From January 1st 2017 the order of contesting of major transactions and related party transactions will change

TRANSACTION
Major transactions and related party transactions

From January 1st 2017 the Federal law from 03.07.2016 No. 343-FZ “On amendments to the Federal law “On joint stock companies” and Federal law “On limited liability companies” shall enter into force (the regulation of major transactions and related party transactions in which conernment exists)” signed by the President Putin on 3rd of July 2016.

The adopted law is aimed at improving such institutions as major transactions and related transactions in which there is an conernment exists.

The first thing one should pay attention to is the change in the qualification of the transaction – what the transaction should be considered a major and a related party transaction. In particular, the definition of related-party transactions excluded such a thing as “affiliates”. We will now use the concept of “controlling person” and “controlled entity” as defined by Federal law “On securities market” as amended, in effect as of July 1, 2016, the Federal law of June 29, 2015 N 210-FZ (p. 1. article 81 of the Federal Law “On Joint stock companies”, p. 1. article 45 of the Federal Law  “On Limited liability companies”). With regards to major transactions it clarifies the scope of the circumstances under which the transaction price the book value of which exceeds 25% of the book value of the company assets will be recognized as major transaction (p. 1. article 78 of the Law “On Joint stock companies”, p. 1. article 46 of the Law on “limited liability companies”). For example, among the transactions for which consent will need to be obtained are the rent and use of results of intellectual activity and means of individualization under the terms of the license.

A notable addition is also the fact that the company’s Charter may stipulate the necessity of obtaining the consent of the Board of Directors (Supervisory Board) of the company or the General meeting of participants or shareholders of the company in respect of certain transactions, as well as the possibility of establishing different from the statutory procedures for approving related party transactions. It is enough to set those procedures for such approval in the company’s Charter or that such provisions do not apply to this company (item 2 of article 69 of the Law “On joint stock companies”, clause 3.1. article 40 of the Law “On LLC”).

Mandatory prior consent to transactions with related parties is now abolished (p. 1. article 83 of the Law “On joint stock companies”, clause 4, article 45 of the Law “On LLC”). In the current edition of the Laws prior consent is not mentioned, but the fact of the endorsement is mandatory with the stipulation of the admissibility of the subsequent approval. Thus, in this part, the legislator has made corrections on the basis of existing practice, when the approval of the transaction was confirmed after its commission. In addition, the Law does not require the approval of major transactions and related party transactions to purchase shares or other securities convertible into shares of public companies, concluded on the terms provided for mandatory offer to acquire, shares or other securities convertible into shares of public companies and in the relations arising from the transfer of rights to property in the process of reorganization and the transition of the share or parts of shares in its authorized capital (p. 3. article 78 of the Law “On joint stock companies”, clause 7 of article 46 of the Law “On LLC”).

The right of judicial contesting of major transactions and related party transactions arises from the moment of the entry into force of the changes and will belong only to the shareholders and members possessing not less than 1% of the voting shares or the total number of votes of the company. Thus, according to the new norms, association of members and shareholders in order to achieve the minimum requirement (if separate share of their participation is less than 1%) is permissible. In the current version there is no such restriction and the right to appeal belongs to every shareholder and member of the company (p. 6. article 78, paragraph 1, article 83 of the Law “On joint stock companies”, clause 4, article 45, clause 4, article 46 of the Law “On LLC”).

In addition, there is a change in the rules of recognition of transactions being invalid. The transaction can be recognized as such if it is proven that the other party to the transaction knew or should have known that the transaction is a major one or it os a related party transaction (PP. 6.1, article 79, clause 1. article 84 of the Law “On joint stock companies”, clause 6, article 45, paragraph 5 of article 46 of the Law “On LLC”). A distinctive moment for invalidation of transactions is only that in the absence of consent to a major transaction, the court must comply with such request, and in the case of related party transactions such consent is not grounds for invalidation. At the same time do not forget that if the transaction with replated party must have consent to its commission based on the requirements stipulated by the company’s Charter – in this case it can also be challenged (p. 2. article 69 of the Law “On joint stock companies”, PP. 3.1. article 40 of the Law “On LLC”).

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