Precedential corporate restructuring case

Mandatory Shareholder Buyout on Company Reorganization Avoided

Our client ZAO Pesyanovskoe is one of the leading agricultural producers in the Tyumen region, specializing in grain.

Pesyanovskoe's controlling majority shareholder decided to acquire another company and obtained the statutory corporate approval by the general meeting attended by a few minority shareholders. The GM's resolution, however, did not address the minority shareholders' statutory right to require the company to buy them out should they wish to withdraw on the reorganization.

Later several minority shareholders demanded a buyout, including one who sued for good measure.

The statutory redemption would have been most inopportune for Pesyanovskoe: the company would have had to sell a considerable part of its assets (including machinery) to pay off the withdrawing shareholders, which would have not only defeated the purpose of the acquisition, but also destroy its whole business.

The duty to buy out could only be legally avoided by the invalidation of the GM's resolution to approve the reorganization (i.e. the acquisition of the other company). On INTELLECT-S's advice and initiative, an action was filed challenging the approval by the general meeting which had been convened and held with irregularities in procedure, the more so that the approval disregarded the minority shareholders' rights and interests.

The court duly voided the GM's resolution, so that the pending action of one of the minority shareholders for mandatory redemption was later dismissed for the lack of grounds, with the court stating that in view of the voided approval, there would be no reorganization, as the grounds for the redemption. The judgment stood on appeal and further appeal in cassation.

Free of the obligation to buy out, Pesyanovskoe completed the acquisition otherwise — by assigning the target company some of its assets and contracts.

Our comment:

The case is unprecedented and landmark in the treatment by courts of the shareholder right to require the redemption of the shareholdings on reorganization).

Previous case law affirmed the shareholder right to require a buyout on approval of a major transaction, regardless of whether the transaction was eventually consummated or not.

We reversed that view, demonstrating that shareholders cannot exercise their rights to discretionary remedies without due regard to the legitimate interests of other shareholders. The courts accepted our client's argument that if a GM resolution was voided on appeal, the very possibility of the proposed transaction ceases to exist ab initio, and, consequently, that the right to require the redemption terminates too. The courts also held that any other interpretation would lead to permitting the satisfaction of some shareholders' claims in prejudice to the right and interests of others, which must be treated as abuse of rights.

The case was carried out by Alexey Filippov, Head of practice, INTELLECT-S.

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