Foreign investors establishing an entity in Russia should note there are two common business structures. The limited liability companies (‘LLC’) and private joint-stock companies (‘JSC’). LLC can be established by one or several persons and is the most common legal entity for foreign investors because registration is simple and corporate form is flexible. The JSC is utilised by larger companies and the legal entity is complex and regulated by Russian company procedures. At Horizons Group, we have assisted foreign investors in establishing both types of companies in Russia.
In this article, we summarise three primary aspects for shareholders in Russia:
- General rights of shareholders
- Protection of minority shareholders
- Constitution of the shareholders’ agreement according to the Russian Practice.
General rights of shareholders
Participating and voting in the shareholders’ meetings are fundamental rights for shareholders. Under the Russian legislation, the company shall hold an annual shareholders’ meeting (“general meeting”) to approve the annual reports and financial statements for the last year. Usually, shareholders’ meetings for LLC shall be held by 30th April and for JSC by 30th June. In light of the current COVID-19 pandemic, the annual shareholders’ meetings of both LLC and JSC are extended to 30th September.
The rights of the shareholders can be varied and dependent on the percentages of shares. During the meetings:
- any shareholder who holds at least 10% of the votes in the company can request the executive body or the board of directors of the company to call an extraordinary general meeting;
- each shareholder of an LLC and holders of at least 2% of the voting shares of a JSC can require to add or to vote an item to the agenda of a general meeting.
Shareholders’rights related to the directors of the company in the general meeting
Through the resolution of the general meeting, shareholders hold the rights to the following actions:
- appoint and remove directors and board of directors (BoD). For LLCs, the resolution requires the majority of all shareholder votes. For JSCs, the resolution requires cumulative voting which is advantageous for minority shareholders. In cumulative voting, the shareholder is entitled to one vote per share multiplied by the number of directors to be elected. Therefore, the minority shareholder may apply all votes to one candidate;
- appoint and revoke executive body (general director or collective executive body);
- approve the payment of remuneration to the directors of the BoD.
Remuneration paid to directors in the board of directors of JSC with more than 50 shareholders must be disclosed in the annual report.
If the directors act unreasonably or in bad faith, causing losses to a company, shareholders can bring legal action for damages against them.
For more information, please see also the article How to maintain healthy corporate governance starting from establishing liabilities of directors in Russian companies?
Protection of minority shareholders
The rights and interests of foreign shareholders holding minority shares can be limited, and subject to violation from the majority shareholders.
However, there are several provisions under the Russian Federation to protect minority shareholders and preserve an equitable treatment of shareholders
- Minority shareholders may challenge the resolution of the general meeting and initiate court proceedings where the resolution is in breach of the law or the company’s charter.
- Minority shareholders in LLC may block certain important decisions of a general meeting, especially those that may affect their participation in the company.
- Minority shareholders in JSC may request by court order, to expel shareholders who seriously violate their duties or whose behavior substantially hinders the company’s activities.
- Minority shareholders in JSC may require the repurchase of shares under certain circumstances
Foreign investors may utilise the shareholders’ agreement as a legal instrument to regulate the relations between the company’s shareholders and safeguard rights. The shareholders’ agreement is commonly used in the Anglo-Saxon judicial system but also recognised by the Russian legal systems.
The shareholders’ agreement allows shareholders the following rights:
- exercise or abstain from rights in a certain way in the context of corporate governance – especially the right to vote;
- acquire or alienate shares at a certain price or in certain circumstances;
- stipulate mechanisms for settling disputes between shareholders out of court or through arbitration.
Foreign investors should note the shareholders’ agreement is only mandatory to the parties to the agreement, and cannot bind third parties under Russian law. There are no requirements for registration or public disclosure of shareholders’ agreements.
Horizons Corporate Advisory
If you are looking to invest in Russia and need further assistance on shareholder rights or legal entity constitution, our international legal and tax experts can help you assess specific risks and provide you with the best solutions.
For further information, please contact Horizons at firstname.lastname@example.org and our Partner in charge will be in touch.