Law reviews
Another set of amendments to the RF Civil Code reform became effective on 1 September 2014: Legal Entities
General Provisions
A new classification of legal entities depending on whether their founders are entitled to be their members or not is introduced to law. The founders and members of corporate legal entities, unlike those of unitary legal entities, have a membership right in respect to such corporate legal entities. It is enshrined that members of corporations enjoy corporate rights with respect to such corporations. Previously law regarded such rights as rights under an obligation.
Pursuant to law the following entities are regarded corporations: business partnerships and companies, peasant (farm) holdings, economic partnerships, producers' and consumers' cooperatives, non-governmental organisations, associations (unions), real estate owners partnerships, Cossack associations, communities of native minorities of the Russian Federation.
Among those legal entities where founders do not become their members and acquire no membership right (unitary legal entities) laws lists: state and municipal unitary enterprises, funds, institutions, autonomous nonprofitmaking organisations, public companies.
However, for the corporations, unlike unitary legal entities, law stipulates a number of special provisions in a particular way regulating rights and obligations of the members of corporations, types of management bodies of corporations and their powers. Specifically, law stipulates new ways of structuring of the corporate governance bodies: it is permitted to form both several sole executive bodies acting independently and confer powers of the sole executive body to several persons acting jointly. Moreover, both an individual and a legal entity may act as the sole executive body.
Law provides for an exhaustive list of legal forms available to nonprofitmaking organisations. Some legal forms came to be considered as types of other forms. In addition, this innovation leads to multiplying of the levels of regulation of any given form of a legal entity. For example, it is enshrined that a non-profit partnership is a form of association (union) being at the same time a corporate organisation. This means that the following provisions apply to the relations associated with non-profit partnership management: 1) those provisions of the Federal Law “On Nonprofitmaking Organisations” governing non-profit partnerships in particular and nonprofitmaking organisations in general that are in line with the RF Civil Code; 2) provisions of the RF Civil Code governing management in non-profit corporate organisations; 3) provisions of the RF Civil Code governing management in corporations; 4) provisions of the RF Civil Code governing associations (unions) management.
However, it is important to remember that in case of controversies between the provisions of the RF Civil Code and those of other Federal Laws, the provisions of the RF Civil Code shall prevail, unless otherwise set out by the Code.
The following legal forms are abolished: additional liability company (provisions of the RF Civil Code on limited liability companies apply to the existing ones) and closed joint stock company (provisions of the RF Civil Code on joint stock companies apply to the existing ones). When the charters of such companies are amended for the first time they should be brought in compliance with laws, however it is important to note that no re-registration procedure is required for a closed joint stock company or an additional liability company. Taking into account that on the official web-site of the Federal Tax Service engaged in state registration of legal entities there is information about just 952 additional liability companies posted, abolishing of this legal form will not affect Russian business adversely.
On the contrary, some legal forms were added to the RF Civil Code. Among them, for example, there are both brand new forms (real estate owners partnerships, combining previously known partnerships of housing owners and horticultural partnerships) and those transferred to the RF Civil Code from the Federal Law “On Nonprofitmaking Organisations” (Cossack associations, communities of native minorities).
Law provides for the possibility to restore corporate control by the members of profitmaking organisations. The member who has involuntarily lost his interest in a corporation as a result of illicit actions of other persons shall have a right to claim repossession of his interest and compensation of losses at the expense the persons guilty in the loss of his interest. At the same time law confers court with broad discretion authority: court may refuse repossession of the interest if this may lead to "unfair deprivation of other persons of their rights or entail exceptionally adverse social and other consequences significant for population". In those cases it will be court who establish the size of fair compensation payable to the affected member.
For the first time liability of a person having actual powers to direct actions of a legal entity (for example, through instructions to the general director) for losses guilty caused to a legal entity is introduced by law.
Reorganisation
Law provides for a number of changes related to reorganisation of legal entities.
For example, now lawmaker expressly indicates that it is possible to carry out a combined reorganisation by combining different forms of reorganisation for all types of legal entities. Previously such a possibility was expressly made available to joint stock companies only.
In addition, simultaneous reorganisation of several legal entities (including those existing in different legal forms) becomes possible subject to admissibility of transformation of such a legal form into another one.
The reorganisation shall be deemed finalised upon state registration of legal entity. Nowadays it is impermissible to complete reorganisation prior to the expiry of a three month period granted to appeal the reorganisation decision. The foregoing period commences on the date when entry on the commencement of reorganisation is made into the Unified State Register of Legal Entities. Therefore, the minimum term for reorganisation, which used to be defined through the term for notification of the creditors of the legal entity being reorganised via mass media, equals three months now.
The introduction of the above-mentioned term is associated with special provisions related to the invalidation of reorganisation decision added to the RF Civil Code. However, the only consequence of recognition of the reorganisation decision invalid shall be compensation of damages to the member of the legal entity who voted against such reorganisation. In this event law stipulates neither liquidation of the created legal entities, nor invalidation of transactions conducted by them. This lawmaker decision might rest on the endeavour to ensure stable civil circulation. Moreover, losses shall be compensated jointly by legal entities created in course of reorganisation and persons who acted in bad faith when they made a reorganisation decision.
We note that the procedure for reorganisation of a legal entity in the form of transformation was simplified. Nowadays when transformation is carried out it is not a must to notify creditors through publishing information on the reorganisation of the legal entity. The creditors of the legal entity changing its legal form are not any longer granted a right to claim early discharge of obligations since obligations of the legal entity to the creditors remain unchanged.
The term "division balance sheet" vanishes from civil legislation; all obligations of legal entities in course of reorganisation shall be reflected in the instrument of transfer.
Some innovations are related to the guarantees of the rights of creditors of the legal entity being reorganised. Here lawmaker followed suit of reduction of the possibilities available to the creditors under the reorganisation process. For example, a provision on the creditor's right to claim early discharge of obligations by the legal entity being reorganised or, in case such discharge is impossible, to claim early termination of obligations and compensation to the creditor of the losses may now be changed upon agreement of the parties.
In addition, the creditors provided with sufficient security shall any longer have no right to claim early discharge or termination of obligations and compensation of losses and the legal entity being reorganised was granted a possibility to make sufficient security available to the creditor within 30 days instead of performance of such creditor's claim regarding early discharge or termination of obligations.
For the first time the RF Civil Code allows recognising reorganisation failed. Such recognition is possible with respect to reorganisation of corporations. Lawmakers have outlined two situations when reorganisation of corporation can be deemed failed: (a) registration authority was filed with documents containing knowingly false information about reorganisation and (b) the situation when a reorganisation decision was not made by the members of the corporation.
The consequences of recognition of the reorganisation failed are aimed at the retrieval of the legal entity. Such consequences relate both to introducing reversing entries to the Unified State Register of Legal Entities, reverse distribution of interests among members and cancellation of the succession in title.
Liquidation
Changes to the RF Civil Code touch upon the provisions governing liquidation of legal entities. Obligations of those who made decision on liquidation of a legal entity are refined. For example, the term for notification of state authority on the adopted decision was précised; nowadays it equals 3 business days from the date when the liquidation decision was made. In addition, there were introduced provisions on joint and several obligation of the members of the legal entity to carry out (at their own expense) actions focused on the liquidation of the legal entity being liquidated in case assets of such a legal entity are insufficient.
Some provisions added to the RF Civil Code aims at the increase in liability of liquidation commission. Liability of the members of liquidation commission in the form of compensation damages caused to the creditors or founders (members) of the legal entity being liquidated is established.
Lawmaker provided for the possibility and established procedure for the distribution of assets of the legal entity discovered after its liquidation. Such a distribution is permissible within five years upon the liquidation and shall be carried out by the administrator appointed by court upon considering application regarding assets discovered.
Business partnerships and companies
The wording related to state participation in business partnerships and companies is amended. The effective version of the Civil Code provides that state and local authorities have no right to be members of business companies and special partners of special partnerships, unless otherwise established by law. The new version states that state and local authorities shall have no right to participate in business partnerships and companies in their own name. State and local authorities, anyway, participate in business companies not on their own name, but on the name of the Russian Federation, its constituent territories and municipalities.
Law sets a requirement pursuant to which when the charter capital of a business company is paid there should be contributed funds in the amount not less than the minimum size of the charter capital. The amount exceeding the minimum size of the charter capital may be paid in the form of non-monetary contributions to be mandatory assessed by an independent appraiser irrespective of their value (at the moment an independent assessment is required only in case the value of non-monetary contribution exceeds RUB 20,000).
Law establishes that, unless otherwise provided by laws on business partnerships, the founders of business partnerships must pay at least three fourth of its charter capital prior to state registration of the company and the remaining part of the charter capital of the business company - within the first year of the company's operation. The introduction of this provision in the new version of the Civil Code spawns doubts about the adequacy of Russian lawmakers. You see, amendments to the joint stock companies law lifting the requirement towards the payment of the charter capital prior to state registration of the company were introduced back in 2001. On the day when amendments to the Civil Code were approved there was adopted a law excluding from the law on limited liability companies and the Civil Code itself a requirement on the payment of fifty per cent of the charter capital prior to state registration. It remains under wraps why lawmaker needed to adopt two polar opposite laws on the same day.
Business companies are divided into public and nonpublic. A joint stock company shall be deemed public if its shares and securities convertible into its shares are publicly placed (through public offering) or publicly listed on the terms and conditions set by laws on securities. A joint stock company shall be deemed public if its charter and company name have a respective reference. All other joint stock companies and limited liability companies shall be deemed nonpublic.
A procedure for holding the general meetings of the members of business companies became more complicated. Decisions made at the general meeting and members of the company who were present when such decisions were made shall be confirmed by a person maintaining the shareholders' register, notarised (in case of nonpublic joint stock companies and limited liability companies) or confirmed in any other way provided by the charter or unanimous decision of all members (in case of limited liability companies).
Law introduces a mandatory audit for all joint stock companies (nowadays such requirement is provided for open joint stock companies and closed joint stock companies who publicly place their bonds or other securities).
Law provides for the corporate agreement concept combining the existing shareholders' agreement and agreement with respect to exercising of rights of members of a limited liability company.
A corporate agreement is an agreement entered into by and between the members of the business company (or any of them) with respect to exercising by them of corporate (members') rights under which they undertake to exercise such rights in a certain way or refrain from exercising them (waiver them) including voting in a certain way at the general meeting of the members of the company, acquire or dispose of interests (shares) in its charter capital at a specific price or subject to the occurrence of specific circumstances or refrain from disposal of interests (shares) until specific circumstances occur. Those members of business company who have entered into the corporate agreement must notify the company about the conclusion thereof, however the content of such an agreement shall not be disclosed. Information about the corporate agreement entered into by the shareholders of a public joint stock company must be disclosed within the limits, in accordance with procedure and on the terms and conditions provided by law on joint stock companies and information on the content of the corporate agreement concluded by the members of a non-public company shall not be disclosed and is confidential. If the corporate agreement of a nonpublic company provides for the scope of authorities of the members disproportional the size of their interests in the charter capital of the company, the information on the conclusion of such an agreement and the scope of authorities of the members of the companies provided therein shall be reflected in the Unified State Register of Legal Entities. The corporate agreement may also be concluded between the members of the company and its creditors or other third parties.
Law has amended the legal regime of subsidiaries and parent companies (partnerships): it is provided that a parent business partnership or company is jointly and severally with the subsidiary liable not only for those transactions that are entered into by the latter in order to perform mandatory instructions of the parent company, but also for those that are entered into just with consent of the parent business partnership or company. However, the concept of dependent business companies is stricken off from the Civil Code.
Those provisions that regulate the consequence of the situation when the value of net assets of a business company becomes less than the value of its charter capital are amended. In this case the current version of the RF Civil Code prescribes to reduce the charter capital; as an alternative the new version thereof offers to increase in the value of net assets. At the same it is noted that if the value of net assets becomes less than the minimum size of the charter capital the company shall be liquidated; literal interpretation of law in this case do not permit the value of net assets to be increased.
The new version of the RF Civil Code provides for a mandatory collegial governance body (supervisory or other board) in all public joint stock companies (nowadays a joint stock company, where the number of shareholders is less than fifty is not obliged to establish such a body). In addition, in public joint stock companies it is prohibited to limit the number and value of shares or maximum number of votes belonging to one shareholder. Public joint stock companies are prohibited to place preferred stock with the nominal value less than the nominal value of ordinary stock.
Law prescribes to reflect in the Unified State Register of Legal Entities the information that the company is comprised of one shareholder.
Speaking about changes to special regulation governing partnerships we note that law limits number of special partners (limited partners) in a special partnership: they shall not exceed twenty partners. The objectives pursued by such a limitation are unclear. The limitation might be introduced in order to impede using special partnerships for the purposes of concealing the relationships associated with co-funding construction and making endless chain schemes.
Nonprofitmaking legal entities
Now nonprofitmaking organisations can be established only in those legal forms that are expressly listed in the RF Civil Code (an exhaustive list is being introduced). Therefore, it is believed that in the near future, for the reason that the said amendments become effective, the number of legal forms of nonprofitmaking organisations will be reduced significantly.
Nonprofitmaking corporate organisations are established in the following legal forms:
• consumers' cooperatives including housing, housing and construction and garage cooperatives, horticultural, market-gardening and dacha consumers' cooperatives, friendly societies, credit cooperatives, hire funds, agricultural consumer cooperative;
• non-governmental organisations including political parties and trade unions (labour union organisations) established as legal entities, social movements, public self-regulatory bodies, spatial public bodies;
• associations (unions) including, inter alia, non-profit partnerships, self-regulated organisations, unions of employers, trade unions, cooperatives and non-governmental organisations, industry and trade chambers, notary and law associations;
• real estate owners partnerships, including, inter alia, partnerships of housing owners;
• Cossack associations registered in the state register of Cossack communities in the Russian Federation; and
• communities of native minorities of the Russian Federation.
To the extent related to regulation of activities of nonprofitmaking organisations it is important to note the creation of a new legal form of nonprofitmaking organisation: a real estate owners partnership. A real estate owners partnership shall be a voluntary association of owners of real property (premises in a building, including in an apartment house or several houses, residential buildings, dacha houses, horticultural, market-gardening and dacha land plots, etc.) established by them for the purposes of co-ownership, joint use and dispose of property (things) within the limits established by law and by virtue of law being in their common ownership or common use and in order to achieve the objectives provided by law (item 1 of Article 123.12 of the RF Civil Code). As a matter of fact, the said real estate owners partnership combines such legal forms as partnerships of housing owners (section VI of the House Code of the Russian Federation) and horticultural, market-gardening and dacha non-profit partnerships (Federal Law No. 66-FZ “On Horticultural, Market-Gardening and Dacha Non-Profit Unions of Nationals” dated 15.04.1998).
As far as it relates to nonprofitmaking unitary organisations, according to the new version of the RF Civil Code they include:
• funds, including public and charity funds;
• institutions including state institutions (including state academies of science), municipal institutions and private (including public) institutions;
• autonomous nonprofitmaking organisations;
• religious organisations; and
• public companies.
Generally, we note that provisions on nonprofitmaking organisations were not drastically changed and modified. Regulation covering many legal forms at the level of the RF Civil Code became more explicit: lawmaker tried to enshrine general provisions on nonprofitmaking organisations to the maximum in the RF Civil Code intensifying the codified nature of civil legislation.
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