Search News and Articles
What businessmen should know about legislative changes with major and interested transactions?
It is well known that before making significant managerial decisions, the general director must obtain approval from the shareholders or the board of directors. Apart from that, if a director is personally interested in entering into a transaction, approval is also required to proceed with the transaction. In the absence of such an approval, the transaction can be challenged and, in certain circumstances, invalidated. In order to minimize such risks and to eliminate legal uncertainty for the parties to the transaction, the rules governing major transactions and interested transactions must be sufficiently clear. Previously, however, the application of these rules was associated with a large number of controversial legal issues, which were finally solved as a result of the legislative amendments, which will enter into force on January 1, 2017. According to the new amendments, the distinction between major and non-major transactions has been delineated more clearly, parties have been allowed more flexibility in relation to approving transactions, the burdensome obligation to obtain prior approval of interested transactions has been abrogated, and finally the procedure for challenging transactions in question has been made much more complex. Overall, the changes should have a positive influence on business, as they contribute to the establishment of firm legal certainty in this area of the law.
First of all, to delineate distinction between major and non-major transactions, the legislative changes clarified that approval is necessary not only for transactions aimed at alienating property, but also for other agreements granting the right to use property (for instance, lease agreements), as well as transactions granting the right to use intellectual property.
On the other hand, transactions associated with corporate restructuring (in particular, merger and acquisition agreements), transactions dealing with the allotment of shares and the obligatory purchase of shares, as well as transactions performed on the basis of a previously approved preliminary contract, are no longer covered by the rules for major transactions and, therefore, do not require approval.
It is also important to remember that transactions entered into over the course of a company’s ordinary business activities are not considered major transactions and, therefore, do not require approval, regardless of their price. The legislative changes have clarified that such ordinary transactions include any deals whose consequences will have no fundamental effects on the company, i.e., will not lead to the termination of its activity or a change in its nature or scope. At the same time, if such transactions are a common practice of other analogous companies within the same industry, the company’s previous participation in similar transactions is irrelevant for determining whether a particular transaction is ordinary for the company.
As regards the procedure for approving major transactions, the legislation established more flexible rules. An approval can now be granted for a transaction by specifying its minimum or maximum terms (price, etc.) or alternative conditions. Analogous transactions or interrelated transactions, when approval for one deal is conditioned by entering into a number of associated deals (such as obtaining securities, pledges, etc.), can be approved proactively.
In addition, the legislative amendments eliminated uncertainty concerning the period of validity of granted approvals. As a general rule, the period of time for which an approval is granted must be specified in the respective corporate decision itself. However, if the term is not specified, the approval will be deemed valid for one year, unless otherwise required by the transaction terms and the circumstances surrounding the transaction’s conclusion.
The rules governing interested transactions have been subjected to significant changes as well. First of all, the number of persons deemed interested in a transaction has been reduced. In this regard, the notion of “affiliated persons” has been replaced with “controlling persons”, while the threshold for control has been raised from 20% to 50%.
Additionally,the obligation to obtain prior approval for interested transactions has been abolished. Approval is now only necessary at the initiative of the general director, a member of the board or the audit commission. Despite the amendments, however, it may be reasonable to have such transactions approved so as to minimize the risks of the transactions being challenged by shareholders, especially in controversial cases when a transaction’s advantageousness and reasonability for the company is not so clear.
Instead of a mandatory approval, it is now established that companies must notify shareholders and the board of directors of a proposed interested transaction and its terms at least 15 days in advance. Therefore, emphasis has been shifted to informing the board of directors or shareholders of a transaction so that they are able to challenge it in the event that the conflict of interest in question will lead to negative consequences for the company. At the same time, it is reasonable to specify the obligation to notify shareholders, along with the members of the board of directors, and clarify the procedure for providing such notifications in the company’s constitutional documents.
The number of deals deemed to be interested transactions has also been reduced. In particular, deals entered into in the course of a company’s ordinary business activities (under the condition that the company previously entered into similar transactions on a number of occasions), petty deals (less than 0.1% of the balance sheet assets), and certain other types of transactions are no longer considered interested transactions. Importantly, non-public companies are now able to fully exclude the application of the rules governing interested transactions by making corresponding amendments to the company’s articles of association.
Last but not least, the procedure for challenging major transactions and interested transactions has become more complex. Previously, any shareholder had the legal right to challenge such transactions, which led to a high number of disputes. The legislative amendments have now established a minimum threshold, and shareholders owning less than 1% of a company’s shares may no longer appeal to a court to challenge such transactions.