The Russian government clarified requirements to disclosure of information about foreign investors' beneficiaries, beneficial owners and controlling persons

FAS continues to follow the general trend for strengthening control in the foreign investments sphere and eliminating the legislative gaps.

The Government Commission on Control over Foreign Investments in the Russian Federation (the Government Commission), which was established by the Russian government in 2008, is responsible for the review of applications. The Government Commission is headed by the Chairman of the Russian government and composed of the heads of certain ministries and other government bodies.

Although the final decision on the application is made by the Government Commission, all the preparatory work (i.e., reviewing an application's completeness, liaising with relevant government bodies) is done by the Federal Antimonopoly Service (FAS). FAS, among other things, performs a preliminary review of the application and prepares materials for a further assessment by the Government Commission.

WHO FILES

An acquirer must file if the proposed acquisition would result in the acquirer's control over an entity engaged in activities of "strategic importance" to Russian national defense and security (a Strategic Entity). The acquirer is required to obtain the consent of the Government Commission prior to the acquisition of control over a Strategic Entity; otherwise, the respective transaction is void.

To apply for the consent, the acquirer must submit an application to FAS with attachments, which include, among other things, corporate charter documents of the acquirer and the target, information on their groups' structures (including the whole chain of control over both the acquirer and the target), transaction documents and a business plan for the development of the target post-closing.

TYPES OF DEALS REVIEWED

The Government Commission reviews transactions that result in acquisition of control over Strategic Entities. Foreign investors must also obtain the Government Commission's consent for certain transactions involving the acquisition of a Strategic Entity's property.

The list of activities of "strategic importance" currently comprises 47 activities that, if engaged in by the target, cause the target to be considered a Strategic Entity. The 47 activities encompass, among others, areas related to natural resources, defense, media and monopolies. The activities include not only those directly related to the state defense and security (e.g., operations with nuclear materials, production of weapons and military machines), but also certain other indirectly related activities (e.g., TV and radio broadcasting over certain territories, extraction of water bioresources and publishing activities).

The criteria for determining control are rather wide and are lower (25 percent) for a target that is involved in the exploration of "subsoil blocks of federal importance" (e.g., oil fields with a certain size of reserves, uranium mines, and subsoil blocks subject to exploration within a defense and security zone).

Foreign public investors (i.e., foreign investors controlled by foreign states or international organizations) are prohibited from obtaining control over Strategic Entities (for Strategic Entities involved in exploration of subsoil blocks of federal importance, that would mean the limit is 25 percent) or acquire more than 25 percent of a Strategic Entity's property, and must obtain consent of the Government Commission for acquisitions of the reduced stakes in Strategic Entities.

Certain transactions in respect of Strategic Entities or their property are exempt from the necessity to obtain the Government Commission's approval (e.g., transactions in which the acquirer is ultimately controlled by the Russian Federation, constituent entities of the Russian Federation or a Russian citizen who is a Russian tax resident and does not have any other citizenship, as well as certain "intra-group" transactions).

Non-disclosing investors (i.e., those refusing to disclose to FAS information about their beneficiaries, beneficial owners and controlling persons) are subject to special, stricter regime established for foreign public investors. In December 2018, the Russian government approved rules for disclosure this information according to which a foreign investor planning to enter into a transaction in respect of the Strategic Entity needs to make a prior disclosure of its controlling entities, beneficiaries and beneficial owners in order to avoid being treated as a "non-disclosing" investor and ensure that the stricter regime established for foreign public investors does not apply to it. Such disclosure has to be made either in a form of application for approval, if such approval is required, or in a form of informational letter filed with FAS 30 days before the transaction. FAS further clarified this procedure in the commentary to Russia's foreign investments laws that FAS drafted in cooperation with lawyer experts from the business community and released at the end of December 2018. According to FAS, the above advance disclosure requirement extends to exempted transactions in which the acquirer is ultimately controlled by the Russian Federation, constituent entities of the Russian Federation or a Russian citizen who is a Russian tax resident, and is a prerequisite for the relevant exemption to be applicable.

Amendments to Russia's foreign investment laws introduced in 2017 gave the Chairman of the Government Commission the right to decide that prior approval is required with respect to any transaction by any foreign investor with regard to any Russian company, if this is needed for the purpose of ensuring national defense and state security. Upon receipt of such a decision from the Government Commission, FAS will notify the foreign investor about the need to receive approval for a prospective transaction. Any transaction made in breach of this requirement is void. The structure of the types of transactions that could potentially fall under the requirements of this amendment is still being formed. FAS confirmed in the commentary that in practice this rule so far has been applied to very exclusive cases only.

Generally, a review of the application assesses the transaction's impact on state defense and security.

FAS initially requests opinions of the Ministry of Defense and the Federal Security Service as to whether the transaction poses any threat to the Russian defense and security. Additionally, if the target has a license for dealing with information constituting state secrecy, FAS requests information from the Interagency Committee for the State Secrecy Protection on the existence of an international treaty allowing a foreign investor to access information constituting state secrecy.

Russian law does not provide for more details on the review's scope or the criteria on which the transaction under review is assessed.

TRENDS IN THE REVIEW PROCESS

In 2018, FAS considered 85 applications by foreign investors, of which 37 were sent for review by the Government Commission (other applications either did not require approval and were returned to applicants, or were withdrawn by applicants themselves). Of 37 applications reviewed, the Government Commission approved 19, rejected five and extended the review period for the remaining 13. The top-three attractive spheres of investments continued to be fuel and energy complex, sea ports and airports.

HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES

At the early stage of a transaction, a foreign investor should analyze whether the target company qualifies as a Strategic Entity and whether the planned transaction triggers the necessity of the Government Commission's consent. In light of the recent amendments, it is also advisable to analyze whether such consent would be needed in case the acquirer is qualified as a "non-disclosing" investor. This will allow the investor to start filing preparations and then file its application sufficiently in advance to manage the filing's impact on the timing of the transaction.

If the planned transaction does not require prior consent but such would be needed if the acquirer is qualified as a "non-disclosing" investor, it is necessary to disclose to FAS information on the acquirer's beneficiaries, beneficial owners and controlling persons in advance, and at least 30 days before the planned transaction.

REVIEW PROCESS TIMELINE

The statutory period for reviewing the application is three months from the date of its acceptance for review. The Government Commission can extend the review period for an additional three months. As follows from the review process trends, in 2018 the Government Commission used this extension right for quite a large portion of applications pending review.

2019 UPDATE HIGHLIGHTS

  • There were no amendments to Russia's foreign investment laws in 2019
  • FAS has issued a commentary to Russia's foreign investment laws that was drafted in cooperation with lawyer experts from the business community and that clarified certain practical issues of application of Russia's foreign investment laws
  • The Russian government approved the procedure for disclosure of information on foreign investor's controlling entities, beneficiaries and beneficial owners. Pursuant to this procedure, a foreign investor planning to enter into a transaction in respect of the Strategic Entity needs to make a prior disclosure in order to avoid being treated as a "non-disclosing" investor
  • FAS continues to follow the general trend for strengthening control in the foreign investments sphere and eliminating the legislative gaps. Thus, it has drafted a bill which, inter alia, formalizes that the requirement for advance disclosure of a foreign investor's controlling persons, beneficiaries and beneficial owners extends to exempted transactions in which the acquirer is ultimately controlled by the Russian Federation, constituent entities of the Russian Federation or a Russian citizen who is a Russian tax resident, and is a prerequisite for the relevant exemption to be applicable; introduces a concept of "joint control" of the Strategic Entity by several unrelated private foreign investors (currently, this concept applies only to foreign public investors); and resolves practical situations where a Russian citizen controlling the Strategic Entity obtained another citizenship (introducing a requirement for such individual to file the application for postapproval of such event). The bill is still being discussed at various levels, including with the business community and with other governing authorities, and has not yet been submitted to the parliament
  • Most transactions submitted to the Government Commission for review are approved. Such approval contains the term within which the respective acquisition needs to be completed. The acquirer can subsequently apply to the Government Commission with a substantiated request to extend this term, if necessary
  • The Government Commission can approve the transaction subject to certain obligations imposed on the foreign investor. Since 2016, the Strategic Investments Law allows the Government Commission to impose any type of obligation on the foreign investor. Those obligations may include the obligation to invest certain amounts of funds into activities of the Strategic Entity, or to process bioresources or natural resources extracted by the Strategic Entity on Russian territory
  • The Government Commission can reject the application for approval of the acquisition