The current legislation does not interpret the concept of an “interconnected transaction” in any way, which gives ample opportunities for interpretation by corporate lawyers and courts of any kind. Nevertheless, interconnected transactions are an important element of civil law relations in society. Only the law on joint stock companies considers the term and equates it with the concept of a “major transaction”. This may not be one transaction, but several aimed at acquiring or disposing of property. The transaction value should be equal to 25% of the book value of the alienated or acquired property.
In practice, lawyers interpret the concept of “interconnected transactions” as contracts united by a common goal. The courts also do not have a clear understanding of the term and interpret it differently in the context of each individual case.
Interpretation of Terms
Related transactions is a term that is not contained in any legislative act, nevertheless it is mentioned in many legal proceedings. Therefore, it is possible to determine a related or several interrelated transactions only by indirect signs.
If the parties to the agreement coincide, then this is the first sign that can confirm the establishment of a certain chain of shell companies. But in the end, the true acquirer can also receive property.
Pay attention to the duration and subject of the transaction. If the property is sold in parts for a certain short period of time, then this is the second confirmation of the related transaction. The purpose of the transaction may also be a confirmation of the relationship, especially if it goes beyond the standard activities of a particular enterprise. Now consider who is involved in such a deal.
- Beneficiary - This is a person, a legal entity, which is the final recipient of the property being sold, even if it was hiding behind several trust agreements.
- Sole person of the executive body. In the context of interrelated transactions, such a person is regarded as a position entrusted with the management functions of a particular enterprise. Such a person may be given a power of attorney to perform certain functions, or they may be confirmed in the charter. The main thing is that the documents clearly define which contracts and for what amounts the director of the enterprise can sign.
Practical use
To get away from the requirements of the current legislation, many joint-stock companies break large transactions into several small ones. This is beneficial when the antimonopoly committee monitors the transactions of the joint-stock company and when concluding a major contract, it necessarily requires its approval. You can also hide from the obligation to negotiate a deal with the owners of the enterprise if the manager can sign contracts only up to a certain amount.
Criteria defining a related transaction
If we rely on judicial practice, we can draw the following conclusion: judges are guided by certain parameters in order to make a certain conclusion.
Unified subjective composition
In this context, the court tries to perceive the mutual relationship between the transactions and the way in which they affect each other. Companies that were able to prove the impact of specific contractual relationships on each other won the courts.
Judges can be guided by the subjective composition of transactions.This means that even if it is possible to prove a complete lack of communication under the contracts, if as a result the buyer becomes the owner of a certain property, transactions are recognized as interconnected.
Common goal and focus
Related transactions with an interest in achieving a single result may qualify as interrelated, but not in all cases. If contracts are concluded between different counterparties, but the goal is the same, and all contracts give rise to the same rights and obligations, then the relationship is easy to establish. If transactions are made only between two parties, but each of them gives rise to different rights and obligations, then such relations cannot be interrelated.
Time frame
This criterion is most often taken into account when considering court cases. The court takes into account whether all transactions were concluded simultaneously or at a certain interval. It is believed that the maximum term for interrelated transactions is one fiscal year. Naturally, if it is possible to prove that each of the transactions was the result of independent rights and obligations, then there will be no talk of any relationship.
The time frame is never considered without establishing the fact of a single focus and objectives of the transactions.
How are the identified criteria applied?
A problem arises when the enterprise itself has revealed all the signs of the relationship between transactions. In this situation, the following is recommended:
- Creation of a local document entitled “Regulation on major transactions and related-party transactions”;
- approval of the Regulation by an authorized body, for example, the board of directors or the general meeting of shareholders.
The approval of interrelated transactions should be carried out in a separate protocol. The regulations and protocols are designed to systematize and qualify large and related transactions and determine those business relationships that are not subject to approval by management bodies. Such local documents will reduce the risks of contesting transactions in court.
The Regulation should necessarily describe in detail the signs of interconnected transactions.
Approval of interdependent related party transactions
In order to control the actions of executive bodies and to exclude the option of obtaining personal benefits, it is necessary to obtain a decision on the approval of interrelated transactions by the governing body and the meeting of shareholders. Approval must necessarily precede the transaction itself. At the same time, if the transaction was completed, and only then approval was obtained, then it is impossible to recognize it as invalid only on this basis. At the time of the conclusion of the contract, no one objected.
As a rule, the board of directors approves interconnected transactions. The main thing is that not a single member of the council has a personal interest in the transaction. If at least one of them is interested in her, then he has no right to vote. When there are more recent persons, then approval can only be carried out at a general meeting of shareholders.
The general meeting of shareholders is required to approve the transaction in the following cases:
- if the alienated property is 2% of the book value of assets or more;
- if shares are alienated, which make up 2% of previously placed;
- other equity securities planned for sale.
After the decision is made, a protocol must be drawn up on the approval of the related transactions. The decision should be made by ordinary majority vote, only without the participation of shareholders who are interested in the transaction. The removal of such members of the company is a kind of protection for the remaining shareholders from indecent actions.
Big deals
As well as interconnected transactions, large ones have different interpretations, depending on the legal form of the enterprise.
- LTD. For such legal entities, a transaction is deemed to be large if more than 25% of the total value of all property of the enterprise is subject to sale or acquisition. Statutory documents may provide for other restrictions.
- AO. In this case, the transaction is recognized as large if property is acquired or sold equal to 25 percent or more of the book value of all assets of the legal entity.
- Unitary enterprise. In this case, for the purpose of determining a major transaction and an interconnected transaction, the size of the authorized capital is used. The transaction should not exceed 10% of the authorized capital or in the contract the total value should not exceed the minimum wage by more than 50 thousand times. The size of the transaction for the sale of property is determined on the basis of the accounting of the enterprise. If the property is acquired, then the value of the transaction is determined by the total value of the contract.
The decision on a major transaction can be made solely with the consent of the owner, who acts in this case, the Russian Federation. If consent is not obtained, then it may be declared insolvent. Therefore, the heads of unitary enterprises are obliged to coordinate almost any transaction with the authorized body.
In the case of state and municipal enterprises, the sale value should not exceed 10% of the book value of the organization’s assets. Statutory documents may establish a different boundary size for determining a major transaction.
As in the situation with unitary enterprises, heads of state and municipal institutions are required to coordinate almost any transaction with the authorized bodies of the Russian Federation. If this is not done, then virtually any business transaction may be invalidated.
The head of the enterprise must apply to the commission, which coordinates such transactions with a specific set of documents.
It:
- a statement on the preliminary approval of the transaction;
- copies of statements for the last financial year;
- A copy of the draft agreement to be agreed;
- when it comes to the sale or purchase of property, then a report on the estimated value of such is attached;
- you have to attach information about existing payables and receivables.
30 calendar days are allotted for decision making.
The rules that are aimed at determining interrelated transactions and major transactions do not apply to ordinary business contracts. Although the legislation does not define the phrase "current business activities of a legal entity." At the same time, the courts have approximately the same opinion in determining the current activities of the enterprise. It:
- contracts that are designed to supply the company with materials and raw materials in order to start the production process;
- transactions aimed at the sale of goods or services;
- loan agreements for current business operations.
Many judges pay attention to the types of activities of the enterprise, that is, they believe that the statutory and ordinary activities are equal.
Challenging major and related transactions
To challenge a transaction, you must have signs of interconnected transactions and large transactions, namely:
- prove that the transaction has a common goal, a specific time frame and there is a single subjective composition;
- there must be a violation of the rights and interests of the members of the joint stock company or other legal entity protected by law;
- the transaction could lead to damage or could cause adverse consequences for the legal entity, its founders.
Evidence of the amount of loss in such litigation is not required.
The concept of "interconnected transaction" implies direct intent in its completion. If at the time of the transaction it was not obvious that it was unprofitable for a legal entity, then it is impossible to prove any intent.You can prove the guilt of the enterprise management only if it is established that the transaction was not planned for execution.
When a lawsuit may be denied
The Plenum of the Supreme Arbitration Court of the Russian Federation explains in detail in what cases a lawsuit may be refused:
- if the plaintiff requests the court to declare the particular transaction invalid, and the decision to conclude the contract was approved by the general meeting, but the plaintiff did not take part in it, it is very important how much his voice would influence the decision;
- at the time of filing the claim, the transaction was completed in the prescribed manner;
- the defendant did not know and should not have known that the other party was violating the requirements stipulated by law and statutory documents on the approval of the transaction.
What's new in order to conclude major transactions this year
Since the beginning of the year 2017, a new procedure has entered into regulating the conclusion of major transactions, which determines the following:
- Now, if the transaction is completely unrelated to the main activity of the enterprise, it may be declared invalid. In the same perspective, transactions that can even indirectly affect the termination of an enterprise or change its type of activity will be considered. These indicators do not apply to leases and licensing transactions.
- Now, at the time of the disposal of the property, it will be necessary to compare the carrying value of the assets and the sale price or the carrying amount. The board of directors of the company must take market value into account.
- The contract must necessarily contain a conclusion with information on what may be the consequences of a transaction, as far as it is appropriate.
- An interconnected major transaction can now be agreed both before its conclusion and after. Enterprises are now entitled to independently expand or reduce the list of transactions that are subject to approval by the governing body. You can also set an upper and lower limit for contracts for the acquisition or disposal of property.
- The right to challenge a major transaction is limited, now you can make such a decision only by the board of directors. In the process of contestation, it is not necessary to prove the loss of business of the transaction. An interdependent transaction may be challenged by a participant who holds at least 1% of the share.
Despite extensive judicial practice, the dependence of the parties to the transaction on each other is still a debatable issue, because it should be based solely on the relationship of rights and obligations, performance. Many jurists still believe that in this case the property status of the organization should not affect the qualification of the contract as a major one. The same opinion exists regarding the term of transactions. It is not a fact that transactions are interconnected if they are concluded within 6 or 12 months. Simply put, each situation requires detailed consideration. Such arguments are relevant for parent and subsidiary enterprises when the resale of property is common practice. Therefore, it is very important to display in corporate documents what is a large and interconnected transaction.