On December 30, 2008, the President of the Russian Federation signed the Federal Law No. 312-FZ “On Amendments to the First Part of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation” (Law No. 312-FZ). Amendments were introduced to the Civil Code of the Russian Federation, Federal Law No. 14-FZ “On Limited Liability Companies” dated February 8, 1998, “Fundamental Principals of Russian Legislation on Notaries” No. 4462-1 dated February 11, 1993 and Federal Law No. 129-FZ “On State Registration of Legal Entities and Individual Entrepreneurs” dated August 8, 2001.
The Law No. 312-FZ introduces significant changes to the existing regulatory framework related to establishment and operation of the limited liability companies.
The amendments enter into force on July 1, 2009. Prior to this date limited liability companies will be regulated by the current legislation. After the amendments have entered into force it will be necessary for existing limited liability companies to bring their constitutional documents into compliance with the new legislation.
Set forth below is an overview of the key changes to the law.
A Single Constitutional Document
In accordance with the Law No. 312-FZ limited liability companies will have only one constitutional document - the charter. From July 1, 2009 existing limited liability companies’ foundation agreements will no longer be valid as the companies’ constitutional documents. However, the legal entities and persons intending to establish a limited liability company will be obliged to enter into an agreement on establishment of the company setting forth the procedure of carrying out of joint activity of the founders for the establishment of the company, the size of its charter capital, the size and nominal value of the participatory shares of each of the founders, as well as the procedure and the terms of payment for each of the participatory shares.
The agreement on establishment of a limited liability company will not be the company’s constitutional document and will not be required to be amended thereafter during the company’s existence.
Limitation of Withdrawal Right
Currently, a participant may withdraw from a limited liability company at any time. In such event the company must pay to the withdrawing participant the actual value of its participatory share. Under the current legislation such right cannot be excluded by contract.
Under the Law No. 312-FZ the right of the participants to withdraw from the company is limited. Participants of limited liability companies will only be able to withdraw from the company if their company’s charter expressly provides a right of withdrawal. Additionally, sole participants in limited liability companies will be unable to withdraw from the company at all.
Notary Certification for Transfer of Participatory Shares
The Law No. 312-FZ has significantly changed the procedure for transfer of participatory shares. Starting from July 1, 2009, most transactions related to transfer of participatory shares will need to be certified by a notary. Failure to obtain a notary certification of the transaction documents will render the transaction invalid. The notary will be responsible for verifying the authority of the seller to sell the participatory share and will be liable for damages caused by any failure to do so. In connection with this, notaries will now be required to obtain minimum insurance coverage for liabilities of 1,500,000 Roubles. Notaries also will be obliged to notify both the registration authorities and the company itself of any changes in the participants’ composition.
Participatory shares in the charter capital of a limited liability companies shall transfer to their acquirer upon certification of the transaction documents by the notary. In cases defined by the Law No. 312-FZ where a notary certification of the transfer of participatory share is not required (for example transactions involving the transfer of participatory shares from participants to the company itself), the participatory share shall be deemed to have been transferred upon entry of the relevant amendments into the Unified State Register of Legal Entities. The legal position, where a transfer of a participatory share is subject to satisfaction of conditions precedent (for example, obtaining of the antimonopoly approval), is unclear.
Pledge of Participatory Shares
Agreements for the pledge of participatory shares in a limited liability company will also need to be certified by a notary. Failure to obtain a notary certification of a pledge agreement will render the underlying transaction invalid. The notary will file the application on making relevant amendments to the Unified State Register of Legal Entities and also provide the company and the registration authorities with copy of the application and the pledge agreement.
Fixed Participatory Share Purchase Price
The charter of a limited liability company may fix the purchase price for its participatory shares as the amount equal to that which all company’s participants would pay if they exercised their pre-emption rights. A charter may stipulate that the purchase price of a participatory share is a certain fixed sum of money or alternatively, it may set out the criteria and basis on which to determine the value of the participatory share (the value of the net assets of the company, book value of the company’s assets on the last reporting date, net profit of the company, etc). In this case any of the participants will be able to acquire the participatory share offered to third parties at such previously determined purchase price.
Pre-emption Right to Acquire Part of Participatory Share
Under the Law No. 312-FZ the charter of a limited liability company may provide for the possibility of the company’s participants or the company itself exercising its/their pre-emption rights to acquire the participatory share partially, i.e. to acquire a part of the participatory share the size of which shall be determined at the acquirer’s discretion. The remaining part of the participatory share may be sold to a third party on conditions communicated to the company and its participants or at the price not less than previously determined by the charter.
The Law No. 312-FZ allows participants of a limited liability company to enter into an agreement to regulate corporate governance of the limited liability companies and the relationship among the participants (i.e. “shareholders” agreements). Under the previous law, the agreements of that kind were thought to be unenforceable. The scope for such agreements seems broad as the text contains non-exclusive wording. Specifically, the new law states that such agreements may regulate the exercise of voting rights, the sale of a participation share at a price defined in the agreement and/or upon the occurrence of certain events, and to suspend the right to sell a participatory share until the occurrence of a specified event.
Register of Participants
Under the current law, the list of participants and details of their respective participatory shares is recorded in the company’s charter. In practice, this means the charter must be amended and re-registered each time there is a change in the participants’ composition.
Pursuant to the Law No. 312-FZ a limited liability company will have an obligation to maintain a Register of participants containing a list of current participants. This registration mechanism is similar to that that applies to joint-stock companies where the company’s executive body (or other body specified in the company’s charter) is required to maintain a Register of participants (rather than record changes in the participants’ composition in the charter). It appears that the “other body” appointed to maintain the Register of participants (if the executive body does not do so) must be an internal body and the amendment to the law does not permit limited liability companies to hire external registrars.
In the event of a conflict between the information contained in the Register of participants and the information contained in the Unified State Register of Legal Entities the information contained in the Unified State Register of Legal Entities shall prevail. In case any disputes arises in respect of the reliability of information contained in the Unified State Register of Legal Entities the right to a participatory share shall be determined on the basis of an agreement or other document confirming title of the participant to the participatory share.
The constitutional documents of an existing limited liability company will have to be brought into compliance with the Law No. 312-FZ by January 1, 2010. Starting from July 1, 2009 these documents will be valid only to the extent they do not contradict the amended legislation. We would, therefore, recommend that new version of the charter be prepared in advance and adopted on or soon as possible after July 1, 2009.
This legal update is issued to inform Norton Rose (Central Europe) LLP clients of legal developments, which may affect or otherwise be of interest to them. The comments above do not constitute legal advice or opinion, and should not be regarded as a substitute for legal advice in individual cases.