Outline Memorandum
Russian business vehicles (legal entities) formation

This memorandum is intended to provide a brief outline of major legal issues related to establishment of Russian business vehicles (including fully-held subsidiaries) enjoying status of an independent legal identity and is therefore confined to the category of vehicles generally referred to in the Russian civil law as "commercial" or profit-generating (business) legal entities.


1 Russian commercial (business) legal entities: overview

Generally, Russian commercial (or business) legal entities may be formed either as partnerships or as companies.

Unlike UK partnerships, partnerships formed under the Russian civil law possess a separate legal identity; therefore, the principal difference between partnerships and companies formed under the Russian civil law lays with the rule of members' (shareholders') and partners' liability allocation and limits. In partnerships, partners bear unlimited liability under the partnership obligations, whereas in companies members' (or shareholders') liability is limited to the value of participatory interests (shares) in the company equity capital held by a company member (shareholder) (with the exception of Supplementary Liability Companies (see Clause 3 (a) below) as well as a few statutory reservations affecting all companies regardless of corporate form).

Although there are very few cases where the law or subordinate legislation provide that certain business shall be operated though a company only, the combination of unlimited liability rule and the immature professional liability insurance system results in the partnerships being significantly less popular with Russian entrepreneurs and foreign investors as compared to companies. Besides, tax treatment of partnerships under Russian tax law is exactly the same as that of companies, which adds to the lack of popularity of partnerships as compared with other forms of legal entities allowed to be formed under the Russian civil law.

We therefore have further limited the scope of this memorandum to companies only.


2 Formation procedure and timeframe

Russian companies are formed by way of state registration and, as matter of Russian civil law, legally become fully operational as from the date of such registration. Nevertheless, in practice certain additional filings and official registrations are required for a newly established Russian business to be fully launched. In particular, a new company shall obtain tax registration, statistics registration and state non-budget funds registration (Pension Fund, Social Security Fund and Mandatory Medical Insurance Fund).

Statutory timeframe for registration of a newly established Russian company is five business days. However, taking into account certain preparatory work preceding filing of a company documents for state registration as well as additional filing and registration requirements referred to above, launching of a new Russian company normally requires 2 - 4 weeks. It should be further taken into consideration, however, that Government authorities and agencies involved in formation of new Russian companies are frequently failing to observe statutory time limits which results in extended formation schedule.

Moreover, as shall be discussed in Clause 8 hereof, launching of business through an already established company may be further delayed in case transacting of such business shall require a license (special permit).


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.


4 Equity (registered) capital

(a) General

Russian corporate law determines minimum size of equity (registered) capital a company may be established and operated with. Registered capital of a company may not be subsequently decreased to a size below the statutory minimum; moreover, in an event the company' net assets' aggregate value shall drop below the equity capital statutory minimum at the end of the second or any subsequent financial year, such company shall be subject to liquidation (voluntary or involuntary).

Equity (registered) capital may be formed in whole or in part by payment of money or by contributing other property (including property rights); however, certain in-kind contributions may be restricted by law and/or company constitutive documents. Moreover, in certain cases determined by law in-kind contributions shall be subject to evaluation by an independent certified auditor.

A foreign investor may pay up his participation interest (shares) in a Russian company's equity (registered) capital either in Rubles or in foreign currency; payment in foreign currency may be exercised directly from the investor's account with a foreign bank, while payment in Rubles would require a special Ruble account (type "K" account) to be opened by such foreign investor with an authorized Russian bank. Opening of type "K" accounts involves registration of a foreign investor with Russian tax authorities and therefore increases overall company formation time. It should be noted, however, that, despite the unambiguous Central Bank permission for foreign investors to pay up their participations in Russian companies in foreign currency, there is a relatively small amount of banks that would provide such service. Therefore, whenever payment in foreign currency is anticipated an advice should be solicited from a local registration agent or a law firm prior to selection of a bank the newly established Russian company should keep its accounts with.


(b) Limited Liability Companies

Equity capital statutory minimum size - 100 minimum wages (currently equal to RUR10,000).

At least 50% of the equity capital shall be paid up before the company documents are filed for state registration with the balance to be paid up within one year from the company formation.


(c) Joint-Stock Companies

Equity capital statutory minimum size for Closed JSCs is 100 minimum wages (currently equal to RUR10,000), for Open JSCs - 1,000 minimum wages (currently equal to RUR100,000).

At least 50% of the company stock shall be paid up within three months from the company formation (state registration) with the balance of outstanding stock to be paid up within one year from the company formation. All of company shares issued at the time of its formation shall be subscribed for by the company founders (incorporators); no public offering or placement is allowed at that stage.


5 Bank accounts and settlements

Russian companies may open and operate settlement accounts in Rubles and foreign currency with domestic banks. Opening of accounts with foreign banks outside the Russian Federation is subject to prior consent of the Russian Central Bank (with the exception of accounts opened to operate a foreign representative office).

Ruble settlements are not limited in any way. Settlements in foreign currency are subject to currency (exchange) control, and in a number of cases may only be performed upon a prior consent of the Russian Central Bank or the Russian Ministry of Finance.

In case of LLCs it should be noted that a bank account shall be required event before the company formation process is finalized, as at least 50% of the company equity (registered) capital shall be paid up prior to filing of the company documents for state registration (provided such payment is anticipated to be performed with money rather than by in-kind contribution). Therefore, a relevant Russian bank shall open an interim bank account that may only be used for the purposes of a new company registered capital formation; once the company formation is completed and relevant documentation is filed the bank, the interim account shall be converted into a current (settlement) account.


6 Address

A company formed under the Russian law is required to have a definite address in the Russian Federation. An investor may opt for any of the two possibilities generally available in the market, in particular:


(a) "Real" office

In an event a company is formed to transact in the Russian Federation any "tangible" business requiring an actual office, location of such office may be used as the company address for registration purposes (subject to a lessor's consent).


(b) "Nominal" office

In case a company is established to perform holding or similar functions not requiring an actual office in the Russian Federation a "nominal" office may be used. "Nominal" office services are provided by a wide range of local agents, however certain degree of care should be exercised in contracting one as only a few are offering fully legal product, including safekeeping of company documents and confirmation of company location upon official inquiry; optional services may also include mailing address and fax facility.


7 Corporate governance in Russian companies

Regardless of a form which a Russian company is incorporated in its corporate governance structure should be composed of at least two management bodies: Members' (Shareholders') General Meeting (the supreme governance body) and an Executive Body (represented by either a sole General Director or a General Director jointly with a Management Board; members of the Management Board, however, are normally not allowed to act for and on behalf of the company and to bind it in any way unless authorised to do so by a power of attorney issued by the General Director). Board of Directors is optional for LLCs, Closed JSCs and Open JSCs with the total number of holders of issued and outstanding shares does not exceed 50; should a Board of Directors be created, it shall be vested with supervisory functions rather than management ones (like members of the Management Board, members of the Board of Directors may not legally bind the company otherwise than on the basis of a power of attorney).

Russian corporate law extensively regulates authority of each of the management bodies forming corporate governance structure as discussed above. In particular, the law provides for a definite list of matters forming exclusive authority of a company Members' (Shareholders') General Meeting and (in case of JSCs) Board of Directors; re-adjustment or delegation of such matters by company articles or memorandum or by any separate instrument of authority is explicitly prohibited by law (except where a Board of Directors is not created and its functions are by law vested with Members' (Shareholders') General Meeting).

The authority allocation approach adopted in Russian companies as described above implies that a company General Director, though vested with power to manage company's daily business and to act on company's behalf without any additional instrument of authority, remains under extensive control of the Board of Directors (if any) and Members' (Shareholders') General Meeting. The most notable examples of such control from the point of view of company business are executing of major (i.e. where contract value exceeds 25% of a company's assets) and interested party transactions.

Nevertheless, a Russian company General Director is ultimately responsible for most aspects of how business is transacted through such company, including entering into and properly performing its obligations under transactions with third parties and honouring its public duties (including tax, accounting and reporting duties, etc.). Accordingly, a General Director of a Russian company is exposed to certain administrative and/or criminal liability for public order violations committed by the company. Therefore, albeit not explicitly prohibited by law, it is rather unusual that General Director functions are vested with a nominee director, nor is it customary for the same person to act as General Director of several companies unless the same are closely inter-related or are operated as a group.


8 Licenses and authorizations

Certain categories of business (determined by law) are only allowed to be transacted in the Russian Federation subject to a special permit (license) issued by an appropriate government authority or agency. Licensing authorities vary depending on the nature of business a license is sought for, as do licensing procedures and requirements. A stamp duty is charged for processing and issue of a license.
It should be noted that transacting of a business a license if required for without such license constitutes a public order offence and is subject to administrative (and in certain cases criminal) prosecution.

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This Memorandum outlines the most fundamental legal issues related to formation of Russian companies and is not intended to substitute a comprehensive legal advice. We therefore recommend that a local legal counsel services should be contracted any time establishment of a new Russian company is being contemplated.

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