Russian business law: the essentials

4.1.2.1.5. Affiliates

The company is considered as an affiliate if another company (or economic partnership) has an opportunity to govern a company’s decisions. Such an opportunity may arise, for example, from the participation of the main company in the affiliate’s charter capital, or from a contract between the main and affiliate companies.

The main company of the partnership, in some cases, bears a joint liability for the affiliate’s transactions. Such liability arises from the transactions signed by the affiliate in pursuance of the instructions, or with the consent of the main company or economic partnership (there are exceptions from this rule). Furthermore, in case of the affiliate's insolvency (bankruptcy) due to the fault of the main economic partnership or the company, the main company bears the subsidiary liability for the affiliate’s debts (Article 67.3 of the CC of the RF).

4.1.2.2. LLC

4.1.2.2.1. The Legal Nature of LLC

A LLC is one of the most common organizational legal forms of legal entities in Russia. One of the main reasons for this is that the Federal Law on Limited Liability Companies regulates many aspects on facultative basis, allowing the legal entity’s bodies to resolve various issues at its discretion. This work is done internally at the company.

Charter capital[36] is divided into participatory interests belonging to the LLC participants. The company is not liable for its participants' obligations. As a general rule, the participants are not liable for the company's obligations either.

Generally, a LLC is not obliged to publish its reports.

4.1.2.2.2. The Features of the Establishment of A Limited Liability Company

In accordance with Clause 1 of Article 89 of the CC of the RF, the LLC founders are obliged to sign an LLC foundation agreement in writing, which shall define some aspects of the company’s foundation.

This contract is not a constituent document of the LLC.

The term for the payment of shares in the charter capital (that has been established by the agreement) may not exceed 4 months. Within this period, the founders are obliged to pay the shares fully.

4.1.2.2.3. LLC Participants

Both individuals and legal entities can be participants to an LLC. The number of LLC participants shall not exceed 50. At the excess of this limit, the LLC must be transformed into a JSC. The LLC may have a single participant (a company having a single participant cannot appear as such a participant, according to Article 7 of the FL on Limited Liability Companies).

4.1.2.2.4. The Transfer of Participatory Interest in LLC’s Charter Capital

As a general rule, the transfer of an LLC’s participatory interest from one person to another is allowed. Upon alienation of the entire participatory interest, this person ceases to be the company's participant. In case a participatory interest is sold to a third party, the other participants of an LLC have the priority to buy the share or part of the share (the seller must first offer its share to the other participants). An LLC charter may include the necessity to obtain the consent of all participants for the alienation of a share. Furthermore, the charter may establish a ban on the shares' alienation.

4.1.2.2.5. LLC Profit Distribution Among the Participants

At the general meeting of an LLC, participants may decide to distribute the company's net profit among its participants quarterly, biannually, or annually. Distribution is made in proportion to the participant's interest in the charter capital. The company's charter may provide other proportions of profit distribution. The FL on Limited Liability Companies contains a list of circumstances under which profit distribution is prohibited.

4.1.2.2.6. Increase and Reduction of LLC Charter Capital

An increase of LLC charter capital may be implemented:

i) at the expense of the company’s assets (without the implementation of additional deposits),

ii) at the expense of LLC participants’ additional deposits,

iii) at the expense of the deposits of the persons entering the company as a participant, if it is not prohibited by the company’s charter.

A reduction of LLC charter capital is implemented by:

i) the reduction of the shares par value for all participants of the company,

ii) the redemption of the company's shares.

4.1.2.2.7. Contributions to the Company’s Assets

The general meeting of participants may oblige all of the participants of an LLC to make contributions to the company’s assets; these contributions do not change the sizes and par value of the participants’ shares in the charter capital (and do not increase the company's Charter Capital). Such contributions are made by all participants in proportion to their shares, unless otherwise stated in the charter.

4.1.2.2.8. LLC Management Bodies

LLC Management Bodies are:

i) The General Participants Meeting

The general participants meeting is the highest management body of an LLC. All of the company’s participants have the right to participate in it. During the general participants meeting, most of the important issues concerning the LLC’s activities can be addressed and resolved.

ii) Board of Directors (Supervisory Board)

The terms "board of directors" and "supervisory board" are synonyms. The formation of a board of directors (supervisory board) in an LLC is not obligatory.

The company's charter determines the competence of the board of directors (supervisory board), taking into consideration the Federal Law on Limited Liability Companies.

iii) A Sole Executive Body

The sole executive body manages the company's current activities. The general meeting of shareholders or the board of directors (supervisory board) elects a sole executive body, which shall be accountable to them.

iv) Executive Board

Forming an executive board is not obligatory for an LLC. The appointment of executive board members is within the competence of the general participants meeting or the board of directors (supervisory board). The chairman of this body is a person holding a position in the sole executive body.

v) An Audit Committee (Auditor)

Forming an audit committee is obligatory for a company which has more than 15 participants. The general participants meeting of the LLC appoints a member to the audit committee. The company’s audit committee (auditor) has the right to carry out inspections of company’s financial and economic activities, and has access to all documentation concerning a company’s activities at any time. The company’s audit committee (auditor) shall carry out an inspection of company’s annual reports and balance sheets, before their approval by the general meeting of participants of the company.

4.1.2.3. Joint Stock Company (JSC)

4.1.2.3.1. The Legal Nature of a JSC

The JSC is one of the most common organizational-legal forms of legal entities in Russia. Its charter capital[37] is divided into shares belonging to the JSC’s participants. The company is not liable for the shareholder’s obligations. The shareholders are usually not liable for the company’s obligations either, except in a situation when they have not fully paid for their shares.

Public JSC, as well as a non-public JSC with more than 50 shareholders, are obliged to disclose information in accordance with the Federal Law on Joint Stock Companies.

4.1.2.3.2. The Features of the Establishment of a JSC

In accordance with the Clause 1 of Article 98 of the CC of the RF, founders of a JSC are obliged to execute a contract among themselves upon the founding a JSC, which shall define some aspects of the company’s creation. Such a contract must be concluded in writing.

This contract is not a constituent document of the JSC.

4.1.2.3.3. The Shareholders

Both individuals and legal entities may be JSC participants. The JSC may have a single shareholder (another company having a single participant cannot appear as such a shareholder, in accordance with Clause 6 of Article 98 of the CC of the RF).

4.1.2.3.4. The Shares

A public company has the right to allocate shares, and issue securities which are convertible to shares, through open subscription. A non-public company does not have the right to offer (to an unlimited group of persons) such securities for acquisition.

A non-public company may provide for in its charter the pre-emptive rights of the shareholders to the acquisition of shares being alienated by another shareholder (on paid transactions). Additionally, the charter may include a requirement to obtain the consent of stockholders for the alienation of the shares.

The JSC has the right to allocate several types of shares, as well as special types such as preferred shares. The JSC charter specifies the dividend amount and/or the cost paid, in the event of a company’s liquidation of preferred shares. The preferred shares do not grant the right to vote at the general shareholders’ meeting. An exception to this rule is for meetings when certain issues are being considered, such as making amendments and additions to the company's charter, limiting the rights of the preferred share owners, as well as other issues.

4.1.2.3.5. The Payment of Dividends

The general shareholders’ meeting may decide to pay dividends to the shareholders on a quarterly, biannually, or annual basis.

4.1.2.3.6. The Increase and the Reduction of JSC Charter Capital

The increase of charter capital may be implemented:

i) by increasing the share’s par value, or

ii) by issuing additional shares.

A reduction of the charter capital is implemented by:

i) the reduction of the share’s par value, or

ii) the acquisition of a part of the shares, with the purpose of reducing their total number.

4.1.2.3.7. JSC Management Bodies

JSC management bodies are:

i) The General Shareholders’ Meeting

The general shareholders’ meeting is the highest management body of a JSC. All shareholders have the right to participate in it. The most important issues of the JSC’s activities are addressed by the general shareholders’ meeting.

ii) Board of Directors (supervisory board).

Forming a board of directors is not obligatory for a JSC, which has less than 50 shareholders with voting shares. The general shareholders’ meeting elects the members of the board of directors (supervisory board) by a cumulative vote. The responsibilities of a company’s board of directors (supervisory board) includes the resolution of issues of the general management of company’s activities, except for the issues that federal law assigns to the responsibility of the general meeting of shareholders.

iii) A Sole Executive Body

The sole executive body manages the company’s current activities. The general shareholders’ meeting or the board of directors (supervisory board) elect the sole executive body, which is accountable to them.

iv) Executive Board

The forming of a executive board is not obligatory for a JSC. If a executive board has been formed, it shall manage the current activities of the JSC together with the sole executive body. The general shareholders’ meeting or the board of directors (supervisory board) elect the executive board, which is accountable to them.

v) An Audit Committee

The general meeting of shareholders elects an audit committee. It controls the company’s financial-economic activities.

4.1.3. Economic Partnership

There are two types of economic partnerships in Russia:

i) general partnerships,[38]

ii) limited partnerships (special partnership)

Only individual entrepreneurs and profit organizations can be participants (partners) of the partnerships. The partners carry out entrepreneurial activities on behalf of the partnership.

The participants jointly bear subsidiary liability for the obligations of the partnership. The person can be a participant of only one general partnership. Management of the general partnership’s activities is carried out with the consensus of all partners, unless otherwise provided by the founding agreement. Due to the aforementioned features, Russian entrepreneurs rarely create economic partnerships.

A founding agreement may provide the following models for the management of general partnership:

i) by all partners jointly (decision-making requires the consent of all partners),

ii) by each partner separately,

iii) by individual partners.

In accordance with Clause 3 of Article 73 of the CC of the RF, the participant of a general partnership has no right to execute transactions on its behalf, for the benefit of the third parties without the consent of the remaining participants if such transactions are similar to the subject of general partnership’s activities. The profit and losses are distributed among the partners in proportion to their contributions, unless otherwise specified by the founding agreement.

The partner has the right to transfer his share to the third party only with the consent of all partners.

In the case when a single participant remains in a partnership, the partnership is subject to liquidation, if the last partner does not transform the partnership into an economic company.

4.1.3.1. Limited Partnership

A limited partnership, along with the general partners, includes the investors (limited partners) therein, who do not participate in the management of the partnership, as well as in conducting its affairs, and bear the risk of the losses from the partnership's activities, within the limits of their contributions to the capital. Any individuals and legal entities can be investors to a limited partnership. Their number may not exceed 20.

4.1.4. Peasant (Farmer) Economies[39]

Currently in the Russian legislation peasant (farmer) economy refers to:

i) the association of citizens (the citizens can conclude an agreement on the establishment of a peasant (farmer) economy, and carry out joint entrepreneurial activities without the formation of a legal entity),

ii) a legal entity.

4.1.4.1. The Peasant (Farmer) Economy as an Association of Citizens

The Federal Law on Peasant (Farmer) Economies determines a peasant (farmer) economy (or simply “farming”) solely as an association of citizens, and not as a legal entity. In accordance with Clause 1 of Article 1 of the aforementioned law, a peasant (farmer) economy includes “the citizens bound by the alliance and/or property, having property goods in common and jointly performing production and other economic activities (production, conversion, storage, transportation and implementation of agricultural products), based on their personal participation.” At the same time, the norms intended for the profit organizations are applied to the peasant economy, without the formation of a legal entity.

In accordance with Article 6 of the Federal Law on Peasant (Farmer) Economies, the property of the peasant economy may include a land plot, farm improvements, ameliorative and other constructions, productive and working cattle, birds, agricultural and other machinery and the equipment, vehicles, stock, and other property, necessary for the implementation of the economy’s activities. The property of the economy belongs to its members on the right of joint ownership, unless otherwise provided by an agreement between them. The shares of the economy’s members, in terms of share property, are established by an agreement between the economy members. Fruits, production, and incomes gained by the economy as a result of its property's use are considered as common property of all members.

4.1.4.2. The Peasant (Farmer) Economy as a Legal Entity

The CC of the RF establishes that the persons who have concluded an economy founding agreement have the right to create a legal entity. The property of such an economy is determined by the right to ownership. Members bear a subsidiary liability for the obligations of the economy.

The peasant economy is a highly unpopular form of entrepreneurial activities in Russia, due to the personal liability of its participants and undeveloped legislation.

4.1.5. Industrial Cooperative

An industrial cooperative is a legal entity created by its participants, for joint industrial and other economic activities, based on their personal labor and other participation. The participants of industrial cooperatives contribute shares to the organization's property. The number of participants cannot be less than five.

The profits of the industrial cooperative are divided among its participants based on the labor participation of each of them in the activities of the organization. The law and the charter can provide another order for profit division. Industrial cooperative members bear subsidiary liability for the obligations of the cooperative, in accordance with the Federal Law on Industrial Cooperatives.

The industrial cooperative is also an unpopular organizational-legal form of legal entity in Russia due to personal liability of its participants, and the need for their labor participation in the affairs of the legal entity.

4.2. The State and Municipal Unitary Enterprises

The state and municipal unitary enterprises (or simply “the unitary enterprises”) are legal entities, which may be founded only by a state[40] or the municipalities. Their property is respectively in a state or municipal ownership. The unitary enterprises have special rights to such property (see below).

There are two types of unitary enterprises:

i) a state enterprise

A state enterprise has the economic management rights of the property assigned to it. Generally, the right to economic management grants the state enterprise with an opportunity to independently dispose of the movable property. For the disposal of real estate, the consent of the owner shall be obtained (state or municipality).

ii) a treasury enterprise

A treasury enterprise has the operational management rights of the property assigned to it. This means that a treasury enterprise must obtain the owner’s consent for the disposition of any property. The production made by the treasury enterprise is an exception (it can independently dispose of it, unless otherwise provided by the legal acts).

The legal capacity of unitary enterprises is limited to the purposes of the activities stated in their charters.

Unitary enterprises are created mainly for rendering services to the population in those spheres where the activities of individual entrepreneurs are inadmissible or impossible (for example, public transportation, the production of goods being important for the state and society, etc.).

5. The Non-profit Organizations

A minimum amount of charter capital for non-profit organizations is not established, except for those organizations whose charter provides for a possibility of exercising activities which may generate income. The minimum amount of the charter capital for this kind of legal entity is 10,000 rubles (Clause 5 of Article 50 of the CC of the RF). In any case, private institutions have no restrictions set by the law on the size of the charter capital.

5.1. The Non-Profit Corporate Organizations

i) A consumer cooperative is a membership-based, voluntary association of citizens and legal entities, aimed at satisfying their material and other needs, being carried out by way of assembling their share contributions.

ii) A public organization is a voluntary association of citizens, who have united in the order stipulated by law on the basis of common interests, for the purposes of satisfying spiritual or other non-material needs, representing and protecting common interests and to achieve other purposes, which are not contradictory to the law.

iii) A public movement is a public association consisting of participants who are pursuing social, political and other socially useful purposes, supported by the participants of the public movement.

iv) An association (union) is an association of legal entities and/or citizens based on voluntary or, in the cases established by the law, on obligatory membership, and are created to represent and protect the common interests, including professional interests, to achieve socially useful purposes, as well as other purposes which are not contradictory with the law, and are of a non-commercial nature. Non-commercial partnerships are also referred to as associations (unions).

v) A fellowship of real estate owners is a voluntary association of real estate owners, created by them for the purposes of joint ownership, use, and within the limits set by law, disposal of the property, which by virtue of the law are under their common property or in common use, as well as the achievement of other goals which are not contradictory with the law.

vi) The Cossack communities are an association of citizens, entered in the state register of the Cossack societies in the Russian Federation, created to preserve a traditional way of life, and manage the culture of the Russian Cossacks, as well as for other purposes stipulated by law, with obligations of carrying out state or other services, as undertaken in accordance with the law.

vii) The communities of Aboriginal Smaller Peoples of the Russian Federation are voluntary associations of the citizens belonging to the Aboriginal Smaller Peoples of the Russian Federation, and are united by kinship and/or territorial and neighborhood principles, aiming at the protection of the primordial habitat, preservation and development of the traditional way of life, housekeeping, crafts and culture.

viii) The Chambers of Advocates are non-profit organizations based on obligatory membership, and are created in the form of the Chamber of Advocates of the Subject of the Russian Federation, or the Chamber of Advocates of the Russian Federation Federal, for the realization of the purposes provided by the legislation on advocacy.

ix) The advocacy formations, being legal entities[41] are non-profit organizations, created in accordance with the advocacy legislation aiming at the implementation of advocacy by the participants.

5.2. Non-Profit Unitary Organizations

i) A fund is a unitary non-profit and non-membership organization, founded by the citizens and/or legal entities, on the basis of voluntary property contributions and pursuing charitable, cultural, educational, or other social or socially useful purposes.

ii) An institution is a unitary non-profit organization created by the owners for the implementation of managerial, socio-cultural, or other functions of a non-commercial nature. A founder is the owner of the property of an established institution. It gets the right to operational management of the property assigned by an owner to an institution, and is acquired by an institution on other bases in accordance with the CC of the RF.

iii) An autonomous non-profit organization is a unitary non-profit and non-membership organization, established on the basis of property contributions of citizens and/or legal entities, aiming at the rendering of services in the spheres of education, health care, culture, science, and other non-commercial activities.

iv) A religious organization is a voluntary association of the citizens of the Russian Federation, permanently and lawfully residing in the territory of the Russian Federation, or other persons, formed by them, aimed at joint confession and spreading of the faith, and registered as a legal entity in accordance with the law (a local religious organization), unions of these organizations (the centralized religious organization), as well as an organization, created by the given union and/or managing or coordinating body of the union. This is in accordance with the law on freedom of conscience and religious associations, and these organizations are aiming at the joint confession and spreading of the faith.

v) The Public-Legal Companies