Equity financing in Russian Joint Stock Companies: Contributions to the assets
On 15 July 2016, amendments to the Federal Law On Joint Stock Companies (“JSC Law”) that will allow shareholders to safely finance Russian joint stock companies (“JSCs”) by means of making so called contributions to the assets, came into effect. Contributions to the assets is a form of equity financing under Russian law, to a certain extent comparable to capital reserve/share premium payments in western jurisdictions. Contributions to assets do not increase the share capital of a JSC or the nominal value of shares.
This method of equity financing has previously been explicitly allowed for Russian limited liability companies (“LLCs”) only. Even though since 2014 the Russian Civil Code provided for a list of items considered as permissible for contributions to the assets of business entities (JSCs qualify as business entities) until now no clear regulations regarding the implementation of contributions to the assets of JSCs had been established. Due to this, equity financing of JSCs by means of contributions to the assets was considered controversial and used to involve the risk of being reclassified as a donation. With the amendment to the JSC Law, this legal insecurity has been eliminated.
According to the new version of the JSC Law, making contributions to the assets of a JSC may either be voluntary or obligatory. In contrast to this, the Law on LLCs provides only for obligatory contributions to the assets by LLC shareholders.
Each shareholder of both public and non-public JSCs has the general right to make a voluntary contribution to the assets of the JSC. In that case, other shareholders are not obliged to also make contributions.
A voluntary contribution to the assets is to be made in accordance with an agreement between the relevant shareholder and the JSC. This agreement requires the prior approval of the JSC’s board of directors (supervisory board). It is not, however, classified as an interested party transaction. Therefore, the members of the JSC’s board of directors who are legally considered to be interested in the contribution to the assets may also vote for/against the approval of the contribution agreement. The amended JSC Law explicitly provides that regulations on donations are not applicable to the agreement on contributions to the assets of JSCs.
Obligatory contributions to the assets are only provided for non-public JSCs.
As it is the case with LLCs, the articles of association of a non-public JSC may stipulate that the company’s shareholders’ meeting may impose an obligation to make contributions to the assets of this JSC on its shareholders. The relevant shareholders meeting resolution has to be adopted unanimously by all shareholders.
Generally, this resolution will be binding for all shareholders of the non-public JSC. They have to make the contributions to the assets pro rata to their shareholding.
As a certain exception from this rule, the JSC’s articles of association may also stipulate that the obligation to make contributions is only to be imposed on shareholders of a certain category (type) of shares. The relevant shareholders’ meeting resolution then requires a unanimous vote of all shareholders on whom this obligation is to be imposed as well as a vote of not less than ¾ of the total number of votes of the shareholders who participated in the meeting.
Contributions to the assets are to be made in cash, unless otherwise provided for by the articles of association or the resolution of the shareholders’ meeting.
The JSC and any of its shareholders are entitled to assert claims for forced contribution to the assets against any shareholder who fails to perform its contribution obligation.
The regulations applicable to taxation of contributions to the assets of LLCs are also applicable to taxation of contributions to the assets of JSCs. Where a contribution has been made in order to increase the net assets of a JSC, this JSC receiving contributions to its assets from its shareholders does not gain any taxable income. Against this background, it is necessary to provide in the underlying documents (shareholders’ meeting resolution/agreement between JSC and the shareholder performing a voluntary contribution) that the contributions are made for the purpose of increasing the JSC’s net assets. For a shareholder, making a contribution to the assets is also neutral for the purpose of income tax.
There is no difference between the taxation of voluntary and obligatory contributions.