New Realities in Ukrainian M&A Transactions after More Than Two Years of Full-Scale War

The unprovoked full-scale Russian aggression against Ukraine is now in its third year and continues to have a profound impact on mergers and acquisitions both in Ukraine and globally. While some potential buyers have paused or entirely abandoned their planned acquisitions, M&A activity in general has adapted to the war situation and is continuing. The impact of war is uneven across different economic sectors and regions of the country. Adventurous acquirers are able to benefit immensely from discounted offers made by local sellers, massive inflow of foreign state money and the immense growth seen in war-related industry sectors.

Currently, the most promising and attractive to opportunistic foreign investment are such sectors of the national economy as defense, agriculture and consumer goods. In contrast, the Ukrainian energy sector, which remains a primary target of continuous Russian air strikes, has lost its attractiveness to potential private sector investors.

Careful consideration is needed as to how the ongoing war situation may affect each stage of a 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 with 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 Russia’s 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 impact of war 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-term dates and material adverse effect clauses.

Due Diligence

The war has seriously affected the possibility of conducting 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 partly remote work regime. Therefore, virtual data rooms are standard in almost all transactions. In-person management representations and interviews can 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 diligences. 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 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) remains restricted in wartime. State registrars and notaries included in special lists maintained by the Ministry of Justice of Ukraine have direct access to the said registers and can, upon request, provide official information therefrom. Otherwise, relevant data can be obtained, either for a fee or free of charge, from alternative public and private databases and providers.

Deal Structure and Russian Element

Ukraine, the EU, US 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 and assets of a target that is incorporated and registered under Ukrainian law whose ultimate beneficiary owner (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. Under certain conditions, the Cabinet of Ministers of Ukraine may, as an exception, approve share deals for such companies. Neither can the mentioned subjects be purchasers and sellers of shares and assets of Ukrainian companies. 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 apply mainly 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 person (individuals and legal entities, both residents and non-residents, regardless of formal affiliation and control) who support the 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. There have already been cases of such expropriation, including, for example, shares in a large shopping mall in Kyiv.

Due to the above, from the very beginning of a transaction special attention should be paid to “Russian elements” in the target’s or buyer`s shareholding structure. 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 an 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 future. Therefore, a prospective acquirer should apply a careful approach to selecting a local target, analyzing its shareholding structure and structuring the deal so asking to avoid any involvement of a Russian element. It should be noted that the cleaning up of corporate structures of Ukrainian companies from Russian elements (on grandparent and higher levels) has progressed and has in many cases been already completed.

Sanctions

Besides the shareholding structure, other potential deal breakers in the present context could be targets 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 target’s shareholding structure, UBOs, as well as its supply chain and customers. Prospective buyers 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.

Forex Restrictions

Ukrainian law prohibits Ukrainian bank account transactions involving payers or beneficiaries being Russia or Belarus; Russian or Belarusian citizens (residents); legal entities incorporated and registered under Russian/Belaruian law; and legal entities incorporated and registered under Ukrainian law whose UBOs, shareholders holding a share of 10% and more are Russia/Belarus, a Russian/Belarusian citizen (resident), or a legal entity incorporated and registered under Russian/Belarusian law. 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 relaxing the existing outbound forex restrictions, such as regarding payments under cross-border contracts and dividend disbursements. The regulator keeps some possibilities for repatriation open because institutional and other Western creditors continue funding Ukraine’s deficits. Local businesses quickly adapt to changes in forex regulations.

Signing the Agreement

The execution of a transaction in presence is complicated and, therefore, is rather the exception than the rule at the moment. Notarization is sometimes problematic due to travel restrictions 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 attorney are useful in this regard.

Signing of documents in electronic (instead of standard paper) form 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

Under martial law, only state registrars and notaries included in special lists maintained by the Ministry of Justice of Ukraine may perform registration/notarization actions (including those related to share deals / M&A) regarding legal entities and real estate rights. At the same time, for certain notaries the list may explicitly provide prohibitions to notarize share and/or real estate deals. Thus, the parties to a deal should verify whether a particular notary is included in the list and any such restriction is provided there.

Furthermore, notarization of most legal transactions (including share transfers and real estate transactions) at the request of a person related to Russia is prohibited. Ukrainian notaries will refuse to notarize a deal (transaction) whose party (signatory) is a Russian citizen, legal entity incorporated and existing under Russian law, as well as 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. Thus, most of the actions whose aim is to change the composition of the target`s direct shareholders and UBOs related to Russia cannot be currently completed.

Regulatory Approvals

The ongoing war and restrictive measures imposed by the Ukrainian government to address the existing situation have significantly affected the normal 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 normal processing times and deadlines were restored in the summer of 2023, 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 abnormal 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 restrictive measures aimed, at the public will (still) qualify as a material adverse change. As war has somehow become a new normal in Ukraine, it is questionable that 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; however, mainly for the sectors of trade and logistics. Nevertheless, this relatively new type of insurance policies may become a stimulating factor for inbound foreign investment.

Force Majeure

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

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

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

Transaction Financing

Unsurprisingly, the war has resulted in commercial bank lending practically drying up for transactions in Ukraine. Third-party financing these days almost always implies funding by Ukrainian, multilateral or foreign state banks or by financial entities backed by them.

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

At the same time, recent attempts to envisage a peaceful resolution of the war give a certain amount of hope. 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 perspectives for future M&A deals In Ukraine.