The draft law on external management was submitted to the Russian Parliament and differs considerably from the previous version. The new draft provides for the establishment of a special interdepartmental commission that will have broad powers to impose external management on any company as it deems necessary. The law is still proposed to apply to circumstances that occurred from February 24. If adopted, the law will create further uncertainty in Russian markets.
Reportedly, the State Duma will schedule the first reading of the draft law for the second half of May 2022, following the May holiday break in Russia. View the previous LawFlash, “Russia Considers Imposing Special External Management over Certain Foreign-Owned Companies” for information on the original draft of the law.
The concept of external management (external administration) is similar to the court-appointed administration of an insolvent company. In effect, the external management is designed to take over the management of an affected foreign-controlled company to keep it as a going concern or to divest its assets to a Russian buyer.
Under the draft law, the external management may be exercised in one of the following types: (1) an external manager takes control of all or part of the shares (equity interest) in an affected company by receiving such shares in the so-called “trust management”; and (2) an external manager receives powers of the executive body of an affected company.
The draft law also provides a procedure to convert external management type (1) to external management type (2).
External management type (1) is similar to a regular Russian-law trust management agreement and is set to be performed for the benefit of the shareholders (participants) of the affected company, provided, however, that the external manager bears no liability towards the shareholders to the extent the external manager acted in the best interests of the affected company. Under the draft law, the external manager may not vote on the matters of the company reorganization, liquidation or changing the charter capital of the company, nor may the external manager engage in any transactions that may result in alienation of shares. This is proposed still to be within the decision-making capacity of the shareholders.
External management type (2) leads to the following consequences:
External management type (2) also allows the external manager to act in a manner similar to bankruptcy managers. Among other things, an external manager can “spin off” the affected 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.
The new version of the draft law removes the asset value and employee number criteria, and institutes more broadly drafted and discretionary criteria. Further, in addition to Russian companies, Russian branches of non-Russian companies may be affected.
As currently drafted, an affected company could be any company located in Russia which (1) is 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;” and (2) has material significance for economic stability, business, protection of rights and interests of citizens in Russia or in a Russian constituent territory (the Significance Criterion).
The law, if adopted, will not apply to the companies owned or indirectly controlled by the Russian Federation or by beneficiaries who are Russian citizens not connected with the “unfriendly states” (even if such Russian citizens exercise control via foreign legal entities connected with the “unfriendly states”).
The draft law further clarifies the Significance Criterion and lists circumstances when a company is considered to have the requisite material significance, as follows:
The proposed draft states that a “branch of an organization” may be treated as an affected company. The broad language suggests that a Russian branch of a non-Russian company meeting the above-described criteria might be covered too.
Various publications suggest that about 10% of Russian foreign-controlled companies may be affected. There is no list of potential targets but judging from the Significance Criterion, industries of concern would include, among others, automotive, retail chains, pharmaceutical, food, and other fast-moving consumer goods.
An affected company may be subject to external management if any one of the below conditions is met:
Under the draft law, the interdepartmental commission will have the power to consider introducing external management at the request of a local governor, a federal ministry, or a body overseeing the industry in which an affected company operates, or due to other grounds as may be identified by the Russian government (notably, labor authorities and a state prosecutor's office are no longer listed among potential requestors in the draft law).
Once the interdepartmental commission determines that external management is needed for a particular affected company, it must seek consent from a local governor concerning the interdepartmental commission’s decision about an organization to serve as the external manager and the type of external management to be introduced (i.e., to control the shares via trust management or to serve as the executive body). If the local governor disagrees, the Russian government makes the requisite decision.
After the decision on the external management is made, the interdepartmental commission authorizes the tax authorities to apply to the Commercial (Arbitrazh) Court of the City of Moscow (the Court) to rule on introduction of the external management. The draft law introduces a short deadline for a local governor and tax authorities to process the case: just one business day. On the date of the application to the Court, the tax authorities must also make an entry about introduction of the external management in the state companies’ register, and notify both the affected company and the proposed external management company.
The Court must decide on accepting the case on the date of its submission and must rule on the case no earlier than five and no later than seven business days from accepting the case. 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
Additionally, upon application of the tax authorities, the Court may also adopt the following measures against the affected company:
The decision of the Court to introduce the external management can be appealed by the shareholders or the executive body of an affected company proposed to be replaced by an external manager.
An employee of VEB.RF, Russia’s state development corporation, or of another organization identified by a decision of the interdepartmental commission may act as an external manager for the affected company. (When interacting with VEB.RF, the direct and indirect impact of sanctions imposed by several countries must be assessed as well. It should be noted that VEB.RF has been directly sanctioned in several jurisdictions.)
Before the date of a Court hearing, the general director (the executive body) of an affected company or its shareholders holding individually or collectively more than 50% of votes may file to the Court an application against the external management and provide an undertaking to resume and continue the affected company’s operations or take other actions to remedy the grounds for introduction of the external management.
The draft law suggests certain examples of possible undertakings, including a sale or transfer to trust management of the affected company’s shares 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 providing the Court with convincing arguments that the circumstances causing the application to be filed will be terminated.
The external management may be discontinued by the Court if the affected company’s shareholders holding individually or collectively more than 50% of votes apply to the interdepartmental commission to terminate the external management and provide an undertaking or take actions as described above, and pay the external manager’s fees. The Court must consider this within 10 business days.
Within six months upon the early termination of external management by the Court, the external manager will have the right to request documents from the affected company or from the purchaser or trust manager, as the case may be, to check compliance with the terms and conditions on which the external management had been terminated.
The external manager in external management type (2) is entitled to sell assets of an affected company at public trades. The procedure will generally follow the rules on public sales in a bankruptcy context, with several specifics. For example, the affected company's foreign shareholders from “unfriendly states” holding 25% or above shares (equity interest) will not be able to participate in 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 no 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.
The new version of the draft law also suggests that an external manager may participate in the trades and bid itself.
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Ukraine Task Force
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Georgia M. Quenby
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Daniel Lopez Rus
Charles C. Rush
Dr. Axel Spies