A Q&A guide to public mergers and acquisitions law in the Russian Federation.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare issues across multiple jurisdictions, visit the Country Q&A tool. This Q&A is part of the global guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.
1. What is the current status of the M&A market in your jurisdiction?
In 2019, both deal numbers and values increased. Foreign investment also increased, despite the sanctions imposed on numerous Russian private and public companies. M&A deals totalled USD63 billion, less than 1% of the global M&A market (https://home.kpmg/ru/en/home/insights/2020/02/russian-2019-ma-overview.html).
Oil and gas sector M&As are prominent, particularly liquid natural gas (LNG) projects. In 2018 and 2019, the key driver of the Russian M&A market was NOVATEK’s share sales in the Arctic LNG-2 project to:
The innovation and technology sector is second in investment value and number of deals. The biggest deals were the:
True public takeovers remain rare in Russia. The vast majority of M&As are:
2. What are the main means of obtaining control of a public company?
There are several ways to acquire a public company (public joint-stock company (PJSC)), in particular:
All public takeover bids are subject to strict rules, including pricing mechanics, though voluntary public offer rules are more flexible.
The public takeover bid rules also apply to certain private companies. Generally, these are non-PJSCs that used to be open joint-stock companies (the form preceding the PJSC).
3. Are hostile bids allowed? If so, are they common?
There is no legal distinction between friendly and hostile takeovers. Hostile takeovers are unusual because very few public companies have truly dispersed share capital. Most public companies have a key majority shareholder (either a single person or a group of affiliates) and their directors are controlled by one or a group of major shareholders. The board can only give recommendations on a public offer and has no legal methods of blocking a public acquisition.
Regulation and regulatory bodies
4. How are public takeovers and mergers regulated, and by whom?
The key legislation regulating public takeovers and mergers includes:
The Bank of Russia regulates public takeovers, specifically the Department of Corporate Affairs. Other regulators (for example, the Federal Anti-monopoly Service) can also be involved, depending on the type of transaction and the target's main activities.
5. What due diligence enquiries does a bidder generally make before making a recommended bid and a hostile bid? What information is in the public domain?
Public acquisitions are most commonly made through recommended bids. In a recommended bid, the acquirer is dealing with one or a group of major shareholders and can therefore be provided with almost any information about the target and conduct a full due diligence investigation into the target's legal and financial status. Certain exceptions can apply if the target company is a regulated entity. For example, if the target company is a bank, the rules on banking secrecy should be considered.
If the bidder already possesses the target's shares, it can obtain certain information directly from the target. The amount of information usually depends on the size of the bidder's shareholding. The fullest access is available to a shareholder (or several shareholders acting in concert) possessing more than 25% of the target's shares. They can access the target's corporate and most of its financial documents.
A full due diligence investigation is unlikely in a hostile bid. A hostile bidder can obtain certain information from the public domain, but this does not usually provide an adequate risk assessment and affects the price determination. A fuller risk assessment is possible if the bidder is already a shareholder in the target and so has access to more information.
Key public sources of information include:
6. Are there any rules on maintaining secrecy until the bid is made?
A voluntary public offer or a mandatory public offer must comply with a special procedure. First, the offer must be filed with the Bank of Russia. Second, it must be sent to the target company, which must distribute it to shareholders. The bidder must not disclose the terms and conditions of the offer until it is sent to the target company (see Question 12).
Agreements with shareholders
7. Is it common to obtain a memorandum of understanding or undertaking from key shareholders to sell their shares? If so, are there any disclosure requirements or other restrictions on the nature or terms of the agreement?
Hostile bids are very rare. Typically, public takeovers are structured through either direct acquisition of a majority shareholding from a particular existing shareholder (or several shareholders) or a public offer. Even voluntary public offers are usually made by bidders that are already shareholders in the target and have sufficient knowledge of the company's business, financial status and corporate affairs.
Privately negotiated acquisitions
If the acquisition is privately negotiated, it is common for the bidder to enter into a memorandum of understanding or other preliminary agreement with the seller before a due diligence investigation is carried out. These preliminary agreements are not legally binding, except for a very limited number of clauses (for example exclusivity, confidentiality and break-up fees). More rarely, the bidder can enter into a conditional binding sale and purchase agreement at the start of the process. The bidder should take particular care in drafting the agreement, especially if they may need to obtain anti-monopoly or other regulatory clearance for the transaction.
Preliminary agreements are not common if the acquisition is made through a public offer.
There are no specific rules on disclosing preliminary agreements. However, certain provisions, particularly those that are legally binding, can require anti-monopoly clearance or disclosure as a material change event (if the bidder is a public company).
8. If the bidder decides to build a stake in the target (either through a direct shareholding or by using derivatives) before announcing the bid, what disclosure requirements, restrictions or timetables apply?
Until the bidder accumulates a 30% shareholding, there are no restrictions on acquiring shares in the target before the bid is formally announced. When the 30% threshold is exceeded, further acquisition of shares must be by mandatory public offer (see Question 16). If the 30% threshold has been exceeded, to protect the interests of the minority shareholders until the mandatory offer is made, the bidder can only vote with 30% of their shares (these rules also apply to a mandatory offer made as a result of exceeding the 50% or 75% thresholds).
For the purposes of the public takeover regulations (in particular those covering mandatory offers), the shareholding of the bidder and its affiliates are aggregated so that this 30% threshold (or 50% or 75%, as applicable) includes the shares owned by the bidder and its affiliates. Conversely, derivatives and other securities (including convertible securities) are not taken into consideration when determining the threshold.
Certain companies (mostly public) must disclose information about any of their shareholders acquiring more than 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% of the shares (or increasing their stake to above any of these thresholds). If the acquirer is a Russian company, in certain cases it can also be required to disclose information about acquisition of a joint-stock company.
Agreements in recommended bids
9. If the board of the target company recommends a bid, is it common to have a formal agreement between the bidder and target? If so, what are the main issues that are likely to be covered in the agreement? To what extent can a target board agree not to solicit or recommend other offers?
Formal agreements between the bidder and the target are legal but uncommon because:
10. Is it common on a recommended bid for the target, or the bidder, to agree to pay a break fee if the bid is not successful?
A break fee is not common because of the minor role of the target and its board in the public takeover process. There is no regulation of break fees. However, a bidder must reimburse the target company all the costs incurred as a result of the offer, principally the costs of notifying the shareholders about the offer received.
Break fee agreements are more common in private acquisitions of shares in a public company. Break fees are not specifically restricted and are therefore enforceable. There is, however, a risk that a court can reduce a break fee if it finds it unreasonable (Civil Code).
11. Is committed funding required before announcing an offer?
Committed funding is required for a voluntary or mandatory public offer. The bidder must obtain an irrevocable bank guarantee for the entire amount of the offer purchase price. There are no other mandatory legal requirements for committed funding.
Announcing and making the offer
Making the bid public
12. How (and when) is a bid made public? Is the timetable altered if there is a competing bid?
The timetable for a voluntary public offer and mandatory public offer for a publicly-listed company is as follows:
A competing bid can be made 25 calendar days before expiry of the most recent bid received by the company, if there is more than one. The competing bid must be made for at least an equal number of shares and the price offered for the shares must be no less than that in the initial bid.
The voluntary and mandatory bid rules apply to a competing bid.
13. What conditions are usually attached to a takeover offer? Can an offer be made subject to the satisfaction of pre-conditions (and, if so, are there any restrictions on the content of these pre-conditions)?
There are strict rules governing mandatory public offers, voluntary public offers, squeeze-out and buyout procedures. For example, the:
The mandatory offer, squeeze-out and buyout procedures cannot be subject to the satisfaction of pre-conditions. The voluntary public offer rules are more flexible and in theory the bidder can make its offer subject to the satisfaction of certain preconditions. In practice, the only condition that is widely used is the minimum number of shares to be purchased for the offer to be effective.
14. What documents do the target's shareholders receive on a recommended and hostile bid?
The main documents received by the target company shareholders depend on the type of offer.
Voluntary public offer
A voluntary public offer must include the:
Voluntary public offers can also include any other information that the bidder considers important for the shareholders, for example, the bidder's plans for the target company and/or its employees.
Mandatory public offer
A mandatory public offer (see Question 16) must include:
A mandatory public offer can also include the bidder's plans for the target company and/or its employees.
15. Are there any requirements for a target's board to inform or consult its employees about the offer?
The target's board has no obligation to inform or consult its employees about the offer. However, the target should consider any change of control provisions in its key employees' (for example, the chief executive officer and board members) employment contracts.
16. Is there a requirement to make a mandatory offer?
When a bidder (together with its affiliates) acquires more than 30% (and more than 50% and 75%) of a PJSC's voting shares they must make a mandatory public offer to the target company's shareholders to acquire all other voting shares, and securities convertible into voting shares at their market price.
A voluntary public offer can also be made under the rules applicable to mandatory public offers, including the offer pricing rules and minimum offer price. This enables the bidder to acquire the shares in the target company without making a mandatory public offer.
17. What form of consideration is commonly offered on a public takeover?
Bidders must offer cash for publicly acquired shares. However, the offer can also include an option for each shareholder to exchange their shares for other securities offered by the bidder in addition to the cash consideration.
In a squeeze-out or buyout procedure (see Question 20) shares can only be purchased for cash consideration.
18. Are there any regulations that provide for a minimum level of consideration?
Voluntary public offers are not subject to any minimum consideration restrictions. A minimum purchase price is set for:
19. Are there additional restrictions or requirements on the consideration that a foreign bidder can offer to shareholders?
There are no additional restrictions on the consideration that a foreign bidder can offer to shareholders.
Compulsory purchase of minority shareholdings
20. Can a bidder compulsorily purchase the shares of remaining minority shareholders?
A bidder can squeeze out minority shareholders in a PJSC company if:
The bidder can submit a notice demanding the purchase of the shares owned by the minority shareholders within six months of the period for acceptance of the relevant voluntary or mandatory public offer.
The squeeze-out notice is forwarded to the minority shareholders through the target company after clearance by the Bank of Russia.
A minority shareholder that disagrees with the squeeze-out price can claim damages if they believe the squeeze-out price is not correct.
A majority shareholder's squeeze-out right correlates with the minority shareholders' right to demand that the majority shareholder buyout their voting shares, and other securities convertible into voting shares (buyout).
Restrictions on new offers
21. If a bidder fails to obtain control of the target, are there any restrictions on it launching a new offer or buying shares in the target?
A bidder can make as many voluntary public offers as it wishes if its previous voluntary offers were unsuccessful.
22. What action is required to de-list a company?
The securities are de-listed by the stock exchange on its own initiative or on an application by the listed company. De-listing is governed by both the:
23. What actions can a target's board take to defend a hostile bid (pre- and post-bid)?
Hostile bids are uncommon, and the role of the target's board is very limited.
An offer (either voluntary or mandatory) must be addressed to the target company's shareholders but sent through the target. The target company must communicate the offer to its shareholders. The target's board can express its views on the offer and make recommendations to the shareholders, and these should be communicated to the shareholders together with the offer.
The legislation is bidder friendly. It restricts the management powers of the target's board during a public takeover. In particular, if the target receives a voluntary or mandatory offer, the following corporate decisions must be referred to a target's shareholders' meeting (and cannot be resolved by the board), including:
These restrictions apply for 20 days from either the
24. Are any transfer duties payable on the sale of shares in a company that is incorporated and/or listed in the jurisdiction? Can payment of transfer duties be avoided?
No transfer duties are payable on sale of a PJSC's shares.
Other regulatory restrictions
25. Are any other regulatory approvals required, such as merger control and banking? If so, what is the effect of obtaining these approvals on the public offer timetable?
Public acquisition is usually subject to merger control. The Federal Antimonopoly Service's prior consent is required for a person or a group of affiliates' (direct or indirect) acquisition of more than 25%, 50% or 75% of the voting shares of a company if either the:
Financial institutions are subject to separate thresholds. The Federal Antimonopoly Service's prior consent is required for acquisition of more than 25%, 50% or 75% of the voting shares in a financial institution if the total balance value of its assets exceeds the following thresholds:
To obtain prior consent from the Federal Antimonopoly Service, a significant number of documents and commercially sensitive information must be prepared, for example, the bidder's and target's market and list of their key suppliers and customers. Preparation for filing and obtaining prior consent usually takes up to two months.
Completion of an acquisition without obtaining prior consent can incur administrative liability and the acquisition can be challenged by the Federal Antimonopoly Service.
There is an additional obligation to notify the Bank of Russia on acquisition or receipt in trust of more than 1% of the shares in a credit institution (Federal Law No. 395-1 on Banks and Banking, 2 December 1990). The Bank of Russia's prior approval is required (the decision should be issued within 30 days of the filing date) for both the:
26. Are there restrictions on the foreign ownership of shares (generally and/or in specific sectors)? If so, what approvals are required for foreign ownership and from whom are they obtained?
The Law on Foreign Investments in Strategic Companies regulates foreign investment. It provides for special rules for foreign investors intending to invest in companies of strategic significance to ensure the country’s defence and national security. These rules apply to companies operating in 47 areas of the economy.
Since August 2017, the concept of a foreign investor has been expanded. The Law on Foreign Investments in Strategic Companies now applies to both Russian citizens with dual citizenship and Russian organisations controlled by foreign investors.
Certain types of transaction made in relation to strategic companies require consent from a special government committee (applied for through the Federal Antimonopoly Service) including the:
(Law on Foreign Investments in Strategic Companies.)
A foreign state or an international organisation (subject to certain exceptions), or a company controlled by either, is not allowed to obtain control over strategic companies and the acquisition thresholds for these types of investor are lower:
Foreign investors that do not disclose their beneficiaries and controlling persons to the competition authorities are subject to the regulation that applies to foreign states and international organisations. In practice, any foreign investor must disclose its beneficiaries and controlling persons to the Federal Antimonopoly Service before making almost any major deal involving strategic entities.
Transactions executed in breach of the Law on Foreign Investments in Strategic Companies are null and void.
In addition, specific restrictions apply to foreign investment in particular industries or activities, for example the media, communications and aviation, including:
27. Are there any restrictions on repatriation of profits or exchange control rules for foreign companies?
There are no legal restrictions on repatriation of profits to foreign investors. To claim certain tax reliefs (where there is a double tax treaty with a foreign company's country of incorporation), the foreign company should provide documentary proof of its tax residence in its country of incorporation.
28. Following the announcement of the offer, are there any restrictions or disclosure requirements imposed on persons (whether or not parties to the bid or their associates) who deal in securities of the parties to the bid?
All persons who are aware of the bid (including the bidder and target company's directors and officers) are subject to restrictions. They must not use, transfer or recommend the use of insider information to any third party. The unlawful use of insider information (including its transfer to other parties) incurs administrative and criminal liability (Federal Law No. 224-FZ on Combating Unlawful Use of Insider Information and Market Manipulation, and Amendment of Certain Legislative Acts of the Russian Federation).
29. Are there any proposals for the reform of takeover regulation in your jurisdiction?
No significant reform of takeover regulation is expected this year.