Application by Courts of Antimonopoly and Banking Laws Relating to Preliminary Approval of Credit Institutions Stock Acquisition.
In March 1998 a Russian bank - owner of the controlling interest (50%+3) in another credit institution (a bank) entered into the stock sale contracts with three separate legal entities, whereby each of the purchasers received 16.6% of the stock. Several months later the shares issuer (the bank) filed a claim before a court seeking invalidity of the transactions and application of transactions invalidity consequences to the said contracts on the ground that they had been concluded without a preliminary approval by an antimonopoly agency and the Central Bank of Russia.
The arbitration court denied the claim on several motives, including that that the claim was filed by an improper claimant. The court of appeal upheld the award and dismissed the bank’s claim. The court of cassation reversed the award of the first instance and the ruling of the court of appeal, and referred the case for a review.
As a result of the case review, the arbitration court, by its award upheld by the ruling of the appellate instance, recognized the sale contracts as invalid (void), since the shares had been acquired by a group of interdependent persons without a preliminary approval of the shares transactions by the Central Bank of Russia and antimonopoly agencies.
In application of the transactions invalidity consequences the court obliged the shares acquirers to return the shares to the bank-issuer (the claimant in the case).
The Federal Arbitration Court that considered the appeal upheld the award of the first instance and the ruling of the court of cassation.
The court of cassation acknowledged that the respondents, while acquiring the shares, acted jointly, within the framework of the agreement of the controlling interest acquisition in order to establish a holding company, referring to the interview given to a newspaper by a person authorized to represent the shares purchasers by proxy at the general meeting of the bank shareholders. The court pointed out that application of the consequences of the transaction recognized as invalid complied with Art. 167 of the Civil Code (the CC).
The territorial agency of the Ministry of Antimonopoly Policy and Business Support of the Russian Federation (the MAP of Russia) took part in the legal proceedings on the side of the claimant as a third party without its separate claims. The territorial agency presented its opinion of the case wherein it stated that the shares had been acquired by a group of persons; therefore, the consummation of the shares acquisition transaction required a preliminary approval of the antimonopoly agency. Since no preliminary approval had been obtained, the territorial agency regarded the shares acquisition transactions as void. In his letter the First Deputy Minister of the MAP of Russia acknowledged that the opinion of the territorial agency was unjustified.
In the course of reiterated consideration of the case arose several questions as to the application of the antimonopoly and banking law rules establishing the procedure of the public control over material transactions of shares acquisition.
1.      Is the shares issuer (the bank) entitled to a recourse to the court with a claim seeking invalidity of shares sale contracts or application of the consequences of invalidity of void transactions on the ground that the contracts have been entered into without a preliminary approval of the antimonopoly agency, or is filing of such claims a prerogative of antimonopoly agencies?
The procedure of the public control over compliance with the antimonopoly requirements in acquisition of the shares (interest) in the authorized capital of companies and consequences of the failure to meet these are established by Art. 18 of the Law of the RSFSR On Competition and Restriction of Monopolistic Activities on Commodity Markets (hereinafter - «the Law on Competition»). Pursuant to para 9 of the said Article the transactions consummated in violation of the established procedure and entailing appearance and enhancement of the domination and (or) restriction of the competition may be recognized as invalid in court, against a claim of the Federal Antimonopoly Agency (or its territorial agency within the latter’s jurisdiction) in the event the parties to the transaction fail to comply with the requirements of the Federal Antimonopoly Agency for restoration of indispensable conditions of the competition within a period fixed by the Federal Antimonopoly Agency.
This rule clearly implies that the transactions consummated in violation of Art. 18 of the Law on Competition are voidable, since they may be recognized as invalid only by court contrary to void transactions that are invalid irrespective of such recognition (Art. 166 of the CC). Besides, the law correlates the invalidity of such transactions with additional conditions of an evaluating and behavioral nature (eventuality of negative consequences for competition on the market and the failure of the parties to the transaction to comply with the Federal Antimonopoly Agency’s requirements), which is absolutely uncharacteristic of the void transactions.
As is known, legal consequences of invalidity of void and voidable transactions are different. In particular, they differ in a circle of persons entitled to file claims resulting from transactions invalidity. In the event of a void transaction the claim may be filed by any interested person, and in the event of a voidable one a circle of proper claimants is limited. Since pursuant to Art. 18 of the Law on Competition a transaction is recognized as invalid only against the Federal Antimonopoly Agency’s claim (or its territorial agency’s claim), the issuer of the shares, which were the subject of corresponding transactions, is an improper claimant. Consequently, if the issuer files such claim on the grounds provided for by Art. 18 of the Law on Competition, the consequences stipulated in Art. 36 of the Code of Arbitration Practice (the CAP) ensue. A claim of an improper claimant is subject to no allowance.
2.      On what grounds can the court recognize a shares sale transaction as invalid if in the process of its consummation the procedure established by Art. 18 of the Law on Competition was violated?
Para 9, Art. 18 of the Law on Competition comprehensively defines the grounds on which a transaction may be recognized as invalid. Firstly, to recognize a transaction falling under Art. 18 as invalid, it must be established that the transaction entails appearance or enhancement of the domination of certain business subjects on the market and (or) restriction of competition as such. Secondly, the fact of the failure to meet the Federal Antimonopoly Agency’s requirements for restoration of indispensable competition conditions by the parties to the transaction within the period fixed by the above agency must be established. Thirdly, if the Federal Antimonopoly Agency approved the transaction on condition that the requirements ensuring the competition would be met (para 4, Art. 18), the fact of the failure to comply with these requirements by the parties to the transaction must be established. Fourthly, the transaction notified to the Federal Antimonopoly Agency pursuant to para 5, Art. 18 may be recognized as invalid if the parties to it have not taken measures to restore indispensable competition conditions by the time fixed by the Federal Antimonopoly Agency.
It follows from the aforesaid that the fact of the failure to receive a preliminary approval of a transaction, when such approval is required by Art. 18 of the Law on Competition, as well as the absence of notification about the transaction in cases provided for by para 5, Art. 18 of the Law cannot per se be the ground for contestation of the transaction by the Antimonopoly Agency and for recognition of it by the court as invalid without examination of all necessary information and determination of eventual adverse consequences of the transaction.
3.      Is the territorial agency of the MAP of Russia, involved by the court in the proceedings as a third party without its separate claims, entitled to present to the court its opinion on invalidity (nullity) of shares sale transactions on the ground of the absence of its preliminary approval?
Pursuant to Art. 12 of the Law on Competition a territorial agency of the MAP of Russia is entitled to file claims and participate in arbitration of the cases related to application and violation of the antimonopoly laws. Consequently, taking into account the rules of the CAP, a territorial agency of the MAP of Russia may participate in proceedings as a party or a third party.
Pursuant to Articles 33 and 39 of the CAP a person participating in the proceedings as a third party without separate claims has procedural obligations and enjoys the rights of a party, except for the rights specified in para 2, Art. 39 of the CAP. It means that a territorial agency involved as a third party without its separate claims is entitled to give its explanations and present arguments before an arbitration court about all questions arising in the course of the proceedings. Besides, pursuant to Art. 53 of the CAP the territorial agency must prove the circumstances whereto it refers in its explanations.
The Code of Arbitration Practice does not provide for participation of public bodies in the proceedings by way of presenting their opinions. Therefore, a territorial agency’s opinion is treated as explanations in a case given in writing and must be supported by the proof of the arguments stated therein. At the same time it should be noted that any explanations of the territorial agency unsubstantiated by the analysis of the necessary information, by revelation of eventual consequences of the transactions consummated in violation of the established procedure, and by adducing another evidence can hardly matter for adjudication.
Having revealed adverse consequences of the transaction consummated in violation of the procedure established by Art. 18 of the Law on Competition, the territorial agency, in accordance with para 9 of the above Article, must first of all pass the resolution obliging the parties to the transaction to restore indispensable conditions of the competition. In the event the parties fail to meet the request of the territorial agency by the time fixed in its resolution, the territorial agency is entitled to file before the arbitration court a claim seeking invalidity of the transaction.
The territorial agency could also join the proceedings by way of replacing the improper claimant, which in the situation concerned was the shares issuer. However, for this it should have performed the above preliminary actions.
4.      Are the Directions of the First Deputy Minister of the MAP of Russia on inconsistency of the territorial agency’s opinion with the laws in force and the proposal to review the opinion on invalidity of the shares sale transactions binding on the territorial agency?
Article 12 of the Law on Competition entitles the Federal Antimonopoly Agency to clarify the antimonopoly laws application. The Federal Antimonopoly Agency has not conferred this authority on its territorial agencies. Consequently, clarification (including in the form of opinions) of application of the Law on Competition is a prerogative of the MAP of Russia.
In reply to one of the respondents’ inquiry the First Deputy Minister of the MAP of Russia sent a letter clarifying the grounds for an antimonopoly agency’s recourse to the court with a claim seeking the transaction invalidity. This letter may be regarded as clarification of the application of Art. 18 of the Law on Competition. It followed from the clarification concerned that the mere fact of acquiring the shares without a preliminary approval of the antimonopoly agency is not the ground for filing a claim seeking invalidity of a transaction. Besides, the letter stated expressly that the territorial agency’s opinion was contrary to the laws in force.
It follows from the above that the territorial agency’s opinion was legally meaningless for adjudication. Firstly, the territorial agency was not authorized to give such opinion. Secondly, the opinion was expressly repudiated by the higher authorities on the ground of its inconsistency with the antimonopoly laws.
5.      Was Art. 18 of the Law on Competition applied in March 1998 in exercising the public control over acquisition of the shares in the authorized capital of credit institutions?
Pursuant to Art. 32 of the Law On Banks and Banking, the Order # 100 of July 22, 1997 issued by the Federal Antimonopoly Agency approved the Regulations On the Procedure of Petitioning Antimonopoly Agencies for Approval of Operations on the Market of Banking Services. According to the Regulations, the public control over acquisition of credit institutions shares by any person is exercised by antimonopoly agencies upon a petition of the shares acquirer. The Regulations specify the documents to be submitted to antimonopoly agencies together with the petition and the grounds for petitioning. The petitions are considered in a manner prescribed by Art. 18 of the Law.
Hence, Art. 18 of the Law on Competition was applied in 1998 to relations in acquisition of credit institutions shares, as well. The Federal Law dated 23 June 1999, # 117-FZ On Protection of the Competition on the Market of Financial Services, effective from December 1999, contains special provisions on peculiarities of the public control exercised by antimonopoly agencies over acquisition of assets and shares of credit institutions. However, these provisions cannot be applied to transactions consummated in 1998, since the Law has no retroactive force.
6.      Were the sharers acquirers obliged to get a preliminary antimonopoly agencies’ approval of their actions performed in March 1998, provided each of them intended to acquire 16.6% of the stock, whereas none of them was entitled directly or even indirectly to dispose under any transactions between them of more than 20% of the issuer’s stock; they had not entered into any contracts stipulating business terms and conditions or permitting one of them to exercise powers of another’s executive body, and none of them was entitled to appoint more than 50% of another acquirer’s executive staff and (or) the board members?
Pursuant to para 1, Art. 18 of the Law on Competition shares transactions are to be approved by antimonopoly agencies if as a result of such a transaction a person (a group of persons) acquires the right to dispose of more than 20% of the stock of a company-issuer (incidentally, it should be pointed out that the lawmaker evidently implied the right to use the votes represented by the shares, rather than the right to dispose of them). Since as a result of the contested transactions none of the acquirers obtained the right to dispose of more than 20% of the stock, the answer to the above question depends on whether the relations between all or two of the acquires may be qualified as relations between the members of a group of persons.
The concept of a group of persons is defined by Art. 4 of the Law on Competition. At the same time it should be taken into account that since the events considered by the court occurred in March 1998 (i.e. prior to the effective date of the Federal Law dated 6 May 1998, # 70-FZ, which altered and supplemented the concept of a group of persons considerably), one should be guided by the definition of a group of persons as worded by the Federal Law dated 25 May 1995, # 83-FZ.
It is the court that must resolve on the presence or absence of features of a group in the relations between the shares acquirers after a thorough analysis of the evidence adduced by the claimant contesting the shares sale transactions. Only the circumstances that existed on the date of conclusion of the shares sale contracts, and not those that arose later, may be taken into consideration. For example, the fact that having acquired the sharers all three purchasers empowered one and the same proxy to vote at the general meeting of the shareholders cannot be deemed as the ground for recognition of the sale contracts as invalid, since Articles 4 and 18 of the Law on Competition imply that the duty to obtain a preliminary approval of shares acquisition by antimonopoly agencies is imposed on the group of persons already existing on the date of the shares acquisition. In this connection, the conclusion made by the cassation instance in the case in question, that in determination of actual relations between the purchasers their intentions and subsequent actions had to be also evaluated, seems to be erroneous.
7.      Are the statements lawful when they ascertain that such notions as «the prevailing participating interest in the authorized capital» and «other ways to influence resolutions» are not defined by the Law with respect to the relations between parent and subsidiary business companies and, consequently, may be construed by the court at its discretion?
Indeed, the said notions used in Art. 105 of the CC are not defined by the law and must be construed by the court with due regard for all factual circumstances. The same is applicable to other evaluating notions in the CC, such, for example, as «requirements of good faith, reasonableness, and justice», «reasonable time», «comparable circumstances», «valid cause», etc. It should be noted, however, that «a group of persons» and «a subsidiary business company» categories are not interconnected and are introduced into the law on different grounds. The first is applicable to the sphere of antimonopoly laws and, accordingly, serves antimonopoly regulation purposes, and the second is included in the conceptual system of the civil law and used for determination of the extent of the civil law liability. That is why a parent and a subsidiary companies do not always constitute a group of persons, and a group of persons does not always consist of companies wherein one is a subsidiary of another. Consequently, the problem of construction of the notions used in Art. 105 of the CC is irrelevant to the situation considered by the court in this case.
8.      Is the sale of the controlling interest in the bank to three different purchasers a violation of the antimonopoly laws if the seller owing the controlling interest was advised to sell the whole controlling interest in one lot, i.e. to one purchaser, but since such purchaser was not found the controlling interest was split and distributed among three purchasers?
The mere fact of the sale of the controlling interest in parts cannot be a violation of the law. However, the law may be found breached in the event such sale was effected in violation of the statutory procedure, in particular, of Art. 18 of the Law on Competition providing for the events when shares transactions must be preliminarily approved by antimonopoly agencies, or antimonopoly agencies must be notified about these after their conclusion. It should be noted that pursuant to para 1, Art. 18 of the Law on Competition it is not a sale, but an acquisition of shares that is subject to the antimonopoly control. Hence, there are no grounds to speak about violation of the law by the seller.
9.      May the fact of location of two different foreign founders of different purchasers at one and the same registered address be considered as a feature of a group of persons as defined by the antimonopoly laws?
Article 4 of the Law on Competition (both in the former and current versions) contains a comprehensive list of the grounds for determination of a group of persons. Coincidence of locations (registered addresses) of different legal entities is not included in the list of such grounds. Therefore, this question should be answered in the negative.
10.      Are the following facts deemed as features of a group of persons and concerted actions of its members: the bank shares purchasers’ delivery of one-time proxies to one and the same natural person to participate at a regular general meeting of shareholders, publishing by the same person on the three purchasers’ behalf of a proposal to establish a holding company, sale by a founder of one of the purchasers (before consummation of challenged transactions) of 100% of the authorized capital in its subsidiary to another person, work of a manager of one of the purchasers as a chief accountant in another LLC - purchaser, work of spouses in one of the purchasers’ executive body consisting of 11 persons, and other circumstances that are not stated in the Law?
Pursuant to Art. 4 of the Law on Competition (the version of the Federal Law dated 25 May 1995, # 83-FZ), none of the above facts attests to availability of a group of persons, since such facts are not entered into the exhaustive list of features of a group of persons specified by Art. 4 of the Law on Competition.
11.      Was the business company, which in 1998 acquired 16.6% of the credit institution stock, obliged to obtain the Central Bank’s preliminary approval?
Article 11 of the Federal Law On Banks and Banking requires that an acquirer of credit institution shares (interest) obtain a preliminary approval of the Bank of Russia only in the event the number of the shares to be acquired exceeds 20 %.
Such requirement is made in case the shares are acquired both by a legal or natural person and a group of legal and (or) natural persons. Besides, the concept of a group of persons defined in the Law On Banks and Banking does not coincide with the concept of a group of persons defined by the Law on Competition.
Pursuant to Art. 11 of the Law On Banks and Banking several legal entities that have acquired credit institution shares may be recognized as a group only in the event they are bound by an agreement and (or) are subsidiaries and interdependent.
The documents submitted to the court showed that the shares acquirers could not be regarded as subsidiaries or interdependent with respect to each other in the meaning of Articles 105 and 106 of the CC.
Had it been established that the shares acquirers were set up by one and the same legal entity, and had it been possible to find respective connections with the founder (parent business company), even then such circumstances would not have attested to the fact that the shares acquirers constitute the same group of persons or are subsidiaries or interdependent.
The court judgments also show that existence of an agreement between the shares acquirers is not evidenced by the materials of the case. The interview to the newspaper given by an unauthorized person who is not an executive cannot evidence the existence of the agreement. The publication read about the possibility to set up a holding company in future; however, two years later the holding company was not set up, and the connections and interdependence between the persons who had acquired the shares in 1998 were not established. Consequently, there are no grounds to recognize Art. 11 of the Law On Banks and Banking as violated in the course of the shares acquisition. The shares acquirers do not fall under the definition of a group of persons specified by Art. 11 of the said Law and, consequently, were not obliged to obtain the Central Bank’s preliminary approval for acquisition of the shares making up 16.6%.
12.      What are the consequences of the failure to seek an approval of acquisition of credit institutions shares from the Bank of Russia?
The Law On Banks and Banking does not provide for the consequences of violation of Art. 11; therefore, with due regard for Art. 32 of the Law, the consequences stipulated by para 9, Art. 18 of the Law on Competition should be applied. Had there been grounds for contestation of the lawfulness of the shares acquisition because of the absence of a preliminary approval of the acquisition, an action seeking recognition of the transaction as invalid by court could have been brought by the antimonopoly agency, and not by the credit institution - the shares issuer.
Even if the shares acquisition transaction had been recognized as void, and not voidable, an action for consequences of such transaction by virtue of Art. 167 of the CC could have been brought only by an interested person. A person having a legal interest is deemed an interested person.
The sale of the shares of an open joint-stock company on the secondary market by its one or several shareholders entailed no legal consequences for the company in the case under review, since the stock company-issuer was already neither the owner of the sold shares, nor the party to the shares sale contract.
Consequently, on these grounds the stock company-issuer cannot be recognized as a legally interested person and thus a proper claimant, either.
Pursuant to Art. 167 of the CC in a bilateral restitution all shares acquired in the transaction would have been returned to the seller. There are no legal grounds for direct transfer of the shares acquired in the transaction recognized as invalid to the stock company-issuer; consequently, judgment on the consequences of the transaction invalidity has been delivered in violation of the CC.
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The answers to the questions arising during the court consideration of the bank-issuer’s action for recognition of the bank shares acquisition transactions as invalid, the analysis of Art. 18 of the Law on Competition, and Articles 11 and 32 of the Law On Banks and Banking make it possible to conclude as follows:
1.       Transactions of acquisition of the shares (interest) in the authorized capital of a bank are subject to the antimonopoly control, given a number of the conditions provided for by these articles.
2.       The failure to meet the requirements for a preliminary and subsequent recourse to an antimonopoly agency may entail a violator’s liability to pay a penalty.
3.       The mere fact of violation of the requirements of Art. 18 of the Law on Competition and Art. 11 of the Law On Banks and Banking for a preliminary and subsequent control over a shares acquisition without the analysis of eventual consequences of such transaction does not entail its invalidation.
4.       A transaction validity may be contested only by an antimonopoly agency, and the court is entitled to recognize the transaction as invalid, given the conditions comprehensively listed in para 9, Art. 18 of the Law on Competition.
In the court case reviewed no violations of Art. 18 of the Law on Competition and Art. 11 of the Law On Banks and Banking have been revealed. But even if the violation of these rules has been established, the court is not entitled to recognize the transaction as invalid against the action of the issuer (the bank) without a preliminary analysis of the market conditions and documents enclosed with the petition.
5.       Even in the event the transaction of shares acquisition on the secondary market is recognized as invalid, the bank-issuer does not acquire any property rights to the shares, since it is neither the shares owner, nor the seller thereof.