1. Recent Amendments to Monetary Threshold for Review
In February 2022, the Federal Assembly of the RF, that is, the Parliament, raised the minimum threshold for merger review from 400 million rubles to 800 million rubles. Thus, companies are generally exempted from antimonopoly review if their total assets are less than 800 million rubles (approximately $10.34 million). Conversely, Article 28 of the Competition Law regarding acquisition of shares, assets, and controlling rights over business entities provides that such transactions are subject to merger control review if two criteria are met:
(1) The combined worldwide value of assets of the acquirer (and its group) and the target (and its group), according to its latest balance sheet (or the consolidated balance sheet of its group), exceeds seven billion rubles (approximately $90.5 million), or their combined worldwide revenue for the previous calendar year exceeds ten billion rubles (approximately $129.3 million); and
(2) The worldwide value of assets of the target group, according to the latest account, exceeds 800 million rubles (approximately $10.34 million).
According to 2022 amendments to the Competition Law, mergers and acquisitions may be executed without prior approval:
(1) For transactions involving financial institutions, which fall under Article 29 of the Competition Law, regardless of the entity’s asset value; and/or
(2) For transactions involving any other type of entity, which fall under Article 28 of the Competition Law, only if the worldwide value of the target group’s assets is more than 800 million rubles but less than two billion rubles.
If an acquirer chooses not to seek prior FAS approval under the above circumstances, it must submit a post-closing notification to the FAS within thirty days. While this amendment applied only to the year 2022, further proposed amendments would extend the rule’s applicability until the end of 2023.
2. Latest Trends in Merger Control Review
The original waiting period of thirty calendar days for FAS review of M&A transactions is, in reality, now more frequently around ninety days, although smaller or less complex deals in non-strategic industries may take only thirty days.
The Fifth Antimonopoly Package bill was passed by the State Duma in late 2022 and, if enacted, will provide several grounds for lengthening the waiting period, such as seeking an expert opinion either at the FAS’s discretion or at the request of the acquiring party. In addition, the Russian Government may extend the waiting period at its own discretion if the subject transaction involves and/or has an impact on a foreign market.
A current trend is the FAS’s increasing attention to e-commerce and online content, including online platforms, high-tech businesses, heavy industry, and socially important industries. In 2021 and 2022, the FAS cleared a number of such international transactions, including Groupe BRIAND/Lindab Group, ABG Reebok LLC/Adidas, Bouygues/ENGIE, and Sibur/TAIF, as well as several sales by global companies of their Russian businesses, including the sale by Shell Oil of 99.99% of the shares in LLC “Shell Neft” to the Russian oil giant Lukoil, PepsiCo’s sale of Wimm-Bill-Dann Drinks to Multipro, the sale of the McDonald’s restaurant business in Russia to Club Hotel, and the sale of OBI to GISK MAX.
B. Foreign Direct Investment Review
The FAS is also the authorized agency for foreign direct investment (FDI) control, handling the associated documentation and providing a preliminary analysis of M&A deals involving FDI. If a transaction is subject to both a merger control filing and an FDI filing, then the FDI clearance must be obtained first. Thus, M&A parties must assess preliminarily whether FDI review is necessary for their transaction.
As described below, direct or indirect acquisition by a foreign investor of a Russian entity may require approval of the Government Commission on Monitoring Foreign Investment, which consists of top government officials and is chaired by the Russian Prime Minister.
In 2022, the FAS continued tightening FDI deal review and enforcement, as summarized below.
1. Strategic Investments Law
Russia’s Strategic Investments Law requires a pre-closing clearance by the Government Commission in order for a foreign investor to acquire control over a “strategic” Russian company. There are fifty-one non-exhaustive categories of strategic activities listed in the Strategic Investments Law (as amended), including, inter alia, manufacturing of aerospace technology, production of weapons and military equipment, nuclear activity, use of infectious agents, natural resources, and coding and producing cryptographic equipment.
The Russian Government is continuously adding more “strategic” activities to the list. For example, in the Schlumberger/EDC transaction, the FAS ruled that a Government Commission review was necessary because the FAS and the Russian Ministry of Natural Resources and Environment had concluded that drilling services are an integral part of minerals exploration and may be significant to ensuring state security, even though the services are not subject to licensing.
2. Foreign Investments Regime
Under the Foreign Investment Law, foreign governments and international organizations, or companies under the control of either, must file for review of all direct or indirect acquisitions of more than twenty-five percent ownership in any Russian company or acquisitions resulting in the right to block the decisions of a Russian company’s managing body, according to procedures set forth in the Strategic Investments Law.
Further, the Foreign Investment Law allows the Prime Minister to submit a transaction to the Government Commission for consideration if he believes it could pose a threat to national defense and/or state security. Usually, however, the procedure is commenced by the FAS, which seeks input from other state agencies, such as the Federal Security Service (FSB), the Ministry of Defense, and industrial agencies, while reviewing a merger control deal with a foreign element. Despite the statutory waiting period of three months, with the possibility of an additional three-month extension, a foreign buyer in this situation should, in practice, anticipate a one-year period for regulatory clearance in Russia.
The FAS is increasingly commencing high-profile cases challenging M&A transactions as violations of the Strategic Investments Law:
(1) In FAS Russia v. Otkritie Holding, the 2017 sale by LUKOIL oil company of AGD Diamonds (a “strategic” company) to the foreign company Otkritie Holding was challenged by the FAS on the grounds that beneficiaries of Otkritie Holding did not provide information about the foreign citizenship of investors gaining control of AGD Diamonds.
(2) In FAS Russia v. Arconic Corporation (formerly ALCOA, a leading American aluminium company), the arbitrazh (business) court imposed unprecedented interim measures preventing shareholders of Arconic’s Russian subsidiary, which was deemed a Russian strategic company, from making management and business decisions, including the possible sale of the company and the receipt of dividends. The court agreed with the FAS’s argument that, in 2019, Elliott Management had obtained control over Arconic without approval from the Government Commission.
(3) In FAS Russia v. Slontecco Investments and other cases, the arbitrazh court ordered the government seizure of shares in the Russian company that were acquired by foreign investors in violation of the Strategic Investments Law, despite the absence of such a remedy in the Strategic Investments Law for a breach.
Despite this extra scrutiny of FDI, the Government Commission approved foreign investment of approximately $11.1 billion in the development of Russian strategic entities in 2021.
C. Counter-Sanctions Review
Since March 2022, President Vladimir Putin has mandated additional restrictions within the rapidly developing field of countersanctions, which apply to transactions involving foreign persons or entities (so-called “unfriendly persons”) that are connected to foreign states perceived as being unfriendly or adverse to Russian companies. Mergers and acquisitions involving “unfriendly persons” usually are reviewed by the Sub-Commission of the Government Commission using the simpler and quicker procedure of applying regulations made by presidential decree, rather than undertaking the full statutory reviews usually performed under the Strategic Investments Law and Foreign Investment Law. Briefly, the main counter-sanctions regulations are:
(1) Presidential Decree No. 81 dated March 1, 2022, which provides a special procedure for transactions between Russian residents and unfriendly persons that result in the transfer of ownership of Russian securities and/or real estate. Subsequent decisions of the Sub-Commission confirm that Decree No. 81 also applies to securities and real estate of non-Russian entities.
(2) Presidential Decree No. 520, which, until December 31, 2023, restricts the disposal of shares (or membership interests) in companies operating in specific areas, including the strategic energy/mining and banking sectors (identified by name in later presidential orders). According to Decree No. 520, if such a company’s ownership shares or interests are to be owned by unfriendly persons, then the transaction requires a special decision of the President of Russia.
(3) Presidential Decree No. 618, which restricts transactions made by unfriendly persons that directly or indirectly involve membership interests in Russian limited liability companies.
(4) Presidential Decree No. 737, which, inter alia, requires transactions made by unfriendly persons that directly or indirectly involve shares of a Russian joint-stock company to obtain the Sub-Commission’s approval.
A filing to review a transaction involving an unfriendly person should be submitted to the Ministry of Finance pursuant to Resolution No. 295 with the required documents, including the applicant’s incorporation documents and information on its assets and beneficiaries. Timelines for consideration are not mandated, but, in practice, the decisions usually take several months.
If a transaction requires both merger and counter-sanction approvals, the FAS, at its discretion, may indicate in its decision that the transaction is also subject to review by the Sub-Commission, but this is not mandatory. In 2022, the Sub-Commission issued many broadly applicable decisions providing exceptions to the presidential decrees that are usually applied.
