Russia is facing potential restrictions of foreign ownership in digital companies. This follows similar restrictions over Russian mass media companies and online cinemas which took effect in 2016 and 2017 respectively. The proposed amendments coincide with the announcement of major e-commerce and foodtech JV deals in Russia with participation of Mail.ru, the owner of Russia’s top social network VKontakte (a JV with Alibaba, Megafon and the Russian Direct Investment Fund (RDIF) as well as a JV with Sberbank).
In particular, on 26 July 2019, Mr. Anton Gorelkin, member of the Russian Parliament, proposed a draft law introducing amendments to the Federal Law on Information, Information Technologies and Protection of Information (the "Draft Law"). The Draft Law provides for restrictions in relation to foreign shareholding in certain Internet / Information resources in Russia. The scope of restrictions and consequences compliance are similar, although not identical to the above-mentioned rules on foreign control over mass media and online cinemas which led to a substantial modification of the media industry in Russia from 2015 to 2016.
The restrictions introduced by the Draft Law shall not apply automatically to all Internet / Information resources, but only to those which have been recognised as "significant information resources" upon the decision of the Government Commission.
According to the author of the Draft Law, Mr. Anton Gorelkin, the Draft Law primarily targets Russian Internet giants such as Yandex and Mail.ru, and potentially major Russian mobile operators, including MTS and Vimpelcom in the attempt to have Russian companies and individuals as ultimate beneficial owners of these assets. However, due to the vagueness of the criteria used in the Draft Law, the Russian Government shall have discretion to impose restrictions on any Russian or foreign marketplace or information resources. Leading players and platforms in this sector in Russia include Ozon.ru, Alibaba.com, Google and others.
Scope of restrictions
Any web site, web page, information system or software ("information resource") which allows its owners to collect data of users located in Russia ("Russian users") may be recognised as a so-called "significant information resource" (a "SIR"). The decision on the recognition of an information resource as a SIR shall be made by the special Government Commission (yet to be established) (the "Commission") upon suggestion by the Federal Service for Supervision of Communications, Information Technology and Mass Media ("Roskomnadzor"). Criteria for getting a SIR status (number of users, volume and content of the accumulated users' data as well as expected impact of the information resource on development of the Russian information, telecom and data processing infrastructure) are not clearly defined and leave much to the discretion of the Commission.
A SIR may be owned only by Russian legal entities or individuals (SIR Owner). The Draft Law further prohibits that more than 20 per cent of shares in the SIR Owner are directly or indirectly owned, managed or controlled by:
- a foreign state, an international organisation or an entity under their control;
- a foreign entity (a legal entity incorporated outside of Russia);
- a Russian legal entity with a foreign shareholding of more than 20 per cent;
- a foreign citizen or a stateless individual or;
- an affiliated person of any of the above mentioned entities or individuals,
(each of the above "foreign shareholder"), unless such foreign shareholder receives an approval from the Commission for shareholding above the prescribed limit of 20 per cent.
It is worth noting that the Draft Law does not limit any other forms of control over the SIR Owner (e.g. through negative (veto) control rights, licence agreements and other instruments).
Foreign shareholders shall be denied access to the data of Russian users accumulated by SIR. SIRs shall also be obliged to keep their servers and other equipment in Russia.
SIR Owners must arrange for modifications of the SIR shareholding structure and report to Roskomnadzor on compliance within two months from the date of receipt of a notice on getting a SIR status.
If a SIR Owner fails to modify SIR shareholding, the Commission shall make a decision on its incompliance which may not be taken before expiry of six months after getting by the SIR Owner of a notice on getting a SIR status. Immediately after such decision is taken, any advertising of SIR or services provided by SIR shall be forbidden. A SIR Owner shall also be forbidden to place on SIR any advertisements aimed at Russian users.
A foreign shareholder which continues to directly or indirectly own, manage or control more than 20 per cent in the SIR Owner without the Commission's approval shall be denied its right to vote by virtue of any shares held in excess of the permitted shareholding.
What does this mean for your business?
The proposed Draft Law is due to be considered by the Russian Parliament during the autumn session which is scheduled to start on 10 September 2019.
Representatives of major Russian Internet and telecom companies as well as several government officials have already expressed their concerns and criticisms of the restrictions. It is likely that the Draft Law will be subject to significant amendments before (and if) it is signed into law. It remains to be seen how the Draft Law will develop. In the meantime, we recommend monitoring further developments and considering appropriate modifications of the shareholding and/or operational structure of a relevant information resource that may be necessary in the future.
Hogan Lovells was in the lead role in helping the Russian mass media players adjust to the new regulation. We have developed a significant know-how in operational models and instruments which may now be used by SIR Owners to the extent applicable in the context of the Draft Law.
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.