Cross-border corporate agreement: cross-border issues

Zarya Aleksandr Andreevich ORCID: 0000-0002-0119-0876 Student, the department of Civil Procedure and Employment law, Southern Federal University 344002, Russia, Rostovskaya Oblast' oblast', g. Rostov-Na-Donu, ul. Maksima Gor'kogo, 88, aud. 319 aazarya777@yandex.ru Other publications by this author

Introduction

The international nature of the activity has become a prerequisite for the success of the corporation in the global market, since the placement of certain components of a legal entity in different jurisdictions allows you to save on the price of labor, materials, to carry out tax optimization in a more profitable way, to conclude transactions with smaller ones. The growth of cross-border interactions has led to an increase in the number of foreign participants of the corporation. In turn, corporate agreements are a fairly effective tool for corporate governance and regulation of relations between participants, as well as control of the risks of legal conflicts associated with the uncertainty of applicable law.

The cross-border nature of the corporation's activities raises questions about the law applicable to its corporate contract, since a significant foreign element must be present in a civil legal relationship to include mechanisms of private international law. And if there is already a certain understanding in the literature about the extent to which the varieties of these elements should be taken into account when determining the cross–border nature of relations generated by a corporate contract ^{[1, pp. 82-90]}, then clarity has not yet been achieved with respect to the degree of materiality of these elements (as, in fact, with respect to other civil legal relations falling within the field of view of private international law).

Section ?. Cross-border criteria.

Paragraph 2 Resolution of the Plenum of the Supreme Court of the Russian Federation dated 09.07.2019 No. 24 "On the application of the norms of private international law by the Courts of the Russian Federation" indicates that the list of foreign elements enshrined in paragraph 1 of p. 1186 of the Civil Code of the Russian Federation (Civil Code of the Russian Federation dated November 30, 1994 No. 51-FZ (ed. from 02/25/2022) // SPS ConsultantPlus), is not exhaustive, which gives the Russian court the opportunity to more freely qualify the legal relationship as a cross-border one. At the moment, an objective approach to a foreign element has been established in Russian practice and doctrine ^{[2, pp. 121-122]}: an attitude is recognized as a complicated foreign element if it contains a specific circumstance established by law or revealed by practice that makes it such.

When analyzing both Russian and foreign experience ^{[3, p. 8]}, two approaches to determining the cross-border nature of a contractual relationship can be distinguished (and a corporate contract in the Russian Federation is primarily of a binding, rather than corporate nature, therefore the norms of Article 1210 of the Civil Code of the Russian Federation apply to it):

1) The legal approach – it prevails in the Russian legal reality and consists in a mechanistic assessment of the presence in the contract of a foreign element fixed by law or judicial practice, the presence of which "includes" the norms of private international law. Such a "test" ignores the fact that the international character of a treaty may arise not from a predetermined territorial localization of the elements of the treaty, but from an economic connection with a certain legal order.

2) The economic approach is designed to eliminate the shortcomings of the legal one, since it takes into account not only positive bindings, but also the objective international nature of the contract. This approach is quite popular in the countries of the common and continental legal systems ^{[4, p. 1139]}.

In particular, the economic approach takes into account the functional relationship of this contract with another cross-border contract, and if the contract in question is internal in itself, then taking into account the contract associated with it, it becomes necessary to classify it as cross-border (however, given the nature of the corporate contract, it is quite difficult to imagine such a relationship with another contract that will entail the recognition of the first as a cross-border one).

Nevertheless, this way of distinguishing between domestic and cross-border contracts places the burden of this choice at the discretion of the court, which does not contribute to legal certainty. In any case, the open list of foreign elements fixed in paragraph 1 of p. 1186 of the Civil Code of the Russian Federation eliminates the gap between the legal and economic approaches, allowing to take into account the objective economic relationship of the contract with the field of international trade and the provision of services.

Asoskov A.V. proposes the following system for determining the cross-border nature of the contract: the first "filter" is paragraph 1 of p. 1186 of the Civil Code of the Russian Federation, through which all contracts with at least one foreign characteristic, taken into account by the legislator, pass (if this filter is not overcome, then the norms of Sec. VI "Private international law" of the Civil Code of the Russian Federation are not subject to application, however, the parties may incorporate into the text of the contract the norms of foreign law as contractual terms).

The second "filter" is Clause 5 of Article 1210 of the Civil Code of the Russian Federation, in the application of which the court must use both legal and economic approaches. We believe that this logic can also be used to determine the cross-border nature of corporate contracts.

Separately, we note that the cross-border nature of the contract (when choosing the applicable law) should be determined at the time of its conclusion, therefore, if a significant foreign element disappears in the future, the law applicable to the contract should remain unchanged (paragraph 4, paragraph 31 of the Supreme Court No. 24 of 09.07.2019). However, the resolution ignores the situation when a foreign element appears in an initially internal contract.

It seems that the regulation enshrined in the Resolution of the Plenum aims to ensure the stability of the legal regulation of the relations of the parties, therefore it is logical to assume that in the case of assignment of the rights of claim under the loan agreement between the Russian parties to a foreign person, the law of the Russian Federation will remain applicable. Similarly, if a foreign person has become a party to a corporate agreement, Russian law will continue to apply to the agreement.

Quite interesting is the situation when the law chosen by the parties is changed in such a way that the performance of the contract becomes illegal, and therefore impossible, or when this change leads to a significant, fundamental change in the rights and obligations of the parties. The prevailing point of view is that in the case of a conflict of laws choice, the parties refer to foreign law as a living, changing organism, therefore, the amendments made to it are valid with respect to the parties to the contract. Is there any way to help the parties in such an extremely difficult situation? For example, a corporate agreement subject to German law provides for a certain procedure for the alienation of shares in an LLC; subsequently, this procedure becomes illegal in accordance with German law. German law allows the use of one or another means of protecting the interests of the parties if the chosen law has undergone fundamental changes due to events such as revolution or regime change ^{[5, p. 31]}.

It is proposed ^{[6, p. 216]} several ways out of this situation:

1) Freezing of the applicable law as it existed at the time of the conflict of laws choice (freezing clauses).

In accordance with this condition, the parties agree that the law they have chosen will apply to their relations in the form in which it exists at the time of reaching an agreement on the choice of applicable law. Such a condition contradicts the above-mentioned principle of "living law", according to which the law should be applied as it would be applied by the courts of the country whose law was chosen by the parties (Article 1191 of the Civil Code of the Russian Federation). A suitable compromise would be to allow the "freezing conditions" to the extent that they relate to the dispositive norms of the chosen law, but to deprive them of any force in relation to its (new) mandatory norms.

The parties may also come to an agreement that certain provisions of the applicable law will regulate their relations in any case, regardless of its subsequent changes (thereby incorporating them into their contract). If the dispositive norms of the law change, the regulation of the relations of the parties will remain the same, and if the imperative norms change, it will change accordingly.

2) Conditional choice of applicable law

Another way to react to changes in the applicable law is to make the choice of law dependent on the fact that the chosen law remains unchanged, as a result of which, in the event of a change, either the second-chosen law (reserve) or the objectively applicable law will be applied. Such a decision may be appropriate when the parties are concerned about a possible reform of the area of law that underlies their relationship (for example, a contract for the supply of materials subject to French law was concluded in 2015 in anticipation of the reform of the law of obligations, which took place in 2016).

In a situation with a corporate contract, the safest choice for the parties is a conditional choice of the applicable law, since freezing clauses may not be taken into account by the court. In addition, the parties always have the opportunity to make changes to the contract in order to adapt it to the changed regulation.

As noted in the literature, the object of a legal relationship can hardly give a corporate contract a cross-border character, since the object of a civil legal relationship is generally understood as the behavior of obligated persons ^{[7, p. 81]}, in this case, such behavior will be, for example, actions on coordinated voting in a state other than the place of establishment of a legal entity, or alienation shares (shares) of the company to a foreign acquirer. In the vast majority of cases, these actions are performed at the place of establishment of a legal entity, so the question of applicable law does not arise. If a party to a corporate agreement is obliged to sell a share of participation to a foreign person, then the connection of these two agreements (one of which does not yet exist at the time of the imposition of the corresponding obligation) may not entail the establishment of another applicable law to the corporate agreement.

It is also difficult to imagine a situation where a legal fact will become a significant foreign element, since in relation to a corporate contract, such a fact is only its conclusion on the territory of a foreign state. By itself, this circumstance cannot cause the establishment of an applicable law other than the place of registration (establishment) of a legal entity.

Thus, the only foreign element that with a high degree of probability can make the relations arising from a corporate contract cross-border is a foreign entity. In this regard, the question arises: will the presence of a foreign participant always lead to the recognition of a corporate contract as cross-border? For example, all participants in a Russian limited liability company have concluded a corporate agreement and one of its parties (i.e., a participant in a legal entity) is an individual with a one percent share. It seems that such a foreign element will not create a sufficient link between a corporate contract and a foreign legal order.

In this case, how much corporate rights should a participant have in order for his presence to serve as a basis for recognizing the contract as cross-border and not applying Clause 5 of Article 1210 of the Civil Code of the Russian Federation? It is hardly possible to specify the exact percentage of participation, upon reaching which it can be said that the foreign element becomes significant: it is necessary to take into account the management structure of the corporation, what role this foreign person plays in it, how often the state of origin of the foreign participant has a public interest ^{[8, p. 180]} in relation to corporate relations. Probably, the norms of clause 4 of Article 6 of the Federal Law on LLC (Federal Law No. 14-FZ dated 08.02.1998 "On Limited Liability Companies" (ed. dated 02.07.2021, as amended on 25.02.2022) // SPS ConsultantPlus) and clause 4 of Article 6 of the Federal Law on JSC (Federal Law No. 26.12.1995208-FZ "On Joint-Stock Companies" (ed. of 02/25/2022) // SPS ConsultantPlus), according to which the company is recognized as dependent if another (predominant, participating) the business company has more than twenty percent of the authorized capital (voting shares) of the first company. This provision of Russian law is currently "dead ^{[9, p. 55]}", since its only consequence is the obligation of the owner of a 20% stake to publish information about the fact of its acquisition.

Nevertheless, if the legislator indicates that relations of dependence arise between companies, it can be assumed that the connection with foreign law is close enough to recognize a corporate contract with such a participant as cross-border and exclude the application of Clause 5 of Article 1210 of the Civil Code of the Russian Federation.

Quite an interesting question in the light of the process of deoffshorization of the Russian economy is the applicable law to corporate contracts that are concluded within the framework of Russian legal entities whose main and even only business is located abroad. According to the classical approach, it is necessary to evaluate the elements of a specific relationship, in this case we have a relationship under a corporate agreement, its subjects in Russia, the object too. Nevertheless, the wording of clause 5 of Article 1210 of the Civil Code of the Russian Federation "all circumstances concerning the substance of the parties' relations" allows for a situation where the law of the country in which it conducts its main business activity will apply to the corporate agreement of such a legal entity (taking into account clause 1 of Article 1214 of the Civil Code). How liberally the court will apply this rule is a matter of future law enforcement practice.

Section ?. Criteria for distinguishing between corporate and other statutes.

The closest statute, which is adjacent to the corporate one, is the personal statute of a legal entity (lex societatis), since paragraph 1 of Article 1214 of the Civil Code of the Russian Federation establishes that the choice of law to be applied to a contract on the establishment of a legal entity and to a contract related to the exercise of the rights of a participant in a legal entity cannot affect the effect of mandatory norms of the law of the country places of establishment of a legal entity on the issues specified in paragraph 2 of Article 1202 of the Civil Code of the Russian Federation. Consequently, there is a problem in the scope of interpretation of the provision of paragraph 2 of this article.

In particular, judicial practice has established that:

- internal relations (Clause 7 of Article 1202 of the Civil Code of the Russian Federation) include the procedure for issuing equity securities, which entails the application of the norms of Russian law to these relations (Decision of the Arbitration Court of the Irkutsk Region of December 5, 2018 in case No. A19-15631/2018 // https://sudact.ru/arbitral/doc/nKTmuRATpKr4 / (accessed: 04/19/2022)).

- the exclusive competence of the general meeting of the joint-stock company cannot be changed by a corporate agreement (Decision of the Arbitration Court of the Irkutsk Region dated July 27, 2018 in case No. A19-10242/2018 // https://sudact.ru/arbitral/doc/5riVBZkvZ3W8 / (accessed: 04/19/2022)).

- the personal statute of a legal entity includes the procedure for approving an interested party transaction (Decision of the Arbitration Court of St. Petersburg and the Leningrad Region of November 20, 2018 in case No. A56-62330/2017 // https://sudact.ru/arbitral/doc/xaxCMtIVQBVT / (accessed: 04/19/2022)).

At the moment, the mandatory legal concept of a corporate contract prevails in Russian law, nevertheless, it may contain provisions that are directly corporate in nature (and they must obey the mandatory norms of lex societatis), as well as binding (lex contractus applies to them). It is noted in foreign literature ^{[10, p. 96]} that the last category should include agreements of participants that do not affect the process of forming the will of a legal entity at the next general meeting of participants, including rules regarding the alienation of shares, for example, conditions on the right of the majority shareholder to require the minority shareholder to join the sale of shares at the at the same price and on the same terms (drag-along), the right of a minority shareholder ("remaining") to join shareholders selling their shares to a third party by selling their shares to such a third party on similar terms (tag-along), etc.

Is this logic applicable to the constituent agreement of a full or limited partnership? This document combines the features of both an agreement on the exercise of rights, on the establishment of a legal entity, and the charter. It seems that the law of the place of establishment of the partnership should apply to those provisions that fall under paragraph 2 of Article 1202 of the Civil Code of the Russian Federation, and, in fact, the contractual terms – the law that the comrades have chosen. A similar approach can be applied to the charter, since the Russian law does not limit its content (for example, paragraph 2 of Article 12 of the Federal Law on LLC), therefore, this constituent document may contain provisions concerning the procedure for exercising corporate rights. By separating the corporate and contractual parts, in essence, it is possible to determine the applicable law, in fact, to any corporate document mediating corporate relations.

The need to separate a corporate contract arises due to the fact that different legal systems define the nature of a corporate contract in different ways (in the USA, for example, a corporate contract is a document parallel to the charter, i.e. corporate in nature, therefore it allows you to change the company's management model). As a result, they have various deterrent mechanisms, which, when they merge within the framework of one agreement, can generate a negative result for law and order ^{[11, p. 35]}.

Therefore, it is hardly possible to talk about untangling the conflict-of-laws regulation of a corporate contract from the personal law of a legal entity ^{[12, p. 46]}, since their connection did not arise because in Russian law this contract has an admixture of corporate nature (for example, clause 6 of Article 67.2 of the Civil Code of the Russian Federation, which allows invalidating the decisions of the body of a business company, adopted in violation of a corporate agreement), but because civil turnover needs protection from mixed legal constructs, which are unexpected for a reasonable counterparty. If business is conducted with a German legal entity, then it would be logical to expect that corporate relations that are important for external relations will correspond to German law in fundamental provisions.

Of course, the conversion of Russian corporate law from a mixed model of a corporate contract to a fully American or continental one is the desired result, but even if it is achieved, the conflict of laws regulation should remain the same.

Due to such a close connection of the corporate statute with the personal statute of a legal entity, the transnational transfer of companies (Cross-border transfer of company seats. URL: https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/583143/IPOL_BRI (2017)583143_EN.pdf (accessed: 04/19/2022)). Such a transition can be carried out in several ways:

1) By moving the company's head office to another country;

2) By concentrating all business activity in another state;

3) By terminating a legal entity in one country and re-establishing it in another (this method is generally accepted in European regulation).

The impact on the regulation of a corporate contract will depend on which model of determining the personal law of a legal entity adheres to the legislation on the Ministry of Emergency Situations of this state. Russian law proceeds from the criterion of incorporation, therefore, only the re-registration of a legal entity to another state matters: in this case, a corporate contract will not be able to contradict the mandatory norms of the personal statute of the legal entity of the relevant country. The corporate statute itself (the chosen applicable law) does not undergo changes, since it represents the will of all parties to the contract and can be changed only by agreement of all its participants (and not only the majoritaries).

Similar to this procedure is the institution of redomicilation, which is currently defined as "a change in the personal law of a legal entity due to the creation of a new legal entity with all the rights, obligations and property of the former legal entity, followed by the liquidation of the former legal entity in the former jurisdiction with the permission of both jurisdictions under the fiction of the continuity of the legal entity ^{[13, pp. 100 – 102]}". With regard to the corporate contract, paragraph 1.2 of Article 4 of the Federal Law "On International Companies and International Funds" is relevant, which allows the continued application of foreign regulation to the relations of corporate participants, as well as paragraph 5 of paragraph 3 of the same article, which preserves the rights, obligations and responsibilities arising from agreements on the establishment of legal entities and corporate contracts.

Therefore, even if the charter does not provide for the continuation of the application of foreign law, the corporate agreement will remain in force. The only change will be its subordination to the mandatory norms of Russian law on the personal statute of a legal entity; the chosen applicable law will remain the same.

In judicial practice, cases of inheritance and corporate disputes are not uncommon, when the participants of a limited liability company refuse to consent to the transfer of a share in the company to the heir of its former owner. In this situation, there is a conflict between the hereditary and corporate statute, since the procedure for giving consent can be regulated by a corporate contract. However, upon closer examination, it turns out that from the date of the opening of the inheritance, the relationship on the transfer of shares is more hereditary than corporate, since the question is how to carry out hereditary succession, and not how to allow the transfer of shares.

In particular, the Moscow District Court of St. Petersburg (The decision of the Moscow District Court of St. Petersburg ¹ 2-386/2017 2-386/2017(2-9198/2016;)~ M-6628/2016 2-9198/2016 M-6628/2016 of July 31, 2017 in case No. 2-386/2017 // https://sudact.ru/regular/doc/u48O10a5nplg / (date of request: 04/19/2022)) established that "paragraph 6.11 of the charters of both companies is not only a contract on the establishment of a legal entity, but also regulates the exercise of the rights of a participant in a legal entity (the right of a participant to consent or refuse to accept heirs as members of the company), the ability of a legal entity to meet its obligations (the obligation of the company to pay the heirs the actual value of the share), therefore the legislation of the Russian Federation applies to relations related to the entry of heirs into the number of participants of companies, the payment of the actual value of the share to them."

It is equally important to distinguish between a corporate statute and a real one, since shares are also securities that can be presented in documentary form (which, however, is a rather rare phenomenon in the modern world). Therefore, a corporate agreement may well provide for the obligation of a shareholder, upon the occurrence of certain conditions, to alienate his documentary shares to a third party, however, if such alienation is prohibited by the law of the location of the shares, then it will not be able to take place.

Conclusion

Thus, the foundations of conflict-of-laws regulation of corporate contracts have already been established in Russian law, it is quite balanced and can be welcomed. Nevertheless, there remain issues that lie outside the scope of Article 1214 of the Civil Code of the Russian Federation and that require their resolution, and not so much by the legislator as by judicial practice.

In particular, it seems that the determination of the cross-border nature of a corporate contract should be carried out using both an economic and a legal approach, and the main foreign element to be taken into account is the foreign statute of the contracting party. The specified status is acquired by a participant when acquiring 20% of voting shares or a participation interest of more than 20%, while this criterion is not strict, the court has the right to give a different qualification to a corporate agreement with such a participant.

In the event of a change in a foreign element (including its appearance or disappearance), the regulation of relations between the parties remains the same as it was agreed upon at the time of conclusion of the contract. Thanks to this approach, the stability of civil turnover is achieved, the occurrence of unforeseen circumstances for the parties is prevented.

In addition, in the event of a change in the applicable law that makes the execution of the corporate agreement impossible, the conflict of laws choice does not change automatically: this requires the consent of all participants in the corporate agreement. The parties may also provide a condition for the application of the chosen law in the form in which it existed at the time of conclusion of the contract, and a provision for changing the applicable law upon the occurrence of certain circumstances, while the latter is the most reliable way. Also, the conflict of laws choice remains unchanged during the relocation of a legal entity and its redomicilation as its special case.

The principle of separation of the contractual and corporate parts of the contract can also be applied to other constituent documents containing provisions of a binding nature concerning the procedure for exercising corporate rights, in particular the constituent agreements of partnerships.

It seems that the revealed principles of conflict of laws regulation can ensure stable and uniform application of the rules on legal relations arising from cross-border corporate contracts.