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Russia: “With Great Power Comes Great Responsibility…”

Russia: “With Great Power Comes Great Responsibility…”

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Several years ago, certain amendments concerning the status of a CEO in Russia (in Russian corporate law, as a rule, this position is called General Director) were introduced to the Russian Civil Code as a part of a major reform of Russian civil legislation. Among these changes was the introduction of the ability to limit the liability of a CEO for damages he or she inflicted on the company, although this is still not widespread and is untested in practice. In this article, we address certain key issues regarding the civil liability of CEOs in Russia, including its potential limitation.

Russian legislation establishes the obligation of the director to act in the interests of the company, reasonably and in good faith. The concepts are not fully defined in Russian legislation and are only touched upon in guidelines provided by the Highest Court of the Russian Federation.

In particular, the CEO may be held liable if by his/her actions or misconduct the company incurred losses (damages) or if he/she concluded a transaction to the detriment of the interests of the company.

In order to hold a CEO liable, a number of issues need to be established: fault must be proven; the company must have incurred losses/damages, and a cause-effect relationship between the actions/misconduct of the CEO and the incurred losses/damages has to be established. In practice it is often difficult to prove all three factors in court and thus to hold the CEO liable.

Moreover, a CEO shall not be deemed at fault if all measures for the proper performance of duties were taken with such care and diligence as are required by the nature of the obligation and conditions of doing business. Specifically, in ambiguous situations involving entering into a transaction or acting on behalf of the company, a CEO shall collect evidence confirming that he/she has sufficient powers to proceed with the action/transaction and is acting in the interests of the company, reasonably and in good faith. For example, the following evidence may be provided during disputes: unlawful actions of third parties, misconduct of counterparties, the CEO voted against the relevant corporate decision resulting in damages, etc.

In addition, prior to stepping into his/her position, a company’s CEO can execute an agreement with the company (with the exception of public companies) limiting his/her liability with respect to unreasonable actions, although it is not possible to limit the CEO’s liability for actions taken in bad faith or representing willful breaches of his/her obligations, or where the CEO is considered to be controlling the company (with the definition of “controlling” established by Russia’s Insolvency Law). However, based on limited court practice, it appears that it can be difficult to draw a distinction between “unreasonable” actions and actions taken “in bad faith,” as such concepts are interconnected (see, e.g., Resolutions of the Arbitration Court of Western-Siberia of November 22, 2018, case No. A45-8908/2018 and of Eastern-Siberia of December 8, 2014, case No. A10-825/2014). In practice, cases concerning the liability of a CEO are rather complex and courts generally make decisions on a case-by-case basis, taking into account the existence of limited liability agreements as one of the factors.

It should also be noted that Russian law contains no rules on the indemnification of the CEO by the company. It seems that due to the above limitations and the Russian interpretation of “indemnity” the existing legal framework leaves little space for indemnification, though in practice indeed some companies may enter into indemnity agreements with their CEOs.

The concept of limiting the liability of a CEO is not tested and in practice there are still many issues which would require the further attention of legislators and practitioners with respect to the type of agreement, the necessity of corporate approval for releases from liability, accession of the issue of whether the release of the liability “option” is attributed to a specific person or can be in general implemented in the corporate set-up of the company, and so on.

Director’s liability insurance is an available tool for minimizing the losses of both director and company, already common in many other countries. However, due to legislative uncertainty, such insurance is not widespread in Russia. The terms and conditions of insurance need to be specifically observed.

Though there are uncertainties with respect to legal options for limiting liability under Russian law, it is clear that the limitations of liability begin with understanding it.

By Svetlana Seregina, Partner, and Polina Savvina, Senior Associate, Peterka & Partners

This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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