The New Version of the Draft Law “On External Administration to Manage a Company”

The new version of the Draft Law “On external administration to manage a company” (Draft Law) dated 12^th April 2022 was introduced to the State Duma. The Draft Law was significantly revised, especially in part of the scope of application and the procedure of the external administration implementation.

In comparison with the previous version of the Draft Law of 9^th March 2022, reported value of the entity and (or) its average staff number as criteria for companies which fall under the scope of the Draft Law is replaced with the criterion of “company of essential significance”. The list of main triggers for the external administration introduction is broadened:

• Managing processes in the company were ceased: company’s top management left Russia in breach of the company’s legal interest. The decision to cease company’s actions led to reduction of the company's property value and (or) breach of respective obligations under the contracts with its counterparties

• The following actions are deemed to signalize that a company may become a subject to cease of its entire operation in Russia, liquidation or bankruptcy:

• making publicly available statements regarding suspension of activities in Russia in the absence of obvious economic reasons
• terminating of contract which are of high importance for the continuation of operating of the company’s activities
• notifying 1/3 of its employees of redundancy

• Decreasing production or sales volumes by 30% in 3 months
• Increasing risks on those industries where a company has a significant impact on the other entity’s manufacturing activities
• Attracting budget funds to continue carrying out company’s activities in Russia

WHAT COMPANIES ARE IN THE FOCUS OF THE DRAFT LAW

• 25% of companies’ shares shall be owned by foreign individuals
• Companies which are of the “essential significance” for the Russian economy and the civil turnover and branches of such companies
• A company will be recognized as of “essential significance” if:

• produces and/or sells goods of prime necessity or goods which are subject to state pricing regulation
• operates within the natural monopoly and (or) occupies a dominant position in a market
• represents a sole manufacturer of certain types of goods, including medicines or medical devices, or a sole supplier of goods which have no Russian analogues, included in the register of sole suppliers in accordance with the Russian procurement legislation
• constitutes the largest local employer (ensures 25% workplaces in a town)
• participates in the supply chains of important manufacturing and changes in the company’s activities may have a negative impact on dependent entities
• ceasing of company’s operation in Russia may result in disasters, price increase and inability to operate socially significant facilitie

• A company may be also recognized as of the “essential significance” regardless of the abovementioned grounds, just under the decision of the relevant interdepartmental commission 

PROCEDURE OF THE EXTERNAL ADMINISTRATION INTRODUCTION 

• Head of the industrial federal executive authority or head of the constituent entity of the Russian Federation at the company’s location proposes to introduce external administration to the interdepartmental commission of the Ministry of Economic Development (Commission)
• The Commission considers the proposal and makes a decision
• If the Commission agrees, the Federal Tax Service (FTS) file a suit for the external administration introduction with the Arbitration Court of Moscow City
• The external administration is introduced under a court decision. The court can also grant certain injunctive relief under the request of FTS

IMPLICATION OF THE EXTERNAL ADMINISTRATION

• transfer of company’s shares to the administration (fiduciary manager) under the fiduciary management agreement
• transfer of company’s CEO powers to the administration

• External administration is run by the government corporation “VEB.RF” or other organization proposed by the Commission
• External administration is introduced for 18 months and can be prolonged for the same period of time after its expiration

Notwithstanding, it is not the first wording of the Draft Law, it is still rather vague and provide a big room for the state authorities discretion when evaluating an action as falling in the scope of the law. The business associations are aware of necessity to clarify or even delete certain provisions of the Draft Law. In this regard, we expect a new version of the Draft Law that will take into account the main worries of the Russian subsidiaries owned by the foreign companies.