The legislation of Russian M&A
From a legal perspective, it pays to keep M&A deals offshore in Russia, according to Sergey Komolov, partner at Hogan & Hartson in Moscow. Global M&A deals are typically completed according to English law, but Russian courts would have trouble applying it, he explained. If either of the entities involved in a transaction is outside Russia, the legal documentation is likely to be governed by English law or in certain cases by the law of the relevant jurisdiction, he said.
Regardless of the nationality of the companies involved in a merger, it is perfectly possible – and advisable – to use an offshore holding company to arrange the deal, thus circumventing the complications of using Russian law. Cyprus is the jurisdiction typically used for this purpose in Russia, due to the favourable tax treaties that exist between Russia and Cyprus.
In some instances where both the acquirer and the acquired companies are Russian, it is possible to have provisions written into the legal documentation to make the terms of the deal more like English law – for example, regarding representations, warranties and indemnities. This is relatively normal practice, although if either side were to challenge these terms – which are unfamiliar to Russian courts – it is highly unlikely the terms would be upheld, said Komolov.
“Russian law is about obligations,” explained Komolov. “It is succinct and specific. In a court to prove a case you need to prove an obligation has not been met, and then you need to prove damage on top of that.” It is difficult to persuade a Russian court that a representation or warranty is a form of obligation, and it is hard to link damage to an inaccuracy of a representation.
Otherwise, shareholder rights in Russia are not well protected, although there is legislation currently being considered to redefine shareholder treatment. But, according to Scott Senecal, partner at Cleary Gottlieb Steen & Hamilton in Moscow, what form this will take when it has emerged from parliament is impossible to guess.