The Supreme Court of Russia has allowed transactions to be classified as large and requiring owners' approval, even if the amount of the company’s assets to be disposed of does not exceed 25% of the total book value. Acsour experts talked about the innovation and how it affects the business.
What happened?
The former participant of the LLC asked to invalidate the agreements on the alienation of the exclusive rights of this legal entity to trademarks and industrial designs. According to the plaintiff, due to the transactions, the LLC ceased to receive income from the use of intellectual property, which led to liquidation. Consequently, large transactions were made without approval.
Three instances rejected the arguments, as the transactions did not fall under the quantitative criterion of large ones.
We remind you that according to the legislation, a transaction qualifies as a large one if it meets 2 criteria simultaneously: quantitative and qualitative. The quantitative criterion means that the price/book value of the transaction item exceeds the limits of 25% of the total book value of assets. The qualitative criterion means that the transaction goes beyond the limits of ordinary business activities.
However, the Supreme Court sent the case for a new hearing, siding with the plaintiff.
The Supreme Court’s Position
In the case under consideration, the general meeting decided to approve a number of transactions, the total amount of liabilities for which exceeded the book value of the company’s assets by 20 times. A shareholder who disagreed with the decision demanded that the company buy out his shares. The company refused, citing the fact that the meeting did not approve a specific major transaction, but rather approved the conclusion of contracts in general over the course of a year. Then the shareholder demanded in court that his block of shares be bought out, but three courts refused. The courts considered the contracts as framework contracts. The courts noted that the fact that the company concluded the contracts approved at the meeting was not proven by the plaintiff, and the company did not conclude any major transactions.
The Supreme Court overturned the decisions and pointed out, among other things, a "significant excess of the quantitative criterion." According to the Supreme Court, in such a situation, it is assumed that the transaction goes beyond the scope of ordinary business activities. Consequently, a presumption of risk arises that the company will cease its activities or that they will change significantly due to the transaction.
How will this affect business?
1.Shift in practice: now courts can recognize a transaction as large primarily based on the qualitative criterion, even if the 25% limit is not formally met.
2. Subjectivity of assessment:
3. Risks for companies:
Acsour experts recommend:
Acsour specialists will ensure the correct conclusion of the transaction and reduce the risk of negative consequences.
What happened?
The former participant of the LLC asked to invalidate the agreements on the alienation of the exclusive rights of this legal entity to trademarks and industrial designs. According to the plaintiff, due to the transactions, the LLC ceased to receive income from the use of intellectual property, which led to liquidation. Consequently, large transactions were made without approval.
Three instances rejected the arguments, as the transactions did not fall under the quantitative criterion of large ones.
We remind you that according to the legislation, a transaction qualifies as a large one if it meets 2 criteria simultaneously: quantitative and qualitative. The quantitative criterion means that the price/book value of the transaction item exceeds the limits of 25% of the total book value of assets. The qualitative criterion means that the transaction goes beyond the limits of ordinary business activities.
However, the Supreme Court sent the case for a new hearing, siding with the plaintiff.
The Supreme Court’s Position
In the case under consideration, the general meeting decided to approve a number of transactions, the total amount of liabilities for which exceeded the book value of the company’s assets by 20 times. A shareholder who disagreed with the decision demanded that the company buy out his shares. The company refused, citing the fact that the meeting did not approve a specific major transaction, but rather approved the conclusion of contracts in general over the course of a year. Then the shareholder demanded in court that his block of shares be bought out, but three courts refused. The courts considered the contracts as framework contracts. The courts noted that the fact that the company concluded the contracts approved at the meeting was not proven by the plaintiff, and the company did not conclude any major transactions.
The Supreme Court overturned the decisions and pointed out, among other things, a "significant excess of the quantitative criterion." According to the Supreme Court, in such a situation, it is assumed that the transaction goes beyond the scope of ordinary business activities. Consequently, a presumption of risk arises that the company will cease its activities or that they will change significantly due to the transaction.
How will this affect business?
1.Shift in practice: now courts can recognize a transaction as large primarily based on the qualitative criterion, even if the 25% limit is not formally met.
- Example: the Ural Cassation Court indicated that a key asset makes a transaction large, regardless of the cost.
- The Moscow Cassation Court referred to the significance of the transaction for the company’s activities.
2. Subjectivity of assessment:
- Courts define what constitutes "ordinary business activity" differently.
- There are no clear boundaries when an excess of cost becomes "significant".
3. Risks for companies:
- Increased uncertainty when approving transactions.
- Increased likelihood of challenge if participants believe that the transaction threatens the company’s activities.
Acsour experts recommend:
- Conduct a preliminary analysis of the transaction not only by cost, but also by its impact on the business.
- Record the approval of the participants even for transactions that do not fall under the quantitative criterion, if they can be recognized as large by qualitative characteristics.
- Consider new judicial practice when structuring transactions.
Acsour specialists will ensure the correct conclusion of the transaction and reduce the risk of negative consequences.
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