On 1 April 2022, a draft law (the Draft Law) prohibiting placement and circulation of depositary receipts representing shares of Russian issuers (DRs) and requiring Russian issuers to terminate their DR facilities was published on the State Duma website, which, if/when adopted, would bring an era of Russia-based companies tapping international equity capital markets through DR issues to an end.
The Draft Law is expressed to enter into force 10 calendar days from the date of it being adopted and officially published (Effective Date), save for certain provisions which become effective earlier as discussed in more detail below.
Draft Law: key points
Termination of deposit agreements
According to the Draft Law, placement and circulation of DRs outside Russia is prohibited.
To that end, the Draft Law provides that the Russian issuers shall undertake the following:
(a) within five business days from the Effective Date, take necessary and sufficient measures to terminate the deposit agreements relating to the DR facilities; and
(b) within five business days thereafter, notify the Central Bank of the Russian Federation (CBR) accordingly and provide the necessary evidence of such measures having been taken.
Conversions into shares and status of unconverted DRs
The above effectively means that the outstanding DRs would have to be converted into underlying shares. It should be noted that, for the purposes of effecting such conversions, the Draft Law provides that DR holders would be determined as of the Effective Date. While not entirely clear from doubt, it is likely that any DR holder which acquired DRs post-Effective Date would not be able to exercise conversion rights which may prompt the depositary banks, custodians / clearing systems and foreign stock exchanges to suspend trading in DRs, to the extent not done so already.
Furthermore, from the Effective Date:
(a) shares underlying the unconverted DRs would not grant voting rights, dividend rights and would not be taken into account for the purposes of voting / quorum requirements. Accordingly, no such rights would be attributable and no dividends would be available for distribution to the DR holders. However, unpaid dividends may be claimed by a shareholder following the conversion of the DRs;
(b) no shares can be credited to the ‘depo programme’ custody account (i.e., the account where the shares underlying the outstanding DRs are held), including for the purposes of conversion of shares into DRs.
The Draft Law provides that a Russian issuer may file for a dispensation to be granted authorising such issuer to maintain the DR programme.
The procedure for applying for such dispensation (Dispensation Procedure) would be adopted by the Russian Government. Any such request for dispensation would have to be properly justified, failing which, declined. For the time being, the authority empowered to grant such dispensations has not yet been appointed, but one would expect that the CBR is likely to be vested with this role.
To the extent the dispensation is turned down, the fivebusiness day period for taking measures aimed at terminating the deposit agreement would commence on the date the Russian issuer is notified of the dispensation being declined.
The Draft Law also sets forth a number of regulatory exemptions facilitating and expediting the application thereof:
(a) all decisions / transactions relating to the termination of the deposit agreement may be taken / entered into by the CEO of the Russian issuer without the need to seek approval from the board of directors or shareholders’ meeting;
(b) the conversion of the DRs into underlying shares would not be subject to:
(i) approval of the acquisition of shares in a Russian bank by the CBR;
(ii) approval or notification of the Federal Antimonopoly Service with respect to the transaction in shares in a Russian bank; and
(iii) requirements relating to mandatory offers.
Issues to consider
Although, as noted above, the Draft Law caters for certain regulatory exemptions, there remains a number of issues to be considered by the Russian issuers, including:
- delisting considerations where the DRs remain listed on a foreign stock exchange;
- Russian law requirements relating to converted shares owned by non-resident holders being credited to restricted (i.e., type “S”) depo accounts;
- timeframes of, basis for and commercial considerations relating to the early termination of deposit agreements; and
- considerations relating to the conversion ratio.
In light of the above, Russian issuers may wish to approach the depositary banks, stock exchanges and their legal counsel in advance.
As of the date of this alert, the Draft Law has not yet been adopted. As currently drafted, the above amendments are expressed to enter into 10 calendar days from the Draft Law being adopted and officially published, save for the provisions relating to the Russian Government being authorised to adopt the Dispensation Procedure which enter into force from the date the Draft Law is adopted and officially published.