A Truly Significant Holiday - Passport magazine

M&A Transactions
Daniel Klein’s Legal Line
Dear Daniel:
Our company is in the food processing
business and we have been importing our
processed goods from Western Europe and
now are finding it difficult to be competitive
on the Russian market. We have hence decided
to purchase a company in our business
sector. I have heard that buying companies
in Russia is fraught with various risk
factors which are unique to Russia. Can you
outline what those might be?
Dear Buyer:
I was lucky enough to go to Davos this year
and take the pulse of industry captains that
have investments here in Russia. The consensus
seems to be that as the ruble continues
to depreciate it is translating into a boost to
local investment for two reasons: lower local
costs and increased importation costs of foreign
made goods. Your intentions are obviously
very welcome and I wish you the best
of luck!
If you haven’t already found this out, investors
with cash are in the driver’s seat as prices
have fallen sharply and buyers are now in a
hurry to sell. As a result, the dynamics of mergers
and acquisitions have been turned inside
out creating a frenzied environment of hasty
acquisitions that are often made without indepth
due diligence of selling concerns. Due
diligences in Russia differ from due diligences
in the west as they tend to provide less accurate
reading of a company’s real value and
risk profile. This is a result of reduced transparency,
rule of law and higher instances of
fraud. Some of the general guidelines relat-
ing to acquisitions which are peculiar to the
Russian market are as follows:
Court Records. In Russian unlike the west
there is no public system relating to law suits
filed and judgments so it may be quite difficult
to get a full profile of a company’s judicial
history.
Credit Rating Agencies. Agencies like Dun
& Bradsteet may exist in Russia but the system
of profiling a company’s payment record is
virtually non-existent. Since Russian businesses
are reluctant to share information, there
is no reliable resource to determine a company’s
payment practices. Credit checks in
the west also help assess the types of debts a
company may have with its suppliers, a fact
that may be completely undiscoverable in
any reliable way in Russia .
The Russian “Promisory Note.” In Russia,
management can borrow money without
establishing a documented document trail.
This can come back to haunt an unsuspecting
buyer.
Employee Rights. If there are on-going or
potential law suits by former or current employees,
these issues may be difficult to determine
even with the most thorough due
diligence. Employee strike suits can be so
severe in Russia that they can potentially
cripple a company’s finances. This is more
of a red flag in Russia than in other countries
with freer labor markets.
Reliability of a Sellers books
Tax Liabilities Tax liabilities have dominated
Russian headlines and have crippled
Columns
more large Russian companies than one
can shake a stick at. Reviewing a company’s
books may only reveal part of a company’s
real business activity. As tax compliance is
not very common in Russia, it is not that uncommon
for a company to have two parallel
sets of books, the so called black books and
white books. During a due diligence companies
with both sets of books may or may not
provide all the relevant information hence
leaving the buyer with a potential contingent
tax liability not to mention an investment with
an exaggerated valuation. Time permitting
it is advisable to conduct as thorough an
independent audit as possible. A buying
company often does not know what he/she
is buying and may find itself paying massive
fines and back taxes post-transaction. It may
not be useful to ask the tax authorities either
since that effort alone may attract undue
attention to the target company resulting in
unwanted attention and audits.
Seller Guarantees As the rule of law is not
what it is in the West seller guarantees may
not be worth the paper they are written on
since bringing a law suit in Russia may not be
easy, cheap, or fun. One advantage of seller
guarantees in Russia is that sellers who fraudulently
misrepresent what they are selling
may find themselves subject to criminal action,
and that can always be used as a bargaining
tool if civil enforcement of a seller
guarantee proves difficult. P
Daniel Klein is a partner at Hellevig, Klein & Usov.
His column is intended as commentary and not as
legal advice.
March 2009 47