News and Updates

December 2011 was a very eventful month in Russia, with the street demonstrations after the political elections, despite which the new Medvedev/Putin regime being elected in March 2012 looks to be assured. Destabilising events such as this combined with the continued world economic recession makes any predictions for 2012 uncertain.

Politically and domestically, 2011 was otherwise a sedate year in Russia. 2012 is due to witness the accession of Russia to the WTO, which marks a significant step from the ambivalent stance the country has held over the past ten years in relation to this World organisation.

The government announced a privatisation policy at least two years ago which was expected to run throughout 2011-2013 with a value of USD 33 billion, however the policy has been delayed to spread over a much longer period of time. The list of assets to be sold off includes leading companies in various sectors of the economy, such as VTB (the country’s second largest bank).
 
The recession is forcing the government to spend on replacing soviet-era infrastructure, however this depends on the availability if public financing and the delay of the privatisation programme. A number of roads, art projects and airport privatisations have already been initiated.

Legally there have been several cases of prominence to note. The highly publicised fall-out between Boris Beresovsky and Roman Abramovich entered the London High Court in October 2011, involving the oil and gas company Sibneft. Beresovsky claims that Ambramovich black-mailed him into selling a valuable stake (21.5%) in Sibneft (sold for USD13billion in tota) at far below its value, by saying that Putin would ensure it was expropriated if he did not so. Beresovsky is claiming USD 5.6billion in damages. Abramovich claims he was supplying Beresovsky with protection services for which he bought himself out of the arrangement with a USD1.3billion payout.

In relation to Yukos, the European Court on Human Rights published its report, and as expected concluded that the company’s rights had been violated in respect of the Russian proceedings instigated against it, and that in fact the company did not have a proper chance to prepare its defence. However the claim that the government used the process to dismantle Yukos did not succeed.

2012 looks like it is sure to witness the safe and un-controversial election of Putin back into power, and continued spurts of growth and privatisation, which will in turn enhance foreign investment, especially once stability is returned after the elections. More updates on legal, anti-corruption measures, and political news will follow on the FGM website.
 

The Government of Cyprus has introduced a new annual levy to companies registered in Cyprus, of €350, in response to the world economic crisis. Law No. 117(1) of 2011 states:
(a) Existing companies, other than those to which certain exemptions apply, are obliged to pay the levy for the year 2011 by 31st December 2011;
(b) In subsequent years the levy must be paid by 30th June.

Exemptions:
A company is not obliged to pay the levy on the year of its incorporation.
In the case of a company belonging to a group of companies, the total amount of the levy per year shall not exceed €20,000. Such amount shall be equally spread between all the groups for that year.

Penalties for late payment:
10% of the levy is charged if the payment is two months late, and increased to 30% if later than two months for up to 5 months. If later than 5 months the company may be struck off the register, but will be re-instated thereafter if the registrar receives the payment of a further €500. If it is struck off for longer than two years, the payment required will be €750.
The Law does not apply to dormant companies or to companies or groups of companies which do not possess any assets, or which hold assets outside of Cyprus (at the discretion of the Registrar).
 

The government has announced it’s intention to reform civil litigation costs and funding after a year-long review, including changes to Part 36 offers to settle, removing restrictions on contingency fees, and changes relating to conditional fee agreements and success fees.
The civil litigation costs review was aimed at making recommendations to ‘promote access to justice at proportionate cost’, and has made key recommendations relating to the funding of litigation.
The rules governing Part 36 offers to settle are to be amended to ‘equalise the incentives between claimants and defendants to make and accept reasonable offers’. This will be achieved by sanctions, such as if a money offer is beaten at trial there will be a sanction, and a sanction amounting to 10% of the damages will be imposed where a defendant rejects a claimants offer but fails to do better at trial.
The review has concluded that the restriction on using Damages-Based-Agreements is ‘no longer appropriate in a modern litigation system’, and there is no proposal to cap DBA’s other than in a personal injury case.
It’s been acknowledged the Conditional Fee Agreements ‘have played an important role in extending access to justice’.
It is anticipated that the reforms will be implemented by autumn of 2012.

 

The Financial Reporting Council’s new guidance on board effectiveness is intended to assist companies in applying the principles of the UK Corporate Governance Code, in particular sections A (leadership) and B (effectiveness), and to stimulate thought on how boards may carry out their role more effectively.
The new guidance covers the role of the board and directors, providing guidance on how to achieve an effective board, the role of the chairman, the role of senior independent directors, and the role of executive and non-executive directors. It also provides guidance on the role of the secretary, and emphasises the importance of investing time in the design of decision-making policies and processes to minimise the risk of poor decisions.
The Guidance sets out the importance of appointing directors with the appropriate range and balance of skills, experience, knowledge and independence and the need to consider diversity to ensure that the board is not composed solely of like-minded people. Board evaluation is described as a powerful and valuable feedback mechanism for improving board effectiveness, maximising strengths and highlighting areas for further development.
The guidance also sets out principles of good practise in relation to audit, risk and remuneration, and relations with shareholders to improve dialogue with stakeholders and increase trust and confidence.

FGM has acted in an equity investment and sale of a significant minority shareholding in one of the biggest IT companies in Russia. The investor is a leading global growth equity investment firm. The company in which shares have been acquired is a leading developer of secure content and threat management solutions.  The agreement between the parties marks the next stage of the company’s global growth strategy. The investor will become the second largest shareholder in the company acquiring a part of secondary shareholding. Financial details of the deal are not being disclosed. FGM, acting for the vendor, advised on all aspects of the sale of the shareholding.

A new version of the double tax treaty has been signed by the Russian and Cypriot presidents. Cyprus currently invests approximately $52billion into Russia, and many of Russia’s biggest companies are owned by Cypriot shareholders. Cyprus was placed on the black-list of off-shore jurisdictions in 2008 for being un-cooperative, and failed to successfully lobby against being put on the black-list. To date, it has been virtually impossible for Russia to gain tax information out of Cyprus for investigations.
The pre-existing treaty between Russia and Cyprus was less restrictive, and was therefore a main reason for the intense level of investment from Russia into Cyprus. In December, 2005, the Russian tax service announced that double taxation avoidance agreements would be reviewed to prevent companies from avoiding tax by registering offshore, and to "protect Russia's economic interests”, and to prevent the federal budget being deprived of more than USD2bn in unpaid profit tax by oil firms during 2004 because the owners of these firms are resident for tax purposes in low tax jurisdictions, such as Cyprus.
The 2010 treaty allows for a greater level of exchange of information between Russia and Cyprus to accord with the latest version of the respective articles in the OECD Model Tax Convention. There are also a number of other changes introduced by the new treaty, such as, to the extent that shares in a company derive more than 50% of their value from immovable property, the country where such property is located shall have the right to tax capital gains on the shares of such company. Also, dividends have been given a broader definition in the new protocol to include payments on shares of mutual investment funds or other similar collective investment vehicles and depository receipts for shares, and there is a new limitation of treaty benefits article has been introduced disallowing benefits accruing to a company which was created for the specific purpose of obtaining such benefits provided that the company is not registered either in the Russian Federation or in Cyprus.

Cyprus will now expect Russia to remove it as a black-listed offshore jurisdiction, and dividends received by Russian shareholders from Cypriot holdings will become tax exempt. The protocol was expected to be ratified by the Russian and Cypriot governments on 1 January 2011.
The general view is that the impact of the new protocol will be limited, and has more to do with streamlining procedures than tax avoidance measures. But nevertheless, the changes made are important ones, and will significantly impact Russo-Cypriot business arrangements.

Despite recent developments in Russian corporate legislation, the M & A and international finance markets still heavily rely on English law for Russian deals. Because English law is not set out in a single civil code it is able to be flexible, adaptable and practical when dealing with the developing needs of commerce. The principles of English law are clear and well-established, and businesses and their advisers have a lot of flexibility to agree to whatever terms they want on their transactions, with the laws being less prescriptive.
In addition, English courts and arbitration tribunals have a strong reputation for reaching fair, balanced and unbiased judgements and rulings and clear and predictable outcomes.
On the other hand, the Russian civil code is the main source of the civil and corporate laws in Russia. Russian law has developed significantly over the last 20 years, however case precedent is not recognised, and Russian law is not yet fully developed in some key areas of international M & A and finance deals. For example, Russian law does not yet recognise the concept of warranties and indemnities, put and call options, drag and tag along or escrow arrangements, and is only developing in regards to deferred consideration and earn-outs, negative covenants and veto rights etc.
All this said, the common practice of Russian-only parties is to use Russian law, and state-owned organisations insist on using Russian law, and it has developed significantly in the past 20 years, whereas it has taken 600 years for English law to develop. So the picture for progress is quite promising.

The mergermarket report is quite positive: it states that 79% of canvassed M & A Practitioners in Russia expect to see M & A activity in Russia increase over the next 12 months, while a further 19% believe that levels will remain the same. Only 2% think that Russian M & A deal flow will fall over the year. This is all positive news, and shows a cautiously optimistic outlook for Russia.
According to the report, recent activity suggests that a recovery in the wider M & A market is underway, driven largely by domestic corporate acquirers. “The Russian market has emerged as a favourable destination for investment. Many cash-rich European and North American companies are diversifying away from troubled home markets and are, instead, looking to grow in more dynamic emerging markets such as Russia.”
“Private equity investors could drive deal-flow as they are immensely knowledgeable on the Russian market and can identify low-valued assets to buy into.”
According to the mergermarket report, the bulk of announced activity has been in the Energy, Mining and Utilities, and TMT sectors, and the most notable deal has been the 50% acquisition by Andrei Kobzar in National Container Company, for a consideration of US$900m. Significantly, 7 of the top 10 deals of 2010 so far have been stake sales. The Russian government plans to raise US$10bn in 2011 by the sale of assets such as stakes in Rosneft, VTB Bank, and Rosspirtpom (please see FGM article dated 13 September 2010 for more information on this anticipated state sale of assets).
Other mergermarket report points of interest are as follows:
• Outlook and trends – 97% expect Russian deal-making to at least mirror global trends going forward, although India, China and South Korea are expected to drive global M & A activity over the near future.
• 98% believe Russia, although slightly lagging behind its counter-parts, IS still a part of BRIC (Brazil, Russia, India and China).
• 62% believe Russian M & A activity over the next 12 months will be driven by economic recovery and the large number of distressed business sales.
• Only 21% believe regulatory concerns will hamper Russian M & A activity over the next twelve months. Corruption is also considered an issue in Russian M & A. Another challenge to M & A activities is the unpredictable nature of the Russian courts. Looking ahead however, it is predicted that there will be increased clarity in relation to enterprise legislation, and development of precedents with shareholder agreements and complex SPA’s under Russian laws, and as a result we should see more application of Russian law than in previous decades.
• 78% indicate that locating deal financing today is much easier than 12 months ago, so there are positive signs that the financing situation is easing up. 60% say the need for funding is in order to finance domestic M & A acquisitions – the other 40% say its to finance foreign acquisitions. 77% believe that Russian acquirers will finance their up-coming acquisitions via private equity and external investors.
• Upcoming legislative changes: the further development of corporate legislation, as well as contract laws, is something to look out for. Upcoming positive legislative and regulatory changes that buyers in Russia should be aware of are as follows:
o Reforms to the Russian Civil Code
o Russian tax regime
o Russian retail sector regarding market monopolies
o Investment policies aimed at foreign investment
o Reductions on tax burdens on foreign investors
o Relaxation on credit control policies.

Conclusion:

The mergermarket report and conference conclude that in Russia, as in many countries, the main criteria for choosing an adviser will rest upon the experience and expertise that an advisory firm can bring to a given transaction. The laws, regulations and tax frameworks can be complex and opaque. When appointing a legal advisor, sector AND country experience is very important, to understand the legal framework, and will achieve better value for money. To do deals in Russia you need someone who understands the Russian approach combined with an experience in UK law. The reality of doing a deal in Russia is not the same as doing a deal in other jurisdictions. You need a very strong understanding of the local legal and regulatory system to ensure a successful transaction. For foreign corporate with little deal-making experience in Russia, having advisers familiar with the local business culture and practices is arguably very important. The most likely cause of failure of an M & A transaction in Russia can often be traced back to the complex, unclear, unpredictable and yet rigid nature of Russian law. This is further complicated by the law being different in many of Russia’s regions. All further reasons for appointing advisors with a good regional knowledge.
 

There have been several amendments to Russian tax law at the end of 2009 and the first half of 2010, with some interesting reforms also planned for 2011:

Removal of the RUB 500 million Equity Investment Qualification Requirement for the Substantial Shareholding Exemption on the Taxation of Dividend Payments

The Tax Code of the Russian Federation (the “Tax Code”) was recently amended (at Article 284.3(1)) to remove one of the qualification requirements for the so-called “substantial shareholding exemption,” which, when triggered, sets a 0% tax rate on dividends distributed by subsidiaries to parent companies. It is no longer required that to qualify for the exemption the company receiving the dividend must have made an equity investment of at least RUB 500 million in the company paying the dividend. This amendment brings shareholders which had previously fallen beneath this threshold into the scope of the substantial shareholding exemption and will likely encourage the further use of Russian holding companies in corporate groups.

New Rate of Income Tax for “Highly Qualified Foreign Professionals”

A new streamlined work permit program for “highly qualified foreign professionals” became effective on July 1, 2010. A 13% personal income tax rate will apply to remuneration received from the professional activities of such highly qualified foreign professionals, even if they are not tax resident in Russia (a tax resident must spend 183 calendar days or more in Russia over a period of 12 consecutive months). Previously, foreign employees who were not tax resident were taxed at 30% on their Russian-source income.

Abolition of the Unified Social Tax

New rules related to the calculation andpayment of social security contributions were effective as of January 1, 2010. Thus, the unified social tax no longer exists and instead separate contributions to the Russian social funds (i.e., state pension, medical insurance and social insurance funds) have been introduced. These contributions are payable by employers in conjunction with employee salaries. From 2011, higher tariffs for these contributions will be introduced. Employers’ reports must now be submitted to the relevant social fund instead of to the tax authorities.

Projected Future Amendments
Consolidated Returns

Russian law does not currently provide for consolidated tax filings for companies under common control in a group structure. However, a draft law is currently under consideration which would allow for consolidated group profits and losses, if the participants of the group agree. Under the draft law, the profits and losses of different group companies could be offset against each other and transactions between group companies would be ignored for tax purposes. These measures would allow corporate groups to reduce their overall tax burden.

Transfer Pricing Rules

A proposed draft law on transfer pricing is also under consideration, which, if adopted, would be effective from January 1, 2011. The key changes would include the introduction of: “advance pricing agreements” with tax authorities (to resolve key issues early); new pricing methods (derived from widely-used international practice); the “arm’s length” concept (as opposed to looking at 20% deviations from market prices); further documentation and reporting rules; and making further sources of data available for the calculation of market prices. Transfer pricing controls would cover transactions between related parties, transactions with third parties in low tax jurisdictions or with other third parties which enjoy tax advantages, and a number of other cross-border transactions.

Capital Gains Tax Exemption For Long Term Investments

In his speech to the St Petersburg Economic Forum on June 18, 2010, President Dmitry Medvedev announced that in 2011 “Russia will completely abolish capital gains tax on long-term direct investment.” However, further details concerning this measure have yet to be published. Since many companies transact business through offshore structures, it is difficult to determine the true impact of the abolition of this tax.
Ratification of the Protocol to the Russia/Cyprus Double Tax Treaty
On April 16, 2009, a Protocol (the “Protocol”) to the Russia/Cyprus Double Tax Treaty (the “Double Tax Treaty”) was signed in Nicosia. 10 articles of the Double Tax Treaty were amended by the Protocol and one new article was added. The main changes will affect revenues from the sale of real estate, the taxation of dividends, the definition of a permanent establishment (which has been broadened) and provisions relating to the exchange of information. The Protocol provides that it will come into effect on January of the year following the date of its ratification by the last of the two parties to do so. An article relating to revenues from the sale of real estate will come into effect four years from the date the Protocol comes into force.

In a bid to improve public finances, the Russian government is planning an auction of state assets over the next three years to raise up to 900-billion rubles ($29-billion or £18.5-billion). The program is believed to be the largest such auction since Boris Yeltsin established privatization programs in the 1990s. The sales will be the biggest swathe of part-privatisations in the former Soviet state since the fall of the Iron Curtain and the mass privatisations which followed, and are likely to have a great impact on the Russian, UK and International legal markets.

The move is a significant reversal of Russia’s previous policy, which had seen it attempt to exert increasing control over its largest companies.

Specifically, the Kremlin seeks to offer up minority stakes in banks, oil companies and transportation firms.

According to press reports, up to ten companies are said to be offering significant stake holdings in their shares. These transactions will include the potential sale of a 27.1 percent stake in Transneft, the state oil pipeline monopoly; a 24.6 percent stake in Rosneft, Russia’s biggest oil producer Rosneft; a 24.5 percent stake in VTB, the country's second largest bank; a 9.3 percent position in Russia's largest lender Sberbank; and a 25 percent piece of of rail monopoly RZhD.

Moscow's MICEX index jumped over 1.26 percent on Monday. Transneft shares rose 3.7 percent and Rosneft, which also published second quarter results, was up 3.2 percent.
 

Medvedev, Putin's handpicked successor, says he wants more foreign investment to upgrade the country's aging Soviet infrastructure and fuel growth after the crisis hammered Russia's energy-dependent economy. This is a genuine attempt to broaden the investor profile in Russia.

New rules to end the bankers' risk-taking culture that led to the global economic crisis were backed by Economic and Monetary Affairs Committee MEPs on Monday evening. Bailed-out bank directors must get no bonuses until banks have repaid public support, bankers' bonuses must be capped at 50% of total remuneration, and bankers' bonus payments should be deferred until profits are actually earned, not just forecast, added the committee.

The rules are due to go to the full European Parliament next week for a vote and, once finalised, those relating to bonuses will come into force from 1 January 2011.

Among the key provisions will be requirements for deferral of at least 40% of bonuses for at least 3 years and the requirement for at least 50% of the non-deferred element to be paid in contingent capital (shares or equivalent instruments which will be called upon first in the case of financial difficulties). Consequently, the rules provide for the capping of up-front cash bonuses at 30% of the total bonus in most cases.

The agreement caught bankers and regulators by surprise and left them scrambling to figure out how the rules would work. The UK Financial Services Authority, which already has a remuneration code in place, said it was studying how the proposed directive would affect its practices.National regulators will have some discretion in applying the rules to their own countries but the overall percentages appear to be fixed. Regulators would be able to impose financial or non-financial penalties on groups with risky remuneration policies.

The Capital Gains Tax (CGT) increase announced in this week’s budget will mean trustees and personal representatives administering the estates of the deceased could feel the full brunt of the rise as gains made will be at risk of exposure to the new higher rate.

The new rate of 28 percent will charge any gains made while the estate is being administered, and also gains for the duration of a trust.

Will trusts, created by parents of young children or vulnerable adults, are particularly exposed to the new regime.

The Law Society and its members are urging trustees and those charged with the task of administering an estate to tread carefully when reviewing trusts or practices in light of the new CGT rate.

Law Society President Robert Heslett has said:

“This reinforces the importance of using a solicitor instead of an unqualified, unregulated will writer for trust or probate matters. In light of this new tax regime and the complications that come with it, do you really want an unqualified, unregulated executor or trustee administering your estate after you pass away, rather than a solicitor who is professional, robustly regulated, qualified and insured?

“Even where a solicitor has not been appointed to administer a trust or estate, anyone who has been given that role should go to a solicitor, who is best placed to take all these issues into account.”
 

Former McDermott Will & Emery partner Michael McFall and co-defendant Peter King, the former financial director of Neutec Pharma, were acquitted on insider trading charges at Southwark Crown Court last week, in which they had been accused of insider trading in the shares of NeuTec Pharma in the days ahead of the announcement of a £305m takeover by pharmaceutical giant Novartis. Co-defendant Andrew Rimmington, a former Dorsey & Whitney partner, had been discharged on compassionate grounds, and was acquitted after the FSA dropped its case.The regulator is still getting criticism for being too much of a light-touch, but did have an increasingly formidable record for the FSA with the body securing five out of five successful prosecutions in a little over a year, most recently the conviction of former Cazenove partner Malcolm Calvert, who was sentenced to 21 months. The recent verdict, which came on the same day as the FSA handed out its highest-ever civil fine, will be viewed as a blow to the watchdog, which has moved to demonstrate a tougher stance against City wrongdoing in recent months. The case could also add weight to proposals from the new coalition Government to create a unified agency to tackle white-collar crime.

The Bribery Act 2010 (the 'Act') became law in the UK on 8 April 2010. It was called called the "toughest enforcement standard in the world". The new legislation replaces UK legislation stretching back to 1889.

The Ministry of Justice has stated: "The Bribery Act reforms the criminal law to provide a new, modern and comprehensive scheme of bribery offences that will enable courts and prosecutors to respond more effectively to bribery at home or abroad."

The Act defines the offence of bribery. Section 7 of the Act relates to commercial organisations that fail to prevent bribery. As a result of the Act, companies will have to introduce or maintain adequate procedures to prevent corruption. However, effective guidance on what constitutes ‘adequate measures’ are yet to be published. The Act includes persons who are associated with the company, and can include agents, subsidiaries, contractors etc.  The Serious Fraud Office has said that when it investigates an allegation it will also assess how proactive a company has been in mitigating the risk of corruption at its organisation. Analysts suggest the SFO will look for a clear anti-corruption culture, fully and visibly supported from the top level of the company in conjunction with a code of ethics. If convicted, persons are liable to a term in prison of up to 10 years, and a fine.

Federal Law “On the procedure for effecting foreign investments in commercial entities that have strategic importance for the national defense and security of the Russian Federation” (the “Strategic Investment Law”) came into force on 7 May 2008.Pursuant to the Strategic Investment Law, if a foreign investor wishes to acquire control over a strategic company, the investor will have to obtain prior governmental consent. This update analyses how the law is being implemented.
Legislation implementing the Strategic Investment Law is now in place and accordingly there is now much more clarity as to how the Strategic Investment Law is to be applied.
In order to consider applications for prior government consent under the Strategic Investment Law, the Russian Government established a governmental commission on control over foreign investments in the Russian Federation (the “Commission”). The Commission is headed by the Chairman of the Government – Mr. Vladimir Putin.
Based on information published by the Federal Antimonopoly Service (the "FAS") as well as on media reports, most applications appear to be for investment in oil and gas companies or in natural monopolies. Approximately 1/3 of the applicants have Russian ultimate beneficiaries, while the remaining 2/3 of the applications are apparently by foreign investors.
In addition to the Strategic Investment Law, particular restrictions on investments in Russia were introduced to the Federal Law No. 160-FZ dated 9 July 1999 "On foreign investments in the Russian Federation" (the "Foreign Investment Law"). Article 6 of the Foreign Investment Law states that transactions effected by foreign state investors resulting in acquisition of (i) more than 25% voting shares of any Russian company or (ii) the right to block decisions of management bodies of such a company, are subject to a prior approval procedure set out in the Strategic Investment Law.
As a general rule, the Strategic Investment Law prohibits foreign state investors from acquiring control over Russian strategic companies. One of the tests of "control" is the acquisition of 10% or more voting shares of companies developing strategic fields. There is, however, a general exemption (not specifically referring to foreign state investors) providing that where the Russian Federation directly or indirectly controls more than 50% of votes in a strategic subsoil company, the restrictions set forth by the Strategic Investment Law do not apply, except for a requirement for a prior governmental approval for acquisition by a foreign state investor of more than 5% in a strategic subsoil company. Due to the ambiguous wording of the law, there was uncertainty as to whether this exemption also applied to foreign state investors.
In an informal clarification FAS stated that a foreign state investor may not acquire more than 10% of voting shares in a strategic subsoil company, even if the Russian Federation controls more than 50% of votes in that company.
 

In June 2009, Russian President Dmitri Medvedev signed into law important amendments to the Russian Stock Companies Law. These amendments focus on four key issues:

(i) Shareholders agreements

For many years, observers considered such agreements to be unenforceable and Russian court practice was generally not supportive of such agreements. In contrast, shareholders in Russian stock companies are now expressly allowed to enter into shareholders agreements under Russian law. New Article 321 of the Stock Companies Law defines a “shareholders agree¬ment” as an agreement relating to the exercise of rights arising from the ownership of shares, including limitations on the exercise of such rights.

(ii) Voting at meetings of the board of directors
Amended Article 68 has tightened up these voting rules. Now, the charter or internal regulations of a stock company must provide that the board of directors adopts deci¬sions by at least a simple majority of the directors present at a meeting.

(iii) Resolution of deadlocks within the board of directors
Amended Article 69 of the Stock Compa¬nies Law now states that if the board is deadlocked with respect to the appointment or termination of senior management (i.e., the general director), then, in addition to other remedies available under a shareholders agreement (if any), the matter may be referred for resolu-tion to the shareholders, unless the charter provides otherwise.

(iv) Increased public disclosure requirements.
Changes to Article 30 of the Securi¬ties Market Law have established new public disclosure requirements for stock companies with a regis¬tered prospectus, which include notification of the following events: Deadlocks with regard to appointment and termination of the senior management (as described above); and Acquisitions by a shareholder (alone or with its affiliates), either directly or indirectly as the result of entering into a shareholders agreement, of more than 5, 10, 15, 20, 25, 30, 50 or 75 percent of voting shares or the power to control more than said percentages of shares.
The disclosures must be made by notice to the proper authority - generally, the FFMS - within five days.
 

A recent decision by the Court of Appeal in Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399, has had implications on how to define "subsidiary" and "holding company" in an agreement pursuant to section 1159 of the Companies Act 2006.

In Enviroco, an agreement defined the term "Subsidiary" by referring to section 736 of the 1985 Act. The case turned on whether or not Enviroco was a subsidiary of Asco plc (Asco). 50% of the shares in Enviroco were held by a third party and 50% were held by Asco. Pursuant to an agreement with the other member, Asco controlled alone a majority of the voting rights. At the time the agreement was signed, Enviroco was a subsidiary of Asco but the Court of Appeal held that when Asco transferred its shares in Enviroco to a lender in connection with the taking of security and the lender entered its (or its nominee's) name in the register of members, Enviroco ceased to be a subsidiary of the holding company within the meaning of section 736(1)(c) of the 1985 Act and therefore the agreement. The decision in Enviroco may also apply where an affected holding company's shares in a subsidiary are held in the name of a nominee (as the court's decision turned on the fact that another person had been registered in Enviroco's register of members, not on the taking of security).
This ruling has implications for contracts which are made by companies whose status as holding companies and subsidiaries derives from subsections 1159(1)(b) and (c), and which define concepts such as "subsidiary", "affiliate", "group" and "holding company" by reference to section 1159 (or section 736). Provisions of a contract that typically turn on such definitions include change of control provisions, rights to assign the contract to or to ask for services to be provided to other group companies, indemnities which benefit group companies, provisions which trigger a grant of a parent company guarantee, VAT clauses which rely on a definition of group, and limitations and exclusions of liability (which limit or exclude liability of group companies of a party).

Under the Companies Act 2006 (2006 Act), a company is the "subsidiary" of its "holding company" if the holding company:
• holds a majority of the voting rights in it (first test); or
• is a member of it and has the right to appoint or remove a majority of its board (second test); or
• is a member of it and (under an agreement with other members) controls alone a majority of the voting rights in it (third test).

Under the second and third tests, the holding company must fulfil two requirements:
• It must be a member of the subsidiary, which means that it must be entered into the subsidiary's register of members (section 112, 2006 Act; section 22, 1985 Act); and
• It must have the particular right set out in the second or third test (to appoint or remove a majority of its board, or, under an agreement with other members, to control the majority of voting rights).

Russia has adopted the Federal Law No. 261-FZ “On Energy Saving and Energy Efficiency Increase and Amending Certain Legislative Acts of the Russian Federation” (hereinafter referred to as the “Law”)

The Law is a central act embracing general principles of Russian policy in the sphere of energy efficiency (EE) and energy saving (ES). The Law replaces the previous Federal Law “On energy efficiency” No. 28-FZ dated 3 April 1996.

The declared aim of the Law is to create a legislative, economic and organisational stimulus for ES and
increasing EE.

The basic principles are:
- efficient use of energy resources;
- support and encourage ES and increase in EE;
- systematic and integrated character of ES and EE programs;
- planning and integration of activities increasing ES and EE;
- use of resources with account to resource, technological, ecological and social conditions.

EE Requirements for Circulation of Goods
According to the Law, goods produced on the territory of the Russian Federation and imported to Russia must contain information on their EE classes in the attached technical documentation, as well as on their tags and labels.
Failure to comply with these requirements will result in administrative liability. Moreover, the EE requirements for the circulation of goods cover the widely debated issues concerning the introduction of energy efficient bulbs. The Law prohibits the circulation of incandescent lamps with power exceeding 100W for the purposes of alternating current and lightning from 1 January 2011.
Even more severe rules are fixed for the public sector: no public procurements for the supply of incandescent bulbs of all power characteristics shall be allowed from 1 January 2011, except for supply of electric bulbs for premises used for large groups of people (halls of theatres and cinemas,
lecture auditoriums, restaurants, etc.).
The Law provides for the adoption of EE requirements for lighting equipment and electric bulbs by 1 March 2010.
EE requirements for buildings, structures, installations
According to the new EE rules, buildings, structures and installations must comply with obligatory
requirements fixed by the Ministry of Regional Development in concurrence with the Ministry of
Energy (ME) and MED under a special Decree adopted by the Government. The EE requirements will be
revised every 5 years and include:
- indicators characterising specific quantities of energy resources consumption in the buildings/constructions;
- requirements relating to the architectural, functional, technological, constructive,
engineering and technical solutions influencing the EE of buildings/constructions;
- requirements relating to separate elements of buildings/constructions;
- requirements relating to equipment and technologies used in buildings/constructions; and
- requirements relating to technologies and materials applied in course of construction,
reconstruction, major repairs.

Failure to comply with EE requirements in designing, construction, reconstruction and capital
repairs, as well as failure to comply with gauge fitting requirements entails administrative responsibility.
The Law also fixes special types of liability for builders and developers.

EE Requirements for Public Sector
Budgetary institutions are to ensure a reduction by 15% of water, fuel, natural gas, thermal energy, electrical energy, coal and black oil consumption within 5 years from 1 January 2010 based on 2009 figures. At the same time, the yearly reduction of energy consumption may not be less that 3%. Furthermore, companies with state participation as well as companies carrying out regulated types of activities are obliged to approve and realise programs aimed at EE increase. Requirements for programs of tariff-regulated organisations will be fixed by relevant federal ministries.
The Law also states new conditions of public procurements in the energy sphere and introduces new
type of contracts named “energy service agreements”. The discretional terms of energy service agreements may include, inter alia, a clause on the price fixed subject to results attained or planned due to the realisation of the contract, (e.g. subject to the value of energy resources savings), and a clause stipulating the obligation of the executor to install and use the energy accounting meters etc. Clauses of energy service agreements may be included in contracts of sale and purchase, supply or transfer of energy resources (except natural gas

Control Mechanisms
The Law provides for two main types of energy control: voluntary (energy surveys) and obligatory (energy audit). The results of energy control must be reflected in energy passports comprising information on availability of energy accounting meters, volume of energy resources used and the modifications of this volume etc. All information contained in the energy passports will be included to the State Energy Register kept by ME.

In order to encourage private investors to participate in the EE program, the Law also proposes a range of incentives, both in the economic and tax spheres. For example, tariff-regulated companies transferring
energy resources will be able to apply two alternative incentives during a maximum 5 year period: either to gross-up their proceeds by the amount of expenses incurred for actions aimed at energy resources losses reduction, or retain economy generated due to investments in EE and ES.
Furthermore, in order to draw the attention of the public to EE and ES matters, the Law provides for a wide range of measures aimed at informing people and raising their awareness.

The Ministry for Economic Development in the Russian Federation has provided a letter of guidance (non-binding) in relation to the composition of shareholders' agreements in Russia (Letter of the RF Ministry for Economic Development No. D06-2643 'On the Clarification of the Amendments Introduced to the Federal Law 'On Joint Stock Companies' Concerning Shareholders' Agreements' dated 14 September 2009). Conditions precedent and subsequent in shareholders' agreements should be realistic and likely to occur. A shareholders' agreement may contain restrictions in relation to the non-disposal of shares for a certain period of time too.

The government has decided not to relax the UK’s anti-money laundering reporting regime despite calls from a House of Lords committee to do so.

In its July inquiry into money laundering and the financing of terrorism, the home affairs subcommittee of the House of Lords select committee on the EU said the law should be amended so that failure to report a suspicious transaction that is based on a minor criminal offence should not be prosecuted.

However, the government said in its response that it ‘prefers the all-crimes approach’. It said that an apparently trivial report ‘may in fact be the tip of a much bigger criminal enterprise’ and that if the House of Lords’ proposal was made law, then ‘valuable intelligence opportunities’ might be missed.

When giving evidence to the House of Lords committee earlier this year, the Law Society argued that the reporting regime placed a heavy burden on solicitors and called for it to be relaxed.

Alison Matthews, chair of the Law Society’s money laundering taskforce, said she remained concerned that the difficulties encountered by the profession need to be fully addressed, but welcomed the government’s commitment to engage with the Law Society on this issue.

The government said that individuals who submit a suspicious activity report (SAR) to the Serious Organised Crime Agency (SOCA) for the first time will be given one-to-one guidance on how to do so. SOCA will then examine their SAR and provide feedback. The government also said that SOCA will endeavour to provide feedback on SARs where they contribute to the success of an operation.

Meanwhile, the Treasury has approved the Law Society’s updated anti-money laundering practice note. The Solicitors Regulation Authority and the courts must refer to this practice note when assessing a solicitor’s conduct in response to money laundering allegations.
 

All sections of the Companies Act 2006 which were not already in force, came into force on 1st October 2009. The key changes are as follows:

COMPANY FORMATIONS

The application form to register a new company at Companies House after 1st October 2009 is a Form IN01 rather than a Form 10/12. Only one subscriber is now required (two were required under the 1985 Act).

Memorandum: The new-style memorandum is very basic, and just states that each subscriber intends to form a company and take at least one share.

New companies formed after 1st October 2009 are unrestricted by objects (or objectives) unless specifically restricted in the articles, and may therefore have corporate capacity to do whatever they want. Existing companies may delete their objects, or continue to be bound by them.

Companies already existing on 1st October 2009 should amend their articles and send a copy to Companies House incorporating the provisions brought across from their existing memorandum before they can appear on the face of the articles.

Articles: There are three sets of Model Articles (in addition to Table A, which remains in force): (i) Model Articles for a public company limited by shares; (ii) Model Articles for a private company limited by shares; (iii) Model Articles for a private company limited by guarantee. The relevant set of articles applies by default, but the members can chose to exclude them entirely or apply them with modifications.

Private company Model Articles: These are very simple, leaving out various provisions, such as the holding of AGM’s, provisions dealing with partly-paid shares and alternate directors, because most small private companies are unlikely to need them. Telephone board meetings are permitted, as well as written resolutions and resolutions where all directors indicate by any means they are in agreement.

Public company Model Articles: These are much more complex and longer, and cater for alternate directors, retirement by rotation, partly-paid shares. They are not suitable for use by listed or AIM companies.

Existing companies with Table-A based articles can chose to keep their articles, or can adopt some or all of the Model Article provisions. If they do so they must notify the Registrar of Companies with Form CC04, together with the resolution and amended articles. The company must send any amendments to the company’s articles to Companies House within 15 days, or they could be liable to a criminal offence and a civil penalty of £200.

All limited companies should still contain a statement in their articles that the members’ liability is limited to any amounts unpaid on their shares.

SHARE CAPITAL

New Companies: There is now no limit on the amount of share capital that can be issued, unless the members choose to limit it in the articles.

The default position for a new company that is private and has only one class of share is that the directors have unlimited power to allot new shares. New private companies that have more than one class of shares must be given authority to allot by means of an ordinary resolution or any provisions in the articles.

Existing Companies: Existing companies can either allow any limits to authorised share capital to be imported by section 28 of the Companies Act 2006, or can revoke the limit by passing a special resolution to amend the articles or pass an ordinary resolution to that effect.

Any existing section 80 authority remains valid until its expiry. The members must resolve to allow the default position of giving directors absolute authority to allot.

New shares must be issued in accordance with the statutory pre-emption regime. Existing exclusions or dis-applications of that regime will still be in effect. There are however new definitions relating to share capital, and new wording for resolutions to authorise directors to allot shares and dis-apply pre-emption rights.

Private companies now automatically have power to issue redeemable shares (public companies still need to be authorised). Directors may now determine the terms of redemption before shares are issued, and payment must still be in cash but can be partly-deferred.

New statements of capital must be filed in returns to Companies House. A statement of capital must also be completed with certain forms associated with notification of capital changes, namely: (i) Allotment of shares; (ii) Notice of consolidation, sub-division of shares or re-conversion of stock into shares or redemption of redeemable shares; (iii) Redenomination of shares; (iv) Reduction of capital as a result of redenomination; (v) Cancellation of re-purchased shares or, (for plcs), immediate cancellation of shares re-purchased into treasury; (vi) Subsequent cancellation of shares held in treasury by a plc; and (vii) Cancellation of shares held by or for a plc in accordance with s.662 of the Companies Act 2006.

The statement of capital must show with regards to the issued capital: (i) the total number of shares of the company; (ii) the aggregate nominal value of those shares; (iii) for each class of shares: (a) prescribed particulars of the rights attached to the shares (these will be determined in regulations and indicated on the appropriate forms); (b) the total number of shares of that class; and (c) the aggregate nominal value of shares of that class; and (d) the amount paid up and the amount (if any) unpaid on each share (whether on account of the nominal value of the share or by way of premium).

DIRECTORS

It is more difficult for members of the public to obtain a directors’ residential address. All companies now need to maintain two separate registers, a register of directors and their service addresses, and a register of directors’ residential addresses. Only the service address needs to be filed at Companies House, or if a residential address is required it will be on a separate page that is kept secret at Companies House.

CHANGE OF COMPANY NAME

A company may now change its name by both special resolutions and by other means provided for by its articles (i.e. delegating the responsibility to the board of directors).

OTHER NEW PROVISIONS

The Registrar of Companies now has power to correct incorrect documents. An incomplete document will have information missing from it that the registrar can insert once he has made enquiries of and received instructions from the company or the person who delivered the document.  Because there are statutory time constraints on the delivery of mortgages and charges for registration and Companies House consider that the informal correction power will initially be most useful in respect of them. Companies can download an informal correction notice of consent, which requires a Company to give a single contact name, postal address and email address for the company or organisation.

From 1st October 2009, Part 35 of the Companies Act 2006 gives the Registrar of companies a range of powers. These include powers to decide on the form and manner in which companies must deliver documents, what is needed for a document to be properly delivered, provision of electronic delivery for certain documents, and amendments to the register.

The registrar can administratively remove from the register: (i) unnecessary material; or (ii) a document that has been replaced.

Material that cannot be removed includes: (i) incorporation documents; (ii) change of company name; (iii) re-registration; (iv) becoming or ceasing to be a Community Interest Company; (v) reduction of share capital; (vi) change of registered office; (vii) registration of a charge; (viii) dissolution; (ix) Agreement for delivery of company information by electronic means: the PROOF (PROtected On line Filing) process.

A company can enter into an agreement with the registrar that it will file specified documents electronically only. This allows companies to protect themselves against the risk of being hijacked or having false filings made against them.

On January 11, 2009, the Russian government introduced the Federal Law of the Russian Federation No. 164-FZ On Amendments to the Federal Law On Protection of Competitions and Certain Statutes of the Russian Federation, the so-called "second antimonopoly package", for consideration by the State Duma. On 22 August 2009 the second antimonopoly package came into effect. This new group of reforms seeks to decrease administrative and compliance burdens on small and medium-sized businesses, and strengthen penalties for violation of antimonopoly legislation. The package involves amendments to a number of laws, including the Federal Law ‘On Protection of Competition’ (the "Competition Law"), the Criminal Code, and the Code on Administrative Violations.

The amendments were developed after discussions with businesses in Russia, and reflect recent concerns and practices. It has been widely acknowledged that governmental and municipal officials and monopolies in Russia commit most of the violations, and therefore the amendments have been aimed at tightening their activities. However a number of provisions are of interest to businesses within Russia.

Competition Law

Extra-territorial Application

The amendments broaden the scope of the extra-territorial application of the law to include, inter alia, other agreements or actions made outside Russia "which may affect competition in Russia.", rather than applying only to agreements between Russian and/or foreign persons or organisations made outside Russia if (i) such agreements are reached in respect of production facilities and/or intangible assets located in Russia, or in respect of shares or equity interests in Russian business entities; and (ii) such agreements restrict or may restrict competition in Russia.

Vertical Agreements

The previous Competition Law set forth a list of anti-competitive agreements and "coordinated actions" which were prohibited per se, such as price-fixing, division of markets and the like. The second antimonopoly package excludes so-called "vertical agreements," or agreements between entities that do not compete directly (such as a manufacturer and its distributor). This change enables the use of dealership or distribution agreements, which were at risk of being considered in violation of the Competition Law, under certain circumstances. The provision was very restrictive and potentially affected all agreements. However, "vertical agreements" which may lead to retail price-fixing or limit the choice of suppliers will remain prohibited.

Thresholds for acquisition or merger of companies were increased

Thresholds which require advanced clearance from the Russian competition body (the Federal Antimonopoly Service, or "FAS") for certain merger and acquisition transactions if the aggregate assets or annual revenues of the acquirer and the target company (or in certain cases, all parties to the transaction) have been increased. Generally, the level of aggregate assets of the relevant companies have been increased to 7 billion Rubles (approximately $194 million); and the revenue thresholds have risen to 10 billion Rubles (approximately $278 million).

Dominance Threshold

The FAS may under certain circumstances recognise a company as dominant even if its share in the relevant goods market is less than 35%, provided that the company can exercise a dominant influence on the general conditions of the goods circulation in the relevant goods market.

Monopolistic pricing

The FAS have introduced a new method of estimating whether the price of goods are monopolistically high, by checking the cost of producing the goods as well as merely comparing prices established under competitive conditions.

New notification procedures

New notification requirements are now in place in relation to transactions by persons or groups who own 50% or the shares in a company.

Conditions of selling through a commodity exchange

The FAS now has the right to issue conditions for selling a particular amount of goods through a commodities exchange.

Audit Procedures

The FAS now has the ability to conduct unscheduled inspections without prior notification. The FAS is entitled to inspect, under authority by the head of the anti-monopoly authority, compliance by business entities with the Russian anti-monopoly laws. Inspectors can claim documents and all business correspondence and information.

Code on Administrative Violations

The amendments to the Code introduce new penalties, including:

·         Fines of up to 15 percent revenues from "coordination" (such as price-fixing) between market participants;

·         Fines of up to 1 million Rubles (approximately $27,800) for acts constituting "unfair competition";

·         A minimum fine of 100,000 Rubles (approximately $2,780) for anti-competitive agreements or "coordinated actions"; and

·         Fines of up to 15 percent of a company's revenue (with certain limitations) for price manipulation on the electric power market.

There are several new administrative violations in state and municipal procurement which increase the efficiency of tenders and reinforce protection of market agents taking part in competitive bidding, aiming to facilitate the involvement of small and medium businesses in tenders.

There has also been introduced a 1-3 year disqualification for the executives of economic entities with a dominant position that have abused that dominant position.

Criminal Code

The Amendments update Article 178 of the Criminal Code by expanding the range of criminally punishable anti-competitive practices, agreements and coordinated actions that may result in criminal liability. These amendments have introduced real criminal enforcement possibilities in respect of rule violators. Violations in question include participating in competition-restricting agreements, repeatedly abusing a dominant position by fixing high prices, unreasonably refusing to sign or evading contracts and restricting market-entry. These offences are punishable by a fine of between 300 and 500 thousand Rubles (formerly 200 thousand Rubles), or 1-2 years of salary, or by imprisonment of 3 years (formerly 2).

The House of Lords via its European Committee published a report examining the current anti-money laundering (AML) and prevention of terrorism rules and application of their provisions to legal practice. In the report the Lords expressed their concern in respect of the breadth of the current regulations, which results in the generation of a great number of unnecessary reports by the legal and other consultants. The report effectively adopts the recommendations of the Law Society, which has long voiced its doubts as to the need for such a wide approach, to review and, if necessary, change the law applying to AML. In particular, the Lords agreed that reporting of minor breaches of AML regulations to the security agencies where the client was taking steps to rectify the breaches was not proportionate. The promises by the prosecution not to pursue such minor breaches were not sufficient. The implication of the report could be a change in the law on AML and relaxation of certain aspects of the current regulation, which would benefit both the legal profession and the clients it seeks to service.

 Source: http://www.publications.parliament.uk/pa/ld/ldeucom.htm

FGM is authorised by the Solicitors Regulation Authority.

Filatov Goldberg Musatov LLP is registered with Companies House.