Russian Supreme Court Prepares Explanations for Business on Transactions Challenging. Commented by Elena Batura for Izvestia

14 june 2018

Russian Supreme Court Prepares Explanations for Business on Transactions Challenging. Commented by Elena Batura for Izvestia

To recognize a transaction major, it is required to observe two conditions simultaneously: the quantitative one (a contract price is less than 25% of the company's assets) and the qualitative one (a transaction should be non-typical for a company). The Supreme Court of the RF prepares such explanations in case of the judicial challenging of transactions in JSC and LLC. This document defines the effective criteria more exactly and brings some innovations. For example, not only lump-sum payments, but also recurring payments may be included to 25% required. Now a claimant have to prove atypicality of a transaction, though earlier it was a defendant's burden. In addition, if a company concealed information on a transaction, it is possible to extend the limitation period on it.

            The Supreme Court prepares explanations on the challenging rules of major and interested party transactions. Today the Supreme Court will consider a relevant draft resolution (available in the Izvestia resolution) during its plenum session.

            Under the effective legislation, unusual transactions for JSC and LLC in the amount of more than 25% of its assets refer to major ones. An interested party transaction is considered the one in making of which, for instance, a member of the company's board of directors or parties actually controlling an enterprise are interested. These types of transactions assume fulfilment of certain requirements upon their execution. For instance, a board of directors (a supervisory board) or a shareholders’ general meeting should approve major transactions.

            A year and a half ago the execution rules were clarified. In particular, the transaction approval procedure was simplified - it was allowed to agree not a certain price, but only a way of its determination. At the same time, the very challenging procedure became tougher. Now only holders having 1% of the company's shares can apply to the court. However, it is possible to bypass this requirement, if minorities unite having collected a required minimum share.

            In 2014, the Supreme Commercial Court (SCC) gave explanations for some issues associated with the challenging of major and interested party transactions. However, since then the procedure for controlling this segment has changed significantly, Evgeny Rozenblat, Attorney of YUST Law Firm, reminded. Nowadays, in order to form a unified law enforcement practice, the updated position of the RF Supreme Court's plenum is required, he noted.

            There is a number of important clarifications in the explanations prepared by the Supreme Court. For instance, the attributes that allow recognizing transactions major are made more specific. To achieve this, it is required to observe two conditions simultaneously. Firstly: transaction value - 25 and more percent of the carrying amount of the company's assets according to accounting statements as of the last reporting date. This condition also includes the agreements that stipulate recurring payments - for tenancy, insurance, storing and other services, if the total amount of payments is more than 25% of the company's assets for all the period. Secondly: the transaction itself is non-typical for the company, namely "it will obviously lead to the dissolution or alternation of its type or a significant change of its size". The Supreme Court clarifies that it may happen, for instance, as a result of sale or commencement of lease of the fixed plant asset. If, due to the transaction, the distribution area of products or the region of activity change significantly, it will be considered non-typical too.

            Furthermore, the Supreme Court clarifies a number of things associated with imputed knowledge of the parties. This factor may affect the courts' decision on recognizing or non-recognizing the transaction valid. If it is not proved that the other party had known or should have known beforehand that the transaction was major and was being made without the approval required, the court dismisses the lawsuit.

            The imputed knowledge takes place, if a contracting party is a shareholder of the company or a party controlling it, the draft resolution said. However, those who wish to challenge the transaction, may refer to other circumstances - for instance, to communications that may prove this fact. At that, the Supreme Court emphasizes that under the law the participants are not obliged to check prior to the transaction whether it is major for contracting parties and whether it is approved, as well as to study the accounting statements of the contracting party to define the carrying amount of assets, types of activities and transaction impact on it.

            The draft resolution also addresses the issue of who should prove typicality or atypicality of the transaction when challenged. Pursuant to the resolution of the Supreme Commercial Court dated 2014, the burden of proving the fact of transaction within the ordinary course of business was borne on a defendant, the attorney Evgeny Rozenblat reminded. It follows from the new explanations that any transaction is considered as made within the ordinary course of business until proven otherwise. And now it is a claimant who will have to prove that it is not so.

Elena Batura, Project Manager of S&K Vertikal Law Firm, noticed that this new document of the Supreme Court describes in more detail how the period of limitation for challenging of transactions should be calculated.

            There is one year for appealing to the court when the shareholder, for instance, became aware of a violation. Earlier the Supreme Court mentioned that the shareholder should be aware of the transaction not later than the annual meeting, if it can be defined from the materials. Now there are exceptions to the rule: if the company's members concealed information on the transaction, the periods of limitation are extended, Elena Batura emphasized.

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