Russian Federation: Legal Aspects Of Doing Business In Skolkovo And/Or St.Petersburg SEZ

Last Updated: 15 April 2014
Article by Valentin Petrov and Petr Shevtsov

Skolkovo:

The main regulatory framework for the formation of a company in Skolkovo consists of the Skolkovo Law, decisions of the President of the Russian Federation, by-laws and special regulations adopted by a Non-Commercial Organization called "Fund for the Advancement of the Center for Development and Commercialization of New Technologies" (the "Skolkovo Fund") which manages Skolkovo. The Skolkovo Law does not cover many areas that a reasonable investor would expect in order to assess whether its investment and property (including intellectual property) in a Skolkovo project are sufficiently protected. For example, Skolkovo Law does not regulate the provision of funding by the Skolkovo Fund to Skolkovo Project Members or establish a legal regime for the ownership of intellectual property developed by companies based in Skolkovo. It is anticipated that these issues will be addressed in future regulations to be adopted by the Skolkovo Fund.

The Skolkovo Law sets out the requirements which an applicant must satisfy in order to obtain Skolkovo member status (the "Skolkovo Project Member").The Skolkovo Fund also has the power to introduce additional requirements for applicants to obtain Skolkovo Project Member status. To become a Skolkovo Project Member an applicant must:

(i) be a company incorporated under the laws of the Russian Federation;

(ii) perform activities in (a) energy, (b) nuclear, (c) space, (d) telecommunication, (e) navigation, (f) medical and (g) strategic computer science and software;

(iii) procure that its by-laws limit its activity exclusively to research;

(iv) undertake to perform its research in accordance with Skolkovo Law and regulations adopted by the Skolkovo Fund;

(v) provide a brief overview of the contemplated project and confirmation that a renowned foreign scientist / specialist has agreed to participate in the project; and

(vi) procure that commencing January 1, 2014 the applicant's CEO and other members of its executive bodies authorized to act on its behalf without a power of attorney will permanently reside in Skolkovo.

Skolkovo Project Member status is valid for a period of ten (10) years. It may be terminated prior to the expiration of the 10-year term if the Skolkovo Project Member (i) fails to comply with the regulations prescribed by the Skolkovo Fund or Skolkovo Law, or (ii) decides to cease its activity in Skolkovo. Although the Skolkovo Law does not specifically provide that the Skolkovo Fund is authorized to terminate the status of a Skolkovo Project Member, it authorizes the Skolkovo Fund to establishes procedures for termination.

As noted above, investments/funding by the Skolkovo Fund in projects of Skolkovo Project Members is not yet sufficiently regulated. Instead, the Skolkovo Fund appears to have adopted an investment policy which governs investments made by the Skolkovo Fund (the "Investment Policy"). The Investment Policy was adopted in the form of a recommendation and therefore is not legally binding on the Skolkovo Fund. Pursuant to the Investment Policy, the Skolkovo Fund provides funding in the form of free grants. It does not seem to contemplate the Skolkovo Fund acquiring equity in Skolkovo Project Members or its participation in profit allocation. The maximum amount which the Skolkovo Fund may provide is approximately USD 10,000,000.

The Skolkovo Law does not specifically regulate intellectual property developed by Skolkovo Project Members. The Skolkovo Law does, however, provide that absent specific regulation in the Skolkovo Law other laws of the Russian Federation shall apply. Pursuant to Clauses 1261 and 1295 (2) of the Civil Code of the Russian Federation, a software developer has exclusive rights over its software and no third party may use such software without the prior approval of the exclusive rights holder. Accordingly, a Skolkovo Project Member which develops new software should have exclusive rights to such software.

The situation, however, may differ if the software is developed by a Skolkovo Project Member which receives Skolkovo Fund investment. The Skolkovo Fund receives its funding from the Russian federal budget and, as such, may be considered a "state customer". The Russian Civil Code provides that, irrespective of any agreement between the developer of software or other intellectual property and the state customer, the state customer has the right to require that a free, non-transferable license is provided to a third party specified by the state customer. Therefore, if a Skolkovo Project Member receives investment from the Skolkovo Fund and develops any intellectual property, the Skolkovo Fund may require a free, non-transferable license.

St.Petersburg SEZ:

The regulatory framework for the formation of a company in St.Petersburg SEZ consists of the St.Petersburg SEZLaw, decrees of the Government of the Russian Federation and regulations of the Russian Ministry of Economic Development (the "Ministry"). St.Petersburg SEZ is a special economic zone which consists of: (i) "Noidorf", located at Strelna, Petrodvorets district; and (ii) "Novorlovskaya", located in the Primorsky District of St. Petersburg. St.Petersburg SEZ was established by the decision of the Government of the Russian Federation in December 2005 for a period of 20 years. It is managed by OJSC "Special Economic Zones" (the "Management Company"). Unlike the Skolkovo Fund, the authority of the Management Company is limited to the management of infrastructure and real estate in St.Petersburg SEZ. The Management Company is not authorized to adopt mandatory regulations such as application requirements for the granting of resident status, investment policy and/or an intellectual property regime. It is also not authorized to make decisions with respect to granting or terminating resident status, nor can it sign agreements with residents of St.Petersburg SEZ.

Resident status should be granted by the affirmative decision of the Ministry's Expert Council within 40 days of the application. In order to be considered for St. Petersburg SEZ resident status, the applicant must meet the following requirements:

(i) be a commercial company incorporated under the laws of the Russian Federation in the St.Petersburg SEZ location;

(ii) undertake to engage in an activity permitted in St.Petersburg SEZ (e.g., software development); and

(iii) provide a business-plan in the prescribed form.

Following the review by the supervisory board of the Management Company and approval by the Expert Council, the potential resident must enter into a standard form agreement with the Ministry which contains (i) the Ministry's obligation to finalize registration and grant resident status, (ii) the terms and conditions of access to infrastructure in St.Petersburg SEZ, (iii) the lease terms for the premises, (iv) events of material breach, and (v) may also contain the investment obligations of the resident. The standard form of the agreement does not contemplate additional terms such as the provision of financial assistance to the resident or the terms governing intellectual property developed by the resident. It may be advisable to confirm with the Ministry whether such additional terms may be negotiated.

Unlike Skolkovo where the Skolkovo Fund has the discretion to terminate Skolkovo Project Member status, resident status cannot be terminated by the decision of either the Ministry or the Management Company. It may, however, be terminated by a decision of the Russian state arbitrazh court in the event of a material breach by the resident of the agreement with the Ministry or if the resident fails to remedy a breach within two months following an audit by Russian authorities.

The procedures, terms and conditions for providing funding to the residents of St.Petersburg SEZ are not expressly regulated by St.Petersburg SEZ Law, and the Ministry has not adopted specific regulations. The St.Petersburg Committee for Economic Development, Industrial Policy and Trade (the "Committee") has limited authority to provide funding to residents of St.Petersburg SEZ. However, there is no clear procedure, terms and/or conditions governing such funding.

St.Petersburg SEZ Law does not specifically regulate matters related to intellectual property developed by the residents of St.Petersburg SEZ. Absent specific provisions in the St.Petersburg SEZ Law, Clauses 1261 and 1295 (2) of the Civil Code of the Russian Federation would apply. As noted above, pursuant to these provisions a software developer would generally retain exclusive rights in the software. However, if the developer who is a resident of St.Petersburg SEZ receives any funding from the Committee it may end up having to grant a free, non-transferable license to a third party designated by the Committee, which for these purposes may be deemed to be a "state customer".

Footnotes

1 Skolkovo Law and the document entitled "Mandate for the Performance of Functions of the Managing Company" (the "Mandate") do not preclude a Skolkovo Project Member having a registered branch/representative office outside Skolkovo.

Although the Skolkovo Law does not provide that an applicant must be incorporated and/or have its registration address in Skolkovo, the Mandate provides that "[O]nly companies-members having registration address in Skolkovo and carrying out its significant part of activity in Skolkovo shall be entitled to preferences and privileges provided by the legislation regulating Skolkovo". The Mandate further provides that "[F]or the period of construction of Skolkovo the status of company-member may be granted to the company not having registration address in Skolkovo and not carrying out its significant part of activity in Skolkovo". However, the term of construction of Skolkovo is not determined in the laws and regulations.

2 In an interview available at http://www.consultant.ru/law/interview/drozdov.html -- I.A. Drozdov, Head of Legal of Skolkovo Fund stated that relevant regulations are unlikely to be adopted in the format of a single document. Instead, the Skolkovo Fund is contemplating the adoption of various regulations which shall comprise a set of mandatory regulations for Skolkovo Project Members and applicants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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