On 29 December 2015, Federal Law No. 391-FZ, which introduces new rules for transferring shares in LLCs and immovable property ("Law"), was signed. Some of the relevant changes are summarised in this alert.
Moment of transfer of ownership rights to LLC shares
Before the entry into force of the Law, shares in Russian limited liability companies ("LLCs") were considered to have been transferred to the acquirer from the moment the transaction was notarised, and the subsequent process of registering such change in the Unified State Register of Legal Entities ("Register") was merely a technical step.
From 15 January 2016 the ownership right to a share in an LLC arises from the moment such change is entered into the Register. This amendment does not apply in the case of transferring shares to the LLC itself.
It remains to be seen to what extent this amendment solves the current issue of not being able to properly separate signing from completion in an LLC share transaction. Prior to the amendment the law provided that upon notarisation of a share transfer, the agreement enters into force and at the same time the share is deemed transferred. This created practical difficulties when parties intended to agree on certain conditions precedent to be fulfilled prior to completion. This has often been addressed by entering into another - preliminary or framework - agreement to create binding obligations and by signing the actual share transfer agreement at completion, which sometimes degrades the share transfer agreement to not much more than a mere transfer instrument. Under the new rules, the notary will need to file for the share transfer registration within two business days from the notarisation of the share transfer agreement, unless a longer term is stipulated by such agreement. Depending on how the practice will develop there is a chance that signing and completion could be separated going forward, but this would require the notaries to assume functions similar to an escrow agent, verifying whether the completion conditions have been met.
Furthermore, the amendment may make the process of completing M&A transactions even more complex, as it is unclear when exactly the state registration (ie completion) will occur. Therefore, either the seller will need to bear the risk of transferring the shares before getting paid or the buyer would take the risk of paying before becoming the owner of the shares. This uncertainty is likely to lead to a broader use of escrow or other security arrangements in Russian M&A transactions going forward.
Taking into account the amendments introduced by the Law, the new process of transferring LLC shares is as follows:
- The purchaser and the seller conclude an agreement regarding the transfer of the shares in the presence of a notary.
Depending on the corporate structure and the provisions of the company’s charter, before such agreement is concluded the seller may also be required to send the company and the other shareholders an offer, which from 1 January 2016 is subject to notarisation, and have the refusals to use their pre-emptive right to buy such interest notarised.
- The notary who notarised the transaction, within two business days from the date of such notarisation (unless a longer term is stipulated by the agreement) should submit to the registration authorities an application to enter the relevant changes into the Register.
In a change from the old procedure, from 1 January 2016 this application must be signed by the notary who notarised the transaction and affixed with the notary’s stamp. Previously, such application was signed directly by the individual selling the shares or by representatives of the legal entity selling the interest. The new procedure thereby allows individuals who are shareholders of LLCs to issue a power of attorney for the conclusion of the agreement on transferring the shares and therefore they would not need to attend its notarisation themselves.
- Within three days from the moment the transfer agreement was notarised, the notary who performed the notarisation or another person stated in the agreement shall send the company a notification on the transaction attaching to it copies of the application submitted to the registration authority.
Procedure of concluding an option agreement in relation to shares in LLCs
Recent amendments introduced an "option agreement" as a new contract type to the Russian Civil Code.
Although these amendments entered into force already on 1 June 2015, up until present the conclusion of an option agreement in relation to shares in a LLC has been difficult to implement in practice as there were no clear statutory requirements in this regard.
The amendments introduced by the Law now regulate in detail the procedure of entering into an option agreement in relation to transferring LLC shares. The procedure of entering into an option agreement is as follows:
- The seller of the shares should have an irrevocable offer notarised.
- Upon the acceptance or occurrence of other conditions provided by the option, the acceptance should be notarised, and from this moment the irrevocable offer is considered to have been accepted.
If the irrevocable offer was made under a condition precedent or a condition subsequent, the accepting party must provide the notary with evidence that the relevant condition has or has not occurred, which should be set out in advance in the option agreement.
- After the notarisation of the acceptance, the notary should, within two business days from the date of the notarisation unless a longer term is stipulated in the agreement, submit an application to the registration authority to have the relevant changes entered on the Register and send the offeror a notification regarding the acceptance.
Necessity to notarise a range of transactions involving immoveable property
Before the entry into force of the Law, all transactions in relation to Russian immoveable property (with certain exceptions) could be concluded in simple written form and did not require notarisation prior to registering the ownership transfer in the state register for immovable property rights.
The Law now introduces the requirement to notarise several more types of transactions involving immoveable property, which previously were not subject to notarisation. In addition the requirement of state registration of the rights to such property remains in force and ownership transfers only upon such state registration. From 29 December 2015 the following transactions must be notarised:
- transactions involving the sale of a share in land ownership;
- transactions involving the sale of a share in a common ownership right to a third party;
- transactions involving the disposal of immoveable property on the basis of fiduciary management or guardianship;
- transactions involving the sale of immoveable property belonging to a minor or a citizen recognised as having limited legal capacity.