Russian Federation: Russian Law Developments

New rules for entering into transactions in Russia

Starting from January 01, 2017 the procedure for concluding major and interested party transactions in joint-stock companies and limited liability companies has changed substantially. These changes have been introduced by the Federal Law No.343-FZ dated July 03, 2016. It should be noted that transactions involving limited liability companies and joint-stock companies are regulated in a slightly different manner. Please find below the general overview of the key changes.

Major transactions

A transaction is considered a 'major transaction' of a company if it is outside the scope of its normal economic activities. In determining whether a particular transaction can be characterized in this way, it is not determinative that similar transactions have previously been carried out by the relevant company. A number of transactions that may otherwise be considered major transactions are specifically excluded from the requirement for such approval (e.g., transactions carried out in the process of reorganization).

When taking a decision on whether to approve a transaction, shareholders may establish the parameters for such an approval. For example, an approval can set the upper and lower limits for the price for the purchase or sale of an asset (or set the procedure for determination of such limits); approve entry into a series of similar transactions; approve alternative terms and conditions of a transaction or approve a major transaction subject to execution of several transactions concurrently. An approval may also set the term of its validity (by default an approval is valid for one year only).

A major transaction may be concluded after getting a preliminary consent to its performance (obtaining such a consent may serve as the condition precedent for the transaction). At the same time, a completed transaction which is later approved shall also be valid.

The requirements for challenging major transactions have also been revised. In particular, now only the shareholders (participants) possessing in aggregate at least 1% of the voting shares in the Company (or 1% of the votes attached to the participation interests) are entitled to challenge a transaction entered into by the company. Prior to the amendments, any shareholder or participant in the company enjoyed such a right.

Interested party transactions

The test for determining whether a transaction qualifies as an 'interested party transaction' has been amended. Previously, any transaction with persons falling within the concept of "affiliated persons" was considered an interested party transaction. This formulation has been replaced with the concept of a transaction entered into with a "controlling person" and/or a "person under control". A controlling person is a person who has the right to dispose directly or through persons under its control (i.e., indirectly) over 50 per cent of votes in the supreme management body of the entity on certain grounds or has the right to appoint or elect a sole executive body or over 50 per cent of the members of the collective management body. Notwithstanding these amendments, a number of transactions that may otherwise be considered interested party transactions are specifically excluded from the requirement for approval.

The general requirement to have mandatory preliminary consent for entry into interested party transactions has been removed. Instead, the company is required to notify the interested participants, members of the board of directors and members of the collective management body (and in certain cases - the shareholders). In addition, the company participants (shareholders) must receive a report prior to the annual meeting which details all the interested party transactions entered into by the company in the relevant year.

Certain persons designated by the law may expressly demand approval of an interested party transaction. Such persons include a general director, a member of the board of directors and of the collective management body, as well as shareholders (participants) possessing in aggregate at least 1% of the company's voting shares (participation interests in the charter capital).

In a non-public company the procedure for approval of an interested party transaction may be modified by the charter.

The shareholders (participants) possessing in the aggregate at least 1% of the company's voting shares (of the total number of the company participants' votes) are entitled to challenge an interested party transaction subject to availability of the grounds set by the law. Prior to the amendments, any shareholder or participant in the company enjoyed such a right.

Approval of other transactions

In addition to the above, the charter of the company may require an internal corporate approval to be obtained in respect of certain transactions specified in the charter. A transaction may be challenged if such a consent is not obtained.

Contributions to assets in joint-stock companies finally permitted

In 2016, important changes were introduced into the Russian legislation on joint-stock companies which enable shareholders to make contributions to the assets of joint-stock companies without an increase of the charter capital or change of par value of the shares. Although previously such financing mechanisms were not uncommon in practice, their lawfulness and validity were in doubt and were often the subject of disputes.

Starting from July 15, 2016, Federal Law No.339-FZ dated July 03, 2016 "On Amending the Federal Law on Joint-Stock Companies" expands the methods by which shareholders may provide financial and other support to joint-stock companies. Gratuitous contributions may now be made by a shareholder on the basis of an agreement to be executed between the shareholder and the company. The charter of a non-public company may provide that a shareholder is required to make contributions to the assets of the company and/or set limitation which apply to such contributions.

Russian Supreme Court comments on liability

On March 24, 2016 the Russian Supreme Court adopted Ruling No.7 "On application by courts of certain provisions of the Civil Code of the Russian Federation relating to liability for breach of obligations" (the "Ruling").

The Ruling is aimed at clarifying a number of issues regarding liability for breach of obligations and other liability issues, which arise from amendments to Part 1 of the Civil Code of the Russian Federation which came into force on June 01, 2015 (the "Civil Code").

Compensation of damages

The Ruling is aimed at making compensation of damages a more effective tool by simplifying the procedure for proving loss of profits in court proceedings. In particular, the Supreme Court clarified that in evidencing an amount of lost profit, creditors have the right to submit not only proof of claims/actions and their efforts to remedy such loss, but also any other evidence they may possess. For instance, a calculation of loss based on the profit the claimant received before the obligation was violated may be presented as evidence.

The Ruling is also aimed at reducing to a certain extent the difficulty of proving a causal connection between a breach and the resulting damages in court proceedings. The Supreme Court emphasised the standard of proof required for establishing damages, clarifying that when an amount of damages is proven, it is sufficient to prove their existence to a reasonable level of certainty. The Supreme Court also introduced a presumption of the existence of a causal connection where the claimant proves that the damages it has incurred are a typical consequence of a breach of the relevant obligation.

The Supreme Court also clarified the rules and standards for the application of the provisions on force majeure. The Supreme Court emphasised that debtors must take all reasonable steps to mitigate any losses that may be caused to their creditors by force majeure circumstances.

Compensation of losses

"Compensation of losses" is a new concept of Russian law which is to a certain extent similar to the concept of an indemnity under English law. The Supreme Court elaborated on how the courts shall apply these new provisions (article 406.1 of the Civil Code).

The parties to a contract may, by mutual agreement, provide for an obligation of one party to compensate another party for losses arising in connection with the execution, amendment or termination of the contract or otherwise related to the subject matter of the contract, but not for any losses resulting from a breach of the contract. In its Ruling, the Supreme Court emphasised that such losses may be reimbursed if the claimant proves the following: (i) it has already incurred the losses or will inevitably incur them in the future; and (ii) there exists a causal connection between the occurrence of a certain event specified in the contract and the losses the claimant incurred.

Pre-contractual liability (culpa in contrahendo)

The Supreme Court clarified certain provisions concerning negotiations conducted in bad faith (article 434.1 of the Civil Code). In particular, a presumption that the parties to a negotiation have acted in good faith has been introduced. The burden of proof in providing bad faith rests on the plaintiff claiming damages from the other negotiating party. The Supreme Court specifically points out that terminating negotiations without presenting any grounds for such termination cannot be treated per se as an evidence of a party's bad faith.

Failure to perform monetary obligation

The Ruling contains a number of clarifications on the application of article 395 of the Civil Code regulating interest payable on monetary amounts due. The Ruling notes that interest under article 395 of the Civil Code is generally not recoverable if a contract establishes a penalty for violating a monetary obligation.

In addition, the Supreme Court distinguished between the application of article 395 of the Civil Code and article 317.1 of the Civil Code. It clarified that interest under article 317.1 of the Civil Code is not a liability measure but is instead a payment for the use of monetary funds and accordingly that the accrual of interest under article 395 of the Civil Code does not influence the accrual of interest under article 317.1 of the Civil Code.

Judicial penalty (astreinte)

The Supreme Court clarified that a judicial penalty is not applicable to monetary obligations or in disputes arising from administrative, labour, pension, social support, family or personal relationships. The Ruling states that a judicial penalty is only applicable in case of failure to perform civil obligations and actions seeking specific performance.

Mandatory storage of data on beneficiaries

Russian legislation on money laundering was recently amended to provide for an obligation for legal entities to keep information on the identity of their beneficiaries. For the purposes of anti-money laundering legislation a beneficiary is defined as (a) an individual directly or indirectly holding 25 per cent in a legal entity or (b) an individual who has a right of control over a legal entity. An exception from the above requirement is made for state bodies, state corporations and organizations with state and municipal ownership in the charter capital exceeding 50 per cent, some international organisations, foreign publicly listed companies, foreign establishments which do not have a form of a legal entity and do not presuppose beneficial ownership and some others.

According to the amendments, which came into force in December 2016, a legal entity must keep information on its beneficiaries, take measures to identify such beneficiaries and must regularly (at least once a year) update such information.

Information on beneficiaries should be disclosed by a legal entity on request by the tax authorities or other state bodies. The law also establishes an obligation of the founders, shareholders and other controlling persons to provide information on beneficiaries that they possess to the legal entity.

For violations of any of the above requirements, the law provides for the imposition of administrative fines on legal entities (up to 500,000 rubles) and on chief executive officers (up to 40,000 rubles).

Developments in subsoil regulation

Change of criteria for subsoil plots of federal significance

Amendments to the Law of the Russian Federation No. 2395-1 "On Subsoil" dated February 21, 1992 (the "Subsoil Law"), which came into force on July 04, 2016, changed some of the criteria for determining subsoil plots of 'federal significance'. Pursuant to these amendments, subsoil plots shall be classified as subsoil plots of federal significance if they contain primary deposits of diamonds and platinum group metals, deposits of uranium, especially pure quartz raw materials, rare earths of the yttrium group, nickel, cobalt, tantalum, niobium, beryllium, lithium, on the basis of the reserves registered in the state balance sheet of minerals starting from 1 January 2006.

Subsoil plots containing deposits of the above listed minerals not registered as reserves in the state balance sheet as well as placer and man-made deposits of diamonds and platinum group metals are no longer classified as subsoil plots of federal significance starting from July 04, 2016 and shall be deleted from the published list of the subsoil plots of federal significance.

Production of accompanying minerals

The subsoil law has been amended in regards to production of accompanying minerals.

The relevant amendments envisage that production of accompanying minerals not covered by the mineral licence shall only be permitted after obtaining conclusion from the state expertise of reserves and entry of the relevant changes into the mineral licence. However, this right shall be granted only to those legal entities, in which the interest of the Russian Federation is over 50 per cent and/or in respect of which the Russian Federation is entitled to dispose of over 50 per cent of the total number of votes falling at the voting stocks constituting authorized capital of such legal entities. It is yet not clear whether this approach applies to other companies where the state has an interest.

The above amendments also broadened the content/scope of a licence. A mineral licence shall now, inter alia, contain the approved level of production of accompanying minerals and the identity of their owner.

All the above amendments related to accompanying minerals came into force on October 03, 2016. It is expected that the Government of the Russian Federation shall determine the criteria for classifying minerals as accompanying minerals.

New regulations on granting of rights to conduct geological surveys of subsoil plots

On January 10, 2017 new regulations came into force regarding the granting of rights to conduct geological surveys of subsoil plots in Russia (the "Regulations")1. The Regulations amended the previous procedures for granting licences for geological surveys of subsoil plots which had been in effect since 2005. The Regulations are not applicable to the subsoil plots of federal significance.

The Regulations envisage a significant number of new changes, including:

  1. the "application principle" for granting a right to survey subsoil plots for which there is no approved information on hydrocarbon reserves and/or hydrocarbon resources (D0 and/or Dl categories). In particular, the right to carry out a geological survey may be granted for such subsoil plots on the basis of an application (accompanied by certain requisite documents), without holding an auction or tender. An equivalent rule in respect of solid (hard-rock) minerals is already in place;
  2. there are now two main approaches for granting the right to carry out geological surveys of subsoil plots on which there is no information on reserves, depending on whether they are: (i) subsoil plots which are included in the official lists of subsoil plots offered for privately-funded geological survey, as duly approved and published by the Ministry of Natural Resources and Ecology of the Russian Federation; or (ii) subsoil plots which are not included in the official lists;
  3. federal geological companies (being strategic joint-stock companies, the entire share capital of which is owned by the Russian state and whose main purpose is to carry out geological surveys within certain territories of the Russian Federation) are now only allowed to file applications for the right to conduct geological surveys of subsoil plots containing solid minerals. Previously, federal geological companies were able to file such applications in respect of plots containing either solid minerals or hydrocarbons. The Regulations provide that, with regard to federal geological companies, there are no limitations on the number of applications permitted or the area of subsoil plots to be potentially authorized for geological survey. As a general approach it is suggested that the applications filed by common subsoil users under the Regulations will have the priority over applications filed by federal geological companies; and
  4. a procedure for obtaining the right to carry out geological surveys on the flanks of deposits in the process of exploration and/or development. Such a right on a pre-emptive basis may now be granted to subsoil users which carry out the geological survey, detailed exploration and extraction of minerals (under the combined licence) or the detailed exploration and extraction of minerals within the adjacent subsoil plot. The right to carry out geological surveys on the flanks of mineral deposits may be granted subject to: (i) the completeness of information regarding reserves of solid minerals or hydrocarbons; and (ii) the boundaries of the flanks should not extend beyond 5 km (for solid minerals) or 20 km (for hydrocarbons) from the boundaries of the existing subsoil plot. There are also further requirements which should be met in order to be granted the right to conduct geological surveys within the flanks.

The Regulations also provide a procedure for establishing the lists of subsoil plots offered for privately-funded geological survey. It is envisaged that these lists could be created either following proposal by local authorities or by those seeking to survey subsoil plots. The draft versions of such lists are subject to approval by the Ministry of Defence and the Federal Security Service.

Footnote

1. Order of Ministry of Natural Resources and Ecology of the Russian Federation No. 583 "On approval of Procedure for consideration of applications for granting the right to use subsoil for geological survey (except for subsoil within the subsoil plots of federal significance and the subsoil plots of local significance)" dated November 10, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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