Russian Federation: New Competition Law Focuses Attention On ‘Group Of Persons´

Last Updated: 15 August 2007
Article by Alexander Skoblo and Ethan Heinz

It may be too early to judge whether Russia’s new competition law, which took effect less than five months ago, will live up to its promise to modernize and streamline Russian antimonopoly review of mergers, acquisitions, and similar equity transactions. To be sure, the new law (Federal Law No. 135-FZ "On the Protection of Competition"), has in some circumstances eliminated altogether the need to obtain prior regulatory clearance of such transactions, and has at least lowered the hurdles to clearance in others. At the same time, the new law has also introduced a significant degree of ambiguity by elevating the importance of the "group of persons" (gruppa lits) of each party to an equity transaction, even as it fails to clarify exactly which persons belong to such a group. This article briefly describes the challenges facing companies and their counsel in determining the requisite degree of disclosure.

The Revised Consent and Disclosure Regime

The prior competition law was frequently criticized for requiring antimonopoly review of transactions and events unlikely to have any appreciable adverse impact on competition. A 2004 OECD report noted that Russia’s competition regulator, the Federal Antimonopoly Service ("FAS"), suffered from "an unrealistically large workload" of cases that were "repetitive, small in scope, and unlikely to have a significant effect on competition." The new law has deleted some of the most intrusive regulatory requirements by, for example, eliminating the requirement for sizeable companies to obtain FAS consent upon their formation, increase of charter capital, or appointment of persons to executive bodies.

The new law does not fundamentally alter the structure of the old law, inasmuch as companies entering into a substantial equity transaction are still required either to obtain the prior consent of FAS or to notify it of the transaction after the fact. Unlike the prior law, however, where regulatory clearance was required both for any initial equity transaction exceeding a 20 percent stake and for any subsequent acquisition, the new law requires clearance only upon obtaining a blocking share (25% or 33% depending on corporate form), a controlling share (50%), and a supermajority share (75 % or 66%).

Assuming no party has been officially identified as a potential monopolist, FAS consent to an equity transaction is required if total assets of the parties exceed 3 billion rubles (or total revenue exceeds 6 billion rubles), and post-transaction notification is required if total assets exceed 200 million rubles. (These amounts were significantly increased by 2005 amendments to the prior law.) Importantly, asset or revenue valuation is determined by reference not only to the purchaser and target, but also to the purchaser’s group of persons and, unlike under the prior law, the seller’s group of persons as well.

The new law also provides that equity transactions within a single group of persons that would otherwise trigger the need for FAS consent instead require only subsequent notification, provided that the group of persons has been disclosed to FAS and posted on its website at least one month prior to the transaction (and without any subsequent changes to the group). Thus, proper identification of a group of persons is necessary both to determine whether consent must be obtained in the first place, and, in the event of an intra-group transaction such as a restructuring or reorganization, whether the consent requirement can be avoided by prior disclosure of the group.

Determining The "Group of Persons"

Article 9.1 of the New Competition Law sets forth fourteen short paragraphs identifying members of a group of persons, who may be thought of as falling into four categories. The first thirteen paragraphs set forth three categories of members of a group of persons of a given company: (i) any person or entity who exercises control over the company, whether by holding a majority of voting equity, nominating or serving as general director, nominating a majority of the board of directors or other executive body, or otherwise having the ability to give binding instructions; (ii) entities related to such company by sharing any of the foregoing traits, by having more than half their boards of directors in common, or by being members of the same "financial-industrial group" (a term of art under a separate Russian law); and (iii) spouses, parents, children and siblings.

These three categories are relatively straightforward and essentially reprise the same categories under the prior law, except in two important respects: the concept of majority control under the prior law explicitly provided for indirect majority control while the new law does not, and the category of close relatives no longer requires them to be connected to a natural person serving in an executive capacity or having control authority.

The fourth category, set forth in paragraph 14, represents the most significant change, introducing for the first time the following to the definition of a group of persons:

"Persons, each of whom is, based on any of the grounds set forth in [paragraphs] 1-13 above, a part of a group with one and the same person, as well as other persons, who are a part of a group with each of such persons based on any of the grounds set forth in [paragraphs] 1-13 above."

This sentence, which may set a new low for clarity of legislative drafting, is no more comprehensible in the original Russian. Consequently, a debate has raged at academic conferences, on Russian law discussion boards, and, of course, across negotiating tables, as to how many steps or "generations" away from the target company one must go in defining a group of persons.

Some companies have preferred to take a conservative approach, noting that paragraph 14 replaces the standard under the prior law by which even indirect control explicitly justified inclusion in a group of persons. In keeping with this view, these companies have interpreted paragraph 14 to apply repeatedly, so that after first identifying the core group of persons according to the criteria in paragraphs 1-13 (such as a target, its parent and daughter companies and its general director), one would then not only apply paragraph 14 to reach any person related on any of the enumerated grounds to any of the core group (e.g., grandparent and granddaughter companies), but also do so again and again (thus reaching third- and fourth-generation parents or subsidiaries, for example).

Other companies choose to read paragraph 14 more restrictively and apply it only once (and thus would not reach beyond the grandparent and granddaughter companies in the above example). Adherents of this approach note that if paragraph 14 were construed to cycle endlessly, one would reach not only the spouse of the general director, but the spouse’s sibling, and the spouse’s sibling’s child, ad nauseum, to ultimately ludicrous effect. In their view, when it comes to making disclosures to the government, less is more, and what the law was intended to say is less important than what it actually says or could plausibly be said to mean.

A review of the nearly twenty group structures revealed to date on FAS’s website (at http://www.fas.gov.ru/merger/groups/index.shtml) demonstrates that to date both approaches have gained currency but neither has prevailed. FAS itself appears to give the law an expansive reading, as the model form of disclosure posted on its website shows a group of persons five generations removed from the company at the center, but its formal written interpretation of paragraph 14 is not expected until later this year.

Conclusion

In any event, a regulatory agency cannot demand more than what the law requires. At least until FAS propounds a formal interpretation, and potentially until one interpretation prevails in court or the law is redrafted, a company’s determination of its group of persons may well depend on the role it is playing in a given transaction, its own institutional and cultural prejudices, and its relative assessments of insufficient and excessive disclosure.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions