Russian business law: the essentials

As a general rule, profit organizations[28] have general legal capacity.[29] This means that they can be engaged in any activity, if this activity does not contradict with the legislation. Non-profit organizations, on the contrary, possess only special legal capacity. This means that they can be engaged only in the activities which correspond to the subject and purpose of the activities fixed in their charters.

3.3. Corporations and Unitary legal entities

The CC of the RF allocates 13 types of corporations and 8 types of unitary organizations.[30]

A corporation consists of members. Members of any corporation form the highest body of the management of the corporation, and due to this, have certain rights and duties in relation to the legal entity.

Basic rights of members are (Article 65.2 of the CC of the RF):

i) the right to manage a corporation;

ii) the right to receive information on the corporation’s activities. The principal duties of members are:

i) participation in the formation of the corporation’s property,

ii) participation in the adoption of decisions required for the company to continue its existence.

The following rights are also attributed to profit corporations’ members:

i) the right to receive income from the activities of the corporation,

ii) the right to receive a part of the property that is remaining after the liquidation of organization.

Other rights and duties of corporations’ participants are established in special laws (Federal Law on Limited Liability Companies, FL on Joint Stock Companies, FL on Non-Profit Organizations, and others).

The participants of a corporation are named members, shareholders or just participants depending on a specific type.

Unitary legal entities have no members.

3.4. Establishment of Legal Entities

The legal entity is considered established from the moment the record is entered into the Unified State Register of Legal Entities (USRLE).

The procedure for the establishment of any legal entity consists of the following steps:

i) drawing up necessary documents,

ii) submission of documents to the registering body,

iii) receipt of documents confirming registration of the legal entity.

Below we will consider each of these three stages in more detail.

3.5. Preparation of Necessary Documents

The list of documents which should be submitted to the registering body is established in Article 12 of Federal Law on Registration. These documents are:

i) a statement on state registration,

ii) a decision on the establishment of a legal entity,

iii) constituent documents,

iv) an extract from the register of foreign legal entities of the respective country of origin (or any other proof of equal legal force) of the legal status of the foreign legal entity being a founder,

v) a document confirming the payment of the state fee.

In addition, the following shall be submitted at the establishment of a non-profit organization in the appropriate body:

i) information on founders in duplicate,

ii) a statement for the inclusion of a non-profit organization in the register of non-profit organizations which are carrying out the functions of a foreign agent, as for non-profit organizations which are carrying out functions of a foreign agent.

3.5.1. Application of State Registration

The application form for the state registration of a legal entity is approved by Order No. MMB-7–6/25, at the Federal Tariff Service (FTS) of Russia, dated January 25, 2012 (appendix No. 1 to this order, form No. P11001). The application form shall be filled out strictly in accordance with the registration requirements, which are approved by the specified order of the FTS of Russia (Appendix No. 20, sections I and II).

3.5.2. Decision on the Establishment of a Legal Entity

The decision on the establishment of a legal entity is made, as a rule, by a protocol which is formed in the results of the meeting of founders. The protocol is composed in a written form, made in a single document and is signed by all of the participants of the meeting.

Provisions of Chapter 9.1 of the CC of the RF shall be complied while holding a shareholder meeting. This chapter is devoted to the decision-making at the meetings, as well as the invalidity of such decisions. This chapter refers to the meetings, including the meetings of the legal entity’s founders.

If the legal entity has only one founder, the decision on the establishment of a legal entity is made by him/her individually, and is not formalized in the form of a protocol. Such a document will be called, for example, “The Decision on the Formation of the Joint Stock Company ‘Alfa’.”

At the establishment of a non-profit organization, the decision on the establishment is provided in duplicate.

3.5.3. Constituent Documents

One of the constituent document of any legal entity is its charter. An exception is the fellowships constituent document, which is the foundation agreement. Rules of the CC of the RF on charters (clause 1 of Art. 52 of the Civil Code of the RF) are applicable to the foundation agreement of the association/fellowship.

The charter of the legal entity must necessarily contain the following information:

i) The Name

Legal entities have full and/or reduced names. The name must contain an indication on the organizational-legal form of the legal entity. Some federal laws establish additional requirements for the name of the legal entity. For instance, the Federal Law on Education establishes that the educational organization must have an indication on type of the educational organization in its name (Clause 5 of Article 23).

ii) The Organizational-Legal Form

iii) The Location

The location is a locality where the legal entity was registered (Clause 2 of Article 54 of the CC of the RF). There is no need to indicate the full address of the legal entity in the charter.

iv) The order of management of the legal entity’s activities

Under the management order in the CC of the RF, there is a list of the managing bodies of the legal entity, with an indication of their powers.

Additionally, in the charters of non-profit organizations, and in cases provided by law, as well as in the charters of profit organizations, the subject and the purposes of legal entities’ activities have to be defined (Clause 4 of Article 52 of the CC of the RF). The subject means the list of the variety of the activities of the organization. The legislation sets other requirements on the content of the charter, depending on its organizational-legal form, and the variety of conducted activities.

The charter of legal entity may contain any provisions which do not contradict to the legislation of Russia.

The CC of the RF allows the possible use of sample charters. However, currently the state authorities have not approved of any sample form of a charter.

Constituent documents are provided to the registering body in duplicate (in triplicate in case of establishing a non-profit organization).

3.5.4. An extract from the register of foreign legal entities of the respective country of origin of the founder (or any other proof of equal legal force), as to the legal status of the foreign legal entity

This document is formalized according to the legislation of the foreign state in which a founder (the given legal entity), is registered.

3.5.5. A Document Confirming the Payment of the State Fee

The document confirming the payment of the state fee is issued by the bank or other organization which paid the state fee. Currently, the fee for the state registration for the creation of most legal entities is 4000 rubles (Article 333.33 of the Tax Code of the RF).

3.6. Submission of Documents to the Registering Body

While establishing a profit organization, documents shall be submitted to the territorial authorities of the Federal Tax Service of Russia. The concrete office of the FTS of Russia is defined depending on the planned location of the sole executive body of the establishing legal entity. If the founders plan to place this body in Moscow, documents must be submitted to the Interdistrict Inspectorate of the FTS of Russia No. 46 for Moscow.[31]

Documents can be submitted personally, by mail, or via the internet (the latter requires an electronic signature).

While creating a non-profit organization, documents shall be submitted to the territorial authority of the Ministry of Justice of Russia, which makes decisions on the state registration of the non-profit organization.

3.7. Receipt of the Documents by the Registering Body, Confirming the Registration of the Establishment of the Legal Entity

The state registration of the establishment of profit organizations is carried out in a period of no more than 5 business days from the date of submission of the documents to the FTS of Russia. After the specified period, the applicant can use the same address of the territorial FTS of Russia, where he/she shall be provided with certificates on state registration, and the statement on tax accounting.

At the registration of a non-profit organization, the territorial body of the Ministry of Justice is obliged to make a decision on registration within 14 business days from the date of the submission of documents. After the adoption of this decision, the territorial authority of the Ministry of Justice of Russia sends the documents independently to the FTS of Russia, which is obliged to register the organization within 5 business days. The territorial authority of the Ministry of Justice of Russia issues a certificate of state registration within three business days from the date of receipt of information from the registering body, and enters this information of the non-profit organization into the USRLE.

3.8. Reorganization and Liquidation of Legal Entities

3.8.1. Reorganization

Clause 1 of Article 57 of the CC of the Russian Federation provides 5 possible forms of reorganization:

i) Merger

At a merger of two organizations, a third, new organization is formed (formula A+B→С). Thus, the rights and duties of the existing organizations are transferred to the newly created one.

ii) Accession

One organization is absorbed by the second, thus the second continues to exist in the updated form (formula A+B→B). Thus, the rights and duties of first organization are transferred to the second one.

iii) Division

The organization ceases its existence, and with its assets, new organizations are created (formula А→B, C). Thus, the rights and duties of the existing organization are transferred to the newly created ones, according to the Transfer Act.

iv) Spin-off

A new organization is spinned from the organization, therefore the old organization continues to exist (formula А→A, B). Thus, some rights and duties of the existing organization are transferred to the newly created one, according to the Transfer Act.

v) Transformation

The organization changes its organizational-legal form (formula А→А). Thus, the rights and duties of this legal entity do not change (except for the corporate rights and duties).

The combination of various forms in the course of reorganization is allowed (for example, merger plus transformation).

The decision on reorganization is made by a general meeting of the legal entity's participants, or the legal entity's other managing body which is authorized to act in this way as per the charter. In addition to the aforementioned decision, this body sets the conditions of reorganization and implementation, and approves of the transfer act.

After entering into the USRLE a record about the commencement of the reorganization procedure, a notice about the reorganization is published twice in mass media (once a month). The creditor of the legal entity, whose claim rights have been established before the publication of the first notice of the reorganization of the legal entity, has the right to (1) demand early payment of the corresponding obligation by the debtor in a judicial proceeding, or (2) at the impossibility of early payment, demand a termination of the obligation, and compensation for the related losses (Clause 2 of Article 60 of the CC of the RF).

3.9. Liquidation

The decision on liquidation is made by the general meeting of legal entity's participants, or the legal entity's other managing body which is authorized to do so, as per the charter. This body appoints a liquidation commission (or an individual liquidator), to establish the order and terms of liquidation. From the moment of the appointment of the liquidation commission, all powers of management of the liquidated legal entity are thereby transferred.

The liquidation commission publishes a message in mass media about the legal entity's liquidation, as well as about the procedure and term of the claims application made by its creditors.

In the event that the liquidated organization has insufficient property to satisfy all creditors' claims, the liquidating commission is obliged to appeal to the arbitration court with an application for bankruptcy. The Civil Code of the RF establishes the priority order for the satisfaction of creditors' claims in Article 64.

A legal entity which hasn't submitted documents on reporting, and has not carried out transactions on bank accounts within 12 months, is subject to liquidation (Article 64.2 of the CC of the RF).

3.10. State Registration of Reorganization and Liquidation

A legal entity is considered reorganized from the moment of the state registration of legal entities that have been created as a result of reorganization. At the reorganization of a legal entity, for matters of accession, the first entity is considered reorganized from the moment the record is entered into the USRLE, concerning the termination of the activities of the acceded legal entity (Clause 4 of Article 57 of the CC of the RF). The legal entity is considered liquidated from the moment the corresponding record is entered into the USRLE.

State registration procedures of reorganization and liquidation are established in the Federal Law on Registration. In general, they are similar to the registration procedure of the legal entity's establishment.

3.11. Managing Bodies; Responsibility of Authorized Officers; Branches and Representations

3.11.1. Managing Bodies of the Legal Entity

Legal entities of various organizational-legal forms have various managing bodies. As a rule, among the managing bodies of a legal entity, the following are included:

i) the highest collegial body (in corporate organizations, this is the general meeting of participants),

ii) the sole executive body,

iii) the executive board,

iv) a revision commission.

The instructions for the obligatory formation of bodies are contained not only in federal laws dedicated to separate organizational-legal forms, but also in laws regulating different types of activities. Thus, Article 26 of the Federal Law on Education stipulates that the educational organization, regardless of its organizational-legal form, must form a collegial management body, which is a general meeting of the employees of the organization.

The corporation’s charter may stipulate that the powers of the sole executive body are given to several persons. Additionally, it is possible to create several sole executive bodies that act independently from each other in a corporation. These rules have been introduced in the CC of the RF recently, therefore the practical application of these rules is still in development.

The natural person (general director, president, chairman), individual entrepreneur (managing director), and legal entity (management company) can act as the sole executive body of the corporation.

3.11.2. Responsibilities of the Person Authorized to Act on Behalf of a Legal Entity; Responsibilities of the Members of the Executive Board of the Legal Entity; and Persons Determining the Actions of the Legal Entity (so-called "removal of a corporate veil")

A person who is granted with the right to act on behalf of a legal entity, as per a legal act or a constituent document, bears liability for losses caused to this legal entity by his/her fault. Conditions of the responsibility of the named person are dishonesty or unreasonableness of its actions. In similar cases, responsibility is also incurred by members of executive board who voted for the decisions of the legal entity which led to losses; or dishonestly evaded from participation in voting. Finally, persons, who have the opportunity to determine the actions of the organization, are liable for losses of the legal entity caused by their guilty actions (Article 53.1 of the CC of the RF).

3.11.3. Representations and Branches of the Legal Entity

Any legal entity has the right to have representations and/or branches. According to the CC of the RF, the representation is a separate division of the legal entity, and is located outside of its primary address. The representation can:

i) represent interests of the legal entity,

ii) exercise their protection.

The branch differs from representation by exercising any functions of the legal entity, including the functions of representation (Article 55 of the CC of the RF).

4. Certain Types of Legal Entities

4.1. Corporate Profit Organizations

4.1.1. General Provisions on Economic Partnership and Companies

Economic partnerships and companies have many features in common. Paragraph 2 of chapter 4 of the CC of the RF contains the general provisions on partnerships and companies. These norms appeared in the CC of the RF recently, and they should be taken into account when dealing with partnerships and companies.

4.1.1.1. Charter (Share) Capital of Economic Partnership and Companies

The charter (share)[32] capital of economic partnerships and companies is divided into parts (shares in a limited liability company and economic partnerships, stocks in the joint stock companies), which give corporate rights to the owners of these shares. Charter capital is the minimum possible size of property of the legal entity expressed in a monetary equivalent. The size of charter capital is established by the legal entity itself and is specified in its charter. Besides, information on the size of legal entity's charter capital is contained in USRLE, and anyone can receive information on it, having ordered an extract from the register.[33]

The share size (number of stocks) at the stage of the creation of the legal entity depends on the cost of the property which the participant brought to the charter capital of the legal entity.

4.1.1.2. Contributions to Property of Economic Partnerships and Companies

Unless otherwise stated in law, as a contribution to the property of the company, participants can bring:

i) money,

ii) goods,

iii) shares (stocks) in the charter (joint) capitals of other economic partnerships and companies,

iv) state and municipal bonds,

v) exclusive rights, other intellectual rights, and rights by license contracts, which are subject to a monetary assessment.

4.1.2. Economic Companies

4.1.2.1. General Provisions on Economic Companies

Issues of interaction of economic companies’ participants (among themselves and with the company), issues of management of economic companies, receiving of profits by participants, establishment, reorganizations, and liquidations of economic companies (corporate-legal issues of economic company’s activities) are regulated by norms of the CC of the RF, as well as by the Federal Law on Limited Liability Companies and the Federal Law on Joint Stock Companies. Currently, Russian corporate law is in a period of deep reformation. Recently the norms of the CC of the RF devoted to legal entities (chapter 4 of the CC of the RF) were essentially changed. The main changes were made by the Federal law No. 99-FZ (as of May 5, 2014), and came into force on September 1, 2014. According to Clause 4 of Article 3 of Federal Law No. 99-FZ (as of May 5, 2014), legal acts (all laws and subordinate legislation) apply only to the extent that they do not contradict with the changes made to the CC of the RF by the present federal law. This should be taken into account when dealing with the FL on Limited Liability Companies and the FL on Joint Stock Companies.

4.1.2.1.1. Types of Legal Entities

In the Russian Federation, the following types of the legal entities exist:

i) Limited Liability Company (LLC),

ii) Joint Stock Company (JSC).

The joint stock companies, in turn, may be public and non-public.

4.1.2.1.2. Public and Non-public Legal Entities

An LLC is a non-publicnon-public legal entity. The JSCs may be both public and non-public. The JSC is deemed public when its shares (or securities convertible into shares) have been publicly placed by an open subscription, or have been publicly converted on the conditions established by the laws on the securities. If the charter and the firm name of the legal entity indicate that the company is public, then the rules on public companies are applied (Clause 1 of Article 66.3 of the CC of the RF).

Many of the issues concerning the activities of the public and non-publicnon-public JSCs are regulated in different ways. This must be considered while conducting business.[34]

4.1.2.1.3. The Legal Entities’ Charter Capital

The charter capital cannot be less than the established minimal threshold (the minimum amount of the charter capital), and this is different for the various organizational-legal forms of legal entities. It is established by the federal laws on the profit of legal entities' separate organizational-legal forms (FL on Limited Liability Companies, FL on Joint Stock Companies). Moreover, the federal laws regulating the implementation of separate types of activities (for example, banking, insurance and others) may establish increased requirements as to the minimum amount of the company’s charter capital.

The minimum amount for the charter capital of LLCs and non-public JSCs is 10000 rubles; and 100000 rubles for public JSCs (the second paragraph of the Clause 1 of Article 14 of the FL on Limited Liability Companies, Article 26 of FL on Joint Stock Companies).

If at the end of the second and each subsequent fiscal year, the legal entity’s net assets value is less than its charter capital, the company is obliged to reduce its charter capital. If the net assets value is less than the minimum amount of the charter capital, it is subject to liquidation.

At a vote on various issues, the number of votes of the company's participants depends on the size of their shares in the charter capital (for LLC) or the stock number (for JSC). There are few exceptions to this rule.

4.1.2.1.4. Corporate Agreement

Some or all of the company's members may sign a corporate agreement/shareholders agreement,[35] which will regulate the implementation of the participants’ various corporate rights (in addition to the law provisions). Such an agreement may contain, in particular, provisions obliging the members to:

i) vote in a certain way at the general meeting of the company's participants,

ii) concertedly implement other actions on the company's management,

iii) acquire or alienate shares in the charter capital (stocks) at a certain price or upon the occurrence of certain circumstances,

iv) abstain from the alienation of shares (stocks) before the occurrence of certain circumstances.

A corporate agreement is executed in writing by drawing up a single document. The terms of the corporate agreement concluded by the members of non-public company are deemed confidential and are not subject to discloser, unless otherwise provided for by the law. The shareholders’ agreement concluded by the shareholders of public JSC shall be publicly disnon-public to the extent necessary, in accordance with the Federal law on JSC. Currently, the norms establishing the terms of the relevant information disclosure are absent in the Federal Law on JSC. A company must be notified about the execution of a corporate agreement.