Draft law regulating specifics of reorganization of legal entities is developed
The Ministry of economic development of Russia prepared amendments to the Federal law № 208-FZ dated December 26, 1994 “On joint-stock companies” (hereafter – “the Law on JSC”), the Federal law № 129-FZ dated February 08, 1998 “On limited liability companies” (hereafter - “the Law on LLC”) and the Federal law № 129-FZ dated August 08, 2001 “On state registration of legal entities and sole entrepreneurs” (hereafter – “the Law on registration”).The main purpose of the amendments is to improve the reorganization procedure, provide rules for reorganization involving several forms of reorganization (hereafter – “Complex reorganization”), simplify procedure for notification of interested persons and amend rules for registering results of reorganization in the Unified State Register of Legal Entities (hereafter – “USRLE”).After the above amendments enter into force:
- General provisions of the Law on JSC and the Law on LLC will be supplemented, which will allow to reflect specifics, procedure and content of notification of reorganization
- The procedure for reorganization of legal entities involving several forms of reorganization will be specified and regulated separately in the Law on JSC and the Law on LLC
- Conclusion on reorganization will be required within reorganization
- Specific features of acquiring public status by the entity established by way of reorganization will be provided
- Act of acceptance will be provided to the registration authority given that provision of such act is required due to reorganization procedure
- Novelties will stipulate in the Law on JSC and the Law on LLC the uniform moment where the reorganization procedure involving its several forms is completed
It should be noted that regulation of Complex reorganization is already provided in subpara. 2 para. 1 art. 57 of Civil Code of the Russian Federation and art. 19.1 of the Law on JSC. The Law on LLC does not contain direct provisions that would enable to conduct such reorganization. Nevertheless, it contains a reference to the Civil Code of Russia (subpara. 2 para. 1 art. 51 of the Law on LLC) which provides an opportunity for LLC to use such Complex reorganization.
In practice, Complex reorganization were conducted relatively rarely since:
¾ major holdings mostly benefit from such reorganization, the rest of the companies are not really interested in them;
¾ Complex reorganization is not regulated in detail, therefore, there are risks of refusal of state registration and increase of costs to conduct it. Moreover, there are cases where registration authority incorrectly applied legal provisions related to reorganization involving different forms of reorganization.
For instance, in case № А70-5616/2016[1] that was heard by the Commercial court of Tumen’ region, registration authority refused state registration of LLC reorganization in the form of a spin-off conducted simultaneously with merger or acquisition due to violation of para.2 art. 51 of the Law on LLC. The registration authority explained that the procedure for split up or spin-off conducted simultaneously with merger and acquisition is provided in art. 19.1 of the Law on JSC, herewith, such form of reorganization is not provided for limited liability companies. The company decided to challenge this decision of registration authority. Courts of first and appellate instances invalidated resolution of registration authority since para. 2 clause 1 art. 51 of the Law on LLC provides for another procedure, meanwhile other procedures or grounds for reorganization of a limited liability company are stated, first of all, in the Civil Code of Russia and other federal laws.
Given the fact that mixed reorganization of a legal entity can be conducted after September 01, 2014 (involving several forms). Therefore, taking into account provisions of para. 2 clause 1 art. 51 of the Law on LLC, limited liability companies may also conduct such procedure of reorganization.
Therefore, as the court of first instance concluded, mixed reorganization, i.e. reorganization involving different forms, can be carried out after September 01, 2014 and effective legislation, in particular, the Law on LLC does not prevent from such reorganization of limited liability companies. Hence, the company had legal basis for such controversial reorganization contrary to the allegations of tax authority.
As we can see from the analysis of the case, registration authority incorrectly applied provisions for reorganization a legal entity, which demonstrates legislation gap in regulation of such reorganizations. The point is that regulation on the possibility of either of these complicated reorganizations is vague. As a consequence, registration authority encounters difficulties when applying provisions regulating complex reorganization procedure.
The new Draft law providing for Complex reorganization, related means and procedural issues would allow to eliminate legislation gaps which, in its turn, will provide for the better implementation of Complex reorganizations in practice.
Having analyzed amendments to the law, we can stress the following basic provisions of the Draft law:
· Changes in basic provisions on reorganization in the Laws on JSC and LLC
In particular, basic provisions of law concerning reorganization of legal entities were simplified and became well structured.
The procedure for notifying of reorganization of legal entities is stipulated separately (clause 7 art. 15 of the Law on JSC, clause 6 art. 51 of the Law on LLC).
Under the amendments introduced by the Draft law provisions of the Civil Code of Russia (art. 60) and the Law on registration (art. 13.1 of the Law on registration) will be actually transferred to the effective special laws. The new versions of the Laws on JSC and LLC will separately include the obligation of reorganized entity to:
1) notify authorized state authority dealing with state registration of legal entities of the commencement of reorganization with indication of the form(s) of reorganization;
2) publish notification of reorganization in mass media where information on state registration of legal entities is published.
The notification procedure is the same for JSC and LLC in this case.
The Law on LLC will be supplemented with a list of information to be included in reorganization notification. Such list will include the following information:
- full and short name, Identification tax number, Primary state registration number of each participant of reorganization, communication method;
- full and short name, registered office of each incorporated legal entity;
- information on persons expected to provide security to the creditors of the reorganized company and terms of such security (if there are any).
The Law on JSC already contains such list (clause 6.1 art. 15 of the Law on JSC), but it will be amended. The notification will include Identification tax number, Primary state registration number of each participant of reorganization. It should be noted that para. 2 clause 3 art. 15 of the Law on JSC as well as para. 2 clause 2 art. 51 of the Law on LLC in the new version of the Draft law contain an exhaustive list of types of legal entities that can be established as a result of LLC or JSC reorganization. These are business entities, business partnerships or production cooperatives. Moreover, it is worth mentioning that art. 20 of the Law on JSC as amended by the Draft law does not allow reorganization of a JSC into non-commercial partnership.
· Reorganization involving several forms is regulated
Since the Laws on JSC and LLC do not provide for a detailed regulation of reorganization involving its various forms, the Draft law suggests including new articles to the Laws on JSC and LLC (chapter 2 of the Law on JSC will be supplemented with art. 15.1 and art. 15.2 whereas the Law on LLC will be supplemented with art. 51.1 (articles as amended by the Draft law).
Art. 15.1 of the Law on JSC and art. 51.1 of the Law on LLC consolidate specifics of reorganization involving its various types for JSC and LLC respectively.
The above articles in fact contain the same structural specifics of a Complex reorganization. The general meeting of shareholders or participants will have to adopt resolutions on each form of reorganization within one agenda.
In case of a merger or acquisition of incorporated company, the merger/acquisition agreement is signed by a person determined by the general meeting of shareholders or participants of the company that is being reorganized (clause 2 art. 15.1 of the Law on JSC and clause 2 art. 51.1 of the Law on LLC).
We would like to highlight that the Draft law introduces a novelty called opinion on reorganization. Such document will be included in the list of documents that are provided to shareholders during preparation for the general meeting of shareholders (art. 15.2 of the Law on JSC as amended by the Draft law). The opinion will describe the necessity of reorganization, its conditions and consequences. The opinion will be approved by the Committee of Directors. Persons having adopted such resolution (having voted for approval of opinion on reorganization) shall be jointly liable for the losses incurred to shareholders due to information in such opinion that was found inaccurate, incomplete or misleading (clause 4 art. 15.1 of the Law on JSC as amended by the Draft law). The shareholders are currently only provided with grounds and conditions for reorganization as additional materials (clause 3.6 of Central Bank of Russia Regulation № 660 – П dated November 16, 2018).
Another significant novelty of the Draft law concerning Complex reorganizations is the elimination of a transitional stage, id. est. inclusion of a record in the USRLE on intermediary legal entity that was established within such reorganization. Currently in case of spin-off or split up and subsequent merger or acquisition a record on the new company is included in the USRLE (art. 15, 16 of the Law on registration; Order of Tax authority of Russia № ММВ-7-6/43@ dated January 28, 2013 “On the approval of procedure for interaction between registration authorities at the address of reorganized legal entities and legal entities established as a result of such reorganization”; clause 9 art. 19.1 of the Law on JSC). Such record will not be included under new provisions of the Draft law.
· Specific features of acquiring public status by the entity established as a result of reorganization will be provided
The main specific of acquiring public status by reorganization is that it has to register its prospectus and conclude preliminary agreement on listing of shares with market operator.
A company cannot be incorporated (reorganized by way of merger, split-up, spin-off, transformation) as a public JSC under the Law on JSC. Clause 1 art. 7.1 of the Law on JSC states that public status can only be acquired by the existing joint-stock company.
Therefore, public JSC cannot be created at the time of incorporation or reorganization by way of merger, split-up, spin-off, transformation, public status can only be acquired after establishment of a company. Herewith, JSC reorganized by acquisition of another company can become public as a result of such reorganization on condition that the procedure is complied.
· Act of acceptance within acquisition and merger is eliminated under special laws
Under the effective versions of the Law on JSC and the Law on LLC acts of acceptance should be compiled within merger and acquisition (clause 5 art. 16 and clause 5 art. 17 of the Law on JSC; clause 5 art. 52 and clause 4 art. 53 of the Law on LLC).
The act of acceptance during reorganization is required only in case of split-up and spin-off since rights and obligations are transferred under the act of acceptance in said procedures (clauses 3, 4 art. 58 of the Civil code of the Russian Federation), in other cases (merger, acquisition, transformation) such act is prepared and applied at the discretion of the parties[2]. The legislator intentionally stated that the act of acceptance is not obligatory within merger and acquisition in the relevant provisions of the Draft law (clause 8 art. 16, clause 9 art. 17 of the Law on JSC as amended by the Draft law, clause 7 art. 52 and clause 9 art. 53 of the Law on LLC as amended by the Draft law).
· Amendments related to the documents submitted for state registration as well as procedure for registration of reorganization are included in the Law on registration
Art. 14 of the Law on registration as amended by the Draft law was amended. In particular, it was supplemented with a separate clause containing a list of documents that are to be filed to registration authority to include information that the company is being reorganized. Such documents include:
а) notification of the reorganization procedure in form Р12003[3];
б) resolution on reorganization adopted by each legal entity participating in reorganization.
Clause 2 art. 14 of the Law on registration providing for list of documents required for filing to registration authority due to completion of reorganization was also amended:
1) under the new version application for state registration due to completion of reorganization of a legal entity in form № Р12016 will include information on all completed reorganizations. Therefore, the law will not require every legal entity established by way of reorganization to file such application.
2) Act of acceptance will be provided to registration authority only when preparation and submission of such act is required according to reorganization procedure.
Moreover, art. 16 of the Law on registration in the version of the Draft law stipulating the moment of completion of reorganization was invalidated. This is due to the fact that the Draft law stipulated the uniform moment for completion of reorganization of legal entities in its various forms in the Law on JSC and LLC. The company is considered to be reorganized from the moment of state registration of legal entities established by way of reorganization, except for reorganization in the form of acquisition.
When the company is reorganized by way of acquisition of another legal entity, a company is considered to be reorganized from the moment of inclusion of a record in the USRLE on termination of the company that was taken over.
Therefore, the Draft law significantly structured and specified provisions on reorganization of legal entities. Inter alia, the Draft law regulated Complex reorganization in detail and normalized reorganization procedure in special laws. Such novelties would not only allow to reduce time and costs of legal entities within reorganization but also make registration procedures more effective and flexible with regards to factual situation on the market.
Ksenia Stepanischeva, Counsel
Ilya Timashkov, Junior Associate
[1] Resolution of Commercial court of Tumen’ region dated August 03, 2016 on case № А70-5616/2016.
[2] The conclusion that the act of acceptance is not necessary within merger, take over and conversion can be derived from practice of the Supreme court of the Russian Federation: para. 12 of the Law review by the Supreme Court of the Russian Federation № 3 (2016) (approved by Presidium of the Supreme court of the Russian Federation dated October 19, 2016), para. 26 of Resolution of High Court of the Russian Federation Plenum № 25 dated June 23, 2015 № 25 “On the application of certain provisions of section I part I of the Civil Code”.
[3] You can find more information about new registration forms that have been effective since November 25, 2020 under Order of the Federal Tax Service of Russia № ЕД-7-14/617@ dated August 31, 2020 “On approval of forms and requirements to formation of documents presented to registration authority within registration of legal entities, sole proprietors and agricultural (farmer) householdings” in a law review by “Kovalev, Tugushi & Partners”.