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CHAPTER E.

CAPITAL AND FINANCING OF LIMITED COMPANIES


1. THE LIMITED LIABILITY COMPANY (THE COMPANY LIMITED BY STAKES) A LLC may be established by one or more individuals or business entities (participants). However, if the number of participants exceeds fifty1, then the entity must be reorganized into an open J-SC or a production cooperative within one-year, or be liquidated. In addition, a LLC cannot have as its sole founder a business entity which is 100% owned by another legal entity. The charter capital of a LLC is divided into participatory stakes, as indicated in its constituent document - the Charter. Liability of Participants Participants of a LLC are not liable for obligations of the company and bear the risk of losses to the extent of their respective contributions. The liability of an insolvent participant is distributed among the other participants in proportion to their respective contributions unless the company's constituent documents provide for different treatment of such liability. An important particularity of a LLC is that a LLC is per se a closed business entity, i.e. a LLC is deemed to have a stable membership. That is the reason why the Civil Code and the LLC Law in detail regulate procedures of exclusion of a participant from the company, their withdrawal, transfer or alienation of a stake of a participant, admittance of the third parties to the membership of a LLC. Establishing the Company. Charter Capital A LLC exists as a legal entity from the moment when its Charter and constituent agreement are registered with the local department of the Tax Service. The constituent agreement provides for the procedure for establishing the company and the contribution of assets, as agreed by the founders. The Charter provides for the operation of the company, including the management structure, rights and obligations of participants, and the transfer of a participatory stake. The list of minimum information that should be in the constituent documents is provided in Article 12 of the LLC Law.

Participants agree upon a nominal value for each participant's stake, which represents the minimum contribution for that participant to the charter capital. The value of the actual contribution cannot be lower than the nominal value. The total nominal value of all contributions forms the charter capital and the size of the participant's stake is the nominal value as a percentage of the charter capital of the company. The charter capital of a LLC is the fixed amount specified in its Charter, and each change in such amount must be recorded as an amendment to the Charter and registered with the local department of the Tax Service. The charter capital may be increased or decreased only pursuant to a decision of the general participants' meeting of the company approved by two-thirds of the participants (or as otherwise provided by the Charter). Note, that when the charter capital is increased, additional contributions are to be made in full prior to the state registration of amendments to the Charter. However, a participatory stake is not regarded as a security under Russian law. Therefore, unlike shares of a J-SC, a LLCs participatory stakes do not require registration with the Financial Markets Service. The Charter The Charter of the LLC must include: General information (the name of the legal entity, the place of location of a legal entity, the way in which the legal entity's activity is managed, etc.) The volume of the charter capital of the LLC The volume of the stake of each of the participants of the LLC The volume, terms and procedure of payment of contributions of participants of the LLC The membership and competence of the management bodies of the company and the procedure of the decision-making process The questions, which are considered unanimously or by the qualified majority. Note: Amendments to the Charter of a LLC are subject to the state registration and enter into force from the moment of the state registration. However, the LLC Law may directly provide for the cases when such amendments enter into force from the moment of the

LLC Law, Article 7.

notification of the body conducting the state registration, e.g. amendments to the Charter of a LLC concerning branches and representative offices. The Minimum Amount of the Charter Capital of a LLC The charter capital of a LLC determines the minimum size of the company's property, guaranteeing interests of its creditors. Under the LLC Law the charter capital of the LLC with or without foreign investment shall not be less than 100 multiples of the minimum monthly pay, fixed by the federal law on the date of submission of documents for the state registration of the company. At present the minimum charter capital for a LLC is 10 000 roubles. The Minimum Monthly Pay The minimum monthly pay under the Law on Minimum Amount of Salaries is 2300 roubles since 1 September 2007. Since 1 January 2001 the minimum monthly pay, which shall be applied to all fines, social payments, etc. is 100 roubles. So, when we speak about the minimum monthly pay related to the amount of the charter capital, we refer to 100 roubles. The Nominal (Par) Value of the Participatory Stake The law separates the par or nominal value of the stock of the company and its real value. Example: At the moment of creation of a legal entity the par value of the charter capital was 20 thousand roubles. After one year of successful business activity net assets of the company became 200 thousand roubles. In this case the nominal value of 50% of the stake of the participant is 10 thousand roubles, but the real value of the stake is 100 thousand roubles. So, when a new participant will be entering the company he/she/it will have to pay the real value of the stake, not the nominal one. Contributions to the Charter Capital Cash, securities, other things or property rights or any rights to be measured in terms of money (in kind contributions) may be contributed to the company's charter capital, unless it is directly prohibited by law.

Example: Article 3.6 of the Law on Entering into Force of the Land Code prohibits contribution of a right of permanent (in perpetuity) use of a plot of land into the authorized (aggregate) capitals of commercial legal entities. The value of the initial contributions-in-kind to the capital of a LLC should be unanimously agreed by the founders (unless the nominal value of the stake to be paid in-kind exceeds 200 multiples of the minimum monthly pay and thereby requires independent appraisal) and set forth in the constituent documents. The nominal value (the increased nominal value) of the stake of the company's participant, paid by such non-cash contributions, may not exceed the amount of the valuation of the said contributions estimated by the independent appraiser. A new norm provides for subsidiary liability of the independent appraiser on the obligations of the legal entity in case of exaggeration of the volume of non-monetary contributions to the charter capital of the LLC. In the event of making non-cash contributions to the company's charter capital, its participants and the independent appraiser shall bear jointly subsidiary liability under the obligations of the LLC in the amount of raising too high the value of non-cash contributions during three years since the date of the state registration of the company or of appropriate amendments in the company's Charter, if the company's assets are insufficient. The company's Charter may stipulate types of property that may not be a contribution to the company's charter capital. As to the property contributions to the Charter capital of a LLC, such property contributions are in the ownership of the company. Exclusions to such provision are the cases when the constituent documents of a LLC contain provisions, indicating that it was not the property per se, which was transferred to the Charter capital of the LLC, but the property right to possess or use the property2. Payment of the charter capital of a LLC may be effected by material rights with certain limitations. Material rights, closely connected with the personality (e.g. alimentary rights) are not subject to transfer to the charter capital of a company.
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P.17 of the Ruling of the Plenum of th Supreme Court of the Russian Federation and the High Arbitrazh Court of the Russian Federation No.6/8 On Certain Problems, Concerning Application of Part One of the Civil Code of the Russian Federation, dated 1 July 1996.

Transfer of material rights shall not be mixed with a permission to effect certain kinds of activity (a license). A license is given to a particular legal entity and is not subject to transfer. Payment of the charter capital may be effected by other rights, having monetary evaluation. These rights include a copyright. The Ruling of the Plenum of the Supreme Court of the Russian Federation and the High Arbitrazh Court of the Russian Federation No.6/8, dated 1 July 1996, states that the object of the intellectual property may not be contributed to the charter capital of a company. The right to use the object of the intellectual property may be a contribution to the charter capital. Payment of the Charter Capital By the moment of registration, not less than a half of the charter capital of the LLC shall be paid up by its participants. Note, that half of the charter capital of a LLC may be paid by all the participants of the LLC or by any of them at their discretion. The remaining unpaid part of the authorized capital shall be subject to payment by its participants within the first year of the company's operation. In case of breach of this obligation, the company shall either make a statement on the reduction of its authorized capital and register the reduction of the charter capital or terminate its activity by way of liquidation. If upon expiration of the second or any following fiscal year the value of net assets of a LLC does not exceed the value of its charter capital, the company must decrease the amount of its charter capital correspondingly. If such reduction would result in the charter capital falling below the minimum established by law, the company must be liquidated. The reduction of the charter capital of the LLC shall be admitted after all its creditors have been notified on such reduction. In this case, the creditors have the right to demand that the corresponding obligations of the company shall be discharged in advance and that the losses of the creditors should be compensated. Note: Payment of the charter capital by a participant may not have a form of an offset. The Constituent Agreement The constituent agreement of the LLC defines:

The order of founders' joint activity on drawing it up Composition of founders (participants), amount of the charter capital and contributions of each of the founders, amount and composition of contributions and terms and due dates of making them Founders' (participants') responsibility for violating the order of making contributions and for distributing the profit Composition of the company's management bodies The order of participant's withdrawal from the company. Note, that in case of conflict between the provisions of the constituent agreement and the Charter, the Charter provisions shall prevail. Increase (Enlarge) in the Charter Capital of a LLC Increase of the company's charter capital is admitted after all the participants of the LLC have made their investments in full volume. Note: The property which a LLC does not have in its ownership (e.g. servitudes, pledge) does not increase the volume of assets of the company. The company has only the right to use such property. Increase of the company's charter capital may be made:

By the company's assets By additional contributions of participants of the company By contributions of the third parties to be accepted to the company. Increase of the Charter Capital of a LLC by the Company's Assets The company's charter capital may be increased by contributions to the company assets under the decision of the general meeting of the company's participants, adopted by a two-thirds majority of their votes, unless the company's Charter provides for a greater number of votes for adoption of such decision. A decision on the increase of the company's charter capital by the companys assets may be taken only on the basis of the data of the company's accounting report for the year that proceeds the year during which such decision has been taken.
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The amount of the increasing charter capital by the company's assets shall not exceed the difference between the value of the company's net assets and the amount of the company's charter capital and reserve fund. If the company's charter capital is increased in such way, the par value of the stakes of all the company's participants shall be increased in proportion without the change of the amounts of their stakes. The participants of the LLC must, by the decision of the general meeting of participants adopted by 2/3 of votes, make contributions to the company's assets, if it is stipulated: By the Charter adopted at the company's foundation By an amendment introduced to the Charter by a unanimous decision of the general meeting of participants. Contributions are made by all participants pro rata their stakes in the charter capital, unless otherwise stipulated by the Charter. The company's Charter may provide for: Par value of contributions made by all participants or by particular participants Other limitations related to making contributions. Contributions to the company's assets are made in monetary form, unless otherwise stipulated by the Charter or by the decision of the general meeting of participants. Contributions do not alter the amount of par value of the participants' stakes in the charter capital of the LLC. Increase of the Charter Capital of a LLC by Additional Contributions of Participants of the Company The general meeting of the company's participants by a two-thirds majority of their votes may take a decision on the increase of the company's charter capital by additional contributions of its participants, unless the company's Charter provides for a greater number of votes for the adoption of such decision. This decision shall determine the total value of the additional contributions, and also shall establish a single (for all the company's

participants) correlation between the value of the additional contribution of the company's participant and the amount by which the nominal value of his stake is increased. The said correlation shall be established due to the fact that the nominal value of the stake of the company's participant may increase by the amount that is equal to, or less than, the value of his additional contribution. Each company's participant has the right to make an additional contribution that does not exceed the part of the total value of the additional contributions that is proportional to the amount of the stake of this participant in the company's charter capital. Additional contributions may be made by the company's participant within two months from the date of adoption of the decision on increase of the charter capital by the general meeting of the company's participants, unless the company's Charter or the decision of the general meeting of the company's participants establishes a different period of time. Not later than a month from the last date of payment of additional contributions, the general meeting of the company's participants shall take a decision on the approval of the results of payment of the additional contributions by the company's participants and on the introduction to the company's constituent documents of amendments concerning: The increase of the company's charter capital The increase of the par value of stakes of the company's participants, who have made additional contributions, and, In case of necessity, amendments concerning changes in the size of the stake of the company's participants. In this case the nominal value of the stake of every participant, who has made an additional contribution, shall be increased correspondently to a single (for all the company's participants) correlation between the value of the additional contribution of the company's participant and the amount by which the nominal value of his stake is increased. Documents for the state registration of the amendments in the company's constituent documents and documents, confirming payment of additional contributions by the company's participants, must be presented to the local department of the Tax Service, within 1 month from the date of adoption of the decision on the approval of the results of the deposition of additional contributions by the company's participants and on the introduction of relevant amendments to the company's constituent documents. The mentioned amendments to the company's constituent documents come into force for the company's participants and the third parties from

the date of their state registration by the local department of the Tax Service. In case the time-limits are not observed, the increase of the company's charter capital is recognized as void. Decision on Increasing the Charter Capital by Additional Contributions of Participants Is adopted by two-thirds majority of votes of the general meeting of participants. The stake may not be increased by more than the additional contribution

majority of votes of participants. Therefore not all the participants may agree to such decision. The participants who will not agree to the decision to increase the charter capital by the additional contributions of the participants of the LLC will not transfer additional contributions, which will incur the following legal circumstances: 1. While approving the results of making contributions the general meeting of participants will take a decision to change the proportion of the participatory stakes, basing on the fact that certain participants have not transferred additional contributions and their stakes in the charter capital have not increased. Such decision shall be taken by the qualified majority as well. 2. The decision to change the proportion of the participatory stakes may failure to receive two-thirds majority of the participants. In this case the change of the proportion of the participatory stakes may become impossible and the increase of the charter capital will not take place. Increase of the Charter Capital of a LLC by Contributions of the Third Parties to be Admitted to the Company

within two months term Additional Contributions Each participant may contribute the amount not exceeding the portion of the overall value of additional contributions proportionate to their stake in the charter capital

within one months term The general meeting of participants takes a decision on approving the results of making contributions and on appropriate amendments to be introduced to the constituent documents

The general meeting of the company's participants may take a decision on the increase of its charter capital on the grounds of the application of the third party (or the applications of the third parties) on their admission to the company and payment of their contribution. Such decision must be taken by all the company's participants unanimously. Together with the decision on increase of the company's charter capital on the grounds of the application of the third party (applications of the third parties) on their admission to the company and payment of a contribution, a LLC shall take a decision to introduce to the company's constituent documents amendments concerning: The acceptance of the third party (the third parties) to the company The estimation of the nominal value and the size of their stake (their stakes) The increase of the amount of the company's charter capital and The change of stake sizes of its participants. The nominal value of the stake acquired by each third party who will be admitted to the company shall be equal to, or less than, the value of their contribution. Documents for the state registration of amendments to the company's constituent documents and documents, which confirm payment of

within one months term The documents are submitted to the state registration, after which they come into force

If this is not done by the deadline the increase of the charter capital is deemed void Note: The decision to increase the charter capital by the additional contributions of the participants of a LLC shall be taken by two-thirds

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additional contributions by the company's participants and of full contributions by the third parties, shall be presented to the local department of the Tax Service within 1 month from the date of payment in full of additional contributions by all the participants of the company and of contributions by the third parties, who filed their applications, but not later than 6 months since the adoption of the decision on increase of the charter capital, by the general meeting of the company's participants. The said amendments in the constituent documents become valid for the company's participants and the third parties from the date of their state registration by the local department of the Tax Service. If the time-limits are not observed, the increase of the company's charter capital is recognized as void. Diminution of the LLC's Charter Capital The company's charter capital may be diminished: By reducing the nominal value of stakes of all its participants in the company's charter capital and/or By acquitting stakes belonging to the company. The company may not diminish its charter capital, if as a result of such diminution its size becomes less than 10 000 roubles. The diminution of the company's charter capital by reducing the nominal value of the stake of all the company's participants is effected with the maintenance of the size of the stakes of all the participants of the LLC. In case the size of the stakes of all the participants of a LLC is not maintained, it shall be a ground for finding the diminution of the charter capital of the LLC invalid in court. Within 30 days from the date of adoption of the decision on the diminution of its charter capital the company is obliged to notify in writing all the company's creditors about the diminution of the company's capital and about its new size, and also to publish the information on the adopted decision in press. The state registration of the diminution of the company's charter capital is carried out only upon the submission of proofs of notification of creditors. Transfers of Participatory Stakes

The participant of the company has the right to sell or in any other way transfer its stake in the company's charter capital or a part thereof to one or several participants of this company. No consent is required from the company or any other participants of the company, unless otherwise is stipulated by the company's Charter. A participatory stake in a LLC is transferable in accordance with the procedures and upon the conditions specified in the company's Charter. Only the portion of a participatory stake which has been fully paid is transferable. All restrictions on stake transfers must be set forth in the Charter. The Charter of the company may, for example: Require an owner to obtain prior written consent of the company or a group of participants as a condition to the transfer of the stake Forbid the transfer of the stake before a certain date Allow the transfer only to a specified person, or Entirely prohibit the transfer of a particular stake to the third parties. The Priority Right The company's participants enjoy the priority right to buy the stake or a part thereof of the company's participant at the price offered to a third party in proportion to the size of its stakes, unless the company's Charter provides for otherwise. The company's participant who intends to sell his stake or a part thereof to a third party is obliged to inform in writing other participants of the company or the company itself with an indication of the price or any other terms of its sale. The following persons can enjoy the priority right for the participatory stake at the asked price: (i) The company participants pro rata their stakes (non-proportionate order may be set by the Charter or by a unanimous decision of the general meeting) (ii) The company, if the participants do not exercise their right (if stipulated by the Charter). In case the company's participants and/or the company itself do not use the priority right of buying the entire stake (or the entire part of the stake) offered for sale during 1 month since the date of such

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notification, unless a different term is stipulated by the company's Charter or by the agreement of the company's participants, the stake or a part thereof may be sold to a third party at the price and on the terms communicated to the company and its participants. When a stake or part thereof is sold with a breach of the priority right of purchase, any company's participant and/or the company itself have the right to demand through legal proceedings the transfer of rights and duties of the buyer to them within 3 months from the date when the company's participant or the company itself has known or should have known about such breach. The priority right may not be ceded. The company's Charter may provide for the need to receive the consent of the company or the company's other participants to transfer the stake or a part thereof of the company's participant to the third parties in any other way than its sale. Note: Transfer of the participatory stake to the third party may be effected not only under the sale and purchase contract, but under the barter contract or donation contract. The LLC Law does not provide for priority right in the letter cases, but the Charter may stipulate a mandatory requirement for a participant, transferring their share under the barter or donation contracts, to obtain prior permission of the company or of all other participants to effect such transfer. The transaction for transfer of a stake or a part thereof in the company's charter capital must be made in simple written form, unless the demand for the notarial form is stipulated by the company's Charter. Nonobservance of the form of a transaction of transfer of a stake or a part thereof in the company's charter capital will invalidate the transaction. The company must be notified on the alienation of a stake in writing. The purchaser practices his rights and duties as of the moment the company has been notified of the alienation. All rights and duties of the participant are assigned to the purchaser, except for additional rights and duties3.
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If a participatory stake is alienated, limitations set for a particular participant are not passed on to the purchaser. The participant alienating his participatory stake bears responsibility for making the contribution which has arisen before the alienation, jointly and severally with the purchaser. In case the company's Charter provides for the need to get the consent of the participants to transfer a stake or a part thereof in the company's charter capital to its participants or the third parties and to transfer a stake to the heirs or legal successors or to distribute the stake among the participants of the legal entity being liquidated, such consent shall be deemed to be received, if within 30 days from the date of the application to the company's participants or within other period of time, stipulated by the company's Charter, they have received the written consent of all the participants of the company or they have not received from any participant of the company a written refusal to give their consent. When a stake or a part thereof in the company's charter capital is sold at a public auction in cases stipulated by law, the purchaser of the said stake or a part thereof shall become a participant of the company, regardless of the company's consent or the consent of its participants. The company's participant has the right to put in pledge the stake or a part thereof that belongs to him in the company's charter capital under the decision of the general meeting of the company's participants taken by the majority of all its participants. Acquisition by the Company of a Stake or a Part Thereof in its Charter Capital The general rule is that the company does not have the right to acquire stakes or a part thereof in its charter capital. If a participant withdraws from the LLC the actual cost of the participatory stake determined by records of the latest period is paid to him. Under the consent of the participant he may be paid property inkind of the same cost.

The LLC Law does not contain provisions as to which general meetig of participants is empowered to take a decision on dispensing a participant with additional rights and duties. Therefore, both the annual and the extraordinary general meetings of participants shall be entitled to take such decision. Another case concerns the procedure of termination of additional rights and duties. The LLC Law provides for the unanimous decision of participants. Therefore, a participant, having additional rights, may be terminated in these rights only with their own consent. So, participants

themselves while dispensing participants with additional rights and duties have to develop the procedure for termination of such rights and duties. Furthermore, the LLC Law does not provide for additional liability of participants, having additional rights, which may result in abuse.

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At the participant's request the LLC must purchase the participatory stake in his possession if: Other participants have refused it Assignment to the third parties is prohibited The LLC has refused those willing to purchase it. In this case the participatory stake passes on as of the moment of making the request. The stake or a part thereof shall pass to the company from: The date of submission by the company's participant of a claim for its acquisition by the company The date of expiry of the time-limit of the deposition of the contribution The date of the expiry of the submission of compensation The date of entry into legal force of the court decision on the dismissal of the participant from the company The date of the receipt from any participant of the company of the refusal to agree to transfer a stake to heirs of individuals (legal successors of legal entities) who were the company's participants The date of receipt from any participant of the company of the refusal to agree to distribute a stake among the participants of the liquidated legal entity - the company's participant, or The date of payment by the company of the current value of the stake or a part thereof of the company's participant at the request of his creditors. The company is obliged to pay the current value of the stake or a part thereof or to give assets in kind of the same value during one year since the date of transfer of a stake or a part thereof to the company, unless lesser period is provided for by the company's Charter. If the participant has not made his contribution to the charter capital in due time in full, or has not provided compensation for the right of use of the property he has transferred to the LLC, which the LLC has been deprived of, his participatory stake passes on to the LLC as of the deadline for making the contribution or providing compensation. The actual cost of
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a part of the participatory stake pro rata the paid up part of contribution or the period the LLC made use of the property transferred to it, determined by accounting records for the latest period, shall be paid to the participant. Under the consent of the participant he may be paid property in-kind of the same cost. It may be stipulated in the Charter that the LLC acquires not all the participatory stake, but the part of it not yet paid up. If a participant has been dismissed from the LLC, his participatory stake passes on to the LLC as of the date the court decision becomes effective. In this case the actual cost of the participatory stake determined by accounting records for the latest period preceding the court decision coming into force shall be paid to the participant. Under the consent of the participant he may be paid property in-kind of the same cost. If the LLC participants refuse to agree to inheritance of a participatory stake (in case such consent is stipulated by the Charter), the participatory stake passes on to the LLC as of the date of getting the first refusal from a participant of the LLC. In this case the actual cost of the participatory stake is determined by accounting records for the latest period and is paid to the heir (successor). Under the consent of the heir he/she may be paid property in-kind of the same cost. If the LLC pays up the participatory stake (part of the participatory stake) that is to be recovered in favour of the third parties, part of the participatory stake not paid up by other participants passes over to the LLC, while the rest is allocated to the participants pro rata payments made by them. Transfer is effected as of the date the LLC makes the payment. The current value of the stake or a part thereof shall be paid from the difference between the value of the net assets of the company and the amount of its charter capital. If such difference is insufficient, the company shall be obliged to reduce its charter capital by the deficient amount. In case the participant's stake (a part thereof) has been acquired by the LLC itself, the company is obliged to distribute such stake among other participants of the LLC or the third parties or to reduce the charter capital of the company. The stake belonging to the company shall be distributed, during one year since it has been passed to the company by the decision of the general meeting of the company's participants, among all the participants in proportion to their stakes in the company's charter capital or sold to all or certain participants of the company and/or to the third

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parties, unless this is prohibited by the company's Charter, and shall be fully paid. Charges on the stake or a part thereof of the company's participant in its charter capital for the debts of the company's participant on the demand of creditors may be put only on the basis of the court decision in case of insufficiency of the participant's other property to cover the debts. Withdrawal of a Participant from the Company

Note: The Ruling of the Presidium of the High Arbitrazh Court of the Russian Federation No.1960/05, dated 1 September 2005, states that a participant shall loose all rights in the LLC from the moment of withdrawal from the company, excluding the rights concerning payment of the share of the withdrawing participant. Distribution of Net Profit

A participant of the company has the right to withdraw from this company at any time, regardless of the consent of other participants or of the company itself. Example: The Ruling of the Presidium of the Supreme Court of the Russian Federation No.6 and of the Presidium of the High Arbitrazh Court of the Russian Federation No.8, dated 1 July 1996, states that the constituent documents of the company, restricting a participant from withdrawal from the company, are void. A participant withdrawing from the LLC is entitled to payment of the money sum equal to the current value of the property contribution of such participant to the charter capital within 6 months from the termination of the financial year, within which a participant filed an application on withdrawal from the company, unless a shorter term is provided by the Charter of the LLC. The LLC may give to the withdrawing participant the property of the company of the same value. The current value of the property contribution shall be paid out of difference between net assets of the company and its charter capital. In case the difference is insufficient, the LLC shall have to decrease its charter capital for the deficient sum. A participant may be excluded from the company only under the court decision based on the claim of the participants jointly having 10 per cent or more of the charter capital of the LLC. Note: The Ruling of the High Arbitrazh Court of the Russian Federation No.10160/01, dated 27 February 2002, states that a participant may be excluded from the company under the court decision based on the claim of the participants jointly having 10 per cent or more of the charter capital of the LLC, but not the company itself.

Every quarter, once in six months or once in twelve months the company takes a decision on the distribution of its net profit among the company's participants. Profit received by the participants shall be distributed among them in accordance with their stakes in the charter capital of a LLC. The particularities of a LLC are that in the Charter the participants may provide for other procedure of distribution of profit. The decision on estimating a part of the company's profit to be distributed among the company's participants shall be taken by the general meeting of participants. The company must not take a decision on the distribution of its profit among its participants: Until payment in full of the company's entire charter capital Until payment of the current value of the stake or a part thereof of the company's participant If at the date of adoption of the decision on the distribution of the profit of the company among its participants the company is up to the signs of insolvency (bankruptcy) or if such signs appear in the company as a result of adoption of such decision If at the date of adoption of the decision on the distribution of the profit of the company among its participants the value of the company's net assets is less than its charter capital and the reserve fund or becomes less than their amount as a result of the adoption of such decision. The company must not pay to the company's participants the profit, the decision on distribution of which among its participants has been taken:

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If at the date of payment the company has the signs of insolvency (bankruptcy) or if such signs appear in the company as a result of payment If at the date of payment the value of the company's net assets is less than its charter capital and the reserve fund or becomes less than their size as a result of payment. Bonds and Other Securities The company has the right to place bonds and other emission securities. The company has the right to place bonds to the sum that does not exceed the amount of its charter capital or the size of the security, provided to the company by the third parties for these purposes, after full payment of its charter capital.

Types of the J-SC Types of the J-SC are the following: Open J-SC Closed J-SC People's nterprises. The Law on People's Enterprises provides for special conditions concerning the charter capital and stocks of workers' J-SC (the people's enterprises) and other questions. In fact peoples enterprises are the transitional form between a J-SC and a production cooperative. Differences and Similarities between an Open J-SC and a Closed J-SC Open J-SC The shares are distributed among the indefinite number of persons The charter capital must not be less than 1 000 multiples of the minimum monthly pay 100 000 roubles Participants may sell or otherwise transfer shares without prior consent of other shareholders The company has the right to carry out a public subscription for the shares it issues and has the right to sell them to an unlimited number of persons An open J-SC must publish every year the annual report, an accounting balance and an account on profits and losses Closed J-SC The shares are distributed among the definite number of persons not more than 50 The charter capital must not be less than 10 000 roubles

2. OVERVIEW OF THE COMPANY LIMITED BY SHARES (THE JOINT-STOCK COMPANY) J-SCs are presently the most popular vehicle for foreign investors forming active business ventures in Russia, particularly if there is a Russian party involved. J-SC is the only type of Russian legal entity which may issue shares. A J-SC is a company, whose charter capital is divided into a definite number of shares. Participants of the J-SC (shareholders) are not liable under its obligations and take risks, involved in losses in connection with its activity, within the cost of the shares in their possession. A J-SC may be founded by one or more persons. The trade name of the J-SC must contain its name and the indication of the fact that the company is a joint-stock one. Federal laws define the particular aspects of the formation, reorganisation, liquidation, and the legal status of J-SC in the spheres of banking, investment, and insurance activities. Such J-SC conduct their activities in accordance with the Law on Banks and Banking Activities, the Law on Investment Funds, the Regulations of the Central Bank of the Russian Federation.

Participants have the priority right on acquisition of shares of other shareholders of the company The company has no right to carry out a public subscription for the shares it issues and does not have the right to sell them to an unlimited number of persons Only in the cases directly provided by law a closed J-SC must publish an accounting balance

If the number of shareholders of a closed J-SC exceeds 50 persons, the company must be reorganized into an open J-SC within one year. If the number of its shareholders is not reduced up to 50 persons, the company shall be subject to liquidation in court. Open J-SC generally have the right to place shares by closed or open subscription, but such right may be limited by Russian law or by the companys Charter. Closed J-SC may only place shares via a closed subscription.
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The minimum amount of the charter capital required to form a closed JSC is 100 multiples of the minimum monthly pay, while an open company requires charter capital of 1 000 multiples of the minimum monthly pay4. The charter capital is the total of the nominal value of all issued shares, which represents the minimum amount of capital available to the company's creditors. The Minimum Monthly Pay The minimum monthly pay under the Law on Minimum Amount of Salaries is 4330 roubles since 1 January 2009. Since 1 January 2001 the minimum monthly pay, which shall be applied to all fines, social payments, etc. is 100 roubles. So, when we speak about the minimum monthly pay related to the amount of the charter capital, we refer to 100 roubles. 3. LIABILITY FOR OBLIGATIONS OF THE COMPANY LIMITED BY SHARES Founders Founders of the J-SC bear joint and several liability for obligations of the company prior to the company's registration. The shareholders may ratify the transfer of such liability to the company once the company has been registered. Shareholders In general, shareholders of a J-SC are not liable for the company's obligations and bear the risk of losses up to the limit of their charter capital contributions unless the company's Charter provides for otherwise. Shareholders who have not fully paid up their shares are jointly and severally liable for the company's obligations to the extent of the unpaid part of their shares. In certain narrow instances a shareholder may be responsible to the creditors of a company beyond the value of its shares in such company. In accordance with Article 3 of the J-SC Law, if a company becomes bankrupt as a result of "the action or failure to act of its shareholder or any other person, who has the right to issue mandatory instructions or otherwise determine the actions of the company" such person may bear subsidiary liability for the obligations of the company. Subsidiary liability means that such liability will only be attached if there are insufficient assets of the bankrupt company to satisfy the claims of creditors. The application of this rule is limited to the cases where a shareholder or a person foresees
4

that the bankruptcy of the company will arise from their instructions or actions. Example: According to the Resolution of the Plenum of the Supreme Court of the Russian Federation No.6 and the Resolution of the Plenum of the High Arbitrazh Court of the Russian Federation No.8, dated 1 July 1996, it is usually the existence or absence of a controlling interest in a company which will determine any liability of such shareholder for the obligations of the company. Directors Under Article 53.3 of the Civil Code and Article 71.1 of the J-SC Law, members of the board of directors (the supervisory board) of a J-SC "when exercising their rights and performing their obligations must act in the interests of the company, and exercise their rights and perform their duties regarding the company reasonably and in good faith". This is the only statutory standard by which members of the board of directors will be measured when assessing any liability for their actions as the board of directors members, and it should be pointed out that the provisions noted above refer only to the duties of the board of directors members towards the company. Under Russian law, no specific duty or obligations are established for the board of directors members to any parties other than the company which the board of directors member is representing. Russian law establishes an underlying presumption that the board of directors members carry out their duties in good faith and in the best interests of the company which they represent. The burden of proof is upon the plaintiff to establish that a director did not act in good faith. To summarize, a director could only be held liable to compensate the company for losses if all of the following conditions are met: (i) During his or her tenure as a member of the board of directors (the supervisory board), the director breached his or her duties to act in the interests of the company, in good faith and reasonable (ii) The director voted in favour of a resolution of the board of directors which caused losses to the company (iii) The board of directors' resolution directly resulted in losses to the company, and

J-SC Law, Article 26.

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(iv) The company or a shareholder (or shareholders) have the right to file a suit against a member of the board of directors, the sole executive body, a member of the collective executive body, and the management organisation or the manager concerning compensation of the losses caused to the company and are able to prove (to a high standard) items (i), (ii) and (iii) above5. A member of the board of directors (supervisory board) of the J-SC who did not take part in the voting or voted against the decision taken by the board of directors is entitled to appeal such decision to court within 1 month from the moment he/she knew or was supposed to know on the decision taken6. The Company From the date of its establishment the company is liable for its obligations to the full extent of its property. The company is not liable for the obligations of its shareholders. 4. THE SHAREHOLDERS Shareholders rights and duties depend on the terms of issuance of shares. Therefore the Charter of the company and the terms of the resolution to issue those shares must be considered thoroughly by the founders of the J-SC. The Most Fundamental Shareholders Rights The most fundamental shareholders rights which a share confers are: 1. The right to a dividend 2. The right to attend and vote at the meetings of the company

divided amongst them proportionately, unless the Charter provides for otherwise. 4. Statutory rights to notices, information and to seek in court according to the J-SC Law: (i) To receive a copy of the Charter of the J-SC

(ii) To inspect and obtain copies of the minutes of general meetings and resolutions (iii) To inspect and receive copies of the company registers (members, directors and their share holding) (iv) To receive copies of the balance sheet, directors and auditors reports (v) To petition the court for winding up

(vi) To petition the court for finding transactions invalid. A shareholder may appeal with a court a decision of the general meeting of shareholders passed with violation of the J-SC Law, other Russian Federation legal acts or the company's Charter, within 6 months from the date the shareholder knew or was supposed to know about such decision, providing the shareholder did not participate in the general meeting of shareholders or voted against the decision being appealed against and that decision infringes his lawful rights and interests. Defending of the Minority Shareholders Rights The J-SC Law provides for particular protection of minor shareholders whose interests may be infringed by actions of bigger shareholders. Defense of the minority shareholders rights include:

3. On winding up, the right to participate proportionally in any surplus of assets after all creditors are paid off One of the most important rights is that of participation in a winding up. Once the creditors and the expenses of the liquidator are paid, the shareholders are returned their capital investment, and any surplus is

The list of issues in the agenda of the general meeting of shareholders the decision on which are to be taken by qualified majority of votes Cumulative voting

The right of the shareholder to claim for redemption of shares7


In case the director did not act reasonably or in good faith 1% of owners of voting shares of the J-SC are required to appeal such decision. Any shareholder or dicrector may appeal decisions appoving selling of shares comprising more than 30% of shares in an open J-SC under the J-SC Law, Article 71.2.5. 6 Federal Law No.153-FZ On Introduction of Amendments to Article 68 of the Joint-Stock Companies Law, dated 12 November 2004.
5

The right of the shareholder to appeal decisions of the management bodies8


7 8

J-SC Law, Article 75. J-SC Law, Article 49.7.

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The liability of the management bodies of the J-SC for damages caused by their actions9 The requirement of the state registration of issuance of shares and reports on placement of shares The requirements to the procedure on acquisition of 30 or more per cent of voting share10 The requirements to the Register of Shareholders (the J-SC with the number of shareholders more than 50 must shift the right to administer the Register of Shareholders to the registrar11) Special requirements to approval of major and interested transactions12 The observance of the anti-monopoly legislation and the liability for violation of the anti-monopoly legislation13 The right of shareholders of not less than 10% of votes to demand convocation of extraordinary general meeting of shareholders. Refusal of the board of directors to convoke the extraordinary general meeting of shareholders may be appealed with a court The right of holder(s) of not less than 2% of shares to introduce addenda into agenda of annual general meeting of shareholders, to propose candidates to the board of directors and the internal audit commission (the inspector) The right of any shareholder to obtain an extract from the register certifying his/her/its right for the shares owned. General Protection Measures Stipulated by the Civil Code In accordance with Article 11 of the Civil Code, protection of infringed or contested civil rights is executed by the court of general jurisdiction, by the Arbitrazh court or by the tribunal of arbitrators, depending on the jurisdiction. Shareholders, respectively, may file requests on protection of their rights to a court of appropriate jurisdiction. Most common forms of protection of rights are the following legal cases filed to court:

Claim to recognize a right (e.g. the right of a shareholder to get information on the activity of the company, including information on transactions concluded). It may also have the form of a demand of a shareholder or a nominal holder14 of shares addressed to the keeper of the register of shareholders to confirm the right for shares by making an appropriate extract from the register of shareholders Appeal against a refusal to include a shareholder into the register of shareholders Claim to provide a shareholder with information on being included into the list of shareholders entitled to participate in the general shareholders meeting Claim to recognize a disputed interested transaction as null and void and to implement the consequences of its nullity, if the transaction is concluded with the breach of the procedure stipulated by law for conclusion of interested transactions Appeal against decisions of the general meeting or the board of directors of the company

In the event of infringement of the priority right the shareholder whose interests are infringed or the company itself may demand with recourse to court to transfer rights and obligations of the purchaser of corresponding shares to the appropriate person. Protection Means Stipulated by the Securities Market Law In accordance with Article 51.1 of the Securities Market Law, harm inflicted by breach of the Russian Federation legislation on securities by professional participants of the securities market is to be redressed as stipulated by the civil legislation of the Russian Federation. In accordance with Article 8.1 of the Securities Market Law, a person who breaks rules of keeping the shareholders register or rules of drawing up reports (issuer, registrar, custodian or owner of shares) may be sued in order to make him/her/it redress the loss (including loss of profits) incurred due to impossibility to execute rights assigned by shares. Other Protection Means

J-SC Law, Article 71. J-SC Law, Article 80. J-SC Law, Article 44.4. 12 J-SC Law, Chapter 10, 11. 13 Anti-Monopoly Law, Articles 17, 18.
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14

A nominal holder of shares is a person, registered in the Register, who performs functions of the depositary and is not an owner of shares. A nominal holder may only be a professional participant of the securities market.

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The Decree of the President of the Russian Federation No.408 On the Approval of the Multipurpose Program on the Security of Depositors and Shareholders Rights, dated 21 March 1996, states that the main institute of security of shareholders rights is the court. Shareholders Duties The principal shareholders duty is to pay a share as in fact sale and purchase contract is concluded between a shareholder and a company.. Other shareholders duties relate to receipt of dividend in contravention of the rules on available profits, and liability for the company debts, if the shareholder influenced on the activity of the company and therefore the company became bankrupt. Should a shareholder fail to pay up their shares in full before the established deadline: The shareholders shares are placed at the disposal of the company (which is to sell them within 1 year at price not less than the shares par value, otherwise the company shall reduce its charter capital) Forfeit (penalty) is imposed at the shareholder for failure to discharge the liability on payment for shares (if stipulated by the Charter) The shares do not carry a right to vote and are not counted as votes The dividend is not accrued on them. Priority Rights of Shareholders of a Closed J-SC Under the J-SC Law shares in a closed J-SC shall be placed among persons, which are defined in advance. The question is: where such persons shall be defined? There are two possibilities here: The Charter contains the list of such persons The Charter provides that the list of such persons shall be approved by the general shareholders meeting under the proposal of the board of directors In case of lack of such provisions in the Charter the shares shall be placed only among founders of the closed J-SC.

A shareholder of a closed J-SC has the priority right to acquire shares being sold by other shareholders of the company at the price of an offer to the third party. A shareholder of the company who intends to sell his shares to a third party shall notify accordingly the rest of the company's shareholders and the company, indicating the price and other terms for the sale of shares. If the shareholders of the company and/or the company do not use their priority right to acquire all the shares offered for sale within 2 months of such notice, unless a shorter term is stipulated by the company's Charter, the shares may be sold to a third party at the price and on the terms of which the company and the shareholders have been informed. The term for exercising the priority right envisaged by the Charter of the company shall be at least 10 days from the date the notice sent. The term for exercising the priority right is terminated if before the expiration of the term written applications are received from all the shareholders of the company as to exercise or refuse to exercise the priority right15. When shares are sold in breach of the priority right of acquisition any shareholder of the company and/or the company itself, if the Charter of the company envisages the company's priority right to acquire shares, shall be entitled to apply to the court claiming the transfer of the buyer's rights and duties thereto, within 3 months from the date when the shareholder or the company became aware or should have become aware of such breach. 5. CREATION OF THE COMPANY LIMITED BY SHARES Procedure of Setting Up A decision on setting up of the J-SC: Is taken by the constituent assembly (in case a company is set up by the sole founder by him alone) Should reflect results of the voting and contain: (i) Unanimous decisions on (a) setting up the company; (b) approving the companys Charter; (c) approving the monetary valuation of securities, contributed by the founders to pay for the company stock

15

J-SC Law, Article 7.

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(ii)

A decision on electing the company's management bodies, audit commission (auditor) of the J-SC taken by a three-quarter majority of holders of shares to be placed with the founders16.

As stated above, a company can become a member of another company provided its Charter allows it. The J-SC may be founded by one person, or it may consist of one person in case a single shareholder acquires all the company's shares17. The data to this effect shall be contained in the company's Charter, shall be registered and published for general information. A J-SC must not have another commercial company, consisting of a single person, as its only participant. Public subscription for shares of the J-SC is not admitted until the charter capital is paid up in full. When founding a J-SC, all its shares must be distributed among the founders. Note: According to the Law on the Rights of Investors at the Securities Market a decision on closed subscription of shares and securities convertible into shares may only be adopted at the general meeting of shareholders. Agreement of Formation

In case a decision on setting up of a J-SC contains a decision on election of an auditor of the J-SC it shall be taken by three-quarter majority of holders of shares to be placed with the founders as well. The sole founder determines in his decision on setting up the company the size of the charter capital of the company, categories (types) of shares, the order of paying for them and the payment amount. While setting up a company limited by shares, its founders shall meet all the requirements to registration of issue of shares that are stipulated by the legislation on securities and stock market. The subscribers of the Charter of a company shall be deemed to have agreed to become participants of the company, and, on its registration shall be entered as participants in the Unified State Register of Legal Entities. This means that as soon as the company is registered, those who subscribe to the Charter automatically become participants. The ways in which people can become shareholders are the following: Allotment of shares directly by the company followed by registration as shareholder Transfer of shares from an existing shareholder and registration of the new shareholder Transmission of shares - i.e. involuntary transfer on bankruptcy or death of a shareholder and registration as a new shareholder. Who Can Become a Participant of a J-SC Founders of a company may be individuals and/or legal entities who have adopted a decision on creation of the J-SC. The state bodies and local self-government bodies may not act as founders of a company, unless otherwise provided for by federal laws.

Article 9 of the J-SC Law provides that participants of the J-SC sign an agreement of formation of the J-SC. The written agreement of formation of the company determines: The procedure for the participation of the founders into the joint activity at the foundation of the company The amount of the charter capital of the company The categories and types of shares subject to placement among the founders The amount and procedure for paying the shares Rights and duties of the founders in connection with the formation of the J-SC. The agreement of formation of a company is not a constituent document of the company and in general case is in force up to the moment of the state registration of a J-SC.

16

J-SC Law, Article 9.4.

17

J-SC Law, Article 98.6.

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The introduction of amendments to the Charter of a company according to the results of placement of its shares, in particular, amendments relating to an increase in the company's charter capital is effected: Under the decision of the general meeting of shareholders on increasing the charter capital of the company or Under the decision of the company's board of directors, if under the company's Charter the board of directors of the company has the right to take such decisions. When the charter capital of a company is increased by means of placing additional shares, the charter capital is increased by the face value sum of the additionally placed shares, and the quantity of authorized shares of specific category and type is reduced by the number of the additionally placed shares of the same categories and types. The introduction of amendments to the Charter of a company in connection with a diminution of the company's charter capital by means of acquisition of the company's shares for the purpose of redeeming them is effected: under the decision of a general meeting of shareholders on such diminution; and under the report on the results of shares acquisition approved by the board of directors of the company. In such case the charter capital of the company is diminished by the face value of the shares so redeemed. The introduction of provisions to the Charter of a company concerning the exercise of the special right of the Russian Federation, a subject of the Russian Federation or a municipal entity to participate in the management of the company (a "golden share") is effected under the decision of the Government of the Russian Federation, a governmental body of a subject of the Russian Federation or a local government body on the exercise of the special right. The termination of such special right is effected under the decision of these bodies on the elimination of such provisions. The J-SC is subject to the state registration. The Charter of the J-SC and modifications and amendments to it are subject to the state registration as well. The Charter of a J-SC The Charter of a J-SC must include:
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General information (the name of the legal entity, the place of location of a legal entity, the way in which the legal entity's activity is managed) Type of the J-SC Classes of shares issued by the J-SC According to the Securities Market Law the issue of bearer shares is permitted in a definite ratio to the amount of the paid-up charter capital of the issuer.

Nominal value of shares and their quantity The volume of the charter (share) capital Rights of shareholders The membership and competence of the management bodies of the company and the procedure of the decision-making process Questions, which are considered unanimously or by the qualified majority. Amendments to the Charter of a J-SC Amendments to the Charter shall be introduced under the decision of the general shareholders meeting or the board of directors (supervisory board) in case the latter is empowered by the Charter to take such decisions. Grounds for introduction of amendments to the Charter of a J-SC are the following: Increasing or diminution of the charter capital of a J-SC18 Change of the type of preference (preferred) shares, introduction of cumulative preference shares19 Bonds issuance20 Change of the form of the notice to shareholders on holding of the general shareholders meeting21

J-SC Law, Article 12. J-SC Law, Article 32. J-SC Law, Article 33.

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Other cases. Note: In contradistinction to LLC, J-SC do not have to introduce changes concerning shareholders to the Charter or the agreement of formation. J-SC have Registers of shareholders, where the transfer of shares to a new owner (shareholder) is registered. Internal Documents of the J-SC The J-SC Law provides for a long list of internal documents of the J-SC, which regulate the procedure of formation, competence and activity of the management bodies of the J-SC. If otherwise is not provided by the Charter of the J-SC internal documents shall be adopted by the board of directors of the J-SC. Internal documents of the company are often called local legislation of the J-SC. Internal documents of the J-SC: (i) Derive their legal force from law and must not contradict the law (ii) Guarantee the execution of laws and other normative acts (iii) Are taken by correspondent management bodies of the J-SC and need not be approved by any government body (iv) Extend their force to all subjects of law, dealing with the company, both internal and external (v) Are taken into consideration by court and law machinery bodies.

The law envisages that J-SC are obliged to adopt a number of internal documents. These are: Schedule of work of the collective executive body (the executive board, the direction) that is approved by the board of directors. The schedule shall establish dates and the order of convocation and holding of meeting of the executive body, and the decision-making procedure Procedure of work of the internal audit commission (the inspector) of the company. The following documents are not mandatory but may supplement the provisions of the Charter: Internal Documents on the Regulation of the Activity of the Management Bodies of the J-SC: 1. Standing orders on the general meeting of shareholders 2. Standing orders on the board of directors 3. Schedule of work of the collective executive body (e.g. direction) 4. Schedule of work of the general director 5. Code of corporate behavior of the persons, who hold positions in the management bodies of the company. Internal Documents on the Regulation of the Activity of the J-SC: 1. Standing orders on the Register of Shareholders 2. Procedure on the modification of the Charter of the J-SC

There are four variants of adoption of internal documents: 3. Standing orders on the redemption of the shareholders shares Exclusively by the employer 4. Procedure on the issuance of bonds Together with the representative body of the employees 5. Standing orders on the funds and reserves of the company With agreement of the representative body With consideration of the opinion of the representative body 6. Standing orders on the payment of dividends 7. Standing orders on the organisation of the accountancy in the company.

21

J-SC Law, Article 52.

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Internal Documents on the Regulation of the Activity of the Personnel of the J-SC: 1. Standing orders on the personnel 2. Standing orders on the competitive selection of heads of departments of the company 3. Standing orders on the term of probation period when employing to the company 4. Regulations on the internal labour standing order 5. Standing orders on the remuneration system 6. Standing orders on the education and qualification of the personnel 7. Standing orders on social and labour guarantees for the personnel. Internal Documents, Regulating Structural Units of the Company: 1. Standing orders on the procedure of formation and termination of branches and representative offices of the company 2. Articles on the branch/the representative office 3. Standing orders on the internal commercial settlement among the branches and the representative offices of the company Internal Documents, Regulating Holding Structure of the Company: 1. Standing orders on the general principles of the activity of the holding company 2. Schedule of work of the council of the holding 3. Standing orders on the competitive appointment of the directors of the daughter companies. There may be other internal documents of the J-SC, including internal documents regulating the activity of the legal department of the company. 6. REORGANISATION AND LIQUIDATION OF THE COMPANY LIMITED BY SHARES

If upon the expiry of the second and of each of the next fiscal years the cost of the company's net assets proves to be less than its charter capital, the company shall be obliged to declare and to register the reduction of its charter capital. If the cost of the company's assets falls below the minimum size of the charter capital provided by law, the company is subject to liquidation. Grounds for Termination of the J-SC The J-SC may be terminated by the following grounds: General grounds (expiration of the term of formation of a legal entity; achievement of goals of formation of a business entity; multiplication or reduction of the number of participants of a legal entity, that contradicts the Charter of the legal entity or Russian law; the court decision on an invalid registration of a legal entity due to irremovable violations of legal acts; insolvency (bankruptcy); business activity without special permission (license); business activity prohibited by law; multiple and gross violation of law and other normative acts; systematic activity of a public or religious organisation, charity or other fund, not provided by the Charter of such legal entity; other circumstances), provided by law for all types of business entities Non-payment of the charter capital within the first year of creation of the J-SC When the charter capital becomes less than the minimum amount of the charter capital 1 000 multiples of the minimum monthly pay, fixed by the federal law, for open J-SC and 100 multiples of the minimum monthly pay, fixed by the federal law, for closed J-SC The number of shareholders of the closed J-SC becomes more than 50, if the closed J-SC was not reorganized into the open J-SC. Forms of Transformation of the J-SC Forms of transformation of the J-SC are the following: The J-SC may be reorganized into the LLC The J-SC may be transformed into the production cooperative. Note: Transformation of a closed J-SC into an open J-SC is not deemed to be reorganisation of the J-SC, because the form of the company is not

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changed. Therefore the requirements of Article 58.5 of the Civil Code and of Articles 15.5, 20 and 75 of the J-SC Law concerning the transfer act, notification of creditors, right of shareholders to claim the redemption of shares, etc. shall not be observed. The procedure of transformation of the joint-stock company into the LLC is the following: 1. The board of directors (the supervisory board) of the joint-stock company shall submit for decision of the general meeting of shareholders the issue on reorganisation of the company, the procedure and terms of reorganisation, the procedure of changing the shares of the joint-stock company into the stakes of the LLC 2. The general meeting of shareholders shall adopt a decision on reorganisation of the company, the procedure and terms of reorganisation, the procedure of changing the shares into the stakes of the LLC 3. Within 30 days from the date of adoption of the decision on transformation the company shall notify the creditors on reorganisation and shall publish the decision on transformation of the company in the printed mass media 4. Participants of the newly-created business entity shall conclude the agreement of establishing the company 5. The general meeting of participants of a newly-created legal entity shall approve the Charter and elect the management bodies 6. The changes shall be registered in the Unified Stated Register of Legal Entities: the joint-stock company shall be excluded from the Register and the entry of the newly-created LLC shall be put into the Unified Stated Register of Legal Entities Means of Termination of the J-SC Means of termination of the J-SC are the following: Reorganisation of the J-SC Voluntary liquidation of the J-SC under the decision of the general shareholders meeting

Liquidation under the court decision. Reorganisation Note: While reorganisation of a J-SC the shares shall not be placed among persons, which are not shareholders of the reorganized legal entities. Below the procedure of reorganisation of a J-SC is examined in the example of merger. The J-SC Law provides that in case of merger the board of directors shall submit for decision of the general meeting of shareholders the following issues: On reorganisation in the form of merger On approval of the contract of merger On approval of the Charter of the newly-created company On approval of the transfer act. One of the possibilities of procedure of merger of the J-SC is the following: The board of directors of each of the companies submits for decision of the general meeting of shareholders of each of the companies, participating in merger, an issue on reorganisation in the form of merger and on the election of the board of directors of the company, created as a result of merger The general shareholders meeting of each of the companies, being reorganized under the proposal of the board of directors, takes a decision on reorganisation in the form of merger and on election of the board of directors by the majority of shareholders owning voting shares and participating in the general shareholders meeting. The quantity of the board of directors elected by each of the mergering companies shall be proportional to the quantity of the total amount of shares, subject to placement among shareholders of respective mergering company Within 30 days from the date of the decision on merger, each of the companies being reorganized informs its creditors on reorganisation and publishes the information on reorganisation

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An authorized body of each of the companies being reorganized elaborates a draft contract of merger The companies, participating in merger, sign a contract of merger, where the terms and procedure of merger are indicated, as well as the procedure of conversion of the shares of each of the companies into the shares of a newly-created company In the cases provided for by the Competition Law the contract of merger shall be agreed with the Anti-Monopoly Service The board of directors of each of the companies submits for decision of the general meeting of shareholders of each of the companies the issue on approval of the contract of merger, on approval of the Charter of a newly-created company and on approval of the transfer act The general meeting of shareholders of each of the companies being reorganized approves the contract of merger, the Charter of the newly-created company and the transfer act The joint general meeting of shareholders of the companies being reorganized creates management bodies of the newly-created company The state registration of the newly-created company is effected. The contract on merger, take-over or the decision on division, separation or transformation of the J-SC may provide a special order on execution of certain types of transactions or the prohibition to execute certain types of transactions from the moment of the decision on reorganisation and until the reorganisation is completed. Breach of such special conditions may result in recognizing in court the transaction as null and void under the suit of the reorganized company or the shareholder of the reorganized company. Special procedure for division or separation of a company simultaneously with merger or take-over is provided by amendments to the J-SC Law, No.146-FZ, dated 27 July 2006. Within 30 days from the date of the decision whereby a company is reorganized (or where a company is reorganized in the form of a merger or affiliation, within 30 days after the date of such decision made by the letter of the companies involved in the merger or affiliation), the company shall notify in writing its creditors and publish an announcement about such decision in a printed publication intended to
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make public the information on the state registration of legal entities. In this case creditors of the company within 30 days from the date when the notices were forwarded to them or within 30 days from the date when the announcement of the decision was published, shall demand in writing the termination or discharge of relevant obligations of the company before the due date and the reimbursement of losses. The state registration of companies formed as a result of a reorganisation and the entries on the termination of the activities of reorganized companies shall be effected if the proof about the creditors having been notified, is presented. Liquidation The liquidation of a J-SC results in its termination, with no transfer of rights and obligations by succession to other persons. Note: P.11 of the Letter of the High Arbitrazh Court of the Russian Federation No.S-13/OP-357 On the Arbitrazh Practice on Resolving Disputes concerning Formation, Reorganisation and Liquidation of Legal Entities, dated 10 December 1992, states that tax evasion shall not be a ground for liquidation of a legal entity. If the company is liquidated voluntarily, then the board of directors of the company subject to liquidation shall submit for decision at the general meeting of shareholders the issue, concerning the liquidation of the company and the appointment of the liquidation commission. The general meeting of shareholders of a company subject to liquidation shall voluntarily adopt a resolution concerning liquidation of the company and the appointment of the liquidation commission. As of the appointment of the liquidation commission, the liquidation commission acquires all powers relating to the management of the activity of the company. The liquidation commission acts in court on behalf of the company subject to liquidation. When a shareholder of a company subject to liquidation is a state or a municipal formation, a representative of the respective Property Agency or of the respective local self-government body must be included to the board of the liquidation commission. Failure to fulfill such requirement may result in the refusal, by the body exercising the state registration, to appoint the liquidation commission.

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The liquidation commission shall publish a notice on liquidation of the company, the procedure and the deadline for the creditor claims in Rossiyskaya Gazeta. The duration of such deadline for creditor claims may not be less than 2 months from the date of publication of the notice on liquidation of the company. Should the monetary funds existing in the company under liquidation prove to be insufficient to meet the creditor claims, the liquidation commission shall sell other companys property by public sale according to the procedure established for the execution of court decisions. Priority in Distribution of the Property of the Liquidated J-SC The property of the company subject to liquidation remaining after the completion of the settlement of accounts with creditors shall be distributed by the liquidation commission among the shareholders in the following order: First turn - payments relating to shares which are subject to redemption at the demand of shareholders Second turn - payments for the dividends credited but not paid with regard to preference shares and to the liquidation value of the preference shares determined by the Charter of the company Third turn - the distribution of assets of the company under liquidation among holders of ordinary shares and all types of preference shares. The distribution of property of each priority is done after full distribution of property of the preceding priority. Payment by the company of the liquidation value of preference shares determined by the Charter of the company is done after payment in full of the liquidation value of preference shares of the preceding priority determined by the Charter of the company. If the value of property existing in the company is insufficient for payment of the dividends credited but not paid, and the liquidation value determined by the Charter of the company as well for all holders of the preference stock of one type, then the property shall be distributed among the holders of such type of preference stock in proportion to the quantity of shares owned by them. The liquidation of a company is considered to be completed, and the company is considered to have terminated its existence from the date of
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entry of the correspondent information to the Unified State Register of Legal Entities. 7. SHARE CAPITAL The Charter Capital of the J-SC The formation of the charter capital is exercised by means of contributions made by shareholders to the charter capital. The shareholders make their contributions to the charter capital while paying up the shares. The capital of a J-SC is divided into ordinary shares of identical par value. The company may also issue one or more types of preference shares, provided that the total nominal value of the issued preference shares does not exceed 25% of the company's charter capital22. Preference shareholders have the right to a fixed dividend, expressed as a percentage of the nominal value of the shares. A J-SC is not permitted to issue bearer shares; all issued shares must be registered (in name)23. The face value of all shares is the same. Shares acquired or bought back by the company are deemed to be placed until their redemption. While the company is being created, all shares must be distributed among the founders. The companys Charter may impose limits on the quantity and total par value of shares held or maximum number of votes cast by one shareholder. The quantities, par values, and capital rights for each share type must be specified in the company's Charter. Every ordinary shareholder is entitled to participate in the distribution of the company's net profits in the form of dividends and in the distribution of the company's assets in the event of liquidation. Ordinary shareholders and voting preference shareholders participate in the company's management by voting at the shareholders' meeting. The Charter may provide for additional authorized ordinary or preference shares which may be issued in the future. Note, however, that while a companys Charter may provide for authorized shares, the stated charter capital amount in the company's Charter should reflect the nominal value of all issued shares. Therefore,
J-SC Law, Article 25.2. J-SC Law, Article 25.2.

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each new issuance of previously authorized shares requires the adoption and registration of an amendment to the company's Charter to increase the stated charter capital. According to the Civil Code, changes in a J-SC's Charter, including changes in the amount of its charter capital, fall within the exclusive competence of the shareholders' meeting. However, Articles 12.2, 28, and 48.2 of the J-SC Law, provide that a decision to increase the charter capital through the placement of authorized but unissued shares, and the adoption of a corresponding Charter amendments may be made by the board of directors if the board of directors is authorized to do so by the companys Charter or the shareholders' meeting. Characteristics and Rights of Shares The relationship of a shareholder with a company, and indeed with other shareholders, is quasi-contractual, with the mutual rights and obligations arising from ownership of the share determined by the Charter and other constitutional references. The terms of the relationship may be dependent on the type of share held. For example, preference shares usually carry a right to a fixed dividend while the dividend payable to ordinary shareholders is usually established with reference to realizable profits. As a contribution to risk capital, the share is a claim against the company. This claim is deferred until the company ceases to exist, except where statute law or the constitution of the company provide for redemption of the share. Even when the company ceases to exist, the right to claim against the share is subordinated to the claims of others, including the liquidator and creditors. Types of Shares Types of shares are the following: Ordinary and preference shares Documentary and non-documentary shares Registered and bearer shares24 Ordinary and authorized shares. Nominal Value Shares may not be issued at a price that is below the nominal value of shares of the same class. Shares may have minimum nominal values so long as their combined nominal values are equal or exceed the
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minimum charter capital amount required by law. While shares issued at the time of a company's formation are acquired at their nominal value, subsequent share issuances must be made at the shares' market value, which may not be lower than their nominal value25. All shares of one class must have the same nominal value. Voting Rights One share of the ordinary stock generally confers one vote at a shareholders' meeting, except in cases of the cumulative voting provided for by law (for example, for the election of members of the board of directors)26. Each ordinary share must grant identical rights to its owner27. Note: It is not possible to have ordinary shares without voting rights or which only entitle the owner to a vote but not to a share in the company's profits upon liquidation. Holders of preference shares may also have voting rights as discussed below. Preference Shares Preference shares confer no voting rights, unless the companys Charter provides for otherwise but they provide a fixed dividend and take preference over the ordinary stock in the distribution of profits and in liquidation28. All holders of preference shares do, however, have the absolute right to vote at shareholders' meetings under the following circumstances: (a) On issues related to the Charter amendments which would limit their rights as preference shareholders (b) On issues concerning reorganisation or liquidation of the company (c) At shareholders' meetings following a meeting at which a decision was adopted not to pay dividends owed to such preference shareholders. Such right to vote extends until the dividends to which the shareholders are entitled are paid, and

25 26 27

At present the provision of the J-SC Law concerning issuance of bearer shares is not applied.

J-SC Law, Article 36.1. J-SC Law, Article 59. J-SC Law, Article 31.1. 28 J-SC Law, Article 32.

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(d) The company Charter may provide for the right to vote for holders of convertible preference shares, provided that the number of votes granted to such shares does not exceed the number of votes of the ordinary shares into which such shares would be converted29. Preference shares may not be converted into bonds or securities of other types, except for shares. A company may issue different classes of preference shares. Each class of preference shares must grant its holders identical rights. If the Charter provides for preference shares of two or more types, it should also determine the schedule according to which dividends on these types of shares and their liquidation cost is paid30. Rights and obligations of a class of preference shares must be set out fully in the Charter. In particular, with respect to each class the Charter should specify: (a) The nominal value (b) Whether the shares are voting or non-voting (c) Entitlement to dividends (d) Cumulative or non-cumulative nature of dividends (e) Entitlement to participate in the distribution of the company's assets in the event of liquidation. The amount of dividend and liquidation value must either be a fixed monetary amount or a percentage of par value of preference shares, and (f) The possibility and conditions for converting preference shares into ordinary shares or preference shares of other types. Should a dividend and/or a liquidation cost be not fixed, holders of preference shares have a right to receive it on a par with holders of ordinary shares. Types of preference shares are the following: Type A shares. Such shares are issued while privatization of the enterprise. They are placed among employees of the enterprise, being under privatization, and entitle their owners to the fixed 10% dividend from the net profit, which is divided proportionately to the quantity of the shares issued.
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Type B shares. Such shares are issued while privatization of the enterprise. The holder of such shares is the property fund. Type B shares may be transferred without consent of other shareholders. The dividend on the shares shall be 5% from the net profit, which is divided proportionately to the quantity of the shares issued. A golden share. A golden share means the exercise of the special right of the Russian Federation, a subject of the Russian Federation or a municipal entity to participate in the management of the company under privatization. The exercise of the special right shall be effected under the decision of the Government of the Russian Federation, a governmental body of a subject of the Russian Federation or a local government body on the exercise of the special right. For example, a golden share can veto decisions in a general meeting relating to: o Amendments to the charter of the company, or the approval of a new wording for the charter o The reorganisation or liquidation of the company o A change in the charter capital of the company o The approval of major transactions o Transactions involving interested parties.

Convertible shares. Such shares entitle their owner to exchange the shares within a stipulated term for the shares of another type of the same issuer. Revocable shares. Revocable shares may be paid within a stipulated term. Exchangeable shares. Such shares may be exchanged for the bonds of the same issuer within the stipulated term under the decision of the issuer. Shares, participating in the profit. The shares do not only entitle their owner to the fixed dividend, but as well entitle to the interest in the profit of the company.

J-SC Law, Article 32.5. J-SC Law, Article 32.2.

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Cumulative shares. The Charter of a J-SC may provide that a dividend which has not been disbursed or has been partially disbursed on preference shares of a specific type, with the rate thereof being set by the Charter, shall be accumulated and disbursed within a term determined by the Charter. Priority shares. Priority shares enjoy priority in payment of the dividend before other preference shares. Other types. In case of changes to the volume of powers under preference shares, new emission and state registration of emission of securities shall take place. Ordinary Shares Each share of the ordinary stock shall grant equal rights to its holder. Holders of the ordinary stock of a J-SC may participate in general meetings of shareholders with the right to vote on all matters within its authority. Holders of the ordinary stock of a J-SC have the right to receive dividends, and in case of liquidation of the company, the right to receive some of its assets. Obligatory characteristics of ordinary shares are that their holder has a right to: Vote at the general meeting of shareholders Receive dividend (the amount is not fixed beforehand) Receive part of property of the company left after its liquidation (the cost is not fixed beforehand). The conversion of ordinary shares into preference shares, bonds and other securities is prohibited. Fractional Shares If in the course of exercising: The priority right to acquire shares sold by a shareholder of a closed J-SC The priority right to acquire additional shares The priority right when consolidation of shares is effected,
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the shareholder cannot acquire an integral number of shares, fractions of shares shall be created (fractional shares). Fractional shares are circulated on a par with full shares. Additional Shares The Charter of a company may determine the quantity, face value, categories (types) of shares the company is entitled to place in addition to the placed shares (the authorized shares) and the rights conferred by these shares. If the Charter of a company lacks such provisions the company is not entitled to place additional shares. Note: The additional share issuance by a J-SC, effected before payment in full of the charter capital, shall be found invalid31. Note: The additional share issuance by a J-SC beyond the quantity of the authorized shares, shall be found invalid32. Payment of Shares At least 50 per cent of the company's shares distributed at the formation thereof shall be paid up within 3 months from the date of the state registration of the company33. The rest within 1 year from the registration date, unless a shorter period is provided for by the Charter of the J-SC. The Charter of the J-SC may provide for financial sanctions for nonpayment or overdue payment of the shares. Payment for shares distributed among the founders of the company at the moment of creation of the J-SC and additional shares placed by subscription may be effected in money, securities, other assets or property rights or other rights that can be appraised in terms of money. The form of payment for shares of a company at the time of creation of the company shall be set out in the agreement of formation of the J-SC. The form of payment for additional shares of a J-SC shall be set out by
31

P.5 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001. P.7 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001. 33 J-SC Law, Article 34.1
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the decision under which the shares are placed. Payment for other issue securities may be effected only in money. Types of payment for shares of a J-SC are the following: In money (in roubles, in foreign currency)34 By property (by things) By securities By property rights (e.g. a right to lease) By other rights, having monetary evaluation (e.g. a right to use the object of the intellectual property). In case of payment of shares by money, the contract between the company and the purchaser shall be regulated by the provisions of the Civil Code, concerning the sale and purchase contract. In case of payment of shares in non-monetary form, the contract between the company and the purchaser shall be regulated by the provisions of the Civil Code, concerning the barter contract. When payment for shares is effected in non-monetary form an independent appraiser shall be invited to assess the market value of such assets. The valuation of assets in terms of money by the founders of the company and the board of directors of the company must not exceed the valuation by an independent appraiser. Article 16 of the Securities Market Law stipulates that registered shares must be only in non-documentary form, unless otherwise provided for by federal laws. Increase in the Charter Capital of a J-SC A shareholders' meeting may adopt decisions to increase or decrease the charter capital at any time, provided that it does not fall below the legal minimal requirement and that any creditors are notified of a decision to reduce the charter capital within 30 days from the date of adoption of such decision. The J-SC may not increase the charter capital to cover incurred losses35.
34 Under the Letter of the Financial Markets Service No.07-OB-03/5724 On Payment of Shares by the Foreign Currency, dated 22 March 2007, non-residents of the Russian Federation may pay shares of Russian companies limited by shares by foreign currency, while Russian residents are prohibited to pay shares of Russian companies limited by shares by foreign currency. 35 Civil Code, Article 100.2.

Modes of Increasing the Charter Capital The Charter capital of a J-SC may be increased: By increasing the face value of shares By placing additional shares. The decision to increase the charter capital shall be adopted by: General meeting of shareholders by simple majority Board of directors (if entitled to decide on the issue by the Charter) by unanimous vote. Increasing the Face Value of Shares The decision to increase the Charter capital of a company by means of increasing the face value of shares shall be adopted by the general meeting of shareholders. An increase in the charter capital of a company by means of increasing the face value of shares shall be effected only for account of the assets of the company. Placing Additional Shares Additional shares may be placed by the company only within the maximum limit of authorized shares stipulated by the Charter of the company. In case of increase of the charter capital of a J-SC by placing additional shares, the charter capital shall be increased by the nominal value of placed additional shares and the quantity of authorized shares shall be decreased by the quantity of placed additional shares. A decision to issue additional shares up to the limit of authorized shares would not require an amendment to the Charter but as the issuance would result in an increase in the charter capital, the Charter will need to be amended to reflect the increase. The shareholders' meeting or the board of directors in case it is provided by the Charter of the J-SC is a competent body which takes a decision to increase the authorized shares of the company or the nominal value of existing shares.

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The company Charter may provide for specific procedures for, or limitations on increase in the charter capital and the priority rights. The decision to increase the Charter capital of a company by means of placing additional shares is taken by the general meeting of shareholders simultaneously with the introduction of amendments to the Charter of the company in the form of: An authorized shares clause

An increase in the charter capital of a company by means of issuing additional shares, if there is a block of shares representing over 25 per cent of votes in the general meeting of shareholders which has been formed in accordance with the legal acts of the Russian Federation on privatization of the state or municipal property, may take place only in case the size of the state's or municipal entity's stake is retained in the event of such increase, if otherwise not provided by the Privatization Law. Diminution of the Charter Capital of a J-SC

An amendment to the authorized shares clause. The decision to increase the Charter capital of a company by means of placing additional shares shall determine: A decision of the general shareholders meeting on diminution of the charter capital shall adopted only under the recommendation of the board of directors. A J-SC whose charter capital is not paid in full within the required timelimits must adopt a decision on reducing the charter capital to reflect the actual paid-in capital. If the net asset value of a company is less than its charter capital at the end of any financial year (except the first fiscal year of the company's operation), the company must adopt a decision to diminish its charter capital to an amount not exceeding such net asset value. If a reduction in the charter capital causes the charter capital to fall below the legal minimum requirement, the company must either be reorganized into a legal form which requires less charter capital or go into liquidation. A company has the right to diminish its charter capital: The amount whereby a company's charter capital is being increased for account of the company's assets shall not exceed the difference between the company's net asset value and the sum of the charter capital and the reserve fund of the company. Where the charter capital of a company is being increased for account of its assets by means of placing additional shares these shares shall be distributed among all shareholders. Every shareholder shall receive shares of the same category (type) as the shares he/she/it owns, in proportion to the number of shares he/she/it owns. An increase in the charter capital of a company for account of its assets by means of placing additional shares resulting in the formation of fractional shares is prohibited. By reducing the face value of shares By diminishing the number of shares, in particular, by means of acquiring fractions of shares, if such possibility is directly provided for by the Charter of the J-SC. The decision of the general shareholders meeting on diminishing the charter capital by diminishing the face value of shares may provide payments to shareholders by money funds and/or transfer to them of emission securities, belonging to the J-SC, placed by another legal entity. The decision of the general shareholders meeting on diminishing the charter capital by diminishing the face value of shares shall be taken by three-quarter majority of shareholders holders of voting shares present at the meeting only under the proposal of the board of directors.

The number of the additionally placed ordinary shares and preference shares of each type within the maximum limit on the number of authorized shares of such category (type) The placement method The price of placement of additional shares by means of subscription or the procedure for determining it, in particular, the price of placement or the procedure for determining the price of placement of additional shares to shareholders who have the priority right to acquire placed shares The form of payment for additional shares placed by subscription and also other placement terms.

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The decision of the general shareholders meeting on diminishing the charter capital by diminishing the face value of shares providing transfer to shareholders of emission securities shall provide that every shareholder shall receive shares of the same category (type) in proportion to the sum by which the face value of shares he/she/it owns is diminished. Documents for the state registration of amendments and modifications herewith shall be submitted to the Tax Service not earlier than 90 days after the date of the decision on diminishing of the charter capital. The list of persons entitled to receive money funds and/or emission securities shall be compiled as of the date of the state registration of amendments and modifications to the Charter of the J-SC. The company is not entitled to diminish its charter capital if in the result of this the charter capital amount falls below the minimum level of the charter capital. The company shall not be entitled to adopt a decision on diminution of the charter capital herewith:

In other cases, provided by the J-SC Law. The J-SC shall not pay money funds and/or alienate emission securities in case of diminution of the charter capital by diminishing the face value of shares:

If, as of the date of payment, the company meets the criteria of insolvency (bankruptcy) or if the insolvency is going to occur as a result of the company's payments If as of the date of payment the value of net assets of the company is less than: (i) (ii) (iii) The charter capital of the J-SC The reserve fund The excess over the par value of the liquidation value determined by the Charter of the issued preference stock, or If it becomes less than the amount thereof as a result of payments.

(iv) Until the entire charter capital of the company is paid up in full Until the redemption of all the stock which is subject to redemption in accordance with the J-SC Law If, as of the date of such decision, the company meets the criteria of insolvency (bankruptcy) or if the insolvency is going to occur as a result of the company's payments If as of the date of such a decision the value of net assets of the company is less than: (i) (ii) (iii) The charter capital of the J-SC The reserve fund The excess over the par value of the liquidation value determined by the Charter of the issued preference stock, or If it becomes less than the amount thereof as a result of the adoption of such decision. Until payment in full of the dividend declared, but not paid, including unpaid dividend on cumulative preference shares

When the above circumstances terminate the J-SC shall have to pay to the shareholders money funds and/or transfer emission securities to them. Within 30 days from the date of a decision to diminish the charter capital, the J-SC must: Notify in writing its creditors that the charter capital is diminished Inform creditors on a new charter capital amount Publish in press an announcement concerning the decision to diminish the charter capital. Creditors of the company are entitled to demand in writing the termination or discharge of relevant obligations of the company before due date and reimbursement of losses, within 30 days from the date when the notice was forwarded to them or within 30 days from the date of publication of the announcement of the decision on termination of the company.

(iv)

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Notwithstanding these mandatory requirements, the company may decide to reduce its capital for several reasons. Firstly, it may decide that the financial accounts of the company do not give an accurate portrayal of the companys worth. Secondly, the company may choose, with his or her agreement, to extinguish the interest of a shareholder. Thirdly, it may be decided that the best interests of the company may be served by higher gearing. The Terms and Conditions of the Charter Capital Payments Terms of Payment Shares may not be transferred to the third parties before they have been paid in full. A share does not deliver the right to vote until it is fully paid for, except for those shares acquired by the founders at the time of the company's initial capitalization. If a share is not paid in full within one year since the company has received its registration certificate, the share shall pass to the ownership of the company. If such shares are not paid in full within one year from the date of their transfer to the company, the shareholders' meeting must adopt a decision to cancel the shares and decrease the company's charter capital. Ways of Payment Payments in cash for shares are usually made in roubles but may be made in foreign currency. Foreign investors may pay for shares in roubles purchased through an authorized Russian bank or with rouble revenues legally received from business activities in Russia. For valuation and accounting purposes, all contributions are stated in roubles. Valuation of any contribution made in foreign currency may be set at an exchange rate agreed upon by the parties. Capital Contributions-in-Kind Shareholders in a J-SC may subscribe and pay for their shares in cash or in-kind, i.e. with property or property rights, such as equipment, knowhow, etc.36. The Charter of the company may restrict permissible types of contributions. Non-monetary contributions must be paid in full at the time shares are purchased, unless the Charter or the decision to issue such shares provides for otherwise.
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The valuation of contributions-in-kind made at the time the company is established is based upon the agreement of the founders. The valuation of subsequent contributions-in-kind is based upon decisions of the board of directors. However, an independent valuation must be made for contributions-in-kind made in exchange for shares37. At present, goods classified as "fixed production assets" which are imported by foreign investors as contributions to the charter capital of Russian entities are exempt from Russian customs duties and value added tax, so long as such goods are imported within the required time periods established by the company and by the applicable law38. Note, that the balance sheet values of assets are not often restated to account for inflation. Therefore, the balance sheet value of assets acquired by Russian entities prior to or during inflationary periods would be low in comparison to such assets' present market value. Such undervaluation could have significant tax and accounting consequences for the entities and potential investors. Note: The share capital of a company limited by shares is regarded as permanent capital, in that once placed, the consideration paid for the shares cannot generally be refunded to the investor. The capital forms ongoing owners equity in the business, though a shareholder may of course sell the shares to another person for their market value at the time of the transaction. Reserve Fund A fund of a J-SC is a part of the property of the J-SC, which may be spent only on the purposes, directly stipulated by law or by the Charter of the J-SC. A J-SC is required to maintain a reserve fund in an amount specified in the Charter of the company, but which may not be less than 5% of its charter capital. The fund is formed by obligatory annual deductions in amounts of not less than 5% of the company's net annual profits. Such contributions are made until the total reserve fund amount is attained. The reserve fund may only be used to cover the company's losses, to cancel bonds and to repurchase the stock, and only if there are no other means to meet such obligations. Net Assets of a J-SC
J-SC Law, Article 34.3. Decision of the Government of the Russian Federation No.883 On Exemptions from Import Customs Duty and the Value Added Tax for Commodities Imported by Foreign Investors as a Contribution to the Charter (Shared) Capital of Enterprises with Foreign Investments, dated 23 July 1996.

36

J-SC Law, Article 34.2. P.6 of the Law on Entering into Force of the Land Code prohibits contribution of a right of permanent (in perpetuity) use of a land plot into the authorized (aggregate) capitals of commercial legal entities.

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Net assets of a J-SC are the amount of difference between the company's assets and obligations. The company's assets include its monetary means and non-monetary property owned, while obligations include all obligations of the company limited by the shares to the third parties. If at the end of the second and each subsequent financial year in accordance with the annual bookkeeping balance sheet proposed for approval to the shareholders of the company or in accordance with the results of an auditor verification, the value of net assets of the company proves to be less than its charter capital, then the company shall diminish its charter capital to the amount not exceeding the value of its net assets. If, at the end of the second and each subsequent financial year, in accordance with the annual bookkeeping balance sheet proposed for approval to the shareholders of the company or in accordance with the results of an auditor's verification, the value of net assets of the company proves to be less than the amount of the minimum charter capital provided by law, then the company is obliged to adopt a decision on its liquidation. If the company within a reasonable term fails to make a decision to diminish its charter capital or to liquidate, the creditors shall be entitled to claim the termination or discharge before due date of the company's obligations and the reimbursement of losses. In these cases the local department of the Tax Service or other local government bodies which have under the federal law a right to present a claim on termination or discharge before the due date of the company's obligations shall be entitled to file a petition with court claiming liquidation of the company. The board of directors (the supervisory board) may propose to the general shareholders meeting to decrease the charter capital, in case on the results of the audit examination the value of net assets of the company proves to be less than the charter capital. Such decision shall be take unanimously by the board. The charter capital shall be diminished within a reasonable term form the date of the decision on diminution of the charter capital, taken by three-quarter majority of holders of voting shares, taken part at the meeting. In case the charter capital is not diminished within a reasonable term, authorized state bodies may claim in court that the charter capital of the J-SC be diminished. The procedure for estimating net assets of J-SC is approved by the Order of the MinFin No.10n and the Federal Securities Commission No.03-6/pz, dated 29 January 2003.

Issuance of a Company Stock While placement of shares the mediators shall be professional participants of the securities market: brokers, dealers, the stock exchange, etc. Note: A sale and purchase contract of shares, executed prior to the due registration of the decision on issuance of shares, shall be found invalid39. Note: The absence of a license to perform operations with securities is the ground to find a sale and purchase contract invalid under the court decision40. Note: A customs body under Article 408.13 of the Customs Code is entitled within its competence to file a suit to the Arbitrazh court on finding invalid a contract of sale and purchase of shares41. Note: The transaction on purchase of shares which does not correspond to the law shall be void according to P.13 of the Information Letter of the Presidium of the High Arbitrazh Court of the Russian Federation No.33, dated 21 April 1998. The purchase of shares in a company is a contractual arrangement between the company and the shareholder. The contract terms are the Charter and the conditions of issue. Failure to comply with the terms of payment results in the discharge of the contract by breach on the part of the shareholder. If a shareholder fails to pay for shares that he has agreed to purchase within the required time limit, the shareholder forfeits the right to the shares. The shares must then be sold by the company to an alternative purchaser within

39

P.1 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001. P.2 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001. 41 P.14 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001.
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one year. Until such a sale is completed, the company cannot pay a dividend on the shares and the shares do not carry voting rights. The sale price must not be lower than the nominal value of the shares. If the company does sell the shares at a discount, it is required to reduce its share capital. The Charter of the company may stipulate that the shareholder who has defaulted on the purchase is liable to pay a forfeit for failure to complete the transaction. Methods for Placement of Shares There are four ways of placing shares and securities convertible into shares: (i) Placement of shares while setting up a J-SC (ii) By subscription (open and closed) (iii) By conversion or (iv) By placing additional shares between shareholders in case the charter capital is increased for account of the property of the company. Note: Shares, placed by subscription, shall be paid by monetary means, while additional shares are placed for account of the property of a J-SC. Placement of shares by subscription depends on the type of the company. Any company may place shares and securities converted into shares by closed subscription, i.e. by proposing these shares to a restricted number of persons. Closed subscription may be restricted by the company's Charter or the law of the Russian Federation. The open subscription method occurs when a company offers its shares to the general public or a broad section of the public. This method of placement is only available to open companies limited by shares. The closed subscription method is available to all companies. This occurs when the shares are made available to a limited number of persons or entities. Note:
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In case of placement of shares by open subscription the issuer shall publish the information on open subscription of shares in the printed mass media published in not less than 10 thousand copies. The decision of the general meeting of shareholders, taken by the majority of three-quarter of votes, unless a greater majority is stipulated by the Charter, is required to place the following shares: All shares placed by closed subscription Ordinary shares which constitute more than 25% of ordinary shares already placed Registered securities convertible into ordinary shares, which constitute more than 25% of ordinary shares already placed. In other cases the decision of the general meeting of shareholders may be taken by simple majority of votes, and decision-making upon placement of additional shares may be referred to the authority of the board of directors. Another form of closed placement is where the company decides to issue additional shares to existing shareholders. The placement price must not be less than the nominal value of the shares and should be estimated by the directors with reference to their market value. Shares issued to those with pre-emption rights may be discounted by up to 10% of the price offered to those who do not have pre-emption rights. Share Issuance Procedure Share issuance procedure in the J-SC Law is the following: The authorized management body of the J-SC (the general meeting of shareholders, the board of directors, founders) takes a decision on placement of shares42 The issuer (the J-SC) approves a Decision on Issuance of Securities The issuer approves a Prospectus of Emission The issue and the Prospectus of Emission shall be registered in the Financial Monitoring Service, if it is provided by law
While foundation of the J-SC the constituent assembly takes a decision on placement of shares among shareholders and stipulates the terms and the procedure of such placement.

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The shares are placed (sale, placement among founders) The issuer approves the Report on Placement Results The Report on Placement Results is registered in the Financial Monitoring Service In case of necessity the corresponding amendments are introduced to the Charter of the J-SC. Note: The presentation of documents for state registration of the share issuance, placed at the creation of the J-SC, with the breach of the stipulated term shall not be a ground for considering a share issuance invalid43. Placement Price Payment for shares distributed between the company's founders in the process of creation of a company shall not be less than the par value of shares. Placement price for additional shares and registered securities convertible into shares is estimated by the board of directors, proceeding from the shares' market value, which must not be less than the par value of shares. Placement price for shares and registered securities convertible into shares distributed between the company's shareholders which enjoy the priority right to such shares (securities) may be less than the placement price of those shares distributed between other persons - but not more than for 10%. Remuneration of an agent participating in the placement of shares (registered securities convertible into shares) may not exceed 10% of the placement price. Procedure for Converting a Company's Issue Securities into Shares The procedure for converting a company's issue securities into shares shall be established:
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By the decision on issuance in respect to conversion of bonds and other issue securities, except shares. Such decision shall be taken by the board of director unanimously and the votes of the former members of the board of directors shall not be counted. Payment for a company's issue securities placed by subscription shall be effected at a price stipulated by the board of directors. In such case payment for issue securities convertible into shares placed by subscription shall be effected at the price equal to the par value or more than the par value of the shares into which these securities are converted. Note: The sale and purchase contract of shares concluded before the state registration of issuance of shares will be held invalid according to the Information Letter of the Presidium of the High Arbitrazh Court of the Russian Federation No.33, dated 21 April 1998. Note: The Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001, states that the issuance of the stock may be found invalid only by the court decision. Priority Right to Acquisition of Shares Priority right to acquisition of additional shares and securities convertible into shares is granted to shareholders to the amount pro rata the number of shares of that particular category (type) in their possession. The priority right extends to:

Any shares (securities) placed by open subscription Shares (securities) placed by closed subscription, in case the shareholder voted against or did not vote on that issue. That requirement does not extend to placement of shares (securities) only with shareholders, if they are able to purchase placed securities pro rata of shares in their possession. If the decision on placement of shares and registered securities convertible into shares provides for payment by non-monetary means, a shareholder enjoying the priority right may also pay by money. The term for execution of the priority right shall not be less than 45 days from the moment of

By the Charter of the company in respect of conversion of preference shares

P.2 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001.

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sending notification or publication of notification on the priority right. In case the price shall be determined after the termination of the priority right than the term for execution of the priority right shall not be less than 20 days from the moment of sending notification or publication of notification on the priority right. At least another 5 days from the moment of disclosure of the information on the price shall be given for payment of the securities. Before the termination of the term for execution of the priority right the company shall not place additional shares and emission securities, convertible into shares, among persons not having priority right of acquisition of such securities. Note: The Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001, states that placing of additional shares in the quantity exceeding the quantity of authorized shares, stipulated in the Charter of the J-SC, or in the absence in the Charter of the provision concerning additional shares, shall be found void by court decision. A J-SC Shareholders Entitled to the Priority Right for Shares Application Name and address of a shareholder Number of securities acquired Payment document

As shares are personality, they are not restricted in regard to their transfer in the same way as real property. How to Transfer Shares Transferee a person, buying shares Transferor - a person, selling shares The transfer of a J-SCs shares is regulated by the Securities Market Law and the J-SC Law. In certain cases, privatization and anti-monopoly legislation will also apply. Shares in an open J-SC are generally transferable without restriction to an unlimited number of persons unless legislation expressly provides for otherwise44. It follows that the Charter of an open J-SC may not therefore impose restrictions on the transfer of a company's shares unless legislation specifically authorizes such restrictions. Shareholders in a closed J-SC have the priority right to acquire shares of existing shareholders at the same price and terms proposed to another person45. Permissible Restrictions on Transfer Shareholders of an open or closed J-SC may agree in a separate agreement that the shares may not be transferred during a certain period of time. This agreement is only binding on the parties to it, may not be relied upon by the third parties and is not binding on the company (unless the company becomes a party to such agreement). Restrictions for sale and redemption of shares (participatory shares) include the following: Shareholders (participants) have the priority right to shares alienated by other shareholders with respect to all shares (securities) placed by open subscription In certain cases a J-SC is prohibited from acquisition of its shares from the shareholders In certain cases shareholders have the right to demand from the company to redeem their shares Anti-monopoly restrictions. Transfer Procedure
44 45

Notice to the persons, enjoying the priority right on: Number of shares (securities) placed Placement price Order of determining how many shares every shareholder is entitled to Term of exercising the priority right

Minimum 45 days (20 days in case the price shall be determined after the termination of the priority right)

Transfers of Shares One of the advantages of corporate status is that the ownership can fluctuate but the company remains the same separate legal entity.

J-SC Law, Article 7.2. J-SC Law, Article 7.3.

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The procedure for transfer of shares and the title to shares of an open or closed J-SC is as follows: The transferee (a person, buying shares) must submit to the company's share registrar: (a) A signed request of the transferor for the transfer of shares (b) The sale and purchase agreement or similar document and (c) An endorsed certificate for the shares, if such shares have been issued in certificated form, along with other documents, such as a power of attorney to carry out the transfer. The registrar will then effect the share transfer and make the corresponding amendments in the company's shareholder register. Under Russian law, the information contained in the shareholders register is conclusive evidence of the right of ownership to the share, in the absence of fraud46. The responsibility to inform the registrar in a timely manner of share transfers generally lies with the purchaser of the shares. Note: A registrar (a J-SC) is not entitled to exclude under its own initiative from the register the information on the owner of shares47. Note: In case of undue holding of the register of shareholders by the registrar, the business entity is liable before shareholders itself48. If shares are sold under a preliminary contract rights and obligations incidental to ownership of the shares pass at once to the purchaser under the contract unless otherwise agreed. Thereafter any dividend received by the vendor, pending registration of his transfer, must be paid over to the purchaser (unless the shares are sold ex-div). The purchaser must indemnify the vendor against any calls made on the shares before the registration of the transfer. The vendor is, however, free to vote at the meetings as he wishes until the purchase price has been paid to him and until the registration of the transfer.
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Note: Article 57.2 of the J-SC Law stipulates, that in case the purchaser has bought shares after the list of persons, empowered to take part in the general shareholders meeting is settled, the seller shall issue a power of attorney to the purchaser. However, a power of attorney is a unilateral transaction and may be at any time revoked by the person, who has granted it. Furthermore, under the Civil Code the parties may not agree to abolish the right of the person who has granted the power of attorney to revoke it and the right of the person to whom the power of attorney was granted to reject it49. Therefore, there is a conflict between the provision of the J-SC Law and the provision of the Civil Code. Open J-SC with more than five hundred shareholders is required to retain an independent share registrar to maintain their shareholders' registry. Open J-SC with less than five hundred shareholders and closed J-SC may maintain their own shareholder records and registry themselves. In addition, under certain circumstances filings must be made and government approvals obtained in connection with share transfers. The following requirements are established by various provisions of the Russian legislation: A. Provision of Public Information Article 6.4 of the J-SC Law and the Order of the Financial Markets Service No.06-117/pz-n, dated 10 October 2006, require that any company acquiring over 5% of voting shares of another company must make this information public in accordance with the procedures, determined by the Financial Markets Service. The Securities Market Law sets forth a substantial amount of information which must be periodically publicly disclosed by any issuer which: (i) Has publicly placed an issue of securities or (ii) Has been required to issue a prospectus in connection with any one of its securities offerings50. B. Anti-Monopoly Service Approval

Securities Market Law, Article 28. P.11 of the Information Letter of the High Arbitrazh Court of the Russian Federation No.63, dated 23 April 2001. 48 The Ruling of the Presidium of the High Arbitrazh Court of the RF No.11570/07, dated 28 January 2008.

49 50

Civil Code, Article 188.2. Securities Market Law, Article 23, 30.

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The acquisition by one person or a group of related persons of control over 20% or more of shares of any issuer, if the combined book value of the assets of the buyer and the seller together exceed 30 million multiples of the minimum monthly pay, requires prior approval of the Anti-Monopoly Ministry. If such transaction takes place between two companies which have a combined asset book-value exceeding 2 million multiples of the minimum monthly pay, the Anti-Monopoly Ministry must be notified of such acquisition within 45 days from its occurrence51. C. Financial Markets Service Notification Article 29 of the Securities Market Law provides that the Financial Markets Service must be notified of all acquisitions by foreigners of shares registered in Russia. Similarly, if a Russian investor purchases shares of any foreign issuer registered in Russia, the parties to such transaction must notify the Financial Markets Service. Acquisition of the Placed Shares by the J-SC A J-SC may wish to progressively acquire its shares if, for example, the purpose for which the company was established is no longer valid. The J-SC Law provides that a company may repurchase its own outstanding shares. An acquisition of the placed shares by the company is allowed: When reducing the charter capital by acquisition and redemption of a part of shares (if stipulated by the Charter). The company may not take such a decision if the aggregate par value of the remaining shares would be less than the minimum amount of the charter capital By the decision of the general meeting of shareholders or the board of directors if the latter is entitled so by the Charter. The company may not take such decision if the par value of the shares in circulation would become less than 90% of the charter capital. The shares acquired by the company may either be cancelled immediately upon repurchase, or may be held by the company for up to one year thereafter. If the company decides to cancel the repurchased shares, the shareholders' meeting will have to adopt a decision to reduce the charter capital. Alternatively, to pay the charter capital under the decision of the board of directors the shares may be sold not below their market value. In case the market value of shares is below the face value, the shares shall be sold at the price not below their face
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value. Alternatively, the shareholders may decide to decrease the nominal value of the remaining issued shares, which will require amendments to the company's Charter to be passed by a 75% vote of shareholders. Prior to this they: Do not vote Are not counted in count of votes Dividends are not accrued on them. In case the decision to diminish the charter capital is not taken within a reasonable term, the Tax Service may file a suit to court on liquidation of the J-SC. Order of Acquisition A seller of shares has a duty (implied by the contract of sale) to deliver a transfer of shares (in exchange for the price) which will give the purchaser a good title to the shares. If he fails to deliver such transfer he is liable to pay damages. But the vendor does not (unless the contract expressly so provides) guarantee that the company will register the transfer. If the company rejects the transfer the vendor as registered shareholder holds the shares in trust for the purchaser as his nominee. A decision on acquisition of shares shall determine: The categories (types) of shares The number of shares of each type The purchasing price (stipulated by the Charter or the market value) The form and the period of payment The period during which acquisition is allowed (at least 30 days). Unless otherwise provided for by the Charter of the company, the paying up of the stock in the event of its acquisition shall be carried out in cash. The shareholders must be notified of the decision at least 30 days prior to the acquisition of the shares by the J-SC.

Anti-Monopoly Law, Article 18.

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Every holder of the stock of the specified categories (or types), the decision concerning the acquisition of which has been adopted, has the right to sell such stock, and the company shall be obliged to purchase it. The procedure for the alienation of the shares belonging to the Russian Federation in case the Russian Federation accrues the right to demand the redemption of such shares by a J-SC is regulated by the Decision of the Government of the Russian Federation No.126, dated 27 February 2003. Acquisition is Not Allowed An acquisition of the placed shares by the company is not allowed: Until the charter capital has been paid up in full If, as of the date of such decision, the company meets the criteria of insolvency (bankruptcy) or if the insolvency is going to occur as a result of acquisition of shares by the company If as of the date of acquisition (or due to acquisition) the value of net assets is less than the sum of the charter capital, the reserve fund and the excess of the liquidation value over the par value: (i) Of placed preference shares (for acquisition of ordinary shares) (ii) Of placed preference shares whose holders have the priority regarding payment of liquidation value over the holders of the shares subject to acquisition (for acquisition of preference shares of a certain type) Until all shares, demands on redemption of which have been submitted due to announcement of the company's reorganisation, conclusion of the major transaction or amending the Charter, have been redeemed. Pledge of Securities Article 6 of the Law on Pledge, which supplements Articles 334-358 of the Civil Code to the extent its provisions are not inconsistent with the Civil Code, permits the pledge of securities, including shares. The Civil Code requires that a pledge be made pursuant to a written contract which should spell out all of the rights and obligations of the parties. To pledge a property right evidenced by a certificated bearer security, the security must be transferred to the pledgeholder or deposited with a notary unless otherwise provided by the pledge agreement. For the pledge of any security, the pledge should be registered in the pledger's pledge

register and in the issuer's register of shareholders and a stamp affixed on the share certificate (if any) to the effect that the share has been pledged. According to Articles 348-350 of the Civil Code, enforcement of a pledge of shares is undertaken either through a court and public auction or as otherwise agreed by the parties. Consolidation of Shares of a J-SC Under the decision of the general meeting of shareholders, a company has a right to consolidate the issued stock, as a result of which two or more shares of the company shall be converted into one new share of the same category (or type). In such case, respective changes concerning the par value and the quantity of the company's placed and authorized shares of the relevant category (type) shall be made in the Charter of the company. Fragmentation of Shares of a J-SC Under the decision of the general meeting of shareholders, a company has a right to carry out the splitting of the issued stock of the company, as a result of which one share of the company is converted into two or more shares of the same category (or type). In such case, respective changes regarding to the par value and the quantity of the company's placed and authorized shares of a relevant category (type) shall be made in the Charter of the company. Redemption of Shares of a J-SC Holders of the voting stock shall have the right to demand the redemption by the J-SC of all or part of the stock owned by them in the following cases, if they voted against the adoption of the respective decision or did not take part in the voting: Reorganisation of the company or The conclusion of the major transaction, the decision concerning the approval of which is adopted by the general meeting of shareholders Amendments and modifications to the Charter of the company or approval of a new version of the Charter of the company which limit their rights. Note:

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According to the Law on Rights of Investors at the Securities Market if the decision on a closed subscription of the stocks and securities convertible into stocks is adopted, at the demand of the shareholders voting against the decision or failing to take part in the vote, the J-SC shall be obliged to redeem the stocks from them. The directors are compelled to include in the notice of the general meeting of shareholders a communication to the effect that this right of shareholders may be invoked should they choose to vote against the relevant matters or abstain from voting. These particularities must refer to the price struck by the directors for redemption of shares (which may not be less than the market value). It must also inform the shareholders what they have to do to demand redemption of their shares. Therefore, a company is obliged to give notice to shareholders on the following: On the existence of their right to demand the redemption of shares by the J-SC On the price of the redemption of shares On the procedure for the redemption of shares. This protects minority shareholders against harm from the decisions which they do not support. The redemption of shares shall be effected by the company at the price determined by the board of directors of the company but not below the market value, which is to be assessed by an independent appraiser. The independent appraiser does not take into consideration the variation of the price resulting from the actions of the company which caused such right to claim the valuation and redemption of shares. The written demand of a shareholder concerning the redemption of the stock owned by him shall be sent to the company, specifying the place of residence (or location) of the shareholder and the quantity of stock, which redemption he demands. The signature of the shareholder natural person or his/her representative shall be certified by notary. The shareholder shall not execute any transactions with the shares from the moment the J-SC has received his/her/it claim on redemption of the shares. The registrar makes an inscription herewith to the Register.

The shareholders may choose to redeem some or all of their shares. The demands of shareholders concerning the redemption of the shareholders shares by the company must be submitted to the company within 45 days from the date of adoption of the respective decision by the general meeting of shareholders. In this case the company is obliged to redeem the stock from the shareholders, who have submitted the demands concerning the purchase, within 30 days from the date of termination of the term for submission of demands by shareholders. The board of directors not later than 50 days from the date of the respective decision of the general meeting shall approve the report on the results of submission of demands on redemption of their shares by shareholders. The registrar makes an inscription on transfer of title basing on the report of the board of directors and the documents, certifying payment of shares to shareholders. The redemption of shares by the company shall be carried out at the price specified in the notification concerning holding of the general meeting of shareholders, the agenda of which shall include matters, voting with regard to which may give rise to the right to demand redemption of the stock by the company. The total amount of assets directed by the company towards the redemption of the stock may not exceed 10 per cent of the value of net assets of the company on the date of the adoption of the decision which gives rise to the right of shareholders to demand purchase by the company of the stock owned by them. If the total quantity of shares subject to redemption exceeds the quantity of the stock which may be redeemed by the company taking into account 10 per cent limitations, then the stock shall be purchased from the shareholders in proportion to the submitted demands. The shares redeemed by the company shall be sold not below their market value within one year thereafter; otherwise the shareholders' meeting will have to adopt a decision to reduce the charter capital by cancellation of such shares. Prior to this the shares: Do not vote Are not counted in count of votes Dividends are not accrued on them. Redeemed shares:

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In case of reorganisation - are cancelled In other cases - are placed at the companies disposal and are to be sold within a years term, otherwise the general meeting of shareholders shall take a decision to reduce the charter capital b cancellation of such shares. Employee Stock Options and Compensatory Benefits A J-SC may offer to its employees the right to purchase a specific number of shares on preferential terms (i.e. share options). A company may also set aside a certain percentage of after-tax profits for distribution among its employees in a form which may include pecuniary compensation or shares of stock. The Charter of the company may provide for a fund created from net profits, the assets of which shall be used exclusively to repurchase shares for subsequent placement among employees of the J-SC52.

Article 18 of the Securities Market Law requires that the securities issues, including bonds, must be registered with the Financial Markets Service or its authorized agencies prior to distribution. Article 20 of the Securities Market Law and the Financial Markets Service (Federal Securities Commission) Regulations describe the procedure for such registration. The decision to issue bonds or similar securities may be made by the board of directors unless otherwise provided for in the companys Charter. Bonds shall be issued only after payment in full of the charter capital of the J-SC. Article 33 of the J-SC Law provides that a company may issue bonds: (i) Secured by a pledge of specific property of the company (ii) Secured by assets provided to the company by the third parties for the purpose of the issue (iii) Unsecured bonds. The limitations on bond issuance of J-SC are the following: A company may only issue bonds after its charter capital has been paid up in full The nominal value of all issued bonds cannot exceed the amount of the company's charter capital or the amount of security provided to the company by the third parties for the purpose of bond issues Unsecured bonds may not be issued prior to the company's third year of existence and only under the condition that two annual balance sheets of the company were properly approved by the time of flotation of bonds. Bonds may be issued in registered or bearer form. Terms and Conditions of Issuance

8. LOAN CAPITAL A J-SC can raise capital either by issuing equity in the form of preference or ordinary shares or by issuing bonds as debt capital. In case of issuing bonds a company undertakes to pay interest on the par value of the bonds and to redeem the bonds upon their maturity. Share issuance is generally a much riskier position than bond issuance, but equity offers the greater potential to run. A J-SC may issue bonds and other debt securities permitted by Russian law in accordance with its Charter. The issuance, registration and circulation of bonds by a J-SC are regulated by the Securities Market Law and by Articles 33 and 36-41 of the J-SC Law. Bonds of J-SC are placed under the procedure stipulated in the Decision of the Federal Securities Commission No.03-30/ps, dated 18 June 2003, the Order of the Financial Markets Service No.06-117/pz-n, dated 10 October 2006. Note: In contrast to a shareholder a bondholder is a creditor of a legal entity53. Holders of debt securities take priority over shareholders in the distribution of profits and proceeds in liquidation.
J-SC Law, Article 35.2. A creditor has a contractual relationship with the company, with the rights and obligations of the two parties defined not by the Charter but by the specific terms of the credit. As a debtor, the company enters into a series of binding covenants with the creditor, the most important of which is to repay the capital and make payments of interest according to the terms of the contract. There may
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be additional covenants, usually designed to reinforce the position of the creditor on default by the company. As payment of interest and repayment of capital is contractual, these obligations are mandatory, irrespective of the profitability of the company. Generally, creditors have no rights of participation in the decision taking of the company. However, their rights to demand full repayment are triggered by events determined by law, such as reorganisation. In the event of insolvency, they are also constrained until the business of the external manager is concluded.

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The form, periods, and other conditions for payment of bonds must be determined in the decision on the issuance of bonds. A company may issue bonds with a commutation payment or bonds with a payment period by series within specified periods. The payment of bonds may be carried out in cash or with other property, in accordance with the decision on the issuance of bonds. Bonds and other securities shall be placed under the decision of the board of directors, unless otherwise stipulated in the Charter. The decision of the board of directors or other authorized body to issue bonds must include, among other information set forth in Article 17 of the Securities Market Law and Article 33.3 of the J-SC Law: (i) A description of the amount and type of bonds to be issued (ii) Terms of redemption, including the form of payment and maturity dates (iii) Convertibility provisions, etc. Redemption of bonds shall be effected by money or other property. Redemption terms by lots of lump sum. Convertibility into Shares Bonds and other securities may be convertible into shares (within the number of authorized shares of the relevant type). Article 37 of the J-SC Law requires that the decision to issue such bonds must specify the procedure for their conversion. A company may not issue convertible bonds and other securities convertible into shares of that company, if the quantity of authorized shares of categories and types into which such bonds could be converted is less than the quantity of shares of the categories and types into which such bonds are convertible. A company and its bondholders may agree in advance to a conversion scheme to take place after a capital increase is properly adopted and registered. Essential Features of Share and Loan Capital of a Joint-Stock Company The Nature of the Legal Relationship between the Issuer of Ordinary Shares, Preference Shares and Company Bonds and the Purchaser

Ordinary and preference shares represent partial ownership of the business. They represent a claim on the company for risk capital invested to fund the enterprise. The nature of the relationship between the shareholder and the company is quasi-contractual. Shares of different classes are issued by the company under the terms of the Charter, which sets out the rights and obligations of the parties to the transaction (e.g., the Charter states the type, nominal value and number of shares to be issued by the company). Of particular importance to the investor is the right to a dividend if declared and to certain constitutional rights in relation to decision taking, though these differ for ordinary and preference shareholders. The relationship between the shareholder and the company is a permanent one in that the redemption of shares can only be effected in a manner that is consistent with the provisions of the Charter or the Joint-Stock Companies Law. Federal law also lays down powerful rights in favour of the shareholder. Company bonds are loan capital and the relationship between the investor and the company is therefore a contractual one of debtor to creditor. The terms of issue of the bond set down the rights and obligations of the parties. Of most importance to the investor are the rights to annual interest and to redemption of capital. Unlike a share in a company, a bond is not permanent capital. The Rights of the Owner of Ordinary Shares, Preference Shares and Company Bonds to Participate in Shareholders Meetings The ordinary shareholder has significant rights of participation in the affairs of the company limited by shares. As a partial owner of the business, the shareholder has the right to notice of general meetings, to attend these meetings and to participate in decision taking. The general meeting of shareholders is of huge importance in relation to decision taking. There are many matters that fall within the exclusive competence of the general meeting and it is for the shareholders alone to decide these. The shareholders elect the board and executive body and have complete control over the constitution of the company. Federal law establishes a number of thresholds through which shareholders have an increasing amount of influence according to the percentage of shares held in the company.

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Preference shareholders generally have less influence over the companys affairs. They cannot vote on routine matters. However, they can exercise a right to vote if the company is to be reorganized or liquidated, or where decisions are to be taken that will materially affect their interests. For example, they can vote if their fixed dividend is not paid or underpaid (including unpaid cumulative dividends), and also on matters that will change or restrict their rights. Holders of corporate bonds do not have any voting rights in the company as their assets represent loan capital. They do however have the right to be informed of major issues such as a proposed reorganisation or liquidation of the company. Whether Ordinary Shares, Preference Shares and Company Bonds Are Capable of Realizing Cash in the Short-Term if the Companys Cash Requirements Increase Unexpectedly Shares in open companies limited by shares and company bonds are transferable and marketable, but the ability to realize cash in the short-term is dependent on the perceived attractiveness of the investment to buyers and sellers. The most suitable type of investment for the company described in the scenario is therefore dependent on market conditions. Shares in closed companies limited by shares are also transferable and marketable, but there is less immediate prospect of finding an investor in the short-term should cash be required. Unless the terms of the Charter so provide, the investor cannot demand that the company redeems the shares, as redemption is only provided for in specific instances dictated by the Joint-Stock Companies Law. It is unlikely that such events will coincide with the investors requirement for liquid funds. Company bonds are transferable should buyers be willing to invest and in practice can sometimes be more marketable than shares. The investor can purchase bonds with maturities that match known future cash requirements, and the debtor is contractually obliged to return the capital to the investor on the maturity date. Unexpected demands for cash may be met immediately by liquidating holdings of bonds, depending on market conditions. For all of these investments, there is no guarantee that sale in the parallel market will realize sufficient cash for the investors requirements, as their capital value will fluctuate with the underlying performance of the company. As registered transferable securities, both shares and bonds may be used as security for an obligation, though the underlying risk makes them unattractive

as collateral for some lenders. There is however a prospect that the securities can be used as collateral to raise cash if required urgently. The Risks in Relation to the Regular Returns on Ordinary Shares, Preference Shares and Company Bonds Ordinary shareholders are legally entitled to a dividend if declared. The dividend is dependent on the recommendation of the directors, which in turn will depend on the profits generated by the company and the need to retain profit for reinvestment. The dividend is therefore not guaranteed and will vary from year to year. If the company does not make a profit then it cannot pay a dividend at all, which means that the investor has no return on risk capital. Preference shareholders usually receive a fixed dividend and are therefore more certain of the return on the securities held. However, this is not guaranteed, as the dividend may be underpaid if the company makes little profit or not paid at all if the company is unprofitable. Unless otherwise specified in the Charter, the right to a fixed dividend carries over to the next year if it is unpaid or underpaid in the current year. Such shares are said to be cumulative. Furthermore, accumulated rights and current rights rank ahead of the dividends payable to ordinary shareholders. Preference shares therefore carry less risk in relation to regular income as long as the company is profitable. The downside of this is that when the company is highly profitable the preference shareholders dividends do not increase. Company bond holders are entitled to interest and not dividends. The interest is a contractual obligation expressed in the terms of issue of the bond. The return is usually fixed, though floating rate bonds may be issued. The interest must be paid by the company. Failure to do so triggers crystallization rights as set out in the terms of issue of the bond. In the event of default the bond holder can litigate for the debt. Therefore, the bond holder has the same certainty of income but is not dependent on the profitability of the company. There is still an element of risk in that the company may encounter periods of illiquidity that compromise its ability to make interest payments. The Risks in Relation to Ordinary Shares, Preference Shares and Company Bonds in the Event of the Liquidation of the Issuer It is a general principle of law that creditors should be paid ahead of shareholders in the event of liquidation. Therefore, the claims of owners of company bonds rank before the claims of any shareholders in the company. This applies not only to the capital due to the bond holders but also any unpaid interest. Generally, secured creditors rank before unsecured creditors.

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All creditors have a right to statutory notices when the company is under liquidation. They also have a right to participate actively in the process. From the above it follows that the shareholders take a greater risk than bond holders. In the event of liquidation it is the shareholders who are most likely to lose some or all of their investment. When a company is liquidated the preference shareholders often rank before the ordinary shareholders in relation to return of capital. The Charter of the company may make specific provisions in this respect. Therefore, advantages and disadvantages of issuing bonds may be summarized to the following. The advantages are the following: Bond holders are not owners of business, they shall not participate in the management of the company, therefore the control of ownership of a J-SC doesnt change with bond issuance The interest paid on bonds is tax deductible, while the interest on shares is paid out of net profit If the bonds are revocable a J-SC has flexibility in interest payments, issuing new bonds a a cheaper interest rate. The disadvantages for bond issuance are the following:

No, unless dividens are declared No, unless revocable preference shares Yes, it may be an increase in dividend payout Lowest, after settlements with all creditors

Right to an income from investment Right to a return of capital Right to participate in extra profit Position in liquidation

Yes Yes No, unless bond issuance terms provide for this Bondholders are creditors of a J-SC, therefore they rank above equity

9. CAPITAL MAINTENANCE AND DIVIDEND LAW Articles 42 and 43 of the J-SC Law regulate the declaration and payment of dividends. Dividends are distributed to holders of ordinary shares in proportion to the number of shares held. Dividends may be paid quarterly, semi-annually or annually, and may be paid in cash or if the Charter so provides for, in other property. There is no requirement to pay dividends, except with respect to preference shares in accordance with the terms of such shares as set forth in the company's Charter. Note: Even when the company bears losses it has to pay interest on debt securities The more debt capital is raised the more is the risk of default Restrictive terms concerning net assets of the company often are introduced to the provisions on bond issuance. Therefore, even when a J-SC pays interest it may still be in default of loan conditions. Rights Holders Yes of Equity Provision Rights of Bond Holders The company is obliged to pay and the shareholders are entitled to claim the declared dividends. In case the dividends were not declared by the J-SC an ordinary shareholder or a preference shareholder, the volume of dividends on whose shares is not provided by the Charter of the J-SC, do not have any grounds to claim payment of the dividends by the company. The decision on payment of dividends is a right and not an obligation of the J-SC. An intermediate dividend is declared by the board of directors and is of a fixed size. The final dividend is declared by the annual shareholders' meeting, based on a recommendation by the board of directors. The directors recommendation cannot be set aside by the subsequent general meeting, though dissatisfied shareholders can act collectively to express their disapproval in other ways. The annual dividend may not be greater than that recommended by the board of directors or than the intermediate dividend, but may be decreased by the shareholders' meeting. Under the Federal Law No.17-FZ, dated 6 April 2004, amending Article 42 of the J-SC Law dividends on ordinary shares may be paid only out of net profits. Preference share dividends may be paid from funds specially designated for this purpose.

Yes

Right to attend general No, unless a J-SC is in meeting default of loan terms, when right to attend the general meeting may be granted Right to vote at general No, unless a J-SC is in meeting default of loan terms, when right to attend the general meeting may be granted
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The company shall not be entitled to adopt a decision (to announce) on disbursement of dividends on shares: Until the entire charter capital of the company is paid up in full Until the redemption of all the stock which is subject to redemption in accordance with the J-SC Law If, as of the date of such decision, the company meets the criteria of insolvency (bankruptcy) or if the insolvency is going to occur as a result of the company's disbursing dividends If as of the date of such a decision the value of net assets of the company is less than: (i) (ii) (iii) The charter capital of the J-SC The reserve fund The excess over the par value of the liquidation value determined by the Charter of the issued preference stock, or If it becomes less than the amount thereof as a result of the adoption of such decision.

Out of net profits of the company (under preference shares the dividend may be paid out of company's special funds) By money and in cases stipulated by the Charter - by other property Within the period set out by the Charter or by the decision of the general meeting of shareholders (in case such period is not fixed - within 60 days from the date of the decision on payment of the dividend54) Withholding Taxes on Dividends The withholding rate is 9% for Russian residents (both individuals and business entities) from participation in Russian business entities under Articles 224.4 and 284.3 of the Tax Code. A 15% rate is paid by Russian residents from the participation in foreign business entities and by foreign residents from the participation in Russian business entities.

(iv)

A company may not declare a dividend on ordinary shares if the dividend to which preference shares are entitled (in the amounts set forth in the Charter) have not been paid. The company may not adopt a decision to disburse dividends on preference shares of a particular type unless a decision has been taken to disburse dividends in full on all types of preference shares that confer priority over those subject to the disbursement. A list of persons entitled to receive annual dividends shall be complied as of the date when the list of persons entitled to participate at the general meeting is drawn up. The compile a list of persons entitled to receive annual dividends the nominal holder of shares shall present information on the persons in whose interests the holder holds the shares. The dividend is paid Under the decision of the general meeting of shareholders (the size of the dividend may not be bigger than the size recommended by the board of directors)

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J-SC Law, Article 42.4.

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QUESTIONS 1. What are constituent documents of LLC? 2. What is the amount of the charter capital of LLC? 3. Who bears responsibility on the obligations of a LLC before the company is created? 4. Enumerate modes of increasing of the charter capital of a LLC. 5. State the main differences between LLC and additional liability companies. 6. Rights of creditors in case of diminution of the charter capital of a LLC. 7. State constituent documents of J-SC. 8. What is the amount of the charter capital of J-SC? 9. Name types of J-SC. 10. Is agreement of formation a constituent document in a J-SC? 11. State main differences between open and closed J-SC. 12. State main differences between LLC and J-SC. 13. What does super-majority mean in J-SC? 14. How rights of minority shareholders are protected in J-SC? 15. When does the right of shareholders to claim the redemption of their shares arise? 16. Give the procedure of payment of the charter capital of J-SC. 17. What is maximum percentage of preference shares in the charter capital of J-SC? 18. May J-SC issue bearer shares? 19. Enumerate modes of increasing of the charter capital of J-SC.

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