The legislation of the Russian Federation provides for the implementation of special legal relations - in the form of related-party transactions. What is their specificity? How is interest in the main legal forms of business of the Russian Federation - LLC and AO determined?
What is an interested party transaction?
An interested party transaction is a legal relationship involving entities with respect to the activities of which various third parties may be interested. For example, if a business company participates in a transaction, then those interested in it may be:
- leaders of this organization;
- shareholders - in particular, those that own 20% of the authorized capital of the company and more;
- relatives of managers and owners of the company.
Moreover, the fact of their interest is also established. It can be fixed if they:
- are direct beneficiaries;
- can use the results of other beneficiaries - on the rights of the head or shareholder.
What is an interested party transaction, we have identified. Let us now consider how these legal relations can be implemented.
Interested party transaction
The main condition for the legal implementation of the legal relations in question is the approval of the transaction with the interest of the competent internal corporate structures. For example, a board of directors or a meeting of shareholders of a business company . The way in which an interested-party transaction is approved depends primarily on the legal status of the enterprise.
So, if the company operates as a joint-stock company, then this approval can be carried out through one of the 3 main mechanisms:
- by a majority of votes of those directors who are not interested in concluding a transaction;
- by the majority of directors who are also not interested in the transaction, but who have the status of independent managers;
- by a majority vote of shareholders who are not interested in the transaction.
The first mechanism characterizes transactions involving business entities in which up to 1000 shareholders with voting shares are involved, the second is used if the number of shareholders exceeds 1000. In both cases, the following condition must be met: the subject of the transaction is one or more that are related must be represented by property that has a value of less than 2% of the amount of the organization’s balance sheet assets in accordance with the financial statements.
The third mechanism, within which a decision is made to approve an interested-party transaction, is implemented:
- if the subject of the agreement is property that has a value of 2% of the book value of the assets of the enterprise or more;
- in a situation where the board of directors failed to make a decision within the framework of the standard transaction approval mechanism.
In the event that an LLC enters into a legal relationship, the decision to approve a transaction in which certain persons are interested is made within the framework of the general meeting of the founders by a majority of those among those participants who are not interested in concluding an agreement.
In addition, if a board of directors is formed in a business company, then a decision to approve a legal relationship, which is a related party transaction, may be referred by constituent documents to the competence of this collegial management body. This mechanism, however, cannot be implemented if the sum of the transaction costs or the value of the property that is the subject of the contract exceeds 2% of the value of the property owned by the company - based on the information recorded in the financial statements.
So, we studied how legal relations are carried out with the participation of firms, which can be influenced by persons with an interest in the transaction. It will also be useful to consider which contracts cannot be assigned to the appropriate type.
In which cases transactions cannot be characterized by interest?
These transactions generally include legal relationships that:
- carried out by a business company, consisting of one founder, which simultaneously performs the functions of a leader;
- assume the interest of all shareholders of the enterprise concluding the contract;
- represent a transaction concluded subject to the preemptive right to purchase shares issued by the company;
- represent legal relations during the purchase, as well as redemption of the issued shares by the business company;
- carried out in the process of reorganization - in the form of a merger with a company whose authorized capital is more than three quarters owned by the reorganized business entity;
- Mandatory from the point of view of ensuring compliance of the enterprise with the requirements of the law;
- are carried out on conditions that do not differ significantly from those that characterize similar transactions with the participation of the company and the interested entity in the normal course of business of the organization, which were carried out before the fact that the fact of interest of a person in concluding the contract was established.
An interested party transaction is a legal relationship in which economic entities most often participate in the status of a joint stock company or LLC. The conclusion of contracts by firms of the first and second type is characterized by a number of features. It will be useful to study them.
Interested party transactions involving LLC: nuances
So, the first type of business entity that can enter into such a legal relationship as an interested party transaction is a limited liability company. The conclusion of contracts, of which LLC is one of the parties, must comply with the requirements of the legislation governing the activities of these enterprises - in case the relevant contracts are characterized by interest.
In particular, those requirements that are established by the law on LLC must correspond to transactions in which the interest is defined:
- a person from the board of directors of a company that is a party to legal relations;
- the general director;
- the collegial executive body of this organization, a member of the company, which owns 20% of the votes of the owners or more in the company;
- a person who has the authority to issue binding instructions regarding a business entity.
Interest in the transaction of these persons is established in accordance with the criteria that are defined in the law on LLC. In particular, this fact is determined if the listed citizens, their relatives, and also persons affiliated with them:
- act as a party to legal relations or represent the interests of third parties in the framework of interaction with a business company;
- own 20% or more of the securities or authorized capital of a legal entity that is a party to legal relations or represents the interests of third parties in their interaction with the company;
- occupy positions in the management system of a company that acts as a party to the transaction or represents the interests of third parties in the framework of legal relations with a business company, or are top managers in the management company of the relevant legal entity.
Apart from the grounds specified in the LLC Law, the fact of the interest of certain persons regarding the conclusion of an agreement may also be determined for other reasons. In particular, the criteria by which the interest of persons in a transaction can be determined can be prescribed in the charter of a limited liability company.
Those citizens who are deemed to be involved in transactions on the grounds under consideration may have a number of obligations defined by law. Consider them.
Stakeholder obligations under the LLC Act
The main obligation of interested parties, as reflected in the law on LLCs, is that these citizens are obliged to timely inform the general meeting of shareholders:
- about legal entities in which these persons, as well as their relatives own 20% or more of the authorized capital;
- about enterprises in which these citizens, as well as their relatives occupy positions in the management system;
- legal relations known to these persons, within the framework of which they can be defined as interested entities.
The procedure for approving a transaction in accordance with the law on LLC is characterized by certain nuances. Above, we examined the general points of this procedure. We will study it in more detail from the point of view of the regulatory provisions of the law.
Approval of transactions under the LLC law: nuances
In accordance with the main regulatory act regulating the activities of the LLC, an interested party transaction is a legal relationship that can be implemented subject to approval by a decision of the meeting of the owners of the company. It is generally accepted by a majority vote of owners among those who are not interested in concluding a contract. The corresponding decision (related-party transactions may predetermine the need to draw up various documents supplementing the contract) should be issued as a separate source, in which:
- those persons who act as parties or beneficiaries in legal relations are indicated;
- reflects the subject of the transaction, as well as its material terms.
The Law on LLC allows the management bodies of the corporation to make the decision in question on transactions that may be concluded in the future as part of the company's main business activities. In this case, the decision on approval of the transaction with an interest establishes a limit amount, which can be fixed in the relevant contract. The regulatory act adopted by the company’s governing bodies is legally valid until the next meeting of shareholders is held, unless otherwise specified by the decision of the managers to approve the contract.
LLC Law: in what cases is approval for interested transactions not required?
There may be cases in which the law on related-party transactions allows the LLC management not to make decisions on the approval of the relevant legal relations. So, this is possible if the terms of the contract do not fundamentally differ from the parameters of similar transactions that are concluded between an economic company and also by one or another interested person in the course of the company carrying out ordinary activities. But they must take place before the subject with interest receives the appropriate status. True, this exception has limitations. It can only apply to transactions made from the moment when the entity with interest received the status of an interested person, and until the next meeting of shareholders.
In a number of cases, major transactions and related-party transactions of the relevant type under the LLC law may be invalidated. Consider the reasons why this is possible.
Law on LLC: recognition of a transaction with an interest invalid
In this case, we are talking about the recognition of the transaction invalid in court. The grounds for a court to make an appropriate decision are:
- the proven fact of voting by an uninterested participant in the LLC, in which his vote did not affect the outcome of the meeting;
- the lack of evidence of the fact that the transaction was not accompanied by losses to the business company or a party who filed a lawsuit, or the possibility of negative consequences for these entities;
- the presence at the time of the court hearing of evidence of the subsequent decision on the approval of the contract, which, by virtue of the provisions of the law on LLCs, should be invalidated;
- evidence of the fact that the other party to the legal relationship was not informed about the transaction, which was concluded in violation of the norms fixed in the law on LLC.
So, we have studied how to conclude and challenge a transaction with an interest in limited liability companies. Now consider the main features of these legal relations in other major business entities - joint-stock companies. The corresponding type of transaction is governed by the provisions of a separate law on joint-stock companies. It will be most interesting to study what are the norms of this legal act regarding the definition of interest.
JSC Law: Determination of Interest
The term in question in the law on joint-stock companies is disclosed in approximately the same way as in the normative act regulating the activities of limited liability companies. Interest in this case may be:
- manager, member of the board of directors of the enterprise;
- CEO of the company;
- a manager operating within the framework of a collegial executive body, which owns 20% or more of the shares of the enterprise;
- a person who has the right to issue binding orders to JSC employees.
Moreover, the fact of interest of these persons is recognized if they, their relatives or persons affiliated with them:
- act as one of the parties to the transaction;
- are a beneficiary, intermediary or representative in the framework of legal relations;
- possess 20% or more percent of the authorized capital of the company acting as a party to the transaction;
- have positions in the management bodies of the company, which is the subject of legal relations, beneficiary, intermediary or representative.
Law on joint-stock companies: determination of lack of interest
In turn, the lack of interest in a transaction under the JSC law by default is determined by:
- in relation to joint-stock companies, which consist of one shareholder, who is also also the general director;
- for legal relations that are carried out in the interests of all participants of the joint-stock company;
- when the company places securities through an open subscription, as well as upon the exercise of the preemptive right to purchase issued shares;
- upon purchase or redemption of issued securities by a joint-stock company;
- during the reorganization of an economic entity in the form of a merger or takeover;
- in transactions that must be completed by virtue of the requirements of the legislation of the Russian Federation - at prices and tariffs established by the government of the Russian Federation;
- for legal relations carried out in accordance with the law on electric power industry;
- in respect of contributions by shareholders of the company to its property.
What features characterizes the procedure for approving the legal relationship in question? In principle, the legislation on joint-stock companies as a whole reflects the same principles for approving related party transactions that we examined above at the beginning of the article. The specifics of making specific decisions may depend on the number of shareholders, as well as on the value of the transaction with respect to indicators for assessing property in accordance with financial statements.
It is worth noting that in the legislation governing the considered legal relations, in 2017 significant changes will appear. Interested party transactions are subject to legal regulation within the framework of norms that can be substantially adjusted by the legislator over time. This may be due to various factors. For example, the need for increased control over the relevant legal relations in which settlements are carried out using budget capital. A particular sample of a related party transaction may be characterized by greater or lesser significance from the point of view of regulators, however, the norms common to all types of relevant legal relations allow their effective monitoring. And if necessary, you can activate existing legal mechanisms in order to exercise control over any transaction.