Update: Delisting of Russian Issuers’ Depositary Receipts – The End of an Era?

A new federal law in Russia prohibits Russian issuers from having their shares traded outside Russia via depositary receipts and requires issuers with existing programs to take delisting measures unless they receive a governmental approval to keep the program.

For many years, certain major Russian issuers’ shares have been traded through American depositary receipts (ADR) or global depositary receipts (GDR) at foreign exchanges. ADR and GDR programs allowed these issuers to enhance the liquidity of their equity and raise capital, in addition to other benefits.

On April 16, 2022, Russia adopted Federal Law No. 114-FZ, "On Amendments to the Federal Law ‘On Joint Stock Companies’ and Certain Legislative Acts of the Russian Federation." Federal Law No. 114-FZ in effect prohibits Russian issuers from having their shares traded outside Russia via depositary receipts (DRs) and requires issuers with existing programs to take measures to delist, i.e., to terminate their DR programs. DR holders are entitled to obtain the shares underlying their DRs. Companies already listed abroad will have to delist unless they obtain an approval of the Government Commission on Control over Foreign Investments (FDI Commission).

The relevant provisions of Federal Law No. 114-FZ will enter into force on April 27, 2022 (the Effective Date).

WHAT IT MEANS FOR RUSSIAN ISSUERS

Federal Law No. 39-FZ, “On the Securities Market,” of April 22, 1996, governs the so-called “circulation of Russian issuer securities outside Russia” organized by way of placement and circulation of foreign issuer securities that certify rights to the underlying Russian issuer securities. These are rules that apply to establishing DR programs on Russian issuer shares (underlying shares). Federal Law No. 114-FZ amends Federal Law No. 39-FZ to state that a federal law may be adopted to cancel the circulation of Russian issuer securities outside Russia, and contains the rules for cancelling.

Under Federal Law No. 114-FZ, Russian issuers must take necessary and sufficient measures to terminate their DR program deposit agreements (Deposit Agreements) within five business days from the Effective Date (i.e., by May 5, 2022, given the Russian public holidays in May); and provide the Central Bank of the Russian Federation (CBR) with evidence of such measures having been taken.

Notably, Federal Law No. 114-FZ does not require DRs to be immediately cancelled and replaced with the underlying shares or require immediately closing all depositary program depo accounts (a special account opened with a Russian custodian where the Russian issuer shares underlying a DR program are recorded). Instead, it provides that a depositary program depo account is to be closed after all underlying shares are transferred out of it.

In order to speed up the delisting process, Federal Law No. 114-FZ establishes the following:

• All decisions relating to the termination of Deposit Agreements may be taken by the executive body of a Russian issuer (e.g., no board or shareholder meeting corporate approvals are required).
• A DR holder receiving the underlying shares does not need to comply with the Russian law corporate requirements relating to mandatory offers (as would otherwise be generally required if, as a result, its shareholding would exceed 30%).
• If the Russian issuer is a bank, a DR holder receiving the underlying shares is exempt from the need to obtain (1) prior approval of the CBR (as would otherwise be generally required if, as a result, the DR holder’s shareholding would exceed 10%); and (2) prior approval of the Federal Antimonopoly Service, Russia’s competition authority (as would otherwise be generally required under the Russian competition laws if, as a result, its shareholding would exceed 25%, 50%, or 75%). Notably, these exemptions do not extend to other issuers’ DR programs.

Applying for Approval to Continue DR Program

Any Russian issuer may apply for an approval of the FDI Commission to continue its DR program by a procedure adopted by the Russian government on April 16, 2022. To receive this approval, the issuer should apply through the Ministry of Finance within five business days from the Effective Date (i.e., by May 5, 2022). The FDI Commission should consider the application within five business days from May 6, 2022 (i.e., by May 16, 2022, given the Russian public holidays in May).

On April 19, the CBR issued its clarification reinforcing the April 27 and May 5 deadlines, as well as clarifying that if the FDI Commission refuses to grant an approval, the issuer must commence the Deposit Agreement termination within five business days.

Federal Law No. 114-FZ establishes only the general legal framework for the delisting process; specific DR program Deposit Agreements contain the rules on termination of DR programs, cancellation of DRs, and delivery of underlying shares. Russian issuers should consider the timeframes and other provisions relating to early termination of Deposit Agreements to minimize risks of contractual liability.

WHAT IT MEANS FOR INVESTORS

Federal Law No. 114-FZ mandates that DR holders entitled to receive the underlying shares are determined as of the Effective Date. This means that in effect, no transactions with DRs should be made after the Effective Date since, as a matter of Russian law, a holder of DRs acquired after the Effective Date is not entitled to receive the underlying shares.

Existing Deposit Agreements may contain conflicting provisions. Standard early termination provisions of a Deposit Agreement would usually provide that a depositary bank must give a notice of termination to the outstanding DR holders setting a date for termination, which is usually at least 90 days after the date of that notice. In this sense, investors should carefully consider the early termination and notice provisions and contact the depositary bank to clarify the process to obtain underlying shares.

From the Effective Date, DR holders cannot exercise any voting rights or receive dividends with respect to the underlying shares. However, unpaid dividends may be claimed by a DR holder after it surrenders the DRs and receives the underlying shares.

OTHER IMPORTANT CONSIDERATIONS

The required cancellation of DR programs creates a set of complex cross-border legal issues.

For example, legal, compliance, and sanctions regimes applicable to depositary banks, custodians, and other institutions involved in a DR program are important. These rules would affect the termination of Deposit Agreements and the delivery of underlying shares. A depositary bank may also charge fees for delivering shares.

Finally, investors should carefully consider whether they can hold Russian shares directly due to restrictions in their investment declarations or applicable legal and sanctions regimes.

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CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Task Force
Giovanna M. Cinelli
Alexey Chertov
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Christina Renner
Peter Sharp
Vasilisa Strizh
Carl A. Valenstein
Dr. Axel Spies
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Christian Kozlowski
Eli Rymland-Kelly
Valentina Semenikhina
Polina Sizikova

Trainee associate Maxim Sidorenko contributed to this LawFlash.