Shareholder agreement – legal breakthrough or failure?

The magazine “Mergers and Acquisitions” held a seminar “Impact of the Civil Code changes to M&A transactions”. Within the framework of the seminar, experts discussed whether it will be easier to apply Russian law after the suggested amendments are enacted.

The lawyers spoke about the peculiarities of conducting M&A in different jurisdictions. For example, over 90% of large transactions are completed outside the Russian jurisdiction. And when the parties execute transactions under English law, they risk that Russian courts will not understand them. For instance, unlike English law, Russian legislation contains no warranties and guarantees institution, and it is thus difficult to protect the right to compensation of damages in our courts. Also, the experts discussed the changes regarding certain contractual obligations, in particular – those about the duty of all circulation participants to act in good faith, the pre-agreement stage included; the rights to issue an irrevocable power of attorney, execution of conditional deals, escrow etc.

Associated Partner Evgeny Zhilin represented the Law Firm "YUST", and he spoke on one of the acute issues, which trouble the Russian business – the fate of the shareholder agreement. The current legislation scarcely mentions the shareholder agreements. The court practice of the recent years shows that judges are inflexible in their approach to the content of shareholder agreements, which reduces the provisional level of corporate relations. E.Zhilin believes that the work done over the draft amendments to the Civil Code may be considered an advance. Still, the expert prognosticates that the shareholder agreement under Russian law will never function properly, since corporate relations, pursuant to Article 2 of the new edition of the Civil Code, are separated from contractual obligations, which means that the parties to those will not have the full liberty of agreement.

E.Zhilin also voiced a number of more frequent issues raised by the suggested provisions on shareholder agreements:

• whether management officers, trustees in bankruptcy etc. may be included among the persons, with whom such agreements may be executed, and how this list may be expanded at all;
• whether the agreement will be ruled invalid if the company itself is a party to it, and if yes, will it be invalid in whole or in part;
• whether it is possible to avoid the collision, when the parties to a shareholder agreement will contest it in practice on the basis of the decision by management bodies of a non-public company, who are intended to be notified of the fact of execution of the shareholder agreement but not of its content;
• how will provisions of Article 1214 of the Civil Code apply, which allow certain corporate relations and contractual obligations, which do not go with the personal statute of the legal entity, to be governed by foreign law.

Concluding the discussion, the participants agreed that, after the introduction of the new provisions to the Civil Code of the Russian Federation, a sufficient further regulation will be required at the level of special laws, for example – laws on joint-stock companies and on limited liability companies etc.

Presentations of the speeches are available here.