Changes of Control Criteria on EU Regulation

31 October 2023
Ksenia Skoromolova

On October 23, 2023, the European Commission issued updated Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014 regarding the definition of criteria for control of companies.

According to the Article 5aa of the Regulation No 833/2014, it shall be prohibited to directly or indirectly engage in any transaction with:

a) a legal person, entity or body established in Russia, which is publicly controlled or with over 50 % public ownership or in which Russia, its Government or Central Bank has the right to participate in profits or with which Russia, its Government or Central Bank has other substantial economic relationship, as listed in Annex XIX;

b) a legal person, entity or body established outside the Union whose proprietary rights are directly or indirectly owned for more than 50 % by an entity listed in Annex XIX;

c) a legal person, entity or body acting on behalf or at the direction of an entity referred to in point (a) or (b) of this paragraph.

The European Commission since October 23, 2023, has interpreted paragraph (c) of the said article as follows. The aim of this Article is to address situations where an entity in Annex XIX attempts to circumvent the application of EU sanctions, for instance by changing the formal ownership of a company to side-step the application of Article 5aa (1)(b). For example, a company previously falling under the scope of Article 5aa(1)(b) is likely to be «acting on behalf or at the direction» of’ an entity in Annex XIX (Article 5aa(1)(c)) if:

  • the ownership structure of the company is modified to reduce the shareholding owned by the entity in Annex XIX to 50% or below according to the ownership designation criterion,
  • in particular where the share transfer is operated within the same corporate group and/or
  • the transfer occurs close to the date of inclusion into Annex XIX of the relevant entity or of the issuance of guidance clarifying the implementation of the measure and/or
  • if any material influence over the relevant entity is maintained (e.g. veto rights or any other influence over the management of the entity).

These criteria, in the opinion of the European commission, indicate the bad faith in the situation of share transfer which was made to camouflage the effective ownership or control and to circumvent the applicability of Article 5aa.

In this regard, the termination of economic transactions with an entity «acting on behalf of or at the direction» of another person is required, including termination within a reasonable period of time to avoid negative consequences of such termination.

The updated FAQs tighten the current regulation and require more careful structuring of transactions related to the acquisition of shares of foreign companies, as well as changes in ownership carried out within a group of companies.