Corporate conflicts and disputes. When they arise. What are the consequences for the company’s activities.

Contents:

• Legislative basis of corporate disputes
• Types of corporate disputes
• Participants in corporate disagreements
• Jurisdiction of corporate disputes
• Pre-trial and judicial procedure for consideration of corporate conflicts
• Question and answer

Corporate conflicts are various disagreements that arise between the participants, investors, shareholders and managers of an LLC on the basis of restrictions on the rights of certain entities. 

Now experts in the field of law propose to distinguish between the concepts of corporate conflicts and corporate disputes. In particular, the latter is usually understood as a disagreement that is already at the stage of pre-trial or judicial review. 

Any corporate conflict can lead to unpleasant economic consequences for the company as a whole and its shareholders-participants in particular. This concerns obvious financial losses, missed opportunities and slow business development. 

However, disputes within organizations are a fairly frequent phenomenon. Sometimes conflicts have a hidden nature, and they arise on the basis of personal motives. In this article we will tell in detail about the causes, types and legal basis of internal disagreements. 

Legislative basis of corporate disputes

First of all, in order to understand the causes of internal disputes, it is necessary to analyze the organizational and legal form of corporations. According to Article 65.1 of the Civil Code of the Russian Federation, corporations should be understood as legal entities that have the highest management and decision-making body formed from the company’s participants. In fact, many enterprises and organizations fall under such requirements, for example, LLC, partnerships, associations, cooperatives and others. 

According to Article 2 of the Civil Code of the Russian Federation, corporate relations must be considered inseparably from a corporate organization and its management. The rights of the management and other members of the company can be violated on many grounds, so conflict situations are not uncommon in any organization. 

Legal practice shows that sometimes corporate conflicts are disguised as other disputes. For example, the division of company shares in the event of a divorce is not a corporate conflict, despite the fact that it directly affects the distribution of securities among their holders. Similarly, a corporate dispute between one company and another legal entity is not a corporate dispute. Thus, any corporate conflict has one important feature – it is always localized within one organization. Other features of corporate disputes include:

• Affects persons directly related to the corporation. Corporate conflicts always affect the interests of a number of subjects. Among them are the founders, shareholders, participants, company management, employees and, under certain conditions, creditors or investors.  
• Availability of conditions for the independent disposal of the disagreements that have arisen. Dispositivity of disputes is one of the most important features of corporate conflicts. The parties can independently outline ways out of the current situation or apply for a resolution of the conflict to third parties or to the court, which will consider in detail, including the issued regulations of the company. These documents can greatly affect the legal status of the company and the participants of the legal entity, so they are given a lot of attention. 
• Compliance with procedural legislation. According to Russian legislation, all participants in a corporate dispute and entities whose interests have been affected must be notified of the existence of a conflict in accordance with the rules of the legislation of the Russian Federation. 
• The property aspect. The object of disagreement is usually the property or assets of the company, as well as property relations.

It is worth noting that a detailed legislative basis for corporate conflicts was formed about thirteen years ago with the adoption of amendments to the Arbitration Procedural Code of the Russian Federation, despite the fact that the issues of resolving such disagreements began to arise acutely already in the 90s of the last century. 

Types of corporate disputes

Every year, the consideration of cases on the merits related to corporate disagreements between the subjects of the enterprise becomes more and more difficult and unobvious. However, all cases are based on the main types of corporate disagreements. Article 225.1 of the APC of the Russian Federation contains a detailed list of the main reasons for starting internal conflicts considered in arbitration. These include:

• Losses of the company due to the decisions of the director. If the director’s work has led to monetary losses of the company, then on this basis compensation can be collected from him according to Article 53.1 of the Civil Code of the Russian Federation. To do this, in the framework of legal proceedings, it is necessary to establish bad faith in the decisions taken by the director, the fact of financial losses, as well as evidence of the relationship of these actions with the consequences. For example, the director could distort the information and provide false information to the management about the concluded contract or sign an agreement bypassing the opinion of the commission. 
• Exclusion of the founder from the membership of the legal entity. Such a possibility is provided for in Article 10 of the Law on Limited Liability Companies, according to which a participant can be excluded from the company only if there are certain conditions: serious misconduct that resulted in violation of the rights of other participants, or inaction that significantly complicates the work of the organization. Typical grounds for starting a lawsuit are consent to conduct unprofitable transactions in advance or frequent absenteeism of general meetings. The court will accept such a statement from the participant (group of participants) LLC, which have a total share in the authorized capital of the company of more than 10%. 
• Cancellation of the signed contract. The Civil Code of the Russian Federation provides a number of reasons for breaking the agreement. These include obviously unfavorable terms of the transaction, the counterparty’s knowledge of the interest of third parties in signing the contract, as well as the lack of consent to conclude an agreement with the commission or managers.
• Disputes over the distribution of dividends. Quite often, the share of dividends paid turns out to be less than the proportional number of securities of the company’s participants. Then the subject gets the opportunity to preemptively defend his rights through the court.
• Conflicts related to the establishment, reorganization and closure of the corporation. As a rule, all three procedures have a clear procedure according to the legislation of the Russian Federation. This concerns the clarity of filling out business papers, compliance with the deadlines for their submission to government agencies, notification of the Federal Tax Service and other points, without which any actions on a legal entity are impossible. If these rules and procedures are not followed, the management of the company may face administrative and even criminal liability. As for corporate conflicts, the subjects most often meet in the courtroom when determining the debt obligations of the company after its liquidation or if there are disagreements about the ownership of shares and shares in the authorized capital of the LLC. 
• Disagreements concerning the resolution of the consequences of disputed transactions. 
• Conflicts about the appointment or termination of the powers of individual employees or managers. In particular, situations with the illegitimate dismissal of the company’s CEO are quite common and such disputes often lead the parties to the courtroom. 
• Conflicts concerning the issue of shares of the corporation. 
• Disagreements over the compilation of the list of owners of securities. It can be said that if inaccuracies are found by the compilers of such a register, a person whose rights have been violated has the right to file a lawsuit to protect their interests. 
• Disagreements concerning the convening and holding of the general meeting of the LLC participants. Violation of deadlines, procedures, notification rules and other items that may affect the legitimate rights of citizens are grounds for filing a claim with the court.  
• Conflict based on decisions made by the managers of the LLC. Any order, order and other internal act may be annulled in court in case of violation of the rights of any of the participants of the legal entity. To file a claim in court, a two-month period is given from the date of discovery of the fact of violation of rights. 
• Disputes over notarization of transactions for the sale of shares in the authorized capital of the company. This, first of all, concerns the completion of a deliberately illegal purchase/sale. 

Participants in corporate disagreements

Internal disputes arise within the firm and concern subjects who are directly involved in the work of the firm. This is the main specificity of judicial proceedings when considering such disagreements. Usually , participants in the proceedings may be: 

• founders or owners of a share in the authorized capital of a legal entity;
• the company itself as a legal entity;
• managing link of a legal entity;
• the full board of directors or its individual members;
• third parties, for example, intermediaries who help the company to keep a register of its shareholders, as well as various public authorities. 

In the latter case, the corporate conflict ceases to be internal and becomes external.

Jurisdiction of corporate disputes

All corporate conflicts belong to the category of arbitration cases. According to Russian legislation, most of such disputes can be referred to arbitration courts. In general, the jurisdiction of corporate conflicts can be divided into several groups.  

1. Arbitrable. Such corporate disputes have the right to be considered by state, as well as arbitration courts. You can apply to the arbitration court in cases of:

• ownership of securities of domestic corporations;
• violation of the procedure for buying and selling shares;
• conflicts related to corporate and other company management agreements; 
• placement or circulation of securities regarding the compilation and maintenance of the register of holders.

2. Non-arbitrable. This means that court sessions on such cases can take place exclusively in state judicial bodies, namely the Arbitration Court of the Russian Federation. Such disagreements include:

• conflicts over violations of the rules of convocation of the general meeting; 
• disputes over transactions involving the purchase of a share in the authorized capital of an LLC and the notarization of the relevant contract with a notary;

2. Non-arbitrable. This means that court sessions on such cases can take place exclusively in state judicial bodies, namely the Arbitration Court of the Russian Federation. Such disagreements include:

• conflicts over violations of the rules of convocation of the general meeting;
• disputes over transactions involving the purchase of a share in the authorized capital of an LLC and the notarization of the relevant contract with a notary;
• challenging the company’s internal regulations;
• conflicts within companies, some of whose shares belong to the state;
• disagreements over the securities of public communities;
• exclusion of entities from the number of LLC participants.

3. Conditionally arbitrable. Such conflicts may be referred to the arbitrators only if a number of conditions are met. One of them indicates a special agreement on the procedure for considering the conflict in a certain court, signed after February 1, 2017. The following disputes are considered conditionally arbitrable:

• related to the creation, reorganization and liquidation of the company;
• related to the claims of the company’s participants for damages, cancellation of commercial transactions;
• concerning the powers of the management of the enterprise;
• about the issue of securities.

Pre-trial and judicial procedure for consideration of corporate conflicts

Any corporate dispute has two main stages of consideration: pre-trial and judicial.

Pre-trial settlement of disputes is traditionally considered the preferred format for resolving corporate conflicts. In this case, the subjects of the dispute have the opportunity to save time, reduce court costs, resolve the issue without publicity in the media, as well as come to a common beneficial solution. To achieve these goals, the parties initiate negotiations within the company or with the involvement of a third independent party – a mediator. However, in both cases, the parties face the same task: to find a way to solve the problem with the least consequences for the company’s activities. In many ways, this means finding a compromise for two subjects of the dispute at once.

It is worth noting that it is important to document the pre-trial stage of conflict settlement officially. This means drafting and sending claims, as well as maintaining a protocol of negotiations. This is important to prove your position in the case of a court hearing.

If the pre–trial stage of the settlement of an internal dispute is unsuccessful, the only option for resolving the conflict is to go to court. To do this, you need:

• Prepare and send a statement of claim to the court.

It should contain information about the causes and essence of the conflict, as well as the requirements for the defendant. When trying to resolve the conflict in a pre-trial manner, this information must be taken into account with the attachment of all necessary documents.

• Prepare for the consideration of the case on the merits. As a rule, all available evidence is presented in court to defend their position. If necessary, the judge will summon witnesses to the court to testify or appoint a number of examinations.

It is important to take into account that the legal proceedings on corporate conflicts are a rather lengthy process. It can take months or even years with the scale of the dispute.

VALEN’s legal specialists have extensive experience in the field of corporate law and protection of the interests of participants and shareholders. We are ready to provide legal assistance at any stage of the dispute.

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