Russian Federation: Joint Venture Companies: Practical Problems Of Their Organization And Corporate Governance

Joint venture companies, being one of the forms of doing business, despite the sanctions and the tense political situation on the world stage, continue to enjoy certain popularity in Russia. Foreign investors are actively investing their money, knowledge and experience in domestic business, together with Russian partners, are opening various companies and enterprises in various sectors of the economy. There are many reasons for this, the main of which are gaining access to new commercial markets, and the ability to produce new types of goods and services.

The desire of foreign investors to invest in the Russian economy and carry out business activities on our territory, to implement various projects has led to the fact that joint venture companies have become the most common form of foreign direct investment, facing its problems in terms of organization and corporate governance.

The main regulatory source of regulation of joint venture companies in Russia is the Federal law dated 09.07.1999 N 160-FZ "On foreign investments in the Russian Federation" (hereinafter – the Law on foreign investments). This law establishes the national legal regime for the activities of foreign investors, i.e. the regime under which foreign investors enjoy the same rights and obligations on the territory of our country as Russian investors.

The result of the rules on the national legal regime is the participation of joint venture companies in business activity on an equal basis with domestic ones, except for those individual restrictions that are established by Federal laws, including the Federal law of 29.04.2008 N 57FZ "On the procedure for foreign investments in economic societies of strategic importance for national defense and state security".

In addition to the legal regime, the Law on Foreign Investments also provides various guarantees and preferences for foreign investors (guarantees of compensation for nationalization, guarantees against adverse changes in legislation or "grandfather's reservation", etc.). But the Law on Foreign Investments does not directly regulate the organization of activities and corporate governance of joint venture companies, referring in this part to the general provisions of civil law.

Therefore, along with the Law on Foreign Investments, the Civil Code of the Russian Federation, as well as the Federal Law of 08.02.1998 N 14-ФЗ "On limited liability companies" and the Federal Law of 26.12.1995 N 208-FZ "On joint-stock companies. "

It is important to note that until recently, domestic legislation regulated corporate governance issues both in joint venture companies and in Russian organizations only with the help of general norms and principles of civil law. The parties entered into corporate agreements, relying not on legislative norms, but on the principle of freedom of contract and dispositive relations.

Only in 2009 in connection with the adoption of the Federal Law of 30.12.2008 N 312-FZ "On Amending Part One of the Civil Code of the Russian Federation and certain legislative acts of the Russian Federation" and the Federal Law of 03.06.2009 N 115-FZ "On amendments to the Federal Law "On joint-stock Companies" and article 30 of the Federal Law "On the securities market", the institution of a corporate contract was enshrined in existing law.

These laws provided for the possibility of resolving corporate issues and issues related to the organization of activities of business companies using agreements on the exercise of the rights of members of the company and shareholder agreements. The introduction of such changes was a big step forward, because, as the law enforcement practice of that time showed, including the judicial one, corporate governance issues needed a certain legal guideline and legal regulation.

Large-scale reform of civil legislation in 2014 consolidated the amendments, as it was, among other things, marked by the introduction of the concept of "corporation" in the Civil Code of the Russian Federation and a separate article that regulates the issues of a corporate agreement in sufficient detail.

The changes introduced by the Federal Law of 08.03.2015 N 42-FZ "On Amendments to Part One of the Civil Code of the Russian Federation" also had a favorable effect on the development of domestic law: concepts such as conditional fulfilment of obligations, assurance of circumstances were introduced into Russian civil law, option contract, option, etc., which have always been mandatory elements of a corporate contract from the point of view of foreign law and order.

With the introduction of amendments, the legislation somewhat balanced the correlation of the concepts of "corporate contract" and "charter". Russian corporate law has always preferred the provisions of the charter over the provisions of corporate contracts. The courts recognized the corporate agreement as completely invalid if certain of its provisions were in conflict with the charter (See, for example, the ruling of the Ninth Arbitration Court of Appeal of 02.11.2014 in case No. A40-97313 / 2013). Now, due to the introduction in 2014 of Article 67.2 of the Civil Code of the Russian Federation, in particular, paragraph 7 of this Article, only certain conditions of a corporate agreement can be recognized as invalid. Moreover, if the provisions of the corporate agreement contradict the terms of the charter, which are imperative, then such provisions may be invalidated, if the corporate agreement contradicts the dispositive rules of the charter, the parties are not entitled to dispute the agreement on this basis.

However, despite all this, in practice, there are still and will be problems of organization and corporate governance of joint venture companies, the main of which is to address the following issues

  • Preparation of Memorandum of intent and choice of legal form;
  • Choice of law applicable to legal relations between the parties;
  • Selection of a body to resolve disputes between the parties;
  • Formation of governing bodies.

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