News

We continue with the topic of corporate law, namely that a majority shareholder in a company cannot make decisions formally aimed at recapitalising the company if the true purpose of such decisions is to dilute the minority shareholder's stake. 

The Supreme Court of the Russian Federation sent an interesting case, A49-11694/2023, for reconsideration, in which a minority shareholder (holding a stake of almost 22%) challenged the decisions of the general meeting of shareholders (GMS).

The facts of the dispute

The minority shareholder demanded that a GSM be held to change the composition of the board of directors (BD). The company set a date for this GSM, but shortly before that, it held another GSM with the aim of increasing the authorised capital by placing additional shares. 

Only the majority shareholder (with a stake of ~80%) attended the first meeting and decided to bring in a new shareholder, a relative of the majority shareholder, which led to the minority shareholder's stake falling from almost 22% to 0.008%. As for the next GSM, the composition of the board of directors did not change for obvious reasons.

Is a new participant/shareholder a sign of abuse of rights?

The Supreme Court of the Russian Federation has identified/reiterated a number of points that LLCs and JSCs should pay attention to:

• although a meeting decision cannot be invalidated if a person's vote could not have influenced its adoption, this rule does not apply if the decision could have significant adverse consequences for that person;
• participants/shareholders have fiduciary (trust) obligations to refrain from abusing their rights both in relation to the company and in relation to each other. Specifically, a majority shareholder is not entitled to use their powers to make decisions that are solely for their own benefit. 

The court has the right to recognise as an abuse of rights the vote of the majority of shareholders in favour of admitting a new participant/shareholder to the company if it is established that there were no economic reasons for this and the main purpose was to redistribute shares.

What arguments can the parties to the dispute put forward?

The Supreme Court of the Russian Federation has indicated that, taking into account Article 10 of the Civil Code of the Russian Federation (presumed good faith of participants in transactions), the law provides for the protection of business decisions (in this case, the admission of a new shareholder).

In view of this, the person who disagrees with the decision (in this case, the minority shareholder) should have provided:

• evidence questioning the existence of reasonable economic reasons for the decision to raise capital;
• evidence of the violation of the minority shareholder's property interests by this decision.

As for the person who agreed with the decision (in this case, the majority shareholder), they were expected to provide evidence of the benefits of increasing the company's capitalisation and developing its activities as a result of the change in the composition of participants/shareholders.

In this dispute, the arguments of the parties (the existence of accounts payable/the amount of the company's revenue as possible indications of the need for investment/the lack thereof) were not considered by the lower courts. 

In addition, the majority shareholder's position that the minority shareholder had lost interest in the company's activities because he was managing a new company with a similar type of activity was not considered.

What should LLCs/JSCs take into account?

The Supreme Court of the Russian Federation has shown that courts can (and should) delve into the specific reasons for companies' decisions in order to protect the rights of minority shareholders, even where the minority shareholder's vote could not influence the decision. 

We recommend that companies with potential corporate disputes take this position into account.