This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Russia.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The main document regulating the M&A sector in Russia is the Civil Code of the Russian Federation (Part 1) dated 30 November 1994 No. 51-FZ, which has recently undergone substantial reform aimed, inter alia, at liberalisation of legal regulation of the M&A sector and, generally, corporate and contract law.
Depending on the form of the target Russian company, Federal law ‘On joint-stock companies’ or Federal law ‘On limited liability companies’ also will apply to a transaction in question.
An important part of M&A regulation is set forth in Federal law ‘On protection of competition' dated 26 July 2006 No. 135-FZ.
Specific M&A relevant provisions can be found in other laws and regulations, such as Federal law ‘On securities market’ dated 22 April 1996 No. 39-FZ and Federal law No. 57-FZ ‘On procedures for foreign investments in companies of strategic importance for national defence and state security’ dated 29 April 2008.
The Federal Antimonopoly Service of the Russian Federation (FAS) is responsible for control over compliance with antimonopoly legislation, legislation in the field of natural monopolies’ activity, legislation on foreign investments in Russia. FAS may also issue some decrees or regulations related to some procedural aspects of M&A transactions.
A wide range of powers is being exercised by the Central Bank of Russia starting 1 September 2013. Since that time, it has been responsible for adoption of regulations, control and supervision over all financial markets.
What is the current state of the market?
As of the end of 2017, the M&A market seems to be recovering after the decline of the previous three years, which recovery is stimulated by an improvement in industrial production, comparative cheapness of assets and deferred demand for transactions.
Major M&A transactions include the following:
- An investment consortium comprising ‘Rosneft’, the ‘UCP fund’ and the Singapore trader ‘Trafigura’ acquired Indian ‘Essar Oil’ in August 2017. The share of the Russian party in that transaction is estimated at $ 9.5 billion.
- Acquisition of American service provider ‘Parexel’ made by investment fund ‘Pamplona Capital Management’ for $ 5 billion in September 2017. This was the largest service sector deal in the history of the Russian M&A market.
- Investment holding ‘LetterOne’ acquired the British retail network ‘Holland & Barrett’ for $ 2.3 billion in June 2017. This is not only the second-largest transaction in the first half of 2017, but also the largest deal in retail business since 2009.
Based on the information available at http://mergers.akm.ru, the total volume of transactions in January-November 2017 exceeded by 15.9% the result of the same period of 2016, reaching $ 39.2 billion (as opposed to $ 33.8 billion in 11 months of 2016). The number of transactions for January-November 2017 also increased in the annual comparison - by 6.5% to 410 transactions, compared to 385 in January-November 2016.
Which market sectors have been particularly active recently?
By value of transactions during January-November 2017, fuel and energy industry represented around 40% of the entire volume of the market and the service and retail sector – around 30%.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Geopolitical and internal political situation (especially in the context of the 2018 presidential election) will be one such factor. Predictability and stability in politics would support resumption of more active M&A. Degree of success of current efforts to diversify the economy and increase the number of attractive investment projects will be another. Finally, the dynamics of oil and gas prices and, by extension, of the Ruble exchange rate will continue to be a major factor – as always in Russia.
In addition, it should be mentioned that the 2017 trend was increased governmental supervision over acquisitions by foreign parties of stakes in Russian companies in all sectors.
What are the key means of effecting the acquisition of a publicly traded company?
The main and most widespread structure of an M&A transaction involves transacting with shares (participation interests) in a target company in a privately negotiated deal. Public acquisitions (through tender offers or otherwise) are practically absent – few Russian companies are listed, and those that are listed float the number of shares that is not sufficient to gain control of the company. However, application of squeeze-out procedures is becoming more common in complex acquisitions of major public companies.
Asset deal are rather rare, as they are usually associated with considerable formalities, including transfer of real estate, assignment of operational agreements, obtaining of required operational permits, certificates and authorisations and transfer of personnel. These formalities may be rather complex and time consuming.
Effecting corporate reorganisations (mergers and amalgamations) requires passing through a lengthy and formalistic process and registration formalities as well. Such reorganisations may or may not follow M&A deals in Russia but are very rarely an M&A vehicle.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
If the target company is a public joint-stock company, it shall disclose material information related to its business (annual and quarterly reports, financial reports, , information on material facts (including, without limitation, information on main shareholders, officers and material transactions), etc.).
If the target company is a non-public company, general information with regard to the amount of its share capital, general director, etc. can be found on the website of the Federal Tax Service in the form of an electronic extract from the corporate register and in the Bulletin of state registration, being the official publication of the Russian corporate register.
Russian Federal law ‘On state registration of legal entities and individual entrepreneurs’ envisages that certain facts about the business of legal entities and entrepreneurs are to be published, including, among other things, information on reorganisation, liquidation, increase/decrease of charter capital, appointment/termination of authority of sole executive body, net assets, pledge of assets of a legal entity, issuance of independent guarantees (other than by banks), acquisition of more than 20% interest in other companies, location and changes of location, certain financial information, etc. The above information shall be published in the Unified federal register of legally relevant information on business of legal entities, individual entrepreneurs and other economic agents (http://www.fedresurs.ru/).
Certain information on the company’s real estate can be collected from the federal service for state registration, cadastre and cartography (Rosreestr) and others. This information, however, does not include any list of real estate assets held by the company (which list can be requested only by the asset owner itself).
Recent changes to the Russian Civil Code introduced a good faith standard in relation to the negotiation process. Pursuant thereto, non-disclosure of reasonably expected information in the course of negotiations or provision of false information can be regarded as bad faith behavior of a party to negotiations and therefore a breach of legal requirements. These provisions, however, have not been sufficiently tested in practice yet and there is no commonly accepted position on the standards and scope of the required disclosure.
A significant number of M&A transactions (especially with involvement of foreign investors) include a due diligence stage.
To what level of detail is due diligence customarily undertaken?
Due diligence normally covers four aspects of a company’s business:
- Operational and business matters;
- Tax matters;
- Financial and accounting affairs;
- Legal issues.
Sometimes also environmental due diligence is undertaken.
The level of detail will depend on numerous facts, such as background and experience of the target company, scale of business, general current situation in the market, and may be limited to quick diagnostics or may include deeper analysis.
The usual scope of legal due diligence includes corporate matters, real estate and title to other substantial assets, loan and financial matters, material contracts, including contracts with key customers and suppliers, disputes and litigations, regulatory affairs and investigations and employment matters.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Key decision making organs, depending on the form of the target company, are:
- In a non-public company, a general meeting of participants (shareholders) of the company acts as the managing body with ultimate authority, including a number of issues expressly reserved to it by law, such as reorganisations (including mergers) or introduction of changes to the company’s charter. Other issues typically reserved for the general meeting (unless delegated to the board of directors, an optional body) include approval of major and interested party transactions, thresholds for which are set in the law and the charter of the company. Additional approvals can be required by the charter of the company. Everyday business is managed by a chief executive body, which may now consist of one or several persons, acting together or independently from each other. Optionally, a board of directors and/or a management board may be formed as, accordingly, supervisory or collective management authority.
- In a public joint-stock company, the scope of issues reserved to the competence of a general shareholders’ meeting’s is set forth in the law and cannot be changed or delegated to the board of director/ management board. The list of reserved matters includes, among others, decisions on reorganisation, changes in the company’s charter, approval of major and interested party transactions. No additional requirements related to sales of shares can be set in the charter of a public joint-stock company. Everyday business is managed by a chief executive body, plus a company should form a board of directors as supervisory authority and may form a collective management body (management board).
What are the duties of the directors and controlling shareholders of a target company?
Pursuant to Russian law, there are no specific duties of directors and/or controlling shareholders applicable to shares (interest) sales (unless they act as a party to the deal). In the event of a corporate reorganisation (merger), like in connection with other affairs involving management of the company in question, directors are required, as a general rule, to act reasonably and in good faith in the interests of the relevant company. The same obligation to act reasonably and in good faith applied to shareholders and other parties directly or indirectly controlling the company in question.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Participants (shareholders) of a non-public company have pre-emptive rights to buy interest (shares) offered for sale to a third party. This right is statutory for limited liability companies and optional for non-public joint-stock companies. A company’s charter may contain further details and requirements for the procedure, or even a pre-emptive right of the company itself to buy out the interest (shares).
Public joint-stock companies are not allowed to provide first refusal rights to any parties, except for the right of shareholders and holders of the company’s securities’ to buy additional shares in certain cases. However, a party which acquired more than 30 or 50 or 75% of shares in a public company shall make to other shareholders a mandatory offer to sell such other shareholders’ shares at the price being the average stock exchange trading price for the six months preceding the offer, or if shares have been traded for less than six months – at the price determined by a valuer.
In the event of a merger or another corporate reorganisation, minority participants of a limited liability company can veto relevant resolutions. In a situation with a joint stock company, shareholders who voted against a resolution on reorganisation or did not participate in the voting are entitled to require purchase of their stakes by the company.
Usually, employees have no say in M&A matters.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality of an M&A transaction is an approach commonly accepted by the market.
Recent amendments to the Russian Civil Code explicitly introduced a concept of conditioned performance of an obligation, providing, inter alia, that potential conditions may be fully dependent on the actions of one of the parties to an obligation. The same conditionality may be agreed in relation to variation or termination of a contractual obligation. Thus, one of the main legal risks relating to conditionality in Russian law contracts was fully removed by amendments to relevant legislation.
What steps can an acquirer of a target company take to secure deal exclusivity?
In 2015 the Civil Code of the Russian Federation was supplemented with Article 434.1 ‘Contractual negotiations’. This Article requires bona fide conduct of negotiations and establishes so-called pre-contractual liability of a party to negotiations that is acting in bad faith.
Unreasonable and unexpected withdrawal from negotiations in a situation where the other party cannot reasonably predict such termination of negotiations is now viewed as bad faith negotiating and may result in a breaching party’s liability in the form of payment of other parties’ damages.
In addition, the Civil Code now explicitly provides that parties to negotiations are entitled to enter into an agreement in relation to conduct of contractual negotiations, setting out relevant procedures and other covenants of the parties, including, inter alia, exclusivity undertakings. Such an agreement may provide for a penalty in the event of breach of relevant undertakings.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
The most common deal protection and cost coverage mechanism is a security deposit, whereby a buyer deposits with a seller an agreed amount in cash which is retained by the seller if the buyer unreasonably refuses to complete the transaction or is returned by the seller if the seller unreasonably withdraws from the negotiations (sometimes in double amount). After recent amendments to the Civil Code, this type of security is explicitly provided for by Russian law.
Which forms of consideration are most commonly used?
The majority of M&A deals provide for cash consideration for the shares being purchased.
However, in recent years the market finds itself in a situation of low availability of loan financing. In addition, real estate development and certain other businesses are overburdened with debt. As a result, we are aware of several substantial deals which were busted because of the buyer’s inability to secure financing for the transaction.
Accordingly, alternative consideration arrangements are encountered more often, providing, for example, for the buyer’s assistance or investment in relation to another project, share exchange transactions, etc. At the same time, sellers are sometimes expected to provide long term post-completion support to the sold business, and post-completion operational results influence the ultimate consideration obtained by the seller.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Public disclosure is required in the following instances:
- Public disclosure by legal entities and sole entrepreneurs of certain facts about their business (e.g. reorganisation, liquidation, increase/decrease of charter capital) in the Unified federal register of legally relevant information on business of legal entities, sole entrepreneurs and other economic agents (http://www.fedresurs.ru/).
- Public disclosure of information on acquisition of more than 20% of shares/ participation interest in a company and reorganisation of legal entities (including mergers, accessions, etc.) is required.
- Public companies and certain non-public companies having a considerable number of stakeholders should also disclose information about material facts (i.e. facts that if disclosed can materially affect the price of the issuer’s securities and their listed price), including, without limitation, information on:
- information on acquisitions / sale of shares (or obtaining of indirect control over votes granted by relevant shares, including, without limitation, under a voting or shareholders agreement) each time any of the following thresholds is reached: 5, 10, 15, 20, 25, 30, 50, 75 or 95% of the company’s shares;
- sending by a joint-stock company of notification on reorganisation to the state registration authority;
- acquisition / termination of control over a material controlled legal entity;
- persons that gain/ cease to exercise control over a joint-stock company;
- receipt /making of voluntary public offer by a person upon acquisition of more than 30% (50%, 75%) of shares of a public joint-stock company, mandatory public offer by a person that acquired more than 30% (50%, 75%) of shares of a public joint-stock company made to the remaining shareholders;
- mandatory redemption of shares by a person that acquired 95% of shares of a public joint-stock company following request for redemption by the remaining shareholders or a public offer made by the person that acquired 95% of shares;
- entering into transactions the value of which is equal to or exceeds 10% of book value of a joint-stock company’s assets.
Publication of notifications about material facts shall be done within 1 (one) day from the date when the relevant fact occurred – via a news service, and within 2 (two) days from the said date – on the joint-stock company’s web page in the Internet.
At what stage of negotiation is public disclosure required or customary?
Other than existing mandatory requirements (please see in question 15 above), there are no customarily accepted standards of disclosure. In certain cases, disclosure is made at the stage of signing of binding contractual documents. In others – upon completion of a transaction.
Is there any maximum time period for negotiations or due diligence?
No, there is no pre-set maximum period for negotiations and/or due diligence. Usually, the process of entering into and completing an M&A transaction takes from two months to half a year or even longer in the case of complex deals including detailed due diligence.
Are there any circumstances where a minimum price may be set for the shares in a target company?
Non-public companies can specify the sale price of shares (interest) being purchased within the scope of implementation of pre-emptive rights in the charter. The price can be specified as a fixed amount or as a method to determine on a case-by-case basis.
Notably, pursuant to Federal law ‘On joint-stock companies,’ a court may disregard the price fixed in the charter of a non-public joint-stock company in a dispute if it is below the market price as of the date of sale.
Public companies cannot set a minimum price of their shares.
Is it possible for target companies to provide financial assistance?
There is no general restriction applicable to financial assistance. In practice, subsidiaries are rather often issuing corporate guarantees to benefit their parents and are lending cash to parents.
However, where a parent is itself a company with several shareholders, such type of transactions may be qualified as interested party transactions for the parent company, requiring approval by non-interested directors or shareholders. The same will be applicable to subsidiaries rendering financial assistance if they are not fully controlled by the parent to which such assistance is being rendered. It should be noted as well that minority participants (shareholders) in a subsidiary company in certain cases are entitled to claim for compensation of damages caused to a subsidiary by a parent company.
Which governing law is customarily used on acquisitions?
Use of English law is rather widespread in Russia, because a considerable number of Russian transactions are being implemented through an off-shore holding company.
Nowadays, however, after the Civil Code reform, use of Russian laws in M&A and joint venture transactions tends to become more common. This is driven by liberalisation of Russian law which is now becoming more understandable and comfortable for foreign investors and has been supplemented with such instruments as warranties, representations and indemnities. High profile of Russian laws in M&A transactions also is driven by the concept of exclusive jurisdiction of Russian state commercial courts and certain accredited arbitration institutions over so called ‘corporate disputes’ the scope of which includes, inter alia, disputes in connection with title to shares / participation interests, matters involving encumbrances on such title, etc. Accordingly, where a transaction target is a Russian company, the parties have to pay attention to Russian laws in constructing the terms and conditions of the transaction.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Russian law does not require the buyer to produce any public-facing documentation, except as referred to in the response to question 15 and except as mentioned below.
In the event of of acquisition of more than 30% of shares of a public joint-stock company, the buyer is required to submit its offer (whether mandatory of voluntary) to the Bank of Russia for preliminary review before its delivery to the target.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Under Russian law, formalities associated with registration of transfer of title would differ depending on the legal organisational form of a target company.
The right to register transfer of title to shares in joint-stock companies is vested with professional independent registrars or, as the case may be, depositaries (nominal holders).
Although overall approach to registration may slightly vary from one registrar/depositary to another, the general rule is that in order to register transfer of shares, the buyer shall provide to the registrar/ depositary a set of required documents, which usually include the seller’s transfer instruction as well as a set of documents with respect to the buyer required to open the relevant personal account with the registrar / depositary (usually includes the new shareholder’s questionnaire, charter, resolution on establishment, etc.).
With regard to limited liability companies, transfer of participation interest requires mandatory certification by a notary public of the relevant participatory interest sale and purchase agreement. Once notarial certification is in place, the relevant title change is to be entered into the Unified State Register of Legal Entities. In order to effect such entry, an application drafted pursuant to an approved form is submitted within 2 (two) business days of certification of the agreement to the registration authorities, which then have 5 (five) business days to register the transfer of title to participatory interest.
Are hostile acquisitions a common feature?
The notion of ‘hostile acquisition’ has a very different meaning in Russia. We are talking about raiders taking over companies by questionable (sometimes illegal) means, rather than through buy-ups of shares of publicly listed companies. Reportedly, such raids are still relatively frequent in the Russian market. However, recent governmental policy, including introduction of notarisation requirement in connection with transfers of participation interest in limited liability companies, is intended to narrow the field for raiders’ takeovers of businesses.
What protections do directors of a target company have against a hostile approach?
From the corporate standpoint, certain protections can be provided by foundation documents of an entity. In certain cases it is possible to provide for the maximum member’s share in the company in question or provide that any sale of shares to a third party requires other members’ consent. These options, however, are working mostly for non-public companies.
Under Russian labour law, unilateral termination of employment of the sole executive body (CEO) (as well as its deputies and the chief accountant) at the initiative of the target company triggers the right of the sole executive body (its deputies and the chief accountant) to receive compensation (a certain equivalent of ‘golden parachute’) in the amount of at least 3 (three) monthly salaries.
The above provision, while establishing the minimum compensation, does not restrict the maximum amount of the compensation.
Despite the above, and given the fact that the practice of payment of ‘golden parachutes’ to management has been strongly criticised (e.g. the case of Ashurkov, Savchenko vs OAO ‘Rostelekom’ (case No. A56-31942/2013)), the Supreme Court of the Russian Federation has established that there should be a balance between the interests of the management and the interests of the shareholders, and the amount of ‘golden parachute’ should not infringe the rights and lawful interests of the shareholders and of the company itself.
The above position, among other things, has resulted in imposition of a limit of 3 (three) monthly salaries on compensation payable to sole executive bodies (their deputies and the chief accountant) of state corporations, state companies or companies at least 50% of which is owned by the Russian Federation or municipal entities.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Pursuant to Federal law ‘On joint-stock companies,’ the person that acquires more than 30%, 50% or 75% of shares of a public joint-stock company (taking into account the shares already owned by the acquirer and its affiliates) has to make a tender offer to other shareholders of the company to buy out their remaining shares of the same category.
The person that acquires more than 95% of shares of a public joint-stock company as a result of the above mandatory tender offer or a voluntary offer, is obliged to buy out the remaining shares of the company (and has the right to compel such buy-out).
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
In addition to the above opportunities to sell their shares to the buyer, minority shareholders have some general rights that are designed to protect their interests in the company.
Among these in joint stock companies are certain matters reserved to general meetings of shareholders that require at least 3/4 of votes to pass a decision, minority shareholders’ right to nominate candidates to board of directors (if they hold at least 2% of voting shares). In certain cases minority shareholders are entitled to file court claims against the company itself to overturn decisions made by the general meeting or the board of directors.
In limited liability companies, minority participants generally have broader veto rights, being able to block any resolution on reorganisation or liquidation of the company, acceptance of new members, capitalisation of shareholders’ loans (which resolutions require unanimous consent). Amendments to a charter require 2/3 majority voting.
Please note that additional voting requirements (and, accordingly, veto rights) in non-public companies may be set forth by a company’s charter.
Is a mechanism available to compulsorily acquire minority stakes?
The person that acquires more than 95% of shares of a public joint-stock company or the person that was the sole shareholder of a reorganised (merged) company that became the holder of at least 95% of shares of the new public joint-stock company created as a result of such reorganisation, is entitled to demand buy-out of all the remaining shares of such public joint-stock company.