Despite the sanctions imposed by western countries, a significant number of foreign companies maintain their presence on the Russian market and continue to operate, mainly through subsidiary limited liability companies ("LLCs"). In this connection, we bring to your attention a review of Russian laws governing the legal consequences of a foreign shareholder's failure to fulfill (or improper fulfillment of) its obligations to manage an LLC established under Russian laws.

1. EXCLUSION OF A SHAREHOLDER FROM AN LLC

On request of other members of an LLC, a shareholder may be excluded from the LLC if they grossly violate their obligations or by their actions/inaction make the activity of the LLC impossible or significantly impair it.[1]

The reason for exclusion from the LLC may be, in particular, evasion of participation in general shareholder meetings of an LLC ("GSM"), since it follows from the law that a shareholder is obliged to participate in the adoption of corporate decisions without which the LLC cannot carry on its activities under the law, if their participation is necessary for the adoption of such decisions.[2] In addition, evasion of participation in the GSM may also constitute a violation of a more general obligation not to commit actions/inaction that significantly impede or make it impossible to achieve the goals for which the LLC was established.^[3]

It follows from explanations of the Russian Supreme Court[4] that evasion of participation in an GSM can lead to exclusion of a shareholder from an LLC if such evasion:

• is systematic

Analysis of court practice shows that courts come to a conclusion as regards systematic evasion of participation a GSM based on the results of assessment of the actual circumstances in each specific case. As an example, there was a decision in which the court recognized as systematic the evasion of a GSM at least twice,^[5]

• has no valid reasons and
• deprives the LLC of the ability to adopt significant business decisions on items on the GSM agenda, if the failure to adopt such decisions causes substantial harm to the LLC and/or makes its activities impossible or significantly impairs them.

Based on acts of interpretation and law enforcement practice,[6]^,[7] decisions without the adoption of which an LLC cannot continue its activities in accordance with the law or the activities of the LLC become impossible (or are significantly impeded) may include, inter alia, decisions: (i) on election and early termination of powers of the single-person executive body or members of the board of directors; (ii) amendments to the charter if they are required by law and without them the LLC will not be able to continue its activities; (iii) approval of annual reports and annual accounting//financial statements; (iv) distribution of profits among members.

We should note separately that the law does not establish restrictions for excluding from an LLC members holding a share in the authorized capital exceeding a particular amount. Examples could include the resolutions of courts on excluding from an LLC the owners of 50% of shares, as well as members holding more than 50% of shares.[8]

A claim to exclude a shareholder from an LLC may be filed with the court by other LLC shareholders whose shares in aggregate amount to at least 10% of the LLC’s share capital.^[9] The rules for excluding a shareholder from an LLC apply to LLC shareholders regardless of their place of registration or citizenship. By its nature, the exclusion of shareholders from an LLC does not apply to an LLC with only one shareholder.

2. FORCED LIQUIDATION AND TERMINATION OF A NON-OPERATING LLC

Clause 3 Article 61 of the Russian Civil Code provides the following grounds for compulsory liquidation, which may apply in a situation where a foreign shareholder fails to fulfill or improperly fulfills its obligations in managing an LLC:

• Based on a lawsuit of an LLC shareholder in the event it is impossible to achieve the purposes for which it was established, including if it becomes impossible to carry out the activities of the LLC or they are substantially impeded.^[10]

These grounds are applicable only in a number of cases where control in a Russian LLC is shared between a Russian and a foreign partner (while foreign businesses in Russia are, for the most part, controlled by a sole shareholder) and the foreign partner's inaction results in an inability to achieve the purpose of the joint venture. At the same time, we note that this tool is generally not used in practice and there is no formed judicial practice on this issue.

• If the LLC carries out activities without a proper permit or license or in the absence of mandatory membership in a self-regulating organization (SRO) / certificate of admission to a certain type of work issued by the SRO.

Thus, if a foreign shareholder fails to ensure that a necessary permit/license is obtained to carry out activities and/or to extend an expiring permit/license, or that the LLC joins an SRO / obtains a certificate of authorization, there is a significant risk of forced liquidation of the LLC through a lawsuit of the registration authority.

• In the event the LLC carries out activities prohibited by law, or in violation of the Russian Constitution, or with other repeated or gross violations of the law or other legal acts.[11]

Please note that these grounds are used in practice, which is confirmed by a significant number of court decisions whose subject is the analysis of this rule and the issue of liquidation of commercial and non-commercial legal entities on these grounds.

Because the rule is worded quite broadly and is defined through evaluative criteria, the nature of a foreign participant's violations is subject to individual assessment.

In addition to forced liquidation, there is also such an administrative instrument as termination of a non-operating legal entity under Article 64.2 of the Russian Civil Code. The above mechanism is used in a situation where an LLC has been excluded from the Unified State Register of Legal Entities (the "Companies Register"), and in 12 months preceding its exclusion it:

• did not submit reporting documents stipulated by Russian laws on taxes and levies, and
• did not perform transactions on at least one bank account.

The exclusion of an inactive legal entity from the Companies Register entails the same consequences as compulsory liquidation. In addition, the exclusion of a defunct LLC from the Companies Register entails a ban on founding new legal entities, become a shareholder of an LLC or performing the functions of the single-person executive body (holding the position of director/general director) for the next 3 years from the date of such exclusion.

3. MEASURES CONTAINED IN THE LAW ON ECONOMICALLY SIGNIFICANT ORGANIZATIONS

Turning to more specific measures introduced in response to foreign shareholders failing (or improperly performing) their obligations to manage LLCs, we should also recall that in August of 2023, the Russian Federation adopted Federal Law No.470-FZ "On peculiarities of regulating corporate relations in commercial entities being economically significant organizations" (hereinafter "Law  No.470").

Law No.470 provides for the possibility of limiting corporate rights of foreign holding companies ("FHCs")[12] with respect to Russian economically significant organizations ("ESOs") which are Russian economic entities of significant importance for ensuring the economic sovereignty and economic security of the Russian Federation that meet certain criteria and are included in the relevant list approved by the Russian Government.

Cases on suspension of a FHC's corporate rights are examined by the Commercial Arbitration Court of Moscow Region. An application for suspension of rights can be filed by an authorized federal executive body, ESO shareholders themselves or other persons specified in Law No.470.

FHC's corporate rights with respect to the ESO shall be suspended if the FHC: (i) refuses/evades exercising its rights and/or performing in good faith the obligations of an ESO shareholder or there is a threat of such refusal/evasion; (ii) commits actions (or allows inaction) aimed at creating obstacles to the management of the ESO and/or its ordinary business activities; and/or (iii) commits other actions (or allows inaction) that could lead to termination or suspension of activities, liquidation or insolvency/bankruptcy of the ESO.[13]

If a court orders suspension of the FHC's rights, the following are among the consequences that occur:[14]

• The FHC shall not have the right to participate in and vote at general meetings of shareholders of the ESO;
• The FHC has no right to dispose of its shares in the authorized capital of the ESO;
• Payment of the distributed part of net profit (dividends) of the ESO in favor of the FHC is not made;
• Shares of the ESO owned by the FHC are transferred to the ESO. Persons who indirectly hold shares of the ESO owned by the FHC and who are citizens and/or residents of the Russian Federation are obliged to take direct ownership of these shares. If such indirect owners are not citizens and/or residents of the Russian Federation, they have the right to take direct ownership of shares.

Earlier, the Russian Ministry of Finance informed that the Commercial Arbitration Court of Moscow Region on May 13, 2024 granted the motion of the Ministry of Finance to suspend corporate rights of Cypriot companies ABH FINANCIAL LIMITED and ALFASTRAKHOVANIE HOLDINGS LIMITED in respect to AB Holding JSC and UNS-Holding LLC, which own ALFA-BANK JSC and AlfaStrakhovanie JSC.[15]

4. MEASURES CONTAINED IN PRESIDENTIAL DECREE NO.16 OF 17.01.2023

Presidential Decree No.16 dated 17.01.2023 (the "Decree No.16") also allows for making decisions without taking into account the votes of shareholders from unfriendly states.[16]

Decree No.16 establishes that decisions of the general meeting of shareholders, the board of directors (or supervisory board), or the collegial executive body of a Russian business entity, if the such bodies include persons from unfriendly states or candidates elected at their suggestion, may be adopted without taking into account the votes of the said persons (both when determining the quorum and when determining the voting results). In order for this rule to apply, shareholders who are not persons from unfriendly states must decide to do so by a majority vote.

It should be noted that Decree No.16 does not apply to all Russian companies, but only to those that meet the following criteria:

• The companies are engaged in energy, engineering or trade activities;
• The "persons from unfriendly foreign states" own shares in the charter capital in the amount up to 50% of the charter capital of such company;
• Restrictive measures have been imposed on the controlling person/beneficiary;
• Revenue of the company (or of the group of entities it is a part of) for the year preceding the year when the company's body made the decision exceeds 100 billion rubles.

5. MEASURES CONTAINED IN PRESIDENTIAL DECREE NO.302 OF 25.04.2023 (TEMPORARY MANAGEMENT)[17]

Under Presidential Decree No.302 of 25.04.2023, in the event of (i) deprivation of ownership title (or restriction of ownership) of the Russian Federation and/or Russian legal entities and individuals to property located on the territory of foreign states that carry out unfriendly actions against the Russian Federation and/or its persons; (ii) creation of a threat of deprivation of such property; (iii) threat to the national, economic, energy or other types of security of the Russian Federation or its defense capability, the Russian Federation shall introduce temporary management in respect to assets (including shares in the charter capital of LLCs) held by entities from unfriendly states.

Temporary management is not associated with deprivation of ownership rights, but is aimed at ensuring effective operation of the asset for the period of temporary management (the temporary manager does not have the right to dispose of the asset, i.e. to alienate it).

The mechanism for selecting foreign assets on the territory of the Russian Federation for introducing temporary management has not been defined yet, so this measure could be applied to any LLC controlled by a person from an unfriendly foreign state.

As of the present, among the assets for which temporary management has been introduced are Unipro, Fortum, Prime Print, ROLF, Baltika, Ulyanovsk Machine-Tool Plant, Capital AgroFinance, AgroTerra, Agrosistema, Ariston Thermo Rus, BSH Household Appliances.

6. MEASURES CONTAINED IN PRESIDENTIAL DECREE NO.442 OF 23.05.2023 (USE OF FOREIGN ASSETS FOR COMPENSATING DAMAGE)[18]

Presidential Decree No.442 of 23.05.2023 introduces a special procedure for compensating damages in connection with unfriendly actions of the US. The Decree establishes that Russian persons who have been unjustifiably deprived of their property on the basis of decisions of US governmental and/or judicial bodies have the right to claim compensation for damages at the expense of property of persons associated with or under the control of the US. The norms of the decree apply not only to property in the Russian Federation owned by the US directly as a state, but also to persons controlled by foreign persons associated with the US, regardless of where they are registered. This means that the decree applies both to the property of a foreign shareholder that is directly incorporated in the US (or is a US citizen) and to a foreign shareholder whose control/ownership through a chain of other entities is exercised by a US-related person (beneficiary).

We should note that the list of property for compensation purposes also includes LLC shares. As with Presidential Decree No.302 of 25.04.2023, the mechanism of the selection of assets has not been defined, and the practice of applying Presidential Decree No.442 of 23.05.2023 has not yet been formed.

We will keep you informed of further developments. We hope you find this information useful.