Top tips for investors in Russia

MOSCOW PE Forum: Normally I wouldn’t give much air time to a presentation from a lawyer because they all tend to say the same thing. However, Squire, Sanders and Dempsey are sponsoring the cocktail reception and on a day as hot as this and when I’m craving a tipple – that deserves some respect. Surprisingly for a lawyer, the ever charming Chris Rose made an interesting presentation around a three little pigs analogy. And so far he is in the lead for the quote of the day award with this blinder “Clearly, the lazy little svinya had it coming,” which he used to describe the little pig which built his house from straw. Yes, that was you Chris – own it.

Despite its humorous overtones, Rose’s chat was insightful and the main take away was that shareholders agreements are not enforceable in this country. For those of you thinking about investing in Russia, below are his top tips.

1. Invest through an offshore holding company. This increases the likelihood that your negotiated rights will be enforceable. Because of their beneficial tax treaties with Russia, Cyprus, the Netherlands and Luxembourg are the most common choices. However, because both Cyprus and the BVI are common law jurisdictions with corporate laws based on the UK Companies Act, these two jurisdictions are significantly more flexible in terms of administration and governance than their civil law counterparts.

2. Govern your shareholders agreement by English law. Used in combination with an offshore company, a shareholders agreement governed by foreign law (i.e. English law) can dramatically increase the chances that your rights will be protected. Be sure, however, that your counsel works with an advisor from the applicable offshore jurisdiction to make sure that the English law agreement does not conflict with any mandatory provisions of local law.

3. Conform the articles to the shareholders agreement. The rights contained in a properly drafted shareholders agreement prepared in accordance with Tips 1 and 2 above should afford substantial protection. However, for a greater degree of comfort, you should incorporate the provisions of the shareholders agreement into the memorandum and articles of association of the offshore company. This is easier to do in common law jurisdictions than civil law jurisdictions, hence my preference for Cyprus and BVI. The benefit of this option is that while a violation of the shareholders agreement is a breach of contract, a violation of the company’s articles can be grounds for invalidation of the action itself for example the appointment of a board member.

4. Ensure that your rights and protections also apply to subsidiaries and affiliates.

An offshore company with articles conformed to a shareholders agreement governed by English law will provide you with a sturdy structure through which you can defend your rights. However, a house is only as strong as its foundation. Accordingly, you must ensure that you are as well protected at the bottom of the structure as you are at the top.