NEW RUSSIAN LLC LAW

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**August - September 1998**
The law "On Limited Liability Companies," signed by Russian President Yeltsin, changed the rules for a widely used form of doingbusiness. The procedures for creating a limited liability company (LLC) were, and continue to be, significantly simpler and quicker than fora joint-stock company (JSC). Founders of LLCs do not have to follow the lengthy (three to four months) and rather complex procedure forregistering share issues. Additionally, voting rights in LLCs are stronger in that important questions are resolved by a majority vote of all LLCparticipants. In a JSC, a majority vote at a meeting with a quorum, which may be far less than the entire voting body, can decide issues. 
     The new LLC law attempts to remedy some very serious defects in the old legislation. For example, ambiguouslanguage in the 1990 provisions on joint-stock companies and limited liability companies left it up to the participants todecide on a procedure for excluding an unwanted participant from the company. It was not unheard of for participants tocome up with a procedure that deprived the target of the ouster of his voting rights. Such a procedure would allow theRussian members, for example, to get rid of a foreign participant   even if he was a majority shareholder. The new law putsan end to such abuses by referring the question of excluding a participant from an LLC to the courts. Moreover, a participantmay be removed only if he flagrantly violates his obligations or if his action (or inaction) seriously impedes the activities ofthe company.
     The new law also assures an excluded member that he will be fairly compensated for the value of his share. The priorlegislation did not define what constituted adequate compensation and lacked a procedure with deadlines for paying theousted participant. As a result, many former LLC participants waited years for any compensation. 
     The 1998 law defines the "actual value" of a participant's share as the value of the net assets of the company that is proportional tothe size of his share. The appropriate compensation is to be given to the participant on the day the court decision ordering his exclusionbecomes final. Defects in the prior procedure for reorganizing an LLC also led to abuse. LLCs were often divided into two companies   withall assets being placed into one company and all liabilities into the other. This deprived creditors of the ability to recover company propertyto satisfy their debts. 
     Under the new law, an LLC is obliged to publish a notice of its intention to reorganize in the official newspapers andto give written notice to all known creditors 30 days before taking any action. This [notification] gives creditors the abilityto accelerate repayment of debts and demand compensation for any losses, if they so desire.
     A final remedial provision of the 1998 LLC law requires that the value of any substantial amount of property contributed to chartercapital be assessed by an independent appraiser. Previously, the value of intellectual and other property contributed to authorized capital waswhatever the parties agreed it was. This [arrangement] could lead to a situation where the value of authorized capital was much less thanclaimed   a potential fraud on creditors.
     To ensure the impartiality of the appraisal, the new law makes the independent appraiser jointly liable with theparticipants in the LLC for a period of three years if the valuation is too high. 
*Reprinted with permission from Russia and Commonwealth Business Law Report, copyright 1998 by LRPPublications, 747 Dresher Road, Horsham, PA 19044-09880.  All rights reserved.  For information on Russia andCommonwealth Business Law Report or for a free 30-day trial subscription, please call 1-800-341-7874, ext. 310.
For an in-depth analysis, see "The New Russian Law on Limited Liability Companies" by Ethan S. Burger, Evgeny Danilov, andIrina Paliashvili of the Russian-Ukrainian Legal Group, P.A, via BISNIS Online athttp://www.mac.doc.gov/bisnis/country/9808llcp.htm.
***This report is provided courtesy of the Business Information Service for the NewlyIndependent States (BISNIS)****