On April 12, 2022, bill No. 104796-8 on the external management in companies with foreign participation that intend to suspend or terminate their activities in Russia (hereinafter referred to as the Bill) was submitted for consideration by the State Duma.

What is at the core of the Bill?

By a court decision, in companies with foreign participation that intend to suspend or terminate their activities in Russia, an external administration may be introduced, which will receive shares (stakes) in this company in trust management or will replace its top-management completely. The goal of the external administration will be to preserve the business. Finally, as a last resort, the sale of the assets of the departed company at auction can be allowed.

The owner can at any time decide to return to Russia, sell the business or transfer the stakes (shares) to trust management; in such situation, the powers of the external administration may be prematurely terminated.

Who is affected by the Bill?

Companies that meet 2 criteria simultaneously fall under the new regulation:

1.       the share of participation of persons from unfriendly states (EU countries, USA, UK, etc.) in these companies is ≥ 25% or such companies are actually controlled by persons from unfriendly states,
2.  companies that are essential for the stability of the Russian economy and the protection of the rights of citizens, namely:

•  manufacturers of essential goods / goods with state price regulation (for example, life-saving medicines);
•  city-forming enterprises;
• subjects of natural monopolies or occupy a dominant position in the market;
•  the only suppliers and manufacturers of products without Russian counterparts;
•  companies that belong to the category of other companies, the suspension (termination) of whose activities may lead to catastrophes and loss of life, market destabilisation or a chain reaction that will lead to the termination of the activities of other companies.

In what cases is external control introduced?

An external administration may be introduced into a company if it:

• was left without management;
• may or has already suspended / terminated its activities in whole or in part: for example, significant contracts were terminated, more than 1/3 of the staff were notified of a reduction, there was a decrease in sales revenue by more than 30% in 3 months compared to last year's figures;
•  poses a threat to the economy and people by continuing to operate without the introduction of an external administration;
•  may suspend (terminate) its activities without support from the state budget.

Who decides on the introduction of external administration?

The decision to introduce an external administration is made by the Interdepartmental Commission under the Ministry of Economic Development of Russia (hereinafter referred to as the Interdepartmental Commission) at the initiative of federal executive authorities (ministries, services, agencies) or the head of the region in which the company is located. Based on the decision of the Interdepartmental Commission, the Federal Tax Service of Russia, applies to the Arbitrazh Court of the city of Moscow.

The court considers the application of the Federal Tax Service of Russia in an expedited manner with a simplified procedure for notifying foreign parties to the dispute - at the last known address in Russia, by phone or e-mail; if there is no such information, then the foreign person is considered notified if information about the court session is posted on the official website of the court. The judicial act on the introduction of external administration is executed immediately.

VEB.RF or another organisation determined by the Interdepartmental Commission may be approved as an external administration. The term of office is up to 18 months, which can be extended.

How will the external administration work?

The Bill stipulates 2 mechanisms for the work of the external administration:

1.  it receives stakes (shares) in trust management with a ban on their alienation and voting on the issues of liquidation / reorganisation of a legal entity / change in the authorised capital, while the management of the Company does not change;
2.  the powers of the head of the company are transferred to the external administration, the powers of other management bodies are suspended, the rights of owners are limited: they cannot distribute profits, demand the redemption of their share, approve major transactions and transactions with interest, and repaying debts on loans to foreign owners from unfriendly states is suspended.

The interdepartmental commission, at the request of the external administration, to which the powers of the head have been transferred, can decide on the replacement of the company's assets - the spin-off of a new company and the sale of its shares at auction. In this case, the external administration reorganises the company in the form of a spin-off and bids for the sale of shares (stakes) of the “spun-off” company, and the company itself is liquidated or bankruptcy proceedings begin against it.

How to prevent the introduction of an external administration or prematurely terminate its powers?

The court may refuse to introduce external administration if, before the court session, the head of the company or the owner of more than 50% of the stakes (shares) will take on obligations to (a) resume the activities of the legal entity, (b) sell or transfer shares in trust management to persons who are not associated with unfriendly states.

If an external administration is introduced, the owner of ≥ 50% of the stakes (shares) may apply to the Interdepartmental Commission with an application for early termination of its powers in exchange for the fulfillment of one of the above obligations. The Interdepartmental Commission prematurely terminates the powers of the external administration if the applicant provides evidence of the honesty of his intentions. If the owner does not fulfill his obligations, the external administration returns to the company.

What should foreign companies do if they risk falling under the law?

1. Monitor the adoption of the Bill and its final wording.
2. Public statements on the termination (suspension) of activities in Russia should be made taking into account the risks of the Bill.
3. Eliminate situations of mass layoffs of employees.
4. Keep in mind all the risks of terminating contracts with counterparties, even if the terms of the contract allow you to cancel it unilaterally.
5. Communicate with supervisory authorities, do not go “into the shadows”, and fulfill your obligations to employees and contractors.

Authors: Managing Partner Denis Arkhipov, Counsel Denis Golubev, Associate Denis Kazakov