In an effort to reduce bureaucratic procedures and address deficiencies in Russian law with regard to strategic investments by foreign entities in Russia, amendments to Federal Law No. 57-FZ “On Procedures for Foreign Investments in Business Entities of Strategic Importance for Russian National Defense and State Security”, dated April 29, 2008 (as amended) (the “Strategic Sectors Law”) were recently adopted (the “Amendments”).¹ The Amendments introduce specific rules lifting restrictions and allowing expedited procedures for foreign investments into certain strategic companies² for which strategic activity is not a core business (the “Non-Essential Strategic Companies”).

Historically, many production factories and plants in Russia whose main activities are not considered strategic were built with certain infrastructure for their employees (e.g., water supply facilities). Legal entities owning such facilities, however, could be considered strategic solely due to the ownership of such infrastructure. This meant that certain foreign investors, including those owned by foreign states (the “Restricted Foreign Investors”),³ could not acquire control over such companies or their capital assets since they were considered strategic entities. Other foreign investors (“Non-Restricted Foreign Investors”)⁴ had to obtain approval from a government commission through the lengthy procedure set out in the Strategic Sectors Law. The situation created unnecessary obstacles and/or restrictions on foreign investors seeking to acquire majority stakes in such legal entities. One of the best known cases in this regard involved the acquisition of shares of Uniper SE, a German company, by Fortum, a Finnish state-owned company, the acquisition of which would result in Fortum establishing control over PJSC Unipro, a Russian subsidiary of Uniper SE. PJSC Unipro’s main activity is electricity generation, which is not considered a strategic activity under Russian law, however, it also owned a water utility that reportedly was built to provide drinking water to employees of the power plant. As a result, PJSC Unipro was considered a strategic entity due to its ownership of the water utility. The government commission approved the transaction in November 2019 subject to the condition that Fortum should not acquire control over PJSC Unipro until the amendments to the Strategic Sectors Law allowing such control are implemented. As the Federal Antimonopoly Service (“FAS”) reported, there were around 30 other such transactions dealing with similar issues at that time. The Amendments are thus aimed at, on one hand, providing foreign investors controlled by foreign states with a right to acquire control over Non-Essential Strategic Companies and, on the other hand, providing Non-Restricted Foreign Investors that already had the right to carry out such acquisitions with a simplified clearance procedure in respect of investments into Non-Essential Strategic Companies.

1. New Rules Imposed by the Amendments

Under the Amendments:

1. Foreign investors controlled by foreign states may enter into transactions (e.g., acquisition of more than a 50% stake) resulting in the establishment of control directly or indirectly over Non-Essential Strategic Companies subject to prior approval of such transactions by the government commission under the standard procedure set forth by the Strategic Sectors Law.

   Thus, the Amendments specifically allow an exemption for foreign investors controlled by foreign states in such cases to acquire control over such Non-Essential Strategic Companies. The general prohibition on acquisition of capital assets of Russian strategic entities (including Non-Essential Strategic Companies), as well as the prohibition to establish control over any Russian strategic companies (including Non-Essential Strategic Companies) as a result of a change in voting rights in the charter capital of such companies, remain in force for foreign investors controlled by foreign states.

   Other Restricted Foreign Investors, e.g., foreign investors who do not disclose to FAS information on their beneficiaries, beneficial owners and controlling persons and organizations under their control, international organizations and organizations under their control, and foreign states, continue to be restricted from acquiring control over Russian strategic entities (including Non-Essential Strategic Companies) and their capital assets.

2. Non-Restricted Foreign Investors may enter into transactions which result in the establishment of control over Non-Essential Strategic Companies or may establish control over Non-Essential Strategic Companies as a result of a change in voting rights in the charter capital of Non-Essential Strategic Companies, subject to approval under a simplified procedure introduced by the Amendments.

2. Key aspects of the simplified approval procedure

As noted above, a new simplified procedure for Non-Restricted Foreign Investors was introduced allowing investors to acquire control over Non-Essential Strategic Companies with approval by FAS without the need to go through the lengthier process involving approval by the Government Commission. FAS may grant an approval if the relevant Russian authorities (including the state authorities directly or indirectly overseeing the industry in which the company operates) conclude that the transaction or establishment of control do not threaten national security and consideration by the government commission is not required. If these criteria are not met, FAS will process the application in the usual manner by sending it to the government commission for approval.

The simplified procedure should significantly reduce the amount of time required to obtain regulatory clearance (under the standard procedure, the clearance could take months to acquire).

3. Criteria for Non-Essential Strategic Companies

Non-Essential Strategic Companies must meet the following criteria:

1. they are considered strategic solely due to carrying out strategic activity (a) relating to the use of certain infectious agents, which is subject to licensing under Russian law, except for manufacturing of drugs, and/or (b) relating to water supply and water disposal services using centralized systems and public utility infrastructure systems being registered as a subject of a natural monopoly;
2. the above activities should not be the principal type of activity of the target; and
3. the balance sheet value of the property used for the above activities should not exceed 1% of the aggregate balance sheet asset value for the preceding three-year period.

4. Russian companies which may be qualified as Non-Essential Strategic Companies

Russian companies from a wide variety of industries may be considered Non-Essential Strategic Companies.

Non-Essential Strategic Companies which perform works with the use of infectious agents may include:

• producers of animal fat, meat by-products and animal feed
• poultry plants
• producers of wool, fur and underfur
• canteens
• producers of perfume and cosmetics
• providers of disinfection services.

Generally, such entities operate in non-strategic industries but own a minor asset for the licensed activity relating to the use of infectious agents (e.g., a laboratory for control over the produced products with a relevant license).

Non-Essential Strategic Companies carrying out water supply and water disposal activities may include:

• companies operating in the glass, ceramics, textile, metallurgical, concrete and brick, and wood processing industries
• companies involved in construction and manufacture of plastics
• agricultural companies
• sanatorium and health resort companies.

5. Additional obligations as a condition to clearance

The Amendments expand the general list of obligations which may be imposed by the government commission on foreign investors as a condition to a prior approval of a transaction or approval for establishing control over a strategic entity by including the following additional obligations:

• provision by a strategic entity of utility services at prices (tariffs) established by Russian law;
• maintenance by a strategic entity of strategic activities;
• transfer of rights to carry out water supply and water disposal activities and/or activities relating to the use of infectious agents and subject to licensing under Russian law, or rights to property required for carrying out these activities, to another person subject to requirements provided for by the Strategic Sectors Law or into public ownership;
• compliance by a strategic entity regarding safety, ecological requirements and requirements on the prevention of natural and man-made disasters established under Russian law throughout the course of its operations providing for vital needs of the population (including water supply and water disposal facilities, electric supply facilities, etc.);
• maintenance of implementation by a strategic entity involved in water supply and water disposal of an effective investment program approved by a competent Russian authority;
• maintenance of production and sales volumes at levels that existed prior to the transaction or establishment of control; and
• implementation of new technologies on industrial facilities located in Russia, as well as localization in Russia of industrial facilities for the production of parts, components and materials used by a strategic entity for the production and sale of products (works, services).

In conclusion, the Amendments will now allow for investment in companies that were previously prohibited due to their ownership of certain assets which were considered strategic, but were not the main point of the investment. Furthermore, the Amendments allow for a more expedited review of transactions involving strategic assets in the future.

Footnotes

1) http://publication.pravo.gov.ru/Document/View/0001202103090042.

2) “Strategic company” means a Russian legal entity carrying out at least one type of strategic activities listed in Article 6 of the Strategic Sectors Law.

3) Restricted Foreign Investors include foreign investors which do not disclose to the Federal Antimonopoly Service information on their beneficiaries, beneficial owners and controlling persons and organizations under their control, foreign states and organizations under their control, and international organizations and organizations under their control, including those incorporated in Russia.

4) Non-Restricted Foreign Investors include foreign investors other than Restricted Foreign Investors.