Actual and Legal Affiliation

In the economic realities of today’s world, the involvement of numerous parties in civil transactions is often necessary. Consequently, especially in the context of legal disputes, the concept of affiliation between parties is frequently employed to prove certain legally significant facts.

The current legislation and judicial practice identify criteria that determine the degree of influence of one person on another in the forms of significant influence and control, given that control is, in particular, the right to give binding instructions or the ability to otherwise determine the actions of another person, including the execution of transactions and determination of their terms, etc. (Article 61.10 of the Federal Law of October 26, 2002 No. 127-FZ "On Insolvency (Bankruptcy)", Article 4 of the Federal Law of December 2, 1990 No. 395-I "On Banks and Banking Activities", etc.). Moreover, such a degree of influence can, as a general rule, be established on the basis of both legal and factual features (Resolution of the Constitutional Court of the Russian Federation dated December 14, 2023 No. 57-P (hereinafter referred to as Resolution No. 57-P)).

It follows from the above that participants in economic activity may not always be legally connected, and therefore courts, when assessing the fact of affiliation of persons, have to rely not only on the criteria established in the current legislation, but also on the factual circumstances of the case, which entails the emergence of such concepts as legal and actual affiliation.

Legal affiliation

The Civil Code indicates that in cases where this Code or another law makes the occurrence of legal consequences dependent on the existence of a relationship of connection (affiliation) between persons, the presence or absence of such a relationship is determined in accordance with the law (Article 53.2 of the Civil Code of the Russian Federation).

As stated in Article 4 of the Law of the RSFSR of 22.03.1991 No. 948-1 "On Competition and Restriction of Monopolistic Activity in Commodity Markets", affiliated persons are individuals and legal entities capable of influencing the activities of legal entities and (or) individuals engaged in entrepreneurial activity.

Affiliates of a legal entity, according to the above Law, are:

• a member of its Board of Directors (supervisory board) or other collegial management body, a member of its collegial executive body, as well as a person exercising the powers of its sole executive body;
• persons belonging to the group to which the given legal entity belongs;

It is worth making a few remarks here. Firstly, the concept of a "group of persons" is contained in Article 9 of the Federal Law of 26.07.2006 No. 135-FZ "On Protection of Competition". Secondly, the Plenum of the Supreme Court of the Russian Federation explained that a group of persons may be considered as a single market participant; however, the legal regime of this group may not apply to a person formally included in a group of persons if, when considering the case, it is established that in fact this person is autonomous in determining its behavior in the commodity market, for example, due to the lack of sufficient legal (contractual, corporate) and organizational (managerial) means of influencing its behavior among other participants in the group (clause 7 of the Resolution of 04.03.2021 No. 2 "On certain issues arising in connection with the application of antimonopoly legislation by the courts").

• persons who have the right to control more than 20% of the total number of votes attributable to voting shares or contributions or shares of the authorized or contributed capital of a given legal entity;
• a legal entity in which the given legal entity has the right to control more than 20% of the total number of votes attributable to voting shares or contributions or shares of the given legal entity that constitute the authorized or contributed capital;
• if a legal entity is a participant in a financial and industrial group, its affiliates also include members of the Boards of Directors (supervisory boards) or other collegial management bodies, collegial executive bodies of participants in the financial and industrial group, as well as persons exercising the powers of sole executive bodies of participants in the financial and industrial group.

In addition to legal entities, this regulatory legal act also establishes criteria for recognizing the fact of affiliation with individual entrepreneurs.

Thus, affiliated persons of an individual engaged in entrepreneurial activity, are:

• persons belonging to the group of persons to which the given individual belongs;
• a legal entity in which a given individual has the right to control more than 20% of the total number of votes attributable to voting shares or contributions or shares of a given legal entity that constitute the authorized or contributed capital.

Thus, legal affiliation determines the corporate connection of persons, in which one person has the ability to influence the business decisions of another person, in establishing which the court is guided by the above criteria. This is usually confirmed by extracts from the Unified State Register of Legal Entities and/or the Unified State Register of Individual Entrepreneurs, information from the Unified State Register of Civil Status Acts, constituent and/or contractual documents, etc.

However, despite the obvious commonality of economic interests, the specified criteria may not always be present in the relationship between persons, which requires an expansion of the concept of affiliation.

Actual affiliation

Since, as already indicated above, the relationship between persons may not always meet the formal criteria of legal affiliation, the Supreme Court of the Russian Federation introduced a new concept of the connection of persons, indicating the possibility of the existence of actual affiliation between persons.

The above is consistent with procedural rules, in particular, in accordance with parts 1, 2 and 4 of Article 71 of the Arbitration Procedural Code of the Russian Federation, the arbitration court evaluates evidence based on its internal conviction, based on a comprehensive, complete, objective and direct examination of the evidence available in the case.

The arbitration court shall assess the relevance, admissibility and reliability of each piece of evidence individually, as well as the sufficiency and interrelation of the evidence in its entirety.

Each piece of evidence is subject to evaluation by the arbitration court along with other evidence.

Taking into account the above provisions of the applicable legislation, the courts have developed an approach according to which one of the methods of comprehensive objective verification of evidence is to compare evidence with each other (rulings of the Intellectual Property Court of 11.08.2022 in case No. A40-109961/2021, of 26.12.2019 in case No. A40-216034/2018, of 25.08.2017 in case No. A56-69922/2013).

In this regard, in its legal positions set out in the rulings of 15.06.2016 No. 308-ES16-1475, of 26.05.2017 No. 306-ES16-20056(6), the Supreme Court of the Russian Federation indicated that proving the fact of common economic interests is permissible not only through confirmation of legal affiliation (in particular, belonging of persons to the same group of companies through corporate participation), but also actual. The second of the named mechanisms, within the meaning of the legislation on the protection of competition, does not exclude proving interest even in cases where the structure of corporate participation and management artificially makes it possible to avoid the formal criterion of a group of persons, but the possibility of influencing decision-making in the sphere of doing business remains.

Thus, according to the given legal position of the highest judicial authority, in the event of the absence of formal legal ties between persons, the court can establish the actual nature of such legal relations, that is, not only through the structure of corporate participation, but also on the basis of the actual nature of the legal relations (actual affiliation).

The existence of this type of affiliation, according to the conclusions of the Supreme Court cited in the above-mentioned definition, may be evidenced by the behavior of persons in economic transactions, in particular, the conclusion of transactions between themselves and their subsequent execution on terms that are not available to ordinary (independent) market participants.

In this case, in the absence of formal legal ties, actual affiliation must be determined by the presence of circumstances in which one person has the opportunity to influence decision-making in the area of entrepreneurial activity of another person.

The Supreme Court included the following among such circumstances: the presence of the same persons among the debtors of such legal entities; the overlapping of the types of activities of legal entities; the expenditure of credit funds of one person to meet the needs of the counterparty; the performance of these legal entities as mutual creditors and debtors of each other.

For example, if we talk about cases related to intellectual property, we can cite the legal position of the Constitutional Court of the Russian Federation, set out in Resolution No. 57-P, according to which consent to the introduction by another person into circulation of a new trademark, similar to the point of confusion with the one already in use, and especially on the same product market, is hardly typical. Therefore, the presence of such consent, also expressed in relation to several trademarks similar to the point of confusion, may, along with other signs, indicate a state of control between affiliated persons. Such a state in this case presupposes the presence of coinciding economic interests among affiliated persons and some coordination of their actions for their most favorable satisfaction. Meanwhile, such consent alone does not in itself indicate affiliation , nor does it indicate bad faith on the part of the copyright holders, since it can be expressed, for example, within the framework of a one-time transaction (cooperation) and is conditioned by the introduction of a certain business model in the exercise of freedom of entrepreneurial activity within constitutionally permissible limits, which include the requirement to take into account the interests of consumers, fair competitive behavior, etc.

The moment of establishing affiliation

In this case, the current judicial practice is based on the impossibility of establishing the circumstances of affiliation once and for all, since it may take place during one period of time, but be absent during another period of time due to a possible change in circumstances (change in the composition of participants (shareholders), appointment as a sole executive body, etc.).

Taking into account the above, the circumstances of connection (affiliation) that determine certain actions of specific persons must be established by the court at the time the person files a claim in court.

A similar legal position is presented in the ruling of the Intellectual Property Court dated 20.10.2022 in case No. A40-219707/2021.

In summary, it should be noted that, unlike legal affiliation, uniform criteria for proving actual affiliation have not yet been developed, which makes it possible to include various groups of persons linked by common economic interests in this concept.