In spite of visible growth of the global mergers & acquisitions market in 2011 and 2012, the area has not recovered yet to the level of pre-crisis times. The current state of the Ukrainian M&A market remains slow-moving as well. Apart from global macroeconomic factors significantly influencing the situation on the national M&A market, it is additionally complicated by peculiarities of the legal system in Ukraine. Usually, foreign investors have limited knowledge of these matters and may face certain problems when purchasing a Ukrainian business. Vadym Samoilenko, a partner with Asters, has agreed to highlight some important aspects of foreign investors' navigating through deep waters of local M&A market.
What is the most effective Ukrainian law mechanism to mitigate the risk of sellers' or buyers' refusal from entering into a deal after a long period of negotiations?
Usually, the parties' willingness to enter into and complete a deal is formalized through execution of a Letter of Intent or a Memorandum of Understanding, which are very popular and widely used in international transactions. However, under Ukrainian law, neither a Letter of Intent nor a Memorandum of Understanding shall be binding upon its parties, unless they specifically stipulate that such a document has the legal effect of a Preliminary Agreement. According to Ukrainian law, a Preliminary Agreement has a binding effect and may establish responsibility for breaching its provisions. Therefore, in order to mitigate the pre-transactional risk of a party's breaking away, it is recommended to conclude a Ukrainian law governed Preliminary Agreement obliging the seller and the purchaser to enter into the main sales and purchase agreement within the stipulated period, which, however, may not exceed one calendar year.
What "surprises" may foreign investors expect from Ukrainian sellers?
Most Ukrainian sellers prefer selling their company "as it is", i.e., without curing any existing defects or solving legal problems the company may face in the future. The common advice a foreign investor would hear from a legal counsel is to conduct a full-blown legal and financial due diligence, which will be the buyer's principal source of information about the target. However, given the fact that most of the information and documents about the target company is furnished by the seller or the target's management, a proper buy-side due diligence does not necessarily mean that the buyer is in possession of complete and correct knowledge about the target. To mitigate this risk, the buyer usually uses the representations and warranties mechanism, which, when coupled with a buy-side due diligence, enables him to learn as much as possible about the target and grants proper protection against a bad-faith seller.
Representations and warranties are frequently seen in Ukrainian law SPAs these days. In many instances they are just mechanically 'borrowed by analogy' from English law contracts the parties had experience with in previous transactions. However, it should be noted that the concept of representations and warranties is not fully compatible with Ukrainian contract law. That raises issues with their enforcement in practice.
Often, representations and warranties may be viewed from Ukrainian law prospective as a contracting party's unilateral statements of fact rather than its contractual obligations. Whereas according to the domestic law, a party to an agreement can be held liable for a breach of its contractual obligation only. A breach of the contractual obligation triggers civil law liability, which may be enforced through a Ukrainian court. Incompleteness and/ or inaccuracy of a unilateral factual statement given would not normally create a valid legal ground for a lawsuit under a Ukrainian law contract.
Therefore, obviously, many representations and warranties may not qualify as obligations and could not be enforceable against the breaching seller under Ukrainian law. Thus, it is advisable for the buyer to insist on converting the seller's representation and warranties in respective contractual obligations rather than to simply 'copy-paste' them from an English law contract to Ukrainian law one.
Is foreign law used in Ukrainian M&A deals?
Yes, mostly, for medium and large-size M&A deals, which involve a foreign element.
Foreign laws, especially English and Cyprus ones, are frequently used in Ukraine in the course of M&A deals structuring and performance. This is mainly due to certain inflexibility of the local legislation. Complete absence of respective legal framework or limited possibility to use in Ukraine such important legal instruments as representations and warranties, shareholders agreements, escrow schemes, etc., is sometimes a strong argument to opt for a foreign law.
As to small-sized transactions, the parties usually prefer to deal under Ukrainian law. However, they still tend to deviate from a traditional court dispute resolution practice (mostly, due to a low level of trust in Ukrainian state courts) and to direct any potential dispute, which may arise from the transaction, for the consideration of either international or local institutional arbitrators.
It is worth mentioning that the parties to M&A deal cannot choose a foreign governing law if the deal does not involve any foreign party to it.
Are shareholders agreements available under Ukrainian law?
Shareholders agreement is an instrument, which came to Ukrainian legal practice from the common law system. It is not fully functional in the domestic legal framework. Intended to cover issues, which are not properly governed by law or are governed contrary to the objectives of the parties, the shareholders agreement, according to established Ukrainian court practice, will most probably be recognized invalid if found incompatible with applicable Ukrainian law, especially if it is governed by a foreign law. Therefore, to fully enjoy the advantages of the shareholders agreement, the parties should seek its conclusion at the level of a foreign holding company with respect to the Ukrainian target, with subordination to a non-Ukrainian law.