The Merger Control Review: Russia
The core statute setting out Russian merger control rules is Federal Law No. 135-FZ of 26 July 2006 on Protection of Competition (the Competition Law). By-laws must comply with its provisions and can only specify certain issues in detail (e.g., by decrees of the Russian government, administrative regulations and other by-laws).
The only state agency in charge of merger control review and enforcement of the Competition Law is the Federal Antimonopoly Service (FAS), which is also an authorised agency for the foreign direct investment (FDI) control regime, dealing with the associated paperwork and providing preliminary analysis of M&A deals from an FDI perspective.
The final decision on an M&A transaction falling within the scope of the FDI regime is taken by the Government Commission on Monitoring Foreign Investments (the Government Commission) chaired by the Russian Prime Minister and comprising top government officials. The Government Commission reviews transactions with a foreign element falling under the scope of the two FDI laws: the Strategic Investments Law2 and the Foreign Investments Law.3
If a transaction is subject to both merger control filing and FDI filing, no merger clearance can be issued unless the Government Commission approves the FDI filing.
Deals concerning credit organisations, including banks, may be notifiable to the Central Bank of Russia under Federal Law No. 395-1 of 2 December 1990 on Banks and Banking activity.
Year in review
Despite the pandemic, the FAS continued working during lockdown in Russia. Some of its officers switched to home working, while others continued to work from the office. Overall, the FAS continued to review M&A deals in the usual manner: there were no official announcements suspending review at any time or asking entities not to file notifications. Due to the efforts undertaken, the FAS continued to hold negotiations with the parties and usually issued decisions within the legally established time frames.
A key trend is the tightening of the FDI control regime from the standpoint of both deals control review and enforcement. With increasing frequency, M&A transactions that include foreign companies fall under the scope of the FDI regime according to the Foreign Investments Law, which covers transactions in sensitive industries more widely. During merger review, the FAS tends to request opinions of the other state agencies (including the Federal Security Service, the Ministry of Defence and industrial agencies) if it is deemed that a transaction could pose a threat to national defence and state security, so that the Prime Minister, in his or her capacity as the chair of the Government Commission, can decide whether approval of the Government Commission is required (in our experience, the Prime Minister refers the vast majority of deals to the Government Commission). If the Prime Minister believes that such an approval is needed, the regulatory timeline will be inevitably prolonged. Therefore, if there are potential red flags, a foreign company should anticipate a 12-month period for regulatory clearance in Russia. Red flag transactions include those:
- with significance to the Russian economy (e.g., national projects, the sole company in a town, dominant market players);
- concerning the last Russian supplier among foreign suppliers;
- involving civil production that could be employed for military purposes; and
- involving the acquisition of a non-controlling stake in Russian strategic companies.
Another trend is the FAS initiating high-profile cases challenging M&A transactions on the grounds of violation of the Strategic Investments Law. In FAS v. Otkritie Holding (once in the top five private financial leaders in Russia), the acquisition of AGD Diamonds by Otkritie Holding in 2017 was challenged on the grounds that the latter provided misleading information about its beneficiaries having citizenship of foreign states, which resulted in foreign investors gaining control of AGD Diamonds, which was deemed a strategic company. In FAS v. Arconic Corporation (previously Alcoa, a US leading provider of aluminium products), the court imposed unprecedented interim measures preventing shareholders of Arconic's Russian subsidiary, which was deemed a strategic company, from taking management and business decisions, as the FAS argued that, in 2019, Elliott Management obtained control over Arconic without approval from the Government Commission. These cases are still pending and wil be precedent-setting in highlighting the importance of compliance with regulatory rules and fair practice.
The FAS is increasingly taking longer to consider mergers. The initial waiting period of 30 calendar days is now being prolonged more frequently by an additional two months so that an in-depth review may be undertaken. It is therefore prudent to anticipate a minimum of three months for review.
While reviewing mergers by foreign companies, the FAS usually requests detailed information on beneficiaries and controlling persons of the acquirer under Government Decree No. 1456 dated 1 December 2018, including passport details, addresses and supporting documents. In practice, it takes some time and effort to collect this information.
Global M&A transactions are scrupulously assessed by the FAS, which gives due consideration to the potential competitive effects of the transaction in Russia. The new head of the FAS, who took office in November 2020, has highlighted this priority. At the forefront of the FAS's attention is e-commerce and online content, including online platforms, high-tech businesses and socially important industries.
In 2020, the FAS cleared a number of global transactions, including Alstom/Bombardier, Fortum/Uniper, WESCO/Anixter and Outotec/Metso Minerals. According to FAS statistics, in 2020 a total of 1,152 notifications were considered, of which 94 per cent were cleared unconditionally, 4 per cent were approved with conditions and only 2 per cent were rejected.
The merger control regime
Under the Competition Law, the following transactions are generally subject to merger control: mergers and takeovers, incorporation of a company (if its charter capital is paid by shares or assets of another company), joint venture creation and acquisition of shares, assets and controlling rights. The Competition Law has extraterritorial effect and is applicable to foreign-to-foreign transactions with certain peculiarities specified below.
There are two forms of merger control: pre-closing clearance and post-closing notification. Post-closing notifications are currently only applicable to intra-group transactions, with an exception for intra-group transactions between companies connected directly or indirectly by 50 per cent share ownership, which do not require any form of merger control at all. Only a minority of intra-group transactions are still subject to post-closing notification. The procedure for post-closing notification for non-exempt intra-group transactions includes disclosure of the group structure on the official FAS website in the month before the transaction closes and submission of a post-closing notification (which is almost identical to a pre-closing notification) within 45 days of the transaction closing. If the parties are not willing to disclose their group structure, they may file a pre-closing clearance instead of submitting a post-closing notification.
Filing thresholds for the pre-closing clearance differ according to the type of merger control transaction, although there is an additional threshold for foreign companies. Triggering events are almost the same for both Russian and foreign targets, with certain peculiarities for the latter.
i Filing thresholds (turnover/assets test)
For mergers, takeovers and incorporation of a company (if its charter capital is paid by shares or assets of another company), or creation of a joint venture, the following thresholds apply to both Russian and foreign companies:
- the combined worldwide value of assets of the parties (and their groups), according to the latest accounts, exceeds 7 billion roubles; or
- the parties' combined worldwide revenue of the previous business year exceeds 10 billion roubles.
For the acquisition of shares, assets and controlling rights, the following filing thresholds for both Russian and foreign companies apply:
- the combined worldwide value of assets of the acquirer (and its group) and the target (and its group), according to the latest accounts, exceeds 7 billion roubles, or their combined worldwide turnover in the previous business year exceeds 10 billion roubles; and
- the worldwide value of assets of the target (and its group), according to the latest accounts, exceeds 400 million roubles.
There is an additional threshold for foreign companies: a foreign company should have supplied goods exceeding 1 billion roubles in value, to Russia, during the year preceding the closing of the transaction. This threshold embodies principles similar to the effects doctrine and is aimed at the exclusion of foreign-to-foreign transactions with insignificant effects on competition in Russia. According to FAS practice, the 1 billion roubles should be calculated not only from sales of the foreign target company itself, but also of its subsidiaries. However, if a foreign target company has a Russian subsidiary or assets, the threshold of 1 billion roubles is not applicable and the transaction can be subject to merger clearance.
The merger control rules and thresholds for financial institutions differ from those provided for other undertakings. Financial institutions include credit, insurance, microfinance and other institutions rendering financial services. The thresholds for these institutions are established by the Russian government on its own, or together with the Central Bank of Russia.
ii Trigger events (substantive test)
The following trigger events are general and relate to both Russian and foreign targets:
- mergers and takeovers;
- incorporation of a company (if its charter capital is paid by shares or assets);
- creation of a joint venture by competitors in the territory of Russia;
- acquisition of controlling rights (to determine business activity or to perform the functions of an executive body); and
- acquisition of assets (fixed production assets or intangible assets located or registered in Russia, the book value of which exceeds 20 per cent of the total book value of the fixed production assets and intangible assets of the selling company).
For Russian targets, there is the following specific trigger event: the acquisition of more than 25 per cent, 50 per cent or 75 per cent of voting shares in a Russian joint-stock company, or one-third, one-half or two-thirds of the participatory shares in a Russian limited liability company. For foreign targets, there is the following specific trigger event: the acquisition of more than 50 per cent of voting shares in a foreign company.
In practice, one of the most common trigger events for foreign-to-foreign transactions is the acquisition of controlling rights or, as specified by the Competition Law, rights to determine business activity or to perform the functions of an executive body of an undertaking. This trigger event usually occurs if a foreign target has a Russian subsidiary or a foreign subsidiary with high Russian turnover. 'Controlling rights', for the purposes of merger control, are not defined by the Competition Law. The general provisions of the Competition Law only contain a definition of 'control' and expand it to both merger control and restrictive agreements as disposal of more than 50 per cent of voting shares or exercising functions of an executive body. There are also no official guidelines on their precise scope. The 2016 Scientific-Practical Commentary to the Competition Law contains a general description of these rights by outlining transactions leading to the acquisition of rights to indirectly influence terms of business activity (e.g., acquisition of a foreign target company holding more than 50 per cent shares in a Russian subsidiary (or less than 50 per cent shares in a Russian subsidiary if a shareholders' agreement allows the acquirer to define the Russian subsidiary's business activity or block decisions of its management bodies)). In practice, whether controlling rights are to be acquired is determined by the FAS on a case-by-case basis, taking all circumstances of a particular transaction into account.
In June 2021, the FAS approved the Merger Guidelines developed by the expert community (particularly the Association of Antimonopoly Experts) together with the FAS. The Merger Guidelines took approximately two years to compile and they aim to fill gaps in the regulation according to established practices, ensuring transparency of FAS decisions and following best international standards.
According to the newly adopted Merger Guidelines, the following rights may count as controlling rights for merger control purposes: rights to determine an undertaking's decisions; rights to give binding instructions or otherwise exercise significant influence over business decisions of the target and its group, through, inter alia, blocking management decisions; and veto rights (negative control). The final decision of whether controlling rights will be acquired as a result of an M&A deal is vested with the FAS.
The Merger Guidelines also cover the key substantive and procedural issues of merger control, including: assessment of joint venture agreements; criteria for interrelated transactions; economic analysis of deals and related effects; and criteria for the admissibility of non-compete agreements. Moreover, the Merger Guidelines address the due process for merger control filing and the criteria for imposing structural and behavioural remedies.
The Competition Law does not provide for any special foreign exemptions. An additional turnover threshold (1 billion roubles) and higher trigger for share deals (more than 50 per cent) can be considered as qualifying elements aimed at excluding transactions with insignificant effects on competition in Russia. Therefore, if a foreign target did not generate significant turnover in Russia, or did not have any Russian subsidiaries or assets, a respective foreign-to-foreign transaction should not be subject to Russian merger control.
iii Waiting periods and time frames
The Competition Law does not provide for mandatory pre-notification discussions as an integral part of the merger review, although the parties have a right to approach the FAS before the filing, to inform them of a deal, provide documents and suggest remedies. Nevertheless, as a rule, the official communication only starts once the filing is submitted. The statutory waiting period for a pre-closing clearance is 30 calendar days, starting from the date of the notification submission (similar to a Phase I European Commission review). If the filing is incomplete, or documents are not provided in due form, the filing is considered as not provided, and will be returned to the applicant.
The FAS may decide to prolong the initial period by up to two months for further consideration and submission of additionally requested data if there are any competition concerns and an in-depth review is required (similar to a Phase II European Commission review).
The FAS is also authorised to prolong the consideration period until the structural remedies imposed on a company are fulfilled as pre-closing conditions, after which the final approval is granted. In these cases, the term for the implementation of the structural remedies can be up to nine months. Thereafter, within 30 calendar days, the FAS reviews documents confirming compliance with the structural remedies and, if confirmed, grants clearance. However, prolongation due to the structural remedies is very rare in practice and is used if a transaction seriously impedes competition in Russia. As a rule, transactions are cleared within three months.
Following the notification review, the FAS issues one of the following decisions: to grant unconditional clearance, to clear with remedies (behavioural or structural) or to reject clearance. As regards conditional clearance, the FAS still tends to impose behavioural remedies, rather than structural ones. Clearance is rejected in very few cases, mostly due to non-compliance with the reporting requirements rather than because of competition concerns.
iv Parties' ability to accelerate the review procedure, tender offers and hostile transactions
Under the Competition Law, there is no official procedure for the parties to accelerate the review process. However, if a transaction does not raise competition concerns, the FAS may clear it before the expiry of the waiting period, in accordance with an official request provided by the applicant, but this is a goodwill gesture and not an obligation on the FAS.
v Third-party access to the file and rights to challenge mergers
The Competition Law does not grant rights to any third parties to access merger control files, and provides that information containing commercial secrets received by the FAS under the merger control process should not be disclosed to any third parties except when disclosure is expressly provided by law. Theoretically, the FAS may pass confidential information to other government agencies if these agencies officially request this. Unauthorised disclosure of commercial secrets may lead to civil, administrative or criminal liability for FAS officers. If information submitted to the FAS is marked as confidential, it must be treated accordingly. This means that only the FAS case handler responsible for the filing, and heads of respective FAS departments, are authorised to review it, and the information cannot be disclosed to any third parties. Therefore, FAS officials are generally very careful in handling confidential information.
Third parties have a limited ability to take part in review processes. Under the Competition Law, the FAS shall only publish information on notifications submitted and transactions subject to an in-depth review on its website. In these cases, the third parties have a right to provide information on the transaction's influence on competition. However, there is no established procedure for third parties to provide comments on the proposed transaction. As regards rights to challenge mergers, the Competition Law authorises only the FAS to do so. There have been rare cases of mergers being challenged in court by third parties, but most of these are unsuccessful.
vi Resolution of authorities' competition concerns, appeals and judicial review
If the FAS has any competition concerns, as a rule these are resolved by behavioural or structural remedies. Despite the fact that the latter became available as a pre-closing condition in 2012, the FAS still does not favour them, preferring instead behavioural remedies.
There are no statutory procedures or special guidelines regarding the remedies that should be applied to each situation. The procedure for arriving at an appropriate remedy lacks transparency, and competitors or other interested parties may take advantage of the lack in transparency in an attempt to influence the FAS. Strictly speaking, the FAS is not under a duty to inform an applicant about potential remedies. As a result, the applicant may first learn of proposed remedies on the last day of the waiting period or shortly before receiving a conditional clearance. In practice, this means that an applicant must be prepared to make important business decisions within a tight time frame. As a rule, for large deals, the FAS tends to negotiate remedies to ensure compliance and increase the acquirer's performance level. However, this is solely out of goodwill on the part of the FAS and not because of any statutory obligation.
FAS merger control decisions are subject to judicial review. If the undertakings concerned do not agree with the conditional clearance or rejected clearance, they have a right to bring a claim to a commercial (arbitrazh) court. In practice, there are good opportunities to appeal FAS decisions. This is mostly due to peculiarities in and drawbacks of the decision-making process (lack of transparency, lack of economic analysis and the lack of involvement of an applicant or third parties) and the decisions themselves, which are commonly very short (one or two pages) and do not contain sufficient argumentation.
vii Effect of regulatory review
The Competition Law provides for a suspensory regime and does not formally allow for any derogation from this. Upon completion of the notification review, the FAS must issue a decision and there is no statutory option whereby the transaction is considered cleared upon expiry of the waiting period without the regulator's opinion or that the waiting period can be terminated early. This strict suspensory effect sometimes causes problems for foreign undertakings, especially when timing is essential and Russian clearance is the only condition precedent remaining.
The transaction should be implemented within one year of the date of clearance, otherwise the validity period of the clearance decision expires and the transaction must be cleared again.
Although the FAS is the only agency in charge of merger control under the Competition Law, clearances from other state agencies under other laws can also be required for a merger control transaction. One transaction can require several regulatory clearances. The Central Bank of Russia has the authority to grant clearance in acquisitions of credit institutions' shares or participation interests. The Government Commission is an authorised agency to clear transactions under the Strategic Investments Law and the Foreign Investments Law, which is similar to the Committee on Foreign Investment in the United States. While reviewing a merger control deal with a foreign element, the FAS tends to ask opinions of other state agencies (including the Federal Security Service, the Ministry of Defence, industrial agencies) if the transaction could pose a threat to national defence and state security. Thereafter, the FAS reviews and sends these opinions to the Prime Minister, who is the chair of the Government Commission. Finally, the Prime Minister decides whether the transaction shall be reviewed by the Government Commission under a separate foreign investment filing. Merger control clearance can be granted only after receiving approval of the Government Commission.
Other strategic considerations
Recent practice shows that the FAS liaises with foreign competition agencies on cross-border M&A deals. To this end, the FAS usually applies waivers of confidentiality, signed by the parties, allowing the FAS to exchange confidential information on the deal with competition agencies from the other jurisdictions concerned. As Russian law does not provide any rules governing supranational communication, the FAS adopted the 'Guidelines on Application of the Confidentiality Waiver Mechanism in Consideration of Mergers and Acquisitions' in 2019. These Guidelines are based on the FAS's experience in interacting with foreign competition agencies in the mergers of, in particular, Oracle Corporation/Sun Microsystems in 2009, Yandex/Uber in 2017, Bayer/Monsanto in 2018, Alstom/Siemens in 2019 and Alstom/Bombardier in 2020.
Therefore, the FAS has vast experience of international cooperation with foreign competition agencies based on confidentiality waivers. Within the confidentiality waiver mechanism, the FAS has held consultations with the European Commission and with competition agencies of multiple jurisdictions, including the US, the Commonwealth of Independent States, Brazil, China, India and South Africa.
Dealing with special situations
The issue of the necessity to notify deals involving a Russian target in bankruptcy or liquidation has not been resolved. Under bankruptcy and corporate legislation, a company shall be considered liquidated only after the relevant record is introduced into the Russian companies register (the Unified State Register of Legal Entities). Liquidation takes about a year. If the register contains information on the Russian target, the proposed transaction is subject to clearance if the filing thresholds are met.
It is possible to obtain clearance by the FAS for hostile transactions. This is because under the Competition Law only the applicant is responsible for the filing and must provide available information on the target. If the target refuses to provide information for the filing, the applicant may indicate in a notification that the respective documents and information need to be collected from the target directly. In this case, the FAS requests that the target provides the necessary data and the target's failure to do so can result in administrative liability. The target can, however, provide objections to the transaction, which will be considered by the FAS along with other materials.
The acquisition of minority ownership interests is subject to review under the FDI control regime by the Government Commission rather than under the FAS merger control regime. In every FDI control case, the scope of minority rights is subject to detailed scrutiny. Meanwhile, in merger control filings, this question is usually considered more broadly, most often in foreign-to-foreign transactions resulting in acquisition of a foreign target holding shares in a Russian company. Merger clearance will be needed if minority ownership interests correspond to a considerable scope of rights (similar to control or exercising decisive influence of important business decisions) or negative control.
The most important strategic consideration, as noted above, is estimation of risks of whether the M&A deal may fall under the scope of the FDI regime according to the Foreign Investments Law or Strategic Investments Law. This is because the FAS is the authorised body for the consideration of both merger control and FDI control filings. Moreover, review of any merger with a foreign element includes testing against FDI trigger events. There has been an increase in the number of M&A deals caught by the FDI control regime as the result of FAS scrutiny.
According to the Strategic Investments Law, a pre-closing strategic clearance by the Government Commission is required for acquisition of control over a Russian company with strategic importance to national defence and state security (strategic companies). A strategic company is a Russian company engaged in any of the 46 strategic activity business areas listed in the Law, including:
- manufacturing of aerospace technology;
- production of weapons and military equipment;
- activity in the nuclear sphere;
- usage of infectious agents;
- natural resources sector; and
- coding and cryptographic equipment sectors.
The trend is to extend the interpretation of the strategic activities to comprise those that are closely related to those on the list. The first example was the Schlumberger/EDC transaction forwarded for a Government Commission review based on the conclusion that drilling services are an integral part of minerals exploration and may have significance for ensuring state security even though the services themselves are not subject to licensing.
Under the Foreign Investments Law, foreign governments and international organisations or companies under their control are subject to a separate filing for direct or indirect acquisitions of more than 25 per cent in any Russian company, or acquisitions resulting in a right to block decisions of these companies' managing bodies, according to the procedure set forth by the Strategic Investments Law. Furthermore, the Russian Prime Minister is empowered by the Foreign Investments Law to forward a transaction of a foreign investor in respect of any Russian entity for consideration of the Government Commission under a procedure provided by the Strategic Investments Law, if the transaction poses a threat to national defence and state security. An increasing number of M&A deals are being forwarded to the Government Commission by the Prime Minister based on the opinions of the FAS and other state agencies. A foreign company should allow up to a year to obtain both FDI approval and merger control clearance in Russia.
Outlook and conclusions
2020 was challenging for the FAS, not only because of the pandemic, but also due to the new head of the FAS taking office at the end of the year. It remains to be seen whether the change in management will impact the regulator's priorities and outlook, and whether interaction between the business community and the FAS will change.
A number of issues are pending and have not yet been settled from a legal standpoint. A set of further amendments to the Competition Law (the Fifth Antimonopoly Package) has been awaiting enactment for several years. The long-awaited Merger Guidelines, approved by the FAS in June 2021 and designed to provide a roadmap for merger control review, should stand the test of time.
Two benchmark cases (FAS v. Otkritie Holding and FAS v. Arconic Corporation) concerning illegally obtained control over Russian strategic companies are to be resolved by the courts. The outcome should clarify the regulatory attitudes towards the scope of the FDI control regime.
The trend for closer attention to global M&A deals to determine their effects on the competitive environment in Russia and the FDI regime remain at the forefront.
1 Elena Kazak is a senior associate, and Anna Numerova and Natalia Korosteleva are partners, at Egorov Puginsky Afanasiev & Partners.
2 Federal Law No. 57-FZ of 29 April 2008 on Procedures for Foreign Investments in Companies Having Strategic Importance for National Defence and State Security.
3 Federal Law No. 160-FZ of 9 July 1999 on Foreign Investments in the Russian Federation.