RUSSIAN UPDATE – Overview of the Key Amendments to the Russian Civil Code
- On April 2, 2012, the Russian President introduced draft amendments to the Civil Code geared towards granting greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- New limited property rights will emerge addressing permanent landownership and development of land plots.
On April 2, 2012 the President introduced to the State Duma draft amendments to the Civil Code (the Draft) prepared jointly by representatives of both the legal and business communities.
The Draft is primarily geared to improve regulations and the business environment in Russia. It should be furthered by the proposed modifications and enhancements with regard to legal entities, transactions, agreements, and other provisions.
The following should be noted as key changes.
1. CORPORATE LAW
First, the new regulation will grant greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Public and private companies
A new classification of business entities will be introduced, so that they will fall into the categories of either public or private companies.
As opposed to members of public companies (joint stock companies, or “JSCs”, with shares traded in regulated markets), members of private companies may freely determine the management structure. For example, they may forego a governing body and change the way general members meetings are convened, prepared, and held.
- JSC – a unified form
The form of a JSC as a closed joint stock company (“CJSCs”) will cease to exist. Before July 1, 2013 CJSCs may, at their own discretion, either (1) change their company type to an LLC or production cooperative; or (2) retain their JSC status (this will not require any extra steps to be taken as the JSC will be the standard form “by default”).
- A Shareholders’ agreement may be entered into not only between a company’s shareholders but also between shareholders, company creditors, and any third parties.
- Reorganisation scheme will be made available in various forms, including involvement of more than two corporate entities of any form of incorporation.
Second, rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- Registered capital will from now on have to be paid for by cash only.
- Registration with the Uniform State Register of Legal Entities
Interested parties will be entitled to file their objections to amendments entered in the Uniform State Register of Legal Entities, and the registration authority will be bound to consider such objections and render its decision thereon.
- Shareholders agreement
Parties to a shareholders’ agreement will be obligated to notify the company as to its execution. If they fail to notify, they will be obliged to indemnify against any damages incurred by other company members.
Furthermore, information about shareholders’ agreements for public will be subject to mandatory disclosure.
Finally, resolutions of corporate governing bodies or transactions involving parties to shareholders’ agreements may be invalidated if such resolutions / terms of transactions contradict the shareholders’ agreement.
- Affiliation and control
Now the Russian Civil Code will define specific indicia of affiliation and control and the concept of controlling and controlled persons.
Furthermore, even if formal grounds are missing, a court may confirm actual affiliation upon an analysis of factual circumstances.
Liability of controlling entities will be strengthened. In certain cases, they will be liable jointly and severally together with controlled entities and responsible for any losses incurred by the latter and their members.
- Management liability
Management as well as those who have an actual possibility to give instructions to the company’s management will be liable for any losses incurred by the company through wrongful, unreasonable or unscrupulous acts. Those who actually determine a legal entity’s conduct, without having formal grounds for control, will be also liable.
2. TRANSACTIONS AND OBLIGATIONS
First, regulation as to invalidity of transactions will be clarified.
- Limitations on grounds for invalidation of voidable transactions
Only a voidable transaction which infringes upon the rights and interests of the contesting party may be invalidated. If a party approved a transaction or expressed its intention to uphold it, that party will not be able to later contest it.
- A presumption of voidability will be established in respect of: (1) resolutions passed by meetings; (2) transactions executed in breach of a law; (3) transactions executed without the required consent of a third party, corporate authority, government authority, local authority.
- The following matters will be regulated comprehensively: (1) invalidation of resolutions passed by meetings; (2) transactions void ab initio in respect of property whose disposal is restricted or limited; (3) invalidity of transactions executed in error.
- New opportunities
Business entities may independently determine the effect of the invalidity of voidable transactions.
A party to a transaction executed ultra vires may withdraw from such a transaction.
Second, parties will have more liberty in determining terms of their transactions, the principles of optionality and freedom of contract will have a broader application.
- Conditioned performance of obligations
Despite the restriction of entering into conditional transactions that depend exclusively or primarily on one of the parties, the performance of obligations, exercise, change or termination of rights under a contractual obligation may nonetheless be made conditional in any manner.
- Irrevocable power of attorney may be used in business relations.
- Creditor agreements
Creditors will be able to enter into agreements regarding their demands for a debtor to perform its obligations and the priority of such demands.
- Managing pledged assets
Several creditors will be able to appoint a representative – a manager of pledged assets (by analogy with securities trustee known in foreign law systems) exercising the pledge rights on their behalf and to their benefit.
- Good faith acquisition of right of pledge and pledged assets
If assets are pledged by an unauthorised person, the good faith acquisition of a right of the pledge will be possible.
Onerous acquisition of pledged assets by a party, which was not aware of and was not obliged to be aware of the pledge, will be considered a good faith acquisition of the pledged assets and in such a case the pledge will be released.
- Late fee
The court’s powers to reduce the amounts of late fee penalties will be limited in business relations.
Parties will be able to recover losses caused by false representations made prior to or following execution of an agreement.
In business relations parties will be able to provide for one of the parties’ right to demand indemnification from the other party for pecuniary losses incurred in connection with performance, amendment or termination of obligations, including misconduct by third parties. Indemnity—a concept that is quite common and widely applicable in large and complex structured deals abroad—would be permitted under Russian law.
- New types of agreements
New contractual structures will be introduced: (1) a framework agreement (agreement with open terms); (2) option agreement (agreement with unconditional right to enter into a specific agreement); (3) subscription agreement (agreement with performance on demand); (4) escrow agreement.
Third, measures to protect parties’ rights will be improved.
- Pre-contractual liability will be stipulated as liability for bad faith negotiations or termination of negotiations in respect of an agreement to be executed.
- The amount of losses must be set by the court even if they cannot be credibly determined.
3. PROPERTY LAW
First, the existing system of property rights will undergo a serious change.
Second, new limited property rights will emerge: (1) permanent landownership; (2) development of land plots; (3) personal usufruct; (4) preferential acquisition of immovable property; (4) pecuniary benefit; (5) limited title of owner of a building to the land plot under such building.
This review covers only some of the changes being introduced to the Civil Code. Generally, the Draft offers a comprehensive revision of the Civil Code. It combines both innovatory and conservative proposals. Generally, the changes covered by this review are progressive in nature. Many of them meet the needs of Russian business practice and create an environment for their long-term improvement. These amendments will be conducive to better corporate governance, increased transparency and a clampdown on abuse in corporate relations, practices to preserve validity of transactions, and growth in business activity in general.