Senior Lawyer at TMF Russia, Dmitriy Shibaev looks at the recent change to the Russian Civil Code regarding regulation of legal entities.
On 1 September 2014 a long-awaited major set of amendments into the Russian Civil Code regarding regulation of legal entities took effect. These relate mostly to the following topics:
- Types (legal forms) of legal entities
- Management bodies of legal entities and their powers
- Liquidation of legal entities
- Reorganisation of legal entities
One can safely say that the most revolutionary change in the Code is that all possible types (legal forms) of legal entities have been divided into two large groups: "corporate" and "unitary". Corporate legal entities are the ones the founders of which shall have the right of participation therein and shall elect the management bodies thereof; these include limited liability companies, joint-stock companies, general and limited partnerships, cooperatives, etc. On the contrary, founders of the unitary legal entities do not become participants thereof; these include enterprises, foundations, institutions, etc. Since foreign companies can establish Russian subsidiaries only in form of corporate legal entities, below we will focus on description of peculiarities of corporate legal entities in the light of the last amendments.
There will no longer be a division between 'closed' and 'open' joint-stock companies. Rather these shall be divided into simple JSC (i.e. "private") and "public" JSCs. The main prerequisite for the JSC to be a 'public' one is that its stock (or other securities that can be converted into stock) are issued and/or traded at a public offering. These "public" JSCs shall be regulated more thoroughly and their founders and management shall have much less room for changes than those in the private ones. This means that the "public" JSCs will be in many respects similar to traditional understanding of a JSC/SA in Western Europe and Corporation in the USA.
On the opposite, according to the amendments, the LLCs and "private" JSCs shall have more freedom in structuring their management bodies, e.g. implementing management models normally used in European and American markets that was earlier frankly forbidden in Russia. For example the functions of an executive body can now be transferred to a Board of Directors, or the Board of Directors can be vested with some powers normally reserved only for the general shareholders meeting.
As well as that, a Russian company (be it LLC, "private" or "public" JSC) can now have more than one Director. These can have either combined or alternative signature right.
Amendments in the liquidation and reorganisation procedures for legal entities should not go unspoken. These are quite specific and detailed, so their description would not be very insightful for laymen, though from the legal perspective they offer a more clear and accurate handling of the said procedures.
Also the whole system of non-commercial legal entities has been revised. Now the complete list of possible legal forms of non-commercial legal entities is indicated in the Civil Code, while earlier this list was spread among different laws.
The above changes in the Civil Code are not likely to have significant effect on existing or planned Russian businesses. However, it should be noted that since the amendments are brand new, there is no relevant legal or business practice so far. This means that unfortunately we cannot yet be sure as to how the Russian courts and state authorities shall apply the law in practice. Since- according to our experience - sometimes the Russian authorities can construe a law differently from its initial meaning, we recommend not rushing to implement new possibilities – such as new management bodies' structures - and waiting a few months before the relevant practice is formed.
Another important issue of recent months is the upcoming change of registration (accreditation) authority for the branches and representative offices of foreign legal entities in Russia. Currently it is either the State Registration Chamber or the Chamber of Commerce and Industry. However, starting from 1 January 2015, this function shall be transferred to another state authority. It is proposed that it would be the Russian tax authorities, which are currently in charge of registration of Russian companies. In this case the procedure of incorporation of the branches and representative offices of foreign legal entities in Russia will be much more similar to incorporation of a Russian company. Unfortunately, the exact decision on which state authority will be in charge of registration of the branches and representative offices of foreign legal entities has not been made yet.
We recommend keeping a close eye on this situation to ensure you don't miss the moment when the state authority is chosen. Please note that according the amendments, all the currently accredited branches and representative offices of foreign legal entities shall re-register with the new accreditation authority no later than 01 April 2015, otherwise their accreditation shall be automatically cancelled.
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.