Corporate Russia awaits key guidance on LLC shareholder exclusion - International Law Office

Introduction
Issues under review
Next steps

Introduction

A shareholder in a Russian limited liability company (LLC) has the right to ask the courts to exclude another shareholder for a severe violation of the latter's duties or for impeding or preventing the LLC's activities. This right has existed since the Federal Law on Limited Liability Companies (14-FZ, February 8 1998) came into force in 1998, and is conferred on shareholders that, solely or together, hold at least 10% of the LLC's share capital. Nevertheless, the brief and very general wording of Article 10 of the law has made this right particularly difficult to exercise. Moreover, the courts have tended to take a highly formalistic approach that has not allowed parties to apply this legal right to the practical needs of their business.

The first attempt to remedy the situation came in 1999, when the plenum of the Supreme Court and the plenum of the Supreme Arbitrazh Court issued Decree 90/14. The decree clarified certain aspects of the law regarding exclusion in Clause 17. However, this did not bring about significant changes in law enforcement practice.

The Supreme Arbitrazh Court is now considering a draft review of court resolutions which, it is hoped, will clarify the main issues surrounding the application of this right. The first version of the draft review was discussed at the end of 2011, and on April 18 2012 an amended version was considered. Such reviews do not constitute legal acts, but are taken as guidance by local courts.

Issues under review

The main unanswered question regarding shareholder exclusion is whether a shareholder can be excluded for causing damage to the LLC while acting not as a shareholder, but in some other function - for example, as the chief executive officer of the LLC or while representing the LLC through power of attorney. Court practice has been divided on the issue, although the conservative approach - that only damage caused by the exercise of shareholder functions can lead to exclusion - has prevailed. The draft review still contains two opposing opinions, one of which will be chosen by the members of the Supreme Arbitrazh Court. If the court rejects the conservative approach, it will become easier to apply this principle. This should help to eliminate abuses of rights, which have often been committed in the past due to the courts' conservative approach.

The other contentious point that remains unresolved - as there is no unanimous opinion among the judges yet - is whether the ability to exclude a shareholder may depend on the amount of its shareholding. One view is that a shareholder can be excluded from an LLC regardless of its part in the share capital, whereas others consider that a shareholder which holds a share of more than 50% can be excluded only if it has no right to withdraw freely from the LLC in accordance with its articles of association.

The court has already reached a unanimous opinion on other guidelines in the draft review, finding as follows:

• A shareholder can be excluded for voting at a shareholders' meeting or for systematically avoiding participation in a shareholders' meeting if its action causes considerable damage to the LLC or considerably impedes or prevents the LLC's activities. For example, a shareholder can be excluded if it approves a transaction involving the sale of the LLC's assets at an undervalue, which is subsequently executed and leads to considerable damage, provided that the shareholder was fully aware that the transaction would be unprofitable. Similarly, a shareholder may be excluded for avoiding participation in a shareholders' meeting, although its vote is necessary to adopt the LLC's articles of association and thereby comply with new legal requirements, and the LLC is subsequently held liable for its failure to adopt the articles of association in compliance with the law.
• A shareholder can be excluded for voting at a shareholders' meeting only if its voting has deliberate and substantially negative consequences for the LLC. The draft review stresses the need to distinguish between a decision whose economic consequences are uncertain and one which deliberately results in a considerable disadvantage for the LLC. In the former case, a court cannot assess economic expediency, so such a decision cannot constitute grounds for exclusion, whereas it may do so in the latter case.
• A shareholder can be excluded if a causal relation can be shown between the avoidance of participation in a shareholders' meeting and the impossibility of making an important decision. The draft review states that a plaintiff must demonstrate the commercial necessity of the decision and the fact that the LLC's activities were hindered or prevented by the decision not being made. Thus, a shareholder that avoids taking part in a shareholders' meeting cannot be excluded if a decision can be made without that shareholder's vote(s).
• A shareholder cannot be excluded for missing a shareholders' meeting of which it was not duly notified.
• Failure to pay in full for a share does not constitute grounds for exclusion, since the law provides other special measures in this case - if a share is not paid in full in due time, the unpaid part is transferred to the LLC.

The draft review additionally provides for the right to exclude a shareholder if the latter abuses its rights by addressing claims against the LLC to the state authorities. However, the Supreme Arbitrazh Court must further refine the exact wording on this point. The court should also elaborate on the statement which would allow for exclusion only if the shareholder fails to attend a shareholders' meeting without good reason.

Next steps

The Supreme Arbitrazh Court was due to vote on issues that have divided opinions on April 24 2012. However, no vote took place. Legal practitioners and corporate bodies will await the next move with interest.

For further information on this topic please contact Olga Mokhonko or Anna Fufurina at Noerr by telephone (+7 495 799 56 96), fax (+7 495 799 56 97) or email (olga.mokhonko@noerr.com or anna.fufurina@noerr.com).