Transactions with LLC interests are now on the Government Commission’s radar

Edict No. 618, published on 8 September, eliminates the last major unregulated category of transactions involving parties from "unfriendly" countries: transactions with LLC interests. Such transactions now require approval from the Government Commission for Control over Foreign Investments.

The edict was formulated in general terms, allowing it to be variously construed. First, the edict applies to transactions involving (1) directly or indirectly (2) the establishment, modification or termination of rights to own, use or dispose of interests in an LLC’s authorized capital or (3) other rights determining an LLC’s conditions of management, or (4) an LLC’s conditions of business.
Second, the edict applies to transactions between (1) residents and unfriendly parties, (2) one unfriendly party and another, and (3) unfriendly parties and other foreign entities. So all possible combinations of counterparties involving an unfriendly party are now controlled.
The edict provides no exemptions for an interest of small size or value.

Direct transactions with LLC interests

Since transactions with LLC interests must be notarized, any notarial action with an unfriendly party’s interest — purchase/sale (including a preliminary agreement), option, pledge, corporate agreement, etc. — will obviously require the approval of the Government Commission. Approval will also be needed to execute historical transactions, i.e. to execute previously concluded options and contracts with a condition precedent and to foreclose on pledged interests.

Approval will likely be required for all corporate actions involving the alienation of interests by unfriendly parties when an LLC’s authorized capital is increased, when an interest is bought back by the company and in the case of reorganization. On a conservative reading, Edict No. 618 could be understood — pending official clarification — as requiring permission for the termination of rights to an interest in the event of an LLC’s liquidation.


Transactions determining the conditions of an LLC’s business

Based on a literal reading of Edict No. 618, approval may be required for transactions that don’t directly involve an interest: an agreement between an LLC owned by an unfriendly member and a management company, a joint operating agreement and even a loan/credit agreement with broad creditor’s rights. It all depends on whether the provisions of such an agreement can be construed as allowing the conditions of the LLC’s business to be determined.

Indirect transactions involving LLCs

Edict No. 618 mentions transactions that indirectly entail changes in rights pertaining to an LLC, and formal permission may be needed even for transactions that don’t involve an LLC directly. For example, the sale of a foreign holding company that has an interest in a Russian LLC indirectly entails a change in the rights pertaining to such LLC. The edict thus establishes something similar to antitrust regulation, where approval is required even for a transaction carried out entirely outside the country.

From the standpoint of the Russian Civil Code, a transaction that violates a law or regulation is invalid (voidable or void, depending on the situation), but it remains unclear in practice how to monitor and contest transactions between nonresidents that indirectly entail changes in the rights to interests in Russian LLCs.


Transactions with interests in foreign LLCs

In our opinion, Edict No. 618 can be interpreted even more broadly: the edict makes no mention of the lex societatis of LLCs on which restrictions are imposed. In other words, it can be understood as restricting not only transactions with interests in Russian LLCs, but also with interests in foreign LLCs. Such an interpretation would seem excessive (again in terms of how transactions are controlled), but the practical implementation of previous edicts introducing various restrictions has shown that the conservative view usually proves correct. If the government has decided to restrict unfriendly parties' transactions with any securities, including foreign, why shouldn’t it follow suit with LLC interests? In our opinion, Russian residents in particular should take this interpretation seriously until official clarifications are issued to the contrary.

For now, we can conclude that Edict No. 618 definitely does not apply to transactions with unfriendly parties involving credit institutions and non-credit financial institutions or to transactions carried out under Edicts No. 416 and No. 520 (the Sakhalin project and strategic companies prohibited from carrying out such transactions through the end of 2022).


Other new provisions

Edict No. 618 clarifies that its rules do not apply to unfriendly members of an LLC that are under the control of Russian entities (provided that their membership is disclosed to the Russian tax authorities) or to persons from friendly countries. The edict extends this exception (on unfriendly members controlled by Russian entities) to include the distribution of an LLC’s profit, a much-discussed gap in Edict No. 254.

In addition to the new rules for transactions with LLCs, Edict No. 618 (1) allows Russian credit institutions under foreign sanctions to meet their foreign-currency obligations in rubles if their clients are resident legal entities, and (2) allows an LLC with members that are mineral resource users listed as strategic enterprises not reject providing its unfriendly members information on business of such LLC.