Russian Federation: Joint Stock Companies And Limited Liability Companies From 1 September 2014

Last Updated: 26 August 2014
Article by Яна Дианова

On 1 September 2014 changes to the Civil Code of the Russian Federation (the Civil Code) regarding legal status, corporate relations and activities of legal entities, in particular, joint stock companies (JSCs) and limited liability companies (LLCs) introduced by the Federal Law No. 99-FZ dated 05 May 2014 (the Law No. 99-FZ) come into force.

1. Public and non-public companies

Instead of open joint stock companies (OJSCs) and closed joint stock companies (CJSCs) all JSCs shall be deemed public or non-public based on the following criteria:

  • whether shares of a JSC and securities convertible into shares thereof are publicly placed (by an open subscription) on conditions provided for by laws on securities; or
  • whether the charter and the company name of a JSC contains an indication that the JSC is public.

In the event that a JSC meets any of the abovementioned criteria it shall be deemed non-public. LLCs shall be deemed nonpublic companies as well.

The Civil Code as amended provides for a more flexible regime for regulating corporate relations in non-public companies:

  1. The charter of a non-public company and the corporate agreement (an agreement entered into by the shareholders/participants of a company and regulating how they exercise their rights) may state that the extent of the rights of the company's participants is not proportionate to the amounts of their shares in the charter capital of the company (provided that information on such corporate agreement and the scope of rights of the company's participants is entered into the Uniform State Register of Legal Entities (the USRLE);
  2. Participants (founders) of a non-public company may on the basis of a unanimous decision include in the charter of the company certain provisions changing the scope of authority of the management bodies of the company and the procedures for taking decisions, as well the procedure for disposing of the shares/participatory interests, in particular:

    • to transfer to the authority of the collective management body or the collective executive body of the company certain matters which by law are within the authority of the general meeting of participants (except for particular matters that concern interests of all the participants, i.e. reorganization or liquidation of the company, determination of the number, nominal value and categories (types) of declared shares and the rights granted by such shares);
    • to establish the procedure for convoking, preparing and conducting a general meeting of participants and the procedure for its taking decisions, which differs from the procedure established by law;
    • to not have an internal audit commission or require its establishment only in cases provided for by the charter;
    • to establish the procedure for exercising the pre-emptive right of purchase of a participatory interest or a part of a participatory interest in the charter capital of an LLC or pre-emptive right of purchase of shares of JSC or securities convertible into shares thereof.

2. Differences in regulation of a JSC and an LLC

The Civil Code as amended by the Law No. 99-FZ includes the following particular features of regulation with respect to JSCs and LLCs:

  1. The fact that a decision was taken by the general meeting of participants and the identities of participants who took part in taking the decision shall be confirmed with respect to:

    • a public JSC – by a person maintaining the shareholders' register of this JSC and performing the functions of its ballot committee;
    • a non-public JSC – by notarial certification or certification by a person maintaining the shareholders' register of this JSC and performing the functions of its ballot committee;
    • an LLC - by notarial certification unless another means (e.g. signing of the minutes of a meeting by all the participants of the company or a part thereof) is provided for by the charter of the company or by a unanimous decision of the general meeting of participants.
  2. A JSC (whether public or nonpublic) shall be obliged to engage every year an auditor who is not connected with the JSC or its participants for the purposes of examining and confirming the annual accounting (financial) statements of the company. For an LLC an obligation to provide its statements for external audit arises only in cases provided for by the law, in particular, at the request of any participants of the company.

3. Differences in the regulation of public and non-public JSCs

Legal status, corporate relations and issues regarding the disposal of shares in public JSCs are regulated by a number of imperative rules of the Civil Code (as amended):

  1. In a public JSC it is not possible to limit the number of shares owned by a shareholder, their total nominal value and the maximum number of votes granted to a shareholder.
  2. Shares of a public JSC may transferred without any restrictions and the charter of such JSC may not stipulate that someone's consent be obtained for such transfer.
  3. None can be granted the pre-emptive right of purchase of shares of a public JSC except for cases when the pre-emptive right of purchase of additionally issued shares or securities convertible into shares of the JSC is vested in shareholders in cases provided for by the Federal Law on Joint Stock Companies.
  4. A public JSC may not issue privileged shares with a nominal value higher than the nominal value of ordinary shares.
  5. The list of matters that lie within the exclusive authority of a general meeting of shareholders of a public JSC is provided for by the Civil Code and the Federal Law on Joint Stock Companies and may not be extended.
  6. A collective management body (a supervisory or another board that controls the activity of the executive bodies of the company) with at least five members and an internal audit commission should be established in a public JSC.
  7. A shareholders register of a public JSC should be kept and the functions of its ballot committee should be performed by an independent organization holding a license required by law.
  8. A public JSC should disclose public information as required by law.

Additional requirements for the establishment, activities and termination of public JSCs are provided for by the Federal Laws on Joint Stock Companies and On the Securities Market.

Non-public JSCs, on the contrary, enjoy significant freedom regarding the regulation of corporate relations. In addition to the matters specified in section 1 above, the charter of a non-public JSC may establish that, at the unanimous decision of shareholders, the authority of a general meeting of shareholders can include matters which are not within such authority in accordance with the Civil Code and the Federal Law on Joint Stock Companies.

4. State registration of company names and of changes in the constitutive documents

JSCs established before 01 September 2014 that meet the criteria of public JSCs shall be deemed such irrespective of an indication in their company names that the company is public. At the same time JSCs that meet the criteria of public JSCs are obliged to submit the information on their new company names containing an indication that they are public JSCs for registration in the USRLE.

JSCs that do not meet the criteria of a public JSC may submit the relevant information on their new company names for registration in the USRLE in order to change their status for that of public companies.

A JSC, from the date of publication in the USRLE of information about the Company's name, containing an indication that such a society is public, acquires the right to publicly dispose of (by public subscription) shares and securities convertible into its shares, which are publicly traded.

Starting from the date when a non-public JSC acquires the status of a public JSC the provisions of its charter and internal documents which contradict the rules for public JSCs established by the Civil Code, the Federal Laws on Joint Stock Companies and On Securities Market shall become invalid.

Foundation documents as well as names of legal entities established prior to 1 September 2014 must be brought into line with the Civil Code as amended by the Law No. 99-FZ at the first change in the foundation documents of such legal entities. When registering the relevant changes to the foundation documents of legal entities no state fee will be charged. Changing the company name of a legal entity, in particular, indicating that a JSC is public, shall not require changes in the constitutive and other documents containing its former company name.

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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Authors
Яна Дианова
 
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