On April 3, 2024, the Arbitration Court of the Kaliningrad Region issued a decision in case No. A21-5127/2023. The decision invalidated the decision of the general meeting of participants of a Russian limited liability company (the “Company”), which is a joint venture, to early terminate the powers of the sole executive body (the “CEO”) and appoint another individual as the new CEO. The resolution of the meeting was challenged by the former General Director (hereinafter - the “Claimant”) of the Company, who was also a 20% shareholder of the Company and did not vote on this issue. The majority shareholder of the Company with 80% share is a legal entity from an “unfriendly” foreign country. In support of the claim, the Claimant stated that the Company violated the provisions of Decree No. 618 of the President of the Russian Federation from September 8, 2022 “On the Special Procedure for the Execution of Certain Types of Transactions (Operations) between Certain Persons" (hereinafter – “Decree 618”).
On July 8, 2024, the Thirteenth Arbitration Court of Appeal[1] upheld the decision of the Arbitration Court of the Kaliningrad Region and the majority shareholder’s appeal was upheld. According to the Claimant, the violation of Decree 618 was manifested in the fact that no permission was obtained from the Government Commission for Control of Foreign Investments in the Russian Federation (the “Government Commission”) to change the CEO, which, according to the courts of the first and appellate instances, is required due to the fact that the majority shareholder of the company is a company from an "unfriendly" foreign state.
The courts did not provide any reasoned legal position as to why the decision to appoint a new CEO who is a natural person (and not to transfer the powers of the CEO to a commercial management organization or a manager - individual entrepreneur) requires the permission of the Government Commission, but only quoted verbatim certain provisions of Decree 618, Letter of the Ministry of Finance from October 13, 2022 No. 05-06-14RM/99138 “Official Clarifications No. 1 on Issues of Application of Presidential Decree No. 618 dated September 8, 2022”, as well as Presidential Decree No. 737 from October 15, 2022 “On Certain Issues of Execution of Certain Types of Transactions (Operations)”. However, in the first two listed documents there is no mention of the need for permission of the Government Commission for a decision to change the CEO who is a natural person, and the third document does not apply to limited liability companies at all.
This decision is the first and so far the only judicial act dealing with the issue of the need to obtain the permission of the Government Commission to change the CEO in companies whose shareholders are “unfriendly” persons, and cannot be considered as a well-established practice, but raises certain concerns in the legal and business community.
[1] Resolution of the Thirteenth Arbitration Appeal Court of 08.07.2024 N 13AP-15836/2024 in the case No. A21-5127/2023.
On July 8, 2024, the Thirteenth Arbitration Court of Appeal[1] upheld the decision of the Arbitration Court of the Kaliningrad Region and the majority shareholder’s appeal was upheld. According to the Claimant, the violation of Decree 618 was manifested in the fact that no permission was obtained from the Government Commission for Control of Foreign Investments in the Russian Federation (the “Government Commission”) to change the CEO, which, according to the courts of the first and appellate instances, is required due to the fact that the majority shareholder of the company is a company from an "unfriendly" foreign state.
The courts did not provide any reasoned legal position as to why the decision to appoint a new CEO who is a natural person (and not to transfer the powers of the CEO to a commercial management organization or a manager - individual entrepreneur) requires the permission of the Government Commission, but only quoted verbatim certain provisions of Decree 618, Letter of the Ministry of Finance from October 13, 2022 No. 05-06-14RM/99138 “Official Clarifications No. 1 on Issues of Application of Presidential Decree No. 618 dated September 8, 2022”, as well as Presidential Decree No. 737 from October 15, 2022 “On Certain Issues of Execution of Certain Types of Transactions (Operations)”. However, in the first two listed documents there is no mention of the need for permission of the Government Commission for a decision to change the CEO who is a natural person, and the third document does not apply to limited liability companies at all.
This decision is the first and so far the only judicial act dealing with the issue of the need to obtain the permission of the Government Commission to change the CEO in companies whose shareholders are “unfriendly” persons, and cannot be considered as a well-established practice, but raises certain concerns in the legal and business community.
[1] Resolution of the Thirteenth Arbitration Appeal Court of 08.07.2024 N 13AP-15836/2024 in the case No. A21-5127/2023.