On 14 October 2014 the Russian president signed a law incorporating important amendments (“Amendment”) to the federal law “on the mass media” (“Law”). The Amendment, which comes into force on 1 January 2016, introduces strict limitations on the ability of foreign entities to own, control or run Russian media businesses.
The purpose of this alert is to provide an overview of the Amendment and give some guidance as to which actions may be necessary in order to ensure compliance with the amendment.
RESTRICTIONS INTRODUCED BY THE AMENDMENT
- The Amendment prohibits foreign persons from:
- founding or participating as a shareholder of a mass media organisation;
- performing the functions of an editorial board of a mass media organisation;
- carrying out any broadcasting activities;
- shareholding, managing or controlling more than 20% of shares directly and indirectly (as well as through entities under their control or cumulatively) of an entity which is a shareholder of a mass media organisation, its editorial board or a broadcasting entity; and
- establishing any other form of control over a shareholder or a founder of a mass media organisation, indirect shareholders of a mass media organisation or an editorial board or a broadcasting entity, if this enables a foreign person to own, manage, control and actually determine their decisions.
While the Law in its current wording is confined to Russian broadcasting businesses limiting foreign participation to a 50% stake, the restrictions on foreign entities introduced by the Amendment go much further.
TYPES OF MASS MEDIA ACTIVITIES COVERED BY THE AMENDMENT
The types of activities now targeted by the Amendment are a lot wider than before. While the Law in its current version applies only to TV and radio broadcasters which meet certain criteria, the Amendment covers (i) mass media organisations in general, which includes any periodical, TV or radio channel, website (if registered as mass media in Russia) and any other form of periodical distribution of information with a permanent name; (ii) any entities performing the functions of the editorial board of a mass media organisation; and (iii) any broadcasting entities.
Given the broad definition of ‘mass media’ in the Amendment, many companies that are actually not in the media business may be subject to the newly introduced restrictions (for example, large retailers that issue flyers or magazines with their products provided they are registered as mass media).
DEFINITION OF ‘FOREIGN PERSON’
A ‘foreign person’ subject to the Amendment includes any of the following: (i) a foreign state; (ii) an international organisation, (iii) an organisation controlled by a foreign state or an international organisation, (iv) a foreign legal entity, (v) a Russian legal entity, more than 20% of which is directly or indirectly owned by a foreign entity, (vi) a foreign citizen, (vii) a person with no citizenship, or (viii) a Russian citizen with a citizenship of another country. This definition is significantly wider than the current wording of the Law which extends only to foreign entities and citizens, Russian entities with a foreign participation of 50% and more, persons with no citizenship and Russian citizens with dual citizenship.
DEFINITION OF ‘CONTROL’
The Amendment also introduces the term ‘control’ prohibiting any form of control over a shareholder or a founder of a mass media organisation, an indirect shareholder of a mass media organisation, or an editorial board or a broadcasting entity. The Law and the Amendment do not give any further explanation as to how to interpret ‘control’. For the purposes of interpreting the meaning of control in the context of the Amendment one may consider applying by way of analogy the control definitions of other Russian laws. For example, a ‘controlling entity’ under the Strategic Investment Law is, inter alia, an entity which has contractually or otherwise received the right or power to determine the decisions of another entity, including the right to determine the terms of such entity’s business activities. Therefore, control rights might also include certain contractual rights of a foreign licensor under IP licensing arrangements (such as termination rights in case of violations of content requirements, etc.).
RELEVANT TIMELINES AND DATES OF REFERENCE
The Amendment comes into effect on 1 January 2016. Most importantly, the founders of mass media or the editorial board of mass media must submit to Roskomnadzor – the Russian media regulator – a formal application statement confirming compliance with the Amendment by 15 February 2016.
Quasi foreign persons (i.e. companies with foreign shareholders, but ultimate Russian ownership) may enjoy a slightly extended period to comply with the requirements. Therefore, provided that the ultimate ownership has been declared to the regulator by 1 February 2016, such persons shall have until 1 February 2017 to satisfy the requirements introduced and notify Roskomnadzor by 15 February 2017.
Activities of a mass media organisation in breach of any of the above restrictions or notification requirements may be suspended and/or terminated by court upon a claim of Roskomnadzor.
Further, any transactions which result in a breach of the restrictions introduced by the Amendment are void.
Non-compliant founders or shareholders of (i) mass media organisations, (ii) entities performing the functions of an editorial board of a mass media organisation or (iii) broadcasting entities are not entitled to perform their corporate rights, including voting rights, the ability to receive information in relation to the entity’s activities and the right to challenge or appeal any decisions of the organisation’s management board.
EXEMPTION – INTERNATIONAL TREATIES
The only exemption to the above restrictions is where bilateral or multilateral international treaties, to which the Russian Federation is a signatory, provide for special investment protection. Although the number of international treaties concerning foreign investment in Russia is quite large, the likelihood that a particular treaty affords the desired protection is rather small, but each case will need to be analysed separately.
CALL FOR ACTION
Taking into consideration the latest restrictions introduced by the Amendment, the general recommendation for all mass media companies (including those that are ultimately Russian owned) acting in Russia and their corporate or individual parents is to review the current ownership/control structure. This should include a review of the shareholders and commercial arrangements with foreign parents, IP holders, and content providers.
If a mass media organisation or its parent will be in violation of any of the above restrictions when the Amendment comes into force, it eventually will need to be decided whether the Russian operations should be continued, and if so, how to restructure the business in order to comply with the Amendment.
The following restructuring options could be considered:
- to create a structure where the mass media is at least 80% owned and managed by a new or existing Russian partner;
- to implement a licence structure according to which the Russian media business is fully owned and operated locally with royalties being paid for brand licences and certain content to foreign licensors and content providers;
- to divide the business so that the editorial and broadcasting activities are controlled by a Russian entity and the remaining part of the business remains foreign-controlled, e.g. separating the roles of the so-called founder (registration as mass media in Russia) and the editorial office/broadcasting entity, on the one hand, from the publisher being in control of the remaining business streams, on the other hand; or
- termination of the mass media registration of websites (in case of online media) or marketing brochures (if the circulation numbers are below the relevant threshold for mandatory registration as mass media).
The above options may entail not only the restructuring of the current (foreign) shareholding, but also involve the revision of the relevant contractual arrangements, such as franchise and licensing agreements, implementing special dividend distribution systems, etc. All of these options are currently being discussed within the media industry and close consultations with Roskomnadzor and various other state bodies are held. It remains to be seen which of the structures will be preferred by the various businesses and whether the legislator or the regulator will adopt modifications and possible carve-outs for certain types of mass media or existing businesses.