Amendments to the Foreign Investments Legislation: New Requirements for Information Disclosure

by White & Case LLP
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On 31 May 2018, the President signed Federal Law No. 122-FZ amending Federal Law No. 160-FZ dated 9 July 1999 "On Foreign Investments in the Russian Federation" ("Law No. 160-FZ") and 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 Defence and Security of the Russian Federation" ("Law No. 57-FZ").

1. A new category of a "non-disclosing foreign investor"

Probably, the most important novelty of these amendments is the introduction into Law No. 57 of a new category of a "non-disclosing foreign investor" instead of the previous "offshore company" introduced into the Law in July 2017.

For information, the amendments, made to Law No. 57-FZ by Federal Law No. 155-FZ dated 1 July 2017, had spread on offshore companies and organizations under their control a special regime (and thresholds) for the approval of transactions, set by Law No. 57-FZ for foreign sovereign investors (i.e., foreign states and international organizations, apart from those mentioned in Government Regulation No. 119-r dated 3 February 2012 and organizations under their control). "Offshore" were the companies from the jurisdictions listed in the Ministry of Finance Order No. 108n dated 13 November 2007.

These amendments had triggered a lot of practical issues, for example, whether the exemptions, provided for by Law No. 57 (in particular, regarding the intra-group transactions and transactions of entities under the control of a Russian citizen), applied to the transactions involving offshore companies; or whether the provisions regulating the aggregate control over a Russian strategic company applied when an offshore company was to acquire the shares, taking into account the existing ownership of sovereign investors in such strategic company; or, the most important, what regulation applies if an offshore company is an intermediary company in the control vertical over the acquiring company whose final beneficiary is a private foreign investor from a non-offshore jurisdiction.

The Federal Antimonopoly Service of Russia (the "FAS") has a conservative view regarding the most of such issues, which is explained by the general de-offshorization goals of the Russian economy.

However, the practice still required certain legislation amendments, which have been introduced by Law No. 122-FZ.

The amendments have replaced the category of an "offshore company" with the category of a "non-disclosing investor" (i.e. investor not disclosing the information about its beneficiaries, beneficial owners and controlling persons).

According to the amendments, when disclosing this information, the category of "control" applies as defined in Law No. 57-FZ, and the categories of "beneficiary" and "beneficial owner" – as defined in Article 3 of Federal Law No. 115-FZ dated 7 August 2001 "On Combating Legalization (Laundering) of Income Obtained by Way of Committing a Crime and Financing of Terrorism."

Thus, the amendments broaden the information disclosure requirements about an acquirer, as compared to the previous requirements. The previous version of Law No. 57-FZ required to disclose the information about controlling persons only. Now Law No. 122-FZ requires in addition to disclose the information about beneficiaries and beneficial owners which are broadly defined in the above mentioned Law No. 115-FZ.

Noteworthy, Law No. 122-FZ does not address the information disclosure requirements to offshore companies only, which means that, literally interpreted, it applies to all categories of foreign investors. Foreign investors will be qualified as "ordinary" investors only if they disclose such information, and special stricter rules applicable to sovereign investors will not apply to them. However, Law No. 122-FZ does not specify when and how a foreign investor must submit this information with the FAS.

In the absence of any clarifications regarding the application of the amendments, these provisions of Law No. 122-FZ may be interpreted broadly, meaning that any foreign investor must submit the required information with the FAS prior to concluding any transaction.

The amendments provide that the information must be submitted as required under the rules, established by the Russian Government, and in the form of a clarification request on the necessity to approve a planned transaction, as required under Article 8(6) of Law No. 57-FZ.

However, no new rules for the submission of information have been adopted following the amendments (although the draft Government Regulation addressing this issue has already been developed). The FAS has given oral comments that a number of such rules already exists and they are the Rules to conduct preliminary approval of transactions and approval of establishing a control by foreign investors or a group with a foreign investor over the strategic companies, adopted by Government Resolution No. 838 dated 17 October 2009, and the Rules for foreign investors or a group with a foreign investor to submit information about the transactions with respect to shares in the strategic companies' charter capital, transactions and other actions subject to the preliminary approval, adopted by Government Resolution No. 795 dated 27 October 2008.

Thus, according to the new version of Law No. 57-FZ and the FAS comments, it is assumed that a foreign investor intending to enter into a transaction with respect to a strategic company and determined to disclose to the FAS the information about its beneficial owners, beneficiaries and controlling persons, has to decide on its own which instrument to use: to submit an application for approval or a notification (depending on the number of shares being acquired), or a clarification request on the necessity to approve the transaction.

Considering the above, while Law No. 122-FZ clarifies certain regulatory issues with respect to investments made by the offshore companies, it, at the same time, creates uncertainty and, in fact, additional burden for other foreign investors.

These questions require prompt settlement in the legislative acts or the FAS clarifications so that foreign investors were sure in what cases, for which categories of foreign investors and when it is necessary to submit the information with the FAS, what scope of disclosure is required, and whether any exemptions apply (e.g., with respect to the next transactions of the investors who have submitted the information before if such information has not changed, with respect to transactions of public companies, etc.).

2. Introduction of definition of a "foreign investor" into Law No. 57-FZ and revision of this definition in Law No. 160-FZ

Prior to the amendments, Article 3(2) of Law No. 57-FZ referred to the definition of a "foreign investor" contained in Law No. 160-FZ.

Law No. 122-FZ has completely changed the wording of Article 3(2), which now provides for the exhaustive list of persons, considered foreign investors for the purposes of Law No. 57-FZ, and a thorough description of each category of foreign investors.

Thus, Law No. 57-FZ now explicitly stipulates, in particular, that foreign investors are an entity (including Russian entities), aggregately controlled by several sovereign foreign investors (as well as, pursuant to the amendments, by non-disclosing foreign investors) according to Article 5(2.1) of Law No. 57-FZ, and a Russian citizen having a citizenship of a foreign state.

The definition of a foreign investor, established in Article 2 of Law No. 160-FZ, has also been changed but in a different context. According to the amendments, Article 2 now provides for the exemptions from the "foreign investor" category for foreign legal entities and organizations, controlled by a Russian citizen or legal entity, and for foreign citizens having Russian citizenship. To apply these exemptions, a category of a "controlled person" and the characteristics of control (which, in fact, repeat Article 5(1 and 2) of Law No. 57-FZ) have been included in Article 2 of Law No. 160-FZ.

The explanatory note to Law No. 122-FZ, published on the State Duma's website, comments that these clarifications to Law No. 160-FZ were made because Russian legal entities and citizens, which implement investment projects using companies, registered abroad, often abuse the additional preferences and rights guarantees, granted to foreign investors by Law No. 160-FZ.

The same purpose is behind the revision made to the definition of a "foreign investment," contained in Law No. 160-FZ, clarifying that it is an investment of a foreign capital "made by a foreign investor directly and independently."

3. The provision regulating the aggregate control of several foreign investors has been clarified

Law No. 122-FZ has clarified the application of the "aggregate control" criterion of several sovereign investors (and, together with the amendments described above, non-disclosing foreign investors) over a Russian strategic company.

According to the amendments, the "aggregate control" criterion does not apply if the control is exercised by a non-disclosing foreign investor – a shareholder of a company that is a public company for the purposes of Article 11 of Part 1 of the Russian Tax Code.

It means that, with respect to a public company, the aggregate control will only be established with regard to its shareholders that are sovereign investors.

Law No. 57-FZ leaves it unclear, whether this principle will apply to acquirers (foreign investors) that are public companies for the purposes of the Russian Tax Code, or it will only apply when the aggregate control over a Russian strategic company is established. This issue requires clarifications form the FAS.

4. Other amendments

The list of documents, required for the preliminary approval of a transaction, now includes the documents containing the information about the beneficial owners and beneficiaries of the applicant (in addition to the information about its controlling persons) to implement the above-mentioned requirement for a foreign investor to submit information about its beneficial owners, beneficiaries and controlling persons.

In addition, the amendments secure the right of the FAS as a competent authority to clarify the application of Law No. 57-FZ.

The amendments entered into force on 12 June 2018.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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