Distribution of liquidation surplus and restrictions on disposition of shares. Changes to legislation
On October 15, 2022, the Russian President signed Decree No. 737 establishing new rules for Russian residents making certain cash distributions to non-Russian residents and entering into transactions with respect to shares in joint-stock companies[1].
Distributions due to the reduction of share capital and distribution of a liquidation surplus
In addition to the restrictions imposed earlier, this decree has introduced new requirements for Russian residents making cash distributions to persons from “unfriendly countries” due to: (1) the liquidation of a company; (2) the reduction of the share capital of a company; and (3) procedures carried out in the bankruptcy of a company.
If a company plans, for example, to transfer a liquidation surplus (any unclaimed cash remaining after making settlements with its creditors) to its shareholders or perform any other of the above transactions, such a transaction may be performed only under a special authorization from the Russian Government Commission or to a special type C bank account opened with an authorized Russian bank.
However we believe that the decree should be interpreted so that these restrictions will not apply to any distribution that will not exceed RUB 10 million a month, or an equivalent in a foreign currency. In other words, the distribution of a liquidation surplus, the transfer of cash due to the reduction of share capital or as part of bankruptcy procedures in an amount of less than RUB 10 million, in our opinion, should be possible without obtaining a special authorization from the Russian Government Commission and directly to a bank account of a non-Russian resident opened with a foreign bank. The Russian Central Bank has not issued any official clarifications on this issue. Moreover it is unclear how Russian banks will interpret this decree in this respect in practice and whether they will freely transfer cash to non-Russian residents on the above grounds in an amount of less than RUB 10 million.
Restrictions on the disposition of shares in joint-stock companies
The decree has also extended the procedure that was established for entering into transactions with respect to shares in limited liability companies, which we covered in our previous legal alert, to certain types of transactions with respect to shares in joint-stock companies. The list of transactions that now require a prior authorization from the Russian Government Commission has been expanded. Such transactions include:
- Any transactions that result, directly and/or indirectly, in establishing, altering, or terminating the rights of ownership, use, and/or disposition of shares in joint-stock companies (except for lending institutions and non-bank financial institutions);
- Any transactions that result, directly and/or indirectly, in establishing, altering, or terminating any other rights that allow to determine the conditions of management of such joint-stock companies and/or the conditions of their business activities.
The above transactions, according to clarifications of the Ministry of Finance of Russia, include a share purchase, the repurchase of shares by a company at the request of a shareholder, the execution of a shareholder agreement, an agreement with a management company, a convertible loan agreement, a share pledge agreement, a share trust management agreement, an agency agreement for rights in shares[2]. In addition to the transactions referred to above, an authorization will also be required for the voluntary reorganization of a company. In addition, the authorization may probably be required to appoint executive bodies (for example, a general director – citizen of an “unfriendly country”), an increase in share capital (including by issuing new shares), and the reduction of share capital by redeeming shares.
Persons who may enter into these transactions only with the authorization of the Russian Government Commission:
- Foreign persons from “unfriendly countries” between themselves;
- Foreign persons from “unfriendly countries” with foreign persons from “friendly countries”.
Please bear in mind the restrictions imposed on transactions with respect to securities that are entered into by Russian residents with (i) foreign persons from “unfriendly countries”, (ii) persons that are under their control, or (iii) persons from “unfriendly countries” that have purchased securities from those referred to in paragraphs (i) and (ii) after February 22, 2022.
Accordingly, without the authorization of the Russian Government Commission, transactions with respect to shares in joint-stock companies may be performed only between:
- Russian residents;
- Russian residents and persons from “friendly countries” (except where persons from “friendly countries” have purchased securities (or otherwise acquired control) from those referred to in paragraphs (i) and (ii) above after February 22, 2022).
If you have any questions or you would like to discuss this further, please feel free to email Julia Talagaeva or Artem Eretenko.
Sincerely,
[1] http://publication.pravo.gov.ru/Document/View/0001202210150002?index=2&rangeSize=1
[2] https://minfin.gov.ru/common/upload/library/2022/10/main/13_10_2022__05-06-14RM_99138.pdf