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. Last Updated: 07/27/2016

Russia – Its Laws and Bureaucracy

In Russia in the 1990s, foreign investors introduced the “due diligence” process — a common law concept, and one in which the directors of public companies owe a duty to investigate diligently any investment opportunity before making the investment on behalf of the company. The initial response of Russian general directors was suspicion and determination to protect their “commercial secrets.”
In one case, after the usual frustrating first morning of arriving at a former military-industrial plant in the Russian heartland, my lawyers and our colleagues, the accounting firm team, were encouraged by the arrival of a member of the board of directors of the publicly-listed American multinational that we were working for. All of our simple requests for information about the company’s suppliers and distributors and number of employees had been stonewalled by the Russian general director on the grounds that they were “commercial secrets.” The American director had traded with the plant during the Soviet era, was known to management, and was warmly greeted by them. Thanks to his arrival, we were invited to a lavish display of Russian hospitality, zakuski, and vodka by the general director whose charm and hospitality was suddenly on display. Over the vodka toasts, the American director gave a textbook perfect description of the purpose of a due diligence exercise. He made it quite clear to our host that his own integrity and his fiduciary duties as a director were at stake, and that without a report from independent legal and accounting consultants giving full information on the Russian company, he would not under any circumstances be able to recommend purchase of the shares in the company. The information was forthcoming, and the transaction went ahead.
Until a few years ago, collecting due diligence about a target company meant traveling to remote parts of Russia, visiting the company and sitting in the general director’s, or chief accountant’s office, inspecting records and talking to them. The discussion usually first focused on lengthy explanations of why the information was needed.  Due diligence was not the routine matter it had already become in the West, where much of the information was available through public sources and data rooms provided the rest.
These days, due diligence is accepted in Russia and online data rooms are common. More information is available through public sources and registries. Indeed, the debate on due diligence has to some extent switched to the point where sellers are now using disclosure of information to put the onus back on the purchaser. They are taking the position that they have disclosed all problems to the purchaser, so that fewer representations and warranties by the seller should be needed. There is still some lingering distrust of the due diligence process, especially with respect to Russian competitor companies that request due diligence before making a bid to buy. This is to some degree warranted. While it is typical for confidentiality covenants to be put in place, which are enforceable; non-compete clauses and non-solicitation clauses, they are widely judged to be completely unenforceable under Russian law.