LLC: Major Changes in Game Rules

The most important changes on LLC and description of the main steps you have to follow in order to comply with new legislative requirements.

In 2009 the Federal Law on Limited Liability Companies (LLC or OOO in Russian version) will suffer significant changes - on December 30, 2008 the new amendments were introduced. These changes will come into force from July 1, 2009.

To the extent that LLC is the most frequently used form of business by foreign entrepreneurs in Russia, these changes will influence already existing LLC as well those that are to be founded in future. Moreover the businessmen who are planning plan to purchase or sell shares in Russian LLC will also experience the impact of the changes.

The article by Anna Kraeva, Senior Lawyer.

Changes in Set of LLC Constituent Documents

Currently LLC constituent documents of LLC include the Articles of Association and the Memorandum of Association. As of July 1, 2009 the Articles of Association solely remains in the list. The Memorandum substituted by the Founders Agreement signed upon the company foundation and specifying the procedure of LLC establishment.

Changes in Procedure of Preemptive Right Exercise

The shareholder's preemptive right is an important legal characteristic of LLC as a company form. Henceforth, the new Law additionally states that the Articles of Association may provide apreemptive right of other shareholders to purchase the share of the outgoing shareholder at price, determined by the Articles (currently at price offered to the third parties). The preemptive right may be exercised with connection to the whole share purchase as well as purchase of part of the outgoing shareholder's share.

Shareholder Retirement from LLC is Possible if Only Provided by Articles of Association

Currently under the Federal Law a shareholder can exit the company any time at its own discretion and without the consent of the remaining shareholders. As a practical matter it often causes various problems for other shareholders as well as for the company which has to repay to the outgoing shareholder the actual value for its share. The amendments to the Law strictly provides that such exit is possible if only set in LLC Articles. Default of such provisions in the Articles prohibits to shareholder to withdraw from the company on its own discretion. In case when the Articles provide for retirement, its procedure and effects are to be specified by the Articles. In no case the retirement will be permitted if the company finds itself without any shareholder.

Introduction of Shareholders Agreements as of July 1, 2009

The one of the most important features of the new Law might be the introduction of SHA to the Russian corporate law (whilst SHA is known in almost all European countries for years). Although some Russian LLC participants practiced SHA, their validity in Russia was under question. As of July 1st 2009 shareholders may enter into the SHA in which their rights and obligations towards each other and the company may be specified: for example, provision for lock-in period during which neither of them is entitled to dispose their shareholdings or determine the share value for the purpose of its possible transfer, or specify put or call options, etc.

Of course this fact will make Russia more attractive for the foreign investors as SHA gives them more freedom to specify their rights as shareholders.

Completely Different Procedure of M&A Transactions with LLC Shares as of Provided Presently

Currently execution of M&A transaction with connection to disposition of share in Russian LLC requires solely the conclusion of written agreement. As of July 1st 2009 the procedure will become more elaborated in view that such transaction is to be certified by a notary and it commencement is conditioned by notary certification. The Seller has to file at the notary office the set of documents (including the extract from the Russian State Register of the Legal Entities), which certifies his title to the share to be sold.

Notary Certification Applies without Limitation to Alienation of Share in LLC, Pledge, Mortgage, and Incumbency on Share Transactions

Currently the Law provides no record procedure for pledges on LLC shares. For the purpose of changing this state of matters the subsequent amendments state that the pledge of the share has to be executed before the notary. Furthermore, the notary within 3 days as of pledge transaction certification date files the Application on entering of subsequent amendments to the Uniform State Register of legal entities to the State Registrar of the legal entities. The Registrar within 3 days upon receipt of the application enters the pledge record to the Register.

As well a notary files to the company which share is pledged the copies of the abovementioned application and pledge agreement. Without any doubt these amendments aim to protect the buyer's interests.

Russian LLC is Required to Keep Its Shareholders Register

The register shall include the shareholders data and information on the shares owned. Information in the internal register shall comply with information in the Uniform State Register of Legal Entities and Share Disposition Transactions which are certified by notary.

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