New Developments for Foreign Investments in Russian Strategic Companies

July 26, 2017

Recent amendments have been made to the Russian FSIL and FIL regarding approval requirements for foreign investments in potentially strategic companies.

Russia’s Foreign Strategic Investment Law (FSIL) and Foreign Investment Law (FIL) were recently amended as of 19 July, effective 29 July, with regard to the approval requirements for foreign investments into companies that may be considered as strategic. The amendments reflect some tightening up of the Russian monitoring/approval regime for such investments, more or less in line with this trend in various European countries, keeping in mind the open-ended nature of what might be considered strategic under the analogous Committee on Foreign Investment in the United States regime.

Changes to the FSIL and FIL

Most notable is an amendment to the FIL (at Article 6) whereby the chairman of the Foreign Investment Control Commission (Commission) (i.e., the body issuing FSIL clearances; the current chairman is Prime Minister Dmitry Medvedev) will now have the discretion to order that any foreign investment (i.e., not necessarily greater than 50% or another significant stake) with respect to any Russian company (i.e., a company not necessarily falling under the FSIL’s strategic category) should be cleared through the FSIL-established regime. On its face this provision is of course quite broad, and its procedural implementation (including the possible sources for triggering such an order) remains to be seen; this will need to be clarified in the regulations that are likely to follow. However, it is possible that such eventual regulations would contemplate the Federal Antimonopoly Service’s (FAS’s) discretion to follow a de facto lighter procedure, where the application would be returned by the FAS with a sort of “no action letter” if the target company were not really strategic.

The amendments also introduce various substantive and technical amendments to the FSIL, including the following:

  • Some refinements and additions were made to the list in FSIL Article 6 of the types of activities that make a Russian target company “strategic.”
  • The list of conditions in FSIL Article 12 that the Commission can impose on a foreign investor seeking approval of the acquisition of a strategic company stake was made open ended. In an FSIL case a few years ago there was talk of the government’s insisting on a “golden share” condition, which isn’t specified in the law—now this condition is possible.
  • Failure to make the (already required) post-transaction notification of a 5% or greater investment into a strategic company may lead to the loss of voting rights by such investor through an FAS-initiated court action. To date, the only penalty under the law for such failure was an administrative fine—which the FAS has been enforcing quite actively of late.
  • All FSIL violation claims are now subject to commercial (arbitrazh) court jurisdiction.

Tighter Restrictions on ‘Offshore Zone’ Investors

Another set of FSIL amendments, effective as of 1 July, impose new restrictions on so-called “offshore zone” investors into Russian strategic companies. An offshore-zone investor is defined as a company incorporated (or controlled by a company that is incorporated) in any of the jurisdictions that appear on the Finance Ministry list targeting certain low-tax/subpar financial reporting regimes. This list includes the British Virgin Islands, the Cayman Islands, Bermuda, the Bahamas, the Channel Islands, Panama, Hong Kong, Macau, Liechtenstein, Monaco, the United Arab Emirates, and several others. In brief summary:

  • Under this new FSIL restriction offshore-zone investors (including even their Russian subsidiaries) in general would need approval to buy more than 25% of the voting shares, and such investors are barred from buying more than 50% of the voting shares, of a Russian strategic-sector company. These investors are also barred from acquiring 25% or more of the fixed assets of such a company.
  • Further, such investors would need approval to buy more than 5% of the voting shares of the licensee company of any minerals field of federal significance (a strategic field), and would generally be prohibited from acquiring 25% or more of the voting shares of such strategic field licensee—although this threshold could go up to 49% if the target company were and remained under the control of Rosneft or Gazprom. (Note that per recently evolved official policy in this sphere, oilfield service providers that drill wells for strategic field licensees are now considered equivalent to strategic.)

The same especially tight threshold and prohibition regime that was previously established and remains in effect under the FSIL for foreign state–controlled companies is now applicable to private “offshore company” investors as well.

Note further that under this FSIL regime, even the shareholdings of unaffiliated foreign state–controlled investors—and now offshore-zone investors—are aggregated in calculating whether there is a proposed acquisition of a controlling or blocking stake in a strategic company, so as to trigger the special approval requirement. By way of example, if an investor controlled by a foreign state already has 49% of the voting shares in a Russian strategic company (or 24% in a strategic field licensee) it would seem that any other offshore-zone private investor (or state-owned investor from a different country) could not buy more voting shares in such company—as otherwise the combined voting shares of these unaffiliated investors would be considered to exert joint control over the strategic company.