Foundation of JV in Russian Jurisdiction
September 7, 2012 By DS Law
Deciding on a joint venture’s location (joint venture vehicle) is one of the most important steps in the planning and structuring of a joint venture. Such a decision generally depends on different factors, including but not limited to preferable tax regime, flexible corporate legislation, commercial benefits, cost of incorporation and management, nationality specifics, accounting requirements and many others.
Heretofore, Russia rarely came up as the preferred location for a joint venture, with the exception, perhaps, of specific joint ventures with Russian state companies and corporations. More often investors prefer to establish a joint venture in some European jurisdiction with a wholly-owned subsidiary in Russia that carries-on the joint business. However, looking at the legal framework in place in Russia, is this situation justifiable?
Incorporation of a Joint Venture (JV) in Russia
Legal entities' types that are mainly used to form a private JV in Russia are the limited liability company (LLC) and closed joint-stock company (CJSC). Each type has its specifics that shall be properly considered with regard to its advantages or disadvantages for a planned joint venture.
As procedures and costs of their incorporation are already subject of many articles and "Doing Business in Russia" materials, I will not dwell on them mentioning only that in practice, the terms and cost of incorporating a JV in Russia are comparable to other popular European jurisdictions.
It should be noted that there are specific limitations on participation of foreign investors in Russian companies carrying on business in several spheres (e.g. banking, insurance, "strategic" spheres, etc.)
Charter Capital and Internal Funds
No matter what type of legal entity is chosen to form a JV, the law requires that 50% of the charter capital be paid either prior to state registration (in case of an LLC) or no more than 3 months following the state registration of the joint venture (in case of CJSC). The second 50% of the charter capital shall be paid within one year of registration with the state. Given the required minimal charter capital for an LLC or CJSC is equal to 10,000 Russian roubles (approximately 333 USD) , this requirement can not be considered cumbersome.
Similar to many European countries, the charter capital for a JV in Russia can be secured in cash, securities, property and property rights and/or other rights that have estimated money value. All non-monetary options (except for in-kind contribution to LLC with nominal value less than 20.000 Russian roubles) require an independent appraisal first.
In the course of business of a JV the amount of its net assets shall be bigger than the nominal amount of its charter capital. If the amount of a JV net assets is less than the amount of its charter capital at the end of a financial year following the second or any ensuing financial year when the amount of a JV net assets was less than the amount of its charter capital, the JV shall (i) decide on decrease of its charter capital, or (ii) be liquidated.
For CJSC there is an obligation to establish a special reserve fund in amount not less than 5% of the charter capital. The sums accumulated in that fund shall be used for cover of losses, bonds redemption and buy-back of own shares.
Limitation of Liability
Participants in a JV (irrespective whether it is formed as an LLC or CJSC) can enjoy so called "limited liability", i.e. such participants could not be considered liable for obligations of a JV and their risk of losses, related to the respective JV activity, is limited to the amount of the JV's charter capital they subscribed for.
There are several exceptions from the "limited liability" principal, e.g. a participant of a JV could be considered liable for obligations of that JV (i) subsidiary, in the event of the JV's bankruptcy resulting from the actions or lack thereof of the participant in question, and (ii) jointly and severally, within the unpaid part of its share in the JV (if the participant in question does not pay-up its share in full).
Tax Efficiency
The rules of taxation for a Russian JV are generally similar to those applied to other legal entities, including, but not limited to profits tax (20%), VAT (18%), etc.
Generally a tax rate of 9% applies to dividends paid to a Russian JV from its Russian or foreign subsidiaries. However, a Russian JV could enjoy a preferential 0% tax rate on dividends paid by its Russian or foreign subsidiaries if on the date of a decision on dividend payment such JV owns more than 50% share in the subsidiary for more than 365 days. It is worth mentioning that this preferential tax rate does not apply to dividends from foreign subsidiaries incorporated in countries with offshore status.
Dividends paid to foreign participants of a Russian JV are subject to withholding tax at a rate that varies from 5% to 15%, depending on the provisions of the respective Double Tax Treaty between Russia and the country of such foreign participant incorporation or residence. If there is no Double Tax Treaty, the maximum withholding tax rate of 15% shall apply.
Therefore, looking at the issue from the point of dividend taxation, as a holding company, a Russian JV could compete with many European jurisdictions.
Moreover, when JV selling shares of Russian subsidiaries the 0% tax rate on profits could apply to such transactions if these shares remain with the JV for more than 5 (five) years and:
(i) were not publicly traded during the holding period; or
(ii) though publicly traded, including during the holding period, are shares of the innovative sector of the economy; or
(iii) were not publicly traded at the time of their acquisition, are publicly traded at the time of their sale, but are shares of the innovative sector of the economy.
Management of JV
In accordance with the Russian legislation LLC/CJSC shall have two management bodies:
1. The General Meeting of Participants/Shareholders (the General Meeting), that decides on main business issues; and
2. The Sole Executive Body (the General Director), that manages day-to-day operations.
Additionally, the Supervisory Board (Board of Directors) and/or the Collegial Executive Body (Management Board) could be formed.
While the exclusive authority of each JV management body is stipulated in the respective legislation and cannot be delegated to other bodies, other responsibilities can be amended, subject to a JV's charter (this is more so for LLCs and is quite limited for CJSCs). Therefore, there is quite flexibility (although limited) on forming management bodies of a Russian JV and authorizing them.
Decision making procedures of JV collegial bodies (except for several procedures regarding General Meetings) are also quite flexible and could be agreed by the JV participants in the charter or other internal JV documents.
There is however, a disadvantage in managing a Russian JV: the Sole Executive Body that acts on behalf of a JV, in matters including but not limited to the signature of documents and entry into transactions cannot consist of two persons. In many European countries, the opposite is the case.
Shareholders' Agreements
In Russia, like in many other popular jurisdictions, participants of a JV can enter into shareholders’ agreements (SHA) with regard to their rights as participants of a JV. At that JV itself cannot be a party of such SHAs. Such agreements are deemed valid under the Russian law once they are presented as a single document executed in a written form. Other issues that may be highlighted in SHAs include obligations of its party inter alia to:
• Vote in a certain way on General Meetings;
• Coordinate voting on General Meetings with other venturers;
• Purchase or sell shares at pre-agreed price and/or upon pre-agreed circumstances;
• Refrain from selling shares before pre-agreed circumstances; and
• Perform other actions in concert with other parties regarding JV management, activity, reorganisation and liquidation.
Unfortunately, since the concept of SHA is quite new institute to the Russian corporate system, its enforceability is still in question. So far, Russian courts have refused to enforce many important provisions in an SHA if these are not reflected in the charter, in particular:
• Obligations of parties to vote in a certain way at General Meetings;
• The procedure for assembling a General Meeting, other than that stipulated in the legislation;
• Agreements regarding the distribution of profits between venturers that are not on a pro-rata basis;
• Restrictions/limitations on the disposal of shares to third parties.
Moreover, Russian courts do not recognise the provision in a SHA that allows one of the venturers to nominate the Sole Executive Body and obliges the others to vote for such nominee.
There are still serious limitations with regard to enforcement of SHA provisions on specific obligations of its parties on voting on General Meetings. Thus, even if a party to SHA votes in breach of its SHA commitments at a General Meeting the other party cannot claim for cancellation of the General Meeting decision made because of such voting.
One more factor than limits the effectiveness of an SHA is the limited list of sanctions legally provided for breach of these types of an agreement. If one of the parties violates an SHA that party is only expected to liquidate the damages, face a penalty or compensate for the losses. All punitive options applied in many popular jurisdictions are not enforceable within the Russian legal framework.
Limitations on Share Disposal
The important factors considered before going into a JV are:
• The stability of the relations between the parties involved; and
• Availability of shares to third parties: this must be very limited.
Like in other holding jurisdictions, Russian corporate legislation is familiar with special measures, such as the pre-emption right to buy shares being sold by non-selling venturers. In Russian legislation there is a possibility to provide JV itself with a pre-emption right if other venturers are not ready to buy such shares. Moreover, in LLC there is room for the prohibition of share disposal, without prior consent of other participants.
Again, there is a failure in ensuring the above limitation. Thus, with regard to pre-emption rights and the prohibition of sale of shares the only protection for the non-selling venturer provided for by the legislation is to claim for transfer of the rights and obligations of the purchaser of the shares, sold in breach of the pre-emption right and the prohibition of sale, to such non-selling venturer. At that, such claim shall be brought to court only within 3 (three) months from the date when the non-selling venturer got to know or shall get to know about such infringing sale.
Unfortunately the Russian legislation and court practice do not allow usage of such important protective instruments as:
• Tag-along right (a contractual obligation which provides the right to "exit" to a venturer when the other venturer sells its shares in the JV to a third party. Generally this "exit" right means the right of a noin-selling venturer to join the share sale transaction of the selling venturer, and the selling venturer shall ensure that the third party purchaser extend its offer on the non-selling venturer's stake.); and
• Drag-along right (a contractual obligation which enables the selling venturer to force the non-selling venturer to join in the share sale transaction on the same price, terms, and conditions as the selling venturer).
Distribution of profits.
Profits in a Russian JV could be distributed quarterly, half-yearly or yearly, upon decision of the General Meeting, subject to several limitations (e.g. it is prohibited to dicede and pay dividends if a JV is qualified for bankruptcy or the amount of its net assets is (or can become after paying dividends) less than its charter capital).
A Russian JV incorporated in a form of an LLC can agree to different profit distribution procedures (including a non pro-rata basis). A CJSC is less flexible with regard to profit distribution, for example, the non pro-rata distribution can be applied only to different classes of shares.
Put/Call Option Agreements
Often, especially when one of the participants of a JV is an institutional investor, the parties of a JV need special vehicles of profit/loss fixation. The key role of such vehicles is usually played by special instruments:
• "Put" option, which means the right of one venturer to require the other venturer to purchase that one venturer's shares; and
• "Call" option, which means the right of one venturer to require the other venturer to sell that other venturer's shares to the requesting venturer.
Generally within put/call option agreements venturers pre-agree on (i) circumstances which can "trigger" the relevant put/call option and (ii) price (or specific price formula) at which such put/call option shall be executed.
Such instruments can be used in Russia; however, their application is substantially limited due to the specific regulation of conditional transactions stipulating their general prohibition in situations where the conditions are dependent on the will of the parties of such transactions. Therefore, any put/call option where its "trigger" is conditional upon any of the parties of such option will could be considered as void and unenforceable.
Russian legislation provides for the possibility of a venturer to "exit" from a JV in special circumstances, including: voting against a major transaction, or against reorganization of the JV, etc. In that case such venturer is entitled to require buy-out of its shares by the JV. Moreover, in a JV incorporated in a form of LLC venturer can withdraw from the JV. However, the above rights are not similar to a "put" option as the parties cannot pre-agree on price or other circumstances of such buy-out.
Deadlock Resolution
Incorporating a JV its participants try to pre-agree possible settlement of so called "deadlock" (situations when the venturers fail to agree on strategy or other key issues affecting the further existence of the JV). In general practice, a deadlock can be resolved by several means:
• Pacific settlement: several procedures for resolving a deadlock that enable a JV to continue, including, but not limited to, (i) casting vote of a chairman or independent director, (ii) reference to arbitration or mediation, (iii) reference to an expert or special panel, etc.
• "Buy/sell procedures": special procedures, that in one way or another force one of the venturers to sell its shares to the other. Among them are such specific mechanisms as "Russian roulette" , "Texas shoot-out" , "Dutch auction" , "Sale shoot-out" , etc.
• Put/call option: this opportunity was discussed in previous paragraph of this article.
• JV's winding-up: the possibility to begin voluntary winding-up on a pre-agreed conditions (e.g. on distribution of assets etc.).
• Joint sale: one venturer may initiate joint sale of all JV shares to a third party. That procedure is unusually to be used just for deadlock resolution and cover also drag-along right which was already discussed hereabove.
Unfortunately, the Russian legal framework does not provide venturers with the possibility to enforce all those deadlock resolution options. Thus, enforceability of buy/cell procedures and joint sale remains doubtful if not to say impossible. The possibility to use put/call options is also limited (see above).
Notwithstanding that venturers have the right to agree on their actions in liquidation (as it was mentioned above in "Shareholders' Agreement" paragraph) the liquidation procedure is quite formal and any agreements on change of that procedure or change in assets' distribution proportion (especially for CJSC) could be considered as void by courts.
Therefore, it is more preferable for participants of a Russian JV to agree on pacific settlement then to try to enforce "divorce" procedures.
Conclusion
All the above shows that Russian jurisdiction could be considered as jurisdiction for a JV, especially, for doing business in Russia or CIS countries. However, the Russian legal framework is not quite flexible for using mechanisms and procedures that are customary in other JV jurisdictions that should be taken into account before opting to incorporate a JV in Russia.
1 The term "joint venture" in this article means a "joint venture vehicle", i.e. a company holding business assets of the joint venture.
2 This is a general rule that has exceptions, e.g. for banks and insurance companies.
3 The list of countries with offshore status was adopted by Order of the Ministry of Finance of the Russian Federation No.108н of 13 November 2007.
4That 0% tax rate will apply only to shares of Russian companies purchased after 1 January 2011.
5 In LLC they are called "participants' agreements".
6 E.g. Decision of Arbitrazh Court of Moscow of 24 November 2010, Resolution of Ninth Arbitrazh Appellation Court of 17 February 2011 №09АП-34453/2010, Resolution of Federal Arbitrazh Court of Moscow Region of 30 May 2011 № КГ-А40/4971-11-П and Decision of Supreme Arbitrazh Court of 12 September 2011 № ВАС-10364/11 with regard to case №А40-140918/09-132-894.
7 One deadlock party (A) serves a notice to the other (B) with an offer to buy B shares at a price per share specified in such notice; B is entitled either to sell its shares at the specified price, or to buy A shares at the same specified price.
8 Each venturer serves an offer to the other stating a price at which it is ready to purchase the other venturer's shares (those offers shall be opened together); venturer that offers a bigger price shall buy the shares of the other venturer.
9 Each venturer serves an offer to the other stating a price at which it is ready to sell its shares to the other (those offers shall be opened together); venturer that offers a lesser price shall sell its shares to the other venturer.
10 One deadlock party (A) serves a notice to the other (B) with an offer to sell A shares at a price per share specified in such notice; B is entitled either to buy A shares at the specified price, or to serve a notice to A with an offer to sell A shares at a price per share lower than in the A notice; if this is the case A has the same rights to accept B offer or make a counter-notice. The procedure terminates when A or B accept an offer to buy the other's shares.
ABOUT THE AUTHOR: Alexander Filimonov, Partner
Specializations: corporate law and intellectual property, mergers and acquisitions (M&A), restructuring of company groups, joint ventures. Experienced in complex legal support for investment projects, transactions to buy and sell businesses, formation and operation of joint ventures, legal support for restructuring company groups, complex Legal Due Diligence, legal support for transactions to dispose of intellectual property.
Member of the Association of European Businesses.
Teacher in the Department of Trade Policy at the National Research University's Higher School of Economics (NRU HSE). In 2012 Mr. Filimonov acquired an advocate status.
Copyright DS Law
More information about DS Law
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Incorporation of a Joint Venture (JV) in Russia
Legal entities' types that are mainly used to form a private JV in Russia are the limited liability company (LLC) and closed joint-stock company (CJSC). Each type has its specifics that shall be properly considered with regard to its advantages or disadvantages for a planned joint venture.
As procedures and costs of their incorporation are already subject of many articles and "Doing Business in Russia" materials, I will not dwell on them mentioning only that in practice, the terms and cost of incorporating a JV in Russia are comparable to other popular European jurisdictions.
It should be noted that there are specific limitations on participation of foreign investors in Russian companies carrying on business in several spheres (e.g. banking, insurance, "strategic" spheres, etc.)
Charter Capital and Internal Funds
No matter what type of legal entity is chosen to form a JV, the law requires that 50% of the charter capital be paid either prior to state registration (in case of an LLC) or no more than 3 months following the state registration of the joint venture (in case of CJSC). The second 50% of the charter capital shall be paid within one year of registration with the state. Given the required minimal charter capital for an LLC or CJSC is equal to 10,000 Russian roubles (approximately 333 USD) , this requirement can not be considered cumbersome.
Similar to many European countries, the charter capital for a JV in Russia can be secured in cash, securities, property and property rights and/or other rights that have estimated money value. All non-monetary options (except for in-kind contribution to LLC with nominal value less than 20.000 Russian roubles) require an independent appraisal first.
In the course of business of a JV the amount of its net assets shall be bigger than the nominal amount of its charter capital. If the amount of a JV net assets is less than the amount of its charter capital at the end of a financial year following the second or any ensuing financial year when the amount of a JV net assets was less than the amount of its charter capital, the JV shall (i) decide on decrease of its charter capital, or (ii) be liquidated.
For CJSC there is an obligation to establish a special reserve fund in amount not less than 5% of the charter capital. The sums accumulated in that fund shall be used for cover of losses, bonds redemption and buy-back of own shares.
Limitation of Liability
Participants in a JV (irrespective whether it is formed as an LLC or CJSC) can enjoy so called "limited liability", i.e. such participants could not be considered liable for obligations of a JV and their risk of losses, related to the respective JV activity, is limited to the amount of the JV's charter capital they subscribed for.
There are several exceptions from the "limited liability" principal, e.g. a participant of a JV could be considered liable for obligations of that JV (i) subsidiary, in the event of the JV's bankruptcy resulting from the actions or lack thereof of the participant in question, and (ii) jointly and severally, within the unpaid part of its share in the JV (if the participant in question does not pay-up its share in full).
Tax Efficiency
The rules of taxation for a Russian JV are generally similar to those applied to other legal entities, including, but not limited to profits tax (20%), VAT (18%), etc.
Generally a tax rate of 9% applies to dividends paid to a Russian JV from its Russian or foreign subsidiaries. However, a Russian JV could enjoy a preferential 0% tax rate on dividends paid by its Russian or foreign subsidiaries if on the date of a decision on dividend payment such JV owns more than 50% share in the subsidiary for more than 365 days. It is worth mentioning that this preferential tax rate does not apply to dividends from foreign subsidiaries incorporated in countries with offshore status.
Dividends paid to foreign participants of a Russian JV are subject to withholding tax at a rate that varies from 5% to 15%, depending on the provisions of the respective Double Tax Treaty between Russia and the country of such foreign participant incorporation or residence. If there is no Double Tax Treaty, the maximum withholding tax rate of 15% shall apply.
Therefore, looking at the issue from the point of dividend taxation, as a holding company, a Russian JV could compete with many European jurisdictions.
Moreover, when JV selling shares of Russian subsidiaries the 0% tax rate on profits could apply to such transactions if these shares remain with the JV for more than 5 (five) years and:
(i) were not publicly traded during the holding period; or
(ii) though publicly traded, including during the holding period, are shares of the innovative sector of the economy; or
(iii) were not publicly traded at the time of their acquisition, are publicly traded at the time of their sale, but are shares of the innovative sector of the economy.
Management of JV
In accordance with the Russian legislation LLC/CJSC shall have two management bodies:
1. The General Meeting of Participants/Shareholders (the General Meeting), that decides on main business issues; and
2. The Sole Executive Body (the General Director), that manages day-to-day operations.
Additionally, the Supervisory Board (Board of Directors) and/or the Collegial Executive Body (Management Board) could be formed.
While the exclusive authority of each JV management body is stipulated in the respective legislation and cannot be delegated to other bodies, other responsibilities can be amended, subject to a JV's charter (this is more so for LLCs and is quite limited for CJSCs). Therefore, there is quite flexibility (although limited) on forming management bodies of a Russian JV and authorizing them.
Decision making procedures of JV collegial bodies (except for several procedures regarding General Meetings) are also quite flexible and could be agreed by the JV participants in the charter or other internal JV documents.
There is however, a disadvantage in managing a Russian JV: the Sole Executive Body that acts on behalf of a JV, in matters including but not limited to the signature of documents and entry into transactions cannot consist of two persons. In many European countries, the opposite is the case.
Shareholders' Agreements
In Russia, like in many other popular jurisdictions, participants of a JV can enter into shareholders’ agreements (SHA) with regard to their rights as participants of a JV. At that JV itself cannot be a party of such SHAs. Such agreements are deemed valid under the Russian law once they are presented as a single document executed in a written form. Other issues that may be highlighted in SHAs include obligations of its party inter alia to:
• Vote in a certain way on General Meetings;
• Coordinate voting on General Meetings with other venturers;
• Purchase or sell shares at pre-agreed price and/or upon pre-agreed circumstances;
• Refrain from selling shares before pre-agreed circumstances; and
• Perform other actions in concert with other parties regarding JV management, activity, reorganisation and liquidation.
Unfortunately, since the concept of SHA is quite new institute to the Russian corporate system, its enforceability is still in question. So far, Russian courts have refused to enforce many important provisions in an SHA if these are not reflected in the charter, in particular:
• Obligations of parties to vote in a certain way at General Meetings;
• The procedure for assembling a General Meeting, other than that stipulated in the legislation;
• Agreements regarding the distribution of profits between venturers that are not on a pro-rata basis;
• Restrictions/limitations on the disposal of shares to third parties.
Moreover, Russian courts do not recognise the provision in a SHA that allows one of the venturers to nominate the Sole Executive Body and obliges the others to vote for such nominee.
There are still serious limitations with regard to enforcement of SHA provisions on specific obligations of its parties on voting on General Meetings. Thus, even if a party to SHA votes in breach of its SHA commitments at a General Meeting the other party cannot claim for cancellation of the General Meeting decision made because of such voting.
One more factor than limits the effectiveness of an SHA is the limited list of sanctions legally provided for breach of these types of an agreement. If one of the parties violates an SHA that party is only expected to liquidate the damages, face a penalty or compensate for the losses. All punitive options applied in many popular jurisdictions are not enforceable within the Russian legal framework.
Limitations on Share Disposal
The important factors considered before going into a JV are:
• The stability of the relations between the parties involved; and
• Availability of shares to third parties: this must be very limited.
Like in other holding jurisdictions, Russian corporate legislation is familiar with special measures, such as the pre-emption right to buy shares being sold by non-selling venturers. In Russian legislation there is a possibility to provide JV itself with a pre-emption right if other venturers are not ready to buy such shares. Moreover, in LLC there is room for the prohibition of share disposal, without prior consent of other participants.
Again, there is a failure in ensuring the above limitation. Thus, with regard to pre-emption rights and the prohibition of sale of shares the only protection for the non-selling venturer provided for by the legislation is to claim for transfer of the rights and obligations of the purchaser of the shares, sold in breach of the pre-emption right and the prohibition of sale, to such non-selling venturer. At that, such claim shall be brought to court only within 3 (three) months from the date when the non-selling venturer got to know or shall get to know about such infringing sale.
Unfortunately the Russian legislation and court practice do not allow usage of such important protective instruments as:
• Tag-along right (a contractual obligation which provides the right to "exit" to a venturer when the other venturer sells its shares in the JV to a third party. Generally this "exit" right means the right of a noin-selling venturer to join the share sale transaction of the selling venturer, and the selling venturer shall ensure that the third party purchaser extend its offer on the non-selling venturer's stake.); and
• Drag-along right (a contractual obligation which enables the selling venturer to force the non-selling venturer to join in the share sale transaction on the same price, terms, and conditions as the selling venturer).
Distribution of profits.
Profits in a Russian JV could be distributed quarterly, half-yearly or yearly, upon decision of the General Meeting, subject to several limitations (e.g. it is prohibited to dicede and pay dividends if a JV is qualified for bankruptcy or the amount of its net assets is (or can become after paying dividends) less than its charter capital).
A Russian JV incorporated in a form of an LLC can agree to different profit distribution procedures (including a non pro-rata basis). A CJSC is less flexible with regard to profit distribution, for example, the non pro-rata distribution can be applied only to different classes of shares.
Put/Call Option Agreements
Often, especially when one of the participants of a JV is an institutional investor, the parties of a JV need special vehicles of profit/loss fixation. The key role of such vehicles is usually played by special instruments:
• "Put" option, which means the right of one venturer to require the other venturer to purchase that one venturer's shares; and
• "Call" option, which means the right of one venturer to require the other venturer to sell that other venturer's shares to the requesting venturer.
Generally within put/call option agreements venturers pre-agree on (i) circumstances which can "trigger" the relevant put/call option and (ii) price (or specific price formula) at which such put/call option shall be executed.
Such instruments can be used in Russia; however, their application is substantially limited due to the specific regulation of conditional transactions stipulating their general prohibition in situations where the conditions are dependent on the will of the parties of such transactions. Therefore, any put/call option where its "trigger" is conditional upon any of the parties of such option will could be considered as void and unenforceable.
Russian legislation provides for the possibility of a venturer to "exit" from a JV in special circumstances, including: voting against a major transaction, or against reorganization of the JV, etc. In that case such venturer is entitled to require buy-out of its shares by the JV. Moreover, in a JV incorporated in a form of LLC venturer can withdraw from the JV. However, the above rights are not similar to a "put" option as the parties cannot pre-agree on price or other circumstances of such buy-out.
Deadlock Resolution
Incorporating a JV its participants try to pre-agree possible settlement of so called "deadlock" (situations when the venturers fail to agree on strategy or other key issues affecting the further existence of the JV). In general practice, a deadlock can be resolved by several means:
• Pacific settlement: several procedures for resolving a deadlock that enable a JV to continue, including, but not limited to, (i) casting vote of a chairman or independent director, (ii) reference to arbitration or mediation, (iii) reference to an expert or special panel, etc.
• "Buy/sell procedures": special procedures, that in one way or another force one of the venturers to sell its shares to the other. Among them are such specific mechanisms as "Russian roulette" , "Texas shoot-out" , "Dutch auction" , "Sale shoot-out" , etc.
• Put/call option: this opportunity was discussed in previous paragraph of this article.
• JV's winding-up: the possibility to begin voluntary winding-up on a pre-agreed conditions (e.g. on distribution of assets etc.).
• Joint sale: one venturer may initiate joint sale of all JV shares to a third party. That procedure is unusually to be used just for deadlock resolution and cover also drag-along right which was already discussed hereabove.
Unfortunately, the Russian legal framework does not provide venturers with the possibility to enforce all those deadlock resolution options. Thus, enforceability of buy/cell procedures and joint sale remains doubtful if not to say impossible. The possibility to use put/call options is also limited (see above).
Notwithstanding that venturers have the right to agree on their actions in liquidation (as it was mentioned above in "Shareholders' Agreement" paragraph) the liquidation procedure is quite formal and any agreements on change of that procedure or change in assets' distribution proportion (especially for CJSC) could be considered as void by courts.
Therefore, it is more preferable for participants of a Russian JV to agree on pacific settlement then to try to enforce "divorce" procedures.
Conclusion
All the above shows that Russian jurisdiction could be considered as jurisdiction for a JV, especially, for doing business in Russia or CIS countries. However, the Russian legal framework is not quite flexible for using mechanisms and procedures that are customary in other JV jurisdictions that should be taken into account before opting to incorporate a JV in Russia.
1 The term "joint venture" in this article means a "joint venture vehicle", i.e. a company holding business assets of the joint venture.
2 This is a general rule that has exceptions, e.g. for banks and insurance companies.
3 The list of countries with offshore status was adopted by Order of the Ministry of Finance of the Russian Federation No.108н of 13 November 2007.
4That 0% tax rate will apply only to shares of Russian companies purchased after 1 January 2011.
5 In LLC they are called "participants' agreements".
6 E.g. Decision of Arbitrazh Court of Moscow of 24 November 2010, Resolution of Ninth Arbitrazh Appellation Court of 17 February 2011 №09АП-34453/2010, Resolution of Federal Arbitrazh Court of Moscow Region of 30 May 2011 № КГ-А40/4971-11-П and Decision of Supreme Arbitrazh Court of 12 September 2011 № ВАС-10364/11 with regard to case №А40-140918/09-132-894.
7 One deadlock party (A) serves a notice to the other (B) with an offer to buy B shares at a price per share specified in such notice; B is entitled either to sell its shares at the specified price, or to buy A shares at the same specified price.
8 Each venturer serves an offer to the other stating a price at which it is ready to purchase the other venturer's shares (those offers shall be opened together); venturer that offers a bigger price shall buy the shares of the other venturer.
9 Each venturer serves an offer to the other stating a price at which it is ready to sell its shares to the other (those offers shall be opened together); venturer that offers a lesser price shall sell its shares to the other venturer.
10 One deadlock party (A) serves a notice to the other (B) with an offer to sell A shares at a price per share specified in such notice; B is entitled either to buy A shares at the specified price, or to serve a notice to A with an offer to sell A shares at a price per share lower than in the A notice; if this is the case A has the same rights to accept B offer or make a counter-notice. The procedure terminates when A or B accept an offer to buy the other's shares.
ABOUT THE AUTHOR: Alexander Filimonov, Partner
Specializations: corporate law and intellectual property, mergers and acquisitions (M&A), restructuring of company groups, joint ventures. Experienced in complex legal support for investment projects, transactions to buy and sell businesses, formation and operation of joint ventures, legal support for restructuring company groups, complex Legal Due Diligence, legal support for transactions to dispose of intellectual property.
Member of the Association of European Businesses.
Teacher in the Department of Trade Policy at the National Research University's Higher School of Economics (NRU HSE). In 2012 Mr. Filimonov acquired an advocate status.
Copyright DS Law
More information about DS Law
View all articles published by DS Law
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
