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
|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
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
|(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
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
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
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
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
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.
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.
|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.