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Amendments to Corporate and Securities Legislation in the Russian Federation
Practical Law UK Articles 2-501-4883 (Approx. 4 pages)
Amendments to Corporate and Securities Legislation in the Russian Federation
by Igor Ostapets, White & Case LLP
| Published on 16 Feb 2010 • Russian Federation |
Debt to Equity Swaps
As a reaction to the current economic situation, the Law allows creditors of Russian companies to use an additional restructuring option which was previously restricted by Russian law. Debt to equity swaps in Russian companies (save for credit organizations) are now permitted when the charter capital is increased as follows either:
- For LLCs, by additional contributions to the charter capital by participants or third persons joining the company (as approved by a unanimous decision of the general participants' meeting).
- For JSCs, by issuing additional shares through a closed subscription.
Thus, the creditors' claims against a company can be set off against the payment for an increase in that company's charter capital.
Charter Capital Decrease and Negative Net Assets
The amendments to the regulations on charter capital decreases and negative net assets are applicable only with respect to JSCs and do not apply to LLCs.
Charter Capital Decrease
The Law amends rules on the creditors' protection in connection with decreases in the charter capital of JSCs. In particular, the JSC will no longer have to individually notify its creditors in writing of the decrease in its charter capital, as was previously required by the JSC Law. Now, a company must:
- Inform the registration authorities of the adoption of the decision to decrease the charter capital, so that a record is made in the Unified State Register of Legal Entities (within three working days of adopting the decision).
- Publish a notification on the decrease of its charter capital once a month for two months in a publication providing information on state registration of legal entities (currently, Vestnik Gosudarstvennoy Registratsii (Bulletin)).
The notification must contain information listed in the Law.
As it was previously provided by the JSC Law, the creditors whose claims arose before the publication of the notification on the decrease of the JSC's charter capital are entitled to request early performance of the JSC's obligations or, if early performance is impossible, request a termination of the obligations and compensation of losses. The Law now sets out the limitation period for such claims, being six months from the date of the last publication on the decrease of the JSC's charter capital.
Net Assets
The Law amends regulations on the net assets of JSCs (save for credit organizations) to regulate in detail the JSC's actions in case its net assets fall below the amount of charter capital.
If the net assets of a JSC fall below the minimum charter capital based on the results of the second financial year and any subsequent financial year, the JSC must decide to liquidate itself within six months from the end of the respective financial year.
If the net assets of the JSC are below the amount of its charter capital (but are above the minimum charter capital):
- Based on the results of the second financial year and any subsequent financial year, the JSC must decide on how to rectify this situation (the JSC's annual report must reflect this problem and contain suggestions for it rectification).
- By more than 25% based on the results of the 3, 6, 9 or 12 months of the third financial year and any subsequent financial year:
- the JSC must publish a notification (the Law sets out the requirements to its contents) on the fact of decrease in its net assets once a month for two months in the Bulletin; and
- the creditors, whose claims arose before the publication of the notification, within 30 days after the last publication are entitled to request early performance of the JSC's obligations or, if early performance is impossible, request to terminate the obligations and seek compensation of losses (the Law lists cases when the court may reject such claims and sets the six month limitation period for such claims).
- Based on the results of the third financial year and any subsequent financial year, the JSC must (within six months from the end of the respective financial year) decide to either (i) decrease its charter capital to the amount of its net assets, or (ii) liquidate itself.
If the JSC fails to perform on time its obligations described in the second and third bullets above, as well as its obligations described above for cases when the JSC's net assets fall below the minimum charter capital, (i) the creditors are entitled to request early performance of the JSC's obligations or, if early performance is impossible, to claim for termination of the obligations and compensation of losses; and (ii) the state authorities may claim for the JSC's liquidation.
Bonds
As a general rule, the nominal value of all bonds of a company must not exceed the amount of its charter capital and/or the amount of security provided to the company by third persons for these purposes. In the absence of security, the company may issue bonds no earlier than the third year of its operation and provided that the annual financial statements for two full financial years were duly approved. The Law extends the list of cases when the above restrictions do not apply and includes in it the following bonds and issuers:
- Legal entities whose issued securities are listed on a stock exchange.
- Legal entities and/or bonds having a credit rating (established by one of the rating agencies accredited by the Ministry of Finance), which is no less than the rating set out by the Federal Service for Financial Markets.
- Bonds designed for qualified investors (e.g., banks, investment funds, insurance companies, brokers).
The Law also introduces requirements for guarantors of bonds under surety agreements. In particular, it provides that bonds may be guaranteed only by:
- Commercial organizations the net assets of which are not less than the surety amount.
- State corporations (e.g., Rosatom, Olimpstroy), or state companies (e.g., Avtodor) (unless prohibited by law).
- International financial organizations (currently, Eurasian Development Bank, European Bank of Reconstruction and Development, and the International Financial Corporation).
The Law also states that the surety agreement may not only provide for joint liability of the guarantor and the issuer for the issuer's failure to perform its obligations, but also the surety term, which must exceed the term of the secured obligation by at least one year.