Starting from 28 January 2018, prior approval of the Central Bank of Russia (the “CBR”) will be needed for:
- the acquisition of more than 10% of shares in, or control over shareholders holding more than 10% of the shares in a Russian insurance organisation as a result of one or several transactions;
- transactions that exceed certain equity ownership thresholds in Russian insurance organisations. Such thresholds for joint-stock companies are 10%, 25%, 50% and 75% of the shares, and 10%, 1/3, 50% and 2/3 of the participatory interests for limited liability companies.
If, however, shares in an insurance organisation are acquired in the course of a public offering or public placement, then such transaction(s) will be subject to subsequent approval by the CBR.
These changes stem from the amendments to the Law “On the Organisation of Insurance Business in the Russian Federation” (the “Law”) to which a new article, article 32.10, was added.
The new regime
Definition of terms
The new requirements will apply not only to the acquisition of more than 10% of shares in an insurance organisation by a sole person or entity, but also by a group of persons. The definition of a group of persons is given in the Federal Law “On the Protection of Competition”. The definition includes, for example, a legal entity and its general director. Legal entities in which more than 50% of the collegial executive body and/or board of directors are the same individuals are also considered to be a group of persons. A commercial company and a person/entity are also considered to constitute a group of persons if the sole executive body of that commercial company is appointed or elected by such person/entity.
In addition, prior approval by the CBR will be required if one plans to acquire direct or indirect control over a shareholder that owns more than 10% of shares in an insurance organisation (or over several shareholders that collectively own more than a 10% stake in an insurance organisation). The concept of control is to be determined in accordance with the International Financial Reporting Standards, which are applicable in Russia. For example, a group of persons is seen as controlling an organisation, if such persons collectively have the authority to determine the financial and operational policies of the organisation in order to benefit from its activities.
The CBR is obliged to consider any application for prior or subsequent approval within 30 days from the date of its receiving the application and all the necessary documents. If the CBR does not notify the applicant in writing of its positive or negative decision within the specified period, then the relevant transaction is deemed to have been cleared and approved to go ahead.
The new version of the Law provides an open and rather broad list of grounds for not granting prior or subsequent approval, such as, for instance:
- the financial standing of the person making the transaction(s) is found to be unsatisfactory. The criteria that will help determine whether or not the financial standing of a shareholder in an insurance company is unsatisfactory have yet to be developed. However, one could refer to the criteria used in the banking sector, where the financial standing of a shareholder is deemed to be unsatisfactory in any of the following situations:
- ongoing insolvency (bankruptcy) proceedings or liquidation proceedings affecting the shareholder;
- the shareholder owes taxes, fees, penalties or fines;
- the shareholder fails to fulfil monetary obligations due to a lack of funds in its bank accounts and other circumstances;
- the person carrying out the transaction(s) fails to meet reputational requirements. Some significant changes to the reputational requirements will also take effect on 28 January 2018; or
- the person carrying out the transaction(s) does not meet the qualification requirements established by the Law (paragraph 8 of article 32.1 of the Law in its new version).
The insurance supervisory authority’s refusal to clear a transaction may be appealed in court.
Consequences of breach
If the CBR discovers a violation of the requirements established by the Law on obtaining prior or subsequent approval, then it will send an order to the offender to rectify the violation. The CBR will also publish on its official website the information about the order no later than the day that it was sent to the violator. A copy of the order is sent to the insurance organisation or to the shareholder of the insurance organisation if the violation of the requirements of the Law occurred during the acquisition of control over the shareholder. In addition, a copy of the order will also be sent to other persons according to a list that will be drawn up and approved by the CBR.
The insurance organisation must, no later than the day following the date of receipt of the order, inform its shareholders of such receipt in accordance with a procedure that will be adopted later by the CBR.
The CBR’s order will be executed in one of the following ways:
- by submitting an application to the CBR for granting subsequent approval for the transaction(s); or
- by “unwinding” the transaction (or transaction chain) in order to return the stakes acquired in violation of the Law, or to stop the takeover of control of the shareholders in the insurance organisation established in violation of the Law.
If the order is executed by going back to the “starting point”, the CBR and the insurance company must be notified about it not later than five days from the date of execution of the order.
From the date that the information on the sent order is posted on the CBR’s official website, up until the date that the information on its cancellation is posted, no voting rights will attach to the shares acquired in violation of the requirements of the Law.
If the CBR’s order is not executed within the specified period, the CBR has the right to file a court action against the violator and request the court to invalidate the relevant transaction(s).
Interestingly, the obligation to notify the CBR about transactions lies not only with the buyers, but also with the sellers, of shares in Russian insurance organisations.
Accordingly, when structuring and executing transactions with shares in Russian insurance organisations, including intra-group transactions, it is recommended that you determine whether or not prior or subsequent approvals of such transaction must be obtained. Further, it will be equally important to take into consideration the possible risk of the CBR’s refusal to clear or approve such transaction or the possibility of its “unwinding” completed transaction.
In addition, it would be diligent to make enquiries about the business reputation and financial standing of counterparties in transactions that involve shares in Russian insurance organisations in order to minimise the possible risk of the CBR’s refusal to clear or approve such transactions.