Private equity in Russian Federation: market and regulatory overview

A Q&A guide to private equity law in the Russian Federation.

The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

To compare answers across multiple jurisdictions visit the Private Equity Country Q&A Tool.

This Q&A is part of the global guide to private equity. For a full list of jurisdictional Q&As visit


Market overview

1. How do private equity funds typically obtain their funding?

The term private equity covers a broad range of equity investment by private equity funds in private, unlisted, companies (referred to as portfolio companies), including start-up businesses. Private equity investment can include:

  • A management buyout.

  • A management buy-in.

  • Public to private transaction.

  • A leveraged buyout.

Private equity also includes the realisation of the investment (referred to as an exit) through, for example, a flotation, trade sale or secondary buyout. Venture capital is a subset of private equity, covering the seed to expansion stages of investment, and is not generally covered in this article.

Private equity funds in Russia obtain funding from a variety of sources, including:

  • Endowments.

  • Family offices.

  • High net-worth individuals.

  • Foreign pension funds.

  • Russian government-supported funds.

  • Russian financial institutions.

  • Development finance institutions.

Geographically, significant levels of capital have recently come from:

  • Russia.

  • Middle East

  • Asia.

Funding from Russian sources, mainly comes from government-funded programmes. This includes the Russian Direct Investment Fund, Russian Venture Company and Rusnano (see Question 2). In addition to sharing investment risks, government-backed funds provide low-cost financing and a certain degree of political coverage.

Compared to many other jurisdictions, local pension funds and insurance companies are rare as a source of private equity funding because of legal restrictions on allocations to alternative asset classes. However the Russian pension system is undergoing considerable reform and there are efforts by some fund managers to diversify the asset classes in which they can invest.

2. What are the current major trends in the private equity market?

The Russian private equity industry remains the smallest of the BRIC countries, with growth hindered by high levels of risk related to corruption, rule of law, bureaucracy and, more recently, a deteriorating economic and geo-political outlook and the impact of economic sanctions. In addition, exit opportunities are considered to be rather limited. Nevertheless, the country has historically produced exceptional private equity and venture capital returns. According to Cambridge Associates and the Emerging Markets Private Equity Association (EMPEA), during a 10-year period, private equity and venture capital deals in Russia and Central Europe bested returns from the US and Western Europe, as well as Asia, Africa and Latin America. Russia and Central Europe returned 16.45% over the past decade, as compared to the 7.4% returned by the S&P 500 over the same period.

In recent years, the Russian government has initiated several programmes to stimulate the growth of the private equity sector and to diversify the national economy from its overreliance on natural resources. In 2011, the Russian Government launched the Russian Direct Investment Fund (RDIF), a US$10 billion initiative authorised to co-invest together with some of the largest and most sophisticated investors globally, as a catalyst for direct investment in Russia. This followed the creation of the Russian Venture Company in 2006, a government fund of funds aimed to further develop the Russian venture capital industry, and the formation of Rusnano in 2007, a US$6 billion investment vehicle, created to encourage investment in nanotechnologies.

To date, the results of these programmes have been mixed. The fundraising environment for Russian private equity remains challenging, with only two fund closings in 2014. Moreover, deal volume has contracted substantially since the 2008 global financial crisis and further since the beginning of 2014, as the United States and the European Union imposed sanctions on Russia over the annexation of Crimea and its role in the escalation of armed conflict in eastern Ukraine. In contrast, the venture capital industry has grown dramatically over the past five years, particularly in e-commerce, where Russia has overtaken Germany as the largest internet market in Europe.

3. What has been the level of private equity activity in recent years?


In 2013, there were 313 active private equity and venture capital funds with assets under management of US$28.9 billion, compared to US$26.9 billion in 2012 (261 active funds) and US$20.1 billion in 2011 (176 active funds).

The total value of newly-raised funds was approximately US$3 billion in 2013, compared to US$6.8 billion in 2012 and US$3.8 billion in 2011.


There were 228 reported private equity and venture capital transactions in 2013, totalling US$2.96 billion, compared to 186 transactions in 2012 totalling US$3.96 billion.

Venture stage investments in 2013 totalled US$264.87 million, representing 10.2% of total investment volume, compared to US$371.26 million or 9% of total investment volume in 2012. Aggregate investment volume at the expansion, restructuring and later stages amounted to US$2.7 billion in 2013, representing 91% of total investment volume, compared to US$3.58 billion, or 90.5% of total investment volume in 2012.

Investments were seen in the following sectors:

Technology, media and telecommunications (TMT). These sectors accounted for approximately US$1.79 billion, or nearly 60% of total investment volume in 2013. By comparison, in 2012 TMT investments amounted to US$1.18 billion or 30% of total investment volume. The top sub-sectors by investment volume were social networks (US$705.12 million), telecommunications (US$240.11 million), e-commerce (US$224.25 million) and business solutions (US$190.03 million).

Financial Services. This sector was the second largest by aggregate investment volume with US$461.20 million in 2013, or nearly 15.56% of the total investment volume.

Energy. Investment totalled US$82.58 million in 2013, compared to US$665.45 million in 2012.

Consumer goods and services. Investment totalled US$43.75 million in 2013, compared to US$299.50 million in 2012.

Medical and Healthcare. Investment totalled US$78.21 million in 2013, compared to US$268.44 million in 2012.

Agriculture. Investment in the agricultural sector increased substantially in 2013, amounting to US$170 million (or 5.74% of the total investment volume in 2013), compared to US$40.93 million in 2012 (or 1% of the total investment).

Industrial Equipment. Aggregate investment volume totalled US$61.57 million in 2013, compared to US$226.88 million in 2012.

Transportation. Aggregate investment totalled US$3 million in 2013, compared to US$113 million in 2012.

Construction. Investment in the construction sector increased significantly in 2013, amounting to US$47.64 million, compared to US$26.14 million in 2012 (a 45% increase).


The average investment size in 2013 was US$13 million, approximately 40% less than in 2012.


In 2013, there were 24 exits by private equity investors from Russian portfolio companies, consistent with the prior year. Sales to strategic investors accounted for 11 exits while exits to financial investors numbered three. Lastly, stabilising financial markets in 2013 enabled six exits via public offerings, representing the largest number of capital markets exits in recent years.

The source of data in this section is the Russian Venture Capital Association (RVCA).



4. What recent reforms or proposals for reform affect private equity in your jurisdiction?

The Russian Civil Code, the primary source of civil law for the Russian Federation, has recently undergone substantial reforms. These amendments cover a wide range of legal issues which are untested in Russian courts, but which are frequently used in transactions implemented through offshore structures, such as commercial representations and warranties and the principal of good faith negotiations. They also introduced a number of legal instruments, such as irrevocable powers of attorney and escrow accounts, which bring Russia's legal environment more in line with continental European jurisdictions.

One area of particular importance to private equity relates to shareholders' agreements, which despite existing legislation recognising their enforceability, have historically suffered from numerous defects. Key changes include allowing shareholders to choose the governing law of shareholders' agreements, whether Russian or foreign law, provided that the choice of law will not override the mandatory rules of Russian law with respect to corporate governance. It is hoped that these amendments will facilitate the use of familiar concepts from Western private equity transactions, such as put and call options.

In addition, the Supreme Commercial Court of the Russian Federation (SCC) in 2013 issued mandatory rules regarding the application of civil liability on directors and officers (see Question 20), and other rules relating to freedom of contract and invalidation of contracts.


Tax incentive schemes

5. What tax incentive or schemes exist to encourage investment in unlisted companies? At whom are the incentives or schemes directed? What conditions must be met?

Russian companies that have obtained the status of project participants at the Skolkovo Innovation Centre, a government-backed initiative which promotes the development of high-technology companies in a tax-friendly environment, are eligible for the following special tax regime:

  • VAT exemption (apart from VAT on imported goods).

  • Exemptions from corporate income, property and land taxes.

  • Reduced social funds payment rate (14% instead of 30%).

  • Specific state duties exemption (such as from foreign employer's duty).

This tax regime applies for ten years, provided that the relevant company's revenue does not exceed RUB1 billion.


Fund structuring

6. What legal structure(s) are most commonly used as a vehicle for private equity funds in your jurisdiction?

Private equity funds formed under Russian law are typically organised as closed investment funds (PIFs) and from 3 March 2014 are regulated by the Department of Collective Investments and Trust Management of the Central Bank of Russian Federation (replacing the now defunct Federal Commission for the Securities Market), in accordance with the Federal Law No 156-FZ, 29 November 2001 (Law on Investment Funds).

However, as most major private equity funds are established under foreign law, a practice which is expected to continue despite the introduction of the Russian investment partnership in 2012 (see below), the focus of this chapter is on offshore fund structures.

The most common offshore structure is a limited partnership formed in a reputable, tax-advantaged jurisdiction such as the Cayman Islands, Luxembourg or Guernsey. Often, the general partner (and possibly a manager) are incorporated in the same jurisdiction as the fund and a Russian company or a foreign company with an office located in Russia acts as a local investment adviser.

Russian source income received by a foreign entity other than through a permanent establishment in Russia can be subject to Russian withholding tax. Accordingly, fund investments are typically made through Cyprus, Luxembourg or Dutch holding companies to take advantage of the favourable double taxation treaties these jurisdictions have with Russia.

On 1 January 2012, the Federal Law No 335-FZ, 28 November 2011 (Law on the Investment Partnership) introduced the concept of the investment partnership to the Russian legal landscape. The Law on the Investment Partnership created a similar vehicle to an English limited partnership and represents a marked improvement from the existing structure for fund vehicles in Russia. Investors (Russian and foreign), who wish to use a Russian investment structure can move their offshore vehicles into (or create investment vehicles under) the jurisdiction of the Russian courts.

The Law on the Investment Partnership allows for the introduction of specific provisions in an investment partnership agreement that are not available in any other Russian structure. Such provisions include:

  • The size and type of contribution.

  • Capital call procedures.

  • Default contribution rules.

  • Conduct of the investment partnership's business (management and decision making procedures, or establishment of an investment committee).

  • Distribution of profit rules.

  • Assignment of rights and obligations rules.

  • Exit rules.

However, investment partnerships have certain disadvantages which make them unlikely to practically replace offshore fund structures. One of the major disadvantages is that all partners can be jointly and severally liable under non-contractual obligations (except for tax obligations). This is in addition to contractual obligations in relation to "non-commercial" parties (those that do not conduct entrepreneurial activity).

7. Are these structures subject to entity level taxation, tax exempt or tax transparent (flow through structures) for domestic and foreign investors?

Offshore limited partnership vehicles (see Question 6) are fiscally transparent for foreign investors. However, the special purpose vehicles (SPVs) through which these limited partnerships typically invest in portfolio companies are subject to withholding taxes on dividends, interest and capital gains in accordance with the applicable tax treaty between Russia and the SPV's jurisdiction.

Due to the Russian tax authorities' relative lack of experience with fiscally transparent structures (flow-through vehicles are generally not legally recognised), it is possible for capital gains derived from investments in foreign limited partnerships by Russian tax residents to be characterised as ordinary income, and therefore taxed at a higher rate. Consequently, Russian investors investing in fiscally transparent fund structures generally hold their interests through a tax-exempt or low-tax offshore company.

An investment partnership (see Question 6) is not a separate legal entity subject to taxation. Individual partners pay tax on profits (if a legal entity) or income (if a natural person) in proportion to their contribution.

VAT does not apply to:

  • Investor capital contributions.

  • Investor-funded commitments.

  • Return of capital up to the partner's paid-in capital.

Property tax is paid by:

  • Managing partners in relation to any initial in-kind contributions of capital to the investment partnership.

  • All partners in relation to assets created by an investment partnership going forward in proportion to their share.

8. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as being tax inefficient (whether by not being recognised as tax transparent or otherwise)? What alternative structures are typically used in these circumstances?

Despite the introduction of the Law on the Investment Partnership (see Question 6) the concept of partnerships remains underdeveloped in Russian legislation. Partnerships are treated as legal entities and their profits are subject to corporate profits tax at the level of the partnership itself rather than at the level of the partners. Profits-tax legislation does not provide for any equivalent to the US check-the-box rules. Accordingly, tax transparent structures commonly used by private equity funds in other jurisdictions (such as limited partnerships) are generally not used for direct investment into Russian companies. Funds typically employ companies formed in Cyprus, Luxembourg or the Netherlands when investing in Russian portfolio companies, which enable the fund to reduce the withholding taxes payable by the holding company through double taxation treaties.


Investment objectives

9. What are the most common investment objectives of private equity funds?

The most common objective of private equity funds is capital appreciation.


Fund regulation and licensing

10. Do a private equity fund's promoter, principals and manager require licences?

The management company, custodian and registered holder of private equity funds incorporated as closed investment funds (PIFs) under Russian law must be licensed. However, all significant private equity funds operating in Russia are established under foreign law and there are no licensing requirements for these foreign funds.

A Russian investment partnership (see Question 6) is not a separate legal entity and does not require a licence or registration.

11. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

Private equity funds formed as closed investment funds (PIFs) under Russian law are regulated as investment funds. These regulations do not apply to foreign funds and, therefore, do not have any practical effect on how most private equity funds are marketed and advertised in Russia.

12. Are there any restrictions on investors in private equity funds?

There are no restrictions on investors in foreign private equity funds. However, there may be restrictions under the laws of the jurisdiction in which a foreign private equity fund was formed.

13. Are there any statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds?

The term for investment funds formed as closed investment funds (PIFs) under Russian law cannot be less than three years or exceed 15 years. Russian law imposes no term limits on offshore private equity funds. However, there can be restrictions under the laws of the jurisdiction in which the foreign private equity fund was formed.


Investor protection

14. How is the relationship between the investor and the fund governed? What protections do investors in the fund typically seek?

For private equity funds operating as a limited partnership, the relationship between the fund and its investors (the limited partners) is governed by the limited partnership agreement. These funds are managed by the general partner, which have unlimited liability. Investors typically seek to negotiate:

  • Restrictions on the types of investments that may be made by the fund.

  • The fund managers' activities.

  • Management fees.

  • Carried interest.

  • Expenses reimbursable by the fund.


Interests in portfolio companies

15. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? Are there any restrictions on the issue or transfer of shares by law? Do any withholding taxes or capital gains taxes apply?

Most common form

Private equity funds generally take equity interests in portfolio companies. When investments are made directly (that is, without using an intermediate offshore holding company), private equity funds buy ordinary shares (in relation to Russian joint stock companies) or participation interests (in relation to Russian limited liability companies). Downside protections are typically negotiated in the shareholders' agreement, usually in the form of equity ratchets and puts.

Private equity fund investments tend to be structured through offshore SPVs. Often these vehicles pre-date the investment, having been formed by the portfolio company's founders. Alternatively, they are formed by the fund for the purposes of the investment. While using these holding companies is primarily motivated by tax efficiency, governance issues also play a significant role.

Private equity investors in Russia tend to acquire minority or majority stakes in expansion capital transactions, as compared to the leveraged buyouts prevalent in Europe and the United States. Accordingly, the availability of debt financing does not generally affect the decision to enter into transactions.

Russian corporate and contract laws are generally inflexible, making certain aspects of typical investment structures unenforceable. Accordingly, foreign law (typically English) is used to improve the enforceability of these investor protections.

Depending on what rights are negotiated in the shareholders' agreement, minority investors may have limited influence over the company's direction or the timing of an exit, and majority shareholders may be able to overrule their objections entirely.

Other forms

Convertible loans and mezzanine financing have become more common in Russia in recent years. As above, the instruments are typically governed by English law and structured through offshore holding companies.


There are certain restrictions on the issue or transfer of shares of Russian companies. For example, a shareholder of a joint stock company has a statutory pre-emptive right in relation to new issuances. Shareholders of closed joint stock companies and participants of limited liability companies have a right of first refusal in relation to sales of shares (participatory interest) by other shareholders or participants.


There is no separate tax on capital gains in Russia; rather, gains are absorbed into the income tax base. As such, the tax rate applicable to the sale of equity interests in a Russian company can be as high as 20%. However, as transfers of equity interests typically occur at the offshore level, investors can benefit from double taxation treaties with Russia which, depending on the jurisdiction, can reduce the effective capital gains rate to zero.



16. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply?

Buyouts of private companies by auction take place, but are not yet common. When they do occur, they typically involve auctions of shares at offshore holding company level. In these cases, Russian law is not involved. However, if the auction involves a Russian company, general legislation and rules relating to auctions or tenders apply (Russian Civil Code No. 51-FZ, 30 November 1994).

17. Are buyouts of listed companies (public-to-private transactions) common? If so, which legislation and rules apply?

Buyouts of listed companies are uncommon. However, when they occur, buyouts:

  • Must comply with the anti-takeover rules under the Joint Stock Company Law (No. 208-FZ, 26 December 1995), which can require notifying the transaction to the Central Bank of the Russian Federation (Article 84.9, Joint Stock Company Law).

  • Can require governmental consent under the Foreign Strategic Investments Law (No. 57-FZ, 29 April 2008).

  • Can require the consent of the Federal Antimonopoly Service (FAS).

Anti-takeover rules

Anti-takeover rules provide that:

  • Any person intending to acquire more than 30% of an open joint stock company's voting shares (including, for these purposes, the shares already owned by the person and its affiliates) can make a public tender offer to other holders of the shares or securities convertible into the shares (voluntary offer).

  • Within 35 days after acquisition by any means of more than 30%, 50% or 75% of such shares the acquirer must make a public offer to buy the remaining shares from the shareholders (compulsory offer).

  • If as a result, the acquirer acquires more than 95% of the voting shares, it must both:

    • notify all remaining shareholders (within 35 days after the acquisition of shares above this threshold) of their right to sell their shares and other securities convertible into such shares; and

    • buy such shares on the request of each minority shareholder;

  • If the acquirer acquired at least 10% of such shares as a result of a voluntary or compulsory offer, the acquirer can, within six months of the acquisition, request that the remaining shareholders sell their shares.

  • Alternatively, instead of giving this notice, the acquirer can deliver a buyout demand, binding on the minority shareholders, demanding that they sell their shares.

  • An offer of this kind must be accompanied by a bank guarantee of payment. In addition, prior notice of the offer must be filed with the Central Bank. The Central Bank can require revisions to the offer terms (including the price) to comply with the anti-takeover rules.

Foreign Strategic Investments Law

Foreign investment in 45 sectors deemed as strategic is subject to government approval in certain cases (Foreign Strategic Investments Law No 57-FZ, 29 April 2008). The 45 strategic sectors include:

  • Areas such as oil and gas, and other natural resources.

  • Defence.

  • Nuclear energy.

  • Certain transportation activities (including airports, seaports, rail and pipelines).

  • Certain telecommunications and media companies (excluding those that are internet-related).

  • Certain electric power and heat transmission businesses.

  • Aviation and aerospace.

  • Fishing.

  • Specialty metals processing.

Specifically, approval is required for:

  • Foreign acquisition of more than 50% in a strategic sector company, or more than 25% for a company in the mineral resources sector.

  • Acquisition by a foreign state, international organisation (except for international financial organisations) or organisation under their control of more than a 25% interest in a strategic sector company, or more than 5% for a company in the mineral resources sector.

In addition, in September 2014, Russia introduced new restrictions on the foreign ownership of mass media.

Approval by the FAS

Under Russian anti-monopoly legislation, prior FAS approval must be obtained for an acquisition of voting interests in a Russian company over certain thresholds (25%, 50% or 75% for joint stock companies or 33.33%, 50% or 66.66% for limited liability companies) through purchase, creation of a joint venture company, statutory merger or consolidation, or the acquisition of more than 20% of the assets of a Russian company where any of the following are met:

  • The combined asset value of the target's group and the acquiring group, calculated in accordance with Russian accounting standards, exceeds RUB7 billion and the target's group has at least RUB250 million of assets (if the selling entity loses control over the target as a result of the transaction, its asset value is not included).

  • The combined revenues of the target's group and the acquiring group, calculated in accordance with Russian accounting standards, exceeds RUB10 billion and the target's group has at least RUB250 million of assets.

  • A company in the target's group or the acquiring group has more than a 35% market share for its goods or services, or is included on the FAS register of monopolists.

In addition, the acquisition of voting interests in a foreign company can be subject to FAS consent if, as a result of the acquisition, control over Russian companies or assets changes.

Acquisitions of more than 50% of the voting interests in a foreign company (or any other rights to determine its business activity or perform functions of its executive body) are also subject to FAS approval, if such foreign company supplied goods to the Russian Federation, exceeding RUB1 billion in the previous year.


Principal documentation

18. What are the principal documents produced in a buyout?

Control over Russian joint stock companies and limited liability companies is generally understood as ownership of 75%, plus one share, which gives the acquirer control over all major decisions (subject to minority protection rights).

The principal documents involved in a buyout of a joint stock company are the share purchase agreement and the share transfer order.

If the target is a limited liability company, the principal document is the purchase agreement, which must be notarised by a public notary.

Buyouts structured as direct asset purchases are not widely used. Typically, if a straightforward share acquisition is not desirable, the parties establish a newly formed company (NewCo), usually in the form of a limited liability company, to which assets of interest to the buyer are transferred as in-kind contributions to the charter capital of NewCo, and the shares of NewCo are subsequently sold to the buyer.


Buyer protection

19. What forms of contractual buyer protection do private equity funds commonly request from sellers and/or management? Are these contractual protections different for buyouts of listed companies (public-to-private transactions)?

Private equity funds commonly request customary representations, warranties and indemnities. Depending on the size of the investment, private equity funds also frequently negotiate:

  • Equity ratchets for:

    • down rounds;

    • the failure of management to meet financial targets (common when the investment is made on the basis of projected targets);

    • failure to achieve exit by a particular date.

  • Puts.

  • In regards to venture capital transactions, liquidation preferences.

Purchase price retentions to ensure payment for warranties or specific liabilities are uncommon except in pure buyouts.

20. What non-contractual duties do the portfolio company managers owe and to whom?

The Joint Stock Company Law and the Limited Liability Company Law have a number of general provisions concerning director and officer duties and liabilities. In particular, they require board members and officers to act in good faith and in the best interests of the company, and makes them personally liable for losses incurred by the company that result from actions they knowingly took against the best interests of the company. An additional duty of care and confidentiality can also arise from the terms of the manager's employment contract.

On 30 July 2013 the Supreme Commercial Court of the Russian Federation (SCC) adopted Resolution No. 62 "On Certain Matters of Indemnification of Damages by Members of a Company's Governing Bodies" (the Resolution). The Resolution provides significant clarifications of the duties of officers and directors of Russian companies.

Bad faith of directors

The Resolution provides bad faith may be found where a director:

  • Acted despite the existence of a conflict of interest.

  • Conceded information or knowingly provided to the shareholders incorrect information on a transaction entered into by him.

  • Entered into a transaction without having obtained the requisite approvals as required by law or the company's charter.

  • Knew or should have known that the counterparty was "knowingly unable to perform its obligations".

  • Knew or should have known that the transaction was unfavourable for the company (for example, the sale of assets at a substantially undervalued price).

Unreasonable conduct

The Resolution further provides that a director may be held liable for unreasonable conduct despite acting in good faith. According to the Resolution, unreasonable conduct includes:

  • Failing to perform adequate due diligence.

  • Taking action notwithstanding known relevant information.

  • Failing to comply with the company's internal procedures (for example sign off by accounting or legal).

Compliance with the law

The SCC further clarified that a reasonable director should procure that the company fulfils its legal obligations, which may include payment of taxes, payment of salaries to its employees, maintaining books and records, complying with licence conditions and so forth. In particular the company must comply with Russian anti-bribery/anti-corruption laws (see Question 31). Therefore, if a company is found guilty under relevant Russian laws, for example due to a breach of legal obligations arising from a director's bad faith and/or unreasonable actions or omissions, which result in losses to the company, such losses may be recovered from the director.

A company will be restricted from indemnifying a director for actions/omissions which result from the company's breach of its legal obligations. Moreover, additional restrictions are currently being considered by the Russian Parliament, including Draft Bill No. 47538-6/2 introducing amendments to the Civil Code, Article 53.1(5), which provide that agreements to restrict or exclude a director's liability are void.

See also Question 3.

21. What terms of employment are typically imposed on management by the private equity investor in an MBO?

Management employment agreements typically include provisions concerning:

  • Severance.

  • Confidentiality.

  • Financial incentives such as cash bonuses and share options.

Non-competition and non-solicitation provisions are generally not enforceable in Russia.

22. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company? Are such protections more likely to be given in the shareholders' agreement or company governance documents?

Private equity funds generally require one or more seats on the supervisory board of the holding company through which the investment is made, and veto rights or special quorum requirements in relation to certain major decisions, including approving:

  • Business plans.

  • Debt or equity financing rounds.

  • Corporate changes.

  • Major acquisitions.

  • Dividends.

  • Appointment of key officers.

These protections are usually found in the shareholders' agreement, but certain provisions (such as veto rights) are often repeated in the holding company's articles.


Debt financing

23. What percentage of finance is typically provided by debt and what form does that debt financing usually take?

Private equity investments are typically comprised entirely of equity, although convertible loans have recently become increasingly common. True leveraged buyout transactions are still uncommon.


Lender protection

24. What forms of protection do debt providers typically use to protect their investments?


Debt providers typically protect their investments through pledges over assets and/or shares.

Contractual and structural mechanisms

Debt providers typically protect their investments through:

  • Third-party guarantees.

  • Bank guarantees or sureties.


Financial assistance

25. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions?


There are no special rules preventing a company from giving financial assistance to assist a purchase of its own shares. However, under Russian civil law financial assistance cannot be made in the form of a gift by one profit-making company to another (Article 575, Civil Code of the Russian Federation).

In addition, certain jurisdictions through which investments in Russia are commonly made (for example, The Netherlands) do have financial assistance rules, which frequently raise issues in connection with the making of warranties and covenants by the company and grants of equity ratchets.


Russian tax law allows for financial assistance if either the company providing financing owns over 50% of the shares or participatory interests of the company being financed or vice versa (Article 251, Tax Code of the Russian Federation).

Following recent court practice (Resolution No. 8989/12 of the Presidium of the SCC dated December 4 2012 with regard to the Case No. A28-5775/2011-223/12), entering into gratuitous transactions for the transfer of funds and property between commercial organisations is now permitted provided that there must be a direct implication that this is the donor's intention. Thus, a transfer free of charge is not the only characteristic of a gift and assets may now be transferred for the purpose of being redistributed within a group of companies in pursuance of the group's common economic objectives.


Insolvent liquidation

26. What is the order of priority on insolvent liquidation?

Creditors have the following order of priority during liquidation (Civil Code):

  • First priority: individuals owed compensation for injury or death, or moral damages.

  • Second priority: employees and copyright claims.

  • Third priority: federal and local governmental authorities claiming taxes and similar payments to pension funds and social insurance funds.

  • Fourth priority: other creditors in accordance with Russian legislation.

Claims of creditors in relation to obligations secured by a pledge of the company's property are satisfied from the sale proceeds of the pledged property before the claims of any other creditors, except the first and second priority creditors whose rights arose before the relevant pledge agreement was entered into. Sale proceeds of the pledged property are distributed as follows:

  • 70% (or 80% if the pledge is a security under a credit agreement) is transferred to satisfy demands for obligations secured by the pledge.

  • 20% (or 15% if the pledge is a security under a credit agreement) is transferred to a special bank account to satisfy demands of the first and second priority creditors (if there are not enough other assets of the debtor to satisfy their demands).

  • Other sale proceeds are transferred to a special bank account for payment of court expenses, bankruptcy manager fees and fees of other persons dealing with the bankruptcy proceedings.

The remaining assets of the company are distributed among shareholders in the following order of priority:

  • Payments to repurchase shares from shareholders with the right to demand repurchase.

  • Payments of declared but unpaid dividends on preferred shares, and the liquidation value of the preferred shares, if any.

  • Payments to holders of ordinary and preferred shares on a pro rata basis.


Equity appreciation

27. Can a debt holder achieve equity appreciation through conversion features such as rights, warrants or options?

Such conversion features are possible, but are typically implemented at the offshore holding company level.


Portfolio company management

28. What management incentives are most commonly used to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction?

Deferred or share-based compensation (including share option programmes) is increasingly used to incentivise portfolio company management. In addition, equity ratchets tied to the company's performance and/or a successful exit by a pre-agreed date are also frequently employed.

29. Are any tax reliefs or incentives available to portfolio company managers investing in their company?

There are no tax reliefs or incentives for portfolio company managers investing in their own company.

30. Are there any restrictions on dividends, interest payments and other payments by a portfolio company to its investors?

Under the Russian Joint Stock Company Law, Limited Liability Company Law and Bankruptcy (Insolvency) Law, a company is prohibited from declaring and/or paying any dividends in the following cases:

  • The company is bankrupt.

  • Its net assets are less than the charter capital.

  • The charter capital is not paid in full.

  • The company is subject to a financial restructuring procedure.

  • Interest payments are subject to the thin capitalisation rules established by the Tax Code of the Russian Federation.

31. What anti-corruption/anti-bribery protections are typically included in investment documents? What local law penalties apply to fund executives who are directors if the portfolio company or its agents are found guilty under applicable anti-corruption or anti-bribery laws?

Investors will often seek to include appropriate anti-corruption warranties in subscription and share purchase agreements as well as anti-corruption covenants in shareholders' agreements. Investors sometimes also negotiate exit mechanisms should a partner be found to engage in prohibited conduct.  The scope of such warranties and covenants will depend on the structure of the deal and the percentage interest being acquired. 

Since 1 January 2013, Russian companies have an affirmative obligation to seek to prevent corruption, which ranges from adopting codes of ethics to co-operating with authorities.  In late 2013, the Ministry of Labor developed a guidance document to assist Russian businesses in developing effective compliance programs. 

Directors of Russian companies may be subject to criminal and civil liability for breach of anti-corruption legislation.


Exit strategies

32. What forms of exit are typically used to realise a private equity fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Under the Russian Joint Stock Company Law, Limited Liability Company Law and Bankruptcy (Insolvency) Law, a company is prohibited from declaring and/or paying any dividends in the following cases:

  • The company is bankrupt.

  • Its net assets are less than the charter capital.

  • The charter capital is not paid in full.

  • The company is subject to a financial restructuring procedure.

  • Interest payments are subject to the thin capitalisation rules established by the Tax Code of the Russian Federation.

33. What forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company? What are the relative advantages and disadvantages of each?

Forms of exit

Unsuccessful investments are normally exited through a trade sale. Alternatively, the company is liquidated.

Advantages and disadvantages

Liquidation has mostly disadvantages as it requires notification to creditors, with whom settlement must be sought together with the payment of any tax liabilities. The distribution of the assets of the portfolio company among its shareholders takes place only after such accounting has been performed.


Private equity/venture capital association

Russian Venture Capital Association (RVCA)


Status. The RVCA is a non-governmental organisation.

Membership. The RVCA has 28 full members and 23 associate members.

Principal activities. The RVCA promotes and develops the private equity and venture capital industry in Russia and abroad.

Published guidelines. See

Information sources. RVCA Yearbook.

National Alternative Investment Management Association (NAIMA)


Status. NAIMA is a non-governmental organisation.

Membership. NAIMA has 21 members.

Principal activities. NAIMA is an association of alternative investment firms and service providers committed to the growth of long-term capital in Russia.

Published guidelines. See

Information sources. N/A

Contributor profiles

Christopher A Rose, Partner

Squire Patton Boggs

T +7 495 258 5250
F +7 495 258 5251

Professional qualifications. New York State, US, 1999

Areas of practice. Private equity; venture capital.

Recent transactions

Advised on over 100 transactions in Russia on behalf of leading private equity and venture capital investors, including Alfa Capital Partners, Almaz Capital, Baring Vostok Capital Partners, Black River Ventures, Darby Private Equity, Digital Ventures, EBRD, Elbrus Capital, Fast Lane Ventures, Frontier Ventures, Goldman Sachs Special Situations Group, HVB Capital, Intel Capital, Macquarie Renaissance Infrastructure Fund, MCI Management, Group, Mint Capital, Mir Capital, Moore Capital, New Russia Growth Fund, Sberbank Investments, Sofinnova Ventures, Strategiya Private Equity, Troika Capital Partners, UCF Capital, UFG Private Equity, United Capital Partners, Van Riet Capital, VTB Capital and Wermuth Capital.

Languages. English, Russian

Professional associations/memberships. Co-founder of the Russian Private Equity Initiative (NAIMA), an association of leading private equity fund managers and advisors in Russia; member of YPO Russia and YPO London.

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