Analytics Law Review

Russian laws[1] address certain requirements for foreign investors willing to contribute to Russian legal entities of strategic importance for national defense and state security (Strategic enterprises). A legal entity is considered to be a Strategic enterprise if it conducts business activities in the following areas (the list is not exhaustive):

(i)   those that have an impact in the area of hydrometeorology;

(ii)  those that have an impact on geophysical processes;

(iii) activities related to radiation and nuclear power;

(iv) space activities;

(v)  data encryption, etc.

A "foreign investor" is a category that include international organizations, states, companies and natural persons registered outside Russia.

There are two basic rules for foreign investors.

(1) Any actions or transactions enabling foreign investors to exercise control over the Strategic enterprise require a state pre-deal consent. The Law on Strategic Enterprises stipulates certain criteria that determine whether actions or transactions lead to what can be defined as control.

(2) Acquisition of five percent, or more, of the shares in a Strategic enterprise require a post-deal notification.

What is important is that the Law on Strategic Enterprises does not require a foreign investor to be a party to the deal that is subject to state control.

Pre-deal authorization

Article 7 of the Law on Strategic Enterprises names an extensive list of transactions that require pre-deal authorization from the Governmental Commission on Control over Foreign Investments (the Commission). For example, pre-deal authorization is required for transactions that result in the foreign investor’s direct or indirect rights to (i) have over 50% of the votes in a strategic enterprise at its disposal; (ii) appoint a General Director, etc.

A "transaction" does not necessarily mean a contract; it may also include actions or other legal circumstances subject to state control.

To obtain pre-deal authorization, a foreign investor needs to submit an application to the Federal Antimonopoly Service of the Russian Federation (the FAS) for review. Within 14 days, the FAS verifies the documents and completeness of the information submitted, and either returns the application, or forwards it to the Commission for decision-making (Articles 9-10 of the Law on Strategic Enterprises).

The Commission may allow the transaction or reject it. If the transaction is allowed, the Commission may charge the applicant with one or several additional obligations under a special agreement (to follow the business plan, to continue conducting business activities aimed toward filling government defense orders, etc.).

Post-deal notification

A foreign investor is required to inform the FAS about any acquisition of five or more percent of the shares in a Strategic enterprise, even if such a deal does not provide control over the company (Article 14 of the Law on Strategic Enterprises).

The idea behind the notification requirement is that the FAS should be able to exercise control over foreign investors' influence on the activities of strategic companies.

Failure to comply with the requirements outlined in the Law on Strategic Enterprises may result in the following consequences (the list is not exhaustive):

(i) a transaction that required pre-deal authorization could be considered void;

(ii) the foreign investor's voting rights in a Strategic enterprise may be annulled by the court

(iii) management decisions, as well as contracts signed during the contract period, could be declared void, etc.

Therefore, we recommend that foreign investors take particular heed of the special rules outlined in the Law on Strategic Enterprises, and do an assessment of the associated risks.

[1] Federal Law No. 135-FZ "On Protection of Competition in the Russian Federation" dated July 26^th, 2006, and Federal Law No. 57-FZ "On Procedures for Foreign Investments in Legal Entities of Strategic Importance for Russian National Defense and State Security," dated April 29^th, 2008 (the Law on Strategic Enterprises).