V. A. Laptev

Corporate Law:
Legal Organization of Corporate Systems

Monograph

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Author:
Laptev V. A., Doctor of Law, Prof., Dr. habil., Judge of the Moscow Arbitration Court, Chairman of the Scientific Advisory Council of the Moscow Arbitration Court, Associate Professor of the Department of Entrepreneurial and Corporate Law of the Kutafin Moscow State Law University, Senior Research Fellow of the Institute of State and Law of the Russian Academy of Sciences.

Reviewers:
Andreyev V. K., Doctor of Law, Prof., Dr. habil., Head of the Scientific Council for the Civil Law Research of the Russian State University of Justice, Professor of the Department of Entrepreneurial and Corporate Law of the Kutafin Moscow State Law University, member of the Scientific Advisory Council of the Supreme Court of the Russian Federation, Merited Scholar of the Russian Federation;
Ershova I. V., Doctor of Law, Prof., Dr. habil., Head of the Department of Entrepreneurial and Corporate Law of the Kutafin Moscow State Law University, member of the Scientific Advisory Council of the Supreme Court of the Russian Federation, Merited Lawyer of the Russian Federation.

This monograph investigates the legal status of Russian corporations at the present day. It describes the legal organization of corporate systems, defines the concepts of corporate relations and corporate property owned by members of corporations. The author analyzes the sources of regulation of corporate relations, identifies the place of corporate law in the Russian system of law branches, investigates the legal aspects of corporate governance mechanisms and discusses the matters pertaining to the protection of corporate rights.

The described legislation is current as of August 2019.

The relevance of the present work is emphasized by its consideration of the latest changes in corporate legislation and judicial practice. The book is aimed at a broad readership, including representatives of public and local authorities, legal practitioners, lecturers in entrepreneurial and corporate law, graduate and postgraduate students.

Translation of: Korporativnoe pravo: Pravovaya organizatsiya korporativnykh sistem.
Translated from the Russian by Ekaterina Delikishkina.

UDC 346+347.7

BBC 67.404

© Laptev V. A., 2020

© Prospekt LLC, 2020

LIST OF USED ACRONYMS AND ABBREVIATIONS

1. Normative legal acts

Russian Constitution — Constitution of the Russian Federation, adopted by popularvote on December 12, 1993 // Rossiyskaya Gazeta. December 25, 1993. No. 237.

Civil Code — Civil Code of the Russian Federation // CL RF. 1994. No. 32 (pt. I). Art.3301; 1996. No. 5
(pt. II). Art. 410; 2001. No. 49 (pt. III). Art. 4552; 2006. No. 52 (pt. IV). Art. 5496.

Code of Administrative Judicial Procedure — Code of Administrative Judicial Procedure of the Russian Federation // CL RF. 2015. No. 10. Art. 1391.

Code of Administrative Offences — Code of Administrative Offences of the Russian Federation // CL RF. 2002. No. 1 (pt. I). Art. 1.

Code of Arbitration Procedure — Code of Arbitration Procedure of the Russian Federation // CL RF. 2002. No. 30. Art. 3012.

Code of Civil Procedure — Code of Civil Procedure of the Russian Federation // CL RF. 2002. No. 46. Art. 4532.

Criminal Code — Criminal Code of the Russian Federation // CL RF. 1996. No. 25. Art. 2954.

Family Code — Family Code of the Russian Federation // CL RF. 1996. No. 1. Art. 16.

Labor Code — Labor Code of the Russian Federation // CL RF. 2002. No. 1 (pt. I). Art. 3.

Land Code — Land Code of the Russian Federation // CL RF. 2001. No. 44. Art. 4147.

Tax Code — Tax Code of the Russian Federation // CL RF. 1998. No. 31 (pt. I). Art. 3824; CL RF. 2000. No. 32 (pt. II). Art. 3340.

Town Planning Code — Town Planning Code of the Russian Federation // CL RF. 2005. No. 1 (pt. I). Art. 16.

Agricultural Cooperation Law — Federal Law No. 193-FZ of December 8, 1995 “On Agricultural Cooperation” // CL RF. 1995. No. 50. Art. 4870.

Arbitral Tribunals Law — Federal Law No. 102-FZ of July 24, 2002 “On Arbitral Tribunals in the Russian Federation” // CL RF. 2002. No. 30. Art. 3019.

Arbitration Courts Law — Federal Constitutional Law No. 1-FKZ of April 28, 1995 “On the Arbitration Courts of the Russian Federation” // CL RF. 1995. No. 18. Art. 1589.

Arbitration Law — Federal Law No. 382-FZ of December 29, 2015 “On Arbitration (Arbitral Proceedings) in the Russian Federation” // CL RF. 2016. No. 1 (pt. I). Art. 2.

Banking Law — Federal Law No. 395—1 of December 2, 1990 “On Banks and Banking Activity” // CL RF. 1996. No. 6. Art. 492. The original version of RSFSR Law No. 395—1 of December 2, 1990 “On Banks and Banking Activity in the RSFSR” // Bulletin of the Congress of People’s Deputies and the Supreme Soviet of the RF. 1990. No. 27. Art. 357.

Bankruptcy Law — Federal Law No. 127-FZ of October 26, 2002 “On Insolvency (Bankruptcy)” // CL RF. 2002. No. 43. Art. 4190.

Business Copartnerships Law — Federal Law No. 380-FZ of December 3, 2011 “On Business Copartnerships” // CL RF. 2011. No. 49 (pt. V). Art. 7058.

Credit Cooperation Law — Federal Law No. 190-FZ of July 18, 2009 “On Credit Cooperation” // CL RF. 2009. No. 29. Art. 3627.

Housing Cooperatives Law — Federal Law No. 215-FZ of December 30, 2004 “On Housing Savings Cooperatives” // CL RF. 2005. No. 1 (pt. I). Art. 41.

Investment Funds Law — Federal Law No. 156-FZ of November 29, 2001 “On Investment Funds”

Investment Partnerships Law — Federal Law No. 335-FZ of November 28, 2011 “On Investment Partnerships” // Cl RF. 2011. No. 49 (pt. I). Art. 7013.

JSC Law — Federal Law No. 208-FZ of December 26, 1995 “On Joint-Stock Companies” // CL RF. 1996. No. 1. Art. 1.

Law on Developing Entrepreneurship — Federal Law No. 209-FZ of July 24, 2007 “On Developing Small and Medium Scale Entrepreneurship in the Russian Federation” // CL RF. 2007. No. 31. Art. 4006.

Law on Enterprises and Entrepreneurial Activities — RSFSR Law No. 445—1 of December 25, 1990 “On Enterprises and Entrepreneurial Activities” // Bulletin of the Congress of People’s Deputies and the Supreme Soviet of the RF. 1990. No. 30. Art. 418.

Law on Protection of Competition — Federal Law No. 135-FZ of July 26, 2006 “On Protection of Competition” // CL RF. 2006. No. 31 (pt. I). Art. 3434.

Law on Public-Law Companies — Federal Law No. 236-FZ of July 3, 2016 “On Public-Law Companies in the Russian Federation and on Amendments to Certain Legislative Acts of the Russian Federation” // CL RF. 2016. No. 27 (pt. I). Art. 4169.

Law on Registration of Legal Persons — Federal Law No. 129-FZ of August 8, 2001 “On State Registration of Legal Persons and Individual Entrepreneurs” // CL RF. 2001. No. 33 (pt. I). Art. 3431.

Law on State Unitary Enterprises — Federal Law No. 161-FZ of November 14, 2002 “On State and Municipal Unitary Enterprises” // CL RF. 2002. No. 48. Art. 4746.

Law on the Organization of Insurance Business — Law of the Russian Federation No. 4015-1 of November 27, 1992 “On the Organization of Insurance Business” // Bulletin of the Congress of People’s Deputies and the Supreme Soviet of the RF. 1993. No. 2. Art. 56.

LLC Law — Federal Law No. 14-FZ of February 8, 1998 “On Limited Liability Companies” // CL RF. 1998. No. 7. Art. 785.

Mortgage Securities Law — Federal Law No. 152-FZ of November 11, 2003 “On Mortgage Securities” // CL RF. 2003. No. 46 (pt. II). Art. 4448.

Mutual Insurance Law — Federal Law No. 286-FZ of November 29, 2007 “On Mutual Insurance” // CL RF. 2007. No. 49. Art. 6047.

Non-Commercial Organizations Law — Federal Law No. 7-FZ of January 12, 1996 “On Non-Commercial Organizations” // CL RF. 1996. No. 3. Art. 145.

Privatization Law — Federal Law No. 178-FZ of December 21, 2001 “On the Privatization of State and Municipal Property” // CL RF. 2002. No. 4. Art. 251.

Production Cooperatives Law — Federal Law No. 41-FZ of May 8, 1996 “On Production Cooperatives” // CL RF. 1996. No. 20. Art. 2321.

Public Associations Law — Federal Law No. 82-FZ of May 19, 1995 “On Public Associations” // CL RF. 1995. No. 21. Art. 1930.

Securities Market Law — Federal Law No. 39-FZ of April 22, 1996 “On the Securities Market” // CL RF. 1996. No. 17. Art. 1918.

SRO Law — Federal Law No. 315-FZ of December 1, 2007 “On Self-Regulatory Organizations” // CL RF. 2007. No. 49. Art. 6076.

2. Government institutions, organizations

Bank of Russia — Central Bank of the Russian Federation

Constitutional Court — Constitutional Court of the Russian Federation

FAS — Federal Antimonopoly Service of Russia

Federal Tax Service — Federal Tax Service of the Russian Federation

Ministry of Construction — Ministry of Construction Industry, Housing and Utilities Sector of the Russian Federation

Ministry of Economic Development — Ministry of Economic Development of the Russian Federation

Ministry of Finance — Ministry of Finance of the Russian Federation

Ministry of Justice — Ministry of Justice of the Russian Federation

Rosimushchestvo — Federal Agency for State Property Management of the Russian Federation

Rosreestr — Federal Service for State Registration, Cadaster and Cartography of the Russian Federation

Rosstrachnadzor — Insurance Supervision Service of Russia

Rostechnadzor — Federal Environmental, Industrial and Nuclear Supervision Service of Russia

Supreme Court — Supreme Court of the Russian Federation

Supreme Court of Arbitration — Supreme Court of Arbitration of the Russian Federation

3. Others acronyms and abbreviations

Art(s). — Article

Ch(s). — Chapter(s)

CL RF — Compendium of Legislation of the Russian Federation

CLS — civil-law society

JSC — joint-stock company

LLC — limited liability company

PJSC — public joint-stock company

pt(s). — part(s)

RF — Russian Federation

RSFSR — Russian Soviet Federative Socialist Republic

SRO — self-regulatory organization

UIF — unit investment fund

USSR — Union of Soviet Socialist Republics

In memory
of Vladimir Vladimirovich Laptev

PREFACE

The reform of the Russian civil and business law, whose main ideas were outlined in the Guidelines for the Development of Civil Legislation (2009)¹, became a milestone event for the Russian legal community at the beginning of the twenty-first century. The legislative recognition of corporate relations in Art. 2 of the Civil Code as a special kind of public relations is a subject of an active discussion in Russian jurisprudence.

The Civil Code has undergone multiple significant changes from the moment of its inception, which has earned it the nickname “the economic constitution”. At different periods during the reform of civil and business law, which is still ongoing, the Civil Code either prevailed over the laws on specific forms of corporations, or vice versa.

The issues pertaining to corporate relations and legal status of corporations have recently come under active scrutiny from scientists specializing not only in economic and private law, but also in general theory of law. The questions of legal standing and activity of corporations are also under consideration of the related (neighboring) branches of law, including labor and administrative law.

An interest towards studying corporations can be explained by their unique essence. The dynamics of development of the legal regulation of corporate relations attests to the relevance of the present study². The search for optimal balance in legal regulation of corporate relations aims to help Russia improve its score in the World Bank’s “Doing Business” report that ranks economies based on the business environment.

The decrease in the entrepreneurial risks and the increase in the standards of corporate governance make the investment climate – and the Russian economy as a whole –favorable. Putting in place a legislative framework for corporate activity has become a priority goal for Russian policy makers.

The present work has incorporated the ideas of the Third Scientific School of Economic Law, whose foundations were laid by the Soviet academicians V. V. Laptev and V. K. Mamutov, that made the objective and elaborate analysis of the subject matter possible. The fundamental ideas of the Third School constitute a logical continuation of the works of the First School – the Dual-Sector Law theory (by P. I. Stuchka), and the Second School – the School of the Unified Economic Law (by L. Y. Ginzburg and E. B. Pashukanis).

The present work considers a corporation not only as a legal entity, but also as a structural unit of the corporate system. To this end, the author defines the concept of a corporate system and describes its legal organization.

The author presents an analysis of corporate relations, defines the sources of their regulation, describes the legal status of specific forms of corporations and the liability of their bodies, identifies the mechanisms and substance of corporate governance, and investigates the scope of corporate liability and the methods of legal protection of corporate rights.

The approaches to evaluation of the subject matter presented in this work are based on actual judicial practice, with due regard to the perspectives of development of corporate legislation.

In this monograph, the author continues the traditions of the Department of Entrepreneurial and Corporate Law of the Kutafin Moscow State Law University and the Entrepreneurial and Corporate Law Sector of the Institute of State and Law of the Russian Academy of Sciences.

V. A. Laptev

Section 1.
GENERAL PROVISIONS

Chapter 1.
Fundamentals of corporate law

1. Definition of corporation

The development of corporate relations in Russia was accompanied by multiple amendments into the existing legislation, many of which were inspired by the foreign legislations. In particular, the institution of corporate agreement (i.e., the agreement stipulating corporate rights) was borrowed into the Guidelines for the Development of Civil Legislation (2009) from the English law. Not all novelties of corporate legislation were welcomed by Russian legislators and legal practitioners. Nonetheless, some provisions of foreign corporate laws are eventually being adopted into the Russian legal framework, as we will see below.

The corporate form of economic activity has a long history. As V. V. Laptev had rightly pointed out, historically, starting from the seventeenth century, the English, Dutch and French corporations, such as the East and West India joint-stock companies, were considered an instrument of economic domination of the Western European states over the Eastern countries. The state played a significant role in the governance of these corporations, whereas the property rights belonged to shareholders³.

Governance practices of contemporary domestic corporations were studied in depth by V. V. Laptev, V. K. Andreyev, A. V. Gabov, I. S. Shitkina and other scholars of law, who emphasized the distinctions between corporations and other legal persons, in particular, the ability of members of a corporation to control its activity⁴.

Across legal frameworks, a corporation (from Latin corporatio) is universally defined as an association of persons. Yet, the term is differently interpreted by the Russian and foreign legislations.

Most scholars view a corporation within the Russian legal framework as a legal person (e.g., see V. K. Andreyev, E. A. Sukhanov, I. S. Shitkina⁵). This follows from Arts. 2, 65.1–65.3 of the Civil Code and the laws concerning individual forms of corporations.

On the basis of the comparative analysis of foreign legislations, E. S. Silova had defined a corporate entity through its adherence to one of the three models of corporate governance: Anglo-American (an outsider model with the participation of individual independent members), Asian (with the significant participation of banks and affiliated persons), or Continental (with the substantial bank participation)⁶. Using a similar economic approach, A. G. Dementieva identified two additional models of corporate governance-family (family-owned business groups that are common worldwide) and Russian (incorporating the elements of other models in its development)⁷.

By scrutinizing the foreign legislative experience, A. E. Molotnikov and E. G. Afanasieva singled out five main models of corporate governance: joint-stock (prioritizing the interests of shareholders), managerial (placing control over a corporation in the hands of the management), labor (with mandatory election of employees into corporate governance bodies), governmental (prioritizing public interests) and stakeholder (taking into consideration the interests of shareholders, employees, creditors, counterparties and other persons)⁸.

In her analysis of public corporations that attract outside investors, I. S. Shitkina distinguishes between the outsider (where the shares are divided between many individuals, none of whom are majority shareholders) and the insider (where the control and the stock are concentrated in the hands of a few individuals) models of corporate governance⁹.

With regard to the Russian corporate practices, we suggest additionally identifying such models of corporate governance as directive (e.g., the corporations Rosneft and Gazprom) and beneficiary (through the nominal owners, e.g., the corporations Nornickel and Polyus), among others.

The abundance of corporate governance models serves as evidence of large variation in the corporate forms of economic activity.

The history of Russian corporate entrepreneurship in the post-perestroika period of the early 1990s suggests that its idea was inspired by Soviet cooperative organizations¹⁰. At the time, collective entrepreneurship in the form of commercial corporations enabled the development of the free-market economy (Art. 2 of the Law on Enterprises and Entrepreneurial Activities). The principle of consolidating individuals and/or their assets became central in shaping today’s commercial corporations, while cooperative associations gradually receded into the background.

V. K. Andreyev in several of his works promotes the view of a corporation as an independent subject of law, as it reveals more similarities to a legal person than to a unitary organization¹¹. A similar view on a corporation is found in foreign legal systems.

The U. S. legislation, based on the case of the state of Delaware, recognizes three types of corporations:

1) corporations, that enjoy the rights of a legal person: Joint-Stock Corporations, Public Limited Companies, Close Corporations, and Membership Corporations;

2) partnerships, i.e. entrepreneurial associations that are not entitled to legal personality: General Partnerships, Limited Liability Partnerships, Limited Partnerships, silent partnerships;

3) business trusts, that pool the assets of beneficiaries¹².

In his analysis of American law, V. M. Shumilov defines corporations as “legal organizational forms of entrepreneurial activity”. Notably, the U.S. corporate law embraces such “hybrid” forms of entrepreneurial activity, as syndicates, equity mutual funds, business trusts, cooperatives, etc.¹³, thereby emphasizing the specific nature of corporations, not confined to legal persons. Furthermore, different U.S. states have their own legal acts governing the regulation of corporations and other business entities.

English corporate forms of entrepreneurship share many similarities with the American ones. The following organizations are considered corporate enterprises, according to the UK legislation:

1) companies that have the rights of a legal person: Public Limited Companies (with the liability limited to the value of the shares or guarantees), Private Limited Companies, as well as Unlimited Companies;

2) partnerships that are not entitled to legal personality, including Limited Liability Partnerships.

Another widespread form of corporations in the U.K. is a trust, whose activity is regulated by the Trustee Act 2000.

The UK has recently undergone the reform of corporate legislation, which has resulted in the Companies Act 2006 that came to substitute the 1986 Act. Other legal acts relevant to the subject matter include the Partnership Act 1890 (on common partnerships), the Limited Liability Partnerships Act 2000, as well as others.

Germany regards legal persons (JSC, LLC) and associations of persons (general and limited partnerships, as well as silent partnerships) as commercial corporations. In her analysis of the German corporate law, C. Maier¹⁴ distinguishes:

1) corporations that attract outside capital – Kapitalgesellschaften (limited liability company – Gesellschaft mit beschränkter Haftung, GmbH; entrepreneurial company with limited liability – Unternehmergesellschaft (haftungsbeschränkt), UG¹⁵; joint-stock company – Aktiengesellschaft, AG);

2) corporations with personal liability – Personengesellschaft (civil law partnership – Gesellschaftbürgerlichen Rechts, GbR; general commercial partnership –Offene Handelsgesellschaft, OHG; limited partnership – Kommanditgesellschaft, KG; silent partnership – Stillegesellschaft).

Partnerships with personal liability (unlike the companies that attract capital) are not considered legal persons.

In France, the following legal entities are regarded as commercial corporations (with or without the rights of a legal person):

1) associations of persons (civil law partnerships, simple limited and general partnerships, de facto partnerships, and partnerships based on joint activities);

2) associations of assets (incorporated anonymous partnerships, incorporated limited partnerships, simplified incorporated partnerships);

3) mixed associations (limited liability companies).

To summarize what has been stated above, the term “corporation” embraces:

1) organizations that have the rights of a legal person;

2) entrepreneurial associations of persons (without the rights of a legal person);

3) associations of persons that place their assets under control of a trustee (not entitled to legal personality).

In Russia, recognition of certain legal entities as “corporations” (in their true sense) does not raise any particular objections (Arts. 48, 50 and 65.1 of the Civil Code). However, several provisions of the Russian legislation impose a distinction between “a corporation” and “a corporate organization”, the latter of which has the rights of a legal person (Art. 65.1 of the Civil Code). “A corporation” serves as an umbrella term and may refer both to legal persons (i.e., corporate organizations) and to corporate associations and trusts.

The legislative consolidation of a state corporation as one of the legal entity types with the right of a legal person, established by federal law (Art. 3, paragraph 5, of Federal Law No. 99-FZ of May 5, 2014¹⁶), has introduced a certain confusion into the term “corporation”. A state corporation represents a unitary non-commercial organization. As E. B. Lauts rightly observed, from this follows that the adoption of the Law on Public-Law Companies¹⁷ mostly boils down to renaming state corporations into public-law companies¹⁸. Yet, aligning the terminology with the true essence of state corporations is reasonable. Moreover, it is in line with the logic of Art. 50 of the Civil Law, that sets forth a closed list of legal entity types (corporate and unitary) entitled to legal personality.

It is noteworthy that the governance structure of public-law companies and state corporations is similar to that of corporate organizations. For example, governance bodies of a public-law company include the supervisory board (the supreme governance body), the Director-General (the individual executive body), as well as the board (the collective executive body) – in case its creation is provided for by the decision on the establishment of a public-law company (Art. 7 of the Law on Public-Law Companies), which demonstrates certain degree of borrowing from the corporate model of governance structure.

The structure of production units of some Russian state corporations is often associated with holding groups. For example, the state corporation Rostec, that brings together approximately 700 organizations, essentially functions as a holding company, whose portfolio includes such famous brands as AvtoVAZ, KamAZ, Kalashnikov Concern, Russian Helicopters, etc.¹⁹

With respect to entrepreneurial associations, a pattern of truncated doctrinal borrowing from foreign legislations is observed. Some provisions of the Russian legislation, however, indicate the contrary. Namely, it concerns the provisions that define the legal status of entrepreneurial associations of a corporate type, such as investment partnerships (the Investment Partnership Law), insurance pools (Art. 14.1 of the Law on Organization of Insurance Business), banking holdings (Art. 4 of the Banking Law), etc.

Such entrepreneurial associations are treated by the Russian law similarly to foreign corporations of this kind, that are referred to as de facto partnerships (Société de fait) or simple partnerships based on joint activities of their members – in France, Partnerships or Limited Liability Partnerships – in the UK and the U.S., general partnerships (Offene Handelsgesellschaft) or limited partnerships (Kommanditgesellschaft) – in Germany, Austria and Switzerland, etc. Furthermore, several provisions of the Russian legislation are simply copying the foreign experience (e.g, cf. investment partnerships in Russia and Limited Partnerships in the UK and the U.S.²⁰). Moreover, until recently even general partnerships in Russia were considered a contractual association of persons without the rights of a legal person (Art. 9 of the Law on Enterprises and Entrepreneurial Activities).

International economic integration (from Latin integratio ‘unification’) has led to fundamentally new approaches to understanding business (trade, commerce) entities. The forms of economic activity are not prescribed by legislation, but–quite the opposite – the economy and the market themselves create the models of entrepreneurial (business) activity, which gradually get consolidated in the legal system. Thus, the economic aspects are primary, and the legal ones are derived from them. One cannot tease apart the entrepreneurial legislation from the economy.

The principle of uniting individuals invariably serves as a basis of a corporation. For the record, for this exact reason Art. 2 of the Civil Code defines relations pertaining to participation in and governance of corporate organizations as “corporate”. Thus, the “contractualness” of establishment and of asset (investment) consolidation cannot be considered defining attributes of a corporation²¹.

The criterion of contractualness is not met by many non-commercial corporations (which are numerous), that are established with an institutional or administrative purpose (Ch. 4, § 6, of the Civil Code). For example, the goal of a self-regulatory organization is coordinating entrepreneurial and professional activity of its members, including developing and setting the standards and regulations governing this activity, as well as monitoring their compliance (Arts. 2–3 of the Self-Regulatory Organizations Law). Moreover, the membership in a self-regulatory organization cannot be viewed as a treaty process, and the establishment of corporate rights depends on the decision of the collective body on the admission to membership (Art. 17 of the Self-Regulatory Organizations Law).

A similar situation, in particular, is observed in the U.S., where nonprofit charitable corporations, mutual-benefit organizations and religious corporations operate (see the Model Nonprofit Corporation Act). For the record, nonprofit organizations do not have the right of a legal person, but are viewed as subjects of law, whose activity is aimed at developing relationships between their members and addressing the members’ needs. These corporate associations are not contractual in nature.

Adoption of the foreign experience is evidenced by the active use of asset pooling in various legal entities formed by associations of individuals²². Over the course of the last twenty years unit investment funds (UIF) – diversified asset portfolios consolidating the assets transferred by trustors under control of a managing company and the assets acquired in the course of such management (Art. 10 of the Investment Funds Law) – have become widespread business ventures in Russia. It is evident that the fund as a pool of assets, while being an object of law, is not entitled to legal personality. Yet, founders of a UIF form a civil-law society, established with the aim of property (asset) management. Membership in a corporate entity (UIF) is confirmed by an investment unit – a registered security certifying its holders’ interest in the ownership of the property constituting the UIF (Art. 14).

The Supreme Court followed the same path by pointing in its Plenary Decree No. 25 of June 23, 2015 “On the Application by the Courts of Certain Provisions of Section I, Part One, of the Civil Code of the Russian Federation”²³ to the existence of three interpretations of the term “civil-law society”:

1) a collective body of a corporation (which constitutes a legal person) – e.g., a general meeting of corporate members, a board of directors, etc. (paragraph 103, point 2);

2) a legal person (paragraph 118, point 1);

3) an association of individuals (a de facto corporation), not entitled to legal personality, such as a bankruptcy meeting of creditors or a meeting of joint property owners (paragraph 103, point 2).

The stated above confirms that the understanding of the term “corporation” cannot and should not be confined to a legal person. The Russian legal doctrine should move past the 2009 Guidelines for the Development of Civil Legislation (Section III, paragraph 1.5) and consider the substance and content of contemporary corporate relations.

The shift of approach in the Russian legal system may also be illustrated by the example of joint-stock companies. Initially, joint-stock companies were viewed as associations of individuals established for the purpose of joint economic activities (Art. 12 of the Law on Enterprises and Entrepreneurial Activities, 1990). Subsequently, a joint-stock company was re-interpreted as a commercial organization whose charter capital was divided into shares that certified the rights of company members with respect to the company (Art. 2 of the JSC Law). A founders’ agreement was regarded as an agreement about joint activity toward the establishment of the company (paragraph 6 of the Decree of the Plenum of the Supreme Court of Arbitration No. 19 of November 18, 2003 “On Certain Issues Pertaining to the Application of Federal Law ‘On Joint-Stock Companies’”²⁴). Finally, at present a joint-stock company is considered a corporate organization whose shareholders have the right of participation in it and form its supreme body (Art. 65.1 of the Civil Code), whereas a joint activity agreement may only establish corporate associations (such as investment partnerships and insurance pools) and is different in its legal nature from a joint-stock company founders’ agreement.

When analyzing the structure of an entrepreneurial trust, one can relate it to “the triad of ownership” (possession, use, disposition). From the moment of the establishment of a trust²⁵, its owners/investors (trustors) lose their rights to possession, use and disposition of their assets, while a managing trustee is granted the authority to manage pooled assets of the trustors. Such transformation of assets into a legal form of entrepreneurial activity is also inherent in Russian commercial corporate organizations (joint-stock companies, limited liability companies, etc.), that assume the rights to ownership of the assets transferred into the charter capital as contributions (payment) and placed under control (management) of the executive body of a corporation (Art. 53 of the Civil Code).

The current state of economic affairs suggests that the concept “beneficiary owner”, common in the English law, is being introduced into the Russian legislation. In Russia, the term “beneficiary” traditionally refers to a gain acquirer or a de facto owner (including a potential transferee) of an asset (e.g., Arts. 368 and 860.1 of the Civil Code). For example, Art. 860.1 of the Civil Code defines a beneficiary of a nominal account through his/her entitlement to the monetary funds that are managed by a trustee (account holder). In banking, a beneficiary owner is defined as a natural person that ultimately, directly or indirectly (through third parties), owns (has participatory interest in the charter capital larger than 25%) a bank client (legal person) or is able to control its activities (Art. 3 of Federal Law No. 115-FZ of August 7, 2001 “On Countering the Legalization of Illicit Earnings (Money Laundering) and Terrorism Financing”²⁶). Thus, the defining characteristic of the beneficial ownership is not the nominal holding, but the ability of a third party (beneficiary) to monitor and manage assets (see the Informational Letter of the Bank of Russia regarding the identification of beneficiary owners by organizations that conduct transactions with monetary or other assets, approved by Letter of the Bank of Russia No. 14-T of January 28, 2014²⁷).

The fundamental prerequisite for the establishment of a beneficiary relation between the members of a corporate trust is the common capital (asset) management. In Russia, UIFs have gained a wide dissemination thanks to the accessibility of participation, qualified asset management (carried out by a trustee), capital structuring and its distribution among unit holders by means of defining their participatory interest using an investment unit and fiscal advantages (including benefits). Similarly, in the U.S., the participation of a beneficiary in a trust is established using trust receipts (securities). It is noteworthy that, unlike shares, investment units (trust receipts) are not considered issue-grade securities.

The comparative analysis of Russian and American funds reveals many commonalities. First, they are established for qualified (e.g., private equity funds, hedge funds) or other investors (e.g., real estate funds – apartment UIFs). Second, they represent a legal form of consolidation of the investors’ various assets (shares, participatory interest in a charter capital, corporate and state bonds, real estate, artistic values, etc.²⁸). Third, they ensure the securitization (protection) of assets transferred to a trust (fund) by third parties, including creditors. Such conditions ensure that trust (fund) corporations are in demand as a model of consolidation of investors’ assets.

The question of corporate personhood is of importance. One should not conflate in with legal capacity of corporations. We share the view of V. V. Laptev that corporate personhood embraces economic (business) competence that implies having exercisable legal rights and bearing obligations, as well as the capacity to have rights and obligations (i.e., legal capacity)²⁹. Therefore, “corporate personhood” is a broader term than “legal capacity”.

Across the foreign juridical systems, the question of acquisition of corporate personhood is resolved differently, with registration (legitimization) not always being a defining factor.

In his study of the history of American corporate law, L. Friedman notes that, while previously corporate registration and discussion of the articles of incorporation in the state legislature followed the same procedure as passing of a law, currently registration is of a concessive (informational) nature and serves to ensure the fiscal and oversight functions of the state³⁰. This change took place in the nineteenth century, after the U. S. Supreme Court had enunciated the right of corporations legally registered in one state to conduct business in other states, leading to a race between different states for the adoption of the most business-friendly laws. As a result, several states had introduced such concepts as no-par value shares, whose price is determined by their value on the stock market, and non-voting shares. Therefore, corporate registration in the U.S. has long ceased being constitutive (law-making), and instead became just one of the confirmatory acts certifying the existence of a subject of law.

In the U.S., based on the example of the state of Delaware, the establishment of an entrepreneurial association in the form of a Limited Partnership is concluded by signing of a partnership agreement or, in some cases, by making of a verbal agreement. Concurrently, the partnership files a certificate of limited partnership with the Delaware Secretary of State, containing the partnership’s address and the information about the partners (in accordance with the Delaware Revised Uniform Limited Partnership Act, as amended). Thus, the corporate personhood of an American incorporated partnership is not determined by its registration date, but depends on the partnership agreement. The filing of the Statement of Partnership Existence has impact only on the tax duties.

In the countries, where a corporation is viewed as a contractual structure of an association of persons, the emphasis is placed on signing the articles of incorporation. For example, in Panama a corporation gains corporate personhood (for third parties) the moment it registers its articles of incorporation (Arts. 2 and 6 of General Law of the Republic of Panama No. 32 of February 26, 1927 “On Corporations”³¹). Notably, the Panama Corporation Law contains provisions defining the legal capacity of a corporation through its legal authority, while omitting its legal obligations (Art. 19).

In the UK, registration of corporate associations (partnerships) is not constitutive. Only members of a partnership – regarded as self-employed individuals by Her Majesty’s Revenue and Customs – get registered. Corporate personhood of UK partnerships as business entities is established only when a partnership agreement is concluded (usually, in writing). A partnership files a registration statement with the registrar of companies (the Companies House); its members must register with the tax authorities only if the partnership engages in economic activities in the UK. UK companies, on the other hand, while being considered corporate organizations (with the rights of a legal person), gain corporate personhood only after they have registered at the Companies House (starting from the date they received a Certificate of Incorporation).

In Germany, information about businessmen (Kaufmann) is contained in the commercial register maintained by courts (Registergerichte). Additional information is held in specialized registers of cooperatives (the Law on Production and Business Cooperatives) and partnerships³² (the Law on Partnerships). Germany applies the principle of public credibility of registers, so a legal subject is considered to be established from the moment information about it is entered into the register. In case a person evades from registration in the commercial register, such registration may be enforced.

In a number of countries registration is viewed as an acknowledgement of a corporation’s delictual dispositive capacity, which gives it the right to be engaged in litigations (Art. 15 of the Nevis Business Corporation Ordinance, dated November 13, 1984³³).

The presence of corporate personhood indicates a corporation’s ability to participate in economic relations. Importantly, its entrepreneurial or any other economic activity relies on certain legal structures. In their review of enterprises engaged in international trade, Y. Funk and V. Khvalei without hesitation classify societies, partnerships, European Economic Interest Groupings (EEIG; French Groupement d´intérêt économique, G.i.e.)³⁴, transnational associations and business trusts as corporations³⁵. These entities represent various forms of corporations. The main difference of a business trust from a legal person or an entrepreneurial association is in the limited liability of its beneficiaries (owners). The liability is channeled through a managing trustee.

Within the Russian civil and economic doctrine, the discussion revolves around the constitutive vs. confirmatory nature of corporate registration (or other means of legitimization) for the purpose of defining the corporate personhood of participants of economic activity. As E. V. Trofimova rightly pointed out, the Russian registration system of corporate organizations (legal persons) is constitutive in nature and is used for public purposes (state control of entrepreneurship, fiscal functions, statistical recording, gathering of information about business entities). She also noted that for commercial corporate organizations the registration procedure is declarative, for non-commercial organizations it is informational (with legal appraisal of the documents), and for credit organizations it is authorization-based³⁶. Yet, the constitutive character of registration does not apply to corporate associations and trusts (funds).

Concerning Russian corporate organizations (legal persons), their legal capacity is in effect from the moment the information about the establishment of a legal person is entered into theUnified State Register of Legal Entities (Art. 49 of the Civil Code).

Determination of the corporate personhood of entrepreneurial associations can be illustrated by the work of the Federal Antimonopoly Service (FAS). In order to determine market dominance, the FAS estimates the economic concentration (consolidation) of property and productive assets. Further, the FAS works to identify cartels (e.g., salt and pollock cartels) that form corporate associations whose activity hinders competition³⁷.

As a rule, corporate associations in Russia gain corporate personhood from the moment the relations between corporate members are legally defined (e.g., by signing an investment partnership or insurance pooling agreement, acquiring significant influence or control in the head organization of a banking holding or a banking group).

Participation of corporate trusts (funds) in economic activity is provided by endowing a trustee with the competence of asset management.

The discussion of the subject matter should not be confined to the concept of legal person, whose fictions are debated by legal experts to this day³⁸. As V. K. Andreyev had rightly pointed out, identification of corporate personhood of a legal person has no legal effect, and it would be more accurate to talk about the competence of the bodies of a legal person (corporation)³⁹. This approach resolves the problem of incorrect interpretation of the body as a legal person’s representative. The main inconsistency of this interpretation lies with the absence of legal relation between the legal person and its representative. After its brief inclusion (with Federal Law No. 99-FZ of May 5, 2014), the erroneous provision in paragraph 1 of Art. 53 of the Civil Code that defined a body of a legal person as its representative, was rightly eliminated.

Similar issues arise with the interpretation of assets transferred to state (non-commercial) corporations. According to Y. K. Tolstoy, a state corporation is authorized only to exercise the right of the federal property owner on behalf of the Russian Federation⁴⁰. In other words, bodies of a state corporation are granted the competence to manage assets transferred to a state corporation at its founding. Thus, the emphasis is placed not on the corporate personhood on the organization, but on the competence of its bodies.

It is also worth mentioning how the domestic legislator treats members of a corporation. For example, Art. 53.1 of the Civil Code, that defines liability of individuals authorized to act on behalf of a legal entity, members of the collective bodies and persons taking executive decisions, implies liability for corporate governance that was not taken in good faith, was not reasonable or was not compliant with the normal conditions of civil transactions or standard entrepreneurial risks.

It appears that the defining factor is the de facto corporate governance, i.e., who actually controls the corporation, albeit outside of the formally established corporate bodies (i.e., the director, the board of directors). The act of “piercing the corporate veil” in English law is based on this principle (cf. the German notion of “destructive interference”). In Russia, individuals that control a corporation de facto may also be held legally accountable for breaking down “corporate shields”.

The Russian economic doctrine regards entrepreneurial (corporate) associations as participants in economic relations (see, e.g., V. S. Belykh, V. A. Laptev, N. I. Mikhailov, I. S. Shitkina⁴¹). The emphasis is placed on the economic aspects that define these corporations as a certain form of economic activity (e.g., common economic policy of steel cartels, governance structure of vertically-integrated oil and gas holding groups). In this connection, we believe that it is essential to move away from the neo-civil approach that denies entrepreneurial associations the corporate personhood and participation in civil turnover (E. A. Sukhanov⁴²), and suggest resuming the discussion of the law on entrepreneurial associations⁴³.

In the foreign jurisprudence, a corporation established by an agreement of a simple partnership has long been entitled to corporate personhood, even in the absence of legal personality. It would be reasonable to adopt a similar approach in the Russian legal framework.

Obviously, a UIF is not a legal person (it’s an object of law), but a corporate association of persons in a corporate form, which has transferred its assets under control of a trustee, has to be viewed as a subject of economic relationships and a subject of law. It is not incidental that the Supreme Court recognizes civil-law societies established in the form of real estate co-owners’ associations as corporations, even in the absence of the registration for obtaining legal personality status (paragraph 103 of the Decree of the Plenum of the Supreme Court No. 25 of June 23, 2015). The FAS frequently deals with complex transaction structures when analyzing corporate partnerships with the participation of non-residents and trusts (e.g., EuroChem⁴⁴), etc.

The moment of establishment of corporate personhood of a corporate trust is determined by the date corporate relations between trustors and a trustee are formed. In other words, a trust corporation is established the moment trust management is established. Several countries pose additional requirements on trust registration procedure. For example, in Cyprus trusts are entered into registers that are maintained by the Cyprus Securities and Exchange Commission, the Cyprus Bar Association and the Institute of Certified Public Accountants.

In the Russian legal framework, the legal status of trusts was determined before the adoption of the Civil Code (see Presidential Decree No. 2296 of December 24, 1993 “On Trust Property (Trust)”⁴⁵). It is evident that trusts and UIFs represent corporate forms of economic activity, and the corporate personhood of a corporate trust is implemented in accordance with the articles of incorporation and the law. Registration requirements for individual forms of trusts are also legally defined, in particular, by Art. 19 of the Investment Funds Law (for UIFs) and Art.27 of the Mortgage Securities Law (for mortgage pools).

General conclusion:

The present analysis suggests that the term “corporation” embraces:

• corporate organizations (legal persons);

• corporate associations (entrepreneurial associations);

• corporate trusts and funds.

2. Corporate relations

The issue of corporate relations is closely related to the branch affiliation of corporate law. One can find different definitions of corporate relations in legal literature. At the core of these definitions are unique properties of the subject of law (corporation), substance of the relations in question (corporate relations), legal aspects of their regulation, economic and social characteristics, as well as other defining criteria. Yet, domestic legal scientists, despite being guided by the same legislative provisions, arrive at different conclusions.

The Russian law defines corporate relations as relations associated with participation in corporate organizations or their governance (Art. 2 of the Civil Code).

At first glance, for relations to be recognized as corporate, one of the two requirements has to be fulfilled – participation in or governance of a corporation. However, the very fact of participation in a corporation automatically grants its members governance rights, as affirmed by the provision of Art. 65.1 of the Civil Code that states that members of a corporation form its supreme body–a general meeting, congress, conference, etc.

This leads to the conclusion that Art. 2 of the Civil Code has legally consolidated a long-standing form of public relations – corporate relations, on a level with property and contractual relations.

The provisions of the Civil Code and other legislative documents attest to the fact that domestic legislative norms regarding corporations are still under development. The development of corporate economic activities is ensured through constitutional freedoms and the traditions of domestic economy.

One necessary measure was the adoption of Art. 307.1 of the Civil Code institutionalizing the applicability of general provisions on obligations to requirements emerging from corporate relations, which, by the way, led to the controversial interpretation of corporate relations as a form of contractual relations. But, as V. K. Andreyev has rightly noted, this provision of the civil law strongly underlines the special legal nature of corporate relations⁴⁶.

The special legal nature of corporate relations is also manifested in the possibility of reinstating corporate rights through replevin (paragraph 3 of Art. 65.2 of the Civil Code, paragraph 7 of the Review of the Practices for Resolving the Disputes over Share Placement and Trading⁴⁷, et al.). Namely, it concerns the cases of regaining corporate control that was lost by a corporate member due to the loss of shares that certified the scope of corporate rights. One should not conflate vindication of property rights with revindication of corporate rights through replevin (it’s a legal analogy).

One should pay attention to the literal text of Art. 307.1 of the Civil Code that stipulates the legal analogy, as it applies:

1) only to requirements (i.e., when it is objectively necessary for safeguarding the legally protected rights and interests of the participants of corporate relations);

2) only to general provisions on responsibilities (application of the provisions on individual types of requirements is not permitted).

The analogy in question is a coercive legal device, necessary for the regulation of corporate relations.

According to I. S. Shitkina, corporate relations represent legally regulated public relations that emerge in connection with the establishment, operation and discontinuation of activities of a corporation⁴⁸.

V. A. Belov suggests that corporate relations are a type of public relations that are directed at the organization and implementation of activities aimed at achieving common goals–unionized or corporate activities⁴⁹.

When examining the substance of corporate relations, V. K. Andreyev comes to the conclusion that corporate relations include two subtypes of public relations – relations associated with participation in corporate organizations and relations associated with their governance⁵⁰.

Based on the doctrine of Roman law, corporate relations should be viewed as a subtype of either contractual or property relations. However, this assumption would be incorrect, as it ignores the content of legal provisions regulating corporate relations.

The substance of corporate relations may be better identified through examining their characteristic traits, as well as defining subjective rights and legal responsibilities of their participants. Moreover, it is beneficial to apply the normative approach, commonly used in Russian jurisprudence, to the assessment of rules of law regulating corporate relations.

As clearly stressed by E. A. Sukhanov, corporate relations cannot be viewed as a subtype of contractual relations, just as the rights of corporate members cannot be viewed as contractual rights, because this may lead to substituting the rules of corporate law by the contractual ones, which cannot be permitted as not corresponding to the legal nature of corporate relations⁵¹.

A special nature of corporate relations is evidenced by a corporate agreement (Art. 67.2 of the Civil Code), grounds for recovery of losses (paragraph 5 of Art. 406.1 of the Civil Code), liability for misrepresentation of circumstances (paragraph 4 of Art. 431.2 of the Civil Code) and other legislative provisions. In many cases, legal regulation of the behavior of participants of corporate relations (e.g., regarding the conclusion of a corporate agreement) is equated in its legal consequences to the mode of entrepreneurship (paragraph 4 of Art. 431.2 of the Civil Code).

The Constitutional Court had repeatedly expressed its opinion on the economic nature of corporate relations, by pointing out that founders (members) of business companies independently perform economic activities with the purpose of profiting from the use of their capabilities and assets by means of production organization and management, sale of goods, performance of the work or service provision (Decree of the Constitutional Court No. 10-P of April 23, 2012⁵²). In many cases, activity of shareholders was categorized as other not prohibited by law economic activity, associated with certain legal risks, as joint-stock companies conduct entrepreneurial activities independently (Decrees of the Constitutional Court No. 3-P of February 24, 2004⁵³, No. 11-P of May 25, 2010⁵⁴, et al.).

Legal literature has started employing the term “corporate responsibility”⁵⁵, which, in all likelihood, represents an artificial legal construct (legal device) used to characterize the scope of corporate rights and responsibilities of corporate members.

Corporate responsibilities are closely related to intraeconomic ones. The concept “intraeconomic responsibilities” can be applied both to corporate responsibilities (conventional name) and to responsibilities in their classic sense (Art. 307 of the Civil Code).

The fundamental difference between corporate and other responsibilities is the moment they emerge. Whereas corporate responsibilities exist from the moment a person becomes a member (participant) in a corporation (Art. 65.1of the Civil Code), all other responsibilities emerge when an agreement (deal) is concluded, as a consequence of causing damage, as a consequence of illicit enrichment, etc. (paragraph 2 of Art. 307 of the Civil Code). Therefore, a participant of a public or corporate relation assumes the status to a party (creditor, debtor – Art. 308 of the Civil Code), as well as subjective rights and responsibilities following a judicial fact – an action or an event (e.g., making a deal or causing harm through inaction). In corporate relations, acquisition of membership (participation) serves as such a judicial fact.

One should take into account the multifaceted nature of corporate relations. In particular, a corporate agreement and an agreement on the pledge of rights of corporate members allow transferring corporate rights to creditors or other persons. The proponents of the civil approach regard such constructs as “quasicorporate relations” to which the contractual law should be applied (see, e.g., S. Y. Filippova⁵⁶). Therefore, if corporate governance can be regarded as the realization of contractual rights, which is doubtful, then the realization of corporate governance rights by creditors does not exist! But does it? In this connection one might remember the doctrinal dispute over the non-recognition of holding groups’ subjective rights and their possessing only quasi-corporate personhood, which is no longer relevant, among other things, thanks to the appropriate legal provisions (the Investment Partnership Law, Art. 4 of the Banking Law, Art. 14.1 of the Law on the Organization of Insurance Business, etc.).

The establishment of corporate rights and responsibilities is, as a rule, preceded by two circumstances:

1) the establishment of a corporation as a subject of law;

2) the will of a corporate participant (member) themselves to acquire corporate rights.

Therefore, corporate rights are realized with respect to an existing corporation (e.g., a joint-stock company registered in the Unified State Register of Legal Entities, a banking holding registered with the Bank of Russia⁵⁷, an insurance pool established as a general partnership, etc.).

In legal literature, one can find a reasonable opinion on the corporate nature (i.e., existing from the moment a decision to establish a corporation is taken) of founders’ rights prior to the establishment of a corporation, since an association of persons (general meeting of founders) gains and exercises the rights and responsibilities, has a governance body and commits acts that have legal consequences (V. K. Andreyev⁵⁸).

A corporate relation should be viewed in the context of cohesion between membership and governance. It is hard to envision corporate membership in isolation from corporate governance. Few exclusions to this rule include cases of judicial restraint, conclusion of a corporate agreement and foreclosure of corporate assets. paragraph 3 of the Decree of the Plenum of the Supreme Court of Arbitration No. 11 of July 9, 2003 “On Arbitration Court Practices for Considering Claims for Imposing Injunctive Relief Associated with the Prohibition of General Shareholders’ Meetings”⁵⁹ provides for handing down judgements preventing an annual or an extraordinary general meeting of shareholders from taking decisions regarding individual issues on the agenda, if these issues represent the subject of a dispute or are directly related to it. Another example is a corporate agreement that may oblige members of a corporate organization to refrain from exercising their corporate rights, including the right to vote in a certain way at a general meeting and commit other acts of corporate governance in a concerted manner (Art. 67.2 of the Civil Code). Finally, the third scenario is when the corporate rights are exercised not by corporate members themselves, but by the pledgees of shares or participatory interest in a charter capital (Art. 358.15 of the Civil Code).

When looking at corporate relations through the prism of characteristics inherent in a corporation itself, one can make an interesting observation. Art. 65.1 of the Civil Code defines corporations as legal persons whose founders (members) have the right of participation (membership) and form the supreme body. Further, Art. 65.2 of the Civil Code institutionalizes the right of a corporate member to participate in corporate management.

It should be emphasized that Art. 65.2 refers to management of corporate affairs, not corporate governance. Such wording was used by the legislator in order to tease apart corporate management from corporate governance and corporate control, the latter of which is realized through the executive bodies (Art. 53 of the Civil Code).

Assessment of the regulatory nature of corporate legal provisions may help unfold the content of corporate relations. It is important to understand what portion of public relations is covered by corporate legislation.

The corporate legislative provisions in question regulate corporate legal relations, determine the legal status of corporations, define the framework and structure of their executive bodies, and dictate the legal regime of corporate management. On the other hand, the law overlooks the will-formation of participants (members) of a corporation with respect to governance as a thought process. It goes without saying that the end product of this process – the development of an appropriate will – should meet the criteria of legitimacy and good faith and cannot infringe upon the rights and lawful interests of others. The thought process itself is not part of the judicial assessment of the actions undertaken by corporate members, in particular, when dealing with claims for expelling persons from a corporation; only the articulated final will and its legal consequences are subject to legal evaluation (see paragraph 5 of the Review of the Arbitration Court Practices for Resolving the Disputes over the Expulsion of Limited Liability Company Members⁶⁰).

Understanding of the essence of a corporate relation is facilitated by the analysis of its object. In the traditional legal doctrine, the object of a legal relation is what a public relation is directed at, as well as what it is built around – i.e., material and other benefits.

In her review of approaches to the interpretation of objects of corporate relations, I. S. Shitkina suggests defining such an object as the activity of subjects directed at obtaining material benefits, rather than the benefits themselves⁶¹. This approach focuses on the subject matter of a corporate relation (behavior of its participants), rather than its object.

It is suggested that an object of a corporate relation is corporate participation (membership). This proposition follows from the provisions of Arts. 2 and 65.1 of the Civil Code.

This brings up the question: if participation (membership) in a corporation and its governance are two indissociable elements of a corporate relation, why is the participation (membership) their only object?

To answer this question, we must separate the primary elements from the secondary. The primary element of corporate relations is the participation (membership) in a corporation, which emerges when a member (participant) joins a corporation and is terminated when he or she leaves it. As for the governance of corporate activities, the emergence and termination of this element of a corporate relation are directly dependent on participation, thus, governance is secondary⁶².

Participation in a corporation may or may not be related to governance (e.g., as in the case of concluding a corporate agreement or pledging the interest in a charter capital of an LLC). Importantly, “corporate management” should not be conflated with delegating the functions of the executive body to a trustee or a managing company (see, e.g., paragraph 1 of Art. 69 of the JSC Law or Art. 42 of the LLC Law) that do not enjoy the rights of membership. The manager fulfilling the role of an executive body serves a dual function: on the one hand, he delivers a contractual compensated provision of services, on the other hand, he exercises corporate governance.

Returning to the thesis of the identity of participation and governance in corporate relations, one should note that, despite the possibility of separating governance and membership, as a rule, these two elements are inseparable. The exclusion of governance aspects from a member’s corporate rights depends on his own volition. For example, if a member does not consent to signing a corporate agreement or pledging his participatory interest in corporate governance, the established system of corporate governance remains in effect.

Speaking of objects of rights, one should not conflate an object of corporate rights with an object of civil rights⁶³. Objects of civil rights include belongings, such as cash money, certificated securities and other property, e.g., non-cash funds, book-entry securities, property rights; deliverables and service provision; protected intellectual property and related identifications; intangible benefits (Art. 128 of the Civil Code).

Non-identity of these concepts is also evidenced by the fact that an object of corporate legal relations – participation (membership) – is first to emerge, which in its turn leads to the establishment of corporate rights with respect to a corporation, whereas objects of civil rights – company shares – emerge later (e.g., on establishment of a business company and introduction of the information about it into the Unified State Register of Legal Entities, or on additional issue of shares).

The content of corporate legal relations reveals the scope of rights and responsibilities of their participants. O. S. Ioffe suggested that legal relations do not embrace the behavior of their participants in general, but rather involve specific rights and responsibilities that define the legal framework outlining acceptable behavior (subjective legal rights and authority)⁶⁴.

The Civil Code defines the fundamental rights and responsibilities of participants in a corporation (Art. 65.2, 67, 73, 85, 123.3, 123.11, et al.). In a sense, they could be labeled minimum rights and responsibilities of corporate members. The detailed description of corporate rights and responsibilities (corporate authority) can be found in special laws (the JSC Law, the LLC Law, the Business Copartnerships Law, et al.).

Corporate relations are defined as internal relations within a corporation. Yet, other relations closely associated with them can also be considered as such. First, the realization of corporate rights requires the involvement of third parties – public authorities and the Bank of Russia. In particular, the Federal Tax Service (FTS) maintains the Unified State Register of Legal Entities and the record of participation interests in charter capitals of LLCs; the Bank of Russia registers equity issuance and monitors compliance with corporate legislation; the FAS regulates economic concentration transactions, in particular through acquiring large stocks of shares and participation interests in a charter capital of business companies. Second, membership and governance relations themselves have public-law aspects. For example, self-regulatory organizations take up the position that internal documents come into force only after they are entered into the state register of self-regulatory organizations by Rostechnadzor (pt. 12 of Art. 55.5 of the Town Planning Code); when concluding corporate deals, their counterparties should take into account local normative acts, including the charter, that regulate corporate procedures for concluding specific types of deals (paragraph 1 of Art. 174 of the Civil Code, paragraph 2 of Art. 69 of the JSC Law).

Speaking of the convergence of public and private aspects of economic (entrepreneurial) relations that is manifested in the interplay between the procedural and regulatory elements of economic activity, the economic law doctrine has labeled intereconomic relations as “the Martemianov triangle”– a model that underlines the presence of horizontal, vertical and internal elements in these relations⁶⁵.

It is no coincidence that T. V. Kashanina referred to corporate law as “the core of entrepreneurial law”⁶⁶, as intracompany and intraeconomic relations have historically constituted the major part of the entrepreneurial law subject matter. Of particular relevance is the study of internal relations in the unified state-owned economic sector of the Soviet era, whose business units (enterprises, production associations, bodies of economic management) represented economic systems – subsystems of the national economy⁶⁷.

To summarize, corporate relations are relations associated with participation (membership) in corporations, their management and control. Relations pertaining to corporate management may be conventionally labeled as intraorganizational relations, whereas relations pertaining to corporate control can be described as intraproductive⁶⁸.

The specific content of a corporate relation depends on the legal entity type of a corporation and on corporate acts that regulate its activity, which we will discuss in more detail in the following sections.

3. Corporate law in the Russian legal system

When analyzing corporate relations, it is necessary to determine the place that corporate law takes in the Russian legal system. The domestic pre-revolutionary, Soviet and modern legal doctrines have not succeeded in developing a single approach towards identifying the criterion for dividing the Russian legal system into separate branches.

Among the proposed criteria were the subject matter of regulation – i.e., the content of public relations (A. V. Dozortsev⁶⁹, V. K. Mamutov⁷⁰, V. K. Raicher⁷¹), the character of regulated relations (V. V. Laptev⁷²), the subject matter and the method (S. S. Alekseyev⁷³, I. V. Pavlov⁷⁴), Y. K. Tolstoy⁷⁵, V. F. Yakovlev⁷⁶), the addressee of regulation (V. S. Tadevosyan⁷⁷), etc. Each viewpoint was supplemented by numerous arguments and, it should be acknowledged, had some merit. Still, division of the legal system into separate branches is not a purely scientific question, as it is necessary for law enforcement and, thus, calls for an appropriate scientific assessment.

Following a lengthy academic debate and the establishment of fundamentally different perspectives, the doctrine now has several definitions of corporate law to offer.

Modern legal literature suggests that many scientists involved in this matter have opted to acknowledge corporate law as an independent branch of Russian law – among them are V. K. Andreyev, V. V. Dolinskaya, T. V. Kashanina, I. S. Shitkina, to name a few. Such a decision is, as a rule, founded on the thesis of uniqueness of the subject matter of the branch – corporate relations.

In particular, being a proponent of the economic (entrepreneurial) law approach, V. K. Andreyev considers the subject matter of legal regulation to be the only possible criterion for separating the branches of law, and corporate law meets this criterion⁷⁸. According to I. S. Shitkina, corporate law is also recognized as a branch of law and is defined as a set of norms regulating public relations emerging in connection with the establishment, operation and discontinuation of corporate activities⁷⁹. The emphasis here is placed on the fact that the subject matter of corporate law is directly linked to corporations as subjects of law. Further, I. S. Shitkina mentions that the norms of corporate law are based on combining private and public methods of legal regulation, thus duplicating the provisions of the general part of entrepreneurial law.

It should be noted that until recently many scholars of economic law had adhered to the view that corporate law constitutes only a major institute of entrepreneurial law that regulates relations pertaining to the establishment and operation of corporations (see, e.g., E. P. Gubin and I. S. Shitkina⁸⁰). However, this institute was subsequently acknowledged to have the attributes of a law branch.

The essence of corporate relations should be the starting point in the assessment of the branch affiliation of corporate law. A corporation itself is a key subject of the legal relations in question, but not a defining one when it comes to separating law branches. Otherwise, we would have to (following the “subjective principle”) recognize not only “corporate law”, but also “unitary law” as a branch of law that regulates the issues pertaining to the legal arrangement and operation of unitary organizations, which is doubtful.

Besides, if one concurs with I. S. Shitkina’s opinion on the subject matter of corporate law (“relations emerging in connection with the establishment, operation and discontinuation of corporations”), then it would be more accurate to substitute the word “operation” with the expression “governance of activity”, which would underline the essence of the relations in question (corporate relations). Otherwise, it sounds like corporate law also regulates production activities and business operations of corporations (banking, insurance, oil-and-gas, construction, etc.). It is evident that the authors did not attach this meaning to their work, as the discussion is confined to relations emerging from participation in and governance of corporations.

When studying organization of the legal system, D. A. Kerimov suggested to define a law branch as an established set of norms that regulates public relations that are homogeneous in quality on the basis of specific principles and methods and, thus, acquiring certain independence, sustainability and autonomy of function. Furthermore, the nature of these relations determines the method of their legal regulation⁸¹.

Worthy of note is the position of T. V. Kashanina who – in her monograph “Structure of law” – classifies corporate law as a subtype of “private law”. According to her, corporate law represents a set of legal norms established by the bodies of a corporation that express the will of its members. The author argues for the uniqueness of the set of norms in question, which are established by the members of a corporation. Among the sources of corporate law, she mentions corporate customs and practices, corporate precedents and corporate normative acts⁸². The emphasis is placed on the idea of corporation as an association of individuals, in any field (political, economic, social or spiritual) in which its participants independently develop (establish) the norms and rules of behavior (sources of corporate law).

An interest towards this approach is explained by the uniqueness of the state-run sanctioning system of corporate policy-making which shapes the system of sources of corporate law. Yet, the legal organization and activity of a corporation is inextricably linked with the issues of registration (legitimization) of a corporation, protection of corporate rights, regulation of corporate procedures by the state and other matters that are traditionally regulated by entrepreneurial law.

N. N. Pakhomova speculates about the corporate nature of social relations and the connectedness of their subjects with each other, but later points out the necessity of singling out corporate relations which possess special attributes (an economic component)⁸³. Further, she without hesitation classifies corporate law as the third sub-branch of civil law, on a level with property and contractual law⁸⁴.

Therefore, one can postulate the existence of a “mega-branch” of Russian law that covers the major portion of public relations and includes all sorts of corporate relations, including family relations (“spousal corporation”), administrative relations (government body as a “public corporate association” of public servants employed there), relations between different ethnic (“ethnic corporation”) and national groups, etc⁸⁵. One can also define an association of the world Internet users as a corporate association that is united by the Internet telecommunications network and is managed by its users. In the latter case, corporate law becomes a supra-national global issue.

When defining a law branch, one should first identify the legal categories and the legal substance of the phenomena in question. Social, economic, historic and other aspects may also be accounted for, but they are not defining.

Many proponents of the school of private law, including E. A. Sukhanov, view corporate law as special private law in relation to general private law – i.e., civil law⁸⁶. Yet, no justification is provided to denying the overlap between the private-law and the civil-law sources of regulation or the complexity of the branch law in question.

In his assessment of E. A. Sukhanov’s scientific views, Y. K. Tolstoy contests the classification of corporate law as a sub-branch of civil law⁸⁷. According to Y. K. Tolstoy, the suggested approach leaves open the question of the place that corporate relations take within civil law. It isn’t clear whether they should be placed into the discussion of the subject matter of civil law (as a subtype of public relations) or into the discussion of legal persons (on corporate entities).

In all cases, defining corporate law as a part of civil law leads to the truncation of tis concept. It appears that special (corporate) private law is based on public relations of private-law character (e.g., equal relationships between participants based on a corporate agreement).

Further, E. A. Sukhanov’s approach does not consider the public-law component of corporate relations, which constitutes their substantial part (including the relations pertaining to corporate governance and regulation of the activity of SRO members, issues related to competence of executive bodies and corporate control, etc.).

V. F. Popondopulo defines corporate law as a set of general and special norms of civil law that regulates contractual obligations associated with participation in corporate organizations and their governance (corporate relations), based on equality, autonomous will and material independence of their participants⁸⁸. This definition is based on the normative approach rooted in Art. 2 of the Civil Code. Yet, this approach undermines the long-awaited amendments to the Civil Code that had introduced the third type of public relations–corporate relations, on a level with property ad contractual ones. Furthermore, it is hard to find “equality” and “autonomous will”, for example, in relationships between the general meeting of a corporation (the will-forming body) and its director (the executive body).

We should note that the proponents of the private law school have been recently paying a lot of attention to the core issues of entrepreneurial law and have attempted to describe them in the vein of civil law science, and in particular this pertains to the term “legal person of public law”⁸⁹. While recognizing that these subjects of law possess specific public competence, they by all means include them into the discipline, ignoring the fact that there is no “equality” and “autonomy of will” to speak of here⁹⁰. However, according to Art. 2 of the Law on Public-Law Companies, these organizations are explicitly granted public-law functions and authority, and their activity is carried out on behalf of the government and society.

Modern scientists specializing in civil law often without hesitation classify corporate law as a sub-branch of civil law⁹¹. In particular, E. V. Bogdanov justifies this point of view through the substance of relations in question, which, according to him, has no fundamental distinctions from civil legal relations. Corporate law is viewed as a sub-branch of civil law that regulates property, personal non-property and civil-law organizational relations associated with the participation in corporations and their governance. However, it isn’t clear on which grounds organizational-governance relations can be classified as private-law ones. Moreover, corporate bodies that participate in corporate relations do not possess the traditional civil-law capacity and do not fit the suggested approach, which demonstrates that it is impossible-based on Art. 2 of the Civil Code – to define corporate relations as belonging to the subject matter of civil law, and that it is reasonable to identify them as the subject matter of corporate law instead.

V. A. Belov sees the academic debate over this issue as an indication that scientists of private and entrepreneurial law try to slap a branch label based on the linguistic (rather than legal) aspect of the word “corporation”. At the same time, V. A. Belov proposes the term “corporate law”– a set of legal norms that regulate public relations directed at the organization and implementation of activities aimed at achieving common goals (unionized or corporate activities), with the reservation that corporate law is not covered by the institute of private law⁹².

While having the above-described views in mind, we suggest a different approach to defining the place of corporate law within the legal system. We also consider it possible and reasonable to rely on the works of pre-revolutionary and Soviet legal scientists that studied this issue.

The history of the economic law doctrine dates back to distant past. Justifying the existence of economic (now referred to as entrepreneurial) law as a branch, representatives of the economic law school relied primarily on the emerging system of trade law (later known as commercial, economic and, finally, entrepreneurial law) that regulated the appropriate public relations within the national economy.

During the Soviet period, O. A. Krasavchikov pointed out the tendency towards unification of the economic legislation already in the 1960s-1970s, which, according to him, indicated the necessity to adopt the USSR Economic Code⁹³. Later he would scientifically justify the establishment of economic law as a unique and independent branch of law.

Entrepreneurial law had developed as a branch of law, a science and a study discipline. As V. V. Laptev rightly noted, all definitions of economic law converge on that it regulates the issues pertaining to the establishment and operation of economic entities, including corporate ones, regardless of whether they belong to the real economy or not⁹⁴.

The most successful criterion for dividing the branches of law is according to the subject matter and the nature of regulated relations. This approach rules out the existence of quasi-branches of law – declared to be independent, but lacking a common component. Furthermore, this shortfall (the absence of a common component in a branch of law) is not addressed by the dogmas of Roman law any more, and the traditional division of law into private and public has become methodological in nature with respect to the separation of private legal norms from public. For example, G. F. Shershenevich, while viewing trade law as part of civil law (a common practice for jurisprudence of that time – see also the works of A. I. Kaminka⁹⁵, P. P. Tsitovich⁹⁶, et al.), could not neglect the difference between the norms of private trade law, public trade law and international trade law⁹⁷. Notably, G. F. Shershenevich more frequently used the term “private law” than “civil law”. Public and international trade legislations could not have been classified as civil, as it would violate all reasonable distinctions that could be made between law branches.

The multifaceted nature of Russian law branches allowed V. K. Raicher⁹⁸ to divide them into basic and complex. Yet, most basic branches of law would become complex over time, as – in Y. K. Tolstoy’s words⁹⁹–it was not possible to isolate “chemically pure” branches.

A similar interpretation was proposed by S. S. Alekseyev, who presumed that a branch of law is the main unit of the legal system, identifiable by a special regime of legal regulation and covering entire sectors, clusters of homogeneous public relations¹⁰⁰. According to him, all branches of law could be divided into profile, special and complex. Economic law was considered by S. S. Alekseyev to be a complex law branch, because it combined heterogeneous institutes of profile and special law branches¹⁰¹.

L. L. Laptev remarked that branches of law are not separated by a “brick wall”¹⁰², yet blurring of the boundaries between them should be avoided. Otherwise, it might create ambiguities regarding what legal norms should be used in each particular case.

Within the science of entrepreneurial law, three subtypes of relations (entrepreneurial-law relations) constituting the subject matter of this law branch can be distinguished:

1) relations that emerge from conducting economic activity (including the entrepreneurial kind);

2) relations emerging from the regulation of entrepreneurship;

3) intraeconomic (intraproductive and intracorporate) relations (V. V. Laptev¹⁰³, V. K. Mamutov¹⁰⁴, S. S. Zankovskiy¹⁰⁵, et al.).

Already in the pre-revolutionary jurisprudence, intracompany and internal relations – that subsequently became the subject matter of Soviet economic and modern entrepreneurial law – were studied in the courses on trade law (in particular, when discussing artisan, general, joint-stock and other partnerships¹⁰⁶). Here we should note that, although the subject matter of entrepreneurial law is multifaceted and discussable, the scope of this work will necessarily be limited to the study of legal nature and content of corporate relations.

Soviet cooperatives founded on the principle of “united labor”¹⁰⁷ are the prototypes of Russian corporations. Modern – primarily commercial – corporations, founded as associations of individuals or their assets, evolved to meet the respective needs of the market economy.

When discussing corporate organizations, whose legal forms are enforced by a closed list in Art. 4 of the Civil Code, one could call into doubt the validity of classifying the activities of non-commercial corporations as the subject matter of entrepreneurial (economic) law.

Non-commercial corporations do not carry out entrepreneurial activities, yet the legislation enables them to engage in “income-generating activities” (paragraph 4 of Art. 50 of the Civil Code). Moreover, in order to conduct such activities, non-commercial corporations are obliged to have assets of sufficient market value, exceeding the minimum charter capital of an LLC (paragraph 5 of Art. 50 of the Civil Code).

Self-regulatory organizations (SRO), membership in which endows subjects with the right to carry out entrepreneurial and professional (including economic) activities, can hardly be considered a subject of private law. A SRO is granted public authority, namely the competence to regulate economic activities of its members (Art. 3 of the SRO Law). Further, one of the sources of funding for SROs is the income gained from the placement of monetary funds in bank deposits (paragraph 1, subparagraph 6 of Art. 12 of the SRO Law), which demonstrates the ability of SROs to engage in income-generating economic activities.

Another good example of economic activities conducted by participants in non-commercial relations is the operation of consumer credit cooperatives that bring together natural and/or legal persons for the purpose of meeting their financing needs (paragraph 3 of Art. 1 of the Credit Cooperation Law). Members of this non-commercial corporation – including participating organizations (legal persons) – gain an opportunity of concessional financing of their business, production or other activities. Activities of real estate owners’ partnerships aimed at management of common property belonging to co-owners of units in an apartment building has an economic rationale (Art. 123.12 of the Civil Code), as it allows them to efficiently organize the structure of asset management, etc.

It hardly seems reasonable to single out Cossack communities and small indigenous communities of Russia as special forms of corporations. Obviously, these social groups represent corporate organizations in the broad sense of this term. However, if we followed this path, we would have to recognize all social groups identified according to other criteria as corporations and subjects of civil or entrepreneurial relations (e.g., on ethnic, religious, spiritual, linguistic or other grounds).

Mentions of Cossack communities and small indigenous communities of Russia in different laws underline the economic component of their activities; in particular, with respect to agricultural activities, the law provides for leasing them land plots for the purpose of agricultural production, preservation and development of their traditional ways of life, economy and trades (paragraph 5 of Art. 10 of the Law on Agricultural Land Turnover).

The corporate essence of both non-commercial and commercial corporations (membership and governance) is the same and is tightly linked to the economic interests of their participants.

Under this approach, it may seem reasonable to rename entrepreneurial law into “economic law”, and in fact this proposal has long been circulating in the domestic academic literature¹⁰⁸. Considering the current economic situation in the country, the label “entrepreneurial law” was suggested to be substituted with “economic law”, because the scope of entrepreneurial activity has long exceeded the framework of the provision of paragraph 1, point 3 of Art. 2 of the Civil Code¹⁰⁹. Still, we prefer using the term “entrepreneurial law” as the working name of the law branch under consideration.

The debate on this issue does not change the scope of public relations regulated by the branch. In particular, according to the civil doctrine, civil law is no different from private law, and the works on civil law traditionally cite the concepts of Roman law. As V. V. Vitryanskiy had rightly pointed out in his evaluation of the outcome of the Russian civil law reform, we may arrive at the most counterintuitive and unpredictable conclusions¹¹⁰. We would like to extend his thesis by noting that modern civil law is not what it used to be, and its subject matter also needs rethinking. However, its scope should be confined to the original understanding of civil relations, i.e., property and personal non-property relations that are based on equality and autonomous will. Otherwise, the boundaries between law branches get blurred out.

A similar situation is observed with respect to entrepreneurial law, which was previously referred to as trade, commercial and economic law. This dispute is never-ending, but we suggest settling on the working name “entrepreneurial law”.

The provisions of the Russian Constitution serve as the final argument in the debate about the branch affiliation of corporate law. First, the provisions of Arts. 34 and 36 of the Russian Constitution enshrine the unrestricted use of one’s abilities and assets in economic activity, as well as the right of association. The Constitutional Court has always viewed a corporate organization that unites its participants primarily as a form of collective entrepreneurship and/or an economic model of asset management, and secondarily as a subject of law¹¹¹. The convergence of private and public aspects of corporate legal relations is emphasized here. Second, it should be taken into account that civil law is an exclusive competence of the Russian Federation (Art. 71), whereas entrepreneurial law is the responsibility of federal law with respect to the legal basis of the single market (Art. 71), as well as the joint responsibility of the Federation and its constituent entities on issues pertaining to the regulation of entrepreneurship (Art. 72)¹¹². Furthermore, corporate activities and many aspects of corporate (governance) procedures are regulated not only by federal law, but also by subsidiary legislation, acts of the Bank of Russia¹¹³, regional normative acts, as well as local corporate acts¹¹⁴ (paragraph 5 of Art. 50, paragraph 4 of Art. 52 of the Civil Code, etc.).

It is incorrect to view corporate relations in terms of corporate governance (if one takes into account their substance) as equal relations based on autonomous will and discretion (paragraph 1 of Art. 2 of the Civil Code). With respect to the methods of legal regulation of corporate relations, scientific analysis suggests the presence of three traditional methods of entrepreneurial law–discretionary, peremptory and recommendatory¹¹⁵.

When analyzing the distinctions of an institute/subbranch from a branch of law, D. A. Kerimov states that an institute of law represents a subset of homogeneous relations (with their specific attributes) and also shares some similarities with a branch of law (objective insularity and organic unity of components, specificity of the method, relative independence, etc.)¹¹⁶. In other words, an institute of law determines the norms regulating a specific type of homogeneous public relations. In contrast to a law branch, a subbranch represents a large subset of public relations that fall within the scope of relations regulated by a branch (V. V. Lazarev, S. V. Lipen)¹¹⁷. Obviously, only an independent branch of law has its unique Common and Specific parts that do not duplicate and don’t borrow from the existing branches of law and have their subject matter, principles, methods of legal regulation, etc.

In his study of the subject matter of entrepreneurial law and the place it takes in the system of law branches, E. P. Gubin had pointed out the unity of the subject matter, the legislation and the corresponding study discipline in entrepreneurial law¹¹⁸.

Corporate relations belong to one of the three types of public relations that constitute the subject matter of entrepreneurial law – intraeconomic relations, on a level with relations directed at the implementation and regulation of entrepreneurial or other economic activity. Intraeconomic relations, in their turn, are divided into intracorporate and intraproductive relations.

In summary, we came to the conclusion that corporate law should be viewed as a subbranch of entrepreneurial law that covers a substantial portion of entrepreneurial legal norms and regulates a homogeneous set of public relations–namely, corporate relations.

4. Sources of regulation of corporate relations in Russia

The sources of regulation of corporate relations may be approached from different angles. Some legal scientists view the sources of corporate law exclusively as the product of local policy-making (T. V. Kashanina¹¹⁹). This opinion has its roots in the idea of corporation as an association of persons. Under this approach, only corporate legal acts adopted by a civil-law society within a given corporation fall under scrutiny. Obviously, corporate acts serve as a source of regulation of corporate relations and represent the most crucial part in the taxonomy of such sources. Still, the entire system of sources of entrepreneurial law needs to be analyzed, and it includes all normative acts pertaining to the regulation of corporate relations¹²⁰.

Let’s review the existing sources of corporate law.

1. Generally recognized principles, generally recognized norms of international law, international treaties and international customs.

The Russian legal system recognizes international acts (paragraph 4 of Art. 15 of the Russian Constitution). The regulation of their use is also enshrined in the Decree of the Plenum of the Supreme Court No. 5 of October 10, 2003 “On the Application by General Jurisdiction Courts of Generally Recognized Principles and Norms of International Law and International Treaties of the Russian Federation”¹²¹.

Generally recognized principles and norms of international law are primary with respect to international treaties, as international treaties are founded on the established principles and norms of international law¹²².

Among such generally recognized principles of international law are the principle of good faith that also pervades the norms of other branches of domestic law; the estoppel principle (from estop, ‘deprive of the right to object’), or the prohibition of abuse of a right. The principle of freedom of contract was introduced into corporate practice, including the case of conclusion of a corporate agreement (a shareholders’ agreement or an agreement stipulating the rights of a company’s participants), that is regulatory in nature.

Another example of a universally accepted norm is the recognition of a subsidiary business (branch, division) as defunct, in case a corporation shuts down its operation in the country of registration (incorporation). This principle was well illustrated by V. M. Koretskiy who pointed out that recognizing the existence of a subsidiary (branch, division) that is independent from its headquarter (corporation) is unacceptable, and the opposite should be viewed as the “resurgence” of a non-existent subject of law or its “double (triple, etc.) existence”¹²³.

We should note that some Russian laws differently approach the regulatory impact of international legal norms. For example, according to the Civil Code, generally recognized principles and norms of international law and international treaties are part of the Russian legislation (paragraph 1 of Art. 7). However, international treaties are prioritized over the civil legislation (paragraph 2, point 2 of Art. 7).

According to paragraph 1 of Art. 5 of the LLC Law, branches and divisions of Russian corporations established in a foreign country are obliged to comply with the foreign legislation, as well as Russia’s international treaties. Analogous provisions exist with respect to the establishment of branches and divisions of joint-stock companies (paragraph 1 of Art. 6 of The JSC Law). Yet, these laws lack any mention of generally recognized principles and norms of international law.

Speaking of international treaties, it is worth reminding that a corporate association is based on the principles of free association and guaranteed protection of property rights, enshrined in Art. 11 of the Convention for the Protection of Human Rights and Fundamental Freedoms (Rome, 1950)¹²⁴ as the essential guarantees of human rights.

2. The Russian Constitution.

In domestic legal science, the Russian Constitution is often referred to as “the Main law”, because it represents the supreme act of legal force, which all legal entities should comply with and which applies throughout the entire territory of Russia. The Russian Constitution is indeed the “main” and the “supreme” legal document in our state. The USSR Constitution (1977) and the RSFSR Constitution (1978) that preceded it even contained in their titles the words “main law”.

It should be taken into account that the Russian Constitution is a directly applicable act, which allows to apply its provisions to corporate relations (paragraph 2 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 8 of October 31, 1995 “On Certain Issues Pertaining to the Application of the Constitution of the Russian Federation by Courts for the Implementation of Justice”¹²⁵).

The Russian Constitution also enshrines the principles of legality, freedom of economic (including corporate) activity (Arts. 8 and 34), plurality and equal protection of all forms of property (Arts. 8, 9, 34 and 35), and other fundamental principles¹²⁶.

3. Legislation that defines the legal standing of corporations and regulates corporate relations.

When speaking of legislation, we need to mention that the existing body of laws containing the norms of corporate law could be conventionally divided into federal and regional legislations.

Although most norms of corporate law are prescribed by the federal legislation (Art. 71 of the Russian Constitution), in several regions of the country certain issues pertaining to the regulation of corporate activities are addressed by regional acts (Art. 72 of the Russian Constitution), in the context of the joint competence of the Federation and its constituent entities.

The federal legislation can be divided into codified and non-codified acts¹²⁷. The codified acts include the Civil Code, the Housing Code, the Town Planning Code, the Code of Administrative Offences, the Family Code, the Criminal Code, the Land Code, etc. The main codified act that regulates corporate relations is the Civil Code.

The detailed regulation of the legal standing of particular forms of corporate entities is implemented with the following laws: with regard to commercial corporations – the JSC Law, the LLC Law, the Business Copartnerships Law, the Production Cooperatives Law, etc.; with regard to non-commercial organizations – the Non-Commercial Organizations Law, the Housing Cooperatives Law, the SRO Law, etc.; with regard to entrepreneurial associations (of the corporate kind) – the Investment Association Law, etc.

Several Russian laws prescribe simultaneously the legal status of specific subject of entrepreneurial law and the details of regulation of their economic activities (e.g., the Banking Law or the previous Law of the Russian Federation No. 2383-I of February 20, 1992 “On Commodity Exchanges and Exchange Trade”¹²⁸).

Regional laws on the regulation of particular types of economic activities may determine the parties involved in projects of a public-private partnership. For example, according to the Law of Saint Petersburg No. 627–100 of December 25, 2006 “On the Participation of Saint Petersburg in Public-Private Partnerships”¹²⁹ and the Law of the Tatarstan Republic No. 50-ZRT of August 1, 2011 “On a Public-Private Partnership in the Republic of Tatarstan”¹³⁰ any Russian or foreign legal or natural person and any association of legal persons without the right of legal personality established by a general partnership agreement may act as a partner on a project.

4. Subsidiary normative acts at the federal and regional levels.

The Russian legal system allows to divide the subsidiary normative acts into two categories¹³¹:

1) acts passed in application of provisions of the law (e.g., by virtue of Art. 2 of the Law on Registration of Legal Persons was issued the Decree of the Government of the Russian Federation No. 319 of May 17, 2002 “On the Authorized Federal Executive Body Responsible for the State Registration of Legal Persons, Agricultural (Peasant) Farms, Natural Persons Acting as Individual Entrepreneurs”¹³²);

2) acts passed by public authorities within their competence – i.e., discretionary power¹³³ (in particular, the Order of the President of the Russian Federation No. 1392 of November 16, 1992 “On the Measures Directed at the Implementation of Industrial Policies in the Privatization of State Enterprises”¹³⁴).

In jurisprudence, Orders of the President of the Russian Federation (presidents of the republics, heads of the constituent entities of the Russian Federation) and Decrees of the Government of the Russian Federation have been traditionally considered normative, whereas Instructions and Messages have been viewed as individual acts. However, in recent years the approach began to shift. For example, the Presidential Message to the Russian Federal Assembly (2012) mentions that, in order to upgrade the economy that would enable fair competition, the Russian Government must adopt (as part of the national entrepreneurial initiative) the “road map” towards the promotion of competition, industrial modernization, development of science and technology, as well as new branches of economy¹³⁵. Another example is the Instruction of the Government of the Russian Federation No. 1315-r of June 25, 2016 which approved the Plan of Action (“Road Map”) “The Improvement of Corporate Governance”¹³⁶.

5. Municipal normative acts.

To a certain degree, corporatization of municipal enterprises required regulation by their owners (municipalities). Clearly, one way for municipal bodies to implement such regulation is by issuing appropriate normative acts. One good example of it is the prescribed use of the “golden share” – a special corporate right (see the Decree of the head of the town of Elektrogorsk of Pavlovo-Posadsky District of Moscow Oblast No. 236 of July 11, 2003 “On Approving the Provision for the Management of Joint-Stock Company Shares Found in the Municipal Property of the Town of Elektrogorsk that were Created during the Process of Privatization and on Exercising the Special Right of the “Golden Share”)¹³⁷.

6. Corporate normative acts.

Local corporate policy-making has a long history and tradition in domestic entrepreneurship. By adapting the norms of law to an individual corporation, local acts successfully supplement the existing legislative bases of the regulation of corporate relations.

Corporate normative acts include local normative acts (a charter and other internal corporate documents); normative agreements (articles of incorporation, corporate agreements, including shareholders’ agreements, agreements on the exercise of participants’ rights, etc.), as well as local legal customs (e.g., corporate governance codes).

T. V. Kashanina has made a significant contribution to the investigation of this topic. In her opinion, corporate and legislative norms should be considered as complex, as only part of the set of corporate/legislative norms regulates public relations. T. V. Kashanina comes to this conclusion based on the fact that corporate norms not only regulate economic relations (e.g., relations pertaining to corporate governance or realization of property rights of corporate members), but also cover social, spiritual and political aspects of these relations¹³⁸.

Relying on the normative approach and the provisions of paragraph 4 of Art. 53 of the Civil Code, V. K. Andreyev suggests to view only those acts that are mentioned in the laws on legal persons as corporate. Considering the stated above, “acts of corporate law, corporate acts include the decisions of supreme or other bodies of corporations, corporate charters, internal regulations and other internal documents, major transactions, interested-party transactions, merger and acquisition transactions, as well as corporate agreements”¹³⁹. Notably, V. K. Andreyev draws a clear distinction between “acts of corporate law” and “corporate acts”¹⁴⁰. Yet, he classifies decisions of meetings as special sources of corporate law, despite the fact that they have characteristics of an individual non-normative act. This conclusion is justified by the legal substance of such decisions, based on which corporations make extraordinary transactions and approve their charter, which allows to consider them on a level with local normative acts of a corporation.

It is no doubt that only normative acts can be considered sources of law: they are intended for repeated application, address a category of persons (rather than specific individuals), apply to a specific corporation or within the framework of activity of a specific corporation (e.g., a self-regulatory organization), have an appropriate form of expression (e.g., a charter, a provision for the executive body, a corporate governance code, etc.). As for decisions of meetings, they serve as corporate acts, but must be viewed as acts of corporate governance – the product of corporate life.

The system of local corporate norms that regulate corporate relations is diverse. In legal literature one can even find a mention of certain forms of corporate law (e.g., a corporate governance code or a shareholders’ agreement)¹⁴¹ that don’t always easily lend themselves to categorization as specific legal forms (local legal customs¹⁴² or normative agreements).

7. Judicial practice as a source of regulation of corporate relations.

In the course of the last hundred years, domestic legal scientists have been disputing whether judicial practice can be considered a source of law. The traditional identification of the Russian legal system with the continental system is countered by an outside perspective. As French comparatist Raymond Léger rightly notes, “the Russian law will for a long time continue to preserve its unique identity, which will be preventing it from joining the family of the Roman-German systems”¹⁴³. By the way, René David considers judicial practice a source of law in the Roman-German legal family¹⁴⁴. Thus, the system of sources of Russian law is individual and unique, despite its borrowing of the elements of foreign legislations.

There are two approaches to judicial acts. The first approach recognizes judicial acts (some of them) and judicial practice as sources of law¹⁴⁵. According to the other approach, judicial acts serve as acts of application or interpretation of normative legal acts and do not possess the property of a source of law¹⁴⁶. However, in the latter case judicial acts, judicial precedents, judicial practice, judicial law and precedent law are viewed as synonyms and are not delineated in this context.

The system of sources of entrepreneurial law established in Russia demonstrates the important role of judicial practice¹⁴⁷. In recent years, the active debate around this issue has subsided, but everyone remained on their side of the fence. Y. K. Tolstoy in his recent works, despite his continuing criticism of the position of the former chair of the Supreme Court of Arbitration A. A. Ivanov on judicial norm-setting (“the precedent has captivated him, … Converted him into a different faith”¹⁴⁸), concedes that “a repeated judicial precedent, i.e., judicial practice pertaining to a certain category of cases, that is reflected by the decrees of the Plenum of the Supreme Court of the Russian Federation” may act a source of law¹⁴⁹. The retreat from the positivistic approach points to the normative character of judicial acts at present.

Judicial norm-setting is also demonstrated by individual judicial acts of the Constitutional Court. For example, G. A. Gadzhiev, who saw the necessity of departure from the positivistic approach, in his dissenting opinion on the Decree of the Constitutional Court No. 19-P of June 16, 1998 “On the Case of the Interpretation of Individual Provisions of Articles 125, 126 and 127 of the Constitution of the Russian Federation”¹⁵⁰ points to the objective need of developing “judicial law” on the basis of court rulings.

The following circumstances can be listed as the prerequisites for recognizing judicial practice as a source of law. First, the borrowed foreign institutes (legal categories) and legislative novelties are being adapted with the help of judicial practice (as a “flexible” source of law). Second, legal uncertainties in the interpretation of norms are being eliminated by taking into consideration the substance and the development of relations in question. The third circumstance is the creation of “new” norms and attaching new meanings to the existing norms of law. The latter argument is probably the most criticized one.

Art. 74 of the Law on the Constitutional Court of the Russian Federation, according to which the established law enforcement practice should be taken into account during constitutional proceedings, speaks in favor of recognizing judicial practice as a source of law. This fact was rightly pointed out by A. N. Vereshchagin in his review of “the myths about judicial precedents” in Russian legal science¹⁵¹.

The normative nature of judicial practice is supported by numerous decrees of the Russian Supreme Court whose provisions contain legal norms that have not been explicitly stipulated in laws (see the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015 “On the Application by the Courts of Certain Provisions of Section I, Part One, of the Civil Code of the Russian Federation”, Decree of the Plenum of the Supreme Court of Arbitration No. 62 of July 30, 2013 “On Certain Issues Pertaining to the Compensation of Losses by Individuals That Act as Members of Bodies of a Legal Person”¹⁵², Decree of the Plenum of the Supreme Court of Arbitration No. 16 of March 14, 2014 “On the Freedom of Contract and Its Limits”¹⁵³, Decree of the Plenum of the Supreme Court of Arbitration No. 19 of November 18, 2003 “On Certain Issues Pertaining to the Application of the Federal Law “On Joint-Stock Companies”, etc.).

The legal trend of the 2014 judicial reform towards the harmonization of judicial practice cannot be confined to the development of legal approaches by courts on the basis of legal analogy. An analogy of law can hardly be considered as a source of law, as it represents a legal device that does not establish a new norm of law, but rather addresses the uncertainties (gaps) in legal regulation, which cannot be said for judicial practice.

The provided overview of the sources of regulation of corporate relations illustrates the necessity of their detailed analysis. The reform of the Soviet model of enterprise governance and the transition to a market economy have resulted in the privatization of the largest state enterprises by means of their corporatization (Rosneft, RUSAL, Gazprom, Russian Railways, Sberbank, VTB Bank, Aeroflot, etc.), which had necessitated the adoption of the appropriate normative legal acts.

The high level and quality of normative regulation of corporate relations in the country creates a favorable investment climate for private equity funds.

Chapter 2.
Legal organization of corporate systems

1. Definition of corporate system

Studies of corporate law have traditionally focused on the legal standing of different types of corporations that have legal personality, such as business companies, cooperatives, partnerships and copartnerships. Among the investigated issues are the establishment of corporations, the organization of their activities and corporate governance, the scope of the rights of corporate members, the legal mechanism of extraordinary transactions, etc.

The present work attempts to analyze the principles and methods of corporate relations in question, address the issue of the legal organization of corporate systems as a whole, describe the diverse corporate systems (subsystems), their structure and the aspects of their governance, identify the scope of the competence of corporate bodies, characterize the relationship between competences of different civil-law societies (corporate societies) and their members.

Soviet studies on the methods of legal regulation, competence of governing bodies and management of economic systems¹⁵⁴ facilitate the analysis of modern corporate systems.

A. V. Venediktov’s work “Legal nature of state enterprises” (1928) placed under scrutiny the economic substance of a legal person that manifested itself as a direct connection between a legal personality of state enterprises and governance of state property, with the preservation of the commodity-money relations in the economy of a socialist state¹⁵⁵.

A modern corporate system should also be viewed as a category of economic law. Economic factors and internal processes in a corporation affect the procedures for conducting business operations and economic activities not less than legal factors (e.g., price, exchange control, banking and technical regulation).

Economic aspects of corporate activities reflect the goals and objectives of the bodies of a corporate system – namely, obtaining socially and economically beneficial results.

The recognition of a corporate system as a legal category is driven by the necessity of considering its parts (bodies of a system) as a whole. Otherwise, in some cases we would have to look at the bodies of a corporate system in isolation from each other, e.g., a business company and a civil-law society (a general meeting of participants). The relationship between a general meeting and a company itself is not a one-time interaction and represents a sustainable legal bond, through which the corporate rights are realized (in particular, during a regular or a special general meeting).

The principles underlying the structuring of corporate systems depend on a variety of factors. A corporate system may be defined by the form of its entrepreneurial activity, its model of property (asset) management or its mode of supporting financial needs. In other words, a corporate system can be viewed from very different angles, depending on the researcher’s goals and objectives.

Historically, in all world economies, the largest and most important enterprises with substantial assets drove the development of a corresponding branch of the economy and acted as fundamental business-units of their economy sector (e.g., in oil-and-gas, energy, automotive and shipbuilding industries). Smaller enterprises catered to larger enterprises (e.g., produced components or unique commodities, trained qualified personnel, etc.) and were completely dependent on the latter¹⁵⁶. Such a state of affairs in some sectors of economy subsequently led to an idea of diversifying capital and management initiatives.

Corporate entrepreneurial associations – including verbally established and silent ones – were created on the basis of large and small enterprises (united by a common economic goal). Establishing a corporate association “on paper” is not the only possible form of its legal consolidation. For example, in the US state of Delaware economic associations are recognized by the law as corporate associations of enterprises (corporations) on the basis of concerted effort even in the absence of such legal formalization¹⁵⁷.

In the Russian and foreign legislations, activity of an association of individuals – a group of persons (corporate associations) or separate large economic entities (corporate organizations) – is subject to regulation by competition law. The main objective of the FAS is regulating the economic environment in order to prevent market monopolization and unlawful concentration of capital and assets. In essence, the object of control is not the market itself, but the procedures for managing productive and economic assets, which should not infringe on the competitive environment.

The branches of Russian law refer to associations of persons differently. For example, the entrepreneurial law uses the categories “group of persons” (competitive relations), “association of members” of a cooperative, “general meeting of participants” of business companies and partnerships (intraproductive/corporate relations); the tax law employs the term “consolidated group of tax payers” (tax relations), etc. In all cases, an “association” is understood as a community of people united by common goals.

In 2013, Federal Law No. 100-FZ of May 7, 2013 introduced to the Civil Code the long-awaited by legal practitioners Ch. 9.1, which mentions the term “civil-law society” (Art. 181.1 of the Civil Code). The interpretation of this term clarified that the societies in question may form corporate organizations (legal persons), corporate associations (entrepreneurial associations) and corporate trusts (unit investment and other investment funds).

A civil-law society (CLS) is an association of persons that are connected by a sustainable economic-legal bond established with the aim of taking advantage of economic opportunities and resources (assets) of the said persons and managing them.

This approach is also applicable to commercial corporations that are established, as a rule, by pooling capital or, in some cases, labor (cooperatives). The proposed definition also fits noncommercial corporations (whose activity, at first glance, is not profit-driven), but whose participants pursue understandable economic objectives, such as gaining the right to participate in entrepreneurial and professional activity (SRO), the right to obtain credit (consumer credit cooperatives), the opportunity to insure property (mutual insurance societies), etc. Following the bankruptcy of an economic entity, its creditors form a CLS (a meeting of creditors is not entitled to legal personality and is based on their economic interest at managing the activities of a debtor until the bankruptcy procedures are finalized).

We would like to avoid dwelling here on the question of whether a commercial corporation represents an “association of persons” or an “association of assets”. It is a topic for a separate academic discussion. We will just note here that, whichever approach we prefer, every stake or interest in a charter capital, every cooperative or investment unit (i.e., any corporate participation) are owned by real people.

When reviewing corporate systems, a well-known acronym M&A – mergers and acquisitions, i.e., economic processes accompanying business consolidation and asset pooling – comes to mind¹⁵⁸. This term is often erroneously associated with corporate disputes (conflicts) emerging from merger and acquisition transactions. In essence, M&A transactions are aimed at acquiring additional production capacities and qualified personnel, attracting additional capital and increasing production resources (asset consolidation).

Corporate practice shows that, as a result of multiple factors (economic processes in the country, expansion of assets, diversification into new areas of economic activity, management quality and structure, levels of investment and reinvestment, etc.), large enterprises and associations of enterprises split into fractions (e.g., the gold-mining company Polyus Gold International split off from Nornickel)¹⁵⁹. And vice versa, some corporate organizations are consolidated into large corporate associations (e.g., the Siberian-Urals Aluminium Company joined the Swiss commodity trader Glencore International AG to form the United Company RUSAL – the world’s largest aluminium company)¹⁶⁰.

Economic methods for management of economic entities are always based on qualified professional governance. Corporate trusts, including unit investment funds, are also founded on the management of assets of unit holders (owners of investment units) that is carried out by a trust company on the basis of the provisions of an investment declaration (Art. 34 of the Investment Funds Law).

Since our topic is the legal organization of a corporate system, we should mention that a system as a philosophical category (from ancient Greek σύστημα ‘a whole that is composed of parts’) presumes the presence of interlinkages between its many elements and components that together constitute a coherent whole.

A corporate system represents the sum total of corporate members, a civil-law society formed by them, corporate bodies and a corporation as a whole (components of the system), among which sustainable economic-legal bonds and organizational coherence are established.

A corporate system, at first glance, does not constitute a subject of law, judging by its property aspects and characteristics of its individual parts. Yet, with respect to governance, it meets all the requirements for corporate personhood, including economic-organizational coherence.

The aim of the legal organization of a corporate system is the establishment of a corporate structure that would allow its components interact with each other in order to ensure the system’s functioning and achieve its objectives (Fig. 2.1).

A corporate system may include single- and multi-level subsystems which, in their turn, interact with the main corporate system, as well as subsystems at the same and lower levels. Thus, considering the abundance of forms of entrepreneurship, the scope of economic activities and the goals of a corporation, corporate systems may be structured according to a simple, complex, integrated, diversified or other model.

Let’s point out the important elements of a corporate system that characterize it as a special category of economic law:

a sustainable legal bond between its elements (a corporation, corporate bodies, corporate members and a civil-law society that they form);

economic motives of its establishment;

organizational coherence of the system’s components and governance structure of a corporate system (subsystem);

corporate competence of the system’s components.

A corporate system combines two elements: management (governance) of the system’s components and carrying out economic activities.

The centerpiece of a corporate system is a civil-law society (an association of persons that are granted corporate rights). The central component of a corporate system governs the activity of a system and its parts.

The proposed approach partially continues the ideas of the Soviet scholars of economic law that studied the central elements of economic systems. For comparison, Soviet legal used the term “center of an economic system” that controlled the activities of a system and its parts¹⁶¹.

The terms “corporation” and “corporate system” are not identical. A corporation is a part (component) of a corporate system, including in multi-level subsystems. A corporate system, on the other hand, includes, for example, relations between corporate members and a civil-law society (not limited to the context of a general meeting), relations between the bodies of different subsystems within the framework of a common corporate system, etc.

All components of a corporate system have a competence – a set of rights and responsibilities with respect to governance and implementation of economic activities. A detailed description of competences of individual components and their legal status are provided in the following sections of this book.

Considering the economic-law aspects of a corporation, the legal organization of a corporate system should be understood as a legal relation between the elements of a corporate system (corporate bodies, corporate members, a civil-law society formed by them and a corporation itself), its structure and governance arrangements.

With respect to corporate governance, corporate systems follow one of the two models:

corporate management (intraorganizational governance);

corporate control (intraproductive governance of economic activities).

In legal literature, these two elements are often conflated, but their distinct nature may be clearly illustrated by the concrete examples of realization of corporate rights. Whereas the former refers to the interaction of corporate bodies with each other (e.g., interaction between a general meeting and an executive body of a corporation), the latter refers to the behavior of a corporation with respect to third parties (e.g., counterparties, public authorities, etc.), i.e., its business and production activities. We should note that some corporate systems combine the elements of both corporate governance models.

As a general rule, governance rights belong to members of a corporation (Art. 65.2 of the Civil Code). However, the rights of corporate management and corporate control are realized differently by corporate members. In the traditional understanding, the legal capacity of a corporation as a legal person is realized through its executive bodies (Art. 53 of the Civil Code), which corporate members do not belong to. Yet, some corporations endow their participants with the competence and the right of corporate control (e.g., business partnerships, business copartnerships and investment partnerships). paragraph 3 of Art. 5 of the Business Copartnerships Law explicitly states that copartners exercise “corporate control in proportion to their interest in the joint capital…” and that “preventing all participants of a copartnership from participation in corporate control is prohibited”. The executive body of a business copartnership serves the function of carrying out the copartners’ will that is prescribed by the copartnership governance agreement (Arts. 6 and 19 of the Business Copartnerships Law).

Domestic scholars of private law promoting the convergence theory (interpenetration and mixture of private and public law), that was developed by N. M. Korshunov, investigate private-law aspects of governance¹⁶². For example, Y. S. Kharitonova in her study “Governance in civil law”¹⁶³ identifies several types of governance: governance of a person (collective entity), governance of property and hybrid governance. Legal persons and entrepreneurial associations are also included in the category “governance of a collective entity” (governance of a person¹⁶⁴).

We agree that the governance of a subject of law should be distinguished from the governance of its assets and suggest that the governance of a subject of law may refer both to corporate management and corporate control. This explains the fundamentally different approaches to defining the essential characteristics of governance adopted by scholars of civil and economic law. If we viewed “governance” as a private-law phenomenon, we would have to treat it on an equal footing with executive corporate bodies, which would violate corporate chain of command. Moreover, it is quite obvious that “governance of a person” has more public-law aspects, not speaking of specific forms of corporate entities, such as joint-stock companies with state participation and directive voting, or strategic companies that ensure security and defence capacity (UralVagonZavod, Aerospace Defence Concern “Almaz-Antey”, Russian Helicopters, Aircraft Holding Company “Sukhoi”, etc.). For this reason, we propose specifying whether a particular instance of “governance of a subject of law” refers to “corporate management” or “corporate control”.

Y. S. Kharitonova draws attention to the presence of private-law aspects in governance, such as the freedom of association and corporate membership. Yet, it should be noted that even in these cases public-law aspects of governance are much more numerous (comparing to private-law ones) and exclude such principles of civil law, as equality of parties and freedom of action. A general meeting of a joint-stock company is a will-forming body that orders its executive (will-delivering) body to make a transaction or to join another company. A Director-General is obliged to execute this order (paragraph 2, point 2 of Art. 69 of the JSC Law).

In fact, there is a fine line between governing a person and governing their property, because governance of property is realized through governance of a corporation (person).

The organization and streamlining of the elements of a corporate system are ensured by its structure.

The structure of a corporate system consists of its bodies – components of the system. One should not conflate the bodies of a corporation (general meeting, board of directors, executive body) with the bodies of a corporate system.

A corporation itself represents an important component of a corporate system. The use of the term “corporate organization” is more justified than “legal person”. A corporation, as one of the bodies forming the structure of a corporate system, has not only the ability to acquire rights and responsibilities (legal capacity) with relation to third parties (counterparties), but also the competence of operational control and corporate control in general. Corporate competence of a body of a system includes legal capacity.

The term “legal person” is commonly used in civil law. In particular, in order for public-law entities to participate in contractual relations (at the level of the Russian Federation, its constituent element or municipality) they are granted the rights of a legal person. However, it does not allow treating a joint-stock company on an equal footing with a public-law entity, as a consequence of the literal interpretation of Art. 124 of the Civil Code, since any artificial legal construct, including the construct of a legal person, should serve a certain purpose.

In a corporate system, internal processes are performed by corporate bodies that directly manage (govern) business and production (i.e., economic) activities of a corporation.

These two elements – governance and economic activities – are present to some degree in all corporate systems. In some systems with governance prevails – such systems are created on the basis of self-regulatory organizations. A notable historical example of a purely governmental system was the Soviet State Planning Committee (Gosplan), which only planned, but did not engage in economic activities. For this reason, such systems were not considered economic.

Among corporate systems that combine both elements are commodity exchanges whose main goal is the organization of trade and that are profit-driven like all joint-stock companies (Art. 9 of the Exchange Trading Law).

The competence of bodies (components) of a corporate system accentuates their role in intracorporate relations. It is not uncommon for a body of a corporation to coincide with a body of a corporate system (e.g., a general meeting represents the supreme body of a corporation and the central component of its system – a civil-law society). Yet, with respect to corporate governance they have different competence, the scope of which depends on the character of the established relations.

Let’s consider an example of a trade organizer in the form of a commodity exchange, which can only be established as a joint-stock company (Art. 9 of the Exchange Trading Law).

Firstly, a civil-law society – a general meeting of members of the exchange – is the supreme and will-forming body of a corporation, i.e. an exchange (JSC). In this case, the competence of a general meeting of the exchange members is prescribed by its charter and the JSC Law. Still, members of the civil-law society can participate in trade organized by their own exchange (corporation)¹⁶⁵ and be viewed as independent participants of legal relations that are granted not only corporate (with respect to the exchange), but also economic (entrepreneurial) competence.

Secondly, bodies of a corporation have different “governance” competences. For example, the general meeting of an exchange carries out corporate management; the board of directors (supervisory board) is a governance body that exercises general control over the exchange; the board and the chair of the exchange form an executive body that is in charge of operational control of the exchange.

Speaking of governance in a corporate system, the exchange (corporation) itself, as one of the components of this system, interacts with other components (members of the exchange), and in certain cases regulates their economic activities on the trade with the help of local acts (trading rules) that are mandatory for all participants of the trade.

Clearly, there are commonalities between bodies of a corporation and bodies of a corporate system. For example, they concentrate public competence (managing and regulating activities, determining the behavior of members and the procedures for making transactions on the exchange). Still, their legal independence (as subjects of law) and economic initiative in other legal relations are preserved, in particular with respect to other corporate systems, on condition of the absence of specific legal restrictions.

Another interesting example of the structuring of a corporate system is a UIF (corporate property trust). A civil-law society, consisting of investors (founders of the trust management), provides property foundation for activities of a corporate system. The trustee ensures effective asset management within the scope of his competence that is prescribed by the trust agreement and the rules of the UIF trust management.

This brings up the question: what is the point of differentiating the terms “corporate system” and “corporation”, and aren’t they equivalent?

First, a corporation is typically viewed as a legal person. This leaves out corporate associations and corporate trusts (corporate UIFs).

Second, consideration of corporate systems allows for a deeper analysis of internal relations between the bodies of a given corporation and a system as a whole.

The analysis of corporate systems reveals that components of a corporate system not only engage in one-on-one intracorporate relations, but may interact in more complex ways (complex and multi-level intracorporate relations). For example, several members act in accordance with a corporate agreement that they made, and a civil-law society exists in parallel with it; a general meeting of SRO members is formed by competent bodies of an SRO, that, with respect to carrying out their activities, interact with an SRO on issues regarding obtaining admission to economic activities; a simple partnership can unite partners that act as a holding company of another–subsidiary–company, etc. Therefore, corporate business operations may involve two, three or more corporate subsystems that are interrelated and intertwined with each other.

The interaction of components of a corporate system demonstrates the cohesion of public and private aspects of its governance. The investigation of these issues helps create new and develop the existing corporate models of entrepreneurship, as well as the methods for organization of governance of non-commercial corporations.

We should also note that the legal organization of corporate systems would be impossible without the internal local sources of law that regulate internal (including intracorporate) relations and determine the activity of a corporation itself.

In the following sections, we will review the existing models of corporate systems and discuss the organization of their individual components.

2. Classification of corporate systems

The existing corporate systems can be classified with respect to their legal organization according to the following criteria.

1. In Russian legal practice, corporate systems (subsystems) can be divided based on the grounds for their establishment into voluntary (including contractual ones) and organic (established by virtue of the law) ones.

1.1. An example of a corporate system of the former type is a SRO, whose members join it on a voluntary basis (Art. 5 of the SRO Law). An investment partnership, as an association of a corporate type, represents a contractual association of persons established with the purpose of investing common property of partners into the realization of venture – including innovation – projects (Arts. 2 and 3 of the Investment Partnerships Law). Most limited liability companies are established on the contractual basis by signing a founders’ agreement (paragraph 5 of Art. 11 of the LLC Law).

One interesting example is a “one-person company” – a special corporate system whose central component has far-reaching competence, due to the fact that its only participant, as a rule, also plays the role of the executive corporate body.

The establishment of a holding (corporate) association requires the volition of a parent company to be aimed at acquiring the majority interest in the charter capital of a subsidiary company that would allow it to control the decisions made by the latter (Art. 67.3 of the Civil Code).

Therefore, the establishment of all mentioned corporate systems is preceded by the collective will of respective persons (participants in a corporation). The will in question is formed voluntarily or organically when corporate members commit legally significant acts.

Probably, the only exclusion to this rule are corporate organizations and corporate associations that are established following privatization of state and municipal enterprises and their subsequent transformation into JSCs and LLCs, because the will of only one person (the property owner) suffices for their establishment (Art. 13 of the Privatization Law, Order of the President of the Russian Federation No. 1392 of November 16, 1992 “On the Measures Directed at the Implementation of Industrial Policies in the Privatization of State Enterprises”¹⁶⁶).

1.2. Corporate systems (subsystems) that are established by law (organic systems) exist objectively, and their creation (as well as their existence) does not depend on the collective will of all or some members of a civil-law society.

For example, a real estate (including apartment) co-owners’ association is established under Arts. 210, 244 and 290 of the Civil Code, Arts.36 and 158 of the Housing Code. Such a civil-law society represents a corporate system that does not require to be publicly registered as a legal person¹⁶⁷.

Importantly, corporate relations of real estate co-owners are not limited to apartment buildings. Similarly, the burden of maintaining common property is borne by co-owners of business centers, industrial parks, shopping and entertainment centers and other entrepreneurial real estate properties¹⁶⁸.

The establishment of an organic corporate system requires the volition of a single person and their will to engage in a legal relation (e.g., by acquiring real estate as a creditor on a loan agreement with a debtor).

Another example of an organic corporate system is a meeting of creditors – a civil-law society established by virtue of Art. 181.1 of the Civil Code following a debtor’s bankruptcy (Art. 12 of the Bankruptcy Law, paragraph 103 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015 “On the Application by the Courts of Certain Provisions of Section I, Part One, of the Civil Code of the Russian Federation”).

One special category are corporate systems whose participants gained membership, for example, by coming into inheritance (e.g., of an interest in the LLC charter capital) or following the division of joint matrimonial property. In essence, such corporate members did not explicitly express their will of participation, but rather it was established “by virtue of the law” (Art. 21 of the LLC Law, Art. 36 of the Family Code). These corporate systems are voluntary, because the receipt of an inheritance or a spousal share was preceded by the will of a person (a testator or a deceased spouse) who subsequently passed their corporate rights on to a new participant.

2. Domestic corporate systems can be established according to one of the following models: corporate management or corporate control. Hybrid models combining both governance styles are also permitted. Such categorization primarily refers to the competence of corporate members and the scope of their (individual or joint) corporate rights.

2.1. One widespread type of corporate organizations are business companies (JSC and LLC) whose members participate in corporate management (Art. 65.2 of the Civil Code, paragraph 1 of Art. 8 of the LLC Law, Arts. 31 and 32 of the JSC Law). Individual provisions of the LLC Law deal specifically with corporate management (paragraph 3, point 1 of Art. 8). In some instances, the legislator uses the term “governance body of a company” when referring to an executive body, a board of directors or a general meeting (see the last point of Art. 33 or the title of Art. 43 of the LLC Law).

2.2. Speaking of the model of corporate control, we should note that this model of corporate systems is initially founded on the competence of a corporate member to engage in business and production activities on behalf of the corporation. One good example is a business partnership. Art. 71 of the Civil Code states that corporate control of a general partnership is exercised by mutual agreement of all or most participants (if the latter is provided for by the charter). Such a contractual corporate system implies endowing each member of a business partnership with economic and production competence with respect to a legal person. Each member of a general partnership has the right to act on behalf on the partnership (Art. 72 of the Civil Code). In this context, although Art. 72 of the Civil Code is entitled “Management of a General Partnership”, in essence it describes corporate control of a partnership. Notably, less than thirty years ago a general partnership in Russia was not entitled to legal personality and represented a contractual structure of a collective undertaking (Arts. 9 and 30 of the Law on Enterprises and Entrepreneurial Activities).

An analogous situation is presented in corporate associations established as simple partnerships, where each partner can act on behalf of all partners, and their competence can be certified by a simple partnership agreement (Art. 1044 of the Civil Code, Art. 9 of the Investment Partnerships Law).

The figure above illustrates that economic activity of a corporation can be conducted both by its individual members and by the civil-law society as a whole.

Some corporate systems allow members of a civil-law society to indirectly control the activity of all corporate members that engage in entrepreneurial or professional activities through a corporation established by them and/or through a membership in a self-regulatory organization (SRO). An SRO (corporation) is a unique subject of law¹⁶⁹. It develops and sets the standards and regulations for a given activity and monitors their compliance by members through its appropriate bodies (Arts. 2, 3 and 6 of the SRO Law).

In contrast to state regulation, self-regulation of professional and entrepreneurial activities is concentrated in the hands of corporate members themselves, who–one way or another–govern their own activities. One can speak of a two-level governance of a corporate system here. The regulations and standards for activities are established collectively by all members of an SRO (in a general meeting of members) with an appropriate quorum necessary for their approval. Therefore, such local self-regulatory norms are often established against the will of individual members (who constitute a minority during a vote in a general meeting of SRO members). Yet, compliance with the approved local acts is mandatory for all SRO members.

3. Depending on the structure of corporate bodies, corporate systems can be divided into simple and complex. This classification takes into account not only the structure of corporate governance bodies and the scope of members’ corporate rights (intracorporate relations), but also the mechanisms of corporate control (intraproductive relations).

Public-law aspects are inherent in the principles of organization and governance of corporate systems. In particular, bodies of a corporate system may combine the competence of governance bodies of a corporate system with the competence of bodies implementing a corporation’s legal capacity.

3.1. A good illustration of a simple corporate system is a corporate organization established as a limited liability company with a two-component system of bodies (a general meeting and an individual executive body).

Corporate systems with the simple governance structure are typically employed by small and medium-sized businesses based on the two considerations. The first one is the convenience of governance and the speed of decision-making by business owners (corporate members), as well as communication of their will to the executive body of a corporation. The second one is the reduction in the expenditure on administration and management.

This model of corporate systems is often employed at the start of business projects, and subsequently–given their successful realization (e.g., with the expansion to new distribution areas), more complex models come into play.

3.2. Complex corporate systems are, as a rule, based on a three-component model of corporate bodies and have corporate subsystems.

Depending on the procedures for the creation of bodies and the governance of intracorporate processes, complex corporate systems can be conventionally divided into two subtypes, established on the basis of one of the two types of corporations:

• corporate organizations that have several collective bodies (e.g., a board, a board of directors and a general meeting);

• corporate associations and corporate trusts.

A corporate system of a large enterprise with many shareholders is often established in the form of a public joint-stock company, particularly in the commodity sector of the economy (e.g., Gazprom, Rosneft and Lukoil). The presence of a board of directors (a supervisory board) in a public corporation is compulsory (paragraph 4 of Art. 65.3, paragraph 3 of Art. 97 of the Civil Code).

Along with a general meeting that represents a supreme governance body (a civil-law society comprising members of a corporation), there is another subsystem – a board of directors. The classification of a board of directors as a civil-law society is ascertained by judicial practice (paragraph 103, point 2 of the Decree of the Supreme Court of the Russian Federation No. 25 of June 23, 2015 “On the Application by the Courts of Certain Provisions of Section I, Part One, of the Civil Code of the Russian Federation”). Relationships between the members of a board of directors represent, in a way, a “mini-system” (subsystem) of a corporate system.

A holding model of corporate systems, in essence, consists of one main system – a corporate entrepreneurial association (a group of corporate organizations that are endowed with legal personality), and at least one subsystem – a corporate organization with the rights of a legal person.

Holding groups have often been scrutinized by domestic legal scientists specializing in entrepreneurial law (V. V. Laptev, N. I. Mikhailov, K. Y. Portnoy, I. S. Shitkina, etc.)¹⁷⁰. In these studies, the emphasis was placed on the legal nature of these entrepreneurial associations and their corporate personhood. And it is not surprising. Such associations of corporate type are necessary for the economy, and their popularity is dictated by the market. However, the regulation of the legal standing of these economic entities has not kept up with the pace and the extent of the use of the business structuring model in question.

The study of the legal aspects of organization and governance of their activity is called for, including the issues of economic dependency of subsidiary companies and the legal regime of managing consolidated (in the economic sense) capital established by a holding group. The economic trends of the market have necessitated the adoption of the 2011 Business Copartnerships Law.

Holding groups are created in many major economic sectors, especially where production business units are deployed in different parts of the country (e.g., in oil-and-gas and chemical industries).

The use of such corporations for the establishment of a corporate system is clarified by explanatory notes of the dedicated committees that accompany the corresponding legislation. From Explanatory Note No. 557159-5 to the draft law “On Business Copartnerships” it follows that business copartnerships may serve as a convenient legal-organizational form for venture investments. Among the merits of business copartnerships are: the organization of governance based on an across-the-board flexible agreement of the parties (participants), including the company itself and–in case of necessity–other persons (including those that are not part of the company), and the enforcement of such an agreement with the help of sanctions that are not subject to easing; the possibility of uneven distribution of participants’ rights and responsibilities, gains and losses, votes, etc.; the possibility of issuing securities (including those with special characteristics, e.g., special liquidation rights); the possibility of ensuring the priority of participants over creditors or the priority of some participants over other participants in the case of liquidation (shutdown) of a company, etc.¹⁷¹

Explanatory Note No. 557184-5 to the draft law “On Investment Partnerships” mentions that an investment partnership (as a form of simple partnership) is close in its essence to a limited partnership that grants its partners (general and limited partners) unequal rights. It also points out its unpopularity: between 1994 and 2011 only 680 limited partnerships were registered in Russia. The proposed form of collective venture investment – investment partnership – is based on the foreign model of limited partnership. Among its merits are: the simultaneous participation in the agreement of two or more persons, one of whom acts as a general partner (usually a venture company – a private equity firm) that acquires assets in the innovation sector and manages them until they are sold, and the other is a limited partner (an investor) whose responsibilities and rights to participate in partnership governance are limited. Thus, an investment partnership agreement is made between governing and non-governing partners who have a different scope of rights, responsibilities and liability¹⁷².

4. Depending on their economic substance and the goals for their establishment, corporate systems can be divided into systems of asset management and systems regulating economic activity.

4.1. Systems of asset management are often structured according to the joint-stock corporate model. For example, in PJSCs, where shares are distributed among hundreds or thousands of participants, asset pooling prevails, while such attribute as “association of persons” is secondary. It is also determined by the fact that in particular periods of time shares may be listed on their nominal holder’s personal (custodian) account that certifies his right to securities belonging to their owners. Moreover, a nominal holder that exercises these rights may commit acts pertaining to the realization of these rights in the absence of proxy, in accordance with the instructions received from the shareowner (Art. 8.3 of the Securities Market Law).

The organization of asset management through a corporate system following the joint-stock model has a long history and, undoubtedly, serves the interests of the world economies.

Another example of a corporate system of asset management is a unit investment fund (UIF) – a diversified portfolio of assets consolidating the assets transferred by trustor(s) under control of a managing company (Art. 10 of the Investment Funds Law).

4.2. A corporate system regulating economic activity is represented by a self-regulatory organization (SRO). Participants on a given market form a SRO that exercises public functions of the regulation of economic (professional or entrepreneurial) activities. Notably, in some areas of activity the creation of a SRO is mandated (in particular, this applies to cadastral activities, construction, planning and design, assessment, audit, activities of judicial administrators, etc.), whereas in other cases it is voluntary (e.g., in the sectors of trading precious metals and stones, mediation, activities of insurance and loan brokers, private security agencies, etc.¹⁷³).

The use of the legal-organizational form of a SRO endows its participants – who pursue their own private-law goals – with public functions through the competence of a general meeting of a SRO. Members of a general SRO meeting form a civil-law society and are granted the status of an economic management body, and the SRO itself constitutes the body of a corporate system that monitors the compliance with standards and regulations approved by the general meeting. Such unity characterizes a SRO as a complex economic entity that combines private and public aspects in its activity. A telling example is a SRO in the construction, planning and engineering surveying sector.

3. Members of a corporation. Civil-law society

Corporate members (participants) occupy a central place in a corporate system. It is no coincidence that Art. 65.1 of the Civil Code explicitly states that the defining attribute of a corporation is membership (participation), and in its absence an economic entity loses its corporate essence.

In Russian legislation, different labels may be applied to such individuals:

• “participant” (LLCs, business copartnerships, general and limited partnerships) and “shareholder” (JSCs, including equity investment funds);

• “partner”, “limited partner”, “governing partner” and “investing partner” (general and limited partnerships; simple partnerships, including investment partnerships);

• “member” (peasant (farm) holdings, SROs, production and consumer cooperatives, unions, real estate owners’ partnerships, chambers of lawyers and notaries);

• “unit holder” and “founder of trust management” (UIFs), etc.

Several terms may be used interchangeably with respect to one type of corporation (e.g., “member” and “participant” – see paragraph 1 of Art. 106.1, paragraph 2 of Art. 123.4, paragraph 1 of Art. 123.6 of the Civil Code), and one term may refer to different types of corporations (e.g., the term “participant” may be used to describe individuals involved in all types of economic entities – see Paragraphs 2 and 5 of Art. 66, paragraph 3 of Art. 66.3 of the Civil Code). All these words are used to refer to corporate members (Art. 65.2 of the Civil Code). We think it would be fair to consider them as synonyms.

Yet, there is a point in distinguishing “membership” and “participation” in corporations, although the difference between these two terms is subtle. In order to better understand it, we need to turn to their definitions.

The Great Soviet Encyclopedia defines a “system of participation” as “ownership of securities of one stock company by another stock company (or their crossholding). It is an important tool for linking and intertwining capitals; it creates a basis for a multi-level dependency of a large number of enterprises from financial groups or individual business tycoons who gain the ability to manage vast amounts of borrowed capital and pump large monopoly gains out of the enterprises under their control”¹⁷⁴. As examples, the Encyclopedia lists large corporations and trust (endowment) funds belonging to the Rockefellers and other holding companies owning subsidiary and affiliate companies.

Membership assumes that an individual (member) has a certain legal status that certifies their affiliation with a civil-law society. In order to obtain membership, it suffices for an individual to meet certain formal requirements imposed on all corporate members (e.g., when joining a SRO).

Participation implies that an individual has to make some property contributions (expenses), which is necessary for the formation of a charter capital.

The economic component of both membership and participation is related to property aspects (contribution to the LLC charter capital, acquisition of JSC shares, SRO admission fees, acquisition of immovable property in a real estate owners’ partnership, etc.). The important difference is that in order to acquire participation, one has to make material contributions (e.g., payment into the LLC charter capital), whereas one gains membership first and only afterwards makes expenses (e.g., in the form of admission, membership or other fees in a SRO). For this reason, participation is common in commercial corporations, while membership is typical of non-commercial corporations.

Below, the categories of “membership” and “participation” will be used as synonymous, regardless of the context.

Corporate members can be natural persons (including individual entrepreneurs), legal persons – commercial and non-commercial organizations, entities of public law (Russian Federation, constituent entities of the Federation and municipalities), as well as entrepreneurial associations (in multi-level corporate systems).

Membership is often predetermined by the legal organizational form of a corporation and the goal of its establishment. The legislation may impose different membership requirements on different types of corporations. For example, individual entrepreneurs and/or commercial organizations may participate in a classic simple partnership (Art. 1041 of the Civil Code), whereas only commercial and non-commercial organizations may act as partners in an investment partnership (paragraph 3 of Art. 3 of the Investment Partnerships Law); any insurer can serve as a member in an insurance or reinsurance pool, including insurance organizations and mutual insurance societies (paragraph 1 of Art. 14.1 of the Law on the Organization of Insurance Business).

Participants in commercial corporations are sometimes called “business owners”, because their will determines the legal fate of a corporation, from its establishment to the cessation of its activities (including following liquidation). The law provides for the possibility of making contributions to the assets of a commercial corporation that are aimed at the improvement of its economic performance and support of its activities. Non-monetary contributions are also allowed (e.g., paragraph 3 of Art. 27 of the LLC Law¹⁷⁵, paragraph 3 of Art. 32.2 of the JSC Law). These contributions do not change the “ownership structure” of the charter capital of a corporation, but merely ensure the growth of corporate assets. Notably, such contributions are not donations, but act exclusively as corporate tools for supporting one’s own business, because they are practiced by commercial corporations.

Interestingly, the Federal Tax Service does not recognize such contributions to assets of an organization as its income (in accordance with Arts. 247, 250 and 251 of the Tax Code), if these contributions were made by participants owning at least 50% interest in the charter capital of a corporation (see Letter of the Moscow Office of the Ministry for Taxes and Charges of the Russian Federation No. 11-14/35285 of August 2, 2002 “On Income Tax”¹⁷⁶). However, this approach may be extended to all corporate participants without exception.

A corporate member has competence (a set of rights and responsibilities pertaining to management and governance) with respect to a corporation. However, one should not conflate the competence of an individual corporate member and the competence of all corporate members (the supreme body).

In a “one-person” corporation this distinction is irrelevant, because the entire scope of competences belongs to one individual. On the contrary, in corporations with multiple participants, the volition of one participant (unless he has majority interest) only contributes to the realization of the competence of a corporate body. In non-commercial corporations, the competence of a general meeting, as a rule, does not depend on the opinion of a majority stakeholder, because all members have an equal vote.

Membership is a defining attribute of a corporation, and corporate members are the holders of corporate rights. Considering this circumstance, some legal scientists believe that corporate relations may be established exclusively between corporate members, a corporation and members of its bodies. All other relations are labeled “quasi-corporate”, and their participants are believed to engage in contractual legal relations (e.g., within the context of a corporate agreement between creditors and corporate members)¹⁷⁷.

The essence of corporate relations is also preserved with respect to third parties (not corporate members) in the following cases:

• a nominal holder (depositary), on whose account the rights to the owner’s securities are listed, participates in the expression of the will of the latter, in particular, by exercising corporate rights certified by appropriate securities (Art. 8.9 of the Securities Market Law).

• a former member of a corporation requests the documents related to its financial and economic activities with the purpose of determining the actual value of his interest or the price of bought out stock (paragraphs 6 and 21 of Informational Letter of the Presidium of the Supreme Court of Arbitration of the Russian Federation No. 144 of January 18, 2011 “On Certain Issues Pertaining to the Arbitration Court Practices of Adjudicating Disputes Regarding the Provision of Information to Participants of Business Companies”);

• a notary establishes entitlement to an interest in the LLC charter capital (Arts. 1171, 1173 of the Civil Code, paragraph 8 of Art. 21 of the LLC Law, Methodological Recommendations on the Subject “On Inheriting Interest in a Charter Capital of a Limited Liability Company”¹⁷⁸);

• creditors of a company, along with its participants, may change the scope of corporate rights or affect the procedure for their realization by establishing an agreement (Art. 67.2 of the Civil Code).

Moreover, these individuals are subject to the same legal norms and remedies for the judicial protection of their rights as corporate members (Chs. 28.1 and 28.2 of the Code of Arbitration Procedure, paragraph 36 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015 “On the Application by the Courts of Certain Provisions of Section I, Part One, of the Civil Code of the Russian Federation”, etc.).

The individuals in question may be conventionally labeled corporate “quasi-participants” (based on their legal status and the scope of their legal authority with respect to a corporation). Still, the relations in which they engage preserve the essence of corporate relations.

The introduction of the category “civil-law society” (CLS), referring to an association of corporate members, into the Civil Code (Art. 181.1) became an important step towards the development of corporate legislation.

In essence, a CLS represents a group of individuals that have established a sustainable legal bond with the aim of governing a corporation.

From the clarifications of the Supreme Court of the Russian Federation, it follows that the term “civil-law society” may be viewed in a very broad sense, including: any collective bodies of a corporate organization; specialized associations without the rights of legal personality, such as a meeting of creditors and a meeting of real estate co-owners; legal persons (paragraphs 103 and 118 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015). This approach fulfills the needs of the modern judicial practice related to corporate disputes.

In most cases, a CLS does not exist in isolation from a corporation, because in the absence of realization of corporate rights the corporate essence of an association is lost. However, there are several exclusions to this rule, including “one-person” corporations and cases of holding an interest in the LLC charter capital in trust until its successors come into inheritance.

The corporate nature of relations emerging between founders/members of a civil-law society already prior to the establishment of a corporation itself was rightly pointed out by V. K. Andreyev. According to him, an association of persons (founders) has a governance body from the moment the decision to establish a corporation is made. Moreover, from that moment an association of persons “becomes a prototype of a legal person”¹⁷⁹.

We have identified the following attributes of a civil-law society:

• an association of persons;

• common interests of its members;

• a sustainable legal bond between its members;

• organizational coherence;

• competence.

Let’s try to unpack the content of these attributes.

Association of persons. A civil-law society unites persons and, as has already been noted, in certain cases it is even equated with a corporate organization – a legal person (paragraph 118 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015). In corporate relations, the term “person” applies not only to the traditional actors in civil transactions (paragraph 1, point 2 of Art. 2 of the Civil Code), but also to the participants in a civil-law society.

Participants of a civil-law society may be natural persons (including individual entrepreneurs) and legal persons (commercial and non-commercial organizations), as well as legal entities of public law – the Russian Federation, its constituent entities and municipalities (e.g., by virtue of Art. 13 of the Privatization Law, following the privatization of state and municipal enterprises by transforming a unitary enterprise into a JSC or an LLC).

In certain cases, an entrepreneurial association may also act as a member of a civil-law society. Although an entrepreneurial association (e.g., a holding group or a simple partnership) represents a complex corporate system, multi-level corporate associations may be comprised of a number of smaller associations.

The law imposes a restriction on the number of CLS members. For example, a SRO in the construction sector shall have at least 100 individual entrepreneurs and/or legal persons as members (paragraph 3 of Art. 55.4 of the Town Planning Code); a production cooperative – at least 5 persons (Art. 4 of the Production Cooperatives Law); a mutual insurance society – at least 5 natural and/or 3 legal persons (paragraph 3 of Art. 5 of the Mutual Insurance Law); a consumer credit cooperative – at least 15 natural persons or 5 legal persons, or the minimum of 7 natural and legal persons in total (paragraph 2 of Art. 7 of the Credit Cooperation Law), etc. A maximum membership limit has been set, for example, for LLCs – they shall not have more than 50 participants (paragraph 3 of Art. 7 of the LLC Law).

Common interests of its members. The establishment of a civil-law society is hardly possible in the absence of common interests. Corporate associations may pursue different goals.

The main objective of commercial corporations entitled to legal personality is profit. Corporate (entrepreneurial) associations may be established in order to ensure financial stability of their members (insurance pools), in order to engage in investment activities, including venture capital investments (investment partnerships), etc. Corporate organizations are established for the purpose of meeting the financial requirements of their members (consumer credit cooperatives), regulating certain aspects of professional and entrepreneurial activities (SROs), mutual insurance of members’ property interests (mutual insurance societies), etc.

With respect to some corporations, the law prescribes that their names should specify their goals and/or the area of their activities. For example, the name of a UIF (its unique designation) should identify it as a unit investment fund and describe the content and structure of its assets: financial instruments fund, real estate fund, commingled fund (Art. 10 of the Investment Funds Law; Directive of the Bank of Russia No. 4129-U of September 5, 2016 “On the Composition and Structure of the Assets of Equity Investment Funds and the Assets of Unit Investment Funds”). The name “consumer credit cooperative” could and should only be used by the cooperatives that carry out activities directed at the organization of mutual financial support for their members (paragraph 1 of Art. 3 and paragraph 6 of Art. 7 of the Credit Cooperation Law). These requirements reflect the priority areas of corporate activities and the interests of corporate members.

A sustainable legal relation between its members and organizational coherence. There is probably nothing more stable than a legal bond between the participants in public relations that is ensured by legal responsibility and – in case of failure to comply with it – liability. The decisions of a civil-law society create legal consequences for all its members (Art. 181.1 of the Civil Code). The compliance with these decisions is mandatory not only for the members of a CLS, but also for other persons (e.g., the decisions of a general meeting of a homeowners’ partnership on the determination of charges payable for maintenance and repair of common property are mandatory for all dwellers of an apartment building, including non-members of a homeowners’ partnership).

A sustainable legal bond is inherent in civil-law societies both with and without the right of legal personality. An example of a CLS in the absence of registration is a bankruptcy meeting of creditors, where the common opinion is formulated by the majority of members, thus, determining the will of the minority creditors (Decree of the Constitutional Court of the Russian Federation No. 14-P of July 22, 2002¹⁸⁰).

Hence, the organizational coherence of a civil-law society is ensured by a sustainable legal bond between its members.

Competence. The key competence (the set of rights and responsibilities) of a civil-law society as a body of a corporate system is the right to make decisions that are mandatory for all members and the corporation as a whole.

The discussed attributes of a civil-law society suggest that it would be appropriate to define it as a corporate society.

Therefore, a CLS represents a central component of a corporate system, whose main legal authority is management and governance of a corporate system. The CLS brings together all components of a corporate system and determines its economic policies. The procedures for the realization of competence of a civil-law society will be discussed in the following sections of this book.

4. Corporate bodies and bodies of a corporate system

The concept “body of a corporation” is widely used in the Russian legislation and legal literature. In addition to it, we propose using the term “body of a corporate system”.

A body is an individual element (component) that performs relevant functions and supports the existence of a system as a whole. Bodies of a system work together and fulfill their predetermined functions. Some duplication of functions and interchangeability of bodies are permitted.

A body of a corporate system represents a component of a corporate system, on a par with a corporation itself. Depending on the type of corporation, bodies of a corporate organization (legal person), bodies of a corporate (entrepreneurial) association or bodies of a corporate trust (fund) are established.

A corporate organization realizes its legal capacity through its bodies (Art. 53 of the Civil Code). The structure and competence of bodies of a given corporation are regulated by constituent documents of a legal person (a charter or articles of incorporation). The law stipulates only the main provisions and requirements for the structuring of bodies of a legal person.

A traditional structure of the bodies of a corporate organization involves a two-component or a three-component model. A two-component governance model consists of a supreme body (a general meeting) and an executive body of a corporation. A three-component model additionally includes a collective governance body of a corporation (a board of directors or a supervisory body).

The choice in favor of a particular model of corporate bodies depends on a variety of factors. Firstly, it depends on the status of an organization, i.e. whether a company is public or non-public. For example, public companies always employ a three-component model of bodies that includes a general meeting, a board of directors and an executive body (paragraph 3 of Art. 97 of the Civil Code).

Secondly, the choice of a governance model is affected by the number of corporate members (members of a civil-law society). “One-person” corporations typically employ a two-component model, in which the sole participant of a company simultaneously acts as its individual executive body. In order to better structure and optimize the corporate procedures in a JSC with multiple shareholders, members of a board of directors represent the interests of corresponding shareholders (regarding the appointment of an executive body, approval of extraordinary transactions, etc.).

Thirdly, the structure of corporate bodies in often predetermined by the area of entrepreneurial or other economic activities, location of production and business operations and the specific legal regimes for conducting economic activities¹⁸¹. For example, the body structure of a SRO necessarily consists of a general meeting of SRO members, a collective governance body (a SRO board of council) and an executive body (Art. 15 of the SRO Law). Governance bodies of a credit cooperative include a general meeting of members (unit holders), a board and an individual executive body (Art. 15 of the Credit Cooperation Law). There is a plethora of other factors affecting the structure (model) of corporate bodies and their modification.

The legislation does not always clearly distinguish “a body of a corporation” from “a governance body of a corporation”. Indeed, if one does not specify what aspect of governance they refer to (corporate management, corporate control or other sort of governance), it can be difficult sometimes to delineate them. Such an approach is reflected, for example, in the title of Art. 65.3 of the Civil Code – “Governance of a Corporation”.

General meeting. The general meeting (congress, conference) is a supreme body of a corporation that determines its economic policies. As has already been noted, a general meeting represents a civil-law society that includes all members of a corporation that collectively decide the legal fate of an organization.

According to paragraph 2 of Art. 65.3 of the Civil Code, the exclusive competences of a general meeting include: the determination of priority areas of activities of a corporation, principles of the establishment and use of its assets; the approval of and amendments to the charter of a corporation; the establishment of the procedures for admission and expulsion of members, in cases not prescribed by law; the establishment of other corporate bodies and early termination of their powers, unless this legal authority lies with other collective bodies of a corporation, as prescribed by its charter in accordance with the law; the approval of annual reports and accounting (financial) statements of a corporation, unless this legal authority lies with other collective bodies of a corporation, as prescribed by its charter in accordance with the law; making decisions on the creation of other legal entities by a corporation, on the participation of a corporation in other legal entities, on opening subsidiaries and representative offices, unless such legal authority lies with other collective bodies of a business company, as prescribed by its charter in accordance with the laws on business companies; making decisions on the reorganization and liquidation of a corporation, on the appointment of a liquidation committee (liquidator) and on the approval of liquidation balance; the election of an inspection committee (inspector) and the appointment of an audit organization or an individual auditor for a corporation.

By looking at the listed competences of a general meeting, one tends to concur with the view that it represents a “will-forming body”¹⁸². In order to realize the competence of a general meeting on certain issues, a unanimous decision of all members of a corporation is required by law. For example, according to Art. 66.3 of the Civil Code on non-public business companies, members of a general meeting may unanimously decide to transfer certain functions of the general meeting to a board of directors (or a collective executive body), with the exception of the decisions on key issues (amendments to the charter, reorganization and liquidation, increase or reduction of the charter capital, etc.); to delegate the functions of a collective executive body to a board of directors (fully or partially) or decide against the establishment of a collective executive body altogether, if its functions are performed by the said board of directors; to transfer the functions of a collective executive body to an individual executive body; to approve the procedures for the convocation, preparation and conduct of general meetings and their decision-making processes that are different from those prescribed by law or other legal acts, on condition that these procedures preserve the participants’ rights to participate in a general meeting of a non-public company and to obtain information about it; to impose the requirements on the number of members, procedures for the establishment and conduct of the meetings of a board of directors or a collective executive body of a company, etc. (paragraph 3 of Art. 66.3 of the Civil Code). To summarize, a general meeting has the legal authority to redistribute the competences of corporate bodies.

However, decisions on a number of issues cannot be transferred to other corporate bodies and require a unanimous vote of all members of a general meeting (otherwise, such decisions are null and void – see Art. 181.5 of the Civil Code). This includes the decisions:

• on the methods of certifying the decisions of a general meeting of an LLC, other that notarization (paragraph 3 of Art. 67.1 of the Civil Code);

• on the voluntary liquidation or reorganization of an LLC (paragraph 1 of Art. 92 of the Civil Code);

• on the transformation of a production cooperative into a business partnership or company (Art. 106.6 of the Civil Code);

• on introducing amendments into the charter of a non-public company regarding the pre-emptive rights of its shareholders to acquire the shares that are being disposed of through a non-gratuitous agreement, their consent to sell the shares to third parties and the additional responsibilities of shareholders (paragraphs 3, 5, 7 and 8 of the JSC Law);

• on the shareholders’ lack of pre-emptive rights to acquire additional shares or issue-grade securities convertible into shares of a non-public company (paragraphs 6 and 8 of Art. 7 of the JSC Law);

• on the establishment of a JSC, approval of its charter and monetary valuation of securities, other assets and property or other rights contributed by the founders as payment for share ownership (paragraph 3 of Art. 9 of the JSC Law);

• on the transformation of a JSC into a non-commercial copartnership (paragraph 1 of Art. 19.1 of the JSC Law);

• on granting, terminating or restricting the additional rights of participants in an LLC (paragraph 2 of Art. 8 of the LLC Law);

• on attributing and terminating the additional responsibilities of participants in a company (paragraph 2 of Art. 9 of the LLC Law);

• on making amendments into the charter imposing a limit on maximum ownership interest and providing for the possibility to reproportion the interests of participants in a company (paragraph 3 of Art. 14 of the LLC Law);

• on the set-off of pecuniary demands of one of the participants or a third party upon a company on account of him making additional contributions (paragraph 4 of Art. 19 of the LLC Law), etc.

In certain legal cases a “unanimous” decision is made by the remaining active or bona fide members of a civil-law society. For example, a decision on the expulsion of a participant from a general partnership through legal action (if there are substantial grounds for this) is made by all remaining participants (paragraph 2 of Art. 76 of the Civil Code).

Collective governance body (board of directors, supervisory or other board) – a will-controlling or a will-supervisory body that can only be established collegially. As the Supreme Court rightly noted, a board of directors represents a civil-law society (paragraph 103, point 2 of the Decree of the Plenum of the Supreme Court No. 25 of June 23, 2015) that can be comprised only of natural persons–unlike a general meeting that can also include legal persons as members.

A collective governance body exercises corporate control, but may not get involved in corporate management.

Yet, with respect to the scope of competences, the civil-law society formed by the members of the collective governance body is secondary to the general meeting. First, members of the collective body are elected by members of the general meeting. Second, the legal authority of the collective governance body is limited only to delivering the will of the main civil-law society – the general meeting of corporate members.

The characterization of a supervisory board and a board of directors as “collective governance bodies” by Art. 65.3 of the Civil Code stresses their competence as bodies exercising general control of a corporation. According to the Corporate Governance Code (2014)¹⁸³, a board of directors “executes strategic governance of a company, determines its main principles and approaches to the implementation of a risk management system and internal control in a company, controls the activity of executive bodies of a company, and performs other key functions” (paragraph 2.1).

Both the above-cited Corporate Governance Code and the Instruction of the Government of the Russian Federation No. 1315-r of June 25, 2016 “ On Approval of the Plan of Action (“Road Map”) ‘The Improvement of Corporate Governance’” address the important issues of corporate practice: transparency in corporate governance, staffing the board of directors with “independent directors” (professional individuals acting in good faith), granting the members of the board of directors access to documents and information related to legal entities controlled by a JSC, disclosure of the remuneration paid to the members of the board of directors, etc. The detailed regulations concerning these issues are determined by local acts of a corporation.

In Russian commercial corporations, the competence of a collective governance body may include:

• determining priority areas of activity;

• convening and approving the agenda of general meetings;

• establishing an executive body of a corporation;

• approving internal documents of a company, with the exception of the documents approved exclusively by a general meeting;

• consenting to and subsequently approving extraordinary transactions;

• approving the company’s registrar, terms of the contract with him and the conditions for its termination (in a JSC);

• making decisions regarding the participation in other business companies;

• making decisions regarding the participation in associations and other alliances, commercial organizations (LLCs);

• creating subsidiaries and opening representative offices;

• other issues prescribed by the legislation or the constituent documents of a corporation.

Since the collective governance body is a will-controlling body, its competence is precisely defined by a general meeting (civil-law society) in the constituent or other internal documents of a corporation.

The competence of the collective governance bodies of a non-commercial corporation depends on the kind of activity carried out by a corporation. For example, in a SRO in the construction sector (planning and engineering surveying) the competence of its permanent governance body (board, council) is determined according to “the leftover principle” – i.e., it includes everything that does not constitute an exclusive competence of a general meeting of SRO members (Art. 55.10 of the Civil Code), such as:

• convening general meetings of a SRO;

• submitting the annual report to a general meeting;

• creating subsidiaries and opening representative offices;

• approving the internal structure of a SRO (staffing chart);

• appointing an audit organization to review the accounts of a SRO, making a decision on conducting inspections of an executive body, etc.

The board of a credit consumer cooperative (paragraph 5 of Art. 21 of the Credit Cooperation Law):

• admits and expels members;

• maintains a register of members;

• prepares and shapes the agenda of a general meeting of members of a cooperative (unit holders);

• ensures the corporate procedures for notifying members about the convocation of a general meeting;

• makes decisions on the approval of transactions of a credit cooperative;

A mutual insurance society that has more than 30 natural persons as members or that has legal persons among its members has the following structure of bodies: the general meeting of society members, the board and the director (Art. 9 of the Mutual Insurance Law). The competence of the board includes (Art. 13):

• giving preliminary approval and delivering to the general meeting the company’s plan for annual activities and year-end activity report;

• appointing and dismissing the internal audit head (internal auditor);

• examining reports on the director’s activities;

• making decisions on admitting new members, if this legal authority is attributed to the board by the charter of the society;

• making decisions on terminating memberships in the society (excluding the cases of voluntary resignation from the membership, expulsion from the society, death of a natural person and company liquidation);

• making decisions on convening a general meeting of members;

• making decisions on investing insurance reserves and other assets of the society, including securities purchase;

• making decisions on conducting an audit, appointing an auditor and approving the terms of the contract with him;

• valuating the society’s assets (that are formed by the contributions paid as admission fees);

• monitoring the procedures for mutual insurance by the society of property interests of its members, etc.

The described competences of collective governance bodies of certain non-commercial corporate organizations demonstrates that this body represents an operational “tool” for corporate control in the hands of the general meeting (supreme body).

Executive body. Operational control of a corporate organization is carried out by its executive body. An executive body is present in all corporations, with the exception of the cases when its functions are transferred to a trustee (managing company).

Traditionally, an executive body follows one of the two models:

• individual;

• individual and collective (board, directorate).

The function of an individual body is performed by a sole natural person. In the second model, a collective executive body (whose membership regulations and establishment procedures are prescribed by the charter) is created in addition to an individual body.

Following the 2014 reform of corporate legislation, the legal status of this body has undergone significant changes (Federal Law No. 99-FZ of May 5, 2014¹⁸⁴).

First, an individual executive body may be established in three ways (paragraph 3 of Art. 65.3 of the Civil Code):

1) by one person;

2) by several persons acting jointly;

3) by several individual executive bodies that act independently from each other.

We would like to stress here that in the first two cases one individual executive body is formed, whereas in the third case several individual executive bodies are created.

First of all, if the competence of an executive body is realized jointly, and its will is expressed by a common opinion of all its members, then only one individual executive body is established in a corporation. If several autonomously operating persons are granted the competence of an individual executive body, two or more individual executive bodies are created. A similar logic is found in the provisions of special laws (e.g., paragraph 3, point 3 of Art. 45 of the LLC Law).

Second, the information about individuals that are granted the authority to act (jointly or independently) as an individual executive body on behalf of a legal person should be included into the Unified State Register of Legal Entities (paragraph 1, point 3 of Art. 53 of the Civil Code). This has to do with the principle of public credibility of state registers, or the “principle of keeping records”. In anticipation of possible discrepancies in the interpretation of this issue, the Supreme Court has noted that, unless the entry in the Unified State Register of Legal Entities explicitly mentions that the competence is realized jointly or in any other specific manner, it is presumed that the said individuals act separately and independently exercise their authority on all matters related to the competence of a given body of a legal person. For example, if a corporation has several individual executive bodies, it is presumed that they act independently on matters concerning their competence (paragraph 24 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 25 of June 23, 2015).

Third, an individual executive body of a corporation can be represented both by a natural and a legal person (paragraph 3 of Art. 65.3 of the Civil Code). This does not concern the contractual transferal of the competence to a trustee (managing company) represented by an individual entrepreneur or a legal person. The legislator has provided for the possibility of a legal person to serve as an individual executive body.

Corporations can also have other, so called “specialized bodies” (e.g., a disciplinary committee and a control commission in a SRO) and “review bodies” (an inspector and an inspection committee in business companies, internal audit services and an internal auditor in mutual insurance societies, etc.).

The analysis of the bodies of a corporation brings up the question of the status of a person determining the actions of a legal person. Is he a body of a corporation himself? On the one hand, bodies of a corporation are listed in Art. 53 of the Civil Code and should be spelled out in the constituent documents of an organization. On the other hand, the combined provisions of Arts. 53 and 53.1 of the Civil Code prevent the unambiguous interpretation of this thesis! In particular, Art. 53 of the Civil Code states that an organization “acquires civil rights and responsibilities through its bodies…”, whereas paragraph 3 of Art. 53.1 of the Civil Code refers to an individual that “has the ability to determine the actions of a legal person”, providing as an example “the authority to give instructions” to an executive body and members of collective bodies. Therefore, the competence of a body of a legal person is realized (governed) by the will of an individual that determines its actions.

The current state of the Russian legislation does not allow to speak of these individuals as corporate bodies (de facto corporate bodies). The suggestion to reserve for this case the term “factual body of a corporation” as a conventional legal construct is quite dubious. The key question here is: what scope of competences is attributed to this body by law? Or is the competence granted exclusively to the body of a corporation, whereas its will-formation and realization of its competence are affected by the said individuals? The latter approach seems more likely, as evidenced by the judicial practice (e.g., see paragraph 3 of the Decree of the Plenum of the Supreme Court of the Russian Federation No. 53 of December 21, 2017 “On Certain Issues Pertaining to Imposing Liability on the Persons Controlling the Debtor in Bankruptcy”). Yet, in foreign legislations (U.K., USA) such individuals may be considered a factual governance body of a corporation by courts.

Corporate associations in the modern Russian law have recently started gaining a more clearly defined legal status. Certain areas of legislative regulation have been successfully employing economic approaches to analyzing the activities of a corporate business-structure – the structure of an entrepreneurial association. The existing diversity of entrepreneurial associations demonstrates the rich variation in structuring of governance bodies. Moreover, one should remember that corporate (entrepreneurial) associations represent a complex multi-level corporate system that includes, among other, corporate organizations.

Governance structure of contemporary corporate associations (holding groups) resembles Soviet economic systems (industrial associations) that were comprised of enterprises and organizations headed by a single center¹⁸⁵.

To give an example, members of insurance (reinsurance) pools¹⁸⁶ form the supreme body of a corporate association that develops the unified principles and approaches to insurance (reinsurance) terms of a pool, arranges the exchange of the information on insurance (reinsurance) agreements, assessment of insurance risks, damages and losses, determines the governance bodies of a pool and/or an insurer (pool leader) and their legal authority, regulates the procedures for the participation in other insurance (reinsurance) pools and the resignation of members from an insurance (reinsurance) pool (paragraph 5 of Art. 14.1 of the Law on the Organization of Insurance Business).

The laws on specific forms of insurance explicitly mention the corporate essence of insurance pool governance. In particular, they stipulate the responsibility of pool members to specify “the procedures for managing a pool” and “making decisions in a pool” in a reinsurance pool agreement (paragraph 2 of Art. 23 of Federal Law No. 225-FZ of July 27, 2010 “On Compulsory Civil Liability Insurance of the Owner of a Hazardous Facility in Case of Damages Resulting from an Accident at the Hazardous Facility”¹⁸⁷, paragraph 3 of Art. 24 of Federal Law No. 67-FZ of June 14, 2012 “On Compulsory Civil Liability Insurance of a Transportation Carrier in Case They Cause Harm to Lives, Health, Property of Passengers and on the Procedures for Compensation of Damages Caused during the Transportation of Passengers by Metro”¹⁸⁸).

Two good examples of insurance pools are the Russian Anti-Terrorism Insurance Pool¹⁸⁹ and the Russian Nuclear Insurance Pool¹⁹⁰.

The governance bodies of the Russian Anti-Terrorism Insurance Pool include:

• an association of the parties to the pool agreement (a supreme body of the pool);

• a supervisory board (a supreme collective governance body that is in charge of planning the pool development strategy and strategic decision-making);

• an executive committee (a “pool coordinator” or an executive working body that organizes and monitors the compliance with the strategic and tactical objectives of the pool).

This insurance pool also has a managing company (a legal person) that arranges the interaction between the pool’s participants, organizes insurance (reinsurance) agreements using an automated management and document circulation system, arranges the document workflow, analyzes the market, etc.

The structure of the Russian Nuclear Insurance Pool includes the following bodies:

• an association of participants of the pool;

• a supervisory board (a collective governance body that approves the statute concerning the executive committee, the annual report of the executive committee, the admission of new participants to the pool, etc.);

• an executive committee (an executive body of the pool whose competence includes: reviewing and issuing an opinion on the incoming statements of insurance against particular risks and insurance claims, enabling the corporate procedures regarding the meetings of the supervisory board, maintaining the record of pool participants and the maximum amounts of their liability, as well as the liability limit of the pool as a whole, etc.).

Just like the Russian Anti-Terrorism Insurance Pool, the Russian Nuclear Insurance Pool has a managing company that was established for the purpose of coordinating the activities aimed at ensuring effective conditions for insuring operating organizations against the damages and harm caused by radiation.

The reviewed body structures of insurance pools historically emerged, to a degree, thanks to several legal acts of Rosstrachnadzor (Rosstrachnadzor Orders No. 08-11r/22 of March 31, 1995 “On the Activities of Insurance Pools”¹⁹¹ and No. 02-02/13 of May 18, 1995 “On the Approval of the Statute Concerning Insurance Pools”¹⁹²).

Another example of body structuring of corporate associations is a banking holding – an association of legal persons that includes at least one credit institution controlled by the parent organization of a holding group (that is not a credit institution itself), as well as other legal persons (that are not credit institutions) that are controlled or significantly influenced by the parent organization of a banking holding or are part of the banking groups of credit institutions that participate in this banking holding¹⁹³ (Art. 4 of the Banking Law). The bodies of a banking holding include:

• as association of participants in a holding group, managed by the parent company (lead organization, holding company);

• a managing company (business company) that is established at the initiative of the parent organization for the purpose of exercising corporate control over the activities of the participants of a banking holding.

Notably, the Banking Law has imposed certain requirements on managing companies. Namely, the parent organization of a banking holding must be able to control the decisions of the managing company of a banking holding on the issues that are included in the competence of the meeting of its founders (participants), including its reorganization and liquidation (point 4 of Art. 4). Thus, the parent company not only controls a banking holding as a whole, but also governs (controls the decisions of) its managing company, which demonstrates the vertically-integrated structure of banking holdings. The list of functions of the managing company of a banking holding is communicated to the Bank of Russia (Directive of the Bank of Russia No. 3780-U of September 9, 2015 “On the Procedures for Notifying the Bank of Russia on the Establishment of a Banking Holding, on the Creation of the Managing Company of a Banking Holding and on the Power Granted to it”¹⁹⁴).

Corporate trusts (funds). The place taken by corporate trusts and funds in the Russian and world economies indicates the transformation of the asset management model. Despite the wide dissemination of legal organizational forms of legal subjects aimed at entrepreneurial and other economic activities, the founders and participants of business ventures have been actively using and structuring their assets without establishing a new subject of law by means of consolidating them into a single subject of law. However, such entities are no less corporate than the traditional commercial corporations that are established as JSCs and LLCs. A clear example of this is a UIF – a diversified portfolio of assets (shared property of the unit holders of a fund), whose participants certify their ownership interests by inscribed issue-grade securities – investment units.

A corporate trust (UIF) represents a particular model of collective investment. An investment portfolio is assembled by a managing company. The procedures for its creation and maintenance are regulated by the Investment Funds Law and a number of secondary legislative acts. This has to do with the diversity of the existing forms of UIFs (according to their accessibility, divided into open-end, closed-end, exchange and interval funds; funds for retail investors vs. for professional investors; according to the types of investment projects and transactions, divided into equity, bond, commingled, index, money market, commodity market, hedge, real estate, mortgage, venture capital, private equity, credit and art funds, etc.).

The following property can be held in trust of a closed-end UIF: securities, monetary claims related to collateralized mortgage obligations emerging from credit agreements, including the mortgagee’s rights secured by a mortgage contract; ownership interest in the charter capital of an LLC; immovable property and artistic values (paragraph 2 of Art. 13 of the Investment Funds Law; the Federal Financial Markets Service Order No. 08–56/pz-n of December 9, 2008 “On Asset Transfer in Payment for Investment Units in a Closed-End Unit Investment Fund and the Timeframe for Establishing a Closed-End Unit Investment Fund”¹⁹⁵).

One particularly interesting case is a closed-end UIF for qualified investors¹⁹⁶. The body structure of such corporate funds includes:

• a general meeting of unit holders;

• an investment committee;

• a managing company.

A general meeting of unit holders is comprised of the investment unit holders of a closed-end UIF (paragraph 1 of Art. 14 of the Investment Funds Law). The procedures for the preparation, convocation and conduct of general meetings of investment unit holders are prescribed by the rules of trust management, as well as normative acts (e.g., the Federal Financial Markets Service Order No. 08-5/pz-n “On the Approval of the Provision for Additional Requirements to the Procedures for the Preparation, Convocation and Conduct of a General Meeting of Investment Unit Holders of a Closed-End Unit Investment Fund”¹⁹⁷, etc.). The competence of a general meeting includes the following issues:

• approving the amendments and additions to the rules of trust management of a closed-end UIF concerning: making changes into the investment declaration; increasing the remuneration of a managing company, a specialized depositary, a person maintaining the register of investment unit holders, an officer of an audit organization; expanding the list of expenses of a managing company; making discounts related to the redemption of investment units or increase of their size; changing the type of a UIF; introducing, excluding and amending the statutes concerning the necessity of approval by the investment committee of transactions secured from the assets that constitute the UIF and/or actions related to exercising the rights of a participant in a business company whose shares or interest constitute this fund, as well as other statutes concerning the investment committee; determining the number of additional investment units of a UIF that can be issued after its establishment is finalized (completed); changing the percentage of investment units that can belong to a managing company; changing other regulations concerning trust management of a UIF that are provided for by the normative acts of the Bank of Russia;

• transferring the rights and responsibilities arising from the closed-end UIF trust management agreement to a different managing company;

• an early termination or an extension of the duration of the UIF trust management agreement (Art. 18 of the Investment Funds Law).

Thus, the general meeting of unit holders of a closed-end UIF represents a civil-law society that brings together investment unit holders (trust management founders).

The investment committee represents a collective governance body of a closed-end UIF, whose investment units are limited in circulation and are intended for qualified investors. It is formed by all or some of the investment unit holders or natural persons appointed by them. The managing company, its officers, employees and persons appointed by it may not serve on the committee (paragraph 6.1 of Art. 17.1 of the Investment Funds Law). Its establishment and regulation of its activities are prescribed by the rules of trust management set by a given fund. The investment committee advocates the interests of the unit holders. The competence of an investment committee typically includes the approval of transactions involving the fund’s assets and management of the said assets.

The competence of a UIF trustee is prescribed by the rules of trust management and by the investment declaration. Although the investment declaration focuses on the economic aspects of the fund’s activities (Art. 35 of the Investment Funds Law), it should clearly define the scope of the competence (describe the goals of investment policies, list the types of investment projects, spell out the risks and the requirements for the UIF asset structure). The managing company is in charge of:

• transferring the fund’s assets to a specialized depositary that takes care of its inventory and/or maintenance;

• record-keeping;

• disclosing information about the fund;

• maintaining its website;

• taking record of the transactions involving the fund’s assets;

• delivering the information about the date when a list of unit holders is compiled to the unit holders in order for them to exercise their rights or to receive compensation for partially matured units without making a maturity claim, etc.

Unit investment funds have particular governance structure and unit holder interaction scheme. First, governance of a fund is concentrated in the hands of a trustee. Second, closed-end UIFs begin their establishment within the course of six months from the registration of the rules of trust management. Starting from this moment, buyers of the investment units form a civil-law society of trust management founders (unit holders). In Russia, such collective investments in the form of corporate trust (fund) are on the whole developing vigorously, which is also evidenced by continuous legislative amendments concerning this issue.

A body of a corporate system represents a component of an integrated corporate system that is granted certain competence (rights and responsibilities with respect to governance or economic activities). Considering the bodies of a system, we suggest introducing the term “corporate competence” – competence pertaining to governance (management, control) and economic activities of a corporate system as a whole.

We suggest distinguishing between the following bodies of a corporate system:

• governance bodies;

• economic bodies.

Governance bodies are further divided into management bodies and control bodies. They also include monitoring bodies.

The structure and competence of bodies of a corporate system depends largely on the legal organizational form of a corporation and the system of its internal bodies. For example, in a “one-person” corporation established as a business company, the competence of management, control and monitoring bodies may be concentrated in the hands of one person – the sole participant (shareholder) of a company. Speaking of large business companies, the function of a management body is fulfilled by a civil-law society formed by the company’s participants (shareholders).

The central component (body) of a corporate system is a civil-law society of corporate rights holders, whose competence includes the strategic governance of the entire corporate system. A civil-law society is a body of corporate management. One can hardly envision a corporation without its participants (general meeting). In the absence of participants, a corporate system either ceases to exist or loses its economic and legal significance.

In contrast to the control body of a corporation, the control body of a corporate system ensures functioning of the system as a whole. In other words, in aids the realization of the competence of an economic body.

An economic body is a component of a corporate system that is directly engaged in economic management: entrepreneurial, income-generating and other economic activities; asset management, etc. The essential competence of an economic body is ensuring business activities and production operations. The role of an economic body may be played by a corporation (e.g., a corporate organization or a corporate association) that directly engages in legal relations with third parties, in particular by signing an agreement, carrying a tax burden, etc.

The scientific discussion about the corporate personhood of an entrepreneurial association was predetermined by the understanding of the universal legal capacity. The civil dogmas prescribing that only natural and legal persons can be participants in civil turnover (we do not take into account the state and municipalities) have compelled the scholars of economic law to temporarily resort to using the compromise term “quasi-corporate personhood”¹⁹⁸, demonstrating the recognition of partial corporate personhood of entrepreneurial associations. However, following the defense of over a hundred doctoral and habilitation theses on the legal status of entrepreneurial associations, this discussion has lost its relevance.

When evaluating the status of a corporate body, we encounter a similar problem. An erroneous amendment to Art. 53 of the Civil Code introduced by Federal Law No. 99-FZ on May 5, 2014, according to which a body of a legal person acted “on its behalf (paragraph 1 of Art. 182)” – and, thus, was considered its representative – was short-lived. This legal construction was trying to equate bodies of a corporation with its representatives, because “the representative’s status is in many respects analogous” (paragraph 10 of Informational Letter of the Presidium of the Supreme Court of Arbitration of the Russian Federation No. 162 of December 10, 2013 “Review of the Arbitration Court Practices Concerning the Application of Articles 178 and 179 of the Civil Code of the Russian Federation”¹⁹⁹). However, a body of a corporation realizes its legal capacity. Indeed, a corporate body has such competence, but with respect to the corporation (not the corporate system) it represents its internal structural element and has corporate status. Detailed arguments against equating a body of a corporation with its representative in light of the different legal nature of corporate relations and the institute of representation are presented by V. K. Andreyev²⁰⁰.

A body of the corporation has special competence with respect to the corporate system as a whole.

Besides, as has already been noted several times, the current legislation grants individual bodies of a corporation specific competence²⁰¹. By virtue of pt. 1.1 of Art. 28.1 of the Code of Administrative Offences, the reasons for instituting an administrative case listed in Arts. 14.12, 14.13 and 14.23 of the Code of Administrative Offences, in addition to those mentioned in pt. 1 of Art.28.1, include “claims made by the governance bodies of a debtor (legal person)”. The administrative legislation also institutionalizes liability of a body of a legal person that is a legal person itself. According to pt. 9 of Art. 2.10 of the Code of Administrative Offences, in cases when an administrative offence is committed by an individual executive body of a legal person that is entitled to legal personality itself, an administrative penalty is imposed on it within the limits of the sanctions set out for legal persons. Here we should note that it may apply to a trustee (managing organization) that performs the function of an executive body of a corporation, as well as to a legal person that acts as an individual executive body (paragraph 3 of Art. 65.3 of the Civil Code).

A variety of body structures of a corporate system are implemented in practice. Notably, the body structure may also change within the life course of a corporation, due to the increase or decrease in the amount of corporate control exercised by appropriate persons, changes in the scope of economic activities, location and other factors.

Therefore, despite the fact that a body of the corporation and a body of the corporate system share some common features, their competence differs with respect to the corporation and the corporate system as a whole. For example, a civil-law society of a holding group acts simultaneously as a body of its subsidiary company (its supreme body – the general meeting) and as a central body of a corporate system (an association of members of a holding group). The association of members of a holding group has its own corporate subsystem within its structure.

The management body of a holding group’s corporate system is, at first glance, represented by the holding company that controls the decisions made by a subsidiary company. However, the ratio of participation and “influence” may change and, therefore, the body structure may also change.

The structure of the bodies of corporate systems is conventionally summarized in Table 2.1.

Тable 2.1

Types of corporations

Bodies of a corporate system

governance bodies

economic bodies

management bodies

control bodies

1

2

3

4

1. Corporate organizations

1.1.

Commercial

business company

association of participants / shareholders

executive body of the company

company

managing company

business partnership

association of general partners

every general partner

partnership

all together

selected partners

business copartnership

association of copartners

individual executive body

copartnership

peasant (farm) holding²⁰²

association of members

head of the holding

peasant (farm) holding

1.2.

Non-commercial

self-regulatory organization

association of members

executive body

self-regulatory organization

consumer credit cooperative

association of unit holders of the cooperative

individual executive body

cooperative

rea estate owners’ partnership

association of members

chair and board

real estate owners’ partnership

2. Corporate associations

2.1.

Simple partnership

insurance pool

association of pool participants

executive committee

managing company

investment partnership

association of partners

governing partner(s)

partners

2.2.

Holding group

banking holding

association of members of a holding group

managing company

parent company and subsidiaries

2.3.

peasant (farm) holding²⁰³

members of a peasant (farm) holding

head of the holding

head of the holding (individual entrepreneur)

3. Corporate trusts (funds)

3.1.

Unit-investment fund (UIF)

closed-end UIF

association of unit holders

managing company

managing company

Chapter 3.
Right of participation in corporate activities

1. History of the corporate form of economic activity in Russia (a brief overview)

Corporate forms of the organization and conduct of economic activities established as economic associations of persons whose joint efforts and assets were directed at “a common cause” existed already in the Old Russian state, as evidenced by the sources of Old Russian law that regulated trade and merchant relations.

We suggest dividing the history of corporate economic activities into three major periods: pre-revolutionary (tsarist and imperial stages), Soviet and post-Soviet (modern). Each of these periods is characterized by a particular economic order and specific legal organizational forms of economic activity. They also have their own unique system of the sources of regulation of corporate relations that reflect the attitude of the state to the subject matter.

1. The pre-revolutionary period (tsarist and imperial stages). Among the first subjects of economic activity that combined private capital were metallurgical manufactories in the seventeenth century Russia of Peter the Great (for example, those owned by the boyars Miloslavsky, Morozov and Naryshkin)²⁰⁴. The first manufactories – possession manufactories – were based on the peasant labor; the peasants working at them could not be sold separately from an enterprise itself. However, towards the beginning of the eighteenth century most of them had switched to hiring labor (later they would be labeled “capitalist manufactories”), because possession peasants showed poor results due to their lack of motivation.

One of the first acts consolidating the legal standing of merchant joint-stock corporations was Peter the Great’s Order No. 1706 of October 27, 1699 “On the Organization of Trading Companies, as in Other States, by Merchants, on the Division of Towns into Provinces According to Trade Areas, with the Subordination of Smaller Towns to the Major Town of a Province, and on Enlisting Raznochintsy that Know a Craft into Slobodas”²⁰⁵. It was followed by Peter the Great’s Order of March 2, 1711 “On Granting the Right of Engaging in Trade to Men of All Conditions, on Escheated Villages and on the Punishment for Deferring from Service”²⁰⁶, that widened the range of people that could carry out trade activities, and in particular act as founders of joint-stock companies²⁰⁷.

Among the large joint-stock companies with merchant participation of that time were the Russian Trading Company in Constantinople (1755), the Persian Trade Company (1758), the Russian-American Company (1799), etc.

On January 1, 1807 Alexander I adopted the Manifesto “On the New Benefits, Distinctions, Privileges Granted to the Merchantry and on the Novel Ways of Promoting and Strengthening Trade Enterprises”²⁰⁸, that regulated the activity of general, limited and joint-stock partnerships.

At the beginning of the nineteenth century, M. M. Speransky wrote that the two sources of national wealth are the abundance of natural resources (nature, forestry, land, water, etc.) and the use of labor and industry. Elaborating on the latter source, he listed manufactories, crafts and factories among its forms. Speransky suggested establishing the division of state economic management on the basis of the former source, and the division of finance on the basis of the latter, because the use of labor and industry are associated with generating revenue, dividing it into parts, counting it and storing the residual funds²⁰⁹.

Thanks to the efforts and painstaking work of M. M. Speransky, The Complete Collection of Laws of the Russian Empire and The Digest of Laws of the Russian Empire were published. The section “On a Trade Partnership”²¹⁰ of The Trade Charter, included in the fourth book of The Digest of Laws of the Russian Empire, introduced the following forms of legal entities engaged in trade: a general partnership, a limited partnership, a joint-stock partnership, a partnership on shares, and an artel partnership.

Established in the second half of the nineteenth century, the Loan-Saving Partnership (Kostroma Governorate, 1865) became one of the first corporations whose activity was based on short-term lending to peasants, craftsmen and small traders. The Partnership also granted loans to its members. The governance bodies of the Partnership included the general meeting of partners (the supreme body approving loan terms and conditions, preparing annual reports, handling complaints against the supervisory council and the board); the supervisory council (monitoring the compliance with the internal documents of the partnership and the decisions of the general meeting); the board (day-to-day management, including approval and issue of loans, receipt and return of deposits).

In his analysis of the Trade Charter (1893), A. C. Holmsten emphasized the role played by partnerships in “committing trade acts”²¹¹. The forms of partnerships that existed at that time included general partnerships, limited partnerships and partnerships with variable capital. At first glance, general and limited partnerships of that period share many similarities with contemporary domestic partnerships. Nonetheless, they had certain unique attributes.

First, unlike contemporary limited and general partnerships that are entitled to legal personality, pre-revolutionary partnerships represented contractual associations without the rights of a legal person. By the way, until quite recently only mixed and limited liability partnerships (closed JSCs), but not general partnerships were eligible to legal personality (Arts. 9–11 of the Law on Enterprises and Entrepreneurial Activities). It was not until the adoption of the first part of the Civil Code (1994) that general and limited partnerships were recognized as legal organizational forms of commercial legal persons.

Second, the joint capital was accrued by a single firm²¹² that united all partners under a common name. The joint capital, aside from the actual capital, could include other assets, such as labor whose share was determined by a partnership agreement. This clause reveals some degree of similarity of pre-revolutionary partnerships to Soviet cooperatives that were based on the union of labor (Art. 1 of the USSR Law No. 8998-XI of May 26, 1988 “On Cooperation in the USSR”²¹³).

Third, partners in general partnerships were held liable with all their property, which served as a guarantee for their creditors and counterparties.

Fourth, a trade partnership elected a plenipotentiary whose competence was defined in the founders’ agreement.

One particular case of corporations was a partnership with variable capital that pooled capital and allowed its participants to use the money, get loans, pensions, premiums, etc. (e.g., through pension funds, loan funds, mutual loan societies). It seems that this legal organizational form, along with many other institutions, was borrowed from the French Commercial Code²¹⁴.

Mutual loan societies gained popularity by the end of the nineteenth century. These societies provided their members (including small traders and manufacturers) with the opportunity of getting “cheap” credit. Such corporations were recognized as credit partnerships, secured by the mutual guarantee of their participants²¹⁵.

In the early twentieth century, Russia underwent an agrarian reform under the direction of P. A. Stolypin that granted peasants the right of collective association for the purpose of efficient farming. The creation of peasant holdings was facilitated by abolishing rural communities and their function as collective land owners (Order of November 9, 1906 “On Adding Certain Provisions to the Existing Law Concerning Peasant Land Ownership and Use”²¹⁶).

The Stolypin agrarian reform had resulted in the development of cooperative movement and consumer cooperation and the creation of credit and consumer cooperatives²¹⁷.

2. The Soviet period. The key legislative act that had determined the legal standing of national economy subjects was the RSFSR Civil Code (1922) that endowed associations of individuals, enterprises or organizations with legal personality (Art. 13). Corporate property was institutionalized on a level with public and private property (Art. 52 of the Civil Code).

Prior to the 1922 Civil Code, the Decree of the RSFSR Council of People’s Commissars of April 10, 1918 “On Consumer Cooperative Organizations” was in force, that provided for tax relief (special fees) for consumer cooperatives. The maximum of two consumer cooperatives could operate within the limits of one locality (territorial jurisdiction), including a general civil and a working class cooperative (paragraph 4). Owners and directors of private-capital trade and industrial enterprises could not serve on the board of consumer societies (paragraph 7), which marked the distinction between corporate and purely capitalist (private) capital.

Subsequently, the Decree of the RSFSR Council of People’s Commissars of March 16, 1919 “On Consumer Communes”²¹⁸ institutionalized the consumer communes – distribution bodies whose competence included the distribution of foodstuffs and essential goods (paragraph 11).

The next step in creating corporate legislation was ensured by the Decree of the RSFSR Council of People’s Commissars of January 27, 1920 “On the Unification of All Types of Cooperative Organizations”²¹⁹, which merged credit and loan-saving cooperative partnerships, as well as their district, governorate and regional groups, into cooperative societies and their groups located in the same area by turning over their assets and liabilities, technical equipment and available personnel to the latter (paragraph 1).

On a district, governorate and all-Russian scales, first-level agricultural and craft cooperatives were consolidated into sectors whose governance was exercised by the Board of the Sector (paragraph 9 of the Decree of the RSFSR Council of People’s Commissars of April 19, 1920 “On Agricultural and Craft Cooperative Organizations (Provision)”²²⁰).

The Decree of the Central Executive Committee, the Council of People’s Commissars of the USSR of May 20, 1924 “On Consumer Cooperation”²²¹ defined consumer societies (cooperatives) as voluntary associations of citizens with no less than thirty members. The property of such a society was formed by founding contributions, admission and share fees, as well as charges on their net income and other earnings (paragraph 6).

The governance bodies of a consumer society included the general meeting (the meeting of authorized persons) and the board. By decision of the general meeting, a council could be additionally established. The role of the monitoring body was performed by an inspection committee (paragraph 11 of the Decree).

Cooperative organizations were granted the right to acquire state-owned property (the Decree of the USSR Council of People’s Commissars of May 6, 1930 “On the Procedures for the Alienation of State Property for Cooperative Organizations Use”²²²).

The preamble to the RSFSR Civil Code (1964) proclaimed that the collective farm-cooperative (kolkhoz) property formed the basis of the Soviet economic system on a level with state-owned property. Art. 24 of the RSFSR Civil Code listed – among other types of legal persons – kolkhozes, interkolkhoz organizations and their groups, other community-based organizations, as well as–in cases prescribed by the USSR and RSFSR legislations – enterprises, institutions and their groups that had independent assets and autonomous balance.

Members of cooperative organizations, interkolkhoz organizations, as well as state-kolkhoz or other state-cooperative organizations were not held liable for the obligations of their organization. The losses could be split between the members in accordance with the charter provisions (Art. 36).

State-owned property managed by the bodies of economic governance constituted the basis of state economy. Interfarm cooperation was developing in parallel with it. For example, in the 1960s there were two forms of interfarm cooperation:

• organizations with legal personality (interkolkhoz and state-kolkhoz enterprises and organizations, interfirm associations);

• organizations not entitled to legal personality (associations of interfarm enterprises, associations of agricultural enterprises established by a joint activity agreement, centralized interfarm funds).

In the 1960s-1970s, groups of agricultural enterprises were being created. Their legal basis was established a joint activity agreement regulated by Art. 38 of the RSFSR Civil Code (1964). These groups were created for the purpose of the construction of housing for workers, as well as large enterprises, roads, community facilities, etc. The competence of these corporate groups was determined by Art. 19 of the Kolkhoz Model Charter (Decree of the Central Committee of the Communist Party of the Soviet Union, the Council of Ministers of the USSR No. 910 of November 28, 1969²²³), according to which, based on the decision of the general meeting of kolkhoz members, the assets of a kolkhoz were consolidated with those of state-owned farms (sovkhozes) and other cost-sharing cooperative organizations for the purpose of constructing facilities.

The legal nature of interfarm funds deserves to be emphasized. Kolkhozes formed monetary and natural interkolkhoz funds. Among the examples of monetary funds were centralized national social welfare fund for kolkhoz members, national social welfare fund for kolkhoz members, republican monetary property insurance funds. For example, according to the Statute Concerning the Centralized National Social Welfare Fund for Kolkhoz Members (approved by the Decree of the Council of Ministers of the USSR No. 919 of November 6, 1964²²⁴), the fund was financed by contributions of kolkhozes, including fishing ones, as well as budgetary allocations, and was intended for pension and benefit payments to kolkhoz members (paragraphs 1 and 2). Governance of the fund was executed by the state authorities in tandem with the public ones (including kolkhoz, district, province, region and republican councils for the social welfare of workers)²²⁵.

Natural funds were insurance seed funds (see the Decree of the Central Committee of the Communist Party of the Soviet Union, the Council of Ministers of the USSR No. 203 “On the Establishment of Interfarm Insurance Grain Seed Funds”). These funds accrued high-quality cereal seeds in the event of natural disasters and provided assistance to kolkhozes, sovkhozes and state-owned farms.

The cooperation of individuals in house construction cooperatives was carried out on a massive scale. Gosplan was even obliged to plan the attribution of construction sites to such cooperatives (Decree of the Council of Ministers of the RSFSR No. 1395 of October 5, 1962 “On Individual and Cooperative Housing Construction in the RSFSR”²²⁶).

In the 1970s, consumer cooperation was taking place on a republican and