June 11 2012
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.
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:
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.
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 (email@example.com or firstname.lastname@example.org).
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