Текст бизнес-книги "Russian business law: the essentials"

Автор книги: Evgeny Gubin

Раздел: О бизнесе популярно, Бизнес-книги

4. Certain Types of Legal Entities

Economic partnerships and companies have many features in common. Paragraph 2 of chapter 4 of the CC of the RF contains the general provisions on partnerships and companies. These norms appeared in the CC of the RF recently, and they should be taken into account when dealing with partnerships and companies.

The charter (share)[32]32
  Economic companies have charter capital, and economic partnerships have share capital. Everything written in the present chapter on charter capital applies to the joint capital as well.


[Закрыть] capital of economic partnerships and companies is divided into parts (shares in a limited liability company and economic partnerships, stocks in the joint stock companies), which give corporate rights to the owners of these shares. Charter capital is the minimum possible size of property of the legal entity expressed in a monetary equivalent. The size of charter capital is established by the legal entity itself and is specified in its charter. Besides, information on the size of legal entity's charter capital is contained in USRLE, and anyone can receive information on it, having ordered an extract from the register.[33]33
  It is possible to receive information on legal entity from official source on the site of the FTS of Russia at: http://egrul.nalog.ru/


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The share size (number of stocks) at the stage of the creation of the legal entity depends on the cost of the property which the participant brought to the charter capital of the legal entity.

Unless otherwise stated in law, as a contribution to the property of the company, participants can bring:

i) money,

ii) goods,

iii) shares (stocks) in the charter (joint) capitals of other economic partnerships and companies,

iv) state and municipal bonds,

v) exclusive rights, other intellectual rights, and rights by license contracts, which are subject to a monetary assessment.

Issues of interaction of economic companies’ participants (among themselves and with the company), issues of management of economic companies, receiving of profits by participants, establishment, reorganizations, and liquidations of economic companies (corporate-legal issues of economic company’s activities) are regulated by norms of the CC of the RF, as well as by the Federal Law on Limited Liability Companies and the Federal Law on Joint Stock Companies. Currently, Russian corporate law is in a period of deep reformation. Recently the norms of the CC of the RF devoted to legal entities (chapter 4 of the CC of the RF) were essentially changed. The main changes were made by the Federal law No. 99-FZ (as of May 5, 2014), and came into force on September 1, 2014. According to Clause 4 of Article 3 of Federal Law No. 99-FZ (as of May 5, 2014), legal acts (all laws and subordinate legislation) apply only to the extent that they do not contradict with the changes made to the CC of the RF by the present federal law. This should be taken into account when dealing with the FL on Limited Liability Companies and the FL on Joint Stock Companies.

In the Russian Federation, the following types of the legal entities exist:

i) Limited Liability Company (LLC),

ii) Joint Stock Company (JSC).

The joint stock companies, in turn, may be public and non-public.

An LLC is a non-publicnon-public legal entity. The JSCs may be both public and non-public. The JSC is deemed public when its shares (or securities convertible into shares) have been publicly placed by an open subscription, or have been publicly converted on the conditions established by the laws on the securities. If the charter and the firm name of the legal entity indicate that the company is public, then the rules on public companies are applied (Clause 1 of Article 66.3 of the CC of the RF).

Many of the issues concerning the activities of the public and non-publicnon-public JSCs are regulated in different ways. This must be considered while conducting business.[34]34
  For example, a public JSC, is obliged to disclose the annual report, annual financial statements, announcement of the shareholders’ general meeting, and other information. A non-public JSC is obliged to do so only if the number of its participant exceeds 50. Furthermore, shareholders of a non-public JSC may have the privilege of stock acquisition, as well as have the ability (if it is provided by a charter) to prohibit the alienation of the stock to a third party. Public JSC shareholders may not have such rights. There are also other differences between public and non-public JSCs.


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The charter capital cannot be less than the established minimal threshold (the minimum amount of the charter capital), and this is different for the various organizational-legal forms of legal entities. It is established by the federal laws on the profit of legal entities' separate organizational-legal forms (FL on Limited Liability Companies, FL on Joint Stock Companies). Moreover, the federal laws regulating the implementation of separate types of activities (for example, banking, insurance and others) may establish increased requirements as to the minimum amount of the company’s charter capital.

The minimum amount for the charter capital of LLCs and non-public JSCs is 10000 rubles; and 100000 rubles for public JSCs (the second paragraph of the Clause 1 of Article 14 of the FL on Limited Liability Companies, Article 26 of FL on Joint Stock Companies).

If at the end of the second and each subsequent fiscal year, the legal entity’s net assets value is less than its charter capital, the company is obliged to reduce its charter capital. If the net assets value is less than the minimum amount of the charter capital, it is subject to liquidation.

At a vote on various issues, the number of votes of the company's participants depends on the size of their shares in the charter capital (for LLC) or the stock number (for JSC). There are few exceptions to this rule.

Some or all of the company's members may sign a corporate agreement/shareholders agreement,[35]35
  A corporate contract concluded by LLC participants is called "a contract on the implementation of the shareholders’ rights". A similar contract signed by JSC shareholders is called "a joint stock agreement".


[Закрыть] which will regulate the implementation of the participants’ various corporate rights (in addition to the law provisions). Such an agreement may contain, in particular, provisions obliging the members to:

i) vote in a certain way at the general meeting of the company's participants,

ii) concertedly implement other actions on the company's management,

iii) acquire or alienate shares in the charter capital (stocks) at a certain price or upon the occurrence of certain circumstances,

iv) abstain from the alienation of shares (stocks) before the occurrence of certain circumstances.

A corporate agreement is executed in writing by drawing up a single document. The terms of the corporate agreement concluded by the members of non-public company are deemed confidential and are not subject to discloser, unless otherwise provided for by the law. The shareholders’ agreement concluded by the shareholders of public JSC shall be publicly disnon-public to the extent necessary, in accordance with the Federal law on JSC. Currently, the norms establishing the terms of the relevant information disclosure are absent in the Federal Law on JSC. A company must be notified about the execution of a corporate agreement.

The company is considered as an affiliate if another company (or economic partnership) has an opportunity to govern a company’s decisions. Such an opportunity may arise, for example, from the participation of the main company in the affiliate’s charter capital, or from a contract between the main and affiliate companies.

The main company of the partnership, in some cases, bears a joint liability for the affiliate’s transactions. Such liability arises from the transactions signed by the affiliate in pursuance of the instructions, or with the consent of the main company or economic partnership (there are exceptions from this rule). Furthermore, in case of the affiliate's insolvency (bankruptcy) due to the fault of the main economic partnership or the company, the main company bears the subsidiary liability for the affiliate’s debts (Article 67.3 of the CC of the RF).

A LLC is one of the most common organizational legal forms of legal entities in Russia. One of the main reasons for this is that the Federal Law on Limited Liability Companies regulates many aspects on facultative basis, allowing the legal entity’s bodies to resolve various issues at its discretion. This work is done internally at the company.

Charter capital[36]36
  For more information about the minimum amount of an LLC Charter Capital, see chapter 4.1.2.1.C.


[Закрыть] is divided into participatory interests belonging to the LLC participants. The company is not liable for its participants' obligations. As a general rule, the participants are not liable for the company's obligations either.

Generally, a LLC is not obliged to publish its reports.

In accordance with Clause 1 of Article 89 of the CC of the RF, the LLC founders are obliged to sign an LLC foundation agreement in writing, which shall define some aspects of the company’s foundation.

This contract is not a constituent document of the LLC.

The term for the payment of shares in the charter capital (that has been established by the agreement) may not exceed 4 months. Within this period, the founders are obliged to pay the shares fully.

Both individuals and legal entities can be participants to an LLC. The number of LLC participants shall not exceed 50. At the excess of this limit, the LLC must be transformed into a JSC. The LLC may have a single participant (a company having a single participant cannot appear as such a participant, according to Article 7 of the FL on Limited Liability Companies).

As a general rule, the transfer of an LLC’s participatory interest from one person to another is allowed. Upon alienation of the entire participatory interest, this person ceases to be the company's participant. In case a participatory interest is sold to a third party, the other participants of an LLC have the priority to buy the share or part of the share (the seller must first offer its share to the other participants). An LLC charter may include the necessity to obtain the consent of all participants for the alienation of a share. Furthermore, the charter may establish a ban on the shares' alienation.

At the general meeting of an LLC, participants may decide to distribute the company's net profit among its participants quarterly, biannually, or annually. Distribution is made in proportion to the participant's interest in the charter capital. The company's charter may provide other proportions of profit distribution. The FL on Limited Liability Companies contains a list of circumstances under which profit distribution is prohibited.

An increase of LLC charter capital may be implemented:

i) at the expense of the company’s assets (without the implementation of additional deposits),

ii) at the expense of LLC participants’ additional deposits,

iii) at the expense of the deposits of the persons entering the company as a participant, if it is not prohibited by the company’s charter.

A reduction of LLC charter capital is implemented by:

i) the reduction of the shares par value for all participants of the company,

ii) the redemption of the company's shares.

The general meeting of participants may oblige all of the participants of an LLC to make contributions to the company’s assets; these contributions do not change the sizes and par value of the participants’ shares in the charter capital (and do not increase the company's Charter Capital). Such contributions are made by all participants in proportion to their shares, unless otherwise stated in the charter.

LLC Management Bodies are:

i) The General Participants Meeting

The general participants meeting is the highest management body of an LLC. All of the company’s participants have the right to participate in it. During the general participants meeting, most of the important issues concerning the LLC’s activities can be addressed and resolved.

ii) Board of Directors (Supervisory Board)

The terms "board of directors" and "supervisory board" are synonyms. The formation of a board of directors (supervisory board) in an LLC is not obligatory.

The company's charter determines the competence of the board of directors (supervisory board), taking into consideration the Federal Law on Limited Liability Companies.

iii) A Sole Executive Body

The sole executive body manages the company's current activities. The general meeting of shareholders or the board of directors (supervisory board) elects a sole executive body, which shall be accountable to them.

iv) Executive Board

Forming an executive board is not obligatory for an LLC. The appointment of executive board members is within the competence of the general participants meeting or the board of directors (supervisory board). The chairman of this body is a person holding a position in the sole executive body.

v) An Audit Committee (Auditor)

Forming an audit committee is obligatory for a company which has more than 15 participants. The general participants meeting of the LLC appoints a member to the audit committee. The company’s audit committee (auditor) has the right to carry out inspections of company’s financial and economic activities, and has access to all documentation concerning a company’s activities at any time. The company’s audit committee (auditor) shall carry out an inspection of company’s annual reports and balance sheets, before their approval by the general meeting of participants of the company.

The JSC is one of the most common organizational-legal forms of legal entities in Russia. Its charter capital[37]37
  See chapter 4.1.2.1.C for the minimum amount of JSC charter capital.


[Закрыть] is divided into shares belonging to the JSC’s participants. The company is not liable for the shareholder’s obligations. The shareholders are usually not liable for the company’s obligations either, except in a situation when they have not fully paid for their shares.

Public JSC, as well as a non-public JSC with more than 50 shareholders, are obliged to disclose information in accordance with the Federal Law on Joint Stock Companies.

In accordance with the Clause 1 of Article 98 of the CC of the RF, founders of a JSC are obliged to execute a contract among themselves upon the founding a JSC, which shall define some aspects of the company’s creation. Such a contract must be concluded in writing.

This contract is not a constituent document of the JSC.

Both individuals and legal entities may be JSC participants. The JSC may have a single shareholder (another company having a single participant cannot appear as such a shareholder, in accordance with Clause 6 of Article 98 of the CC of the RF).

A public company has the right to allocate shares, and issue securities which are convertible to shares, through open subscription. A non-public company does not have the right to offer (to an unlimited group of persons) such securities for acquisition.

A non-public company may provide for in its charter the pre-emptive rights of the shareholders to the acquisition of shares being alienated by another shareholder (on paid transactions). Additionally, the charter may include a requirement to obtain the consent of stockholders for the alienation of the shares.

The JSC has the right to allocate several types of shares, as well as special types such as preferred shares. The JSC charter specifies the dividend amount and/or the cost paid, in the event of a company’s liquidation of preferred shares. The preferred shares do not grant the right to vote at the general shareholders’ meeting. An exception to this rule is for meetings when certain issues are being considered, such as making amendments and additions to the company's charter, limiting the rights of the preferred share owners, as well as other issues.

The general shareholders’ meeting may decide to pay dividends to the shareholders on a quarterly, biannually, or annual basis.

The increase of charter capital may be implemented:

i) by increasing the share’s par value, or

ii) by issuing additional shares.

A reduction of the charter capital is implemented by:

i) the reduction of the share’s par value, or

ii) the acquisition of a part of the shares, with the purpose of reducing their total number.

JSC management bodies are:

i) The General Shareholders’ Meeting

The general shareholders’ meeting is the highest management body of a JSC. All shareholders have the right to participate in it. The most important issues of the JSC’s activities are addressed by the general shareholders’ meeting.

ii) Board of Directors (supervisory board).

Forming a board of directors is not obligatory for a JSC, which has less than 50 shareholders with voting shares. The general shareholders’ meeting elects the members of the board of directors (supervisory board) by a cumulative vote. The responsibilities of a company’s board of directors (supervisory board) includes the resolution of issues of the general management of company’s activities, except for the issues that federal law assigns to the responsibility of the general meeting of shareholders.

iii) A Sole Executive Body

The sole executive body manages the company’s current activities. The general shareholders’ meeting or the board of directors (supervisory board) elect the sole executive body, which is accountable to them.

iv) Executive Board

The forming of a executive board is not obligatory for a JSC. If a executive board has been formed, it shall manage the current activities of the JSC together with the sole executive body. The general shareholders’ meeting or the board of directors (supervisory board) elect the executive board, which is accountable to them.

v) An Audit Committee

The general meeting of shareholders elects an audit committee. It controls the company’s financial-economic activities.

There are two types of economic partnerships in Russia:

i) general partnerships,[38]38
  The general partnership should not be confused with the simple partnership, which is not a legal entity.


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ii) limited partnerships (special partnership)

Only individual entrepreneurs and profit organizations can be participants (partners) of the partnerships. The partners carry out entrepreneurial activities on behalf of the partnership.

The participants jointly bear subsidiary liability for the obligations of the partnership. The person can be a participant of only one general partnership. Management of the general partnership’s activities is carried out with the consensus of all partners, unless otherwise provided by the founding agreement. Due to the aforementioned features, Russian entrepreneurs rarely create economic partnerships.

A founding agreement may provide the following models for the management of general partnership:

i) by all partners jointly (decision-making requires the consent of all partners),

ii) by each partner separately,

iii) by individual partners.

In accordance with Clause 3 of Article 73 of the CC of the RF, the participant of a general partnership has no right to execute transactions on its behalf, for the benefit of the third parties without the consent of the remaining participants if such transactions are similar to the subject of general partnership’s activities. The profit and losses are distributed among the partners in proportion to their contributions, unless otherwise specified by the founding agreement.

The partner has the right to transfer his share to the third party only with the consent of all partners.

In the case when a single participant remains in a partnership, the partnership is subject to liquidation, if the last partner does not transform the partnership into an economic company.

A limited partnership, along with the general partners, includes the investors (limited partners) therein, who do not participate in the management of the partnership, as well as in conducting its affairs, and bear the risk of the losses from the partnership's activities, within the limits of their contributions to the capital. Any individuals and legal entities can be investors to a limited partnership. Their number may not exceed 20.