Special rules for implementing (effecting) certain types of transactions (operations) in respect of participatory interests in limited liability companies

On 8 September 2022, Decree No. 618 of the President of the Russian Federation “On special rules for implementing (effecting) certain transactions (operations) between certain persons” (the “Decree”) was signed and published with immediate effect. This Decree lays down the requirement to obtain a permit from the Government Commission for Monitoring Foreign Investments in the Russian Federation (the “Government Commission”) for implementing certain types of transactions (operations) with participatory interests in limited liability companies (“LLC”).

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A Government Commission permit is required for implementing (effecting) transactions (operations) with participatory interests in LLC’s subject to the following two criteria being met simultaneously:
1.   the transactions (operations) are made:
a.         between Russian residents and Foreign Persons From Unfriendly States;
b.         between Foreign Persons From Unfriendly States among themselves;
c.         between Foreign Persons From Unfriendly States and foreign persons that are not Foreign Persons From Unfriendly States, and
2.   transactions (operations) entail, directly and/or indirectly, establishment, modification or termination:
a.         of rights to own, use and/or dispose of participatory interests in LLCs (with the exception of credit and non-credit financial institutions); or
b.         of other rights dictating how such LLCs should be managed and/or how they should carry on business.

Foreign Persons From Unfriendly States are understood as foreign persons related to states that perform unfriendly actions in relation to the Russian Federation, Russian legal entities and individuals (the list of such states is given in Russian Government Directive No. 430-p, dated 05 March 2022, as amended and supplemented) (“Unfriendly States”), including:
1.   individuals, legal entities and other persons who have citizenship of such states and whose place of registration, principal place of business or principal place of income is in these states;
2.   persons controlled by the above-mentioned persons (irrespective of their place of registration or principal place of business).
The issued permit, if necessary, may contain the conditions for the implementation (execution) of such transactions (operations).

Foreign Persons From Unfriendly States do not include:
1.   persons who simultaneously meet the following requirements:
a.         they are controlled by the Russian Federation, Russian legal entities or individuals (they are their ultimate beneficiaries), including with control through foreign legal entities; and
b.         information concerning such control is disclosed by Russian beneficiaries to Russian tax authorities;
2.   persons controlled by:
a.         legal entities or individuals whose personal law is the law of a state not listed among Unfriendly States, and (or)
b.         a state not listed among Unfriendly States,
but subject to such control being established before 1 March 2022.

Transactions (actions) requiring Government commission approval exclude:
1.   Transactions (operations) performed in accordance with Russian Presidential Decree No. 416, dated 30 June 2022, i.e., transactions in connection with the production sharing agreement related to the Piltun-Astokhskoye and Lunskoye oil and gas fields;
2.   Transactions (operations) referred to in Russian Presidential Decree No. 520, dated 5 August 2022, i.e., specific transactions in respect of specific Russian legal entities listed in the Decree No.520.

The procedure for issuing the permits by Government Commission should be approved within 10 days by the Russian Government.

In the absence of official comments, we believe that the Decree may apply to quite a broad spectrum of transactions which, as such, do not lead to establishment, modification or termination of rights to participatory interests in LLCs, but may entail such consequences in the future. In particular, such transactions might include:
·      option agreements to conclude a contract for disposal of a participatory interest in an LLC  (provision of a related offer);
·      option agreement;
·      preliminary sale and purchase agreement, donation and exchange agreements with respect to participatory interests;
·      participatory interest pledge agreement (in particular, subject to such pledge enforcement type as retention);
·      LLC capital increase;
·      convertible loan.

We have discussed these developments with a few notaries and they confirmed that in the absence of any comments on the part of government authorities and/or the notarial chamber they are not planning to certify the above-mentioned transactions without providing to them permission from the Government Commission.

Also, in our opinion, a broad interpretation of the Decree may create a risk of classifying indirect transactions related to the transfer of governance rights in relation to an LLC, including through the transfer of rights to control instruments at a foreign level, to the scope of restrictions established by the document, but such an approach causes questions regarding its practical implementation.

ALUMNI Partners lawyers will be happy to advise you on issues related to the approval of transactions by the Government Commission, as well as assist you in preparing and filing an application in connection with such a transaction (operation).

If you have any questions or comments regarding this alert, please contact us to discuss them.

Anton Panchenkov, Partner, Corporate / M&A,
Ekaterina Dedova, Partner, Corporate / M&A,
Matvey Kaploukhiy, Partner, Corporate / M&A,

The alert was prepared with the participation of Anastasia Kudryashova, Senior Associate, and Vladislav Lazutkin, Associate, Corporate / M&A.