an absentee voting procedure when they need resolutions to be adopted at the level of the business's owners.

What aspects of the procedure do you need to remember so that your company avoids facing in future the adverse effects of a general meeting of members held in absentia?

Make sure that an internal instrument has been approved and is applied within the LLC regulating the absentee voting procedure.

Why this is important

The requirement for such an internal instrument is stipulated by article 38(3) of the Federal Law On LLCs[1]. The internal instrument regulating absentee voting should, specifically, provide for the following:

• an obligation to send the proposed agenda of the meeting to all the company's members;
• the opportunity for all the company’s members to familiarise themselves with all necessary information and materials before the voting starts;
• the opportunity for the members to propose that additional items should be included in the agenda of the meeting;
• an obligation to advise all the company’s members of changes in the agenda by forwarding to them an amended agenda before the voting starts;
• the voting deadline.

Please note that, in the absence of such a document, courts often invalidate resolutions of the general meeting that were adopted by absentee voting[2]. Please be reminded that the above internal instrument regulating the procedure of absentee voting can be approved within an LLC by its general meeting of members only[3].

Review the LLC’s charter from the perspective of provisions enabling the LLC to hold a general meeting of members not only in the format of joint attendance, but also using absentee voting (in absentia).

Why this is important

Despite the clarifications of the highest-level court [4] issued in 2015 that, if no restrictions have been imposed in an LLC’s charter with respect to the format of a general meeting, a company may hold it either by joint attendance or in absentia, some courts still insist that a special provision should be stipulated in the charter that the LLC is entitled to conduct an absentee voting. If there is no such provision in the charter, the LLC’s minority shareholders may have a formal ground for invalidating a resolution that has been adopted[5].

Please note that in summarising the case law the Supreme Court pointed out that the right to conduct absentee voting is not in itself restricted in any way (when no specific restriction has been made in the charter by company’s members) and is granted to companies by law. Nevertheless, lower courts still do not have a consistent position on this matter.

While invalidating resolutions adopted by the general meeting of members that was conducted in absentia, some courts stress that the charter is an internal instrument[6] in which the absentee voting procedure must be set out. In this regard, they require that the charter contains not only a reference to the company’s right to hold a meeting in absentia, but also has express provisions setting out the procedure for absentee voting as stipulated in the Law on LLCs. Other courts adhere to a less formal approach. We believe that if an LLC has a separate internal instrument (regulations or guidelines) regulating the procedure of absentee voting, the risks are minimal that a relevant resolution will be challenged, even if the company’s charter does not contain any provisions regarding absentee voting.

Make sure that no items are included in the agenda of the anticipated general meeting in absentia which cannot be approved by absentee voting.

Specifically, such items include approval of the company’s annual financial statements and its annual balance sheet[7]. In addition to the above items of the agenda, resolutions cannot be passed by absentee voting when the fact of the meeting itself and the attending members of the company must be notarised with respect to such resolutions, as stipulated by the law or the company’s charter[8].

Why this is important

The Law on LLCs expressly prohibits general meetings from adopting resolutions on the above items by absentee voting. As regards the resolutions that must be notarised, the legislation on notarial activity[9] does not currently provide for any absentee or other remote procedures for holding such meetings; therefore, no such resolutions will be recognised as having been notarised, which makes the resolutions automatically void.

Ensure that all procedures related to absentee voting are properly documented.

First, this applies to notifications being forwarded to all the company’s members about the meeting to be held in absentia, attaching the whole set of materials to be considered at the meeting. Make sure the company receives documents confirming that each member has been properly notified of the meeting and has received the relevant documents (i.e. the company must have all documents at its disposal confirming that notice of the meeting and materials pertaining to it have been served on all members). Voting ballots must be attached to the notices of the meeting in absentia.

Why this is important

It is not uncommon for courts to invalidate the resolutions adopted at a meeting held in absentia owing to a failure to follow the proper procedure and timeframes for notifying all members of the meeting, or when a member of the company did not have an opportunity to familiarise him/herself with the materials related to the meeting. That said, if a defendant proves the fact all the LLC's members were given due notice and that each one of them had the opportunity to fully familiarise him/herself with the list of materials for the meeting, the chances to win the dispute increase significantly[10].

Methods of serving notice

It is extremely important that the above documents (notices of the meeting, voting ballots, materials and information) are sent to the members by one (or several) methods that are provided in the charter or internal instrument (e.g. by registered mail). In addition to these methods, notice can also be served on members using their email addresses. It is advisable, if practicable, that members’ email addresses be used that are posted on the LLC’s corporate domain (i.e. email addresses of the company’s mail service).

If this is impracticable, the relevant messages can be sent to other personal email addresses of the members; at the same time, it is preferable that such emails do not belong to such public email services as gmail, yandex, and the like, but have been created within a corporate domain. In other words, notices and materials can be repeated to the members’ email addresses via which the company generally communicates with its members. In this case, if a dispute arises, such communications can be enclosed as indirect evidence of notices being served on the members, even if the company’s charter does not provide for such method of notification. Yet, such method of notification cannot be used as the primary one.

Include all necessary information in the ballots and minutes of the absentee voting, as required by law and customary business practice.

Specifically, the above documents must contain the following information:

general information for a ballot and the minutes:

• a statement that voting will be held using absentee voting (in absentia);
• the deadline for accepting voting ballots;
• an address to which voting ballots that have been filled in must be sent;
• the correct ID of a relevant member;

the following should be also included in a ballot:

• wordings of all items put to a vote and wordings of relevant resolutions;
• voting options for each item put to a vote, together with such wordings as “in favour”, “against” or “abstained” for each item put to a vote, and indicating that a member may only choose one voting option and the way to demonstrate such choice (e.g. to cross out those options that do not apply, or tick the check box under the option chosen);
• stating when a completed ballot is deemed to be invalid;
• stating that a ballot must be signed by the member personally or by his/her authorised representative (in which case ID of the representative and details of the power of attorney must be indicated when the ballot is filled in);

as regards the minutes, also:

• information about the persons who participated in the voting;
• results of the voting for each item of the agenda;
• information about the persons that counted the votes;
• information about the persons who signed the minutes of the general meeting.

The above documents should also contain other information provided for by the legislation, and, as an option, information required by customary business ethics and standard business practices.

Please note that the ballots completed and signed by the members must be subsequently attached to the minutes of a general meeting that has been held in absentia.

Why this is important

A material breach of the rules for drawing up minutes of a general meeting of LLC’s members, including regarding its written form, constitutes a separate ground for the invalidation of resolutions of the general meeting set out in such minutes.

Ensure that bulletins are properly signed by company’s members.

It is advisable that all ballots are signed by each member with his/her own hand (by heads of the relevant organisation if we refer to members who are legal entities).

Powers of attorney

If ballots need to be signed on behalf of any members under a power of attorney and the power of attorney has been issued by a member who is an individual, such power of attorney must be notarised. A power of attorney conferring a right to vote must clearly state the voting option for each specific item on the agenda and should not leave it to the representative to decide how to vote by conferring on him/her general powers only.

Please be strongly advised against issuing powers of attorney to a director or a member who is interested in the transaction to vote on certain items of the agenda (in particular, transactions where a general director or a member has a conflict of interests).

If a member signs completed ballots under a power of attorney, such power of attorney should be attached to the ballot when the latter is sent to the person who draws up the minutes of the relevant meeting in absentia.

Digital signature

Although the legislation formally provides that a meeting in absentia can be held using electronic means[11], there is no well-established court practice legalising the possibility of signing voting ballots with digital signatures.

In our opinion, this is not formally prohibited, and if a company has documents providing for the use of a simple digital signature, including for the purposes of a meeting in absentia, the risk is low that a resolution adopted during such a meeting will be invalidated. This is all the more true for enhanced digital signatures (an enhanced encrypted non-certified digital signature and enhanced encrypted certified digital signature).

To use a simple digital signature, special rules should be set out in the company’s charter and internal regulations; specifically, there should be provisions regarding the procedure for electronic interaction between the company and its members, including when absentee voting is held. Yet, given the absence of case law on absentee voting in LLCs where a digital signature is used, even having proper documents does not guarantee a favourable outcome of a court dispute. In any case, the facts to be proven, such as confirming the authenticity of the members’ signatures on ballots, will pose significant problems for a defendant.

Exchange of documents in PDF-format

An LLC’s members are advised against sending to a person who draws up minutes of a meeting in absentia ballots completed with the use of a text editor and converted into a pdf-file where the relevant member does not attach his/her own signature (such as when an original hard copy of a ballot received by the member was damaged). When transactions are consummated in a digital environment, the exchange of documents in pdf format that have not been signed can be treated as standard business practice, provided that certain conditions have been met. Nevertheless, we do not recommend using such method in corporate relationships. It is advisable to find the opportunity and print out the electronic image of the ballot and sign it with your own hand.

Why this is important

If a court holds that certain ballots have not been signed, the resolutions of the meeting reflected in the relevant minutes can be invalidated owing to the rules having been breached for the format of such minutes or that the relevant member’s will was compromised.

If a company subsequently plans to send the minutes of a meeting held using absentee voting to notaries, banks or any state authorities, it is advisable to learn in advance from such authorities and organisations whether they will accept for the relevant purposes minutes which have been drawn up using a procedure for absentee voting by the LLC’s members. This includes if it is necessary for the purpose of confirming the powers of persons and management bodies of the LLC who have been appointed to their positions or established at the corresponding meeting in absentia.

Why this is important

Although there are legal grounds for using absentee voting and resolutions have equal legal force when adopted within the scope of the “standard” procedure and when using absentee voting, we are aware of quite a few cases when banks or notaries have refused to accept minutes recording absentee voting as a document confirming the relevant facts or powers. In view of the above, we advise you against adopting resolutions that are significant for the company (the approval of a new version of the charter, a change in management bodies and the like) at a general meeting held in absentia, unless the company is absolutely confident that it has complied with all necessary requirements, including those set out above.

What to do if there is no internal instrument regulating absentee voting, or the charter does not have any provisions regarding absentee voting, but it is essential to conduct absentee voting.

The risks that the resolution will be challenged in such a case are above average. Yet, even in this case, you may try and reduce the risk of the resolution being challenged by doing as follows:

• present to the court sufficient evidence of proper and timely notice being served on all the company’s members about the absentee voting, together with confirmation of all necessary documents and voting ballots having been sent; and
• during any subsequent general meeting of the company that is held in the joint presence of the members, adopt a resolution ratifying all resolutions in dispute that were previously adopted by the members using absentee voting[12].

_____________________________

[1] Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998

[2] Resolution No. F06-5551/2016 of the Commercial Court for the Volga Circuit dated 13 April 2017 in case No. А57-10122/2015

[3] Resolution No. F07-3655/2019 of the Commercial Court for the North-Western Circuit dated 17 May 2019 in case No. А05-5863/2018

[4] This matter is referred to the competence of the general meeting by article 33(2)(8) of Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998

[5] Clause 105 of Resolution No. 25 of the Plenum of the Russian Supreme Court dated 23 June 2015 “On certain provisions of Section I of Part I of the Civil Code of the Russian Federation being applied by the courts”

[6] Resolution No. 17AP-8669/2018-GK in case No. A60-26426/2018 of the Seventeenth Commercial Court of Appeal dated 22 October 2018

[7] As provided for by article 38(3) of the Law on LLCs. In our opinion, it is not entirely justified from a legal viewpoint to identify the internal instrument for which this article provides, which is confirmed by, among other things, article 52(5) of Russian Civil Code (Part I) 51-FZ dated 30 November 1994

[8] Article 38(1)(2) of Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998

[9] For instance, that such procedure must be complied with is stipulated by article 17(3) of Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998 for adopting a resolution that issued capital should be increased

[10] The Fundamental Principles of the Legislation of the Russian Federation on the Notariate (as approved by the Russian Supreme Court’s Resolution No. 4462-1 dated 11 February 1993)

[11] The Resolution of the Thirteenth State Commercial Court of Appeal dated 18 November 2019 in case No. А56-55824/2019.

[12] Article 181.2(1)(2) of Russian Civil Code (Part I) 51-FZ dated 30 November 1994

Resolution No. 17AP-8669/2018-GK of the Seventeenth Commercial Court of Appeal in case No. A60-26426/2018 dated 22 October 201 8