Control over FDI in Russian Strategic Companies

 

July 5, 2023

BRACE Law Firm ©

 

The issue of foreign investments in strategic companies is a key matter regarding the stability, security, and development of the Russian economy.

Investments are classified as domestic or foreign based on the investor's status (resident or non-resident). Foreign investments are regulated by international treaties of the Russian Federation, Federal Law No. 160-FZ dated July 9, 1999, On Foreign Investments in the Russian Federation (the "Foreign Investments Law"), Federal Law No. 225-FZ dated December 30, 1995, On Production Sharing Agreements, and Federal Law No. 57-FZ dated April 29, 2008, On the Procedure for Foreign Investments in Economic Entities Having Strategic Importance for National Defense and State Security (the "Law No. 57-FZ", the "Law on Foreign Investments in Strategic Entities") [1].

In the current economic situation, special attention is paid to the operations of foreign investors in the Russian market. Simultaneously, certain economic sectors are under special state control, as are investments in them, and organizations operating in such sectors are of strategic importance.

Scholars note that exercising control over foreign investments in strategic economic sectors is not unique to Russia. By the time Law No. 57-FZ was adopted, similar acts were already in force abroad. For example, the Foreign Investment and National Security Act entered into force in the USA in 2007, replacing previous laws and establishing a significantly modified procedure for reviewing and making decisions on foreign investments. In the European Union, the regulation of foreign investments regarding state security is determined at the level of several national governments. Special regulation of foreign investments in strategic sectors is also provided for in the UK, Japan, China, and other countries [2].

This article examines the specifics of investing in economic entities of strategic importance for national defense and security.

Concept and Signs of Economic Entities Having Strategic Importance

According to Article 3 of the Law on Foreign Investments in Strategic Entities, an economic entity having strategic importance for national defense and state security (the "economic entity having strategic importance", "strategic entity") is an economic entity established in the territory of Russia and carrying out at least one of the types of activities having strategic importance for national defense and state security. In accordance with Article 6 of Law No. 57-FZ, the main activities having strategic importance include:

• Active modification of hydrometeorological processes and phenomena;
• Activities related to the use of infectious disease pathogens;
• Placement, construction, operation, and decommissioning of nuclear installations; handling of radioactive waste;
• Design and construction of nuclear installations;
• Provision of services in the field of information encryption;
• Activities for the detection of electronic devices intended for wiretapping (surreptitious information gathering);
• Development, production, and disposal of weapons and military hardware;
• Trade in weapons and military hardware;
• Activities ensuring aviation security;
• Space activities;
• Fishing;
• Activities for assessing the vulnerability of transport infrastructure facilities and vehicles; activities for ensuring the physical protection of fuel and energy complex facilities;
• And a number of others.

In practice, organizations do not always agree with the relevance of this list. For instance, the Constitutional Court of the Russian Federation previously considered a case in which a foreign organization believed that classifying "geological study of subsoil and (or) exploration and extraction of mineral resources on subsoil plots of federal significance" as a strategic activity violated the organization's constitutional rights. The Court provided the following clarifications: "The main goal of Federal Law No. 57-FZ is to limit the participation of foreign capital in economic entities having strategic importance and to prevent unsupervised transactions resulting in a foreign investor gaining control over such an economic entity. The mechanism for realizing this goal is the establishment of a permissive legal regime for such transactions, involving the receipt of a decision on their preliminary approval. A feature of such a restrictive legal regime is the introduction of full control over foreign investments in economic entities having strategic importance. This is expressed in the establishment of corresponding exemptions for cases of participation in such economic entities by foreign investors both directly and indirectly—through a group of persons to which they belong—as well as in a broad understanding of control, which covers corporate influence exerted by foreign investors on economic entities having strategic importance not only directly but also through third parties. The contested provisions per se cannot be regarded as violating the applicant's rights in the aspect indicated by him. Verification of the legality and validity of court decisions and the correctness of the choice of legal norms does not fall within the competence of the Constitutional Court" [3].

According to Article 2 of the Foreign Investments Law, a foreign investor is a foreign legal entity, the civil legal capacity of which is determined in accordance with the legislation of the state in which it is established, and which is entitled, in accordance with the legislation of said state, to make investments in the territory of the Russian Federation; a foreign organization that is not a legal entity, the civil legal capacity of which is determined in accordance with the legislation of the state in which it is established, and which is entitled, in accordance with the legislation of said state, to make investments in the territory of the Russian Federation; a foreign citizen, whose civil legal capacity and capacity to act are determined in accordance with the legislation of the state of his citizenship and who is entitled, in accordance with the legislation of said state, to make investments in the territory of the Russian Federation; a stateless person who permanently resides outside the Russian Federation, whose civil legal capacity and capacity to act are determined in accordance with the legislation of the state of his permanent residence and who is entitled, in accordance with the legislation of said state, to make investments in the territory of the Russian Federation; an international organization that is entitled, in accordance with an international treaty of the Russian Federation, to make investments in the territory of Russia; foreign states in accordance with the procedure determined by federal laws.

Moreover, Law No. 57-FZ recognizes the following as foreign investors:

• A foreign legal entity, the civil legal capacity of which is determined in accordance with the legislation of the state in which it is established, and which is entitled, in accordance with the legislation of said state, to make investments in the territory of Russia;
• A foreign organization that is not a legal entity, the civil legal capacity of which is determined in accordance with the legislation of the state in which it is established, and which is entitled, in accordance with the legislation of said state, to make investments in the Russian territory;
• An organization under the control of a foreign investor, including one created in the territory of the Russian Federation;
• A foreign citizen, whose civil legal capacity and capacity to act are determined in accordance with the legislation of the state of his citizenship and who is entitled, in accordance with the legislation of said state, to make investments in the territory of Russia;
• A citizen of the Russian Federation holding other citizenship or holding a residence permit or other valid document confirming the right to permanent residence in a foreign state;
• A stateless person permanently residing outside Russia, whose civil legal capacity and capacity to act are determined in accordance with the legislation of the state of his permanent residence and who is entitled, in accordance with the legislation of said state, to make investments in the territory of Russia;
• Foreign states in accordance with the procedure determined by federal laws;
• An international organization that is entitled, in accordance with an international treaty of the Russian Federation, to make investments in the territory of Russia;
• Since December 2022, a foreign agent.

Thus, the Law on Foreign Investments in Strategic Entities recognizes as foreign investors not only the persons specified in Article 2 of the Foreign Investments Law but also organizations created in the territory of Russia that are under the control of foreign investors. At the same time, the creation, reorganization, and liquidation of commercial organizations with foreign investments in the Russian Federation are carried out on the terms and in the manner provided for by the Civil Code of the Russian Federation and other federal laws, in particular, Federal Law No. 129-FZ dated August 8, 2001, On State Registration of Legal Entities and Individual Entrepreneurs [4]. Below, we consider in more detail the main signs that an economic entity having strategic importance is under control.

Signs of a Strategic Entity Being Under Control

Article 5 of the Law on Foreign Investments in Strategic Entities establishes specific signs of a strategic entity being under control when it carries out the use of subsoil plots and fishing, as well as signs regarding other strategic entities.

Thus, an economic entity having strategic importance — a controlled entity (except for an economic entity having strategic importance and carrying out the use of a subsoil plot of federal significance and (or) fishing) — is considered to be under the control of a foreign investor, or a group of persons (the controlling person), if one of the following signs exists:

• The controlling person has the right to directly or indirectly dispose of more than 50% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of the controlled entity based on a property trust management agreement, pledge agreement, repo agreement, security payment, other agreement, or transaction;
• The controlling person, based on an agreement or other grounds, has obtained the right or authority to determine decisions made by the controlled entity, including the conditions for the controlled entity's business activities;
• The controlling person has the right to appoint the sole executive body and (or) more than 50% of the composition of the collective executive body of the controlled entity and (or) has the unconditional ability to elect more than 50% of the composition of the board of directors (supervisory board) or other collective management body of the controlled entity;
• The controlling person exercises the powers of the management company of the controlled entity.

It is important to note that the aforementioned right to directly or indirectly dispose of more than 50% of the total number of votes is also provided for cases where such right of disposal is exercised based on a property trust management agreement, a simple partnership agreement, an agency agreement, or as a result of other transactions or on other grounds. Thus, the specified list of grounds is open-ended.

As for the signs that a strategic entity carrying out the use of a subsoil plot of federal significance and (or) fishing is considered under the control of a foreign investor or group of persons (the controlling person), such signs are similar to those listed above, except that the right to dispose of the controlled entity's votes is not 50% of the total number of votes, but 25%. The right to appoint the sole executive body and (or) more than 25% of the composition of the collective executive body of the controlled entity and (or) the ability to elect more than 25% of the composition of the board of directors is also established.

Furthermore, a controlled entity is considered under control if the controlling person has the right to directly or indirectly dispose of less than 50% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of the controlled entity, provided that the ratio of the number of votes attributable to said shares (stakes) that the controlling person is entitled to dispose of, to the number of votes attributable to voting shares (stakes) constituting the authorized capital of the controlled entity and belonging to other shareholders (participants) of the controlled entity, is such that the controlling person has the ability to determine decisions made by the controlled entity.

Also, a strategic entity is considered under the control of foreign investors if the right to directly or indirectly dispose of more than 50% (or under the condition provided above, less than 50%) of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of such economic entity belongs in aggregate to foreign investors not belonging to the same group of persons.

It is important to note that the sign of a strategic entity being under control by an aggregate of foreign investors not belonging to one group of persons does not apply to foreign investors — shareholders of an organization that is a public company, with the exception of shareholders of such company who are international organizations and (or) foreign states, and (or) organizations under their control. Recall that according to Article 11 of the Tax Code of the Russian Federation, public companies are Russian and foreign organizations that are issuers of securities that (or depositary receipts for which) have passed the listing procedure and (or) have been admitted to trading on one or several Russian exchanges holding the relevant license, or exchanges included in the list of foreign financial intermediaries provided in the annex to the Directive of the Bank of Russia No. 4393-U dated May 30, 2017.

It is important to note that according to Part 9 of Article 2 of Law No. 57-FZ, said Federal Law does not apply to relations associated with transactions regarding economic entities having strategic importance for national defense and state security if the acquirer in such transactions is an organization under the control of, inter alia, a citizen of the Russian Federation who is a tax resident of the Russian Federation in accordance with the legislation of the Russian Federation on taxes and fees (excluding citizens of the Russian Federation who also hold other citizenship). According to FAS Russia, this exception applies both to organizations under the control of an individual citizen of the Russian Federation who is a tax resident of the Russian Federation and does not hold other citizenship, and to organizations under the aggregate control of two or more citizens of the Russian Federation who are tax residents of the Russian Federation and do not hold other citizenship.

Notably, if the control of a strategic entity engaged in fishing is revealed, its activities are subject to forced termination. Thus, according to Clause 2 of the Resolution of the Government of Russia No. 502 dated June 3, 2016, On Approval of the Rules for Forced Termination of the Right to Harvest (Fish) Aquatic Biological Resources in Cases Specified in Clauses 6 and 7 of Part 2 of Article 13 of the Federal Law "On Fishing and Conservation of Aquatic Biological Resources", and on Amendments to the Rules for Execution, Issuance, Registration, Suspension, and Cancellation of Permits for Harvesting (Fishing) Aquatic Biological Resources, as well as Amendments thereto, the basis for forced termination of the right to harvest is the conclusion of the Federal Antimonopoly Service on the identification of the fact that control by a foreign investor has been established over a legal entity registered in Russia holding the right to harvest (fish) aquatic bioresources in violation of the requirements of Law No. 57-FZ. In such cases, FAS Russia issues a conclusion on the identification of the fact that the user is under the control of a foreign investor prior to obtaining the right to harvest (fish) aquatic biological resources. Most often, such conclusions are challenged in court on the grounds that the fact of control arose after obtaining the relevant permit. However, courts in most cases remain on the side of the control body and conclude that if no decision on the majority of issues within the competence of the general meeting can be made without the participation of the foreign company/individual, this indicates the power of the foreign person to determine decisions made by the Russian strategic entity and confirms that the entity is under the control of a foreign investor [5].

Essentially, the listed signs of a controlled strategic entity are directly related to investments by foreign legal entities or individuals in organizations having strategic importance.

The above criteria for classifying a strategic entity as controlled by a foreign investor are used to determine the presence/absence of the need to apply restrictions to such entities, including restrictions on transactions resulting in the establishment of control. Below, we consider the main features of executing transactions.

Transactions Subject to Approval by the Government Commission on Control over Foreign Investments

According to Article 6 of the Foreign Investments Law, transactions entered into by foreign states, international organizations, or organizations under their control, as a result of which these foreign states, international organizations, or organizations under their control acquire the right to directly or indirectly dispose of more than 25% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of a Russian economic entity, or otherwise acquire the ability to block decisions of the management bodies of such economic entity, are subject to preliminary approval in the manner provided for by Law No. 57-FZ.

Thus, according to Articles 4 and 7 of the Law on Foreign Investments in Strategic Entities, the execution of transactions or other actions resulting in the establishment of control by a foreign investor or group of persons over entities having strategic importance, or providing for the acquisition of property of such economic entities, is permitted subject to a decision on the preliminary approval of such transactions or actions, issued by FAS Russia and valid for a specific period.

The following transactions are subject to preliminary approval by the Government Commission:

1. Transactions (excluding transactions regarding shares (stakes) constituting the authorized capital of a strategic entity carrying out the use of a subsoil plot of federal significance and (or) fishing) as a result of which a foreign investor or group of persons acquires:

• The right to directly or indirectly dispose of more than 50% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of the strategic entity (including taking into account the right to dispose of votes temporarily transferred to another person (other persons) based on a property trust management agreement, pledge agreement, repo agreement, security payment, other agreement, or transaction);
• The right to appoint the sole executive body and (or) more than 50% of the composition of the collective executive body of the entity and (or) the unconditional ability to elect more than 50% of the composition of the board of directors (supervisory board) or other collective management body of such economic entity;

2. Transactions regarding shares (stakes) constituting the authorized capital of a strategic entity carrying out the use of a subsoil plot of federal significance and (or) fishing, if as a result of these transactions a foreign investor or group of persons acquires:

• The right to directly or indirectly dispose of 25% or more of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of such economic entity (including taking into account the right to dispose of votes temporarily transferred to another person (other persons) based on a property trust management agreement, pledge agreement, repo agreement, security payment, other agreement, or transaction);
• The right to appoint the sole executive body and (or) 25% or more of the composition of the collective executive body of such economic entity and (or) the unconditional ability to elect 25% or more of the composition of the board of directors (supervisory board) or other collective management body of such economic entity;
• Transactions entered into by a foreign investor or group of persons regarding a strategic entity carrying out the use of a subsoil plot of federal significance and (or) fishing, if this foreign investor or group of persons has the right to directly or indirectly dispose of not less than 25% and not more than 75% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of such economic entity, including taking into account the right to dispose of votes temporarily transferred to another person (other persons) based on a property trust management agreement, pledge agreement, repo agreement, security payment, other agreement, or transaction. An exception applies to transactions resulting in no increase in the participation share of this foreign investor or this group of persons in the authorized capital of such economic entity, if such transactions are executed during an increase in the authorized capital of such economic entity or are carried out by persons under the control of a person exercising control over such economic entity;

3. Agreements on the exercise by a foreign investor of the functions of the manager (management organization) regarding an economic entity having strategic importance;
4. Transactions aimed at the acquisition by a foreign state, international organization, foreign investor not providing information, or organization under their control, of the right to directly or indirectly dispose of more than 25% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of an economic entity having strategic importance, or other ability to block decisions of the management bodies of the entity, or the right to directly or indirectly dispose of more than 5% of the total number of votes attributable to voting shares (stakes) of an entity carrying out the use of a subsoil plot of federal significance and (or) fishing (including taking into account the right to dispose of votes temporarily transferred to another person (other persons));
5. Transactions by an organization under the control of a foreign state resulting in the establishment of control by such organization over an economic entity having strategic importance that is such exclusively due to carrying out activities related to the use of infectious disease pathogens (excluding the production of medicinal products) and (or) activities for the provision of water supply and sanitation services using centralized systems, utility infrastructure systems), for which said activities are not the main activities and provided that for the last 3 years preceding the date of application for transaction approval, the book value of the property used for carrying out said activities constitutes no more than 1% of the book value of the assets of such economic entity determined as of the last reporting date according to accounting (financial) statements, or regarding an organization not having strategic importance under whose control such strategic entity is located;
6. Other transactions or agreements aimed at transferring to a foreign investor or group of persons the right to determine decisions of the management bodies of an economic entity having strategic importance, including the conditions for its business activities.

Also subject to approval are transactions providing for the acquisition of ownership, possession, or use of property classified as fixed production assets of a strategic entity, the value of which constitutes 25% or more determined as of the last reporting date.

It is important to note that this list is not exhaustive. Along with the transactions listed above, preliminary approval is also required for other actions resulting in a foreign investor or group of persons acquiring the right to determine decisions of the management bodies of an economic entity having strategic importance, including the conditions for its business activities. Approval requirements apply to other cases of acquisition of shares (stakes) resulting in the direct or indirect establishment of control by a foreign investor or group of persons over a strategic entity, including through the implementation by a foreign investor or group of persons of an obligation to purchase securities of such economic entity.

Preliminary approval is not required for transactions with shares (stakes) constituting the authorized capital of a strategic entity and other aforementioned transactions regarding such economic entity if, prior to such transactions, the foreign investor intending to execute the transaction directly or indirectly disposes of more than 50% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital, and (or) if the foreign investor is under the control of a person exercising control over such economic entity. However, such transactions involving an entity carrying out the use of a subsoil plot of federal significance and (or) fishing remain subject to approval.

Thus, a very significant number of transactions and other actions related to investing in the activities of strategic entities may be regarded by FAS Russia as transactions subject to preliminary approval.

In the absence of transaction approval, the transaction may be declared invalid (void), and the consequences of the invalidity of a void transaction will be applied. Upon a claim by the regulator, the court may make a decision to strip the foreign investor of voting rights at the general meeting of shareholders of the economic entity having strategic importance [6].

Most frequently in FAS Russia practice, challenging transactions in the absence of approval is observed as a method of control over compliance with approval requirements. In some cases, transaction participants claim the application of the statute of limitations. However, the Supreme Court of the Russian Federation clarified in one case that until information was received that control by a foreign person over a strategic entity was established as a result of interrelated transactions, the authorized body could not challenge them. The right to file claims for the application of consequences of invalidity of void transactions is linked to the onset of execution consequences. The defining date for calculating the limitation period should be considered the date when the non-legal result generated by the transaction arises [7].

It is also important to note that on April 28, 2023, Federal Law No. 139-FZ On Amendments to the Federal Law "On the Procedure for Foreign Investments in Economic Entities Having Strategic Importance for National Defense and State Security" was adopted, expanding the court's powers when applying the consequences of transaction invalidity. Specifically, it is established that when the court makes a decision to apply such consequences, the presence or absence of risks of maintaining or creating a threat to national defense and (or) state security in the event of applying the consequences of the invalidity of a void transaction is taken into account. The court applies the consequences of invalidity of a void transaction in accordance with civil legislation; specifically, it may forfeit to the revenue of the Russian Federation shares (stakes) constituting the authorized capital of an economic entity having strategic importance acquired as a result of a void transaction by parties acting intentionally, or property classified as fixed production assets of an economic entity having strategic importance acquired as a result of a void transaction by parties acting intentionally, as well as forfeit to the revenue of the Russian Federation income received as a result of a void transaction by parties acting intentionally. Thus, if an unscrupulous foreign investor illegally, without approval, acquired property of a strategic entity or a share in its capital, in the event the transaction is recognized as void, the shares may be forfeited to Russia's revenue by the court. Experts note that these measures are justified, as if a shareholder intentionally committed violations that led to risks for national defense and state security, they should not be entrusted with control over the strategic entity again, and the shares should be converted into state revenue rather than returned to the seller [8].

Procedure for Transaction Approval and Liability Measures

Articles 8–9 of Law No. 57-FZ establish that a foreign investor or a legal entity or individual within a group of persons planning to execute transactions subject to approval are required to submit to FAS Russia, in two copies, a petition for preliminary approval of such transaction, a petition for approval of the establishment of control, or a petition for preliminary approval of executing a transaction and (or) obtaining a decision resulting in the granting of the right to harvest (fish) aquatic biological resources.

The petition for preliminary approval contains the following documents:

• An application for preliminary transaction approval containing a proposal on the validity period of the decision on preliminary transaction approval, addressed to the authorized body and drafted in free form. In a petition for preliminary approval of transactions resulting in the applicant acquiring the right to directly or indirectly dispose of a certain number of votes attributable to voting shares (stakes) of a strategic entity, the application must indicate the number of votes attributable to said voting shares (stakes), the right of disposal of which the applicant intends to acquire;
• A document confirming the state registration of the applicant — a legal entity or an individual as an individual entrepreneur — in accordance with the legislation of the respective state, or regarding an applicant — legal entity — another document confirming the fact of its creation;
• A document certifying the identity of the applicant — individual;
• A document confirming the fact of establishment of the applicant — a foreign organization that is not a legal entity—in accordance with the legislation of the state in which it is established;
• Constituent documents of the applicant — legal entity;
• A draft agreement or other agreement disclosing the content of the transaction (except for cases of filing a petition for preliminary approval of transactions resulting in the applicant acquiring the right to directly or indirectly dispose of a certain number of votes attributable to voting shares (stakes) constituting the authorized capital of an economic entity having strategic importance);
• A document containing information on the main activities of the applicant carried out by the applicant during the two years preceding the date of filing the petition, or, if the period of activity of such applicant is less than two years, during such period of activity, drafted in free form (except for cases of transactions by a foreign state);
• A document containing information on the composition of the group of persons to which the applicant belongs, as well as information on their participation in agreements that may have a significant impact on the activities of the economic entity having strategic importance;
• A document containing information on beneficiaries, beneficial owners, the person exercising control over the applicant, and signs of the applicant being under control;
• A draft business plan for the strategic entity;
• Information on shares (stakes) constituting the authorized capital of the strategic entity belonging to the applicant, as well as other circumstances existing on the date of filing the petition resulting in the establishment of control by the foreign investor in the event of transaction execution;
• The balance sheet of the economic entity having strategic importance as of the last reporting date preceding the date of submission of the petition;
• Information on the book value of the assets of the economic entity having strategic importance as of the last reporting date preceding the date of submission of the petition (in case of filing a petition for preliminary approval of a transaction providing for the acquisition of ownership, possession, or use of property classified as fixed production assets of the economic entity having strategic importance, the value of which constitutes twenty-five percent or more of the book value of the assets of such economic entity determined as of the last reporting date according to its accounting (financial) statements).

The petition for preliminary approval of executing a transaction and (or) obtaining a decision resulting in the granting of the right to harvest (fish) aquatic biological resources includes, in addition to the documents listed above:

• An application for preliminary approval of executing a transaction and (or) obtaining a decision resulting in the granting of the right to harvest (fish) aquatic biological resources in free form, indicating information on existing rights to harvest (fish) aquatic biological resources or information on the absence of these rights, as well as information on the right to harvest (fish) aquatic biological resources for the granting of which such economic entity plans to apply;
• A document containing information on shares (stakes) constituting the authorized capital of the entity regarding which the petition is filed, as well as other circumstances indicating the presence of control by a foreign investor or group of persons over said economic entity.

In addition to the documents listed above, the applicant is permitted to submit other documents and information deemed necessary to confirm the fact of establishment of control over the strategic entity.

The detailed procedure for transaction approval is established by the Rules for Preliminary Approval of Transactions and Approval of the Establishment of Control by Foreign Investors or a Group of Persons Including a Foreign Investor over Economic Entities Having Strategic Importance for National Defense and State Security, approved by Resolution of the Government of the Russian Federation No. 838 dated October 17, 2009. An inventory of the documents sent is attached to the application.

It is important to note that if, during the execution of a transaction, the fact of establishing control by the applicant or a group of persons including the applicant over an economic entity having strategic importance is not obvious, the applicant has the right to send a request to FAS Russia regarding the necessity of approving such transaction. A response is sent within 30 days from the date of receipt of the relevant request.

Within a period of no more than 14 days from the date of receipt of the petition, FAS Russia registers the petition, verifies the presence of necessary documents, and determines the fact of control over the strategic entity, as well as the compliance of the transaction being approved with the criteria established for determining the necessity of its approval.

If, after reviewing the petition, it is established that it contains false information, or the applicant has not submitted additionally requested information, the petition remains without consideration and is subject to return to the applicant.

Furthermore, Federal Law No. 40-FZ dated March 9, 2021, introduced amendments to Law No. 57-FZ, introducing a simplified procedure for transaction approval for strategic entities whose activities aimed at ensuring national defense and state security are not primary and are related to the provision of water supply (sanitation) services, or performance of work using infectious disease pathogens. The ban on executing transactions resulting in the establishment of control by an organization under the control of a foreign state over said entities or organizations not having strategic importance under whose control said strategic entities are located has been lifted.

These transactions are subject to mandatory preliminary approval by the Government Commission on Control over Foreign Investments in the Russian Federation (the "Commission", the "Pravkomissiya on Control over Foreign Investments"). Under the simplified procedure, a decision on preliminary transaction approval is made taking into account the conclusions of the Ministry of Defense and the FSB on the absence of a threat to national defense and state security, as well as taking into account the positions of Rospotrebnadzor, the Ministry of Economic Development, and the Ministry of Construction [9].

As a general rule, within 3 days from the completion of the verification and receipt by FAS Russia of the conclusions of the Ministry of Defense and the FSB and the conclusion of the interdepartmental commission on state secret protection, FAS Russia sends to the Commission said conclusions, the petition, and materials obtained as a result of the verifications, as well as its proposals regarding the decision on preliminary transaction approval or approval of the establishment of control, or a decision on refusal of preliminary transaction approval or approval of the establishment of control, or makes a decision on preliminary transaction approval or approval of the establishment of control under the simplified procedure.

Within 30 days from the date of receipt of conclusions and materials, the Commission makes one of the following decisions:

• On preliminary transaction approval or on approval of the establishment of control;
• On preliminary transaction approval or on approval of the establishment of control (with conditions);
• On refusal of preliminary transaction approval or approval of the establishment of control.

The total term for consideration of the petition cannot exceed 3 months from the date of registration of the petition by FAS Russia to the day of preliminary transaction approval or approval of the establishment of control or refusal of preliminary transaction approval or approval of the establishment of control, formalized by the relevant decision of the authorized body. In exceptional cases, the consideration period for the petition may be extended by the Commission's decision for 3 months.

In the event of a decision on preliminary transaction approval or approval of the establishment of control, the Commission determines one or more of the following main obligations imposed on the applicant:

• Formation of management bodies of the strategic entity from among persons who may be admitted to information constituting a state secret, and implementation by such economic entity of measures for state secret protection;
• Continuation of the supply of products (works, services) by the economic entity under the state defense order;
• Implementation of activities for the provision of services at prices (tariffs) established in accordance with legislation on natural monopolies, and (or) activities for the purpose of providing utility services at legally fixed prices (tariffs);
• Execution of the business plan of such economic entity submitted by the applicant;
• Immediate adoption of measures determined under conditions of martial law or a state of emergency in the territory of Russia or in its specific localities where such economic entity is located;
• Processing of mineral resources within the territory of Russia, within the framework of using a subsoil plot of federal significance and/or aquatic biological resources harvested (fished) by the strategic entity;
• Implementation of activities at facilities ensuring the livelihoods of the population;
• Ensuring the preservation of production volumes and supplies of products (works, services) at a level not lower than that preceding the date of the transaction or establishment of control;
• Implementation of innovative technologies at industrial production facilities;
• Other obligations.

This list is open-ended. These obligations are enshrined in an agreement.

As previously noted, liability measures for non-compliance with the requirements of Law No. 57-FZ include the court making a decision on the application of consequences of invalidity of a void transaction. The court, applying the consequences of invalidity of a void transaction, may forfeit to the revenue of the Russian Federation shares (stakes) constituting the authorized capital of the strategic entity acquired as a result of a void transaction by parties acting intentionally.

Since 2023, an additional measure is the stripping of the foreign investor or group of persons of voting rights at the general meeting. Specifically, if it is impossible to apply the consequences of invalidity of a void transaction to transactions, as well as if a foreign investor fails to submit a petition for approval of the establishment of control to the authorized body within the established period, the court, upon a claim by the authorized body, makes a decision to strip the foreign investor or group of persons of voting rights at the general meeting of shareholders (participants) of the economic entity having strategic importance. When a foreign investor is stripped of voting rights at the general meeting of shareholders (participants), the votes belonging to them are not taken into account when determining the quorum of the general meeting of shareholders (participants) of such economic entity and counting votes at the general meeting.

In judicial practice, claims by FAS Russia when challenging transactions are most often satisfied if the illegal establishment of control by an unscrupulous foreign investor over a strategic entity led to the withdrawal of its assets and the impossibility of it carrying out activities, which resulted in harm to public interests in ensuring national defense and state security, or if transactions contradict the foundations of law and order and morality [10].

Furthermore, gross or repeated failure by a foreign investor to fulfill obligations imposed by the Commission entails the stripping of the foreign investor or group of persons of voting rights at the general meeting of shareholders by court order upon a claim by the authorized body.

If a foreign investor or group of persons who established control over a strategic entity received a refusal to approve the establishment of control, within 3 months from the date of sending the decision on refusal to approve the establishment of control, they are required to alienate part of the shares (stakes) of the entity belonging to them such that the remaining shares (stakes) do not provide this foreign investor or this group of persons with the right of control over the strategic entity.

Additionally, according to Part 3 of Article 18.17 of the CAO RF, non-compliance by a foreign legal entity, its branch, or representative office with restrictions on carrying out certain types of activities established in accordance with federal law regarding foreign organizations entails the imposition of an administrative fine in the amount of 800,000 to 1,000,000 rubles or administrative suspension of activities for a period of 14 to 90 days.

Another important innovation is that foreign agents are classified as foreign investors. Foreign agents, regarding whom the legislation has introduced additional restrictions, may find their ability to participate in strategic entities very difficult. Specifically, foreign agents cannot make donations to a political party and its regional branches, or enter into transactions with a political party, its regional branch, and other structural subdivision. A legal entity recognized as a foreign agent is not entitled to carry out educational and enlightenment activities regarding minors, participate in state procurements, as well as in procurements of goods, works, and services in accordance with Federal Law No. 223-FZ dated July 18, 2011. Also, a foreign agent is not entitled to use simplified accounting methods, including simplified accounting (financial) statements. Funds placed by foreign agents (excluding individuals) or in their favor are not subject to insurance [11].

Is it possible to challenge the Commission's decisions on refusal of preliminary transaction approval or refusal of approval of the establishment of control? Based on Part 7 of Article 11 of Law No. 57-FZ, such an opportunity is provided by challenging the refusal decision in the Supreme Court of the Russian Federation. However, as noted in the literature, the competence of this court and the subject of judicial proceedings are not defined by Law No. 57-FZ. Is the Supreme Court of the Russian Federation authorized to preliminarily approve a transaction or established control in the event of resolving a dispute in favor of a foreign investor? And if not, are its powers limited merely to assessing the formalities of the Commission's decision-making procedure? A simple indication of the possibility of challenging the Commission's decision is insufficient to grant the Supreme Arbitration Court of the Russian Federation (now Supreme Court) such power ex officio. At the same time, a necessary basis for protecting foreign investments is the ability to refer a dispute to a competent state or international body that will resolve it on the merits [12].

This article has outlined the main features and restrictions applicable to strategic economic entities, including regarding investment in them. As noted by lawyers, when considering the specifics of constitutional and legal regulation of foreign investments in economic entities having strategic importance for national defense and state security, it is necessary to pay attention to the specifics of the legal regime of foreign investments in said economic entities.

Firstly, Law No. 57-FZ defines a special procedure for verifying economic entities having strategic importance.

Secondly, to obtain preliminary transaction approval or approval of the establishment of control by a foreign investor, in a number of cases, the applicant is charged with fulfilling a set of obligations in the sphere of national defense and state security.

Thirdly, the law provides for various types of adverse legal consequences for violation of requirements for executing transactions or other actions over economic entities having strategic importance [13].

Based on the foregoing, it can be noted that in the case of control over foreign investments, it is necessary to observe a balance of private and public interests of the state. Control over economic concentration involving strategic economic entities must be objective and effective in order to ensure the attractiveness of the Russian economy for foreign investors. In particular, investors must understand what criteria exist in the legislation for initiating the transaction approval procedure with the Government Commission on Control over Foreign Investments. It can be assumed that significant market power of a subject indicates the need to pay attention to transactions with its shares, stakes, or assets [14].

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References

[1] Speranskaya L.L. Investments and their types // SPS ConsultantPlus. 2023.

[2] Fedyaev D.A. The right to sue when challenging transactions resulting in the establishment of control by foreign investors over economic entities having strategic importance // Herald of Civil Procedure. 2021. No. 4. P. 115.

[3] Ruling of the Constitutional Court of the Russian Federation No. 1106-O dated June 18, 2020, On the refusal to accept for consideration the complaint of the foreign company 'Canrig Drilling Technology Canada Ltd.' regarding the violation of constitutional rights and freedoms by the provisions of Article 6 of the Federal Law 'On the Procedure for Foreign Investments in Economic Entities Having Strategic Importance for National Defense and State Security'.

[4] Lisitsa V.N. Investment Law. Ministry of Education and Science of the Russian Federation; Novosibirsk National Research State University. Novosibirsk, 2015. P. 28.

[5] Ruling of the Supreme Court of the Russian Federation No. 305-ES21-8229 dated June 10, 2021, in case No. A40-130925/2019.

[6] Competition in a market economy: limits of freedom and restrictions: monograph / A.A. Amangeldy, O.A. Belyaeva, A.N. Varlamova et al.; ed. by A.V. Gabov. M.: IZiSP, Yurisprudentsiya, 2016. P. 311.

[7] Ruling of the Supreme Court of the Russian Federation dated April 12, 2019, in case No. 309-ES18-16403.

[8] They want to protect strategically significant enterprises from foreign investors. A. Boyko, A. Vergazova, Ya. Surinskaya // "Vedomosti". December 12, 2022.

[9] A law aimed at improving the procedure for foreign investments in certain economic entities having strategic importance has been adopted. Prosecutor's Office of the Nenets Autonomous Okrug. March 9, 2021.

[10] Ruling of the Supreme Court of the Russian Federation No. 309-ES18-16403 dated June 20, 2023, in case A50-10758/2017.

[11] Temirplatov S.R. Recognition of a legal entity as a foreign agent // SPS ConsultantPlus. 2023.

[12] Shabrov R.V. Investing in economic entities having strategic importance for national defense and state security // Legislation and Economy, 2009, No. 7.

[13] Krasinsky V.V. Protection of state sovereignty: monograph. M.: NORMA, INFRA-M, 2017. P 467.

[14] Mazurenko V.A. Dominant position as a sign of the strategic importance of an economic entity // Actual Problems of Russian Law. 2021. No. 11. P. 99 – 106.