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. Last Updated: 07/27/2016

Specifics of Deal Structuring in M&A

Although the M&A business environment in Russia is now more civilized, some specifics of Russian legislation still merit careful consideration.

Most M&A transactions in Russia are structured through an acquisition of shares (a "share deal") rather than of assets (an "asset deal"). A share deal involves accepting certain risks of the acquired business, but is more efficient than acquiring isolated assets, transferring contracts and employees and obtaining licenses and permits (some of which are nontransferable).

Russian sellers, desiring a simple deal and to "play in their own yard," may insist on the acquisition of a Russian company governed by Russian law. However, a foreign investor should consider certain issues before agreeing to Russian law in a straightforward share deal.

Early in a potential acquisition, a foreign investor often prefers to sign a nonbinding document (letter of understanding or letter of intent, "LOI"), which preserves in writing the main terms agreed in principle as the basis for further negotiations. Under Russian law, an LOI sometimes can be construed as a binding pre-agreement. It is therefore essential to state in the LOI that the letter is not intended to be legally binding.

A purchaser will normally seek warranties from the seller in relation to the acquired business. Such warranties usually cover the seller's title to the shares, the proper legal formation and existence of the target, compliance with all (or specific) laws and regulations, good title to assets, the existence and validity of all required licenses and permits and other material issues. Under Russian law, the seller is liable for a breach of title warranties, but likely escapes liability for a breach of warranties that covers other matters. This leaves the purchaser with very little protection; which is why most Russain M&A transactions are structured under foreign law.

If a foreign investor purchases less than 100 percent of the shares in a Russian company resulting in a joint venture with a Russian partner, a shareholders' or joint venture agreement is usually concluded. Note that a Russian court cannot as a matter of Russian law enforce a shareholders' agreement or other arrangement (whether under Russian or foreign law) that contradicts mandatory rules of Russian corporate legislation. Often even purely Russian business joint ventures are structured using a foreign holding company owning a Russian subsidiary to achieve the enforceability of the shareholders' agreement and other agreements under foreign law.

Russian sellers often request "money first" before transferring title of assets (shares) to the purchaser. An escrow agent can assist by releasing the consideration simultaneously with or immediately after the transfer of the title. Unfortunately, Russian law does not provide for escrows, which is why some banks offer so-called DVP (delivery vs. payment) schemes where a bank, acting also as a depository, ensures that the shares are transferred to the purchaser simultaneously with the transfer of consideration to the seller.

When acquiring shares in a Russian company, transaction implementation issues should be carefully planned, which depends on whether the company acquired is an LLC (limited liability company) or a JSC (joint stock company).

With a JSC, a transfer of shares must be reflected in the share register, for which the independent service provider normally requires three to four days or more to do. To save time, the parties can open depositary accounts with the same depositary, which will act as nominee holder of the shares and promptly reflect a transfers of such shares in its own (depository) register. A bank offering such depository services could simplify the deal even further if the bank provided DVP or similar services.

With an LLC, there are no shares and, therefore, no share register. Any changes in the members must be reflected in the company's foundation documents and the state (public) register of legal entities. This takes time and, if possible, part of the consideration should be retained by the purchaser pending official registration of such changes. A DVP structure will not work with an LLC.

Upon completion, the purchaser often desires to appoint a new CEO of the acquired Russian company. Until such change is reflected in the state register of legal entities, the former CEO will remain the "acting" CFO for the public and the state authorities.