Until recently, Russian authorities mandated that financially unstable joint stock companies (JSCs) which are required to decrease their charter capital or be liquidated under Russian law, may not subsequently increase their charter capital. However, in 2012 this view was finally reconsidered when the Federal Service on Financial Markets (the FSFM) addressed this issue in its Informational Letter No. 12-DP-03/12363 on March 27, 2012 (the Letter).
The FSFM has confirmed that if a JSC whose assets have fallen below its charter capital increases its charter capital, the increase per se will not be considered a violation of Russian law. This change in the FSFM’s position allows greater flexibility for JSCs to resolve their financial problems, as this issue frequently arises in Russia. It should be noted, however, that the Letter does not have any binding effect on Russian courts. Thus, it is yet to be determined when Russian courts will adopt this new approach and reflect it in court practice.
Actions Required to Be Taken if Net Assets Are Negative or Insufficient
Under Russian law, the value of the net assets of a JSC may not be lower than the amount of the charter capital of that JSC. This requirement applies to JSCs starting from the second fiscal year after incorporation and for each consecutive fiscal year. If the value of the JSC’s net assets falls below the amount of the charter capital, Russian law provides for certain corporate actions that a JSC must take in order to rectify the deficiency. These actions vary depending on whether the amount of the charter capital meets the statutory requirements for the minimum amount of charter capital:
- If the Net Assets Exceed the Minimum Statutory Threshold
If, at the end of the second or any subsequent fiscal year, the net asset value of a JSC falls below the amount of its charter capital (the Year of the Decrease) but still exceeds the minimum amount of the charter capital required by law, the JSC is required to take the following actions. First, the JSC must ensure that the annual report of the JSC includes information on the state of its net assets and the measures that the JSC intends to take to increase its net assets. Further, during the year following the Year of the Decrease (the Reporting Year), the JSC is required to monitor, and if necessary, report on the status of its net assets. In particular, if at the end of any quarter of the Reporting Year the difference between the net assets and the amount of the charter capital exceeds 25%, the JSC must publish information on the decrease of its net assets. Publishing the information is required in order to inform the JSC’s creditors that there has been a decrease in its net assets and to provide them with the option to demand acceleration of the obligations of the JSC or, if early performance is impossible, termination of such obligations and compensation for damages. If, after the Reporting Year, the issue with the net assets remains unresolved, the JSC should either decrease its charter capital or call for its liquidation. The decision on the course of action of the JSC must be adopted within six months after the end of the Reporting Year.
- If the Net Assets Fall Below the Minimum Statutory Threshold
If the amount of a JSC’s net assets falls below the minimum amount of the charter capital required by law, then the JSC must call for its liquidation. The decision to liquidate must be adopted within six months after the end of the Year of the Decrease.
New Approach to Increasing the Charter Capital
Previously, it was not entirely clear whether a JSC, which under Russian law was required to decrease its charter capital or be liquidated in such instances, could increase its charter capital and issue new shares in order to rectify the situation. The FSFM took a conservative position and deemed such actions in violation of Russian law, even denying state registration of the issuance of new shares based on those grounds.
However, the FSFM has recently reconsidered its position, as reflected in the Letter. The FSFM has clarified that financial difficulties should not affect the legal standing of a JSC.
Under Russian law, the failure to remedy the financial state of a financially troubled JSC may only trigger the following consequences: (i) the creditors of the company may demand acceleration of the obligations or, if early performance is impossible, termination of such obligations and compensation of damages; and (ii) tax authorities and other authorized persons may claim liquidation of the JSC in court. However, it should be noted that the risk of liquidation in court is generally remote. As a general rule, courts tend to deny such claims from the tax authorities if a JSC is duly performing its obligations to creditors, pays its taxes, etc. If such JSCs do not commit any gross violations of law, the courts consider the insufficient/negative level of net assets to be evidence of a distressed financial state, which should not automatically entail liquidation.
The FSFM emphasized that even if a JSC is required to decrease its charter capital or to be liquidated, it may still adopt corporate resolutions, enter into transactions and take other actions to improve its financial state. Moreover, Russian bankruptcy laws expressly provide insolvent companies with the right to increase their charter capital, which is considered a measure aimed at improving their financial state. Accordingly, a joint interpretation of the requirements of Russian bankruptcy and corporate law suggests that if a JSC that is facing financial difficulties decides to increase its charter capital, such actions per se should not be considered in violation of Russian law.