The Limits of Limited Liability

What is happening to the Russian company? One of the more recent sources of legislation responsible for redefining the essential nature of a Russian company was Part One of the new Russian Civil Code, which was adopted late last year.

While the introduction of the new Civil Code attests to the continuing commitment of many in the Russian executive and legislative branches to a rationalization of laws and to social and economic growth, it is unfortunate that none of the changes introduced by the Civil Code promote such growth.

What is the purpose of permitting the creation of "limited liability" companies with unlimited investor liability? It would appear the drafters could simply not decide how to balance the conflicting interests of promoting economic growth by providing limited liability for investors, and protecting minority investors and creditors. They apparently chose ambiguity.

This lack of resolve is most regrettable, as the general rule of Russian legislation since 1990 -- and a prevalent element in the legal frameworks of developed market-based legal systems -- has been that the liability of investors is limited to capital contributions.

Various clarifications set forth in the Civil Code reduce protection from liability to the exception, obliterating the principle of the "corporate shield." The exceptions are so broad that, applied literally, a majority stockholder (or a partner in a limited liability vehicle) could be required to pay the debts of its subsidiaries even if the majority stockholder was without fault.

The destruction of the integrity of the corporate vehicle is seen also in the treatment of directors and officers. The question of liability of directors and officers is often of interest to investors for two conflicting reasons.

On one hand, an investor would like to ensure that directors and officers are held to a standard of care and duty that will protect the investor's interests. On the other hand, the investor may have provided an indemnity to, or purchased officer's liability insurance for, directors and officers representing the investor in the management bodies of a Russian company.

In the latter case, the investor may itself bear all or part of the economic cost associated with a judgment against an officer or director representing its interests.

This question is complicated further if insurers refuse to provide liability insurance for directors and officers of Russian companies. If legislation relating to officers' and directors' liability is too vague or too broad, insurers will refuse to offer policies and, not surprisingly, officers and directors representing investors may -- and often should -- refuse to serve in such positions.

The answer must be to find a reasonable balance in any applicable standard of directors' and officers' liability. Unfortunately, the standard contained in Russian legislation has evolved from a relatively lenient standard more suitable for sophisticated joint venturers (Decree 601) to a potentially dangerously broad standard (under the new Civil Code) apparently designed to protect the average Russian consumer/investor.

Once again, it is unclear which standard applies and which policy consideration will prevail. Meanwhile, the essence of the Russian company remains a mystery.

Maryann Gashi-Butler, a partner at White & Case, has been practicing law in Russia since 1990.