Litigation - Russia

Introduction

The Federal Law on Joint Stock Companies and the Federal Law on Securities Markets allow a company to issue uncertified shares by creating electronic and paper records. As such shares are not represented by certificates, information on them and their owners must be kept in a unified share register; records in such registers are prima facie evidence of title to uncertified shares. A share register may be kept by either the issuing company or an independent professional registrar acting under a contract with the company; if an issuing company has over 50 shareholders, it must use a professional registrar. In any case, the issuing company remains legally responsible for the maintenance of the register.

Despite detailed rules issued by the securities market regulator, it is not unusual for information in a register to be distorted by a registrar's unlawful acts, whether intentional or not. For example, a registrar may carry out an unlawful act unintentionally when provided with a false share transfer order.

Such unlawful acts deprive the shareholder of its property and control over the corporation. The two main types of court action which a shareholder may bring each consist of multiple claims.

First, a court action against the wrongful holder of the shares will include claims for:

• a declaration on the rightful ownership of the shares;
• a declaration that the contract for the sale of the shares or the share transfer order is void; and
• 'revendication' (ie, restoration) of the shares.

Second, an action against the registrar will include claims for:

• a declaration that the previous record is void (but not an order for its deletion);
• the execution of a new record to reflect the plaintiff's rightful position; and
• damages.

Revendication Actions

The use of the remedy of revendication - a type of restitution claim - is unusual in this context and new to Russian litigation practice.

Recently, federal arbitrazh (ie, commercial) courts and the Supreme Arbitrazh Court have allowed plaintiffs to use the main action as a primary action in proceedings for the revendication of shares from an unauthorized holder. A revendication action is generally granted for the protection of rights over physical property; the extension of such protection to uncertified shares, which have no physical form and are fungible, was a considerable step for the Supreme Arbitrazh Court, which upheld lower court rulings to this effect.

Revendication actions are based on Article 301 of the Civil Code, which states that an "owner shall have the right to reclaim [its] property from another person's unlawful possession".

In order to prove the case, the plaintiff must:

• show that the shares still exist (ie, they have not been converted, cancelled or merged) and are recorded in the name of a particular person;
• specify the holder of the share account from which the shares should be removed; and
• show that the transfer was made unlawfully without the previous holder's consent.

There are likely to be preliminary questions to resolve before such a claim can be granted. For example, if a defendant can convince the court that it purchased the shares in good faith and at fair value, the court will not grant the action and the plaintiff will be limited to recovering damages from the initial unlawful possessor. However, a successful plaintiff will wish to initiate enforcement proceedings.

Enforcement Proceedings 

Uncertainty remains about how such a court order should be executed and whether it should be enforced against the registrar or the unlawful possessor of the shares. At present, precedents are evenly divided and the courts are awaiting guidance from the Supreme Arbitrazh Court. Despite the fact that enforcement against the registrar is likely to be quicker and more effective, legal obstacles to such enforcement may remain. The safer option is to initiate enforcement proceedings against the unlawful possessor of the shares as the main defendant. Enforcement against the registrar should be initiated only if it is clear that the unlawful possessor will be uncooperative and will not freely give up the shares by issuing a share transfer order, or if the unlawful possessor cannot be found.

International Law Office