The ongoing process of Russian corporate reform continues in an effort to streamline the operations of companies and bolster protections for investors. Russia is currently considering important changes to the Civil Code that will affect the types and forms of legal entities available for business activity. These are currently being considered by the Russian parliament and could be enacted later this year, although the exact timing is unclear as of this writing.
Public and Private Companies
Currently, Russian law distinguishes between different forms of stock companies, namely a closed stock company (zakritoe aktsionernoye obschestvo, or ZAO) and an open stock company (otkritoe aktsionernoye obschestvo, or OAO). The shares of an OAO may be freely bought and sold, and this form of entity is typically used for companies listed on a stock exchange. In a ZAO, existing shareholders have a “right of first refusal” to purchase shares being sold by a fellow shareholder to a third party. There are additional differences between a ZAO and an OAO, mainly relating to corporate governance rules.
Under the proposed amendments, there will be three principal forms of commercial companies: the public stock company (publichnoye aktsionernoye obschestvo, or PAO), the nonpublic stock company (nepublichnoye aktsionernoye obschestvo, or NAO), and the limited liability company (obschestvo s ogranichenii otvestvenosstiu, or OOO). The PAO and NAO are brand new forms of companies; the OOO is not new, but will be subject to certain new rules.
In brief, a PAO will have shares or securities convertible into shares that are offered to the public or listed on a stock exchange. The proposed Civil Code provisions will establish certain new requirements for PAOs, including a prohibition on limiting the number of shares that may be owned by a single shareholder, the appointment of a board of directors with at least five members, and arrangements for a professional registrar to maintain a shareholder register and verify compliance with procedural and voting rules at shareholder meetings. These changes are clearly intended to address past complaints about corporate governance in Russian public companies.
All stock companies not meeting the requirements for a PAO will be NAOs. The NAO is relatively flexible with respect to internal corporate governance rules. For example, the company charter of a NAO may specify that certain key decisions have been delegated to the board of directors, such as approval of annual reports and financial statements, incorporation of and participation in subsidiaries, determination of priority areas of business, and certain other matters. In a PAO, only shareholders may decide these matters. However, other rules remain mandatory for all stock companies.
Interestingly, new NAOs will not have one key feature of ZAOs: there is no required “right of first refusal” on shares sold by fellow shareholders. Presumably, this feature can be included, if desired, by agreement of the shareholders.
Both PAOs and NAOs will be required to engage an independent auditor to audit and confirm the accuracy of their annual financial statements. This may substantially raise the costs of operating a stock company and may lead many private companies to use the OOO form instead.
The new Civil Code provisions do not change the fundamental aspects of OOOs under Russian law, but will implement certain changes to management and operating rules. For example, a person appointed as the “sole executive body” (e.g., the general director or president) or a member of a “collegial executive body” (e.g., a management board that operates the company) may not also serve on the board of directors. However, OOOs will be subject to relatively few such mandatory rules and will likely remain the most popular and cost-effective option for private companies.
Once the new Civil Code provisions become effective, new companies will be required to utilize only the new forms of legal entities. Existing companies will not be required to convert to the new forms or “reregister” immediately. Instead, a transition period until July 1, 2013, will be established for existing ZAOs to convert to OOOs or production cooperatives. Other existing companies will be required to reregister their charters and company names to bring them into compliance with the amended Civil Code only when they make further amendments to their charters. However, even before such reregistration occurs, in case of any conflict, existing charter provisions will be superseded by the provisions of the amended Civil Code.