Private Equity in Russia: Q&A Review


1. Overview

1.1 What are the most common types of private equity transactions in Russia and what is the current state of the market for these transactions?

For the most part, PE acquisitions in Russia involve a PE fund acquiring a controlling or minority interest in a private investee company.  Acquisitions of interests in Russian public companies are generally less popular, owing to greater regulatory and disclosure requirements.  Convertible loans and mezzanine financing are not yet that common.

Overall, in 2014 the market was heavily dominated by Russian PE houses.  These include very successful big players like Alfa Group and its A1, Summa Group, Renova and other small and medium-sized local PE funds.  Also, equity-type firms, such as the state-owned Rosnano, and other government-backed development sponsors and financial institutions, such as RDIF, are fairly active.

1.2 What are the most significant factors or developments encouraging or inhibiting private equity transactions in Russia?

From the legal infrastructure perspective, it is worth mentioning Civil Code amendments, some of which are quite revolutionary (e.g., an implied obligation to act in good faith; conceptually new indemnity analogous instruments).  These amendments are clearly a positive sign of progress and an ambition to create a more predictable and flexible legal environment for all concerned.  Another key change is the deoffshorisation campaign designed to bring investment held by Russian corporates and individuals back to the Russian jurisdiction.

2. Structuring Matters

2.1 What are the most common acquisition structures adopted for private equity transactions in Russia?

The majority of PE funds operating in Russia are structured as offshore limited partnerships established under foreign laws.  Typically, one or several intermediate special purpose vehicles (SPVs) incorporated in tax efficient jurisdictions are employed by limited partnerships to conduct investments in Russian portfolio companies.  Please refer to question 9.1 for more detail on PE deal structures.

2.2 What are the main drivers for these acquisition structures?

The main drivers for the above acquisition structures are tax efficiency as well as corporate governance and shareholder protection matters that, in a foreign investor’s view, are better to be dealt with under foreign, normally English, law and in the foreign jurisdiction (e.g., at the SPV level).  The deoffshorisation campaign and the natural push towards the use of Russian law and preferred choice of the Russian jurisdiction for transactions with assets located in Russia by state-owned investors are likely to cause, at very least, small-to-medium sized deals onto the Russian territory which, if work well, may also be very cost sensible.

2.3 How is the equity commonly structured in private equity transactions in Russia (including institutional, management and carried interests)?

The types of equity participation vary widely, from direct equity ownership to shadow equity participation in the form of bonus payments calculated with reference to the share price or other financial indicators.  Equity ratchets tied to the company's performance and/or a successful exit are the ones most frequently used.  The percentage held by, or awarded to, the management tends to be only 3-5%.

2.4 What are the main drivers for these equity structures?

Management equity structures and types depend on: (i) the private equity firm’s priorities and its approach to management equity in portfolio companies; (ii) the expected profile of investor returns; (iii) type of portfolio company and its principal place of business; and (iv) the tax considerations of the private equity firm, management and portfolio company.

2.5 In relation to management equity, what are the typical vesting and compulsory acquisition provisions?

In recent years, performance vesting linked to a company operating metric (e.g., EBITDA) is becoming more popular.  A full vesting term generally varies from three to five years, with vesting varying within that period.  “Cash in” or payment does not normally require vesting, although, in practice, founders may roll in part of their equity price (the share scheme thereby becoming a de facto earn out).

3. Governance Matters

3.1 What are the typical governance arrangements for private equity portfolio companies?

These include establishment of a board of directors consisting of members nominated by investors in accordance with a shareholders’ agreement concluded either at an SPV or Russian company level, and in certain instances, the Management Board/Committee, normally at the level of a portfolio company.  In order to strengthen operational control, relevant limitations may be included in the Russian Articles of Association setting out additional approval requirements for the portfolio company CEO activities.

3.2 Do private equity investors and/or their director nominees typically enjoy significant veto rights over major corporate actions (such as acquisitions and disposals, litigation, indebtedness, changing the nature of the business, business plans and strategy, etc.)?

Investors usually obtain veto rights over major corporate, commercial and financial matters, which are typically documented in a shareholders’ agreement and the Articles of Association of the SPV holding company and/or its portfolio company.

Depending on the legal type of the Russian company, Russian law itself provides various veto rights on enumerated decisions (such as, unanimous shareholders’ approval for reorganisation or liquidation of the limited liability company or certain cases of its authorised capital increase).

3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level?  If so, how are these typically addressed?

Generally, there are no statutory limitations on these rights per se, although, veto rights in the traditional meaning are yet to be tested in Russian courts.  For this reason, veto arrangements with respect to Russian entities are typically structured by setting out a list of decisions requiring approval by all or special majorities of the members of the board or shareholders, which has limited use in public companies.

3.4  Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)?  If so, how are these typically addressed?

Due to recent amendment to the Civil Code, majority shareholders owe fiduciary duties to the company and, to a limited extent, to minority shareholders.  Thus, majority shareholders are obliged to act in the company’s interests and discharge their functions in good faith and reasonably.  If they fail to do so, they may be held liable for damages caused to the company. 

Also, a PE investor that acquires more than 30, 50 or 75% in a public company is obliged to make a mandatory offer to the remaining shareholders.  Acquisition of more than 95% of shares also triggers mandatory buy-out requirements.

3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including governing law and jurisdiction)?

The Russian corporate legislation contains a large number of mandatory rules, which often precludes being flexible with regard to the contents of shareholders’ agreements governed by Russian law.  Foreign law may be chosen to govern a shareholders’ agreement with respect to a Russian entity provided that certain conditions are met (e.g., when one of the parties to such an agreement is a non-Russian person or entity).  Despite this, even if the parties agree to make law other than Russian law applicable to the shareholders’ agreement, certain mandatory Russian provisions still have to be respected (e.g., provisions on incorporation, reorganisation and liquidation of the Russian company, pre-emption rights, corporate governance, structure of the company's bodies and their competence, casting votes and liability of shareholders).

Russian law does not explicitly prohibit referring disputes arising out of shareholders' agreements to arbitral tribunals in Russia or abroad.  However, Russian courts tend to qualify disputes concerning shares, management and participation in Russian companies as “corporate disputes”, which according to recent and very questionable interpretation by the Higher Arbitration Court can only be heard by Russian state commercial courts and cannot be submitted for the consideration of arbitral tribunals or foreign state courts.

3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies?   What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies?

Generally, all board members of Russian companies bear fiduciary duties and may be held liable for damages caused to the company as a result of their unconscientious or unreasonable actions.

Also, in certain industry sectors such as securities markets, insurance, and the banking and financial sector, there exists specific qualification requirements as to directors’ education, practical experience, reputation, etc.  A certain number of independent directors may be required on the board of a Russian mutual fund and joint stock investment fund.

Unlike in many foreign regimes, Russian company board members may not have alternative directors.    

3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?

As stated above, directors of Russian companies bear fiduciary duties to the company, so they are obliged to act in the best interests of the company.  This principle should be accounted for when building relations between the director and the shareholder that nominated him/her.

Apart from the obligation of directors to disclose their interest in other parties, e.g., other portfolio companies, and to refrain from voting on approval of a company’s transactions in which they have a vested interest, there are no other specific requirements on how conflicts of interests should be dealt with by the directors of Russian companies.

If an investment is structured through an SPV registered offshore, indemnity letters are customary practice for directors.

4. Transaction Terms: General 

4.1  What are the major issues impacting the timetable for transactions in Russia, including competition and other regulatory approval requirements, disclosure obligations and financing issues?


Acquisitions may be subject to anti-monopoly control by the Russian Federal Antimonopoly Service (FAS) when certain control thresholds are reached.  This also applies to indirect acquisitions through offshore holding companies.  Obtaining preliminary FAS consent to a transaction normally takes 30 days.

Strategic company clearance

Additional approvals may be required if the target operates in the “strategic” industries, such as aviation, publishing or mining.  For example, direct or indirect acquisition by a private foreign investor of more than 50% of the voting shares in a strategic company or 25% of those in a strategic company licensed to use federal natural resources requires consent from the Government Commission for Control over Foreign Investments.  Obtaining the above-mentioned consents may take up to six months.

Russian public deals structured as direct acquisition of shares may be subject to voluntary or mandatory buyout offers when the acquired stake exceeds 30%, 50% or 75% of the voting shares and, subject to meeting certain statutory requirements, possible squeeze-out of minorities if a shareholder acquires more than 95% of the company’s shares. 

Financial services

PE transactions in the banking and insurance sector are subject to special regulations setting out numerous clearance and qualification requirements.  In particular, acquisition of more than 10% of the shares in a bank or other credit institution, or obtaining of direct or indirect control over a shareholder holding more than 10% of the shares in a bank or other credit institution, is subject to preliminary approval by the Russian Central Bank.  Disposal of any number of shares in a Russian insurance company to a foreign investor or its subsidiary is also subject to preliminary approval by the Russian Central Bank.


Starting from 1 January 2016, foreign persons will not be allowed to acquire, directly or indirectly (including through controlled persons or entities where foreign ownership exceeds 20%), more than 20% of shares in a shareholder of a media founder, media editorial office or broadcasting company.


Disclosure of information on material facts is applicable to public companies.  In particular, disclosure is required in the event of acquisition/disposal, directly or indirectly, of 5% or more of the voting shares in a public company, or when the shareholding exceeds or drops below 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% of the voting shares in the company.

Where PE-sponsored transactions involve debt financing, agreements on collateral will then normally be negotiated with the banks after signing.  State registration of Russian mortgages normally takes up to two weeks.

4.2  Have there been any discernible trends in transaction terms over recent years?

There’s a major push for investment transactions to be governed by Russian laws and consummated in Russia.  It's likely that it will have an immediate effect on small-to-medium sized transactions while large commercial deals will keep requiring English law and foreign dispute venues.

5. Transaction Terms: Public Acquisitions  

5.1 What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?

Though buyout deals are not rare on the Russian market, they mostly involve strategic, rather than PE, investors.  There are general takeover rules binding on all investors acquiring public companies in Russia.

The public-to-private transactions are mostly conducted through: (i) a first step tender offer; and (ii) a squeeze-out of the remaining minority shareholders.  In addition, prior to making a tender offer, investors often acquire the stock from the company’s majority shareholders under a privately negotiated deal.  

In some jurisdictions (e.g., Hong Kong), PE investors provide financing to founders or managers of public companies for carrying out takeovers, but this is not common practice in Russia.  In most cases, public takeovers are funded through debt financing, since, as mentioned above, such deals mostly involve strategic investors. 

 5.2 Are break-up fees available in Russia in relation to public acquisitions? If not, what other arrangements are available, e.g. to cover aborted deal costs?

Russian law neither provides for any restrictions in relation to, nor explicitly regulates, break-up fees or similar payments.  Even so, in practice, public company transactions in Russia do not include break-up fees, particularly since this might give rise to a conflict of interest between the personal interests of the major selling shareholders (who might also be the company’s board members) and the interests of the target company.

As an alternative to break-up fees, a buyer may seek various types of deal protection directly from the major shareholders in the public company (e.g., shareholders' irrevocable undertakings to the bidder not to solicit, to convene a board meeting and/or vote in favour of the board resolution required to implement the offer, etc.).  Such shareholders’ undertakings, however, might not stand up to Russian judicial scrutiny and, consequently, might be unenforceable in Russia.

6. Transaction Terms: Private Acquisitions 

6.1 What consideration structures are typically preferred by private equity investors in Russia?

All main forms of payment structures are used by PE investors in Russia. Cash is the most common form of consideration, though shares in the buyer or shares combined with a cash element are sometimes used.  Assumption or repayment of debt is also common in PE deals.

PE sellers usually favour locked-box pricing structures offering price certainty from the outset, control over financial information, potentially reduced contractual liability, cost savings and prompt distribution of sale proceeds to investors post-closing.  A completion account is another pricing mechanism commonly encountered.  Price adjustments for working capital and net debt variations are frequently encountered in PE deals in Russia.  At the same time, earn-out and other contingent post-closing payments based on the target’s performance are quite rare.

6.2  What is the typical package of warranties/indemnities offered by a private equity seller and its management team to a buyer?

The package of warranties/representations is contractually negotiated and varies from transaction to transaction, heavily depending on a stake size, but usually includes customary warranties (and, very rarely, representations) regarding title (to shares and assets), liabilities, and regulatory as well as typical transactional warranties – such as capacity.

Unlike the North American market, indemnities have more limited use and as a rule are employed for specific aspects only.

Portfolio company management teams (assuming they don’t hold equity stakes) are not typically asked to make representations, warranties or indemnities.

6.3 What is the typical scope of other covenants, undertakings and indemnities provided by a private equity seller and its management team to a buyer?

In an acquisition agreement governed by foreign law, a private equity seller usually provides pre-completion undertakings limiting the seller's actions between signing and closing without the buyer's consent and (assuming a locked-box pricing structure) a no-leakage undertaking.

The acquisition agreement typically includes the full range of conditions precedent expected in any other jurisdiction (e.g., third party consents, antitrust and other government approvals, accuracy of representations and warranties (subject to materiality tests), and performance of pre-completion undertakings).  The buyer might also look for deal-specific closing conditions based on its due diligence.  Material adverse change clauses remain relatively rare in Russian PE deals.  Financing-out as a completion condition is also very infrequent.

A PE seller might also be asked for non-compete covenants, enforceability of which is, however, questionable from the Russian law perspective (to date, the prevailing view held by legal practitioners is that non-compete undertakings would not be enforceable in relation to the Russian-based elements of the business and might be found to violate Russian antimonopoly laws).

Members of the management team do not usually agree to provide any covenants and undertakings unless they are also selling shareholders, but may be asked to agree to non-competition restrictions or their employment terms post-acquisition (this being a kind of "moral obligation" of the employee and unlikely to be enforced by Russian courts).

6.4  Is warranty and indemnity insurance used to "bridge the gap" where only limited warranties are given by the private equity seller and is it common for this to be offered by private equity sellers as part of the sales process?

It is not yet common in Russian PE transactions for either the buyer or the seller to obtain warranty and indemnity insurance.  The warranty and indemnity insurance tools structured under Russian law are almost untested.  The most common way to bridge any warranty gap used in Russian deals is to reduce the purchase price to address a specific potential liability. 

6.5 What limitations will typically apply to the liability of a private equity seller and management team under warranties, covenants, indemnities and undertakings?

Limitations on the seller’s liability in Russian law-governed acquisition agreements are quite narrow and usually only concern the type of damages that may be claimed by the buyer (as a rule, indirect damages, such as loss of profit, are excluded from Russian deals).  Caps and baskets could be structured under Russian law but these have not yet been properly tested in the courts.  The limitation period for bringing claims for breach of contract (which is generally three years) cannot be increased or decreased by an agreement governed by Russian law.

The sellers’ liability in foreign law-governed agreements (as typically used in Russian PE deals) is usually subject to a number of limitations.  Frequently, fundamental warranties, such as title and capacity, survive for three years post-closing or are not subject to any limitations at all.

Warranties regarding business operations would typically be expected to be time-barred after a period of 12 to 18 months.  The time limitation for tax warranties is usually three to four years, this being linked to the time during which the Russian tax authorities can reopen tax assessments for earlier periods.  Indemnities are usually subject to a different regime; tax indemnities are normally time-barred after tax assessments have become final and environmental indemnities often last for three to five years.  At the same time, escrows are rarely provided for more than 12 months.  Caps, baskets and thresholds for warranties and indemnification payments are also common in Russia-related PE deals.  The threshold for bringing claims is generally between 1% and 5% of the purchase price, with the cap on the seller's liability being anywhere from 50% to 100% of the purchase price.

6.6  How do private equity buyers typically provide comfort as to the availability of equity finance and what rights of enforcement do sellers typically obtain if commitments are provided by SPVs?

In Russian PE deals, structures are not uncommon where the buyer is a newly-formed SPV for which a PE firm arranges acquisition financing through financing commitments from third party lenders and/or equity commitments from a PE fund.  

In this case, the seller typically requests that a PE fund issue an equity commitment letter.  Third party and other enforcement rights are frequently included in equity commitment letters for the seller to be able to enforce the commitment directly against the PE fund on its failure to fund the buyer.  Sometimes, funds also provide the sellers with limited guarantees covering the buyers’ obligations to pay the reverse break-up fees.

Parent company/PE fund guarantees are the most common forms of seller protection in an acquisition where only Russian buyers are involved.

6.7 Are reverse break fees prevalent in private equity transactions to limit private equity buyers' exposure? If so, what terms are typical?

Reverse break fees payable by the buyer to the seller when the deal is not completed, e.g. owing to the buyer’s failure to obtain financing and/or corporate or regulatory approval for the deal, are not common between Russian buyers and sellers.  However, sometimes they can be seen in Russia-related deals where US sellers are involved.

7. Transaction Terms: IPOs 

7.1  What particular features and/or challenges should a private equity seller be aware of in considering an IPO exit?

On the Russian market, generally PE sellers exit portfolio companies via trade sales to strategic or financial investors.  IPOs of Russian portfolio companies are less common.  Yet, even on the muted IPO market, there have been a number of successful IPO exits in recent years.

In this regard, inclusion of appropriate rights and protections in joint venture shareholders’ agreements is critical to facilitating a clean exit.  PE funds’ interests in an exit from a JV are not always aligned and it is crucial to have variable terms in the shareholders’ agreement for different shareholders’ groups at the time of disposal of shares.  In particular, in order to ensure that the shareholders’ agreement allows for an exit plan, detailed obligations would normally need to be imposed on minority shareholders in respect of an IPO.  Those often include the minorities’ obligations to swap their shares for shares in an IPO special purpose vehicle, the obligation to give all consents and pass all resolutions required to effect the IPO, as well as the obligation to escrow a portion of their shares in an IPO exit.  Thorough consideration needs to be given by a private equity investor to factors that may complicate the exit, such as a non-cash consideration or complex capital structures.

As in other jurisdictions, for the IPO exit to be successful, investors need to consider in advance their respective objectives to the timing of their investment realisation.  Given the current Russian market conditions, it is very difficult to assess the perspective timing for IPO exits.

7.2 What customary lock-ups would be imposed on private equity sellers on an IPO exit?

Where Russian companies place their stock on overseas stock markets, it is customary for PE sellers to lock-up or escrow all or part of their stock in the listing vehicles for a period of 180 or 90 days post-listing.

For IPOs on the Russian stock exchange, the lock-up period is normally 180 days, but a period of 90 days is not unheard of.

7.3 To what extent can rights in pre-existing shareholders’ agreements survive post-IPO?

The Russian stock exchange establishes certain specific post-IPO requirements; these mostly concern the corporate governance of listed companies, including on the number of independent directors on the board and the qualifications of the executives of the listed company, etc.

At the same time, if the IPO underwriters and/or the private equity funds believe that retaining governance and/or transfer restrictions post-IPO will adversely affect the contemplated offering or the trading value of the offered shares, then some or all provisions of the pre-IPO shareholders’ agreement can be modified or even terminated concurrently with completion of the IPO (such as rights to nominate directors, tag-along rights, drag-along rights and veto rights).

8. Financing 

8.1  Please outline the most common sources of debt finance used to fund private equity transactions in Russia and provide an overview of the current state of the finance market in Russia for such debt.

Debt financing is typically attracted from banks and other financiers to fund the acquisition and sometimes the working capital needs of the target.  In large acquisitions, it is not unusual to see multiple layers of debt and debt securities.  True leveraged buy-outs are still uncommon in Russia.

Prior to the credit crunch, in most cases debt was cheaper than equity.  Now, the fundraising for Russian PE is challenging owing to the high cost of bank credit.  Therefore, at present, it is not unusual for equity finance to comprise 50% or more of the total funding requirement.  That said, there are examples of state banks providing debt financing for acquisitions.

8.2  Are there any relevant legal requirements or restrictions impacting the nature or structure of the debt financing (or any particular type of debt financing) of private equity transactions? 

When it comes to debt financing from banks and other third party lenders, there are no specific legal requirements for PE investors in Russia; they borrow like any other M&A player.  Even so, in the event that a Russian borrower seeks debt financing from its overseas owners, Russian thin capitalisation rules apply.   

9. Tax Matters 

9.1 What are the key tax considerations for private equity investors and transactions in Russia?

Interests in Russian private companies are typically held via holding companies located in tax treaty jurisdictions rather than by fund structures directly.  This is because tax transparent fund structures are typically not eligible to apply treaty benefits, and for this reason fully taxable holding and subholding companies with a favourable participation regime are often interposed.  For many years Cyprus has been a default jurisdiction of choice for establishing holding companies for Russian inbound investments, but Luxembourg and the Netherlands are used more and more often, particularly in structures with Luxembourg fund vehicles.

Financing is typically done via a combination of debt and equity, with due consideration of thin capitalisation rules that establish a 3:1 debt to equity ratio.  Interest deduction is subject to special restrictions that may in certain situations require transfer pricing analysis and notification.  Profit repatriation is generally subject to 15% withholding tax on dividends and 20% on interest, which can be reduced, subject to a number of conditions, down to 5% and 0%, respectively, under the tax treaties with Cyprus, Netherlands and Luxembourg, as well as some other popular jurisdictions.

Generally, non-resident capital gains upon exits from investments are subject to Russian tax only if the underlying Russian target’s assets mainly consist of real estate located in Russia.  Tax treaty with Cyprus provides an exemption from this tax until 2017, the Dutch treaty still contains a full exemption but is expected to be revised, whereas treaties with Luxembourg and Switzerland have already been revised to give taxing rights to Russia.  Gains upon sale of non-real estate companies, such as those in the IT and high-tech sectors, are generally not subject to Russian tax.

9.2   Have there been any significant changes in tax legislation or the practices of tax authorities (including in relation to tax rulings or clearances) impacting private equity investors or transactions and are any anticipated?

As of 2015, Russia has introduced a revolutionary package of “deoffshorisation” measures that has impacted the typical investment structures in a ground-breaking way.

First of all, Russia has introduced new disclosure requirements and its first ever CFC rules for Russian tax resident individuals and companies in relation to their foreign companies and structures.  In 2015, a non-Russian company is regarded as a CFC if a direct or indirect participation exceeds 50%, while from 2016 and onwards the threshold drops to more than 25% (or, if an SPV is controlled by Russians by more than 50%, to more than 10%).  Even if these thresholds are not met, a company or a structure can still be regarded as a CFC if there is “de facto” control in place.  However, according to a special clause, if a company or an individual that manages a fund’s assets is regarded as Russian tax resident, this fact per se does not make a fund itself a CFC of such company or individual.

Secondly, the new rules have introduced a “corporate tax residency” concept to Russian tax laws.  Under the new rules, non-Russian companies can be regarded as Russian tax resident vehicles if their “place of effective management and control” is in Russia, in which case they are not regarded as CFCs but their profits are subject to 20% Russian corporate profit tax.  As in many western countries, no “investment manager” exemption is established by Russian tax legislation.

Thirdly, Russia has significantly revised its treaty clearance procedure, which may be an issue for funds that not only rely on capital gains upon exits but also plan on receiving dividend and interest income from target companies.  From 2015, when income is paid to SPVs resident in Cyprus, the Netherlands, Luxembourg or other treaty jurisdictions, a tax residency certificate per se no longer suffices for applying reduced withholding tax rates (5% instead of 15% on dividends, and 0% instead of 20% on interest).  In order to apply the advance tax relief, Russian income paying targets should request from foreign SPVs (and keep in their files) a confirmation that such companies are “actual recipients of income” (beneficial owners) and determine its economic future.

Overall, with this new reform there is an obvious trend of Russian tax authorities taking a new approach when dealing with international structures.  Instead of looking at particular technical elements of specific transactions, they aggressively test structures and challenge treaty relief from the viewpoints of substance, business purpose, functional analysis and “subject to tax” test.  For these reasons, PE investors in Russia need to review and reconsider their existing and future investment structures in the context of the new rules and should seek tax and legal advice in order to avoid situations where adverse tax developments may significantly impact the IRR of their investments.

10. Legal and Regulatory Matters 

10.1 What are the key laws and regulations affecting private equity investors and transactions in Russia, including those that impact private equity transactions differently to other types of transaction?

All major PE funds operating in Russia are structured as offshore funds established under foreign law, with direct or indirect subsidiaries incorporated in Russia. Offshore PE investors and PE deals are not subject to any specific or additional regulation compared to other business players.

There is no special state authority or professional self-regulatory organisation supervising offshore PE funds’ activities.  The main source of regulation of such funds’ activities in Russia is the Russian Civil Code and laws on joint stock companies and limited liabilities companies, which regulate all main forms of Russian commercial legal entities and their business operations.

Apart from offshore investment funds, there are other investment vehicles used on the Russian market.  Those include mutual (unincorporated) investment funds (e.g., PIFs) established in accordance with Russian laws and incorporated investment funds established in the form of a Russian joint stock company in accordance with Federal Law on Investment Funds No. 156-FZ dated 29 November 2001.  These investment funds, their structure and investment portfolio are subject to various specific security markets regulations, licensing requirements and supervision by the Central Bank of Russia.

There are also investment partnerships, which were introduced on to the Russian market in 2012 by Federal Law on Investment Partnership No. 335-FZ dated 28 November 2011.  Russian investment partnerships allow for joint investment activity of their members, Russian and non-Russian entities, under investment partnership agreements.   

10.2 Have there been any significant legal and/or regulatory developments over recent years impacting private equity investors or transactions and are any anticipated?

In recent years, Russian legal regulation of business operations has undergone a number of massive and substantial revisions.  These have made the Russian PE market more attractive to foreign and local investors.  The Russian Civil Code has been revised to include concepts used in PE deals on other markets but previously arguable under Russian law.  The significant changes that have already come into force include the concepts of irrevocable powers of attorney and escrow arrangements.  Shareholders are able to choose the governing law of their shareholders’ agreements in respect of Russian companies.  Also, new Russian provisions on option agreements, warranties, representations and indemnities are to take effect on 1 June 2015.

10.3 Has anti-bribery or anti-corruption legislation impacted private equity investment and/or investors’ approach to private equity transactions (e.g. diligence, contractual protection, etc.)?

Anti-bribery and anti-corruption compliance are becoming a significant part of assessment of target companies operating in all business segments in Russia, particularly because of the potentially substantial financial penalties (depending on the circumstances, possibly exceeding RUB 100,000,000) and reputational damage resulting from non-compliance.  Recent legislative developments (in particular, introducing restrictions on acquisition of shares in financial companies by persons with an outstanding conviction for an economic, including anti-corruption, crime or their holding of management positions in financial companies) have also brought anti-bribery and anti-corruption concerns into sharp focus.

Owing to these requirements, representations, warranties and covenants dealing with anti-corruption, anti-bribery and other compliance matters have become fairly common in deals involving foreign PE buyers.

10.4 Are there any circumstances in which: (i) a private equity investor may be held liable for the liabilities of the underlying portfolio companies; and (ii) one portfolio company may be held liable for the liabilities of another portfolio company)?

As a general rule, the shareholders in a Russian portfolio company or their affiliates are not liable for such company obligations.  Even so, in certain limited cases, the corporate parents, other shareholders or even affiliated persons could be held liable for the debts or other liabilities of a portfolio company.

Generally, these include the following instances: (i) the corporate parent is jointly and severally liable for deals concluded by its Russian subsidiary further to binding instructions from such parent company or with the parent company’s consent; and (ii) the controlling shareholders bear secondary liability for debt of its insolvent Russian subsidiary if the subsidiary’s bankruptcy was caused by culpable actions on the part of the parent company.  Secondary liability may be also imposed on the former shareholders in an insolvent subsidiary or its affiliated persons provided they were entitled, during a period of two years prior to bankruptcy claim, to issue to such insolvent company binding instructions.

For many years, the Russian courts were, however, reluctant to “pierce the corporate veil” and generally refused to hold a parent or controlling company liable for the debts of its subsidiaries or affiliates.  The changes to the Russian Civil Code evidence a shift towards a broader approach to holding controlling persons liable for the debts of their affiliates.

11. Other Useful Facts 

11.1  What other factors commonly give rise to concerns for private equity investors in Russia or should such investors otherwise be aware of in considering an investment in Russia?

Most PE investors identify financing difficulties as the greatest constraint on PE activity over the last year.  This caused companies to pivot towards Asian markets or rely mostly on government-owned banks or development institutions, including Sberbank, VTB Bank and VEB.  The managements of most PE firms are looking to the end of 2015 for a rebound in debt financing and improvement in the funding environment.  An increase in the number of non-cash transactions is expected in 2015.


The authors would like to thank Artem Toropov, Senior Associate, International Tax, and Oksana Orlovskaya, Associate in the Corporate/M&A practice of Goltsblat BLP, for thier contribution towards the preparation and finalisation of this chapter.

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