August - September 1998

The law "On Limited Liability Companies," signed by Russian President Yeltsin, changed the rules for a widely used form of doing business. The procedures for creating a limited liability company (LLC) were, and continue to be, significantly simpler and quicker than for a joint-stock company (JSC). Founders of LLCs do not have to follow the lengthy (three to four months) and rather complex procedure for registering share issues. Additionally, voting rights in LLCs are stronger in that important questions are resolved by a majority vote of all LLC participants. In a JSC, a majority vote at a meeting with a quorum, which may be far less than the entire voting body, can decide issues.

The new LLC law attempts to remedy some very serious defects in the old legislation. For example, ambiguous language in the 1990 provisions on joint-stock companies and limited liability companies left it up to the participants to decide on a procedure for excluding an unwanted participant from the company. It was not unheard of for participants to come up with a procedure that deprived the target of the ouster of his voting rights. Such a procedure would allow the Russian members, for example, to get rid of a foreign participant even if he was a majority shareholder. The new law puts an end to such abuses by referring the question of excluding a participant from an LLC to the courts. Moreover, a participant may be removed only if he flagrantly violates his obligations or if his action (or inaction) seriously impedes the activities of the company.

The new law also assures an excluded member that he will be fairly compensated for the value of his share. The prior legislation did not define what constituted adequate compensation and lacked a procedure with deadlines for paying the ousted participant. As a result, many former LLC participants waited years for any compensation.

The 1998 law defines the "actual value" of a participant's share as the value of the net assets of the company that is proportional to the size of his share. The appropriate compensation is to be given to the participant on the day the court decision ordering his exclusion becomes final. Defects in the prior procedure for reorganizing an LLC also led to abuse. LLCs were often divided into two companies with all assets being placed into one company and all liabilities into the other. This deprived creditors of the ability to recover company property to satisfy their debts.

Under the new law, an LLC is obliged to publish a notice of its intention to reorganize in the official newspapers and to give written notice to all known creditors 30 days before taking any action. This [notification] gives creditors the ability to accelerate repayment of debts and demand compensation for any losses, if they so desire.

A final remedial provision of the 1998 LLC law requires that the value of any substantial amount of property contributed to charter capital be assessed by an independent appraiser. Previously, the value of intellectual and other property contributed to authorized capital was whatever the parties agreed it was. This [arrangement] could lead to a situation where the value of authorized capital was much less than claimed a potential fraud on creditors.

To ensure the impartiality of the appraisal, the new law makes the independent appraiser jointly liable with the participants in the LLC for a period of three years if the valuation is too high.

Reprinted with permission from Russia and Commonwealth Business Law Report, copyright 1998 by LRP Publications, 747 Dresher Road, Horsham, PA 19044-09880. All rights reserved. For information on Russia and Commonwealth Business Law Report or for a free 30-day trial subscription, please call 1-800-341-7874, ext. 310.

For an in-depth analysis, see "The New Russian Law on Limited Liability Companies" by Ethan S. Burger, Evgeny Danilov, and Irina Paliashvili of the Russian-Ukrainian Legal Group, P.A, via BISNIS Online at http://www.mac.doc.gov/bisnis/country/9808llcp.htm.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)