The Ministry of Economic Development has developed draft laws aimed at reforming the rules on corporate agreements (shareholder agreements and LLC participant agreements). The changes concern options, protection of minority shareholders, penalties, challenging decisions of meetings, confidentiality, etc.
Key innovations
1. Irreducible penalty
The reform proposes to establish as a general rule the impossibility of a court reducing the penalty for breach of obligations under a corporate agreement. According to the draft laws, it will be possible to reduce the penalty only if the following conditions are met:
- It will be necessary to prove that the plaintiff will receive a greater benefit from the penalty than from proper performance of the agreement.
- A party to a corporate agreement that carries out entrepreneurial activity and demands a reduction in the penalty must also prove its lack of guilt in violating the corporate agreement.
As experts note, this will make a reduction in the amount of the penalty for breach of a corporate agreement an exception rather than a rule. As a result, the penalty will become a truly effective mechanism for ensuring the fulfillment of obligations by the parties to the corporate agreement.
2. Inclusion of options in the corporate agreement
The bill will now directly allow the inclusion of options to buy and sell shares/stocks, as well as elements of an option agreement, in the corporate agreement.
A third party may be appointed to confirm the grounds for exercising the option, if provided for by the agreement.
3. Securing the tag-along and drag-along mechanisms
- Tag-along (a condition obliging to send an offer to buy out shares) is the right of minority shareholders to join the sale of shares/stocks on the same terms as the majority shareholder.
- Drag-along (a condition on the possibility of buyout upon reaching a certain ownership share) is the right of the majority shareholder to oblige minority shareholders to sell their shares/stocks if a buyer is found for the entire business.
Mechanisms that have long been used in transactions can now be officially enshrined in legislation. Thus, minority shareholders can receive protection from forced buyouts on unfavorable terms, and majority shareholders - a tool for effective exit from the business with the involvement of investors.
The implementation of the reform mechanism assumes that the majority shareholder first acquires a package of minority shareholders independently, and only then alienates 100% of the company's shares in favor of the acquirer. If the shares of the minority shareholder joining the sale have not been transferred to the final purchaser, the minority shareholder has the right to demand:
- the return of the shares that belonged to him,
- invalidation of the agreement on the alienation of shares between the initiator of the sale (the majority shareholder to whom the minority shareholder has joined) and the final purchaser.
4. A "substitute" court decision as the vote of a party to an agreement
If a participant votes contrary to the terms of the corporate agreement, the court will be able to:
- either recognize the vote of the person who violated the corporate agreement as invalid,
- or recognize him as having voted in a certain way in accordance with the corporate agreement.
This will protect the interests of the parties without the need to terminate the agreement or complex litigation.
5. New grounds for challenging decisions of a meeting of LLC/JSC
The bills provide that participants in a corporate agreement will be able to challenge decisions of the meeting if they contradict the agreement, even if other shareholders do not participate in it. This will require three conditions:
- such an opportunity is provided for by the charter;
- all participants knew about the agreement;
- the violation affected the quorum or the number of votes needed for the decision.
According to the current legislation, a violation of a corporate agreement gives the parties the right to challenge decisions of the company's bodies only if the agreement is concluded by all participants.
6. Other changes
According to the reform, the parties to a corporate agreement may agree to prohibit disclosure of its terms to third parties. It seems that in reality this is not an innovation: most corporate agreements already contain provisions on their confidentiality.
The amendments also establish the deadlines for filing a claim to invalidate a decision of the general meeting of participants or shareholders. This period will be two and three months from the date of drawing up the minutes of the general meeting of participants or shareholders of LLC and JSC, respectively.
The changes are supposed to be applied retroactively, that is, to corporate agreements concluded before the draft laws came into force, with the exception of some elements of the reform, for example, in terms of the possibility of the court making a “substitute” decision or setting higher standards of proof for the purpose of reducing the penalty.
The law firm "Nadmitov, Ivanov and Partners" advises on corporate law and legal regulation of corporate agreements in Russia and foreign jurisdictions.
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