This Special Update provides a brief overview of the Presidium of the Supreme Commercial Court Information Letter No. 131 "Overview of the Commercial Courts' Practice on the Preemptive Right to Acquire Shares of Closed Joint Stock Companies," dated 25 June 2009 (Overview).

The Overview discusses certain issues connected with exercising a pre-emptive right to acquire shares in a closed joint stock company (Company) by shareholders and the Company (if such a possibility is provided by the Company's charter). In particular, it covers the application of the provisions of the Law on Joint Stock Companies (JSC Law) on the pre-emptive right where the shares are:

The Overview clarifies that if shares are transferred to third persons under contracts, other than share purchase agreements (for example, an exchange contract), other shareholders do not have a pre-emptive right to acquire such shares under the JSC Law.

As the establishment of a pre-emptive right to acquire shares when they are transferred otherwise than under a share purchase agreement is considered a limitation of the shareholders' right to freely dispose of their shares, such a limitation may be created only by the law. Consequently, the Company's charter may not extend the application of the pre-emptive right to transfers of shares other than under sale and purchase agreements.

The Overview also covers cases where a Company's shareholder concludes sham transactions which:

In this case other shareholders are entitled to claim that the rights and obligations of a purchaser under the share purchase agreement that was hidden by the sham transactions are transferred to them.

Such sham transactions refer, in particular, to cases where a Company's shareholder executes a gift contract for an insignificant part of its shares with a third party (not being a Company's shareholder) and then sells another (significant) part of its shares to the same person. (The rules on exercising the pre-emptive right could not be applied in this case, as they apply only to cases of sale of shares to third parties which are not shareholders of the Company.)

The Overview lists the criteria for such sham transactions (for example, execution within a short period of time and donation of an insignificant amount of shares as compared to the amount sold to the same person).

The pre-emptive right aims to protect the shareholders' interest in controlling the Company's shareholding structure (that is, the personal composition of its shareholders). The Overview clarifies that the charter may not extend the application of the pre-emptive right to sales of shares between the Company's shareholders, as in such cases the shareholding structure remains unchanged.

The pre-emptive right to acquire shares applies only where the shares are sold to third parties. According to the Overview, the Company itself may not be considered a third party; therefore, when the Company acquires its own shares other shareholders do not have a pre-emptive right to acquire such shares.

The procedure for acquisition by a joint stock company of its own shares set out by article 72 of the JSC Law (including the requirements to the term for acquisition and the determination of the share price) do not apply to the exercise by the Company of its pre-emptive right to acquire shares.

However, in this case the limitations set out by article 73 of the JSC Law to protect the Company's creditors and shareholders must still apply. For example, the Company may not acquire shares:

The Overview provides that if a shareholder decides to sell its shares to a third person through an auction, the other shareholders of the Company are entitled to exercise the pre-emptive right to acquire such shares following the terms and procedure set out by the JSC Law.

In case of levy of execution on shares or their sale through a public auction as part of enforcement proceedings, the exercise of a pre-emptive right may infringe the interests of the debtor, as well as the creditors, whose interest is in a quick sale of shares at the maximum possible price.

Consequently, in this case the pre-emptive right of shareholders to acquire shares must be exercised by their participation in the auction and consent to acquire shares at a final price of the auction.

The organiser of the auction must inform the Company of the auction no less than 30 days before the auction.

The Overview clarifies that the execution of a share purchase agreement in breach of a pre-emptive right does not entail the invalidity of the agreement. This is because the JSC Law sets out other consequences for breach of a pre-emptive right (that is, a person whose pre-emptive right was violated may apply to the court for the rights and obligations of the purchaser to be transferred to it).

The Overview clarifies that the registrar cannot refuse to enter a record in the shareholders' register on the transfer of rights to the Company's shares to the purchaser because of a breach of the pre-emptive right at the time of transfer.

According to the Overview, the fact of a person, who purchased shares in breach of a pre-emptive right, participating in a general shareholders' meeting of the Company cannot be grounds for invalidating a decision of the meeting. Before the rights and obligations of the purchaser under a share purchase agreement are transferred to another person, the initial purchaser was a shareholder and could exercise the respective rights to, and provided by, the shares.

A claim to protect the pre-emptive right must not be sustained if the applicant, who was the Company's shareholder, as of the date of execution of the share purchase agreement further sold its shares to another person (as a result of which its pre-emptive right to acquire the shares in question expired).

The Overview also provides that the term for protecting the pre-emptive right to acquire shares set out by article 7(3) of the JSC Law (that is, three months) should be considered (under article 195 of the Civil Code) the limitation period. The rules on suspension of, break in and restoration of, a limitation period apply to this term.

Further, the Overview clarifies that, irrespective of the performance of the agreement, both the seller and the purchaser must be the respondents when the protection of the pre-emptive right is claimed in court.