‘External Management’ Impositions On Foreign Invested Businesses In Russia
Protecting Your Russian Business & Assets Under Sanctions & New State Regulations
Numerous international businesses, mainly high-profile brands, have been exiting Russia as shareholder, domestic government, and media pressures upon them have persuaded many that for now, Russia is too much of a political hot potato to handle. Others have elected to ride it out, however may also face changes to their business operations based upon their performance.
Russia is shortly to adopt laws to instigate this, by issuing regulations on a bill titled “On the external administration for the management of the organization”. These outline the conditions under which Russian management may proceed to manage important foreign-invested businesses that decided to leave the Russian market after the start of the sanctions or whose performance declines.
The bill, expected to be passed by the State Duma within days, assumes that the external management will be appointed by court decision for organizations that are of “significant importance” for the Russian economy, and include all businesses with a minimum of 25% of the shares in foreign ownership.
External Management In Russia
“External management” can be applied to almost any company whose turnover has decreased prior to the end of June 2022 and has been put into position to prevent any deliberate assets-stripping, or other running down of the overall corporate operations.
The bill introduces the possibility of imposing an external management board in almost any organization with foreign participation. The main thesis of the bill suggests that if companies do not return to their previous capacities by the end of December 2022, then external management can be applied to most of the enterprises, and especially if sales volumes fall by at least 30%.
The time frame for conducting judicial procedures to impose external management have also been significantly reduced. External managers appointed by the courts will be paid by the organization itself according to the rules established by the government.
Such management can be assigned in two ways:
- A transfer of shares of the organization to the trust management
- A transfer of powers of the head of the organization to the external management.
Terminating External Management Agreements In Russia
Such forms of management will be valid for 18 months, after which they can be extended for the same period. However, External management can be terminated ahead of schedule:
- At the request of the owners of the company if they plan to sell their shares or eliminate the circumstances due to which they were appointed with the external management.
- In the event of liquidation of the company. In the case of initiating bankruptcy, the bill proposes transfering the powers of the liquidator or bankruptcy manager to the external administration. In addition, it will have a pre-emptive right to acquire shares or interests of the organization, as well as its property.
It should also be noted that according to the decree of the President of the Russian Federation No. 81 of March 1, 2022, government decree No. 295 of March 6, 2022 was adopted, requiring permission from the Russian Government Commission For The Control of Foreign Investments in order to oversee transactions made by Russian nationals with foreigners. It is required to coordinate transactions for the alienation of securities and real estate. Transactions with shares in the LLC will also require the permission of the government commission.
Ongoing global changes as concerns sanctions and the imposition of new regulations mean that foreign investors in Russia must make decisions regarding their further work in Russia as soon as possible.
Selling the Russian Investment
This can include actively looking for Russian partners to transfer the company under external management, or to sell their business to companies from non-sanctioning countries (such as China, India, or most Asian countries) that want and are ready to enter the Russian market without spending money and time building their own corporate infrastructure.
A Later Return to Russia
For many foreign business executives of foreign invested businesses in Russia, the priority at this moment may not be the making of profit that is most important, but the issue of preserving assets and maintaining the later ability to return to the Russian market.
In this case, companies may consider transferring their assets to trust management, sell to a controlled beneficiary, or transfer corporate control to a third party with the possibility of buyback.
Companies that have decided to leave Russia completely may transfer control to their partners when a profitable offer to sell the business turns up. This step was taken by the German company “Obi GmbH”, (a network of construction stores). The company was transferred to the trust management of the Russian consulting group “Audit Group” for the subsequent search for a buyer and sale of the business.
Another example is Renault, which decided to proceed by transferring their assets in a “Purchase for 1 Ruble” with the right to return to the Russian market later for similar considerations. Obviously, such transactions must be undertaken with trusted advisors.
Foreign investors with assets or interests in Russia should make decisions based on the options currently available (reducing the share of participation in the company capital, transferring to trust management, selling the business, selling the business with the possibility of buyback) as soon as is possible.
Dezan Shira & Associates have long term relationships with Russian based partners who can act as Trustees and possess assets in Europe or elsewhere that may be negotiated and lodged as guarantees. We also have an extensive Asian network of Russia market interested businesses. Our Chairman, Chris Devonshire-Ellis will be available in Russia in June to discuss such requirements and to liaise with counsel to assist with the facilitation of such introductions and transactions. He may be reached in strictest confidence at firstname.lastname@example.org
Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at email@example.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.