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MITIGATING RISKS When Buying Business in Ukraine
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.
