Russia is considering introducing legislation that, if adopted, will have a dramatic impact on foreign-owned businesses and their strategies concerning Russia. The goal of the proposed law is to (1) warn foreign owners that they may lose their Russian companies if they abandon them and (2) conserve business and preserve jobs by allowing the sale of affected companies’ assets to a Russian third-party.
The draft law has not been submitted to Russia’s parliament and has already received criticism for its sweeping nature. The legislation may be amended before it goes to the parliament for review.
The concept of special external management is similar to the court-appointed administration of an insolvent company. The draft law proposes several rules to conduct the management-takeover and to insulate the business of the affected company, including the following:
Employees of Russia’s Deposit Insurance Agency (DIA)—Russia’s state corporation overseeing bankruptcy of financial institutions—will serve as external managers for affected companies in the financial industry. Employees of VEB.RF—Russia’s state development corporation—will act as external manager for companies in other industries. (When interacting with DIA and VEB.RF, the direct and indirect impact of sanctions imposed by several countries must be assessed as well. For example, VEB.RF has been directly sanctioned in several jurisdictions.)
Under the draft law, an external manager must compile a list of creditors and their claims, and otherwise take actions to preserve the value of the affected company in a manner similar to bankruptcy managers. Among other things, an external manager can “spin off” the company’s assets into a separate company and sell that company at public trades. Once the sale is completed, the external manager will file with a Russian court for bankruptcy or liquidation of the affected company.
Any Russian company (1) with the balance sheet value of its assets above one billion rubles and/or with more than 100 employees; and (2) controlled, or at least 25% owned (directly or indirectly, in aggregate), by persons residing in, registered in, having their main place of business in, or main source of income from any of the unfriendly states, in any of the following cases:
Reportedly, the Russian authorities are putting together a list of foreign-owned businesses that have recently announced ceasing operations in Russia and will consider introducing the external management to them; some names are mentioned in various publications.
The following persons may apply to have the special external management be introduced:
The Russian government may introduce additional grounds for external management introduction.
A person requesting external management must apply to the Commercial (Arbitrazh) Court of the City of Moscow. The court must consider the case within five to seven business days. The court may also impose interim restrictive measures on the affected company, until the final decision on external management is made.
These measures include prohibitions on
Before the date of the court hearing, the general director of the affected company or its shareholders holding more than 50% voting authority may file an application against the external management and provide an undertaking to resume and continue the affected company’s operations.
The draft law suggests certain examples of possible undertakings—a sale or transfer in trust of the shares in the affected company to a person who is not connected with any unfriendly state (such sale or transfer to be completed within three months from the court decision), or other providing the court with convincing arguments that the circumstances causing the application to be filed will be terminated.
Special external management may be discontinued by the court if shareholders holding more than 50% voting authority apply for a discontinuance and provide an undertaking as described above, and pay the external manager’s fees. The court must consider this within 10 business days.
Within six months upon early termination of the external management, the external manager will have the right to request documents from the company and the purchaser/trust manager, as relevant, to check compliance with the terms and conditions on which the external management had been discontinued.
The procedure will generally follow the rules on public sales in a bankruptcy proceeding, with several specifics. For example, shareholders of the affected company will not be able to buy the company at such trades. Certain preemption rights (right to match) will be given to bidders operating in the same industry as the affected company.
The winning bidder will enter into a purchase agreement with the external manager, under which the winning bidder must undertake to preserve not less than two-thirds of the jobs of the affected business and to ensure the continuation of operations for at least one year. The external manager retains a right to verify compliance of the purchaser with the conditions imposed by the purchase agreement.
Foreign creditors affected by the decree may also be protected under one of the bilateral investment treaties concluded by the Russian Federation. These treaties provide guarantees to foreign investors; for example, with regard to expropriation and the free transfer of capital. Claims by foreign investors against the Russian Federation under these treaties can be brought before an international arbitral tribunal.
Matters of currency exchanges and currency conversion of existing obligations have already resulted in a series of arbitrations against certain countries; for example, Argentina.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Giovanna M. Cinelli Bruce Johnston Melanie Ryan Grigory Marinichev