Agreeing on payment conditions as well as on any holdback amounts for warranty claims has always been problematic in Russian share deals due to the absence of the internationally recognized escrow mechanism in Russian law. In light of this, the parties found themselves in a win-lose situation and tried to mitigate any transactional risk by using letters of credit, statutory pledge or structuring the transaction under foreign law to the extent possible.
The first positive change came in July 2017 when Russian banks were allowed to act as escrow agents and to open special escrow accounts. However, escrow accounts have not become very popular due to rather high bank fees as well as the complex and formalistic approach of the Russian banks. Starting from June 2018, basically any person may act as an escrow agent, and not only funds but also other types of property (e.g. documents, securities, etc.) can be deposited with an escrow agent. In this context, special rules have been introduced for Russian notaries acting as escrow agents which make them a logical and preferred choice for Russian share deals.
Special features of Russian notaries as escrow agents
A limited liability company is the most popular form for a privately held legal entity in Russia. Therefore, transactions with shares in Russian limited liability companies are quite frequent. Such transactions are subject to notarization, i.e. the seller and the purchaser need to sign a share sale and purchase agreement (or a share transfer agreement) in the presence of a Russian notary. In this framework, using a Russian notary as an escrow agent is rather convenient due to the following:
- Flexibility / no notarization is required
There is no need for a separate notarized escrow agreement. Instead, the parties to a share deal only need to sign a rather simple and straightforward joint application whith its contents not being regulated by law. In practice, such joint application refers to the underlying sale and purchase agreement, defines the obligation of the notary as the escrow agent to verify the existence of the grounds for the transfer of the property held in escrow to the beneficiary as well as the procedure for such verification. The underlying agreement itself must also clearly indicate that a notary will act as the escrow agent as well as how and when the deposited property will be transferred to the beneficiary.
- Independence / impartial agent
As an escrow agent, a notary technically acts as a third party to the transaction who undertakes to ensure safe-keeping of the funds, securities or moveable assets until certain conditions are fulfilled. However, unlike in some Western jurisdictions, the notary is formally not a party to the transaction, which is an exception to the general rule set forth in Article 961.1(1) of the Russian Civil Code. A notary is independent of either of the parties, acts impartially and in full compliance with Russian law.
- Safety of funds / special "untouchable" accounts
The degree of statutory protection of the deposited property in Russian escrow arrangements is quite high. Such property can neither be arrested due to claims of third parties and state authorities nor enforced in light of the debts of the escrow agent, the deponent or the beneficiary in bankruptcy proceedings. In addition, Russian notaries acting as escrow agents must open a special public deposit account with a reputable Russian bank and keep the deposited funds in such account. The notary may only accept and subsequently transfer the funds from the public deposit account. Any other transactions on the public deposit account are prohibited. Currently, the only practical drawback is that a public deposit account can be opened only in Russian roubles. Therefore, if the transaction amount is denominated in a foreign currency, the parties to a share deal have to bear certain expenses related to the currency conversion.
- Lower fees
The fees of a Russian notary acting as an escrow agent in a notarized share transfer are limited by Russian law and amount to only RUB 1,500 (approx. EUR 20). Such fees are significantly lower in comparison to the fees of Russian banks providing escrow services.
In light of the above, using a Russian notary as an escrow agent, in particular in Russian share deals, is a practical and recommendable choice. Other options do not appear to be preferable or more attractive in the Russian environment. Russian attorneys-at-law are to some extent less trusted than notaries and do not enjoy the benefits listed above which have been specifically established for notaries. On the other hand, banks acting as escrow agents have proven to be rather formalistic and expensive.