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New regulation regarding transactions between related parties Jul 12

On July 13, 2017, amendments to the Commercial Law (hereinafter - the "Amendments"), which provide a new regulation regarding transactions between related parties of the company, will enter into force. The amendments are based on the recommendation of the Organization for Economic Co-operation and Development (OECD) about the necessity to review the regulatory framework on the evaluation, coordination and disclosure of the transactions between the related parties.

The Amendments improve the definition of the related party and the procedure for the conclusion of transactions with related parties in order to ensure a higher level of protection of minority shareholders.

With the Amendments, Chapter XI, Section 1.1 "Restrictions on the conclusion of a transactions with a founder, shareholder, member of the board or the supervisory council and a related persons" is excluded from the Commercial Law. Instead, the Commercial Law has been supplemented with a new Chapter 6 "Transactions of related parties".

According to the new regulations, following persons are considered to be related parties:

1)     the shareholder of the company, which has a direct decisive influence in the company (hereinafter - the "Shareholder");

2)     the member of the board and the member of the supervisory council of the company;

3)     the members of the board and members of the supervisory council of the shareholder (if legal entity);

4)     a person who is a relative (until the second degree), spouse or brother-in-law until the first degree of the member of the board, the Shareholder or the member of the supervisory council or a person with whom the mentioned persons have a shared household;

5)     a legal entity in which the Shareholder, the member of the board, the member of the supervisory council or the persons listed in the previous paragraph have a decisive influence.

The decisive influence in a company arises on the basis of a group of companies contract or a shareholding. A definition of a decisive influence is included in Article 3 of the Group of companies Law, as well as in case law.

Unlike the previous version of the Commercial law, the new wording of the law provides the same procedure for all the transactions of the related parties, that are not closed in the course of the usual commercial activity performed by the company or which does not conform to the market conditions. All the transactions of the company with the related parties must be approved by the company's supervisory council, but if the company does not have a supervisory council, then with the meeting of the shareholders.

Prior to the adoption of the aforementioned decision, the board of the company is required to provide information to the members of the supervisory council about the related party, the necessity of the transaction, the terms of the transaction, as well as an assessment of the impact of the transaction on the company's business activities, financial situation and influence on the shareholders of the company which are not related parties.

It should be noted that in the event of a failure to comply with the prescribed procedure, the transaction between the company and its related party is to be considered null and void. It should also be taken into account that a person whose interests have been affected by the transaction may request a declaration of invalidity of the transaction.

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