Control over strategic enterprises is getting considerably more complicated for Russian nationals with a second citizenship
Draft amendments to Federal Law On Foreign Investments in Business Entities of Strategic Importance for National Defense and State Security[1] (further the “Law On Strategic Enterprises”) were published on September 10, 2018 on the website used for official publication of draft regulations. The proposed amendments will affect those Russian nationals who control strategic enterprises and plan to apply for or are in process of obtaining another/second citizenship.
This draft, proposed by the Federal Antimonopoly Service (FAS), is probably in no small way motivated by the great demand for citizenship by investment (CBI) from the owners of large Russian companies. Popular CBI programs are offered in Malta, Cyprus, St. Kitts and Nevis, as well as in other countries.
What are the current rules?
The Law On Strategic Enterprises provides a list of activities which are, according to the government, of strategic importance for national defense and state security (for example, encryption (cryptography), armament, aviation, radio and television broadcasting, oil mining, geology, altogether more than 45 activities have been included in this list)[2].
Before entering into any transactions or performing any actions intended to gain control over a company operating in the abovementioned strategic fields, foreign investors must obtain the government commission’s prior approval. If a foreign investor concludes a transaction with a 5% or more stake in the share capital of a strategic enterprise, but not resulting in any control over such enterprise, the foreign investor will be required to notify the antimonopoly service.[3] [4]
Control over strategic enterprises
Foreign investors are deemed to have gained control over a strategic enterprise if they are able to affect the decisions of such enterprise[5]. In particular, the following transactions entered into by foreign investors require the government commission’s prior approval:
- Receipt of right to directly or indirectly dispose of more than 50%[6] of the votes from voting shares or stakes in share capital;
- Receipt of right to appoint CEO or more than 50% of the members of a management body (board) or board of directors;
- Conclusion of contract for management of strategic enterprise;
- Other transactions, agreements intended to transfer to foreign investors the right to affect/determine the decisions of the management bodies of a strategic enterprise[7].
The above thresholds are lower for strategic enterprises using federal subsoil plots.
Foreign investors
The Law On Strategic Enterprises applies not only to foreign companies, structures and citizens, but also to Russian nationals with a second citizenship. This means that Russian nationals with a second citizenship must obtain approval to gain control over strategic enterprises.
The Law On Strategic Enterprises does not, however, regulate cases where Russian nationals, who already have control over a strategic enterprise, acquire another (or second) citizenship in the future, obtaining by the same token the status of foreign investor. In such case, Russian nationals are not required to get approval or submit any notice of control over strategic enterprise. Strategic enterprises can therefore fall under a foreign investor’s control without approval from the government commission or notification of the Federal Antimonopoly Service (FAS).
What are the proposed changes?
The FAS proposes to eliminate this gap in the law by providing that after receipt of another citizenship Russian nationals must get the approval of the government commission to exercise control over a strategic enterprise or notify the FAS of the relevant transaction when the law provides for notification instead of approval.
What will happen if the government commission does not give its approval to exercise control over a strategic enterprise?
If the government commission rejects the possibility for a Russian national with another/second citizenship to exercise control over a strategic enterprise, such Russian national must dispose of some of his/her shares in the strategic enterprise so that the remaining shares confer neither to him/her nor to his/her group control over the strategic enterprise. If the shares are not disposed of within three months of the approval rejection, the FAS will be entitled to go to court to demand that the foreign national be deprived of his/her voting right at the general meeting of shareholders of the strategic enterprise.
What will happen if no application for the government commission’s approval to control a strategic enterprise is submitted or no notification is filed?
In such case, the FAS will be entitled to go to court to demand that the foreign investor or his/her group be deprived of the right to vote at the general meeting of shareholders of the strategic enterprise.
Recommendation
If you intend to apply for a second citizenship, then the approval of control over strategic enterprises is just one of the issues that will be relevant to you. Tax status, notification of second citizenship to state authorities, criminal liability for failure to notify second citizenship are among the many other not so obvious issues that should be taken into account when applying for a second citizenship.
If you have any queries or require assistance with any questions that may arise when applying for another or second citizenship, please feel free to contact us. We are always happy to help.
If you require further information or would like to discuss this article, please feel free to contact Anton Kabakov.
Truly yours,
[1] http://regulation.gov.ru/projects#departments=41&npa=83397.
[2] Article 6 Law On Strategic Enterprises
[3] Article 14 Law On Strategic Enterprises
[4] It is important to note that the above consent/notification requirements apply also if not only foreign investors but also their group of entities perform transactions and actions to gain control over strategic enterprises, and the definition of such group provided by law is rather broad.
[5] Article 3(1(3)) Law On Strategic Enterprises
[6] The Law On Strategic Enterprises provides for a number of exceptions where the acquisition of the right to dispose of less than 50% of the votes also requires the government commission’s prior approval.
[7] Article 7 Law On Strategic Enterprises