Recovery of Damages from CEOs in Russia

10.07.2015
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Russia is undergoing a full-scale civil law reform touching, among other areas, upon various aspects of corporate law. One area affected by these changes is the liability of governing bodies.

These include, in the first place, the sole executivebody – in Russia most often called “general director,” an equivalent to chief executive officer (CEO) – that has actual control over the company and is entitled to enter into transactions, represent the company before third parties, and so on. In addition to the amendments introduced in the Civil Code of Russia, the Supreme State Commercial Court of Russia has issued the Resolution “On Certain Aspects of Recovery of Damages from Persons Being Members of Governing Bodies” (the “Resolution”) on July 30, 2013, setting forth clear criteria for holding CEOs liable.

As a result, the practice of holding CEOs liable has gained tremendous momentum. It is fair to say that there were such cases before the above-mentioned developments, but they were isolated.

So, what is the issue of recovery of damages from CEOs about and in what cases do grounds for such recovery arise? The general rule is that grounds for recovery actions arise where a company suffers damages from fraudulent (willful) or unreasonable (negligent) acts by its CEO. These may include entering into a transaction that is obviously disadvantageous (e.g., the sale of an important asset for a price much below its market value), or stripping assets from the company to the benefit of the CEO’s affiliates. But apart from such obvious and easily-understandable situations, grounds for recovery of damages from a CEO may also arise where the company is made publicly liable (e.g., in tax or administrative matters). Such actions may be brought by the company itself (e.g., represented by its new CEO) or by a company shareholder.

The first notable case in which damages were awarded against a former CEO on the basis of the criteria introduced by the Resolution involved damages resulting from a money transfer to a fly-by-night company for services that were never actually rendered (Case No 40-56721/13). The case was handled by Schekin & Partners. After that, successful actions against former CEOs followed one after another. Thus, in one case (Case No A41-2271/13) a company recovered more than USD 7 million from its former CEO (at the exchange rate as of the award date). Paying such a debt was not easy even for a successful and highly-paid top manager.

That is why the first judicial precedents shocked the business community, particularly top managers who often hold the position of sole executive in companies. During the first six months of the Resolution (from late November 2013 through late April 2014), more than 30 claims were satisfied while only 15 were dismissed.

I remember speaking to business persons at a seminar and seeing their frightened faces and eyes full of despair. At that time, top managers felt extremely vulnerable to employers and shareholders. Many feared becoming pawns in a conflict between various shareholder groups. As experts, we also realized that any such claim against a CEO allowed by a state commercial court might later become a basis for commencing a criminal action for embezzlement or abuse of power, because the circumstances established by the state commercial court would not need to be proven in a criminal case.

We had different expectations, however, believing that there would be no mass persecution of CEOs and that the high percentage of claims satisfied against them was due to the fact that cases taken to court were the most flagrant ones, where abuses by CEOs were plain to see.

Everything worked out as we expected. Over the period from early May 2014 to the present, the numbers of claims satisfied and dismissed against CEOs have become almost equal, the latter even outweighing slightly (78 claims satisfied and 83 dismissed), while the practice of converting civil liability into criminal liability has not spread.

I would conclude by noting that there are many cases when CEOs begin to play their own games that do not always meet the interests of their companies. In this light, the launching of directors’ liability seems to be a useful instrument of control for businesses.

Roman Serb-Serbin, Partner, Schekin & Partners

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