Ivan Viktorov on Commercial Partnerships

In December 2011, the State Duma passed two laws designed to increase the attractiveness of the Russian economy and to draw investments from venture funds.

These are the law ‘On Commercial Partnerships’ of December 3, 2011 № 380-FZ (the Law) and the law “On Amendments to Article 50 of the Civil Code of the Russian Federation in Connection with the Adoption of the Federal Law ‘On Commercial Partnerships’” of December 6, 2011 № 393-FZ (Amendments to the Civil Code).

They introduce a new form of legal entity, a commercial partnership.

Ivan Viktorov
senior associate

Muranov, Chernyakov & Partners
+7 495 783-74-50

Amendments to article 50 of the Civil Code suggest that commercial partnerships are given general capacity. In other words, they can carry out any business in any manner not prohibited by law in any economic sector and even, if required by law, those businesses that require special permission (license).

Few restrictions include the prohibition on the issuance of bonds and other securities, on advertising its product or services, and on participation in other companies (except joining associations and unions).

The law ‘On Commercial Partnerships’ regulates creation, registration, management, operation, reorganization and liquidation of partnerships.

The definition of a partnership, as given by the Law, states, in particular, that a partnership is a commercial entity created by at least two partners. It is managed by partners in accordance with the Law and a partnership agreement. As the law stands, non-partners too can take part in the management of a partnership, if this is agreed in a partnership agreement.

The law does not set a minimum capital. This, in my opinion, can have both negative and positive consequences.

The absence of a minimal capital requirement helps creation of new legal entities which, according to the authors of the law, should facilitate investment in the Russian economy, including from venture capital funds.

It is quite possible that the absence of minimum capital is good for venture capital, but granting general capacity to partnerships enables them to carry out any business, even unrelated to investments. This, together with the absence of statutory requirement on the minimum amount of assets guaranteeing the interests of creditors, can lead to abusive practices.

The articles of association is the only founding document of a partnership. In addition, however, there must be a partnership agreement.

The articles of association must contain certain mandatory provisions noted in article 9 of the Law (the name of the partnership, its purpose and activities, location, size and composition of the share capital, recordkeeping, information about the partnership agreement).

A partnership agreement, on the other hand, can regulate a much wider range of issues.

The partnership agreement can contain any provision, not conflicting with the Law, on managing the partnership, its activities, reorganization or winding up.

The agreement must be certified by a notary public and comes into force from the date of such certification. A copy of the agreement must be stored by the notary. The agreement is not subject to state registration, and information about it is not contained in the unified state register of legal entities.

The only governing body of the partnership required by the law is the sole executive body (CEO, president, and so on). Only a natural person and a partner can become the sole executive body.

However, the partnership agreement can create any management structure (including the board of partners, board of directors and so on) known to the modern law. The powers of such management bodies are defined by the partnership agreement.

Given the fact that any person who is not a partner, can be a party to the partnership agreement and that the rights and duties can be assigned in any manner, even disproportionately to the amount of shares owned or contributions made, it may happen that a person who is not a partner (and, therefore, is not liable to the creditors) and who has a ‘separate agreements’ (including those under a foreign law) with one or more partners, will be able to abuse its rights or carry out activities aimed, for instance, at money laundering or unfair competition. A party to the partnership agreement, but not a partner, has no corporate connection (does not belong to the group of affiliated persons) and can abuse the dominant position on the market.

The agreement can restrict the right of partners, for example, to withdraw from partnership, it can provide for the exclusion of a partner, redemption of shares (including forced redemption).

The law does not regulate the legal position of third persons involved in the partnership agreement. For example, while a partner is liable for breach of her obligations, which includes damages, penalties, fines and the like, such provisions are not, strictly speaking, mandatory to third persons.

A partnership agreement can be regulated by foreign law. In effect, management of a partnership can be moved outside the Russian Federation.

If we compare the partnership agreement with the shareholders agreement, restrictions inherent in the shareholders agreement - as to the nature of decisions that may be regulated by the shareholders agreement as well as on the parties to the agreement - become obvious.

In Russian law, the shareholders agreements exist as an agreement between the participants of limited liability companies. The case law in respect of such agreements is ambiguous.

A good example is the ‘experiment’ of the shareholders Verniy Znak Ltd. Here, courts ruled that if the shareholders agreement contradicts to the article of association, the shareholders agreement is void (the decision of the Federal Appellate Court of May 30, 2011№ KG-A40/4971-11-P). We can expect, therefore, that the judiciary is likely to take a negative view on the partnership agreement as well, and the attempts to create a more favourable investment climate are going to fail. Instead, a wide field for abuse will emerge.

As a summary, I would agree with the opinion of the Presidential Council. The law is a ‘raw’ attempt to copy the limited liability partnership. It does not integrate into the Russian legal system. The provisions of the law are in direct conflict with the Constitution, the Civil Code and other legal acts governing the civil law in Russia.

Muranov, Chernyakov & Partners