Thus, the present Model Law establishes a presumption that interested persons-having property interests that compete with the interests of the joint-stock company-are those who participate in the adoption of a resolution for the company to conclude such transaction by virtue of the sole fact that they hold a position in the company or that they hold major blocks of voting shares of stock of the company. 1.2. Definition of Interested Persons (zainteresovannoe litso) Given the above presumption, one of the primary tasks to be addressed by the Model Law's Working Group was to specify-as accurately as possible-persons having interests in transactions. As Article 138 of the present Model Law illustrates, an officer or major shareholder of a jointstock company is a party havingan interest in a transaction where such officer or shareholder acts as the company's counterparty to the transaction or is an officer or a major shareholder of a counterparty or represents a counterparty on any other legal basis. An officer or a major shareholder of a company also is deemed to have an interest in a corporate transaction where an affiliated person of an officer or a major shareholder acts as the company's counterparty to the transaction or is an officer or a major shareholder of the counterparty or lawfully represents the counterparty. Pursuant to Article 2, Clause 8 of the present Model Law, officers of a joint-stock company (depending on the selected company management system, i.e., dualistic or monistic) are deemed to be members of the supervisory board and those of the management board or members of the board of directors and those of the executive body (or the person acting as the sole executive body) of a joint-stock company. Major shareholder status is characterized as the lawful exercise of the voting right to 10% or more of voting shares of stock of a joint-stock company. In turn, the relevant subclauses of Article 2 of the present Model Law define the term ' affiliated person' (affiliirovannoe litso) which is based on legal or blood relations among market players effectively coordinating their will in the form of an association or a group of persons or promoting the dominant player's intentions. This Article also specifies the circle of subjects (including related persons, immediate relatives, controlling and controlled legal persons, and legal persons along with corporations which are subject to common control) that are deemed to be affiliates of another person. It should be noted the present Model Law provides that an officer of a corporation is deemed to have interest in a transaction where said officer acts on his/her own as counterparty of the company or is a representative of a counterparty or an intermediate in such a transaction. To this end, it is worth mentioning that this provision of the present Model Law may only be applied in jurisdictions where a representative (who exercises authority by virtue of a power of attorney or on the basis of legislation, a court judgment or an administrative act) is not prohibited from concluding a transaction on behalf of the person whom s/he represents either in his/her own person or in that of another person whose interests s/he is simultaneously representing. For instance, according to Kazakh legislation (where the relevant prohibition has been established in Art.163, Clause 3, of the Civil Code), an officer of a company (unless it is a commercial representative office regulated by Art.166 of the Kazakh Civil Code) may not represent a corporation in transactions which involve the officer him/herself or another organization represented by the officer by virtue of a law, articles of association or a power of attorney. Furthermore, the present Model Law categorizes conflict-of-interest transactions not only as those which are separate and distinct but, also, those made up of asetofinter-relatedtransactions (Art.138). In this connection, it is not unreasonable to view as a set of inter-related transactions those civil-law transactions aimed at reaching a common business goal, including (but not limited to) cases where one of the transactions is conditioned upon the achievement of the outcome of another, related transaction. This interpretation of inter-related transactions is set forth in Article 140 of the present Model Law, which defines major transactions. However, national legislation or internal documents of a particular corporation may provide for other attributes in the presence of which several transactions can be deemed to be inter-related. 1.3. Principle of Transparency In establishing special rules and regulations for transactions in which there is a conflict-of-interest, the legislator is not seeking to prevent a corporate officer who has an influence upon the process of corporate decision-making from receiving income from a source not related to the post held by the officer in the company-albeit from the use of corporate assets. Rather, the present Model Law contains specific articles (e.g., Arts.119 and 133) prohibiting members of the management board, or the board of directors and the executive body from pursuing their own personal interests and basing the performance of their functions as an office of the joint-stock company on that personal interest. These Articles contain unequivocal references to such conflict-of-interest situations which are not permitted in the activities of corporate officers whatever the circumstances maybe or which-in order to be permitted-require special authorization from either the board of directors or the supervisory board. In fact, the basic idea of these conflict-of-interest rules and regulations is to prevent the company from concluding transactions in which its officers or major shareholders have a personal interest under terms and conditions less favourable than those available to the company in engagingin a similar transaction in an open and competitive market. Therefore, the present Model Law does not prohibit conflict-of-interest transactions. However, the issue itself of whether or not a joint-stock company may conclude a conflict-of-interest transaction is conditioned upon the requirement that the transaction price be in line with the market value of the property which is the subject of the transaction (Art.139, Clause 2). This fundamental concept is implemented through: (a) establishing regulations on centralizing timely information on all related persons; and (b) tightening the terms and conditions for adopting a resolution to conclude such transactions. This special regime is based on the principle that information on interests should be freely accessible and transparent and on the duty of corporate officers to duly act in the best interests of the company and to be loyal to the company. Incentivizing officers to act properly and to prevent them from deviating from the mandatory lines of this behaviour is a distinctive feature of these regulations. In particular, the present Model Law provides for a system to prevent uncontrolled conflict-of-interest transactions: it establishes conditions through which a joint-stock company may supervise the observance of the duty of loyalty of its officers to the company. In this case, the present Model Law assumes that a joint-stock company must know that a person is (or could become) an interested person in civil-law transactions concluded by the company. To this end, the present Model Law establishes a procedure for notifying the company of a specific, impending related-party transaction. In particular, pursuant to Article 138, Clause 5, a person having an interest in the conclusion of a transaction by the company is required-prior to the conclusion of said transaction-to provide written notification to the corporate body, competent for concluding such transactions, of its interest and of the conflict of interests. This duty is imposed upon every interested person-not just upon officers or major shareholders of the company. This provision promotes the observance by corporate officers of their duties to be honest (chestnyi) and to act in good faith (dobrosovestnyi) as regards the company-to act in its best interests (the duty of loyalty). 1.4. Requirement for a Control System However, regardless of whether persons have notified the company in good faith of impending transactions in which they have a personal interest, the present Model Law establishes a number of requirements under which a company must implement a system of special measuresto prevent its engaging in such a transaction to the prejudice of its own interests. For this purpose, according to Article 138, Clause 4: «A person having an interest in transactions concluded by a company is required, not less than once a year, to submit information in writing to the company's board of directors (supervisory board) sufficient for the timely identification of conflict-of-interest transactions of the company.» This provision presumes that a joint-stock company provides for the collection and centralization of information on all persons who may have a personal interest in any civil-law transactions in the conclusion of which there might a divergence from (or conflict between) the company's property interests and the interests of said persons. This provision also presumes that there will be a corporate control system in place to ensure that the list of interested persons is up-to-date and to mandatorily verify that no counterparty to any proposed transaction is on the list. It is to be noted that the present Model Law does set forth a detailed procedure on how a joint-stock company should collect and record such information; these matters can be regulated either by the company's articles of association or by internal documents. However, of principal importance is the fact that the present Model Law requires every interested person to disclose information on potential conflicts of interest arising from transactions entered into by the company even though this person may not have an immediate relationship to the joint-stock company. This approach shows how delicately the Model Law's Working Group has treated the right of participants in trade and commerce to maintain their own private interests, information about which is not subject to disclosure to the general public. In particular, regulations on related-party transactions of a joint-stock company on conflicts of interests and the bases thereof (blood relationships, investments in the corporate capital, holding office or representing interests) relate solely to the interests of the joint-stock company. Therefore, such information must only be made disclosed to the company in the person of its bodies and shareholders-not to any other broad portion of the public. It is to be noted that, by default, interested persons are deemed to be those subjects who by virtue of various reasons are affiliated and who-often unwillingly, by virtue of circumstance-have become interested persons as regards this particular company. To this end, it is important that a person disclosing a connection to the company or his/her/ its affiliation to the company's officers or major shareholders makes such a disclosure independently and willingly. This approach should prevent conflicts arising from unwarranted invasions of privacy. Furthermore, the Model Law's Working Group has addressed the difficult problem of receiving full and accurate information from interested persons where the latter may have a right to refuse to disclose information about themselves while the company may not have substantial levers of pressure which can be brought to bear upon them. Therefore, it is entirely permissible for national legislation to require only shareholders and officers to notify the company of their affiliated persons. For instance, Article 67 of the 2003 Kazakh Law «On Joint-Stock Companies» provides for the articles of association of a company to set forth the procedure for notifying a company about one's affiliated persons only as regards shareholders and officers of the company. However, similarly to the present Model Law, this Article imposes an obligation on the appropriate natural and legal persons to notify a joint-stock company of their affiliation to the company and about their own affiliated persons immediately after such persons have become affiliated to the company. Despite a certain inconsistency of this provision in the Kazakh law, the contents thereof do create a regime in which a company, in such cases, does not enter into relationships with all categories of interested persons (for instance, immediate relatives of its officers or organizations where such persons are major shareholders, etc.) but only collects the necessary information through its shareholders and officers. Although this procedure for collecting information on related persons seems more efficient, it remains legally flawed due to the obvious ambiguity of whether or not it is reasonable for the above-mentioned parties to disclose private information related to other subjects although they may be connected to officers or shareholders of the company. 1.5. Adopting Corporate Resolutions: Procedure and Conditions Having identified a conflict of interest in a proposed transaction, a joint-stock company is required to follow the procedure and conditions established by the Law for adopting a resolution to conclude (or to obviate) the transaction. It is to be noted that the company must observe the procedures and conditions regardless of the manner by which the company became aware of the conflict of interest in a proposed transaction: on the basis of a written notification from the appropriate related party or as a result of verifying its own lists or other databases on corporate affiliated persons and analyzing the legal status of the proposed counterparty to the transaction (identification of its major shareholders, officers, affiliated persons and representatives). Among these conditions, the following are crucial: (a) the terms and conditions of the transaction must be commensurate with objective market indicators (see above regarding the importance of identifying the market value of a proposed conflict-of-interest transaction); (b) the adoption of a resolution to conclude the transaction must be only by a duly authorized body of a company; (c) there must be impartiality in considering the appropriate matter (by way of forbidding a related person, i.e., a corporate officer or major shareholder, from taking part in debating and in adopting the resolution on the company's concluding the transaction); and (d) there must be liability for adopting the corporate resolution to conclude the appropriate transaction. Depending on the management system (dualistic or monistic) and the existing circumstances, either the board of directors or the general shareholders' meeting of a company adopts a resolution on whether or not to conclude a conflict-of-interest transaction. In particular, the board of directors adopts a resolution under a monistic system where the managerial body is the board of directors acting at its sole discretion (Art. 124 of the present Model Law). It is to be noted that such a resolution must be adopted unanimously by the members of the board of directors who have no interest in the transaction to be concluded. Where over one-half of the elected members of the company's board of directors have an interest in concluding a transaction, said transaction may only be concluded by virtue of a resolution adopted by the general shareholders'meeting. Where a major shareholder of a company has an interest in a transaction or where, for any reason, the resolution on concluding a transaction has been raised to the level of the general shareholders' meeting, said major shareholder may not take part in voting on the resolution. Under the dualistic management system, where the management board is liable for managing the company and representing its interests in third-party transactions (Arts.114 and 117 of the present Model Law), resolutions to conclude a conflict-of-interest transaction are adopted only by a general shareholders' meeting. In this case, where a major shareholder of the company has an interest in the transaction, the shareholder may not vote on the resolution pertaining to such transaction. 1.6. Consequences of Failing to Comply With the Law Adherence to the above-mentioned requirements of the present Model Law-intended to avoid the infliction of property damage upon a joint-stock company-is ensured by the negative legal consequences for participants in corporate relationships. In particular, the present Model Law assumes that a conflict-of-interest transaction may not be concluded to the prejudice of the property interests of a joint-stock company. Above all, failure to comply with the present Model Law renders a transaction invalid (nedeistvitel'no). Thus, for instance, the company is entitled to demand that an appropriate transaction be rendered invalid where: (a) at the moment of adopting the appropriate corporate resolution, the board of directors (general shareholders' meeting) had not been informed about all the circumstances related to the conclusions of the transaction but, thereafter, the circumstances became known to the company; and/or (b) the transaction was concluded in breach of other of the above-mentioned requirements established by the present Model Law. Mention should be made of the fact that the present Model Law has an alternative for declaring a transaction invalid in the above cases: the company is entitled to request its counterparty to immediately and prematurely terminate the transaction and compensate the company for its damages (if any). A transaction is rendered invalid or terminated early (with or without a claim for indemnification of damages) upon the demand of a joint-stock company. The executive body representing the company (monistic management system) or the management board (dualistic management system) must make demand upon the counterparty to have the transaction rendered invalid. The executive body/management board may act either at its own discretion or at the demand of the board of directors or the general shareholders' meeting. The present Model Law also ensures that the executive body (management board) of a joint-stock company will pursue the appropriate course of action so as to take the necessary steps, in such cases, for the interested party to indemnify the damages incurred by the company as a result of the conclusion of such a transaction. To this end, Article 135 of the present Model Law regulates the liability of directors and other corporate officers, mandating them to perform their duties reasonably and in good faith in the interests of the company under threat of indemnifying the company for damages sustained by the company as a result of their wrongful breach of such duty. Articles 136 and 137 of the present Model Law provide for detailed regulations on how the joint-stock company's bodies or shareholders can hold corporate officers liable. In addition to the possibility of rendering conflict-of-interest transactions invalid at the company's demand, the present Model Law establishes that conflict-of-interest transactions are void ab initio where the transactions cause losses to the company but where corporate management board (board of directors) wilfully have acted to cause losses to the company, of which the other party to the transaction knew or should have known (Art.139, Clause 9). In those jurisdictions where there are no regulations on void transactions (nichtozhnyesdelki) and where declaration of a transaction as invalid requires a challenge by interested persons (osparimye sdelki) (e.g., Kazakh legislation), a provision may be made for such transactions to be rendered invalid upon a lawsuit filed by an interested party. Regardless of whether a transaction is rendered invalid by virtue of it being void (nichtozhnaia) or voidable (osparimaia), all corporate officers who wilfully have acted to the prejudice of the company must bear financially liability vis-à-vis the company pursuant to the above-mentioned Articles 136 and 137 of the present Model Law. It is to be noted that the present Model Law uniformly presumes the financial liability of related persons for failing to comply with the Model Law: should a company incur any losses arising from a transaction as a result of abreach of legal requirements for the disclosure of information regarding affiliation to the company, or an interest in a specific transaction, or about terms and conditions for calculating the transactional value or the procedures for adopting a resolution for concluding the transaction, the related persons are deemed to have wilfully acted to the prejudice of the company's interests. However, where the transaction resolution has been adopted fully pur suant to the present Model Law's requirements based on a comprehensive evaluation of all the terms and conditions of the transaction and where the value of the property which is the subject of the transaction corresponds to its fair market value, damages incurred by the company as a result of the transaction do not render the transaction invalid and the company's officers-including related persons-are not liable to the company for the damages. However, this does not release corporate officers and bodies from their responsibility to take all acts to minimize such damage and to ensure that it is indemnified from other acceptable sources. Finally, it should be noted that, for the purpose of a stable business environment, the present Model Law permits a corporate resolution-on the basis of which a related-party transaction has been concluded-to be challenged and rendered invalid without challenging and rendering invalid the underlying transaction. This preserves the commercial and overall business relations of a joint-stock company with its counterparties while the appropriate related party-at his/her/its own expense-indemnifies the company for any damage arising from said transaction based on the above presumption of financial liability to the company. The requirements in the articles of the present Model Law which are the subject of these comments apply not only to conflict-of-interest transactions but, also, to any changes or amendments which are made to such transactions. Thus, in addition to the clearly established conditions and procedures for adopting resolutions on related-party transactions concluded by a joint-stock company, the present Model Law also provides for differentiated and efficient rules and regulations on the validity of such transactions, and on the conditions and the consequences of rendering such transactions invalid under various circumstances-where the company itself challenges such transactions or where such transactions are rendered invalid as the result of a lawsuit filed by interested subjects. Moreover, in establishing the regulations on corporate transactions of this category, the present Model Law consistently implements the concept that corporate officers are financially liable for the bad-faith performance of the duties incumbent on them under the Law, the articles of association, a service agreement (corporate contract) or a contract of employment with the company which result in damages to the interests of the company.
2. Major Transactions
2.1. Definition of a Major Transaction Since property and financial obligations must always adequately be secured by the appropriate assets of a debtor, the value of a joint-stock company burdened by high levels of debt may be considerably reduced and its development and the market quotations of its stock negatively affected, while the insolvency of a company may result from crystallization of the risk of its default on its debt. These circumstances are obviously of major importance for shareholders and creditors of a joint-stock company. Therefore, in numerous jurisdictions, modern corporate laws provide special regulations on concluding what are termed 'major transactions' by joint-stock companies. The present Model Law-in a fairly traditionally fashion for modern corporate legislation-establishes that a major transaction is one involvingthe actual or potential acquisition or alienation of property, directly or indirectly by a company, the value of which exceeds the minimum threshold specified in the Model Law. According to the present Model Law, the definition of a major transaction is based on the following assumptions: (a) a major transaction is not a common business transaction for the company involved; (b) such a transaction does not involve the formation or maintenance of corporate capital by the placement of shares of stock or securities convertible into the company's shares of stock; and (c) the transaction price correlates in a particular way to the value of the company's assets (Art.140). It is to be noted that the national legislation and the articles of association of a specific corporation may list additional transactions to be deemed (or not to be deemed) 'major' for joint-stock companies (or for a given joint-stock company). The present Model Law also permits the articles of association of a company to specify any other transactions requiring approval similar to that for major transactions provided for by the Model Law. As in regulating the transactions of a joint-stock company in which there exists a conflict of interests, the present Model Law deems major transactions to be not only separate, independent transactions but, also, the aggregate of mutually linked transactions defined as the aggregate of civil-law transactions aimed at a common business goal including (but not limited to) cases where the possibility of engaging in one of the transactions is conditional upon the result of another transaction (Art.140). The possibility is kept open, however, for other indicia to also be provided by national legislation or the internal documents an specific corporation which, where these are present, may result in a number of transactions being deemed to be mutually linked. It is to be noted that the present Model Law classifies not only the direct but, also, the indirect acquisition or alienation of corporate property as major transactions. This would be, for instance, where a corporate subsidiary pledges to any third party corporate property, the value of which constitutes a substantial part (25% or more) of the value of the company itself. The regulation of such 'indirect' transactions is directed not only securing the property interests of shareholders willing to preserve and increase the value of their investments but, also, is related to the present Model Law's provisions on groups of companies (Chapter XII) which, on the one hand, are aimed at combating corporate raiding and abuses of market position and, on the other hand, in maintaining transparent business relations among market players. 2.2. Determining the Value of a Major Transaction It is obvious that the valuation of property, which is the subject of the transaction and its comparison with the value and solvency of the company itself, is critical for classifying a transaction as major (in addition to its contents or subject matter). It is known that various indicators may be used to value a company. For instance, the 'solvency test' is based on the current ability of a company to pay its debts. The 'balance-sheet test' is usually based on the value of corporate net assets used both to perform obligations and to develop business. Both approaches may be used in combination. The Model Law Working Group proposes, as a starting point, the proposition that the value of a company must be supported by accounting statements since focusing on the performance of current obligations might only entail an increase in indebtedness to finance corporate business and a decrease in the company's ability to service its debt in the immediate future. While the presence of corporate net assets does not always mean that they can be used to service debt or to develop business, valuation of the subject of a transaction-based on the book value of the company's assets according to corporate accounting statements (as of the latest accounting date)-is the most objective and the soundest technique that provides for, in general, a combination of the above-mentioned indicators. The present Model Law holds the supervisory board (the board of directors) (depending on the management system used) responsible for the proper valuation of the property (services) to be acquired or disposed of, regardless of whether a particular major transaction requires the approval of the above body of the company or the general shareholders' meeting. This provision also consistently implements the principle that officers of a joint-stock company are required to act in good faith in the interests of a company. It is the board of directors that manages the company at its own discretion (Art.124) under the monistic management system while the supervisory board exercises control over the management board (Art.102) under the dualistic management system. 2.3. Procedure for Concluding Major Transactions Classifying a proposed transaction as a major transaction for a particular corporation automatically leads to a special procedure f or concluding the transaction. The scope of competence of the company's management board or executive body may not, under any circumstances, include a resolution to conclude such a transaction. As the conclusion of major corporate transactions is critical for the company's shareholders-and, in a number of instances, for its creditors-the centre of adopting the appropriate corporate resolution may only be the shareholders themselves who interact with the company in the form, and within the framework, of general shareholders' meetings or the corporate body directly constituted by its shareholders which is subordinate thereto. In this connection, the present Model Law proposes that the management board (executive body) or the board of directors be required to obtain the consent (approval) of the supervisory board (board of directors) or a general shareholders' meeting (depending on the scope of competence of such bodies according to the company's articles of association) prior to concluding a major transaction. Similar to conflict-of-interest transactions, the present Model Law requires the unanimous resolution of all members of the supervisory board (board of directors) to conclude each major transaction since major transactions are critical for the company's financial position, business development and for maintaining the value of the investments of its shareholders. This should ensure that each corporate resolution adopted by responsible officers of the company is well-balanced and should prevent the subsequent use of any clauses whatsoever that might waive the liability of a member of the appropriate body from indemnifying the company for damages inflicted upon the company arising from a major transaction which has been approved by the appropriate body of the company. However, to promote business and cooperation among market players, the present Model Law permits a major transaction to be referred to the general shareholders' meeting in those cases where the supervisory board (board of directors) has failed to adopt a unanimous resolution. It is to be noted that such matter may be referred to the shareholders only where there is no unanimity among the members of the company's body: where the supervisory board (board of directors) unanimously has decided not to conclude a major transaction, the matter may not be referred to the company's shareholders. Such regulations are designed to ensure a balance between business development and the basic assumption in corporate law that it is corporate bodies which are responsible for their acts and not the shareholders. Shareholders may not freely interfere with or put pressure on the corporate bodies when the latter exercise their discretionary powers to manage the company: the general shareholders' meeting may not discuss matters which have been accorded to the competence of the company's managerial and supervisory bodies unless expressly established by the Law. Thepresent Model Lawproposes to differentiate between the major-transaction approval powers of a joint-stock company's bodies and those of the general shareholders' meeting depending on the value of property under a transaction. Thus, application of the major-transaction approval procedure-as described in the previous two paragraphs-is proposed where the value of the property under the transaction is not more than 50% of the book value of the company's assets. Where major-transaction approval procedure is required for a major transaction the object of which is property exceeding 50% of the book value of the company's assets, the appropriate resolution only may be adopted by the general shareholders' meeting. It is to be noted that in such an instance, where the value of property under the transaction is substantial (sushchestvenno), the present Model Law proposes a qualified majority of 75% of the votes cast by the holders of voting shares of stock attending the appropriate general shareholders' meeting. The present Model Law proposes the comprehensive consideration of an issue concerning a major transaction to be concluded by a company and the adoption of the appropriate resolution be not only a formal one but, rather, be based on a consideration of all the essential terms and conditions of the major transaction. For this purpose, the Model Law requires that the resolution approving a major transaction specify the party (parties) to the transaction, the beneficiary (beneficiaries) and the transaction price as well as the subject-matter and other essential terms and conditions. The present Model Law also regulates cases where a major transaction is simultaneously a conflict-of-interest transaction. In such an event, the procedure for concluding the transaction is governed by this Article along with Article 139 of the Model Law but only as regards that portion according to which persons having an interest in the transaction may not take part in adopting a resolution to conclude or to amend such transaction. 2.4. Consequences of Violating the Requirements of the Law The present Model Law expressly specifies the consequences of a violation of the requirements for the conditions established thereby to determine the valuation of a property which is the subject of a transaction or of the requirements for the procedure for approving a major transaction. In particular, it is proposed to classify major transactions as voidable (osporimye) thereby allowing them to be rendered invalid upon a lawsuit brought by the company or its shareholder. The classification of a company's transactions as voidable rather than void is directed at maintaining the stability of the activities and the business relations business connections of a joint-stock company, to prevent shareholders from abusing their status and to avoid the management board (executive body) from abusing its powers as established by the articles of association.
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