THE BUYBACK OPTIONS OF FOREIGN INVESTORS – THE POINT OF NO RETURN?

Amendments to Federal Law No. 160-FZ dated 9 July 1999 “On Foreign Investments in the Russian Federation" (hereinafter the "Foreign Investment Law") were adopted.

The amendments introduce a new Article 20.1 which stipulates the mechanism for terminating the rights of a foreign investor to buy back assets that it had previously owned in Russia.

The parties entitled to file claims for the termination of buyback rights and the assets affected

When applying the mechanism for terminating the buyback right, foreign investors are understood to mean persons from unfriendly states (legal entities, individuals, foreign organisations that are not legal entities), as well as any legal entities and organisations that are not legal entities controlled by persons from unfriendly states.

A claim for the termination of the buyback right (hereinafter the claim) of a foreign investor may be filed by the following parties (hereinafter the acquirers):

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Russian citizens

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Russian legal entities and

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Foreign legal entities that are controlled by a Russian citizen and whose personal law is the law of a foreign state that is not included among unfriendly states.

The buyback right termination option applies to shares, participation interests in the charter capitals of limited liability companies and other business assets. A claim may only be filed in respect of buyback options that had been concluded after 22 February 2022.

The Commercial Court of Moscow Region is the competent court that will hear any such claim. The existence of an arbitration clause applicable to the resolution of disputes between contracting parties is not relevant here as the draft law stipulates to all intents and purposes the exclusive competence of the Commercial Court of Moscow Region.

A claim may be filed by:

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The acquirer after the receipt of a positive opinion (the so-called position) of the relevant federal ministry and a positive opinion of the Government Commission for Control of Foreign Investments in the Russian Federation (hereinafter the Government Commission),

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The relevant federal ministry after the receipt of the respective authorisation of the Government Commission.

The procedure for issuing opinions must be determined by the Government of the Russian Federation. We assume that this will be done through an addendum to the existing Resolution No. 295 of the Government of the Russian Federation dated 6 March 2022, which regulates at present the issue of permits by the Government Commission.

Criteria for satisfying a claim

The following are the criteria for satisfying a claim:

1.

After 22 February 2022 the foreign investor committed any of the following actions (hereinafter unfriendly actions):

a)

Supported publicly the commission of unfriendly actions against the Russian Federation, Russian citizens or Russian legal entities, advocated the commission of such actions, or

committed actions aimed at discrediting the use of the Armed Forces of the Russian Federation and/or the exercise by the state authorities of the Russian Federation of their functions to protect the interests of the Russian Federation and its citizens, maintain international peace and security, or

disseminated, on the pretext of truthful communication, patently false information on the use of the Armed Forces of the Russian Federation and/or the exercise by the state authorities of the Russian Federation of their functions for the indicated purposes;

b)

Engaged in actions associated with the financing of terrorism, extremism and/or the financing of the proliferation of weapons of mass destruction;

c)

Issued a public statement on the termination and/or suspension of operations in the Russian Federation and/or committed actions (failed to take any action) associated with such a declaration, or did not duly perform their duties, inter alia, arising from corporate and/or other similar contracts, or

committed actions aimed at restricting the conclusion and performance of and/or at cancelling contracts of material significance for the operations performed by the foreign investment asset, facilitated the commission of such actions by another person, inter alia, regarding prohibition on the use in the Russian Federation of intellectual property and/or means of identification, the prohibition, termination or suspension of or imposition of material restrictions on the production (delivery) of goods, the provision of services and/or the performance of work in the Russian Federation.

The actions indicated in this paragraph are deemed to have been committed if they are not attributable to evident economic reasons (grounds) and/or there are grounds for assuming that they are related to compliance by a foreign investor with restrictive measures introduced by foreign states and/or international organizations which are committing unfriendly actions against the Russian Federation, Russian citizens and Russian legal entities;

2.

The buyback option implies the purchase (buyback) of the foreign investment asset by the foreign investor at a price that deviates from the market price of the foreign investment asset by 25% and more, and/or the acquirer made additional investments in the foreign investment asset and/or in other assets, and also took other actions where failure to do so might have led to the suspension of, a material decrease in or termination of the operations of the foreign investment asset in the Russian Federation.

Compensation paid to the foreign investor

A foreign investor is entitled, not later than one year after the date of the entry into force of the court decision on satisfying the claim, to file a demand with the purchaser for the payment of compensation. In case of a dispute between the foreign investor and the acquirer on the amount of compensation, the court is entitled:

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To reduce the amount of compensation to the foreign investor, taking into account the nature of its unfriendly actions, the size of the losses associated with such actions, as well as the volume of the investments made by the acquirer in the foreign investment asset and other related business assets after the alienation by the foreign investor of the foreign investment asset;

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To deny the payment of compensation of the foreign investor in case of the commission by the foreign investor or its officials, who are or had been the sole executive officers, of actions associated with the financing of terrorism, extremism and/or the financing of the proliferation of weapons of mass destruction, if this had served as grounds for holding the indicated persons administratively or criminally liable.

Consequences

At the moment it is hard to say how the provision under consideration here will be applied in practice. It looks as if a key role here will be played by the Government Commission. It is unclear how compensation will be calculated and how it will be paid – abroad or to a type C account. The issue as to how extensively the presumption of the law that sanctions compliance constitutes an unfriendly action remains open at present, for sanctions are the law in the countries that approved them, accordingly compliance is a priori binding on persons from such countries.

We will keep you informed of any developments regarding this topic.