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On July 16, Vladimir Putin made a significant move by signing a decree that placed foreign shares in Baltika Breweries, the well-known Russian company, previously owned entirely by German and Swedish companies, under the control of the Russian Federation through “temporary management.” The Carlsberg concern was already in the process of divesting its Russian assets; the company had even announced that it had succeeded in finding a buyer for its Russian subsidiary. Apparently, Carlsberg faced obstacles in the form of obligatory permission from the special Governmental Commission for this transaction, which might have hindered or entirely halted the sale.

Recent developments in Russia have sparked concerns among foreign investors about their ability to sell stakes in Russian limited liability companies (LLCs). Understanding the intricacies of these new developments is crucial for investors looking to navigate the complexities of the Russian business landscape.

In this article, I delve into certain details of the process of selling stakes in Russian businesses, shedding light on the challenges and potential implications for foreign investors.

New rulemaking

The full-scale invasion of Ukraine by Russia, referred to in Russian official documents and sources as the “special military operation”, has entailed both many sanctions restrictions that have had a significant impact on doing business in Russia and transactions in this jurisdiction and the emergence of completely new rulemaking.

Following the invasion, President Vladimir Putin signed Decree No. 618 on September 8, 2022, covering transactions between Russian residents and foreigners from “unfriendly” countries, as determined by the Russian government. It applies to transactions related to the ownership and management of shares in LLCs or other rights that influence their management or business activities.

The primary consequence of Decree No. 618 is the requirement to obtain authorization from the “Government Commission for Control over Foreign Investments” (the Commission, hereinafter) for transactions involving shares in LLCs. Notably, transactions in the fuel, energy, and financial sectors are not affected by the new procedure.

The decree also allows companies to withhold information about their operations from co-owners from unfriendly countries, particularly affecting companies with shares owned by strategic Russian enterprises.

Foreign persons associated with unfriendly states, as identified by the Russian government, are listed in the order of the Government of the Russian Federation dated March 5, 2022, No. 430-r. The current list includes persons from Canada, among other states and territories.

Transaction authorization by the Commission

Transactions subject to authorization by the Commission require the submission of relevant documents, including a valuation report and a positive conclusion from a self-regulatory organization of appraisers.

The Ministry of Finance of the Russian Federation, in its letter dated October 13, 2022, clarified that transactions requiring authorization from the Government Commission include, inter alia:

• the transfer or acquisition of shares,
• withdrawal of a participant from the company,
• agreements regarding the transfer of executive powers,
• convertible loan agreements,
• agreements on pledging shares,
• voluntary reorganization,
• partnership agreements, trust management.

According to additional regulations implemented over the last year, obtaining a permit from the Commission involves the following alarming requirements that are not only highly unusual but are also highly detrimental to foreign investors: the sale price must not exceed 50% of the appraised market value; investors are expected to defer payment from the sale for a period of 1-2 years, and make a “voluntary contribution” to the Russian State budget, which should be at least 10% of either – half the appraised market value of the assets, or the total appraised market value of the assets if they are sold at a discount exceeding 90%.

Decree No. 618 does not contain any restrictions on the amount of the transaction; accordingly, no transaction, regardless of the price criterion or equivalent, can be made without the authorization of the Commission.

Impact and economic consequences

The adoption of Decree No. 618 poses challenges for foreign investors exiting the Russian market, particularly those with call options to repurchase shares in the future. The decree may lead to corporate disputes related to management and liquidation, increasing the likelihood of conflicts in companies with partial foreign ownership.

Many Russian experts claim that the decree continues the line, allegedly provoked by Western states, of tightening the legal regulation of certain types of transactions with participatory interests. However, the current situation warrants a critical examination of the excessive and arbitrary regulation, as it should be seen as direct interference by the Russian state and is believed to impose significant restrictions that negatively impact share transfer process.

Given the already challenging economic situation in Russia, the implementation of additional regulatory measures is expected to exacerbate the existing difficulties. Selling company shares to management or third parties would allow preserving jobs and the business, but in the current circumstances, many players will now choose bankruptcy, liquidation, or a business freeze instead of selling.

Risks and disputes

The introduction of numerous counter-sanctions restrictions, including Decree No. 618, motivates foreign investors to expedite transactions due to the risk of additional bans and the changing legal landscape of Russian law, especially law relating to transaction approval by the Commission.

The financing of such transactions can be non-transparent, and transactions may involve hidden beneficiaries, further increasing the risk of disputes. For example, in August 2022, it was announced that the German holding company OBI GmbH would sell its business to GISK MAX. However, it soon became clear that another person, who had entered into a preliminary agreement for the sale and purchase of 40% of the shares in GISK MAX under a conditional clause, was claiming a stake in the business.

Later, the buyer refused to conclude the transaction; therefore, on December 21, 2022, the Moscow Arbitration Court (case No. A40-191780/22) imposed an obligation to conclude the sale and purchase agreement. Subsequently, the Court of Appeal accepted the final buyer’s rejection of the claim for the obligation to conclude a sale and purchase agreement, and the conflict was probably exhausted.

Hence, successful transactions with shares in Russian companies do not eliminate the significant risks of contestation and subsequent court disputes. The anti-Western sentiment fostered by the Russian state and the position of Russian courts towards “unfriendly” parties inversely affect the chances of successfully defending one’s interests in accordance with the law.

At the same time, those investors who will be able to make a deal in the foreseeable future may find themselves in a significantly advantageous position compared to those whose businesses will be nationalized by the Russian state. Talks about the need for appropriate rulemaking have arisen since the beginning of the Russian invasion of Ukraine. Although the draft law on nationalization was rejected by the Duma, on April 25, 2023, the President of the Russian Federation issued Decree No. 302, which implemented temporary management of foreign stakes in energy companies Fortum and Unipro. The latest example of nationalization in respect of Baltika, made in July 2023, shows that foreign investors, even if they are in the process of preparing a deal with potential buyers of their assets in Russia, should be prepared for unpleasant surprises from the Russian leadership.

Conclusion and advice

The special procedure for transactions with shares in Russian limited liability companies by foreign persons, as outlined in Decree No. 618, has introduced significant changes and challenges for businesses operating in Russia. The need for authorization from the Government Commission and the potential risks associated with these transactions highlight the complexity and uncertainty facing foreign investors in the Russian market.

One crucial aspect of Decree No. 618 is the carveout for transactions in the fuel, energy, and financial sectors. In accordance with the Decrees of the President of the Russian Federation No. 520 dated 05.08.2022 and No. 876 dated 05.12.2022, it is prohibited to conclude any transactions with stakes owned by foreign investors in the companies of these sectors.

Another concerning factor is the provision that allows companies to withhold information about their operations from co-owners from “unfriendly” countries. This raises concerns about communication and transparency amongst foreign co-owners and could cause uncertainty and conflicts in businesses with mixed ownership.

Foreign investors face additional costs and confusion because of the decree’s alarming conditions, which include forced sales at below-market prices, delayed payments, and the demand to make “voluntary contributions” to the Russian State budget.

Foreign investors in Russia are recommended to use cautiousness and a strategic approach when navigating Russia’s business environment in light of recent changes. The following actions are suggested to reduce risks and uncertainties:

• Stay informed: Due to the rapidly changing legal landscape in Russia, it is crucial for foreign investors to stay up to date with the latest developments, including sanctions, regulations, and restrictions.
• Due Diligence and risk assessment: Before entering any transactions involving shares in Russian limited liability companies, conduct thorough due diligence on all parties involved. This includes reviewing the ownership structure, financial stability, and potential risks associated with the company. Consider the potential financial impact of the new regulations and restrictions on investments. Evaluate the risks and benefits carefully before proceeding with transactions in Russia.
• Dispute resolution mechanisms: Given the potential for conflicts and disputes, it is advisable to include robust dispute resolution clauses in contracts related to transactions. Consider alternative dispute resolution methods, such as arbitration, to mitigate potential challenges in Russian courts.
• Documentation: Maintain comprehensive records of all transaction-related documents, including authorizations, agreements, valuations, and communication with authorities. These records will be crucial in case of any future disputes or challenges.  
• Monitor Geopolitical Developments: Keep a close eye on geopolitical developments and changes in the relations between Russia and your home country. This will provide insights into potential future changes in regulations or sanctions that may affect your investment.