Russian legislation has traditionally been strict regarding the payment of share capital of a commercial company. Formerly, it was expressly prohibited to release a shareholder from the obligation to pay share capital, including allowing a shareholder to set-off its claims to the company against its obligation to pay its portion of the share capital. Thus, it was not possible to convert debt (of any kind) into share capital.

Conversions of Debt Related to Increases in Share Capital Permitted as of 31 December 2009

Subsequent to amendments, Russian legislation now distinguishes between payment of the initial share capital of the company and capital increases. While the initial share capital must be paid by the shareholders (no kind of release from this obligation is permitted), capital increases may be set-off by the shareholders against their claims to the company.

This method of payment of capital increases is possible in:

  • Russian limited liability companies (OOO), subject to a unanimous decision of the participants’ meeting, and
  • Russian joint stock companies (AO), but only when the additional shares are distributed through a closed subscription.

This legislative reform clearly creates wider opportunities for foreign investors, and the option of share capital increases should be taken into consideration when planning commercial transactions. The new rule entered into force on 31 December 2009.