Restoration of corporate control. The essence and procedure of the procedure. In which cases is it relevant

Sep, 01 2022

Contents:

Registration of a company, namely a limited liability company, is not a complicated or labor-intensive procedure today. To do this, it is necessary to have one or more founders, an authorized capital of more than 10,000 rubles, a charter, a protocol on the establishment of an LLC and an agreement if there are several founders. The latter document performs a rather important function – it fixes the size, procedure and terms of payment of shares in the authorized capital for each of the founders in order to avoid a dispute. 

However, the creation of an LLC does not always go without problems. Sometimes corporate conflicts arise between LLC members, which later turn into an acute stage when there is a violation of the rights of individual founders. This situation arises due to the failure of the terms of payment of the share in the authorized capital and the subsequent failure to take into account the vote of the participant. The founders, who subsequently failed to make the payment on time, must restore control over the business in court. In this article we will look at all the details of the procedure. 

Restoration of corporate control

Regulatory legal acts of the Russian Federation grant LLC participants various rights. For example, corporate rights or the rights of shareholders are fraught with legitimate grounds for making a profit, for controlling a business, for selling or buying shares, and others. 

Most seriously, in our opinion, it is necessary to take the following types of rights: to profit and control over the enterprise. Dividends consolidate the obligation of the founder or shareholder to influence the fate of the company, and management responsibilities grant the right to develop the organization through a decision-making system, influence economic activity and protect their own economic and other interests. It should be borne in mind here that corporate rights directly depend on the fact of ownership of shares in a limited liability company. It turns out that such rights are acquired only after the registration of the company in the Unified State Register of Legal Entities or the appearance of a mark in the register of shareholders, if it is a joint-stock company. According to Article 2 of the law “On the Securities Market”, the corporate rights of a subject in a joint-stock company enshrines the fact of the presence of shares. 

The concept of rights that are acquired from the fact of participation in an LLC is directly related to the term corporate control. The latter means the fact of business management by the shareholders or participants of the LLC. Such entities influence the economic and economic affairs of the company through the opportunity to lobby their interests on a number of issues in proportion to the ownership share. Thus, the greater the number of shares or the size of the share owned by the subject, the easier it is for him to influence the state of affairs in society without taking into account the interests of others. 

There may be many reasons that may be associated with the loss of corporate control. The most common of them are:

  • Transfer of the share in the LLC to third parties. This is possible if the company’s charter allows the purchase or assignment of a share to a non-participant entity. However, it is important to keep in mind that any of the founders has a preferential right to purchase a share, however, when using some fraudulent schemes, this rule can be circumvented. For example, one of the participants of an LLC can sell its share to another participant, who in turn will donate it to a third party. In this case, there are no restrictions on gratuitous transactions within the framework of establishing a pre-emptive right. In the second “gray” scheme, we can talk about obtaining a loan from a third party, who, in case of debt occurrence, can collect the debt with shares in the authorized capital. 
  • Purchase of shares by nominal owners who are related to the real owner on the basis of a trust relationship. 
  • Transfer by the owner of the share of voting rights to a third party on the basis of a power of attorney. 
  • The subject’s withdrawal from the group of LLC participants on the eve of the organization of the owners’ meeting. Then the share goes to the LLC, and the vote of the founder is not taken into account. 
  • Alienation of a share in favor of another entity through forgery of documents and a chain of front persons. 

Ways to restore corporate control

As a rule, the restoration of corporate control as a way to protect their rights can occur using various methods, which sometimes have opposite legal forms. Among the most effective of them are the following. 

Method No. 1. Bypassing the vindication claim. 

Clause 1 of Article 149.3 of the Civil Code of the Russian Federation contains a rule on the right to demand from a subject who illegally received shares the return of a similar block of shares without filing a vindication claim. It should be borne in mind that vindication has a number of disadvantages associated with determining the nature of the origin of securities. If there is a mixture of securities on the account of one person, then it will be problematic to prove the theft of assets. 

As we noted earlier, shares are corporate securities, so they endow their holder with a whole list of corporate rights. Upon restoration of ownership of securities, the entity will be able to regain control of the company’s affairs.

Method No. 2. Cancellation of the minutes of the owners’ meeting. 

If the decisions recorded in the minutes of the meeting violate the rights of the founder of the LLC and deprive him of control over the company’s affairs, then to restore the situation, one should rely on clause 2 of Article 149.4 of the Civil Code of the Russian Federation. The paragraph contains conditions for the cancellation of the decision, which are as follows: 

  • Non-compliance with the rights and interests of the owner of a block of shares or a share in an LLC. 
  • Awareness by other persons about the existence of a dispute on the shares. 
  • Conditions under which the subject was prevented from voting despite the fact that his vote could influence the decision. 

It is important to take into account that according to clause 9 of Article 49 of the Law “On Joint Stock Companies”, the recognition by the court of illegal decisions taken at the general meeting does not automatically cancel the relevant transactions. Contracts must be annulled by the court separately from the minutes of the general meeting, since then it is necessary to prove the existence of damage as a result of the transaction. 

Method No. 3. The return of the rights to a share in the company’s capital. 

It is a separate way to protect your rights to manage your business and restore corporate control. To resort to this method, it is necessary to fulfill a number of conditions: 

  • The share is alienated by selling at a certain price. 
  • The entity that sold the share could not do it legally. 
  • The buyer had no idea about the illegality of the transaction. 
  • The owner lost his share in the company’s capital through illegal manipulations of other persons. 

It turns out that when registering a claim for the restoration of corporate control over the restoration of rights to a share in the company, the court may not take into account the positive intentions of the buyer in relation to the acquired share. And therefore, he, in turn, will not be able to count on the restoration of corporate control. After the court’s decision to return the share to the rightful owner, the defrauded buyer has the right to receive compensation from other persons (fraudsters) in the amount established by the court. 

It should be noted that problems in defending their corporate rights in the event of an illegal loss of a share in the company’s capital or shares are one of the main problems on the way to regaining corporate control. At the same time, it is not always possible to solve this problem in classical ways, that is, making a decision by the court. 

Sometimes, in order to return the lost block of shares to the rightful owner, the court may resort to the restitution procedure – bringing the subjects of settlement agreements to financial responsibility. The use of this method is feasible only if the share or shares were lost through an illegitimate transaction.  

Supreme Court clarifications on the return of corporate control

The Law “On Limited Liability Companies” establishes the following consequences for the founder of an LLC in case of violation of the terms of payment of a share in the company’s capital: 

  • Alienation of this share in favor of the company, the other participants of which must sell it in accordance with Article 24 of the above-described law.  
  • Payment of a penalty or other compensation for violation of the procedure for payment of shares. However, sanctions can be applied only if there are relevant clauses in the contract.

It is important to know that the share should be transferred to the name of the LLC only after the last day set for depositing funds into the company’s capital. 

Regarding the above information, in 2019, the Supreme Court of the Russian Federation clarified the return of corporate control, noting that the procedure is a special case of restoring one’s rights. The court also clarified that: 

  1. The fact of the unpaid share must be confirmed by the cash register, receipt orders, the presence of accounts receivable. 
  2. The fact of non–payment of a share in the authorized capital of an LLC is not a reason for automatic alienation of a share in the company. 
  3. The transfer of the share is fixed by deleting the participant of the company from the Unified State Register of Legal Entities, which should happen within the limitation period. 

The requirement to restore corporate control

The return of their rights as a member of a limited liability company or a shareholder takes place in court. A claim for the restoration of corporate control is filed by a subject (a former shareholder or participant of the company), which directly lost control. This provision is spelled out in paragraph 3 of Article 65.2 of the Civil Code of the Russian Federation. 

The limitation period for filing an application to the judicial authority to restore their rights to securities or shares is three years from the date when the person learned or should have learned about the illegitimate loss of control. It is important to keep in mind that in 2020, the Supreme Court of the Russian Federation issued an explanation that the use of a reduced two-month statute of limitations in such cases is incorrect and indicates a misinterpretation of the law. 

Author of the article
Restoration of corporate control. The essence and procedure of the procedure. In which cases is it relevant
Valentina Khlavich
Managing Partner
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