Legal Aspects of IPOs in Russia in 2008

UnknownAlexander Klochkov, Partner / DLA Piper, Moscow
A dark cloud hangs over the international debt and equity markets from the credit crunch and recent political developments, but many Russian companies are still considering an IPO as one of their strategic goals.

Due to investors becoming more selective, it is important to structure the business and the issuer's internal procedures based on best practices. An IPO in Russia is usually preceded by meticulous and considerable legal restructuring, legal separation of major shareholders' transactions from the company's business, implementation of appropriate corporate governance principles and bringing financial statements into compliance with international standards. For a company to be successful in the public market it is very important to discover and mitigate potential legal risks and to have a well-thought-out strategy that can be legally implemented. At the preparation stage, legal aspects are one of the decisive factors determining the jurisdiction and stock exchange for the listing.

Moreover, in May 2008, a new law regulating foreign investments in commercial organizations of strategic importance for Russian national defence and state security came into force. This law is already having a significant impact on transactions and IPO plans of companies operating in such strategic sectors in Russia. Potentially, it can affect not only foreign "controlling" investors, but also foreign and Russian minority investors, because non-compliance of the foreign "controlling" shareholder can lead to invalidation of the day-to-day business transactions of Russian issuers.

Tax considerations are important for any Russian IPO and any public company. A public company in Russia cannot afford to use tax optimization schemes that might be acceptable for some private businesses. In addition, consolidation of operating businesses and assets under an IPO vehicle requires a thorough tax analysis to mitigate any past risks and to avoid any negative tax consequences for the public company in the future. In many cases, the choice of jurisdiction for an IPO vehicle is driven by tax considerations.

Generally, legal and tax risks are perceived to be much higher in Russia than in countries with established market economies. The government is putting considerable efforts into developing the Russian capital market. Nevertheless, the Russian legal environment for IPOs requires significant reformation. In particular, the general disclosure principles, as well as the registration and prospectus requirements have to be carefully revised. The modern IPO is not just about selling shares to raise money from investors. In exchange for the investors' money, the issuers, as public companies, are supposed to disclose financial results and all other information which is material to an investor's decision to invest or which is necessary to prevent disclosures from being misleading or deceptive. After the IPO, public companies should also provide such information on an ongoing basis. Fair and reliable information about operations of public companies helps to correctly assess the issuer's business, its competitors, the industry and eventually allow an assessment of the economy, the country and its place in the world.