Amendments to the Foreign Investments Law: a means to tighten control?

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On 18 July 2017, the Russian President signed Federal Law No. 165-FZ, which contains a package of amendments to Federal Law No. 160-FZ dated 9 July 1999 "On Foreign Investments in the Russian Federation" (the "Foreign Investments Law") and to Federal Law No. 57-FZ dated 29 April 2008 "On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the National Defense and Security of the Russian Federation" (the "Strategic Investments Law").


1. Applicability of the Foreign Investment Law is widened

The most important change in the package is the amendment to Article 6 of the Foreign Investments Law, which gives the Chairman of the Government Commission on Control over Foreign Investments in the Russian Federation the right to decide that approval is required with respect to any transaction by any foreign investor with regard to any Russian company if this is needed for the purpose of ensuring national defense and state security. Upon receipt of such a decision from the Government Commission, an authorized agency, the Federal Antimonopoly Service (FAS), has three days to notify the foreign investor about the need to receive approval for a prospective transaction. Any transaction made in breach of this requirement is considered null and void. Other consequences provided in Article 15 of the Strategic Investments Law may also be applied to such transaction.

For the purpose of the above amendment, the definition of a "foreign investor" now also includes Russian nationals who are also holding any other citizenship and companies controlled by foreign investors, including Russian companies. Notably, according to the amendment, to determine whether a foreign investor "controls" a company, of all the criteria listed in Article 5 of the Strategic Investments Law, only Point 1 of Part 1 of Article 5 qualifies (that is the ownership of more than 50 percent of shares). Moreover, we note that the amendment mentions "transactions" only, while according to the Strategic Investments Law, "actions" also require the Commission's approval if, as result of such actions, a foreign investor (or a group of persons) acquires control over a strategic entity.

What transactions could potentially qualify for the above amendment is yet to be determined in practice. For example, whether it could apply to minority investment in a strategic entity, which does not require approval under the Strategic Investments Law, or to minority investments of certain state investors, which do not require approval under the Foreign Investments Law, or to any foreign investment in a sphere which is not on the list of "strategic" activities, but is potentially important for national defense and security. Similarly interesting is how this amendment will work in practice—evidently, FAS's monitoring of planned foreign investments will become crucial. In any case, it is already obvious that the amendment introduces a considerable level of uncertainty to the investors’ evaluation of the need to obtain regulatory approvals in Russia and increases compliance risks resulting from investments in the Russian economy.

The Strategic Investments Law was also amended to contain the above extended definition of a "foreign investor," which includes Russian citizens who are also holding any other citizenship.


2. More severe consequences of a failure to notify FAS of an acquisition of five or more percent of a strategic entity's authorized share capital

The principal amendment to the Strategic Investments Law is the change in consequences resulting from a failure of a foreign investor (or a group of persons) to notify FAS about an acquisition of five or more percent of a strategic entity’s authorized share capital. While previously a foreign investor could only receive an administrative fine (from RUB 250,000 to 500,000) for such a failure, now, FAS will file a suit to deprive the investor (or the group of persons) of the right to vote in the annual general shareholders’ meeting until the notification is received. Such a tightening trend demonstrates the importance of control in the sphere and is aimed at disciplining foreign investors.


3. The established practice of FAS to define a "strategic entity" and oblige foreign investors to perform certain actions is confirmed

Some of the current practices of FAS also found their way into the amendments. For example, according to the amended Article 10 of Strategic Investments Law, FAS can now check not only licenses but other authorization documents as well when considering an application for approval. This, in a way, widens the initial understanding of the concept of "strategic entity" as only "an entity in possession of the necessary licenses."

Furthermore, if a transaction is approved, subject to an agreement with the applicant-foreign investor to fulfill certain obligations, the Government Commission may now specify additional obligations outside of the limited list provided in Article 12 of the Strategic Investments Law. According to FAS, this amendment is primarily aimed at securing the foreign investors’ right to define in their agreements the obligations that are not in the Law, for the purpose of ensuring that the transaction is approved.


4. The limited application of the exception to transactions of companies controlled by Russian citizens

The amendments limit the applicability of the exception set out in Part 9 of Article 2 of the Strategic Investments Law for the transactions of companies controlled by Russian citizens who do not hold any other citizenship and are tax residents of the Russian Federation. Previously, Parts 1 and 2 of Article 5 of the Strategic Investments Law were used to determine that an entity is controlled by such a Russian citizen—not only the ownership of more than 50 percent of voting shares, but also the ability to determine decisions of the entity, taking into account the other shareholders, defined as having "controlling" status. Currently, according to the amendments, "control" is solely determined by the ownership of more than 50 percent of voting shares—thus, only the simplest and the most obvious criteria of control qualify. Therefore, the exception will not apply if a Russian citizen controls the company-acquiror based on any other criteria specified in Article 5 of the Strategic Investments Law.


5. The extended list of "strategic" activities

The amendments add the following to the list of "strategic" activities: operating an electronic platform for state purchases, closing the points of radioactive waste burial and using nuclear materials and radioactive substances while conducting atomic energy works for defense purposes. Moreover, the descriptions of some types of strategic activities have been specified either in relation to legislative changes or to the established FAS practice.


6. Notifying about investments in strategic entities in the Crimean Republic and Sevastopol

According to the amendments, foreign investors (or their groups of persons), who own five or more percent in the authorized share capital of strategic entities registered in the Crimean Republic or Sevastopol have to deliver the necessary notifications to FAS within 90 days after the day the amendments come into force. A failure to do so will, as described above, trigger a suit by FAS and lead to the foreign investor being deprived of the right to vote in the annual general shareholders' meeting of the strategic entity until the appropriate notification is received by FAS.

The amendments also clarify that cases related to breaches of the Strategic Investments Law are under the jurisdiction of commercial (arbitrazh) courts.

The amendments came into force on 30 July 2017.


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