Supreme Court of adopts Review of Judicial Practice on Certain Aspects of the Application of Corporate Law

February 2020

On December 25, 2019, the of the NB: The RF Supreme Court previously Russian Federation (the “RF Supreme Court”) stipulated that a resolution on the use adopted a Review of the Judicial Practice on Certain of an alternative method to confirm resolutions Aspects of the Application of Corporate Law (the of the general meeting should be taken “Review”).1 unanimously by the participants, without remarking that such resolution is subject 2 This latest review from the RF Supreme Court to notarization. summarizes the major rulings on the following topics:  the notarization requirements for meeting minutes  corporate governing body resolutions, also apply to limited liability companies with a single 3  vicarious liability, participant;  major transactions,  company repurchase of participation interests NB: Five days after the adoption of the Review (shares) at the request of participants in question, the RF Supreme Court issued (shareholders), a ruling in a case stating that, “[…] in  removal of participants from a company, the interests of legal certainty and protecting  challenging of transactions. the reasonable expectations of parties to business transactions, the clarifications given Below we give the RF Supreme Court’s main in sections 2 and 3 of the Review of the Judicial conclusions and our practical recommendations on each Practice on Certain Aspects of the Application 4 topic. It should be noted that in some instances of Corporate Law, adopted by the Presidium the position taken by the RF Supreme Court of the Supreme Court of the Russian Federation is inconsistent. For this reason, we also reference other on Dec. 25, 2019, are only applicable sources. in the adjudication of disputes involving the challenging of resolutions of general meetings of participants (resolutions of a sole What conclusions has the court reached? participant) taken after that date.”5 Corporate governing body resolutions:  the size of the participation interest (number of shares) held by the plaintiff is irrelevant to  a resolution of the general meeting of participants the invalidation of a resolution of the general of a limited liability company on the use meeting of participants (shareholders) of a company of an alternative method confirm resolutions if there is proved to be a material breach of of the general meeting (e.g., the signing of minutes the procedure for calling a meeting (e.g., the plaintiff by all or some participants) requires notarization was not notified of the calling of the meeting) that (as a resolution modifying the basic notarial prevented a participant (shareholder) from procedure provided by the RF Civil Code);

1 http://www.supcourt.ru/documents/thematics/28639/ 4 This means the notarization requirements for a resolution of the 2 Paragraph 107 of RF Supreme Court Plenum Ruling No. 25 of general meeting of participants whereby an alternative method will be June 23, 2015. used to confirm company resolutions, and the notarization 3 It should be noted that, previously, the notarization requirements for requirements for a resolution of the sole participant of a company. meeting minutes did not apply to companies with a single participant 5 https://kad.arbitr.ru/Document/Pdf/8ce05a09-5936-49f4-903c- (section 2.3 of Federal Notarial Chamber Letter No. 2405/03-16-3 of d59b1ccd0504/6e8ab831-c84d-4f07-b5e0-40847318e3ee/A72-7041- Sept. 1, 2014). 2018_20191230 5523426.1 Moscow 5526083.1

exercising the right to participate in the decision- knew or should have known about this; there is making by a company’s governing bodies; no need to prove that the company was harmed by the major transaction.  resolutions of the general meeting of participants of a company taken on any matter without Company repurchase of participation interests (shares) the required majority of participants cannot from participants (shareholders): be invalidated if the lack of the required majority vote was due to the majority’s unreasonable avoidance  in the context of a mandatory repurchase of voting on the relevant matter; of the participation interest of a company participant, the participant does not need to send the company  a resolution to increase a company’s charter capital an offer to enter into an agreement for disposition by additional contributions from its participants may of the participation interest or an application be invalidated if it was intended not to raise funds to withdraw as a participant; the participation interest (including when there is no such need), but rather is repurchased pursuant to a timely request from to diminish the participation interests of participants the participant through payment to the latter of that disagree with such resolution and are not the fair market value of its participation interest; participating in the charter capital increase;  if the value of shares declared by a shareholder  a financial benefit for a company participant itself for mandatory repurchase in connection with may speak to the latter’s bad faith, which, together a resolution on restructuring the company exceeds with harm to the company’s interests, is sufficient 10% of the value of the company’s net assets that grounds for invalidating a resolution of the general may be used for the repurchase of shares under law, meeting. the remaining non-repurchased shares are to be exchanged for shares (participation interests) in the Vicarious liability: restructured company.

 a general director can refuse to implement the Exclusion from a company: resolutions of the general meeting if executing them would harm the company’s interests;  that a participant is inflicting major damage on a company is sufficient grounds for that participant’s  a general director referring to the implementation removal from the company, regardless of whether of a resolution of the general meeting does not the effects of the wrongdoing can be countered release him/her from responsibility for damages without depriving the wrongdoer of the opportunity inflicted on the company. to manage the company;

Major transactions:  a corporate conflict in which the company participants have participatory interests of the same  in order to determine that a transaction is a major size (e.g., a 50/50 split) is not grounds for dismissal transaction, it is necessary to establish that two of an action for removal of a participant from the criteria (quantitative and qualitative)6 were met at the company; time of the transaction; the presence of the latter means that a major transaction is being concluded  a participant with a participation interest greater than in order to cease the company’s business or 50% in a company’s charter capital can also be to materially change the nature or scale thereof; removed as a participant when there are sufficient transactions that do not meet both criteria grounds, since the law does not set any limits on simultaneously are not major transactions (e.g., the size of the participant’s interest in this situation. the court refused to recognize a loan agreement as a major transaction because it was aimed Challenging of transactions: at supporting the company’s conduct of business, rather than the cessation thereof);  when a transaction is being challenged, the publication of a legal entity’s constitutional  in order to invalidate a major transaction, it is document (e.g., on the Internet) is not adequate sufficient if it was not approved, and the other party evidence that the other party knew or must be taken

6 The RF Supreme Court also highlighted the two criteria for a major transaction in paragraph 9 of RF Supreme Court Plenum Ruling No. 27 of June 26, 2018. Moscow 5523426.1 Moscow 5526083.1

to have known about restrictions impacting known about the company’s charter containing a transaction (e.g., about the need to obtain prior provisions on the approval of the transaction consent to the transaction from a governing body in question (including even if the company’s charter of the company); has been published on the Internet).7

 a dispute arising from a standard-form loan 4. Company officers have to carefully evaluate the agreement between a participant (individual) and consequences of executing shareholder resolutions, a company must be settled in a court of general because merely following a shareholder’s requests jurisdiction (unless the loan agreement contains is not grounds for releasing an officer from provisions relating to corporate governance or responsibility for damages that may be inflicted on a the disposition of participation interests company as a result of executing a shareholder’s in the company’s charter capital). resolution. Evaluating these consequences is one of the duties of a company’s officer.8 What are the recommended practical considerations?

1. It is necessary to take note of whether a limited liability company’s charter provides for any other

method to confirm resolutions of the general meeting of participants apart from notarization. If the company participants adopt a resolution to amend the charter in order to include therein any

alternative method of confirming resolutions (apart from notarization), this resolution must be notarized. If an alternative method is defined by resolution of the general meeting of participants (without Contacts amending the charter), this resolution must also be notarized. Vladimir Sokov 2. When a company participant is paid the fair market Partner value of its participation interest in the context of a mandatory repurchase of the participant’s Т: +7 495 644 05 00 interest, no offer to enter into an agreement for E: [email protected] disposition of the participation interest or application

to withdraw as a participant is required. Andrey Glebashev Senior Associate 3. A reference in a contract to the general director acting on the basis of the charter is not conclusive Т: +7 495 644 05 00 evidence that the other party must be taken to have E: [email protected]

7 According to paragraph 22 of RF Supreme Court Plenum Ruling resolution of the collective governing bodies (or the founders No. 25 of June 23, 2015, in general, a person on the governing bodies (participants) of the legal entity) is not grounds for dismissal of a claim of a legal entity has no duty to review the legal entity’s constitutional for recovery of damages from the director, because the director has a document in order to identify limitations on or delineations of the chief separate duty to act in good faith and reasonably for the benefit of the executive officer’s powers. legal entity (Art. 53(3) of the RF Civil Code). 8 According to paragraph 7 of RF Supreme Commercial Court Plenum Ruling No. 62 of July 30, 2013, the mere fact that a director’s action entailing adverse consequences for a legal entity was approved by

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