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Options under Russian law

An option to enter into a contract and a preliminary contract for the purchase and sale of an interest are the same thing.

This is not true. One of the main differences between a preliminary contract and an option to conclude a contract is that, according to civil law, a preliminary contract is bilaterally binding, while the will of one party is required to conclude the main contract on the basis of an option to conclude a contract.

In the case of a pre-sale agreement for shares in an LLC, if one of the parties subsequently refuses to enter into the main agreement for the purchase and sale of shares in an LLC, the other party will require the conclusion of the contract through the court. While the contract option structure, which contains an irrevocable offer, allows the other party to conclude the main contract by notarizing the existing offer from the notary (i.e., at the time of conclusion of the main contract, the will of one party is required) and in case of a conflict, the party who granted the option will no longer be able to avoid entering into the main contract.

When entering into a preliminary agreement, the parties must immediately agree on all the essential conditions of the main agreement (paragraph 3 of article 429 of the civil code of the Russian Federation). But when entering into an option to conclude a contract-no: it is enough to describe the way in which they will be determined at the time of acceptance of the irrevocable offer.
The option does not need to be notarized

Unfortunately, I often hear that an option for shares in an LLC does not have to be certified by a notary, since an option agreement is not a management transaction. Even more astonishing are the stories about the fact that the court does not recognize such an agreement as null and void.

The option to conclude a contract for the purchase and sale of a share in an LLC is subject to mandatory notarization, since:

   According to paragraph 5 of article 429.2 of the civil code, an option to conclude a contract is concluded in the form established for the contract to be concluded.
  The law on LLC provides in clause 11 of article 21 that transactions aimed at alienating a share or part of a share in the authorized capital of a company are subject to notarization.Failure to comply with the notarial form entails the invalidity of such a transaction.

The courts also clearly believe that option agreements must be notarized. So, for example, in the decision of the Arbitration court of the Republic of Bashkortostan in case no.A07- 27369/2018 of 30.05.2019, an option agreement was concluded between the parties, but they did not notarize it.

As a result, the court concluded that the agreement on granting an option does not have the legal force of an option to conclude a contract due to its invalidity due to the lack of a notary certificate.

A similar position is held by the Supreme Court of the Russian Federation. The court considered a dispute in which the parties entered into an agreement to grant an option in a notarized form, but the parties signed an additional agreement to the option agreement, where the specific amount of the LLC's share was determined, in simple writing. The Supreme court in its decision noted that the supplementary agreement has no legal force option to conclude the contract nullity for lack of notarization as required by paragraph 5 of article 429.2 of the civil code, paragraph 2 of article 163 of the civil code and paragraph 11 of article 21 of the Federal law of 08.02.1998 No 14-FZ "About societies with limited liability" in their regulatory unity.
You can't put an option on a share that you will learn about in the future

One of the common misconceptions is that you can't put a contract option on shares that don't exist. However, the legislator specifies that the subject of the contract to be concluded, can be described in any manner sufficient to identify him at the time of acceptance of irrevocable offer. (par. 2 clause 4 of section 429.2 of the civil code). That is, for example, can specify in the agreement how long will be created in OOO, who will be its participants, it will be distributed in the proportion, what is the name of the society, etc. Similarly, you can determine and shares that will be purchased in the future: how much, what kind of society, who will be the seller and other determining conditions depending on the specific situation.

This position is also confirmed by article 455 of the civil code of the Russian Federation, according to which a contract can be concluded for the purchase and sale of goods available to the seller, as well as goods that will be created or purchased by the seller in the future. At the same time, the very design of the option indicates that it is possible to specify as a condition for acceptance actions that depend on the parties, so that the purchase of shares by the party that granted the option can be qualified as such a condition.
The option must specify the specific amount of the transferred share

As noted earlier, an option to conclude a contract does not necessarily specify the subject matter clearly – it is sufficient to describe it in such a way that it can be identified in the future, at the time of acceptance. That is, the parties do not necessarily have to fix that the party will receive exactly X% of the authorized capital of the company, the size of the received share can be flexible, depending on the fulfillment or non-fulfillment of the established KPIs. You can specify that meeting the set KPIs by 80% makes it possible to get 80% of the maximum promised share.

In practice, various formulas are often used to determine the size of the share, depending, for example, on some other indicators that are important to the parties, or formulas that allow you to determine how much the party will receive from the range specified in the option to conclude a contract.

However, it is worth noting that in this case, the parties must clearly determine how the size will be determined. For example, in one of the cases, the parties simply stipulate that the parties will get to 4.62% of the share capital, while not putting the method and principles of determining what size share, in what circumstances, under what conditions the parties can accept. The terms of such an option grant agreement do not allow determining the specific amount of the portion of the interest to be transferred under the purchase and sale agreement, as the wording used allows for the possibility of any value in such a range. Thus, the courts concluded that the absence in the option grant agreement of a condition on the specific amount of the portion of the share to be transferred, or a clear mechanism for determining it, which allows us to clearly indicate its content by the time of acceptance, leads to the inability to determine another significant condition – the price. (Ruling of the Supreme Court of the Russian Federation of 18.06.2019 No. 305-ES19-8295 in the case no. A40- 207820/2017).
The lender will not be able to foreclose on the option

An option to enter into a contract does not transfer the right to a share in the LLC to the buyer at the time of its conclusion. Registration of the transfer of rights to a share in an LLC takes place after a notary certifies the acceptance of an irrevocable offer and submits the necessary set of documents to the tax service for registration of changes in the unified state register of legal entities. Thus, all rights to the share until the moment of acceptance and registration of the transfer of rights to the share belong to the person who issued the option, so this share can also be foreclosed on.
We would like to note that foreclosure by creditors on the share or the part of the member's share of company in the authorized capital of the company for the debts of the participant of a society is permitted only on the basis of a court decision in case of insufficiency to cover debts of other property of a member of the company (clause 1, article 25 of the law on LLC).
Thus, the share promised under the option can be foreclosed in compliance with the procedure provided by law, that is, if there is insufficient other property and if there is a court decision to foreclose on the share.

A contract concluded by means of an option may be declared invalid if it is aimed at evading the execution of a judicial act, etc. (that is, if a person acts in bad faith, such an action will be an abuse of the right). So, for example, in one of the cases, the creditor demanded to invalidate contracts for the purchase and sale of shares in the authorized capital of an LLC concluded through an agreement on an option to conclude contracts and apply the consequences of the invalidity of the transaction, since the conclusion of contested transactions is aimed at evading the defendant from executing a judicial act on the recovery of borrowed funds by excluding liquid assets from its possession. (Decision of the Tenth arbitration court of appeal of 18.12.2019 no. 10AP-22485/2019, 10AP-22668/2019 in case No A41-890/2019.)

If a party has entered into an option to conclude a contract, and subsequently creditors have begun to foreclose on the debtor's property and the option has not yet been accepted, the creditor will be able to foreclose, including on the share "promised" on the basis of the option to conclude the contract.

In an LLC, you can allocate a pool of shares that will belong to the company and then be distributed to the option (reserve)
There is a register of issued share options

At the moment, there is no register of issued share options. In the unified state register of legal entities, data on the encumbrance of shares with options are also not entered.

The only tool that allows you to protect the parties today is assurances and guarantees. In case of making any transactions with shares, we recommend asking the other party to provide assurances that options for entering into a contract with respect to shares were not issued (based on article 431.2).


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