An analysis of the restrictions on the transfer of rights to shares in an LLC

Lawyers from Nordic Star have analyzed the scope of Presidential Decree No. 618 dated 9 August 2022 “On a special procedure for the implementation (execution) of certain types of transactions (operations) between certain persons” (the “Decree”). They came to the following conclusions regarding whether the prohibition established by the Decree applies to the disposal of rights to a share in Russian LLCs (a prohibition on transactions without obtaining permission from the government commission):

1. Transfer of powers of the chief executive officer of an LLC to the manager (management company)

The prohibition applies to transactions that entail the establishment of rights allowing the conditions to be determined of the management of companies (i.e., including the conclusion of an agreement with a management company).

2. Transfer of shares in an LLC under a trust management agreement

The prohibition applies to transactions that entail the establishment, adjustment or termination of rights of possession, use and/or disposal of shares in the issued capital of LLCs.

3. Liquidation of an LLC

Technically speaking, the prohibition does not apply to this operation; however, there is a problem in paying the liquidation balance to an LLC’s members. This is because Decrees of the President of the Russian Federation No. 254 dated 4 May 2022 and No. 95 dated 5 March 2022 established a limit on the payment of dividends to non-residents from “unfriendly” countries in the amount of 10 million rub. per month (or the equivalent in currency at the exchange rate on the 1st day of the month).

4. Conclusion of an agreement on the exercise of the rights of an LLC’s members (corporate agreement)

The prohibition applies to transactions that entail the establishment of rights that allow conditions to be determined on the management of LLCs (i.e., including the conclusion of a corporate agreement)

5. Withdrawal of a member from an LLC

Yes, the prohibition applies. Withdrawal from an LLC is an operation that entails the termination of the rights of an LLC’s member; formally, these operations are transactions for the disposal of a share to the LLC itself (i.e., a transaction in respect of the share between a non-resident and a resident).

6. Allocation to an LLC’s remaining members of a share owned by the LLC as a result of the withdrawal of a member of the LLC when the LLC’s remaining members are legal entities from “unfriendly” countries.

Considering that the size of the share of the LLC’s remaining members changes, formally, the prohibition applies to this situation.

7. Sale to third parties of a share owned by an LLC as a result of the withdrawal of a member of the LLC (an “allocation through sale”, with an agreement for the sale and purchase of the share being concluded). At the same time, the LLC’s remaining members who will decide on the sale are legal entities from “unfriendly” countries

This is a controversial situation because formally the seller in this transaction is a resident – the LLC itself. If the buyer is also a resident, the transaction potentially might be registered. However, the final decision will depend on the position of the registering authority, which might consider that it is actually a transaction regarding the corporate control of “unfriendly” non-residents.

8. What if a foreign company from an “unfriendly” country (“Company 1”) owns a share in a Russian LLC, and Company 1 is reorganized in the form of a demerger of a new legal entity (“Company 2”), to which, during the process of reorganization, a share in the LLC is transferred as an asset?

Considering that the reorganized legal entity is located in a foreign jurisdiction, formally, the Decree cannot affect the reorganization itself. However, during the registration of the rights for the successor, obvious difficulties will arise: since not only transactions but any other operations with the shares of Russian LLCs fall under the scope of the Decree, there is a high possibility of the registrar refusing to effect registration when trying to enter information about a new member of the LLC in the Unified State Register of Legal Entities. It is better to consider the reverse scenario – the transfer to Company 2 of all the assets of Company 1 except for the share in the Russian LLC.

9. Considering Decree No. 618 of the President dated 8 September 2022, are there any legal ways for persons from “unfriendly” countries to dispose of their shares in the issued capital of a Russian LLC (in addition to obtaining the consent of the government commission of the Russian Federation to carry out such a transaction)? If so, what are they?

With the question being formulated in this way, it must be considered that any methods for disposing of shares in a Russian LLC to “unfriendly non-residents” without obtaining permission from the government commission might be regarded as circumventing the law (art. 10 of the Civil Code of the Russian Federation).

The only technically possible way to dispose of the share of a member of a Russian LLC who is a resident of an “unfriendly jurisdiction” will be to sell a share in the foreign company to the holders of a Russian share (provided that this corresponds to the economic interests of the client). Only in this case does the transaction completely fall outside the regulation of Russian legislation, since it does not entail changes in the Unified State Register of Legal Entities.

However, this method is also not indisputably legal, since the Decree requires permission, including for indirect changes in corporate control; the foreign sale is obviously aimed at circumventing this restriction. Currently, there is no specific liability for circumventing  restrictions that have been “decreed”; these risks are difficult to specify.

 
Andrei Gusev
Managing Partner, Attorney-at-Law

+7 921 938 29 90
St. Petersburg

 
Natalia Kashina
Associate, Attorney-at-law

+7 921 568 80 56
St. Petersburg