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Publications - Due Diligence in Ukraine: Latest Developments

Due Diligence in Ukraine: Latest Developments

Ukrainian Law Firms 2009

orporate acquisitions market has developed quite quickly during last year as many businesses have been sold to new owners, and some companies have merged with bigger corporations. Due diligence procedure has already become well-known to both professionals and businessmen involved in M&A transactions. However, some special aspects of due diligence may be familiar neither to vendors nor to buyers of assets and existing businesses. The latest developments of due diligence procedure in the Ukrainian market and different aspects of vendors due diligence will be reflected in this article.

Obviously, the aims and objectives of the due diligence procedure and its different techniques are closely connected with the type of anticipated transaction and depend on business structure of the target company. However, the main purposes of due diligence have remained unchanged for many years and are aimed, certainly, to receive true and impartial information and data with regard to the history and documents of the target company or business, to make an impartial appraisal of the target company, first and foremost of all its assets, and, finally, to minimize various risks which may emerge once the transaction is completed. This list can be surely extended depending on the circumstances and the special requirements, as determined by the purchaser.

Moreover, the type and the scope (full or limited to a certain specific type of company activity) of due diligence actions to be performed shall be defined by virtue of the type of transaction to be implemented by its parties, and taking into consideration the value of the transaction, its legal and business structure, and the form of the target company to be acquired. As a result, the respective kind of due diligence should be proposed by lawyers and agreed with the purchaser.

On the other hand, although the aims of the buyer and type of due diligence may vary, the established material assignments of any due diligence procedure may not be avoided anyway. Such assignments are to be specifically focused on in the due diligence report and include the following matters.

Firstly, the insistent examination of financial statements and instruments of the target company or business should be carried out with due care. Such an examination can embrace the verification of balance sheets, income statements, different tax matters, liabilities, accounts receivable and payable, operating budgets and forecasts. This part of the due diligence procedure requires the higher persistency and application of skills by experienced auditors and financial analysts.

Secondly, the target company’s agreements and arrangements should be analysed. This stage of due diligence includes the proper examination of all contractual rights and obligations of the company. None of the existing agreements can be missed by lawyers, and such instruments may include any and all sales and supply contracts, joint venture and partnership agreements, and other material agreements (both in and out of the course of ordinary business, though threshold of materiality can vary in these cases) which the company has entered into. Quite close to this stage is the revision of any and all agreements related to the target company’s real property and its most valuable assets. This includes all existing leases, loans, pledges and mortgages, contracts and company’s rights in respect of intellectual property.

Thirdly, all documentation related to ongoing litigations and arbitrations, to which an acquirer is a party, is subject to revision by lawyers conducting due diligence. With respect to this part of the review all pending or potential litigation, arbitration and disputes where the target company is in any way involved in, are to be analysed. Then, depending on the type of the target company planned for the acquisition, labour and nature protection issues are to be taken into account.

Types of due diligence reports requested by the clients of Ukrainian law firms have become more diverse in Ukraine in the last few years.

Vendor’s due diligence is now quite a widespread procedure. Sellers of assets or companies more frequently understand that due diligence of their assets can be much more efficient if it is conducted by lawyers commissioned by the vendor himself as the seller would be able to become aware of all potential deal-breakers and other defects before they would be discovered by the buyer itself or by its counsels. After such due diligence the seller’s managers have some time to present assets in the best light so they can be sold at the highest price.

Occasionally, sellers present a special data room for buyers and their counsels where they may review essential instruments. However, the rules of a data room are very restricted, and lawyers have only limited time for the research, and the volume of documents presented is defined by the seller’s advisors.

A due diligence report at the request of the vendor is also one of the mechanisms, which allow the limiting of access to the company’s documentation. Bidders would be able to see the due diligence report drafted by vendor’s counsels and related documents as determined by the owner of the company. This would especially suit situations where the assets are offered for acquisition at tenders with several participants, who compete for the assets. However, the sole buyer prefers to have more detailed information about the company to be acquired.

Due diligence of single transactions, which are not related to the acquisition of companies, are now conducted more often. Companies, which are parties to such deals, would like to know more about their counterparts, so they ask their counsels to investigate the title documents to the company’s property which would become subject of the transactions, clear up the contractor’s financial situation or litigation involving their partners.

One of the best examples is due diligence of property which is due to be sold. This process has become much more popular alongside the recent boom in the real estate market. The due diligence review in this situation includes title clearance and review of different licences, certificates, and permits which are necessary in Ukraine for design and construction of a building or other construction.

Limited-scope due diligence is lso carried out often when a future investor becomes interested in certain features of the target company’s business. Initial due diligence reviews of company’s instruments are requested by companies, which intend to be informed enough to be able to make a business decision on investment expediency into such a company. In this case lawyers should provide an outline of the company’s business and point out the main areas where threats to such a company may be contained (assets, arbitration, government actions, etc.). After such prior examination standard due diligence may follow as a part f of the deal.

One of the acute problems of due diligence in Ukraine is the evident lack of public resources, which can assist independent examination of a company’s business. As a result, lawyers often have to rely only upon documents and information obtained from the interview of company management and officers. The lack of a comprehensive register of land and real estate is one of the crucial factors, which prevent the development of real market economy in Ukraine and hugely impede business. Consequently, whilst trying to find solutions and to avoid any difficulties, a due diligence team is often forced to use such means and resources, to which the public do not have access, and which are of an unofficial nature.

Very often representations stated in due diligence reports have a crucial effect on the deal itself. Therefore, an experienced due diligence team of lawyers must be selected very carefully by potential clients and will help to avoid many problems and risks both during the fulfilment of the transaction and its completion.

Volodymyr Belimov,
is an Associate with Volkov Koziakov & Partners law firm

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