Frequent Legal Issues for Contractors on
Sakhalin Oil and Gas Projects
(Appearing soon in the Russian Energy Law Journal)

V. Antimonopoly Considerations of Investments in Sakhalin Projects

Presented by Sergei L. Lazarev, Partner of the firm’s Russian Practice Group and Executive Director of the firm’s Moscow office.

Types of Antimonopoly Control

The predominant Russian legislation governing transactions that may influence competition is a law passed during Soviet times entitled, “On Competition and the Limitation of Monopolistic Activities on Commodity Markets” (“Antimonopoly Law”).(37) Particularly noteworthy is the fact that in addition to defining certain events as potentially influencing competition on Russian markets, the Antimonopoly Law provides for the extraterritorial effect of its rules, expressly covering instances where the actions of foreign entities outside of the Russian Federation may potentially limit competition within Russian markets. (38)

The Russian government, through the Ministry of Antimonopoly Policy (“Ministry”), exercises two major forms of antimonopoly control over typical corporate transactions. Depending on the type of activity and the amount of assets involved, a company seeking to perform an activity may need to either seek prior governmental approval of the transaction, or notify the government about the transaction after it is completed.

Of the two forms of control, prior approval, is from a timing and planning perspective, the more burdensome, as it requires filing a motion with antimonopoly bodies before a transaction is commenced. The Ministry considers the motion in view of the transaction’s potential effect on competition. If there is no negative effect, the motion should be granted. If there is a potential limitation on competition, the motion may be denied. If an applicant can demonstrate that the transaction’s positive social effect outweighs its negative consequences, or that the applicant is able to take measures to preserve competition, a motion may be granted even in the presence of a finding that competition will be limited as a result of the proposed transaction. (39)

Subsequent notification of a transaction to the Ministry must furnish information that enables the Ministry to assess the effect of the transaction on competition. A finding that the transaction has negatively impacted competition may result in its rescission by the Ministry.

Typical Transactions Subject to Antimonopoly Control

Subject to the triggering of economic thresholds, which vary for each type of transaction and are set forth in the table below, the Antimonopoly Law governs the following types of transactions:

• The formation of a commercial organization such as a limited liability company, joint stock company, full partnership or limited partnership. (40)
• Mergers and acquisitions involving Russian commercial organizations. (41)
• A transfer of fixed assets exceeding 10% of the total book value of the fixed and intangible assets of the transferring entity, through sale, donation, lease, temporary uncompensated use, or other instances of temporary transfer. (42)
• The acquisition of 20% or more of the shares or participatory interests (43) in a Russian company. This rule is not applied to the founders of a company at the time of its formation.
• The acquisition of the right to control business activity of a Russian legal entity or to perform the functions of its executive body. For example, the execution of a management contract by which one legal entity performs the functions of the executive body (44) of another legal entity.
• The election of an individual to the Board of Directors (Supervisory Board) or to another executive body of a Russian legal entity. (45)

Threshold Amounts Invoking Antimonopoly Control

Timing and Venue of Filing

The antimonopoly bodies generally must consider motions for approval within 30 days from the date of filing,(47) however, under certain circumstances, they may extend this period for an additional 20 days. In practice, the antimonopoly bodies may also request additional documents and thus renew the period of consideration.

Subsequent notifications must be filed within 45 days after the reported event took place. (48) The Antimonopoly Law does not specify the time period within which the Ministry must issue a decision regarding notifications. In practice, a reply is usually received within two months after filing.

Motions for approval and notifications of mergers and acquisitions, and notifications of the formation of legal entities are filed with the federal Ministry of Antimonopoly Policy, if the assets in question exceed 10 million TMW. (49) In other cases, these motions and notifications are filed on the regional level with the relevant subdivisions of the Ministry.

The acquisition of rights to control business activity, transfers of fixed assets, purchases of shares and elections to the boards, as set forth above, are controlled on the federal level when the assets of the entities involved exceed 20 million TMW. (50) Otherwise, these events are subject to antimonopoly control on the regional level.

Basic Information and Documents Required for Filing

Document requirements are extensive and vary for each type of controlled transaction. However, all filings include the registration documents of parties to the transaction (charter, certificate of incorporation), a statement of the purpose of the transaction, the value of total assets involved, and a list of the members of the executive body and the board of directors. All foreign documents filed must bear an apostille or consular legalization and be supplemented by a certified Russian translation. If information provided at filing constitutes a commercial secret, applicants must alert the antimonopoly bodies to this fact.

After the initial filing, the Ministry may require additional information and documents before making a decision on the application and may set a deadline for the provision of such information and documents at its own discretion. (51) Therefore, preparatory work to collect the anticipated information and documents should be undertaken in advance. Additional information may be requested relating not only to the parties to the transaction, but also related to other interested persons. The list of additional information is extensive. (52) The most noteworthy requests include the following:

a) Information contained in quarterly accounting and statistical reports or in their supporting documents, as well as other documents related to the calculation and payment of taxes and other obligatory payments for three preceding years.

b) Description of major types of goods (work, services) supplied to the market and their major substitutes in production and consumption.

c) Information on the volume and share of supply for government and military orders.

d) Description of the market environment before and after the transaction.

e) Information on production facilities and the level of their utilization for the production of the specific type of goods (work, services), including an assessment of the total production facilities of the type in the Russian Federation or region.

Liability for Violation of Antimonopoly Control Rules

Failure to file a motion for approval or a subsequent notification with the antimonopoly bodies when required by law is subject to administrative fines. The amount of such fines ranges from 20 to 50 TMW (approximately $70-170) for executives, (53) and from 500 to 5,000 TMW (approximately $1,700-17,000) for legal entities. (54)

In addition to administrative fines, antimonopoly bodies may seek court ordered liquidation of a legal entity formed in contravention of the Antimonopoly Law. (55) Furthermore, any transaction conducted in violation of the Antimonopoly Law may be challenged and invalidated in court proceedings on the basis of its illegality. (56)

(37) Law of the RSFSR No. 948-1, dated March 22, 1991 (as amended).
(38) Antimonopoly Law, Article 2(1).
(39) Antimonopoly Law, Article 17(4).
(40) Antimonopoly Law, Article 17(5).
(41) Antimonopoly Law, Article 17(1).
(42) Antimonopoly Law, Article 18(1).
(43) Antimonopoly Law, Article 18(1).
(44) Antimonopoly Law, Article 18(1).
(45) Antimonopoly Law, Article 18(6).
(46) TMW is an abbreviation for “times the minimum (monthly) wage,” established by the Government of the Russian Federation. As of today the minimum wage for the purposes of administrative law is 100 rubles. Given the current exchange rate of approximately US$1to RuR 29, the minimum wage is approximately US$3.45.
(47) Antimonopoly Law, Article 17(2).
(48) Antimonopoly Law, Article 17(5).
(49) Regulations on the procedure of filing of motions and notifications with the antimonopoly bodies under Articles 17 and 18 of the Law of the RSFSR “On Competition and Limitation of Monopolistic Activities on Commodity Markets,” approved by Ministry of Antimonopoly Policy Order #276, August 13, 1999 (MAP Order), Item 6.1.2.
(50) MAP Order, Item 6.2.1.
(51) MAP Order, Item 5.3.
(52) MAP Order, Appendix 1, Item 2.
(53) The Code of the Russian Federation on Administrative offences #195-FZ, dated December 30, 2001, Article 19(8).
(54) The Code of the Russian Federation on Administrative offences #195-FZ, dated December 30, 2001, Article 19(8).
(55) Antimonopoly Law, Article 17(9).
(56) Russian Civil Code, Article 168.