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Organising an investment: Requirements of a joint-stock company (JSC)
(Country Commerce Via Thomson Dialog NewsEdge)Under the Civil Code of the Russian Federation and the Law on Joint-stock Companies of December 26th 1995 (No. 208-FZ, last amended in April 2004), joint-stock companies (JSCs) in Russia may be organised under two legal forms. Shares of an open JSC are freely transferable, and may be transferred to existing shareholders if such a deal does not violate the company charter or any legal acts. Shares of a closed JSC may be distributed to either its founders or a predetermined and limited circle of shareholders. Shares surrendered by shareholders must be offered to existing shareholders; the company may not offer shares freely.
Capital. Minimum capital is 1,000 times the official minimum monthly wage (Rb100) for an open JSC and 100 times the minimum monthly wage for a closed JSC. Capital contributions may be made in cash, buildings, equipment and other tangible assets, securities, land-use rights or intellectual property. Capital contributions in-kind are subject to examination and determination of rouble value by an independent appraisal, the cost of which may not exceed the value of the contribution. From January 1st 2002, 50% of the shares to be initially distributed may be paid for within three months after the initial registration.
Until 50% of the shares distributed among the shareholders are paid for, the company may not carry out any deals other than those connected with founding the company.
Legal reserve. At least 5% of the authorised capital must be set aside in a legal-reserve account.
Founders and shareholders. Founders of a JSC may be legal entities or individuals; they need not be citizens or residents of Russia. The number of shareholders of an open JSC is unlimited. A closed JSC may have no more than 50 shareholders and as few as one founder if the single shareholder is not, in turn, 100% owned by a single legal entity or individual. If a company acquires more than 20% of the voting shares of another company, it must immediately publish information about the acquisition as set out by the federal and the anti-monopoly authorities.
A bill to introduce amendments to JSC law whereby shareholders with 90% plus one share could forcibly buy out minority stakeholders with less than a 10% stake passed its initial reading in the State Duma in July 2004, but it had yet to be approved in November 2005. The bill foresees independent appraisers valuing the market price of the common shares held by minority shareholders before they are sold. The law would not extend to companies in which the state owns 10% plus one share. Supporters of the bill, which was put forward by the pro-Kremlin United Russia party, say the amendment would give majority shareholders greater control over their assets by preventing decisions from being blocked by shareholders with small stakes. However, the bills opponents say it would open up minority shareholders to abuse from unscrupulous majority stakeholders who could bribe auditors to calculate an unfairly low market price of the companys shares.
Documentation. JSCs must keep the following documents: agreement to found the company; registered company charter, including any changes and proof of registration; ownership documents for assets on the balance sheet; internal documentation and byelaws; annual report; accounts and financial statements; protocols from annual general meetings (decisions) and meetings of the board of directors, the audit committee and other management bodies; voting ballots and proxies; independent appraisers reports; list of affiliated parties; list of parties eligible to participate in the annual general meeting, receive dividends, etc; reports from the audit committee, the auditor and state and municipal financial-control authorities; prospectuses, quarterly reports, and other forms of disclosure; and other documents that are required under the JSC law.
The charter must specify the name, location and type of organisation; its objectives, corporate purpose and activities; requisites of its founders; the amount of authorised capital; information on categories of shares to be issued, as well as on the number and value of shares; consequences of non-fulfilment of subscription obligations; particulars of the distribution of profits and compensation of losses; and the composition and powers of management and decision-making procedures, including a list of issues that merit a qualified majority vote and other information required by the JSC law.
Registration. Registration of Russian legal entities with foreign investments located anywhere in Russia takes place upon submission of all necessary documents to the local tax authorities. All changes to the JSCs charter are subject to registration with the companys local tax authorities.
Board of directors. A board of directors is mandatory only if the JSC has 50 or more shareholders. Companies with morethan 1,000 shareholders must have at least seven board members, and those with more than 10,000 shareholders must have at least nine board members. Amendments of March 17th 2004 to the 1995 Federal Law on Joint-stock Companies established that a board must consist of at least five members; previously, companies with fewer than 1,000 shareholders could decide the number of board members themselves. Companies with a small number of shareholdersfor example, JVs with just two partnersare most affected by the amendments, and many may decide to abolish the board of directors rather than have a minimum of five board members.
The new law also introduces mandatory cumulative voting for the board. Before March 2004, cumulative voting was compulsory only for companies with more than 1,000 shareholders, and others could conduct simple majority voting. Now, however, the number of shares owned by a given shareholder is multiplied by the number of board members and each shareholder can either cast his total number of votes for one candidate or several. This measure is intended to help minority shareholders elect at least one director. The amended law also stipulates that a general shareholders meeting can approve the early termination of all board members; previously, selected members could be removed.
Management. JSCs may have a board of directors, a management board and a single (or multiple) general director serve as their internal management bodies. The Civil Code permits shareholders to establish internal management bodies or to contract with a separate company to provide management services.
Disclosure. Under the Law on the Securities Market (No. 39-FZ, of April 22nd 1996, last amended December 2002), open JSCs must prepare a share-issue prospectus, which should be approved by an auditor and registered with the regional branch of the Federal Service on Financial Markets.
JSCs must publish annual accounts and balance sheets; as established by the Law on Audit Activity, annual mandatory audits are required for all open JSCs, banks and insurance companies, and for legal entities and individuals if their annual proceeds exceed 500,000 times the monthly minimum wage or if the value of the balance-sheet assets exceeds 200,000 times the monthly minimum wage.
Taxes and fees. Companies applying for registration must pay Rb2,000 (about US$70) for registration under the Law on Bringing Legal Acts into Correspondence with the Law on Government Registration of Legal Entities (No. 31-FZ, of March21st 2002, last amended October 2003). Incorporation also entails substantial solicitor and notary costs. No levies or taxes apply upon capital increases.
Types of shares. Bearer-equity shares are not permitted; all shares must be registered. Russian law permits common and preferred (that is, voting or non-voting) shares. Preferred shares may account for no more than 25% of the companys charter capital.
Control. Annual shareholder meetings are mandatory. Meetings must be held 26 months after the end of each fiscal year. Members must receive notices of meetings 20 days before the annual meeting (30 days if the agenda includes a question about reorganisation). A three-fourths majority vote is needed for major decisions specified in the Law on Joint-stock Companies. Changes in the authorised capital need only a simple majority of votes, unless otherwise provided for in the charter of the company, but such a change requires amending the charter, which may be done only by a three-fourths majority vote. Material transactions related to the acquisition and transfer of property (worth 50% or more of the book value of the companys assets) by the company also requires a three-fourths majority vote.
Dividends. Amendments to JSC law in April 2004 (effective from July1st 2004) clarified the definition of net profit from which dividends can be paid out as the companys after-tax profits determined in accordance with the companys financial statements. The amendments also clarified that dividends on preferred shares can be paid from a companys special-purpose fund if it has one. Previously, the law did not specifically define net profit and did not stipulate that special-purpose funds had to be established prior to a dividend payment.
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