Foreign investments: liberal amendments
The last five years have been notable for the way in which legislation relating to foreign investments in strategic companies has developed and been refined. It has been possible gradually to create a mechanism that is both understandable and transparent to a respectable degree. At the same time, practical issues continue to arise which need to be addressed at the level of primary legislation.
It was at the end of 2011 that the most recent amendments were made to Federal Law No. 57-FZ ‘On the regime for foreign investments in business companies of strategic significance in order to safeguard the country’s defence and state security’ (“Law No. 57-FZ”). These changes aimed to liberalise and simplify regulation.
Russia’s Federal Antimonopoly Service (the “FAS”) understands how important it is for the legislative base to be further improved so that it is fit for purpose in the context of modern realities. Now, at the behest of the Government’s Commission for Overseeing the Making of Foreign Investments in Russia, the FAS has come up with a legislative bill that contains amendments to Law No. 57-FZ. The current status of this bill is that it has been passed in its first reading by the State Duma (the Russian parliament’s lower chamber) and it has been scheduled to be reconsidered at another hearing in April 2014. The amendments that the bill proposes aim to clarify the areas in which Law No. 57-FZ has effect and to improve the system for overseeing foreign investment in strategic business companies.
The primary purpose of the proposed amendments is to further simplify the regulatory regime and cut down barriers to foreign investments, creating a favourable investment climate. Ahead of the bill’s second reading, the FAS has prepared various additional proposals which the government has not yet approved. These proposals may be viewed at the agency’s official website.
In addition, it is important to note that the State Duma is also examining in the first reading a bill that deputies put forward as early as 2010 . This proposes, in particular, to expand the list of strategic types of activity so that it includes activity involving socially significant services being supplied over the Internet (information searches, postal services, the building and hosting of websites and so on, if such services are provided in a set volume and predominantly in relation to requests from within Russia).
Moreover, it is proposed that the current geographical restriction will be removed so that all companies carrying out radio and television broadcasting will be defined as strategic, as will all companies whose activity involves editing and/or publishing printed periodicals, with the current circulation threshold being abolished. In addition, the bill provides that specific regulatory procedures will be set in relation to business entities which are active in the mass media sector. Bearing in mind that this bill has already been under consideration for a rather lengthy period and has still not been passed in its first reading, we will not dwell on these proposed changes in any detail.
However, the bill which the FAS has worked up may be passed in the near future. We will therefore focus on what we regard as the most significant amendments.
Instances of Law No. 57-FZ not being applied
First of all, we may separate out a block of amendments concerning the rules defining the cases and conditions in which restrictions imposed on foreign investments in strategic economic companies may be disregarded.
Thus, the current version of the law provides for an exception under which if, before a transaction is completed, a foreign investor or a group of persons already control a strategic company (in other words, they directly or indirectly have at their disposal more than 50% of the total voting rights in the strategic economic company), no consent is required for such foreign investor or group of persons to acquire additional shares or membership interests .
Further, judicial and administrative decisions state that in the above case such a foreign investor has already obtained permission from the Government Commission to acquire control in relation to the strategic economic company. A second application for consent is therefore not required.
The bill proposes amendments which will result in a transaction falling within the exception only if the foreign investor itself that is proposing to complete the transaction already has more than 50% of the strategic economic company’s share capital at its disposal, or if the foreign investor is controlled by a party that also controls the strategic economic company (i.e. if the transaction is being undertaken by a parent company and a subsidiary). Under the proposal, if a foreign investor’s group already has control over the strategic economic company, this case will not fall within the exception.
It is recommended that a similar exception be introduced for strategic companies which are subsoil users. The bill sets out somewhat harsher wording for the conditions of the exemption from regulation for these companies than it uses for other strategic companies. To this end, it is proposed that transactions will fall outside the scope of regulation if a foreign investor already owns more than 75% percent of the shares (membership interests) in the issued capital of a strategic business company which is using a subsoil plot of federal significance.
Furthermore, the project corrects a number of inaccuracies and omissions which make provisions of Law No. 57-FZ complicated to apply in practice. In particular, it is proposed to amend the exemption under which transactions are outside the scope of Law No. 57-FZ if they involve companies controlled by the Russian Federation or Russian citizens acquiring control over strategic economic companies . The current version of Law No. 57-FZ provides that the exception covers transactions between companies controlled by the Russian Federation or Russian citizens. If read literally, this rule points to the conclusion that, for the exception to be applied, both parties to the transaction – and not just the purchaser – must be controlled by the Russian Federation or Russian citizens. In addition, it is clear that for the purposes of exercising regulation over foreign investments, the seller of shares (membership interests) and the person or entity controlling it have no relevance. The bill puts forward more precisely drafted wording for this rule, so that it may be unequivocally construed as meaning that, for the exception to apply, it is sufficient for the Russian Federation or a Russian citizen to control the foreign investor. Moreover, the amendments provide that the exception from the rules of Law No. 57-FZ applies to relationships involving transactions being completed by investors controlled by constituent entities of the Russian Federation, not just to those controlled by the Russian Federation itself.
Amendments are also proposed with a view to ruling out the ambiguous interpretation of the current text of the provision which states that Law No. 57-FZ does not extend to relationships that involve foreign investments being made in strategic economic companies which are subsoil users when the Russian Federation has a controlling stake of more than 50% of the voting rights in such company . The amendments clarify that the exemption applies if, once the transaction is completed, the Russian Federation maintains its controlling interest in the strategic company. This addition has no effect on the court and administrative approach , but it makes the rules of Law No. 57-FZ simpler to understand and interpret.
List of strategic types of activity
It is intended, with a view to easing regulation, also to make changes to the list of types of activity that are regarded as strategic . The bill provides for an amendment to ensure that, rather than any activity which involves agents of infectious diseases being used, only such activity as needs to be licensed will be regarded as strategic. Moreover, it is proposed to remove from the scope of regulation cases where this activity which involves agents of infectious diseases is carried out by business entities whose main activity is associated with food production.
Experts have long pointed to the fact that enterprises in the food industry (for example, the production of cheeses, sour milk products, juices, baked goods, beer and so on) fell without good reason under the scope of Law No. 57-FZ because they had licences for activities associated with the use of agents of infectious diseases. If these amendments are passed, this will be a long-awaited measure to liberalise the approach to such enterprises, making this initiative an unequivocally positive development.
Procedural amendments
It is important to be aware of the range of amendments to the procedure for obtaining the consent of the Government Commission.
As far as prior consent for a transaction is concerned, the bill provides that it is possible to extend the period for which a decision of the Government Commission is in force further to the relevant communication from an applicant explaining why this period needs to be extended and indicating the length of additional period that is required. The Government Commission then takes a decision on whether or not to grant such an extension. At present time, if a foreign investor is not able to complete the transaction within the timeframe set in the Government Commission’s decision taken further to the applicant’s proposal, it will need to prepare a new set of documents and apply for consent again.
Moreover, the amendments establish that foreign investors or groups of persons have an obligation to file notifications that transactions have been completed if the Government Commission has previously given its consent to such transactions.
Currently it is subordinate legislation that makes provision for this obligation. Under clause 22 of the Russian Government’s Resolution No. 838 dated 17 October 2009, foreign investors who have applied for and are granted prior consent to a particular transaction must inform the duly authorized body that such transaction has been carried out. Further, the notification must be filed in accordance with article 14 of Law No. 57-FZ and the Russian Government’s Resolution No. 795 dated 27 October 2008. It is extremely important to enshrine this obligation in primary legislation, since foreign investors frequently fail to understand that they need to provide a notification concerning a transaction for which prior consent was given.
Ahead of the second reading, the FAS has also added to the list of documents and information to be supplied with an application for prior consent to a transaction (for regulation to be established). In addition to the documents and information listed in article 8 of the Law, information about ultimate beneficial owners is now also included. The introduction of this requirement will lead to control being tightened over foreign investors as well as to both transactions and the market as a whole being more transparent. To this end, the term ‘ultimate beneficial owner’ needs to be clearly defined, since there is no such definition in antimonopoly legislation and in practice this gives rise to numerous questions.
In addition, the FAS is proposing for the second reading to make an adjustment in the form of amending article 5 of Law No. 57-FZ, which establishes the factors dictating whether a strategic company is under the control of a foreign investor. This article will be supplemented so that it covers a case when foreign states are the shareholders (members) of such business company and their aggregate equity interests afford them control. Also, article 12 of Law No. 57-FZ will be supplemented with a clause that sets the list of obligations which may be vested in a foreign investor by agreement, which provides that a foreign investor has an obligation to process, within Russia, marine biological resources.
Thus, an analysis of the proposed amendments shows that it is reasonable to state that the legislation on foreign investments in strategic companies has been further improved and that legislation as a whole in this area has been liberalised.