Contributed by Anton Sitnikov, Partner, Head of Corporate / M&A, and Nikolay Kholshev, Counsel, Corporate / M&A, Bryan Cave Leighton Paisner (Russia) LLP (until 2018 in Russia Goltsblat BLP)
Chambers Europe 2019 Russia overview
The M&A market in Russia seems to be demonstrating growth in 2018 in terms of the overall value of transactions. According to some surveys, the value of M&A transactions with participation by Russian companies increased in the first half of 2018 by as much as 134% over the same period in 2017. At the same time, this increase in the value of M&A transactions has not resulted in a corresponding increase in the number of M&A transactions. Furthermore, an overall reduction in the number of M&A transactions is expected in 2018.
The leading sectors in which the Russian market players were most active include the energy and natural resources, IT and retail industries. There has also been a substantial growth in M&A activity in the telecoms, media, consumer and industrial sectors.
Following the significant development of Russian corporate law, Russian courts clarified and interpreted these new provisions, offering much awaited guidance to practitioners. We observe that, in light of these developments and clarifications, parties actively utilise the Russian law instruments as assurances on circumstances (comparable to representations and warranties), compensation for proprietary loss (comparable to indemnity), conditional performance of undertakings (including conditions that depend entirely on the will of a party), an option mechanism and Russian law retention accounts.
In our experience, mid-market deals as well as transactions between Russian companies, are more likely to be governed by Russian law. Having a transaction with the state acting as a buyer or seller might also increase the likelihood of the transaction being structured using Russian law.
At the same time, major transactions and transactions with foreign companies still tend to be governed predominantly by English law, demonstrating traditional preferences of the M&A market players.
This means that law practitioners have to be equally familiar with and skilled in both Russian and English law and be prepared to advise their clients on advantages and disadvantages of different options for structuring the M&A transaction in question.
The recent arbitration law reform also clarified parties’ ability to choose a forum for resolving M&A related disputes. Previously, it was much debated whether certain types of corporate disputes relating to Russian companies (for example, shareholder agreements, subject to certain requirements) could be submitted for arbitration. As a result of the reform, such disputes are now expressly recognised as arbitrable. The law requires all arbitration institutions to qualify as “permanent arbitration institutions” in order to be authorised to administer arbitrations seated in Russia or certain corporate disputes seated abroad, e.g., arising under share purchase or share pledge agreements in relation to shares in Russian companies. At the time of writing, the list of such permanent arbitration institutions includes only four arbitration institutions: the International Commercial Arbitration Court (ICAC), Maritime Arbitration Commission (MAC), Russian Arbitration Centre at the Russian Institute of Modern Arbitration (RIMA) and the Arbitration Centre of the Russian Union of Industrialists and Entrepreneurs (RSPP). The law provides that foreign arbitration institutions enjoying a “widely recognised reputation” have an opportunity to be recognised as “permanent arbitration institutions” without having to comply with the extensive new Russian legal requirements.
The Russian Ministry of Justice is considering an application by the Hong Kong International Arbitration Centre (HKIAC) to receive governmental permission to administer arbitrations seated in Russia. Until the HKIAC or another foreign arbitration institution receives such permission, parties have to arbitrate their disputes in Russia-based arbitration institutions, retain their cases to be heard in state courts or structure their M&A transactions through offshore SPVs to be able to use the ICC, LCIA, SCC or another foreign arbitration institution of their choice.
There have been other regulatory developments, such as fine-tuning of the rules related to registration and operation of companies (approval of model charters for limited liability companies, streamlining of the registration procedure for limited liability companies, clarification of shareholders’ information rights and requirements on approval of major and interested-party transactions). Furthermore, certain new concepts already recognised in other jurisdictions have been introduced into Russian law, such as inheritance funds and syndicated loans.
Regulation of digital market and stricter control over foreign investment
In addition to the regulatory improvements discussed above, there have also been adjustments of the legal requirements in areas that might be relevant to investors interested in purchasing Russian assets.
The Russian Federal Antimonopoly Service (the “FAS”) is currently considering a wide set of amendments in response to the challenges of the digital economy. These amendments are primarily focused on introducing new criteria for establishing dominance on digital markets: (a) ownership of relevant digital facilities (platforms) for bringing together consumers and business; and (b) so-called “network effects”, whereby bigger numbers of consumers improve the customer value of goods. These two criteria together would suffice for finding a company to be dominant on a digital market.
In addition, the FAS has started paying more attention to merger control regulation and has declared that it will focus on this area for the next few years. This means that there will be more deals that the antitrust authority will analyse in detail, which might result in certain remedies being imposed on the parties (e.g., transfer of technology and compulsory licensing). Consequently, the above amendments provide a new threshold for M&A deals and also contain provisions extending the FAS’s authority to issue behavioural remedies as part of the merger control procedure.
The foreign investment control procedure has been amended several times over the last two years. Now any transaction concerning a foreign investor in a Russian company will potentially need government approval. Previously this was required only in case of acquiring control or veto rights over companies in so-called strategic sectors. Foreign investors are now also required to disclose their beneficiaries and controlling persons to the competition authorities before making deals involving Russian strategic entities. In addition, we have noted that, in the last two years, the actual review process timeframes have been extended up to one year, possibly in connection with delicate negotiations with the authority on potential clearance conditions.