Commentary to the Judgment of the Commercial Court of Kaliningrad Oblast dd 16 May 2022 № А21-12303/2021. ORNETO PARTNERS v. Kaliningrad Commercial Seaport

Facts

On 24.12.2020 ORNETO PARTNERS Limited Partnership purchased shares of Joint Stock Company “Kaliningrad Commercial Sea Port” (hereinafter – JSC “KCSP”) in amount of 43 000 ordinary voting shares (43% of votes). A record on the transfer of rights to the shares was made on 02.03.2021, as follows from the depo account statement.

On 13.08.2021 ORNETO PARTNERS Limited Partnership sent a request about information to JSC “KCSP”, which was left without satisfaction.

ORNETO PARTNERS Limited Partnership brought a claim against JSC “KCSP” and required the following information.

1. Balance sheet for the 2021.

2. Statements of accounts receivable of the Company.

3. Statements of accounts payable of the Company.

4. Statements issued by the tax authorities regarding the Company’s open and closed bank accounts.

5. Statements of all bank accounts for the 2021.

6. Annual financial statements and the auditor’s report thereon.

7. Contracts on the purchase and sale of real estate for 2021.

8. Lease contracts for 2021.

9. Currently executable lease contracts.

10. Contracts and unilateral transactions for the 2021, which are major transactions and (or) related party transactions.

11. Contracts for 2021 entered into to secure obligations (independent guarantees, sureties, pledges and others).

12. Valid loan and credit agreements.

13. Other contracts for 2021.

14. Contracts currently being executed for which the price exceeds RUR 1,000,000.

15. Protocols of decisions of the Company’s Board of Directors for 2021.

16. Company internal documents regulating the activities of the Company’s bodies.

17. Protocols of decisions taken by the Company’s general meetings of shareholders.

18. Report of the Internal Audit Commission (internal auditor) of the Company.

19. Notices of shareholders’ agreements.

20. Full auditor’s reports.

21. Information on immovable property owned or owned by JSC “KCSP” in 2021.

22. Information on the Company’s fixed assets as of 12.08.2021.

23. Reports from appraisers on the evaluation of property, in respect of which the Company has conducted transactions in 2021 which are major transactions and (or) interested-party transactions.

24. Lists of the Company’s affiliates.

The plaintiff also requested that the defendant should be ordered to pay astrente in the amount of 50,000 roubles per day from the first day of the non-enforcement of the judgment until the judgment would be enforced.

Claimant’s arguments

According to the Article 91 of Federal Law No. 208-FZ of 26 December 1995 on Joint-Stock Companies, a shareholder with 43% of the voting shares has the right to the required information about the company’s activities.

Defendant’s arguments

The court must dismiss the claim on the basis of Article 148 § 1 (7) of the Code of Arbitraz Procedure of the Russian Federation. Article 148 § 1 of the Code of Arbitraz Procedure as the power of attorney was signed by an unauthorised person. Namely, the power of attorney was not under the deed as it required under Article 61 § 5 of the Code of Arbitraz Procedure.

Judgment of the court of first instance

The court rejected the claim and gave the following reasons for its decision.

At the end of February and beginning of March 2022, the UK adopted restrictive (political and economic) measures against the Russian Federation, Russian legal entities and individuals. In particular, the Sanctions and Anti-Money Laundering Act 2018 was amended on 10.02.2022. Prior to this, the sanctions regime against the Russian Federation allowed the British government to impose restrictions on those directly involved in destabilising, undermining or threatening Ukraine’s territorial integrity, sovereignty or independence. With the adoption of the amendments, the criteria for defining these individuals and legal entities has been significantly expanded. The new regulations allow for the adoption of restrictions against businesses in strategic sectors of Russia. According to the amendments of 10.02.2022, they include companies in the military, chemical industry, transport, finance and energy sectors. JSC “KCSP” is a marine terminal operator and operates in the field of transport.

Decree of the RF President dated 28.02.2022 № 79 «On Application of Special Economic Measures in Relation to Unfriendly Actions of the United States of America and Associated Foreign States and International Organizations» was issued. Based on this Decree Government of the Russian Federation made a Resolution dated 05.03.2022 № 430 and classifies Great Britain as a foreign country which carry out unfriendly acts against Russia, Russian legal entities and citizens. Resolution of the Government of the Russian Federation dated 12.03.2022 № 351 «On peculiarities of disclosure and provision of information in 2022...» established that Russian joint stock companies have the right to refuse to provide information in accordance with requirements of the Federal Law “On Joint-Stock Companies” if providing the relevant information would (could) lead to introducing restrictive measures against the issuer and (or) other persons, including introducing new restrictive measures. This rule shall apply to legal relations arising from 01.01.2019.

The Orneto Company, which owns 43,000 ordinary shares in JSC “KCSP”, is a legal entity registered and operating in the United Kingdom (a foreign state and territory committing unfriendly acts in relation to Russia, Russian legal entities and citizens). The UK authorities have adopted regulations allowing the imposition of restrictive measures against Russian legal entities carrying out activities in the field of transport, as well as a wide range of other persons. The defendant is active in the field of transport and is the operator of a marine terminal. Consequently, the provision to the claimant the documents and information as required by the Joint-Stock Companies Act may lead to the imposition of additional restrictive measures against JSC “KCSP” and/or other persons as will become known from the defendant’s documents.

Position of the court of appeal

This appeal will be heard on August 24, 2022.

Commentary

The commentary to the case is included in the Maritime Law Journal because the company about whose activities the foreign shareholder sought information was a seaport. This fact raises the question of the universality of the position expressed by the courts.

The commentary is structured as answers to typical questions that draw attention of a lawyer.

1. Is it true that under Russian law a shareholder entitled to the information that the plaintiff is claiming in the present case?

The answer to this question is to be found in Article 91 of the Joint Stock Company Act. The amount of information to be provided depends on the number of voting shares held by the shareholder.

Any shareholder has the right to examine the annual accounts and the auditor’s report thereon, as well as the protocols of general meetings, lists of affiliated persons and the opinion of the auditing committee (Article 91(1) of the Joint-Stock Company Act).

A shareholder who owns more than 1% of the voting shares is entitled to information on transactions and valuation reports, but if he has less than 25% of the voting shares he must state the business purpose for which such information is needed. In particular, if the shares are to be selled or pledged, the creditor’s interest in knowing the financial position of the company is justified (Article 91(2) of the Joint-Stock Company Act).

The company may refuse to provide information not only when the shareholder is not entitled to the information according to the already named rules, but also when the information is requested repeatedly or posted on the website.

According to the Article 91 of the Joint-Stock Company Act, it could be concluded that in this case a shareholder, who owns 43% of the voting shares, has the right to the information he has requested from the company. What is questionable is his right to obtain information on bank accounts (paras. 4–5 of the claimant position).

2. Does the position expressed by the court relate to any foreign shareholder’s claim or is it caused by the specific nature of the defendant’s business – the seaport operation? In other words, is the court’s position of refusing to provide information to a foreign shareholder universal?

The first impression is that this judgment cannot be universal for all foreign shareholders.

The court bases its reasoning on the fact that the company is a marine terminal operator, and the so-called Russian sanctions legislation prohibits disclosure of information on its activities to persons originating from countries on the list of unfriendly countries. The Court explicitly writes that according to the Decree of the Russian Government dated 12.03.2022 № 351 the company has the right to refuse to provide information in accordance with the requirements of the Joint-Stock Law if providing the relevant information will (may) lead to the introduction of restrictive measures against the issuer and (or) other persons, including the introduction of new restrictive measures against the person about whom the issuer provides information.

The shareholder has a right to information that concerns the company’s financial and trading activities. It is difficult to imagine how the disclosure of information about the company’s counterparties or financial turnover would contribute to the adoption of new restrictive measures (sanctions). Decree of the Russian Government dated 12.03.2022 № 351 and the reasons of this judgements seems to be adopted just for case, so that the shareholder does not find out any information about the activities of the sea port. Once we assume that the position is formulated “just in case”, it becomes universal.

This idea could be formulated in another way. A grammatical interpretation of both Decree of the Russian Government dated 12.03.2022 № 351 and this judgement leads to the conclusion that the position is not universal but was applied in a particular case only because the company is a marine terminal operator. However, a teleological interpretation leads to a different conclusion: the purpose of the sanctions law is also to keep the company’s counterparties and the transactions carried out by the company unknown. So, in terms of purpose any joint stock company has the right to refuse to provide information to a foreign shareholder from a unfriendly country so that he does not find out about the company’s counterparties.

The teleological interpretation tends to prevail over the grammatical interpretation, so the refusal to provide information to a foreign shareholder seems to be universal.

A shareholder demands information from a company for the sake of control over its managers. Under Russian law, when managers act in bad faith or in an unreasonable manner, the shareholder has the right to sue against the company’s transactions and to claim damages from the managers in favour of the company. Restrictions on obtaining information deprive the shareholder of the ability to control managers and protect the company from their possible unfair or unreasonable actions. For example, without knowing the counterparty with whom the company has entered into a transaction, the shareholder will not be able to sue, because he does not know the defendant. The shareholder has no evidential basis to defend the company when he is denied in information.

An exception from the gloomy prognosis about the closed nature of information about the activities of Russian legal entities for foreign shareholders (participants) is the activities of public joint stock companies, which are required by law to post information about their activities and financial turnover on a publicly accessible website.

3. Does a power of attorney without a seal means that there is no authority for a lawyer to represent his client in a court?

In cases with participation of foreign persons in Russian court hearings, a favourite objection of procedural opponents is the argument of lack of authority of a lawyer.

Usually, the extract from the Chamber of commerce or Registrar in many countries differs from its Russian counterpart. Many extracts do not contain information about the director, for example, there is no such information in the Certificate of Incorporation, so Russian lawyers enjoy the argument about lack of authority. In such cases, a Certificate of Incumbency can be presented, where the information about the director is usually reflected.

However, some Russian lawyers also suggested that there may be more than one director and that the Articles of association of the legal entity should be provided. As if the Certificate of Incumbency would not show if there were two directors.

In this case the procedural opponent was no less formalistic and insisted on the lack of authority when there was no seal on the power of attorney.

During the reform of civil law legislation in Russian in 2014, the provision about the seal was removed from the Civil Code. Therefore, the Arbitrazh Procedural Code of Russia should be applied through the prism of the Civil Code. The seal is unnecessary.

In this case the court did not take into the account the defendant’s absence of authority argument and did not accept the seal argument because the claim was dismissed and was not abandoned as it would have been if there had been no authority.

4. Has the court an authority to dismiss the claim according to the sanction’s legislation, although the defendant referred only to the lack of authority of the plaintiff’s representative?

As it appears from the judgement the defendant argued only that the plaintiff’s representative had no authority. It was not clear whether the defendant had referred to the sanction legislation.

However, the legal qualification of the dispute rests to the court. It means that the court chose what legislation to use and to what rules refers. So according to Russian procedural rules its ordinary situation, when judge used the law, on which the parties didn’t referred.

5. If the courts of appeal or cassation change the decision of the court of first instant, how likely is it that the position of refusing to provide information will be repeated?

Regardless of the position of the court of appeal or the court of cassation, the practice of the courts of first instance in refusing to provide information to a foreign shareholder seems likely. The court of first instance is wary of deciding against the state and whatever the position of the other instances, it is the first instance that is most sensitive in protecting the state’s interests at present. ■