The State Duma is preparing to consider in the second reading a draft law1 that will significantly amend Federal Law No. 57-FZ ‘On the procedure for making foreign investments in business entities of strategic importance to ensure national defence and state security’. The draft law was passed in the first reading in May 2013 and is scheduled to be considered further in April 2014.

The goal of new amendments is to simplify even more the control mechanism, eliminate extra administrative barriers for foreign investors and to create favourabe investment climate. For the second reading of the draft law, the Russian Federal Antimonopoly Service (the ‘FAS’) prepared a number of amendments that have not been approved yet by the Russian Government (these amendments are posted on the FAS’s official web site2).

Below are the main provisions of the draft law and amendments to it.

Situations where Law 57-FZ does not apply

A number of amendments are proposed with regard to provisions that determine in what situations and conditions limitations to not apply, which are established with regard to foreign investments to strategic business entities.

For example, there is an exception in the effective version of the law, according to which if, before a controlled transaction is concluded, the foreign investor or a group of persons already have control over the strategic business entity, i.e. directly or indirectly control more than 50% of the total amount of votes in the strategic business entity, this foreign investor or a group of persons do not need to seek consent to acquire additional shares.3 The draft law suggests that amendments be made according to which the transactions will fall within the exception only if the foreign investor that intends to perform it already controls more than 50% of the strategic business entity’s issued capital, or if the foreign investor is controlled by the person that at the same time controls the strategic business entity, i.e. if the transaction is performed between the parent company and its subsidiary. The draft law suggests excluding a situation where the group of the foreign investor already has control over the strategic business entity.

A similar exception is suggested to be introduced for strategic companies that are subsoil users. However, the wording is somewhat stricter in the terms and conditions for such companies to be released from their obligation to obtain consent. It is suggested that transactions are excluded from control, if they are aimed at acquisition by the foreign investor of the right to directly or indirectly control shares in the  issued capital of the strategic business entity that uses the subsoil plot of federal importance, if this foreign investor already holds more that 75% of the shares in this entity.

Moreover, the draft law suggests correcting a number of inaccuracies and defects that makes it more difficult to apply Law No. 57-FZ in practice. In particular, the draft law suggests amending exceptions from Law No. 57-FZ whereby transactions are excepted which are connected with acquiring control over strategic business entities controlled by the Russian Federation or a citizen of the Russian Federation4. Pursuant to effective version of Law No. 57-FZ, transactions between the companies controlled by the Russian Federation or citizens of the Russian Federation qualify for the exception. If read literally, this rule points to the conclusion that, for the exception to be applied, both parties to the transaction – and not just the purchaser – must be controlled by the Russian Federation or Russian citizens. In addition, it is clear that for the purposes of exercising regulation over foreign investments, the seller of shares (membership interests) and the person or entity controlling it have no relevance. The draft law suggests that the wording of this provision be made clearer, so that it follows expressly from this provision that control over the foreign investor by the Russian Federation or by a Russian citizen is enough to apply the exception. Moreover, amendments suggest not applying provisions of Law No. 57-FZ to relationship connected with transactions concluded by investors controlled by constituent entities of the Russian Federation, rather than only by the Russian Federation.

Also, amendments are being prepared that are aimed at preventing ambiguous interpretation of effective version of the provision according to which Law No. 57-FZ does not apply to relationship connected with making foreign investments into strategic business entities that are subsoil users when the Russian Federation has a right to control such an entity through control over more that 50% of the total number of votes5. According to amendments, it is suggested to point out that, to be able to use the exception, the Russian Federation should keep its right of control over the strategic business entity after the transaction is concluded. This amendment will not change the existing administrative and judicial decisions6, but will make it easier to understand and interpret Law No. 57-FZ. 

List of strategic types of activities

It is also suggested that amendments aimed at loosening control be made to the list of the types of activities treated as strategic activities7. The bill provides for an amendment to ensure that, rather than any activity which involves agents of infectious diseases being used, only such activity as needs to be licensed will be regarded as strategic. Moreover, it is proposed to remove from the scope of regulation cases where this activity which involves agents of infectious diseases is carried out by business entities whose main activity is associated with food production.

Experts have long before pointed out that food industry enterprises, for example those producing cheese, fermented milk products, juices, bakery products, beer, etc. are subject to Law No. 57-FZ without sufficient grounds for that, just because they hold licences for activity connected with the use of infectious agents. If the suggested amendments are adopted, this will be a long-awaited measure aimed at relaxing the approach to such enterprises.

Procedural amendments

The draft law makes a number of amendments to the procedure for obtaining consent from the Government Commission.

According to the draft law, it will be possible to extend the validity of the Government Commission’s decision to give a preliminary consent for the transaction based on the relevant application from the company, justifying why the validity needs to be extended and stating what additional period of time is needed. The Government Commission takes the decision to grant a preliminary consent for the transaction or to refuse to grant such consent. At present, if a foreign investor does not have time to conclude the transaction before the deadline established in the decision of the Government Commission based on the company’s application, it has to prepare the set of documents once again and to apply for consent.

Moreover, the draft law suggests establishing obligations of foreign investors or a group of persons to provide information regarding the transactions, the decision to grant a preliminary consent for which has been adopted by the Government Commission. This obligation is now established in bylaws. Under clause 22 of the Russian Government’s Resolution No. 838 dated 17/10/2009, foreign investors who have applied for and are granted prior consent to a particular transaction must inform the duly authorised body that such transaction has been carried out. The notification must be sent in accordance with article 14 of Law No. 57-FZ and Order No. 795 of the Russian Government dated 27 October 2008. It is very important to enshrine this obligation in the law, since it is not always obvious for foreign investors when they need to notify of a transaction with regard to which they obtained a preliminary consent.

In the second reading, the FAS also suggested including information about beneficiary owners in the list of documents and information submitted with an application for a preliminary consent of a transaction (establishing control), apart from the documents and information listed in article 8 of the Law. If this requirement is enshrined in the law, this will result in a stricter control over foreign investors and enhanced transparency of transactions and the market as a whole. However, the term ‘beneficial owner’ should be defined clearly, as there is no such term in antimonopoly legislation and it raises a lot of issues in practice.

Moreover, as an amendment for the second reading, the FAS suggests adding a clause to article 12 of Law No. 57-FZ that would establish a list of obligations that may be imposed on a foreign investor under the agreement and that would stipulate the foreign investor’s obligations to process aquatic biological resources in the Russian Federation.

To think about, to do

In connection with anticipated amendments, we recommend doing the following:

  1. To monitor how the amendments to Law No. 57-FZ are being considered and whether they have been adopted.
  2. If it is determined that the Government Commission needs to consent to the transaction, attention should be paid to the amendments under which the regulatory regime will not be applied to certain situations in which strategic business entities are acquired.
  3. With regard to any violation of Law No. 57-FZ committed by your company, to check whether amendments apply retroactively, since a part of transactions that needed to be approved by the Government Commission, but were concluded without the Commission’s consent, will not be treated as violation of the law after amendments come into force given that the provision of the law that establishes the body of the offence will have been repealed / amended.
  4. If a company has a licence to use infectious agents, you should make inquiries whether it will retain the status of a strategic business entity.
  5. If a transaction needs to be concluded and the consent granted by the Government Commission to such transaction has expired, to apply for extension of the consent.
  6. When the Government Commission’s consent to a transaction has been obtained, to send a notification that the transaction has been completed, if the company has not sent such a notification earlier.
  7. To determine the beneficial owners, details of which need to be submitted at the same time as the application is made for the transaction to be approved.

Help from your adviser

Pepeliaev Group lawyers monitor how the suggested amendments are being considered and whether they have been adopted. We are ready to reply to questions arising in connection with changes to the regulatory control of the procedure for approving foreign investors’ transactions with regard to strategic legal entities, as well as to conduct the required corporate training. Moreover, our lawyers are ready to provide legal support with regard to the retroactive effect of the above provisions on transactions that have already been concluded and to handle court disputes with the Federal Antimonopoly Service, if any arise. 

Pepeliaev Group lawyers provide legal support for projects that involve evaluating whether commercial companies’ intended transactions need to be approved by the Government Commission in accordance with Law No. 57-FZ. Moreover, the lawyers from Pepeliaev Group provide legal support in obtaining consent for a transaction and/or notifying the Government Commission that a transaction has been concluded, including all the required stages from preparing an application and the supporting documents to providing legal support when the transaction is reviewed by the competent authorities.