On Foreign Investment in Businesses of Strategic Importance for National Defence and Security

27.11.2014

On 6 December 2014, amendments (1) came into effect to the Federal Law “On Foreign Investment in Businesses of Strategic Importance for National Defence and Security” (the “Law”) prescribing that prior consent be obtained from the Government Commission for Control over Foreign Investment in the Russian Federation (the “Commission”) for transactions involving acquisition of ownership title, holding or using production-related fixed assets of a strategically important business entity (the “strategically important entity”), the cost of which amounts to 25 per cent or more of the book value of the entity’s assets. In addition:

  • certain transactions have been excluded from the Law;
  • the list of control criteria for a strategically important entity has been extended; specifically, the Law introduces the possibility of exercising control by several foreign investors belonging to different groups;
  • the types of activities strategically important for national defence and security have been adjusted;
  • the Commission is now to be notified about transactions that have been approved as prescribed by the Law. 

Close-up:

This legal update focuses on the following key amendments:

  • The Law prescribes that prior consent be obtained from the Commission for transactions involving acquisition of ownership title, holding or using production-related fixed assets of a strategically important entity, the cost of which amounts to 25 per cent or more of the book value of the entity’s assets as of the last reporting date (2)  mentioned on the balance sheet;
  • The Law no longer includes transactions under which the acquirer is an organisation under the control of the Russian Federation or a constituent entity thereof or citizens thereof who are treated as Russian tax residents under the Russian legislation on taxes and levies (except for those holding any other citizenship).

Currently, this exception applies to transactions where the buyer is also controlled by the parties mentioned above;

  • The Law introduces a new criterion for determining that a strategically important entity is under the control of a foreign investor. Specifically, the entity is treated this way in the event that several foreign investors (belonging to different groups), directly or indirectly controlled by a foreign state and (or) international organisation, have the right to dispose of more than 50 per cent of the votes attached to the participatory interest (shares) in the authorised capital of a strategically important entity. It is worth noting that, in exceptional circumstances, control is also exercised when the said persons own even less than 50 per cent of the voting power (depending on the proportion of votes in the entity as a whole);
  • The list of activities strategically important for national defence and security has been amended as follows:
  • the Law now applies to activities relating to use of infectious disease agents only if they have been licensed, other than for companies with a primary focus on food production;
  • the Law includes activities relating to provision of services at Russian ports only if the relevant company has been duly registered (3) and has a dominant position on the market (4);
  • the criteria have been clarified for treating activities of an editorial office and (or) a publisher and (or) founder of periodical printed media as of strategic importance.
  • The Law no longer includes transactions with a participatory interest (shares) in strategically important entities that use a subsoil area of federal significance provided that the foreign investor (or group) has the right to dispose, directly or indirectly, of more than 75 per cent of the total number of votes;
  • The Law stipulates the right of an applicant to request that the Russian FAS extend the term of a Commission resolution (this request should be justified and include information about the term to be extended); 
  • The Law establishes the obligation to notify the Russian FAS about transactions that have been approved pursuant to the Law (5).
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(1) Federal Law No. 343-FZ of 4 November 2014 “On Amendments to the Federal Law “On Foreign Investment in Businesses of Strategic Importance for National Defence and Security” and Certain Legislative Acts of the Russian Federation”.

(2) Please remember that, for the purposes of the Law, the last reporting date means the last day of the relevant quarter.

(3) The Register of business entities (save for financial institutions) with a market share exceeding 35 per cent on the relevant market or with a dominant position on a certain market, provided that federal laws have established cases of dominant position of an entity on the relevant market for application purposes.

(4) Please note that these amendments also introduce changes to certain industry federal laws. These changes set out a reduced domination threshold of over 20 per cent with respect to services rendered at sea-water ports and river harbours of the Russian Federation. 

(5) The term for serving such a notice should be established in the Russian Government Resolution.

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