LawFlash

Russia Considers Imposing Special External Management over Certain Foreign-Owned Companies

March 13, 2022

Russia is considering introducing legislation that, if adopted, will have a dramatic impact on foreign-owned businesses and their strategies concerning Russia. The goal of the proposed law is to (1) warn foreign owners that they may lose their Russian companies if they abandon them and (2) conserve business and preserve jobs by allowing the sale of affected companies’ assets to a Russian third-party.

The draft law has not been submitted to Russia’s parliament and has already received criticism for its sweeping nature. The legislation may be amended before it goes to the parliament for review.

What Is ‘Special External Management’?

The concept of special external management is similar to the court-appointed administration of an insolvent company. The draft law proposes several rules to conduct the management-takeover and to insulate the business of the affected company, including the following:

  • The powers of the affected company’s executive body are passed to an external manager, and the powers of its other governing bodies (e.g., the board of directors or shareholder meeting) are suspended.
  • All powers of attorney issued by the affected company prior to the date of the external management introduction cease to be effective.
  • The external manager does not need to make mandatory bankruptcy filings under Russian bankruptcy law.
  • All corporate decisions on voluntary liquidation, reorganization, dividend payment, share buybacks, amending constitutional documents, and certain others, cease to be effective.
  • No redemption of shares by a shareholder is permitted.
  • If a charter allows the shareholders or the board to make decisions on matters not provided by law, this decision-making authority ceases, and the powers of the external manager are determined under the standard provisions of law.
  • The affected company’s counterparties may not exercise contractual rights to unilaterally terminate or amend a contract by notice—all amendments or termination must be done via a Russian court only.
  • An affected company’s counterparty that is an IP owner connected to the so-called “unfriendly countries” is not permitted to terminate IP rights (including under licenses and franchise) granted to the company; any IP rights terminated after February 24, 2022 will be reinstated without any fees due to the IP owner until the end date of the external management.
  • The external manager may terminate any contract of the affected company within three months from institution of the external management, if such contract has not been fully or partially performed and if such contract contributes to the affected company being insolvent.

Employees of Russia’s Deposit Insurance Agency (DIA)—Russia’s state corporation overseeing bankruptcy of financial institutions—will serve as external managers for affected companies in the financial industry. Employees of VEB.RF—Russia’s state development corporation—will act as external manager for companies in other industries. (When interacting with DIA and VEB.RF, the direct and indirect impact of sanctions imposed by several countries must be assessed as well. For example, VEB.RF has been directly sanctioned in several jurisdictions.)

Under the draft law, an external manager must compile a list of creditors and their claims, and otherwise take actions to preserve the value of the affected company in a manner similar to bankruptcy managers. Among other things, an external manager can “spin off” the company’s assets into a separate company and sell that company at public trades. Once the sale is completed, the external manager will file with a Russian court for bankruptcy or liquidation of the affected company.

What Companies May Be Affected?

Any Russian company (1) with the balance sheet value of its assets above one billion rubles and/or with more than 100 employees; and (2) controlled, or at least 25% owned (directly or indirectly, in aggregate), by persons residing in, registered in, having their main place of business in, or main source of income from any of the unfriendly states, in any of the following cases:

  • The company management de facto ceased exercising its powers in breach of the Russian laws (e.g., since February 24, 2022, management, members of the governing bodies, and/or shareholders have left Russia and refrain from their duties to the detriment of the company’s interest, or caused the company to suffer substantial loss in asset value or otherwise discontinued operations in breach of the Russian laws). In this case, external management may be introduced for a term of up to three months, without possibility for early termination of the external management.
  • The company management, members of the governing bodies and/or shareholders act in such a manner that is likely to cause the company to cease its operations, go into bankruptcy or liquidation (e.g., after February 24, 2022, such persons publicly announced termination of the operations in the absence of apparent economic grounds, or terminated material commercial contracts, or notified more than one-third of the employees of their dismissal). In this case, external management may be introduced for a term of up to six months but with the possibility of early termination of the external management.
  • Other criteria as may be further determined by the Russian government.

Reportedly, the Russian authorities are putting together a list of foreign-owned businesses that have recently announced ceasing operations in Russia and will consider introducing the external management to them; some names are mentioned in various publications.

How the Special External Management May Be Initiated

The following persons may apply to have the special external management be introduced:

  • A member of the affected company’s board of directors.
  • Tax authorities (at their own discretion or at the request of a local governor, federal ministry or body overseeing the industry in which the company operates, employment inspectorate, or local general prosecutor).
  • The external manager—if within six months from early termination of external management conditions imposed by a court in connection with an early termination are not fulfilled.

The Russian government may introduce additional grounds for external management introduction.

A person requesting external management must apply to the Commercial (Arbitrazh) Court of the City of Moscow. The court must consider the case within five to seven business days. The court may also impose interim restrictive measures on the affected company, until the final decision on external management is made.

These measures include prohibitions on

  • acquiring or alienating assets comprising more than 5% of the company’s balance sheet asset value (other than in the ordinary course);
  • unilaterally dismissing employees;
  • terminating material contracts; and
  • transacting shares of the company.

Can Special External Management Be Prevented?

Before the date of the court hearing, the general director of the affected company or its shareholders holding more than 50% voting authority may file an application against the external management and provide an undertaking to resume and continue the affected company’s operations.

The draft law suggests certain examples of possible undertakings—a sale or transfer in trust of the shares in the affected company to a person who is not connected with any unfriendly state (such sale or transfer to be completed within three months from the court decision), or other providing the court with convincing arguments that the circumstances causing the application to be filed will be terminated.

Can Special External Management Be Discontinued?

Special external management may be discontinued by the court if shareholders holding more than 50% voting authority apply for a discontinuance and provide an undertaking as described above, and pay the external manager’s fees. The court must consider this within 10 business days.

Within six months upon early termination of the external management, the external manager will have the right to request documents from the company and the purchaser/trust manager, as relevant, to check compliance with the terms and conditions on which the external management had been discontinued.

How a Sale via Public Trades Works

The procedure will generally follow the rules on public sales in a bankruptcy proceeding, with several specifics. For example, shareholders of the affected company will not be able to buy the company at such trades. Certain preemption rights (right to match) will be given to bidders operating in the same industry as the affected company.

The winning bidder will enter into a purchase agreement with the external manager, under which the winning bidder must undertake to preserve not less than two-thirds of the jobs of the affected business and to ensure the continuation of operations for at least one year. The external manager retains a right to verify compliance of the purchaser with the conditions imposed by the purchase agreement.

Protection Under Bilateral Investment Treaties

Foreign creditors affected by the decree may also be protected under one of the bilateral investment treaties concluded by the Russian Federation. These treaties provide guarantees to foreign investors; for example, with regard to expropriation and the free transfer of capital. Claims by foreign investors against the Russian Federation under these treaties can be brought before an international arbitral tribunal.

Matters of currency exchanges and currency conversion of existing obligations have already resulted in a series of arbitrations against certain countries; for example, Argentina.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Giovanna M. Cinelli Bruce Johnston Melanie Ryan Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Vasilisa Strizh
Carl A. Valenstein
Nicola Kelly
Valentina Semenikhina