TOP-6 trends on the M&A market:what the civil legislation reforms have already achieved and how they impact on the ways to structure corporate deals

10.08.2016

The extended upgrading of the Russian civil and procedural legislation has provided players on the Russian market with broad opportunities for using instruments and mechanisms that are traditional in some foreign jurisdictions. Their absence from the Russian legal environment in the past virtually dictated the choice of foreign (predominantly English) law for structuring complex projects in Russia.

These amendments have contributed to triggering a rise in the number of deals with Russian assets for which the parties have preferred to use domestic law. Over the last two years, for instance, instruments and mechanisms that are novel to the Russian legal system or exclusively Russian law have been used in structuring many landmark deals on the Russian market. Take the projects to set up JVs on the basis of OAO Vnukovo International Airport and PAO Sheremetyevo International Airport in conjunction with the Federal State property Management Agency and private investors.

Aside from the elements of foreign jurisdictions introduced into Russian law, the reform has brought certain instruments and mechanisms traditional in the Russian legal system under a totally new regulatory framework. Some rules, such as those regulating when precisely title to an interest in a limited liability company is transferred, require the parties to apply new deal structuring approaches.

This is a brief summary of our observations and thoughts concerning what the civil legislation reforms have already achieved and how they impact on the ways to structure corporate deals in the Russian legal environment.

1.1. Choice of law

The Russian legal system has been enriched by legal instruments of a type long familiar to the international business community and used traditionally in M&A transactions, Private Equity and to set up joint venture deals. The appearance of these instruments has boosted considerably the demand by market players for domestic law. Even though the choice of law is currently dictated primarily by which market players we are talking about, Russian law is often a convenient and effective choice, especially for shareholders agreements.

1.2. Liability of governing bodies and “controlling” persons

Regulation of the liability borne by governing bodies of legal entities has undergone some truly interesting but quite ambiguous changes. The usual liable group, including the single-member executive body or a manager/management company fulfilling the relevant functions, as well as members of collegial bodies, has been padded by a “person actually able to determine a company’s actions”.

So the legislation has now extended the fiduciary obligations to act in good faith, reasonably and in the interests of the company to those who legally or actually control it.

1.3. Transfer of share title

What is more, on 15 January 2016, closing a transaction to acquire interests in limited liability companies also came in for a substantial change. The time when the title to the participatory interest transfers has been changed from when the deal is notarised to when it is entered in the Companies Register. This legislative innovation means that the parties to such transactions now have to take more care in structuring the relevant procedure, including in relation to the parties’ mutual obligations to provide for transfer of the title to the participatory interest and to the payment deadlines and arrangements.

1.4. Damages and indemnities

Russian contract law and practice are being fundamentally upgraded, largely by taking over elements of foreign law. Quite recently, further to last year’s amendments to the Russian Civil Code, the Supreme Court voiced a guidance relating to liability for breach of contract, which, in particular, reflects a major trend towards easing the standard of proof of damages.

1.5. Arbitrability of corporate disputes

The amendments to the Arbitration Procedural Code of the Russian Federation and the arbitration legislation that come into effect on 1 September 2016 are some of the most important ones in the procedural sphere. On the one hand, a substantial number of corporate disputes may now be referred to an arbitral tribunal, whereas the choice of actual arbitration institution (forum for considering the dispute) is greatly restricted.

1.6. Overview of novel developments in the pledge legislation

Since the summer of 2014, most pledge regulations have been concentrated directly in the Russian Civil Code and the separate law "On Pledge" of 1992 has been cancelled for good, so this concept is now regulated in a more or less orderly fashion.

If you would like to read the full text of the overview, please send us a preliminary application giving your name, position and company to info@gblplaw.com

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