Frequency of M&A disputes

In 2019, the Russian M&A market was at its highest level since 2014 in terms of number of deals (reportedly, 670).[2] The total value of the deals also increased by 21.5 per cent as compared to 2018, to almost US$63 billion. Interestingly, nearly one-third of the deals involved foreign inbound investment (which grew by nearly 50 per cent as compared to 2018), which not only came from Asian investors, but also from EU and US investors. Understandably, the oil and gas sector was responsible for a significant part of that growth.

While the data on M&A transactions is largely public and can be analysed, there is no publicly available information on M&A disputes. As explained below, the majority of M&A disputes involving Russian parties are resolved by arbitration rather than by public litigation.

From experience, however, a significant number of M&A transactions result in disputes of some sort after closing, although parties would not necessarily proceed to fully fledged arbitration or litigation in every case. Sometimes, the disputes are resolved through negotiation and occasionally through some sort of expert determination (with respect to price adjustment disputes, for example).

Publicly traded companies are usually slow to escalate disputes to arbitration and try hard to resolve their disagreements amicably. However, smaller, privately owned companies tend to be more aggressive and litigious. This is usually because many of them do not have enough liquidity to pay contractual penalties or price adjustment amounts as provided for in the contractual documents, so for them it really becomes a bet-the-company dispute, which they are prepared to fight as hard as possible. Of course, this observation is only as good as any generalisation and there are many different scenarios in between.

Form of dispute resolution

Historically, most M&A deals were governed by English law and usually provided for arbitration (mostly London-seated LCIA arbitration), while occasionally the parties also opted for High Court litigation in London. After 2014, there was a gradual shift away from English law and English arbitration, predominantly in response to sanctions imposed by the US and the EU against certain Russian companies and individuals. The shift is particularly prevalent when a transaction involves a state-owned company, which usually insists on Russian law as a governing law or, alternatively, on Singaporean law as a substitute for English law. Nonetheless, private companies are still comfortable with English law and English arbitration.

While Russian substantive law became more popular for M&A transactions in Russia, parties still prefer arbitration to litigation in the Russian state courts. The main reason for this is that parties believe they have a better chance of presenting their respective cases before an international arbitral tribunal. Russian commercial courts are very busy and, therefore, judges rarely have an opportunity to dedicate significant time to each particular case. Additionally, Russian commercial courts rarely (if at all) hear fact witnesses or expert evidence. Accordingly, arbitration is more suitable for complex and fact-intensive cases such as M&A disputes.

This trend has two implications. First, Russian courts have seen very few cases relevant to complex M&A transactions and, hence, there is no developed jurisprudence in relation to the relevant Russian law principles. Second, the limitations of arbitrability of shareholders’ disputes play a particular role in structuring deals in which parties are particularly keen on arbitration.

Grounds for M&A arbitrations

Russian M&A transactions will differ in structure and complexity depending on the size of the deal. While smaller domestic transactions may not include, for example, representations and warranties, provisions on price adjustment or earn-outs, larger deals usually have a complex transactional structure and often involve significant cross-border elements. The grounds for the dispute will therefore depend predominantly on the deal structure.

Again, due to the lack of publicly available data, it is very difficult to assess the most common grounds for M&A arbitrations. From our experience, however, we can establish the following.

  • Most frequently, disputes arise from a breach of representation and warranties or disagreement around price adjustment or earn-out provisions.
  • Frequently, albeit somewhat surprisingly, disputes relate to the execution of put or call options embedded into the M&A deal. It is not uncommon for parties to Russian M&A deals to disagree on whether the triggering event has occurred or over the option price calculation (if applicable). Occasionally, one of the parties may refuse to transfer shares or pay the option price.
  • Disputes relating to pre-contractual failure to disclose or fraud are not that common. However, these disputes occasionally arise from a breach of representations and warranties.
  • Disputes relating to failure to complete the transaction are also relatively rare.

Fraud and failure to disclose

Failure to disclose or fraud at a pre-contractual stage may render a contract voidable (though not void) under Russian law for mistake[3] or deceit.[4]

If a party erroneously believed in a certain set of facts, which in reality did not exist, such a party can avoid the contract for mistake, if the mistake was so material that the party would have never entered into the contract had it known the actual state of facts. The party that was subject to mistake can file a claim for invalidation of the contract with the court or a tribunal.[5] While the burden is generally on a claiming party to show the materiality of the mistake, certain mistakes are presumed to be material (e.g., mistakes about the subject matter of the contract and its essential characteristics or about the circumstances that a party clearly had in mind when entering into a contract).[6]

A party can avoid the contract for mistake irrespective of whether the mistake was caused by the other party. However, the consequences will differ depending on the role of the second party. If the contract is invalidated, the court would order restitution and each party would have to return whatever it received under the contract. However, if the mistake arose due to the circumstances for which the second party is responsible, the claimant would be entitled to recover losses from the second party.[7]

If the mistake is caused by intentional actions or omissions of the second party, the innocent party may avoid the contract for deceit. It does not matter if the relevant information was misrepresented or withheld by the party itself or a third person as long as the party is deemed to have known about the deceit. This knowledge is presumed where the misrepresentation is made by an employee or representative of a party or a person assisting it with the transaction.[8] The contract can be avoided by an innocent party by filing a claim for its invalidation with the relevant court or tribunal. The legal consequences are the same as under Article 178 of the Russian Civil Code, but the innocent party is always entitled to damages.

In practice, claims under Articles 178 and 179 of the Russian Civil Code are currently relatively rare in Russian M&A disputes and would be suitable only for smaller domestic M&A transactions. Parties to more sophisticated deals are rarely interested in avoiding the contract altogether. They would also prepare deals more carefully with due diligence being conducted at the pre-contractual stage, and would include provisions for price adjustment or liquidated damages for breach of representations or warranties.

Burden of proof

As a general rule, a party that advances an assertion or proposition bears the burden of proving its allegation or argument.[9] There are certain specific burden-shifting rules in Russian law that may occasionally be relevant for M&A disputes. For example, a commercial party is liable for breach of contract irrespective of its fault, unless it can show that the non-performance was due to force majeure (the burden lies with the party in breach). However, the liability of individuals for breach of contract depends on the individual’s fault, which is presumed. Accordingly, once the breach is established, the burden shifts to an individual to show that the breach is not due to his or her fault.

Knowledge sharing

There are no clear rules on pooling of knowledge of sellers with the management or other representatives of the target in Russian law.


Depending on the nature of the breach, various remedies may be available to a successful claimant in an M&A arbitration. As a general rule, the specific performance of a contract is a primary remedy under Russian law. However, in M&A arbitrations it is arguably very rarely used because most disputes arise after the target company is handed over to the buyer. However, the specific performance may be claimed where the respondent refuses to transfer certain shares under the call option.

Therefore, the most common remedies for breach of contract are damages and contractual penalties (liquidated damages), if agreed in the contract. This is the case, for example, if the breach concerns representation or warranties made by one of the parties.[10] In addition, if the party relied on the information misrepresented by the other party and such information was material for the innocent party, it may terminate the contract in addition to claiming damages or contractual penalties,[11] or seek invalidation of the contract if the conditions of Article 178 or 179 of the Russian Civil Code are met.[12]

Measure of damages

One of the main principles of Russian law is that damages for breach of obligation must compensate the innocent party in full, but shall not penalise the party in breach. Accordingly, punitive damages are not available in Russian law and awards ordering punitive damages would not be enforceable in Russia on public policy grounds.

Russian law calls for full compensation of losses of an innocent party caused by the breach of contract. This generally includes compensation for actual harm and lost profits. According to Article 393(2) of the Russian Civil Code, the principle of full compensation means that the claimant shall be put in the position it would have been in had the obligation been performed correctly.

In practice, until fairly recently, Russian courts were generally reluctant to order compensation of lost profits because they expected a claimant to establish the amount of lost profit with certainty as well as to show the actions the claimant undertook in preparation for future profit-making activities. However, the courts are becoming less strict in this respect and only require the claimant to show the lost profit with reasonable certainty. Moreover, since 2015, even if the claimant cannot establish the amount of lost profit with reasonable certainty, the court cannot dismiss its claim, but has to order compensation of losses that it finds just and proportionate by reference to all circumstances of the case.[13]

Special procedural issues

In Russia, the arbitrability of ‘corporate disputes’ has long been questionable. In 2012, the Supreme Arbitrazh Court of the Russian Federation (then the highest instance in commercial disputes) ruled in the case of NLMK v. Maximov that any corporate disputes fall within the exclusive jurisdiction of the state arbitrazh (commercial) courts and hence cannot be referred to arbitration.[14] While there were isolated cases in which courts did not follow the ruling,[15] there was generally a consensus that corporate disputes could not be referred to arbitration.

In 2016, the legislator made certain types of corporate disputes arbitrable under certain conditions (discussed below). From the outset, note that under Russian procedural law, corporate disputes are disputes concerning the establishment and liquidation of a Russian entity, participation in its corporate governance and rights over shares in such an entity. However, if the shares in a Russian entity are held through a foreign holding company and the shareholders’ relationships (and disputes) are at the level of the foreign holding company, such disputes would not be considered corporate disputes for the purposes of Russian legislation.

While not every type of corporate dispute would be relevant for M&A transactions, in practice Russian rules on arbitrability of corporate disputes do play a role in the way transactions are structured. Arguably, disputes arising out of share purchase agreements (SPAs) and shareholders’ agreements (SHAs) are the most relevant for M&A transactions, therefore the following discussion focuses on these.

Disputes arising out of SPAs in relation to shares or participatory interest in a Russian company can be referred to arbitration provided that two conditions are met: the arbitration agreement was concluded after 1 February 2017; and the agreement provides for arbitration administered by one of the permanent arbitral institutions (i.e., those licensed[16] by the Russian government).[17] If the above conditions are met, the seat of arbitration does not have to be in Russia.

Disputes arising out of SHAs had initially been placed in a category that required all shareholders of a company and the company itself to agree to arbitration (rather than only the parties to an SHA) and the arbitration to be administered by a permanent arbitral institution under special rules for arbitration of corporate disputes.[18] This was obviously unworkable for most SHAs, and the legislator made changes that entered into force on 29 March 2019. Under the current regime, disputes under an SHA can be arbitrated provided that the parties to the SHA agreed to arbitration to be administered by a permanent arbitral institution and with the seat of arbitration in Russia.[19]

There is one more notable limitation to arbitration of corporate disputes. Russian legislation provides for a special regime for foreign investment into ‘strategic entities’ (companies performing activities of ‘strategic importance’), including in the areas of natural resources, defence, media and natural monopolies.[20] Corporate disputes concerning a strategic entity cannot be referred to arbitration under any circumstances.[21] This is an important limitation as many investments are made in strategic entities (including in the oil and gas sector).

Accordingly, the main requirement for both types of disputes is that they should be administered by one of the licensed arbitral institutions (i.e., by one of the Russian institutions or by the Hong Kong International Arbitration Centre or the Vienna International Arbitral Centre if the dispute is not purely domestic). In practice, however, foreign investors prefer not to follow the requirements set out above if they do not expect to attempt to enforce the resulting award in Russia.


[1] Andrey Panov is a counsel at Allen & Overy.

[2] KPMG, ‘Russian M&A Review 2019’,

[3] Article 178 of the Russian Civil Code.

[4] id., at Article 179(2).

[5] id., at Article 178(1).

[6] id., at Article 178(2).

[7] id., at Articles 178(6) and 431.2(1). If the second party is not responsible for a mistake, it should generally be able to recover its losses from the claimant.

[8] id., at Article 179(2).

[9] Article 65(1) of the Arbitrazh Procedural Code of the Russian Federation (the procedural code relevant for disputes in commercial matters); Article 26 of Federal Law No. N 382-FZ of 29 December 2015 on arbitration (Arbitral Proceedings) in the Russian Federation (as amended) (the law dealing predominantly with domestic arbitration).

[10] Article 431.2(1) of the Russian Civil Code.

[11] id., at Article 431.2(2).

[12] id., at Article 431.2(3).

[13] id., at Article 393(5).

[14] Ruling of the Supreme Arbitrazh Court of 30 January 2012 in Case No. VAS-15384/11. The case itself concerned a share purchase price adjustment mechanism.

[15] Resolution of the Federal Arbitrazh Court for the Moscow Circuit of 3 April 2013 in Case No. A40-111506/2012 and Resolution of the Thirteenth Arbitrazh Appellate Court of 15 November 2013 in Case No. A56-37022/2013.

[16] Following the reform, all Russian arbitral institutions must have either received a licence or ceased operations. Currently, only five Russian arbitral institutions have the status of permanent arbitral institutions and can administer disputes seated in Russia. Of these, one is responsible for maritime disputes and another for sports disputes. The three remaining institutions offer a broad range of services, including arbitration of commercial and corporate disputes: the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry, the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs and the Russian Arbitration Centre at the Russian Institute of Modern Arbitration. Foreign arbitral institutions may also obtain a licence (though this is not necessary). The Hong Kong International Arbitration Centre and the Vienna International Arbitral Centre are currently the only international institutions with Russian licences. Note, however, that they cannot administer Russian domestic disputes.

[17] Article 225.1(5) of the Arbitrazh Procedural Code.

[18] Only three Russian permanent arbitral institutions have adopted such rules.

[19] Article 7(7.1) of Federal Law No. N 382-FZ. Note that there is a discrepancy between this Article and the requirements set forth in Article 225.1 of the Arbitrazh Procedural Code (which was not amended through the legislation that came into force on 29 March 2019). While the prevailing view seems to be that one can rely on the amended conditions, in the absence of any guidance from the courts, this cannot be stated with any certainty.

[20] Federal Law No. 57-FZ of 29 April 2008 (as amended) on the procedure of making foreign investments in companies of strategic importance for national defence and state security.

[21] Article 225.1(2)(3) of the Arbitrazh Procedural Code. The only exception is SHAs that do not require prior approval under Federal Law No. 57-FZ (i.e., when a foreign investor sells shares to a Russian buyer or when only a small number of shares are bought by a foreign investor).

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