Asking a Shareholder to Leave

The Supreme Commercial Court has discussed the draft review of the court practice on expulsion of a shareholder from a limited liability company. In particular, the following has been proposed:

(1) a shareholder in a limited liability company (OOO) has a duty not to cause harm to the company and in the event of the flagrant violation of this duty he or she can be forced to leave the company; (2) a shareholder’s voting at a meeting of shareholders in a manner obviously disadvantageous to a company is a reasonable ground for expulsion; (3) a systemic failure to participate in general meetings of shareholders can be a ground for expulsion; (4) a majority shareholder is not immune and can be forced to leave the company.

On December 27, 2011, the Supreme Commercial Court held a discussion of the draft review of the case law on the expulsion of a shareholder from a limited liability company (hereinafter Review).

The Review deals with essential issues that arise from article 10 of the Federal Law ‘On Limited Liability Companies’: the grounds for expulsion of a shareholder from a company; whether a majority shareholder can be forced to leave a company; whether abstaining from voting can constitute a reasonable ground for expulsion and other issues. The draft review has received mixed responses from legal community as several of its provisions require improvement.

For instance, the idea that a participant can be expulsed if he or she caused damage to the company seems dubious. The wording is too general; it can give rise to various abuses. For example, based on the phrasing, one can deduce that if a shareholder breaks a window in the company building that shareholder can be expelled from the company.

This approach needs correction. It would be fair to acknowledge that a participant can be excluded only if he or she used his or her corporate rights (voting rights) with the sole purpose of causing harm to the company. This approach is also reflected in the text of the Review (article 1), and I believe that such provision would be fairer and more reasonable.

Article 3 of the Review also seems controversial. It states that a shareholder can be expulsed if her systematic failure to participate without a good reason in the general meeting of shareholders has deprived the company of opportunities to make significant decisions.

The Review does not tell what a ‘significant decision’ is. Such ambiguity creates room for all kinds of abuse and provides greater freedom for raider attacks.

What is a ‘significant decision’? The decision on the election of management bodies? The decision to increase the authorized capital of the company? Or can it be the decision to elect the secretary and the chairman of the general meeting? The Review does not answer these questions.

On the other hand, the absence of the definition gives room for judicial interpretation which can be seen as an additional guarantee to shareholders: they will be able to prove in court that a particular decision is or is not significant to the company. This is a plus, since it is often difficult to see right away which decision is significant for a company and which is not.

The expulsion of a majority shareholder is also resolved in a rather controversial manner (article 12 of the Review). The review offers two mutually exclusive options to deal with this matter. The first option: a majority shareholder can be excluded from a company as the Federal Law ‘On Limited Liability Company’ does not prohibit this.

The second option: an owner of more than 50 percent shares can be excluded only if the company’s articles of association does not give other participants the right to secede from the company.

It seems that the second approach is fairer: it can give to the majority shareholders protection against corporate raids.

On the other hand, the second approach, though reasonable, is based not on the Federal Law ‘On Limited Liability Companies’, but rather on the general perception of ‘reasonableness’ and ‘fairness’ in corporate law.

It will become clear very soon what approach shall prevail, based on law or on justice, when the Supreme Commercial Court of Russia adopts this review.

In conclusion, I would like to emphasize that this Review is of extreme importance for Russian corporate law, for transactions with shares of limited liability companies, for resolution of corporate conflicts in limited liability companies (for instance, deadlocks).

Muranov, Chernyakov & Partners