Civil Code Chapter on Companies: 7 Things to Consider

03.10.2014

Legal500.com

So the amendments to Russian company law that so many lawyers have talked about for so long are finally in force. What needs considering? Any new opportunities to take advantage of or tasks to fulfil?
 
Multiple directors. Joint signature

This is something that many overseas parents have longed to see. Subject to company Articles of Association, the law expressly allows several directors or other named sole executive bodies to be appointed in a company to act jointly or each individually. As in many other jurisdictions, all such directors are included on the companies' register.
 
Previously, the joint representation concept did not exist for Russian company directors per se. The General Director, otherwise called the CEO, was authorised to act individually and had implied authority to engage in deals on the company's behalf. The way available for limiting the CEO's authority was (and remains) an internal approval process that has to be undergone for an established list of reserved deals prior to their conclusion.
 
Liability news

The wording pertaining to parent company liability makes the parent jointly liable for deals concluded by a subsidiary further to binding instructions or with the parent's approval. There's no certainty what the approval by the parent means in this context. Should the normal approval provided by a shareholder, e.g., for major transactions, qualify as approval entailing joint liability? The draft laws on joint stock companies and limited liability companies, which are now under consideration by Parliament, make us think that this is not exactly the case and that the joint liability should only apply in the case of shareholder approval when the company is expressly obliged to seek such approval by a contract or Articles of Association. The same draft laws allow a parent's liability to be excluded or limited in the subsidiary's contracts, which is worth considering in order to avoid any doubts here.
 
Another new point is liability for damages imposed on persons that have an actual possibility of influencing the company's activities. From now on, such a person will bear fiduciary duties, including to act in the best interests of the company. This obligation seems unusual since, in some situations, it might apply, for instance, to a major shareholder or even major creditor of a company.
 
Shareholder contributions

The list of properties that may be contributed by shareholders to form the capital of the Russian company is now closed. Such items as leasehold rights, some types of securities and debentures (e.g., bonds other than state or municipal, receivables, etc.) cannot, for instance, be contributed to capital. Shares in overseas companies may, in general, be contributed, as explained by the draft Standards of Securities Issue currently under approval by the Central Bank. This is, however, subject to such shares being qualified as securities (CFI, ISIN assigned, etc.) and the beneficiary being a qualified investor.
 
Squeeze-out

Since a squeeze-out request will only be possible in companies that have the word "public" in their names, plan to include relevant amendments in the Articles of Association, if you aim to squeeze-out your minorities. Note that, further to the draft amendments to the Law on Joint Stock Companies, which are now being considered by Parliament, for de facto non-public companies to be renamed public companies an unanimous vote of all the shareholders will be required.
 
Pre-emptive rights

In a joint stock company, the pre-emptive right to purchase a share offered for sale is now only enjoyed by the shareholders if this is expressly stated in the company Articles of Association. Previously, it was implied for closed joint stock companies.
 
Shareholder meetings

General Shareholder Meetings will require attendance by either the registrar or a notary. This may, however, be overruled for a limited liability company by providing for other ways to certify the resolutions passed by the shareholders, either set out in the company Articles of Association or approved by anonymous shareholder vote.
 
At the other end, for non-public companies, the law allows much greater flexibility with respect to the in terms and procedure for convening shareholder meetings.
 
Easy conversion

Conversion of a business entity from one form to another (say, joint stock company to limited liability company or vice versa) has become easier, since there is no longer any obligation to give multiple notices to creditors. From now on, creditors are not entitled to early discharge or termination of contracts or, equally, to security, solely on the grounds that a company is being converted.
 
Another positive change is the mixed reorganisation allowed for business entities. For example, a limited liability company may be merged into a joint stock company without needing to be converted in advance. Or a company may be split in two, with one part being merged, at the same time, into another company of whatever form.
 
So there are things to think about. Our list here is not exhaustive, of course. The selection was made at our own discretion and in consideration of the ideas occurring to both us and our clients these days.

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