Mergers and Acquisitions in Russia and the CIS Countries IBA Conference
On November 15, 2019, the 11th Annual IBA Conference “Mergers and Acquisitions in Russia and the CIS Countries” was held at the Hotel Baltschug Kempinski.
The moderator of the first session “Review of M&A market in Russia and CIS – trends and developments”, Giovanni Salvetti, Rothschild & Co, Managing Director, Head of Russia & the CIS, Moscow, presented the scheme showing the difference in the amount of M&A deals in Russia and the CIS in comparison with the other world and highlighted the negative influence of the Ukrainian crisis 2014 on the Russian market.
Dmitri Sedov, Goldman Sachs, Managing Director, Co-Head, told about the main reasons of the Russian M&A market shrinkage. He pointed out that the Russian segment has fallen in price, the competition for the assets is insufficient and the level of debt burden of some of the Russian companies is quite high. As a result the asset sellers do not seek to make deals in Russia. In speaker’s opinion, the traditional investment model is not suitable for Russia. So-called family offices as well as investments of big industrial enterprises into other national branches of domestic economy may contribute to improving the market. Dmitri has expressed optimistic view on the development of M&A in Russia due to the change of generations in the business world.
Vladimir Primak, Russian Direct Investment Fund, Director, noticed that the decrease in M&A market activity does not mean the decline in investment one. Growing dynamics of the investment market in Russia ensures the foreign cash inflow. Since the amount of sovereign investors is increasing, the Russian investment market will develop as well. Among the best investment sectors Vladimir listed technology, including the artificial intelligence, pharmacy, energy sector.
Mikhail Bekker, Elbrus Capital, Director, emphasized the close connection of the political situation in a country with its economy. Nevertheless, despite the positive trends in Russian economy, the level of M&A deals remains quite low because investors are afraid of losing their money. The reasons for that are the immaturity of private investment in Russia, the imposition of sanctions by the US and EU, the historically unstable background of Russia. In order to change this situation, the investors should “dive” in the Russian market deeper and the amount of success stories like Yandex, Avito, HeadHunter should increase. As for the CIS states, Kazakhstan, Uzbekistan and Belarus have the most appealing markets, according to the speaker.
Pavel Vlasov, Sberbank, Advisor, highlighted the interconnection of the outcome of such foreign-policy events as Brexit with the presence of investments in Russia. He noted the gap between the expectations of sellers and buyers in our country, but the behavior of such companies like Uber, Lyft, Case should “sober up” Russian sellers. There are also that segments in Russian market, where consolidation is clearly needed because of the absence of leaders. As for the banking, Pavel emphasized the high state share in Russian banks with the 5-7 years horizon for privatization.
The moderator of the second session «Technology M&A deals» Oxana Balayan, Hogan Lovells (CIS), Managing Partner, told about an increase of M&A deals in the technology sphere. She mentioned that 2018 was a record year with more than 108 deals in that field totaling to $1 billion. Among the most successful IPOs in 2019 she listed Uber, Slack, Lyft. The share of such deals in Russian market is also quite high - 10%.
Michal Berkner, Cooley, London, Partner, compared traditional M&A deals with those in tech sphere. The first difference is the deal speed – time is of the essence for disruptive tech companies. The second one consists in valuations – human capital is of the utmost importance for tech M&A deals, instead of the revenue streams. The third one is the higher confidentiality level. As a result, global trends in tech M&A are the increased regulatory oversight, increased activity by Chinese investors, more cross-border consolidations and dual-track processes. Answering to the moderator’s question, Michal mentioned that Brexit has really small impact on tech M&A in UK.
Shahen Melikyan, Sistema Venture Capital, Chief legal officer, described the legal aspects of M&A in Russia. A significant contribution to the development of this sphere was made by the Civil code 2015 amendments, in particular due to the inclusion of representations or indemnities, with the use of which the non-competitive agreements might be made. Nevertheless, Russian legislation still does not provide a complete set of tools for M&A deals. Thus, domestic law lacks the settlement of human capital issues, whereas the primary aim of tech M&A is a purchase of a team and its skills.
Viktor Biryukov, VimpelCom, Head of Legal, Eurasia business unit, told about M&A in mobile communication market. In Russia the average revenues per subscriber are considerably lower than in other countries. The main source of income for mobile operators is the big data market, but it is quite problematic for our country because of the lack of a legal framework in that field. There are some other ways of company development apart from M&A, such as the inner cultivation of technology or partnership (the most frequently used form). The advantage of M&A deals is its speed, the disadvantage however is the price. It is important for a lawyer which handles M&A deals to understand all technical aspects, to think strategically, and in order to interact with creative people in a team – to develop himself in all spheres.
Peter Cutman, Cobalt, Estonia, Partner, told about the Estonian unicorn companies, which are Skype, Playtech, TransferWise, Bolt. Skype, the most famous one, was sold for $8,5 billion, even though it has started with only a few engineers. Peter has given a piece of advice for a successful start-up: you should think globally. That is what has contributed to the Skype’s success.
Fedor Smyk, Sberbank, Director, M&A and business development, listed the possible approaches for the development of a company: in-house R&D, strategic M&A, VC. The M&A deals in particular provide for the comprehensive development of a business, creation of new platforms, competition protection and a purchase of human capital - the latter however is not settled in Russia. Nevertheless, the speaker has noted that a flexible approach might maximize the benefits from a deal. As an answer to the question from the moderator, Fedor mentioned that Sberbank still prefers to subject M&A deals to the English law, but highlighted that the Russian law has been actively developing recently.
At the third session, “Actual problems in the field of mergers and acquisitions in Russia and the CIS countries,” panelists discussed deals on the creation of joint ventures. They drew attention to the peculiarities of transactions with the Chinese partners.
Grigory Gadzhiev, Linklaters, spoke about his experience in negotiations with the Chinese parties. He noted that the Chinese delegates should never be "driven into a dead end" - they will try to keep a good game even with absurd arguments. The moderator discussed with the panelists the choice of forum in case of disputes around the joint venture.
Alla Generalova, SIBUR, also spoke about transactions with partners from China. The speaker elaborated on framework agreements, their pros and cons. She paid attention to the understanding of “obvious” legal concepts and principles by the Russian and Chinese sides, for example, “advance payment”, and also spoke about Chinese unwritten rules and public policy in concluding transactions. The speaker drew attention to the composition of the negotiation teams, and also spoke about the role of the leaders and negotiation tactics.
Oksana Vnuchkova, Rosneft, noted that when working with the Chinese side, it is crucial to agree on the preamble of the agreement, and also noted that a fully negotiated contract does not mean the cooperation will be carried out as written. A big plus for the behavior of the Chinese partners, in her opinion, is the desire to go far to maintain business bonds. In her report, she talked about creating a standard for international transactions of Rosneft, which took 5 years. The speaker listed the "traps" that warn lawyers as company representatives when creating a joint venture.
Veronika Kondruseva, Severstal Management, drew attention to the problems of obtaining guarantees from banks when creating a joint venture. She spoke about the nuances of creating a schedule for the provision of financing with its annex to the shareholder agreement, as well as forms of financing with the possible withdrawal of a participant from the enterprise.
Julia Solomakhina, Cleary Gottlieb, talked about choosing a jurisdiction to establish a legal entity. She noted that the legislation has new rules in this regard - in particular, if the company is registered in the offshore, then its founders will be responsible under Russian law. The lawyer drew attention to the possibility of choosing the law applicable to the corporate contract, on the basis of Art. 1214 of the Civil Code of the Russian Federation. The speaker drew attention to the procedure for considering corporate disputes in accordance with Art. 225 APC (the Russian Procedural Code for Commercial Disputes) and the new version of the Law on Arbitration.
Arman Berdalin, Sayat Zholshy & Partners, Kazakhstan, spoke about legislative changes in Kazakhstan over the past few years. The speaker touched upon an imperative collision provision in the Civil Code of Kazakhstan. He noted that the provisions of the law of this republic create an analogue of the instruments of English law, such as guarantees, assurances, reparations.
The moderators of the fourth session, “Through thorns to the stars” or how M&A transactions can be successful under sanctions and tightening AML, were Rabbe Sitnikov and Alan Kartashkin. Rabbe Sitnikov, Hannes Snellman, asked panelists to discuss the significance of financial transactions in the context of international sanctions.
Alexey Vostokov, Polyus Gold, highlighted the problems associated with the presence of individuals included in the list of sanctions designated nationals (SDN) outside the current management of the company.
Nelly Yurchenko, Norilsk Nickel, highlighted the case when a person acting by proxy from SDN is a signatory to the transaction. She also highlighted the screening process for counterparties. She noted that all divisions of Norilsk Nickel had functions to identify sanctions elements, information on which is transmitted to a single methodology center in the head office.
Alan Kartashkin, Debevoise & Plimpton, spoke about the details of dividing into primary and secondary (extraterritorial) sanctions. We need to think about station risks when structuring a deal, the speaker noted. He dwelled on articles 226 and 228 of the American law CAATSA, applicable to non-American banks and individuals. The speaker examined the effect of sanctions on the example of the case of Lamesa Investments Ltd v Cynergy Bank Ltd.
Eric Mikhailov, Renaissance Capital, spoke about recommendations for tracking sanctions for compliance in an investment bank, including through the media - for example from Bloomberg as an information source. Eric described two scenarios for action in case if the company is added to the sanctions list.
Petr Glushkov, Tatneft, commented on the purchase of the Neste gas stations network by Tatneft, and asked what would happen if Russia imposed “outgoing” sanctions prohibiting the supply of petrochemicals from abroad. He also analyzed the situation when it is impossible to make a payment if the beneficiaries of the company are citizens of Ukraine and are included in the sanctions list of the Russian Federation. He also mentioned fiscal difficulties in making international payments.
Opening the fifth session “M&A Disputes in State and Arbitration Courts - Recent Changes and Key Events,” Anton Asoskov, the Moscow State University, introduced the speakers. Asoskov asked representatives of foreign centers if they plan to open offices in Russia. The speaker noted that the preparation of a new resolution of the plenum of the Supreme Court of Russia on the issues of arbitration has entered the final stage. According to Asoskov, the work on the act was not easy, but in many respects it was possible to convince colleagues in the Supreme Court that the explanation should be in a pro-arbitration vein. It is expected that it will be approved in early December. The speaker noted that he is trying to introduce clear explanations on corporate disputes in this document. The discussion on them continues.
Co-moderator of the session, Sergey Petrachkov, ALRUD, in turn, dwelt in detail on the issue of arbitrability of corporate disputes by foreign arbitral institutions.
Sarah Grimmer, HKIAC, spoke about the arbitration center she represents. For more than 30 years of its existence, the center has examined more than 10 thousand cases. She noteв that the HKIAC arbitrators list includes over 40 Russian-speaking arbitrators. She spoke about the possibility of imposing interim measures on assets in China by a decision of the HKIAC tribunal.
Gunter Horvath, VIAC, presented the Vienna International Arbitration Center, which was established in 1975, and talked about why the center focuses mainly on foreign disputes.
Tatyana Menshenina, Withersworldwide, spoke about the LCIA's approach to assessing the arbitrability of disputes. She spoke about features necessary for the rules on resolving corporate disputes have? It would be optimal if for such disputes there was no special, complicated regulation at all, she noted.
Andrey Gorlenko, the Russian Arbitration Center, spoke about the practice of Russian courts in resolving disputes regarding the ownership of shares related to SPA and SHA. He analyzed indirect claims to challenge the company's transactions from the standpoint of arbitration. The speaker noted that they relate to “conditionally arbitrable” corporate disputes with a simplified regime regarding arbitration clauses.