Doing Business In Russia

Company Formation

In General

Foreign investors can establish legal presence in Russia in any of the following forms:

•     Setting up a legal entity of one of the types provided by the Civil Code of Russia. There exist various options of foreign capital participation — both formation of a new company and purchase of an existing business or shares/participations in the same;

•     Setting up an office with representative functions that will not carry out any commercial activity;

•     Setting up a branch office that will carry out commercial activity; and

•     Establishing operations related to deriving income from sources in Russia without setting up a representative office or a branch.

In accordance with the Federal Law on Foreign Investments, commercial organizations with foreign investments are subject to state registration in the manner determined by the Law on State Registration of Legal Entities and Individual Entrepreneurs.

Like other commercial organizations, legal entities with foreign participation are established in a declarative manner. At present, the Law on registration generally requires only one additional (compared to registration of companies without foreign participation) document to be produced by a corporate founder to the registering authority, and namely an extract from the register of foreign legal entities of the relevant country.

Limited-Liability Company

In General

The limited-liability company is one of the major forms of doing business in the Russian Federation. Activities of limited-liability company are governed by the Russian Federation Civil Code (Part 1, articles 87–94) and the Federal Law on Limited-Liability Companies.

A limited-liability company is a company which is established by one or more persons and whose charter capital is divided into participations of amounts determined in its constitutional documents. The main features of a limited-liability company are the following:

•     The minimum charter capital is RUB 10,000;

•     At least half of the charter capital of a limited-liability company must be paid up by the time of registration;

•     The unpaid remainder of the charter capital is to be paid up by the members within the first year of the company's existence;

•     The number of members is limited to 50;

•     The liability of members and risks of losses connected with the company's business are limited to the amount of the members’ contributions to the capital;

•     The company cannot have a single member which is a commercial company consisting of one person only;

•     The constitutional document of the company is its charter;

•     Certain types of transactions (large-scale or related-party transactions) may require approval of the general meeting of members (or the supervisory board); and

•     An annual audit is generally not obligatory, the cases where it is obligatory are set out in the Federal Law on Audit.

The title to a participation is transferred as follows:

•     The disposal (sale) of a participation in the charter capital must be certified by a notary public. If not done before a notary public, the transaction is invalid;

•     The law provides for a number of exemptions from notarial certification;

•     The participation or part thereof in the charter capital passes to the purchaser from the date of notarial certification of disposal of such participation or its part or, where no notarial certification is required, from the date of entry in the uniform state register of legal entities of the relevant changes, based on the documents of title;

•     The company keeps the register of its members, which contains the details of each member, value of his participation and its payment, and value of participations held by the company, dates when such participations passed to or were purchased by the company;

•     The details of members are also available on the public state register;

•     A company member generally has the right to sell or otherwise dispose of his participation or part thereof in the capital; and

•     Company members have a pre-emption right in purchase of participations over third parties; besides, the sale of participation may be restricted by the company's charter, which helps keep the board of company members unchanged.

The specific feature of a limited-liability company is a member's right at any time to withdraw from the company irrespective of consent of other members or of the company itself, if such right is provided by the company’s charter. In this case, the company is obligated to pay the withdrawing member the actual value of his participation. Withdrawal of a member from the company as a result of which no members remain in the company or withdrawal of the sole member is not permitted.

Management Bodies of a Limited-Liability Company

The superior body of the company is the general meeting of members which has an exclusive competence defined by law; the powers of the general meeting cannot be delegated to other bodies of the company. All the members are entitled to vote at the meeting. Resolutions are adopted by the majority of one-half or two-thirds or three-quarters of all votes of members, depending on the type of resolution. The charter may require that a resolution be passed by a bigger majority of votes. A number of resolutions can only be adopted unanimously.

The limited-liability company creates an executive body (collegial and/or one-person) which carries out daily management of the company's business and is accountable to the general meeting of the company's members. The executive body is elected by the general meeting of the company or by its supervisory board (if such is provided for in the charter) for a term determined by the charter of the company.

The company also may create (elect by the general meeting of members) a supervisory board whose competence is defined by the company's charter subject to the provisions of law. However, the law sets forth only a limited list of matters delegable to the supervisory board of a limited-liability company; therefore, the practice of creating supervisory boards is scarce.

In order to exercise control over financial and economic activity of the company, the general meeting of members may, in accordance with the charter, elect an internal audit commission (internal auditor) of the company. All the officers of the company are obligated to act in good faith and for the failure to do so or to comply with the law will bear disciplinary, administrative, and criminal liability.

Joint-Stock Company

In General

A joint-stock company is one of the most common forms of doing business in the Russian Federation. The activity of a joint-stock company is governed by the Russian Federation Civil Code (Part 1, articles 96–104) and the Federal Law on Joint-Stock Companies. The joint-stock company is a company whose charter capital is divided into a certain number of shares.

Joint-stock companies fall into open or closed ones. A joint-stock company whose members may dispose of their shares without consent of other members is called an open joint-stock company. Such company is entitled to offer an open subscription to and sale of its shares. An open joint-stock company must annually publish for general information its annual report, balance sheet and profits and loss account.

A joint-stock company whose shares are only allotted to its founders or other persons determined in advance is called a closed joint-stock company. Such company cannot offer an open subscription to its shares or otherwise offer them to the public. A shareholder of a closed joint-stock company has a pre-emption right to the shares sold by other shareholders of this company. The number of members of a closed joint-stock company is limited to 50. The main features of a joint-stock company are:

•     The minimum charter capital of a closed joint-stock company is RUB 10,000 and of an open joint-stock company RUB 100,000;

•     The company places ordinary shares and may place one or several types of preference shares. The par value of placed preference shares must not be more than 25 per cent of the company's charter capital;

•     All shares in the company are registered shares;

•     The shares in the company allotted at its formation must be fully paid up within one year of its state registration, unless a shorter time period is specified in the company's founding agreement;

•     At least 50 per cent of shares in the company allotted at its establishment must be paid up within three months of state registration of the company;

•     Before payment of 50 per cent of its shares allotted to the founders, the company cannot make any transactions other than related to the company's establishment;

•     The company's charter must specify the number and par value of shares taken by shareholders (placed shares) and rights attaching to such shares;

•     The company's charter may specify the number, par value and classes (types) of shares which the company has a right to allot in addition to the placed shares (ordinary shares), and rights attaching to such shares;

•     The liability of company members and risks of losses connected with the company's business is limited to the amount of the members’ contributions to the capital;

•     The company cannot have a single member which is a commercial company consisting of one person only;

•     The constitutional document of the company is its charter;

•     Certain types of transactions (large-scale or related-party transactions) may require approval of the general meeting of shareholders (or the supervisory board); and

•     An annual audit is generally obligatory.

Management Bodies of a Joint-Stock Company

The superior body of the company is the general meeting of shareholders, which has an exclusive competence defined by law; the powers of the general meeting cannot be delegated to other bodies of the company. The general meeting of shareholders is valid (has quorum) if attended by shareholders having collectively more than half of votes of allotted voting shares. The right to vote at the general meeting of shareholders on matters put to vote can be exercised by:

•     Shareholders holding ordinary shares in the company; and

•     Shareholders holding preference shares in the company, where permitted by law.

A resolution by the general meeting of shareholders on a matter put to vote is adopted by the majority of votes of shareholders holding voting shares in the company and attending the meeting, except a resolution that must be passed by the majority of three-fourths.

The joint-stock company forms an executive body (collegial and/or one-person) which carries out daily management of the company's business and is accountable to the general meeting of the company's members. The executive body is elected by the general meeting of the company or by its supervisory board (if such is provided for in the charter) for a term determined by the charter of the company.

A supervisory board in the joint-stock company carries out general management of the company's business and performs functions falling outside the competence of the general meeting or executive body. The supervisory board is elected by the general meeting of shareholders. The charter of a company with less than fifty members holding voting shares may provide that the functions of a supervisory board be performed by the general meeting of shareholders. In contrast to a limited-liability company, the law gives considerable powers to the supervisory board of a joint-stock company.

In order to exercise control over financial and economic activity of the company, the general meeting of members may, in accordance with the charter, elect an internal audit commission (internal auditor) of the company. All the officers of the company are obligated to act in good faith and for the failure to do so or to comply with the law will carry disciplinary, administrative and criminal liability. The title to shares is transferred as follows:

•     Sale of shares is executed in uncertified written form;

•     The title to the shares is deemed to be transferred from the date of record made in the register of shareholders maintained by either a special registrar or by the entity itself; and

•     There is a special procedure for purchasing 30 (50, 75) per cent of shares which provides for a mandatory (voluntary) offer.