On April 12, 2022, Draft Law No.104796-8 “On external administration for managing a company” (the “Draft Law”)[1] was introduced to the State Duma of the Russian Federation. The Draft Law allows external administration of companies with non-friendly foreign participation of at least 25%.

The Draft Law is meant to protect national interests of the Russian Federation, including ensuring national security and financial stability, as well as rights and legitimate interests of companies, creditors, employees and the public.

Please find below an overview of the key provisions of the Draft Law.

COMPANIES FALLING UNDER THE EXTERNAL ADMINISTRATION LAW

The external administration may be appointed by court order over a company, including a company’s branch office, which meets all of the following criteria:

1. A foreign entity (or foreign entities, including several entities not affiliated with each other) associated with a “non-friendly” foreign state[2] controls the company or owns, directly or indirectly, at least 25% of the voting shares of the company; and
2. The company is essential for ensuring stability of the economy and civil turnover, as well as for protecting rights and legitimate interests of citizens in the Russian Federation or in a constituent entity of the Russian Federation.

The company can be deemed essential in the events set forth by the Draft Law, including if: the company manufactures essential goods; is a subject of a natural monopoly or holds a dominant position on the market; is the only manufacturer of goods which have no Russian equivalents; is a city-forming enterprise; is involved in a chain of significant production entities. This category may also include companies whose termination might lead to disasters or deaths, termination of operations of socially significant facilities, an increase in retail prices.

Upon the decision of the Interdepartmental Commission under the Ministry of Economic Development of the Russian Federation (the “Interdepartmental Commission”), a company can be declared essential even if it is not covered by the events expressly specified by the Draft Law.

GROUNDS FOR APPOINTING EXTERNAL ADMINISTRATION

External administration may be appointed if at least one of the following grounds exists:

1. The company’s head, management bodies and/or shareholders have in fact ceased managing the company’s activities in violation of the statutory requirements set forth by the Russian legislation or are taking actions which may lead to the unjustified termination of the company’s activities, its liquidation or bankruptcy or to damage being caused to the company[3];
2. The company’s activities have been terminated or suspended in part or in full and/or the volume of production, sale of goods, performance of works/services has significantly decreased;
3. The company continuing operations without the external management poses a threat of termination or suspension of activities of the company / other companies, a threat of a significant decrease in the volume of production, sale of goods, performance of works/services or a threat of disasters or deaths, termination of operations of socially significant facilities or an increase in retail prices;
4. Elimination of the grounds for appointing the external administration may require state budget funds of the Russian Federation or of a constituent entity of the Russian Federation.[4]

EXTERNAL ADMINISTRATION

The head of the executive body monitoring the particular industry or the head of the region where the company is registered or operating may initiate appointment of the external administration. A proposal to appoint the external administration should be reviewed by the Interdepartmental Commission and then, following its decision, the Federal Tax Service files a respective application with the Commercial Arbitration Court of Moscow. The Federal Tax Service may also seek interim measures to avoid withdrawal of the company’s assets and actions which prevent recovery of the company’s operations.

VEB.RF, a State Development Corporation, or another organization as set by the decision of the Interdepartmental Commission together with the head of the region where such organization is registered, may be appointed as the external administration.

The external administration may be appointed as follows:

1. Transfer of the company’s shares for trust management of the external administration. In this case, the external administration becomes the trust manager and carries out the trust management of the company’s shares for the benefit of the company and its shareholders; the company’s shareholder acts as a trust management beneficiary; the trust manager exercises all rights of the company’s shareholder with respect to shares, but is not entitled to vote on issues associated with the company’s reorganization/liquidation and changes in the company’s charter capital, and is not entitled to alienate the company’s shares.
2. Transfer of powers of the company’s head to the external administration. In this case, powers of the company’s head are transferred to the external administration and powers of other management bodies of the company are suspended; the external administration focuses, among other things, on exercising powers of the company’s head, managing the company’s assets and funds, taking measures to ensure recovery/continuation of the company’s activities, preventing its bankruptcy, taking measures to retain the assets and workplaces.

The external administration is appointed for up to 18 months, and this term may be extended by another 18 months. At the same time, powers of the external administration may be terminated earlier upon the decision of the Interdepartmental Commission based on the following:

1. Application of shareholders owning over 50% of the company’s shares as to elimination of the circumstances having resulted in appointment of the external administration within 3 months or on alienation or transfer of the company’s shares for trust management within the same period;
2. Initiation of the company liquidation procedure;
3. Initiation of a bankruptcy procedure against the company.

Therefore, the Draft Law allows business owners to return to Russia or sell their business to third parties after appointment of the external administration.

COMPANY’S LIQUIDATION OR BANKRUPTCY. REPLACEMENT OF THE COMPANY’S ASSETS

In the event the external administration is appointed and vested with powers of the company head, the external administration may initiate a decision to apply through court for involuntary liquidation of the company or, if the company shows any signs of bankruptcy, for declaring the company bankrupt. The external administration files a respective application with the court based on the decision of the Interdepartmental Commission.

Upon request of the external administration exercising powers of the company’s head, the Interdepartmental Commission may decide to replace the company’s assets through reorganization in form of a spin-off. A business entity will be incorporated on the basis of the company’s assets and the company will become its sole shareholder. All assets and obligations of the company, other than obligations to related or affiliated parties, will be transferred to the newly incorporated entity through universal succession of title.

Shares of the newly incorporated entity will subsequently be sold through a tender in accordance with the rules set forth by the Federal Law “On bankruptcy/insolvency,” but subject to specific aspects established by the Draft Law. The organization which acted as the external administration has the preemptive right to purchase the shares. In the event there is no buyer, the shares will be bought by the Russian Federation at the minimum price.

In order to participate in the tender, it is mandatory for the buyer, in case of winning, to be able to:

1. Retain at least 2/3 of workplaces;
2. Continue the company’s operations in the Russian Federation for at least 1 year.

The successful bidder enters into an agreement on fulfilling such terms and conditions. The external administration is entitled to request, within 1 year after entering into the shares sale and purchase agreement, a confirmation from the buyer that it has fulfilled the abovementioned terms and conditions. Otherwise, the shares sale and purchase agreement is to be terminated by court and the tender is held again.