Covenants (including negative covenants and veto rights): a Russian and English law comparison | Practical Law

Covenants (including negative covenants and veto rights): a Russian and English law comparison | Practical Law

A table comparing and summarising the Russian and English legal positions on covenants. This is part of a set of resources comparing the English and Russian law provisions on commonly used terms in international transactions.

Covenants (including negative covenants and veto rights): a Russian and English law comparison

by Ian Ivory and Anton Rogoza, Goltsblat BLP, Moscow
Law stated as at 19 Jan 2011 • England, Russian Federation, Wales
A table comparing and summarising the Russian and English legal positions on covenants. This is part of a set of resources comparing the English and Russian law provisions on commonly used terms in international transactions.

Covenants (including negative covenants and veto rights)

Covenants

English law
Russian law
A covenant is an agreement or promise to do or provide something, or to refrain from doing or providing something, intended to be binding on the party giving the covenant.
Covenants are essential on financing deals and most banks and institutional investors would not consider lending without them. The most common are:
  • Financial covenants (for example, tests of solvency).
  • Non-financial covenants.
  • Restrictions on how the borrower's business is run.
Covenants are widely used in shareholders' agreements and joint ventures. They are also used on M&A deals, particularly where there is a:
  • Delay between signing and completion.
  • Deferred element of the purchase price.
  • Performance (earn-out) payment post-completion.
The law is still developing in this area and there is no clear and defined case history for the courts to follow on a consistent basis.
The concept of shareholders agreeing (by use of their voting rights and other powers of control) that the company in which they hold shares will do or not do something is not recognised. It is unlikely to be enforceable, since the action or inaction relates to a third party (the company) and not the shareholders themselves.

Positive covenants

English law
Russian law
An example of a positive covenant is:
"We undertake to provide key financial information to the bank on request."
Positive covenants (for example, providing key financial information) should be enforceable as they are treated by the courts as an obligation.

Negative covenants

English law
Russian law
An example of a negative covenant is:
"We undertake not to grant new security."
In most cases negative covenants are not permitted and the general principle applied by the courts is that a party cannot waive or contract out of its right to do something.
Rewording a negative covenant, so it is drafted in positive terms, would be unenforceable. The courts take a substantive approach, looking at the actual effect of the clause and not just whether it is worded positively or negatively.

Veto rights

English law
Russian law
A veto right is the right of a party to withhold its approval to a proposed course of action or decision requiring its consent. They are similar in some respects to certain negative covenants.
Rights of veto are widely used in shareholders' agreements and joint ventures. They are also used on M&A deals, particularly where there is a:
  • Delay between signing and completion.
  • Deferred element of the purchase price.
  • Performance (earn-out) payment post-completion.
Rights of veto are unlikely to be enforceable.