The State Duma is preparing to pass a law which will clarify legal consequences of the invalidation of transactions with foreign investments
Pepeliaev Group advises that on 15 February 2023 the State Duma considered in the first reading a Draft Law which amends article 15 of Federal Law No. 57-FZ dated 29 April 2008 “On the procedure for foreign investments in business entities of strategic importance for ensuring national defence and state security” (Law No. 57-FZ).
The draft law has been prepared for the purpose of specifying in more detail the legal consequences of transactions being invalidated that were carried out in violation of statutory requirements concerning the procedure for foreign investments in business entities of strategic importance for ensuring national defence and state security which correlate with current provisions of civil legislation.
The main new developments are as follows.
1. Direct entrenchment of the consequences of the invalidation of transactions carried out in violation of Law 57-FZ.
Please be reminded that by virtue of article 15 of Law No. 57-FZ, any transactions that fall within the scope of Law No. 57-FZ and are carried out in violation of its provisions are void.
The consequences of the invalidation of such transactions apply to them (through court proceedings, further to a claim of the antimonopoly authority) in accordance with civil legislation, including mutual restitution which means that the parties return everything they have received under the transaction (article 167 of the Russian Civil Code).
The draft law sets forth that provisions will be directly entrenched in Law 57-FZ according to which, when the court applies consequences of the invalidation of a transaction carried out by a bad faith foreign investor or a group of such persons in violation of requirements of Law No. 57-FZ, the court can award to the Russian state budget:
shares of (or membership interests in) the business entity of strategic importance which were acquired as a result of such transaction effected by the parties acting intentionally,
property acquired by a foreign investor (or a group of such persons) which is classified as PP&E of the aforementioned business entity,
income received as a result of such transaction effected by a foreign investor (or a group of such persons) acting intentionally.
The draft law also provides that the consequences of the invalidation of transactions with foreign investments will by analogy apply to other actions that fall under the scope of Law No. 57-FZ (article 7 of Law No. 57-FZ) and have resulted in a foreign investor (or a group of such persons) unlawfully receiving a right to determine the decisions of managing bodies of a business entity of strategic importance (including the terms and conditions of how it carries out its business activity).
At the same time, according to the draft law, when the court decides whether consequences should be applied of the invalidation of a transaction, it will take into account the risks which will or will not arise in the case of mutual restitution in connection with new or existing threats to national defence and/or state security.
We believe that these new developments are entirely logical and will improve legal certainty in the sphere of control over foreign investments in Russia.
2. Recovering losses under transactions carried out in violation of LawNo. 57-FZ.
The draft law provides for a possibility to recover from a bad-faith foreign investor (or a group of such persons) losses, including lost profit, and compensation of damage caused to the property of the business entity of strategic importance as a result of the exercise by the foreign investor (a group of such persons) of rights over such company or its property acquired as a result of a transaction or of any other action specified in article 7 of Law No. 57-FZ and carried out in violation of its provisions.
Therefore, a business entity of strategic importance will have a right to submit to a court or a state commercial court a corresponding claim against the investor or a group of persons of which the foreign investor is a member.
We believe that the part of this rule which provides for a possibility to apply to the court of general jurisdiction needs to be corrected because it violates both article 15(6) of Law No. 57-FZ (which stipulates that cases connected with a violation of requirements of this law fall under the jurisdiction of state commercial courts only) and provisions of the Russian Commercial Procedure Code.
What to think about and what to do
We believe that the adoption of this Draft Law will, among other things, simplify the procedure for recovering property from bad-faith foreign investors under Law No. 57-FZ. At the same time, the final text of the Draft Law has not been confirmed yet and will likely change.
We recommend becoming familiarised with the Draft Law and following up on its developments, and then, once it has been adopted, taking its provisions into account when carrying out professional activity.
Help from your adviser
Pepeliaev Group’s lawyers have significant experience of providing legal support to clients in the sphere of antitrust regulation, including in obtaining preliminary approval of transactions with foreign investors.
Our lawyers continually monitor changes in antitrust legislation and are ready to promptly advise clients on any legal aspects that arise in connection with new provisions being adopted.
If it is impossible to return a received item in kind, the parties must return its value, unless the law provides for other consequences of the invalidation of the transaction.
A state commercial court examines cases arising from economic disputes and other cases relating to the conduct of business or other economic activity (article 27(1) of the Russian Commercial Procedure Code).