In-Depth: Protection Against Seizure

Property seizures involving the forging of documents are becoming less popular as the parties risk criminal charges, should the fact of forgery be established. A much safer solution is a lawful scheme where a corporate raider earns a profit without facing the risk of ending up behind bars. These days, the most popular are the following two schemes of seizure.

Scheme I

At the first stage, the raider acquires a stake in the target company, sufficient to initiate a shareholder’s meeting. Then the new shareholder holds the shareholder’s meeting attended only by himself and shareholders loyal to him. The meeting is called the second session after a first one was allegedly cancelled due to the lack of a quorum.

To hold the second session the attendance of shareholders controlling 25-30% of the shares is usually enough. The session installs new governing bodies, replacing the old management with new executives. All those steps are taken without notifying the staff or the company’s shareholders, who are not present at the meeting.

Then, the raider heads to the tax inspectorate to have the changes registered. As the tax authorities do not question the legality of the changes – their only requirement being that the applicant provide the full set of documents – they register the changes automatically.

And then, the original deal, which the entire operation was launched for in the first place, is struck. The building is sold to a firm set up especially for the purpose. Quite often such firms are registered in offshore zones.

Needless to say, the property is sold at book value price, considerably below its market value. If need be, the newly-appointed general director provides a document confirming that the sum of the deal is below the 25% mark of the total value of the company’s assets, which makes it possible to OK the deal without calling a general shareholder meeting to approve it. After the new owner’s title is registered the operation is complete.

To speed up the registration the raiders are ready to splash out. As a result, quite often the shareholders face not only the loss of property but also the threat of losing a successful business.

Protection

Where a joint stock company holds the titles to valuable properties, shareholders simply have to take measures to protect their assets. For example, the background of every new major shareholder ought to be thoroughly checked. At that stage it is possible to make out the true purpose being pursued with the acquisition of the stake that in turn can mean the right of a decisive vote is withheld.

Also, it would be useful to make inquiries at the single state register of legal entities so as to track any changes in the company’s governing bodies. As soon as some changes come to light the efforts of potential raiders can be considered foiled and their plan to catch the owner unawares is revealed.

After the changes are detected it is necessary to take emergency measures to protect your assets by notifying the tax inspectorate and the directorate of the Federal Registrar Service that no general shareholder meeting has ever taken place, and filing a claim in court asking to invalidate the decision regarding changes in the company’s governing bodies.

It is also important to obtain an injunction with the court, preventing any persons from taking any actions aimed at the alienation of property and the official registration of the title to it. That step will stall any efforts by newly appointed directors to take actions regarding the company’s assets pending the examination of the case in court.

If the shareholders fail to take these measures on time and the new owner succeeds in registering his title with the single state register of titles to real estate property, remedying the situation will be much more difficult. If the new owner goes further and re-sells the acquired property the previous owner will lose control over the situation, as the 2004 changes to the civil legislation in this country have considerably strengthened the position of bona fide buyers.

Article 223 of the Civil Code of the Russian Federation states that the title to real property secured by a bona fide purchaser is recognized as valid from the moment it is registered (Paragraph 1, Article 302). That means that even if the sale is invalidated later on, the person recognized as a bona fide buyer will retain his right to the property and will be free to own, use and alienate it at his own discretion.

Another set of protective measures pertains to keeping the register of joint stock companies. Many joint stock companies opt to keep their register themselves ignoring the risks arising from such a policy.

Quite often third parties wield strong instruments of persuasion and succeed in winning over the general director of the company inciting him to assist in the withdrawal of assets, which makes the raider’s task fairly easy.

When the register is kept by a professional agency – the register-holder – that guarantees an additional legal examination of the documents submitted to introduce changes in the composition of the shareholders and governing bodies.

Another means to prevent changes in the governing bodies is to initiate a sham conflict between the founders and shareholders over their stakes or any other property-related issue. When hearing that dispute the court may take measures to protect the property, preventing the tax service from registering any changes at the single state register of legal entities, which serves as an insurance against the unsanctioned change of a general director or the founders.

To return the situation to normality all the co-founders have to do is to “come to terms”, i.e. officially drop their claims, thus putting an end to the dispute.

Scheme II

In order to take over property assets raiders also practice such means as protesting an earlier executed deal. The raider begins with purchasing a firm that has recently sold off a large commercial property.

If that company is not involved in economic activity, its acquisition does not require high spending. Then, on various pretexts the new owner asks the court to invalidate the sale of the property and order the restitution to the seller, who gets back the building, and to the buyer, who gets back the money at the amount stated in the sale agreement.

In this case the buyer bears some losses, because often the amount stated in the agreement is the book value price while the lion’s share is paid in cash, for the purposes of tax evasion. Needless to say, the buyer cannot count on getting his money back in full.

Protection

Standing up to the seller who seeks the invalidation of the deal is far more difficult: it is impossible to forestall the move on the part of the seller with the help of tax officials, as no changes are being registered there. Sometimes, the co-founders and shareholders are not even aware of the court ruling.

If such a fact is detected, the company has to go to court immediately to protect its property, in the form of an injunction issued to the Federal Registrar Service against registering any changes. Then the litigation, time-consuming and nerve-racking for both parties, begins. If no injunction is issued the raider may be able to sell the property again, thus bringing in a bona fide buyer.

Claiming the property obtained by a bona fide purchaser is possible only where the plaintiff proves in court that the property had been alienated against the company’s will (Article 302 of the Civil Code). It also has to be remembered that as the company lost its title on the basis of the court ruling it will have to demand the cancellation of that ruling.

To protect the title to a recently obtained property there are a number of methods preventing any registration procedures. The first method is to pledge the property as security for a bank loan. A property encumbered by a pledge cannot be resold without the consent of the bank and the landlord. As an additional advantage, the company frees up cash required for further development; the disadvantage is the interest rate payments to the creditor.

The second method is easier and less costly – arranging for a so-called encumbrance by law. In line with Article 488 of the Civil Code, unless otherwise provided by the sale agreement, from the moment the goods are transferred to the buyer and until its payment, goods sold on credit are recognized as being in pledge of the seller to secure the performance by the buyer of their obligation to pay for the goods. The same rule applies to the sale of goods by installments.

To impose an encumbrance on the property, the new owner transfers the building to its affiliate on condition of deferred payment. The buyer is not allowed to sell the building until the seller confirms that the money has been paid in full. If both firms belong to the same owner, he can keep the building encumbered by law indefinitely.

This piece was contributed to Vedomosti by Alexander Sharapov, president of the company Becar. Commercial Property. The point of view of the author does not necessarily reflect the position of the editors.