At present, the Federal Antitrust Service is working on draft amendments to the legislation on foreign investments aimed at strengthening the regulation in this area. The draft text is published on the portal for public discussion.

The proposed amendments provide for the following changes:

New grounds for prior approval of transactions by foreign investors

The effective legislation contains a list of grounds for prior approval of transactions aimed at purchasing stock/shares or establishing control over a Russian company of strategic importance.[1]

It is proposed to add to this list the case when the transaction is of special importance for ensuring national security and defense.

The criteria based on which a transaction can be recognized as being of special importance for ensuring national defense are not established.

Accordingly, any transaction performed by a foreign investor in relation to a Russian business entity, regardless of the share being purchased by the foreign investor and the fact of weather the Russian company performs strategic activity or not, can be subject to prior approval.

The Russian President and the Chairman of the Government Commission on Control over Foreign Investments (the “Commission”) will be authorized to make decisions on the special status of a transaction.

The Commission members are to be approved by the Government. The current Commission is headed by Prime Minister Dmitry Medvedev.

Extension of the Commission’s powers

According to the effective rules, in the event of prior approval of a transaction (or establishment of control), the Commission imposes on the applicant one or several obligations explicitly specified in the Law on investments in strategic entities.[2]

The FAS of Russia proposes to expand the list of possible obligations, adding a clause on other obligations the performance of which is directly related to the possibility of ensuring national security and defense.

The proposed wording indicates that in this regard the powers of the Commission will not be restricted.

Expanding the list of industries of strategic importance

The amendments also presume expanding the list of types of activities of strategic importance.

In particular, pursuant to the effective legislation,[3] the notion of strategic business entities includes entities dominating on the communications market and in ports of the Russian Federation, which are included in the register of dominating business entities (the “Register”).

According to the draft amendments, the criterion related to such companies being included in the Register will not matter.

Furthermore, activity of electronic platform operators in the contractual system field is proposed to be added to the list of strategic activities.

Notion of foreign investor

It is proposed to expand the notion of foreign investor by including in it citizens of the Russian Federation who hold another citizenship.

Accordingly, when a person with a dual citizenship performs transactions or other actions entailing establishment of control over entities of strategic importance, such actions will be subject to compliance with the legislation on foreign investments.

Control over a strategic entity by a Russian resident

The effective legislation on foreign investments does not apply to relations connected to transactions in relation to an entity of strategic importance in the event the purchaser under such transaction is:

-     An organization under the control of the Russian Federation or its constituent entity;

-     An organization under the control of a citizen of the Russian Federation who is its tax resident.

The fact of control of the specified entities over a strategic entity can be established based on certain criteria similar to the criteria of control on the part of a foreign investor.[4]

In accordance with the amendments, it is proposed to leave only one criterion – the opportunity for the named entities to dispose over a share exceeding 50% of the total number of votes related to the voting stock/shares constituting the share capital of the strategic entity.

That provided, the notion of control on the part of the Russian Federation, its constituent entity or resident citizen is determined based on other rules that are stricter than control by a foreign investor.

Accordingly, the range of transactions performed by a foreign investor that are subject to prior approval has been expanded.

Changes in liability

The draft amendments propose to expand the list of types of liability for not performing the obligation on providing information about a foreign investor’s purchase of 5% or more of stock/shares constituting the share capital of strategic entities.

At present, an administrative fine in the amount from 250,000 to 500,000 Rubles is provided for such violation.[5]

If such amendment is adopted, a foreign investor can be deprived of the voting rights at the general shareholders meeting of the strategic business entity. The votes of the foreign investor will not be considered when calculating the votes at the general meeting of shareholders and for determining a quorum.

Subsequently, the voting right can be restored by a court decision after proper performance of the obligation.

Considering the duration of the administrative procedures and timeframes for examining the cases in court, in the event such measure is applied, the foreign investor can be deprived of the voting rights and opportunity to vote for over half a year.

The proposed amendments will certainly have influence on the rules of conduct for foreign investors in relation to transactions with Russian companies. It is important to react to the changes in time in order to be prepared and to consider the changes when planning and performing such transactions.

Irina Akimova  Of Counsel                                Moscow   iakimova@cls.ru  Tel.: +7 (495) 970 1090

Dmitry Gavrilenko     Associate                Moscow       Tel.: +7 (495) 970 1090

Additional notes

Should any questions arise in connection with the above or if you need any additional materials, please contact Irina Akimova or Dmitry Gavrilenko, Moscow Office of Capital Legal Services.

This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.