The Russian State Duma has adopted in the third reading the law on corporate relations in economically significant organizations

On 20 July 2023, the State Duma of the Russian Federation adopted in the second and third readings the Law "On the Regulation of Corporate Relations in Companies That Are Economically Significant Organizations" (Draft No. 176 651−8).[1] The law has been submitted for approval to the Federation Council.

Once the draft is approved by the Federation Council and signed into law by the President, it will enter into force thirty days after its official publication.

If the law does enter into force, corporate rights exercised by foreign holding companies in respect of Russian economically significant organizations may be suspended, and the rights to shares (interests in the authorized capital) of Russian economically significant organizations may be transferred to citizens or residents of the Russian Federation.

The law is generally intended to facilitate the transfer of economically significant organizations to Russian jurisdiction, i.e., it provides an alternative to redomiciliation when there are difficulties in managing a Russian company via a foreign parent company. However, the law may potentially also affect foreign holding companies in which Russians are not majority shareholders but have an ownership interest of at least 20 percent.

I. Terminology used in the law

Economically significant organization

An economically significant organization is a Russian company that is significant for ensuring the economic sovereignty and economic security of the Russian Federation and has been included in the list of economically significant organizations adopted by the Russian Government as well as meets the conditions established by law.

First, a company must meet at least one of the following criteria:

• The total revenue of the company and other Russian legal entities belonging to the same group[2] exceeds 75,000,000,000 rubles pursuant to the financial statements as of the latest completed reporting year
• The total number of employees of the company and other Russian legal entities belonging to the same group exceeds 4,000
• The total assets of the company and other Russian legal entities belonging to the same group exceeds 150,000,000,000 rubles pursuant to the financial statements as of the latest completed reporting year
• The company and other Russian legal entities belonging to the same group contributed no less than 10,000,000,000 rubles in total taxes (levies) to the budgets of the Russian budget system in the previous calendar year

Second, a company or its subsidiary must meet at least one of the following criteria:

• As of 1 February 2022, the company or its subsidiary was a subject of critical information infrastructure[3]
• As of 1 February 2022, the company or its subsidiary was a town-forming enterprise with a corresponding impact on regional development
• The company or its subsidiary introduces technologies and / or software for socially significant services and / or provides services in the area of information technologies and communication
• The company or its subsidiary takes part in the creation or modernization of highly productive and / or highly paid jobs
• The company or its subsidiary is a systemically significant credit institution

In addition, persons who indirectly own shares (interests in the authorized capital) of an economically significant organization that belong to a foreign holding company and who are citizens or residents of the Russian Federation must have a share of over 50 percent, or over 30 percent if such persons could determine a decision of the foreign holding company’s executive body at the executive body’s most recent meeting,[4] or over 20 percent if such shareholders (partners) of a foreign holding company or economically significant organization are under blocking sanctions imposed by a foreign country or international organization.

Foreign holding company

A foreign holding company is a foreign legal entity that is related to foreign countries taking actions unfriendly to the Russian Federation, Russian legal entities and individuals and that owns at least 50 percent of the voting shares (interests in the authorized capital) of an economically significant organization.

Persons indirectly owning shares (interests in the authorized capital) of an economically significant organization

These are persons who indirectly own shares (interests in the authorized capital) of an economically significant organization that belong to a foreign holding company and who are citizens or residents of the Russian Federation that are to become direct owners of such shares (interests in the authorized capital) under the adopted law.

Such persons include:

• Shareholders (partners) of a foreign holding company
• Owners of a foreign issuer’s securities verifying the rights to shares of a foreign holding company
• Owners of shares in foreign investment funds whose assets include shares of a foreign holding company and / or a foreign issuer’s securities verifying the rights to shares of a foreign holding company
• Persons determining the actions of an owner of shares of a foreign holding company (owner of a foreign issuer’s securities verifying the rights to shares of a foreign holding company, owner of shares in foreign investment funds)
• Organizations through which persons determining the actions of a holder of foreign securities determine, directly or indirectly, the actions of an owner of shares of a foreign holding company (owner of a foreign issuer’s securities verifying the rights to shares of a foreign holding company, owner of shares in foreign investment funds) as well as shareholders (partners) of such organizations
• Shareholders (partners) of a shareholder (partner) of a foreign holding company (owner of a foreign issuer’s securities verifying the rights to shares of a foreign holding company, owner of shares in foreign investment funds), except for persons determining the actions of foreign-security holders as well as persons determining the actions of such persons
• Organizations through which persons determining the actions of a person referred to in the previous clause determine, directly or indirectly, the actions of a shareholder (partner) of the shareowner (shareholder) of a foreign holding company (owner of a foreign issuer’s securities verifying the rights to shares of a foreign holding company, owner of shares in foreign investment funds) as well as shareholders (partners) of such organizations
• Beneficiaries / founders / partners of foreign entities that do not constitute a juridical person (trust, private fund, etc.) and are referred to above
• The beneficial owner of an economically significant organization

II. Key provisions of the law

Corporate rights exercised by foreign holding companies with respect to Russian economically significant companies may be suspended in cases stipulated by law

The adopted law provides for the possible transfer of foreign holding companies' shares (interests in the authorized capital) of Russian economically significant organizations to the Russian economically significant organization itself and, subsequently, to citizens or residents of the Russian Federation who indirectly own the shares (interests in the authorized capital) of such economically significant organization in cases stipulated by law.

In this event, a foreign holding company’s corporate rights with respect to an economically significant organization are suspended if one of the following circumstances is established:

• The foreign holding company refuses to exercise the rights of a shareholder (partner) of an economically significant organization or to perform the obligations of such a shareholder (partner) in good faith or there is a threat of such refusal
• The foreign holding company takes (or fails to take) actions in order to hinder the management of an economically significant organization or its normal business operations, including the actual cessation of the management of such organization by its sole executive body or collective management bodies appointed (elected) wholly or in part at the proposal of the foreign holding company
• The foreign holding company takes (or fails to take) other actions that may lead to the cessation or suspension of operations, liquidation or insolvency (bankruptcy) of an economically significant organization

It can be considered evidence of these circumstances if, in the period after 24 February 2022, a foreign holding company or the executive bodies of an economically significant organization that were appointed (elected) wholly or in part at the proposal of a foreign company took one of the following actions:

• Publicly announced the cessation of operations of an economically significant organization or their involvement therein, or took (failed to take) actions in connection with such announcement, including failure to exercise the rights of a partner (shareholder) of an economically significant organization
• Abrogated contracts important for the operations of an economically significant organization or ceased to perform their obligations under such contracts without cause
• Sent redundancy notices to more than a third of the workforce of an economically significant organization
• Took (or failed to take) actions in order to comply with restrictive measures introduced by foreign countries and / or international organizations that take actions unfriendly to the Russian Federation and / or Russian legal entities and individuals
• Performed their obligations improperly, including those stipulated in corporate or similar contracts
• By their actions (inaction) made the operations of an economically significant organization impossible, or significantly hampered its operations or development, or restricted sales markets for the goods, work or services of an economically significant organization
• Took action indicating their intention to prematurely terminate contracts between them (their affiliates) and an economically significant organization, where such contracts are important for operations stipulated in the economically significant organization’s charter, or suspended performance of their obligations under such contracts, or stated that such actions could be taken in the future

Special procedures have been established for reviewing petitions for the suspension of foreign holding companies' corporate rights in respect of Russian economically significant organizations

Cases concerning the suspension of a foreign holding company’s corporate rights are considered by the Arbitration Court of Moscow Region on the basis of a petition that may be filed by

• The federal executive agency authorized by the Government of the Russian Federation
• Shareholders (partners) of the economically significant organization, irrespective of the number of shares they own (size of their interests in the authorized capital)
• The sole executive body or a member of the board of directors (supervisory board) of the economically significant organization
• Persons referred to in Section I who indirectly own shares (interests in the authorized capital) of the economically significant organization

The law requires a petitioner to notify the foreign holding company at its most recent known address (including an email address) that a petition has been filed for the suspension of rights. The notification is regarded as delivered five days after it is sent by the petitioner.

The court must consider a petition for the suspension of rights not earlier than five business days and not later than one month after its acceptance.

If the court, having considered a petition, rules to suspend the foreign company’s rights, the ruling is executed immediately.

The consequences of suspending foreign holding companies' corporate rights with respect to Russian economically significant organizations have been regulated

The following consequences take effect on the day a decision is made to suspend a foreign holding company’s corporate rights with respect to a Russian economically significant organization:

• The foreign holding company is not entitled to vote at the Russian economically significant organization’s general shareholders' (partners') meeting, take part in its general shareholders' (partners') meetings or demand their convocation or exercise other rights ensuing from interest in the economically significant organization
• The foreign holding company is not entitled to dispose of shares (interests in the authorized capital) of the economically significant organization: such shares (interests in the authorized capital) may not be alienated or redeemed
• Dividends (the distributed share of net profit) on shares (interests in the authorized capital) of the economically significant organization will not be distributed to the foreign holding company
• The foreign holding company does not have a priority right to acquire (purchase) shares (interests in the authorized capital) of the economically significant organization that are owned by other shareholders (partners) in the event of their alienation to third parties
• Shares (interests in the authorized capital) of the economically significant organization that are owned by the foreign holding company will be transferred to the economically significant organization
• Persons referred to in Section I who indirectly hold shares (interests in the authorized capital) of the economically significant organization acquire an obligation to become direct owners of such shares (interests in the authorized capital); at the same time, the law permits such persons to transfer the right to become direct owners to another Russian citizen or Russian legal entity

Shares (interests in the authorized capital) of an economically significant organization that were owned by a foreign holding company and later transferred to the economically significant organization will be distributed among persons entitled to become direct owners of such shares (interests in the authorized capital) proportionally to their indirect ownership shares in the economically significant organization’s authorized capital.

In this case, shares (interests in the authorized capital) of the economically significant organization that are not distributed among persons that have become direct owners of such shares (interests in the authorized capital) will not be redeemed and will be treated as equity of the economically significant organization (interests in the authorized capital that are owned by the economically significant organization).

At any time while its rights are suspended, a foreign holding company may claim compensation from the economically significant organization in the amount of the market value of the shares (interests in the authorized capital) of the economically significant organization that have not been distributed among persons that have become direct owners of such shares (interests in the authorized capital). The Government of the Russian Federation will establish procedures for determining the amount of such compensation and distributing it.

It is important to note that the restrictions placed by the law on a foreign holding company’s corporate rights with respect to a Russian economically significant organization are established exclusively for the term determined in a judicial act, but for no longer than through 31 December 2024.

An economically significant organization will be required to obtain public status

Under the provisions of the adopted law, an economically significant organization that is not a public joint-stock company will be reorganized as a public joint-stock company, or it will acquire public status according to the procedure stipulated in the law if the foreign holding company which is its shareholder (partner) is a public company and meets the following conditions:

• the foreign holding company directly or indirectly controls 100 percent of votes in the authorized capital of an economically significant organization which is a limited liability company
• the shares of the economically significant organization that are owned by the foreign holding company give it a majority of votes required for the general shareholders' meeting to adopt a resolution amending the charter to stipulate the joint-stock company’s public status