Update: Russia Introduces Restrictions on Investors’ Ability to Restructure Holdings in or Exit Russian LLCs

Until recently, investors were not generally restricted in selling their (participatory) equity interests in Russian limited liability companies (LLCs). However, Russian President Vladimir Putin issued Decree No. 618, requiring that a prior clearance by the Russian government commission on control over foreign investments is required for direct or indirect transactions with participatory interests in, or resulting in obtaining management rights over, LLCs, if persons connected with the so-called "unfriendly states" or persons controlled by such are involved.

The new decree affects a broader range of transactions as compared to similar restrictions affecting transactions with shares in Russian stock companies.

Decree 618 is in effect as of September 8, 2022. Furthermore, supporting legislation on the approval process is expected to be adopted by September 18, 2022.

RESTRICTED TRANSACTIONS

Decree 618 requires that prior approval by the government commission on control over foreign investments (the government commission) is required for any transaction (operation) that results directly or indirectly in creating, modifying, or terminating (a) rights to own, use, or divest of any participatory interest of any LLC (other than Russian credit institutions and non-credit financial institutions); (b) other rights allowing the determination of the terms and conditions of management of any LLC; or (c) other rights allowing the determination of the terms and conditions of entrepreneurial activity of any LLC. There is no carveout for minority investments and non-material transactions; and any transactions as listed are subject to the prior approval.

The broad language of Decree 618 suggests that restricted transactions include not only sale and purchase agreements, but under certain circumstances may also include pledge or option agreements, management agreements, and may also apply to a shareholder agreement or even a charter (articles of association) of an LLC if it provides a restricted person control rights or with more rights as compared to what it has under law.

Further, Decree 618 appears to cover indirect transactions, including transactions entered into and completed outside Russia (for example, sale of shares in a non-Russian company holding the participatory interest in a Russian LLC).

Decree 618 appears to affect the wider range of transactions as compared with the earlier introduced restrictions for sale and purchase transactions with securities such as shares in a Russian stock company. Refer to our prior LawFlashes, including our LawFlash titled, “Russia Adopts Countermeasures to Support Its Financial Markets” for further information.

UNFRIENDLY PERSONS

A restricted transaction requires the government commission’s prior approval if it is a transaction between the following persons (whether natural or legal entities):

• Russian residents and the so-called unfriendly state persons (which are non-Russian persons connected with the so-called unfriendly states or by persons who are under control of such non-Russian persons irrespective of their domicile and place of business);
• unfriendly state persons; or
• unfriendly state persons and non-Russian persons who are not unfriendly state persons.

However, the following persons are not considered unfriendly state persons for the purposes of Decree 618:

• an unfriendly state person is controlled (ultimately beneficially owned) by the Russian state or a Russian person (whether natural or legal entity) (in the latter case provided that the ultimate beneficial ownership was properly disclosed to the Russian tax authorities); and
• a person under control of a state other than any unfriendly state (the friendly state) or any person from such friendly state, provided the requisite control was established before March 1, 2022.

GOVERNMENT COMMISSION APPROVAL

The government commission has broad discretion to decide whether to issue approval, issue approval with conditions, or deny approval.

TRANSACTIONS SIGNED BUT NOT COMPLETED BEFORE SEPTEMBER 8, 2022

Decree 618 does not grandfather transactions which were signed but not completed by the parties before September 8, 2022. This means that to complete such transactions, the parties would need to seek the government commission approval. Under certain circumstances, the approval might be needed to have the already signed agreements amended.

EXCLUSIONS

Decree 618 does not apply to certain transactions, as follows:

• Transactions covered by Presidential Decree No. 416 of June 30, 2022: This decree is on the forced re-domiciliation of Sakhalin Energy, a Bermuda company, the operator of Sakhalin-2 project, as a Russian LLC, and the special procedures concerning allocation of participation interests in this LLC to Sakhalin Energy’s shareholders.
• Transactions banned under Presidential Decree No. 520, of August 5, 2022: The decree bans certain transactions in certain industries but the Russian president can permit any otherwise banned transaction; and
• Any transaction (operation) which results directly or indirectly in creating, modifying or terminating rights to own, use, or divest of any participatory interest of a Russian credit institution and non-credit financial institution (some of these transactions might be caught by earlier introduced restrictions, including under Decree No. 520).

ENFORCEMENT

Decree 618 is intentionally broad. The Russian Ministry of Finance has a power to provide official interpretation on any aspect of Decree 618.

Transfers of participatory interests in a Russian LLC, as well as any arrangements aimed at such transfer (e.g., pledges or options), require notarization by a Russian notary public. It is clear that Russian notaries will not be notarizing transactions relating to Russian LLCs without the governmental commission approval (or the Ministry of Finance or the government commission’s confirmation that no approval is needed) even in situations where arguably no approval under Decree 618 is needed and the parties fail to provide sufficient evidence of compliance with Decree 618.

It remains to be seen how Decree 618 official interpretation and enforcement practice will develop, including with respect to indirect transactions entered and completed outside Russia or where no direct or indirect transfer of legal title to an LLC participatory interest occurs.

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