The role legal advisors play in M&A transactions abroad is a quite significant or in certain cases, even crucial. Considering the importance of each legal issue, usually parties clearly understand the necessity of involving a qualified legal advisor who would assist on each stage of a transaction. In Ukraine, however, the role of a transactional legal advisor still remains underestimated. Many clients take a perfunctory approach to a transaction and do not pay due attention to legal nuances, which may directly affect the results of a transaction or protection of interests of the parties involved. In this article, we will review the major and the most interesting nuances and specifics of the legal consulting when making M&A transactions in Ukraine.
Agreeing on the key arrangements and transaction structure
It is crucial to clearly understand all client's needs and intentions as well as record in writing the same. Formal signing of the minutes of meetings may help to settle this issue. The lack of clearly specified essential commercial arrangements agreed upon by the parties to a transaction is common practice in deals involving the residents of Ukraine. This a trend is applicable both to simple and multilevel transactions, which may require actions related to acquisition/disposal of assets not only in Ukraine but in other jurisdictions as well. In such circumstances, a Ukrainian lawyer has to perform a function of a manager and a mediator in case of a deadlock/default between the parties, which may arise in terms of implementation of a transaction. Therefore, it is important to agree upon and put in writing all principal arrangements of the parties and make sure they understand all the details of a transition before the start of an active phase thereof. In such a case, a detailed step-by-step plan of a transaction based on the letters of intention/memoranda of understanding or other preliminary agreements may significantly facilitate the overall procedure.
Detailed due diligence
A majority of M&A deals involves detailed due diligence of the sale assets. It is aimed at revealing and assessing of all legal risks arising from a transaction. Such risks should be considered in terms of preparation of transactional documents (in particular, in terms of development of provisions related to representations and warranties, limitations and liability). Either party to an M&A deal use due diligence results to substantiate a fair price. Legal advisors should pay special attention to deals in respect of acquisition of distressed debt portfolios, in particular – a possibility to enforce a collateral. As regards transactions on acquisition of corporate rights, retrospective analysis of all previous share purchase transactions in a target entity plays a key role in terms of due diligence. There is a risk that interested parties may potentially challenge such transfers to the court, which, in its turn, may be used to challenge validity of the transaction based on formal grounds. In terms of a legal due diligence, lawyers seriously scrutinize "grey" operations of Ukrainian entities (cash settlements, salaries in envelopes, corruption, collusion with counterparties, schemes involving individual entrepreneurs), which may potentially have negative consequences and thus prevent transfer of a business to a "normal" mode of operation, and potentially – attract unwanted attention of enforcement bodies in the future. Based on the due diligence results, lawyers prepare a report, however, a client may not always be willing to review it in detail given that usually such a report is made in a complicated "legal language". Given that all risks, identified in terms of due diligence, should be properly presented to a client, lawyers should provide summaries prepared in a simple and clear language, which must cover all significant risks and recommendations to mitigate them.
Upon completion of due diligence and review of the results thereof, lawyers should commence to prepare all the necessary documents to carry out an M&A transaction. Deficiencies and risks revealed in the course of due diligence should be thoroughly negotiated by contracting parties; outcomes of negotiations should be specified in transactional documents related to a respective M&A deal. Advisors should accurately specify each step of a deal, warranties provided by the parties; special attention should be paid to limitations and liability applicable in case of a breach of warranties and/or obligations.
The lack of a straightforward business structure is another issue regularly handled by advisors in terms of an M&A transaction. As a general rule, Ukrainian business is established non-systematically, involves a range of legal entities (including non-residents) in order to optimize taxes, conceal actual beneficiary, avoid handling issues with the anti-monopoly committee. Legal due diligence of such unstructured business is time-consuming. In addition, an improper structure negatively affects relations with banks, potential investors, etc. Also, further consolidation of a business requires more time and money; hence the proper upfront structuring/restructuring of a business and appointment of a party responsible for such restructuring are crucial in this case here.
Given that the Ukrainian competition law is very formalistic, almost every (even small) deal should be thoroughly analyzed whether it requires that an approval be obtained for concentration/concerted actions. M&A advisory pays special attention to a retrospective analysis of all potential violations of competition law by the contracting parties. It should be noted that historically (before May 2016) financial thresholds applicable to assessment of concentrations/concerted actions in Ukraine were very low, whereas the limitation period in such deals constitutes 5 years. Considering the above, many transactions implemented before May 2016 had required approval of the Ukrainian anti-trust authority. Many market players formally breached the competition law rules in this regard; moreover, this fact could be detected by the anti-monopoly authorities in terms of review of new transactions that need to be approved. At the same time, we should note that assessment of the retrospective violations of the competition law is driven by a quite loyal approach of the the anti-monopoly authorities, shall such violations be detected; the amount of fines imposed for such violations is also not significant in the majority of cases.
Applicable law and arbitration
Considering conflict of laws and legal issues existing in the Ukrainian law, the M&A advisory generally covers advice regarding a possibility to structure a purchase deal of a Ukrainian business through the sale of holding companies registered in foreign jurisdictions; typically such transactions are subjected to the English law. In the first place, it can be explained by the willingness of the parties to ensure enforcement of arrangements and warranties mutually provided by the parties. Considering the above, attention should be paid to the novelties of the Ukrainian law in respect of corporate agreements. At the same time, practical implementation of provisions of such an agreement remains vague given the ambiguity of the law and absence of relevant court practice.
Given existent limitations, special attention should be paid to specifics of currency regulation when rendering a legal advice for an M&A deal in Ukraine. The Law of Ukraine "On Currency and Currency Operations", which entered into force in February 2019 had to ensure liberalization of the currency legislation. Although "old" regulatory legal acts that regulated currency issues were cancelled, they were replaced with new ones that provide for equivalent limitations. Currently, structuring and scheduling of an operation are to consider the following limitations:
- limitation to transfer foreign currency aimed at returning dividends to a foreign investor (save for established exemptions); a permitted amount should not exceed equivalent of EUR 7 million within one calendar month;
- limitation of an amount of purchase/transfer of a foreign currency aimed at returning funds abroad, which were received by foreign investors as a result of a sale of certain investment objects (e.g. securities, corporate rights, etc.); a permitted amount should not exceed equivalent of EUR 5 million within one calendar month;
- prohibition to use borrowed money for currency purchase if an operation is made for the benefit of a non-resident,
As a general rule, the role of advisors is not limited to draftingof all transactional documents and conducting of all necessary actions (including registrations). Post-transactional support of a buyer is of paramount importance. Transactional lawyers are familiar with all peculiarities of an asset in question, hence they frequently provide legal support within a certain period after closing of a transaction (as a general rule, up until the moment an in-house lawyer arrives to the office and accepts all the matters).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.