Recovery of M&A with foreign investment
Despite the challenging economic environment in Russia, the M&A market, though still volatile, seems to be heading for recovery. According to Thomson Reuters, Russian acquisitions by overseas buyers have hit their peak since the sanctions were imposed in 2014. M&A transactions with foreign investors totalled USD4.6 billion (GBP 3.55 billion) in the first half of 2017, which is almost triple of the USD1.6 billion level seen for the same period in 2016 and the best result for the same period since 2012.
In terms of sector activity, the energy and natural resources continues to be the most attractive to foreign investors. However, there has also been significant foreign investment in retail, agriculture, pharmaceuticals and financial services industries.
The previous de facto absence of contractual provisions common in international business law often meant foreign law (predominantly English law) was chosen for structuring complex M&A deals in Russia. However the new amendments provide more freedom and fewer restrictions in regulating commercial arrangements, as well as introducing legal mechanisms to protect against various risks. In particular, relatively new amendments include:
• the possibility of providing assurances on circumstances (comparable to the use of representations and warranties), as well as setting out an undertaking to compensate for proprietary loss (comparable to indemnity);
• an option mechanism that includes an irrevocable offer that may be accepted by the other contracting party if certain pre-agreed circumstances occur;
• the possibility of structuring tag-along as well as drag-along rights;
• the rules on storage and provision of information to shareholders have been clarified to minimise their misuse;
• the requirements of approval of major and interested-party transactions have been clarified.
In addition to the changes made to the Civil Code and corporate legislation, the so-called “de-offshorisation law” is being implemented to encourage the return of funds accumulated by Russian residents in foreign jurisdictions, including Cyprus, the BVI, the Caymans and the Netherlands.
Furthermore, certain legislative amendments designed to encourage the use of arbitration have recently come into force. For instance, the new provisions clearly state the presumption of validity and enforceability of arbitration agreements and expressly make certain types of corporate disputes (for example, shareholder agreements, subject to certain requirements) relating to Russian companies arbitrable which previously has been a contentious issue. Additionally, the law now requires all arbitration institutions to qualify as a “permanent arbitration institution” in order to be authorised to administer arbitrations seated in Russia or certain corporate disputes seated abroad, e.g., arising under share purchase or share pledge agreements. The law declares that the International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission automatically qualify as such permanent arbitration institutions. Additionally, the Arbitration Centre of the Institute of Modern Arbitration (IMA) and the Arbitration Centre of the Russian Union of Industrialists and Entrepreneurs (RSPP) have now attained the status of “permanent arbitration institutions” in Russia. Other Russian arbitration institutions will have to undergo certain procedures to comply with the new regulatory requirements. However, it should be noted that foreign arbitration institutions with a “widely recognised reputation” will not have to comply with new Russian law requirements. As such, none of the highly-regarded international arbitration institutions, such as ICC, LCIA or SCC, have yet applied for such recognition from the Russian Government.
As a result of recent significant changes, including those listed above, Russia has significantly improved its position in a number of international business ratings. Most notably, in the Doing Business – 2017 rating published by the World Bank Russia moved up to 35th place out of the 190 ranked countries (compared to 40th place last year).
Having said that, we need to mention that the key practical drawback of all these developments in the Russian corporate law for the time being is the absence of well-established court practice giving guidance as to how all these instruments will be applied and construed in practice. Considering the currently enhanced role of the Russian courts and, at the same time, their sometimes unpredictable interpretation of the law, the majority of investors are yet unwilling to test the efficiency of the amendments.
Consequently, many parties still tend to choose English law and foreign-seated arbitration institutions in large-scale M&A transactions structured through offshore SPVs, which are now Russian tax resident, for corporate and contractual flexibility purposes. However, parties do increasingly often agree to arbitrate their disputes at the ICAC or IMA.
More strict foreign investment regulation
Despite some general liberalisation of the legal business environment in Russia it should be noted that there has also been some tightening of legal requirements.
In July 2017, new amendments regulating foreign investment in Russia came into force that increased control over transactions involving foreign investors. Now any transaction concerning a foreign investor in a Russian company will potentially need government approval which was previously only required for acquiring control of companies in so-called strategic sectors. However, the government has yet to issue any clarifications on these new provisions, so their practical application remains unclear.