Amendments to the Civil Code: will the corporate agreement “Russian style” survive?

Evgeny Zhilin Law Firm "YUST", for RAPSI

The Committee on Civil, Criminal, Arbitration and Procedural Legislation of the State Duma prepared the draft Federal Law on amendments to the Civil Code of the Russian Federation for the second reading. The draft, as submitted by the Committee, contains the unmodified corporate agreement provisions, which had caused so much argument. A compromise has apparently been reached. But has it? And what will actually change in the Russian corporate practice, when the new CCRF provisions on corporate agreements are adopted? Will corporate agreements actually function or will they remain a more or less “advanced” fiction?

With a “plus” sign

Advantages of the new corporate agreement provisions of the Civil Code include: expansion of the number of parties to the corporate agreements to include creditors and other persons entitled to enter into a corporate agreement at the stage of creation of an economic company (before official registration), the possibility in principle to rule invalid the decisions of the bodies of economic companies, when such decisions are against the corporate agreement.

Taking into account other provisions of the draft Civil Code, the norms of potestative conditions (conditions dependent on the will of the parties to the transactions), of options, of irrevocable powers of attorney, of assurances about circumstances, of escrow may be applied the corporate agreements. We will finally receive the classic conditions of the English shareholders’ agreements, which Russian lawyers have been working with in connection with the English law – or so it would seem. Is it not an opportunity to thank the makers of the new CC?

With a question mark

However, it is actually not that simple. If one reads the new CC provisions with attention, a sense of incompleteness will come. The sense grows, if one attempts to compare the provisions of the new Article of the Civil Code with other norms of the same draft law or of the current legislation.

For example, how will the provisions of a simple written form of the corporate agreement, which contains inter alia an option on the sale/purchase of a share of a limited liability company, correlate with the CC provisions on the option agreement and the norms of the Federal Law “On limited liability companies” regarding the sale/purchase of LLC shares, which require that the transaction of alienation of those shares be completed in a notarial form?

What is the purpose of maintaining in the draft law of the “half-norm” requiring that the company should be informed of the fact of execution of a corporate agreement? What will the company get from such information? Why can’t the company be a full party to the corporate agreement, even if not in the sense of voting and disposing of quasi-treasury stock, at least in the sense of the obligation to observe the provisions of corporate agreements and of the right to demand that the parties perform under the respective agreements?

Splitting the agreement

The following circumstance is also somewhat confusing: the provisions of the draft law regarding the appeals against the decisions of the company’s bodies, which violate the corporate agreement, have “wormholes” – the necessity for all shareholders to participate in the corporate agreement, non-violation of rights and legally protected interests of third parties. Obviously, an entire arsenal of tricks eliminating the possibility of successful appeal against the meetings’ decisions will be created for this very category.

Moreover, the very fact of informing the company of the existence of a corporate agreement may be a move against the management of the economic company (board of directors, sole executive body), which may simply be not aware of the corporate agreement’s content, and whose decisions may be appealed against by the shareholders precisely for the reason of their going against the corporate agreement.

Finally, the following does not escape attention: a rather “half-hearted” norm of possibility of application of foreign law to the corporate agreements in regard of Russian economic societies insofar as it does not overlap with the personal statute of such companies. Until now, the courts dismissed the possibility of application of foreign law to such relations, and with good reason. Now, if the legislation permits the parties to “split” corporate agreements into two or more law orders, the Russian courts will be hard put to resolving the disputes arising out of such agreements.

Permissiveness vs. decisiveness

Analysis of the new edition of the draft CC makes one think that its developers, attempting to implement the permissiveness principle and to include as many novelties as possible, intentionally or accidentally overlooked the legal certainty principle, which may result in that the CC amendments regarding corporate agreements will never start functioning.

At least, until certain civil legislation acts are adjusted in accordance with the renewed Civil Code and a steady arbitration practice on application of corporate agreement provisions is formed – and this, in all probability, will take years. It would be very nice to err with such a prognosis, for corporate agreements is the best test of confidence in the Russian law. Whether or not they can get “started” – the vector of development of the entire Russian corporate practice will largely depend on it.

Source of the publication - here