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MEMORANDUM January 19, 2009

01.01.2009


MEMORANDUM


 In view of the promulgation of the Federal Law that significantly amends the legal regulation concerning limited liability companies established in Russia, this memorandum gives a brief description of basic amendments, their effective date and the deadline for bringing constitutive documents of a limited liability company in compliance with the new regulation.

 Federal Law on Amendment of Part I of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation, dated December 30, 2008, No. 312-FZ, has introduced material changes in the legal regulation concerning the limited liability company (“LLC”, the “company”). The changes are incorporated in Part I of the RF Civil Code, Fundamentals of the RF Legislation on Notaries Public, dated February 11, 1993, No. 4462-I, Federal Law on Limited Liability Companies, dated February 8, 1998, No. 14-FZ, and Federal Law on Registration of Legal Entities and Individual Entrepreneurs, dated August 8, 2001, No. 129-FZ.

 Below is a brief description of the basic amendments:

1) Definition. According to the altered definition, the limited liability company is a company with charter capital divided into (participatory) shares; the members of LLC are not liable for its obligations and bear the risk of losses connected with the activity of LLC to the extent of the value of shares held by them. Thus, “contribution” has been excluded from the new definition.

2) Constitutive documents. Foundation agreement (an agreement for foundation of the company) has been excluded from the constitutive documents of LLC. Charter will be the only constitutive document. Nevertheless, the foundation agreement is still to be made in a simple written form at the time of setting up of LLC, be kept in the company’s files and, in the future, will serve as a confirmation of the powers of LLC members to dispose of their shares.

3) Charter capital. The minimum amount of charter capital is a fixed sum (10,000 Rubles) now and does not depend any more on the amount of minimum monthly wages.

4) Liability of the founders. The founders of LLC will bear joint and several liability for obligations that are connected with the foundation of the company and that arose before its state registration. If the general meeting of members approves the actions of the founders, then it is LLC that will bear liability for such obligations.

5) Withdrawal from LLC. The possibility of withdrawal from the company will be limited, namely, withdrawal of a member will be possible (irrespective of whether consent is given or withheld by the other members or the company) if such a possibility is stipulated by the charter of the company. A resolution on introduction of corresponding amendments in the company’s charter before January 1, 2010 is to be passed by the ¾ majority of the company members and after that date – unanimously.

6) Preemptive right. LLC members will enjoy the preemptive right to buy the share (part of the share) of the selling member at the price determined based on two options, namely (i) at the price of offer made to a third party or (ii) at a price, other than the price offered to the third party, determined beforehand in the charter of the company. Such price determined beforehand may be set in the charter as a fixed sum of money or on the basis of one of the criteria for determination of the share value (value of the company’s net assets, book value of the company’s assets as per the recent financial statement, net profit of the company, etc.). The price determined beforehand in the charter should be equal for all members of the company. A resolution approving amendment of the charter to the extent of establishment of the price determined beforehand and the manner of its determination is to be passed by all members of the company unanimously, and a resolution on exclusion of such provisions from the charter – by the 2/3 majority of the members. The charter may also provide for the possibility to exercise the preemptive right to buy a portion of (rather than the entire) offered for sale share or part of the share. After purchase of the portion by the company or its members the remainder of the share (part of the share) may be sold to a third party at the price and on the conditions notified to the company and its members or at a price no less than the price determined beforehand in the charter. The procedure for exercise of the preemptive right has been changed too. The member intending to sell its share (part of the share) to a third party is obligated to notify in writing the other members and the company by giving an offer through the company. The offer is deemed to have been received by all members at the time of its receipt by the company. Waivers of the preemptive right should also be sent through the company.

7) Share disposal (e.g. sale) / pledge. Any transaction for disposal or pledge of a share (part of a share) in the charter capital of LLC will require certification by a notary, otherwise the transaction will be deemed invalid.

8) Transfer of rights to a share. A share (part of a share) in the charter capital of LLC will pass to the person that has acquired it not at of the time of receipt by the company of a notification of its disposal, but at the time of certification of the transaction by a notary or, where certification by a notary is not required, at the time the corresponding amendment is recorded in the Consolidated State Register of Legal Entities. Where the transaction requires notarization, the notary is to notify the company of the transaction made and within 3 days comply and send to the registering authority a set of documents necessary for state registration of appropriate amendments to the constitutive documents of the company. The company may be notified by one of the parties to the transaction, if they so agree, and in such case the notary will not be responsible for notification of the company about the transaction.

9) Confirmation of powers. Before proceeding with certification of the transaction, the notary is to check the powers of the person disposing of the share. The powers should be confirmed by (i) a notarized agreement on the basis of which the share (part of the share) was previously acquired by the person concerned; or (where the share was received by way of succession or in other cases where notarization is not or was not required) an instrument evidencing transfer of the share by way of succession or an instrument expressing the contents of transaction made in a simple written form; or the resolution on setting up LLC by the sole founder; or a notarized copy of the agreement for foundation of LLC; and (ii) an excerpt from the Consolidated State Register of Legal Entities. The notary will put on the notarized agreement on the basis of which the share (part of the share) was previously acquired a notation that such share (part of the share) has been transferred.

10) Term for paying a member the real value of its share. In addition to the general 12-months term for payment by the company to its member of the real value of the member’s share (part of the share) there has been set a special three months’ term which also applies in the event of withdrawal from the company.

11) List of members. LLC should maintain a list of its members containing information about each member, the size of its share in the charter capital, indication whether the share has been paid up, the size of shares held by the company, the dates of transfer of such shares to the company or purchase of such shares by the company.

12) Governance of LLC. Matters referred to the exclusive competence of the company that are not subject to delegation to the other management bodies of the company are set forth in the charter. The charter may refer the following matters to the competence of the board of directors (supervisory board): appointment/formation of executive bodies of the company (General Director, Management Board) and early termination of their powers, delegation of the powers of the individual executive body of the company to the managing company (manager), approval of the manager and of the contract with the manager. Delegation of powers to the manager is regulated in more detail now, and LLC may effect the delegation by virtue of law (previously, the possibility of such delegation was to be expressly set forth in the charter of LLC). Besides, it is established that minutes of the general meeting of members should be sent to each member within ten days after recording.

13) Approval of transactions. Changes have been made in the grounds and procedure for approval of interested-party transactions and major transactions. For example, it is now possible to give prior approval of an interested-party transaction that will be made by the company in the future in the course of its regular economic activity, indicating the maximum amount of such transaction.

14) Affiliates. Each affiliate of LLC is obligated to notify the company in writing of the affiliate’s share in the company within 10 days from the date of acquisition of another share (part of a share) in the company where such acquisition together with the share held by the affiliate in the charter capital of the company gives the affiliate the voting right exceeding 20% of the total votes of the company members. If as the result of the affiliate’s failure to provide or untimely provision of such information the company has suffered damage, the affiliate will bear liability to the company to the extent of the damage caused.

15) Merger. The LLCs involved in a merger should enter into a merger agreement where they are to determine terms and conditions of a merger, exchange of LLCs’ shares into the shares of the new entity. In a merger of LLCs resulting in the emergence of a new entity, share in the charter capital of one company held by the other company involved in the merger is to be redeemed. In a merger of LLCs resulting in the disappearance of one of the entities (of the joining company), subject to redemption are:
• share held by the joining company in the charter capital of the receiving company;
• share in the charter capital of the joining company owned by the joining company;
• share held by the receiving company in the charter capital of the joining company;
• share in the charter capital of the receiving company owned by the receiving company.

16) Reorganization. LLC may be reorganized into a commercial entity of another kind, a commercial partnership or a production cooperative, not only into a joint stock company, a superadded liability company or a production cooperative.

17) Information in the Consolidated State Register of Legal Entities. The Register will contain the following additional information about LLC: size and nominal value of shares in the charter capital held by the company and its members, pledge of shares (parts of shares) or other encumbrance of shares, details of the person managing an inherited share. When conducting registration of amendments to the constitutive documents of LLC, the registering authority will record in the Register the size and nominal value of members’ shares on the basis of the foundation agreement effective at the time of state registration of the amendments.


Effective date of the amendments

 The Federal Law introducing the amendments will come into force on July 1, 2009. As of this date, charters and foundation agreements of LLCs set up in Russia before July 1, 2009 will apply to the extent where they do not contravene the RF Civil Code and the LLC Law (as amended by the said Federal Law) until such charters and foundation agreements are brought in compliance with the amendments introduced by the Federal Law.
Foundation agreement will cease to be a constitutive document as of July 1, 2009.


Bringing in compliance

 Charters and foundation agreements of LLCs set up before July 1, 2009 should be brought in compliance with the amendments introduced by the Federal Law by the deadline January 1, 2010.


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We are ready to give you advice and clarifications with respect to the foregoing, and shall be happy to assist you in making necessary amendments to the constitutive document of your company and in having the amendments registered by the Russian competent authorities.