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Shareholders’ Agreement and Arbitration Clause

Recently, Russian law started to give foreign investors more arguments in favor of making the issues relating to the management of Russian based businesses subject to Russian law. The reform of civil and corporate law in Russia introduced legal institutions that allow parties a certain amount of flexibility to settle their corporate relationships.

Let us submit to arbitration tribunal!

Corporate law has become more flexible, particularly with relation to the legal status of non-public corporations – the most widely spread form for legal entities in the Russian Federation.

Russian civil law has generally become more responsive to the needs of business: in 2015 the legislator expressly provided in the Russian Civil Code for a number of legal instruments widely practiced abroad such as options, warranties and representations, indemnities and other and settled many formerly contentious issues.

In addition to that, in the near future the parties to shareholders’ agreements will become able to submit for arbitration the disputes arising from such agreements. We consider this as a big step forward.

The fact is that before the changes that have entered into force on 1 September 2016 the arbitrability of corporate disputes was a hot subject for debate and the parties to such disputes were not able to resort to arbitration. This caused a negative response from investors, including foreign ones.

By way of background, paragraph 1 of Article 33 and Article 225.1 of the Russian Arbitration Procedure Code (the «APC») expressly provide that corporate disputes shall be referred to state arbitration courts. At the same time, in opinion of the majority of lawyers and on the basis of the explanatory note to the law which introduced such rule, the lawmakers wanted to divide the jurisdiction of the courts of general jurisdiction from the jurisdiction of the state arbitration courts. So, regardless of whether a party of a dispute was a legal entity or an individual entrepreneur or a natural person, corporate disputes as a special category of disputes should have been considered by state arbitration courts (as opposed to courts of general jurisdiction) which are a branch of the state judicial system intended to deal with disputes of an economic nature.

From the point of view of the majority of representatives of Russian legal community, even before the amendments to Article 225.1 of APC entered into force on the 1st September 2016, it allowed the arbitrability of corporate disputes, i.e. allowed the parties of a dispute to refer it to an arbitration tribunal. The fact is that the APС did not contain a clear ban and thus, from a formal point of view, it was possible to conclude that corporate disputes can be submitted to arbitration.

The case of M.V. Maximov against NLMK

Law enforcement practice, however, had come to a definite conclusion that corporate disputes were in the exclusive jurisdiction of the state arbitration courts.

The most striking precedent is the well-known case «M.V. Maximov against NLMK» where the Federal Arbitration Court of the Moscow District came to a conclusion that the agreement concluded between the parties to the dispute governed that matters that included corporate governance. With reference to paragraph 2 of Article 225.1 of APC and the specific character of corporate relationships that arose from the agreement and, in the opinion of the court, had public legal aspect, the court concluded that the case belonged to the special jurisdiction of state arbitration courts and should have been considered by such which excluded its submission to an arbitration tribunal.

New Opportunities

Changes to the legislation with respect of arbitrability of corporate disputes that entered into force on 1st September 2016 offer investors new opportunities for settlement of disputes under shareholders’ agreements.

As before, the new edition of Article 225.1 of the APC provides that corporate disputes are subject to jurisdiction of state arbitration courts. However, under the new regulations, in certain cases and under certain conditions such disputed can be referred for the decision by an arbitration tribunal.

Moreover, the legislator has done a great job in solving the problems associated with the settlement of corporate disputes by arbitration (by arbitration tribunals).

First of all, when deciding whether a dispute that arose from corporate relationships can be submitted to arbitration the key factor has always been the nature of the dispute, i.e. whether such dispute can be classified as «corporate» dispute in the sense defined in Article 225.1 of the APC.

The recent amendments to Article 225.1 of the APC clearly provides that the disputes over the issues relating to managing a legal entity, including disputes arising from the shareholders’ agreements, are corporate disputes.

Parallel Proceedings

Let’s scrutinise the problem of parallel proceedings that the Russian legislators meant to deal with.

One of the reasons for the negative practice on the arbitrability of the corporate disputes was partly the fact that the arbitral tribunal is only entitled to make a decision that will bind only the parties to the arbitration agreement. At the same time, in practice, corporate disputes may arise between both the persons, which have entered into a corporate agreement with the relevant arbitration clause, and the persons that have not entered into it. Thus, under the previous regulations the case could be that some of such parties of a dispute brought it before an arbitration court, the other could turn to the state court of arbitration (as required by Art. 225.1 of the APC), although the claims of the both groups of the claimants could have the same ground and subject. It was possible that the decision of the arbitral tribunal and the state court of arbitration might be different and, at the same time, they would have a different circle of persons bound.

The Russian legislator used the experience of Germany in order to solve this problem. As a result, a mechanism similar to German has been adopted and established in Russia in which to submit a corporate dispute to arbitration is possible only if the arbitration agreement:

a) is concluded between the legal entity itself, all of its participants, other persons (plaintiffs and defendants in the corporate disputes). It is possible to make such an agreement a provision of the charter of the legal entity (other than a public joint stock company or a joint stock company with the number of shares one thousand or more);

b) provides for the submission of a dispute to a permanent arbitration institution in the territory of the Russian Federation which has approved and published rules of the proceedings on the corporate disputes (Paragraph 3 of Article 225.1 of the APC). In other words, it is impossible to submit a corporate dispute (including a dispute that arose from the corporate agreement) to be resolved by an add hoc arbitral tribunal formed by the parties for a specific case.

The Matters not for Foreign Tribunals

Another example is the problem of impossibility to perform foreign arbitral decisions.

When submitting a dispute to an arbitral tribunal the key point is the possibility of further enforcement of its decision. In our practice, we are often asked by the clients to make a shareholders’ agreement subject to foreign law and to provide for the submission of such agreement to a foreign arbitration. This approach is generally based on the reluctance of the shareholders of large companies to give authority to resolve issues, which are essential for the development and existence of business, to Russian state courts.

Currently, thanks to the civil and corporate law reform, legal mechanisms were introduced into the Russian law that allow the parties certain flexibility with regard to structuring their corporate relationships, e.g. by means of incorporating to the charter and (or) corporate agreement certain appropriate provisions. It is not as difficult as before to settle disputes arising from the corporate agreements in accordance with the Russian law. This means that business will no longer face legal uncertainty due to lack of court practice or absence of necessary instruments.

The choice of foreign law for the shareholders’ agreements is not prohibited, by the Russian law but, from a practical point of view, such a decision will cause difficulties for the court associated with the need to establish the content of foreign law, rules applicable to the case in accordance with their official interpretation, legal precedents and doctrine of the corresponding foreign country. When choosing law to govern a shareholders’ agreement, it is feasible for the parties to be guided by practical considerations of the duration and cost.

According to the abovementioned amendments to the APC, the corporate disputes may be referred to an arbitral tribunal only, if it is a permanent arbitral tribunal (institution) placed in the Russian Federation.

Accordingly, such a dispute cannot be settled by the foreign arbitration tribunal and the decision of such arbitration tribunal on this category of disputes shall be unenforceable as provided by paragraph 2 «a», Article V of the United Nations Convention «On the Recognition and Enforcement of Foreign Arbitral Awards» (New York, 10 June 1958): recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that the subject matter of the difference is not capable of settlement by arbitration under the law of that country.

Recommendations

To sum up, the recent amendments bring more clarity and solve some of the key problems associated with the arbitrability of disputed under shareholder’s agreements although it should be noted that certain issues shall be further clarified including the clarifications by the court practice.

We do not recommend including in the shareholders’ agreements an arbitration clause to settle disputes arising from such agreements by a foreign arbitral tribunals.

Starting from 1 January 2017, the arbitration clause can be included either in a shareholders’ agreement concluded between all the participants or shareholders of a legal entity or into its charter.

While including an arbitration clause into the shareholders’ agreement or the charter, the parties shall in each particular case pay attention to the fact whether a particular dispute can be considered by a particular arbitral tribunal.