Legal Alert: Changes to the Regulation of Legal Entities in Russia: What May Concern Your Company?
Amendments to Chapter 4 of the Civil Code of the Russian Federation entered into force on September 1, 2014.
Chapter 4 establishes the legal framework for legal entities, including companies.
With these amendments, legal entities have been divided into:
- Corporations or corporate legal entities (those with members or shareholders who have the right to participate in the legal entity’s governance), including companies
- “Unitary” legal entities (those whose founders have rights over the legal entity’s assets, but who do not acquire membership rights), including state- and municipally-owned legal entities, funds, institutes, etc.
Of special concern for companies (which fall within the corporation category) is the division between public companies (public joint stock companies) and private companies (private joint stock companies and limited liability companies).
While the amendments have conceptually changed legal entities in Russia, there remains a number of points which require further clarification, which we expect will come with the passing of amendments or new laws in relation to the specific form of the legal entity (e.g., amendments to the Federal Law on Joint Stock Companies and the Federal Law on Limited Liability Companies, etc.).
Nevertheless, at this point, we feel that it is important for you to consider the following:
1) What forms of business entities remain? Has my company’s business entity form changed?
My company is currently a “closed” joint stock company (ZAO) or “open” joint stock company (OAO)
These forms for business entities no longer exist. Your company by default becomes a joint stock company and is either “public” or “private”. At this point, it is not mandatory to make any amendments to your constitutional documents. However, the first time that you decide to make any changes, you must also bring them into conformity with the latest amendments to the Civil Code and select a new form for your business entity. In the meantime, your constitutional documents are still valid with the exception only of those provisions that contradict the new rules. Changes made to your company’s name in connection with these amendments will not require that you make changes to title and other documents containing your company’s previous name (e.g., property title documents, trademark ownership certificates, etc.).
My company is currently a limited liability company (OOO)
Limited liability companies still exist, albeit with certain changes. Nevertheless, you do not need to change your company name.
2) My company was a joint stock company (ZAO or OAO) – How do I know if it is “public” or “private”?
Public companies are joint stock companies whose shares are publically traded (on a stock exchange) or whose shares were publically traded at any time in the past. Any company that meets one of these criteria will be considered as “public”, regardless of whether the name of the company has the word “public” in it. In addition, all newly founded companies will need to provide information on their public status to the registration agency.
All joint stock companies which do not meet one of the two criteria are considered to be “non-public” or “private”.
We strongly recommend that all former “open” joint stock companies (OAO) review their share issue history in order to determine if they are a “public” or a “private” joint stock company.
3) What is the difference between a public and a private company?
Public companies are more heavily regulated with stricter requirements for corporate procedures and the legal statuses of shareholders. E.g., public companies cannot limit the number of shares held by one shareholder or establish a priority right to purchase shares. Until further changes are made to other laws, the provisions on open joint stock companies (OAOs) will apply to public joint stock companies (unless these provisions contradict the Civil Code). Please note that there is no set method in which a public joint stock company can change into a private joint stock company.
Private companies are given much broader freedom in choosing the manner in which they are run. The rights of shareholders/members, the exact make-up of governing bodies and their authorities, and the ability to delegate certain competences to other bodies may be stipulated in the company’s articles of association in a manner which is different than the default provisions set by the Civil Code.
4) What has changed for the governing bodies of my company?
The governing bodies of all legal entities have now been given equal status to representatives. This establishes additional restrictions (e.g., it is prohibited to complete transactions with another legal entity when the representative of both legal entities is one and the same person), while at the same time provides expanded grounds for holding persons on governing bodies liable for their actions. For example, not only will the company’s main director (CEO, general director, etc.) and members of its board be liable for harm caused to a legal entity due to unfair or irrational behaviour, but any person who has de facto control of the company will also be liable. This new approach is meant to pierce the corporate veil and may apply to holding structures, “shadow” directors, and majority shareholders with control through intermediaries. Parent companies now hold liability for transactions made by subsidiaries (more than 50% ownership) if those transactions are made based on instructions from or with the consent of the parent company.
We strongly recommend that you review your corporate governance procedures and ensure that liability is properly distributed.
In addition, it is now possible for a company to have more than one “sole executive director” (i.e., general director, CEO, president, etc.). The sole executive director’s authorities may be given to more than one person with complete authority to act individually, may be spread out among different persons, or may be given to directors who must act jointly. The method for distributing authority must be stated in detail in the company’s articles of association, and amendments must be made to the Unified State Register of Legal Entities.
Please note that we would recommend that you wait until further laws are passed regarding your form of business entity before introducing any complex structures, as more detailed provisions concerning this issue may be introduced and you may run into difficult situations in practice with counterparties.
5) Are there any practical changes for general meetings and the way they are run?
Yes. Requirements have been introduced which require special certification.
(i) For public joint stock companies – the participants in a general meeting and the decisions they make must be certified by your company’s shareholders’ registrar
(ii) For private joint stock companies - the participants in a general meeting and the decisions they make must be certified by the shareholders’ registrar or a notary
(iii) For limited liability companies - the participants in a general meeting and the decisions they make must be certified by a notary or in any other method (e.g., by having all participants sign the minutes).
Please note that these requirements do not apply if there is only one shareholder or member.
Considering these changes, we recommend that limited liability companies stipulate in their articles of association the methods in which decisions may be made by the general meeting in order to avoid the need to go to a notary for each resolution.
6) Are there any other major changes?
Yes. Here are some of them in brief:
- Unless established otherwise by a separate law, at least three quarters of a company’s share capital must be paid before registering the company, with the remaining share capital paid within one year after the company is registered. LLCs may now pay their entire share capital within four months after registration, i.e., LLCs are not required to pay their entire share capital before registration as previously required.
- Various changes have been made to the procedures for conducting mergers, consolidations, reorganizations, etc. For example, it is now possible to conduct two procedures at the same time (e.g., to merge a public joint stock company and limited liability company into a limited liability company, etc.).
- “Corporate agreements,” which are a new type of agreement, have been introduced. These provisions replace previous regulations on shareholders’ agreements and operating agreements. Among the changes, corporate agreements may now be entered into with third parties (e.g., creditors). In general, these agreements may require the execution of certain corporate rights in a certain manner (or refraining from executing certain rights), including voting at general meetings.
- Domiciles in articles of association may be stated as a city or town instead of a specific address.
- Information on branch offices and representative offices does not need to be included in the company’s articles of association.
- Companies may now have other internal documents that regulate the relations among the owners in addition to the articles of association.