The State Duma is currently considering a draft bill* that would allow foreign companies designated as “unfriendly” to be denied the right to buy back Russian assets.

Under the draft bill, current shareholders in Russian companies would be allowed to simply refuse to follow through on any agreement to sell assets back to the foreign company.

This relates to “exit” deals where foreign companies sold their Russian assets but kept the right to buy them back later — usually through option contracts or similar setups.

Conditions and procedure for refusal

At this point, it looks like the one-sided cancellation rule will apply to options that meet the following conditions:

• the buyback was set up at a price well below market value and on fixed terms agreed in advance;
• the foreign seller was given the option to buy back the assets for three years or longer;
• it’s been more than two years since the option (or similar) agreement was signed.

In addition, the Russian company has to properly meet its obligations to both employees and creditors.

If these conditions are met, the current shareholder (the buyer in the original deal) can simply choose not to go through with the option. That means the foreign seller would lose the right to buy back the Russian asset.

Prohibition

The draft bill also gives the relevant government body (e.g. the appropriate ministry) the right to block foreign investors from buying back Russian assets on its own initiative. This ban can be applied — under the same conditions listed above — if the Russian company is deemed important for the economic or social development of its sector or region.

The draft bill doesn’t go into detail about how the one-sided refusal, or the ban would actually work in practice. If the bill gets passed, it’s likely that these details will be clarified later in subsequent regulations.

Compensation

The draft bill also lets the foreign investor have up to a year after the refusal to ask for compensation from the shareholder because the option was ended.

It remains unclear how this compensation would be worked out or enforced. However, the draft bill does say compensation could be reduced or even denied if the foreign investors didn’t act in good faith when they sold the shares — like if they got in the way of the Russian company’s management or ignored their shareholder responsibilities.

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Please note that this remains a draft bill currently under consideration by the State Duma. We’re keeping a close eye on how it develops and will provide further analysis should the proposed regulations be enacted.

* In Russian

Authors:

Maxim Boulba, Partner

Elena Andrianova, Senior Associate