Deprivation of the right to carry out a strategic type of activity as a form of state coercion in case of violation of the legislation on foreign investment

Milchakova Olesya PhD in Law Associate Professor of the Department of Competition Law at Kutafin Moscow State Law University 123995, Russia, Moscow, Sadovaya Kudrinskaya str., 9 millov@yandex.ru Other publications by this author

The objectives of the prohibitions and restrictions established by law when foreign investors, a group of persons that includes a foreign investor, make transactions on the acquisition of assets of Russian companies that are of strategic importance for ensuring the defense of the country and the security of the state, are to eliminate conditions and factors that pose a threat to the vital interests of the individual, society and the state, limiting the participation of foreign capital in activities of strategic companies, prevention of unsupervised transactions, as a result of which a foreign investor would gain control over a strategic company (see: Ruling of the Constitutional Court of the Russian Federation No. 1106-O dated 06/18/2020).

The types of activities of strategic importance for ensuring the defense of the country and the security of the state, Article 6 of Federal Law No. 57-FZ of 29.04.2008 "On the procedure for foreign investments in business entities of strategic importance for ensuring the defense of the country and the security of the State" (hereinafter – Law No. 57-FZ) include 51 types of activities, including in the fields of hydrometeorology, nuclear energy, defense industry, cryptography and encryption, aviation, space activities, subsoil use, cargo transportation by sea, inland waterway, etc.

Based on the requirements of Article 7 of Law No. 57-FZ, mandatory preliminary approval by the Government Commission for the Control of Foreign Investment in the Russian Federation (hereinafter referred to as the Government Commission) is subject to:

1) obtaining by a company under the control of a foreign investor or a group of persons that includes a foreign investor, a license or other authorization document granting such a company the right to carry out a strategic type of activity (if such activity is subject to mandatory licensing and (or) obtaining other permits in accordance with industry legislation), obtaining a decision or the conclusion of a contract entailing the granting to the specified company of the right to extract (catch) aquatic biological resources;

2) acquisition by a foreign investor, a group of persons that includes a foreign investor, of the right to directly or indirectly dispose of a certain number of votes attributable to shares (shares) that make up the authorized capital of a strategic company (already carrying out a strategic type of activity and (or) having a license or other authorization document to carry out such type of activity, the right to extraction (catch) of aquatic biological resources), acquisition by the specified persons of other rights that allow determining the decisions of management bodies or conditions for the implementation of entrepreneurial activities of a strategic company, the acquisition of its main production facilities.

Compliance with the permissive procedure for foreign participation in strategic sectors of the economy is ensured by state enforcement measures applied when detecting violations of prohibitions and restrictions established by law. According to M.N. Petrenko, the grounds for the use of state-right coercion in a broad sense is the need for the state to implement its functions. ^[5] It can be clearly stated that state-legal coercion in the area under consideration proceeds from the goals of state policy to control foreign investment and ensure national security.

As A.I. Kaplunov notes, the legal form of state coercion is understood as "a specifically isolated group of coercive measures united by a commonality of goals, grounds, legal consequences and procedures for their application, i.e. those elements that determine and characterize a specific method of coercive influence in ensuring law and order and public safety." ^{[2, p. 7]}

The peculiarities of the legal form of state coercion in connection with the violation of legislation on foreign investment in strategic sectors of the economy are a complex combination of coercive measures characteristic of both administrative and civil law coercion. It seems that this is predetermined by the fact that, according to V.F. Yakovlev and E.V. Talapina, "the legal problems of the economy are complex and cannot be covered by only one legal branch." ^{[10, p. 11]}

Despite the versatile nature of the coercive measures under consideration, they are concentrated mainly in one normative legal act – Law No. 57-FZ, which defines the possible measures themselves, the grounds and subjects of their application, and the implementation procedures. The initiator of the application of these measures is an authorized body acting in the public interest: the FAS of Russia, which performs the functions of monitoring the implementation of foreign investments.

In the sphere of public relations under consideration, the following coercive measures are provided.

1. Suspension, cancellation of a license or other permissive document granting the right to carry out a strategic type of activity.

If it is revealed that a company under the control of a foreign investor or a group of persons that includes a foreign investor has received (reissued) a permit for the implementation of a strategic type of activity in the absence of the necessary preliminary approval in accordance with Law No. 57-FZ, the FAS of Russia sends an opinion on the identification of this fact to the Government Commission and to the business company, in respect of which an opinion has been issued.

The Government Commission is obliged to consider the specified conclusion within 3 months and, taking into account the presence (absence) of a threat to the country's defense and state security, the need for reliable and uninterrupted functioning of facilities that ensure the vital activity of the population, socio-economic and environmental consequences of the suspension of the implementation of a strategic activity, decides on the need to suspend the license or other permissive document received by the company in violation of Law No. 57-FZ.

Guided by the decision of the Government Commission, the FAS of Russia sends to the body or organization by which the specified permit document was issued (reissued) (or changes were made to the register of licenses), a decision on the need to suspend the validity of the permit document. Within no later than 10 working days, the validity of the permit document is suspended by the body or organization by which it was issued (reissued).

In cases where the conclusion of the FAS of Russia has not been appealed in court within 3 months, or based on the results of such an appeal, it has been recognized as lawful, the authorization document is canceled by a court decision based on the application of the body or organization that issued this document. If the conclusion of the FAS of Russia is declared invalid by the court, the validity of the authorization document is renewed within 10 working days from the date of receipt of information about this by the body or organization that made the decision to suspend the validity of the said document.

2. Suspension, cancellation and refusal to issue new permits for the extraction (catch) of aquatic biological resources, refusal to conclude new and termination of existing agreements on granting the company the right to extract (catch) aquatic biological resources.

In case of determining the fact of establishing control over a company engaged in the extraction (catch) of aquatic biological resources by a foreign investor or a group of persons that includes a foreign investor, in violation of the requirements of Law No. 57-FZ or the fact of making a transaction and (or) obtaining a decision entailing the granting of the right to extract (catch) aquatic biological resources the company under the control of these persons, in the absence of prior approval in accordance with Law No. 57-FZ, the FAS of Russia sends an opinion on the establishment of the relevant fact to the Government Commission and to the business company in respect of which such an opinion was issued, as well as to Rosrybolovstvo, its territorial bodies, executive authorities of the subjects of the Russian Federation, which were contracts have been concluded and (or) decisions have been made (permits have been issued), entailing the granting of the right to extract (catch) aquatic biological resources to the specified company.

From the date of receipt of the conclusion of the FAS of Russia, these authorities are not entitled to make new decisions, issue permits, conclude contracts entailing the granting of the right to extract (catch) aquatic biological resources to the company in respect of which the FAS of Russia issued a conclusion, as well as to formalize the transfer of the right to extract (catch) aquatic biological resources in the order of universal succession from such a society to other persons and to such a society.

No later than 3 months from the date of receipt of the conclusion of the FAS of Russia, the Government Commission considers it and, if there is a threat to the defense of the country and the security of the state and there are no negative socio-economic and environmental consequences of the suspension of activities for the extraction (catch) of aquatic biological resources, decides on the need to suspend the permits for the extraction (catch) of aquatic biological resources issued to the company, which were received in violation of the requirements of Law No. 57-FZ.

Based on the decision of the Government Commission, the FAS of Russia sends to Rosrybolovstvo, its territorial bodies, the authorities of the subject of the Russian Federation, which issued permits for the extraction (catch) of aquatic biological resources in violation of Law No. 57-FZ. Within no later than 10 working days, the validity of these permits is suspended by the authorities by which they were issued. If the conclusion of the FAS of Russia is declared invalid by the court, the validity of these permits is renewed within 10 working days from the date of receipt of information about this by the authorities that issued such permits.

In cases where the conclusion of the FAS of Russia has not been appealed in court within 3 months, or based on the results of such an appeal, it was recognized as lawful, permits for the extraction (catch) of aquatic biological resources are canceled, and decisions on granting the right to extract (catch) aquatic biological resources are canceled by the decision of the authorities that issued them. At the same time, the relevant agreements on granting the right to extract (catch) aquatic biological resources with the company are terminated unilaterally by notification of this sent to the company by the authority that is the second party to the contract.

3. Application of the consequences of the invalidity of the transaction for the acquisition of assets of the strategic company.

According to Part 1 of Article 15 of Law No. 57-FZ, the transactions specified in Article 7 of this law and committed in violation of it are null and void, and other actions as a result of which a foreign investor or a group of persons that includes a foreign investor acquired the right to determine the decisions of the management bodies of a strategic company, including the conditions for implementation they are entrepreneurial activities that do not entail legal consequences from the moment they are committed.

The court applies the consequences of the invalidity of such void transactions and actions in accordance with civil law, and if as a result of restitution on the basis of paragraph 2 of Article 167 of the Civil Code of the Russian Federation, the risks of a threat to the defense of the country and (or) the security of the state remain or arise, the court has the right to recover shares (shares) acquired by the parties who acted intentionally), constituting the authorized capital of the strategic company, property related to the main production facilities of the strategic company.

4. Depriving foreign persons of the right to vote at the general meeting of shareholders (participants) of the strategic company.

If it is impossible to apply the consequences of the invalidity of an insignificant transaction made in violation of Law No. 57-FZ, as well as if a foreign investor or a group of persons that includes a foreign investor fails to provide information about the acquisition of 5% or more shares (shares) of a strategic company or information about the receipt by a citizen of the Russian Federation who owns the specified block of shares (shares) a strategic company, a foreign citizenship or a residence permit in a foreign state (as a result of which such a citizen is recognized as a foreign investor for the purposes of Law No. 57-FZ), the court on the claim of the FAS of Russia deprives a foreign investor or, accordingly, a group of persons of the right to vote at the general meeting of shareholders (participants) of a strategic business company.

In this regard, votes belonging to a foreign investor or, accordingly, a group of persons are not taken into account when determining the quorum of the general meeting of shareholders (participants) of a strategic company and counting votes at the general meeting of shareholders (participants) of such a company.

Thus, the legislation provides for a fairly wide range of measures of state coercion in identifying violations of legislation on foreign investment.

At the same time, with regard to the suspension and cancellation of permits for the implementation of strategic activities, it should be noted that by their legal nature, these measures of state coercion are very similar to the cancellation of licenses used in violation of licensing requirements. As R.R. Faikhsanov notes, the measure to revoke licenses "is aimed at stopping the illegal activity of a legal entity and contains signs characteristic of administrative responsibility." ^{[6, p. 109]} Also noteworthy is the position of K.E. Shilekhin that "the institution of administrative responsibility is primarily aimed at protecting and restoring public interest in various spheres of state regulation". ^{[9, p. 26]} I.G. Chernyshenko, justifying the need to introduce administrative punishment in the form of deprivation of a special right for legal entities in the Administrative Code of the Russian Federation, claims that a legal entity has the same special (limited) legal capacity as an individual on the basis of a permit document, for example, for the implementation of only those types of activities for which a corresponding license has been obtained. ^{[8, p. 4]}

At the same time, compliance with the legislation on foreign investments is not a licensing requirement, which does not allow us to unequivocally assert that the measures under consideration of state coercion are types of administrative responsibility. In addition, Article 19.8.2 of the Administrative Code of the Russian Federation provides only an administrative fine as a sanction for an administrative offense for failure to submit petitions, notifications (information) to the federal executive body authorized to perform functions to monitor the implementation of foreign investments.

However, the cancellation of the authorization document granting the right to carry out a strategic type of activity in connection with the revealed fact of violation of Law No. 57-FZ is by its legal nature an administrative and legal sanction bearing adverse consequences for the offender. The same legal nature is characteristic of the cancellation of a license in violation of licensing requirements, which the judicial authorities pay attention to (see: Ruling of the Supreme Court of the Russian Federation No. 305-ES19-26163 of 14.05.2020).

Termination of the contract granting the rights to the extraction (catch) of aquatic biological resources is obviously a measure of state coercion of a civil nature.

By their nature, the above-mentioned coercive measures for the cancellation of permits and termination of contracts can also be attributed to measures to prevent illegal actions designed to prevent the harmful consequences of uncontrolled foreign participation in strategic sectors of the economy, which is dictated by the goals of the need to ensure the country's defense and state security.

On the one hand, when applying these measures of influence, the Russian company is deprived of a permit for the implementation of a strategic type of activity directly, despite the fact that a foreign investor (a group of persons to which he belongs) is obliged to apply to a Government commission in order to coordinate the possibility of obtaining such a permit by a company under his control.

But on the other hand, a business company under the control of a foreign investor or his group of persons acts obeying the will and in the interests of such a foreign investor or group of persons. Consequently, it is a foreign investor or a group of persons to which he belongs that had the intention to participate in the implementation of a strategic type of activity, in connection with which they are justifiably deprived of the opportunity to carry out such type of activity indirectly, through the company, participating in the activities of the company itself.

As another feature of state enforcement measures for the cancellation of permits for strategic activities and the forced termination of the right to extract (catch) aquatic biological resources, it is necessary to note their actually hybrid procedural form, combining the investigative type of jurisdictional law enforcement process (verification measures, identification and fixation of the fact of violation, sending the final document to other bodies, including in court), as well as an adversarial jurisdictional law enforcement process (the court's decision to revoke the license, termination of the contract). Such a mechanism may be another example of the trend of embedding liberalization instruments in law enforcement institutions, which A.I. Kaplunov draws attention to. ^{[3, pp. 64-65]}

With regard to the legal nature of measures of state influence when applying the consequences of the invalidity of void transactions made in violation of Law No. 57-FZ, as well as when depriving the right to vote at the general meeting of shareholders (participants) of a strategic company, their civil nature should be noted.

As D.N. Karkhalev notes, "coercive measures in civil law are of a proprietary nature, are ways of protecting violated subjective rights (Article 12 of the Civil Code of the Russian Federation), are based on protective norms and are applied in favor of the injured person." ^{[4, p. 29]}

Restitution, entailing the return of everything received under an invalid transaction, as well as the recovery of shares (shares), property of a strategic company to the state's income, as well as the deprivation of the right to vote at the general meeting of its shareholders (participants) are measures of a property and organizational nature, which, on the one hand, entail adverse consequences of a sanctions nature for a foreign investor and his groups of persons who acted intentionally bypassing the legally established requirements for preliminary approval of transactions by a Government commission, and on the other hand, being also protective measures, are aimed at protecting public interests in the protection and restoration of law and order, ensuring the defense of the country and the security of the state. It seems that one of the justifications for the introduction of such measures into legislation may be the economic reasons inherent in the institution of confiscation of property, by which, for example, D.G. Bargaev suggests understanding "a set of economic factors that determine the need for the existence and application of confiscation of property as an effective means of restoring normal economic relations in society and compensation for property damage caused by criminal act". ^{[1, p. 182]}

When applying these measures of state coercion, a foreign investor and a group of persons to which he belongs are deprived of any opportunity to participate in the implementation of a strategic type of activity, because regardless of the consequences of the invalidity of transactions and actions listed above adopted by the court, the strategic company is out of the possession of a foreign investor, his group of persons.

A similar result of termination of the participation of a foreign investor in the implementation of a strategic type of activity is achieved by limiting the exercise of corporate voting rights at a general meeting, which excludes his actual opportunity to participate in the implementation of a strategic type of activity by a business company.

According to E.A. Tsygankova, "the target orientation of forms of coercion indicates what results the law enforcement officer is striving to achieve by implementing this or that coercive measure." ^{[7, p. 287]}

It seems that all the considered measures of state coercion in violation of the legislation on foreign investment have one target orientation in the form of deprivation of the right to carry out a strategic type of activity of a foreign investor, the possibility of using which (indirectly, through a controlled Russian company) was obtained in violation of the licensing procedure established by the state. This ensures the achievement of the constitutional goal of ensuring the defense of the country and the security of the state.