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Specialist Guide to the

Global Leaders in Media Law Practice

The end of the year was especially hectic, but most of the businesses managed to meet the deadline. Now it is time to take stock and see what lies ahead.

Ban on Foreign Ownership – Key Features

To recap, on 14 October 2014 the Russian Parliament adopted Federal Law No. 305-FZ, amending the existing Russian Mass Media Law (Law No. 2124-I of the Russian Federation on Mass Media, 27 December 1991). Amended Article 19.1 of the Mass Media Law introduced the ban preventing any foreign government, international organisation or foreign person including a Russian citizen who also has foreign citizenship (each such entity or person, a “foreigner”) from controlling, directly or indirectly, more than 20 per cent of any Russian mass media organisation.

The ban was intended to identify – and prohibit – all direct or indirect means by which foreigners own or control any Russian mass media organisation, including print, online, television and radio businesses. While some of the law’s new restrictions focussed on equity ownership of a Russian media company, others referred generally to “control” and decision-making powers.

Despite numerous requests for clarification of the ban from the business, until July 2015 the Russian media regulator – Roskomnadzor – kept silent and did not provide any substantive comments on the application of the ban. On 03 July 2015 Roskomnadzor conducted its first roundtable for media businesses to discuss the new law; the second followed on 09 December 2015. Both events gave an opportunity for media companies to discuss the most pressing issues, but still there are no definitive answers on some topics. As a result, companies proceeded with restructurings based on their individual understanding of the new law.

Even now that the law has come into force, there are still certain gaps in the general understanding of the new Article 19.1 of the Mass Media Law. Below we summarise the top four open questions that caused the most heated debates among Russian media lawyers in 2015:

1. What activities or agreements may constitute “foreign control” and are therefore prohibited?

It appears that the Russian regulator will be checking for forms of control by foreigners that may violate the Mass Media Law, including both direct and indirect control, as well as legal and “economic” control. These concepts have all been mentioned in public discussion of the new law. However, neither the Mass Media Law nor any other Russian laws contain a definition of or even use certain relevant terms, such as “indirect economic control.”

In early 2015, the Kommersant newspaper quoted an unnamed member of the Russian Government who said – in the context of a meeting of Alexander Zharov, the head of Roskomnadzor, with the representatives of Vedomosti newspaper owners Dow Jones and Financial Times – that the definition of “control” may “apply variably in certain cases" (see http://www.kommersant.ru/doc/2684633).

Following that interview, Roskomnadzor officials repeatedly mentioned, both in their written responses to official requests for clarifications and during open roundtables, that they will review the corporate documents and commercial agreements of mass media companies for signs of control, including “indirect economic control” by foreign companies.

Therefore, uncertainty remains regarding the interpretation of this issue by the authorities and the practical consequences for companies.

2. What voting rights may a foreign minority shareholder have?

Typically, in joint venture agreements both majority and minority shareholders enjoy certain voting rights and protections. Within the context of the amended Mass Media Law, it is unclear how to find an appropriate balance between two competing objectives: first, complying with the foreign control ban, and second, maintaining the necessary level of protection to allow a foreign shareholder to feel comfortable in cooperating with its 80 per cent Russian joint venture partner.

3. Do we need to create multi-tier structures?

The most conservative interpretation of Article 19.1 of the Russian Mass Media Law suggests that a foreign investor can hold 20 per cent in a media company only at the holding company level, and only through its Russian registered special purpose vehicle. This means that several Russian legal entities must be included in the overall group structure; the foreign investor cannot directly own 20 per cent of the Russian mass media company. More liberal interpretations do exist but to our knowledge have not been officially confirmed.

4. What provisions are allowed in contracts with foreign partners?

It is common practice for international media companies to include certain standard provisions in their agreements with Russian partners and distributors, including certain restrictions on the use of the licensed brand and content, audit rights and other customary arrangements. Moreover, in some cases such restrictions are mandatory. For example, Article 1489 of the Russian Civil Code requires a licensee to ensure that the goods produced or distributed by the licensee and bearing the licensed trademark comply with the quality requirements established by a licensor. Article 1489 further provides that the licensor has the right to control compliance with this provision.

At this point, the approach toward such provisions is not clear. However, it seems reasonable to conclude that such provisions do not create any issues under the Russian Mass Media Law.

Ban on Foreign Ownership – Reporting and Enforcement

The ban became effective on 01 January 2016. There is, however, one exception – companies with more than 80 per cent Russian beneficial ownership enjoy a grace period until 01 January 2017.

All mass media companies were required to bring their foundation documents into compliance with the ban by 01 February 2016 and submit confirming documents to Roskomnadzor by 15 February 2016.

During the roundtable in December 2015, Roskomnadzor’ s officers mentioned that they do not plan to conduct any unscheduled inspections for compliance with the ban, unless they receive complaints from consumers or other third parties that a certain media company is not compliant. We note, however, that Roskomnadzor included a number of mass media organisations that were previously owned by foreigners on the list of scheduled inspections for 2016 available at websites of regional departments of Roskomnadzor (see, for example, the list of inspections scheduled by Central Federal District Department at http://77.rkn.gov.ru/p5275/).

If Roskomnadzor discovers a violation of the ban it can bring a court claim to suspend mass media registration and/or cancel a broadcasting license. In addition, persons owning shares in a founder/editor/broadcaster in breach of the ban are denied voting and certain other shareholder rights, and such shares will not be counted for quorum purposes. Further, any transactions resulting in a breach of the ban (for example, the sale of over 20% of shares to a foreigner or foreign-controlled entity) are treated as invalid.

Foreign Financing Reporting Requirement

To add to the complexities of Russian media regulation, at the end of December 2015 the Mass Media Law was further amended to include an obligation of mass media companies to report on foreign financing.

In brief, if a mass media editorial board, publisher or broadcaster receives any “monetary funds” from a foreigner (as defined below) this must be reported to Roskomnadzor on a quarterly basis. It is expected that the reporting procedure and relevant forms will be approved in early 2016. All reports will be publicly available through the Roskomnadzor website.

In the context of these amendments, a “foreigner” includes a foreign state, an international organisation, any foreign legal entity, a non-profit organisation having the status of foreign agent, a foreign citizen or person having no citizenship, or a Russian legal entity whose participants (founders) are any of the foregoing.

Certain funds are exempt from reporting. These include funds received from a “founder” of the relevant mass media organisation, funds that constitute advertising or distribution revenues for the relevant channel or other mass media and funds in the amount of less than RUB 15,000 (about USD 200).

Failure to comply with the new requirements may result in administrative fines up to 200 per cent of the amount of unreported funds, or up to 400 per cent for a repeated violation. Company officers may also be fined.

It is too early to determine how these rules should be applied; some interpretation will be needed until an established practice has developed. At this point, it appears that the following contracts between a Russian mass media entity and its foreign or foreign-owned counterparties may need to be reported: financing arrangements such as loans from a foreign source, loans from a Russian bank which is a subsidiary of a foreign bank, and consulting and other service agreements. Other contracts, such as distribution agreements and licenses with a foreign licensee, may be exempt.

Ban on Advertising for Paid TV Channels – Is There a Way Out?

In addition to foreign investment restrictions, in 2014 Russia introduced a ban on all advertising through paid television channels. The respective Federal Law No. 270-FZ of 21 July 2014 on Introduction of changes to Article 14 of the Federal Law on Advertising came in force starting 01 January 2015.

The ban affected television channels which are accessed exclusively on a paid basis or with the use of decoding technical devices, such as cable channels. However, the ban contained an exemption for “must-carry” channels (which must be included in all packages) and channels that broadcast by terrestrial transmission using “limited frequency resources” (see below for more details). The controversial language of the ban prompted many questions from channel owners, as it affected both independent and state-owned media.

In October 2014, the Russian advertising regulator – the Federal Anti-monopoly Service (FAS) – clarified some details in FAS letter No. АК/39552/14. The letter explained that the exemption applies to channels using analogue or digital transmission via certain “limited frequency resources,” meaning channels that are allocated by a special subdivision of Roskomnadzor in a tender for terrestrial analogue broadcasting in “large cities” (i.e., cities with populations of 100,000 or more). In general it is understood that, although the Advertising Law contains no clear legal basis for this, if a cable channel owner acquires a large-city terrestrial license, then it may be exempt from the ban and may include advertising content in all of its broadcasts over the same channel, including via cable platforms.

Overall, the need to restructure Russian businesses due to the new restrictions prompted many media companies to reevaluate their Russian operations generally, and some even decided to leave the market. Russian media businesses still face unprecedented challenges, in both the regulatory sphere and the declining economic environment. Nevertheless, Russian consumers remain very interested in both local and international content, while new technologies bring new possibilities every day. Despite challenges, there are positive examples where media businesses were restructured and continue to be available in Russia, providing hope for a brighter future.

Biography

Anastasia Dergacheva counsels diverse clients on a variety of matters relating to intellectual property, regulatory, and anti-trust matters. A native Russian, Ms Dergacheva is fluent in English. Her practice is focussed on the entertainment, manufacturing, and technology industries. Ms Dergacheva is vice chair of the Pro Bono Committee for the Moscow office, which is involved in providing employment and corporate advice and counsel to a range of NGOs.

RUSSIA

Foreign Ownership Restrictions in the Russian Media Sector:

It’s Here, So What’s Next?

Written by Anastasia Dergacheva,

Morgan Lewis & Bockius

2015 was a challenging year for foreign and domestic media businesses in Russia that were focused on restructuring their Russian operations to comply with foreign ownership restrictions by the 01 January 2016 deadline. In most cases, such restructurings included the sale of part of the Russian business to a Russian partner and, sometimes, the spin-off of a non-regulated business into a separate entity.

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Anastasia Dergacheva