Since their inception in 1996, related-party transaction
requirements have often proven to be a headache for investors (and
a favourite due diligence finding for lawyers). The rules set out
in Section 196a of the Commercial Code are designed to avoid the
abuse of companies by the entities/individuals that control them.
In a related-party transaction, the price for any transfer of
assets that amount to over one-tenth of a company's registered
capital must be determined by a court appointed expert. The Supreme
Court has repeatedly and consistently ruled (i) that the expert
valuation must be made prior to the contract, (ii) that the price
in the contract must be the same as determined in the valuation,
and (iii) that a failure to comply with these rules will result in
the contract being invalidated. In real estate transactions,
violation of Section 196a causes a major defect in the title
chain.
Lately, we have seen some movement in the still waters of the
related-party transaction rules. Efforts have been made to improve
legal security, but these efforts have caused problems in
interpretation. Let us consider two of the most important
developments.
1. New legislation: more protection for owners of real
estate
An amendment to Section 196a of the Commercial Code (effective as
of 1 January 2012) provides that if assets acquired in violation of
the related-party rules are further transferred, the new owner
still obtains good title (provided that he acts in good faith i.e.
he did not know about the violation of Section 196a).
Unfortunately, the wording of the amendment is not definitive as
to whether it applies to real estate transactions. The amendment
refers to the "appropriate use" of a provision of the
Commercial Code which concerns "goods". However, in legal
theory, real estate is generally not regarded as "goods".
As the purpose of the amendment is to protect good-faith owners and
reference is made to the appropriate use of the provision
protecting the owners of "goods", we interpret the
amendment as also protecting "good-faith owners" of real
estate. However, this interpretation will need to be tested by the
judicature. Until then, we expect the market to be reluctant to
rely on the new amendment.
2. New Supreme Court decision: good intentions causes
confusion
The Grand Senate of the Supreme Court has issued a decision (No. 31
Cdo 3986/2009) in which it upheld a related-party transaction that
had not precisely followed the rules of Section 196a. The parties
transferred real estate for a purchase price, the price being based
on oral information supplied by a valuer. The valuer was appointed
by a court and the valuation report was made only after the
transaction was completed, not before. The price in the report was
the same as in the purchase agreement. Contrary to its former
practice, the Court ruled that in this case the transaction was
valid.
This decision has attracted a lot of attention and has been
interpreted by some to mean that a valuation by a court-appointed
expert is no longer required in related-party transactions. Such a
conclusion could be misleading. The decision concerns a very
particular set of facts and any generalisation must be made with
great care. Importantly, the court only said that when it is
"obvious" that a related-party transaction was for a
market price, the mere absence of a prior proper valuation will not
invalidate the transaction per se. The Court did NOT, however, say
that proper valuations are not required prior to related-party
transactions. This obligation still emerges directly from the
law.
The Court displayed good intentions in seeking to uphold common
sense and the true spirit of protecting parties in related-party
transactions. However, to avoid any hasty conclusions, the
reasoning of the Court must be carefully reviewed; otherwise there
is a risk that the decision might be misinterpreted. We strongly
recommend that the correct procedure of the Section 196a is always
followed, including having the price determined by a valuation of a
court-appointed expert prior to the transaction.
The new amendment to Section 196a should increase the security for
owners of real estate, but the favourable interpretation outlined
needs support from the courts before being widely relied upon. The
decision of the Supreme Court on the related-party transaction
rules refers to a particular case, and should not be interpreted
extensively. In general, the decision does not change the rules for
related-party transactions.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 06/03/2012.