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Outline Memorandum
Russian business vehicles (legal entities) formation

3 Choice of a corporate form

Russian companies (including fully-held subsidiaries of foreign companies) may be established as either Supplementary Liability Companies (SLCs), Limited Liability Companies (LLCs) or Joint-Stock Companies (JSCs). This Section 2 summarizes major specific features of each of the corporate forms while some additional differences may be found in other Sections hereof.

(a) Supplementary Liability Companies

Russian law provides for a certain degree of similarity with respect to members' liability limitation between SLCs and partnerships. In particular, SLCs' members' liability extends beyond the value of their respective shareholdings in the company equity capital to the members' personal assets; however, such liability is nevertheless limited by a certain ratio determined by company constitutive documents and multiplied by the value of the relevant member' share value.

Otherwise, SLCs are subject to the same regulations as LLCs. Nevertheless, the supplementary liability rule discussed above makes SLCs and partnerships equally unattractive for investors; therefore, SLCs are not further discussed in this memorandum.

(b) Limited liability Companies

LLCs possess certain fiduciary features inherent in partnerships, though to a less extent than SLCs. In particular, members of an LLC, unlike shareholders of a JSC, may exercise supplementary rights and bear supplementary obligations determined by company constitutive documents or approved by unanimous vote of all company members with no regard to size or value of such members' participation interest in the company equity capital. Moreover, in circumstances stipulated by law a member of an LLC may be expelled by a court award passed on a suit filed by other members (holding at least 10% of the equity capital in the aggregate).

Maximum number of LLC members is restricted and may not exceed 50.

LLCs equity (registered) capital is composed of participation interests that do not qualify as securities under the Russian law and, therefore, LLCs are exempted from securities marker regulations (unless any debenture securities are issued). Neither public offering or placement of participation interests nor issue and placement of any securities convertible into participation interests are possible.

Participation interests may be of unequal size and value; however, all participation interests confer to holders thereof the right to vote in the company members' meeting (pro rata to the size thereof unless otherwise provided by the company constitutive documents). No different classes of participation interests may be created under the Russian law. Maximum size and/or value of participation interest held by a company member or maximum number of votes conferred by a participation interest may be restricted by the company constitutive documents.

LLCs provide for the most restrictive among other companies approach towards change of ownership structure. LLC members enjoy the statutory pre-emption right in connection with offering of participation interests to third parties and the company constitutive documents may (optionally) prohibit transfer of participation interest or any part thereof to third parties. Other forms of disposal of participation interests (including pledge thereof) are also subject to certain restrictions (both statutory and those imposed by company constitutive documents).

(c) Joint-Stock Companies

JSCs are the least fiduciary of all corporate forms available under the Russian law.

JSCs may be formed as either Closed JSCs or Open JSCs. The major differences between the two forms are:

(I) Total number of shareholders in a Closed JSC may not exceed 50;

(II) Closed JSCs are subject to lower equity capital statutory minimum size requirement (see Clause 4 (c) below);

(III) No public offering or placement of shares is allowed for Closed JSCs;

(IV) Closed JSC shareholders and, if so provided by constitutive documents, the company itself enjoy the statutory pre-emption right with respect to offering of shares to third parties;

(V) Closed JSCs are subject to less stringent information disclosure requirements.

JSCs' equity capital is formed of shares of stock (ordinary or preference). Each ordinary share confers to its holder an equal scope and volume of corporate rights; rights conferred by preference shares may differ from those attaching to ordinary shares or preference shares of a different class but should be equal within the same class of preference shares. As a rule, only ordinary shares confer the right to vote in the shareholders meetings; however, several statutory exemptions exist qualifying holders of the preference stock to vote on particular occasions. No bearer shares are allowed under the Russian law.

Shares of stock are treated as securities under the Russian law, and, therefore, JSCs are subject to a set of securities market regulations, including statutory procedures for issue, offering and placement of shares, registration of shares prospectus, redemption and conversion of shares, issue, offering and placement of convertible securities, keeping of shareholders' register, corporate information disclosure, etc.

Transfer of shares held in an Open JSC is not limited in any way. Transfer of shares in a Closed JSC to third parties is subject to other shareholders and (if so provided by company constitutive documents) the company's pre-emption right.

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