Changes in M&A Laws

In the last few years, the legal regulation of M&A activity in Russia has been experiencing dramatic changes. Some of the burning milestones of Russian legislation include the adoption of a new federal antimonopoly law "On Competition Protection" and the revision of the federal law "On Joint Stock Companies" in the area of major shareholding regulation. The legislature is taking certain steps toward the integrative development of takeover law. It shall put certain emphasis on law enforcement practice in respect to so-called shareholders agreements and elaborate on share purchase contracts with numerous remedies for the protection against any risks, affecting the quality of the subject of the contract. The referred problems are addressed below in more detail.

The antimonopoly law, effective since Oct. 26, 2006, significantly revised state governance in the sphere of competition protection as to economic concentration issues. Thus instead of the previously existing requirement for approval of each shares purchase transaction, the law provides for the obtainment of prior consent given by the antimonopoly body for the acquisition of a blocking stake of voting shares (25 percent), controlling stake (50 percent) and a stake of voting shares excluding any blockage of a shareholder's decision by third parties (75 percent). One of the notable developments of the antimonopoly law is the particulars of the regulation of assets transfer within a group, which were introduced in order to simplify the procedure of antimonopoly regulation.

At the same time, the antimonopoly law still lacks some clear and obvious reasons for rejecting the approval of a transaction by the antimonopoly bodies and the criteria set by law are too discretionary.

Chapter 11.1 of the joint stock company law came into force on July 1, 2006, and substantially altered legal regulation in the sphere of shares acquisition. The provisions of the referred chapter govern the procedure of sending voluntary and mandatory offers on shares acquisition: a person intending to acquire more than 30 percent of the company's voting shares may make a voluntary offer on shares purchase, also a shareholder who has acquired more than 30 percent of the voting shares must make a compulsory offer to all other company's shareholders to purchase their shares. By this statement, the law sets exclusive competence to the general shareholders meeting for adopting decisions on a number of matters subject to the receipt of a voluntary or mandatory offer. It appears that such a restriction may be fraught with abuses raised both on the part of shareholders and third parties by making consciously unacceptable offers that may paralyze the day-to-day activity of the company.

At the same time, the necessity to secure each voluntary and mandatory offer with a bank guarantee will substantially hinder the application of these procedures in any other aims than shares acquisition.

The law further requires a person wishing to acquire more than 95 percent of shares to purchase the rest of the outstanding shares. The referred novels demonstrate the imbalance of minority and majority shareholders interests in favor of the latter, however the law protects the minority shareholders by granting the right to demand that the acquisition of the shares is done according to the specifically determined procedure.

It should be noted that the legislature has taken active and complex measures against hostile takeovers. The State Duma is currently considering a bill amending a number of normative acts related to the development of measures aimed at the settlement of corporate conflicts. The proposed amendments are intended for developing both the procedural legislation (in respect to special competence and judicial jurisdiction over corporate disputes, interim measures and the insurance of claim rights by the affected party to the corporate dispute) and federal laws containing substantive rules.

One of the burning issues of M&A transactions is the practice of conclusion agreements usually aimed at company management (shareholders agreement). Since the regulation for corporate matters is subject to a considerable number of mandatory prohibitions and prescriptions, a shareholders agreement of a Russian company has to be governed by Russian legislation, such agreements cannot act as a vehicle for corporate dispute settlement. Furthermore, the domestic judicial practice, which is currently being developed, recognizes shareholders agreements as void. In practice, shareholders tend to submit regulation of their relationships to the law of the states, which is characterized by a more flexible method of governing the shareholders intercourses with a help of multilevel business structuring. Such an indirect holding of Russian companies allows, firstly, the selection of more flexible means of regulating the shareholders issues and, secondly, ensures a more effective transaction structure of the transfer of rights over to Russian companies through the shares of a foreign holding company instead of a Russian one.

The most frequent problem that occurs while entering into an M&A transaction involves the protection of the purchaser's rights in the case of discovering any defects in the subject of the contract that cannot be detected during the due diligence procedure, held prior transaction execution or have been discovered, but can not be resolved before the deal's execution. Such issues shall be resolved at the stage of terms negotiation. The parties usually work out numerous remedies against any risks influencing the quality of an asset being acquired, by elaborating the agreement with dissolving and conditional terms.