Ongoing battle to modernise Russian civil law

July 2013 | EXPERT BRIEFING | FOREIGN INVESTMENT

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For decades during the 20th century, Russia had a state-controlled planned economy without private ownership and commerce. After the beginning of a period of reform, the laws created to serve such an economy could no longer be used. Since 1991, the legal landscape in Russia has changed dramatically. Russia’s first important step towards laying a legal foundation to serve the changing economy and its businesses was introducing the Civil Code of the Russian Federation, Part 1 of which was adopted in 1994. Following its adoption, the demand to further significantly reform the Civil Code of the Russian Federation became obvious.

An attempt to modernise Russian civil law by shifting the balance of public and private interests to increase the flexibility of civil law and adopting well-established market-oriented concepts from other jurisdictions has been undertaken through significant amendments to the Civil Code. This work was started in 2009 at the initiative of then-President Dmitry Medvedev. It is expected that these changes will improve Russia’s legal environment and make it an attractive destination for investors (primarily, Russian investors).

Legislative reform is devoted, in part, to the development of Russia’s corporate law. The proposed revisions to the corporate law have been actively and acutely debated by the community. In general, there are two groups involved in the discussions. One group calls for making corporate law very flexible, minimising the number of mandatory rules and deleting obsolete rules, such as the rules on share capital. The other group calls for maintaining many of the existing rules in corporate law mandatory, elevating areas of public interest in this law, and creating economic and administrative barriers to the formation of new companies.

Approximately 500 amendments were adopted in the first reading at the end of April 2012. In November 2012, the State Duma resolved to split the introduction of amendments into the Civil Code in portions. The first tranche consisting of 19 amendments was signed into law on 31 December 2012 and generally came into force on 1 March 2013. The second tranche consisting of 44 amendments was signed into law on 7 May 2013 and will generally come into force on 1 September 2013. The decision to split the amendments into portions and the quality of the amendments have received criticism from many scholars and practitioners.

In the first tranche of amendments, the important rule is that corporate relations (relations with regard to creation, management and operation of a company) are governed by civil law. Another important amendment is an explicit statement that a resolution of a general meeting creates civil rights and obligations in cases provided for by law. These are important amendments because the Civil Law is typically interpreted by Russian courts to mean that anything that is not explicitly provided for in the Civil Code does not exist.

In the second tranche of amendments, perhaps among the most important amendments for direct investors is the new chapter 9-1 ‘Resolutions of meetings’. The rules in this chapter apply unless otherwise set forth by law or in the order stipulated by law. Thus, the rules of the chapter supplement and are subordinate to the specific provisions governing general meetings in other laws, such as the Law on Joint Stock Companies, the Law on Limited Liability Companies, Bankruptcy (Insolvency) Law, etc.

Chapter 9-1 provides, in particular, that a resolution of a general meeting (including a general meeting of shareholders/participants in a joint stock company or limited liability company) creates legal consequences for such shareholders/participants and for other persons. The chapter incorporates provisions governing the procedure of taking resolutions by general meetings. In general, all such provisions will apply as default provisions governing general meetings in the absence of special laws or to the extent they do not contradict special laws or provisions in corporate documents adopted in pursuance of such special laws.

Chapter 9-1 of the Civil Code also introduces the concepts of voidable resolutions and resolutions that are null and void from the outset. It accepts the same approach as the one utilised for transactions in the Civil Code: a resolution of a general meeting is invalid if it is determined as such by court (voidable resolution) or independently of a court decision (null and void resolution). An invalid resolution is voidable unless the law explicitly provides that it is null and void. The chapter lists the grounds for each such case. In addition to the grounds listed in the Civil Code, the grounds listed in other laws should also be used as guidance.

In relation to such grounds, the Civil Code supplements other laws and lists the following grounds to challenge voidable resolutions: (i) gross violation of the procedure of convocation, preparation or conduct of a meeting affecting the expression of the will of participants in such meeting; (ii) a person representing a participant in the meeting has not been authorised; (iii) equal rights of participants in a meeting have not been observed during its conduct; and (iv) gross violation of the rules determining the minutes of a meeting, including the written form of the minutes.

Chapter 9-1 lists the following grounds to determine that a resolution is null and void: (i) resolution is taken in regard to an issue which is not in the agenda of a meeting, unless all participants/shareholders in an entity have participated in the meeting; (ii) resolution is taken by a meeting which does not have a quorum; (iii) resolution falls outside the competence of a general meeting; and (iv) resolution goes against fundamental principles of public order and morality.

Chapter 9-1 sets forth in sufficient detail the procedure for challenging voidable resolutions in court. The statute of limitations for such claims is six months from the moment a person knew or should have known that its rights have been violated by the resolution. There is a preclusive term for such claims – two years from the date when information on the resolution became known to participants in an entity. Notably, unlike the provisions in the Law on Joint Stock Companies or the Law on Limited Liability Companies, according to Chapter 9-1, a participant who voted in favour of a resolution still retains the right to challenge it in court in the event that the expression of their will has been violated at the meeting.

Whether the attempt to modernise the Russian Civil Code will have any success and achieve its stated objectives is yet to be seen. Sceptical voices remind us of the Russian courts, which tend to construe civil law in an authoritative, non-market and inflexible manner.

Natalya Morozova is managing partner of the Moscow Office of Vinson & Elkins LLP. She can be contacted on +7 499 270 0127 or by email: nmorozova@velaw.com.

Natalya Morozova

Vinson & Elkins LLP