In brief
The law creates a court procedure for Russian owners to terminate buyback options (call options) granted to former “unfriendly” foreign investors who exited Russia after 2022, effectively cancelling their right to reacquire Russian assets.
In detail
The procedure affects deals concluded after February 22, 2022, where investors from “unfriendly” countries (“Foreign Investor”) sold their Russian businesses to Russian buyers (“Russian Owner”) and retained call options to repurchase the assets later.
What are the conditions for blocking the buyback?
A Russian court can terminate the option if both of the following sets of conditions are met:
1. The Foreign Investor has engaged in at least one of the following:
a. publicly supported anti-Russian sanctions or discredited the Russian military (“Anti-Russian Actions”);
b. financed activities deemed to be “extremism, terrorism or proliferation of weapons of mass destruction” (e.g., sponsored the Ukrainian military);
c. announced the suspension of its Russian business or otherwise defaulted on its obligations in a way that harmed the Russian business, provided these actions were driven by sanctions compliance and not by “evident economic reasons”.
2. The buyback option itself meets at least one of the following criteria:
a. the buyback price is 25% or more below the market price;
b. the Russian Owner has made significant new investments into the asset or taken other actions that were critical for the business’s survival.
What is the procedure?
This is a court procedure. It may be initiated by either the Russian Owner or the Ministry in charge of the industry relevant to the asset. Irrespective of the applicant, the claim right is subject to prior review and confirmation by such Ministry and the RF Governmental Commission.
The Russian Owner may proactively seek the restriction of buyback irrespective of whether the Foreign Investor has already activated the call option or not.
The claims are subject to the exclusive jurisdiction of the Arbitrazh (Commercial) Court of the Moscow Region.
What remedies are available to the Foreign Investor?
If the court terminates the option, the Foreign Investor has one year to claim compensation from the Russian Owner. However, the court has wide discretion over the amount:
1. Compensation can be reduced based on the Foreign Investor’s Anti-Russian Actions, any damages caused, and the value of new investments made by the Russian Owner.
2. Compensation can be denied entirely if the Foreign Investor is found to have financed extremism or terrorism.
When will this law apply?
The law takes effect upon its official publication after being signed by the President. Critically, it will apply retroactively to all call options in deals closed after February 22, 2022.
Practical implications
As of today, we are not aware of instances where Foreign Investors would be triggering buy-back options with regard to their former Russian assets. That said, this law fundamentally changes the balance of power in post-exit M&A deals:
1. For Russian Owners, this law is a powerful renegotiation tool. They can now approach Foreign Investors to renegotiate the terms of a buyback (e.g., the price formula) under the credible threat of going to court to have the option cancelled entirely.
2. International arbitration counter-leverage. The story may not end in a Russian court. If the original option agreement is governed by foreign law and subject to international arbitration (e.g., LCIA, HKIAC), the Foreign Investor could still initiate arbitration. An international award in their favor could potentially be enforced against the Russian Owner’s assets outside of Russia, creating a significant risk for Russian groups and UBOs with an international footprint.
Contacts
Sergei Voitishkin, Managing Partner, Moscow
Sergey Krokhalev, Partner, Moscow
Maxim Kalinin, Managing Partner, St. Petersburg
