Ukrainian M&A Transactions after 3 Years of War and Trump Back in Office

The unprovoked full-scale Russian aggression against Ukraine is in its fourth year and continues to have a profound impact on mergers and acquisitions in Ukraine. M&A activity in general has adapted to the war situation and is continuing, at a lower level, during the conflict. Adventurous acquirers are able to immensely benefit from discounted offers by local sellers, a massive inflow of foreign state money, and the immense growth of the defense and related sectors. As the war persists, ongoing migration of millions of Ukrainians abroad has worn thin the workforce of many businesses.

Currently, the most promising and attractive sectors for opportunistic foreign investment are such sectors of the national economy as defense, agriculture, and consumer goods. The Ukrainian energy sector, which has suffered as it has been a primary target of Russian air strikes, has recently seen an uptick in investment as energy production and distribution structures are transforming into smaller-scale and more flexible segments with sizeable foreign state aid flowing in.

Careful consideration is needed on how to address the war situation at each stage of an M&A transaction. War can become a serious deterrent and even render a transaction unfeasible due to considerable associated risks, such as when the target company or its assets are located in an occupied territory or close to the frontline or are (as in the case of energy facilities) potential targets of air strikes. In many cases, the conflict will trigger specific obligations of the parties to a transaction agreement.

Term Sheets

In the context of the war in Ukraine, both buyers and sellers will often seek to postpone more than usual the negotiation and signing of a term sheet, letter of intent, heads of agreement or a memorandum of understanding until the buyer has completed due diligence and the extent of the war’s impact on the target’s business can be estimated.

Furthermore, the content of a negotiated term sheet will be somewhat different from what is normally included in such a document and also reflect specific pre-closing and closing conditions, especially long-stop dates and material adverse effect clauses. 

Due Diligence

The war has altered the professional practice of conducting the full-scope legal due diligence of a target. Due to physical safety issues, primarily in areas close to the frontline and active battlegrounds, as well as the constantly present risk of air strikes by Russia, many enterprises still practice a remote work regime (where that is feasible considering the nature of a particular business, e.g., IT, consultancy services, etc.) or have relocated the workforce to western parts of Ukraine. Therefore, virtual data rooms are standard in almost all transactions. In-person management representations and interviews can also be substituted by video conferences. The parties should also adjust their timetables and take into account possible delays in the collection of additional documents.

Furthermore, the conflict has considerably changed the scope of due diligence. In particular, buyers need to investigate specifically how the war situation impacts the target’s business, including such aspects as (i) the existing or potential physical damage to and destruction of the target’s assets; (ii) employment, in particular, how mobilization and migration is affecting the target’s workforce; (iii) supply chain risks; (iv) legal obligations under key business contracts; (v) forex restrictions, financial and tax liabilities; (vi) contingency arrangements and business continuity plans; (vii) insurance policies and their coverage, (viii) any presence of Russian elements in the shareholding structure as well as connections to sanctioned persons, and properly evaluate all related legal risks.

Finally, the conduct of legal due diligence is complicated by the fact that access to the (otherwise publicly accessible) Ukrainian public registers containing material corporate data on legal entities (such as the Unified State Register of Legal Entities, Private Entrepreneurs, and Public Organizations) and information on real estate assets (such as the State Register of Rights to Real Property) can be restricted in wartime. As of the date of this article, such restrictions exist with respect to the temporarily-occupied territories as well as territories where active combat operations are taking place.

Deal Structure and Russian Element

Ukraine, the US, EU and other countries and organizations have imposed severe restrictions and ever-increasing sanctions on Russia as well as businesses owned or controlled by Russia or its citizens/residents.

Ukraine has prohibited transactions with shares of a target that is incorporated and registered under Ukrainian law as well as with such assets as real estate, securities, road vehicles, water- and aircraft if the seller or purchaser is: (i) Russia; (ii) a Russian citizen; (iii) a legal entity incorporated and registered under Russian law; (iv) a legal entity incorporated and registered under Ukrainian law whose ultimate beneficiary owner (UBO), participant (shareholder) holding a share of 10% or more is one of the subjects mentioned under items (i)-(iii); or (v) a legal entity incorporated and registered under foreign law whose UBO, participant (shareholder) holding a share of 10% and more is one of the subjects mentioned under items (i)-(iii). (Under certain conditions, the Cabinet of Ministers of Ukraine may, as an exception, approve the above-mentioned share deals.) Notarization, state registration, and otherwise recognition (endorsement) by Ukraine of any respective share and/or asset deals are prohibited.

Beyond that, assets, including shares (corporate rights) in Ukrainian companies, located in the territory of Ukraine and belonging to Russia as a state, its residents, and other persons supporting the war of aggression, are subject to forcible seizure (expropriation). The respective regulations are applicable in the main to Ukrainian legal entities (their branches, representative offices), whose founder, participant, shareholder, and/or UBO is directly or indirectly (through other legal entities) Russia or any other persons (individuals and legal entities, both residents and non-residents, regardless of formal affiliation and control) who support Russian aggression against Ukraine. Any movable and immovable property of the mentioned entities and persons, including funds, bank deposits, securities, corporate rights, and other property (assets) can be seized (expropriated) without any compensation (reimbursement) of its value. Meanwhile, there have been numerous cases of such expropriation, including, for example, shares in a large shopping mall in Kyiv.

Due to the above special attention should, from the very beginning of a transaction, be paid to “Russian elements” in the shareholding structure of either the targets or buyer. The presence of a Russian direct shareholder and/or UBO will be an immediate deal breaker, effectively preventing a potential share or asset deal under Ukrainian law. Even indirect Russian shareholding on the grandparent and other intermediate levels of the shareholding structure will be frowned upon by Ukrainian authorities and may lead to potential issues in the future. Therefore, a prospective acquirer should apply a careful approach to selecting a local target, analyzing its shareholding structure, and structuring the deal to avoid any involvement of a Russian element. It should be noted that the cleaning of corporate structures of Ukrainian companies from Russian elements (on grandparent and higher levels) has, in many cases, already been completed.

Sanctions

Besides the shareholding structure, other potential deal breakers in the present context could be the target, seller or buyer being subject to or having connections to persons and entities currently under sanctions imposed by Ukraine, the EU and other countries and organizations in response to Russian aggression. Such connections could be maintained through the shareholding structure, UBOs, as well as the supply chain and customers. For example, a prospective buyer should consider declining a deal if the target’s major suppliers or customers are sanctioned entities, including those located in Russia or Belarus. And part of the target’s legal due diligence should be reviewing the most recent sanctions lists to clarify potential deal breakers. It is worth noting that after the start of the Trump II administration, alterations of US sanctions have become more likely as an element of the increasingly disruptive, deal-oriented US foreign policy.

Forex Restrictions

Ukrainian law prohibits (with some exceptions) outbound Ukrainian bank account transactions involving payers who are: (i) Russian or Belorussian residents, including individuals who are resident there as well as legal entities incorporated and registered under Russian/Belorussian law; and (ii) legal entities (except banks) whose UBOs are Russian or Belorussian residents. Furthermore, prohibited (with some exceptions) are payment transactions whose beneficiaries are: (i) Russia; (ii) a Russian citizen; (iii) a legal entity incorporated and registered under Russian law; (iv) a legal entity incorporated and registered under Ukrainian law whose ultimate beneficiary owner (UBO), participant (shareholder) holding a share of 10% or more is one of the subjects mentioned under items (i)-(iii). Thus, under a contemplated M&A deal, payments should be structured in a way that excludes any of the above-mentioned subjects/entities/persons as payers or beneficiaries.

Other than that, the National Bank of Ukraine is gradually adopting its existing outbound forex restrictions, such as regarding payments under cross-border contracts, loan and interest repayments, and dividend disbursements. The regulator keeps some possibilities for repatriation open because institutional and other Western creditors continue to fund Ukraine’s deficits. Local businesses are quick to adapt to changes in forex regulations.

Signing the Agreement

The execution of a transaction in person is complicated and, therefore, rather the exception than the rule at the moment. Notarization sometimes poses practical problems due to travel restrictions and tight controls for Ukrainian male citizens applicable under martial law. Thus, the parties should, ahead of time, envisage specific arrangements for the signing, exchange of counterparts, and coming into force of their agreement. Well-prepared, comprehensive notarized powers of an attorney are useful in this regard.

The signing of documents in electronic form (instead of standard paper) by using qualified digital signatures is becoming more common in Ukrainian legal practice. However, the legal reliability of digital signing cannot be ensured in 100% of cases, and this form is still not suitable for large and other cross-border transactions, especially those that are subject to notarization and state registration.

Notarizations and Registrations

It should also be kept in mind that under martial law, only state registrars and notaries whose office is located outside of the temporarily occupied territories and territories where active combat operations take place may perform registration/notarization actions (including those related to share deals / M&A) regarding legal entities and real estate rights.

Furthermore, notarization of most legal transactions (including share transfers and real estate transactions) at the request of a person related to Russia is prohibited. I.e., a Ukrainian notary will refuse to notarize a deal (transaction) whose party (signatory) is: (i) Russia; (ii) a Russian citizen; (iii) legal entity incorporated and existing under Russian law; (iv) a Ukrainian legal entity whose UBO, participant (shareholder) holding a share of 10% and more is Russia, a Russian citizen, or a legal entity incorporated and registered under Russian law; or (iv) a legal entity incorporated and registered under foreign law whose UBO, participant (shareholder) holding a share of 10% and more is one of the subjects mentioned under items (i)-(iii). Thus, most of the actions in order to change the composition of the target`s direct shareholders and UBOs related to Russia cannot currently be completed.

Regulatory Approvals

The ongoing war and restrictive measures imposed by the Ukrainian government to address the existing situation still have an impact on the working routines of regulatory bodies. Originally, the government had suspended the statutory deadlines for the provision of certain public services, which increased the time required to procure regulatory approvals for an M&A deal, such as antitrust clearance from the Antimonopoly Committee or approvals issued by the National Bank of Ukraine. Although most normal processing times and deadlines were restored in the meantime, the possibility of re-introducing such measures remains open (depending on the overall war-related situation in the country) and, thus, should be duly taken into account as a factor affecting the completion of a transaction.

Specific Deal Terms

Obviously, war-related issues need to be sufficiently addressed in transaction documents in order to minimize associated risks.

In particular, the parties should consider including in the agreement adequate provisions on how the target’s business will function under war conditions and how the parties intend to coordinate their actions during the period between signing and completion. It is essential that the seller and target be able to make crucial decisions to address crisis situations in a timely and effective manner whenever the buyer’s consent is required. Also, representations and warranties provided in the agreement should adequately cover all potential implications of the war related to the target’s operation and the obligations of the parties.

The parties should also thoroughly take into consideration whether war and the resulting public restrictive measures will (still) qualify as a material adverse change. As war has somehow become a new normal in Ukraine, it is questionable whether every war-related event gives rise to a party’s right to file a lawsuit requesting unilateral termination of the agreement pursuant to the respective provisions of the Civil Code of Ukraine.

Notably, parties may provide for insurance of war-related risks in their agreement. Various insurance policies have become available on the Ukrainian market as well as in certain Western jurisdictions, though mainly for the sectors of trade and logistics. Nevertheless, it can also become a stimulating factor for inbound foreign investment.

Force Majeure

Force majeure is generally understood as extraordinary circumstances outside of a party’s control which, in contrast to a material adverse change, only relieve the affected party from liability for breach of contract attributable to such circumstances.

In Ukrainian legal practice, force majeure has never had the same relevance as in developed Western jurisdictions because of difficulties in proving its existence and actual impact. Preferably, a force majeure event needs an express confirmation from the Ukrainian Chamber of Industry and Commerce for being legally relevant.

Consequently, Ukrainian transactional practice has developed other tools for amending or dissolving contractual obligations in the case of unexpected outside events.

Transaction Financing

Unsurprisingly, the war situation has resulted in a fall in lending by commercial banks for transactions in Ukraine. These days third-party financing almost always implies funding by Ukrainian, multilateral or foreign state banks or by financial entities backed by them.

Practice has shown that application paperwork for obtaining public funding should be prepared as early as possible, typically in the early stage of negotiations, taking into account lengthy processing and budgetary regulations in relevant jurisdictions.

Transaction agreements should provide sufficient flexibility for the buyer to walk away from a deal if financing becomes unavailable. The seller may, in turn, seek to include in the agreement higher break-up fees for a buyer who fails to obtain financing and close the deal.

Conclusion

Overall, the Russian full-scale invasion of Ukraine, which has lasted for more than three years to date, continues to have a serious, adverse impact on M&A. In these circumstances, parties are advised to carefully consider all war-related aspects when planning and implementing a transaction in order to adequately address, limit, or allocate relevant risks.

At the same time, recent attempts by the Trump II administration and other state actors from the EU to bring the war to an end, however unbalanced they are, increase the chances for a return to some normality in the not-so-distant future. And, depending on the outcome of the war, the impending post-war reconstruction of Ukraine may open up immense investment opportunities for existing and potential foreign investors, which will undoubtedly provide positive prospects for future M&A deals.