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Due Diligence of Renewable Energy Projects
Author: Olena Yasentyuk
Source: The Ukrainian Journal of Business Law. – November 2018
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According to the official statistics of the National Commission which performs state regulation in the energy sector and utilities 160,1 MW of renewable energy facilities were commissioned as of the third quarter of 2018. That is 2.4 times more than in the same period in 2017.

The renewable energy market continues to make remarkable progress. This is due to the perfect Ukrainian setting for renewables such as — favorable weather conditions, the highest “green” tariff in comparison with European countries and, therefore, the strong interest in investments in the renewables in Ukraine.

As it is known, the Law of Ukraine “On Electricity Market” adopted by the Verkhovna Rada of Ukraine on 13April 2017 became an important process of the Ukrainian legislation reform to comply with the Third Energy Package. The market started to dictate new rules of the game in the renewable energy sector, therefore a highly skilled lawyer oriented in one specific field of law is obliged to extend his knowledge and break new ground – inter alia, explore technical aspects of the renewables to provide clients with the qualified legal expertise.

Generally, the trend to invest in Ukrainian renewable energy sector is purchasing already incorporated SPV (special purpose vehicle set up especially for the construction of the alternative energy object) that will be the subject of due diligence.

As a rule due diligence of each project starts with preparing the general list of questions and documents to be provided by the SPV’s representatives or the sellers. The questions are divided into sections depending upon the field of law. Then the SPV provides the lawyer with the requsted answers documents within the determined deadlines. It is necessary to be always in touch with the SPV or sellers to include all new arising changes in the drafted due diligence report. The due diligence report is concerned solely with legal issues arising from lawyer’s review of the provided documents and does not include any tax, financial, accounting, technical, operational or commercial due diligence evaluations if the otherwise is mentioned herein.

The main figure of the Corporate Law Matters part of the due diligence report is analysis of the constituent documents of the incorporated SPV, minutes and resolutions of the SPV’s governance bodies, documents certifying registration of the SPV, all available documents related to acquisition of participatory interest in the SPV by its existing and previous participants, decisions of the Antimonopoly Committee of Ukraine/applicable AMCU thresholds etc.

The SPV and its participants shall be checked in the State Register of Encumbrances over the Movable and Non-Movable Property with regard to the pledge of corporate and movable rights of the company, in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Associations and Bankruptcy Register.

The most frequent faults within the Corporate Law Matters part is incompliance of the SPV's Charter with current legislation on limited liability companies due to newly adopted Law of Ukraine "On Limited Liability Companies" No. 2275-VIII dated 06 February 2018; the absence of documents evidencing consent of the remaining participants of the SPV; absence of spousal consents (if the SPV's participants are married and willing to purchase their corporate rights of the SPV, the spousal consents must be received); absence of checks/bank receipts evidencing full payment for the purchased participatory interest in the SPV and for the authorized capital or its increment.

In the key findings of the due diligence report the lawyers indicate all the found problems, determine the level of their risk and suggest the solution – to provide with the appropriate documents, to make necessary payments, to restate charter in new version etc. There cases where the risk is not curable, thus, it is recommended to include it as a condition precedent or any closing in the sale and purchase agreement (SPA) of the SPV. Incurable risk can also be a subject of negotiation between the purchaser of the SPV and the seller to reduce the transaction price.

The greatest attention of the due diligence report is paid to the Real Estate and Land part. For the purposes of the solar power plant (SPP) or biomass/biogas project construction, generally one or several long term lease agreements are concluded by the SPV. In controversy, the wind power plants (WPP) require long term lease agreements for placing each wind turbine of the WPP and additional servitude agreements for transportation of construction, construction, reconstruction, overhaul, placement of structures of supporting structures of overhead power lines, transformer substations, distribution points, devices, underground cables, conducting of research and other works for the construction of power lines etc. The above mentioned objects attached to the servitude agreements can be constructed on the lands without changing the designated use of the land into energy lands and servitude agreements will be enough to construct power lines, for example.

The other energy objects must be constructed at the lands with target designation of land as ‘industrial, transport, communication lands, lands of energetics, defense and other designation’. When the lawyers identify that the target designation of the land plots was changes from agricultural to non-agricultural lands, the SPV shall provide with a certificate or conclusion/report on the qualitative rich soil layer as is required by the law.

In case the target designation of the land plots was changed with violation of legal requirements, it can lead to the invalidation of resolutions on transfer of the land plots into lease and as the result to the invalidation of the land lease agreements on the whole.

It is also necessary to check whether the lands (that previously were for commercial agricultural production) are not the subject of moratorium, existing under the Land Code of Ukraine. If the transfer of the land plot from the previous owner to the SPV is made in contrary to the moratorium requirements, such transfer can be invalidated by the interested party as well.

It is recommended to pay attention on the land lease agreements that should be executed in accordance with the Model Land Lease Agreement approved by Decree of the Cabinet of Ministers of Ukraine "On approval of the Model Land Lease Agreement" No. 220 dated 03 March 2004 with all necessary annexes and essential terms (lease object (cadastral number, locality, size of the land plot); term of the land lease agreement; land lease payment). In case of any discrepancies, it is advisable to conclude additional agreements to land lease agreement adding necassarry information hereto.

The other painful and long-term issue for the investor is preparing the detailed plan of the territory (DPT) where the alternative energy project will be located. Generally, it is forbidden to transfer land plots from the state or communal property without the approved DPT. Unfortunately, the most of Ukrainian cities and villages cannot boast of the approved DPT, therefore the burden to its development rests mainly on the investors. Moreover, the public hearings of the draft DPT is an important event that must be properly organized and conducted prior to its final approval (that is also investor’s problem). Approval of the DPT without holding public hearings on consideration of public interests is expressly prohibited, otherwise the transfer of the land plot to the SPV can be invalidated. There are many projects when the DPT is already officially approved, but public hearings have not been held, so this fault cannot be remedied. It should be recommend that the sellers under the SPA indemnify the purchaser from any claims, liabilities, penalties, costs, expenses and legal fees connected to DPT's dismissal due to its defects connected to organization and conduction of public hearings. 

When the construction project documentation is already prepared for the SPV, it should be investigated as well. In Asters practice, there are cases when the land project documentation included protection zone of historical monuments at the leased land plot, but the construction project did not have any references hereto. Since the protection zones are the subject of registration and have special status, it could be risk of violation of the requirements of the legislation. Or there are cases when the construction project documentstion determined installed capacity that differ with the technical conditions to grid connection agreement. We believe that this could be a technical discrepancy, but in any case we recommend to amend or restate the construction project documentation in new version. Otherwise, if the constructed energy object does not comply with the construction project documentation, the Construction Inspection shall refuse issuing the certificate for commissioning.

As a rule, the construction of SPP are classified as objects capable of causing medium consequences (CC2) and WPP as objects capable of causing medium (CC2) or significant (CC3) consequences according to the Law of Ukraine "On Regulation of Town Construction Activity" No. 3038-VI dated 17 February 2011. Hence, the Company must obtain a construction permit and pass obligatory expertize. Construction without the effective construction permit is prohibited by the legislation and could not be commissioned. Interesting, that on 4 September 2018, the Ukrainian Parliament passed Bill No. 8015 which expect to downgrad the construction complexity of WPP to CC1 offering a shorter and more streamlined process of commencing construction works and commissioning, so we will see.

For placement and construction of the WWP, the SPV should pass additional procedures, inter alia, have environmental impact assessment, receive the approval of the Ministry of Defense of Ukraine/staff of the Air Forces of the Armed Forces and State Air Service. If the SPV does not commence the construction during 3 years from obtaining the respective approval, the authority's resolution regarding the approval of such construction is cancelled.

Within the Financial part of the due diligence report, generally, financing agreements concluded by the SPV are analized to be confident that the SPV have no encumbrances under outstanding financing agreements, no effective collateral agreements in place, and no financing agreements other than those provided for legal analysis and that the SPV owes, no debt to the related companies.

Business Operation Agreements part includes analysis of all the agreements concluded by the SPV with the other contractors on performing of services or works. As a rule it is suggested to pay all the debts before any closing or executing the SPA by the investor, or to reduce the price of the project according to the SPV’s debt amount.

The Intellectual Property And Information Technology part specifies whether the SPV owns any designs, inventions, utility models, know how, brands, copyright, domain names and other IP objects, trademarks, software etc. For this purpose we conduct the independent verification through research of publicly available databases and receive the statement from the SPV's representatives to confirm fact of owning any object of intellectual property rights.

Within the Employment Relations part the lawyer revise all the labor documents on the employees of the SPV. The main and the most common mistake is the absence of concluded employment agreement with the director, as is required by the law. So, it should be recommended to conclude the employment agreement with the director as well.

The Litigation part comprises information on any claims including (i) any litigation (historic or pending) or settlements since the SPV was established, (ii) number and amount of all existing material court proceedings (including at arbitration courts) and disputes which may develop into court proceedings with customers or third parties, including pending or threatened disputes with tax and other authorities, and (iii) number and amount of all material court procedures for last 3 years. The above findings are made based on the search in the publicly available database of court decisions. Generally the SPV for alternative energy objects are not involved in any litigation proceeding. 

If the SPV has already entered into a grid connection agreement with a purpose to connect future generating capacities to the grid and sell electricity, we summarize regulatory aspects and analyze documents provided by the SPV in the Regulatory Matters part.

To summarize, it is recommended that buyers (investors) do thorough investigation of the energy project and prepare legal due diligence before the purchasing. This reduces the risk the buyer will be displeased after purchasing of the project and increases the chances the sellers will get what they most want - a good price.