Party of the corporate agreement may grant an irrevocable power of attorney to the other party to exercise the right to vote in order to ensure the fulfillment of the obligation to vote in a certain way under such corporate agreement;
- Possibility to invalidate the decision of the general meeting if the party of corporate agreement has violated the obligation to vote in a certain way;
- Securing specific terms of the corporate agreement on overcoming deadlocks and redistributing corporate control, terms on options of the parties;
- Possibility of exercising the right provided for by the corporate agreement to demand the transfer of shares by the registrar directly without receiving an order from the obligated party;
- Difficulty in the possibility of reducing the amount of forfeit or compensation under the corporate agreement.
The draft law № 02/04/11-21/00122141 “On the introduction of amendments to article 32 of the Federal Law “On Joint Stock Companies” and other legislative acts of the Russian Federation” (on amendments to rules on shareholder agreements) (hereafter – “the Draft law 1”) and the draft law № 02/04/11-21/00122129 “On the introduction of amendments to part one of the Civil Code of the Russian Federation” (hereafter – “the Draft law 2”), hereinafter collectively referred to as the “Draft laws”, were published on November 01, 2021 on the official web portal for drafts of legislative acts. The Draft laws proposes the following amendments.
1. Irrevocable power of attorney to fulfill voting obligations
The Draft law 1 proposes to supplement art. 32.1 of the Federal Law “On Joint Stock Companies” with clause 2.1, which stipulates the possibility of introducing into the shareholder agreement the obligation to grant an irrevocable power of attorney in order to ensure the obligations of the parties of the shareholder agreement to vote at meetings of participants in a certain way or to abstain from voting. If such irrevocable power of attorney is granted, the party that granted the power of attorney has the right to participate in the general meeting of shareholders without the right to vote and to take part in the discussion of issues on the agenda of the general meeting. In this case, the person who granted the power of attorney does not register at the meeting, but instead representative shall register.
Possibility of securing the term for granting an irrevocable power of attorney to vote in corporate agreement was used in practice due to freedom of contract (article 421 of the Civil Code), and therefore the proposals of Draft law 1 in this part are not something qualitatively new. It seems that the Ministry of Economic Development seeks to give legislative response to the widespread entrepreneur practice and to consolidate this practice in company laws.
The concept itself that the person who granted the power of attorney has the right to attend the meeting without registration and participate in the discussion of agenda issues is controversial. So, there are some questions such as what specific powers can in this case be transferred in an irrevocable power of attorney (only the power to vote without participation in the discussion?), what is the advisability of participating in the discussion without the right to vote (since the right to participate in the discussion inextricably correlates with the voting right) and can the person and the trustee simultaneously exercise the right to participate in the discussion?
2. Consequences of violating the obligation to vote in a certain way
Paragraph 4 of the Draft law 1 proposes to establish that violation of the obligation to vote in a certain way by the party of shareholders’ agreement may serve as a ground for declaring such party’s vote invalid or for declaring it to have voted in a certain way (decision of the court replaces the will of the person). However, from the point of view of the current civil legislation, the recognition of the vote (an expression of will, and not a deal and not a decision) invalid raises reasonable doubts. Likewise, the introduction of the institution when court’s decision replaces the vote of participant of the company is controversial, since the legislation establishes other consequences of party’s violating contractual obligations (for example, payment of forfeit or recovery of damages). We assume that in this case the voting should be recognized as failed, and such failed vote shall grant the possibility of invalidating the decision of the meeting (in the presence of set of other conditions established by law).
Separate paragraph of the Draft law 1 emphasizes that the recognition of the vote as invalid entails invalidity of the decision of the meeting itself if the conditions of paragraph 6 of art. 67.2 of the Civil Code are present (in the current edition: invalidity of decision taken in violation of corporate agreement if all participants of the company were parties of the corporate agreement). At the same time, this provision of the Draft law 1 should be interpreted in conjunction with subparagraph “b” paragraph 1 of the Draft Law 2, which proposes amendments to paragraph 6 of art. 67.2 of the Civil Code.
Thus, according to the Draft Law 2, the decision of the meeting may be invalidated even if not all participants of the company were parties of the corporate agreement, but all voting persons knew or should have known about the violation of the corporate agreement. It seems that the above provision of the Draft Law 2 should be adjusted in terms of indicating the knowledge of the voters about the content of the corporate agreement. Otherwise, we assume that this reform should be welcomed, including given the proposed opportunity to enter information about the content of the shareholder agreement in the Unified State Register of Legal Entities (USRLE) (see point 5 below for details) and its public credibility for the third parties which are not the parties to a corporate agreement. Since challenging the decisions of the meetings is possible only if the parties to the corporate agreement are all participants of the company, use of this remedy is significantly complicated in practice. This new mechanism will protect the bona fide parties of the shareholder agreement from abuse by unscrupulous shareholders who received the majority of votes at the meeting (including as a result of the grant of an irrevocable power of attorney).
3. Options in corporate agreement
In art. 32.1 of the Federal Law “On Joint Stock Companies” the Draft law 1 proposes to state clauses 3.1 - 3.4, according to which the parties to shareholder agreement may include in it option mechanisms for early settlement of issues related to (1) the withdrawal of participants from the company upon the occurrence of certain circumstances, (2) the establishment of the sale price or redemption of shares, including (3) in order to get out of deadlocks.
3.1. Option to conclude a contract on the model of an irrevocable offer (art. 429.2 of the Civil Code). If the offeror avoids concluding an agreement, the person who made the acceptance has the right to file a claim with a commercial court demanding the fulfillment of this agreement, including transferring or accepting shares. The option to conclude a contract can be used as a way to get out of deadlocks arising in the process of corporate governance. For example, if the opposing parties own equal shares in the authorized capital and it is impossible to appoint a director.
The Draft law 1 proposes to establish that option may provide for conditions according to which in case of alienation one party’s shares to third parties, the other party may demand the purchase of its shares on the same terms as the initiator of the alienation uses to transfer them to the acquirer, or on the other terms stipulated by the option (the so-called tag alone condition). An option may also provide for the mandatory alienation of shares by the other party on the same terms as the initiator of the alienation uses to transfer them to the acquirer, or on the other terms stipulated by the option (the so-called drag alone condition). The initiator of the alienation is obliged to notify the other parties of the corporate agreement of the intention to sell its shares, and also to notify the acquirer of the terms of such option.
3.2. An option contract (art. 429.3 of the Civil Code), included in the shareholder agreement, providing for the possibility of one of the parties to demand the execution of such option contract within the time period established by it by transferring or acquiring shares.
Both options to conclude a contract and option contract are widely used by companies’ participants in practice. This is probably why the Ministry of Economic Development proposes to consolidate the rules on the possibility of including option mechanisms in the corporate agreement. In general, the consolidation of the provisions on options in corporate agreements in the legislation can contribute to the formation among participants and investors (including foreign ones) of an unambiguous understanding of the admissibility of concluding such corporate agreements.
4. Execution of the option contract with the participation of the registrar
Further to the above provisions, the Draft law 1 proposes to add clause 3 to art. 29 of the Federal Law on the Securities Market, according to which an option contract may include a term stating that the transfer of shares may be exercised by the registrar making an entry in the register without the order of the person who owns the transferred shares.
As follows from the Draft law 1, shareholder agreement should be provided to the registrar by a person whose obligation to transfer the rights on shares is stipulated by the agreement. Upon expiration of 5 working days after the occurrence of the event specified in the option agreement, the party requiring the transfer of shares sends a notification of the occurrence of the relevant event to the registrar and the party obliged to transfer the shares. The registrar no later than one business day sends the other party to the shareholder agreement information about the content of the notification received, as well as to the confirming person – a request for confirmation of certain circumstances. The confirming person within 5 working days sends the reasoned response containing confirmation of the occurrence or absence of the circumstances specified in the option agreement. Based on the response received from the confirming person, the registrar makes an appropriate entry on the transfer of rights on shares.
Hence, the Draft law 1 proposes to establish a complex multi-stage procedure for transferring rights on shares with the participation of a third party (confirming person), in which the transfer of rights on shares should still be initiated by the person obliged under the option contract. In this regard, the proposal needs modification in order to minimize participation of the person obligated under the option contract from the procedure for transferring rights on shares.
5. Informing about the content of the shareholder agreement
The Draft law 2 proposes amendments to paragraph 3 clause 4 art. 67.2 of the Civil Code and establishes that the participants of non-public company (parties of shareholder agreement) can establish in the agreement condition about the disclosure of its content. We assume that in this case the Draft law 2 proposes entering information about the content of the concluded shareholder agreement in the USRLE with preliminary notification of the company about the fact of its conclusion and disclosure of its content so that the director of the company can fill out and submit the appropriate registration forms. At present, registration forms allow to enter information about the disproportionate distribution of the participant’s votes in the company (without specifying such disproportion) and about the presence of restrictions and conditions for the alienation of interests (shares). It seems that the disclosure of the content of the shareholder agreement is possible by filling in information about the disproportionate distribution of the scope of powers of the participants of the company.
This provision can reduce the risks of counterparties when interacting with the company, as well as inform the shareholders who are not parties of the shareholder agreement about the fact of its conclusion and about its content. In this case, the confidentiality of the shareholder agreement is leveled by the agreement of its parties. In turn, the company and the parties may refer, among other things, to the information of the USRLE and public credibility as grounds indicating that the counterparties and other members of the company are aware of the content of the shareholder agreement (“knew or should have known”).
6. Difficulty reducing the amount of forfeit under the shareholder agreement
In addition to the general grounds for reducing the forfeit under art. 333 of the Civil Code (disproportionality of the consequences of violation), the Draft Law 1 proposes to establish that (1) person requiring reduction of the forfeit or compensation under the shareholder agreement should also prove that the party of the shareholder agreement, which is a creditor, acted in bad faith; and (2) the recovery of the forfeit in the amount stipulated by the shareholder agreement will put such party in more advantageous position compared to that in which the party would find itself if the other party exercised the rights in accordance with the terms of the shareholder agreement. The Draft law 2 contains the same proposals in this part.
On the one hand, this reform will make it possible to discipline the parties of corporate agreement and encourage them to fulfill their obligations, since the possibility of reducing the forfeit / compensation in court is often perceived by unscrupulous parties as a way to reduce their liability in case of deliberate violation of the shareholder agreement. On the other hand, in addition to the already existing assessment condition of disproportion, the legislation introduces two more assessment conditions: (1) the bad faith actions of the person in whose favor the forfeit is levied, and (2) the advantageous position of such person. At the same time, the courts, as a rule, should not assess the economic feasibility of the actions of participants in civil turnover, since the courts are not professionals in the field of business. However, the rule directly orders the courts to immerse themselves in the economic conditions of the commission / noncommission of actions by the parties of shareholder agreement, which increases the risk of judicial mistakes when deciding whether to reduce the amount of forfeit or compensation specified in the agreement.
7. Retrospective effect of amendments
It is noteworthy that the Draft law 1 will come into effect retrospectively, that is, will apply to corporate agreements concluded before its entry into force. At the same time, the Draft law 2 provides for the following procedure for the coming into effect of amendments to the Civil Code:
- It will be possible to agree on the disclosure of the content of corporate agreement (new edition of clause 4 of art. 67.2 of the Civil Code) in relation to agreements concluded before the entry into force of the Draft law 2;
- Challenge the decisions of the meeting, taken in violation of the corporate agreement, on the proposed paragraph 6 of art. 67.2 of the Civil Code will be possible upon their adoption after the entry into force of the Draft law 2, but at the same time the violated corporate agreement may be concluded even before the amendments enter into force;
- Making more difficult to reduce the amount of forfeit under the corporate agreement will be possible only in relation to those agreements that were concluded after the entry into force of the Draft law 2.
Accordingly, the new edition of art. 67.2 of the Civil Code will apply to corporate agreements concluded before the entry into force of the Draft law 2, and to decisions of meetings adopted after its entry into force. The new edition of art. 333 of the Civil Code will apply only to agreements concluded after the entry into force of the Draft law 2.
Separately, it is worth noting that the Ministry of Economic Development in the Draft law 1 stated that the new rules on shareholder agreements will apply to agreements on the exercise of the rights of participants in LLC companies, while the corresponding provisions are not included in the text of the Federal Law “On Limited Liability Companies”. It seems that such a legislative technique may cause difficulties with the application of the new regulation in LLC.
Thus, the Ministry of Economic Development has taken a step towards the consolidation in corporate legislation of institutions that are actively used in practice. In general, these amendments will facilitate the conduct of business by participants of companies, since they are aimed at expanding the legal mechanisms that can be used in corporate agreement, and at increasing liability for violation of corporate agreement by its parties.
The Draft laws are at the stage of public discussion. Moscow law office “Kovalev, Tugushi & Partners” will check the further progress of the Draft laws.