Foreign Business Asset Buy-Back Laws Considered By State Duma

In June, the Russian State Duma will consider a bill prohibiting the buy-back of shares to foreign companies in the second and third readings. The document has already been approved by the Russian Ministry of Finance.

The bill describes in which cases foreigners will be refused the ability to buy back their once-owned assets, with decisions able to be made by the current owner or by pertinent Russian agencies. However, bona fide foreign investors can apply for compensation.

According to the bill, if the share that the departed foreign owners want to buy exceeds 10% of the voting shares, a special permit from the government commission is required for the transaction.

This means that the owner of the shares of a once-foreign owned company can unilaterally block the exercise of an option for several reasons: if the foreign shareholder is from an unfriendly country; if the repurchase agreement specifies a price below the market rate; if two years or more have expired since the conclusion of the contract, and if the current Russian owner has fulfilled all obligations assumed – such as finances due to employees and creditors.

If acquisition is denied, a foreign business can receive compensation — its amount will be set by the government. If the former partners did not fulfill their obligations before leaving, the amount of compensation under the option will be reduced, and the amount of reduction will be calculated by the court.

According to the draft, the federal authorities will have the right to refuse to return assets to foreign entrepreneurs. For example, if the company belongs to an industry that significantly affects the socio-economic state of Russia. A critically important business related to financial stability and the country’s defense can be returned to foreign ownership with the approval of the Russian President. The law will enter into force on the day of its publication.

It is not yet known whether transitional provisions affecting previously concluded option agreements will be included in the draft, for example, if the terms of their withdrawal have been approved by a Government commission, but it can be assumed that the right to unilaterally terminate option agreements will apply to them as well.

Re-entering the Russian market may not be so easy and appears to depend on a case-by-case basis and the attitudes of the foreign investor at the time. Some, such as Netflix, exited the Russian market and terminated all Russian contracts yet did not provide financial compensation to users for any unused portions of their agreement. Mercedes-Benz has stopped providing technical support and has completely disconnected Russian dealers from its software, which is used to perform maintenance and identify mechanical problems. The list of unsatisfactory corporate exits from Russia is quite substantial.

Russian President Putin alluded to this on Monday (May 26) when commenting about a market return for McDonald’s restaurants, saying that it is necessary to remember how the company exited the market, given the U.S. company’s current option to buy back the business in Russia. “They put everyone in a difficult situation and ran away. If they want to return now, should we clear the table for them? Of course not.”