In mid-2015, serious changes were made to a special part of the Civil Code. One of the most important introductions concerned the emergence of 2 mechanisms, in particular: the option to conclude an agreement and the corresponding agreement. Until then, these tools were unfamiliar to Russian business. We learn from the article that they mean what the differences are, how they can be applied in practice, and what needs to be taken into account.
General concept
An option is a contract according to which one party undertakes to perform an action that is provided for by an auction in relation to the other party in a certain period or when appropriate circumstances arise. Appearing as a derivative instrument and used on exchanges, the option to conclude a share purchase and sale agreement was not limited. It began to spread widely outside the exchange space. Most often, it is used in structural transactions in the area of acquisitions and mergers. Often, shareholder agreements provide for a mechanism to break the deadlock by appropriate management of the company, as well as use in other commercial relations.
If earlier in our country the option was used only on the stock exchange, then over time two models of its legal regulation have developed.
- In the first case, one party, on a paid or free basis, provides the other party with an offer for a certain time to sign a contract or to issue an appropriate offer. The second party may exercise the right of acceptance, as a result of which the main contract is signed. The peculiarity of this right is in the second form, which means the possibility of implementation without the participant who issued the offer.
- In the second model, an option to conclude a contract (purchase and sale of real estate, for example) is initially executed in the form of a basic agreement without applying a scheme with an offer and further acceptance. In this case, one party grants the second party a second right of demand to apply the relevant performance in any period or under certain conditions.
How it was and how it became
More recently, the following values could be included in an option to conclude a contract:
- Issuing Central Bank, which gives the right to acquire shares of the AO that issued the corresponding Central Bank. This is carried out on the basis of Article 2 of the Law "On the Securities Market" No. 39-FZ.
- A derivative of a financial type, which is used at auction on the exchange, according to the instruction of the Central Bank of the Russian Federation “On types of derivative financial instruments” No. 3565-U.
Both the issue and the circulation of the issuer's option are regulated by applicable law. The issuer's option is not issued for the asset, with the exception of the issuer's shares. This tool was not actually used for commercial purposes. But an option contract in the form of a financial derivative cannot be used outside the exchange. Therefore, until recently there were simply no over-the-counter options in the country.
At the same time, Russian businessmen, basing their position on the principle of freedom of agreement, have repeatedly tried to use options for concluding a contract. Judicial practice, in turn, recognized them invalid, because the option in almost all cases is a deal under a test condition in connection with the possibility of using which there has been a negative court practice. Examples of relevant decisions are resolutions of the Federal Antimonopoly Service of the Volga-Vyatka District No. A28-10224 / 2004-284, the Federal Antimonopoly Service of the North Caucasus District No. F08-3832 / 2003 and others.
Courts often recognized options for concluding an equity agreement as preliminary agreements. For both parties, this meant the emergence of additional risks that are associated with interpretation (if you had to go to court to resolve disputed issues).
However, in mid-2015, when changes were made to the Civil Code, the situation changed. The law fixed the possibility of making transactions with conditions that depend on the parties that signed the relevant agreement (i.e., test). In addition, 2 mechanisms were simultaneously recorded: this is an option to conclude a contract and the corresponding contract. They are indicated in articles 429.2 and 429.3 of the Civil Code.
In the article we will study these legal mechanisms, their similar and distinctive features, and also compare them with the subscription agreement as another new instrument of Russian law.
Irrevocable offer
As mentioned above, the recently introduced option to conclude an agreement, provided for by Article 429.2 of the Civil Code of the Russian Federation, consists of 2 parts.
The first consists in signing a contract, where one side provides an irrevocable offer to the second, that is, the opportunity to sign the main contract on agreed terms. The second part includes the implementation by acceptance of the issued irrevocable offer. To sign the main contract, one acceptance is enough. Therefore, the participation of the one who issued the offer is optional.
In accordance with the law, an option to conclude a contract is characterized by the following main points:
- It may be accompanied by payment or be free of charge.
- It contains conditions that allow you to identify the subject and other significant conditions of the main contract.
- It is concluded in accordance with the form of the main contract.
- It may be with the assignment of rights to the option.
The ability to fulfill the option by a single party through acceptance makes it convenient for use in different schemes. At the same time, you need to remember the need to comply with all applicable legal provisions. For example, if we are talking about an option to conclude a contract of sale of shares, this means preliminary obtaining the approval of the corporation, waiver of preemptive rights and so on.
At the same time, when operating with this tool, you should remember about the problems that are associated with the actual exercise of the corresponding option, when the main agreement must be certified by a notary or subject to state registration. The option to conclude a contract is concluded in accordance with the form of the main agreement. In practical implementation, questions may arise regarding the certification by the notary or state registration of the offer and acceptance if they are certified separately, and not in the form of a single document.
Option with shares LLC
An example is the options for concluding contracts of sale of shares in an LLC, since, according to current law, a transaction on the alienation of a share or the corresponding part in the authorized capital of an LLC must be certified by a notary. This is stated in Article 21 of the Law "On LLC" No. 14-FZ. In fact, often problems arose that were related to the unwillingness of notaries to certify the acceptance and offer, as well as to recognize these documents as sufficient for the implementation of a purchase or sale transaction or an option to conclude an agreement for the gratuitous alienation of a share in an LLC. However, since 2016, Law No. 14-FZ has been amended, according to which a transaction was possible only when a single document was certified by a notary, which was signed by both parties.
In accordance with this, the use of the corresponding option (to conclude a share donation agreement, for example) has actually become impossible, since its implementation requires signing, and therefore the participation of 2 parties. Therefore, the provision of an acceptance by an irrevocable offer side is not enough to realize the option.And this goes against the very construction of the described mechanism.
In accordance with the foregoing, it can be summarized that the form of an option to conclude a contract is interesting for the implementation of the relevant schemes. There are certain problems and limitations, as well as potential ones that should be taken into account when using this tool.
Demand for execution
Although the option contract has a similar name with the option to conclude the contract, the purchase and sale of shares, real estate, donation and other transactions through it constitute an independent mechanism, which is carried out not through acceptance of an irrevocable offer, but through the demand for fulfillment of a previously signed option contract. Therefore, it is understood as an agreement according to which one party may require the other to carry out certain steps in a preliminary manner, for example, to transfer an asset, transfer money and other actions.
An option contract has the following main characteristics:
- The requirement to perform actions may be stated under certain circumstances specified in the option.
- The law explicitly states that an option may be gratuitous, that is, without paying money for the possibility of making a claim under an option contract, even if it is signed by commercial entities.
The traditional English option scheme, which is also known to Russian businessmen, can be implemented in two payments:
- The payment of a premium on an option.
- A payment for the transaction, for example, the transfer of an asset.
Risks under an option contract
According to our law, payment is possible only by option agreement. However, payment is not provided for a person to perform a certain action, that is, a transaction. On the basis of the principle of freedom of contracts, it can be assumed that the parties themselves may provide for remuneration for the performance of these actions. But due to the fact that there is no direct indication of the possibility of payment for the performance of certain actions in the law, the corresponding obligation can be fixed in the option agreement in other ways. In this case, each party carries risks, which are as follows:
- Making a payment for some actions as part of an option premium. Since this concept does not serve as a fee for performing actions, there is a risk in options when performing the corresponding actions. An example of this is the transfer, under an option, by one person of a product that does not meet the necessary quality standards. If this fee refers to the option premium, then in calculating losses due to receiving defective goods, the court most likely will not take into account this fee, because it is not a fee for transferring goods as such.
- Making a payment in the form of a condition for the exercise of an option. The risk described above regarding payment for the performance of an action within the framework of an option premium is also relevant for a payment in the exercise of an option. In addition, the payment for the execution of an action can be realized only after its implementation, since the condition for the exercise of the option must be fulfilled before this action.
These methods may be characterized by other risks arising in connection with certain actions that are performed during the option. Thus, when exercising an option, the best way to pay for the execution of an action should be evaluated, depending on what needs to be done.
Notarization and state registration
When executing an option contract, as well as, in fact, with an option to conclude a contract, problems may arise that relate to the stage of certification of an agreement with a notary or state registration. Currently, regarding what concerns the verification of the fulfillment of conditions, a certain practice has not yet developed.The reason is that this procedure is not the responsibility of either a notary or government agencies. In addition, there may be situations in which notarization or state registration will make an option contract completely impossible. An example of this may be transactions, the result of which is the transfer of ownership of shares in the LLC. Since this transition is completed from the moment of notarization of the transaction, this specialist will most likely refuse to certify the option contract. Otherwise, there will be an instant transfer of ownership, which is contrary to the terms of the option.
Regulatory issues
Compared with the option to conclude a sale contract (or other transaction), the option contract is much less regulated at the legislative level. This condition has both positive and negative features of the corresponding mechanism. It allows you to determine the option terms on your own, but at the same time in conjunction with relevant practice in business and court cases, which can lead to problems.
An option contract is a promising mechanism by which it will be possible to implement option schemes in Russian law by concluding a single document. In the future, this mechanism is likely to help successfully implement option schemes in Russian law.
Differences between the option agreement and the subscription
Since mid-2015, a new agreement appeared in the Civil Code, which was called the subscription agreement. This is stated in Article 429.4 of the Civil Code. Its design is somewhat similar to an option contract. However, this is a different concept.
As part of the subscription agreement, the subscriber will make certain payments that may be of a regular nature, as well as another provision for the right to require the executor to perform actions under the agreement on the terms and conditions defined by the subscriber. At the same time, the subscriber is obligated to transfer payments on time or otherwise perform the execution by agreement, regardless of whether he requested the appropriate execution or not.
Similarity with an option contract may appear only if you do not go into details. If we consider both agreements more deeply, we will find a difference that lies in a different legal nature. So, in the subscription agreement it is not quite clear what is meant by “provision”, which the subscriber is entitled to demand from the other party. Therefore, the legal nature may vary depending on the understanding of this term. For example, if it is a service, then the agreement has similar features with a service agreement, and if it is work, then with a work contract, etc. Thus, a subscription agreement can be understood as a framework agreement that is created for the purpose of joint application with other agreements.
Perhaps this agreement was introduced in order to adjust the judicial practice regarding contracts, which, in essence, are of a subscriber nature. For example, if persons who pay for certain services for a period have never exercised their right to demand performance during the validity period, they may charge an amount due to the failure to provide the corresponding services.
Therefore, the legal nature of the subscription agreement is different, and it was created for other purposes than options. This agreement cannot be applied in option schemes, especially considering the special provisions that establish 2 types of option contracts as separate instruments.
Recommendations and conclusion
Drawing a conclusion from the foregoing, we can say that in our law in the end there was an opportunity to execute option schemes using special appropriate constructions. In fact, this is a big step towards the development of law.Together with other amendments to the Civil Code, it helps lawyers to use the main mechanisms in structuring transactions owned by lawyers abroad. However, one must remember that these tools are not without drawbacks. These include, for example, weak regulation, conflicts between existing and introduced norms of the law, not always clear distinction between option mechanisms and other instruments of the corresponding branch of law.
All these problems are connected, first of all, with the fact that options for concluding contracts of sale of real estate, shares and other things, donations are new tools for our law, and there is no judicial practice on them yet. In this regard, it is recommended with caution to use these mechanisms, taking into account the features of the upcoming transaction. This also applies to potential problems with certification by a notary public or the state registration of options, as well as the need to fix a certain fee for their implementation.
