M&A Transactions Resulting in Acquisition of Control: Antimonopoly Aspects

When structuring an M&A deal taking place either in or outside of Russia (where some Russian elements on the side of the seller are present), it is important to check whether there exists any grounds for notification to the Federal Anti-Monopoly Service, or FAS.

At the end of 2006 a new federal law "On Protection of Competition" came into force. In the field of merger control in Russia this long-awaited legislative act, though preserving basic principles of the previous legislation on competition, introduced some changes, including new notification requirements in respect to M&A transactions.

In general, the law and the respective notification requirements are applicable to domestic transactions. However, the rules on antimonopoly control over economic concentration are applicable, in certain situations, to transactions taking place abroad. The law applies to such transactions only if they actually result or may potentially result in any restriction of competition in Russia, and are concluded in respect of assets located in Russia, shares in Russian companies or rights in respect to Russian companies. No clear guidance exists so far as to which cases are likely to result in restricting competition. Therefore, it is, generally, recommended to apply a most critical approach to analyzing a potential acquisition from the perspective of the applicability of Russian notification rules.

The law does not use such terms as "acquisition of control" or "change of control." Instead, it applies a concept of "acquisition of rights to determine conditions of business activity of a commercial organization." The law contains a nonexhaustive list of examples of an "acquisition of rights," including agreements on trust management, agreements on joint activity and agency contracts. In practice, however, the most common way of acquiring the said rights is through the purchase of a parent company owning shares in a Russian subsidiary, which in that case, becomes the ultimate target of the acquisition (even if it is not intended as the prime objective of the transaction taking place outside Russia).

In fact, it is quite a common situation where an international group of companies is being purchased by another group and the latter discovers, once the deal is closed, that the target owns one or several companies in some jurisdictions that have not been the subject of detailed pre-acquisition due diligence (often such companies would not be very active in the market or would be almost dormant). The result could be a clear breach of applicable rules on obtaining prior clearance for corporate transactions resulting in change of control over a Russian legal entity.

It is also important to note that, within the framework of one global acquisition, several transfers of shares or control in respect of a number of particular companies may take place, each requiring separate formal notification to the FAS (although the practice of the FAS is to allow to combine several applications into one file with one underlying set of documents).

The criteria for notification pursuant to the new law is, in general, more consistent with the international practice and national standards of countries with developed market economies, rather than those previously applicable in Russia.

Prior consent for transactions resulting in the acquisition of control over a Russian target is necessary in each case where:

Х†Total assets of the purchaser's group and the target company exceed 3,000,000,000 rubles; or

Х†Total revenues for the last year of the purchaser's group and the target company exceed 6 billion rubles, and the target company's assets exceed 150 million rubles; or

Х†One of the parties involved is recorded in the register of commercial organizations holding a share of a particular market exceeding 35 percent.

In the case of banks and other credit institutions the respective criterion is determined by the government together with the Central Bank and currently is established as 3 billion rubles for the value of the assets of the target bank in which respect the rights are acquired.

The law also sets forth a list of exceptional transactions which are not subject to prior approval of the antimonopoly authorities. For example, an exception is provided in respect of intra-group transactions for which a simplified procedure of disclosure of the group structure and subsequent notification are envisaged.

In general, the transactions mentioned above are subject to subsequent notification to the antimonopoly authorities provided that the respective thresholds exceed 200 million rubles for the aggregate assets or revenues of the purchaser's group and the target and 30 million rubles for the assets of the target.