Clarification of the definition of a “business entity of strategic importance”
According to the amendments, a company may be recognised as strategic not only by virtue of it directly engaging in strategic activities, but also by virtue of it having a licence or other special permit to carry out such activity.In this respect the amendments consolidated previously established law enforcement practice (see, for example, the Resolution of the Arbitrazh Court of the West Siberian District dated 10 September 2021 in case No. A45-26808/2020).
Furthermore, according to the new provisions, strategic entities may include not only business entities but also non-profit organisations engaged in strategic activities.
Supplementing the list of strategic activities
The following activities have been added to the list of strategic activities:Use of a subsoil plot that is not classified as a subsoil plot of federal significance but meets the established reserve volume
In particular, strategic activities will include the use of a subsoil plot with recoverable oil reserves of 50 to 70 million tonnes, gas reserves of 30 to 50 billion cubic metres, gold reserves of 30 to 50 tonnes, and copper reserves of 300,000 to 500,000 tonnes (reserve thresholds immediately preceding the thresholds for subsoil plots of federal significance).
It is important to note that currently, a company carrying out such activities may be recognised as “quasi-strategic” under clause 10 of article 6 of Law No. 160-FZFederal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999..
Under current regulations, a transaction concluded by a foreign investor with respect to such a subsoil user may be submitted for approval in accordance with Law No. 57-FZ by a decision of the Chairman of the Government Commission on Monitoring Foreign Investment in the Russian Federation.
Furthermore, with the entry into force of the amendments, such activity will be considered exclusively strategic, and, accordingly, the foreign investor will be required to independently initiate the transaction approval procedure with respect to the company using such a subsoil plot, in accordance with Federal Law No. 57-FZ.
Use of a subsoil plot containing underground water
The relevant activity is considered strategic if the following conditions are simultaneously met:
- the plot is not classified as a subsoil plot of local significance;
- water is used for drinking and domestic water supply;
- the production volume is 3,000 cubic metres per day or more; and
- the production is carried out for the purpose of sale after processing, preparation, reprocessing, and/or packaging the water in containers.
Pasture-based aquaculture of anadromous fish species (Pacific salmon)
Fish production
An activity is considered strategic if the fish production company meets the established conditions regarding:
- the revenue from fish production (50% or more of the company’s total revenue for the last calendar year), and
- the total book value of the company’s assets and its group of entities (more than RUB 800 million as at the last reporting date).
Nevertheless, a foreign investor entitled to control more than 50% of the votes in such companies will be required, within 365 days of the effective date of these amendments, to submit an application for approval of the establishment of control over such strategic companies or to reduce its stake in them to less than 50% of the votes, with the corresponding notification to the Federal Antimonopoly Service of Russia.
New procedural aspects
An application under Law No. 57-FZ now requires information on the beneficiaries, beneficial owners, and controlling persons of the seller in the transaction. In its current version, the law formally requires disclosure of such information only with respect to the acquirer in the transaction.Furthermore, applications under the Law on the Protection of CompetitionFederal Law No. 135-FZ “On the Protection of Competition” dated 26 July 2006. now require disclosure of information regarding the foreign residence permit status (in addition to citizenship) of the applicant’s beneficial owners and controlling persons. This innovation logically follows from the amendments to Law No. 57-FZ that entered into force in 2023, which expanded the definition of a foreign investor to include Russian citizens holding foreign residence permits.
In general, these new rules are consistent with the previously established practice of approving transactions under Law No. 57-FZ and the Law on the Protection of Competition.
The adopted law also establishes the procedure for adopting decisions on applications submitted in accordance with the Law on Natural MonopoliesFederal Law No. 147-FZ “On Natural Monopolies” dated 17 August 1995., if the actions declared in the application are also subject to prior approval in accordance with the procedure stipulated by Federal Law No. 57-FZ.
A transaction cannot now be approved under the Law on Natural Monopolies until it has been approved under Law No. 57-FZ (if such approval is required).
Expanding the scope of transactions subject to approval under Law No. 57-FZ
Transfer of the right to use a subsoil plot of federal significanceLaw No. 57-FZ now requires the approval of a transfer of the right to use a subsoil plot of federal significance on the grounds specified in part 1 of article 17.1 of the Law on SubsoilLaw of the Russian Federation No. 2395-1 “On Subsoil” dated 21 February 1992. (e. g., as a result of the reorganisation of a subsoil user; acquisition of the property of a subsoil user recognised insolvent (bankrupt); transfer of rights from a parent company to a subsidiary).
Such approval will be required if a foreign investor has the following rights in relation to the recipient of the right to use a subsoil plot of federal significance:
- the right to directly or indirectly control more than 10% of the votes;
- the right to determine decisions adopted by such company;
- the right to appoint a sole executive body and/or more than 10% of the collegial executive body/board of directors.
Furthermore, in addition to the specified provisions, upon entry into force of the amendments, the acquisition by a foreign investor of the abovementioned rights in relation to a new user of federal subsoil resources already after the transfer of the relevant right to it on the grounds specified in part 1 of article 17.1 of the Law on Subsoil (except in cases of a transfer of the right to use a subsoil plot as a result of the reorganisation of the subsoil user) will also be subject to approval.
Therefore, the amendments, in particular, require the approval of a foreign investor for the acquisition of the right to control more than 10% of the votes of a subsoil user after the transfer of the right to use the subsoil.
Furthermore, according to the new provisions, the transfer of the right to use subsoil plots that are not subsoil of federal significance, but whose use is classified as strategic activities (with reserves of pre-federal significance, as well as subsoil containing underground water), to a company controlled by a foreign investor, is permitted only after approval of the possibility of such transfer in accordance with Law No. 57-FZ.
Acquisition of strategic state or municipal property
The requirements of Law No. 57-FZ will also apply to the acquisition by foreign investors of state or municipally owned fixed production assets used for strategic activities.
For the purposes of applying the Law on the Protection of Competition, the determining factor for classifying property as fixed production assets is its recognition in the accounting records and financial statements of an organisation as fixed assetsClause 1.2 of Section I of Clarification No. 19 of FAS Russia dated 11 June 2021. (e. g., immovable property, machinery and equipment, vehicles, production and business inventoryClause 11 of Federal Standard of Accounting “Fixed Assets”, approved by Order of the Russian Ministry of Finance No. 204n dated 17 September 2020.). We believe a similar approach is applicable to defining fixed production assets within the meaning of Law No. 57-FZ.
In practice, such fixed assets may include, for example, property within the public utility infrastructure.
Expanding the grounds for notifying ownership of shares (participation interest) in a strategic company
Foreign investors who do not exercise control over a strategic company will now be required to notify FAS Russia of their ownership of 5% or more of the company’s shares (participation interest) in the following cases:- a decision is adopted to issue a licence (or amend the licence register) for such company to carry out strategic activities (if, as a result of such actions, the company is recognised as strategic);
- granting such company the right to harvest (catch) aquatic biological resources.
