GOVERNMENT RELATIONS ASPECTS IN FDI SCREENING PROCEDURE IN

December 3, 2020 1 Landmark Cases

OVERVIEW OF CASES THAT LAID DOWN A NEW MERGER CONTROL & FDI SCREENING PRACTICE

BAYER–MONSANTO: SCHLUMBERGER — EURASIA DRILLING COMPANY MERGER CONTROL OF CROSS-BORDER M&A TRANSACTION FDI SCREENING IN INDUSTRIES SUBJECT TO SANCTIONS

IMPORTANCE & KEY LESSONS

▪ Model case for the FAS practice of reviewing global M&A transaction. ▪ The case highlights new political and procedural risks emerging in the FDI screening procedure in the industries subject to sanctions. ▪ The FAS abandoned the “legalistic” approach to merger control and for the first time used its broad interpretation, including the “economic security” arguments ▪ The FAS for the first time suggested ”sanctions backstop” for foreign investor, when analyzing the transaction including the “exit clauses”.in case blocking sanctions are imposed ▪ Technology transfer requirements for the first time ever integrated in the ▪ The case confirms high level of decision-making unpredictability in the industries competition remedies subject to sanctions and significant ability of the state-owned companies to influence the case. ▪ Non-discriminatory access to Big Data integrated into the remedies, highlighting the FAS’ focus on digital technology and its impact on competition even in non- ▪ Decisive role of stakeholders not formally involved in the FDI screening procedure digital industries (state-owned companies) in influencing the final decision ▪ The practice of creating interagency working groups and involving multiple stakeholders in the government and industry in assessing the transactions tested for the first time ▪ The FAS closely coordinated its approaches with the competition authorities of BRICS countries, etc.

IMPACT ON LEGISLATION & ENFORCEMENT PRACTICE

▪ The case highlights the domination of political and national security considerations, ▪ Major success for the FAS raising the status of the authority as important as well as the decisive role of SOEs when reviewing transactions in the most contributor to reducing Russia’s dependence on critical foreign technology. politically sensitive industries. ▪ Direct impact on the legislation: most of the FAS practices tested in this ▪ The FAS considers “sanctions backstop” requirements suggested for Schlumberger transaction are integrated into the “Fifth Antimonopoly Package”. to be a model for reviewing similar transactions in the future – despite they did not work in that case.

6 FDI Screening Policy in Russia

L ATES T TRENDS

“Convergence” FDI screening and merger control procedures gradually converge — while being different in purposes, both procedures are increasingly of FDI screening used to negotiate with foreign investors their additional commitments to Russia (localization, technology transfers etc.) and merger Procedural convergence is also being discussed in the Fifth Antimonopoly Package (including a possibility for foreign investor to submit filing control under both procedures simultaneously)

Increased • Russia's FDI support policy is becoming more subject to geo-political and national security considerations — some “critical” industries are de-facto closed for new US investments (oilfield services and broader energy sector supplies), while opened for investors from “selectivity” other countries of FDI support policy • However, the Government is unwilling to cede control in most important strategic companies even to investors from “friendly” jurisdictions, preferring to sell non-controlling stakes to multi-market investment consortiums.

Role of political With more selective approach to FDI, the role of political endorsement of most important investments increases exponentially: and inter-state Russian Direct Investment Fund emerges as key stakeholder to support major strategic investments to Russia from priority jurisdictions endorsement and (China, Middle East, Asia), securing indirect state presence in the strategic assets approvals Increased role of inter-state institutions on economic cooperation (in countries where they work actively — China, Asian countries France, Italy) to support most important FDI projects.

Role of the state-run As the Russian economic system becomes more centralized, state corporations, SOEs and even private “industry champions” gain a companies and decisive voice in strategic FDI approvals. “national champions” State corporations (Rostekh, Roscosmos, ) and state-run companies increase their expertise in the FDI screening and capacity to influence the process both formally and informally. In the future, the acquisition of major strategic asset in Russia without an approval or a partnering with the Russian industry leader or SOEs would be significantly restricted, especially in most critical industries (energy, infrastructure, tech, telecoms, etc.)

Coordination The FDI screening will increasingly cross with the new investment support policies announced in Russia (Investment Protection with Russia’s and Promotion Agreement and SPIC 2.0) new investment The Government will encourage foreign investors, particularly those with major projects in priority sectors, to use these support measures It makes sense to examine new investment support policies and build relationship a with the respective stakeholders support policies (Agency for Investment Development, Industrial Development Fund, Ministry of Economic Development, regional authorities) 3 National Security & Political Risks during the FDI Screening

WHAT FOREIGN INVESTORS SHOULD TAKE IN MIND FOR THE RISK ASSESSMENT?

Sanctions-related risks for the sectors subject to sanctions and seen as strategically important (energy, finance, tech, telecoms, defense industry & dual use goods, critical infrastructure, pharmaceuticals)

The availability of critically-important technologies and corporate know-how with no competitive alternatives in Russia (high probability of integrating technology transfer requirements into the remedies / commitments).

Political interference of high-level decision-makers. Some most important strategic transactions were eventually blocked under significant influence of decision-makers not being members of the Government Commissions (state-owned companies, etc.)

Involvement of national security and political stakeholders with no formal powers to consider the transaction (the Presidential Administration, Security Council)

Non-transparency of decision-making in the national security bodies and vague criteria of assessing the transaction's impact on the national security

Involvement of “sensitive” assets of high importance for the Russian national security or defense sector (assets involved in public defense procurement or being a part of supply chain for the defense industry)

Involvement of local market players, competitors and customers (particularly SOEs). They may be driven by their own business interests and influence decision of the Government’s Commission. 4 List of Possible Commitments under FDI Screening

WHAT FOREIGN INVESTORS SHOULD BE PREPARED TO NEGOTIATE?

Remedies / Transfer of key technologies and competencies to local companies commitments Production localization requirements, including for particular components and technology of high importance for Russia applicable both under FDI Local staff training and transfer of professional skills and competencies screening and merger control Establishment of “competency centres” in Russia jointly with local companies for R&D localization procedures “Sanctions backstop” to ensure business continuity in Russia (supplementing shareholder agreements with “exit clauses” for the case of blocking sanctions).

Disclosing source codes of software used in goods / components supplied to Russia

Providing local companies with non-discriminatory access to global corporate databases (in case they constitute a significant part of the company’s competitive advantages and value)

Export-related requirements (removing restrictions on export of Russia-produced goods to foreign markets within the corporate export marker distribution system).

Pricing control requirements (prices for goods supplied to Russian should not exceed prices for supplies to other comparable markets)

Coordination of remedies for global M&A transactions with competition authorities of BRICS countries

Commitments State secrecy protection, appointing Russian nationals to key managing positions relevant only for Maintaining public defence procurement commitments FDI screening procedure Martial law / emergency-related and other “force majeure” commitments

Tariff-related commitments for natural monopolies

Employment-related commitments (maintaining the number of employees by the date of the transaction approval), etc.

4 “Informal influencers”

KEY STAKEHOLDERS OUTSIDE OF THE GOVERNMENT COMMISSION

NATIONAL SECURITY AND STATE CORPORATIONS INVESTMENT SUPPORT POLITICAL DECISION-MAKERS AND STATE-RUN COMPANIES INSTITUTIONS

Nikolay Patrushev Sergey Chemezov Kirill Dmitriev Secretary of the Security Council General Director of State Corporation CEO of Russian Direct Investment Fund Rostekh

Sergey Vakhrukov Aleksey Likhachev (member of Andrey Ivanov Deputy Secretary of the Security Council, the Government ‘s Commission) Deputy Minister of Economic Development, prospective Chairman of the Interagency Commission General Director of State Atomic Energy CEO of the Agency for Investment Development on Economic and Social Security Corporation Rosatom

Dmitry Rogozin Roman Petrutsa General Director of State Space General Director of the Industrial Development Fund Aide to the President on Economic Policy Corporation Roscosmos (under Ministry of Industry & Trade)

5 GR Counsel in FDI Screening Process AD D ED VA LU E O R EXTR A R I S K?

FDI screening in Russia is a complicated process involving multiple stakeholders

Key decisions are made by the Government's Commission for Foreign Investment Control as a collective body and may be influenced by stakeholders outside of the Commission (e.g. state corporations) National defense and security authorities play a significant and increasing role in the procedure, but it also involves a broad range of other decision-makers which can be a point of interaction for investors (Deputy Prime Ministers, “line” ministries, regional authorities, etc.).

WHERE GR FUNCTION CAN BRING ADDED VALUE TO FOREIGN INVESTOR?

1 PRELIMINARY DESK ANALYSIS OF THE POLITICAL ENVIRONMENT AND RISKS OF THE TRANSACTION PRACTICAL STEPS

Going into M&A with strategic assets in Russia requires complex assessment of political environment Creating a comprehensive stakeholder map covering all stakeholders with a potential interest and national security risks to identify potential points of concern for all involved stakeholders. to the transaction.

The risk assessment should take into consideration the whole range of potential influencers, Elaborating a strategy to outreach involved stakeholders (proactively or reactively) and address their including those with no formal voice in the approval process (state corporations, customers, concerns competitors, regional authorities etc.)

2 PUTTING A TRANSACTION INTO THE CONTEXT OF THE GOVERNMENT’S PRACTICAL STEPS AND STAKEHOLDERS’ PRIORITIES Tailoring the arguments about the transaction’s importance for Russia for key Analysis of the Government’s policy priorities in the industries / markets affected by the transaction decision-makers Analyzing the role and positions of Russian business players able to influence the government Predicting the scope of potential commitments based on the knowledge of Government’s decision-making (competitors, customers, suppliers) with a focus on SOEs, and considering priorities the need of in-advance engagement. In advance scenario planning and work on negotiation strategy

3 STAKEHOLDER OUTREACH ADDITIONAL OPTIONS

Preliminary interaction to identify the position of third-party stakeholders and possible risk areas Engaging inter-state economic cooperation institutions (Inter-Govt Commissions etc.) to make them aware of the transaction and include the transaction in their agenda. Delivering the arguments about the transaction’s importance for the Russian economy to key members of the Government Commission, with the focus on “line” ministries and Deputy PMs. Involving Russian Direct Investment Fund (RDIF) and foreign sovereign wealth funds cooperating with RDIF, when appropriate. Interaction with national security and defense authorities, where appropriate.

7 APPENDIX

8 Map of Key Stakeholders

The Government’s Commission for Control over Foreign Investment Chairman – PM Mishustin, Executive Secretary – Head of the Federal Antimonopoly Service Maksim Shaskolskiy (from November 2020).

The Federal Antimonopoly Service Deputy Head of the FAS Andrey Tsyganov (in charge of FDI control), Foreign Investment Control Department

National defense and security authorities Deputy PM , Ministry of Defense, Federal Security Service, Military- KEY Industrial Commission, Interagency Commission for State Secrecy Protection

STAKEHOLDERS Other governmental stakeholders IN THE FDI Ministry of Industry & Trade, Ministry of Transport, Ministry of ICT & Mass SCREENING Communications, Ministry of Economic Development, etc.

PROCESS Political stakeholders formally not involved in transaction’s consideration Presidential Administration, Security Council, Aides to the President, etc.

Regional authorities In case the transaction participant has production facilities in the Russian regions

Local customers & competitors, particularly state-run companies Е.g. Rostekh, Russian Railways, Rosneft, etc. 9 Government’s Commission for Control over Foreign Investments

KEY COMMISSION MEMBERS

Deputy PM – Head of the Government’s Executive Office Dmitry Grigorenko

Deputy PM Viktoria Abramchenko (natural NATIONAL DEFENSE LEADERSHIP resources and environment) AND SECURITY AUTHORITIES

PM Chairman Deputy PM Yury Borisov Deputy PM

of the Commission Defense industry, public energy sector OTHER OTHER MEMBERS defense procurement, etc. Deputy PM Aleksey Overshuk First Deputy PM Director of the Federal Security (international cooperation) Deputy Chairman of the Service Alexander Bortnikov Commission Minister of Industry & Trade Head of the FAS Maksim Minister of Defense Shaskolskiy Secretary of the Sergey Shoigu Commission Minister of Digital Development, Acting Head of Staff of Military- ICT & Mass Communications Industrial Commission of Maksut Shadayev Russia Igor Borovkov Minister of Healthcare Head of the Federal Service for Technical and Export Control, Chairman of the Interagency Commission for State Secrecy Minister of Economic Protection Vladimir Selin Development Maksim Reshetnikov, etc. 10 GR Counsel in FDI Screening Process CO M M UN I CATI ON W I TH T HE F AS VS CO M M UN I CATI ON W ITH O THER S TAKEHOL D ERS

COMMUNICATION WITH THE FAS COMMUNICATION WITH OTHER STAKEHOLDERS

KEY GUIDELINES REASONS TO COMMUNICATE WITH OTHER STAKEHOLDERS BEYOND THE FAS

The FAS is the only official point of contact for foreign investor and its legal FDI screening is a complicated interagency process with the FAS being only one of counsel at all stages of the procedure — from submitting the filing to signing multiple involved stakeholders. agreement on commitments Other members of the Government’s Commission (both the national security and “civil” The FAS is the only body authorized to officially negotiate with foreign authorities”) have significant influence on the final decision and discussing / preparing the investors on commitments, conditions of transaction’s approval etc. commitments.

Interaction with other stakeholders, if any, should be coordinated with Other Commission members may use FDI screening to press foreign investor on issues official process in the FAS in order not to create internal inconsistencies – not relevant to the national security (localization, additional investments or technology both at the government and at the investor’s side transfer, maintaining jobs in Russia, training the staff, etc.). It makes sense to communicate to them directly, identify their possible concerns and deliver tailored LIMITATIONS OF THE STRATEGY RELYING messages EXCLUSIVELY ON COMMUNICATION WITH THE FAS “Line Ministries” and Deputy PMs are often a “gateway” for business stakeholders A foreign investor may not have a broader picture of discussion and cannot (customers, competitors, suppliers, industry associations) to be involved in discussion (as deliver arguments or address concerns of other stakeholders they may not have established contact with the FAS or prefer dealing with their responsible Ministry). Other members of the Government’s Commission (including ”civil” ministries and Deputy PMs) play their role in the decision-making and may influence State corporations and SOEs may be important (or even key) decision-makers and the outcome. require separate engagement strategy

Non-governmental stakeholders (SOEs, customers, competitors etc.) often KEY LIMITATIONS interact not with the FAS but with the responsible Ministry or other Commission member, trying to influence the Commission’s decision Communication with other stakeholders, if any, should better be coordinated with official interaction with the FAS not to cause inconsistencies

Communication with the national security authorities requires feasibility and risks’ assessment in each particular case 1 1 CONTACTS

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