Overview of amendments to Russian legislation

In view of recent changes to the Russian Civil Code (the “Civil Code”), Russian legislators have adopted a package of amendments to a number of federal laws, including the legislation governing joint stock companies. While certain of these amendments became effective in July 2015, a significant portion will only come into force in July 2016.

The changes are primarily aimed at providing a more detailed regulatory framework for public (PJSC) and non-public joint stock companies (JSC) and are intended to bring the provisions of the Federal Law No. 208-FZ “On Joint Stock Companies” into compliance with the Civil Code. The procedure for the conversion of a JSC into a PJSC (and vice versa) has been determined and requirements for status registration have been set out in detail.

New provisions of the legislation on joint stock companies provide for more flexibility in respect of operation and management of JSCs as compared to PJSCs. For instance, currently the pre-emptive right to purchase shares in a JSC may be exercised by the existing shareholders only if such a right is included in the charter. The charter of a JSC may require that the consent of all shareholders be obtained as a pre-condition to a sale of shares to third persons – such consent is valid within the term specified in JSC charter subject to a maximum term established by the law. The changes provide for more flexibility in determining the procedure for holding shareholders meetings in JSCs. More specific regulation is established in respect of the preference shares of JSCs, which may be issued as any of a number of types and may now also grant voting rights in respect of all or certain issues falling within the competence of the shareholders meeting – such voting rights may also be linked to certain events (e.g., the taking of a particular action by the shareholder or the company or its omission, the occurrence of an established deadline). Some new provisions are intended to improve the process of holding shareholders meetings using new technologies and the internet, in particular when convening shareholders meeting or voting at the meeting. 

The time limits in connection with convening shareholders meetings, including for notification of the meeting and determining the date for fixation of participants of the meeting were shortened.

Some additional regulations have been introduced in respect of buy-back of shares by the company and voluntary and obligatory offers for purchase of shares in PJSCs.

Amendments to several legal acts, including the Civil Code and the Federal Law “On Limited Liability Companies”, have been introduced by the Federal Law No. 209-FZ (the “Amendments”). The Amendments focus on the introduction of a template charter to Russian limited liability companies; they became fully effective as of 1 January 2016.

The notion of a template charter of a corporation was initially raised by amendments to the Civil Code in September 2014. Since then there has been only a theoretical opportunity to get a company registered with minimal effort (that is, by relying on a template charter). De facto such procedure was not available since no template was developed by an authorised state authority and no procedure set forth by the legislation.

The Amendments provide that a template charter will also be made available to existing companies— at any time a company may switch from using its unique charter to the template charter and vice versa. In order to effect this change, a resolution must be passed at a general meeting of participants with subsequent registration of the change being recorded with the Unified State Register of Legal Entities.

The Amendments are expected to be useful for small to medium-sized businesses and are targeted primarily at reducing the costs of incorporation of limited liability companies by removing the necessity of developing bespoke charters.

The process of initial registration of companies is expected to be expedited by the introduction of the Amendments. It is stated that the initial state registration of legal entities shall be completed within just three business days.

The plenum of the Supreme Court of the Russian Federation issued Resolution No. 25 dated 23 June 2015 “On the application by courts of certain provisions of Part One of the Civil Code of the Russian Federation” (the “Plenum Resolution”).

The Plenum Resolution has provided some clarifications concerning the application of Part One of the Civil Code  that could have a significant impact on court practice. It addresses a number of issues including, inter alia, the use of customary norms, registration of real estate objects and notes of objection, validity of transactions, resolutions of general meetings of shareholders/participants, representation and power of attorney.

Increase of role of court in court proceedings

It is clarified that in court proceedings the court may, at its own initiative and even in the absence of the relevant claim from the party to the dispute, acknowledge that the other party acts in bad faith and apply appropriate measures, by, for instance, refusing to grant certain remedies.

If the court establishes that the claimant has chosen an improper remedy it may, at its own initiative, bring up for discussion the question on re-qualification of the lawsuit.

Application of provisions on entrepreneurial activity to non-commercial organizations

As the civil legislation allows non-commercial organizations to be engaged in entrepreneurial activity to the extent that it conforms to the purposes for which such organizations have been established, the Supreme Court has clarified that the provisions of the legislation normally applicable to individuals/companies performing entrepreneurial activity also apply to non-commercial organizations in respect of their conduct of entrepreneurial activity.

Signing authority

Following the provisions of the Civil Code, the Supreme Court has stated that the information on the authorities of a general director (CEO) of a company or distribution of authorities between two general directors set out in the Russian State Register of Legal Entities  is sufficient for the purpose of examination of their authorities by counterparties in transactions with the company. The counterparties are not required to review the company’s charter for these purposes. The Supreme Court has also stated that any provisions of constitutional documents of a company which deal with authorities/distribution of authorities between the general directors (in case a company has more than one CEO) may not be grounds for invalidation of a particular transaction, except for the cases where the other party to the transaction knew or should have known about such restrictions with respect to the authorities.

Voluntary liquidation of a legal entity

The Civil Code contains a general provision according to which a legal entity may be liquidated under a claim by its founder (shareholder) in the event it becomes impossible to achieve the goals for which such legal entity was established, including when the business activity of the legal entity is impossible or otherwise impeded. In explaining this provision, the Supreme Court indicated that a company may be liquidated as a last resort in circumstances where there has been a long-term corporate conflict in which all of the shareholders or participants (as applicable) of that company have been involved in abusive practices which have impeded the company’s business activities.

Expulsion of a shareholder

The Supreme Court stated that a court may not enforce the claim of a shareholder seeking the expulsion of another shareholder from the company where there are grounds for the expulsion of the claimant itself.

Legal notices

The Supreme Court indicated that, unless otherwise provided by law, contract, or by customary or legal practice, a legal notice may be sent by email, fax or by any other means of communication where the sender and the recipient of the message can be accurately identified. The burden of proof in respect of the sending and receiving of a notice lies with the sender.

Invalidity of transactions

A significant part of the Plenum Resolution addresses issues related to invalidity of transactions. Amongst other things, the Supreme Court explained that tax authorities may, at their own initiative, re-characterise transactions, the status and type of business of any taxpayer and claim in court for the imposition of additional taxes where the authorities have concluded that the relevant taxpayer has decreased its taxable base due to an improper legal characterisation of a transaction.
Whereas the Civil Code contains a very broad provision under which a transaction concluded for a purpose knowingly contradicting the principles of public order and morality is null and void, the Supreme Court has clarified that tax evasion per se may not lead to the characterisation of a transaction as contradicting the principles of public order and morality.

Also covered by the Plenum Resolution are the consequences of a sham transaction, that is a transaction concluded for the purpose of covering an actual transaction. Furthermore, it is clarified that if a court establishes that the parties to a transaction have concluded that transaction for a lower amount to actually cover the one for a higher amount the court qualifies the transaction as having been concluded for the higher amount.