Under the Russian law there are four legal forms of a company with a limited liability:
- Limited Partnership (partnership in commendam)
- Limited Liability Company
- Additional Liability Company
- Joint Stock Company
In the present business environment in Russia and considering the needs of a typical foreign investor, the most viable options are a limited liability company and a joint stock company. Therefore, this article concentrates in those company forms.
2. Limited Liability company
2.1 General
A limited liability company is a company established by one or several persons in which the authorised capital is divided in shares (parts) as determined by the constituent documents. Partners of a limited liability company are not responsible for the company's liabilities. Their liability for the debts and losses of the company is limited to their contributions into the authorised capital.
In Russian limited liability company is abbreviated OOO and the company name is stated in quotation marks. An English version LLC "company name" has the same meaning.
2.2 Establishing documents
The constituent documents of a limited liability company consist of the Founding Agreement signed by the founders and the Articles of Association approved by them. In case the company is established by only one person, the latter alone shall suffice.
2.2.1 Founding Agreement
The Founding Agreement is entered into to agree on founding the company and on joint activities in the founding procedure. Furthermore it shall include, for example, the following information:
2.2.2 Articles of Association
- founders of the company,
- the amount, contents, term and method of making contributions by partners,
- the liability of partners for violation of the obligations on making contributions,
- certain other information to be included also in the Articles of Association
The Articles of Association of a limited liability company shall include, for example, the following information:
- the name of the legal entity,
- its domicile,
- the way in which the legal entity's activities are carried out,
- the amount of the authorised capital,
- the share of each partner;
- the members and the scope of authority of the company's management bodies,
- the order of decision making by the management bodies and the matters in which an unanimous decision or a qualified majority is required.
- exit by a partner from the company
- transfer of assets of the company
2.3 Registration
The company is considered established as of its state registration. For registration of the company an application accompanied with the founding agreement (if more than one founder), the articles of association, confirmation of the necessary payments and documents on the founders (trade register extract, articles of association and a letter of reference from their bank) shall be submitted to the registration authority.
The registration authority shall examine the founding documents within 21 days of their submission and register the company within that time if all the documents are in order.
The state registration of companies in Russia is carried out by the State Registration Chambers. The relevant State Registration Chamber is that of the company's domicile, but a company with foreign investment exceeding 100.000 roubles shall be registered at the State Registration Chamber of the Ministry of Economy of Russia in Moscow.
Having registered the company with the State Registration Chamber, it should additionally be registered with a number of local authorities.
3. Corporate issues
3.1 Authorised Capital
The minimum authorised capital of a limited liability company is 100 times the minimum wage, i.e. at the time of drafting this article the minimum authorised capital is 8490 roubles (approximately USD 560).
Of the authorised capital 50% shall be paid before state registration of the company. The remaining 50% shall be paid within one year after the date of registration. Different Registration Chamber may, however, have differing practices.
The authorised capital may be paid for both in cash and in kind. In kind contribution may, in some cases, have tax and customs consequences. Furthermore, overvaluation of an in kind contribution causes a personal liability to the partners for a period of three years.
3.2 Management of the company
3.2.1 General Meeting of the partners
The highest management body of the company is the general meeting of the partners. The following decisions are within the exclusive authority of the general meeting of the partners: amendments to the Articles of Association and authorised capital; formation of the executive bodies; liquidation or reorganisation of the company; confirmation of the annual final accounts and election of an auditing commission.
3.2.2 Board of Directors
A limited liability company may, but is not required to have a board of directors. If a board of directors is not formed, its functions are performed by the general meeting of the partners.
3.2.3 Executive body
The company shall have an executive body that is responsible for day-to-day operations. Such a body may consist of several members or only one member. In practice in Russia such a body is the General Director.
3.2.4 Transfer of shares
Any partner of the company has the right to withdraw from the company as well as to sell his share or a part of his share. In case of withdrawal he shall get a part of the assets of the company in proportion to his share in accordance with what is provided in the constituent documents of the company. All partners of the company have the right of first refusal to purchase such a share.
In order to sell a share to any third person or to obtain it by way of inheritance or will, the Articles of Association of the company shall contain such provisions. If the Articles of Association do not provide for the right to sell the share or its part to a third person or to inherit it and no partners are willing to purchase such a share, the company shall pay to the seller/successor a fair market price of the share in cash or by assets of the company corresponding to such a price.
4. Joint Stock Company
4.1 General
A joint stock company is a company in which the share capital is divided into a certain number of shares. The liability of the shareholders for the debts and losses of the company is limited to their share of the paid up share capital.
There are two legal forms of a joint stock company: closed joint stock company (ZAO) and open joint stock company (OAO). In English a joint abbreviation JSC is often used. The main difference between them is that the shareholders of a closed joint stock company have the right of first refusal to purchase the shares of the company in case such shares are sold by another shareholder to a party that is not a shareholder of the company.
4.2 Founders
Both physical and legal persons may act as founders of a company. The number of founders of a closed joint stock company cannot exceed 50.
For establishing a Russian resident company a foreign legal entity is not required to have any permits or licenses issued by the Russian state authorities or other organisations.
4.3 Constituent Meeting
The founders shall decide on establishing a company at a constituent meeting. In case of only one founder the Resolution mentioned above should include this information.
The constituent meeting shall make the following decisions:
- establish the company;
- approve the articles of association;
- approve the valuation of the property or property rights to be invested into the share capital (if the share capital is to be paid in kind);
- elect the management bodies.
4.4 Founding Agreement
The founders of a joint stock company shall conclude a written agreement on establishment of the company which stipulates how joint activity related to establishment of the company shall be carried out, the amount of the share capital, categories and types of shares to be given to the founders, amount and method of payment of the shares and rights and obligations of the founders when establishing a joint stock company.
The founding agreement is an agreement on joint activity. It is required for establishment of the company only and becomes redundant from the moment of the state registration of the company.
4.5 The Articles of Association
The articles of association of a joint stock company shall include the following main provisions:
- full and abbreviated firm's name;
- domicile of the company (the domicile of the company determines the place of its state registration);
- type (closed or open);
- number, nominal value and category of shares;
- shareholders' rights;
- amount of share capital and how it shall be paid for;
- structure and powers of the management bodies and order of their decision making;
- order of preparation and holding of general shareholders' meetings;
- information on branch and representative offices (if any);
- order of liquidation;
- some other provisions set forth by the law.
In addition a joint stock company with foreign capital is required to have provisions on the following issues in its articles of association.
- field of activities of the company;
- shareholders names and the number of shares they own;
- decisions of the shareholders' meeting requiring unanimous vote.
The articles of association may include also other provisions provided they do not contradict the Russian laws. It should be noted that the articles of association are the main document in which provisions governing the rights and obligations of the shareholders are included instead of, for example, a separate shareholders' agreement.
4.6 Registration
The company is considered established as of its state registration. For registration of the company an application accompanied with the founding agreement, the articles of association, minutes of a constituent meeting, confirmation of the necessary payments and documents on the founders (trade register extract, articles of association and a letter of reference from their bank) shall be submitted to the registration authority.
The registration authority shall examine the founding documents within 21 days of their submission and register the company within that time if all the documents are in order.
The state registration of companies in Russia is carried out by the State Registration Chambers. The relevant State Registration Chamber is that of the company's domicile, but a company with foreign investment exceeding 100.000 roubles shall be registered at the State Registration Chamber of the Ministry of Economy of Russia in Moscow.
Having registered the company with the State Registration Chamber, it should additionally be registered with a number of local authorities.
5. Corporate issues
5.1 Share Capital
The share capital of the company is the aggregate nominal value of the outstanding shares. The minimum share capital of a closed joint stock company is 100 times the minimum wage and of an open joint stock company 1000 times the minimum wage i.e. at the time of drafting this article the minimum share capital is 8490 roubles or 84900 roubles (approximately USD 560 or 5600 respectively).
The share capital may be paid for both in cash and in kind. In kind contribution may, in some cases, have tax and customs consequences. Subsequently the share capital may be increased or decreased. At least 50 % of the issued share capital must be paid before the company may be registered.
5.2 Limits in shareholdings
The holdings of one shareholder may be limited by the Articles of Association. The number of shareholders in a closed joint stock company may not exceed 50. In case it exceeds 50 a closed joint stock company shall be transformed into an open joint stock company within one year or dissolved.
5.3 Management of the Company
5.3.1 General Shareholders' Meeting
The highest management body of a joint stock company is the general shareholders meeting. Its exclusive authority covers i.e. amendments to the Articles of Association and the authorised share capital; elections of the members of the Board of Directors and the auditing commission; liquidation and reorganisation of the company and confirmation of the annual final accounts.
In most cases decisions in the general shareholders meeting may be made by a simple majority of votes. Certain decisions, however, require a majority of at least 3/4 of votes. In particular, such decisions are those on amending the articles of association, reorganization of the company, liquidation of the company and on conclusion of transactions of considerable value in comparison with the net assets of the company. Therefore, 75% of shares give the controlling interest in the company, 50% + 1 share are sufficient for adoption of most decisions and 25% + 1 share allows to block decisions requiring qualified majority.
The articles of association may contain provisions on issues that shall be decided unanimously or by qualified majority (3/4) of votes.
5.3.2 Board of Directors
A joint stock company may have a board of directors comprising at least 2 members. In case there are at least 50 shareholders in the company, it shall have a board of directors. The board of directors takes care of the general management of the company except for the matters referred to the exclusive authority of the general shareholders' meeting. If a board of directors is not formed, its functions are performed by the general shareholders meeting.
The board of directors shall be elected by the annual general shareholders meeting in the order provided by the law and the articles of association for a term of one year. The board of directors is headed by a chairman to be elected either by the general shareholders meeting or the board itself.
5.3.3 General Manager and Directors
The only mandatory executive body of the company is the general manager who takes care of routine management of the company. In addition to the general manager also a collegial body of directors (a directorate) may be formed. In that case, the directorate is headed by the general manager. Nomination and dismissal of the executive bodies and their members shall be made by the general shareholders meeting or the board of directors. A director may be dismissed at any time without a notice period.
5.4 Transfer of Shares
Shares belonging to a shareholder may be freely transferred (sold, donated, exchanged, invested into share capital of third companies, etc.).
However, in case of contemplated transfer of shares by sale or exchange to a person who is not a shareholder of the company, all shareholders of a closed joint stock company have the right of first refusal with respect to such shares at the price agreed between the seller and the contemplated buyer. The right of first refusal does not, therefore, exist in case of donation, inheritance etc. transfer free of charge, nor does it exist in an open joint stock company.
6. Comparison between a limited liability company and a joint stock company
In comparison a limited liability company is less bureaucratical but the joint stock company is a more stable form of co-operation of at least two shareholders and its decisive advantage over the limited liability company when there are more than one shareholder may be that a shareholder is not entitled to require a part of the assets of the company to be paid back if he withdraws from the company. This in turn secures the interests of the other shareholders.
This article contains general information on the subject matter and shall not be relied upon for a specific case. Specialist advice should be sought with respect to any specific circumstances.
