New Legislative Regulation Concerning Major Transactions and Related Party Transactions within JSC and LLC
Certain amendments with regard to major transactions and related party transactions have been introduced to the Joint Stock Companies and Limited Liability Companies Act.
Aforesaid amendments will take full effect on the 1st of January 2017 and will be applicable to the transactions concluded subsequently.
It is not required to conform company's charter with the newly introduced amendments. In fact, only those provisions of a charter which do comply with the amendments are to be applied henceforth.
The restriction of powers (jurisdiction) of the executive body to conclude transactions, mandatory approval of the transactions (there are two different terms introduced: "a consent" which should precede the transactions and "an approval" which should follow it) by the board of directors and/or by the general meeting of shareholders (general meeting of the participants) are cited among the fundamental corporate management issues.
Therefore, it is advisable to determine the conformity of company's charter to the revised act, as well as to the relevant state of affairs in a company, to its current corporate management and its control system. This will facilitate the decision of whether there is any necessity to introduce certain amendments to the charter.
According th the revised act, company's charter may stipulate for a mandatory consent of the board of directors or of the general meeting with regard to certain transactions (which may not be regarded as major transactions or interested party ones).
Anteriorly it used to be possible to execute the approval of certain transaction in a like manner to the one of major transactions. The revised act sets forth different procedures applicable to the consent of major transactions and to the one of all the others. Thus, it is vital to regulate with a greater detail the approval of certain transactions cited in a charter.
Aforesaid amendments are practically non applicable to those companies where the only participant (shareholder) is the company's executive body (director).
Major Transactions
1. Definition of "a major transaction" is changed. According to the revised act, a major transaction is a transaction which extends beyond the regular course of dealing.
The revised act sets forth a definition of transactions concluded in the scope of regular course of dealing: any transaction is regarded as such if concluded in the scope of regular course of dealing by a company or any other legal entity engaged into similar activity, regardless of whether such transactions have been ever concluded by this company before, as long as this transaction does not cause ultimate termination or modification of a company nor has any considerable influence on its scale.
Thus, the revised act narrows the circle of transactions that could be viewed as major ones.
The criterion of 25 % of the book value and higher is retained.
2. It is expressly indicated that the transfer of property for temporary possession could be regarded as a major transaction (previously legal practice disclosed certain difficulties when invoking major transaction status with regard to such lease relations).
3. In order to express its consent (approval) with regard to a transaction, the board of directors (or the executive body in the absence of such) ratifies a report, which should include information regarding the presumptive consequences such a transaction could possibly trigger as well as regarding the advisability of this transaction.
Aforesaid report becomes part of the information (materials) provided to the shareholders in the course of preparation for their general meeting, where it is planned to address the question of granting consent or subsequent approval of a major transaction.
4. Major transactions may be challanged by the company itself, by any member of its board of directors or by its shareholders (participants), who own more than 1 % of the voting shares (1 % of the total number of votes). Previously there did not use to be stipulated for any restriction of the kind.
Related party transactions
1. The term "an affiliate person" is no longer applied so as to define a person who could be viewed as a privy. The revised act introduces two new terms: "a controlling person", "a controlled organization".
A controlling person is someone who is authorized expressly or implicitly (via controlled parties) to dispose (by virtue of him being a participant of the controlled organization and (or) under a trust agreement, and (or) under a commission agreement and (or) under a shareholders' agreement, and (or) under any other agreement, the subject of which is the exercise of rights certified by shares (stakes) of a controlled organization) of more than 50 % of votes in the supreme governing body of a controlled organization or who is vested with the right to appoint (elect) a sole executive body and (or) more than 50 % of the collective executive body of a controlled organization. A controlled person (a controlled organization) is a legal entity subject to the express or implied control of a controlling person.
Previously, a person used to be regarded as a privy as long as he owned 20 % or more of shares (stakes).
2. Mandatory preceding approval of the related party transactions is no longer required.
Instead, companies are obliged to inform their members of the board of directors or their shareholders (participants) within 15 days prior to the moment when a related party transaction is due to be concluded.
Shareholders (participants) who own more than 1 % of the voting shares (1 % of the total number of votes) may initiate the approval by sending an appropriate request to the company.
3. There has been an increase in the size of transactions that could be approved of exclusively by the general meeting. According to the Joint Stock Companies and Limited Liability Companies Revised Act, actual transaction size should be 10 % of the assets' book value, instead of the former 2 %.