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Relevant Issues of Legal Status of Business Organizations in the Transition Period

As we have written in special annual edition of Analatika, in September 2014 radical amendments were introduced to the Russian civil law concerning, first of all, corporate law provisions.

The lawmaker has significantly revised structure of types of legal entities operating in the Russian Federation, and introduced new terms previously unfamiliar to the Civil Code.

The system of business organizations valid until September 1, 2014 is described in the scheme below:

In comparison with it, the new structure valid from September 1, 2014 did not become less complex, but anyway has significantly changed:

“Corporate business organizations” is a term, which in fact united two common types of business: joint stock company and limited liability company. This cumulative definition and selection among joint stock companies of public and non-public companies is derived by the Russian law from its European equivalents.

In fact, introduction of additional (and maybe this particular breakdown is now the primary) breakdown of organizations in public and non-public became the main amendment related to the system of business organizations in Russia. Though this breakdown is valid not only in relation to business organizations, in this article we will dwell precisely on them.

It is notable that all corporate business organizations, both joint stock and participatory, are broken down in public and non-public. That’s why the following scheme will be as true as the previous:

The reader for sure understands that all the foregoing is within the scope of theoretical civil law and is quite loosely related to practical corporate law, which business operating on the Russian market faces.

The first six months of new legal corporate structure of business organizations revealed a number of issues, which arise in the process of business activity. We have collected the most relevant, in our opinion, of them in order to make a kind of FAQ on actions required (or on the contrary, not required) in relation to various corporate units.

Our organization is LLC. Did anything change for us?

No, introduced amendments has not affected legal entities established as limited liability companies. However, some business owners decided not to rely on their luck and referred to our experts with this question, and as in 2009, were ready to attack the registering body armed with revised articles of association.

We work through organization established as additional liability company. Can we continue using it or are we required to establish a new legal entity?

A quite exotic situation, but sometimes it happens.

Such type of business as additional liability companies was included in the Civil Code so that participants of corporate relations had an opportunity to specify in articles of association of such legal entities proportionate (multiple) liability of incorporators (members) to creditors in the amount exceeding the size of the authorized capital. It was believed that such type of business will take intermediate position between LLC and private entrepreneurs. Their bigger asset security and opportunity for members to define limits of their personal liability to creditors were declared as the main goals of additional liability companies. In theory, it was considered that this type of business will increase attractiveness of organization for counterparties and will release its members of excessive liability.

If fact all advantages appeared to be only fiction, and registered additional liability companies were so few that it was useless to keep this type in law. By way of natural selection, additional liability companies did not survive. From September 1, 2014 provisions on limited liability companies apply to organizations operating within such type of business.

Prior introduction of amendments to the Civil Code, our company was open joint stock company. Did we now become public or non-public joint stock company?

Break down of joint stock companies in public and non-public is not directly related to the fact whether they previously were open or closed companies. The grounds for such break down lie in the existence or absence of public offering (public trading) of securities issued by such companies. The law qualifies all joint stock companies, which shares (other equity-linked securities) are offered by way of public subscription or are publicly traded on terms specified in the law on securities as public companies.

As lawmakers themselves state, it was deemed that quite small number of joint stock companies will be public, and this category will include large companies. However, it appeared that features of public joint stock companies may be interpreted quite broadly.

The Bank of Russia has dispelled some doubts. Thus, if shares of a joint stock company were placed by way of public subscription, but then redeemed prior September 1, 2014, then as of the date amendments introduced to the Civil Code come to force, the Bank shall recognize such joint stock company as non-public. Also, the Bank of Russia excluded from the group of public features of a joint stock company the existence of prospectus of securities issue. In other words, if a prospectus of securities issue was registered, but the issue was not carried out due to any reasons, the society did not become public.

The most serious doubts are related to public trading of securities. The law on securities includes in it regulated trading, and also offering to an unlimited number of people, also using advertising . However, upon placing advertising of securities owned by him/her, a prospective seller does not have an obligation to notify the issuer on his/her actions. Thus, the issuer (in our case, a joint stock company) cannot find out whether advertising in relation of issued securities was placed, and accordingly, whether it became public. Moreover, in theory on these grounds even a closed joint stock company may become public.

Prior September 1, 2014 our organization was a closed joint stock company. Do we have to re-register?

Unfortunately, the lawmaker also did not make itself clear on this issue leaving it for dispute among lawyers.

The law stipulates a closed list of companies, which are not subject to re-registration. This list includes abolished types of business (for example, additional liability companies we have already discussed), and also closed joint stock companies. In relation to open joint stock companies only the principle of break down in public and non-public was determined, but the existence or absence of requirement for re-registration is not stipulated in the law.

The lawmaker left another evidence, which, obviously, should make an attentive reader suggest the right decision: joint stock companies, which comply with public features, shall be recognized as such regardless whether it is specified in their company name . But it also didn’t help.

Thus, we have two prerequisites, which may independently from each other lead to controversial conclusions:

1. On the basis of disposition principle, the corner stone of the civil law, if the law does not specifically stipulate obligations of participants of legal relations, such obligations are absent.
2. The law specified only one case when an open joint stock company doesn’t need to re-register: the situation when the company complies with public features.

Relying on such provisions, the following assumptions, which, probably, will further prove to be regulatory enforcement, can be made:

1. If an open joint stock company complies with public features, its re-registration is not required.
2. If taking into the account revised provisions of the Civil Code, an open joint stock company should be recognized as non-public, it requires re-registration. But as the lawmaker didn’t define time limits and terms for such re-registration, non-compliance with this term cannot be deemed an offense and does not imply liability.

Against all odds, you will be required to introduce amendments to the name of a legal entity and define whether it is public or non-public upon registration of first amendments in its articles of association.

We have changed the name of our company by including words “public joint stock company” in int. Now we understand that according to the law the company should be recognized as non-public company.

In such case, you will have to follow the rules specified for public companies . In general, if you doubt your type of business, it is better to request written explanations in two bodies: in the Federal Tax Service Directorate of the subject of the Russian Federation where the organization is registered and in the Bank of Russia. There is no point in recognizing yourself as a public joint stock company, if you don’t intend to place securities publicly.

We need to increase the authorized capital of a joint stock company. Thus, we will have to introduce amendments to the articles of association, but we wouldn’t want to amend its name. Can we do that? For how long is it possible to extend the moment of introduction of amendments to the company name?

Starting from September 1, 2014, constituent documents and names of previously established organizations should be brought into compliance with provisions of Chapter 4 of the Civil Code upon the first amendment of constituent documents of such legal entities. This provision doesn’t leave choice to organizations, that’s why amendment of the company name is a mandatory procedure, without which no other amendments will be registered.

State registration of amendments introduced to the articles of association of the company due to the increase of the authorized capital shall be made after registration of report on the results of additional issue. The law does not determine the precise time limit for the introduction of such amendments. In other words, after registration of report on the results of additional issue, amendments to the articles of association can be introduced at any time. However, the company shall bear no risks.

Nevertheless, delaying state registration implies certain difficulties in operation for other reasons. As it is known, information on the authorized capital of a business organization specified in its constituent documents should be contained in the Unified State Register of Legal Entities. The same law stipulates that in case of non-compliance of information stored in the Register with information maintained by a legal entity, information stored in the Register shall be deemed valid. As a result, both information on the size of the authorized capital, taking into the account issue results, and, accordingly, maintained by the Bank of Russia, and information maintained by the registering body shall be valid. This inconsistency will be revealed upon the first appeal of the company to any authorities, which will imply not only the risk of refusal of such actions, but also certain reputational risks for the company.

We are ready to introduce amendments to the name of a joint stock company, but numerous documents, which we need for our operation, have been obtained specifying the old name. Will we need to obtain again or update such documents? Will we have any problems upon appeal to any state bodies in relation to the amendment of the name?

In order to overcome excessive problems related to re-issuance of documents and refrain from imposing additional obligations on organizations, the law specifically stipulates the following term: “Amendment of the name of a legal entity for bringing it into compliance with provisions of Chapter 4 of the Civil Code [...] does not require introduction of amendments to documents of title and other documents containing its previous name”. The lawmaker supposes that incompliance of the old and the new name of organization should not lead to any difficulties in appeal to registering and other state bodies.

Though the law expressly addresses this issue, we decided to check, if representatives of state bodies are indeed ready for such documents. In this regard, our experts referred to inquiry service of the Russian State Register. To our request on the provision of explanations, representatives of the said service said that they have no common position on this issue.

Thus, in six months after enactment of the law it was revealed that not all state authorities understand how to work with documents of renamed organizations. Maybe, inspectors of the Russian State Register or the Russian Service for Patents and Trademarks will request additional documents or written explanations suspending registration process for this (almost all state authorities have such powers). However, we suppose that none of such state authorities will be able to find grounds for denial in performance of any legally essential actions in respect of such organizations because some kind of delaying of registration can be the biggest trouble here.

Previously, our counterparty was a closed joint stock company, and now it became a non-public joint stock company. How can we transfer rights and obligations under the contract executed between us and the closed joint stock company? Which documents we should request?

First of all, it should be noted that at simple amendment of name no reorganization takes place. It means that counterparty organization did not change, i.e. no additional documents mediating transfer of rights and obligations to non-public joint stock company under the old contract are required.

If we talk about convenience and confirmation of reasonable diligence in choosing a counterparty, it makes sense to request a written notification on the amendment of the name (often such requirement is specified in final provisions of the contract, though usually such notifications are sent as a matter of courtesy). For a new counterparty, it will be relevant to receive a recent extract from the Unified State Register of Legal Entities. As for the rest, relations with such counterparty will remain the same.