Although such risk allocation mechanisms as due diligence investigation of target companies, NDA, non-compete, LoI, break-up fees, purchase price adjustments, escrow accounts, warranties and indemnities, earn-out, etc., are common practice in foreign jurisdictions – they are not developed in Russian law. Even SPAs in Russia are made in a very simple form. Up to now majority of M&A deals involving Russian assets are done under English law.
Investors often use Russian law for smaller deals – it is when the buyer has an appetite for risks relating to the target. In these cases, the focus is rather on transferring title as opposed to allocating risks in transaction documents, which is imprudent of them. Also, in the last several years the number of deals done under Russian law has naturally increased with Russian investors being more active as opposed to foreign investors and some of them following the de-offshorization trend. Besides Russian law is being used for local acquisition deals when both parties are Russian entities as it is mandatory.
Evidently, certain steps have already been taken to introduce basic international M&A legal concepts into Russian law. Shareholders agreements were introduced into Russian corporate law few years ago. This was done in an effort to legalize shareholders’ agreements after Russian courts ruled in several cases that foreign law-governed shareholders agreements relating to Russian companies were invalid.
Since the concept of a shareholders agreement itself is relatively new and has no comprehensive and stable court practice, most foreign investors still prefer foreign law to govern their Russian business relationships. At the moment, Russian law does not make it clear if a shareholders’ agreement for a Russian company can be governed by foreign law and be subject to international arbitration. As a result, M&A deals are commonly structured by foreign investors in order to use a non-Russian company as the main corporate vehicle with respect to which its shareholders will enter into a shareholders agreement governed by non-Russian law. For tax reasons, the most common jurisdictions for the incorporation of such a non-Russian corporate vehicle are the Netherlands and Cyprus.
Changes in the scope and focus of pre-acquisition due diligence reviews are also quite noteworthy. Traditionally, foreign investors have given special attention to careful due diligence investigations of Russian targets, particularly with respect to tax liabilities. Over the last few years, there has also been a strong focus on corruption and issues with compliance. For most foreign investors, it is crucial to determine whether the target has been involved in any practices that go against local or Western anti-corruption legislation (the FCPA in the United States and POCA in the UK), such as bribes, kick-backs, tax evasion, or illicit cash payments to employees. If the target has been involved in such practices, it may seriously impact plans for acquisition. It is generally advisable to investigate these issues at a very early stage of the transaction.
The years 2014 and 2015 saw extensive changes to the Russian Civil Code introducing some of the concepts traditionally used in common law, the process promoted and prioritised by the policy of ‘de-offshorisation’ called for by President Putin in 2012.
The overall direction of the reform can be described as ‘liberalisation’ of corporate and contract laws with respect to non-public companies, including much greater flexibility with respect to shareholders agreements, broader opportunities for fine tuning of corporate governance procedures, and, of course, introduction of concepts similar to common law representations, warranties and indemnities. (please read our blog news and relevant laws & treaties secitions)
The amendments introduced to Part 1 of the Civil Code of the Russian Federation in May 2014 (in effect since September 1, 2014) included, in particular, new provisions on shareholders’ agreements, definitions of public and private companies (previously unknown to the legislation), and a number of rules for establishment, reorganisation, liquidation and management of commercial and non-commercial entities. These new provisions, among other things, allowed shareholders/participants more flexibility in determining the structure of governing bodies of their companies and distribution of competence between them. For the first time, the law allowed more than one person to be appointed to act as the chief executive officer of the company, something that foreign investors wanted for years.
Circumstantial evidence and our experience suggest that nowadays, after the overhaul of the Civil Code, use of Russian laws in M&A and joint venture transactions tends to become more common. Not only do Russian counterparties find desired concepts in their domestic law, but also new provisions make Russian law more understandable and comfortable for foreign investors as well.
The second factor is the concept that appeared on the stage in 2012 and has gained universal acceptance since then, namely, the exclusive jurisdiction of Russian state commercial courts over so-called ‘corporate disputes,’ the scope of which includes, for example, disputes in connection with title to shares/participatory interests, matters involving encumbrances on such title, etc. Accordingly, where the target is a Russian company, the parties have to pay attention to Russian laws in constructing the terms and conditions of the transaction.