Russian Federation: Recovery Of Losses From A Shareholder Of The Company

Last Updated: 7 September 2018
Article by Mikhail Ivanov and Roman Zaitsev

In order to recover losses in the form of lost profit from a company shareholder it is necessary to prove that the shareholder has the actual ability to determine the company's actions, that there is a causal relationship between the shareholder's actions and the losses, and to confirm the amount of the losses with a reasonable degree of certainty.

A foreign shareholder suspended cooperation with a Russian company after European Union restrictive measures were imposed on the company. The Moscow Arbitrazh Court dismissed the claim for recovery of losses in the form of lost profit brought against the company's shareholder. The court found that the respondent did not have the actual ability to determine the company's actions and the method of calculating the amount of losses proposed by the claimant was not valid.

The Russian Company Interavtomatika CJSC was incorporated in 1994 as a company specializing in power equipment automation work and services. After European Union restrictive measures were imposed on the company in August 2017 the company's shareholder Siemens Aktiengesellschaft (45.72%), and also Siemens LLC and Siemens Gas Turbine Technologies LLC suspended all business transactions (including the performance of concluded contracts) with Interavtomatika CJSC.

Another shareholder of the company, Technopromexport VO OJSC (17.34%), decided that Siemens Aktiengesellschaft was at fault for the company having been caused losses in the form of lost profit because it was impossible to perform a number of contracts concluded with the company's clients.

Technopromexport VO OJSC (the claimant) filed a claim with the court against Siemens Aktiengesellschaft (the respondent), Siemens LLC and Siemens Gas Turbine Technologies LLC (the co-respondents) for joint and several recovery of RUB 46.8 million and €1.4 million in losses in the form of lost profit (considering the amendment of claims). The case was considered by the Moscow Arbitrazh Court (case No. А40-234039/2017).

The claimant claimed that the respondent had the actual ability to determine the company's actions, as:

  • The respondent holds 45.72 percent of the company's shares and two out of five members of the company's board of directors were elected further to the respondent's proposal
  • According to the charter, the company's activity includes marketing, engineering, sales, provision of services and maintenance of high-performance products and automated control systems that are designed using Siemens design tools and the major part of which are manufactured by Siemens or under a Siemens license

The claimant also claimed that the respondents had acted in bad faith in suspending all business transactions with the company and these actions caused losses in the form of lost profit.

In dismissing the claim, the court found that the claimant had not proven the respondent had the ability to determine the company's actions. The court noted that pursuant to the company's charter, holding shares did not entitle the respondent to solely determine the decisions taken by the company. Also, as noted in the court decision, there was no principal-subsidiary relationship between the respondent and the company.

The court evaluated the contents of the company charter provisions that its activity involved use of Siemens technologies and found that those provisions do not limit the company's legal capacity and are not an exhaustive list of the types of activity the company is entitled to engage in. Consequently, the fact that the respondents suspended their cooperation with the company did not mean the company could not continue its operations.

The court also noted that these provisions of the company's charter do not authorize the respondent to give the company binding instructions or otherwise determine its actions.

In deciding on the case, the court held it had not been proven that there was a causal relationship between the losses claimed and the respondents' actions, as the claimant had not confirmed that the respondents' suspension of cooperation with the company had become an obstacle to performing the company's contracts with third parties.

The court disagreed with the claimant's proposed method of calculating the amount of losses. A claim for recovery of lost profit was filed because the company had failed to perform three specific contracts concluded with the company's counterparties. The claimant connected the inability to perform these contracts with the respondents' suspension of cooperation with the company. The claimant determined the amount of losses incurred based on the company's "average gross profit margin" for the three years preceding the claim with regard to the disputed contracts.

The court did not consider such an approach to determining the amount of lost profit valid, as:

  • The claimant unreasonably assumed that the company's profitability in 2014-2016 would be fair also for contracts concluded in 2017
  • The calculation of losses did not consider the different types, subjects and scopes of work and costs to perform the disputed contracts
  • The claimant had ignored the changed economic situation in 2017, the change in market conditions and other financial indicators (fewer orders, a decrease in industrial production, capital flight from the energy industry), which must have affected the company's profit

Important court findings in this case:

  • If the charter states that the company's activity is related to using the products of a specific manufacturer, this does not mean that by implication of law the manufacturer has the actual ability to determine the company's actions (e.g., by canceling deliveries)
  • The approach of determining the amount of lost profit based on the company's profitability data for past periods cannot always be applied to calculate the amount of losses incurred

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