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One too many directors?

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Changes in the Russian Civil Code provide Western companies with many benefits

Changes in the Russian Civil Code will impact the way Western companies do business. Here are some things you need to know.

Will the changes be significant?

Yes, they will. From Sept. 1, 2014, the Russian Civil code allows enterprises to have more than one general director. Moreover, there can be even three or more of them. (The upper bound is not established.) This innovation seems insignificant; however, it significantly changes management schemes in Russian subsidiaries of Western companies.

What do new rules mean for my business?

First of all, this change will allow foreign investors to feel more confident. From now on, not everything will depend on the signature of only one person, the general director, who can make mistakes or even act with malicious intent.

It is possible to stipulate in the company’s charter whether only one of many directors or two directors acting simultaneously is enough to approve commercial activity, or even all the directors at the same time (using the well-known “four eyes” principle in Germany). It is even possible to specify that each general director has the right to sign contracts with a specific limit individually (for example, up to 10,000 euros), and in case the transaction amount exceeds this, the signature of a second director is required.

Though the aforementioned management scheme has a lot of advantages, it is necessary to consider that the staff of the Russian enterprise has to become accustomed to a considerably new situation, with two or more managers having equal rights. For the former general director, who single-handedly controlled everything, it is also difficult because now he or she must now work with a management team.

The director will have to coordinate his or her decisions not only with the head office, but also with colleagues in the office. The other serious problem that can occur is that the first general director can consider the appointment of the second GD as a sign of mistrust. The employees can have the same impression, which may negatively affect the atmosphere in the company.

Are there any other important changes?

Yes, and they are also positive. Now the Civil Code allows companies to transfer the general director function to a management company. It may be interesting to foreign investors because the involvement of a management company may lead to a substantial decrease in expense.

This will be especially convenient for those small subsidiaries of Western companies, which are engaged only in sales of goods or rendering technical services, in which all main decisions are made by the head office. In this case, there is no need to employ a general director with high salary, and using a management company in Russia in this case is quite reasonable.

The involvement of an independent management company offers a significant improvement in controlling the business in Russia. The management company can objectively inform the parent company about all current events affecting the subsidiary in English, German or other languages, which is also beneficial.

How soon will the new rules come into force?

Although they came into force on Sept. 1, 2014, to fully implement this scheme, Russia must first introduce some changes into the law on limited liability companies, which can take some time.

RUSSIA CONSULTING, founded in 2003, has nearly 500 employees and gives support to foreign investors in Russia, Ukraine, Kazakhstan, Poland and Germany. There are more than 100 companies among the clients of RUSSIA CONSULTING management company. For more information, contact news@russia-consulting.eu or www.russia-consulting.eu.