By Eldar Mansurov, PETERKA & PARTNERS
Within the ongoing reform of the Russian Civil Code, significant amendments with regard to the regulation of legal entities will come into effect as of 1st of September 2014. The purpose of this article is to give a brief overview of the most significant changes in the regulation of Russian legal entities.
1. The division of companies into public and private introduced
With effect from 1st of September 2014, all commercial legal entities in Russia shall be classified as either public or private companies. In accordance with the amended article 97 of the Russian Civil Code, a public company is defined as a joint-stock company entitled to issue securities through public offering. The public status of a company shall be indicated in the corporate name and only after the amended name has been registered with the state register will a company acquire the right of public offering. The rest, joint-stock companies and limited liability companies, are regarded as private companies.
As one of results of the classification adopted, at least two existing legal forms of entities --closed joint stock companies and extended liability companies --will cease to exist. However, this does not mean that these companies shall be wound up and deregistered immediately, the law provides that the respective rules on joint-stock companies for closed joint-stock companies and on limited liability companies for extended liability companies are to be applied. At the same time, all closed joint-stock companies will have to amend their legal statuses with a charter amendment and to opt for either public or private status.
In a nutshell, private companies will be regulated in a more flexible manner compared to public companies, for instance, they will be provided with the right to re-adjust to a wider extent the authority of corporate governance bodies and vest the board of directors with the powers normally attributed to a shareholders' meeting. Whilst more formal and strict requirements will apply for public companies, e.g., public companies will not be able to avoid establishing an executive board with at least five directors.
2. Totally new principle for executives' powers introduced
One of the most important amendments introduced is the principle of when the executive body's authority in a company can be delegated to several persons, acting either jointly or separately. At the same time, in order to facilitate the checking of the authorities of executives in a company by third parties, the law requires such information be included in the state register of legal entities. However, procedural and formalistic issues on how this information should be included and reflected in the extract are still to be formulated.
3. Management liability for damages to a company extended and specified
A new article, 53.1, elaborating and specifying the liability of management will be introduced. The list of persons who could be sued for damages, along with executive bodies, has been supplemented with "persons de facto capable of influencing the decisions taken by a company". This means that not only the formal director, but also "shadow directors" can be held liable, if they caused damages to a company as a result of violation of their fiduciary duties.
4. Rights and obligations of shareholders and members of corporations specified more coherently with adoption of article 65.2 of the Civil Code
A new article, 65.2, dedicated to the rights and obligations of shareholders and members of corporations is to be introduced. Though the list is not exhaustive, the important obligation for a shareholder or member to take all reasonable measures to notify other shareholders or members if the director is being sued for damages or a company's transaction is being contested will be introduced. Furthermore, should the shareholder or member fail to join the claim, he/she will not have the right to sue for the same in future, unless a court considers his/her excuses for not joining as reasonable. Thus, the Civil Code in fact has introduced a collective manner for suing directors for damages or contesting transactions.
5. Liability of shareholders and members in commercial corporations who have not fully paid for the shares extended
The Civil Code has readjusted the rules on payment of charter capital and the liability of subscribers thereof. It is now established that unless otherwise provided by a charter or laws on specific commercial corporations, ¾ of charter capital shall be paid before the registration of a company, and the rest - within 1st year of the registration. At the same time, the liability for those shareholders and members who have not paid fully for their shares has been substantially extended - such members and shareholders will now incur full subsidiary liability for the company's obligations until the shares are fully paid.
6. Corporate (shareholders') agreement elaborated to a deeper extent
The list of parties entitled to participate in a corporate agreement will be expanded - the company's creditors and third parties are now entitled to sign the respective corporate agreement with shareholders and members. Having said that, it should be noted that not all such parties are entitled sign a corporate agreement with shareholders or members, but only those who have a legitimate interest (e.g., a crediting bank or major supplier). In addition, a general obligation to notify the commercial corporation of the fact of a signed corporate agreement is established, though the disclosure of its content is not mandatory. Moreover, unless provided by specific laws, the contents of a corporate agreement in private companies is regarded as confidential. In contrast, information on a corporate agreement with regard to a public company shall be disclosed in more detail; however, still no procedure or list of information to be disclosed has been established.
Another important issue is that from now on the decisions of a company taken contrary to the corporate agreement may be challenged in a court and deemed as invalid, provided that all shareholders or members of a company are parties to the corporate agreement. Unfortunately, the new rules on corporate agreements did not resolve the question of whether a corporate agreement may establish provisions contrary to those in the Civil Code and laws and what rules shall be applied in such case. Hence, until the issue is resolved in court practice or the Civil Code is amended in this respect, we would recommend taking into consideration all possible mandatory provisions of Russian law when drafting a corporate agreement for Russian corporations.
7. New rules formalizing shareholders' meetings introduced
Major amendments with regard to the procedure for drafting and formalizing the minutes of meetings of shareholders in commercial corporations have been introduced. In accordance with the new provisions, the composition and decisions taken by the meeting of shareholders in a public joint-stock companies shall be certified by the registrar, in private joint-stock companies by the registrar or a notary and most notably - by a notary in limited liability companies, unless "otherwise (by signing of minutes by all members or some members; by using technical means, allowing to determine the fact of decision making; by other lawful means) is provided by a charter or a decision taken unanimously by all members". In practice, this means that until the respective changes to charters are made, while executing minutes of meeting of members in a limited liability company, one should remember to include in the minutes the provision that "all members unanimously decided not to certify the minutes by a notary" or engage a notary while holding the meeting.
8. Rules on corporate control recovery are formally introduced to the Civil Code
A very important, and already de-facto existing in court practice, notion of corporate control recovery will be formally introduced to the Civil Code. In accordance with the implemented provisions, a member or a shareholder of a commercial corporation, who has lost his/her title for shares in a corporation beyond his/her will and due to the unlawful actions of third parties, is entitled to repossess his/her shares with fair compensation from the party holding such shares. Also, he/she may sue for damages the person(s) whose unlawful actions resulted in the loss of possession.
9. Major amendments to the regulation for reorganization and liquidation of legal entities made
New provisions of the Civil Code allow for what is known as combined reorganization - the simultaneous conducting of different forms of reorganization (merger, acquisition, spin-off, demerger, transformation, etc.). The amendments are aimed at facilitating and accelerating the process of complex corporate restructuring and mergers and acquisitions. Furthermore, the new provisions provide limited and strict grounds for a court to invalidate reorganization, namely the reorganization can be cancelled only if the court finds that the decision for reorganization has not been made by members or counterfeit documents to register the reorganization have been submitted.
10. Exhaustive list of non-commercial entities established
New provisions of the Civil Code re-establish the existing forms of non-commercial entities, for instance, partnerships of property owners, and enact the exhaustive list of legal forms for non-commercial organizations. In addition, the requirement for non-commercial entities, which conduct profitable activity, to have quasi-charter capital is established. ***Despite the fact that the adopted amendments do not require an immediate reaction as the harmonization of charter documents may be done during the first necessary amendments to charter documents, new provisions of the Civil Code have significantly evolved the concept of legal entities in Russian legislation and should be paid special attention by all practicing lawyers.
