On September 4, 2023, Federal Law No. 470-FZ dated August 4, 2023 “On the specifics of regulating corporate relations in business entities that are economically significant organizations” came into force.
The Law introduces a new concept of an economically significant organization (hereinafter – ESO).
The concept of ESO. List of ESO
ESO are Russian business entities that are essential for ensuring the economic sovereignty and economic security of the Russian Federation and are included in the relevant list formed by the Government of the Russian Federation.
Let us consider in more detail which criteria allow to classify a company as an ESO:
The first subgroup of criteria (it is enough to meet only one). If the Company and Russian legal entities included in the same group with it have:
- total revenue according to the financial statements for the last reporting year exceeds 75 billion rubles;
- number of employees exceeds 4,000 people;
- total value of assets for the last reporting year exceeds 150 billion rubles;
- the amount of taxes (fees) paid in the Russian Federation for the previous calendar year is at least 10 billion rubles.
The second subgroup of criteria (at least one is enough). If the Company or its subsidiary:
- as of February 1, 2022, it is a subject of critical information infrastructure, defined in accordance with Federal Law No. 187-FZ of July 26, 2017 “On the security of critical information infrastructure of the Russian Federation”;
- as of February 1, 2022, it is a city-forming organization that has a significant impact on the development of the region;
- implements technologies and/or software for socially significant services and/or provides services in the field of information technology or communications;
- participates in the creation and modernization of high-performance and (or) high-paying jobs;
- is a systemically significant credit institution.
The third subgroup of criteria:
The share of direct or indirect participation of citizens of the Russian Federation or residents of the Russian Federation in a foreign holding company owning at least 50% of the charter capital of the company in Russia (hereinafter referred to as FHC) is:
- more than 50 %;
- more than 30 %, if at the last meeting of the supreme management body of the FHC, prior to the inclusion of the Company in the ESO list, they had the opportunity to determine the decision of the supreme management body of the FHC;
- more than 20 %, if restrictive blocking measures have been applied to them or to the relevant ESO itself by the United States of America and foreign countries and international organizations that have joined them.
Further these persons are referred to as “indirect beneficiaries”.
The Ministry of Economic Development has already prepared a draft “Rules for making a decision on the inclusion of a Russian business entity in the list of economically significant organizations”, which describes in detail how and on the basis of what information the company is included in the list of ESO (hereinafter – the “Rules”).
The inclusion of the company in the list is made by the decision of the Government of the Russian Federation, which in turn is adopted on the basis of a reasoned proposal of the Ministry of Economic Development and the federal executive body, which controls the main activity of the company.
At the same time, a reasoned proposal should include both information about the company itself and a justification for meeting the criteria from each of the three subgroups listed above, with documentary confirmation.
The decision to include a company in the list of economically significant organizations is not subject to appeal to a court or Arbitration court.
Suspension of corporate rights of a foreign holding company
Cases on the suspension of corporate rights of FHC are considered by the Arbitration Court of the Moscow Region.
An appeal to the court is possible when the following circumstances occur:
- refusal/evasion of FHC from exercising rights, conscientious performance of duties of a shareholder/participant of ESO, threat of refusal/evasion;
- Actions/inaction made by the FHC aimed at creating obstacles to the management of the ESO, its normal business activities, including the actual termination of management by the heads of the Company appointed in full or in any part at the proposal of the FHC;
- other actions/inaction of the FHC that may lead to the termination or suspension of the activities, liquidation or insolvency (bankruptcy) of the ESO.
Such circumstances may be evidenced, in particular, by the following actions of the FHC:
- public statements regarding the termination of the ESO's activities or its participation in it, related actions, including non-exercise of the rights of the ESO participant/shareholder;
- termination or groundless suspension/termination of performance under contracts essential for the ESO activity;
- sending a notification to more than 1/3 of ESO employees about staff reduction;
- actions/inaction aimed at compliance with restrictive measures imposed by unfriendly countries, improper performance of their duties, including those arising from corporate and other similar agreements, creation of impossible conditions or significant hindrance to the activities and development of ESO, restriction of markets for goods, works, services of ESO;
- actions indicating the intention to terminate contracts between FHC or its affiliates and ESO and having significant importance for the implementation of activities provided for by the ESO charter, suspension of performance of its obligations under such contracts, a statement about such a possibility in the future.
The following may apply to the Arbitration Court:
- Authorized federal executive body;
- Any shareholder/participant of ESO;
- Sole executive body or member of the board of directors (supervisory board) of ESO;
- Indirect beneficiaries.
The applicant must send a notification to the FHC about filing an application for suspension of the exercise of rights. It will be considered delivered in 5 days.
The application for suspension of the exercise of rights is subject to consideration by the Arbitration court not earlier than five working days and not later than one month from the date of acceptance.
Before the date of the court session, the shareholders/participants of the ESO have the right to send a response to the application to the Arbitration court and to the applicant. The response must be accompanied by evidence of sending a copy of the response to the applicant, as well as evidence justifying the absence or elimination of grounds for suspending the exercise of rights.
Shareholders/participants who have a permanent residence outside the Russian Federation or their location is unknown are considered notified by posting information about the court proceedings on the official website of the Arbitration court that accepted the application for suspension of the exercise of rights in the information and telecommunications network “Internet”.
Shareholders/participants of ESO included in the list are recommended to:
- Regularly monitor the official website of the Arbitration Court of the Moscow Region;
- Issue a power of attorney with an apostille in advance to an authorized person who will be able to timely provide objections and participate in the proceedings in the Russian Federation.
Possible consequences of the Arbitration Court's decision to suspend corporate rights:
- Suspension of FHC's corporate rights in relation to ESO;
- Entry of indirect beneficiaries into the ownership rights of shares / stocks of ESO, bypassing the FHC;
- Transformation of ESO to PJSC;
- Payment of dividends from ESO directly to indirect beneficiaries, bypassing FHC.
Suspension of FHC corporate rights in relation to ESO
FHC is deprived of the right to:
- Participate and vote at the general meeting of shareholders (participants) of the ESO, demand its convening, exercise other corporate rights, including the pre-emptive right to purchase stocks (shares) in ESO;
- Dispose of stocks (shares) in ESO;
- Receive dividends from the ESO.
Also as a result of the suspension of corporate rights of the FHC shares of the ESO owned by the FHC are transferred to the ESO itself on the basis of the decision of the Arbitration Court. This transition is registered:
- in the USRLE: no later than within 1 week from the date of receipt of a copy of the decision of the Arbitration Court;
- by the Register holder: no later than within 1 week from the date of the decision of the Arbitration Court on the basis of the received copy of the decision of the Arbitration court.
These restrictions may also be applied by the Arbitration Court in the form of interim measures before a decision is made.
The period for suspending the corporate rights of FHC according to the decision of the Arbitration Court, is no more than until December 31, 2024 inclusive.
Entry of indirect beneficiaries into the ownership rights of shares of ESO
For indirect beneficiaries, there is an obligation to enter into direct ownership of shares in the charter capital of the ESO.
The ESO is obliged to send a corresponding notification to the indirect beneficiaries known to it within 10 working days from the date of the decision by the Arbitration Court.
Indirect beneficiaries are obliged to send an application to the ESO confirming their rights to take ownership within 3 months from the date of receipt of the notification.
An indirect beneficiary has the right to transfer the right to enter into direct ownership to the ESO itself or to another Russian citizen/legal entity.
The shares in the charter capital of the ESO transferred to the ESO are distributed among the indirect beneficiaries in proportion to the share of their indirect ownership in the charter capital within 10 days after the end of the three-month period for submitting applications.
Terms of registration:
- USRLE – 5 working days;
- Registrar/Depository – 3 working days.
Shares in the charter capital of the ESO that have not been distributed among indirect beneficiaries are not subject to the cancellation and are accounted for as own stocks (shares in the authorized capital) of the ESO.
Reorganization of the ESO to PJSC
An ESO that is not a PJSC acquires public status if the following conditions are met:
- FHC is a public company;
- FHC owns 100% of ESO – Limited Liability Company;
- FHC has a qualified majority of votes in the JSC, sufficient to vote for the acquisition of public status by the JSC.
The basis for the reorganization is the decision of the Arbitration Court.
The necessary changes are made to the USRLE on the basis of the decision of the Arbitration Court on the suspension of the corporate rights no later than 20 working days from the date of provision of the decision of the Arbitration Court. At the same time, it is not required to provide any other documents provided for by the legislation of the Russian Federation for the reorganization procedure.
The Bank of Russia makes a decision on the registration of the issue of shares within 10 working days from the date of the appeal of the ESO (the head of the ESO has 5 working days for such an appeal).
The ESO has the right to conclude a contract for maintaining the register of shareholders with any professional participant in the securities market who has a license to carry out activities for maintaining the register of owners of securities.
The ESO, no later than 5 working days from the date of entering information on the change of name and status into the USRLE, must contact the trade organizer in order to conclude a share listing agreement with him and include the shares in the list of securities admitted by the trade organizer to organized trading (indicating the level of listing of shares).
The adoption of a separate corporate decision on applying for the listing of ESO shares, as well as other corporate decisions (regardless of the requirements for their necessity contained in the ESO charter) are not required.
The trade organizer makes a decision on the conclusion of an agreement on the listing of ESO shares and a decision on the inclusion of shares in the list of securities admitted by the trade organizer to organized trading, including in the quotation list, within 10 working days from the date of submission of documents.
Such a decision is made by the trade organizer without complying with a number of requirements of the regulations of the Bank of Russia and the rules of listing of the trade organizer (in particular, to the size of the charter capital of PJSC, the preparation and disclosure (publication) of consolidated financial statements (financial statements), the composition of the management bodies of PJSC, registration and disclosure (publication) of the prospectus of securities, the period of existence of the issuer, the number of shares of the issuer in circulation and their market value).
The ESO will have 6 months from the date of the start of trading to ensure compliance with these requirements, including to bring its documents into compliance with the requirements established for joint-stock companies, as well as to ensure the registration of a securities prospectus in respect of its shares.
Payment of dividends to indirect beneficiaries directly from ESO
It is possible by the decision of the Arbitration Court, if:
- the share of direct participation of the FHC in the ESO ranges from 50% to 75%, and Russian indirect beneficiaries have more than 50% of the votes in the FHC;
- the share of direct participation of the FHC in the ESO ranges from 50% to 75%, and Russian indirect beneficiaries have more than 30% of the votes in the FHC and could determine the decision of the supreme governing body of the FHC.
It is possible by the decision of the indirect beneficiaries themselves, if:
- the share of FHC direct participation in the ESO is from 75%, and Russian indirect beneficiaries, in turn, own more than 50% of the votes in the FHC.
Appealing the decision of the Arbitration Court to suspend corporate rights
The decision of the Arbitration Court to suspend the exercise of rights is subject to immediate execution and can be appealed in the manner prescribed by the Arbitration Procedural Code of the Russian Federation.
Payment of compensation
At any time during the period of suspension of the exercise of rights, the FHC has the right to apply to the ESO with a claim for compensation in the amount of the market value of stocks (shares in the authorized capital) of the ESO, which were not distributed among the persons who entered into direct ownership of the relevant stocks (shares in the authorized capital). The procedure for determining the amount and payment of such compensation is established by the Government of the Russian Federation.
Termination of consequences associated with the suspension of FHC corporate rights
Termination is possible:
- Due to the expiration of the suspension of corporate rights
- By decision of the Arbitration Court, under the condition of:
- Termination of unfriendly actions of the United States and other countries or other circumstances that served as the basis for the decision to suspend the exercise of rights
- Providing the court with written evidence of elimination and assurances about preventing in the future the circumstances that served as the basis for the suspension of the exercise of rights.
Termination result:
- Shares/shares in the authorized capital of ESO that were not distributed among indirect beneficiaries are returned to FHC;
- FHC has the right to claim dividends received.
However, if the FHS has already received compensation provided for by law, it is deprived of this right.
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