Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation “Оn several issues related to challenging major transactions and interested-party transactions”

15.07.2014

Information Letter No. 471

This material has been prepared on the basis of legal acts as of 16 May 2014

Goltsblat BLP advises that Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation dated 16 May 2014 No. 28 “On several issues related to challenging major transactions and interested-party transactions” (hereinafter the “Resolution”) has been adopted.

The Resolution contains useful clarifications on conclusion and recognition of major transactions and interested-party transactions involving business entities, state and municipal unitary enterprises, cooperatives, autonomous institutions and other non-profit organisations (hereinafter the “Extraordinary transactions”), as well as current issues on challenging these.

Circumstances subject to proof

The Resolution stipulates that the person filing a lawsuit seeking invalidity of an Extraordinary transaction on the basis of it being made in violation of the approval procedure must argue existence of the following circumstances:

  • attributes of an Extraordinary transaction, as well as violation of its approval procedure; and
  • infringement by the transaction of the rights or legitimate interests of an entity or its participants (shareholders).

Absence of infringement of such rights and interests may be attested by, among other things, the following:

  • the consideration under the transaction was equivalent to the property disposed of ;
  • the transaction was made to preclude even greater losses; and
  • the transaction, even though unprofitable in itself, was part of a series of related transactions united by a common commercial goal engendering profits for the entity.

That said, account should be taken of the fact that a resolution of the General Participants’ (Shareholders’) Meeting on statutory approval of an Extraordinary transaction does not equal invalidation, pursuant to clause 2, article 174 of the Civil Code of the Russian Federation, of such a transaction that runs counter to the entity’s interests, if it is proven that the other party to the transaction knew or should have known of the apparent detriment to the entity or there were other circumstances indicating collusion or other joint actions of the representative or the entity’s body and the other party to the transaction to the detriment of the interests of the representee or of the entity.

Dismissal of a claim for invalidation of an Extraordinary transaction filed by a participant or the entity does not preclude these persons from claiming indemnification suffered by the entity a claim being satisfied for expulsion from the entity of the participant that directly concluded the transaction or voted for its approval at the General Participants’ Meeting.

The meaning of “ordinary course of business” is disclosed

The Resolution states that “ordinary course of business” should be understood to mean any operations that are standard for the current activities of the relevant entity or other commercial entities involved in equivalent activities, similar in the amount of assets and turnover volume, irrespective of whether such transactions have been concluded by the entity previously.

Yet, the basis for classifying a transaction as having been concluded in the ordinary course of business may not consist merely in conclusion of the transaction within the scope of the type of activity indicated in the Unified State Register of Legal Entities or the entity’s Articles of Association as its core activity or in the entity being licensed to perform this type of activity.

Content of a resolution approving an Extraordinary transaction

It is clarified that a resolution approving an Extraordinary transaction may contain a reference to:

  • general parameters of the principal conditions of the transaction subject to approval;
  • alternative versions of the principal conditions of the relevant transaction;
  • permissibility of concluding only a few transactions simultaneously; and
  • validity of the approval of the relevant transaction, in the absence of which the approval is deemed valid for a period of 1 (one) year from the date of its receipt.

Interrelated transactions

When qualifying several transactions as being interrelated, account should be taken of the fact that interrelatedness may be indicated by, among other things, pursuit of a common commercial goal in concluding the transaction, common commercial purpose of the sold property, consolidation of the entire property disposed of under the transactions in the hands of a single person, and a short time between conclusion of these transactions.

Even so, to determine whether a transaction consisting of several interrelated transactions may be qualified as a major one, the value of the property disposed of under all the interrelated transactions should be compared with the book value of the assets on the last reporting date, which is the date of the balance sheet preceding conclusion of the first transaction.

Extension of grounds for a transaction being classed as a major one

The Resolution stipulates that an agreement stating the entity’s obligation to sign over temporary title to property and (or) use thereof may be qualified by the courts as a major transaction if the following conditions exist in aggregate:

  • the value of the property assigned to temporary ownership and use equals over 25% of the entity’s asset value;
  • this property is used by the entity in its core business; and
  • as a result of conclusion of the agreement, the entity is denied use of this property for extended lengths of time (for example, for over 5 (five) years).

Qualification of an employment contract as a major transaction

The Resolution confirms the option of classing an employment contract as a major transaction if such contract provides for payments (single or recurring) to the employee in the event of dismissal and (or) other circumstances or for salary payments for the duration of the employment contract equal to 25% or more of the book value of the entity’s assets. Even so, the accounting period for the purposes of qualification of an open-end employment contract as a major transaction should be considered as 1 (one) year.

Yet infringement upon the legal entity’s interests through conclusion of such an employment contract must be established by evaluating the extent to which its conditions meet the standard clauses of employment contracts made with experts of an equivalent background and a relevant professional level, taking into account the nature of the employees’ responsibilities, including non-disclosure of information, non-competition following dismissal, the scale and profitability of the business, etc.

Applicants

The Resolution clarifies that a participant in an entity may apply for nullification of an Extraordinary transaction whether or not it was a participant of the said entity when the transaction was concluded.

Even so, it should be considered that the statute of limitations for claims by such participants runs from the day when the predecessor to the entity’s participant learned or should have learned about conclusion of an Extraordinary transaction in violation of the approval procedure.

This alert has been prepared with the assistance of Mikhail Filatov, Junior Associate, Corporate/ M&A practice, Goltsblat BLP. 

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