Oda Russian Commercial Law 2007-1

122 COMPANY LAW

In a full partnership, partners are liable for the debts of the partnership in cases where the assets of the partnership are insuf cient to cover the debts, i.e. partners bear unlimited liability. In a limited partnership, one or several partners who conduct entrepreneurial activities in the name of the partnership bear unlimited liability, while other partners are liable to the extent of their capital contribution. Since these two forms of commercial organisations involve unlimited liability, they are seldom utilised by foreign investors.

Among commercial companies, the company with supplementary liability is perhaps the most unfamiliar. This exists in the Hungarian CompanyAct of 1988 (amended in 1997) which served as one of the models of Russian company law. It is a variation of limited liability companies. When the assets of the company are not suf cient to cover the debt, participants in this type of company are liable in a subsidiary way up to a xed amount, determined by theArticles of Incorporation in proportion to their participatory share.

In reality, it is the joint stock companies and limited liability companies that are the most common forms of companies in Russia.

Joint stock companies are de ned in the Civil Code as companies whose capital is divided into a certain number of shares. Shareholders are not liable for the debt of the company and bear the risk of loss only within the amount of their contribution (Art.96). There are two types of joint stock companies; open and closed. Joint stock companies whose shares are freely transferable are open joint stock companies, while companies whose shares are distributed only among founders or other pre-determined persons are closed joint stock companies (Art.97, paras.1 and 2). The major difference between these two types of joint stock companies is that while in open joint stock companies, shareholders are free to transfer shares to those other than shareholders, in closed joint stock companies, other shareholders have pre-emption rights to purchase the shares on offer (JSCLArt.7).

As a collolary, open joint stock companies may publicly offer and sell shares. Closed joint stock companies’ shares may not be offered to the public or to an unspeci ed scope of people (Art.97).

Other differences are:

i) The number of shareholders in closed joint stock companies may not exceedfty, while it is not limited in open joint stock companies (JSCL, Art.7, para.3);

ii) Minimum capital for open joint stock companies is 1,000 times the statutory minimum wage, while it is 100 times for closed joint stock companies (JSCL Art.26);

iii) Open joint stock companies are under an obligation to publicise their annual report, balance sheet, and pro t and loss report to the general public (Art.97, para.1).

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The Civil Code de nes a limited liability company as a company which is established by one or several persons whose capital is divided into participatory shares held by the members in accordance with the ratio (percentage or quota) determined by the Articles of Incorporation (Art.87, para.1). This is in contrast with joint stock companies in which the capital is “divided into a xed number of shares” (Art.96, para.1). Participants (holders of the participatory share) are not liable for the debt of the company and bear the risk of loss only within the amount of their contribution (Art.87).

Differences between joint stock companies and limited liability companies are as follows:

Table 8 Comparison of Joint Stock Companies and Limited Liability Companies

	Limited Liability Companies	Joint Stock Companies
Sources of Law	The Civil Code and the Law on	The Civil Code and
	Limited Liability Companies	the Law on Joint Stock
		Companies
Minimum Capital	100 times minimum wage	1,000 times minimum
		capital for open joint
		stock companies and
		100 times for closed
		joint stock companies
Management Struc-	Participants’ meeting, board of	Shareholders’ meeting,
ture	directors (optional), collective or	board of directors, sin-
	single executive body	gle executive body or
		single executive body
		plus collective execu-
		tive body (companies
		with less than 50 share-
		holders can dispense
		with the board)
Transfer of Shares	Transfer to a third party subject to	In closed joint stock
(participatory share)	restrictions	companies, transfer to
		a third party subject to
		restrictions
Withdrawal from the	Possible without the consent of	Redemption of contri-
Company	other members; contribution to be	bution not possible
	paid back
Exclusion of Mem-	Exclusion from the company
bers	possible by an action by a 10%
	participant

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Table 8 (continued)
		Limited Liability Companies	Joint Stock Companies
Audit		Audit committee not mandatory;	Audit committee not
		audit by an independent profes-	mandatory with some
		sional auditor not mandatory	exceptions; audit by an
			auditor
Issuing of Bonds		Possible up to the amount of the	Possible; also con-
		capital or of the guarantee pro-	vertible bonds can be
		vided by a third party	issued
Disclosure		Public disclosure not required	Annual accounts to be
		except when bonds are issued	published in open joint
			stock companies)

According to the statistics of the Federal Tax Service, in 2005, there were 168,583 joint stock companies, while there were 1,327,320 limited liability companies.70 However, according to the estimates of the State Statistical Service, 30-50% of these companies have stopped operating a long time ago.71 The proportion of open and closed joint stock companies is not accurately known. It has been assumed that there are six closed joint stock companies for one open joint stock companies.72

5COMMON RULES ON JOINT STOCK COMPANIES AND LIMITED

LIABILITY COMPANIES

1)Liability of Shareholders (Participants)

In both types of companies, the risk of shareholders (participants) is limited to their contribution. However, the Civil Code has a couple of provisions which seem to set an exception to this principle. Thus,Article 56, para.3, after declaring that the founders (participants) of juridical persons are not liable for the debt of the juridical person “except in cases provided by the present Code or the founding documents of the juridical person”, provides as follows:

If bankruptcy of a juridical person was caused by founders (members)...., or other persons who have the right to give binding instructions to the juridical person or in other ways, have a possibility of determining its activities, these persons shall bear

70www.nalog.ru/html/prog/1UR_2005_01_01.xls

71A.Yakovlev, supra, pp.390-391.

72Ibid., p.391.

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subsidiary liability on its obligation in cases where the assets of the juridical person are insuf cient.

The 1990 USSR Fundamental Principles of Civil Legislation had a similar provision, but it was applicable only when the act of the relevant person was unlawful. The Civil Code has dropped the requirement of unlawfulness.

This provision was reproduced in the Law on Joint Stock Companies and the Law on Limited Liability Companies. However, as a result of criticisms from foreign investors, the Law on Joint Stock Companies which was enacted after the Civil Code added a paragraph to it (Art.3, para.3):

Bankruptcy of a company is regarded as caused by an act (omission) of its shareholders or other persons who have the right to give binding instructions to the company, or in other ways have a possibility of determining its activities, only when they utilised such a right and/or possibility for the purpose of having the company perform a certain act, knowing that it would cause bankruptcy of the company.

On the other hand, the corresponding provision on the liability of the participants and other persons in the Law on Limited Liability Companies, which was adopted another two years after the Law on Joint Stock Companies, explicitly requires fault on the part of such persons, but does not contain the above paragraph (Art.3, para.3).

2)Liability of the Parent Company

Another problematic provision in the Civil Code involves the liability of the parent company in relation to a subsidiary.

Aparent company is de ned in the Civil Code as a company which, by virtue of an overwhelming (preobladaiushchie) participation in the capital, by agreement concluded between the parties, or by other means, is capable of determining a decision which is adopted by another company (Art.105). This provision is repeated in the Law on Joint Stock Companies (Art.6) and in the Law on Limited Liability Companies (Art.6, para.2).

The problem is that “overwhelming participation” does not necessarily mean a 50% or more stake. In fact, there is no xed percentage set by law. A commentary suggests that the percentage is not always decisive. Depending on the number and the spread of shareholders of the company, even a 10-15% stake may be regarded as a de nitive in uence.73 Thus, even if the shareholding

73 Tikhomirov, supra, p.47.

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does not reach 50%, due to extremely dispersed share ownership structure, if a shareholder is capable of exercising certain in uence on the decision-making of the subsidiary, it can be an “overwhelming participation”.74

In contrast, af liated companies are numerically de ned. The Joint Stock Company Law as well as the Law on Limited Liability Companies de ne af liated companies as those companies in which another company has more than 20% voting rights (both laws, Art.6, para.4).

The Civil Code provides as follows (Article 105):

Aparent company which has the right to give binding instructions to the subsidiary, including those by a contract, is liable jointly and severally with the subsidiary for a transaction concluded in implementation of such an instruction (para.2, section 2).

In cases of bankruptcy of the subsidiary, the parent company may be held liable. Thus, the same provision states:

In cases of bankruptcy of the subsidiary by the fault of the parent company, the parent company bears supplementary liability for the debt of the subsidiary (para.2, section 3).

Furthermore:

Participants of the subsidiary are entitled to demand compensation to the parent company for the loss caused to the subsidiary due to fault on the part of the parent company (para.3).

Article 105 is also reproduced in the laws on joint stock companies and limited liability companies. The Law on Joint Stock Companies limits the liability of the parent company as provided by para.2 section 3 by inserting a sentence identical to that provided in relation to the liability of shareholders;

Bankruptcy of a subsidiary is regarded to have been caused by the fault of the parent company, when the parent company utilised the above right and/or possibility for the purpose of the performance of an act by the company, knowing that it would result in the bankruptcy of the company.

The liability outlined in para.2, section 3 is limited by the following sentence (Art.6, para.3):

74O.N.Sadikov, Kommentarii k grazhdanskomu kodekusu Rossiiskoi Federatsii, chasti pervoi, 3rd edition, Moscow 2005, p.284.

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The loss shall be regarded to have been caused by the fault of the parent company only in cases where the parent company utilised its right and/or possibility for the purpose of causing the subsidiary to perform a certain act, knowingly that it would cause loss to the subsidiary.

The Law on Limited Liability Companies, which was enacted after the Law on Joint Stock Companies does not have the equivalent of such limiting provisions.

It should be added that in both laws, there was no attempt to limit the liability of the parent company concerning transactions effected by the subsidiary upon the parent company’s instruction (para.2, section 2), which is in fact a sweeping provision which potentially puts burden on the parent company.

There was a judgment of the commercial court at the cassation level to the effect that insofar as the loan agreement concluded by the subsidiary was actually an implementation of the instruction from the parent company, the parent company bears joint and several liability with the subsidiary.75 This virtually means that without any arrangement for a guarantee, the parent company maynd itself in a position as a guarantor of the subsidiary.

Although it may be an isolated case, the following judgment of the Commercial Court of the Moscow Province acknowledged the liability of shareholders of a bank which became bankrupt:

Co-owners of the RFG Bank were found to be liable for 23.5 million roubles. The Bank had its licence withdrawn, became bankrupt and was put under the control of the Deposit Insurance Agency. After the withdrawal of the license, a temporary administrator was appointed by the Central Bank. The administrator was unable tond any documents or information on clients of the bank. Criminal prosecution of the managers was unsuccessful. The Agency then initiated an action against shareholders for the payment of the above amount, which was the difference between the registered amount of the creditors’ claim and the assets of the bank. These shareholders were pursued for liability not for any speci c act, but for the failure to take any measures to prevent bankruptcy. The court cited Article 56, para.3 of the Civil Code which provides for the subsidiary liability of shareholders in cases where they had led the company to bankruptcy. According to the press, the Agency “unexpectedly” won the case.76

75Decision of the Commercial Court of the North Kavkaz District, April 22, 2003, Case F08992/2003 cited in D.V.Lomakin, Sudebno-arbitrazhnaia praktika Federal’nogo zakona “ob aktionernykh obshchestvakh”, Moscow 2005, p.34.

76Cited in V.I.Dobrovol’skii, Problemy korporativnogo prava v arbitrazhnom prakitike, Moscow 2006, p.82.

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3)Registration

COMPANY LAW

Whereas in the Tsarist period, companies could be set up only with a concession of the government, now, registration is the only requirement. All juridical persons are subject to state registration and are deemed to be established on the day of registration (Civ.C Art.51).

The system for registration of companies in the 1990s could be characterised at best as confusing. Local governments began setting up their own “registration chambers”, e.g. the Moscow Registration Chamber established in 1991. The Civil Code originally provided that juridical persons were to be registered by the Ministry of Justice in accordance with the Law on State Registration of Juridical Persons. However, this Law was not enacted until 2001, and therefore, until then, the “existing procedures” were applied. Registration of companies in which foreign investment did not exceed 100,000 roubles was effected by the local government, except for oil and gas production companies and re ning companies as well as coal mining companies. The State Registration Chamber, which was established by government in 1994 and operated on the basis of a statute enacted by the Ministry of Economy, had jurisdiction over companies in the above-mentioned industries, and companies in which foreign investment exceeded 100,000 roubles.77 By the Decision of the Government of September 5, 1998, the Chamber was transferred to the Ministry of Justice in line with the Civil Code.

The long-awaited Law on the State Registration of Juridical Persons was enacted in August 2001 and took effect in July 2002.78 Initially, it was thought that the registration would be handled by the Ministry of Justice and its territorial bodies, but in the end, it was the Federal Ministry of Tax and Levies (now the Federal Tax Service) which was entrusted with this task. The Civil Code was amended accordingly to accommodate this change. Details of registration are provided by an edict of the government.79

The Law covers not only the registration of commercial companies, but all juridical persons including non-commercial organisations. In 2003, the Law was amended to accommodate the registration of individual entrepreneurs.

All these entities are entered in the Uni ed State Register of Juridical Persons (EGRIuL). It exists in documentary form as well as in an electronic form. The register contains, inter alia, the following information (Law Art.5, para.1):

77A.Kramarenko, “Poriadok gosudarstvennoi registratsii kommercheskikh organizatsii s inostrannymi investitsiiami”, PiE, 1999 No.10, pp.12-17.

78Law No.129-FZ of August 8, 2001.

79Edict of the Government No.438 of June 19, 2002.

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i) full and abbreviated name of the company;

ii) organisational-legal form of the company (OOO, ZAO, OAO etc.); iii) address of the permanent executive body of the company;

iv) means of establishment (newly established or reorganised);

v) information on the founders and the administrator of the shareholders’list; vi) the original of the Articles of Incorporation or its certi ed copy;

vii) share capital as indicated in theArticles of Incorporation of commercial companies;

viii) name and positions of the persons who, without power of attorney, are entitled to act on behalf of the company, their passport number etc. and identi cation number as a tax payer if this applies;

ix) information on the licence which the company holds; x) informationon the branches and representative of ces; xi) tax payer’s identi cation number etc.;

xii) code of the economic activity in accordance with the Federal classi cation; xiii) date of registration and registration number with the pension fund, social

security fund and medical insurance; xiv) bank account.

Naturally it is not only the establishment of companies which is subject to registration.Amendments to theArticles of Incorporation, reorganisation and liquidation of companies are also required to be entered in the Register.

Information contained in the Register is open to the general public, except for the bank account numbers (Art.6, para.1). It should be noted that potentially, the Register is a major source of information on a speci c company. With the payment of fees, any person can obtain not only an excerpt from the Register, but also a copy of documents led for registration including shareholders’agreement and agreement of merger. Concerning companies which have a foreign founder, a copy of the commercial register of the founder in the home country is also available to the public.

Documents required for registration are as follows (Art.12):

i) application form for registration signed by the applicant; ii) resolution, or agreement to establish a company; iii) Articles of Incorporation (original, or a notarised copy);

iv) excerpt from a register of foreign juridical persons of the respective country or proof of a similar nature of the status of the foreign founder of the company;

v) receipt of payment of the registration fee;

In the application, it has to be con rmed that a) the submitted Articles of Incorporation are compatible with the requirements of the law, b) information contained in the documents submitted is truthful, c) in setting up the company,

130	COMPANY LAW

required procedure was observed including the payment of capital, and d) where necessary, consent of the relevant body has been obtained.

Application for registration at the time of the establishment of a company is to be made at the tax inspectorate of the location of the company’s permanent management body (Art.13, para.1). Applicants are: the general director of the juridical person to be registered and others who are empowered to represent the juridical person without a power of attorney, founders of the juridical person, head of the juridical person which is to be a founder of the juridical person (Art.9, para.1).

The rather cumbersome procedure was simpli ed by the 2003 amendments. While under the previous system, applicants had to go to the Registration Chamber and then to the Tax Agency to register as a tax payer and also visit the Government StatisticalAgency to obtain a number, there is now a one stop shopping system. Whereas in the past, registration could take weeks, now by law, registration must be completed within 5 working days following the application (Art.8, para.1), but may still take longer.

Registration can be refused only on the grounds speci ed by law, i.e. failure to submit the required documents, or submission of documents to the wrong registration of ce (Art.23, para.1). Refusal of registration can be contested in court.

One of the problems with the Russian register was that those entities which had ceased to operate, nevertheless, seldom applied for the registration to be deleted. There were a substantial number of entities which were “dead souls”. The current arrangement is that if an entity fails to submit returns etc. required by the tax legislation and there is no operation involving the bank account for 12 months, it can be excluded from the Register (Art.21.1, para.1).

The Law on Competition and Restrictions on Monopolistic Activities used to require approval by the Anti-Monopoly Agency (the Federal Anti-Monopoly Service) for the establishment of companies. The new Law on the Protection of Competition requires the advance approval of the Agency only in cases where a company is set up by very large companies.80

For the establishment of a company with foreign participation, Foreign Investment Law provides that such companies may be set up in accordance with provisions of the Civil Code and other laws (Art.20, para.1). Foreign investors are allowed to make investments in Russia in any form which is not prohibited by legislation (Art.6). As exceptions, investments which endanger the basis of the constitutional regime, ethics, health, rights and lawful interests of citizens,

80 Law No/135-FZ of July 26, 2006.

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national defence and public security can be restricted (Art.4, para.2). There are some other restrictions such as the registration found in the Aviation Code, which sets the maximum level of foreign participation at 49% in airline companies and requires that the top management be a Russian national.81

Companies with foreign investment are subject to state registration in accordance with the above-mentioned Law on the Registration of Juridical Person (Art.20, para.2).

4)Af liates of Foreign Companies

Af liates of foreign companies are subdivisions of a company which perform all or part of the functions of the company. The concept includes both the branch of ces and representative of ces.

Af liates of foreign companies are accredited by the State Registration Chamber, which is part of the Ministry of Justice.82 There is a Register of the Af liates of Foreign Companies. The procedure of accreditation is regulated by a provisional statute approved by the Ministry of Justice of December 21, 1999 and the Edict of the Council of Ministers of the USSR of November 30, 1989.

For accreditation, foreign companies are required to submit:

i) Application by the head of the company with the information on the business relationship with Russian partners, perspective of business cooperation in Russia, and the purpose of opening an af liate in Russia;

ii) Articles of Incorporation of the company; iii) Certi cate of Commercial Registration or its excerpt; iv) Decision of the foreign company to open an af liate;

v) Letter of recommendation from the bank which services the company regarding the creditworthiness of the company.

Unlike in the procedure for setting up companies, a one-stop shopping system has not emerged yet. Therefore, registration with the tax inspectorate, the State Committee for Statistics, and extra-budgetary funds are required separately.

81G.S.Shapkina ed., Postateinyi kommentarii k Federal’nomu zakonu “Ob aktsionernykh obshchestvakh”, second edition, Moscow 2000, p.83.

82www.palata.ru.