In the first half of March 2022, the list of Russian “anti-sanctions” measures changed significantly. Current acts of the Russian state authorities in this area are aimed at solving two key tasks, namely, reducing the outflow of foreign currency from the Russian banking system and limiting the exit of foreign investors from Russian assets.

In early March, Andrey Belousov, First Deputy Prime Minister, proposed three possible strategies of demeanor on the Russian market for foreign businesses, given the current circumstances:

• Continuing operation without any restrictions;
• Transferring business management to Russian partners;
• Closing the company and ceasing activity in Russia.

The third option is regarded as the least desirable, and therefore, investors who choose this option are expected to face adverse consequences in the form of initiation of an “accelerated” bankruptcy procedure (or other special procedure for external administration, the draft law on which is described below).

Given the position outlined by the Russian Government, foreign companies not intending to continue their commercial activities in Russia can take the following actions:

1. “Freeze” commercial activities or transfer business management to Russian partners;
2.  Exit from the Russian market, subject to the restrictions established by the effective laws.

These options should be studied carefully, taking into account the potential adoption of the Federal Law "On external administration for managing a company," the draft of which has been prepared by the Russian Government.

“FREEZING” COMMERCIAL ACTIVITIES

Effective Russian laws do not provide for a special mechanism for recognizing a company as a dormant corporation by analogy with English law. However, the law does not prohibit the company from suspending its commercial activities, which includes:

• Dismissal of employees (except for the CEO) or granting them a vacation;
• Termination or suspension of existing contracts, including license agreements which allow the use of means of individualization or other intellectual property (if any) registered in the name of the company, as well as revision of the terms of such license agreements;
• Suspension of investments in new projects;
• Sale or lease of assets owned by the company (e.g. real estate).

However, this option has a number of disadvantages, in particular, the need to retain a registered office, submit accounts, pay taxes (e.g. if the company retains employees or has real estate on its balance sheet) and pay salaries to employees, including the CEO. In practice, in order to prevent interruptions in the continuous cycle of management, the option of delegating powers of the CEO to a managing company for remuneration is common, e.g. in the event the foreign management is suspended from operations.

Moreover, if the company fails to submit financial statements and perform operations on its banking accounts for 12 months, there is a possibility of such a company being excluded from the Russian Companies Register (EGRUL). This will lead to a ban for its owners and CEO on incorporating new legal entities and becoming their shareholder or CEO for a period of 3 years from the date of exclusion from the EGRUL.

Another negative consequence of actual cessation of operations is potential early termination of the legal protection of trademarks owned by the company in Russia due to failure to use them for 3 consecutive years. However, in this case, the legal protection of a trademark is not automatically terminated, since it requires an interested party to send a relevant application to the right holder, and then to a court.

At the same time, it is important to stress that these actions should not give rise to signs of bankruptcy in the Russian company. In addition, please note that this option, along with the complete cessation of operations, may carry risks, including for foreign investors owning over 25% of shares or stakes in medium and large businesses, in the event the Federal Law “On external administration for managing a company” is adopted.

TRANSFERRING BUSINESS MANAGEMENT TO RUSSIAN PARTNERS

Another option to minimize participation of a foreign investor in management of the company is transferring management to its Russian partner.

This could be done through a trust management agreement, under which one party (the trustee) undertakes to manage the property for the other party (the settlor), provided that the ownership title to such property is not transferred to the trustee[1]. Please note that transferring management to a Russian company does not mean the cessation of shareholding; therefore, this option may be relevant for those investors who want to take a break in deciding whether to exit the Russian market and at the same time to step back from managing Russian assets.

If a share in the charter capital of a limited liability company is handed over for trust management, the trustee will exercise all the powers of the shareholder, including voting at the general meeting of the company’s shareholders. At the same time, the trust management agreement may impose restrictions on certain actions of the trustee, e.g. a ban on disposal over shares, a requirement to obtain approval from the shareholder on the position regarding certain agenda items, etc.

Please note that despite the fact that the Russian Civil Code expressly provides for handing over rights certified by securities for trust management, the issue of whether a trust management agreement is admissible for the purposes of transferring management of a joint stock company to a trustee is less clear.

For joint stock companies, a separate personal account in the name of the trustee must be created in the register of shareholders, which is used for crediting shares transferred to the trustee (such shares are automatically debited from the settlor’s personal account). Instructions No.018-34-3/1202 of the Bank of Russia dated 28.02.2022 suspended, starting February 28, 2022, all operations on write-off of securities of Russian issuers from personal and custody accounts opened for foreign companies and individuals. In this regard, writing off shares transferred to trust management from the account of a foreign shareholder may be technically restricted until the said order of the Russian Central Bank is cancelled or until a separate act regulating trust management transactions is adopted.

EXIT FROM THE RUSSIAN MARKET

Despite significant legislative restrictions introduced on the exit of foreign investors from Russian assets, a number of exit mechanisms still remain.

Sale of shares

Pursuant to Presidential Decree No. 81 "On additional economic measures for ensuring financial stability of the Russian Federation" dated March 1, 2022 ("Decree No.81"), Russian residents are allowed to make transactions that result in transfer of ownership title to securities and real estate from individuals/companies from foreign countries that perform non-friendly acts on the basis of permits from the Government Commission for Supervision over Foreign Investments in the Russian Federation. A similar provision applies to entities controlled by "non-friendly" individuals/companies (for more about the restrictions imposed by Decree No.81 see here).        

This provision prescribes that starting March 1, 2022, Russian residents must obtain a special permit both for acquisition or alienation transactions with securities and real estate, if they involve individuals/companies associated with "non-friendly" states. Therefore, a foreign investor’s ability to exit from a Russian joint stock company by selling its shares is significantly limited. In addition, as we wrote above, all operations on writing off securities of Russian issuers from personal and custody accounts opened for foreign companies and individuals have been suspended.

As to foreign individuals/companies holding shares in limited liability companies, there are no similar restrictions. Decree No.81 does not contain provisions establishing a special procedure for transactions with shares in the charter capital of limited liability companies.

Moreover, according to Letter No.1176/03-16-3 of the Federal Notary Chamber dated March 2, 2022, the procedure prescribed by Decree No.81 for transactions with securities and real estate does not apply to transactions on the disposal over shares in the charter capital of limited liability companies. Other shareholders and third parties are both allowed to buy shares. Settlements under the transaction can be made in any currency. However, in practice (as of today), few notaries are willing to certify such transactions, as they expect further clarifications from the competent authorities.

Withdrawal from a limited liability company

A shareholder shall be entitled to withdraw from a company by alienating shares of the company, regardless of consent from other shareholders of the company[2]. To do so, two conditions must be met at the same time:

• If withdrawal from the company is expressly provided for by its charter, otherwise it is prohibited;
• If at least one shareholder remains in the company after such withdrawal.

Withdrawal from a company requires notarization of a statement of withdrawal, after which the notary sends the application to the Federal Tax Service for entering the appropriate changes into the EGRUL. Such changes must be made within 5 work days from the date of submission; after that period, the shareholder is deemed to have withdrawn.

Within 3 months after the record on withdrawal of the shareholder is made in the EGRUL, such shareholder must be paid the actual share value, even if the company's charter provides for a different timeframe. The actual share value is defined as partial value of the net assets of the company pro rata to the size of such share. Settlements on payment of the actual share value are allowed in any currency.

Please note that this option applies only to cases when the activity is carried out through a limited liability company, since the Russian laws on joint stock companies contain an extremely limited list of grounds for withdrawal from a joint stock company by alienating shares to the company.

Liquidation

From a regulatory perspective, there is still no ban on liquidation of limited liability or joint stock companies. Nevertheless, it can be complicated if, in particular, real estate is held on the company’s balance sheet.

In the course of liquidation, the company’s property remaining after creditors’ claims are satisfied is to be transferred to its founders/shareholders, following which the liquidation of such a company can be registered in the EGRUL and recognized as completed. As we wrote above, Decree No.81 introduces a special procedure for transactions between Russian residents and individuals/companies associated with "non-friendly" states, if they give rise to ownership title to real estate, which precludes transferring it to foreign shareholders/founders.

A possible way to overcome this issue is to sell real estate held on the company's balance sheet before the liquidation procedure begins. In this case, real estate may be alienated either in favor of a "friendly" non-resident, since technically, Decree No.81 does not apply to them, or in favor of the Russian Federation, since Decree No.81 does not apply to transactions with the Russian Federation and its state bodies.

In addition, please bear in mind that if the company has insufficient property to satisfy its creditors’ claims, liquidation will be transformed into a bankruptcy procedure (prescribing the appointment of an independent administrator and court supervision). In this regard, we would like to draw special attention to the statement of Igor Krasnov, Prosecutor General of the Russian Federation, who said "each fact of cessation of activity will be assessed for signs of fictitious or intentional bankruptcy in accordance with the law."[3]

Therefore, despite there being no formal legislative ban on the liquidation of companies with foreign shareholders, in practice this procedure may become risky and costly; thus, this mechanism to exit the Russian market may not lead to the desired result or may entail significant costs.

In addition to the above, we would like to mention that the draft Federal Law "On the external administration for managing a company," the current edition of which provides for the introduction of an external administration both in case of "actual termination" of the management of the company by its shareholders and in cases where shareholders take actions that can lead to "unjustified termination, liquidation or bankruptcy of the company." We will analyze the provisions of this draft in the following briefs.