Russian Federation: Merger Control In Russia

Article by Anton Sitnikov and Matvey Kaploukhiy

Originally published in The Moscow Times, 13.03.07

On Oct. 26, 2006 a new antimonopoly law – Federal Law No. 135-FZ of 26 July 2006 "On Protection of Competition" – came into force in Russia. The law that it replaces was enacted more than 15 years ago and, despite numerous amendments, was hardly able to continue regulating the actively emerging Russian market.

The new law establishes procedures for notification and prior clearance with antimonopoly authorities for corporate reorganizations and transactions aimed at acquiring major blocks of shares or ownership interest in business entities or significant portions of their assets. Some aspects of merger control are also covered by other federal laws, international treaties, regulatory acts and other subordinate legislation.

The Russian Federation’s main merger control authority is the Federal Antimonopoly Service (FAS), with the Central Bank also acting as a merger control authority in transactions involving banks.

Transactions subject to merger control regulation may require either preliminary consent of the FAS or its subsequent notification.

Russian legislation lists certain types of transactions for which compliance with merger control legislation is required, and specifies the subject matter of such transactions.

Transactions falling within the scope of antimonopoly regulation include:

• Corporate reorganization of for-profit organizations through consolidations and mergers;

• For-profit organizations set up by means of contributing over 25 percent, 50 percent and 75 percent of voting shares, one-third, one-half or two-thirds of ownership interest in another organization or a considerable part of fixed assets and intangible assets to its charter (authorized) capital;

• An entity (or group of entities) acquiring more than 25 percent, 50 percent or 75 percent of voting shares in a joint-stock company;

• An entity (or group of entities) acquiring more than one-third, one-half or two-thirds of ownership interest in the charter (authorized) capital of a limited liability company;

• An entity (or group of entities) acquiring rights allowing it to determine the conditions on which business may be transacted by another business or enabling the entity to exercise functions of an executive body;

• An entity (or group of entities) acquiring rights to over 20 percent of fixed assets or intangible assets (hereinafter referred to as "assets").

(NOTE: In this article we do not cover specifics of applicable financial, banking, insurance and related services antimonopoly legislation)

The transactions referred to above may differ in their legal nature. The key criterion is the legal consequences of the transaction – acquisition of a certain block of shares/ownership interest in the charter (authorized) capital or a certain amount of assets.

Corporate reorganization of for-profit organizations through consolidations and mergers is subject to prior clearance with the FAS provided one of the following conditions is observed:

• the total value of assets of the reorganized companies (or their group) on balance sheets as listed at their most recent reporting date exceeds RUR 3 billion (approximately $115 million)

• total revenues of reorganized companies (or their group) for the previous calendar year exceed RUR 6 billion (approximately $230 million)

• one of the companies participating in the reorganization is included in the register of business entities with a market share of over 35 percent on a certain product market.

Acquisitions of shares, assets and rights allowing an entity or group of entities to determine the conditions on which business may be transacted by another business or enabling the entity to exercise functions of an executive body require prior clearance with the FAS under the following conditions:

• the total value of assets of the buyer (or its group) and the entity (or group of entities), the shares and assets of which and the rights in respect of which are acquired, exceeds RUR 3 billion (approximately $115 million) according to balance sheets at the most recent reporting date and the total value of assets according to the most recent balance sheet of the entity (or group of entities), the shares (ownership interest) and assets of which or the rights in respect of which are acquired, exceeds RUR 150 million (approximately $5.7 million)

• total revenues of the above-mentioned entities for the previous calendar year exceed RUR 6 billion (approximately $230 million) and the total value of assets according to the most recent balance sheet of the entity (or group of entities), the shares (ownership interest) and assets of which or the rights in respect of which are acquired, exceeds RUR 150 million (approximately $5.7 million)

• one of the above-mentioned companies is included in the register of business entities with a market share of over 35 percent for a certain product market

Setting up for-profit organizations is subject to preliminary merger control under the following conditions:

• the total value of assets of the founders (their group) and the entity (its group), the shares or assets of which are contributed to the charter (authorized) capital of a for-profit organization, exceeds RUR 3 billion ($115 million) according to balance at the most recent reporting date

• total revenues of the above-mentioned entities for the previous calendar year exceed RUR 6 billion ($230 million)

• one of the above-mentioned entities is included into the register of business entities with a market share of over 35percent for a certain product market.

Transactions and other actions that do not meet the aforementioned criteria require post-transaction notification of the Federal Antimonopoly Service in the following cases:

About corporate reorganizations described above – if, according to the most recent balance sheets, the total value of assets of reorganized companies, including the ones that terminated their activities as a result of reorganization or their total revenues for the calendar year preceding the consolidation year exceeded RUR 200 million rubles (approximately $7.5 million).

About acquisition of shares, ownership interest, assets or rights relating to for-profit organizations if:

• total value of assets of the buyer (its group) or the for-profit organization founders and the entity (its group), the shares, assets of which or rights in respect of which are acquired, exceeds RUR 200 million (approximately $7.5 million) according to the balance sheets at the most recent reporting date and the total value of assets of the entity (its group), the shares and assets of which or rights in respect of which are acquired, exceeds RUR 30 million rubles (approximately $1 million) according to balance sheets at the most recent reporting date

• total revenues of the above-mentioned organizations for the previous calendar year exceed RUR 200 million (approximately $7.5 million) and total value of assets of the entity (its group), the shares and assets of which or rights in respect of which are acquired, exceeds RUR 30 million rubles (approximately $1 million) according to balance sheets at the most recent reporting date

• one of the above-mentioned entities is included in the register of business entities with a market share of over 35 percent on a certain product market

The law indicates that being listed as a business entity with a 35 percent or more market share is an additional condition supplementary to two major ones. The provision is quite ambiguous and the antimonopoly authority treats this criteria as a self-sufficient one. Based on past legislation, we would still recommend applying for consent if a respective transaction involves a business entity listed as a market player with a 35 percent or more share, irrespective of applicability of other conditions.

The timeframe set by the law for applications to be scrutinized by the FAS is 30 days. The period for considering an application may be prolonged by two months.

If an application for consent to reorganize business entities in the form of consolidation and merger or set up a business entity is filed, the FAS is entitled to prolong the period for considering the application to enable the applicant to meet the conditions under which the application will be satisfied. The term to fulfill the above-mentioned conditions may not exceed nine months.

The key criterion for the consent of the FAS to a transaction or any other action subject to control is their impact on competition, including as a result of a stronger dominant position of an entity (group of entities). Unfortunately, the legislation does not provide a clear system of criteria, which would allow the identification of these transactions and actions with sufficient certainty.

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.