There have been several legislative initiatives published recently aimed at reforming the legal environment for M&A deals and business practices in Russia. One initiative is the so called "fourth antimonopoly package of laws" (the "Antitrust Amendments") which has been the subject of heavy criticism from the business community. Many perceive it as an attempt to increase further the regulator's powers rather than foster competition. The package has not been submitted to the Parliament yet but is still expected to become a law by the year-end.
Another initiative is a draft bill amending the Strategic Law 57-FZ (including regulator's proposed changes, the "Bill"). The Bill may be adopted in the first half of 2014. It contains some helpful clarifications although it is debatable whether such clarity is always helpful to boost foreign investment. Finally, recently, Russian LNG legislation has been liberalised so that companies such as Rosneft and Novatek are now allowed to export LNG directly rather than through Gazprom. Hopefully this will attract more investments into this area which may require further legislative input. Set out below is a short summary of (i) the "business-friendly" changes which are aimed at attracting new investments in Russia and (ii) the changes which introduce new requirements or restrictions.
Strategic Law: Russian individuals free to invest in strategic assets (no need for both parties to be Russian)
Currently, there is no need to seek a Strategic Law approval for an acquisition of a Russian strategic asset where both the purchaser and seller are controlled by the Russian state or Russian nationals (being Russian tax residents and having no other nationality). A puzzling question – why should it matter whether the seller is also Russian if it will cease to control the asset after the transaction. The Bill clarifies this issue and confirms that going forward, assuming the bill is adopted in its proposed form, only the acquirer (and not both parties) will need to be Russian. In other words, Russian nationals acting through offshore companies would be exempt from seeking the Strategic Law approval for acquiring strategic assets in Russia.
Antitrust regulator to apply market analysis in its decisions
Where a company is found to be dominant in a market, its business could be subjected to an intensive review by the antimonopoly regulator. Companies therefore need to be careful about the business practices they use (eg exclusivity, resale price-maintenance, etc). Dominance is currently presumed if a company has a market share of over 50% and can be argued by the regulator for companies with a market share of over 35%. A register of companies holding over 35% of their given market maintained by the regulator has been a helpful tool for the regulator when arguing the question of dominance. Very poorly kept and infrequently updated, the register has unjustifiably subjected businesses to a strict compliance review. Now the Antitrust Amendments provide that market share should be calculated in each particular instance without a reference to any register. This will give businesses more leverage in putting forward their case of no dominance in which case no special control would apply. Further, the law will require that the regulator carries out a full-scale market review when investigating any abuse of dominance and other offences.
Structuring a Russian LNG investment becomes easier
Russian LNG export legislation has been recently liberalised. Previously, only Gazprom was allowed to export LNG and other LNG producers would enter into an agency agreement with Gazprom in order to export LNG. Now the law contains a set of criteria, subject to which Russian companies may export LNG directly. Currently, only two companies qualify – Rosneft and Novatek although it seems that the criteria might be interpreted to include other companies as well. Therefore, in future investment into an LNG joint venture with Rosneft or Novatek could be structured more simply, i.e. without having to agree exports with Gazprom, especially if it is not a party to the transaction.
2. Tightening-up control: new restrictions and requirements
Joint cooperation agreements to require antimonopoly approval
The Antitrust Amendments seek to introduce a separate type of merger control approval for the entry into joint cooperation agreements between competitors. In the previous guidelines published by the regulator, these were defined as agreements whereby parties pool their assets and jointly assume business risks. The regulator has invited parties to submit such agreements for a compliance review (eg where the agreement contains non-compete clauses). With this new development, it is not entirely clear whether an M&A transaction would require both ordinary merger control and this new type of clearance. Hopefully, the introduction of this new type of control would help the regulator distinguish between cartels and customary competitor agreements.
Strategic Investment Law: only parent-subsidiary transactions to be exempt
Currently, there is no need to approve an acquisition of a strategic company (with the exception of subsoil users) in case of intra-group transactions, ie the group continues to control more than 50% of the target. The regulator was not comfortable with the potentially broad scope of this exemption, given how wide the concept of a "group" may be when using various criteria for assessing affiliation. The Bill proposes that only parent-subsidiary transactions should be exempt. In other words, only interposing an intermediary holding company or moving the asset upward or downward within the parent group would be allowed without regulator's approval. At the same time, a similar exemption is proposed for strategic subsoil users (which is not currently available) with the threshold set at control of 75%.
Foreign governmental investors – foreign states' shares to be aggregated
Currently, the Strategic Law provides for stricter rules for foreign investors controlled by foreign states and certain international organisations as compared to foreign private investors. The question has always been – where an investor is owned by several foreign states (eg. the major Scandinavian telecom company TeliaSonera which Russian courts deemed as a foreign governmental investor through the aggregation of the shares of Sweden and Finland), should the shares held by foreign states be aggregated? Previously there was no guidance in the law or from court practice. Now the Bill expressly confirms that foreign governments' shares should be taken together in determining whether an investor is controlled by a foreign state. In other words, the focus is shifting from foreign state investor to foreign state capital.
Strategic Investment Law: other notable changes
The regulator has proposed amending the Bill to introduce a new type of Strategic Law approval for the acquisition of 25% or more of the fixed production assets of a strategic Russian business. With this development, it would not be possible to bypass the approval requirement by structuring an acquisition as an asset deal.
An unrelated sectoral development – where Russian fisheries (which are deemed strategic companies) are controlled by foreigners, the Bill proposes that Russian fisheries will only be allowed to catch fish if the foreign control has been approved under the Strategic Law. This development follows an illustrative example of a Chinese company, Pacific Andes, which was ordered to dispose of the Russian fisheries it owned as it had failed to have its investment in those fisheries duly approved. This development may affect number of Asian companies active in the Russian fishing market.
Third Party Access regime to apply to dominant companies
Currently, Russian natural monopolies (e.g. Russian Railways, energy generation, ports, etc) are subject to a third party access regime. If this regime applies, then these monopolies need to provide customers access to their facilities and infrastructure on terms which would apply in a competitive environment. Now the Antitrust Amendments propose to extend this regime to dominant businesses with a market share over 70%. This may affect such Russian companies as Uralkali (world's largest potash producer), PhosAgro (major chemical producer) and many others. With this development, major market players may be required to use standard-form contracts, to include certain terms in commercial contracts and be required to service a group of customers in a priority order. If this amendment takes effect, there is the risk that it will allow the regulator to interfere unduly with business practices used by major companies.