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Professional advice on the legality and risks of affiliate-involved transactions, including prospects for declaring them invalid.
Recognition of Transactions with Affiliated Persons as Invalid
Expert guide on voiding affiliate transactions under corporate law.
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How to Invalidate Deals with Affiliates
Along with the owners (shareholders), each business company has affiliates who can potentially influence the conduct of business or whose business is influenced by the company itself. Affiliates are often interested in the company’s transactions. Such transactions are concluded in a special order. When this procedure is not fulfilled, transactions may be invalidated. Our lawyers will evaluate the client’s transactions according to the criterion of interest of affiliated persons and prepare documents for the transaction. If the transaction is disputed in court, we are ready to represent the interests of the client. More than 10 years of experience in judicial representation allows us to do this.
What are the features of making a decision on concluding transactions with the interest of affiliated persons
1. Decision-making by the general meeting of participants
The decision on making a transaction with the interest of an affiliated person is made by the company’s management body. This is usually a general meeting of the participants (shareholders) of the company. Another management body of the company may be prescribed in the company’s charter, which decides on a transaction with the interest of affiliated persons. The General Meeting of Participants (shareholders) makes a decision by a majority vote of the participants who are not interested in the transaction.
2. Decision-making by the Board of Directors (Supervisory Board)
When a company has a board of directors (supervisory board), it decides on an interested party transaction when:
- This is stated in the company’s articles of association.
- The transaction price is not higher than 2% of the value of the company’s assets for the last reporting period before the transaction. A higher percentage may be prescribed in the charter.
The decision on the transaction is made by a majority vote of all members of the Board of Directors (Supervisory Board) who are not interested in making the transaction — independent directors. When the number of independent directors is insufficient to make a decision, the decision is made by the general meeting of the company’s participants.
3. Decision-making by the Director
The decision on a transaction involving the interests of affiliated persons is made by the director or the management board of the company when:
- All affiliated persons are the owners of the company and are interested in the transaction.
- The company buys its own shares by its own decision or repurchases shares at the request of shareholders. In these cases, transactions are concluded in the usual way for the company to conclude transactions that have been concluded three or more times in the last year.
Features of invalidation of transactions with the interest of affiliated persons
When a company does not comply with the procedure for making a transaction with the interest of an affiliated person, such a transaction can be declared invalid in court. This does not mean that the court will automatically invalidate it. A person who decides to go to court must prove that the transaction violated their rights and caused losses to the company, its owners, and the claimant personally.
When a transaction involving interests of affiliated persons is not recognized as invalid
Even when the company has not fulfilled the requirements for making a transaction with the interest of affiliated persons, it will not be invalidated when:
- The voting of the company’s owners, members of the Board of Directors, who were notified of the general meeting and who demand that the transaction be declared invalid, could not affect the results of voting on the transaction.
- The transaction did not cause losses to the company or the owners of the company who went to court and there are no other adverse consequences.
- Before the case is considered in court, the decision on the transaction is executed in accordance with the procedure defined for making transactions with the interest of affiliated persons. The relevant documents must be sent to the court.
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Who Is Required to Disclose Information About Affiliated Parties?
Maintaining and updating a list of affiliated parties is mandatory for both open and closed joint-stock companies (JSCs) under clauses 3 and 8 of Instruction No. 43. This requirement is linked to the fact that JSCs regularly submit periodic reports, including a dedicated form titled “Information About Affiliated Parties” (clause 6 of Instruction No. 43).
As for limited liability companies (LLCs) and additional liability companies (ALCs), keeping such a list is not strictly mandatory but becomes highly relevant in certain situations:
Internal Rules or Disputed Director Actions
When the company’s participants adopt internal rules requiring compliance with affiliate disclosure laws or when they challenge transactions made by the director without prior approval from the general meeting.
Seeking Bank or Financial Institution Funding
When the company seeks funding from banks or financial institutions, whether domestic or foreign.
Involvement of Active Investors
When investors are part of the ownership structure and actively monitor financial decisions and transactions.
Working with International Corporations
When the company serves as a supplier, contractor, or service provider for international corporations.
In such cases, maintaining an updated list of affiliated parties is a practical necessity to ensure legal compliance and transparency.
When Affiliates are Interested in a Deal
An affiliated person is interested in making a transaction when he is one of the parties to the transaction or represents the interests of third parties in relations with the company.
There are some other cases where affiliates are interested in a deal:
- When they own 20% or more of the shares of the company, the parties to the transaction or a representative of third parties in relation to the company.
- When they are the owners of the company’s property, the parties to the transaction or represent third parties in relations with the company.
- When they are members of the management bodies of a business partner of the company or a partner who represents the interests of third parties in relations with the company.
- When other affiliated persons are listed in the company’s articles of association or the procedure for determining them.
Our Services
Transaction Support
Drafting and reviewing documents for transactions with affiliated parties to ensure compliance and reduce potential disputes.
Pre-Trial Documentation
Preparing a legally sound set of documents to support the claim of invalidity before filing a lawsuit.
Lawsuit Preparation
Compiling a full claim package, including the lawsuit and supporting evidence, ready for court submission.
Court Representation
Full legal representation in court to protect your interests and seek annulment of the contested transaction.
Who Qualifies as an Affiliated Party in a Business Entity
Company Executives and Board Members
Members of the board of directors (or supervisory board) and executives of the company are considered affiliated parties due to their direct involvement in decision-making.
Entities in the Same Holding
Legal entities that are part of the same holding structure as the company qualify as affiliated parties because of shared ownership or control.
Individuals with 20%+ Ownership (Self or Relatives)
Individuals who, alone or together with close relatives (such as spouses, parents, children, grandchildren, siblings, and in-laws), own or control 20% or more of the company’s shares or charter capital are considered affiliated.
External Entities with 20%+ Ownership or Influence
Legal entities that own or control 20% or more of the company’s shares or have the contractual right to influence company decisions fall under the affiliated party category.
Entities Controlled by the Company (20%+ or by Contract)
Legal entities in which the company itself holds 20% or more of the capital or has decision-making influence under a contract are also classified as affiliated parties.
Unitary Enterprises Created by the Company
Unitary enterprises established by the company are affiliated because they are wholly dependent on the founding company.
Executives of Affiliated Legal Entities
Members of collective management bodies or executives of a legal entity affiliated with the company are also treated as affiliated parties due to their indirect influence.
Importantly, the Republic of Belarus, its territorial units, the National Bank, government ministries, and local authorities cannot be considered affiliated parties.
Each business entity is responsible for defining its affiliated parties, maintaining a registry, and notifying them in writing.
Importantly, the Republic of Belarus, its territorial units, the National Bank, government ministries, and local authorities cannot be considered affiliated parties.
Each business entity is responsible for defining its affiliated parties, maintaining a registry, and notifying them in writing.
Affiliated parties are considered interested in the following situations:
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How to Execute a Transaction Involving Affiliated Interest
1
Identify Affiliated Parties
The company must define its affiliated parties in accordance with internal rules, maintain an up-to-date list, and notify them in writing. Without this, tracking and approving interested-party transactions becomes problematic.
2
Maintain a Formal Register
The director is generally responsible for keeping the register of affiliated persons. This list is essential for transparency and legal compliance when planning or approving transactions.
3
Obtain Prior Approval
If an affiliated interest is present, the company must get prior approval from the general meeting of participants or the board of directors before executing the transaction.
4
Ensure a Proper Quorum
A decision is valid if over 50% of voting rights are present. If there’s no quorum, a second meeting may be held with at least 30%, unless a higher threshold is required by the charter.
5
Know When Approval Is Not Needed
Approval is not required if all participants are interested parties, or if the transaction is part of regular business activity under standard conditions and occurs at least three times in 12 months.
6
Sign the Transaction
Once approval is received (if necessary), the company may proceed to sign and execute the transaction in line with corporate procedures and documentation standards.
7
Approve After the Fact (If Needed)
If a transaction was signed before receiving the required approval, post-factum approval is possible. This must follow the same process as prior approval to validate the deal.
8
Challenge a Transaction If Violations Occur
The company, participants, or board members can challenge the deal in court if it violated legal requirements or internal approval rules.
9
Prove Improper Notification
To dispute a deal, one must prove that proper notice of the meeting wasn’t given. Even if a vote wouldn’t change the outcome, lack of notice may justify a claim.
10
Demonstrate Damage or Risk
Another basis for disputing the deal is showing that the transaction caused or could cause losses to the company or its stakeholders or resulted in other negative consequences.
11
Consider Subsequent Approval
If the company later ratifies the transaction through a formal resolution, the court will likely consider the deal valid and refuse to declare it invalid, even if procedural issues occurred.
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