Changes in legislation affecting major and interested party transactions

Intercomp informs that the amendments affecting major and interested party transactions will take on January 1, 2017 [1].

A Major Transaction As It Is Now

As defined by the legislation currently in effect, a major transaction is a transaction associated with the acquisition, alienation, or possible alienation, directly or indirectly, of assets whose value is 25% or more of the book value of the assets of a company.

A company’s articles of association may also indicate other transactions that the company will consider as major transactions.

    Exemptions from the general rule are:
  • Transactions made in the ordinary course of business of a company;
  • Transactions associated with the placement of a company’s shares, the issuance of securities convertible into a company’s shares; and
  • Transactions that a company is required to make by virtue of law.
    Generally, major transactions must be approved before they are made. Furthermore:
  • Transactions whose subject is assets valued at 25% to 50% of the book value of the assets of a company are subject to the approval of the board of directors (if this matter falls within its competence); and
  • Transactions whose subject is assets valued at over 50% of the book value of the assets of a company are subject to the approval of the general meeting of shareholders or members of a company.

A Major Transaction As Amended

As defined by the amended legislation, a major transaction is a transaction that is outside the ordinary course of business of a company. Furthermore, it must meet one of the two criteria:
  • A transaction is associated with the acquisition, alienation, or possible alienation, directly or indirectly, of assets whose price or book value is 25% or more of the book value of the assets of a company;
  • A transaction binds a company to transfer assets for temporary possession or use or grant to a third party the right to use a result of intellectual activity or a means of individualization on the terms of a license, whose price or book value is 25% or more of the book value of the assets of a company.
Accordingly, the legislator has made critical for a transaction to be recognized as a major transaction whether or not it is outside the ordinary course of business of a company. Moreover, it is the first time that law has defined a transaction that is not outside the ordinary course of business. Such transactions are transactions that are customary for the activities of a company or other business entities engaged in similar types of activities, irrespective of whether the company has made such transactions before, if such transactions do not result in the termination of the activities of the company or the change of their type or a significant change in their scale.

The procedure for approving a major transaction remains unchanged.

An Interested Party Transaction

As defined by the legislation currently in effect, an interested party transaction is a transaction in which the following persons have an interest: a member of the board of directors, a chief executive officer (general director), a member of a company holding 20% or more of shares or interests in a company, or a person that has the right to give binding directives to a company.

There is an interest in a transaction if these persons, as well as their spouses, parents, children, full and half-siblings, adoptive parents and adopted children and their affiliates:
  • are parties to such a transaction, a beneficiary, an intermediary, or a representative;
  • hold (each of them individually or collectively) 20% or more of the shares (interests, stocks) in a legal entity that is a party, a beneficiary, an intermediary, or a representative in the transaction;
  • hold positions in the management bodies of a legal entity that is a party, a beneficiary, an intermediary, or a representative in the transaction, or positions in the management bodies of a managing organization of such a legal entity;
  • in other cases, if so provided for by the articles of association.
Before the amendments take effect, interested party transactions must also be approved before being made. Generally, such transactions are approved by the board of directors by a simple majority vote of uninterested members of the board of directors (if this matter falls within its competence).

An interested party transaction must be approved by the general meeting of shareholders or members:
  • if its subject is assets valued at 2% or more of the book value of the assets of a company;
  • if its subject is the placement of shares by subscription or sale that represent more than 2% of the ordinary shares of a company;
  • if its subject is the placement of issuable securities convertible into shares that may be converted into shares that represent more than 2% of the ordinary shares of a company.
An exemption from the above rule is a situation in which a transaction is not outside the ordinary course of business of a company.

An Interested Party Transaction As Amended

As defined by the amended legislation, in addition to the above, an interested party transaction is a transaction whereby a member of the board of directors, the general director, or a shareholder of a company is a controlling person of another legal entity. The law uses the term “control,” rather than “affiliation.” In this law, the term “control” means the ability to control, directly or indirectly, 50% or more of votes in a supreme management body of an organization and the right to appoint a chief executive officer or more than 50% of the members of a collegiate management body.

In some cases, the term “control” may also mean a situation in which a person may control 20% or more of votes. This relates to companies included on a list of strategic companies and enterprises approved by an executive order of the Russian President.

A significant change is the provision that no mandatory prior consent will any longer be required to make an interested party transaction. A prior consent to make such a transaction may be obtained at the request of the general director, a member of the board of directors, or a member of a company holding at least 1% of voting shares or interests in a company.

The law also expands the competence of the board of directors when it comes to the approval of interested party transactions. After the amendments take effect, the board of directors will approve interested party transactions whose subject is valued at up to 10% of the book value of assets.

Significance of Amendments

The legislative regulation of major transactions and interested party transactions has sustained significant changes. Generally, the changes are aimed at allowing companies greater freedom to enter into such transactions without the approval of the board of directors or the general meeting of shareholders.

As to major transactions, the law places special emphasis on whether or not a transaction is outside the ordinary course of business of a company, and makes this the key criterion for a transaction to be recognized as a major transaction.

In the case of interested party transactions, the law makes it generally unnecessary to seek the approval of such transactions.

Recommendations

Legal entities, company shareholders, and members are recommended to:
  • Modify and/or amend their articles of association if there arises any conflict with the new rules;
  • Take into consideration the new rules for the approval of transactions; and
  • Pay attention to judicial practice and judicial clarifications on disputable aspects of the amended legislation after the amendments take effect.
Intercomp specialists would be pleased to:
  • Check whether the provisions of the articles of association are in compliance with the laws currently in effect;
  • Modify and/or amend the articles of association; and
  • Provide advice on important issues relating to corporate law.
This Information Bulletin is not a substitute for professional legal advice that always requires up-to-date and specific information about the client’s situation.

[ 1] Federal Law No. 343-FZ On the Amendment of the Federal Law On Joint-Stock Companies and of the Federal Law On Limited Liability Companies dated July 3, 2016