Expropriation of foreign companies in Russia? Third-party management for companies with foreign participation
The Russian government plans to introduce a draft law “On External Administration for Company Management” to the Russian parliament soon, which, among other things, will regulate the procedure for appointing an external manager for Russian companies with foreign shareholders from so-called “unfriendly states”.
The draft law has already been approved by the “Government Commission on Legislative Activities”. On March 16th, the Tax Service and the Central Bank expressed their comments. Whether and when the draft law will be introduced into the parliament, the Duma, has not yet been determined.
The aim of the law is to prevent subsidiaries of foreign companies from ceasing operations in Russia for no good reason or for political motives, thus endangering jobs and the Russian economy as a whole.
The draft law stipulates that the foreign management function is to be transferred to the state-owned company “VEB.RF” (State Investment Company for the Promotion of Russian Development Projects), which, among other things, carries out the fiduciary management of state assets. In the case of financial organizations, i.e., banks, these functions are to be performed by the “Deposit Insurance Agency”, which acts as an insolvency administrator for insolvent banks.
However, external management is envisaged only for larger companies that meet the following criteria:
the participation share of foreign persons from “unfriendly states” is above 25% threshold;
the book value of the company's assets according to the latest financial statements exceeds RUB 1 billion (approximately EUR 8.2 million) or the average number of employees in the month prior to the application for the appointment of third-party management exceeds 100 people; and
the company's activities have ceased in violation of the law.
The application for appointment of external management shall be submitted by a member of the management (supervisory) board of the organization or by the Federal Tax Service.
Arbitrazh (commercial) courts shall decide on the appointment of an external manager without undue delay (not later than on the business day following the receipt of the relevant application). At the same time, the court shall issue interim measures prohibiting the sale of shares of the company, dismissal of employees on the employer's initiative, termination of major contracts and conclusion of certain transactions.
Third-party management may be introduced for up to three months and extended up to six months. Within this period, the shares of the organization shall be sold by auction. The new shareholder is obliged to maintain at least 2/3 of the jobs and to continue the business activity for at least one year. Alternatively, the shares / stocks could be transferred to the Russian state in trust upon the proposal of the tax authority.
Early removal of the third-party management is possible if the partners / shareholders holding more than 50% of the voting shares / interest in the company's capital decide to reinvigorate the company (including by selling or transferring the shares / interest in trust). In this regard, the intention of the shareholders to actually resume business activity is subject to judicial review.
The current version of the draft law does not provide for compensation for foreign shareholders in the event of compulsory expropriation. However, the Russian tax authority has proposed that this issue be explicitly regulated in the law and that it be stipulated that the proceeds of the auction, after deduction of the costs incurred and payments to creditors, be transferred to the shareholders or retained until such transfer is feasible.
Russia has concluded investment protection agreements with many states that protect investors from expropriation and provide for compensation payments in the event of expropriation. It remains to be seen to what extent the investment protection agreements will function and provide effective protection.
