Investing to Ukrainian agribusiness - how to reduce the risks
Any investment process includes determining of various risks: at the business level, technical level, at the level of relations with the government, etc., including the risks at the legal level.
In the present article we briefly review the main aspects one should turn attention to during investing in agricultural business, in order to reduce any possible risks. The article analyzes the risks of investing in the form of acquisition of a company in agribusiness. Other possible forms include purchasing of assets, foundation of a joint venture, etc. – are not considered in the article.
Selection of the seller
The first way to reduce the risks of investing is the right choice of the seller. Whatever all legal methods of protection, which we consider in the article, the choice of the seller (based on his reputation on the market, credit history and other important factors) is the priority one. Why? First, because an adequate business-partner is initially focused on making the deal beneficial to both parties; his purpose is not to short-term sell a cat in a bag, but to make a normal transaction. Second, the buyer in such transactions is always more vulnerable than the seller, because he buys the commodity with unknown history (in fact, “a cat in a bag"). Therefore, it is especially important that the seller is honest. We should note that we are not talking about some honesty or charity, it is about trustworthiness, or the proper fulfillment of the contract obligations by the seller.
Because despite all legal mechanisms for protection of the buyer, which with proper professionalism of consultants to be included in the contract, consideration of any disputes not through negotiations, but through the court, requires a lot of time and money resources, and does not correspond to the original business plans of the buyer.
Checking of the property to be acquired
Before purchasing of the company there is realized its audit, which can be divided into such processes as technical, tax, and due diligence ones.
In the present article we will concentrate on the due diligence process (legal audit).
Hundreds of articles are written about the audit, and all of them are mainly provided for lawyers. But what does audit mean for the investor? It is an examination of the target company, to be acquired soon, through the main parameters. It is important to understand that the investor determines the required parameters for such audit only. It is time-consuming occupation, often hopeless one, to monitor the story of the company with 10- or 20-year experience. Why? Because it is completely impossible to determine all risks in terms of such examination. But why it is important to realize such audit, despite the facts? Because it may specify significant risks in the company's business - the object of the transaction, i.e. those risks, which make the company uninteresting for the investor without their removal.
At the same time, every business has its own specific essential parameters. They depend on the company`s activity, and what is important for the investor in the acquired business, what assets, rights, know-how, staff, etc. the company has.
Therefore, before the audit it is necessary to specify the key parameters which are the most important for the investor within frames of the transaction.
Certainly, there is a list of standard questions which will be examined in any case (for example, the equity story, property right to the enterprise (its shares or stocks), title to capital assets and charged assets, material contracts or obligations, etc.). But the well assigned task for auditors (all types of auditors, not just legal ones) allows to the investor to get answers to those questions, he is interested in. And he has to take a decision on the possible purchase on the basis of such answers.
After the due diligence process the investor receives the document containing basic legal problems detected in the company. At the same time, these problems can be divided into the following groups:
- problems, which elimination is possible before the transaction;
- problems, which elimination is impossible before the deal, but it is quite possible in the longer term;
- problems, which elimination is impossible;
- problems, which elimination the buyer does not consider necessary due to various circumstances (for example, if they are irrelevant for the business-plan of the acquiree). As an example of the situation: the target company illegally owns a certain land area, but the investor is not going to use the area at all, and its loss or absence does not affect the value of the company for that particular investor.
But how do the specified problems impact at the purchase of the company?
The problems, which elimination is possible before the transaction, and the problems, which elimination is impossible before the deal, but it is quite possible in the longer term
Solution of such problems is realized by the seller, and often does not affect the price, or realized by the buyer. In the latter case it is the issue influencing the price.
The problems, which elimination is impossible
These are the main risks of the transaction. Since it is impossible to eliminate the problems, the buyer decides whether he makes the purchase of the company with such risks. If the decision is positive, the next step is price negotiations. Such type of problem is usually reflected in the price level as much as possible.
The problems, which elimination the buyer does not consider necessary
Such type of problems can be used as the factor for putting pressure on the price level. At the same time, it is the area where the parties might be easier to find some compromise, as it does not have any significant impact on the transaction and its results for both parties.
Structure of the transaction and the seller's guarantee in the contract
Basing on the fact that the investor purchases "a cat in a bag", the seller's guarantees get rather special importance within the transaction. What is the guarantee? It is the specific statement of the seller about the acquisition target or the seller's right for it (e.g, "the seller has the complete ownership and estate in fee simple" or "the company registered for a proper purpose and operates under the legislation of Ukraine").
If in the period stipulated in the contract of sale, it turns out that the guarantees provided by the seller are not true, the seller is liable under the contract conditions (usually it is recovery of losses for the buyer). At the same time, the list of guarantees, their duration and the seller's responsibility are the key issues during the negotiation process. On the one hand, the buyer wants the seller to give the maximum possible number of long-term guarantees, and in turn, the seller desires to reduce the guarantee terms and reduce the number of issues, covered by the guarantees.
At the present stage, I would recommend to the investor to be hard, even despite the active desire to acquire the particular company. The guarantee disclaimer by the seller is highly undesirable, and should at least have some impact at the price level or payment procedure.
It should be noted that inclusion of the guarantees to the contract considers the certain structure of the transaction. In order to provide a real legal force to the guarantees of the contract, it is recommended to subject the contract to NOT the Ukrainian legislation, and any possible disputes – to NOT the Ukrainian court. Why? First, under the Ukrainian legislation application of the guarantees is quite controversial, and the guarantees themselves are limited in effect. Submission of such contract to foreign law - for example, German or English one – allows to more widely formulate and apply the guarantees in favor of the buyer. Second, the disputes in the Ukrainian court have a significant number of defective features, it is well known. Consideration of the disputes in arbitration courts (including the International Commercial Arbitration Court at the Chamber of Commerce & Industry of Ukraine) has a number of advantages, including the higher objectivity of judges. It should be noted that if the seller is the Ukrainian company, then the decision of the arbitration court will still be applied through the mechanism of Ukrainian courts. It is often quite long, expensive and, moreover, does not always lead to the required result.
But what is the solution? The transaction should be structured in such way that a foreign company becomes the seller - purchasing of a foreign holding. And the issues of the future transaction structure should be discussed at the stage of preliminary negotiations, before signing of any memorandums or agreements of understanding. The task of the seller during presales of the company is to create the company structure attractive for the potential buyer.
Thus, we considered three main ways to reduce the possible risks during investment in Ukrainian agribusiness. From the perspective of a lawyer I kindly ask you to be quite cautious and careful in any transaction.
Involvement of professional consultants who understand your business goals as the investor and will assist to you to reach them, can significantly improve your chances to efficiently invest.
Wish you successful investments!
Evgenia Novichkova , Attorney-at-Law,
Law firm CMS Reich-Rohrwig Hainz, Kiev
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