Review of the Supreme Court’s position on the case of recovery of damages from the director for awarding oneself a bonus

What is this legal alert about?

On 11 April 2025, the Supreme Court of the Russian Federation (“SC”) published a ruling in case No. A40-215730/2023 (“Ruling”) in which SC outlined several important conclusions for disputes over the recovery of damages for CEO illegally rewarded with bonuses itself and the company's employees.

We have previously prepared a legal alert – “Corporate conflicts: directors' liability for rewarding themselves in the absence of consent from company participants” where we presented the key positions of the courts on this category of disputes. You can read it here.

In this legal alert, we have analyzed the Ruling of the SC and identified the main conclusions that may affect court practice in similar disputes.

Essence of the dispute considered by the SC

Joint Stock Company “Med.Com” (“Company”) filed a lawsuit against the former general director for the recovery of losses in the form of unjustifiably accrued bonuses to himself and his deputy.

For 2.5 years, the former general director paid bonuses to himself and his deputy on behalf of the Company without receiving direct approval from the shareholders.

The lower courts dismissed the claim, considering the actions of the General Director to be lawful, since the payment of bonuses was actually approved at the general meeting of shareholders of the Company when agreeing on the results of revision and audit inspections, and the implementation of incentive payments was in accordance with the established practice of doing business in the Company.

Position of the SC

The SC did not agree with this approach. It drew the attention of the lower courts to the following circumstances:

On the issue of payments to the general director

• Given that the resolution to disburse funds is adopted by the director in his own personal interest, such a decision falls under the applicable provisions of corporate law regulating the process and framework for obtaining approval for a transaction involving a conflict of interest. This includes the requirement to disclose information non-interested shareholders.
• The burden of proof of approval for the transaction rests with the director, who must provide evidence of the informed voluntary consent of the participants (shareholders) to enter into the transaction.
• Contrary to the conclusions reached by the lower courts, the approval by the general meeting of shareholders of the results of the audit and revision inspections cannot be a sufficient basis for the conclusion that the disputed payments were approved, since they contain information only on the total amount of payments to all employees of the company, but they do not contain information on the distribution of the total amount of payments among specific persons, including interested parties in the company.
• Taking into account that shareholders could not approve payments of which they were not duly notified by the general director, the approval of the annual accounting (financial) statements and the auditor's report on the results of the regular annual meetings of shareholders is not considered proper (informed) corporate approval.

On the issue of payments to the deputy general director

• The basis for the liability of the general director is not only his unethical behavior (conducting transactions under a conflict of interest, etc.), but also the director’s unreasonable actions (inaction) of the director that do not correspond to the interests of the company.
• Since judicial review is intended to ensure the protection of the rights of business entities and their participants (shareholders), and not to verify the economic feasibility of decisions taken by the executive bodies of the company, the director cannot be held liable for the very fact of paying remuneration in favor of other persons performing management functions in the company, including in the event of disagreement of the participants (shareholders) or the newly appointed director with the amount of payments made.
• At the same time, the plaintiff has the right to prove that the actions (inaction) of the director did not correspond to the usual conditions of business turnover, i.e., any reasonable (professional) director would have acted differently under such circumstances.
• In relation to the dispute under consideration, the payment of bonuses in favor of the deputy general director was made in violation of the rules established in the Company, as well as without taking into account the hours worked, and their amount was many times higher than the maximum amount of incentive payments determined by the employment contract.
• At the same time, the defendant did not provide any explanations about the principles by which the bonus was paid to his deputy, including the criteria for assessing the quality and effectiveness of his work.

Conclusions

The SC once again reiterates to the lower courts the need to assess in each specific case the circumstances related to the disclosure of information about the upcoming incentive payments to the founders / shareholders.

Using the example of the case considered, the SC drew attention to the fact that in such disputes the director must provide such evidence that would exclude doubts about obtaining the informed voluntary consent to pay a bonus.

With regard to payments to subordinate employees, the courts, in addition to assessing the director's actions for good faith, need to assess the reasonableness of such actions, in particular, to establish how such payment corresponded to the performance and quality of the employee's work that were rewarded with a bonus.