Legal Consequences of Void Transactions on the Acquisition of Strategic Assets by Foreign Persons

Milchakova Olesya PhD in Law Associate Professor of the Department of Competition Law at Kutafin Moscow State Law University 123995, Russia, Moscow, Sadovaya Kudrinskaya str., 9 millov@yandex.ru Other publications by this author

The scientific legal literature pays considerable attention to various theoretical and practical issues of the invalidity of transactions and the consequences of their invalidity. At the same time, the main attention of researchers focuses on the provisions of the Civil Code of the Russian Federation. In this regard, it seems relevant to consider the issues of invalidity of transactions in the so-called special legislation, in particular, in the aspect of limiting the participation of foreign capital in strategic sectors of the economy, including in the context of changes in legislation made in 2023 and established law enforcement practice.

As noted by D.A. Melkonyan, the transaction is considered valid if it meets "the following requirements: 1) the legality of the content of the transaction; 2) the coincidence of the will and will of the parties; 3) the legal capacity of the participants in the transaction; 4) compliance with the form of the transaction." Thus, if the transaction does not meet any of the specified requirements, it cannot be recognized as valid. ^{[1, p. 64]}

E.Ya. Savchenko, classifying invalid transactions into transactions with defects of subject composition, defects of will and expression, defects of content, defects of form or in violation of the requirements for state registration, notes that "transactions with defects of content can include all transactions that do not meet the requirements of legislation," while this "feature is common the basis for invalidating any defective transaction." ^{[3, p. 13]}

Proceeding from the mandatory provisions of Federal Law No. 57-FZ of 29.04.2008 "On the Procedure for Foreign Investments in Business Entities of Strategic Importance for ensuring the Defense of the Country and the Security of the State" (hereinafter – Law No. 57-FZ), the commission by a foreign investor, a group of persons that includes a foreign investor, transactions provided for by this law and other actions in relation to a business company of strategic importance for ensuring the defense of the country and the security of the state are allowed only if there is a decision on the preliminary approval of such transactions, actions executed by the authorized body. Such bodies include the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation and the FAS of Russia, which performs the functions of monitoring the implementation of foreign investments in the Russian Federation.

Consequently, a violation of Law No. 57-FZ when making a transaction with respect to a strategic company does not meet one of the specified requirements for the validity of the transaction: having illegal content, it is a transaction with defects in content.

Article 166 of the Civil Code of the Russian Federation distinguishes among invalid transactions the disputed ones, which are considered valid until they are declared invalid by the court at the claim of the interested person, and the void ones, which are invalid regardless of such recognition, that is, upon the fact of such transactions.

Considering that the legislation establishes a special legal regime for foreign investments in strategic sectors of the economy, providing for restrictive exemptions for foreign investors with their participation in the authorized capital and management of strategic business companies, the federal legislator has fixed the rule that transactions subject to mandatory preliminary approval in accordance with the procedure established by this law, and committed without such approval, insignificant.

T.Y. Rodina and D.A. Kozin, justifying the inexpediency and inefficiency of classifying invalid transactions into void and disputed, while paying attention to the formality of the nature of such classification, note that despite the presumption of "invalidity" of void transactions established by the Civil Code of the Russian Federation, proceeding from paragraph 2 of Article 166 and paragraph 1 of Article 181 of the Civil Code of the Russian Federation, when a person who is not a party to the transaction applies to the court for the application of the consequences of the invalidity of an insignificant transaction, he, as well as in the case of a disputed transaction, must first prove the fact of the viciousness of the transaction and only then should the goal of challenging the transaction be realized in the form of the application of the consequences of its invalidity. ^{[2, pp. 118-119]}

It seems that an additional confirmation of the fairness of the stated opinion is the specifics of challenging transactions made in violation of the legislation on foreign investment. An analysis of judicial practice in cases involving violations of Law No. 57-FZ allows us to conclude that, with the exception of rare cases of litigation between shareholders, as a general rule, the authorized body, the FAS of Russia, acts as a plaintiff in defense of public interests, acting independently or jointly with the prosecutor as a co–plaintiff.

With a detailed study of the relevant judicial acts (see, for example, acts on cases No. A50-10758/2017, A4210735/2019, A50-32879/2019, A53-16168/2021, A42-6270/2022, A21-2269/2023), it is not so difficult to notice that these authorized bodies declare both requirements in the lawsuit simultaneously (on recognition of the transaction invalid and the application of the consequences of its invalidity), and after the court finds the fact of the invalidity of the transaction proved, it resolves the issue of the application of the necessary legal consequences. Since the authorized bodies are not parties to the disputed void transaction, but have a legally protected public interest in invalidating it by the court, the same high standards of proof are applied in cases of their claims in connection with violation of Law No. 57-FZ, which are typical when these bodies file lawsuits with the court to invalidate the disputed transactions.

With regard to the applicable consequences of the invalidity of transactions made in violation of the legislation on foreign investment in strategic sectors of the economy, it should be noted that until May 2023, Law No. 57-FZ contained only a reference norm to civil legislation, without disclosing exactly what consequences can be applied by the court in each specific case.

In practice, the courts applied not only bilateral restitution on the basis of paragraph 2 of Article 167 of the Civil Code of the Russian Federation (for example, case A19-6208/2018), but also the recovery of shares (shares) of strategic companies acquired by a foreign investor in violation of the law, on the basis of Article 169 of the Civil Code of the Russian Federation (for example, case no. A50-10758/2017, A42-10735/2019, A42-7217/2021), as well as depriving a foreign investor of the right to vote at the general meeting of shareholders (participants) of a strategic company in case it is impossible to apply the consequences of the invalidity of the transaction (for example, cases no. A50-32879/2019, A12-3804/2019, A76-37167/2020).

D.A. Fedyaev and E.V. Lyubimova note that the violation of Law No. 57-FZ "does not give grounds for the conversion of all received by the parties under the transaction to the income of the Russian Federation on the basis of Article 169 of the Civil Code of the Russian Federation"; "the latter applies only in cases provided for by law and does not apply to violations of legislation on foreign investments in strategic companies". ^{[4, p. 104]} This thesis is refuted by the established judicial and law enforcement practice.

Answering the question about the possibility of applying Article 169 of the Civil Code of the Russian Federation to the cases under consideration, it should be noted that despite the absence of clearly defined concepts of "fundamentals of law and order" and "morality" in the legislation, the Constitutional Court of the Russian Federation notes that Article 169 of the Civil Code of the Russian Federation highlights a group of invalid transactions dangerous to society – antisocial transactions, which contradict the foundations of law and order and morality. The concepts of "fundamentals of law and order" and "morality", like any evaluative concepts, are filled with content depending on how they are interpreted by participants in civil turnover and law enforcement practice, but they are not so vague that they do not provide a uniform understanding and application of the relevant provisions. The anti-social nature of the transaction, which gives the court the right to apply Article 169 of the Civil Code of the Russian Federation, is revealed during the proceedings, taking into account all the factual circumstances, the nature of the violations committed and their consequences (see, for example, the ruling of the Constitutional Court of the Russian Federation No. 226-O of 08.06.2004).

Taking into account the legal position repeatedly expressed by the Constitutional Court of the Russian Federation that Law No. 57-FZ is an integral part of the foundations of the rule of law, having established, on the basis of Part 3 of Article 55 of the Constitution of the Russian Federation, exclusions of a restrictive nature to prevent unsupervised transactions, as a result of which a foreign investor would gain control over a strategic company (see, for example, definitions of the Constitutional Court of the Russian Federation No. 924-O-O dated 05.07.2011, No. 1106-O dated 18.06.2020), in judicial practice on claims of the FAS of Russia in connection with the revealed facts of violation of Law No. 57-FZ, the position on the characterization of transactions made in violation of this law as antisocial and encroaching on the foundations is now firmly entrenched law and order and morality.

The judicial authorities note that the violation of Law No. 57-FZ means that transactions in violation of it are contrary not only to the fundamentals of morality, but also to the rule of law; those who committed them: 1) have come into conflict with the public interests of society and 2) act against the preservation of its economic sovereignty, 3) hinder the provision of national defense and state security, 4) deprive the possibility of preserving national interests through participation in enterprises of particular importance (see, for example, judicial acts in case no. A42-7217/2021).

The approaches developed in the course of many years of law enforcement practice have found their consolidation in the current version of Article 15 of Law No. 57-FZ. Based on a comprehensive analysis of the legal norms of this article of the law, the following logical sequence of the choice by the law enforcement officer of the options for the consequences of the invalidity of the transaction is presented.

When applying restitution on the basis of paragraph 2 of Article 167 of the Civil Code of the Russian Federation, the court must take into account, among other things, the presence or absence of risks of preservation or the emergence of a threat to the defense of the country and (or) the security of the state in the event of its application. This means that in the presence of such risks, the court does not apply restitution, but chooses other consequences of the invalidity of the transaction in order to ensure the satisfaction of public interest and the restoration of legality in a more effective way.

Such methods are the collection to the state income of shares (shares) acquired by a foreign investor (a group of persons that includes a foreign investor) as a result of an insignificant transaction that make up the authorized capital of a strategic company, its main production assets.

It should be noted that, firstly, from the judicial acts on cases in which the shares (shares) of the strategic company were recovered to the state's income, it follows that the question of the presence or absence of risks of threats to the country's defense and state security is being investigated by the courts in one way or another, and secondly, the above rule corresponds to paragraph 4 of Article 167 of the Civil Code of the Russian Federation, according to which the court has the right not to apply restitution if its application would contradict the fundamentals of law and order or morality.

At the same time, attention is drawn to the fact that Law No. 57-FZ focuses on the recovery of assets of a strategic company from the parties to the transaction who acted intentionally to the state's income. It also follows from the judicial acts on the above cases that the question of the intentional actions of a foreign investor to establish control over a strategic company, bypassing Law No. 57-FZ, is being investigated by the courts. Also, this provision of the current version of the law complies with the norms of Article 169 of the Civil Code of the Russian Federation.

At the same time, if with respect to the acquirer of the transaction – a foreign investor, the presence of intent to acquire assets of a strategic company bypassing Law No. 57-FZ, officially promulgated and made publicly available, can be assumed with certainty, then with respect to the seller of the transaction, everything is not so certain. Refraction of M.V. Khvostitsky's position ^[5] to the circumstances under consideration, it seems that the seller of a paid transaction for the sale of assets of a strategic company can be considered as bona fide if he proves by his actions that before concluding the contract (transaction) he showed due diligence, checked the documents on registration of the acquirer under the transaction (his jurisdiction) and its controlling persons, on the basis of which such a seller concluded that there was no need to approve the transaction in accordance with the procedure established by Law No. 57-FZ.

The legal consequence of the invalidity of the transaction in the form of the recovery of strategic assets that are the subject of an insignificant transaction to the state's income is very similar in nature to the confiscation of property to the state's income. However, it seems that to a greater extent the nature of this measure of influence is combined with Article 225 of the Civil Code of the Russian Federation, since the court, making such a decision, actually determines the fate of the object of civil rights, the ownership of which the foreign investor does not possess, especially in cases where the seller of an insignificant transaction – a legal entity is liquidated by the date of the court decision. At the same time, the deprivation of the voting rights of a foreign investor at the general meeting of shareholders (participants) of a strategic company will not actually lead to the satisfaction of public interest, since the management of the strategic company will continue to be carried out by managers previously appointed by a foreign investor who acquired the assets of such a company in violation of the law.

New to Law No. 57-FZ are the legal norms: on the application to actions committed in violation of Law No. 57-FZ, as a result of which a foreign investor received the right to determine the decisions of the management bodies of a strategic company, by analogy with the consequences of the invalidity of an insignificant transaction; on the right of the court to recover the state income received as a result of the commission on the right of a strategic company to recover losses from a foreign investor, including lost profits, damage caused to the property of a strategic company, in connection with the unfair exercise by a foreign investor of rights in relation to a strategic company or its property acquired as a result of void transactions.

Regarding the application of the consequences of invalidity to actions as a result of which a foreign investor received the right to determine the decisions of the management bodies of a strategic company, including the conditions for carrying out entrepreneurial activity, it seems that in practice the question of non-property corporate rights in relation to a strategic company may arise. For example, on the right to appoint a sole executive body, more than half of the members of the board of directors or other collegial management body of the company, on the right to exercise the functions of a management organization, etc., available by virtue of a shareholder agreement or other corporate agreement. In this case, non-property corporate rights cannot be recovered to the state's income, they can be transferred from a foreign investor to the state. In the event that it is impossible to transfer any rights, as a result of which a foreign investor has established actual control over a strategic company, shares (shares) in the authorized capital of such a company may be recovered to the state income.

With regard to the possibility of recovery by the court of income received as a result of the commission of an insignificant transaction by the parties who acted intentionally, it seems that this measure of state influence, in addition to what has already been stated above, has not so much a confiscation as a compensatory nature. By collecting dividends or other payments received from a strategic company by a foreign investor during the period of illegal control over it into the state's income, the state compensates for the damage caused to public relations in the field of national defense and state security.

By its nature, such a consequence is similar to the prescription already existing in the legislation and applied in practice on the transfer to the federal budget of income received as a result of violation of antimonopoly legislation. The Constitutional Court of the Russian Federation has repeatedly noted that this measure, on the grounds and procedure of application, as well as its legal consequences, is a specific form of coercive influence on participants in public relations protected by legislation. It is designed to ensure the restoration of the balance of public and private interests by withdrawing income received by an economic entity as a result of abuse, and to compensate for incalculable state expenses related to the elimination of negative socio-economic consequences of the offense (see Resolutions of the Constitutional Court of the Russian Federation No. 11-P of 24.06.2009, No. 7-P of 17.02.2022).

A similar approach can be applied to violations of Law No. 57-FZ. At the same time, the measure provided for by the law is applied exclusively in court, upon confirmation of the fact of violation of the law, within the framework of due process and with the granting of the right to judicial protection to a foreign investor.

In conclusion, it is advisable to note that strategic business companies make up a rather small number in the total number of Russian business entities, that is, the measures of state coercion considered are applicable only in limited cases.

The consequences of the invalidity of these transactions provided for by the legislation are measures adequate and proportionate to the consequences of violating the legislation on foreign investment in strategic sectors of the economy, which is an integral part of the foundations of the constitutional order. At the same time, the rigidity and some lack of alternative consequences of the invalidity of transactions involving the acquisition by foreign investors of assets of Russian strategic companies are predetermined by constitutionally significant goals to ensure the defense of the country, the security of citizens, society and the state.