Oda Russian Commercial Law 2007-1

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expires on a non-working day, the date of expiry is the closest working day after this day (Art.193). If the period is xed for performing a certain act, the act must be performed by the 24th hour of the day. However, if such an act is to be performed by an organisation, the period expires at the time when this organisation, in accordance with established rules, nishes its operation. Written declaration and noti cation given to an organisation before the 24th hour of the last day of the period are deemed to have been given within the term (Art.194).

(2)Prescription Period for Litigation

Litigation is barred by the lapse of time. The general period of prescription is three years (Art.196). There are some provisions which establish special periods of limitation as exceptions in the Code as well as in other laws. The Civil code provides for a 10 year prescription period for a claim to apply consequences of invalidity of a juristic act (Art.181). The Merchant Shipping Code provides for a 2 year general prescription period.

The claim of the person whose right was infringed will be heard by the court regardless of the expiry of the period of prescription for action. Prescription is applied only upon the petition of the party before the court renders the judgment. In such cases, the court dismisses the case (Art.199).

The limitation period starts, as a rule, from the day when a person became aware of, or should have become aware of the infringement of his rights. For obligations with a xed time of performance, the limitation period starts from the time the period for performance ends. For obligations in which the time of performance is not determined, or obligations which become due on request, the period starts at the time the right of the creditor to require performance emerges (Art.200, paras.1 and 2).

The ow of the period of prescription is suspended in the following circumstances (Art.202, paras.1 and 2):

i)presentationoftheclaimtocourtwashinderedbyextraordinaryandinsurmountable circumstances;

ii)the plaintiff or the defendant was in military service;

iii)moratorium by the Russian Government based on law;

iv)suspension of the law or legal act which regulates the performance of the obligation.

These circumstances must have emerged or continued in the last six months of the period.

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The ow of the limitation period is interrupted by the initiation of litigation or performance of an act by the obligee which demonstrates the recognition of the obligation (Art.203).

If the court, in exceptional cases, acknowledges that there was a justi able ground involving personal circumstances of the plaintiff for the lapse of the period for prescription (serious illness, helpless situation, illiteracy etc.), the period of prescription is “restored” and the action is not barred (Art.205).

The period of prescription for an action is not applied in the following cases (Art.208):

i) claim for the protection of personal non-proprietary rights (Persönlichkeitsrecht) and other things of non-material value;

ii) claim of the depositors on their deposit vis à vis the bank;

iii) claim for compensation of damage caused to the life or health of an individual; however, for claims made after three years of the emergence of the right to claim compensation, the compensation shall only cover three years up to the initiation of litigation;

iv) claim of the owner or possessor of property concerning removal of all violations of his rights, regardless of whether he was dispossessed or not.

In the celebrated Iukos case, Iukos was sued in 2004, among other matters, for the underpayment of tax in the period between January 1, 2000 and January 1, 2001. Article 113 of the Tax Code provides for a prescription period of three years. Yukos argued that the claim of the tax agency was barred by prescription. However, the Commercial Court of the City of Moscow ruled that norms of the tax legislation which provide rights or guarantees to tax payers in good faith do not extend to taxpayers in bad faith.90

90Cited in the decision of the Constitutional Court of January 18, 2005, Case 36-O. The Constitutional Court declined to rule on the matter.

4

COMPANY LAW

1HISTORY OF THE RUSSIAN COMPANY LAW

It was in the late 18th century that a company akin to a joint-stock company called the Russian-American Company was founded in Russia. Some more companies followed, and in 1836, the Statute on Stock Companies (aktsionernaia kompaniia) was enacted. It was the intention of Speranskii, when compiling Svod zakonov, to combine the civil and commercial codes, but for technical reasons, some of the commercial provisions had to be separated from the civil law. In the Svod zakonov, the part on civil law in volume X part 1 contained provisions on companies (tovarishchestvo) including joint stock companies. Most of the provisions on joint stock companies came from the 1836 Statute. The Statute on Commerce (ustav torgovyi), which was accommodated in volume XI part 2 of the Svod zakonov, also had some provisions on commercial companies such as full partnership, limited partnership, limited liability companies and joint-stock companies.1 This was obviously insuf cient, and attempts were made to modernise company law. The draft Civil Code (grazhdanskoe ulozhenie) of 1905 accommodated company law provisions in Book V – law of obligations. Some 160 provisions were allocated to joint stock companies.2 However, these attempts to enact a commercial code or a new law on joint-stock companies failed, and therefore, the 1836 Statute served as the basic law on joint-stock companies until the October Revolution.3

1D.Nosenko ed., Ustav torgovyi, 5th edition, St.Petersburg, 1909. G.F.Shershenebich, Uchebnik

torgovago prava, 7th edition, Moscow 1914, pp.20-23.

2Grazhdanskoe ulozhenie; proekt vysochaishche uchrezhdennoi redaktsionnaia kommisia po

sostavleniiu grazdanskogo ulozheniia, St.Petersburg 1905.

3Shershenevich, supra, pp.128-129.

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After the Revolution, the Civil Code of the RSFSR was enacted in 1922.4 This was the beginning of the New Economic Policy, the period in which the Bolsheviks pursued a policy of mixed economy – socialist and market. The 1922 Code, which was close to the draft Civil Code prepared earlier in the century, incorporated provisions on commercial companies including limited liability companies and joint-stock companies.5 In 1927, a separate statute on joint stock companies was enacted.6 However, the government abandoned the New Economic Policy in 1928 and embarked on the course of “socialist industrialisation” which made commercial companies based upon private capital totally redundant. In fact, under a system in which the means of production was to be solely owned by the state, it was an anathema to allow the “accumulation of private capital”. Even small private entrepreneurial activities were banned under the threat of criminal penalties.

It was only in 1988 that a limited scope of private entrepreneurial activity was legalised. The newly enacted Law on Co-operatives allowed individuals to form and invest in co-operatives and perform entrepreneurial activities as long as the size of business remained small and others were not employed.7 Cooperatives were allowed to operate outside the state economic plan and to determine the price of the product by themselves. It was a monumental piece of legislation allowing de facto companies to be set up by individuals. By 1990, there were around 210,000 co-operatives, but with the liberalisation of various forms of companies, they were converted into companies and the number declined.

In the socialist period, there were no commercial companies; instead, there were state enterprises which were solely owned by the state.8 In place of company law, there was the Law on State Enterprises which was part of the administrative law. This Law regulated the vertical relationship between the ministries and enterprises rather than the horizontal relationship between the enterprises. Under the planned economy, state enterprises conducted business in strict conformity with the state economic plan. The autonomy of these enterprises was severely limited, although they were granted juridical personality and had a separate balance sheet. In the absence of the market, prices were determined by the state economic plan. State enterprises did not have the power to dispose of their income and make investments. They did not even have the power to conclude a contract unless so mandated by the plan. It was only towards the end of socialism that state enterprises came to be granted some autonomy.

4SU RSFSR, 1922 No.71, item 904.

5 An English translation can be found in Gsovski, Soviet Civil Law, vol.2, Ann Arbour 1949. 6 SZ SSSR, 1927 No.49, item 499.

7VVS SSSR 1988 No.22, item 355.

8Some foreign trade organisations and other entities were joint-stock companies, but the state was the sole shareholder.

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Following the USSR Law on Ownership of March 6, 1990, which signi - cantly expanded the scope of private ownership, the USSR Law on Enterprises was enacted on June 4 of the same year.9 This Law referred to joint stock companies and other forms of commercial companies based upon “collective ownership” without going into much detail. The next year, on May 31, the USSR Fundamental Principles of Civil Legislation was enacted. This Law, for the rst time in the history of Soviet law, accommodated provisions on various commercial organisations, including joint-stock companies and limited liability companies.10

At the RSFSR (now the Russian Federation) level, the Law on Ownership and the Law on Enterprises and Entrepreneurial Activities were enacted on December 24 and 25, 1990 respectively.11 The former allowed ownership of “enterprises and property complexes” by individuals. The latter Law was the rst piece of legislation which can be characterised as company law. In a way similar to the 1922 Civil Code, it listed full and limited partnerships, limited liability companies and joint-stock companies as basic types of companies. However, there was some confusion; the legislature seemed to have failed to distinguish between limited liability companies and closed type joint-stock company. On the same day, the RSFSR Statute on Joint Stock Companies was enacted.

As a result of these legislative developments, companies owned by private capital mushroomed in Russia. This was accelerated by the privatisation of state enterprises, in which state enterprises were converted into joint-stock companies.

However, it was only by the enactment of the present Civil Code (Part One) on October 21, 1994, that a detailed regulation on companies emerged.12 As the Civil Code was based upon the uni ed system, i.e. civil and commercial laws were combined in the Code, it contained fairly detailed provisions on companies in the part dealing with juridical persons.

Regulations contained in the Civil Code were still insuf cient until the Law on Joint-Stock Companies was enacted on December 26, 1995.13 This was followed by the Law on Limited Liability Companies of February 8, 1998.14

A Russian economist pointed out that:15

9VVS SSSR, 1990 No.25, item 460.

10VSND SSSR i VS SSSR, 1991 No.26, item 766.

11VSND RSFSR i VS RSFSR, 1990 No.30, item 418.

12SZ RF, 1994 No.32, item 3301.

13Law No.205-FZ of December 26, 1995.

14Law N.14-FZ of February 8, 1998.

15A.D.Radygin et als., The Problem of Corporate Governance in Russia and its Regions, Moscow 2002, p.52.

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the period between 1993 and 1996 became notorious for the wildest violations of corporate law caused by struggle for control: crossing out an undesirable stockholder from the register, voting at shareholder general meetings by simple rising hands rather than according to the “one share one vote” principle, solving con icts using power structures (including government ones), etc.

A commentary to the Law on Joint Stock Companies described the actual state of affairs as follows:

The practice of application of the Law on Joint Stock Companies has demonstrated that in reality, in large joint stock companies which are banks, insurance companies, and investment funds....and in companies established as a result of privatisation, it has become a rule to fend off a majority of shareholders from participating in the management of the respective organisation. Infringement of the proprietary rights of the shareholders of these organisations is not rare.16

Since Russian companies tend to be dominated by insiders, the management often ignored the shareholders’ rights in order to secure control over the company. A survey in Russia shows that the dominating role in the management as well as in the distribution of the pro ts was played by the top executives of these companies; second came the “higher management (administratsiia)”. It was pointed out that “all these things such as registrars of shares acting in bad faith,agrant breach of laws (which themselves are “super liberal” for the management), manipulation of the procedure for the general shareholders’ meeting, allow us to talk about the dominance of the top executives”.17

A judge of the commercial court explains as follows:

Many corporate con icts are related to the desire of minority shareholders to take control of the company, in other words, manage the company against the will of the holder of the controlling stake. Why should the holder of the controlling stake hold the general shareholders’meeting in breach of law, if, at the meeting, a resolution in his interest can be adopted any way?.... In a situation where the holder of a controlling stake is unwilling to dispose of the shares, but at the same time, is not willing to adopt a resolution needed by the minority shareholder, the latter adopts the resolution by himself. In doing so, the minority shareholder violates the procedure for convening and conducting the general shareholders’ meeting, and even resorts to criminal offences (theft of shares, falsi cation of documents and signets,

16M.Iu.Tikhomirov ed., Kommentarii k federal’nomu zakonu ob aktsionernykh obshchestvakh, Moscow 1999, p.11.

17G.Klein, “Upravlenie korporativnymi predpriiatiiami v perekhodnoi ekonomike”, VE 1999 No.8, p.68.

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falsi cation of evidence etc.). The primary goal of this operation is to replace the general director with someone who will loyally implement the instruction of the minority shareholder.... By unlawfully appointing his own directors (taking over the management of the company), the minority shareholder immediately disposes of the most liquid assets of the company in the hope that the assets cannot be recovered from a bona de acquirer.18

Some organisations have conducted research on the state of corporate governance in Russia. According to those sources, typical breaches include:19

i) unlawful refusal of share registration;

ii) preventing shareholders from taking part and voting in the shareholders’ meeting;

iii) dilution of shares of existing shareholders by the issuing of additional shares; iv) asset-stripping by transfer pricing and other means, by holding companies; v) con ict of interests and abuses of power by directors and members of the

executive bodies.

OECD has been making efforts to facilitate improvements of corporate governance in Russia.AWhite Paper on Russian corporate governance was published in 2002. This was followed by the adoption of the Code of Corporate Governance in line with the OECD guideline.

There were proposals to amend the Law on Joint-Stock Companies, particularly in order to curb abuses by the management, and a bill was submitted to the Duma in 1999. However, due to some pressure from large companies resisting introduction of “constraints” on corporate governance, the adoption has been delayed. It was only in August 2001 that a fairly substantial amendment was introduced. The changes took effect from January 2002.

The 2001 amendment was a major step towards improvements in corporate governance. A foreign observer rather prematurely commented that corporate governance had receded as an issue because of changes in both legislation and management attitudes.20

However, the OECD White Paper on Corporate Governance in Russia presented a different view:21

18Dobrovolskii, “Sudebnaia zashchita prav aktsionera (uchastnika) – vopros pravoprimeneniia”, VVAS 2005 No.4, p.139.

19Institute of Corporate Law and Corporate Governance ed., Corporate Governance in Russia, Moscow 2000, pp.5-9;A.Ledeneva, Unwritten rules: How Russia really works, London 2001, pp.17-31.

20Petroleum Review, February 2002, p.15.

21OECD, White Paper on Corporate Governance in Russia, 2002, p.9.

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...amendments to the JSC Law adopted in 2001 provide enhanced protection of shareholder rights, attempting to close various loopholes for abuse in potential major and interested party transactions. However, during the long delay between its rst reading in April 1999 and its nal enactment in August 2001, changes were made in some instances that weakened the provisions of the initial draft.

The 2001 amendments to the Law on Joint Stock Companies have removed some loopholes in the Law. Blatant breaches of the rights of shareholders by the management may have decreased in number, but certainly, there is still more room for improvement. Abuses by the company management at the detriment of the interest of minority shareholders including foreign ones still remain.

2PRIVATISATION OF STATE ENTERPRISES

In present day Russia, the majority of large companies are either former state enterprises which have been privatised or companies which have been spun-off by state enterprises in the process of privatisation. According to a survey data on the form of enterprises in four cities, 83.9% of the joint stock companies are privatised former state enterprises.22 Many of the co-operatives established after 1988 were later transformed into companies. In addition to those companies, there are “unitary enterprises” – Federal enterprises and enterprises of the constituent entities, which have not been privatised yet, or are not planned to be privatised.23

In a market economy, private enterprises, not state enterprises, play a major role. Naturally, a sizeable private sector cannot develop in a short time span from scratch. In a country which had almost no private sector (except the “second economy”), and where there was no “original accumulation of capital”, in order to create a market economy, the capital has to be transferred from the existing state sector to the private sector. Besides, towards the end of socialism, the enormous state sector which had developed over the decades in Russia was not sustainable any more. Furthermore, in order to alleviate the burden on the budget and to generate income, privatisation of state enterprises was inevitable.

Even before the formal privatisation process began, privatisation of state enterprises in Russia had already started in a “spontaneous” manner after the enactment of the 1988 Law on Co-operatives. As a Russian author put it, “the

22S.Clarke and V.Kabalina, “Employment in the New Private Sector in Russia”, Post-Communist Economies, 1999 No.4, p.430.

23Russian Academy of Science, Institute of Economy in Transition ed., Russian Economy – 1999, Annual Report, Moscow 2000, p.158.

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process of “allocation” of state property got under way long before the adoption of of cial decisions on privatisation”.24 State enterprises set up co-operatives to avoid state interference with their business activities. This was understandable, since it was much more pro table to sell their products through co-operatives which were not bound by the state plan. What was more, pro ts could be distributed among members without surrendering them to the state. Thus, there was a large-scale erosion of state property – unof cial transfer of assets from state enterprises to cooperatives.

In 1989 the USSR Fundamental Principles of Lease was enacted.25 Together with the Law on Cooperatives, this was a breakthrough against the principle of the state monopoly of means of production. The Law allowed non-gratuitous lease of various means of production by state enterprises to juridical persons as well as physical persons. Lessees were even granted the right to purchase the assets, including enterprises. Soon afterwards, the USSR Law on Enterprises allowed state enterprises to spin offpart of the enterprise as a separate, non-state enterprise.26

In practice, the process was grossly abused by insiders, i.e. of cials of sectoral ministries and the management of state enterprises as well as the employees. Government of cials and the management colluded to transfer part of the state enterprise to newly set up companies whose founders were those of cials and executives. These companies leased and eventually purchased the assets of the state enterprise at a low price. Such insider privatisation was dubbed “nomenklatura privatisation”.27 Russian economists reminisced ten years later:

....with the collapse of the state control over enterprises, on the one hand, and the absence of the legal basis for private ownership on the other hand, the seizure and maintenance of control were effected by forceful methods with the connivance of the criminal network and bribery of state and party of cials traditionally responsible for the control of enterprises.28

The formal legal basis for privatisation was created by the RSFSR Law on Privatisation of July 1991 (replaced by a new Law in 1997 and then in 2002).29 The

24A.Letenko and D.Lvov, “Problems of Ownership and Privatization in Russia”, in J.Prokopenko ed., Privatization: Lessons from Russia and China, ILO Working Paper, Geneva 1998, p.21.

25VVS SSSR, 1989, No.25, item 481.

26VVS SSSR, 1990, No.25, item 460.

27J.Tedstrom, “Russia; Progress Report on Industrial Privatization”, RFE/RL Research Report, 1992 No.17, pp.46-48.

28A.Radygin and I.Sidorov, “Rossiiskaia korporativnaia ekonomika: sto let odinochestva?”, VE, 2000, No.5, p.47.

29Law No.178-FZ of December 21, 2001.