EU sanctions against Russia: does the duty to freeze assets of listed persons also extend to their voting rights in corporations?

For Cedric Ryngaert, there are limits to the duty to freeze assets of persons listed under the EU sanctions regime against Russia. In particular, he approves of a recent decision of the District Court of Amsterdam, which held that a listed shareholder in a Dutch corporation should not be barred from voting regarding matters of corporate governance. He argues that such voting need not result in funds being transferred to Russia, which could be used to fund the war in Ukraine. Still, he believes that the Court of Justice of the EU may want to give more guidance on the matter on the basis of a preliminary ruling.

It is no secret that the exact scope of application of certain EU sanctions against Russia remains unclear (see, e.g., here). EU courts have so far only given limited guidance (see, e.g., here). While the European Commission has developed a lengthy and constantly updated guidance (frequently asked questions, currently counting a whopping 253 pages), this document has no binding effect; the Commission added the regular disclaimer that ‘[o]nly the Court of Justice of the EU can give an authoritative interpretation of Union legislation’.

In the meantime, EU member state courts give their own interpretations to EU sanctions legislation. In this blogpost, I discuss a decision (only available in Dutch) rendered by the District Court of Amsterdam on 6 September 2022. The District Court was called on to rule whether sanctioned persons who have a financial stake in an EU company, through their ownership of – frozen – share certificates, can exercise their voting rights at company meetings. The Court ruled that they can, provided that voting does not lead to a change regarding the frozen certificates, and thus does not result in funds or economic resources flowing to Russia. This decision – which the Dutch media have also picked up – is an important one: it makes clear that sanctioned shareholders, in spite of their share certificates being frozen, can continue to participate in a company’s corporate governance.

The case before the Dutch court

The case concerned the question whether Sberbank of Russia, a sanctioned entity, could, via a special purpose vehicle (an indirect subsidiary), take part and vote in a meeting of certificate holders of the Dutch-based holding company of the Croatian Fortenova Group, one of the largest companies in Southeast Europe. One of the agenda points of the meeting, as proposed by another shareholder, pertained to a change in the corporate governance of the company, which would inter alia dilute the voting power of sanctioned parties such as Sberbank.

Fortenova argued that it was bound by EU sanctions and therefore could not allow the Russian bank to take part and vote in the meeting. Fortenova also submitted that it was under serious pressure from banks, accountants and business partners, who had concerns over the fact that sanctioned persons (Sberbank, but also VTB) held 49,9 % of the certificates in Fortenova, and over the fact that Sberbank had adopted pro-Russian views regarding the war in Ukraine. Sberbank objected to Fortenova’s position on the ground that EU sanctions do not apply to voting rights. It requested the District Court of Amsterdam to order Fortenova to allow it to take part and vote in the meeting. 

The legal question

The legal question was, in essence, whether the Russian bank, whose certificates were frozen, could still exercise its voting rights in light of Article 2(1) of EU Regulation 269/2014, one of the two key regulations regarding sanctions against Russia. Article 2(1) provides that ‘all funds and economic resources belonging to, owned, held or controlled’ by any listed persons are to be frozen. While it is uncontested that shares or share certificates qualify as funds and must accordingly be frozen, it is not clear whether the obligation to freeze certificates also implies that the sanctioned entity can no longer participate in a corporation’s governance. The EU guidance states in this respect that ‘it is prohibited for the listed person to exercise any voting rights which could lead to any change in relation to these shares (e.g. in their volume, amount, location, ownership, possession, character, destination etc.)’ (guidance, pp. 24-25). This implies that listed persons can at least exercise some voting rights, notably those which do not lead to any change in relation to their shares.

Confusingly, however, the Dutch Ministry of Finance indicated in its own Guidance on Financial Sanctions (Addendum), in relation to Article 2(1) of EU Regulation 269/2014, that listed shareholders cannot exercise any voting rights in a Dutch company.

The Court’s decision

According to the Dutch court, the Commission’s answers prevail over the answers of the Dutch Ministry of Finance (para. 4.15), apparently on the grounds that EU law prevails over the law of the member States (para. 4.3; never mind that neither set of guidance is binding …). Interpreting the Commission’s guidance, the Court held that the examples given by the Commission indicate that sharesneed to be frozen as much as possible, with a view to preventing  the generation of funds or resources for the war effort, but that voting regarding the administrative conditions and decision-making of the holding company does not qualify as a change in relation to these shares (para. 4.10). Indeed, according to the Court, for Sberbank to vote for or against the proposed changes to the company’s corporate governance does not lead to a flow of funds or resources to Russia (para. 4.11). 

Assessing the Court’s reasoning

The Court’s reasoning appears as persuasive, as the aim of the economic sanctions enacted by the EU is to ‘thwart Russian abilities to continue the aggression’ and to ensure that sanctioned persons’ ‘money can no longer be used to support the Russian regime’. Thus, activities of sanctioned persons which do not result in money flowing to Russia, such as voting with regard to corporate governance, should not be captured by the obligation to freeze funds and resources. As the Court pointed out, sanctions legislation should not be abused to serve the interests of other shareholders, who may well be eager to benefit from the exclusion of rival and sanctioned shareholders from corporate decision-making (para. 4.12). 

It bears notice that, also in respect of other sanctions regimes, courts have decided that the exercise of voting rights with respect to corporate governance is not covered by the obligation to freeze assets. Most notably, in respect of UN Security Council Resolution 1970, which provides in para. 17 for the freezing of assets belonging to certain Libyan individuals and entities, in wording that is similar to Article 2(1) of EU Regulation 269/2014, the Cayman Islands Grand Court, Financial Services Division, decided in 2019 that the exercise of voting rights to remove directors of and appoint new directors did not fall within the scope of the concept of asset freeze. Strikingly, regarding the same resolution, the Dutch Supreme Court held in 2019 that the exercise of such voting rights may well fall within this scope – but it refrained from taking a definitive decision on the matter. I commented on that decision in NJ (in Dutch).

Concluding observations

If anything, the District Court’s decision makes it clear that the scope of an assets freeze is not unlimited: even if a minority shareholder’s certificates are frozen, this does not mean that the shareholder is barred from voting regarding matters of corporate governance. This decision deserves support, provided that the outcomes of the vote do not result in funds being transferred to Russia, which could in turn be used to fund the war in Ukraine. Fortenova has appealed the District Court’s decision. Higher Dutch courts may well want to request a preliminary ruling from the Court of Justice of the EU on the scope of Article 2(1) of Regulation 269/2014, as this court has the ultimate authority to interpret the scope of the obligation to freeze under EU sanctions legislation.