Russian Federation: Changes To The Law On Limited Liability Companies In Russia

Last Updated: 23 January 2009
Article by David Cranfield

Federal law # 312-FZ (the "new law"), which was signed by the President of the Russian Federation on 30 December 2008, significantly changed the way limited liability companies are regulated in Russia by introducing amendments to the Russian Civil Code, the Federal law "On Limited Liability Companies", the "Fundamental Principles of Russian Legislation on Notaries" and the Federal law "On State Registration of Legal Entities and Individual Entrepreneurs".

The amendments will come into force on 1 July 2009. Prior to this date, limited liability companies will be regulated by the current legislation. From 1 July 2009 until 1 January 2010, all limited liability companies in Russia will be required to bring their constitutional documents into compliance with the new regime.

The following is a summary of the key factual changes to the law.

Major Focus Points:

1. Definition of Constitutional Documents

The new law eliminates the ambiguity in the current legislation by defining the charter as the company's sole constitutional document. This does not remove the requirement for a limited liability company with more than one participant to have a founders' agreement but will remove the necessity to amend the founders' agreement thereafter during the company's existence.

2. Introduction of the Register of Participants

Under the current law, the list of participants and details of their respective participation interest is recorded in the company's charter. In practice this means the charter must be amended and re-registered each time there is a change in the participation interest.

The new law introduces a registration mechanism similar to that applying to joint stock companies where the company's executive body (or other body specified in the company's charter) will be required to maintain a "Register of Participants" ending the requirement to record changes in the participation interest in the charter. It appears that the 'other body' appointed to maintain the Register of Participants must be an internal body and this amendment to the law does not allow for an external registrar for limited liability companies. The responsible body will be obliged to ensure that information contained in the Russian Unified Register of Legal Entities conforms to the information provided in the Register of Participants.

3. Transfer of Participation Interests

The new law has significantly changed the procedure for transfer of a participation interest. With effect from 1 July 2009, most agreements for the transfer of participation interests will need to be notarized. The notary will be obliged to verify the seller's authority to dispose of the participation interest and to provide the registration authorities and the company itself with copies of the transaction documents. A corresponding entry in the Russian Unified Register of Legal Entities will be made.

The participation interest will be transferred upon certification by the notary. In cases defined by the new law where a notarial certification of the transfer agreement is not required (for example on transfers by participants to the company itself), title will transfer upon entry in the Russian Unified Register of Legal Entities.

4. Pledge of Participation Interests

Pledge agreements of participation interests in a limited liability company created after 1 July 2009 will need to be notarized in order to be valid. The notary will provide the registration authorities and the company itself with copies of the transaction documents, following which a pledge entry in the Russian Unified Register of Legal Entities will be made.

5. Notary's Liability

The new law amends the Fundamental Principles of Russian Legislation on Notaries. A notary will be fully liable in damages for losses caused by unlawful notarization or a refusal to notarize. The minimum professional indemnity insurance coverage for the city private practice notary is set at 1,500,000 RUR.

6. Participants' Agreements

The new law allows participants of a limited liability company to enter into contractual arrangements to regulate the rights of participants (ie 'shareholders' agreements) where this was thought to be unenforceable under the old law. The scope for such agreements seems broad as the text contains non-exclusive wording. Specifically, the new law states that such agreements may regulate the exercise of voting rights, the sale of a participation interest at a price defined in the agreement and/or upon the occurrence of certain events (we will be looking at this to understand if it can provide a legal framework for share options), and to suspend the right to sell a participation interest until the occurrence of a specified event (a legal framework for a 'lock in').

At first sight these reforms open the way for 'shareholders' agreements in relation to limited liability companies enabling (particularly with the abolition of the Exit Right see 7.2 below) joint ventures to be structured domestically in Russia without the imposition of an off shore holding structure.

7. Miscellaneous Provisions

The new law also provides a number of other changes to the existing regime that are of varying significance, including the following:

7.1. The charter may define the sale price at which the participation interests in the company will be sold to other participants (participant), exercising their preemptive right. The new law further enables the charter of a limited liability company to allow transfers of participation interests to third parties subject to participators' consent. Under the current law, the charter may include a prohibition on sale of participation interests to third parties but does not give the option to allow them subject to the consent of participants. This has meant that under the current law the participants must amend the charter each time they wish to allow a transfer.

7.2. Abolition of the 'Exit Right' so that a participant may no longer withdraw from the company unless such a right is explicitly given by the charter.

7.3. The new law further establishes a statutory time limit for a participant to challenge a decision taken by the board of directors bringing the regime in line with the regime for challenging decisions of the general meeting of participants. The claim must be filed within two months of the date the claimant became aware of that decision, or from the date at which it should have become aware of the decision.

7.4. Changes in the powers of the Board of Directors have been enacted clarifying that the charter may expand the list of competencies to include any that are not expressly by law reserved to the general meeting or to the general director.

7.5. The amendments extend the list of exemptions from the requirement for major/interested party transaction approval.

7.6. There is some codification in the new law of the protection and remedies available to purchasers of participation interests.

8. Our initial reaction to the new law

These are some of the most significant changes to Russian corporate law since the rafts of legislation we saw in the 1990's and some time is needed to understand their full impact. The new procedures for notarization upon the agreement to transfer participation interests may create stronger protection against non-transparent takeovers but in a way that we believe will have significant practical implications for the way transactions are done. While the ability to control and manage completion of the transfer of a legal interest in participation units in real time is a clear advance, the application of the procedure to agreements for sale rather than to the instrument of transfer is likely to be troublesome in the context of many transactions; for example ones where completion of the transfer is subject to the fulfillment of certain conditions.

Indeed depending on the approach taken by notaries to their new role, the new procedures may give a further incentive for inward investments to continue to be made through offshore holdings, contrary to what appears to be the intent of many of the other reforms.

The new approach to agreements regulating the exercise of stockholders' rights is significant. The shortcomings of the inflexible regime which most practitioners believe exists under the old law (and was seemingly confirmed in the Megafon case) have been recognized by the legislators and a new trend toward encouraging direct investments in Russian entities seems to be under way. However, as Russian law operates for the most part prescriptively, the new law needs to be carefully analysed to be sure that the new regime is sufficiently flexible in reality. We might also note that similar concessions have not been enacted for closed joint stock companies and with the disappearance of the troublesome Exit Rights, the limited liability company may become a more attractive vehicle for Russian on shore direct investments.

A comprehensive registration regime for pledge agreements affecting participation interests backed by legislation protecting the purchaser in good faith without notice would have been a major advance. The reforms in the new law may be a first step in that direction but we are not there yet. The new law on pledges described here is a small part of the new legislation enacted at the same time reforming Russian law and approaches to security instruments and their enforcement generally, which is outside the limited scope of this note.

A substantial body of subordinate legislation for the practical implementation of the new law is necessary over the coming months for the new law to operate effectively once it comes into force on 1 July 2009.

CMS will analyse these important developments and update you with our views over the coming weeks.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 22/01/2009.

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