The Judicial Collegium on Economic Disputes of the Supreme Court of the Russian Federation issued a ruling on a number of important issues of corporate law

On 11 June 2020, the Judicial Collegium for Economic Disputes of the Supreme Court of the Russian Federation (JCED) rendered a ruling in case No. 306-ЭС-19-24912 (Ruling) that may have a significant effect on the further application of corporate laws.

Below we provide a brief overview of the key findings contained in the Ruling.

Relationships established in the course of participating in business companies are governed by the presumption of optionality principle

In the Ruling the JCED makes a very important conclusion on the optionality of relationships of participation in business companies, which is based on the position of the Constitutional Court of the Russian Federation (CSRF) set out in Ruling No. 1564-O of 3 July 2014. In that ruling, the CSRF stated that the nature of business companies is based on the economic self-determination of citizens and on self-regulation.

According to the JCED's position, due to the presumption of optionality, all rules relating to restrictions on the disposal of participation interest in the charter capital to third parties, including pre-emptive rights to purchase a participation interest, may be changed or completely cancelled in the company charter. Therefore, the JCED's position expressed in the Ruling is intended to resolve the dispute existing in the legal doctrine and law enforcement practice involving the possibility of excluding from the charter the participants' pre-emptive right to purchase participation interest in charter capital of a limited liability company.

As a reminder, the discussion regarding this issue arose, inter alia, after Order dated 1 August 2018 No. 411 of the Ministry of Economic Development of Russia, whereby the Ministry approved 36 model charters under which limited liability companies can act. Some of them contained provisions to the effect that company participants do not have a pre-emptive right to purchase participation interest (or part thereof) when such interest is disposed of to third parties.

In light of the foregoing, the JCED offers broad prospects for the further development of law enforcement, inter alia, in the area of a company charter changing the statutory rule on the pre-emptive right to purchase a participation interest.

The charter of a business company is a transaction

The JCED has reached the conclusion that the charter of a business company or a resolution of the general meeting of participants at which such charter (or amendments thereto) is approved are a special type of transaction. The general provisions of the Civil Code of the Russian Federation (CCRF) relating to transactions (including the provisions of paragraph 2 of article 168 of the CCRF on the voidness of transactions violating the requirements of law and public order) apply to resolutions of the general meeting of participants (as a special type of transaction) to the extent they are not contrary to the essence of provisions specifically regulating such resolutions.

It should be noted that this is not the only case in which the court has recognised the transactional nature of a business company's charter. For instance, we are aware of the resolution of the First Arbitrazh Court of Appeal in case No. 43-14409/2018 of 2 December 2019 in which the court stated that the charter, being a constitutional document based on the founders' agreement, is a multilateral corporate transaction to which the civil law rules on transactions and the invalidity of transactions are applicable.

However, up to present, the Supreme Court of the Russian Federation has not expressed an equivalent or similar position on this issue. Before the Ruling, the JCED's practice was that for certain provisions of the charter to be recognised invalid, it was necessary to prove that the general meeting of participants/shareholders at which the version of the charter being challenged was adopted was held with violations of legislative requirements. For instance, in Ruling of the Supreme Court of the Russian Federation No. 308-ЭС18-718 in case No. А53-33143/2016 of 16 March 2018 and Ruling of the Supreme Court of the Russian Federation No. 310-ЭС18-1059 in case No. А83-8105/2016 of 19 March 2018, the court refused to invalidate the provisions of charters of joint stock companies, since the restated charters were approved at general meetings of shareholders in compliance with the requirements of law and with the charters themselves in relation to the quorum necessary for deciding on an agenda item to approve the restated charters.

Therefore, the interpretation set out in the Ruling may result in much broader chances of charters of business companies being challenged, as participants will be able to challenge the provisions of the charter, including where such provisions are contrary to rules of law or the essence of legislative regulation.

Provisions of the charter on the pre-emptive right to purchase a participation interest in the charter capital at a pre-determined price where the company participants do not have the right to exit may not remain in effect indefinitely

According to the JCED, provisions of a limited liability company's charter on the pre-emptive right to purchase participation interest at a pre-determined price where the company participants do not have the right to exit may not remain in effect indefinitely and will be deemed void for being contrary to the essence of legislative regulation.

The basis of such position of the JCED is that the pre-emptive right provisions of the charter cannot fully deprive participants of the possibility of recovering their investments. According to the JCED, from the perspective of the balance of interests, restrictions on the disposal of participation interest are only permissible for a reasonably short period of time (eg the economically foreseeable payback period or technology lead time).