Chambers and Partners, December 2014
1.1 M&A Market
Russian M&A activity in 2013 was sharply down on 2012, with an estimated c.49% decrease in deal activity in value terms and c.28% decrease in volume terms from the previous year, in a Russian M&A market which is still re-adjusting following the fall-out from the global financial crisis. In the continued absence of many Western investors previously active in the market, deal activity continued to be driven by major Russian corporates, including state-backed enterprises, with this trend seemingly set to continue for the foreseeable future.
The most significant deals in the energy and natural resources sectors included the USD14.3 billion acquisition, by Russian Grids of the Federal Grid Company, of a majority shareholding in Unified Energy System from the Federal Agency for State Property Management. Onexim Group sold a stake in Polyus Gold to private shareholders for USD3.6 billion and separately acquired a stake in Uralkali, alongside other private investors.
Rosneft completed the acquisition of the former TNK-BP after buying out the remaining minority shareholders for USD4.5 billion. This was in addition to various other unrelated acquisitions in the sector, including the acquisition of a controlling stake in Sibneftgaz from Novatek for USD1.8 billion. Yamal Development acquired a stake in SeverEnergia from Eni SpA for USD2.95 billion. Gazprom Energoholding, Renova Group and Lukoil all made smaller acquisitions in the sector.
In the banking sector, Bank Petrocommerce was sold by Financial Group IFD Capital to Otkritie Financial Corporation, and a private investor group also acquired a 13.8% stake in VTB Bank for USD3.3 billion. VTB Bank also sold a minority stake in Rosbank to Société Générale SA.
2013 saw some notable deals in the technology sector, including acquisitions of stakes in Russian internet companies Yandex, Mail.ru, Qiwi and VKontakte. In the media and telecoms sector VTB Bank also acquired Tele2Russia for USD3.5 billion, and Russian Technologies State Corporation and USM Holdings acquired a stake in MegaFon from Telconet for USD1.1 billion.
In the pharmaceuticals sector Pharmstandart acquired Bever Pharmaceutical, and Pharmacy Chain 36.6 sold Veropharm to GardenHills. RusNano also sold a stake in Nearmedic Pharma. In automotive, a consortium of the Russian Direct Investment Fund, One Equity Partners and Titan International acquired a controlling stake in Voltyre-Prom from Cordiant. In the defence sector, Russian Technologies State Corporation acquired 49% of Kalashnikov Corporation from private individuals.
In the leisure sector, Sberbank acquired a stake in Krasnaya Polyana from the Krasnodar Government and a private individual. The real estate and construction sectors saw the acquisition of Metropolis phases 1 and 2 by Morgan Stanley Real Estate Investing for USD1.2 billion, one of the largest investments into Russia in 2013 by a Western institutional investor, and also the sale by them of a 50% stake in Metropolis phase 1 to CalPERS and Hines. Millhouse Capital acquired White Gardens from VTB Capital and AIG and also Four Winds Plaza from AFI Development and Snegiri.
The agriculture sector saw some smaller deals, most notably the acquisition by Russkoe More-Dobycha of companies Turnif, Intraos, Sovgavanryba and Vostokrybflot. In the transport, infrastructure and logistics sectors, a 30% stake in Stroygazconsulting changed hands between private investors for USD4.8 billion and Global Ports Investments also acquired the National Container Company from private investors for USD1.6 billion.
2014 began with the usual cautious optimism amongst M&A practitioners in Russia, but this was short-lived following wider geopolitical events in Ukraine and elsewhere. At the time of writing, there has been a significant deterioration in Russian-Western political relations and the imposition of sanctions programmes by both sides, including those directly affecting some of the very Russian state-backed entities which have been driving forward and/or financing a lot of recent M&A deal activity. Against this backdrop, business confidence has understandably been impacted and the full extent of the ramifications of all of this for the Russian M&A market remains to be seen.
Nonetheless, the Russian government has been active in its promotion of greater cooperation between Russian and Asian markets, partly as an alternative and even replacement to Western business cooperation, and this has fed through to M&A activity. Most notable of all these initiatives was the China-Russia USD400 billion cooperation deal, under which it is reported that Gazprom will supply China National Petroleum Corp with 30 years of natural gas.
At the same time as this deal was signed, some 40 other Sino-Russian transactions were purportedly concluded in finance, investment, aircraft and automobiles, including a joint venture between the Russian United Aircraft Corporation and China’s Commercial Aircraft Corporation COMAC. Sibur signed a contract with Sinopec, the China Petroleum and Chemical Corporation, to establish a joint venture for the construction of a rubber plant. Novatek signed a deal with China’s CNPC to supply liquefied natural gas from their joint Yamal LNG project in the north of Russia. Russia’s Eurocement signed a number of contracts with the Sinoma, CNBM and Sinomach Groups, and the Russia-China Investment Fund (RCIF) and Vcanland agreed to invest USD800 million on the development of tourism and social projects between their two countries.
The Russian Direct Investment Fund, a USD10 billion fund formed by Russian, Middle East and Asian investors, also announced a USD700 million investment in an LNG terminal owned by Sibur, in a deal which purportedly included Chinese investors amongst others.
Thus the trend for the short-to-mid term at least points towards increasing involvement with Asian counterparties on cross-border M&A projects.
1.2 National Trends
1.3 Key Industries
2. Regulatory Field
2.1 Acquiring a Company
The most frequently used technique for acquiring a company in Russia is to purchase shares in such a company or in its holding company. Although Russian law stipulates certain legal formalities associated with purchasing shares and transferring the title thereto, non-compliance with which may seriously damage the interests of the investors, businesses still prefer share deals for acquisitions.
In a share deal, the purchaser’s exposure to the liabilities of the target company is limited to the nominal value of the purchased share and the share purchase procedure does not, in most cases, require cumbersome and complex state registration (except for transferring shares in an LLC, which normally requires notarisation and subsequent amendments to the Unified State Register of Legal Entities). Yet share deals still have certain disadvantages, most of which are connected with the very limited possibility of protecting the purchaser and holding it harmless against potential defects in the acquired business under Russian law, whereas the opportunities for using foreign law and mechanisms for purchaser protection for local transactions are often limited or even impossible. In addition, several disadvantages might be connected with situations when the purchaser is not the sole shareholder in the company: in this case, the purchaser needs to “fit into” the existing business and, to some degree, is restricted by the statutory requirements of Russian law on limited liability companies and joint-stock companies. It is worth mentioning that local regulation with respect to shareholder agreements is also rather rigid and some matters (that can normally be agreed and set out there under foreign law) fall under local imperative requirements, so cannot be “tuned”.
In contrast to the share deal, the main purpose of the asset deal is to acquire the existing assets of the target and make subsequent use of them in the purchaser’s business. This type of acquisition is quite complex and is normally connected with a lot of registration formalities (e.g. registration of rights to immovable assets, registration of IP rights, obtaining new licences, etc.; furthermore, transfer of assets is usually subject to VAT). Consequently, parties usually choose share deals for acquiring a company in Russia.
In addition to share and asset deals, a company may be acquired by means of corporate reorganisation but this technique is also used comparatively rarely.
2.2 Primary Regulators
Since 1 September 2013, the functions of the Federal Commission for the Securities Market have been transferred to the Central Bank of Russia, so the latter has been vested with a wide range of regulatory powers relating to corporate and securities market activities, including M&A transactions, and has gained the authority to supervise the financial market as a whole. While it is one of the principal regulators, the Central Bank of Russia is not itself a government body. It is established as a legal entity independent of all state government bodies, although it performs the functions of a government authority.
Supervisory and clearance functions are performed by the Federal Antimonopoly Service of Russia, which controls mergers and acquisitions in Russia, as well as by the Government Commission for Control over Foreign Investment in the Russian Federation. Moreover, the Federal Agency for State Property Management exercises certain powers with respect to companies with state-owned shares.2.3 Foreign Investment
There are certain restrictions on foreign investment in Russia. The Law on Foreign Investments in Strategic Companies restricts foreign investments in 45 spheres of the Russian economy. In particular, foreign investors are partially excluded from acquiring controlling stakes in companies engaged in restricted business activities and acquisition of a minority stake by foreign investors is subject to obtaining clearance from the Government Commission.
Additionally, there are certain restrictions on foreign investment in insurance, banking and media businesses, as well as the subsoil, land use and certain other areas of business. From the standpoint of foreign investment, it is, therefore, important to verify all activities of a target group to assess whether it qualifies as strategic and is therefore subject to the restrictions stipulated by law.
Transactions executed in breach of the Law on Foreign Investments in Strategic Companies are deemed void and the parties thereto may be required to return everything acquired under such a transaction. If a deal is irreversible, the foreign investor may be deprived of voting rights at General Shareholders’ Meetings of the strategic company if the foreign investor has not complied with the legal requirements.
2.4 Antitrust Regulations
In certain cases prior clearance from the Federal Antimonopoly Service of the Russian Federation (the “FAS”) may be required.
In general, the transactions that should be cleared by the FAS are the following: (a) mergers or consolidations between Russian companies; (b) acquisition of more than 25% of the voting shares in a Russian company; (c) acquisition of more than 20% of all the fixed assets and/or intangible assets of a Russian company; (d) acquisition of more than 50% of the voting shares in a foreign company that supplied to Russia at least EUR21 million during the last year; (e) acquisition of more than 50% of the voting shares in a foreign company that has a subsidiary in Russia.
In addition, like in the EU, Russian antitrust law sets a number of thresholds that should also be met.
The general term for the FAS to review an application is one month. This can be prolonged for a maximum of 2 months (3 months in total). In practice, the timing very much depends on the FAS official who is dealing with the application but, in most cases, it does not exceed 1.5 months.
Failure to meet merger control requirements might entail an administrative fine and (or) invalidation of the transaction (the statute of limitations is 1 year from the FAS becoming aware of the violation) if the transaction in question leads to or might lead to restriction of competition.
2.5 Labour Law Regulations
Generally, acquirers should be aware that the Russian labour legislation is “pro-employee” and has a number of mandatory requirements that cannot be varied by the parties to an employment contract, which, in turn, cannot be regulated by foreign law and should be in the Russian language. Should a conflict arise, the employee will most likely be in a position to demand in court application of the protective provisions of the Labour Code, which will prevail over any conflicting provision of the individual employment contract.
Normally, an employment contract is for an indefinite term. Fixed term employment contracts may only be used in a limited number of cases expressly listed in the law.
Once the probation period (which is 3 months max.) has expired, it can be rather difficult to terminate the employment contract and the employee may only be dismissed for one of the reasons specifically listed in the Labour Code, and legally prescribed termination procedure should be strictly followed.
The termination procedure is also expressly provided for in the Labour Code and should be strictly followed, otherwise the termination might be judged illegal by a court. Cases of lawsuits resulting in reinstatement of illegally dismissed employees and payment of damages for wrongful dismissal are increasing in frequency, particularly for employees of foreign or foreign-owned entities. Potential damages include the salary due to the employee for the period during which access to work was denied to him or her as a result of illegal termination, and moral damages.
Normal working hours are 40 hours a week and overtime may be required only with the employee’s written consent and should be paid for at the increased rates.
Non-competition and non-solicitation provisions are ineffective in Russia since they run counter to Russian law and even if included in the text of the contract they are not legally protected and may create only a moral hold over the employee. It should also be noted that, in order to work in Russia, a foreign employee must obtain a work permit (for highly qualified employees, the procedure for obtaining such permits is less onerous).
2.6 National Security Review
In accordance with the Law on Foreign Investments in Strategic Companies, the Government Commission for Control over Foreign Investment, chaired by the Prime Minister of the Russian Federation, is the supervisory body from which clearance must be obtained prior to acquiring a stake in a company engaged in certain restricted activities (e.g., those related to the nuclear industry, cryptographic technologies, military equipment and ammunition, space activities, etc.). It may take up to six months to obtain such clearance.
3. Recent Legal Developments
A significant court decision was recently passed to the effect that a due diligence investigation is a usual and customary business practice and a company cannot be considered as having displayed due circumspection in purchasing a large stake if it does not conduct a risk assessment. Even so, please note that a judicial precedent does not serve as a source of law in Russia.
Also, new amendments to the Civil Code of the Russian Federation come into force on 01 September 2014. These are of key significance from the perspective of corporate law and relate to the legal status of legal entities and their activities. The classification of legal entities no longer includes closed joint-stock companies and additional liability companies and specifies as follows:
(a) a division of legal entities into corporations and unitary organisations on the basis, in particular, of whether the founders have participation (membership) rights therein.
(b) general rules governing commercial and not-for-profit corporations.
(c) a division of commercial entities into public and non-public ones, the former category including joint stock companies whose shares (or securities convertible into shares) are placed or traded publicly on the terms stipulated by the law on securities. Limited liability companies and joint-stock companies that do not meet the above criterion for being public are recognised as non-public.
The rules concerning creation, reorganisation and liquidation of legal entities have been updated and significant new developments in corporate governance have also been introduced.
It is worth mentioning that the new provisions on material liability of executives of legal entities and members of the collegial governing bodies require all such persons to reimburse any losses caused thereby to the legal entity, if it can be proven that they acted in bad faith or unreasonably in exercising their rights and fulfilling their obligations. This includes actions (omissions) on their part that do not comply with customary business practices or usual business risks.
Recently, there have been significant updates to the Russian Civil Code that affect, to some extent, M&A transactions as well. For instance, among others, provisions on escrow accounts, irrevocable powers of attorney and updated provisions on pledge have been introduced into the Russian Civil Code in 2013 and 2014 and a large bulk of updates to the Civil Code on legal entities (updated provisions on shareholder agreements, corporate governance, provisions on challenging a corporate reorganisation, etc.) and these changes will entail relevant amendments to the Law on Joint-stock Companies (in terms of squeeze-out regulations and other specific procedures). We therefore anticipate some important changes to the takeover legislation in 2014-2015.
The underlying principle of stakebuilding, which is for a potential bidder to acquire or accumulate a number of shares in order to facilitate a subsequent merger or acquisition, is difficult to implement in Russia. The reason is that the market strategy of companies is not to release a significant number of shares on to the open market, as well as the fact that even a minimum share ownership requires disclosure of shareholders in the target, including information about the group of potential bidders and beneficiaries. The two stakebuilding strategies involve either a bidder accumulating shares, which is included in direct stakebuilding, or the companies of the bidder group doing so, which is considered as coordinated stakebuilding. Although coordinated stakebuilding was implemented by Sberbank of Russia and Vnesheconombank, it is rarely considered as an advantage to the bidder, as acquisition of more than 30% of the target’s shares will result in the bidder having to make a mandatory tender offer and not being able to establish different acquisition terms than those in the Russian legislation.
4.2 Material Shareholding Disclosure Thresholds
The effective Russian legislation imposes certain reporting obligations on public companies, requiring them to disclose that a person or group of persons has acquired or disposed of, directly or indirectly, a certain number of voting shares in the company. The disclosure should be made to such publicly traded company and to the Central Bank of Russia within 10 business days. The reporting thresholds are 5, 10, 15, 20, 25, 30, 50, 75 and 95 per cent of the company’s voting shares.
Similar requirements apply to a public company if it has acquired or disposed of (directly or indirectly) a certain number of voting shares in another public company or in a company with assets exceeding RUB5 billion (approx. USD140 millon). Also, all joint stock companies, with certain exceptions, must disclose any acquisitions of more than 20% of the voting shares in another joint stock company.
4.3 Hurdles to Stakebuilding
Russian mandatory information disclosure requirements are set out exclusively by the legislation and regulations of the Central Bank of Russia and may not be introduced or amended by a company’s articles of incorporation or by-laws. Yet, in addition to the information disclosed by virtue of law, some information may be disclosed by a company on a case-by-case basis, e.g., as a press release on its web-page.
The Central Bank of Russia may release a joint stock company from its reporting obligations if the following requirements are met: a relevant decision to apply for relief from information disclosure is passed by ¾ of the votes of the company’s shareholders; such a company has no registrable securities other than its shares; the company’s shares are not admitted to trading on a stock exchange and the number of the company’s shareholders does not exceed 500. Otherwise, companies cannot be released from their reporting obligations set out by law.
As to other hurdles to stakebuilding, some of them are set out in the legislation governing limited liability companies and closed joint stock companies, the shareholders in which, as a general rule, have preferred rights or rights of first refusal in relation to the shares in the company.
4.4 Dealing in Derivatives
Dealings in derivatives are allowed in Russia. The regulation of derivatives is provided for in the Law on the Securities Markets and various subordinate regulations of the Federal Financial Markets Service and Central Bank of Russia. Even so, derivatives (which, under Russian law, include options, futures, forwards, swap contracts, etc.) are commonly used in stock trading and not in M&A transactions.
As a general rule, there are no special disclosure obligations relating to dealing in derivatives. Depending on the circumstances, however, the general rules on information disclosure may apply, e.g., a material fact disclosure. Also, a public company must disclose information on agreements entered into by the company (or by a person controlling it or by a person controlled by the company) containing an obligation to acquire shares in such a company (this requirement covers, among other things, derivative instruments).
4.5 Shareholder Intentions
As a general rule, there is no requirement for existing or potential shareholders to report on their intentions regarding control over the company or to disclose the genuine purpose of the acquisition. Yet such disclosure may be required in the course of special procedures, such as antitrust filing. Also, Russian rules on voluntary and mandatory tender offers stipulate that a person wishing to acquire shares in a company may disclose its plans regarding the target company and its employees.
5. Negotiation Phase
5.1 Requirement to Disclose a Deal
If a transaction to acquire a company’s shares is to be made as a result of a voluntary or mandatory tender offer, the disclosure obligation comes into effect once such an offer is received by the company. Consequently, a public company must disclose information on any voluntary or mandatory tender offer it has received and also one wishing to acquire shares in another public company must disclose the conditions of the voluntary or mandatory tender offer it sends to such a company. There is no other direct obligation to disclose a deal unless it falls under other disclosure requirements provided for by the local legislation on the securities market.
Legislative requirements relating to companies’ disclosure obligations are mandatory and any non-compliance therewith is a violation of law, so there is no lawful market practice differing from the legal requirements and any violations of the timing of disclosure might result in administrative liability.
5.2 Due Diligence
In private M&A deals the scope of due diligence may depend on many factors, such as the size of the target company, timeframe and resources allotted to the procedure by the buyer, terms of the agreement of the deal (e.g., whether any representations and indemnities are given), and other factors.
For the most part, due diligence on a company in a private transaction in Russia tends to be within the same scope as any M&A deal. However, the following general aspects need to be taken into account: there are a limited number of public searches available and, if the deal is to be structured under Russian law only, then regard needs to be made to the on-going development of Russian law in areas such as warranties and indemnities and the experience and position of the Russian courts in relation to such matters. This often means that the due diligence review needs to be as comprehensive as possible, to obtain information on possible risks for the buyer and to adjust the price if needed before the deal completes.
Special attention needs to be given to merger control matters in Russia. For many cases approvals and clearances from the government bodies will need to be obtained before the transaction can proceed. Also, foreign investors need to pay attention to the list of strategic companies and resources in Russia, since they will need to obtain advance clearance from the Russian government on whether the target falls under the regulated category.
Over the last few years, there has also been a strong focus on reducing corruption and issues with compliance in due diligence. For most foreign investors, it is crucial to determine whether the target has been involved in any practices that go against local or Western anti-corruption legislation (for example, the FCPA in the United States and the UK Bribery Act in the UK), such as bribes, kick-backs, tax evasion, or illicit cash payments to employees. If the target has been involved in such practices, it may seriously impact on plans for acquisition. It is generally advisable to retain lawyers and other advisers to investigate these issues at a very early stage of the transaction.
Also it should be noted, that in public takeovers full scope due diligence differs from due diligence in the course of private deals, since in most cases the bidder of a takeover transaction is an existing shareholder of the target, who already knows its business pretty well. Moreover public takeovers are normally rather formalised and do not provide for real options to include representations and warranties covering the condition of the target other than those related to the shares.
5.3 Standstills and Exclusivity
In Russian M&A transactions, neither standstills nor exclusivity agreements are widely used, since enforceability of such instruments is dubious. Under the Russian Civil Code, waiver of rights has no legal effect. Consequently, once relevant provisions are fixed in an agreement governed by Russian law, they will most likely not be legally protected. Often parties choose to use foreign law for these arrangements, but use of foreign law in transactions relating to Russian targets requires proper determination, i.e., there should be a foreign element in the deal (e.g., a foreign party) and a protection mechanism in case of breach should be carefully considered from the standpoint of its subsequent implementation, as it would be rather hard (if not impossible) to implement a decision of an international court based on violations of standstill or exclusivity provisions.
5.4 Tender Offers
The Russian legislation on voluntary and mandatory offers is quite formalised and provides for virtually no optionality. For instance, the procedure for voluntary and mandatory tender offers is highly regulated by imperative provisions of law. That is why, although definitive agreement is not directly prohibited by Russian law, it is not common to submit a tender offer in a separate definitive agreement. The only legally binding document is a tender bid with supporting documents, on the basis of which a share purchase agreement is entered into, this also being binding on the parties.
6.1 Length of Process
The length of time for the deal in a private M&A transaction can vary significantly, depending on the size of the deal, the parties’ intentions as to due diligence and other factors. The head of terms / term sheet / letter of intent (LOI) will usually outline the key points, objectives and timetable for the transaction and any key milestone dates that need to be met.
The seller may look to make any exclusivity granted to the buyer conditional on it keeping to the timetable. However, in practice the timetable can be stretched out due to unforeseen circumstances. For example, the regulatory issues connected with Federal Antimonopoly Service (“FAS”) may significantly protract large deals, if approval is required, since by law FAS is authorised to extend its review time.
A typical timescale in private M&A deals for a reasonably large transaction would be 2-4 months for completion of due diligence, 1-2 months to negotiate and agree legal documentation including the sale and purchase agreement (in practice this often runs concurrent with the due diligence exercise) and then 1-3 months after signing to satisfy conditions precedent and complete the transaction.
Given that rules concerning regulated procedures such as reorganisation, voluntary and mandatory tender offers, and squeeze-out are imperative and quite formal in Russian courts, time limits must be strictly observed and complied with. It is likely to take approximately four to five months to implement both voluntary and mandatory tender offers and from two to three months for squeeze-out procedure.
6.2 Mandatory Offer Thresholds
Under Russian law, a potential acquirer must submit a mandatory tender offer if it has acquired (either solely or with its affiliates) more than 30% of the voting shares in a Russian open joint stock company. The mandatory tender offer should be made within 35 days (from the time it knew or should have known about such possession). Before the date of mandatory tender offer submission, only 30% of the acquirer’s shares are voting shares.
The same rules apply if an acquirer already has more than 30% of the shares in an open joint stock company and it intends to increase its stake in the company up to 50% or 75%.
Generally, cash is more commonly used as a consideration in Russian M&A transactions but a share consideration may be used as well.
6.4 Takeover Offer Conditions
The concept of takeover is applicable for acquiring shares in public and private companies. A bidder may make an offer directly to the shareholders or through special procedures provided for by the law on Joint Stock Companies, namely a voluntary or mandatory tender offer.
Both voluntary and mandatory tender offers must be submitted to shareholders (or/and the owners of securities convertible into shares in the target company) via the target company itself. They must contain, among other things, the following information: the type, category and number of shares the bidder intends to acquire, the number of shares in the target company already owned by the bidder and its affiliates, the purchase price or method for calculating it, the form of consideration for the shares (the voluntary offer must contain a cash consideration as one possible form of consideration), the time period for payment (in case of a mandatory offer, it may not be less than 15 days following transfer of the shares to the bidder’s depo account). It must also include an acceptance period, which may not be less than 70 or more than 90 days (80 days in the case of a mandatory offer) following receipt of the offer by the company.
In addition, an offer must include information on an irrevocable bank guarantee securing the bidder’s payment obligations. This bank guarantee should remain in force at least 6 months after expiry of the period for payment.
It should be noted that a bidder may amend certain initial conditions of the bid. In particular, this is allowed with respect to price conditions and payment terms.
6.5 Minimum Acceptance Conditions in Tender Offers
In Russia, a minimum acceptance condition is allowed only for a voluntary tender offer, which may stipulate the minimum number of shares the bidder is willing to purchase. Even so, a minimum acceptance condition is not widely used in Russia and no such condition may be included in a mandatory tender offer.
As regards voluntary tender offers, the following thresholds might be important. A shareholding stake of 50% plus one share gives the purchaser general control over the target’s business and day-to-day affairs (e.g., appointment of the management bodies, decision-making on distribution of dividends, approval of major transactions with a value of less than 50% of the target’s assets, etc.). The purchase of 75% plus one share also enables the shareholder to make decisions on all other matters put to the vote at a General Meeting of Shareholders, except for approval of interested party transactions, if such a shareholder has a conflict of interest. If a purchaser manages to accumulate more than 95% of the shares in a public company (with at least 10% of the shares being purchased by means of a voluntary or mandatory public offer of all shares), it acquires the right to squeeze out the remaining minority shareholders.
6.6 Requirements for the Bidder to Obtain Financing
As regards private acquisitions or business combinations, so far, Russian court practice concerning conditional agreements is inconsistent. Although not directly prohibited by law, it is usual for Russian courts to consider as null and void conditions controlled, to some extent, by one of the parties to the transaction. Yet business combinations conditional on obtaining financing are used, though not very frequently, in practice.
Tender offers cannot be conditional on the bidder obtaining financing. Conversely, the tender offer must be supported by a bank guarantee securing the payment obligations of the purchaser.
6.7 Deal Security Measures
Under Russian law, a contract cannot, as a general rule, be terminated at the sole discretion of one of parties thereto unless this is directly provided for in the agreement. The exception is a material breach of the contract entitling the non-breaching party to file a court claim for termination of the contract. Russian law allows penalties that may be used as break-up fees. A Russian court may, however, and often does reduce the amount payable in such a case, if it considers the penalty to be excessive (i.e., not corresponding to the nature of the breach and damages caused). The validity of “force the vote” and non-solicitation provisions is questionable under Russian law and their use is quite risky. They are, however, quite common for M&A transactions structured through purchase of an offshore holding company and governed by English law for the transaction documents.
When making a voluntary or public tender offer, use of deal security measures available to the bidder are, in fact, limited to statutory remedies such as damages.
6.8 Additional Governance Rights
As a general rule, the corporate rights of shareholders in joint stock companies are exercised proportionally to the number of shares held by the relevant shareholder. Even so, shareholders may enter into a shareholders’ agreement but the parties’ discretion in such an agreement is limited by imperative provisions of Russian law. Corporate governance rules in limited liability companies are more flexible, as weighted voting is permitted and the company’s Articles of Association may provide for additional rights for certain participants.
6.9 Voting by Proxy
A shareholder may exercise its right to participate in a General Shareholders’ Meeting and vote on all the items on its agenda either in person or by proxy (through a representative). A representative must act on the basis of and in accordance with a notarised power of attorney.
6.10 Squeeze-out Mechanisms
The possibility of initiating a squeeze-out procedure is provided for the shareholders in public joint stock companies holding (together with their affiliates) more than 95% of its shares, provided no fewer than 10% of the shares were acquired by the given shareholder during a preceding voluntary or mandatory tender offer procedure (see above). Such a mechanism is not available for public companies.
6.11 Irrevocable Commitments
Irrevocable commitments are not common for public takeovers in Russia but are used for private acquisitions. It is common practice for the transaction documentation to contain certain conditions precedent to closing, such as obtaining the requisite approvals and clearances. It should be noted that Russian court practice is generally opposed to so-called “potestative” conditions that are completely within the control of one of the parties.
7.1 Timeline and Process
A public company must disclose information on a voluntary or mandatory tender offer it has received. Also a public company wishing to acquire shares in another public company must disclose the contents of the voluntary or mandatory tender offer it sends to such a company.
There is no general obligation to disclose a bid in relation to acquisition of a private company, but certain information relating to a bid might be covered by other disclosure requirements if it is made by or towards a public company that is required to disclose information potentially materially affecting the value of its shares. For instance, a corporate decision to approve a major or interested party transaction as part of a private bid process should be disclosed.
7.2 Type of Disclosure
Any share issue by an open joint stock company must be disclosed. Issue of shares might require registration of a prospectus and, following such registration, the issuer must disclose a variety of information at each stage of the issue and placement process.
7.3 Requirements for Financial Statements
During an M&A transaction, a bidder is not required by Russian law to produce financial statements in its disclosure documents.
7.4 Extent of Disclosure
In M&A transactions in Russia, it is not required to make public any transaction documents in full. The conditions of voluntary or mandatory tender offers should, however, be disclosed by public companies. Also, some information may be disclosed on the basis of other specific disclosure requirements or in order to comply with mandatory requirements on providing certain information to the Central Bank of Russia.
8. Duties of Directors
8.1 Principal Directors' Duties
The concept of directors’ fiduciary duties is not well developed in Russia. The Russian legislation stipulates that members of the Board of Directors and of the Management Board and the CEO must act with due prudence, in good faith and in the interests of the company but there are no specific fiduciary obligations owed to the company’s shareholders, creditors or employees. Legally, directors are not obliged to follow the instructions of shareholders or other persons and should make their own judgments on the basis of the company’s interests, although, in practice, directors are heavily dependent on majority shareholders. Breach of fiduciary duties by a director might entail a claim for damages brought by the company or a shareholder acting on behalf of the company (a derivative claim).
In the context of a public takeover, the Board of Directors must assess the terms of the offer, including the price and the bidder’s plans with respect to the company and its employees, and make its recommendation to the shareholders to accept or reject the offer. The CEO is under an obligation to communicate the tender offer and the Board’s recommendations to all the shareholders.
8.2 Ad Hoc Committees
Special or ad hoc committees may be established by decision of the Board of Directors, including for a particular business combination. Yet such committees are not regularly established in Russian business practice, as they have only advisory functions and are not commonly used to resolve a conflict of interest.
8.3 The Business Judgement Rule
In takeover situations, the members of a company’s Board of Directors (as well as its Management Board and its General Director) must act in good faith, must act reasonably and must exercise a due level of prudence and care when providing advice for shareholders or deciding on other matters included in their terms of reference (e.g., approval of major transactions). According to the new provisions of the Civil Code, which come into effect on 1 September 2014, the same rules will apply to a person who is actually able to determine the decisions made by the company (shadow directors). If it is proved that a director acted not in good faith or unreasonably, including contrary to the ordinary course of business or ordinary business risk, such directors may be held liable for any losses the company might incur. The Supreme Commercial Court has clarified that members of a company's Board of Directors and its General Director are not liable for their actions resulting in losses to the company if such actions involved ordinary business risk.
8.4 Independent Advice
In Russian M&A transactions, it is usual for companies to engage outside legal and financial advisers, as well as independent auditors or appraisers, and in some cases it is obligatory to engage an independent appraiser for a particular corporate decision or transaction (e.g., approval of certain major transactions, confirmation of the share price, etc.).
8.5 Conflicts of Interests
Usually, a conflict of interest becomes subject to judicial scrutiny when there is a risk that the rights of shareholders have been violated. There have been numerous decisions in which the court examined corporate procedures that were launched because of a conflict of interest, if any, and whether the participation by an interested party could have any significant influence over the decision-making process. The default rule is that any transaction in which a director or a shareholder has an interest (interested party transaction) must be approved by the independent members of the Board of Directors or shareholders with no conflict of interest. Breach of that rule is the most common type of grounds for minority shareholders to bring claims in Russia.
9. Defensive Measures
9.1 Hostile Tender Offers
In the Russian legislation, there is no specified procedure for filing a “hostile tender offer” to a company’s shareholders. Voluntarily and mandatory tender offer procedures are highly regulated by imperative provisions of Russian law and there is no differentiation in Russia as to whether the tender offer is hostile provided the imperative requirements are complied with. Also, it is worth mentioning that the directors cannot block the takeover (mandatory or voluntary tender offers). Their role is limited to providing recommendations to the shareholders. For that reason, the “hostile takeover” concept as such is not known in Russia.
9.2 Directors' Use of Defensive Measures
Under Russian law, if shareholders in an open joint-stock company receive a voluntary or mandatory tender offer, the company’s Board of Directors must issue recommendations in respect of the offer received, including an estimation of the price offered for the shares in the relevant tender offer. The Board of Directors is limited to its terms of reference provided for by law and the company’s Articles of Association and it is up to the shareholders to decide whether or not to dispose of their shares.
9.3 Common Defensive Measures
Defensive measures are implemented at the discretion of the General Shareholders’ Meeting. As there is no clear hostile tender offer screening mechanism, there are no specific response mechanisms either.
9.4 Directors' Duties and Defensive Measures
As mentioned above, directors of the target company cannot enact defensive measures during a public takeover. They are, however, to exercise a due level of care and prudence when providing recommendations to the General Shareholders’ Meeting.
9.5 Directors' Refusal
As mentioned above, directors of the target company cannot block a public takeover.
If a Board of Directors’ decision is required for implementing a ‘private’ business combination (rather than through a public takeover), e.g., a particular transaction requires the preliminary approval of the Board of Directors under the company’s constitutive documents, then the Board of Directors is entitled to decide whether or not to approve the transaction. Yet the Board of Directors is limited by its fiduciary obligations to the company and must act in good faith and in the company’s best interests.
10.1 Frequency of Litigation
Litigation for M&A deals is relatively common in Russia. One of the factors affecting it is that the legal regulation of some important aspects of M&A transactions, such as, for example, warranties, representation and indemnities, is still underdeveloped in Russia and the parties cannot be confident in their legal positions. This causes disputes and applications to courts for settlements and mediations. According to the prevailing Russian courts’ view, all corporate disputes are considered incapable of being resolved by arbitration tribunals. This view is backed by the court practice based on the broad interpretation of Article 33 of the Russian Arbitrazh (Commercial) Procedural Code, which states that all corporate disputes about Russian shares or participatory interests in Russian limited liability legal entities are subject to the special jurisdiction of the Russian state commercial (arbitrazh) courts. If an arbitration clause is included in a share purchase agreement related to the shares or participatory interest in a Russian company or shareholders' agreement with respect to Russian entities, there is a risk that the Russian courts would not recognise the arbitration clause, as well as any potential arbitral award. For this reason, referring the M&A disputes to litigation is more common today in domestic deals than relying on arbitration. For international deals, however, this issue may be overcome by structuring the M&A deal offshore.When the parties to an M&A deal in Russia do turn to litigation, it usually happens after the deal is closed, and in connection with any deficiencies in status or financial situation of the businesses, assets or shares purchased in the course of the deal.
10.2 Stage of the Deal
11.1 Shareholder Activism
Though shareholder activism remains a less important corporate law trend in Russia than in the EU or within the Anglo-Saxon legal system, it is fair to say that it is gaining a bigger role in corporate governance relations within Russian companies. Even so, considering Russian specifics and the relative conservatism of Russian law and court practice, shareholder activism is not really an issue for most publicly exposed Russian companies, whose ownership is still densely concentrated.
Even so, Russia is quickly heading towards adapting its legal system to modern challenges. Recent and soon-to-be-adopted changes to the civil legislation provide for a wider and more transparent range of opportunities for upgrading the institution in question in the interests of both minority activists and their opponents (major corporations and their advocates). These changes include strengthening the liabilities of corporate governing bodies, further regulations on bona fide actions and a ban on evading the law and abusing rights.
11.2 Interference with Announced Transactions
Over recent years, shareholder activism in Russia has been deeply rooted in the Russian political environment and the specifics of Russian civil society and the legal system (not always flattering to the latter). Currently, bona fide shareholder activism still fails to have any real impact on costly business decisions, though it has quite a coverage in the media and within the business community.
Recent Russian legislative and law enforcement trends incline towards conservation and stabilisation of civil law turnover and shareholder activism does not usually interfere with completion of major transactions. The state and other key business players are quite sensitive to such activism and, should there be any inclination in that direction, are prone to take the stand of a boxer to avoid any possible interference.