The corporate governance structure of Russian companies consists of:
- the General Meeting of participants / shareholders (“GSM”) and
- the Executive Body: Chief Executive Officer (“CEO”) (optionally, CEO and Management Board or Executive Board (“Management Board”).
LLCs and non-public JSCs with less than 50 shareholders may optionally also have the Board of Directors (also known as Supervisory Board or Supervisory Council; “Board of Directors”). For PJSCs, a Board of Directors is mandatory.General Meeting
The GSM is the supreme governing body which is responsible for the company’s most fundamental issues. Its competence typically includes, among other things: changes to the company charter or to the charter capital amount; approval of annual report and annual financial statements; distribution of profit; approval of “major transactions” (as defined by laws); reorganization or liquidation. In LLCs and non-public JSCs, the competence of GSM is not limited by statutory provisions and may be expanded by the charter to include any other issues (e.g., approval of specific transactions including those within ordinary business, recruitment, salary, bonuses etc.). If a company structure provides for the Board of Directors, the majority of issues pertaining to GSM competence may be delegated to the competence of the Board of Directors, except of some critical issues (e.g. reorganization or liquidation, charter amendments). This does not apply to PJSCs.
The GSM must be convened annually. In an LLC, the annual meeting must be held between March 1 and April 30, while in a JSC between March 1 and June 30. Any other meetings are considered as “extraordinary” (special) ones.
Most resolutions at a GSM (both in LLCs and JSCs) are passed by a simple majority vote. Some decisions require a qualified majority: in case of LLC, 2/3 for approving amendments to the charter, increase of charter capital, change of company’s name and place and some other specific issues as provided by law or the company’s charter; in case of a non-public JSC, 75 per cent are required for amendments to the charter, decisions on reorganisation or liquidation, on the number, nominal value, category (type) of authorised shares and the rights granted by these shares, for approval of certain major transactions and buy-back by the company of its own shares. A company’s charter may provide for higher voting thresholds for any issue.
A unanimous vote is required in JSCs to approve transformation of a company into a non-profit partnership, as well as for introducing some amendments to the charter of LLC or non-public JSC (e.g., on delegating the powers of GSM to the Board of Directors or to the Management Board, on the procedure for exercising the pre-emptive right, on extending the competence of GSM in a non-public JSC etc.).
LLC, amore “closed” corporation by its nature, have a much wider list of matters requiring unanimity. In particular, in addition to the charter amendments described above, a unanimous resolution of all participants is required for:
- reorganisation or liquidation of a company;
- approval of appraised monetary value of non-cash contributions to the charter capital;
- increase in its charter capital through admission of new participants to the company or additional contribution by certain participants;
- set-off of claims against the company in the course of payment of contributions by admitted new participants or additional contributions by the participants;
- granting, limiting or cancelling of additional (i.e. those not stipulated by law) rights and obligations of the participants;
- adoption or removal of the provisions on disproportionate voting or profit distribution;
- certain matters relating to pre-emptive right and withdrawal from the company;
- and other matters as may be specified in the charter.
If there is only one participant / shareholder, there is no need for convening a GSM as any issue within the competence of GSM may be resolved by such participant / shareholder in the form of written resolution.Board of Directors
Unlike other jurisdictions, the Board of Directors under the Russian laws is a supervisory body rather than executive one. It is responsible for the overall oversight and direction of the company’s activities. As mentioned above, both LLCs and non-public JSCs may operate without the Board of Directors. If there is no Board of Directors, almost all issues of its competence (except of calling the GSM and approval of its agenda) may be vested in the GSM.
The Board of Directors may include the individuals only. As a general rule, the Board member position is unpaid (however, the GSM may decide to remunerate and compensate the Board members). The members of executive bodies cannot comprise more than ¼ of the Board of Directors, nor can a CEO act as the Chairman of the Board of Directors.
If an LLC opts to have the Board of Directors, its election, terms of office, competence and decision-making procedures are all governed by the charter of the company and the internal regulations. The law does not provide for any mandatory rules in this regard but rather points out some typical issues that may belong to its competence such as:
- giving main directions to the company's activities;
- appointment and compensation of executive bodies, their early termination;
- the company's participation in business associations;
- approval of the company’s internal documents;
- establishment of branches and representative offices;
- approval of major transactions and interested-party transactions in cases provided by laws;
- preparing, convening and holding the GSM etc.
In JSCs, the regulation of the Board of Directors is much more detailed. The number of directors depends on the number of shareholders holding voting shares: three as a minimum for non-public JSCs (five for PJSCs), seven if a company has more than 1,000 shareholders, nine if more than 10,000 shareholder. The Board members are elected annually by the GSM and may be re-elected unlimited number of times; the GSM may also dismiss the Board at any time. The Board is elected by cumulative voting. In addition to the issues listed above, the Board’s competence must include, in particular:
- approval of decision to issue company’s shares (or securities converted into shares) and placement memorandum;
- recommendations on the amount of dividends and its payment terms;
- use of reserve fund and other funds of the company;
- approval of annual report and annual financial statements (if so provided by the charter);
- approval of the registrar’s candidature and its terms of engagement as well as its termination etc.
As a general rule, the resolutions by Board of Directors are passed by a majority vote, unless the law provide for a qualified majority (e.g., ¾ for decisions to temporary suspend the powers of CEO in some cases etc.) or unanimity (e.g., charter capital increase by means of additional share issue, issue of bonds convertible into shares etc.); the company’s charter may also stipulate the higher thresholds. Each Board member has one vote; the charter may provide for the right of the decisive vote of the chairman in case of equality of votes.CEO and the Management Board
The CEO (may also have a title of Director General, Director, President of otherwise as per the company’s charter) is responsible for executive management functions and other day-to-day operations of the company. It is the only body entitled to act on behalf of the company without the power of attorney.
The CEO may be represented by: (1) an individual; (2) two or more individuals acting jointly as one CEO (“two-signature rule”); (3) two or more individuals acting independently as two or more CEOs (not to be confused with the Management Board, below); and (4) external legal entity (or individual manager) acting on a contractual basis as a management company (or a manager).
CEO is appointed by the GSM or the Board of Directors (if so provided by the company’s charter). There is no statutory prescribed term of office of CEO so the issue must be governed by the charter.
CEO has very broad powers as it is generally in charge of all issues that fall outside the competence of GSM or the Board of Directors. Among other things, it has the authority to implement the resolutions of GSM and the Board of Directors, to represent the company, to enter into transactions on its behalf, to handle HR issues, to issue powers of attorney and to give the binding instructions to the employees. The authority of CEO may be limited by making some of decisions subject to approval by GSM or the Board of Directors (e.g., transactions over a certain value etc.); such limitations must be set out in the company’s charter.
In Russian companies, CEO is exposed to a vast number of liability norms throughout plenty of branches of legislation. It bears full responsibility for the company’s activities under labour, tax, customs law etc. and may be fined along with the company itself or even become a subject to criminal proceedings. The general advise is that a person gets a forehead knowledge of basic applicable rules and possible sanctions (both general ones and those of the relevant sector / industry) and seeks a timely legal advice in case of any ambiguities.
A CEO may also face civil liability as it may be claimed by the company itself or by a participant / shareholder to compensate the company for any damages resulting from the breach of obligation “to act reasonably and in good faith while serving the company’s interests” (same may be applied to the members of the Board of Directors or the Management Board, as well as to “shadow directors”). As mentioned above, in certain cases the managers and controlling persons may be liable in the event the company becomes insolvent.
The Management Board is a collegial body that does not have executive powers but functions alongside with CEO rather as an advisory organ. It’s typical role includes discussion of the company’s day-to-day operating activities, joint elaboration of most important decisions, coordination of various subdivisions etc. If the Management Board is established in a company, CEO acts as its chair.
From the practical point of view, Management Boards are unusual body for wholly owned subsidiaries of foreign entities which typically need less complicated governing structure. Moreover, Management Board members are considered employees of the company which entails working permits and working visas for non-Russian individuals.