Wait for years or take it with bills

The White House is trying to restore the controllability of Russian companies under the control of foreign holdings, lost due to sanctions restrictions. The government has determined the rules for paying them compensation when their corporate rights in Russian economically significant organizations (ESO) are frozen. There is no list of ESOs yet, but it can be wide – it could include enterprises in “critical” industries and high social risks if they are shut down. Foreign holdings will lose the right to vote at meetings of EZO shareholders, receive their dividends, and dispose of shares and shares. In return, they will be offered compensation for the value of the assets, although the money may be frozen in Type C accounts, or await the return of rights. For beneficiaries in the Russian Federation, this will simplify redomiciliation, essentially reducing it to a forced purchase of assets without serious international legal risks.

The government has approved rules for determining the amount and payment of compensation to foreign holding companies (IHCs) during the period of suspension of their corporate rights in Russian economically significant organizations. The compensation mechanism was required in accordance with 470-FZ of August 4, 2023 – the law is designed to restore controllability of Russian companies controlled by foreign holdings by limiting the corporate rights of their foreign participants.

IHC in the law are foreign companies associated with an unfriendly jurisdiction, with more than 50% of the shares (shares) of the EZO. Economically significant organizations are business entities important for ensuring the economic sovereignty and security of the Russian Federation. The list of EZOs is determined by the government; it is not ready yet. The criteria for classification as an EZO are as follows (it is enough to meet one): annual revenue – more than 75 billion rubles, value of assets – more than 150 billion rubles, staff – more than 4 thousand people, the company’s work in critical industries, as well as the share of direct or indirect participation of Russian beneficiaries in the IHC (as a general rule – more than 50%).

According to the Vegas Lex law firm, there are more than 100 EZOs with foreign participation in the Russian Federation. According to Dmitry Kletochkin, a partner at the law firm Rustam Kurmaev and Partners, the list of both EZOs and their foreign owners may be unlimited. “EZO will be determined on the fly, taking into account not only the actual integration into critical industries, but also potential social risks (plant shutdown, staff reductions, and so on),” he says.

The inclusion of a company in the EZO list is not subject to appeal. At the same time, Russian owners of foreign companies can, through the court, suspend the corporate rights of foreign holdings in relation to EZO (this is the right to vote at shareholder meetings, receive dividends, dispose of shares and shares). Indirect Russian beneficiaries are required to take direct ownership of shares and shares, and undistributed assets are accounted for as own shares (shares in the authorized capital) of the EZO. This process is called “exemption of a restrictive nature” – the grounds for it may be the refusal and evasion of the IHC from conscientiously fulfilling the duties of a shareholder, as well as any actions or inactions that could lead to the suspension, termination of activities, or bankruptcy of the EZO.

By law, IHC has the right to demand that a Russian organization pay compensation in the amount of the market value of undistributed assets. According to government decree No. 1835, the decision on compensation will be made by the economically significant organization itself, and the amount of payment will be calculated based on the assessment of assets on the date of entry into force of the court decision to suspend the corporate rights of IHC. If the holding company does not apply for compensation, after the unfreezing of corporate rights, shares in the capital of the Russian structure will be returned to it. Currently, the period for freezing IHC rights is until the end of 2024, but the restrictions may be extended.

According to lawyers, the changes are an attempt to return controllability to Russian assets and at the same time protect the Russian Federation from accusations of their seizure. “The purpose of the law is to ensure a balance between the property rights of foreign persons from an unfriendly jurisdiction and the normal functioning of the EZO,” says Artem Kasumyan, a lawyer at the Delcredere Bar Association. The compensation mechanism, he adds, protects the Russian Federation from international legal risks: for example, investment treaties of the Russian Federation provide guarantees against expropriation (the concept is widely interpreted in international law, and the suspension of corporate rights can be recognized by arbitration as its type). According to Artem Kasumyan, by paying compensation, the Russian Federation seeks to protect itself from the risks of being held accountable. “In fact, now no one can say that he was unjustifiably and unfairly deprived of his property rights – a person has the right to take the market value in money. This is fully consistent with the long-standing nationalization mechanism in many countries, that is, forced purchase,” says Dmitry Kletochkin.

In practice, the mechanism may be controversial. Earlier, BCS World of Investments analysts noted that the foreign “registration” of parent companies has still been one of the main problems for the payment of dividends, but the changes simplify the process of redomiciliation in the Russian Federation. Among the largest companies registered abroad and for which changes are important, analysts named Rusagro, CIAN, X5 Group, Fix Price, HeadHunter, Ozon, VK. The head of the Vegas Lex directorate, Kirill Nikitin, believes that few companies will take advantage of the opportunity, and the majority will continue to take a wait-and-see approach. “The procedure for calculating compensation for the value of rights will raise many questions. The method of determining price by independent assessment of market value is in practice criticized by experts in relation to business valuation,” he notes. The resolution also stipulates that compensation is paid in accordance with the counter-sanction legislation of the Russian Federation – this may mean that the money will go to a type C account, so that the owner will be able to dispose of it subject to restrictions. “Everyone decides for himself what is better – to have corporate rights, which are unknown when they will be unfrozen, or money in a type C account, which can be used with great restrictions,” states Dmitry Kletochkin.

Diana Galieva