Mergers and Acquisitions

1. Acquisition of an Interest in a Russian company

a) Acquisition of Shares/Participatory Shares in a Russian Company
It is by now a common practice for a foreign investor to buy the shares/participatory shares of a Russian company and to become a shareholder/participant in that company. However, Russian law sets forth certain legal formalities associated with the purchase of shares/participatory shares and the transfer of the title thereto, the non-compliance with which may seriously damage the interests of the investors.

Basically, there are two commonly used forms of Russian companies: joint-stock companies and limited liability companies. Joint-stock companies issue shares of stock, which are securities under Russian law. Therefore, the Russian securities legislation introduces additional regulations (as compared to those governing transactions with participatory shares) governing transactions with shares of stock as securities, e.g.:

- each emission of shares must be properly registered with the RF Federal Commission for the Securities Market – the absence of such a registration results in the invalidity of any transaction involving the purchase of such shares under Article 168 of the RF Civil Code;
- if an investor is buying shares from a shareholder of a Russian joint-stock company, the investor should make sure that those shares are fully paid in – otherwise, the transaction will be deemed invalid and may be challenged by any interested party;
- most Russian joint-stock companies issue shares in non-documentary form, i.e., such shares exist only as entries in a special registry of shareholders, maintained by the joint-stock company itself or by an independent registrar; therefore, the applicable Russian legislation provides that title to such non-documentary shares transfers only at the moment of the filing of the relevant entry in the registry of shareholders; consequently, it is very important for an investor to make sure that it receives an extract from the registry of shareholders of the Russian joint-stock company, confirming the investor's title to the acquired shares.

Limited liability companies do not issue shares of stock; therefore, the participants of such companies instead hold participatory shares. Transactions with the participatory shares of a Russian limited liability company do not require registration of the participatory shares. However, just like in the case of the shares of a joint-stock company, an existing participatory share may be sold only if it is fully paid in. In addition, an investor will obtain the rights of a participant in the limited liability company only after the company is notified of the sale of the participatory share. Moreover, since all of the participants in a Russian limited liability company must be named in its charter and foundation agreement, it is very important to make sure that a meeting of participants is convened and that the relevant amendments of the company's charter and foundation agreement are approved; naming the investor as a new participant in the limited liability company.

The advantages of a share (participatory share) purchase scheme is that, firstly, the exposure of the purchaser to the liabilities of the target company is limited to the nominal value of the purchased share (participatory share) and, secondly, the procedure for the share (participatory share) purchase, in most cases, does not require any lengthy and onerous state registration (with the exception of LLCs, where the charter and the foundation agreement of the LLC must be amended in order to reflect that the purchaser of the participatory share is a participant in the LLC).

Unfortunately, there are also certain disadvantages of such a scheme. The purchaser must ''fit into'' an existing company, which is especially difficult in the situation where the purchaser will not be the only shareholder (participant) of the company. Also, there is a potential problem for a purchaser in regard to return of its investment in a case of implementation of a strategy its exit from the company (especially in the case of JSCs). Finally, there is the necessity to complete certain corporate formalities prior to the sale of the shares (participatory shares) to third parties.

However, notwithstanding the aboveindicated advantages and disadvantages of a share (participatory share) purchase scheme, the following steps must be taken by a purchaser:

- Perform a full due diligence of the target company;

- Obtain the prior approval of the RF Ministry of Anti-Monopoly Policy in those cases where such an approval is required under Article 18 of the RF Law ''On Competition'';

- Ensure that the appropriate corporate procedures are followed (such as the waiver of the preemption rights of other shareholders (participants), the approval of ''major transactions'' in the case of the placement of shares of stock, etc.);

- Sign a share purchase agreement and other required documents (such as a share transfer instruction in the case of JSCs or a notification to the company in the case of LLCs);

- Ensure that the purchaser of shares of stock is entered into the shareholders registry of the joint-stock company, or that a new version of the charter and foundation agreement, reflecting the purchaser of a participatory share as a participant in the limited liability company, is properly approved and registered.

b) Acquisition of the Assets of a Russian Company
As opposed to the case of a share (participatory share) purchase, the main purpose for purchasing the assets of a Russian company is to acquire the assets, both tangible and intangible, from that company in order to build the purchaser's own business by using those assets. Under Russian law, two main methods of assets purchase are available:

- the purchase of particular assets;
- the purchase of an ''enterprise'' (Chapter 30, Paragraph 8, of the RF Civil Code).
The advantages of an assets purchase are that, first of all, the procedure for purchasing assets is relatively simple and no state registrations are required (with the exception of the purchase of real estate objects and some objects of intellectual property, such as patents and trademarks); and secondly, the purchaser does not acquire the liabilities of the company-seller, as in the case of the purchase of an enterprise.

As in the case with a share (participatory share) purchase scheme, an assets purchase scheme also has certain disadvantages. For example, if the acquired assets are encumbered (e.g., a pledge, mortgage, etc.), those encumbrances will transfer along with the assets. Furthermore, the acquisition of the assets may be subject to VAT. Finally, the rights to, and transactions with, certain assets require state registration (real estate objects, patents and trademarks, etc.).

The acquisition of an enterprise is advantageous because the purchaser acquires a complex of tangible and intangible assets, which allows it to launch or proceed with its own business, i.e., the purchase of an enterprise is in reality an acquisition of a business. However, there are also several disadvantages in an acquisition of an enterprise. One such disadvantage is that the purchaser acquires not only the assets, but also the liabilities of the seller which are attributable to those assets. Furthermore, the applicable Russian legislation provides for the joint liability of the purchaser and the seller of the enterprise before the creditors of the seller and it is necessary to register the enterprise as a real estate object and to register the enterprise purchase agreement with an appropriate state authority of the Russian Federation.

The following steps must be taken by a purchaser of assets:

- Perform a due diligence of the purchased assets (mainly, title due diligence and due diligence of the status of the seller and the authorities of the officers/directors of the seller);
- Obtain the prior approval of the RF Ministry of Anti-Monopoly Policy in those cases where such an approval is required under Article 18 of the RF Law ''On Competition'';
- Ensure that the appropriate corporate procedures are taken (such as, the approval by the seller of a ''major transaction'' in the case of the sale of the company's assets with a value exceeding 25 per cent of the book value of all of the company's assets, etc.);
- Sign an asset purchase agreement(s) (an enterprise purchase agreement) and other required documents (such as acts of transfer and acceptance, etc.);
- Ensure that all of the required state registrations, which are associated with the asset purchase, are completed (such as registrations of the rights to, and transactions with, real estate objects, the registration of enterprise purchase agreements, the registration of assignments of patents and trademarks, etc.).