Signs of M&A recovery in Russia
Despite the currently challenging economic environment in Russia, the M&A market, though still volatile, seems to be heading for recovery. Our firm’s corporate instructions indicate that the number of M&A transactions has been growing impressively.
Key industries for Russia in terms of M&A deal numbers (rather than deals' value), which in our experience have enjoyed significant growth in 2016, include the energy and natural resources sector as well as agriculture, infrastructure, construction and development, pharmaceuticals, TMT and the car retail sectors. The current market trend of reviving M&A activity gives us hope that 2017 will see it continue.
Over the last couple of years, the Russian legislators have done tremendous work strengthening the Russian civil and procedural legislation and making Russian law more attractive to businesses by making it more viable and flexible. Russian law now provides M&A deal makers with a wider choice of legal tools to structure their commercial arrangements in ways which are common in most well-developed foreign jurisdictions.
General overview of the regulatory improvements
The previous de facto absence of contractual provisions common in international business often meant the choice of foreign (predominantly English) law for structuring complex M&A deals in Russia. The new amendments provide more freedom and fewer restrictions in regulating commercial arrangements, as well as introducing legal mechanisms to protect against various risks a buyer may be exposed to.
The new legal instruments have considerably boosted the demand for Russian law in Russian M&A deals. Yet this should not be interpreted as meaning that the English law is being replaced as English law is still often chosen by one or both parties to the contract. Moreover, there is no clear tendency towards using Russian law in the high-value business sale and purchase transactions structured as share deals and, in our opinion, this is unlikely to change in the near future. Yet the ongoing modernisation of the Russian civil and procedural legislation means that the choice of Russian law in a transaction might turn out to be a more convenient and effective option than foreign law, particularly in certain circumstances, such as structuring shareholders’ agreements in relation to the establishment of a joint venture in Russia.
More specifically, the new developments include:
• the strengthening of the principle of good faith in dealing with counterparties (including at the stage of negotiations and agreements on the preliminary key terms and conditions of a transaction);
• the recognition of the conditional performance of undertakings (including conditions that depend entirely on the will of a contracting party);
• 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 possibility of issuing cash calls to shareholders;
• an acknowledgement of irrevocable powers of attorney, if issued in regard to business activity;
• a significant expansion of security instruments available to the parties, as well as amendments that facilitate out-of-court enforcement of pledges.
It should be noted that, despite the significant improvement of the Russian legal environment, the main drawback to using Russian law remains the lack of court practice, which makes it difficult to predict potential risks. However, businesses have demonstrated willingness to accept some uncertainty in this regard.
Changes in procedural regulation
On 1 September 2016, a number of amendments to the law regulating the Russian arbitration process came into force. This is a result of a wider legal reform that was launched in 2012 and aims to promote the use of arbitration in Russia. On the other hand, the changes imposed a number of regulations that are intended to ensure that arbitration will be used only under certain conditions. For example, the amendments introduce restrictions on the use of arbitration under certain circumstances and provide additional supervisory powers to Russian courts over arbitrations seated in Russia. Nonetheless, a number of the amendments may certainly be regarded as arbitration friendly. For example, the presumption of validity and enforceability of arbitration agreements is clearly stated in the new law. Also, certain types of corporate disputes, such as those arising from shareholders’ agreements, can now be taken to arbitration if certain requirements are met, while previously the law was unclear on the subject.
The amendments distinguish between ad hoc arbitrations and arbitrations administered by permanent arbitration institutions. For example, the parties in an administered arbitration seated in Russia waive their right to request assistance from Russian courts with respect to appointment and removal of arbitrators or waive the right to apply for an annulment of an arbitral award to a Russian court. However, institutions administering arbitrations are now required to obtain a special government permission to qualify as a “permanent arbitration institution” authorised to administer arbitrations seated in Russia as well as certain corporate disputes that may be seated abroad (e.g. disputes arising from share purchase agreements). The new law declares that the International Commercial Arbitration Court and the Maritime Arbitration Commission qualify as permanent arbitration institutions. Still, other Russian arbitration institutions will have to undergo a separate procedure and comply with its extensive requirements. Foreign arbitration institutions deemed as having a “widely recognised reputation” in arbitration will not have to undergo a special permit procedure.