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Higher risk of liability for ultimate beneficial owners of Russian businesses


The Russian Ministry of Economic Development has drafted amendments to the Civil Code of the Russian Federation (the “Civil Code”). The amendments, which are now being prepared for the Russian Parliament’s review, are aimed at changing the liability regime for losses incurred by legal entities due to the fault of their ultimate beneficial owners.

If the draft is adopted in its existing form, the familiar model of “parent company and subsidiary” will be replaced, at least at the Civil Code level, by that of “controlling and controlled persons”. Consequently, the scope of persons who are responsible for losses incurred by Russian legal entities will be significantly expanded.

In 2012, a comprehensive bill on the amendment of the Civil Code proposed to introduce similar changes. However, it was abandoned following fierce criticism.

The existing model

According to the Ministry, not all persons who exercise actual control within the framework of the current regulatory model are liable if they were at fault for losses incurred by controlled legal entities. In particular:

  • it is not possible to sue an individual who, in some cases, exercises actual control (since only a “commercial parent company or partnership” may be held liable under the current model); and
  • liability cannot be imposed on unitary (i.e. non-corporate) organisations, non-profit corporate organisations and state corporations.

In addition, the absence of additional criteria for establishing control, together with the use of evaluative terms, have created legal uncertainty that has led to conflicting court practice.

The new model


The bill is primarily aimed at expanding the list of persons who are liable for losses incurred by controlled organisations. The notion of a “controlling person” will include individuals, as well as commercial and non-commercial legal entities, irrespective of their organisational and legal forms.

The bill provides for the following:

  • Direct and indirect control methods: direct control implies the presence of a supervising person who exercises control without intermediary links. Indirect control is carried out through a vertical chain of persons who in turn act as supervisors in relation to each subordinate controlled entity.
  • Independent and joint control methods: independent control is carried out solely by the controlling person, while joint control is carried out by the controlling person together with their controlled or related persons. Such persons are usually relatives such as spouses, parents, children, full and half siblings, adoptive parents and adopted children.

Grounds for control

The bill proposes a fairly broad list of grounds for establishing relationship of control, which can be subdivided into two categories.

In the first group, it is possible to identify control relationships by virtue of:

  • creation of a legal entity;
  • a foundation agreement;
  • the charter of a legal entity;
  • a partnership management agreement;
  • participation in the charter capital of a legal entity; and
  • participation in a non-profit organisation.

In the second group, it is possible to identify a control relationship by virtue of a contract relating to the exercise of rights certified by shares or participatory interests in a controlled entity, namely, by virtue of the provisions of:

  • a corporate agreement;
  • a simple partnership agreement;
  • a trust management agreement;
  • an agency agreement;
  • a pledge agreement; or
  • other contracts relating to the exercise of rights certified by the shares or participatory interests in a controlled organisation.

The bill also specifies the list of corporate rights which a person must enjoy in order to be deemed a supervising person on the above grounds. These rights can be as follows:

  • the right to control more than 50% of the votes in the supreme management body of the controlled organisation;
  • the right to control at least 30% of the votes in the supreme management body of the controlled organisation, provided that there is no other person directly or indirectly having, independently or jointly, a large number of votes in the supreme management body of the controlled organisation (this wording helps catch persons who have less than 50% of the votes, but due to the relative majority exercise corporate control);
  • the right to appoint the sole executive body, managing organisation or manager, or more than 50% of the members of the collegial executive/management body of the controlled organisation; and
  • the right to otherwise determine the actions of the controlled organisation.

A person will also be considered to be controlling an entity if it owns more than 50% of the entity’s property.

Potential liability of controlling persons for losses incurred by their controlled organisations

The controlled organisation or its members will be able to demand damages from the controlling person if that person was at fault for losses incurred by the controlled organisation. The general rules on obligations that result from damages in Chapter 59 of the Civil Code and the rules for establishing loss under Article 15 of the Civil Code, will apply.

Controlling persons who exercise joint control will be jointly and severally liable for such losses. If the losses were caused by the controlling persons in conjunction with members of management bodies of the controlled entity, such members will also bear joint and several liability with the controlling persons.


The bill is aimed at unifying the legislators’ approach to the liability of controlling persons in the Civil Code and the legislation on bankruptcy. It will also confirm judiciary’s approach in terms of holding beneficiaries liable for the activities of their controlled entities.

This bill should be taken into consideration when structuring transactions for the establishment of joint ventures (“JVs”). Direct participants in JVs and their ultimate beneficiaries could potentially be held liable (along with members of the board of directors and the sole executive body) for losses incurred by JVs if the transactions were approved, or voted for, by such persons.

CMS Client Alert | Corporate/M&A | May 2018
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Vladimir Zenin