Contributed By Bryan Cave Leighton Paisner (Russia) LLP
Overall, mergers and acquisitions (M&A) activity in Russia was almost flat in terms of value in 2018, totalling EUR19.99 billion across 153 transactions, compared to EUR20.2 billion (178 deals) announced in 2017 (according to Mergermarket). The second half of the year showed the lowest value and number since 2002, with only EUR5.8 billion (29% of total annual activity) across 74 deals.
Choice of law – more obvious than before yet not to be underestimated and not always made swiftly
Following the significant and, to a certain extent, revolutionary development of Russian corporate law, Russian courts, including the Supreme Court, have begun to clarify and interpret these new provisions, offering long-awaited guidance to practitioners. In light of these developments and clarifications, it appears that parties now have more confidence in Russian law when structuring their transactions and actively utilise these Russian legal instruments as assurances with regards to 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, Russian law retention accounts and others.
Mid-market transactions, as well as those between Russian companies, are likely to be governed by Russian law. Having a company with State participation acting as a buyer or seller might also materially increase the likelihood of a transaction being structured using Russian law.
At the same time, large-scale transactions and transactions with foreign companies still tend to be governed predominantly by English law (most customary at a foreign level), demonstrating the traditional preferences of M&A market players. For law practitioners providing legal support for M&A transactions, this means they must be equally familiar with, and skilled in, both Russian and English law and be prepared to advise their clients on the advantages and disadvantages of different options for structuring the M&A transaction in question.
Choice of venue – less available than before
The recent arbitration law reform also clarified parties’ ability to choose a forum to resolve M&A-related disputes. Previously, it was much debated whether certain types of corporate disputes relating to Russian companies (eg, shareholder agreements subject to certain requirements) could be submitted for arbitration. As a result of the reform, these disputes are now expressly recognised as arbitral. However, the law now requires all arbitration institutions to qualify as ‘permanent arbitration institutions’ to be authorised to administer arbitrations based in Russia or certain corporate disputes based abroad, eg, arising under share purchase or share pledge agreements in relation to shares in Russian companies.
To date, there are only four permanent arbitration institutions, all of which are based in Russia:
Although the law provides foreign arbitration institutions enjoying a ‘widely recognised reputation’ with an opportunity to be recognised as ‘permanent arbitration institutions’ without having to comply with the extensive new Russian legal requirements for such institutions, no foreign international arbitration institution has, as yet, received this status. At the same time, it has been publicly reported that 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 this 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 special purpose vehicles (SPVs). Only this will enable them to use the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), or another foreign arbitration institution of their choice.
There have been other regulatory developments aimed at generally improving the business climate in Russia. There has been fine-tuning of the rules related to registration and operation of companies, eg, the streamlining of the registration procedure for limited liability companies, clarification of shareholders’ information rights and requirements on approval of major and interested-party transactions. In contrast, certain new concepts already recognised in other jurisdictions have been introduced into Russian law, such as inheritance funds and syndicated loans.
Regulation of digital markets, stricter control over foreign investment and counter-sanctions
In addition to the regulatory improvements discussed above, there has also been some adjustment of the legal requirements in areas that might be relevant to investors interested in purchasing Russian assets.
The Federal Antimonopoly Service of the Russian Federation (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:
In addition, the FAS has started paying more attention to merger control regulation and has declared that it will focus on this sphere 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, eg, transfer of technology and compulsory licensing. Consequently, the above amendments provide a new threshold for M&A deals: the deal price, which should help in covering transactions within the digital sector, and also contain provisions extending the FAS’s authority to issue behavioural remedies as part of the merger control procedure.
Another area that is always relevant for the Russian watchdog is the foreign investment control procedure, which has been amended several times over the last two years. In particular, the Prime Minister of Russia is now authorised to decide that any transaction concerning a foreign investment in a Russian company needs governmental 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 almost any deal involving Russian strategic entities.
In addition, in the last two years, it appears that the actual review process timeframes have been extended for up to a year, possibly connected to delicate negotiations with the authority on potential clearance conditions. This should be borne in mind by potential investors when considering deals involving Russian strategic companies.
Finally, in 2018, the so-called ‘counter-sanctions’ law was introduced in Russia. This law allows the President to adopt measures against ‘unfriendly foreign states’ and organisations under their jurisdiction. While the practical implications of this law remain to be seen, foreign investors should probably consider how compliance with the foreign sanctions regime could be maintained following the acquisition of assets in Russia.
The most substantial growth in M&A activity has been seen in the fields of pharmaceuticals, agriculture, IT / technology and retail / consumer.
The most frequently used technique for acquiring a company in Russia is to purchase shares in it or in its holding company and businesses still prefer share deals for acquisition purposes.
The share purchase procedure does not, in most cases, require complex state registration (except for transferring shares in a limited liability company (LLC), which normally requires notarisation and subsequent amendments to the Unified State Register of Legal Entities).
In 2015, substantial amendments to the Russian Civil Code relating to contract law came into force, providing more flexibility in contractual matters in general and introducing several instruments for M&A deals in particular. These were not, of course, new instruments for foreign jurisdictions but they had not been recognised by Russian law prior to 2015. For example, the Civil Code now provides for instruments materially similar to representations and warranties, indemnification of losses, option agreements and other concepts that expand the possibility of protecting the purchaser and mitigating the risk of potential issues with the acquired business.
The amendments increased the popularity of Russian law and we are now seeing more parties choosing it as the governing law for M&A deals (although foreign law is still used quite often). Businesses have also started using Russian law for shareholder agreements .
However, these amendments to the Civil Code are relatively new and court practice has only just begun to shape, which may cause difficulties to parties willing to conclude a transaction under Russian Law. It is very important for the business environment that the courts properly construe the nature of the new contractual instruments. In one of its resolutions, the Plenum of the Supreme Court of the Russian Federation officially interpreted the new provisions on indemnities and liability for bad faith negotiations, so this should facilitate the practical application of these specific legal mechanisms.
In contrast to a share deal, the main purpose of an asset deal is to acquire the existing assets of the target entity and make subsequent use of them in the purchaser’s business. This type of acquisition is complex and normally involves a number of registration formalities, eg, registration of rights to immovable assets, registration of IP rights, obtaining new licences, etc. Further, the transfer of assets is usually subject to VAT. Nonetheless, if the purchaser is interested in just one or only a few of the vendor’s assets (eg, a plot of land and a building), an asset transaction might be the preferable option.
A company may also be acquired through a corporate reorganisation, but this technique is relatively rare. Still, it is worth mentioning that local legislation on corporate reorganisation has also changed in last four years. Its provisions are now more flexible and business-orientated, although it did not lead to a substantial increase in the number of acquisitions through corporate mergers or other forms of reorganisation.
The Central Bank of Russia is vested with a wide range of regulatory powers relating to corporate and securities market activities, including M&A transactions, and it also has the authority to supervise the financial market as a whole. While it is one of the principal regulators, the Central Bank of Russia is not itself a government body. It is a legal entity independent of all government bodies, although it performs the functions of a government authority.
Supervisory and clearance functions are performed by the FAS, which controls mergers and acquisitions in Russia, and by the Government Commission for Control over Foreign Investment in the Russian Federation. In addition, the Federal Agency for State Property Management exercises certain powers with respect to companies with State-owned shares.
Merger control matters in Russia deserve special attention. In many cases, approvals and clearances will need to be obtained from government bodies before a transaction can proceed. Foreign investors should also note the list of strategic companies and resources in Russia, since, if the target company falls within a regulated category, it will need to obtain advance clearance from the Russian Government.
There are certain restrictions on foreign investment in Russia. The Law on Foreign Investments in Strategic Companies restricts foreign investment in 47 areas of the Russian economy. In particular, foreign investors are partially excluded from acquiring controlling stakes in companies engaged in restricted business and acquisition of a minority stake by foreign investors is subject to clearance from the Government Commission.
Since August 2017, the concept of a foreign investor for the purposes of the Law on Foreign Investments in Strategic Companies has been expanded: both Russian citizens with dual citizenship and Russian organisations controlled by foreign investors are now considered foreign investors.
Additionally, there are certain restrictions on foreign investment in insurance, TMT and banking businesses, as well as subsoil, land use and certain other areas. From the standpoint of foreign investment, it is therefore important to verify all the activities of a target company to assess whether it qualifies as a strategic company and consequently is subject to restrictions stipulated by law.
Transactions executed in breach of the Law on Foreign Investments in Strategic Companies are deemed void and the parties may be required to return everything acquired under such a transaction. If a deal is irreversible, a foreign investor that has not complied with legal requirements may be deprived of voting rights at General Shareholders’ Meetings of the strategic company.
In addition to the above, a foreign state needs to seek a similar consent to acquire or gain control of more than 25% of shares in any Russian acquisition.
Finally, there are certain separate restrictions on foreign investment in Russian media. Since 2016, foreign entities or individuals have been prohibited from holding more than 20% in the capital of any media outlet or establish/exercise any kind of control over them. Moreover, media organisations are generally required to report quarterly on any foreign investment.
In certain cases, prior clearance may be required from the FAS. In general, the transactions that should be cleared by the FAS include (provided that the specified thresholds and conditions are met in each case):
The applicant is entitled to discuss the transaction and certain documents with the FAS before the actual filing and the FAS should take such discussions into account when considering the transaction.
The FAS is generally to review an application within a month, although this can be prolonged for up to an additional two months. In practice, most cases take no more than six weeks.
Failure to meet merger control requirements can lead to an administrative fine (a maximum of EUR6,000) and/or an invalidation of the transaction through the courts on the basis of a claim filed by the FAS if the transaction in question leads to or might lead to a restriction of competition. There is a statutory limitation period of one year from the date on which the FAS becomes aware of the violation.
Generally, acquirers should be aware that the Russian labour legislation is ‘pro-employee’ and has a number of mandatory requirements that may not be varied by the parties to an employment contract. These regulations cannot be controlled by foreign law and must be written in Russian. The Russian Labour Code, as well as other related laws, provides a minimal mandatory set of protections to each employee. In case of a conflict, the employee will most likely be in a position to demand that a court apply the protective provisions of the Labour Code and related laws, which will prevail over any conflicting provision of the individual employment contract.
Normally, an employment contract is concluded for an indefinite term. Fixed term employment contracts may also be concluded but for no longer than five years and may only be used in a limited number of cases expressly listed in law. In accordance with a special chapter in the Labour Code regulating the employment of foreign employees in Russia, the general requirement on the term of an employment contract also applies with respect to foreign employees.
Once the probation period (generally a maximum of three months) has expired, it can be difficult to terminate a contract of employment and the employee may only be dismissed for one of the reasons specified in the Labour Code.
The termination procedure is also expressly provided for in the Labour Code and should be strictly followed, or a court could judge the termination invalid. The number of cases of lawsuits resulting in the reinstatement of illegally dismissed employees and the payment of damages for wrongful dismissal is increasing, particularly for employees of foreign or foreign-owned entities. Potential damages include the salary due to employees for the period during which access to work was denied to them as a result of illegal termination, plus compensation for moral damage .
Normal working hours are 40 hours per week and overtime requires the employee’s written consent and should be paid for at a higher rate.
Non-competition and non-solicitation provisions are ineffective in Russia, since they run counter to Russian law and, even if included in the text of a contract, they are not legally binding and may create only a moral hold over the employee.
Note that in order to work in Russia, a foreign employee must obtain a work permit and that the process is easier for highly qualified persons.
The Law on Foreign Investments in Strategic Companies makes the Government Commission for Control over Foreign Investment – chaired by the Prime Minister of the Russian Federation – the supervisory body from which clearance must be obtained to acquire either a stake in a company engaged in certain restricted activities (eg, those related to the nuclear industry, cryptographic technologies, military equipment and ammunition, space activities, etc) or a certain part of its fixed production assets. It may take up to six months to obtain such clearance.
Transactions made in violation of the Law on Foreign Investments in Strategic Companies are null and void. The statutory limitation period is three years from the date on which the FAS becomes aware of the violation.
Although judicial precedent does not serve as an official source of law in Russia, the lower courts typically follow decisions of higher courts, so court practice plays a significant role in interpreting laws and determining how various provisions of law should apply in practice.
An important court decision was recently issued confirming that shareholders in a joint-stock company may agree on a disproportionate distribution of a company’s assets remaining after its liquidation. Prior to that, it was debatable whether a provision on the disproportionate distribution in a shareholders’ agreement could be enforced in a Russian court. This and other decisions illustrate that freedom of contract in corporate relations is gaining ground in Russia.
Another court decision confirmed that the ultimate beneficial owner of a company had the right to challenge a resolution of the company’s general participants’ meeting that violated the UBO’s rights and legitimate interests. Prior to that, it was unclear whether a person who was not a direct participant (shareholder) in a company was entitled to challenge resolutions of the company’s general participants’ meeting.
Also, in recent decisions, courts have refused to reduce the amount of penalty for the breach of shareholders’ agreements on the basis of Article 333 of the Civil Code (which was a common practice previously). This is a significant advancement in court practice regarding shareholders’ agreements in Russia.
As for legislative updates, amendments to the Civil Code on contract law that came into force in 2015 are still among recent major reforms. Along with the recognition of the mechanisms commonly used for M&A deals, those amendments also provide new means for securing contractual obligations, including independent guarantees and security payments. The general concepts of contract law have also been affected. Thus, the Civil Code has:
The most recent amendments to the Russian corporate law concern the approval of major transactions and interested party transactions that came into force in January 2017. Also, the means of financing a joint-stock company were supplemented and now include contributions to the company’s assets, which were earlier available only for limited liability companies.
Recently, there have been significant updates to the Russian Civil Code that also affect M&A transactions. Among other things, provisions on escrow accounts, irrevocable Powers of Attorney and updated provisions on pledge, as well as a large set of updates on legal entities and contractual regulations (updated provisions on shareholders' agreements, corporate governance, provisions on challenging a corporate reorganisation, etc) were introduced into the Russian Civil Code in 2014 and 2015. These changes have already entailed some relevant amendments to the Law on Joint Stock Companies and the Law on Limited Liability Companies.
During stakebuilding, a bidder, alone or via a group of companies, acquires a minor number of shares in the target entity, which are distributed in small numbers among the shareholders or are released on to the open market. The underlying principle of stakebuilding, which is for a potential bidder to acquire or accumulate a number of shares to facilitate a subsequent merger or acquisition, is difficult to implement in Russia. This is because the market strategy of companies is not to release a significant number of shares on to the open market, and also because even a minimum share ownership requires disclosure of the shareholders in the target company, including information about the group of potential bidders and beneficiaries. The two stakebuilding strategies involve either a bidder accumulating shares, which is included in direct stakebuilding, or the companies of the bidder group doing so, which is considered to be co-ordinated stakebuilding.
The effective Russian legislation imposes certain reporting obligations on public companies, requiring them to disclose, among other things, that a person or group of persons has acquired or disposed of, directly or indirectly, a certain number of voting shares in the company. The disclosure should be made to the publicly traded company and to the Central Bank of Russia within ten working days. The reporting thresholds are 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 95% of the company’s voting shares.
Similar requirements apply to a public company if it has acquired or disposed of, directly or indirectly, a certain number of voting shares in a publicly traded company or in a company with assets exceeding RUB5 billion (approximately EUR64 million). Also, joint stock companies, with certain exceptions, must disclose any acquisitions greater than 20% of the voting shares in another joint stock company.
Russian mandatory information disclosure requirements are set out exclusively by the legislation and regulations of the Central Bank of Russia and may not be introduced or amended by a company’s articles of incorporation or bylaws. Yet, in addition to the information that should be disclosed by virtue of law, companies may disclose some information on a case-by-case basis, eg, as a press release on the company’s website.
The Central Bank of Russia may release a joint stock company from its reporting obligations if the following requirements are met:
a) it has no registrable securities, other than its shares, with respect to which a prospectus was registered; and
b) none of its registrable securities is admitted to trading on a stock exchange;
a) its’ shares and securities convertible into the company’s shares are not admitted to trading on a stock exchange;
b) it does not have more than 500 shareholders; and
c) its’ general meeting has passed a resolution to amend its articles of association to exclude an indication that it is a public company.
In any other instance, companies cannot be released from their reporting obligations set out by law. Other hurdles to stakebuilding are set out in legislation governing limited liability companies and non-public joint stock companies, the shareholders in which, as a rule, have pre-emptive rights or rights of first refusal relating to shares. Additional restrictions may be imposed by shareholders’ agreements, which are becoming increasingly common within the Russian business environment.
Dealings in derivatives are allowed in Russia. Under Russian law, derivatives include options, futures, forwards, swap contracts, etc. Regulation of derivatives is provided for in the Law on the Securities Markets and various subordinate regulations of the Central Bank of Russia. However, derivatives are commonly used in stock trading and not in M&A transactions.
In general, there are no special disclosure obligations relating to dealing in derivatives. Depending on the circumstances, however, rules on information disclosure may apply, eg, material fact disclosure. Also, a public company must divulge information on agreements entered into by the company (or by a person controlling it or by a person controlled by the company) containing an obligation to acquire shares in such a company (this requirement covering, among other things, derivative instruments).
As a rule, there is no requirement for existing or potential shareholders to report on their intentions regarding control over a company or to disclose the genuine purpose of the acquisition. Yet, such disclosure might be required during special procedures, such as an antitrust filing. Also, Russian rules on voluntary and mandatory tender offers stipulate that a person wishing to acquire shares in a company may disclose his or her plans regarding the target company and its employees.
If a transaction to acquire a company’s shares is to be made as a result of a voluntary or mandatory tender offer, the disclosure obligation comes into effect once the company receives this offer. Consequently, a public company must disclose information on any voluntary or mandatory tender offer it has received. There is no other specific obligation to disclose a deal unless it falls under other disclosure requirements provided for by the local legislation on the securities market.
Legislative requirements relating to companies’ disclosure obligations are imperative and any failure to observe them is a violation of law. There is no lawful market practice differing from the legal requirements and any violations of disclosure timing can entail an administrative liability.
In private M&A deals, the scope of due diligence may depend on many factors, such as the size of the target company, the timeframe and resources allotted to the procedure by the buyer, and the terms of the agreement on the deal (eg, whether any representations and indemnities are given), etc.
For the most part, due diligence on a company in a private transaction in Russia tends to be the same as with any M&A deal. Even so, there are a limited number of public searches available and this often means that the due diligence review needs to be as comprehensive as possible, to obtain information on possible risks for the buyer and to adjust the price, if needed, before the deal is closed. However, now that warranties and indemnities are recognised by Russian law, the lack of public information on the target company can be partially covered by relevant contractual buyer-protection mechanisms.
There has also been a strong focus recently on corruption and compliance issues in due diligence. For most foreign investors, it is crucial to determine whether the target has been involved in any practices, such as bribes, kick-backs, tax evasion or illicit cash payments to employees that go against local or Western anti-corruption legislation (eg, the Foreign Corrupt Practices Act in the United States and the UK Bribery Act in the United Kingdom). If the target company has been involved in such tactics, this might seriously impact the acquisition plans. It is generally prudent to engage lawyers and other advisers to investigate these issues at an early stage of the transaction.
It should also be noted that in public takeovers full scope due diligence differs from due diligence in the course of private deals, since the bidder in a takeover transaction is usually an existing shareholder in the target company who already knows the business well. Moreover, public takeovers are normally rather formal and do not provide any real options for including representations and warranties with respect to the target other than in relation to its shares.
The Russian Civil Code was recently amended as part of a Russian contract law reform programme to give contracting parties more flexibility. Parties may now agree on the terms of negotiation in a legally binding agreement, and it is becoming a common practice to include standstill and exclusivity provisions in term sheets or memoranda of understanding made under Russian law. However, such provisions should be properly drafted to avoid being recognised as waivers of rights that still have limited legal effect in Russia.
The Russian legislation on voluntary and mandatory offers is regulated and provides virtually no choice for the parties. The procedure for voluntary and mandatory tender offers is highly controlled by law and although Russian law does not directly prohibit a definitive agreement, it is not common to submit an offer in a separate definitive agreement. The only legally binding document is the tender bid with supporting documents, on the basis of which a share purchase agreement is entered into, this also being binding on the parties.
The length of time required for a private M&A transaction can vary significantly, depending on its scope, the parties’ intentions as to due diligence and other factors. The heads of terms/term sheet/letter of intent will usually outline the key points, objectives and the time schedule for the transaction and any key milestone dates that need to be met.
The vendor may look to make any exclusivity granted to the buyer conditional on it sticking to the timetable. In practice, however, the timetable can be extended owing to unforeseen circumstances. Eg, regulatory issues connected with the FAS may significantly protract large deals if approval is required, since the FAS is permitted by law to extend its review time, in certain cases, to up to three months in respect of an ordinary merger filing. In cases of foreign investments in strategic companies, consideration of the relevant application by the Government Commission may take up to six months.
A typical timescale in private M&A deals for a reasonably big transaction would be two-four months for the completion of due diligence, one-three months to negotiate and agree the legal documentation, including the sale and purchase agreement (in practice, this often runs concurrently with the due diligence exercise) and then one-three months after signing to satisfy the conditions precedent and complete the transaction.
Given that the rules concerning regulated procedures such as reorganisation, voluntary and mandatory tender offers and squeeze-outs are imperative, and the Russian courts are reasonably formal, time limits must be strictly observed and complied with. It is likely to take approximately four-five months to implement both voluntary and mandatory tender offers and two-three months for a squeeze-out procedure.
Under Russian law, a person must submit a mandatory tender offer if it has acquired (either solely or together with its affiliates) more than 30% of the voting stock in a Russian public joint stock company. The mandatory tender offer should be made within 35 days of the relevant shares being transferred or the acquirer becoming aware (or the date on which it should have become aware) that it holds, solely or together with its affiliates, more than 30% of the company’s shares. Before the mandatory tender offer is submitted, only 30% of the shares held by the acquirer and its affiliates, if any, are deemed to be voting shares. The same rules apply if an acquirer already has more than 30% of the shares in a public joint stock company and it intends to increase its stake in the company to 50% or 75%.
Generally, cash is more commonly used as consideration in Russian M&A transactions, but share considerations are permitted too.
Different commercial and regulatory factors can influence the choice of consideration. Eg, the restrictions imposed by the currency control legislation must be taken into account; foreign currency operations between Russian residents are usually limited.
A special takeover regulation applies to acquiring shares in public companies only. A bidder may make an offer using the procedures provided for by the Law on Joint Stock Companies, namely a voluntary or mandatory tender offer and a squeeze-out. Both voluntary and mandatory tender offers must be submitted to shareholders (and, in the case of a mandatory tender offer, to the owners of securities convertible into shares in the target company) via the target company itself.
An offer must contain, among other things, the following information:
The offer must also include information on the acceptance period, which may not be less than 70 or more than 90 days (80 days in the case of a mandatory offer) following receipt of the offer by the target company.
In addition, a copy of an irrevocable bank guarantee securing the bidder’s payment obligations must supplement an offer. This bank guarantee must remain in force for at least six months after the expiry of the payment deadline.
Note that a bidder may amend certain initial conditions of the bid, in particular the bidder may increase the price and/or reduce the time period for payment.
In Russia, a minimum acceptance condition is allowed only for a voluntary tender offer, which may stipulate the minimum number of shares the bidder is willing to purchase. Even so, a minimum acceptance condition is not widely used in Russia and no such condition may be included in a mandatory tender offer.
Regarding voluntary tender offers, the following thresholds are to be noted:
Prior to 2015, the Russian legislation and court practice did not allow parties to condition the performance of their obligations (or the exercise of their rights) with the circumstances that were within the parties’ control (so called potestative conditions). The Russian courts often considered such conditions as null and void and did not enforce them.
Since the Civil Code reform in 2015, the Russian legislation expressly provides that the performance of obligations and/or the exercise of rights under a contract may be conditional on the occurrence of circumstances that are under control of the parties (including an action by one of the parties). Therefore, the parties are now free to include various conditions precedent and conditions subsequent in contracts, provided they are properly drafted.
Tender offers cannot be conditional on the bidder obtaining financing. Conversely, the tender offer must be supported by a bank guarantee securing the payment obligations of the purchaser (as described above).
Under Russian law, a contract may not, as a rule, be terminated at the sole discretion of one of the parties thereto unless this is directly provided for in the agreement. The exception is a material breach of the contract entitling the non-breaching party to file a court claim for termination of the contract. Russian law allows penalties that may be used as break-up fees. However, a Russian court may, and often does, reduce the amount payable in such cases if it considers the penalty to be excessive (ie, not corresponding to the nature of the breach and damage caused). The validity of ‘force the vote’ and non-solicitation provisions is questionable under Russian law and their use is risky. They are not used in practice unless the M&A transaction is structured as a purchase of an offshore holding company and is governed by English law.
When making a voluntary or public tender offer, use of the deal security measures available to the bidder is, in fact, limited to statutory remedies such as damages.
As a general rule, the corporate rights of shareholders in a public joint stock company are exercised proportionally to the number of shares they each hold. Even so, shareholders may enter into a shareholders’ agreement but certain provisions of Russian law limit the parties’ discretion here.
Corporate governance rules in a private company are more flexible, as weighted voting is permitted and the company’s articles of association may provide additional rights to certain participants. It should be noted that there is a legislative initiative proposing to prescribe in law that preference shares could be divided into different classes by analogy to the classification of preference shares in Cypriot and other Anglo-Saxon jurisdictions. Even though this initiative has not been formalised, it should be taken into account, since, in Russia, legislative initiatives may be formalised and passed into law within short periods of time.
A shareholder may exercise his or her right to participate in a general shareholders’ meeting and vote on all the items on its agenda either in person or by proxy (through a representative). The representative must act on the basis of and in accordance with a power of attorney issued in compliance with the law.
The possibility of initiating a squeeze-out procedure is available to shareholders in a public joint stock company that hold (together with their affiliates) more than 95% of the shares, provided at least 10% of the shares were acquired by the given shareholder during a preceding voluntary or mandatory tender offer procedure (see above). Such a mechanism is not available for private companies.
Irrevocable commitments are not common for public takeovers in Russia but are used for private acquisitions. It is common practice for the transaction documentation to contain certain conditions precedent to completion, such as obtaining the requisite approvals and clearances.
A public company must disclose information on a voluntary or mandatory tender offer it has received and a public company wishing to acquire shares in another public company must disclose the contents of a voluntary or mandatory tender offer it sends to a company.
There is no general obligation to disclose a bid in relation to the acquisition of a private company. Even so, certain information relating to a bid may be covered by other disclosure requirements if it is made by or towards a public company required to disclose information potentially materially affecting the value of its shares. For instance, a corporate decision of a public company to approve a major or interested party transaction as part of a private bid process should be disclosed.
As a rule, there are no disclosure requirements on a share issue by a private joint stock company. Any share issue by a public joint stock company must be disclosed. The issue of shares requires registration of a prospectus, after which the issuer must disclose a variety of information at each stage of the issue and placement process.
During a M&A transaction, a bidder is not required by Russian law to produce financial statements in its disclosure documents.
It is not required to make any transaction documents fully public. The conditions of a voluntary or mandatory tender offer should, however, be disclosed by public companies. Also, some information may be disclosed on the basis of other specific disclosure requirements or to comply with mandatory requirements on providing certain information to the Central Bank of Russia.
The concept of directors’ fiduciary duties is generally recognised in Russia. Russian legislation establishes that members of the board of directors and of the management board and the CEO must act with due prudence, in good faith and in the interests of the company but there are no specific fiduciary obligations owed to the company’s shareholders, creditors or employees. Legally, directors are not obliged to follow instructions from shareholders or other persons and should make their own judgements on the basis of the company’s interests. In practice, however, directors are in fact dependent on the shareholders who nominate them. Breach of fiduciary duties by a director might entail a claim for damages brought by the company or a shareholder acting on behalf of the company (a derivative claim).
In the context of a public takeover, the board of directors must assess the terms of the offer, including the price and the bidder’s plans with respect to the company and its employees, and recommend whether the shareholders should accept or reject the offer. The CEO is under an obligation to communicate the tender offer and the board’s recommendations to all shareholders.
Special or ad hoc committees may be established by a decision of the board of directors, including for a particular business combination. Such committees are generally established in some major public joint stock companies and have only advisory functions within their fields of activity, eg, elaborating recommendations and drafting decisions of the board of directors. Additionally, the Russian Corporate Governance Code, which has no legal effect but is applied in an advisory capacity, suggests establishing a committee to resolve a conflict of interest among the management or the board of directors members.
In takeover situations, the members of a company’s board of directors (as well as of its management board and its general director) must act in good faith and reasonably, and exercise a due level of prudence and care when advising shareholders or deciding on other matters included in their terms of reference (eg, approval of major transactions). According to the Civil Code, the same rules apply to any person actually able to determine the decisions made by the company (eg, controlling shareholders or shadow directors). If it is proved that a director acted not in good faith or unreasonably, including contrary to the ordinary course of business or ordinary business risk, those directors may be held liable for any losses the company might incur.
The Supreme Commercial Court has clarified that members of a company's board of directors and its general director are not liable for their actions resulting in losses to the company if the actions involved an ordinary business risk.
It is customary for companies to engage outside legal and financial advisers, as well as independent auditors or appraisers, and in some cases it is obligatory to engage an independent appraiser for a particular corporate decision or transaction (eg, approval of certain major transactions, confirmation of the share price, etc). Yet it is uncommon for directors to engage a separate independent adviser for such purposes.
Usually, a conflict of interest becomes subject to judicial scrutiny when there is a risk that the shareholders’ rights have been violated. There have been numerous instances of courts examining corporate procedures launched because of a conflict of interest and deciding whether the participation by an interested party could have any significant impact on the decision-making process. To date, the default rule is that independent members of the board of directors, or shareholders with no conflict of interest, must approve any transaction in which a director or a shareholder has an interest (an ‘interested party’ transaction). Breach of this rule constitutes the most common grounds for minority shareholders to bring claims in Russia.
It is worth noting that the regulation in this area changed significantly in 2017. According to the new rules, there is no longer a default rule requiring approval of an interested party transaction. Instead, the law introduces additional shareholder information rights about transactions bearing a potential conflict of interest, as well as the right of shareholders and directors to challenge any such transaction in court if it was detrimental to the company’s interests and a counterparty to the transaction was aware of this.
Russian legislation does not specify any procedure for filing a hostile tender offer to a company’s shareholders. Voluntary and mandatory tender offer procedures are highly regulated by Russian law and there is no differentiation in Russia as to whether the tender offer is hostile, provided that the requirements are observed. Also, note that the directors cannot block a takeover (a mandatory or voluntary tender offer). Their role is limited to providing recommendations to the shareholders. For that reason, the hostile takeover concept, as it is known in the United States or the United Kingdom, is not recognised in Russia.
Under Russian law, if shareholders in a public joint-stock company receive a voluntary or mandatory tender offer, the company’s board of directors must issue recommendations on this, including an evaluation of the price offered for the shares. The board of directors is limited to its terms of reference provided for by law and the company’s articles of association; it is then up to the shareholders to decide whether to dispose of their shares.
Defensive measures are implemented at the discretion of the general shareholders’ meeting. As there is no clear hostile tender offer-screening mechanism, there are no specific response mechanisms either.
Directors of a target company may not enact defensive measures during a public takeover. They are, however, bound to exercise a due level of care and prudence when making recommendations to the general participants’ meeting.
As mentioned previously, directors of a target company cannot block a public takeover.
If a board of directors’ decision is required to implement a ‘private’ business combination (rather than through a public takeover), eg, a particular transaction requires preliminary approval from the board of directors under the company’s constitutional documents, then the board is entitled to decide whether to approve the transaction. However, the board is limited by its fiduciary obligations to the company and must act in good faith and in the company’s best interests.
Litigation in connection with M&A deals is relatively common in Russia. The parties make active use of both domestic and non-Russian litigation routes, depending on the deal structure.
When the parties to a M&A in Russia do turn to litigation, this usually happens after the deal is completed. Normally, parties do not seek intermediary/prohibitory injunctions prior to execution or completion of a deal in either public or private M&As.
Shareholder activism may be found in a number of major public joint stock companies and in companies of social importance (eg, banks, conveyors, mining companies, etc), where minor shareholders in some cases set up special committees.
The board of directors may, at its own discretion, take into account such committees’ positions on issues. Nevertheless, these committees have no formal rights. It should be noted that, over recent years, Russian law has tended to raise shareholding thresholds for exercising some corporate rights. This legislative trend may be explained by lobbying by large corporations as major shareholders in joint stock companies.
Activists do not seek to encourage companies to enter into M&A transactions.
Currently, bona fide shareholder activism still fails to have any real impact on major business decisions, although it receives some considerable coverage in the media and within the business community.
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