Draft law on the right to deny foreign investors who have left the market the option of repurchasing assets

Draft Law No. 1059849-7 (“Draft Law”) proposes amendments to Federal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999 (“Law”).

New mechanism for protecting the interests of Russian investors

Article 1 of the Draft Law introduces restrictions on the exercise by a foreign investor or any of its affiliates (“Foreign Investor”) of its call option, allowing such Foreign Investor to acquire (repurchase) sharesOr LLC participation interests. In this note reference to ‘shares’ includes both joint stock company shares and participation interests in limited liability companies. in a Russian company sold (or otherwise disposed of) by such Foreign Investor after 24 February 2022.

So, the Draft Law entitles the current shareholder, which acquired the shares in a Russian company from a Foreign Investor and is bound by a Foreign Investor call option, to unilaterally deny the exercise of the call option, provided that each of following conditions are satisfied:

• the Foreign Investor falls within the category of “unfriendly” persons within the meaning of Decree No. 95 of the President of the Russian FederationClause 1 of Decree No. 95 of the President of the Russian Federation dated 5 March 2022 “On the Temporary Procedure for the Performance of Obligations to Certain Foreign Creditors”: “... being foreign persons associated with foreign states that commit unfriendly acts against the Russian Federation, Russian legal entities and individuals (including if such foreign persons are citizens of such states or if such states are their place of registration, primary place of business or primary place of profit) or persons under the control of such foreign persons, regardless of their place of registration (unless their place of registration is the Russian Federation) and primary place of business”. “On the Temporary Procedure for the Performance of Obligations to Certain Foreign Creditors” dated 5 March 2022;
• the Foreign Investor sold or otherwise disposed of the shares in the Russian company (in respect of which the Foreign Investor’s call option is exercised) between 24 February 2022 and 1 March 2025;
• the sale and purchase agreement (or another relevant agreement, as the case may be) pursuant to which the Foreign Investor disposed of its shares in the Russian company (“SPA”):
• provided for the sale (or other disposal) of the shares at a price significantly lower than their market value. We note that the Draft Law does not set criteria for such a “significant” reduction in the market value. We believe however that transactions for the sale of Russian businesses performed in compliance with the conditions regulated by the Government Commission (in particular, the required discount of at least 50% of the market value) should fall under this criterion (the principal conditions established by the Government Commission are available here. Further updates to these conditions are available here); and
• granted the Foreign Investor a call option to repurchase the shares on predetermined terms within a period of at least three years;
• at least two years elapsed after the date of the Foreign Investor’s SPA; and
• the Russian company in respect of which the Foreign Investor’s call option is exercised duly performs its payment and other obligations to employees (or former employees) and creditors.

The current shareholder’s right to deny the exercise of the Foreign Investor’s call option may be exercised regardless of whether the call option has actually been exercised by the Foreign Investor. If current shareholder expresses its denial in the exercise of the Foreign Investor’s call option (in compliance with the conditions set out above), the call option shall be terminated.

Balancing compensation mechanism

If the current shareholder expresses its denial in the exercise of the Foreign Investor’s call option, the Foreign Investor has the right to claim compensation from such shareholder in connection with the termination of its call option. Such claim may be lodged by the Foreign Investor within one year.

Nevertheless, the current shareholder may refuse to pay the Foreign Investor such compensation or demand a proportionate reduction in its amount provided that in disposing of the shares the Foreign Investor:

• refused or evaded to exercise its rights or to perform its obligations as a shareholder of the Russian company in good faith, or threated of such refusal or evasion;
• committed action or omission:
• aimed at creating obstacles for the management or business of the Russian company; or
• which could lead to cessation of business, liquidation or insolvency (bankruptcy) of the Russian company.

The right of the authorities to deny Foreign Investors a repurchase option

The federal authority regulating the sector in which a Russian company whose shares were disposed of by a Foreign Investor operates:

• if the Russian company and/or the group of persons to which it belongs has/have a significant impact on the socio-economic development of the Russian Federation; or
• due to other circumstances determined by above mentioned federal authority,

has the right, subject to the simultaneous conditions described in the above section “New mechanism for protecting the interests of Russian investors”, to prohibit the Foreign Investor from exercising its call option, entailing consequences similar to those applicable to the exercise by the Russian company’s current shareholder of the right to deny the call option, as described above.