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. Last Updated: 07/27/2016

Medium-Sized Firms: Most Attractive Option

Of course, size is not everything. A Russian company likely to attract foreign investment will probably have modern equipment, a market for their goods either at home or abroad, and management and staff willing to work with foreigners and adapt to their stringent financial controls and commercial orientation.

For the foreign investor, the most interesting time to acquire a shareholding in, and possibly control of, a company is during the privatization procedure when he may purchase at a cost that justifies the other expenses involved in modernizing the company. He can then influence the development of the company from the outset of its new existence.

In the first stage the medium-sized state-owned enterprise is transformed into an open joint-stock company so that its shares can be sold. The privatization plan for each company is decided by the workers who choose the method to be followed which, in turn, determines the number of shares that will be sold to the workers and the number that will be offered for sale to the public.

The remaining shares may be sold by voucher auction (until July 1) or investment tender. The plan has to be approved by the State Property Committee, which may decide that a majority of the shares will remain state property if the company is involved in a strategic area. Even if the company is not obviously in a strategic area the state may retain one "golden" share, which carries a veto on changes in the company's charter and on any reorganization.

This can affect the long-term plans of the foreign investor who may want to concentrate on the core business of the company and hive off some of its activities into separate companies. He may also want to convert the open company into a closed company so that new share issues do not have to be offered for sale to the public.

At present it is not clear whether this is possible. The 1994 privatization program prohibits conversion of open companies to closed companies, but this may refer to the existence of the "golden" share and its accompanying veto, which is usually limited in operation to three years and does not necessarily have to be exercised.

Marcia Levy, an attorney with Norton Rose, has been practicing law in Moscow for three years.