Russian Federation: Commercial Legal Entities - What’s New?

Last Updated: 23 August 2012
Article by Igor Orlov

The draft Federal Law No. 47538-6 "On Introducing Amendments to Parts One, Two, Three and Four of the Civil Code of the Russian Federation and to some legislative acts of the Russian Federation" (currently with revisions approved by the State Duma of the Federal Assembly of the RF in the first reading on 27.04.2012) ("the Draft") introduces, inter alia, significant alterations relating to commercial legal entities in Russia.

Commercial legal entities, (i.e. entities, the main objective of which is profit making), can still be established in organizational and legal forms of business partnerships and companies, business associations, producers' cooperatives, public and municipal unitary enterprises. At first glance there are no fundamental changes in the list (in contrast to non-commercial organizations). However, as the Draft stipulates for the division of legal entities into corporate entities (founders/members of which have a right to take part in the management of their activity (right of membership)) and unitary entities (founders of which do not become their members and do not acquire a right of membership), it is established that business partnerships, business companies and producers' cooperatives are referred to as corporate commercial entities, or corporations, and public and municipal unitary enterprises as unitary entities (articles 50, 65.1 in the revision of the Draft). That is to say, virtually all commercial entities are considered to be corporations, except for unitary enterprises. Let us consider the main innovations related to corporations.

The Draft introduces substantial alterations and additions to the general provisions on legal entities and introduces many general regulations related to corporations in particular.

Thus, some of the general provisions now regulate, for instance:

  • The issues of form and content of a decision to establish a legal entity (new article 50.1 of the Civil Code)
  • Liability of a person authorized to act on behalf of a legal entity, members of collegial bodies of a legal entity and persons deciding on the actions of a legal entity (new article 50.3 of the Civil Code) – in the first place, obligation of such persons to act reasonably and in good faith in the interests of a legal entity is set out, and in the second place, liability of such persons to a legal entity if they acted unreasonably or not in good faith is set out in the form of compensation for the respective damages, and it is not possible to exclude or limit such liability

The Draft also introduces general provisions related to affiliation, control and liability of persons who control a legal entity (new respective articles 53.2, 53.3 and 53.4 of the Civil Code). We note that these provisions are aimed at the introduction of uniform regulation of this issue and, in particular, the replacement of the relevant rules on affiliation of the Law of the Russian Soviet Federative Socialist Republic (RSFSR) dated 22 March 1991 No. 948-1 "On Competition and Restriction of Monopolistic Activity at Product Markets". The Draft stipulates for a different, presumably more up-to-date, list of grounds for affiliation establishment, and for an opportunity for a court to acknowledge an affiliation between entities, in spite of the lack of above mentioned grounds, if an actual possibility to influence a legal entity as a result of coordinated activities of relevant persons is proved. Furthermore, the Draft determines a notion of "controller" (together with a relevant list of grounds to acquire this status) namely, persons who directly or indirectly (through third parties), independently or together with their associates (affiliates) have an opportunity to determine actions (decisions) of a legal entity, and specifies certain circumstances for both joint liability of a controller for debts of a controlled entity and the right of a controlled entity or its members to claim damages inflicted on the controlled entity by a controller. That it to say, it is an attempt to implement the principle of "piercing the corporate veil" for persons who control the activity of a legal entity – they will have no opportunity at all to refer to autonomy of activities or independence of legal entities.

The Draft changes the regulations related to certain aspects of registration of legal entities and unified state register of legal entities (EGRUL) (new revision of article 51 of the Civil Code. For instance:

  • Third parties are now entitled to rely in good faith on the validity of data contained in EGRUL, and a legal entity itself has no right to refer, in relationship with these parties, to circumstances which are not reflected in the register)
  • Constituent documents (now it is a charter only, and legal entities can use standard charters elaborated by authorized bodies; only business partnership act on the basis of Foundation Agreement which has the legal force of a charter – article 52 of the Civil Code)
  • Name and location (article 54), reorganization and liquidation of legal entities (for instance, now it is allowed to reorganize two or more legal entities at the same time, including those of different organizational and legal forms
  • There is a separate regulation on consequences of reorganization invalidation; a list of grounds for liquidation of a legal entity in a judicial proceeding is introduced, etc.)

and many other general regulations.

We would mention that it is proposed to formalize in the Civil Code a regulation similar to the regulation of article 21.1 of the Federal law dated 08.08.2001 No. 129- FZ "On State Registration of Legal Entities and Individual Entrepreneurs" the possibility to exclude from the state register a legal entity that has virtually stopped its activity (i.e in the last twelve months has not provided tax reporting documents and has not carried out operations at least with one bank account) (new revision of article 61 of the Civil Code).

Finally, in relation to corporations, as a general regulation the Draft stipulates uniform rights and obligations of the members (including, for instance, an obligation not to disclose confidential information on corporation's activity and not to perform acts that would harm the interests of the corporation) and uniform rules of corporate management (including, inter alia, regulations on corporate management bodies and their types) (articles 65.2 and 65.3 of the Civil Code in revision of the Draft).

On the whole it appears that the proposed changes considerably increase the responsibility of management bodies and members of legal entities, raise and to a degree regularize the grounds for establishment, reorganization and liquidation of Russian legal entities.

In relation to commercial corporate entities, these are divided into business partnerships (which can be established in the form of general partnership or limited partnership), business companies (joint-stock companies or limited liability companies) and producers' cooperatives (workmen's cooperative associations) – this is actually the complete list.

As can be seen, it was decided to abandon closed joint-stock companies, the status of which was very similar to the status of a limited liability company (this is, probably, one of the most debated and predictable innovations in terms of organizational and legal forms) and additional liability companies (which almost did not exist).

Instead of open and closed joint-stock companies as separate forms, a status of public and non-public joint-stock companies is introduced together with respective different regulation. Thus, a public company is a joint-stock company, shares and convertible securities of which are publicly placed (by means of public offering) or publicly outstanding on conditions stipulated by the laws on securities. The rules on public companies are also applied to joint-stock companies, charter and company name of which indicate that the company is public. Special regulation is applied to public companies which stipulates for more transparency in company management, public disclosure of information and reports submission (new article 66.3 of the Civil Code).

The amount of the charter capital of commercial corporations was left at the same minimum level - RUB 10 000 – for all corporations except for joint-stock companies, the minimum charter capital of which is set in the amount of RUB 100 000 (paragraph 2 of article 66.2 of the Civil Code in the revision of the Draft).

The Draft considerably changes the general regulations on rights and obligations of members of business partnerships and companies and their management. We would mention, in particular, , inter alia, that the Draft provides the members of business partnerships (or some of them) the right to make an agreement with each other on the exercise of their corporate (membership) rights (corporate agreement), in accordance with which they undertake to exercise those rights in a certain way or to abstain (refuse) from exercising them, including voting in a certain way at a general meeting of members of the company, perform in a coordinated fashion other actions connected with company management, acquire or alienate shares in its charter capital (stocks) at a certain price and/or under certain circumstances or to abstain from alienation of share (stocks) until the occurrence of certain circumstances (new article 67.2 of the Civil Code) – as can be seen, the Draft considerably develops and upgrades a quite recently introduced innovation in Russian legislation – shareholders' agreement / agreement between participants of an LLC.

It is specified that a corporate agreement can, in some cases, determine the structure of a company's bodies and their competence (where the law permits such amendment by virtue of the company's charter).

Members who executed a corporate agreement should notify the company about the fact of execution of this agreement, and if they fail to do so, the members which are not parties to this agreement are entitled to claim damages.

It is an important innovation that from now on according to the Draft a violation of a corporate agreement can be a reason to invalidate decisions of the company's bodies on an action brought by a party to the agreement, on condition that as of the moment of making such decisions all the members were parties to the corporate agreement, and invalidation of the body's decision does not violate the rights and interests of third parties. It is also specified that a transaction made by a party to the corporate agreement in violation of this agreement can be held invalid by a court on the action brought by a party to the agreement if the other party to this transaction knew or should have known about the restrictions stipulated by the agreement. Finally, parties to a corporate agreement do not have the right to refer to its invalidity connected with its contradiction to the provisions of a company's charter. Curiously enough, the law will allow company's creditors and other third parties, in order to secure their legitimate interests, to make with company's members agreements similar to a corporate agreement.

It appears to us that the indicated regulations and provisions will help, in the long run, to eliminate existing ambiguities on the status of shareholders' agreements and will allow members of business corporations to use this important instrument to regulate corporate relationships to the full extent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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