Lending in Russia

Pre-contractual negotiations

The Russian Civil Code establishes:

• a duty on those entering into contractual negotiations to act in good faith and not to enter into negotiations frivolously; and
• the notion of bad faith negotiations and defines the concept of bad faith as where one party to the negotiations provides the other party with incomplete information or conceals certain facts, or unexpectedly breaks off the negotiations without due cause.

If a party breaches the above requirements, it will have to reimburse the aggrieved party’s losses, which are defined as the expenses incurred by the good faith party for the conduct of the negotiations and any expenses related to the lost opportunity to conclude a contract with a third party.

The rules will clearly apply to negotiations carried out between Russian individuals and entities. We assume they would also apply to negotiations of agreements that shall mandatorily be governed by Russian law. Application of the rules to cross-border negotiations is a more complex issue, which remains uncertain until the relevant court practice has been formed.

To minimise the associated risks, the negotiating parties should establish the time when negotiations have formally started. This could be achieved by way of execution of a letter of intent or any other document that could be used as evidence if a claim for reimbursement of expenses related to termination of negotiations (as described above) is filed.

In order to have an argument that Russian rules on pre-contractual negotiations do not apply to the parties and rules of a foreign jurisdiction apply, it is further advisable that the letter of intent or any document that evidences the commencement of negotiations contain applicable law provisions to avoid automatic application of the conflict of rules principle.

Corporate capacity and authority

As a rule, the general director, or any person acting under properly delegated authority (by way of a power of attorney), has the capacity to bind the company.

If the transaction value equals or exceeds 25% of the balance sheet asset value of the company (and no lower threshold is provided for in the charter), the transaction will constitute a “major transaction”. If the value is between 25% and 50% of this balance sheet value, unanimous approval of the board of directors (if appointed) would be required, and if over 50%, approval of a 75% majority of shareholders who participated in the meeting, would be required for a joint-stock company. Similar thresholds apply to a limited liability company, and an approval of a simple majority of all participants would be required, unless otherwise provided for in the company’s charter. 

In accordance with legislative amendments that came into force on 1 January 2017, “interested party transactions” (e.g. transactions that may involve affiliates or cross-management) do not require any corporate approval unless the management of the company or a shareholder with no less than a 1%-stake requested such an approval. However, the company’s charter may envisage different rules for corporate approvals of “interested party transactions”.

Regulatory considerations on enforcement

When taking security over a company’s shares (either directly in Russia or through an offshore holding company, under a foreign law), two key aspects must be considered:

• With regards to enforcement of the security, ownership of the Russian entity may be restricted as “strategic” under Federal Law No. 57-FZ “On the Procedure for Foreign Investments in Commercial Organisations of Strategic Importance for the National Security of the Russian Federation” dated 29 April 2008. For more details please see the Common forms of business structures for foreign investors chapter.
• Ownership may also need approval from the Federal Anti-monopoly Service under Federal Law No. 135-FZ “On Protection of Competition” dated 26 July 2006. For more details please see the Anti-monopoly issues chapter.