Getting In and Getting Out:

Structuring Your Joint Venture and Obtaining Dollar Payments from Sakhalin

 

Outline of remarks by Jonathan Russin, Russin & Vecchi L.L.C. (See contacts at end of report)

 

March 10, 2002

 

This report is published as a courtesy to U.S. business, and is not to be construed as BISNIS sponsorship or endorsement of any companies or content herein.

 

This outline attempts to illustrate the general legal structure of a typical  arrangement to provide contract services to the operators of the Sakhalin I and II projects.  In order to provide a general overview, the outline necessarily simplifies and in some cases omits dealing with many of the requirements and considerations which will affect any specific transaction.  Most Russian tax issues are not mentioned in the outline. . .(due to coverage elsewhere - BISNIS).

 

  1. Establishing a Russian limited liability company.

 

In most cases both Sakhalin Energy Investment Company (SEIC) and Exxon Neftegas Limited (ENL) are requiring contractors to meet the Russian content requirements.

 

The usual corporate form to comply with the 50% Russian ownership requirement is the limited liability company or LLC (sometimes known by its Russian initials as an “OOO”).

 

Russian law spells out the detailed requirements and features of an LLC, including

 

·        The minimum paid in capital requirement is approximately US$350

·        The contribution of in-kind capital is permitted

·        The procedure for formation and registration of the LLC is heavily documented and time consuming (usually requiring from two to three months)

·        The law specifies that a participant in an LLC may withdraw at any time and may require prompt repayment of its capital contribution

·        Russian custom and tradition gives substantial (and often unexpected) authority to the Managing Director

 

  1. The Shareholders Agreement

 

A formal agreement among shareholders embodying their commitment to form the LLC is a required document. 

 

This contract should not be confused with the general concept of a Shareholders Agreement as used in the United States where it often contains

 

 

 

·        Obligations among the shareholders to vote shares identically on certain issues

·        Agreements on the management of the company, e.g. the President will be American, Vice President will be Russian

·        Undertakings to provide additional capital in the event of a cost overrun

 

Russian courts have found such obligations to be unenforceable since they contradict the rights established in company charters which provide that these issues will be decided, not in advance, but by shareholders decision during the life of the company.

 

Most of these issues can be adequately dealt with through the use of other types of agreements which are expressly recognized under the Russian Civil Code.  For example, through the use of a management agreement.

 

  1. The Management Contract

 

One of the classic solutions used in situations where the foreign shareholder is in fact providing a disproportionate part of the financing and expertise of the LLC is to have the shareholders unanimously agree in the charter of the LLC that the management functions of the company will be contracted to a third party.  A Management Contract between the LLC (usually approved by unanimous vote of the shareholders) and the foreign shareholder conveys full operating responsibility on this party.

 

  1. Payments and Cash flow

 

With a 50:50 LLC now established and managed by the financing partner, the LLC enters into a contract with SEIC or ENL under which the LLC will perform certain services in Russia and the U.S. shareholder company will provide services and equipment from the States.  In effect there are two agreements:

 

·        A prime contract between SEIC (or ENL) and the LLC, and

·        A subcontract between the LLC and the U.S. shareholder company

 

For services performed by the LLC in Russia, the LLC will have income and will pay a yearly profit tax of 24%. Profits can then be distributed to the shareholders.

 

·        If the turnover of the LLC is greater than approximately $1.7 million, dividends can only be paid out following verification by a certified auditor.

·        Dividends paid to the foreign shareholder are subject to a 15% withholding tax. Under the U.S. Russia Avoidance of Double Tax Treaty, payments to a U.S. shareholder can be reduced to 5%.  But the reduction is not automatic and requires time consuming documentation.

 

In order to pay its subcontractor, the LLC will send a copy of the sub-contract to its local Russian bank.  Under Russian law commercial banks act as the agent of the Central Bank to assure compliance with currency transfer regulations.  The local bank will open ruble and foreign currency accounts for the LLC (again the procedure requires time consuming documentation), and the bank will issue a “transaction passport” which traces the payment provisions of the subcontract.

 

 

Upon receipt of an invoice from the subcontractor, the LLC will invoice SEIC or ENL. When payment is received, the LLC will request the bank to transfer payment to the subcontractor, and the bank will wire payment to the subcontractor and enter the transfer into the transaction passport.

 

  1. Liquidation

 

In order to wind up the LLC at the end of its usefulness, the shareholders meet to elect a liquidation commission.  The procedure for liquidation of a solvent company is detailed in the law and requires:

 

·        Publication announcing the wind up of the company and advising all creditors to present their claims within a two month period.

·        Preparation of an interim liquidation balance for approval by the shareholders.

·        Sale of all physical assets and payments in cash to creditors.

·        Approval by the tax service and the company registration authority (again, heavily documented and time consuming)

·        Final distribution to the shareholders.

·        Deletion of the company from the company register.

 

For Further Information:

 

Russin & Vecchi, L.L.C. International legal counsellors

32 Kommunistichesky Prospect, Sakhincenter, Suite 610 · Yuzhno-Sakhalinsk, Russia 693000 · tel.: (7-4242) 72 67 86/87 · fax: (7-4242) 72 67 58 · e-mail: russinvecchi@snc.ru· www.russinvecchi.com

 

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)