Corporate & M&A Russia Legal Alert January 2016 www.bakermckenzie.com For further information please contact Moscow Sergei Voitishkin +7 495 787 27 00 firstname.lastname@example.org Alexey Frolov +7 495 787 27 00 email@example.com Sergey Krokhalev +7 495 787 27 00 firstname.lastname@example.org Dmitry Marchan +7 495 787 27 00 email@example.com St. Petersburg Maxim Kalinin +7 812 303 90 00 firstname.lastname@example.org Baker & McKenzie — CIS, Limited White Gardens, 10th Floor 9 Lesnaya Street Moscow 125047, Russia Tel.: +7 495 787 27 00 Fax: +7 495 787 27 01 BolloevCenter, 2nd Floor 4a Grivtsova Lane St. Petersburg 190000, Russia Tel.: +7 812 303 90 00 Fax: +7 812 325 60 13 New Rules for Transfer of Title to Participation Interests in LLCs and Other Changes In January 2016, Russian corporate laws were amended to: (i) modify the procedures for the transfer of title and pledge of participation interests in limited liability companies (LLCs); (ii) substantially increase the role of public notaries in certifying various corporate actions in LLCs; (iii) simplify the registration of legal entities; (iv) broaden the powers of tax authorities in verifying information about legal entities; and (v) change the procedure for registering changes of the location and address of a legal entity. Below is an overview of the most important amendments1 to the laws “On Limited Liability Companies" ("LLC Law") and "On State Registration of Legal Entities and Individual Entrepreneurs" ("State Registration Law"), along with related practical recommendations to corporate lawyers. Key Developments Procedure for the transfer of title to participation interests in an LLC: new rules New regulations have significantly changed the procedure for transferring participation interests in an LLC. As of 1 January 2016, any transaction aimed at the disposal of a participation interest must be certified by a notary, with a single document prepared and signed by the parties. For example, currently the exercise of a preemptive right requires that a single notarized document be put in place and executed by the parties. The Law allows few exceptions from this rule, for instance, a single document is not required for the execution of a transaction pursuant to the exercise of an option, and notarial certification is not required for the transfer of a participation interest pursuant to a court decision. 1 Amendments were introduced by Federal Laws No. 209-FZ dated 29 June 2015 "On Amendments to Individual Legislative Acts of the Russian Federation in Regard to Permitting Legal Entities to Use Standard Charters", No. 67-FZ dated 30 March 2015 "On Amendments to Individual Legislative Acts of the Russian Federation in Regard to Securing the Accuracy of Information provided at the Time of State Registration of Legal Entities and Individual Entrepreneurs", and No. 391-FZ dated 29 December 2015 "On Amendments to Individual Legislative Acts of the Russian Federation ". Corporate Law 2 Legal Alert January 2016 Another important development effective from 15 January 2016 is that a participation interest in an LLC is deemed transferred to its acquirer from the moment when related entry is made in the Unified State Register of Legal Entities ("Register"), and not from the moment of notarization of a transaction (as was the case earlier). These changes should be taken into account when allocating risks between parties to a transaction and when protecting the acquirer's interests. In light of the new law, parties may be expected to link the date of payment of consideration to the date when title to participation interest is actually transferred. If, however, consideration is paid on the date when the contract is signed, parties may wish to use additional instruments to transfer actual control to the buyer and to protect its interests (e.g., irrevocable power of attorney from the seller granting rights to dispose of a participation interest, replacement of the company's CEO as of the transaction date, pledge of a participation interest, and relevant warranties and indemnities). In addition, as from 1 January 2016, an application on the change of information about LLC participants in connection with the disposal of a participation interest or acceptance of an irrevocable offer must be signed by the notary who certified the transaction (formerly it was signed by the seller of a participation interest). Then it must be sent via electronic means of communication by the notary to the registration authority. This change aims to increase the efficiency of communications between notaries and the tax authorities and minimize parties' role in completing registration formalities. Extension of notaries' powers The new rules significantly broaden the role of public notaries in certifying and attesting various corporate actions in an LLC. In particular, the following acts require notarization as from 1 January 2016: (i) a resolution to increase the charter capital (the fact of adoption of a decision by the company's general participants’ meeting and attendance of its participants in the meeting); (ii) an offer to sell a participation interest or a part thereof to a third party; (iii) a request by a participant to the company to buy-out its participation interest in cases when the participant voted against a resolution to approve a major transaction or increase its charter capital; (iv) a participant's notice about its withdrawal from the company; (v) in addition to the above, new regulations limit the number of cases where the transfer of a participation interest does not require notarization (e.g., the transfer of a participation interest upon the exercise of a preemptive right will now require notarization). The above changes will require involvement of a notary for such common ways of acquiring rights to a participation interest in an LLC as charter capital increase and exercising a preemptive right. Company's preemptive right: new rules As from 1 January 2016, the LLC Law establishes by default a 7-day period for the company to exercise its preemptive right upon the sale by a participant of its participation interest to a third party (when the charter provides for a preemptive right of the company). A longer term, however, may be set in the LLC charter. The term is counted from the date when (i) all company participants waived their preemptive rights, or (ii) the expiry of the deadline for the exercise of preemptive rights by the participants. Corporate Law 3 Legal Alert January 2016 Option agreements for participation interests in LLC On 15 January 2016 new detailed rules came into force for structuring option agreements with respect to equity interests in LLCs which develop the principles envisaged by the Russian Civil Code earlier. An option arrangement with respect to a participation interest in an LLC can be put in place through the notarization of an irrevocable offer and subsequent notarization of its acceptance. Such irrevocable offer shall be deemed accepted as at the time of notarization of its acceptance, and the notary must notify the offering party about it. These new provisions make it possible for parties to execute transactions and transfer participation interests without the seller's involvement at the stage of transfer of title. This allows to mitigate the risk that the seller does not show up at completion or otherwise refuses to cooperate in the transfer of title. In addition, the law envisages that an irrevocable offer may be conditional (for example, be subject to obtaining approval from the Federal Antimonopoly Service, or obtaining a bank loan). In this case, the accepting party must provide the notary with evidence confirming fulfillment of respective conditions. It should be noted that options to purchase a participation interest in an LLC are not recorded in the Register as an encumbrance. In order to address related risks for the buyer, parties may consider putting in place a pledge (which is recorded as encumbrance in the Register). Simplified state registration of legal entities Starting from 1 January 2016, the time required for the state registration of legal entities and individual entrepreneurs has been reduced from five to three business days. In addition, going forward LLCs shall be able to operate on the basis of a standard charter, the form of which has yet to be approved by the Federal Tax Service (the "FTS"), which is expected in the near future. Extended powers of tax authorities in verifying information about legal entities In furtherance of the principle of public credibility of the state register, the tax service is empowered as from 1 January 2016 to verify the accuracy of information that is recorded or to be recorded in the Register, in particular: (i) an entry can be made in the Register about the inaccuracy of information about a legal entity; (ii) FTS is authorized to verify the accuracy of information to be recorded or which is already recorded in the Register if there is reasonable doubt as to its accuracy; and (iii) FTS is entitled to suspend the state registration of a legal entity for up to one month if there is reasonable doubt as to the accuracy of the information provided. Change of legal entity’s address: new provisions The following new rules regarding changes in a legal entity’s address took effect on 1 January 2016: (i) in the event of a change of address without a change of location of a legal entity (for example, within the boundaries of Moscow), the registration of the change is completed in one stage applying the existing rules; Corporate Law 4 Legal Alert January 2016 (ii) if a change of address is accompanied by a change of location of a legal entity (e.g., if it moves from Moscow to Novosibirsk), the registration is performed in two stages: at the first stage, a resolution on the change of location of a legal entity, along with a notarized application, must be filed with the registration authority at the former location, and the authority reflects appropriate changes in the Register; and at the second stage, a resolution on the approval of a revised charter, the text of the revised charter, documents confirming the right to use non-residential premises at the new location, and a notarized application must be filed with the registration authority at the new location. These documents must be submitted to the authority at the new location not earlier than 20 days from the date on which the entry was made in the Register about the legal entity’s decision to change its address along with a change of its location.2 Recommended Actions (i) When structuring transactions parties should comply with the new rules for the transfer of title to participation interests in LLCs and new requirements for the notarization of transactions when disposing of participation interests. Also, if necessary, modifications should be made to the company's charter; (ii) Take into account new rules extending the notaries' powers when planning and implementing charter capital increases in LLCs, exercising preemptive rights, buying-out participation interests and effecting withdrawals from an LLC; (iii) Implement option arrangements in line with new rules in terms of deal structuring; (iv) Bear in mind the 7-day term for exercising the preemptive rights by the LLC and, where necessary, make appropriate amendments to its charter; and (v) Take into account new rules for the change of a legal entity’s address when simultaneously changing its location. This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of time sensitive legal developments which may effect or otherwise be of special interest to them. The comments above do not constitute legal advice or opinion and should not be regarded as a substitute for detailed legal advice in individual cases. 2 For more details see FTS of Russia Letter No. ГД-4-14/52@ dated 11 January 2016 "On Certain Questions as arise in Connection with the Enforcement of Federal Law No. 67-FZ dated 30 March 2015, Federal Law No. 209-FZ dated 29 June 2015 and Federal Law No. 391-FZ dated 29 December 2015".