Year in Review - Russian Law in 2016

Arbitration reform: In September 2016 new laws in relation to domestic and international arbitration came into effect. The main features of the new laws include: (1) identification of a wide range of disputes that can be referred to arbitration; (2) arbitrability of corporate disputes in relation Russian companies, subject to certain limitations and exceptions; (3) establishment of permanent arbitral institutions (“PAIs”) by non-commercial organisations, subject to certain conditions and following a receipt of a license to perform these functions from the Russian Government; and (4) extension of the authority of state courts to provide assistance to PAIs. A particular highlight of the reform is a direct rule that a majority of corporate disputes are arbitrable. Among non-arbitrable corporate disputes the new laws name disputes in relation to legal entities of substantial significance for national defense and state security (“Strategic Entities”) at the time the judicial or arbitral proceedings are brought. The new laws exempt from this rule and indicate as arbitrable corporate disputes connected with holding shares, participatory interests in the share (contributed) capital of the Strategic Entities, if such disputes result from transactions, which do not require a pre-transactional approval. Arbitrable corporate disputes can be considered in arbitrations administered by PAIs but not in ad hoc arbitration. Special requirements for arbitration are applicable to the majority of corporate disputes: (1) the disputes shall be considered under special arbitration rules for consideration of corporate disputes, (2) the seat of arbitration shall be in Russia, (3) a legal entity, all shareholders and other parties which are claimants or respondents in a case shall be parties to an arbitration agreement. The new laws state that arbitration agreements in relation to corporate disputes, regulated by the new laws, can only be concluded on or after 1 February 2017. Arbitration agreements which are concluded before February 2017 will be deemed unenforceable.

Obligatory pre-litigation proceedings: On 1 June 2016 new rules in relation to obligatory pre-litigation proceedings came into effect. The new requirement is that before submitting a claim to the Russian state arbitrazh court the parties must submit a pre-litigation request to the opponent. Only after the expiration of a 30-day period a party can file a claim with a Russian state arbitrazh court. The parties can stipulate a shorter term for a pre-litigation request in the agreement. If a claimant has failed to comply with the mandatory pre-litigation procedure, the court will refuse to accept the claim or leave the claim undecided (if it has already been accepted). The legislation contains a list of certain categories of claims to which the mandatory pre-litigation procedure does not apply. The list includes bankruptcy disputes, corporate disputes, class actions and challenges of domestic arbitral awards. The new requirements are not applicable to submitting a claim to international arbitration, i.e. a party does not need to submit any pre-arbitration request to the opponent before submitting a request for arbitration to an international arbitral institution unless it is expressly indicated in the contract.

Derivatives markets developments: The Russian derivatives market is experiencing an ongoing regulatory reform and it appears to be high on the Central Bank’s agenda. Over the past years there have been a number of important regulatory changes which affect the market and more changes are planned by the regulator. This includes changes to the trade reporting regulations, regulator’s proposals to improve the financial collateral legislation, introduce domestic structured notes and mandatory centralised clearing for certain standardised swaps. Read more

Squeeze-out procedures simplified: In July 2016 amendments to the joint stock companies’ law came into force which simplified the procedure for the squeeze-out of minority shareholders of a public company in the course of reorganisation. If two or more public companies are reorganised in the form of a merger or an accession, and as a result of such reorganisation, the sole shareholder of one of such companies becomes the owner of more than 95% of the reorganised company, it may submit a voluntary offer to acquire the remaining shares in the company within 5 years from the date of the reorganisation. If, as a result of such voluntary offer, it acquired at least 50% of the remaining shares, such shareholder is entitled to call for the squeeze-out of all the remaining shareholders within 6 months from the expiry of the term for the acceptance of the voluntary offer at a price not lower than that under the voluntary offer.

Beneficial owners disclosure: On 21 December 2016 new rules in relation to the disclosure of information on the company’s beneficial owners (i.e. individuals holding, directly or indirectly, more than 25% of the company’s shares or having the ability to control its actions) came into effect. Under the new requirements companies must obtain and record information on their beneficial owners, update such information on an annual basis, keep it for 5 years from the date of receiving such information and provide it to the tax and other regulatory authorities at their request. The law applies to foreign entities carrying out their activities in Russia subject to certain exemptions such as for foreign companies whose securities have been listed on a recognised foreign exchange or foreign unincorporated structures which by their nature may not have beneficial owners.

Contributions to assets of JSCs: Amendments to the joint stock companies law enacted on 15 July 2016 at last provided for the possibility of non-refundable contributions into the assets of a Russian joint stock company (“JSC”). Previously, such contributions were expressly permitted by Russian law for limited liability companies only, whereas a non-refundable contribution by the shareholders into the assets of a JSC were associated with a risk of being qualified as a “gift” (in Russia, “gifts” between commercial entities are prohibited).

Amendments to the Trade Law in 2016: In July 2016 a set of major amendments to the Federal Law No.381-FZ “On the Principles of State Regulation of Trade in the Russian Federation” (the “Trade Law”) came into effect. One of the biggest changes introduced by these amendments is the rule that the maximum total bonus (the aggregate of bonuses for advertising, marketing, logistics and other services in addition to the ‘bonus for volume of purchase’) that a retail chain is allowed to receive from the supplier is 5% of the total price of purchased goods. Before these amendments, the Trade Law had regulated only the ‘bonus for volume of purchase’ which could not exceed 10% of the total price of purchased goods (other services could be subject to additional unregulated bonuses). Further, in accordance with the amendments, the delay for the payment for different categories of food products has been decreased to 8-30 days instead of a maximum of 10-45 days with the term depending on the shelf life of the goods. In addition, the amendments to the Trade Law now expressly regulate that agency and commission and similar agreements may not be used for food product supplies to retail chains; that any bonuses not envisaged by the Trade Law may not be paid to retail chains at all; and that the Trade Law prohibitions (e.g., discrimination and bundling, creation of barriers to access to the market, etc.) apply to all entities which constitute one “group of persons” (within the meaning provided by antimonopoly legislation) with the entities which are subject to the Trade Law regulations.

Anti-corruption: In July 2016, the Russian Parliament adopted changes to the legislation on anti-bribery and corruption which: (1) clarified the definitions of corruption crimes and sanctions for them; (2) introduced fixed amount of fines and increased terms of imprisonment for many types of corruption crimes (up to 15 years); (3) differentiated the sanctions for commercial bribe-giving and receipt of a commercial bribe based on the amount of the relevant bribe (previously only sanctions for public bribe-giving and receipt of a public bribe depended on an amount of a bribe);  (4) introduced new corruption crimes – (i) minor public bribery and (ii) minor commercial bribery (for bribes not exceeding RUR 10,000 (approx. €145)) and (iii) mediation in commercial bribery (previously only mediation in a public bribery was specified in the legislation as a criminal offence).

Year to come - Russian Law in 2017

Arbitration reform: The new laws on arbitration generally came into effect in September 2016. However certain amendments will come into effect in 2017: (1) from 2017 state courts will consider applications for enforcement or for setting aside arbitral awards during one month (compared to three months under previous legislation); (2) from February 2017 parties can conclude arbitration agreements in relation to corporate disputes (subject to compliance with certain requirements); and (3) on 1 November 2017 expires the time period for obtaining a licence from the Russian Government for existing arbitral institutions if they want to be recognized as permanent arbitral institutions. Arbitral institutions which do not obtain a licence will not have the right to administer disputes and their activity will be considered as ad hoc arbitration.

New corporate approvals procedures: In January important amendments to the laws governing the so-called interested party transactions (“IPTs”) (similar to related party transactions) and major transactions (“MTs”) will come into effect. The approach to such transactions has been reversed: the regulation of IPTs now becomes more flexible as compared to MTs whereas previously the opposite was true. (i) Under the new regime IPTs will no longer require a mandatory preliminary approval by the company’s non-interested directors or shareholders. Such approval will only need to be obtained on the demand of the members of the company’s management bodies or shareholders holding at least one per cent. of the company's voting shares. That said, the new legislation imposes quite onerous notification obligations on the companies in relation to their planned and executed IPTs and envisages specific grounds for invalidation of unapproved IPTs. These additional provisions substantially diminish the effect of the elimination of the approval requirement and in practice the counterparties are still likely to insist on the approval for an IPT to be obtained. (ii) For a non-public joint stock company or for a limited liability company it is now possible to introduce an alternative procedure for the approval of an IPT or to expressly provide that such company is not subject to any statutory IPT provisions. (iii) The list of persons who may be deemed interested in a transaction has been changed and, in particular, includes a controlling shareholder instead of a 20 per cent. shareholder (together with its affiliates). (iv) The law no longer allows excluding the requirement for the approval of an MT or changing the definition of an MT by raising the materiality threshold in the charter of a limited liability company. (v) The law has widened the list of exclusions from the IPT and MT rules. For instance, minor transactions (i.e. those below the lesser of 0.1% of book value of the company’s assets or the minimum value to be set by the Russian Central Bank) and transactions executed in the ordinary course of business (with certain exceptions) will be carved out from the IPT rules.

Tender offer rules: In 2017 we expect the enactment of the amendments on the tender offer rules for public joint stock companies – the relevant draft law passed its first hearing in the State Duma in June 2016. The key proposed changes include the following: (i) tender offer rules will apply to non-voting preference shares and securities convertible into such shares; (ii) if a mandatory offer is triggered and until it is completed, the voting rights of the purchaser will be limited to 3/7 of the total number of votes held by the other shareholders; (iii) acquisition of indirect control over a public company will trigger the mandatory offer; and (iv) if the obligation to launch a mandatory offer is breached, any shareholder whose shares could have been tendered may within a year from the moment it becomes aware of the breach force the offeror to buy-out its shares.

Standard charters for LLCs: 2015 amendments to the law on limited liability companies introduced the possibility for a limited liability company to accede to a standard charter to be approved by the Russian government. We are expecting the resolution of the Russian Ministry of Economic Development approving such charter in 2017 as its draft has been undergoing public consultation since July 2016.

Beneficial ownership confirmation: Starting from 2017 due to amendments to the Tax Code, in order to rely on double tax treaty benefits, it will be obligatory for foreign income recipients to confirm their beneficial ownership of income. Previously, Russian tax agents had the right to ask foreign recipients of Russian-source income to confirm their beneficial ownership status. There is no official form or guidance for the confirmation, contract parties have to agree it in the documentation.

National Competition Development Plan for 2017-2018: The Federal Antimonopoly Service (the “FAS”) is preparing the National Competition Development Plan for 2017-2018 (the “Plan”). As of the date of this publication the draft of the Plan is not publicly available. However, according to the FAS, the Plan is expected to propose deregulation in the certain sectors of the economy (it is not yet clear which sectors will be affected but the regulation of natural monopolies – the newest area of FAS’ responsibility – is likely to undergo a significant overhaul) and introduce a prohibition on the creation of state enterprises in competitive markets. In addition, it is planned to restrict state enterprises and state companies in the acquisition of shares in other companies. Once adopted, the National Competition Development Plan will mould the competition policy for at least all of 2017 – long-term competition regulation plans tend to be revised annually or replaced with new plans before their initial expiration date.

Proposed differentiation in the liability for anticompetitive agreements: The FAS has developed a set of amendments to the Code of Administrative Liability of the Russian Federation which would lead to the differentiation in the liability for “anticompetitive” agreements. In particular, liability is to vary depending on the extent of public danger which the particular anticompetitive agreement represents. For instance, the minimum fine for cartels is proposed to triple (increasing from 1% to 3% of turnover). At the same time, the maximum fine for other – less harmful - anticompetitive agreements is to decrease from 15% to 3-5% of turnover.

Proposed amendments to the Competition Law and Strategic Law in 2017: In June 2016 a draft law changing tender offer procedures in relation to large stakes in public joint stock companies was passed by the State Duma in the first reading. In particular, it proposed certain amendments to the Federal Law No.135-FZ “On Protection of Competition” (“Competition Law”) and the Federal Law No.57-FZ “On Foreign Investments into Entities of Strategic Significance for Defence of the Country and Security of the State” (“Strategic Law”). According to these amendments, if a particular transaction triggers both a mandatory tender offer in relation to the shares of a public company and an obligation to obtain a clearance(-s) in accordance with the Competition Law or the Strategic Law, the relevant applications should be filed with the regulatory bodies in relation to the acquisition of the entire 100% of the shares of such public company (even if a lesser stake will in fact be or is expected to be acquired).

Proposed amendments to the Procurement Law 223-FZ in 2017: Certain amendments to the Federal Law No.223-FZ “On Procurement of Goods, Works and Services by Certain Legal Entities” (“Procurement Law”) passed by the State Duma in the first reading in late 2015 are still under consideration and it is unclear when the second reading will take place. However, the amendments are expected to change the Procurement Law significantly in particular due to the introduction of the exhaustive list of permitted procurement procedures (these currently remain unregulated and in the discretion of the regulated entities).

Anti-corruption: Further amendments to anti-corruption legislation are in progress. If passed, they would: (1) introduce liability for (i) a promise, (ii) an offer or (iii) a request to receive or transfer a bribe or a commercial bribe; (2) increase sanctions for the bribery of a public official, a foreign public official or an official of a public international organisation; (3) introduce liability for public and commercial bribery where the bribe is of non-pecuniary nature, (4) introduce liability for (i) undue influence, e.g. any illegal transfer, offering or promise of money, securities, other property or pecuniary or non-pecuniary services to a public official, foreign public official or an official of a public international organisation (directly or through a mediator) and (ii) the consent of such an official to use his/her influence.

Proposed introduction of compulsory licensing of pharmaceuticals: In November 2016 a draft federal law introducing amendments to the Civil Code of the Russian Federation which add new grounds for application of the compulsory license was published. Pursuant to the proposed law (which was developed by the FAS), the compulsory license can be issued by the Government of the Russian Federation and such license will allow the use of intellectual property in the pharmaceutical industry without the consent of the relevant IP owner by merely notifying the IP owner and providing an appropriate compensation to such owner for the sake of protection of health and life and national security (currently such license can be issued in the interests of national security only). Proposed amendments are strongly opposed by various market participants, however, this remains an active initiate of the FAS and is likely to see swift development in 2017.