Simple Partnerships Now More Attractive

A partnership under Russian law is, as most investors are now aware, the opposite of its Anglo-American counterpart: It is a juridical person in its own right, which is precisely what the Anglo-American partnership is not. When is a Russian partnership not a juridical person? Under Part Two of the Russian Civil Code the answer is: when it is a simple partnership. If the foreign investor can live with its essential features, the simple partnership offers full "pass through" sought by so many Anglo-American investors for their own domestic tax considerations.

Two or more partners may contribute to the simple partnership not only money and property, but also knowledge, skills and business reputation and connections. These may be valued by agreement of the parties and are presumed to be equal unless they specifically stipulate otherwise. The 1995 Code enhances the attractiveness of the simple partnership by providing that everything contributed to it and produced as a result of the joint activity is in the common participatory share ownership, that is, divisible and separable ownership, unless a particular law or the contract creating the partnership provides otherwise or unless it follows otherwise from the essence of the obligation. This eliminates one chief apprehension of the foreign investor, who previously found himself owning property with his fellow partners by right of common joint ownership.

Keeping the accounts may be entrusted to one of the juridical persons participating; common property is to be used by their common consent. They are at liberty to agree which of them may act in the name of all the partners -- a key feature for natural resource arrangements where the investors often prefer to designate the operator.

Liability is a key consideration. The Code stipulates that if the simple partnership is engaged in an entrepreneurial activity, the partners are liable jointly and severally for all common obligations irrespective of the grounds on which they arise.

An innovation is the so-called silent simple partnership, whereby the partners may agree that the very existence of the partnership is not to be divulged to third persons. Each simple partner is liable with his own property for transactions concluded in his name but in the common interests of the partners.

In all, the scheme is a considerable step forward. The question is whether the general body of Russian foreign investment legislation has fully caught up with the simple partnership, so that the general priorities, privileges and exemptions available extend to this arrangement, too.

Professor William Butler, a partner with White & Case, has been practicing CIS law for 30 years; Maryann Gashi-Butler is head of the Moscow office of White & Case.