Author: Arina

Rights restrictions of “unfriendly“ shareholders participating in big russian market players

The recently released Decree of the President of the Russian Federation dd. January, 17 2023 establishes temporary procedures of corporate decision-making for Russian legal entities (i.e. the meetings of shareholders, boards of directors or other collegial executive bodies).

The new procedure is applicable to the entities meeting the following requirements simultaneously:

• The entity belongs to energy\machinery engineering\trade industries,
• Its revenue in the year prior to the intended decision’s adoption is more than 100 billion rubles (approx. 1 319 600 00 EUR),
• Sanctions against the beneficiary owner\controlling person of the entity were imposed by ‘unfriendly’ states[1] or unions,
• Not more than 50% of the share capital belongs to the shareholders from the ‘unfriendly’ states.

As from January, 17 2023, it is allowed for such entities to make decisions on the agenda without taking into account the votes belonging to persons from ‘unfriendly’ states (except for those who have their registration in Russia) and/or candidates nominated by such persons to the governing bodies. The votes of the mentioned persons and candidates also should not be taken into account when determining the quorum.

However, the new temporary procedure does not come into force automatically, it can only be adopted by a majority vote of the company’s shareholders being from ‘not-unfriendly states’)

The Decree specifies what persons\entities are not to be considered as ‘unfriendly’:

• Citizens of the Russian Federation and persons\entities controlled by them,
• Persons coming from ‘not-unfriendly’ states exercising control over persons\entities from ‘unfriendly’ states on condition that such control was established before March, 01 2022,
• Persons, being under control of persons\entities from ‘not-unfriendly’ states (or under control of ‘not-unfriendly’ states themselves) on condition that such control was established before March, 01 2022.

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[1] USA, Canada, Austria, Bahamas, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Estonia, the Great Britain (including Jersey, Anguilla, British Virgin Islands, Gibraltar), Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, North Macedonia, Japan, South Korea, Australia, Micronesia, New Zealand, Singapore, Taiwan, Isle of Man, Guernsey Island, the Bermuda, the British Antarctic Territory, the British Indian Ocean Territory, the Cayman Islands, the Falkland Islands, Montserrat, the Pitcairn Islands, Saint Helena, the Ascension and Tristan da Cunha Islands, the South Georgia and South Sandwich Islands, Akrotiri and Dhekelia, Turks and Caicos.

Barriers for foreign investors on the way out of the Russian market –

Mandatory Government Approval for transactions with Russian shares

On September this year Presidential Decree No. 618 introduced restrictions for foreign investors trying to sell their Russian businesses in order to slow down the outflow of investments from Russia. Since the issuance of the Decree it is required to obtain a mandatory approval of the Government Commission for transactions with shares of Russian limited liability companies (hereinafter LLC) where at least one of the parties involved is registered in or controlled from an “unfriendly” country[1].

You can find more about the Decree No. 618 in our previous article https://www.juralink.nl/en/new-obstacles-for-foreign-exit-strategies-from-the-russian-market/  

The Decree affects transactions that result in direct or indirect establishment, modification or termination of:

1. rights to own, use or dispose of shares in an LLC
2. other rights that allow determining the conditions for the management of LLCs or their entrepreneurial activities.

Subject of the approval[2]:

• Transfer of LLC shares to one (several) member(s) of this company or to a third party;
• Acquisition by an LLC of a share in its own authorized capital;
• Exit of the shareholder from an LLC by way of alienation of his share to the LLC or demanding such acquisition by the LLC;
• Transfer of LLC shares to an investment fund;
• Management contract on the transfer of powers of the sole executive body of a LLC;
• Corporate (Shareholder) agreement;
• Convertible loan agreement;
• Share pledge agreement;
• Pledge management agreement;
• Voluntary reorganization of an LLC;
• Joint Venture Agreements, concluded by an LLC;
• Trust or fiduciary agreement, or any other agreement, the subject of which is the exercise of rights on shares of an LLC;
• Other transactions (operations) entailing directly and (or) indirectly establishing, changing or terminating the rights of possession, use and (or) disposal of shares in the authorized capitals of an LLC or other rights that allow to determine the management conditions of an LLC and (or) conditions their business activities

Hereto the list of transactions is open for broad interpretation and can for example include option agreements, any introduction of changes into the LLC’s authorized capital (capital increase or decrease) or even amendments into the LLC’s Articles of Association, if such addresses the management /approval rights of shareholders.

The Application procedure is stipulated by the Governmental Decree dd. 6.03.2022 N 295

Applicant: both residents and non-residents from unfriendly states (any party)

Approval term: is not stipulated. There is no clear rule so far when and how often the commission meets. According to an official publication at one meeting of the Government commission, no more than 10 applications can be considered[3]. Based on our experience the application approval takes considerable time (at least 1 to 3 months).

Required documents and data:

1. Application in the form prescribed by the Ministry of Finance;
2. Petition in a free from, containing information about the planned transaction (purpose, subject, content, all essential terms of the transaction (including the price and payment terms), the planned duration of the consent, the number of votes for the shares that are the subject of the transaction);
3. Documents confirming the state registration of the applicant;
4. Constituent documents of the applicant;
5. Applicant ID, if it is an individual;
6. Information about the beneficiaries, beneficiaries and controlling persons of a non-resident associated with unfriendly countries;
7. Independent appraisal report on the market value of alienated shares (in some cases the Government commission advises on 50% discount to the established market value)
8. Information about the Russian and foreign accounts of the applicant and amount of funds on them;
9. Information about the order of transfer and use of funds received from the implementation of the transaction;
10. Shares and votes distribution after the transaction;
11. Rational for approval grant and consequences of refusal to grant permission for the applicant as well as for the socio-economic development of the Russian Federation

Nota bene: The Presidential Decree No. 618 does not affect transactions involving credit institutions and non-credit financial institutions, which are regulated separately.

Furthermore, the obtainment of Government approval in accordance with the Presidential Decree No. 618 does not eliminate the obligation for antitrust clearance, in case an envisaged SPA-transaction is also subject to FAS approval in line with general rules of Competition law.

In the event a strategic clearance is required, the rules of the Strategic Law No. 57-FZ dd. 29.04.2008[4] have primacy over the Government Commission approval.

If you are evaluating an exit strategy from the Russian market our M&A experts would be glad to assist you with the transaction structuring and implementation, accompany the procedure for obtaining permission from the Government Commission and complete all necessary registration actions.

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[1] The list of unfriendly countries is determined in the Government Decree dd. 5.03.2022 N 430-r

[2] Official explanations No. 1 of the Ministry of Finance as of 13.10.2022 No 05-06-14PM/99138

[3] Clause 2.2 Extracts from the Minutes of the meeting of the subcommittee of the Government Commission for the Control of Foreign Investments in the Russian Federation dd. 14.03.2022 No. 9, released by the Ministry of Finance on 17.03.2022 No. 05-06-10 / BH-12520

[4] On the procedure for making foreign investments in business entities of strategic importance for ensuring the defense of the country and the security of the state

After the announcement of partial mobilization by the President’s Decree on September 21, 2022 the employers are obliged to facilitate the enlistment into the Russian army when the call up to the military service will be forwarded to the reservists through the employer-company.

According to the Government Decree November 11, 2006 N 663 an employer must notify his employees on the enlistment against their signature as a rule, no later than 3 days before the appearance date specified in an army service summons. By failure to do so the employer would face administrative fines up to 3.000 RUB Clause 21.2 Code of Administrative Offences. Mobilization notification has to be organized by company’s HR department or its director, in case the employer does not have persons specially designated for such tasks.

The employer who duly notified the employee on the enlistment is not responsible for the employee’s further actions. Employer is only obliged to facilitate the timely appearance of the employee by the military enlistment office and not to interfere with the conscription.

In cases where an employee is directly summoned to the army by the military enlistment office, the employer should take the opportunity to make a copy of such summons for his staff files/personnel record.

According to the Federal Law On military duty and military service No 53-FZ dd. 28.03.1998 the called up employee should be released from work and continue to get an average monthly pay for the period he will be absent from work for a medical examination, mandatory preparation for military service, conscription for military service or entry into military service under a contract, admission to the mobilization manpower reserve, conscription for military training. The employee also retains his working place and position in the company. The time spent by the employee at events related to conscription for military service is included in the length of service for his annual paid leave. The employee’s costs during his absence period should be later reimbursed to the employer by the military enlistment office. Called up employees could not be dismissed. Their employment contracts should be uphold and they have the right to return to their previous place of work after they were released from the military service.

In case the employee is absent (vacation, sick leave, unexcused absence) or rejects to accept and sign into the summons the employer should document this fact and report the military enlistment office hereon.

There are cases where the company may receive a request with unspecified employees’ lists who are due to appear before the military commission instead of personal summons for particular employees. Such request will indicate characteristics of military professions (specified in individual military record card), which are summoned to the military enlistment office. Hereafter the employer needs to notify all relevant employees on the summon request. The commissariat will still have to give each of the employees a personal summons. Additionally the employer should also draft a list of employees who meet the criteria indicated in the request and forward it to the military enlistment office.

September 27, 2022 Russian Parliament is considering the draft law on ensuring the labor rights of mobilized. We will monitor the situation closely and update our clients on the relevant changes.

On September 08, 2022 the President Decree No. 618 implemented another hurdle for foreign companies trying to terminate their business operations in Russia. Since March of this year foreign companies from “unfriendly countries” were restricted to execute any transaction with shares of the Russian joint stock companies and other Russian securities, unless they obtained the consent of the Government Commission for these.

From now the approval of the Government Commission will be also mandatory in relation to any transactions with the shares of Russian limited liability companies in cases persons (individuals or legal entities) from “unfriendly countries” are involved. In the event foreign company is party to the transaction its “unfriendly status” can be based both on direct or indirect control of the person from the “unfriendly country”.

Hereto, any transactions entailing directly and (or) indirectly the establishment, change, termination of the rights of ownership, use or disposal of shares or of other rights that allow determining the conditions for managing Russian limited liability company or the conditions for its business activities are subject to the prior approval by the Government commission. If required the Government commission may also stipulate the conditions under which such transactions are allowed. 

The detailed procedure for obtainment of such governmental approval has not been specified yet, and should be issued within 10 days from the publication of President’s Decree.

The approval requirement will not be applicable in case the exemptions from the unfriendly status are given:

• Entities whose beneficiaries are Russian persons will not be considered persons of unfriendly countries, provided that control is disclosed to the tax authorities.
• Entities under the control of persons of friendly countries will also not be considered persons of unfriendly countries, provided that such control was established before March 1, 2022.

Consequently, the separation process from the Russian subsidiaries in the form of third-party sale or management buy-outs will require additional time and efforts from the foreign businesses and even could be put on hold by the Government Commission. 

We will monitor further changes and will be glad to provide advice on your exit / freezing options within the Russian market.

Starting from 2022 UBO Reporting in Russia will be required for all foreign companies.

Russian subsidiaries of foreign companies are already required to maintain and annually update the UBO file. A new requirement is that all foreign companies registered with the Russian tax authorities (i.e., having branches or representative offices in Russia) will be obliged to annually submit information about their participants (founders, beneficiaries and managers). This information must be provided to the tax authorities at the place of tax registration starting from 2022. The extended obligation was implemented into item 3.2. Art. 23 Tax Code RF by the Federal Law No. 100-FZ of April 20, 2021.

Information shall disclose direct and indirect participation (if any) of an individual or a public company, if the share of their direct or indirect participation exceeds 5%.

The deadline for UBO reporting in Russia (providing the status as of 31 December of the preceding year) is March 28 of each year. Hereto first UBO submission for foreign companies shall be done no later than March 28, 2022. It is often a lengthy process to establish a UBO file and gather the corporate approvals for its disclosure among foreign holding structures. Therefore, we recommend to start preparing the UBO information well in advance and will be glad to provide our assistance in this matter.

We are awaiting the clarification of the tax authority on the submission and respective documents and will keep you updated on the next developments.

Many employers do not care where their remote employees work. And for this reason they do not indicate in employment contracts the place of work performance or simply write “Russia” or even “the whole world”. However, there are at least 8 reasons to specify the place of work performance in the employment contract. What are these reasons, why is it dangerous for the company that the employee chooses himself in which region to work, and how should the place of work performance be specified in the contract?  This is explained by Anastasia Korotaeva, Ph.D., LL.M., senior lawyer at Juralink , in her article published in the legal journal “Labor disputes”, No. 4 (April), 2021. You can read the article here.

Since the beginning of 2021 the Decree of the Ministry of Economic Development of Russia N 478 came into force that implemented the obligation for the applicants of conformity declarations for products manufactured outside the territory of Russia or EAEU to specify the GLN (Global Location Number) in relation to the place of products manufacturing, as well as the GTIN (Global Trade Item Number), which allows to identify the object of declaration in the course of the declaration registration. 

These codes can be obtained by registering with the GS1 association (an international organization that deals with the standardization of accounting and bar coding of goods).

However, after numerous appeals from the business community representatives the implementation deadline was resceduled for the July 1, 2021 and the transition period was specified as follows:

1. The GLN code is specified only if available – until July 1, 2021.

2. The GTIN code is specified if available.

Currently, membership in GS1 is voluntary and the lack of the above mentioned codes and, accordingly, the impossibility of entering it into a specialized service for automated electronic registration of conformity declarations does not prevent the registration of such declarations. Still if the receipt of GLN code will become mandatory from July 1, 2021, importers will have to be registered with the GS1 association, which will incur additional costs and administration. 

Please check with your logistic department, if your company could be affected by the new regulation, to be prepared or initiate the necessary steps in advance.

We’ll keep you posted.

602,308,745 rubles were received by illegally dismissed employees from their employers through the courts for the period 2018 – the first half of 2020.

This figure perfectly demonstrates that the employees in Russia actively defend their rights in court, and the employers still make many mistakes while dismissing the employees.

On December 9, 2020, the Russian Supreme Court approved large Survey of the court cases related to the termination of an employment contract at the initiative of the employer (https://www.vsrf.ru/documents/all/29463/ ). In this document, the Supreme Court analyzes the courts’ mistakes and explains how the legal provisions on dismissal shall be applied.

One of the main points of this Survey is that the principle of humanity shall be applied by the courts in relation to the employees. It is forbidden to use the employment law instruments only for the purpose to get rid of an employee. The circumstances of the particular situation must be taken into account.

One interesting case was mentioned by the Supreme Court in its Survey. It concerns the dismissal of a remote employee for absence at work. Initially, this employee worked in the office. Then he started working from home. This was agreed with the employer. However, no amendments to the employment contract were made. One day (after several years working from home!), the employer decided to dismiss the employee for long absence at work. The employee filed a lawsuit and the court in this case took the side of the employee. The court indicated that the employee and the employer have reached an agreement on the remote performance of work. The employer was the one who was responsible for correct formalization of this agreement.

And we would like to remind you that as from January 1, 2021, the amendments to the Labor Code of the Russian Federation concerning remote work came into force. During this year remote work has become our new reality, and now, more than ever, it is important to have legally accurate internal regulations and employment contracts provisions associated with remote work issues.

Our team will be happy to advise you on all the nuances of the new legislation and elaborate all the necessary documents. For all the questions, please contact us.

Foreign businesses will no longer need to register a separate company in Russia. The Ministry of Economic Development is planning to allow the branches of foreign companies in Russia to obtain a license without the need to establish a separate Russian entity. The draft law would apply to a wide range of business spheres and should facilitate the access of foreign investors to the Russian market.

At the present moment the grant of license is only possible to the companies established in Russia and registered with the Unified State Register of Legal Entities (USRLE). Branches of foreign legal entities are registered in a separate “Register of accredited branches and representative offices of foreign companies” (Accreditation register), which is kept by the Russian Federal Tax Authority. Currently more than 2000 branches are registered with it. Because of this difference, in case a foreign company is planning to carry out business in Russia, which falls under licensing regulation, it is forced to establish a Russian subsidiary. Thanks to the law amendments Russian and foreign businesses will gain equal opportunities without additional administrative burden.

The draft will enable the branches of foreign companies to obtain licenses based on their registration number and the date of registration in the Accreditation register. 52 types of activities would fall under the new regulation, among which are education, medicine, passenger traffic and pharmaceuticals.

The measure is advertised as stimulating foreign enterprises to expand, invest money into Russian economy and create new jobs. However, not all foreign entities would enjoy the facilitation of market entry. For example no changes are due for the financial sphere: The Central Bank of Russia will not issue a license to carry out banking activities to foreign companies.

If you wish to know more about doing business in Russia, proper choice of the legal form for your activities, advantages and disadvantages of having a Russian subsidiary vs. a foreign branch, envisaged costs, legal and reporting obligations in this regard we would be glad to provide you with detailed advice.

Since 17 November 2020 a number of new COVID-19 rules are applicable in Russia.

The most important new rules are:

1. The COVID-19 laboratory test must be no older than  48 hours now (there was no time limit set previously). 

2. Discharge from COVID-sick leave requires 1 negative test now, instead of 2 previously.

3. Self-isolation of 14 days is mandatory for the following persons:

– COVID-19 positive tested;

– having COVID-19 symptoms (suspected cases);

– having had close contact with persons who have tested positive for COVID-19. In case of absence of COVID-19 symptoms within 14 days, a COVID-19 test is not necessary.

4. The territorial bodies of Rospotrebnadzor are obliged to:

– notify persons who have tested positive for COVID-19 and all their contacts of mandatory 14 days isolation;

– notify medical organizations about the need to establish medical surveillance of the above persons.

The new rules will remain in force until 1 January 2022.

Please let us know if you have any questions. We will be happy to assist you.