Russian corporate law has recently been significantly amended.
Amendments have been made to Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998 (the “LLC Law”) and Federal Law No. 208-FZ “On Joint-Stock Companies” dated 26 December 1995 (the “JSC Law”). They are aimed at changing the procedure for regulating, entering into and challenging major transactions and related-party transactions. These amendments, which were made under Federal Law No. 343-FZ “On Amending the LLC Law and the JSC Law” dated 3 July 2016, will come into force on 1 January 2017 (the “Amendments to the LLC Law and the JSC Law”).
The Amendments to the JSC Law, made under Federal Law No. 339-FZ “On Amending the JSC Law” dated 3 July 2016 which came into force on 15 July 2016, provide that shareholders of a JSC may make contributions to its assets in a similar manner to participants of an LLC (the “Amendments to the JSC Law”).
Under the amendments to Federal Law No. 115-FZ “On Combating Money Laundering and Terrorism Financing” dated 7 August 2001, JSCs and LLCs are required to annually update and store the information on their beneficial ownership. A failure to do so will lead to administrative liability. These amendments, which were made under Federal Law No. 215-FZ “On Amending the Money Laundering Law and the Russian Code of Administrative Offences” dated 23 June 2016, will come into effect on 21 December 2016.
More detailed information on the most important changes in the law is set out below.
The Amendments to the LLC Law and the JSC Law are aimed at improving the mechanism of regulating major transactions and related-party transactions.
The “major nature” criterion clarification
Major transactions, effective from 1 January 2017, will include any transactions that are outside the ordinary course of a company’s business and related to the acquisition, disposal or possible disposal of its assets directly or indirectly, or requiring a company to transfer the temporary possession and/or use of its assets, as well as transferring a company’s rights to use intellectual property worth at least 25% of the book value of its assets to third parties.
It should be noted that even now, subject to certain conditions (if the value of the asset to be transferred for temporary possession and use exceeds 25% of a company’s asset value, such asset is used by the company in the ordinary course of its business, the company after entering into a contract will not be able to use the asset for a long period), the courts recognise the lease of an expensive asset as a major transaction. In this context, the legislators have simply upheld the current court practice.
Change in the definition of transactions as “transactions executed in the ordinary course of a company’s business”
The qualification of transactions as “transactions executed in the ordinary course of a company’s business” had to be fundamentally changed. A single approach has been adopted for defining this category of transactions for both LLCs and JSCs. First, “ordinary” transactions mean any transactions that are normally carried out by a company or other business entities engaged in similar activities. Second, irrespective of whether or not a company had entered into such transactions previously, no transaction will be deemed as being outside the ordinary course of its business if it does not result in the cessation of its activities or change in the type of its business or a substantial change in the scope of its operations.
Expanded list of exemptions
Major transactions, starting from 1 January 2017, will also not include any transactions to acquire a public JSC’s securities on the terms of a mandatory offer and any transactions made on the terms of an approved preliminary contract, as well as any transfer of rights to assets upon reorganisation of a company and other deals.
Clarification of the rules for major transactions approval
A resolution on prior or subsequent approval of a major transaction may establish a validity period of such approval. If no period is specified in the resolution, the approval is generally deemed valid for one year after the date when the resolution was adopted.
A resolution may also set out the minimum or maximum parameters of transactions (such as the upper limit for the purchase price of assets or the lower limit for the sale price of assets) or the procedure for their determination, the approval of a number of similar transactions, alternative options for the terms of transactions requiring approval, or the approval of transactions, provided that several transactions are effected concurrently.
The criteria for defining the “related-party nature”
For the purpose of defining a transaction as a related-party deal, the legislators have replaced the term “affiliate” with the term “controlling entity.” The new term refers to any person or organisation that has the right to directly or indirectly control over 50% of the votes in a company’s highest management body and/or appoint the company’s sole executive body or over 50% of the members of its collective executive body.
Therefore, this definition has reduced the number of transactions that may be qualified as related-party deals.
Expanded list of exemptions
The legislators have expanded the list of transactions that do not require approval:
- transactions in the ordinary course of a company’s business, provided that the company has repeatedly and over a long period entered into similar transactions with independent parties on similar terms;
- public placement of a company’s bonds or purchase of its own bonds;
- transactions made on the same terms as those contained in the preliminary contract, if such contract has been approved as a related-party transaction;
- transactions made through or based on the results of public sales, if the terms of such sales had been earlier approved by the company’s board of directors (supervisory board) or a general meeting of the company’s participants (shareholders); and
- transactions involving assets, whose price or book value is up to 0.1% of the book value of the company’s assets.
Clarification of the rules for related-party transactions approval
The legislators have abolished the current requirement that says all related-party transactions must be subject to prior approval. A related-party transaction will no longer be subject to prior approval, unless the company’s sole executive body, a member of the collective executive body, a member of the board of directors or a shareholder (participant) of the company, which holds at least 1% of the company’s voting shares (1% in its charter capital), requires otherwise.
According to the Law, JSCs are required to give a notice of a related-party transaction to the members of their boards of directors, members of their collective executive bodies, and, if all members of the board of directors are interested in the transaction or if the JSC has no board of directors, to the shareholders. LLCs are also required to inform their independent participants and independent board members about a related-party transaction. Such notices must be sent at least 15 days before the transaction date.
JSCs now have a simplified procedure for approving related-party transactions. Previously, such transactions were approved by the majority vote of all the independent shareholders with voting shares. Now the new approval procedure requires a majority vote of all the independent shareholders that have voting shares who are taking part in the vote.
Moreover, the law has increased the threshold value of transactions that are now to be subject to the general meeting’s approval, from 2% to 10% of the book value of the company’s assets.
Challenging major transactions and related-party transactions
As before, the law allows challenging major and related-party transactions that were concluded without obtaining prior approvals. However, the legislators have changed the grounds and procedure for challenging such transactions.
Challenging major transactions
A major transaction may be challenged in accordance with Article 173.1 of the Civil Code of the Russian Federation (the “Russian Civil Code”).
Only JSC’s shareholders/LLC’s participants, who in aggregate have at least 1% of the voting shares/participation interest in the JSC/LLC, have the right to challenge transactions. It is obvious that the new threshold limits the powers of the minority shareholders/participants to control major transactions.
From now on, the courts will reject a claim to invalidate a major transaction, if one of the following criteria is met:
- the transaction was subsequently approved; or
- it was not proved that the other party to the transaction knew or should have known that the transaction constituted a major transaction for the company and/or that the company failed to duly approve the transaction.
Challenging related-party transactions
Related-party transactions may be challenged in accordance with Article 174 (2) of the Russian Civil Code, and may be voided if it is proved that:
- the transaction negatively affects the company’s interests. This is the case when both of the following circumstances exist: (i) neither prior nor subsequent approval was obtained; and (ii), the claimant requested but was not provided with the information on the challenged transaction;
- it was proved that the other party to the transaction knew or should have known that the transaction was a related-party transaction for the company and/or that no prior approval was obtained.
Just as in the case with major transactions, the right to challenge a related-party transaction rests only with the JSC’s shareholders/LLC’s participants, who in aggregate have at least 1% of the voting shares/participation interests in the JSC/LLC.
The new approach to defining “ordinary transactions” will significantly reduce the number of unjustified claims for invalidating transactions, while at the same time providing the good faith parties to such transactions with additional protection against such claims.
Obviously, the procedure for challenging major transactions and related-party transactions is being simplified, as companies are no longer required to prove that such transactions had resulted in losses.
Contributions to a JSC’s assets
From 15 July 2016, a JSC’s shareholders, effective from 15 July 2016, may finance the JSC by making contributions to its assets. A JSC’s shareholders may make gratuitous contributions to the JSC’s assets at any time, which will not increase JSC’s charter capital or change the nominal value of shares. The contributions may be made in cash or in other forms. However, the contributions are limited to monetary funds, goods, participation interests (shares) in other companies, state and municipal bonds, and exclusive rights, other intellectual property rights and rights under licence agreements that can be evaluated.
The contributions may be made pursuant to an agreement between the company and the shareholders or, in the case of non-public JSCs, by a decision of the general meeting of non-public JSC’s shareholders, if the obligation to contribute is set out by the non-public JSC’s charter.
Agreement between shareholders and their company
Generally, the agreements for contributions to a JSC’s assets require a prior approval of the board of directors (supervisory board). The provisions of the civil law on donations do not apply to such agreements.
Resolutions of the general meeting of a non-public JSC’s shareholders
The charter of a non-public JSC may provide for the maximum amount of contributions and other related limitations, such as restricting imposing the obligationthe right to make contributions to the company’s assets only toon the shareholders that own a certain category (type) of shares or thatmaking such contributions could be made other than on a pro rata basis.
The newly introduced right to make contributions to a JSC’s assets, which is similar to the right of the LLC’s participants, will help improve the financial position of a JSC without the need to increase its charter capital.
If a shareholder evades the obligation to contribute to a non-public JSC’s assets, a court claim may be brought against that shareholder by another shareholder of the non-public JSC or by the company itself.
Mandatory disclosure and keeping beneficial ownership information
All legal entities must, starting from 21 December 2016, have all the information on their beneficial owners and keep it for at least five years after obtaining such information.
The beneficial ownership information must be updated at least once a year. Legal entities must establish the following details of their beneficial owners, i.e. individuals who ultimately, directly or indirectly, own (have a predominant share of more than 25% in the charter capital) of the legal entity or have the ability to control its actions:
- surname, name, patronymic name (if any);
- date of birth;
- details of his identification document;
- details of the migration card, a document confirming the right of a foreigner or a stateless person to legally stay (reside) in Russia, the address of the place of his residency (registration) or temporary stay in the country; and
- taxpayer’s identification number (if any).
If requested by the tax or other competent authorities, the legal entities must submit their beneficial ownership information and other related documents.
Legal entities’ failure to identify, submit, update and keep their beneficial ownership information will lead to administrative liability and payment of a fine, ranging from RUB 100,000 to RUB 500,000 (approx. EUR 1,370 to EUR 6,850).
We recommend that companies thoroughly review these amendments and take them into account when doing business in Russia. Specifically, they need to pay special attention to the new rules for approving major and related-party transactions, the procedure for challenging related-party transactions and the legal entities’ new obligations to report such transactions and submit their beneficial ownership information to the competent authorities.