A strategic legal entity was merged into another entity whose shares had been charged in favor of a foreign lender to secure a debt. Russian courts found that this type of merger was tantamount to establishing indirect foreign control over the strategic enterprise (via the charge over shares in the surviving entity upon completion of the merger). As this foreign control had not been approved by the Russian government as required by the Russian Strategic Enterprises Act, the courts seized the shares of the surviving entity in favor of the Russian state.

In 2015, as part of a privatization procedure, “Kupets” LLC purchased the shares of Murmansk Sea Fishing Port, which is designated as having strategic importance for the defense and security of Russia. Subsequently, in 2020, “Kupets” LLC was acquired by “Zeus” JSC, whose shares had been charged (used as a collateral to secure a debt) in favor of a foreign company, C.I. Falcon Ltd (which later assigned its rights to Hermes Investment & Trading Pte Ltd).

Although the charge agreement did not provide that the foreign lender would be able to exercise any shareholder rights in the company by virtue of its security interest, the Russian Federal Antitrust Service (FAS) found that this arrangement (including an assignment of debt between foreign companies and a number of other transactions such as the acquisition of “Kupets” LLC by “Zeus” LLC) breached the Russian Strategic Enterprises Act (Federal Law No. 57-FZ “On the Procedure of Foreign Investment in Enterprises of Strategic Importance for National Defense and State Security”).

Russian courts agreed with FAS and found that prior approval required by the Russian Strategic Enterprises Act had not been obtained prior to establishing foreign control over the strategic enterprise in question. As a result, Russian courts found that the relevant contracts were invalid and ordered that shares in the strategic enterprise be seized in favor of the state (Ruling of the State Arbitrazh (Commercial) Court of the North-West District dated 13 June 2023 on case No. А42-7217/2021).