Restrictions on transactions with LLC equity interests

Yesterday, a new Presidential Decree No.618 was published (the “Decree”), which limits the ability to carry out transactions with LLC equity interests for the following categories of persons:

1. Between residents and “unfriendly” persons;
2. Between “friendly” non-residents and “unfriendly” persons; and
3. Among “unfriendly” persons.

“Unfriendly” persons are defined as residents of “unfriendly” states, as well as entities they control, regardless of where they are incorporated (thus including Russian companies owned by “unfriendly” persons).

The list of operations for which permission is required:

• Transactions entailing direct or indirect establishment, change or termination of the rights to possess, use or dispose of LLC equity interests, in other words, transactions beyond just sales and purchases of LLC equity interests, which significantly expands the scope of operations for which permission is required. For example, this restriction can apply to M&A transactions involving a change of control over a foreign company which in turn owns equity interests in a Russian LLC;
• Transactions relating to any other rights which enable the management of the LLC or change the manner of exercising corporate control (for example, hiring a management company in Russia).

Please note that according to the Decree, such transactions are not prohibited, but can only be carried out with the permission of the Governmental Commission, and the procedure for issuing such permissions will be determined within 10 days. The procedure might set additional criteria for determining which transactions require permission (such as value thresholds), which leaves open the possibility that certain categories of transactions might be exempted from the requirement for permission.

Interestingly, in Clause 4 of the Decree, Russian-controlled foreign companies are excluded from the scope of the restrictions, meaning that they are treated as de-facto Russian residents for the purposes of the Decree. At the same time, it remains unclear whether Russian-controlled foreign companies are meant to be excluded as parties to transactions or as targets or both; this will likely be clarified at a later time.

In light of the new Decree, all transactions involving LLCs are currently suspended and the likelihood of obtaining timely permissions for completing transactions seems low until the implementing regulations are published.