Company legislation development concept.

30.03.2009

LEGAL UPDTE No. 12.

The Council under the President of the Russian Federation for Codification and Improvement of the Civil Legislation has proposed for discussion a draft Development Concept for the Legislation on Legal Entities (hereinafter the “Concept”). It is expected that the final version of the Concept will be submitted for consideration by the Russian President by 1 June 2009.

The Concept provides for dramatic developments affecting the institute of legal entities.

The main idea is to preserve the basic role of the general provisions of the Civil Code of the Russian Federation (hereinafter the “RF Civil Code”) on legal entities while increasing the number of such provisions and reducing overall that of in laws on legal entities. The regulatory framework is to preserve its two-tier structure, consisting of the RF Civil Code and special laws on particular types of legal entity, without any additional tiers being introduced (e.g., in the form of a law on reorganisation of legal entities). The RF Civil Code is to provide an exhaustive list of both commercial and non-profit organisations, while the regulatory framework should become more specific. This would make it possible to combine the existing laws on limited liability and joint-stock companies in a single law on business entities and to withdraw the interim legislation on non-profit organisations and certain other laws.

The Concept proposes consistent transformation of unitary enterprises holding assets by right of economic jurisdiction into business entities with predominant public participation. Federal (but not municipal) state-funded enterprises enjoying the right of operational management are the only ones to be preserved. In this case, the law on federal and municipal unitary enterprises could be set aside subject to the RF Civil Code providing a more specific regulatory framework for state-funded enterprises.

Furthermore, it is again proposed to eliminate such legal forms as a supplementary liability company and closed joint-stock company.
The Concept suggests distinguishing public joint-stock companies from among open joint-stock companies, the new status being acquired after state registration of a prospectus for securities (shares) to be distributed among an unlimited number of persons by open subscription.

According to the Concept, there are no sufficient grounds today for abolishing the authorised capital of a business entity. It should preserve its real function – start-up financing and security for creditors’ rights. In this connection, the Concept suggests that the minimum authorised capital be raised significantly to 1 million roubles for limited liability companies (currently – 10 000 roubles) and 2 million roubles for joint-stock companies (currently – 10 000 roubles for closed joint-stock companies and 100 000 roubles for open joint-stock companies). 

The new sums are not considered to constitute an obstacle, as entities with insufficient capital may operate either as individual entrepreneurs, under a simple partnership contract, or in the form of a production cooperative. A limit should also be established on non-monetary authorised capital contributions (in the form of promissory notes, rights, etc.).

The Concept also notes that the legislation permits agreements between participants in a limited liability company and suggests that shareholders’ agreements be allowed in certain cases, subject to a rigorous regulatory framework.

It is also emphasised that limiting participation by entities in the authorised capitals of other entities (so-called “crossholding”) would be reasonable. Provisions on companies created by or consisting of one person must be supplemented by regulations establishing secondary liability of their founders (participants) for the debts (transactions) of said companies, if sufficient assets are lacking and if transactions performed thereby were designed to meet orders (instructions) of their sole founder (participant). In fact, this would mean “ripping off the corporate mask”, with provisions on liability of the main (parent) companies for debts of their subsidiaries being extended to such relations.

The Concept suggests discussing a legal requirement for recognising legal capacity of offshore companies under Russian law, i.e., registration of such companies in the Unified State Register of Legal Entities (hereinafter the “Companies’ Register”), including mandatory disclosure of information on their founders (participants) and beneficiaries. In the absence of registration, companies would be unable to perform transactions in the Russian Federation, acquire property, etc.

Among non-profit organisations, it is suggested that only consumer cooperatives, public organisations, associations and unions, funds and institutions be retained, with their business activities to be subject to maximum restrictions. Another idea that appears quite radical is to abolish the legal form of state corporations, with existing ones being converted into the legal forms under which they actually fall pursuant to the Concept, in particular: Rosatom and Olympstroy – into public authorities; Vneshekonombank, Deposit Insurance Agency, Rosnanotekh, Rostekhnologii – into legal entities with 100% state participation; the Fund for Support of the Housing and Utility Industry Reform – into a fund as a legal form.

The Concept considers fundamentally revising the treatment of major transactions and interested-party transactions.

It recommends that mandatory legal expert examination of the contents of constituent documents be introduced in order to verify their compliance with the legislation and that the rules for registration of legal entities be amended in order to ensure unconditional public reliability of the data contained in the Companies’ Register. It is proposed that the duty of maintaining the Companies’ Register pass from the tax authorities to judicial authorities or even the state arbitration court (Austria and Germany have similar experience).

The Concept also addresses in detail more efficient reorganisation and liquidation of legal entities.

For further information, please contact:

Anton Sitnikov, Partner, Corporate/M&A,Goltsblat BLP;
Tel: +7 (495) 287 44 44,
Email: info@gblplaw.com

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