RUSSIAN UPDATE – English Law Still Dominates in Russian M&A Transactions; a Comparison Shows Why…
This paper is the first in a series of papers on the choice of law in international M&A transactions. We invite further papers on this topic.
- Despite developments in Russian corporate legislation, the mergers and acquisitions and international finance markets in Russia still heavily rely on English law.
- Business partners in Russia often choose to enter English law governed shareholders’ agreements because English law gives them the flexibility to structure an agreement in exactly the way they want, and English law has an established use of a number of key provisions which are often invaluable in shareholders’ agreements. These key provisions include concepts such as put and call options, rights of veto, restrictive covenants, drag along and tag along provisions, good leaver and bad leaver provisions, step-in rights, share ratchets and deadlock mechanisms, which Goltsblat BLP regularly advise clients on.
The following summary table comparing English and Russian law positions demonstrates why many parties in Russian deals rely on English law:
|Legal concept and summary||English law position||Russian law position|
|Transfer of rights in a contract from one party to a new third party.||Use is well established.||Use is well established.|
The right for one party to require another party to sell its shares.
Use is well established.
Use is not well established.
|Performance is often secured through the grant of a power of attorney.||Irrevocable power of attorney not permitted.|
|Mechanism for carrying out a completion date audit of the company, to facilitate an adjustment to the purchase price.||Use is well established.||Theoretically possible but not tested in the courts.|
|Provisions stating that the contract (or certain parts of the contract) will only come into force if and when agreed conditions are met.||Use is well established.||Only permitted if the whole contract is conditional.Conditions must be outside of the control of the parties.|
|Covenants and veto rights|
|Contractual promise to do, or not do, something, or to stop something from happening.||Use is well established.||Positive covenants permitted.Negative covenants and rights of veto are unlikely to be enforceable.|
|Damages for breach of contract|
|Financial compensation payable to an innocent party for breach of contract by the other party, to compensate for loss suffered from the breach.||Use is well established.Subject to rules on causation, remoteness and mitigation.Damages for loss of profit and consequential loss are possible.Grossing-up provisions permitted.||Two main options available:- unwind transaction and return purchase price (without costs, etc.);or- seek price reduction to reflect actual state of the asset.|
|Damages for loss of profit and consequential loss are possible but can be difficult to prove.|
|Grossing-up provisions not recognised.|
|Contractual provisions used to break a deadlocked decision between the parties, often leading to the buy-out of one of the parties.||Use is well established.||Theoretically possible but not tested in the courts.|
|Payments of part of the purchase price at intervals after completion, often linked to agreed performance targets.||Use is well established.||Use is well established.|
|Dispute resolution and jurisdiction clauses|
|The process agreed for resolving disputes under the contract and the jurisdiction of the dispute hearing.||Use is well established.||Use is well established.|
|Mechanism allowing a majority shareholder selling its shares to force the minority shareholders to sell their shares at the same time.||Use is well established.||Theoretically possible but not tested in the courts.Irrevocable power of attorney not permitted.|
|Deferred consideration based on achievement of agreed financial targets for an agreed period after completion.||Use is well established.Contract frequently includes covenants restricting conduct of the business during the earn‑out period.||Theoretically possible but not tested in the courts.Negative covenants and rights of veto during the earn-out period are unlikely to be enforceable.|
|Arrangement to deposit title documents and/or completion monies with a third party escrow agent, who then releases them once the completion conditions have been satisfied.||Use is well established.||Escrow arrangements are not currently recognised.|
|Good leaver/bad leaver provisions|
|Contractual mechanism obliging employee shareholders to sell their shares when they leave the company, for a set price depending on the circumstances of their departure.||Use is well established.||Theoretically possible but not tested in the courts.Irrevocable power of attorney not permitted.|
|Linking “bad” leaver events to the restrictive covenants would not be enforceable.|
|Contractual undertakings to compensate for a particular loss or liability.||Use is well established.||Not currently recognised.|
|Joint and several liability|
|All parties are each liable for the full amount of the claim and must agree contributions amongst themselves.||Use is well established.||Use is well established.|
|Limitations on liability|
Provisions restricting the ability of one party to bring a claim against the other.
Use is well established.
Possible but with certain limitations.
|Attempts to exclude liability for fraud or dishonesty are void and unenforceable.|
|Limitation periods (for breach of contract)|
|Time periods for issuing legal proceedings for breach of contract claims.||6 years from the date of breach. 12 years for contracts executed as a deed.||(Generally) 3 years from the date the innocent party learns (or should have learned) of the breach.|
|Can be reduced by agreement.||Cannot be reduced or increased by agreement.|
|Limited recourse liability|
|Limits the contractual liability of one party to another, generally by restricting recourse to the enforcement of security over a specific asset only.||Use is well established.||Not currently recognised.|
Obligation to pay a sum of money in the event that a contract is breached that is higher than the loss suffered.
Penalties are void and unenforceable.
|An obligation to pay a sum that is no higher than a genuine pre-estimate of the loss (i.e. liquidated damages) is enforceable.||Permitted but amounts need to be reasonable.|
|Preferential share rights|
|Rights for one class of (i.e. preference) shares to receive greater or prior ranking economic rights than other shares (e.g. in respect of dividends/returns of capital).||Use is well established.||Not available for LLCs.Basic preference shares available for JSCs.|
|The right for one party to require another party to purchase its shares.||Use is well established.||Use is not well established.|
|Reasonable and best endeavours|
|The efforts that a party must go to in order to ensure that something outside of its direct control is done.||Use is well established.||Not recognised under Russian law.|
|Statements which induce a party to enter into a contract.||Use is well established.Often expressly excluded on M&A transactions (other than for fraud).||Representations outside of the contract not recognised.|
|Non-compete undertakings given in relation to the protection of the business.||Use is well established, and is generally enforceable so long as the restrictions are reasonable in scope and duration.||Risk of being deemed illegal and non-enforceable.|
|An account jointly controlled by a seller and buyer, holding part of the purchase price, to be released to seller on the satisfaction of agreed conditions or to buyer to settle warranty claims.||Use is well established.||Retention accounts are theoretically possible but not tested in the courts.|
|Mechanism to increase/decrease the number of shares and/or amount of sale proceeds a shareholder receives, based on a performance formula.||Use is well established; less popular now, often due to tax issues.||Theoretically possible but not tested in the courts.|
|Mechanism allowing one party to “step-in” and take voting control of the board and/or shareholder meetings.||Use is well established.||Theoretically possible but not tested in the courts.|
|Right is triggered by agreed events of default.|
|Mechanism allowing minority shareholders to sell their shares at the same time as the majority shareholder sells its shares.||Use is well established.||Theoretically possible but not tested in the courts.|
|Third party rights|
|Third party who is not a signatory to the contract may still enforce provisions beneficial to it.||Use is well established.||Use is well established; the third parties must be expressly named.|
|Statements or promises in a contract that confirm particular facts or circumstances.||Use is well established.Can cover a wide range of topics, including on the purchase of the shares in a company, the underlying business and assets of that company.||Basic warranties only, implied by law. Cannot be amended or extended.Do not apply to the underlying business and assets if buying shares. The absence of liabilities cannot be warranted.|
To see the full report, Use of English Law in Russian Transactions, a Comparative Review, please click Report