Russian company law dictates the structure of and rules governing corporate entities in the Russian Federation. There are essential two types of Russian companies, limited liability companies and joint stock companies. The latter is broken down into two types, open and closed joint stock companies.

The names of these types of countries are rendered in Russian:

The most frequent company types appearing in Russia are OOOs and ZAOs. They are smaller in scale, limited to 50 members, with fewer legal hurdles and greater operating freedom. The legal atmosphere in which limited liability companies operate is much less restrictive.  The auditing process can be either optional with OOOs or less stringent with ZAOs. The amount of startup capital necessary is less with both of these types.

Many of Russia’s largest companies and all those who have held initial public offerings (IPOs) in recent years are Open Joint Stock Companies. These companies are more heavily regulated.

There is more flexibility in the ownership structure of an LLC. Each ordinary share of a JSC gives its owner the same set of rights. On the contrary, an LLC's charter may stipulate that owners of equal shares in the charter capital have different rights. For example, the charter of the company may provide that a participant whose interest in the company represents 50 percent of the charter capital of the company may have 60 percent of the votes.

A JSC shareholder may leave the company by giving up his shares to other parties. In doing so, settlements for the shares are made between a shareholder and the other party. An LLC shareholder who wishes to leave the company transfers his share to the LLC and receives a proportionate part of the LLC's property or its monetary equivalent in accordance with the procedure stipulated by the charter.

The establishment and registration procedures of all types of companies are virtually identical.

Limited Liability Companies

The number of possible shareholders is limited to 50

All participants must be treated equally according to the level of their participation in the company. There cannot be two classes of participants.

There are generally fewer administrative requirements and fewer people who need to be involved in operating the company.

An LLC has between one and 50 founders, and subsequently, shareholders. A list of participants and the size of their participation is included in the company's charter which must be amended as participations change. A separate share register need not be maintained

Management

The highest governing body of LLCs is the General Meeting, but there maybe only one member of this body. The number of votes is proportional to the participant's share in the charter capital (unless a different voting mechanism is unanimously adopted by the participants).

LLCs have an option whether to create a Board of Directors. If they opt to create this board, then its powers must be set out in the company's charter and it must have at least two directors

There must be an executive body charged with running the company. It can be a single person, such as general director or president, or a collegiate body, such as a management board or directorate. This executive body is appointed and approved by the participants at the General Meeting.

However, if the company has only one participant, it is possible for the General Director and the sole participant to be the same person. But the General Director may not act as Chairman of the company’s Board of Directors.

Auditing

If there are fewer than 15 shareholders in an LLC, then a regular audit of the company is optional. Such an audit can be conducted by an internal audit commission or single auditor.
If necessary or desired, an internal audit must be prepared annually.

Shares

In an LLC, shareholders stakes are called dolya (which literally translates to participations). It is not necessary to register these shares with Russia’s Federal Securities Service.

All shareholders (participants) have equal rights and obligations according to the size of their participation and no distinction can be made between different types of shares.

Capital

To start an LLC, Russian law requires a minimum start-up capital of 100 minimum wages, approximately $300. To increase or infuse more charter capital, it requires approval by a two-thirds majority vote of the General Meeting. This majority can be increased beyond two-thirds if the charter calls for it.

Because of the nature of the company, new shares (participations) are only issued if all the existing participants allow third parties to become new participants If an individual participant applies to increase its participation by investing further money in the star-up capital, the member’s application must be approved by all other existing participants whose participations would be diluted by such an increase.

A decrease of charter capital requires notice to be given to all creditors and the creditors may be given an opportunity to ask for earlier payment of their debts. In addition, Russia’s Law on Limited Liability Companies requires publication of an announcement in a printed journal intended for the publication of information on state registration of legal entities.

Joint Stock Companies

A joint stock company has a definite number of shares with an equal value. Both open and closed JSCs are legal entities which act on the basis of the articles of association adopted by its partners. Both have unlimited duration unless otherwise stipulated by the charter.

The shareholding and management structure is generally more complex than an LLC and it is common for a number of interests to be represented at shareholder and management level.

Shareholders do not bear responsibility for the company's liabilities. Instead, the shoulder the risk of losses if the company performs poorly and the share price decreases.

Joint-stock companies are required to register the issue of shares with Federal Securities Market Commission. This allows the shares to be traded publicly in the case of an Open JSC or among specified shareholders with a Closed JSC.

Founders of a joint-stock company sign an organizational charter to form the company, which is then registered with federal securities officials. This document outlines the amount of the company’s start-up capital, the types and categories of shares to be allocated between founders, amounts to be paid for the shares, among other things.

A Joint Stock Company charter contains the following

-    full and brief names of the company
-    address of the location of the company’s office
-    company’s type (OAO or ZAO)
-    quantity, par value, categories of shares (ordinary, preferred) and types of preferred shares to be allocated
-    rights of shareholders of each category of shares
-    the sum of the authorized capital
-    structure and authority of company’s management bodies and boards
-    the procedures of the decision-making process
-    order of preparation and conducting of shareholders’ general meeting
-    information about subsidiaries or representative offices

The main difference between an Open and Closed JSC is the procedure for transferring shares by current shareholders. A shareholder in a closed JSC may only sell its shares with the prior consent of the other shareholders. There is no such restriction for shareholders in an Open JSC who, therefore, may cede their shares to other persons without the consent of other shareholders.

A share register must be maintained by the company or by a specialized registrar of shares.

An Open JSC can distribute its shares to an unlimited number of shareholders and sell them without limitations. The statutory minimum charter capital is 100,000 Russian rubles.

A Closed JSC has a limited number of shares distributed among a limited number of shareholders. The maximum number of shareholders is 50. The statutory minimum charter capital is 10,000 Russian rubles.

Governance

The highest body of authority in all JSCs is called the General Meeting of Shareholders All common shares have the right to vote (one share, one vote). In certain limited circumstances, shares not generally carrying a vote (preferred shares) may give the holder a right to vote (where the decision would affect the existing rights of the preferred shareholder).

An Open JSC must have a Board of Directors, which is appointed by the General Meeting of Shareholders. For Closed JSCs, a Board of Directors is optional. If created, the Board of Directors has certain exclusive powers as set out in the law on Joint Stock Companies.

If created, there must be at least five directors on the board, and in an Open JSC that minimum number of directors will be seven and nine if the number of members is greater than 1,000 and 10,000 respectively.

Both Open and Closed JSCs must have an executive body, the size of which depends on what the shareholders prescribe in the charter. This body is appointed by the general meeting of shareholders unless the power is delegated to the board of directors. While, in a Closed JSC, it is possible for the general director and the sole member of a JSC to be the same person, the general director may not act as chairman of the Board of Directors

Auditing

For both Open and Closed JSCs, an annual internal audit is required. This audit may be carried out by a single auditor or an Audit Commission.

Shares

Shares are called stocks and require registration as securities at the Federal Securities Service (in addition to the usual company registrations).

Stocks may be divided into a number of different types (common shares and preferred shares). Common shares usually carry full voting rights at the General Meeting of Shareholders whereas preferred shares generally do not carry a right to vote, except where it is specifically provided for by Russia’s law on Joint Stock Companies.

Capital

Charter capital can be increased either by the increase of the nominal value of existing shares or by the issue of additional shares. Additional shares can be issued only if the shares have already been authorized in the company’s charter.

If the shares to be issued have not been authorized in the company’s charter, the decision to increase the charter capital by issuing additional shares can be taken simultaneously with a decision on amendments to the charter on the amount of authorized shares. The decision to increase the charter capital requires approval by a simple majority of the shareholders attending the general meeting.

Buy-backs of shares by the company

In cases provided for in the charter, it is possible for the general meeting or the Board of Directors to authorize the company to buy back shares from existing shareholders but the number of shares remaining must be at least 90 percent of the charter capital of the company and the amount must never be less than the minimum required by the Law on Joint Stock Companies. In certain limited cases, the company must repurchase shares on shareholders’ demand.

Compiled By: Grant Slater

Updated: March 26, 2008