National security reviews 2017: A global perspective — Russian Federation | White & Case LLP International Law Firm, Global Law Practice
National security reviews: A global perspective

National security reviews 2017: A global perspective — Russian Federation

2017 amendments to Russian foreign investment laws potentially require approval of any transaction by any foreign investor regarding any Russian company to ensure national defense and state security

The Government Commission on Control Over Foreign Investments in the Russian Federation (the Government Commission), which was established by the Russian Government in 2008, is responsible for reviews. The Government Commission is headed by the Chairman of the Russian Government and composed of the heads of certain ministries and other government bodies.

Although the final decision on the application is made by the Government Commission, all the preparatory work (i.e., reviewing an application's completeness, liaising with relevant government bodies) is done by the Federal Antimonopoly Service (FAS). FAS, among other things, performs a preliminary review of the application and prepares materials for a further assessment by the Government Commission.

 

In 2016, FAS received 54 applications from foreign investors, exceeding the number of applications reviewed in 2015 by 30 percent.

 

Who files

An acquirer must file if the proposed acquisition would result in the acquirer's control over an entity exercising activities of "strategic importance" to Russian national defense and security (a Strategic Entity). The acquirer is required to obtain consent of the Government Commission prior to the acquisition of control over a Strategic Entity; otherwise, the respective transaction is void.

To apply for the consent, the acquirer must submit an application to FAS with attachments, which include, among other things, corporate charter documents of the acquirer and the target, information on their groups' structures (including the whole chain of control over both the acquirer and the target), transaction documents and a business plan for the development of the target post-closing.

 

Types of deals reviewed

The Government Commission reviews transactions that result in acquisition of control over Strategic Entities. Foreign investors must also obtain the Government Commission's consent for certain transactions involving acquisition of a Strategic Entity's property.

The list of activities of "strategic importance" has recently been expanded and currently comprises 46 activities that, if engaged in by the target, cause the target to be considered a Strategic Entity. The 46 activities encompass, among others, areas related to natural resources, defense, media and monopolies. The activities include not only those directly related to the state defense and security (e.g., operations with nuclear materials, production of weapons and military machines), but also certain other indirectly related activities (e.g., TV and radio broadcasting over certain territory, extraction of water bioresources and publishing activities).

The criteria for determining control are rather wide and are different for a target that is involved in the exploration of "subsoil blocks of federal importance" (e.g., oil fields with certain size of reserves, uranium mines, and subsoil blocks subject to exploration within a defense and security zone).

Foreign public investors (i.e., foreign investors controlled by foreign states or international organizations) are not permitted to obtain control over Strategic Entities or acquire more than 25 percent of a Strategic Entity's property and must obtain consent of the Government Commission for acquisitions of the reduced stakes in Strategic Entities. The special, stricter regime established for foreign public investors has recently been extended to "off-shore companies" (entities registered in jurisdictions from a list approved by the Ministry of Finance—the list includes the UAE, Jersey, Hong Kong, BVI, Bermuda).

Certain transactions in respect of Strategic Entities or their property are exempt from the necessity to obtain the Government Commission's approval (e.g., transactions in which the acquirer is ultimately controlled by the Russian Federation, constituent entities of the Russian Federation or a Russian citizen who is a Russian tax resident and does not have dual citizenship, as well as certain "intra-group" transactions).

Recent amendments to Russian's foreign investment laws gave the Chairman of the Government Commission 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, FAS will notify the foreign investor about the need to receive approval for a prospective transaction. Any transaction made in breach of this requirement is void. What transactions could potentially fall under the requirements of this amendment is yet to be determined in practice.

 

Scope of the review

Generally, a review assesses the transaction's impact on state defense and security.

FAS initially requests opinions of the Ministry of Defense and the Federal Security Service as to whether the transaction poses any threat to the Russian defense and security. Additionally, if the target has a license for dealing with information constituting state secrecy, FAS requests information from the Interagency Committee for the State Secrecy Protection on the existence of an international treaty allowing a foreign investor to access information constituting state secrecy.

Russian law does not provide for more details on the review's scope or the criteria on which the transaction is assessed.

 

Outcomes

  • Most transactions submitted to the Government Commission for review are approved. Such approval contains the term within which the respective acquisition needs to be completed
  • The Government Commission can approve the transaction subject to certain obligations imposed on the foreign investor. Until recently, the list of such obligations was exhaustive and established by law. The new amendments allow the Government Commission to impose any type of obligation on the foreign investor. Those obligations may include the obligation to invest certain amounts of funds into activities of the Strategic Entity, or to process bioresources or natural resources extracted by the Strategic Entity on Russian territory
  • The Government Commission can reject the application for approval of the acquisition

 

Trends in the review process

In 2016, FAS received 54 applications from foreign investors, which exceeds the number of applications reviewed in 2015 by 30%. Most foreign investors came from the US, China, United Arab Emirates, Canada, Norway, Netherlands, India and Singapore.

 

How foreign investors can protect themselves

At the early stage of a transaction, a foreign investor should analyze whether the target company qualifies as a Strategic Entity and whether the planned transaction triggers the necessity of the Government Commission's consent. This will allow the investor to start filing preparations and then file its application as early as possible, thereby reducing the filing's impact on the timing of the transaction.

 

Review process timeline

The statutory period for reviewing the application is three months from the date of its acceptance for review. The Government Commission can extend the review period for an additional three months.

 

2017 update highlights

Russia's foreign investment laws were substantially amended in 2017.

  • The first package of amendments extended special regulation (and thresholds) established for foreign public investors to offshore companies and organizations under their control. An "offshore" company is one registered in one of the jurisdictions included in a list established by the Russian Ministry of Finance. This list includes such jurisdictions as the British Virgin Islands, Jersey, the UAE, Bermuda, Hong Kong, and the Isle of Mann, among others
  • The most important change made in the second package of amendments was to introduce a new right of the Chairman of the Government Commission 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. Any transaction made in breach of this requirement is considered null and void. What transactions could potentially qualify for the above amendment and how this provision should technically work is yet to be determined in practice
  • The definition of a "foreign investor" for the purposes of Russian foreign investment legislation now also includes Russian nationals who are also holding any other citizenship and companies controlled by foreign investors, including Russian companies
  • Other amendments opened up the list of obligations which the Government Commission may impose on a foreign investor as a condition for approval (previously the list of obligations was exhaustive), expanded the list of what activities are considered "strategic" activities (the list now includes, among other things,. operations of an electronic platform for state purchases), and tightened liability for a failure to provide a notification to FAS on acquisition of a minority stake in a Strategic Entity

 

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