Corporate Rights in Russian Economically Significant Organizations

The Federation Council approved on 28 July 2023 a draft law¹ regulating the procedure for the exercise of corporate rights by foreign participants of Russian companies.

The draft law applies to economically significant organizations (ESO) – Russian companies that are essential for ensuring the economic sovereignty and economic security of the Russian Federation, are included in the relevant list by Russian Government. ESO shall simultaneously meet the following criteria:

• ESO and its group² shall have:
• the total revenue for the last reporting period over BRUB 75; or
• more than 4,000 employees
• the total value of assets for the last reporting period over BRUB 150
• paid over BRUB 10 of fees and duties to the budgets of Russia for the previous calendar year
• ESO or its subsidiary shall:
• be a subject of critical information infrastructure³ or a city-forming organization that has a significant impact on the development of the region or systemically significant credit institution as of 1 February 2022
• implement technologies and/or software for socially significant services and/or provides services in the field of information technology or communications
• participate in the creation and modernization of high-performance and (or) high-paying jobs
• the amount of direct and (or) indirect participation of Russian beneficiaries in a foreign holding company (Holding), which owns at least 50% of the shares of ESO , is:
• more than 50%, or
• more than 30% with the opportunity to determine the decision of the supreme management body of the Holding, or
• more than 20%, if restrictive measures of a blocking nature are applied to the shareholders of Holding or to ESO itself.

The inclusion of a legal entity into ESO list may entail such consequences as:

• suspension of corporate rights of Holding in ESO
• allocation of dividends in ESO directly to Russian beneficiaries, without paying to Holding
• transformation of ESO to PJSC.

1. Suspension of corporate rights

The decision to suspend Holding’s corporate rights may be taken by the Arbitration Court of the Moscow Region, if Holding:

• refuses (evades) to exercise of rights and/or performance of the duties of the shareholder of ESO  in a good faith, or there is a risk of such refusal (evasion)
• commits actions (inaction) aimed at creating obstacles to the management of ESO and (or) the implementation of its economic activities, including by the actual termination of the management of ESO by its management bodies appointed (elected) in full or in any part at the suggestion of the Holding
• commits actions (inaction) that may lead to the termination or suspension of the activities, liquidation or insolvency (bankruptcy) of ESO.

If such decision is made, Holding will not be entitled to:

• take part and vote on general meetings of shareholders of ESO, demand for its convocation, as well as exercise other corporate rights, including pre-emptive right to purchase ESO shares
• dispose of shares of ESO
• receive dividends from ESO (excluding cases, when beneficiaries may receive dividend directly).

At the request of ESO and interested parties, the court may authorize the execution of certain transactions and actions, provided that such transactions will not lead to disruption of smooth functioning of ESO.

The most significant consequence of the recognition of a legal entity as ESO is the transfer of ESO shares from Holding to ESO itself. At the same time, the Russian beneficiaries are obliged to register the direct ownership to such shares proportionally to the amount of their indirect ownership in the authorized capital of ESO. ESO shares can also be transferred to a specially established legal entity, which shares belong to the beneficiaries of ESO.

Holding has the right to apply to ESO with a claim for repayment of the market value of shares that were not distributed among its beneficiaries or return of ESO shares after the suspension of corporate rights expired or cancelled.

2. Allocation of dividends

The draft law provides for the possibility of paying dividends of ESO to beneficiaries in following cases:

3. Transformation of ESO to PJSC

ESO, which doesn’t have public status, should be transformed into PJSC if Holding:

• is a public company
• controls directly or indirectly 100% of votes in authorized capital of ESO LLC, or has the qualified majority of votes necessary to make a decision on adoption of amendments to the charter in part of public status of ESO JSC.

At the same time, ESO transforms into a PJSC automatically after the decision on suspension of Holdings corporate rights, i.e. there is no need to submit an application to the Federal Tax Service. After that ESO shall issue shares and conclude a listing agreement. ESO also has a 6 months period for providing its activity in compliance with the requirements applicable to public companies.

The draft law, if signed by Russian President, will enter into force 30 days after its official publication. The adoption of the draft law will entail the possibility of significant restrictions of corporate rights in Russian subsidiaries of foreign companies– however, the draft law establishes a validity period of these restrictions until 31 December 2024 inclusively.

¹ Draft Law No. 176651-8 “On the specifics of regulating corporate relations in business entities that are economically significant organizations” / URL: https://sozd.duma.gov.ru/bill/176651-8
² Determined in accordance with Federal Law No. 135-FZ of 26 July 2006 “On Protection of Competition”
³ Determined in accordance with Federal Law No. 187-FZ of 26 July 2017 “On the security of the critical information infrastructure of the Russian Federation”