Russia: New Rules on Approvals of Certain Corporate Actions

November 08, 2016

The new rules, which take effect on 1 January 2017, will apply to both limited liability and stock companies.

Russia recently changed the laws governing the approval of certain corporate actions.

Certain actions by Russian companies—including limited liability companies and stock companies—require special procedures for approval. Generally, transactions that exceed certain thresholds or fit certain other criteria are categorized as “major transactions” (for large transactions) or “interested party transactions” (where a shareholder or other related person is conducting business with a company). Failure to obtain the requisite approvals may result in the transaction being deemed invalid, along with other negative consequences. The rules and procedures for such approvals are potentially complicated and, in some cases, have been subject to conflicting interpretations.

Recent amendments (as set forth in Federal Law No. 343-FZ dated 3 July 2016) have sought to clarify the situation. The new rules will apply to both limited liability and stock companies and will take effect on 1 January 2017. The key changes from current law include those listed below.

Major Transactions

  • The key criterion for a major transaction remains the same as before: the value of the assets involved must equal or exceed 25% of the book value of a company’s assets.
  • However, new rules clarify how to determine the assets’ value, depending on the type of transaction. This is equal to

– the assets’ purchase price, for an acquisition;

– the greater of book value or sale price, for a sale; and

– the book value, for a temporary transfer.

  • In addition to the sale and purchase of assets, “major transactions” now expressly include leases, transfers of assets for temporary possession or use, and license agreements.
  • Transactions within a company’s “ordinary course of business” are excluded from the definition of “major transactions.” These include transactions common for a particular company’s business or any other entity that conducts similar business, and that do not result in the business’s termination, a change in the type of business, or a material change in its scale.
  • There are some additions to existing carve-outs (for example, no approval is currently required for certain transactions involving a company with only one shareholder who is the company’s general director). Newly exempted transactions include standard-form (“public”) contracts, mandatory tender offers for shares, and certain contracts where a corresponding “preliminary agreement” was already approved as a major transaction.
  • A major transaction entered into without requisite approval may be challenged in court by the company or any member of the board of directors or shareholder(s) who has 1% or more equity interest in the company. The court may refuse to invalidate the transaction if the court has been presented with an approval obtained after the transaction is concluded or it has not been proved that the other party to the transaction knew or should have known that there was no prior approval or that this was a major transaction.
  • One other change is designed to enhance corporate governance, but will reduce flexibility for management: company charters will no longer be allowed to contain a standing waiver of requirements for major transaction approvals.

Interested Party Transactions

  • Currently, any transaction between a company and its “affiliated person” is treated as an interested party transaction, requiring approval by disinterested shareholders or board members. However, the existing definition of an “affiliated person” is rather broad and has given rise to many questions and some controversies.
  • The new amendments replace the term “affiliate” with the concept of “control” and establish an exhaustive list of persons who are considered “controlling,” along with the criteria for determining the requisite “interest” in a transaction. (Company charters will no longer be allowed to establish additional criteria.)
  • The minimum value of interested party transactions that require consent will increase to 10% or more of the book value of a company’s assets (currently, the threshold is 2%).
  • Another major change is that prior approval of an interested party transaction will no longer be required. Instead, a company must notify the members of the board of directors and management board (and the shareholders, in certain cases) of a proposed transaction at least 15 days prior to its execution. The general director, any member of the board of directors or the management board, or shareholder(s) who have 1% or more equity interest in the company may then request that the requisite consent be sought prior to execution. If they do not, the transaction may proceed, and no subsequent approval is required.
  • If a company enters into an interested party transaction without consent, any member of the board of directors or shareholder(s) who has 1% or more equity interest in the company may request that it provide further information concerning the transaction and corresponding documentation to confirm that the transaction has not damaged the company’s interests. If the response is not satisfactory, the requesting person(s) may challenge the transaction in court. The court may invalidate the transaction if it is shown to be  detrimental to the company’s interests and if the other party to the transaction knew or should have known that there was no consent or that this was an interested party transaction. Importantly, without such a court decision, the mere absence of consent does not make the interested party transaction invalid per se.
  • The amendments also grant additional flexibility to limited liability companies and nonpublic stock companies: their charters may provide for an approval procedure different from what is stated in the law or may even waive the approval requirements entirely for interested party transactions.
  • The amendments also introduce further exemptions from the approval requirement (currently, certain matters are exempted, such as transfers of assets during reorganizations and transactions by a company with only one shareholder). The new exemptions cover transactions within a company’s ordinary course of business, transactions with a value below 0.1% of the book value of the company’s assets, contracts pursuant to public tenders, and certain contracts where a corresponding “preliminary agreement” was already approved as an interested party transaction.

What Should Companies Do to Benefit from the Changes?

Most company charters already contain detailed rules on approvals for major and interested party transactions. After 1 January 2017, certain of these provisions may no longer be valid, such as waivers of approval for major transactions or requirements that interested party transactions be approved in advance. There is no formal requirement to update and reregister company charters to reflect the new amendments. However, for clarity and to avoid confusion or disagreements, companies should review existing charters and determine whether registering amendments to reflect the new rules would be useful. This may be especially important for companies such as joint ventures that have minority shareholder protections or other nonstandard corporate governance arrangements.