Russian counter measures. Recent developments (13 April updates)

 

The initial legal initiative on external administration of the foreign companies (also known as the “nationalization draft law”) has been put on hold, according to an information published on 11 April 2022 by Izvestia. 1

Three sources in the Government confirmed that, “since most of the companies only made declarations of suspension or suspended their activities but continued to pay salaries and payments under their lease agreements, the legal initiative is no longer relevant.”

As a reminder, the draft law prepared by a Russian political party United Russia (Yedinnaya Rossiya) provided for external administration of foreign companies that suspended their activities in Russia. The draft law never got introduced to the State Duma. For more information on the draft law, please refer to our legal alert dated 7 April 2022. 2

However, a new legal initiative on external administration was introduced to the State Duma on 12 April 2022 3. While it at first appears to be a less rigid version of the initial draft law, it still has some inconsistencies and unclear provisions that either have to be clarified for further readings in the Duma or will be applied at the discretion of the courts and the specific commission once the initiative becomes law. In particular the draft law primarily targets companies of significant importance for Russian economy but also allows a specific commission to determine a company as significant on a case-by-case basis.

Currently the draft law is at the initial stage of the legislative process. It has to be approved in three readings by the State Duma before being transferred to the Federation Council and then to the President. The date of the first reading is yet to be announced.

I. Targeted Entities

An entity or its branch can be subject to external administration if the following conditions are simultaneously met:

►A person associated with unfriendly states (as defined by the governmental decree, including the US, UK, and members of the EU) including through their citizenship incorporation, place of business or profit is a controlling person or holds at least 25 per cent of (voting) shares of the company. This rule does not apply to persons controlled or beneficiary owned by Russian citizens albeit through foreign entities related to such unfriendly states; and

►The entity is of significant importance for Russia’s economy and civil transactions, protection of rights and legal interests of the Russian citizens. The company will be considered as of significant importance if:

+It manufactures or sells goods (provides works or services) which relate to staple foods and goods or for which the Russian law provides for the possibility of state price regulation;

+It manufactures or sells goods (provides works or services) within a natural monopoly or its position can be considered as dominant on the market pursuant to the Russian antimonopoly law;

+It is the sole manufacturer of certain goods, including medicine or medical devices, or it is the sole supplier of the goods that does not have Russian analogs as determined by the established legal procedure;

+The number of employees of the organization is at least twenty-five percent of the working population the respective locality;

+Cessation of business might invoke industrial or environmental disaster, death of people, termination of operation of life support facilities, transport or social infrastructure, energy facilities, industry or communications, as well as other socially significant objects;

+Cessation of business might lead to destabilization, unreasonable increase in consumer prices of goods mentioned above;

+It participates in the significant production chain and cessation of business might lead to termination of operation of other companies.

A specially formed commission can consider the company as significant even if it does not meet the criteria above.

External administration can be introduced if one of the grounds below applies:

►Management of the company has de facto stopped in violation of the Russian legislation, particularly if top management or owners of the company left Russia leaving the company unmanaged, or committed other actions that led to a significant decrease of the value of the company assets, or inability of the company to perform its obligations;

►Actions of the company management or its owners led to unreasonable cessation of operations, liquidation or bankruptcy of the company, particularly if said persons made public announcements on cessation of business without any reasonable grounds, terminated company’s agreements significant for its operation or notified more than a third of the staff on staff reduction.

►Operation of the company’s activities stopped or suspended or the production or sale volume decreased significantly, particularly, the company profits for the past three months decreased for 30%;

►External administration might also be introduced if continuance of operation without external administration might lead to the occurrence of grounds for external administration and / or consequences mentioned above.

II. External Administrators

►State Development Corporation VEB.RF; or

►Any other organization appointed by a specialized committee.

External administrator will be entitled to:

►Trust management of shares, all or their part, in the charter capital of the company;

►External management of the company.

III. Filing a request on external administration

Unlike in the previous legal initiative, this draft law provides for a more complex procedure.

A request on external administration is filed to the State Arbitration Court of Moscow subject to a decision adopted by a special interagency commission. Such decision can be adopted based on:

►A request of the head of the federal executive agency in charge of securing uniform economic policy in the field of operation of this organization;

►A request of the highest official of the subject of the Russian Federation where the company is incorporated or where it conducts its business.

The court initiates proceedings within one business day from the date of filing. The court can also provide for interim measures, if requested, prohibiting transactions made within normal business activity, terminating employees, terminating substantial contracts, disposing of the company’s shares.

If the interagency commission decides so, a request on external administration can also contain a motion for interim measures appointing the organization authorized in the decision as the external manager, suspension of all bank operations, granting it access to the premises of the company and other powers incidental to a company’s executive body.

The court should review the request not earlier than five business days and not later than seven business days from the date of initiating the proceeding.

Before the date of the hearing the company’s managers or shareholders can request cancellation of external administration due to the company resuming its operation. Particularly, in case mentioned persons intend to alienate the shares or place them in trust. The company cannot file this request for a second time.

External administration can be established for a term not exceeding eighteen months. The term can be prolonged for another eighteen months if the interagency commission does not decide to stop such administration. The term can be ended earlier if the management or the shareholders of the company adopt measures aimed at elimination of the circumstances that served as grounds for introduction of such external administration.

IV. Types of external administration

The draft law provides for two types of external administration, not specifying, however, what circumstances invoke either type of administration. According to the general logic of the draft law, it seems that initially the courts establish trust management of shares (a lighter version of external administration) and may switch to external administration with the transfer of management powers commission if the interagency commission files a motion requesting the switch with comprehensive justification of such switch. The details are not specified.

Trust management of the shares of the company.

In this scenario the trustee exercises all the rights of the shareholder. It cannot, however, vote on the following issues:

+Liquidation or reorganization of the company

+Change in the charter capital of the company.

Such shares cannot be seized under obligations of the external administration, nor can it transfer such shares. General rules of the Russian Civil Code on trust management also apply, unless proposed draft law provides otherwise.

Appointment of external administration with the transfer of management powers.

Consequences for establishing external administration:

+Powers of the manager of the company are transferred to external administration;

+Powers of other governing bodies are suspended;

+Powers of attorney issued by the company become invalid;

+Company’s obligations on filing for bankruptcy are suspended;

+Company’s resolutions on its voluntary liquidation, reorganization, dividend payment, shares acquisition, amending the charter and on giving the general manager obligatory instructions become invalid;

+Request of the shareholder on payment of the actual price of the share is denied;

+Payment of dividends is suspended;

+Requests of the management, shareholders or other controlling persons of the company on the return of the loans are denied;

+Provisions of the charter limiting the powers of the general manager in comparison with the law, particularly requiring authorization from other corporate bodies;

+Unilateral termination or modification of the contract out of court is restricted. The party can file a claim to the court requesting termination or modification of the contract under provisions of Article 450 clause 2 of the Russian Civil Code (substantial violation of the contract or other grounds provided by the law);

+Exclusive rights of the company remain effective in case the owners of such exclusive rights are foreign persons related to unfriendly states. Royalty is not paid while the company is governed by external administration.

Liability of external administration can be invoked only in cases of wrongful misconduct or gross negligence. Since no clarification is proposed, we suppose such misconduct and negligence will be left to courts’ discretion.

Major and interested-party transactions are subject to approval of the interagency commission.

Such external administration with managerial powers can, subject to approval of an interagency commission:

+Decide on replacement of assets (the zamescheniye aktivov’) of the company. This procedure is established by the Russian bankruptcy law as an alternative to bidding. This happens in the form of a spin-off (the vydeleniyeunder Russian law) of a company with the parent company as its sole shareholder. The new company receives all the assets, rights, licenses, and liabilities of the company, except for liabilities towards interested and affiliated persons. The amount of the charter capital should equal the liquidation value of the assets of the parent company. Shares of the newly incorporated entities are bidded;

+Decide on forced liquidation of the company or initiation of the bankruptcy procedure in case the company has signs of insolvency. Moratorium on bankruptcy will not apply.

+Change in the charter capital of the company.

V. Procedural issues

State Arbitration Court of Moscow is the competent court for all disputes arising out of relations regulated by this draft law.

The judgments are subject to immediate execution; they can be appealed within 14 working days, such an appeal does not stop execution.

The parties are notified at their last known location, telephone, email address. In case such information is unavailable the person is considered as notified through publication of an update on the official website of state arbitration courts.

We are actively following the developments related to those issues and are fully prepared to advise our clients.

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