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Legal Due Diligance in Ukraine
At present, the companies and integral production complexes in Ukraine are usually concentrated in the hands of those people who can or, at least, they think that they can secure the most efficient use of the resources available in their companies. There are established large financial and industrial groups and holding companies that acquire into their property large number of both industrial giants and small businesses. Like worldwide, the trend to mergers and acquisitions is also prevailing at the financial market of Ukraine. At that, acquisition of new assets is often accomplished chaotically and due attention is not always paid to proper legal issuance of the documents necessary for legalization of transactions.
In order that a company or a investor – a potential purchaser of the business or already an actual owner of the business – makes sure if the transaction related to purchase of or subsequent investment into the business would become profitable, they have to collect the most possibly complete, fair and true data about the current standing of the company, probable risks inherent to its activity and the methods for their minimization. Collection of the above data with respect of the company by the owner is also an efficient method of continuous monitoring and evaluation of the operation efficiency of the hired management of the company or its separate units at different work stages.
I think that due diligence – the service, which is recently widely offered by most of Ukrainian law companies and becoming still more popular among the clients – is the most optimal means of collection and systematization of the said information.
In its classical meaning accepted in the Western democracies, the due diligence is the proceeding of thorough analysis and testing of the legal, taxation and financial aspects of the company activity.
However, the Due Diligence offered by Ukrainian law companies is usually a bit different in its essence from the Due Diligence in the classical meaning of its term. It is restricted to investigation of the legal and, partially, taxation aspects of the company activity. It is for that reason the Ukrainian law circles have got used to the term of Legal Due Diligence, being disclosed in more detail here below.
As I have already mentioned the legal due diligence is very often performed within the framework of the preparatory work to the transactions aimed at purchase of the company (or a part of it), execution of reorganization of the companies by means of mergers and acquisitions.
At the same time, the ordering customers of the Legal Due Diligence are more frequently represented by the owners of the companies who wish to attain the objective of continuous monitoring and evaluation of the operation efficiency of the hired management of the company and its improvement; the owners of the holding companies wishing to optimize and standardize the activities of the group of companies in order to reach the goals set before it; the owners of the company wishing to get their company ready for sale at the maximally profitable for them price, including the preparation proceedings related to IPO.
The ordering customer of the legal due diligence can also be represented by the company management interested in receiving of an independent expert opinion issued by the lawyers with respect of the standing of the company, estimation of efficiency of operation of its separate units, determining the problematic spheres that should be primarily paid attention to and taken care of.
The list of questions to be investigated at performing of the legal due diligence can be either enlarged or reduced depending upon the type of legal organization of the company, its history and the mission determined by the ordering customer.
The most thorough investigation of legal aspects of the company activity within the framework of the Legal Due Diligence proceedings usually includes studying and analysis of the constituency documents related to incorporation of the company; the documents related to issue, registration and execution of other transactions with securities, the authorizations with respect of the company assets including authorizations for the objects of intellectual property; financial and taxation reports; licenses and permits; contracts and other documents confirming the receivable and payable amounts; materials of court cases; internal regulations of the company, collective and labor agreements, orders and other documents related to establishment of employment relationships with the employees.
Within the framework of the Legal Due Diligence proceeding there could also be required holding of interviews with the employees and officials responsible for the spheres of company activity under consideration including interviews with the chief accountant, senior and mid-level managers etc. These are exactly the officials who, as a rule, possess the most detailed information about the history and the current activities of the company.
Here it is necessary to point out the very important aspect. Performance of the Legal Due Diligence suggests submission to the law company of all of the necessary information (documents) including the information related to confidential (being the subject of the company trade secret) and the ordering customer has to be ready to the obligation of submission (providing of submission) of the above information and of submission the full information. Only in this case the outcome of performance of the legal due diligence could provide for the desirable result – the complete, fair and true picture of the company or of that sphere of its activity, which is the subject of investigation.
You need not be afraid of the leak of information while at entering into the agreement with a law company the latter guarantees you non-disclosure of the information received in the course of performance of the Legal Due Diligence and all law companies are strictly following the said rule because here it goes about the issue of the good name of the law company.
After studying of the submitted documents and the data and in order to obtain the most full, fair and true information about the company and the prospects of its activity it is usually performed a cross-check of the data received in the course of investigations. For this purpose there can be used, in particular reports of the previously performed audits, as well as the information obtained from the open access sources, e.g. from the generally accessible State Register of Court Decisions, the rules of information disclosure at the stock market of Ukraine and from other sources.
On the basis of the performed Legal Due Diligence there is usually prepared a report providing the opinion on the following:
• completeness and correctness of execution of the documents of the company having legal value,
• compliance of the company with the procedures imposed by the law and the internal regulation norms of the company,
• the revealed breaches to the legislation in the course of company business activity,
• estimation of law risks stipulated by the revealed drawbacks including their monetary evaluation,
• recommendations on elimination of the above,
• suggestions on the solutions with respect of optimization of the taxation of the company.
Under the agreement with the customer the report can also provide the estimation of performance of the activities in different spheres of the company activity (in particular, contracts, claimants and suits, personnel etc.) and provide recommendations related to improvement of its efficiency.
And, finally, I would give a free legal advice to those companies, which could potentially face the necessity of performing the Legal Due Diligence and interested in obtaining the report with the minimum of revealed drawbacks and the risks inherent thereto.
Our practice of performing legal due diligence showed that the companies should pay special attention to proper execution of the documents related to change in the company ownership starting from the establishment or privatization of the company as well as to the correctness of execution of the documents granting rights for the assets and the intellectual property object. These are the spheres of activities where there occur the violations resulting in the most serious law risks and assuming the most complicated procedure of elimination of such risks.
Andriy Panchenko
24 May 2007
24.05.2007
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United Legal Group Association
5/1 Tryohsvyatytelska/Kostyolna St.
Kyiv 01001 Ukraine
e-mail: office.ulg@ulga.com.ua |
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