Inherited Business Assets in Russia: Problems and Risks

by | Jul 28, 2014

Russian legislation does not provide any specific regulations to protect business assets after the death of testator which leads to impossibility to inherit business as a whole complex. There are risks of losing the business till the heirs accept the inheritance. For more details please follow…

What Problems One May Face with Inherited Business Assets in Russia?

In accordance with the Russian laws the inheritance comprises all the assets owned by the testator by the moment of death. If the inherited estate includes the business assets (shares, participatory shares in Russian or foreign legal entity) the heirs and the business itself may face a number of difficulties. Russian laws do not take into account the following points:

  • type of assets;
  • place of their location;
  • number of heirs;
  • heirs age, social, cultural, educational background.

Moreover, there is no definition of “Business” in Russian law so it is impossible to inherit the business as a whole complex but only via transferring to the heirs separate elements of it.

Also Russian laws provide only standard instruments for inheritance issues – inheritance by operation of law and making a will. Trusts and foundations are not recognized in Russia (but of course Russian persons may be settlers and beneficiaries of such institutions established under the foreign law).

The facilities of the instruments allowed by law are limited. For example, it is impossible to inherit the beneficial rights to the assets and the spouse’s share (The property acquired by the spouses during their marriage shall be their joint property according to the Family Code of the Russian Federation. The shares of the spouses are considered as equal, unless the alternative is provided by marriage contract.

The freedom to transfer the business assets under will is limited by the right of the following forced heirs:

  • minor or disabled children of the testator;
  • disabled spouse and parents;
  • disabled dependants of the testator

The forced heirs shall inherit at least half of the share each of them is entitled to in the case of legal succession.

This half of the share cannot be inherited in accordance with the provisions of the will. Also the testator cannot indicate in the will the following items:

  • the conditions for the heirs to be considered as the owners of the inherited business assets (for example attaining of a certain age, receiving the education) or
  • to give the instructions to the heirs on the manner of managing the assets in future.

So there is a high risk that the inherited business assets will be transferred to the heirs not in accordance with the wishes of the testator or be transferred to the persons who actually do not have required professional skills for managing business.

Risks Arising within Six Months Period of the Inherited Business Assets Acceptance

The heirs are entitled to accept the estate (inherited business assets) within six months period from the death of the testator (in some cases this term may be prolonged). And the estate shall be considered to be owned by the heirs from the moment of the testator’s death. But in practice the heirs cannot exercise their right to manage the business assets, i.e.:

  • attend the general meetings of shareholders;
  • receive dividends, etc

until they have received the certificate confirming their rights. The confirming certificate shall be issued by the notary who deals with the inheritance case upon expiration of six months period from the testator’s death (except for the cases when the notary is entitled to issue the certificate earlier).

So the uncertainty in shareholding structure exists during the mentioned six months, i.e. it may be difficult to clear up in advance the following:

  • who are the heirs;
  • whether the heirs have the intention to accept the inherited business assets or not.

Due to it the company which shares are being inherited may have the following difficulties and risks:

  • difficulties in convening and holding the general meeting of the shareholders for taking decisions and solving urgent problems (as there is no information on the persons entitled to participate in such meeting);
  • if nonetheless the general meeting was held there is a high risk of contestation of the taken decisions in future. The contestation may be provided by the new shareholders upon receiving the notary certificate.

This problem is relevant not only to the heirs of the business, but also to the management (members of the BoD, CEO) as there are no persons who can give the necessary instructions and make decisions.

Also it is worth mentioning that the period of uncertainty in shareholding structure may last for a very long time, i.e.:

  • heirs may not be aware that the estate includes business assets;
  • heirs may not inform the company on the fact of acceptance of the estate and receipt of the notary certificate;
  • the company or the shareholders alive do not have the access to the following information:
    – to the inheritance case,
    – to the information whether the will exists or not,
    – to the provisions of the will.

The situation becomes critical if the diseased was not just the shareholder of the company but also the CEO. In this case the company’s activity will be actually paralyzed as there are no corporate bodies entitled to take decisions required in day-to-day dealings of the company.

Managing the Inherited Business Assets on Behalf of the Heirs

If the estate includes shares and other assets to be managed, it is possible to establish the fiduciary management of the inherited business assets for the period until the heirs accept the estate and the notary issues the certificate confirming the rights of the heirs. The conditions of such fiduciary management are:

  • to be established by the notary or by the executor of the will;
  • exists only until the heirs accept the estate and not longer than nine months from the death of the testator if the management was established by the notary.

So it is recommended for the persons having business assets to make a will and indicate in it the authorities of the will executor. It will help to avoid the situations when:

  • the notary is not interested in execution of a fiduciary management agreement and does nothing, or
  • the notary enters into agreement with persons/companies not being professionals (as the activity of such managers is not licensed and there are no formal requirements for them), or
  • the heirs contest the inheritance issues in court for more than six or nine months, and
  • there is no authorized person to manage the assets during proceedings in the case in court.

Anyway in case the inherited business assets require managing after the heirs acceptance of the estate (for example in case the heirs are minors) then the business of the diseased may face a lot of problems as the transactions with the property of minors may need the approval of the tutorship authority.

Whether the Consent of Other Shareholders is Required for Transferring Shares of Inherited Business Assets to the Heirs?

Articles of Association of a limited liability company may provide that the participatory share in such company can be transferred to the heirs of the diseased only with the written consent of other participants of the company.

So in theory the rights of the heirs to receive a participatory share may depend on the will of other participants.

Under the practice of Russian courts the participants can approve or not the heir to be a new member of the shareholder structure only upon expiration of the six months period from the testator’s death. This may prolong the period of uncertainty in the shareholder structure.

The participants may give their consent by issuing one of the following documents depending on the provisions of Articles of Association:

  • Minutes of the general meeting of the participants to be signed by all of them (the share of the diseased shall not be taken into consideration);
  • Consent to be executed as a single document signed by all the participants;
  • Written statements to be signed by each participant.

The heir is considered to be a new member of inherited business assets shareholder structure automatically if the participants remain silent within 30 days from the receipt of request for approving of the heir to be a new member of the shareholder structure.

If the participants of the company deny the heirs right to receive the diseased share in the Authorized capital, the shares shall pass to the company itself. In this case the company is obliged to:

  • divide the shares between the existing participants of the company or,
  • dispose the shares to the third parties within one year if it is not prohibited by the Articles of Association.

In this case the heirs are entitled to receive the compensation for the shares. The shares cost  should be calculated on the basis of the last accounting statements of the company prepared prior testator’s death.