In July 2017 Russia enacted new rules strengthening state control over transactions involving foreign investors with respect to Russian companies1.
Government may block any transaction
Under the new rules, the chair of the Governmental Commission on Control over Foreign Investments in the Russian Federation (the Commission) may decide that any transaction by a foreign investor with respect to any Russian company is subject to prior approval by the Commission if the transaction may threaten national defense and state security.
- Previously, prior approval was only required for the acquisition of certain shareholdings or veto rights or control, and only over Russian companies that conduct strategic types of activities (strategic companies) or their assets. The new rules use the words a transaction "with respect" to any Russian company which gives the Government the right to substantially expand the list of transactions which may require prior approval.
- Once the chair of the Commission decides that a transaction requires preliminary approval, the Federal Antimonopoly Service (FAS) shall, within three days from the date of receiving such decision, notify the foreign investor that he must submit an application for preliminary approval of the transaction to FAS in accordance with the requirements set for strategic companies.
- Transactions made without approval of the Commission, if one was required, are void. Such transactions may also be subject to other sanctions envisaged by law (deprivation of voting rights, challenging in court of transactions made by the target company, etc.)
- Investments by offshore companies (i.e. those incorporated in a state or territory included in the list of the Russian Ministry of Finance2) and companies under their control are now subject to the same limitations as investments by foreign states and international organizations: they are prohibited from purchasing 25% or more of assets or control over strategic companies; and when doing minor acquisitions - purchasing more than 25% of shares of a usual strategic company, or 5% of shares of the strategic company being a subsoil user, or veto rights, they must obtain the preliminary approval of the Commission.
- Amendments provide stricter liability for failing to notify FAS about the acquisition of 5% or more of shares of a strategic company (even when the foreign investor previously obtained the preliminary approval of the Commission and the transaction was completed in accordance with such approval). Under new rules, a foreign investor may not only be fined but may also be deprived of the right to vote at a general shareholders' meeting.
Please be aware that in accordance with the FAS' clarifications published earlier, the notification requirement shall also apply if a foreign investor acquires the right to indirectlydispose of 5% or more of shares of a strategic company.
Participation in strategic companies in Crimea and Sevastopol
- Foreign investors owning 5% or more of shares of strategic companies registered in the Crimea or the City of Sevastopol shall notify FAS of this by 28 October 2017.
Breach of this rule may entail deprivation of the foreign investor's voting rights at a general shareholders' meeting of a strategic company by a court decision based on a claim by FAS.
1 See Federal Law No. 155-FZ dated 01.07.2017 "On introducing amendments to Article 5 of the Federal Law "On Privatization of State and Municipal Property " and to the Federal Law "On the Procedures for Foreign Investments in Companies of Strategic Significance for National Defense and Security of the State" (effective as of 1 July 2017) and Federal Law No. 165-FZ dated 18.07.2017 "On introducing amendments to Article 6 of the Federal Law "On Foreign Investments in the Russian Federation" and to the Federal Law "On the Procedures for Foreign Investments in Companies of Strategic Significance for National Defense and Security of the State" (effective as of 30 July 2017).
2 See Ruling of the Ministry of Finance of the Russian Federation No. 108n dated 13.11.2007 "On Approving the List of the States and Territories Providing for Beneficial Tax Treatment and (or) Failing to Disclose or Share Information when Conducting Financial Operations (Offshore Zones)".