Internal Approvals for M&A Transactions

Anna Klimova
Beiten Burkhardt

In the 2009 crisis year, the Russian market faced not only a dramatic drop in the number of M&A transactions and freezings and shutdowns of current projects, but also increased attempts to revise completed transactions. Parties tried to challenge transactions as void, especially those conducted shortly before the beginning of the financial downturn, because of a reduction in the price paid for the asset acquired, whether in shares or property.

Considering the recent gradual increase in M&A activity, the experience of the downturn as it relates to causes for challenging transactions should be examined in more detail. One of the most commonly used grounds for contesting M&A transactions was the lack of necessary internal approvals to be obtained by the parties to a transaction.

While preparing to execute and close a transaction, two separate types of approvals should be examined. The first approval is that of the authorities of the transaction documentation signatories, who are acting in the name of the parties and on their behalf. The second approval is that of the transaction and the terms thereof. At the same time, the correspondence of these approvals must also be verified. For example, if a signatory’s authorities do not cover all of the transaction terms that were approved by the company’s relevant body, the validity of not only these terms but of the entire transaction may be questioned, depending on whether the terms are deemed material for a transacting party.

New Russian regulations that entered into effect in 2009 often require the use of Russian law while executing an M&A transaction, instead of the regulations of other jurisdictions. For example, this requirement covers all direct acquisitions of participation shares in Russian limited liability companies. In such cases, the issue of determining the expiration of the limitation period, which is governed by Russian legislation, may lead to a transaction being contested. Despite the one-year limitation period specified in Russian legislation for recognizing a transaction as void, the start of such a period cannot always be clearly determined.

The limitation period often begins at the moment an entity, such as a party to an agreement or shareholder thereof, became aware or should have become aware that the transaction was conducted. In other words, if a shareholder of a party to a transaction becomes aware of the transaction only a year after it was executed, the shareholder will be able to challenge the conducting of the transaction a year after that moment. This regulation makes it almost impossible for the other party to the transaction to eliminate the risk of the transaction being recognized as void by stating the end of the limitation period during which the transaction may be challenged.

To minimize the risks of an M&A transaction being contested, underlying issues concerning internal approvals by the parties to the transaction should be considered. The approvals must be examined not only as formal consent to conduct the transaction, but also as consent to the particular terms and obligations undertaken by the parties. It is crucial to verify that all of the material terms and conditions of the transaction, and not only the general information, have been duly approved by the relevant bodies of the party to the transaction. This avoids situations in which the approval for the transaction, along with the transaction itself, could be contested on the basis of several possible interpretations.