The International Comparative Legal Guide to Mergers & Acquisitions 2011
1. Relevant Authorities and Legislation
1.1 What regulates M&A?
The Russian legislation that regulates M&A activities include:
(i) the Civil Code of the Russian Federation - general provisions;
(ii) Federal Law No. 208-FZ dated 26 December 1995 “On Joint Stock Companies” (as amended) - specific provisions applicable to joint stock companies;
(iii) Federal Law No. 14-FZ dated 8 February 1998 “On Limited Liability Companies” (as amended) - specific provisions applicable to limited liability companies;
(iv) Federal Law No. 39-FZ dated 22 April 1996 “On the Securities Market” (as amended);
(v) Federal Law No. 135-FZ dated 26 July 2006 “On Protection of Competition” (as amended);
(vi) Federal Law No. 160-FZ dated 9 July 1999 “On Foreign Investment in the Russian Federation” (as amended);
(vii) Law No. 1488-1 dated 26 June 1991 “On Investment Activity in RSFR” (as amended); and
(viii) Federal Law No. 57-FZ dated 29 April 2008 “On foreign investments in business entities of strategic importance for national defence and state security” (as amended) and certain other acts.
1.2 Are there different rules for different types of public company?
Under Russian law, the closest equivalent of a public company is an open joint stock company (“OJSC”) (though this does not mean that the shares in such an open joint stock company are listed on a stock exchange).
The Federal Law “On Joint Stock Companies” (“JSC Law”) includes special provisions regulating acquisition of shares in open joint stock companies. The comments below are prepared in the light of these special regulations, which are set out in Chapter XI.1 of the JSC Law.
1.3 Are there special rules for foreign buyers?
According to the Russian legislation, foreign investors enjoy national treatment, i.e., the legal framework for their activities in Russia should not be any less favourable than that granted to Russian investors.
Restrictive exemptions may be established for foreign investors only by federal laws and insofar as required for protecting the constitutional system, the morals, health, rights and legitimate interests of others, national defence and state security.
Russian companies may, however, at their own discretion, limit acquisition of their securities by non-residents in the securities issue resolution.
1.4 Are there any special sector-related rules?
Some Russian laws pertaining to particular industries or activities stipulate specific rules for foreign investment. Certain restrictions apply to foreign investment in mass media, communications, aviation, insurance and some other industries.
Apart from specific industry regulations, the Federal Law “On foreign investments in business entities of strategic importance for national defence and state security“” contains special rules for foreign investors intending to invest in so-called “strategic companies”. These rules are only applicable to the companies operating in specific industries mentioned in the law, but the list of such industries is quite long.
1.5 What are the principal sources of liability?
Breach of Chapter XI.1 of the JSC Law triggers the following types of liability for the parties involved:
(i) a former shareholder can claim damages from a bidder under Chapter XI.1 in the event a public takeover offer not complying with the legal requirements;
(ii) a bidder under Chapter XI.1 and its General Director (if the bidder is a legal entity) may be held liable and have to pay administrative fines if they breach Chapter XI.1 regulations; and
(iii) members of a company’s Board of Directors and Management Board, a company’s General Director and any management company or external manager are liable to the company and the shareholders for losses caused by acts/omissions breaching Chapter XI.1 regulations.
2 Mechanics of Acquisition
2.1 What alternative means of acquisition are there?
There are certain alternative means of acquisition of an OJSC, in particular:
(i) voluntary public offer: voluntary acquisition of more than 30% of the voting shares in an OJSC by means of a public offer;
(ii) mandatory public offer: obligation of an acquirer of more than 30% of the voting shares (as well as over 50% and 75%) in an OJSC to make a public offer to acquire all other voting shares in the company and securities convertible into such shares at their market price; and
(iii) squeeze-out: the right of an acquirer of more than 95% of the voting shares in an OJSC through a voluntary or mandatory public offer to ‘squeeze-out’ the remaining voting shares in the company and securities convertible into such shares from other minority shareholders in the company.
The squeeze-out right of the majority shareholder correlates with the minority shareholders’ right to demand that such a majority shareholder buy- out their voting shares, as well as other securities convertible into such shares (‘buy-out’).
The law sets out strict rules governing mandatory public offers, squeeze-out and buy-out procedures, as well to the share purchase-price determination procedures. For example, a mandatory public offer (and a voluntary public offer), squeeze-out and buy-out notification must be made to the shareholders only through the OJSC. Shares must be acquired at their market price and the JSC Law establishes different rules for determining the share market price, depending on whether or not they are listed on the securities market. The offer price (except for in the case of a squeeze-out) must be secured by an irrevocable bank guarantee.
The voluntary public offer rules are less flexible, in particular those relating to the share price and the minimum number of shares being purchased for the offer to be effective (i.e., conditional offer). The voluntary offer price must also, however, be secured by an irrevocable bank guarantee.
For protection of the minority shareholders’ rights, a shareholder required to make a mandatory public offer is entitled to vote only with respect to the shares constituting 30% (50% or 75% respectively) of the company shares until the appropriate mandatory public offer is made. Such a shareholder also enjoys only a limited right to acquire shares in the company under terms differing from those of the mandatory offer.
2.2 What advisers do the parties need?
An acquirer would normally engage a legal counsel to support a public offer, squeeze-out or buy-out. In the event of big acquisitions through a voluntary or mandatory public offer, a financial adviser might be involved.
In some cases, the market price of the shares must be confirmed by an independent appraiser. If a voluntary or mandatory public offer provides a possibility for the purchased shares to be paid for by other securities not traded on the stock exchange, the market value of such securities should also be confirmed by an independent appraiser.
2.3 How long does it take?
The approximate timelines are as follows:
(i) voluntary public offer: 3-4 months;,
(ii) mandatory public offer: 5-6 months;
(iii) squeeze-out: 3-4 months; and
(iv) buy-out: up to 8 months.
The above terms do not include time required for obtaining a merger or any other regulatory consent (if necessary).
2.4 What are the main hurdles?
In practice, obtaining an irrevocable bank guarantee might be quiet expensive, especially for public acquisition of a big OJSC. Obtaining anti-monopoly and other regulatory consents might be time-consuming and involve practical difficulties related to preparation of documents and disclosure of all the requisite information.
2.5 How much flexibility is there over deal terms and price?
Except for a voluntary public offer, Chapter XI.1 sets the minimum purchase price for public acquisitions:
Mandatory public offer
(i) the weighted average price of the shares as quoted on a stock exchange for the preceding 6 months; or
(ii) if the shares are not traded or have been traded for less than 6 months, the price determined by an independent appraiser; or
(iii) the maximum price the acquirer (any of its affiliates) has paid or agreed to pay for the same shares within the preceding 6 months.
(i) the price determined by an independent appraiser; or
(ii) the price paid for the shares under a public offer resulting in the acquirer accumulating 95% of the shares; or
(iii) the maximum price the acquirer (any of its affiliates) has paid or agreed to pay for the same shares since expiry of such a public offer.
(i) the price determined in accordance with the rules set out for a mandatory public offer; or
(ii) the price paid for the share under a public offer resulting in the acquirer accumulating 95% of the shares; or
(iii) the maximum price the acquirer (any of its affiliates) has paid or agreed to pay for the same shares since expiry of such a public offer.
2.6 What differences are there between offering cash and other consideration?
Shares purchased through a squeeze-out or buy-out can be paid for in cash only. In the event of a voluntary or mandatory public offer, the shares can also be paid for by other securities. The offer must, however, always provide a shareholder with a choice of the form of payment (either cash or securities).
2.7 Do the same terms have to be offered to all shareholders?
Yes, all shareholders must be offered the same terms.
2.8 Are there any limits on agreeing terms with employees?
There is no obligation to agree the public offer documentation with the company’s employees (their representatives) or get their preliminary comments thereon.
2.9 What documentation is needed?
(i) Voluntary public offer: voluntary public offer; and bank guarantee.
(ii) Mandatory public offer: mandatory public offer document,; bank guarantee; and documents supporting the share price (including an independent appraiser’s report).
(iii) Squeeze-out: squeeze-out demand; and documents supporting the share price (including an independent appraiser’s report).
(iv) Buy-out: buy-out notification,; bank guarantee; and documents supporting the share price (including an independent appraiser’s report).
2.10 Are there any special disclosure requirements?
A public acquisition will require disclosure of certain information in accordance with the JSC Law, the Securities Market Law and securities market regulations. The acquirer will need to disclose, among other things, information about the company, the acquirer and its affiliates holding shares in the same OJSC, the purchase price, etc. If the public acquisition requires preliminary antimonopoly consent, a significantly greater volume of information will have to be disclosed to the antimonopoly authorities, including information about the acquirer’s group of companies, their business, value of their assets, etc.
2.11 What are the key costs?
The key costs are associated with obtaining a bank guarantee, with independent appraiser, legal and other adviser costs.
2.12 What consents are needed?
Public acquisition is normally subject to antimonopoly control. In the event that a person or group of persons acquires more than 25, 50 and 75% of the voting shares, the transaction might, in certain cases, be undertaken either with the preliminary consent of the antimonopoly body (the Federal Antimonopoly Service) or with subsequent notification thereof.
Prior clearance with the Federal Antimonopoly Service is required in the following cases:
(i) the total asset value of the acquirer (its group) and the target (its group) exceeds 7 billion roubles according to the balance sheets on the most recent reporting date and the total asset value according to the most recent balance sheet of the target (its group) exceeds 250 million roubles; or
(ii) the total revenues of the above entities for the previous calendar year exceed approx. 10 billion roubles and the total asset value according to the most recent balance sheet of the target (its group) exceeds 250 million roubles; or
(iii) one of the above entities is included in the register of business entities with a market share of over 35% of a certain product market.
If the above-mentioned conditions are not met, post-transaction notification of the Federal Antimonopoly Service may still be required.
Public acquisition by a foreign investor may also require some other regulatory consents, for example if the investor acquires shares in a bank or a strategic enterprise.
2.13 What levels of approval or acceptance are needed?
The relevant thresholds are set out in Section question 2.1.
2.14 When does cash consideration need to be available?
Cash consideration must be available:
(i) in the event of a voluntary public offer: within the term specified in the offer;
(ii) in the event of a mandatory public offer: within the payment term specified in the offer, which cannot be more than 15 days following transfer of the shares to the acquirer;
(iii) in the event of a squeeze-out: within the payment term specified in the offer, which cannot be more than 25 days following listing date of the squeezed-out shareholders; and
(iv) in the event of a buy-out: within 15 days of receipt of a buy-out demand (such a demand may be made by a minority shareholder within 6 months of receiving a notification of its right to effect the buy-out).
3 Friendly or Hostile
3.1 Is there a choice?
Russian law does not distinguish between friendly and hostile takeovers. In practice, hostile takeovers (as this term is used in the US and Europe) are not customary in Russia, since there are very few true public companies with dispersed share capital. The Boards of most public companies are under the control of one or a group of major shareholders. Legally, the Board is entitled only to give recommendations on the public offer and has no legal instruments for blocking a public acquisition.
3.2 How relevant is the target board?
The target Board may only give an opinion on the offer made by the bidder and its recommendations to the target’s shareholders as to whether or not they should accept the offer.
3.3 Does the choice affect process?
The choice between a hostile and friendly offer does not affect the process.
4.1 What information is available to a buyer?
The bidder is able to access all publicly available information about the target company, which includes its annual reports and annual financial statements, the articles of association of the target company, information on its affiliates and some other information.
If the bidder is a shareholder in the target company, it may have access to a wider range of documents and information about the target company’s activities. The level of access depends on the percentage of shares already owned thereby (more shares give more access to documents and information).
4.2 Is negotiation confidential and is access restricted?
Chapter XI.1 does not require negotiations to be confidential. Moreover, the bidder is subject to certain disclosure requirements when making an offer to acquire shares.
4.3 What will become public?
Please see our comments to question 2.10 above.
4.4 What if the information is wrong or changes?
Chapter XI.1 stipulates the information to be included in the offer documentation. The bidder may amend the offer documentation by changing the proposed price of the shares or terms when the bidder plans to pay for the acquired shares. Such amendments should be communicated to the shareholders through the target company.
Please see our response to question 1.5 for comments on wrong (false) information being included in the offer documentation.
5.1 Can shares be bought outside the offer process?
Yes, shares can be acquired privately provided they are acquired on the same terms as established by the obligatory offer.
5.2 What are the disclosure triggers?
The acquirer is required to notify the Federal Service for the Financial Markets and the target company about taking possession of the target company’s ordinary shares in the following cases:
(i) the acquirer takes possession of 5 or more per cent of the target company’s ordinary (common) shares;
(ii) any change whereby the acquirer’s ownership share in the target company’s ordinary shares has become more or less than 5, 10, 15, 20, 25, 30, 50 or 75 per cent of the outstanding ordinary shares; and
(iii) the acquirer, together with its affiliated persons, directly or indirectly acquires, on the basis of a share purchase agreement or shareholder agreement, more then 5, 10, 15, 20, 25, 30, 50 or 75 per cent of the voting rights attached to the outstanding ordinary shares in a JSC that has registered a securities prospectus.
If the acquirer accumulates all of the target company’s shares, this should be reflected in the target company’s articles of association.
5.3 What are the limitations and implications?
According to Chapter XI.1, in the event of acquisition of more thaen 30% of the voting shares (as well as over 50% and 75%) in an open joint stock company, the acquirer is entitled to vote solely with respect to the shares constituting 30% (or 50% and 75% respectively) of the company shares until the mandatory public offer is made to acquire all the remaining voting shares in the target company from its shareholders.
6 Deal Protection
6.1 Are break fees available?
Chapter XI.1 does not provide for any break fees to be paid if an offer (either voluntary or mandatory) is unsuccessful (even if the Board of the target company supported the offer).
6.2 Can the target agree not to shop the company or its assets?
If the target company receives a voluntary or a mandatory offer, the following corporate decisions must be referred to the target’s shareholders’ meeting:
(i) issue of additional shares;
(ii) approval of sale or disposal of assets worth 10 or more per cent of the target company’s asset book value;
(iii) approval of interested party transactions; and
(iv) increase in the compensation for the target company’s top management; and some others.
These restrictions are applicable until either expiry of 20 days from lapse of the term for acceptance of the relevant voluntary or mandatory offer or calculation of the results of the voting to elect a new Board of Directors of the target company at a shareholders’ meeting convened by a bidder that has acquired more than 30% of the shares as a result of the voluntary or obligatory offer.
6.3 Can the target agree to issue shares or sell assets?
The target company is not able to accept any obligations of this kind as part of the process described in Chapter XI.1. Moreover, matters concerning issue of new shares or sale of the target company’s assets will have to be resolved by the target company’s shareholders as described in our response to question 6.2 above.
6.4 What commitments are available to tie up a deal?
Since Chapter XI.1 is rather formal (and does not mention possibilities to commit) it is very unlikely that any commitments to accept or decline the offer will be enforceable in Russia.
7 Bidder Protection
7.1 What deal conditions are permitted?
Only a voluntary public offer may include conditions not directly prescribed by the Law. Other conditions are the purchase price, timing for accepting the offer, payment term, etc.
7.2 What control does the bidder have over the target during the process?
The level of the bidder’s control over the company depends on the quantity of voting shares it holds, subject to the restriction mentioned in questions 5.3 and 6.2.
7.3 When does control pass to the bidder?
Control passes to the bidder as soon as it obtains title to the shares (i.e., when the relevant entry is made in the shareholders’ register). The particular timing depends on the means of public acquisition.
7.4 How can the bidder get 100% control?
Theoretically, the bidder can get 100% control through a voluntary or mandatory public offer. If such a bidder manages to accumulate only a 95% stake, he can then acquire the shares of minority shareholders through a squeeze-out.
8 Target Defences
8.1 Does the board of the target have to tell its shareholders if it gets an offer?
According to the law, an offer (either voluntary or mandatory) should be addressed to the target’s company shareholders but be sent through the target company. The target company is obliged to communicate the offer to its shareholders within 15 days of receiving it.
The Board of the target company should express its views regarding the offer and make recommendations to the shareholders with respect to the offer, and these should be communicated to the shareholders together with the offer.
8.2 What can the target do to resist change of control?
The target can only express its opinion regarding the offer through the recommendations made by its Board to the shareholders.
8.3 Is it a fair fight?
It depends whether or not the bidder already controls the target company (its Board). In general, the bidder cannot force the target company’s shareholders to sell their shares unless the bidder already owns more than 95% of the target company’s voting shares acquired in accordance with Chapter XI.1.
9 Other Useful Facts
9.1 What are the major influences on the success of an acquisition?
Obtaining all the requisite consents (such as consent from the antimonopoly authorities) and careful drafting of the offer documents are crucial.
9.2 What happens if it fails?
The bidder is allowed to send as many voluntary public offers as it wishes if its previous offers were not successful.
10.1 Please provide, in no more than 300 words, a summary of any relevant new law or practices in M&A in Russia.
On 9 July 2009 Federal Law No. 312-FZ “On Amendments to Part One of the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation” (hereinafter – the “Federal Law”) became effective, introducing fundamental changes to the regulations governing the setting up and operations of limited liability companies (LLC) which is another form of private company in Russia.
Although the most revolutionary novelty is that the founders of (participants in) an LLC are now allowed to enter into an agreement on exercising the rights of participants in an LLC (analogues of a shareholder’s agreement) some other important amendments were introduced.
Share disposal (subject to certain exclusions) and pledge transactions will be void unless certified by a notary. The notary must verify the authorities to dispose of the share and submit to the state authority in charge of legal entity registration an application from the LLC participant disposing of or pledging the share for relevant changes to be introduced into the Companies Register . The notary bears full material liability for any damage caused by an unlawful notarial act or refusal to perform a lawful notarial act and divulgence of information on notarial acts. The damage is to be reimbursed from the insurance indemnity under the civil liability insurance contract entered into by the notary for the purposes of performing notarial activities. A change of ownership of a share may be challenged only by a relevant claim being filed with the state arbitration court.
Another drastic development is the right granted to LLC participants to join in arbitration proceedings on a suit entered by another LLC participant seeking assignment thereto of the rights and obligations of the purchaser of a share purchased in violation of the pre-emptive right of participants to acquire said share.