Company Formation in Russia: The Russian Corporate Law

Company Formation in Russia

Company Formation in Russia: The Russian Corporate Law

 

 

RUSSIAN JOINT STOCK COMPANIES:

Russian corporate law provides for two types of joint stock companies (“JSCs”):

  • open joint stock companies (“OJSCs” or “OAO” in Russian); and
  • closed joint stock companies (“JSCs”or “ZAO” in Russian).

With respect to most corporate matters Russian corporate law does not distinguish between OJSCs and CJSCs. However, below stated are the main distinctions between the two are:

  • CJSCs cannot have more than 50 shareholders;
  • acquisitions of more than 30% of voting shares in an OJSC trigger mandatory tender offer requirements; and
  • CJSCs cannot issue shares by open subscription (a public offer of shares);
  • shareholders in a CJSC have pre-emptive rights (i.e. rights of first refusal) to acquire shares sold by the other shareholders to third parties.
  • the latter rule applies regardless of whether a proposed transferee is affiliated with the selling shareholdes.
  • The management structure:
    • general meeting of shareholders,
    • board of directors (optional for the JSC with less than 50 shareholders) and
    • the executive (chief executive officer (“CEO”) and/or management board).
  • Russian corporate law provides relatively little flexibility in the CJSC context with respect to structuring shareholder relationships and procedural matters. Shareholders decisions require a simple majority (50% +1 share). The presence of shareholders holding more than 50% of the company’s voting shares is sufficient for quorum purposes.

RUSSIAN LIMITED LIABILITY COMPANIES:

  • A Russian limited liability company is a less regulated and rigid corporate vehicle.
  • Issuance of equity or changes in capitalization of an LLC does not require registration with the Central Bank.
  • There is much more flexibility in managing their internal affairs and structuring corporate governance
  • If Russian court would be prepared to recognize uphold any “novel” or “untraditional” arrangements or even those that merely deviate from the express provisions of the law, is really hard to predict.
  • LLCs can have a two- or three-tier management structure:
    • general meeting of participants,
    • board of directors (optional) and
    • the executive (CEO and/or management board).
  • Further, the number of votes held by LLC participants may be disproportionate to their respective participation interests.
  • As a general rule, a transaction aimed at the transfer of participation interest requires notarial certification. It is very unlikely that a Russian notary will certify a sale and purchase agreement if it is governed by any law other than Russian law.
  • LLC participants can have pre-emptive rights in relation to participation interests of the other participants, but as per a Russian court precedent, it is not possible to bypass the right of first refusal requirements by structuring the transfer of a participation interest other than as an outright sale.

RUSSIAN JOINT VENTURES:

  • The proposed establishment of a Russian joint venture may require a preliminary approval or subsequent notification of the Russian antimonopoly authorities.
  • Requirements:
    • incorporation of a subsidiary that involves contributions of fixed assets or shares of another company,
    • acquisition of more than a 25% stake in an existing CJSC or 1/3 of participation interests in an existing LLC or
    • transfer to a subsidiary of a certain amount of fixed assets. In addition, acquisition of control over an existing JSC or LLC operating in one of strategic business sectors will require preliminary consent of the Government Commission under the Federal law
  • Joint ventures with Russian companies are formed by one of the two main approaches only like
    • using an on-shore Russian joint venture vehicle or
    • incorporating the joint venture outside of Russia (which operates in Russia through a wholly-owned Russian subsidiary).
  • The preference for one of the two alternatives is typically determined by a variety of factors, including sophistication of the joint venture parties, real and perceived cost and efficiency trade-offs, share ownership percentages, commercial interests and negotiation leverage between the parties, concerns over the protection of shareholder/participant rights, etc.
  • On grounds that it is arguably a cheaper alternative and a format that the Russian side is more familiar with, a Russian party can also insist on using a Russian joint venture vehicle.
  • Further, Russian corporate vehicles may not offer the level of commercial flexibility and certainty that a foreign investor expects in a joint venture setting.
  • In addition, Russian courts do not have a good record of protecting shareholder/participant rights generally and foreign investor’s rights in particular.
  • Due to Russian law issues described above, a significant number of joint venture vehicles are incorporated outside Russia.
    • They usually offer reliable legal protection of shareholder rights
    • and also make sense from the corporate governance and tax stand point.
    • Like, it is very common to set up Russian joint ventures in Cyprus and the British Virgin Islands and have their shareholders or joint venture agreements governed by English law with dispute resolution clauses providing for international arbitration.

 

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