On 1 September 2016, new Russian arbitration legislation (the Reform Legislation) came into force, with significant consequences for Russian M&A deals.
Under the Reform Legislation, disputes arising out of M&A agreements involving Russian companies and shares / participation interests therein (the shares) are deemed corporate. Such disputes can be referred to arbitration starting from 1 February 2017 subject to the conditions discussed below.
The purpose of this information letter is to summarise your possible legal exposure, and offer high-level practical guidance and update you on the most recent relevant developments in respect of arbitration in Russia.
Corporate Disputes: What Is Included and Excluded
A corporate dispute as defined in the Reform Legislation effectively means any dispute relating to the incorporation, reorganisation or liquidation of a Russian company or its management, or to the ownership, encumbrance or transfer of its shares (Article 225.1(1) of the Arbitrazh Procedure Code of the Russian Federation (the APC)). The term arguably covers any and all types of dispute arising out of SPAs, SHAs/JVAs, and, potentially, other types of M&A contracts such as share options, irrespective of the subject matter of the dispute. However, a corporate dispute within the meaning of the Reform Legislation only arises where a dispute (and, by extension, an M&A contract) involves a Russian company.
1. Disputes arising under sale and purchase agreements (the SPAs), share pledge agreements, shareholders’ agreements, joint venture agreements (the SHAs) and other M&A agreements directly involving Russian target companies and their shares are corporate disputes according to a conservative interpretation of the Reform Legislation.
2. Disputes arising under SPAs, share pledge agreements, option agreements and similar contracts relating to shares in a foreign company holding shares in a Russian company (e.g., an offshore holding company that holds shares in a Russian target) are not corporate for Russian law purposes, subject to the limitations and risks discussed below.
3. Disputes arising under SHAs involving foreign companies which:
- establish the management structure and regulate corporate management issues of a Russian target could potentially be recognised as corporate disputes;
- regulate some issues indirectly affecting Russian targets (e.g., reserved matter clauses which pre-determine future corporate decisions in the target company) could qualify as corporate disputes according to a more conservative interpretation of the law, although this remains more of a grey area.
4. Disputes arising under security instruments (other than a Russian share pledge), for example, a deed of guarantee relating to a Russian M&A transaction, are potentially also a grey area. In our view, there is a strong argument that they should not be deemed corporate disputes.
5. Finally, disputes arising under framework agreements and other similar umbrella instruments could be deemed corporateto the extent they contain Russian corporate governance or Russian share disposal elements.
The corporate dispute test is substantive and is driven by the target, i.e., the qualification of disputes as “corporate” for the purposes of the Reform Legislation does not depend on the applicable law of the contract, nor does it depend on the nationality of the parties to the contract.