Amendments to the Law on Strategic Investments signed by the Russian President
legal updates
05 / 05 / 2023
Amendments to Law No 57-FZFederal Law No 57-FZ “On the Procedure of Foreign Investment in Business Entities of Strategic Importance for National Defence and State Security” dated 29 April 2008 have been adopted to clarify the consequences of the invalidity of transactions performed in breach of Law No 57-FZ and to extend the definition of “foreign investor” to Russian citizens with foreign residence permits.
The amendments will enter into forceFederal Law No 139-FZ dated 28 April 2023 on 9 May 2023.
Consequences of the invalidity of transactions in breach of Law No 57-FZ
In accordance with the current version of article 15 of Law No 57-FZ, transactions performed in breach of the requirements of this Law are void, and the court applies to such transactions the consequences of the invalidity in accordance with the Civil Code of the Russian Federation (clause 2 of article 167) – restitution and restoration of the parties to the original position before the transaction.
The new Law No 139-FZ expressly allows the court to recover shares (participation interest) or property of a Russian strategic company acquired in breach of Law No 57-FZ, as well as income received by the parties as a result of a void transaction, for the benefit of the Russian Federation.
The court adopts an appropriate decision:
if the parties breached the requirements of Law No 57-FZ deliberately (if a transaction is performed without the necessary consent, intent may be implied); and
considering the threat to the country’s defence and/or state security in case the consequences of the invalidity of a void transaction are applied (eg if the former owner is also a foreign investor, including from an “unfriendly” state).
These consequences may also apply in the case of the indirect acquisition by a foreign investor of rights in relation to a strategic company (eg in the case of a transaction at the level of a foreign parent company of a Russian company).
These amendments are partly the result of a generalisation of the current court practice. In particular, in Case No A42-10735/2019 the courts recovered the participation interest in Fin-Project LLC, which controls a strategic company – Lovozersky GOK LLC, for the benefit of the Russian Federation under a claim filed by FAS Russia.
The amendments also provide for the invalidity (ie lack of legal consequences) of other acts (in addition to transactions) as a result of which a foreign investor acquires the right to determine the decisions of the governing bodies of a Russian strategic company (eg in the event of a reorganisation, the appointment of investor’s nominees as the majority of members of the collective governing body of a strategic company, by the performance of other corporate actions).
The amendments also explicitly stipulate the strategic company’s right to file a claim against a foreign investor for damages caused to the company as a result of a transaction in breach of Law No 57-FZ. Such damages may, in particular, arise when the investor terminates certain activities of the company or in the event of drawn out litigation between FAS Russia and the foreign investor.
Definition of “foreign investor”
Furthermore, under Law No 139-FZ, Russian citizens who have acquired the right of permanent residence (residence permit) in a foreign country are classified as foreign investors. Previously, Russian citizens were only treated as foreign investors if they held another citizenship.
As of the time of the entry into force of new Law No 139-FZ, Russian citizens with foreign residence permits will be required to obtain the consent of the Government Commission when they acquire direct or indirect control over strategic companies.
In addition, if such Russian citizen already controls a strategic company by the time he or she receives a foreign residence permit, he or she will be required to obtain the approval from the Governmental Commission to such control after receiving the right of permanent residence outside the Russian Federation.
The amendments, together with the earlier amendments to Law No 57-FZFederal Law No 577-FZ dated 29 December 2022 and Law No 160-FZFederal Law No 620-FZ dated 29 December 2022 (in terms of a more detailed description of the characteristics of “quasi-strategic” companies), are indicative of the further systematisation of the law makers’ approach to regulating investments in strategic and “quasi-strategic” companies, including those involving Russian citizens with a strong link to a foreign state.
