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03 09 / 16

The approval procedure for major transactions has changed. How to work under the new rules

The approval procedure for major transactions has changed. How to work under the new rules

Expert: Kliment Rusakomskystrong>

Managing partner of Legal Group «Paradigma»

Source: magazine «The Corporate Lawyer»

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 On January 1, 2017 new rules for coordination and approval of major transactions, related party transactions will come into force. The list and criteria of major transactions will expand, the order of their approval will change. The process of determining the cost of a major transaction and signs of affiliation will become more clear. The decision on approval will now be called "consent to the transaction" and will have mandatory content requirements. LLC and JSC still have a few more months to prepare thoroughly for innovations.

Simple paragraphs of the laws regarding the transaction approval procedure have changed and became more detailed. The familiar transaction approval decision has changed its name. It has become a decision on consent to transaction or recognition of the transaction. The restrictive threshold of 1 percent of the voting shares has established for the minority shareholders. It is no longer required to approve an interested party transaction. You just need to send a notification under the established requirements. The usual rules of transaction approval procedure also have changed. How much these changes will affect the current practice is not known yet. But we can explore them in more detail.

The list of major transactions has expanded

At this moment major transactions include only transactions relating to the acquisition, disposal or possibility of disposal of property, the cost of which is 25 and more percent of the company's book value (Art. 78 of the Federal Law of 26.12.95 № 208-FZ "On Joint Stock Companies" hereinafter –Law № 208-FZ, Art. 46 of the Federal Law of 08.02.98 № 14-FZ "On Limited Liability Companies», hereinafter – Law № 14-FZ). The concept of major transactions covers such transactions as purchase and sale, donation, pledge, guarantee, loan and mortgage.

From January 2017 such transactions as transfer of property for temporary possession or use also will be added to major transactions. To a large extent this change is aimed to include a lease agreement in major transactions. The courts used to recognize a rent as a major transaction, but now it will be fixed at the legislative level (sub-paragraph 5 para. 8 of Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation on 05.16.14 № 28 "On some issues relating to the challenging of major transactions and related party transactions", hereafter – Resolution № 28, the decision of Federal Arbitration Court of North-West District dated 18.03.11 № A56-38981/2010).

Intellectual property is also included in the list of major transactions. Back in 2003, the courts annulled the intellectual property transfer agreements. The reason was a violation of the procedure for concluding such transactions (13 Arbitrazh Court of Appeal dated 12.12.07 on the case № A56-21604/2003).

It became easier to determine the cost of a major transaction

A wider collation value of the company's assets to the value of the transaction. The old version only contains a reference to any assignment or purchase of property.


CITING THE DOCUMENT: In case of alienation of, or the possibility of alienation of property with a company's book value matches the value of the property as determined on the basis of accounting records, but in the case of acquisition of property – the price of purchase (sub-paragraph 2 para 1 of Article 79 of the Law № 208-FZ).


The Law № 14-FZ contains similar provisions (para. 2, Art. 46).

The cost of property determined on the basis of accounting records can often be much less than the price of alienation. This lead to abusive practice by persons interested in the transaction. The transaction does not fall under the category of major.

In new version of the article the ratio of a price or book value to the assets of society will be determined due to the nature of the transaction. In case of alienation (or likelihood of alienation) of property asset value is compared with the maximum value (cost or balance sheet value of the alienated property). In the case of transfer for temporary possession the book value of transferred property is deemed to be the value.

For example, the company sells premises for 1 000 000 rubles. The balance sheet value of the property at the time of the sale is 250 000 rubles. The company's assets value at the time of the sale of the premises amounts to 2 000 000 rubles. As a result, the transaction value is 50% of the company's assets value, and it is a major transaction. In case of the transfer of the same property for temporary possession it is not a major transaction, as the ratio of the values (assets value and the balance sheet value) will be 12,5%.

To reduce the number of abuses with the transaction valuation, the new version of the law stipulates that a highest price – book value or price – has an advantage in determining the transaction value (par 1.1 of Art 78 of the Law № 208 -FZ as amended). This rule is intended to protect public interest, since the probability of hitting a deal into the category of major transactions increases.

There is a new concept of control instead of affiliation

Now, instead of the term "affiliate" a new terms "controlling person" and will be used, and "controlled person (controlled company)". These concepts will be needed to determine the signs of interest in the transaction.

A controlling person is understood to be a person who may control more than 50% of the votes in the supreme management body of the controlled company. Or such persons have the right to appoint (elect) a sole executive body and (or) more than 50% of the management board of the controlled company. Controlled person (controlled company) is a legal entity being directly or indirectly controlled by the controlling person (Art. 81 of the Law № 208-FZ, art. 45 of Law № 14 -FZ).

New laws cancel the requirement for prior approval of related party transactions. It is sufficient to notify the Board of Directors not later than 15 days before the date of the transaction. The notice must contain the parties of transaction, beneficiaries, price, subject of the transaction and other essential conditions. The notice also should contain the information on the persons interested in the transaction, and the reasons for which these persons are interested. Articles of association may include the obligation to notify shareholders along with the Board of Directors (Para. 1.1 of art. 81 of the law № 208-FZ, as amended, para. 3 of art. 45 of the Law № 14-FZ as amended).

Now, in preparation for the next general shareholders meeting it will be necessary to prepare a report on the related-party transactions concluded during the reporting year (Art. 82 of the Law № 208-FZ).

A shareholder who has no less than 1 percent of the voting shares, will be able to initiate an approval procedure for allegedly related-party transaction (para. 1, Art. 83 of the Law № 208-FZ as amended). To do this, he needs to send a request to hold a general shareholders meeting to deal with the issue of consent for the related-party transaction. This request is sent and considered in order provided by Art. 55 of the Law № 208-FZ.

The absence of authorization of related-party transaction will not be an independent ground for invalidating such transaction. Two conditions are required for this: the transaction should be executed to the detriment of company interests and it should be proved that the other party knew or should have known that it was a related-party transaction, and (or) that there was no authorization.

Previous to bringing the matter before the court interested parties must request the company for information on the transaction. And company shall provide the necessary information within 20 days of receipt of such request (par. 1, art. 84 of the Law № 208-FZ as amended).

The threshold is set at 1% for minorities

At first glance, new versions of laws restrict the rights of minority members. But there are no limits for them to make statements collectively. It is not prohibited by the legislators.

The biggest criticism by minority shareholders can cause the amended par. 6 of Art. 79 and par. 1 of Art. 84 of the Law № 208-FZ, which sets the threshold for shareholders at 1% to initiate transactions complaints procedure. However, this 1% threshold of the voting shares can be overcome by joint efforts of interested shareholders. For this purpose, shareholders have the opportunity to file a lawsuit challenging the transaction collectively.


CITING THE DOCUMENT: Major transaction made in violation of the consent obtaining procedure can be invalidated (Art. 1731 of Civil Code) on a claim of the company, board member (supervisory board) or its member (-s) or shareholder (-s) holding in their entirety not less than one percent of voting shares. The statute of limitation for challenging major transaction cannot be revived in case of default (para. 6, Art. 79, para. 1, Art. 84 of the Law № 208-FZ as amended).


A similar limit is fixed in the new version of Article 84 of the Law № 208-FZ. To get information on related party transactions, the shareholder is entitled to have at least 1 % of the voting shares.

From a formal point of view, this innovation limits the rights of minority shareholders and reduces the possibility of challenging the transaction. To understand the scale of limitations, it is necessary to recall the existing norms. Thus, para. 6 of Art. 79 of the Law № 208-FZ gives the right to challenge a major transaction to any shareholder, but the court will reject a claim if:  voting of an applicant could not affect the results of the vote (sub-para. 3 para. 6 of Art. 79 of the Law № 208 -FZ);  the applicant cannot prove that the damage has been done to a company or there is a possibility of losses.

To prove that the damage has been done to a joint-stock company or there is a possibility of losses, it is necessary to receive accounting documents and records of proceedings of the board of directors. And it is possible only for shareholders who have not less than 25 per cent of voting shares of the company. This is the real limit.

Please note that from January 2017, these requirements will be excluded from para. 6 of Art. 79 of the Law № 208-FZ. No more need to prove the occurrence of losses or other adverse effects. And the ability of the claimant to influence a vote at the general shareholders meeting will no longer be relevant to the court.

Details in a decision on consent may be a cause for abuse

The transaction approval decision will be known as a decision on consent to transaction or recognition of the transaction. The explanatory note says nothing about the reasons for changing the terminology. The law will now contain all mandatory and optional requirements to the content of the decision on consent to transaction. The obligatory term of consent becomes action. If not specified, the law establishes its duration - year from the date of signing the agreement.

The decision on consent to a major transaction now should contain information about:
-a person who is a party or a beneficiary of the transaction;
-price, subject of the transaction and other essential terms or the procedure of their determination;
-general parameters of the main conditions of the deal that requires the consent of its commission;
-consent to the commission of similar transactions;
-alternatives to the basic conditions of the transaction;
-consent to the transaction in the case of execution of a several transactions at the same time;
-the period during which the consent to the transaction will be in force.

So the structure of the decision on consent to a major transaction will be more complicated and will require special attention during the preparation of the document. Any mistake would entail additional reasons to challenge the transaction. There's also a different situation when the text of the decision on consent to a major transaction will be made with the notorious violations of form. Such violations may become the cause of action for invalidation of transactions.

Cases in which it is not required to obtain consent to a major transaction

The legislator added the list of cases when the provisions of Chapter X of the Law № 208-FZ does not apply (para. 3 of Art. 79 of the Law № 208-FZ, as amended):
-if 100% of the voting shares are held by one person. And this person is a shareholder and the sole executive body of the Company at the same time;
-if transactions are related to the rendering of services on placement (public offering) and (or) arranging of placement (public offering) of company’s shares and convertible issuance securities;
-if transactions are related to the transfer of rights to the property in the process of company’s reorganization, including the merger agreements and acquisition agreements;
-in cases of the conclusion of standard form contracts that are concluded by the company on terms that are not different from other company’s standard form contracts;
-in cases of the acquisition of shares (other convertible issuance securities) of the public company on the basis of transaction concluded on the conditions provided by a mandatory offer to acquire the public company’s shares;
-to the transactions concluded on the same terms and conditions as the previously signed preliminary contract, if there is a consent to the preliminary contract.

This list of exceptions has been brought by the legislator in line with the established court practice on the matter. In general, the court practice has had a significant impact on the changes to the law № 208 -FZ and the Law № 14-FZ regarding the approval procedure for transactions. к.