April 20, 2016
In its recent judgment, the Supreme Court of the Russian Federation (the “Supreme Court”) has opened the gates to allow beneficiaries of Russian companies (i.e., persons indirectly, through a chain of companies, owning shares in Russian companies) to go directly to Russian courts and dispute their corporate decisions. Prior to that, only actual shareholders could have done that. This recent move by the Supreme Court strengthens the rights of ultimate beneficiary owners, particularly in a situation of a corporate conflict, when the control over Russian subsidiaries turns increasingly problematic.
Aspect Finance (“AF”) was a Russian legal entity with complicated ownership structure, including a number of companies and trusts scattered over several jurisdictions. AF was owned by a Cypriot entity belonging to three shareholders, among them Mr. Moskalyov (claimant). At some point in October 2013, a general meeting of AF’s shareholders took place, which elected a new CEO of AF. According to Mr. Moskalyov, the general meeting of shareholders was held in blatant violation of corporate procedures, without duly drafted powers of attorney and overstepping the boundaries of its powers (ultra vires). Moreover, one POA was issued after the respective meeting of shareholders took place.
In parallel court proceedings, Mr. Moskalyov claimed that the newly appointed CEO soon after his appointment disposed of the AF’s most valuable asset – 90% of shares in Bank Aspect, by selling them at a nominal price to various persons, including the CEO himself. The proceedings are still pending before the Supreme Court.
Having realized that as a result of the above sale Mr. Moskalyov has lost the value of owning AF in the first place, he filed a claim with the Russian court, asserting he was the ultimate beneficiary of AF and that he had an interest in challenging the election of the CEO. This, however, did not persuade lower courts which noted that a chain of shareholding was not in itself sufficient to prove a legitimate interest of the claimant.
However, the Supreme Court took a different view. According to the court, it was not only for shareholders to challenge corporate decisions. Whenever such decisions are claimed to be void (e.g. for the lack of quorum or ultra vires nature) other persons having a legally protected interest should be able to file a respective claim. The interest in protecting assets of AF, ultimately owned by Mr. Moskalyov, was held enough to pass the “legally-protected interest” test. Thus, the Supreme Court found a violation of material law and remanded the case.
Structuring corporate ownership has historically been achieved through various levels of chain ownership. Most often this was a result of tax optimization, desire to hide people behind the scenes and make use of foreign corporate law. Oftentimes, this web of corporate structuring caused considerable difficulties, as ultimate beneficiaries were stuck in legal battles in foreign jurisdictions while the control over Russian subsidiaries was practically lost.
According to the new approach, all persons able to show a legally protected interest have a standing in Russian courts in matters related to void decisions of corporate bodies. Such widening of access to justice deserves praise and facilitates protection of foreign investments. It is, however, not clear what a legally protected interest is and whether there is any threshold to it at all. One can imagine a scenario in which a beneficial owner of 0,001% of a Russian company would try to invalidate various corporate decisions, undermining stability of corporate relations and amounting to “greenmail.”
Yet another issue relates to the category of decisions subject to challenging by ultimate beneficiaries. In the case at hand, the Supreme Court referred only to decisions that are considered void under Russian law (lack of quorum or ultra vires nature). But what if a decision is merely voidable? Should such disputes be left for shareholders or does the interest of other persons trumps this narrow approach? No guidance or clarifications are available at the moment. We hope that Russian courts will be able to strike a balance between the interests of predictability, on the one hand, and the need to protect rights of beneficial owners from harmful actions, on the other.