Regulation of Relations between Controlling and Controlled Companies under the Contract

Abstract

The current regulation of relationships arising due to the exercise by a parent company of corporate control over a subsidiary (“relationships of controllability”) in Russian law is insufficiently clear and consistent. The law, doctrine and judicial practice do not define the boundaries of application of the rules of para 2 and 3 of Art. 67.3 of the Civil Code, therefore they are equally applicable to relationships of controllability, arising both on the basis of majority participation in the authorized capital of the company and on the basis of a contract or other grounds. Such uncertainty of legal regulation causes serious difficulties in dogmatic elaboration and explanation of such basic constructions as the right of the parent company to give instructions to the subsidiary; joint and several liability of the parent company for transactions of the subsidiary made in execution of the instructions; liability of the parent company to the subsidiary for issuing disadvantageous instructions to it. Therefore, an important goal is to define the legal nature and peculiarities of such categories and to integrate them into the existing systematics of Russian corporate law. To achieve these goals in the paper the author uses the analysis of German judicial practice and doctrine, in the framework of that the relationships of controllability based on the contract between affiliated companies, known as “contractual concern”, are examined. The author concludes the joint liability of the parent company for the obligations of the subsidiary is based on the doctrine of piercing liability and the concept of “concern liability for breach of trust”, and the right to give instructions should be understood as legal actions of the parent company to manage the executive body of the subsidiary, the scope of which is determined by the contract, but may not affect the powers of other managing bodies. It is also concluded that executive bodies should comply with the duty of care, when giving instructions to the company, and in some cases members of its executive bodies may be held liable in addition to the parent company.