10th Annual IBA Conference "Mergers and Acquisitions in Russia and the CIS"
On Friday, November 16, the tenth annual conference of the International Bar Association “Mergers and Acquisitions in Russia and the CIS” was held at the Baltschug Kempinski Hotel in Moscow.
The conference participants discussed the most important problems facing lawyers working in the Russian market of mergers and acquisitions. Among those issues are general trends and development of the market of mergers and acquisitions in the context of anti-Russian sanctions, tax structuring for joint ventures and M&A transactions, as well as disputes related to such transactions in international arbitration. The conference was opened by the welcome speech of Christian Herbst, a partner of Schoenherr law firm. The conference was co-chaired by Vasily Rudomino, senior partner of the law firm ALRUD, and member of the Federal Chamber of Lawyers of the Russian Federation.
The first session of the conference was devoted to a review of major trends and the development of the mergers and acquisitions market.
The section moderator Dmitry Sedov, Managing Director and co-head of Goldman Sachs, asked panelists about the main trends in the Russian M&A market of transactions, as well as the criteria for selecting legal consultants for mergers and acquisitions.
Georgy Suzdaltsev, Director of MTS Mergers and Acquisitions Department of MTS PJSC, stressed the difficulty of managing non-core business assets in “telecoms”. At the same time, asset management in key business is not difficult, core – companies are fully integrated in a year. The main trend of the past years, according to Suzdaltsev, is that the Russian market got encapsulated, that is, it “closed on itself”.
Tim Lassen, member of the Board of Directors of ER-Telecom Holding, JSC, Director of International Legal Affairs, LLC PFI-Group, noted the presence of a special service of mergers and acquisitions within his company - a cable television provider. Up to 200 people are associated with integration issues in the holding, noted Lassen. The secret of successful integrationlies in thorough preparation for the transaction. Tim noted a return to deals under Russian law, and increase in the number of mergers and acquisitions within Russia. Responding to questions from colleagues, Tim acknowledged that now "outside of Russia, Russian business is now not welcome."
Yulia Barinskaya, senior manager of M&A, corporate investment, “Luxoft”, noted that in the company both organic and inorganic growth are associated with the international (and not Russian) market. The difference between M&A transactions in the West is in understanding of the approaches to valuation, the understanding of the legal support of the transaction. In the US, business sellers are serial entrepreneurs who initially build their business for sale; they can negotiate without a financial advisor (while legal counsel is usually required). Western companies are also distinguished by high financial transparency. Julia stressed the importance of the client base of the purchased company, especially in the US market. As for financial criteria, Luxoft is interested in transactions with companies from 10 to 100 million dollars in revenue, and with a target margin of at least 17%.
Dmitry Sedov asked Dmitry Kononov, director of investor relations and M&A of MegaFon PJSC, how the importance of working with M&A changed after the withdrawal from the public offering market.
Dmitry Kononov replied that Megafon has reached saturation with subscribers, and is now looking at the "periphery" of the main business - small companies. Nevertheless, even small transactions require the completion of a full cycle of proper M&A procedures.
Kononov noted that the “Yarovaya’s Law” requiring telecoms to store all clients’ voice records for six months and all clients’ electronic correspondence for three months for is helping the large player to buy smaller companies: to comply with this regulatory act, the company must have large funds that small market players do not have.
According to Kononov, in general, placement on the stock exchange disciplines the company. It is not suitable for all types of business, but it gives advantages in management. However, in order to be placed on the stock exchange, the company must be sufficiently prepared for this.
Responding to a question about the criteria for choosing a legal adviser for a merger and acquisition transaction, Kononov noted that the consultant’s business sense is crucial. Also, lawyers should not tune the team involved in the transaction too aggressively, the speaker said.
Dmitry Sedov himself expressed a generally consonant position. He noted that for him an important feature of a good lawyer (both in M&A transactions and in general) is the ability to look at the situation from the outside, to understand the context and the market. A good consultant should have a sound, calm assessment - what is called a “judgment”, said Dmitry.
Session 2 was devoted to a whole range of topics, the main of which were comparing options, indemnity, guarantees and assurances under Russian, English and European continental law, as well as structuring and “protecting” M&A transactions in the light of sanctions.
Discussing the benefits of using option agreements on English law, Alexey Vostokov, director of legal affairs at Polyus, said that today the notary can act as an agent of “automatic” execution of the transfer of shares in relation to call-options. According to him, the terms of acceptance should be as simple as possible. This applies to prices and terms of the transaction. It is necessary to pronounce certain terms of the contract with notaries and, possibly, involve third parties, for example, to check the price of the contract.
Vostokov also told about the features of using the tool indemnity in case one of the parties is a party to the SPA - Share Purchase Agreement.
Vera Shelokova, executive director for support of corporate transactions and M&A projects of PJSC Sberbank, said that when certifying options, the notary must verify certain facts, such as the consent of the FAS or the option commission. Shelokova noted the emergence of such a tool as an escrow contract and transfer of funds through an escrow agent. Prior to this, an irrevocable power of attorney was used, she noted. Shelokova also spoke about the use of assurance tools about the circumstances and the guarantee of compensation for losses.
Nick Kuthnaks, director of KMP Advisors, spoke about the relationship between the concepts of warranty and indemnity in the common law system, where there is no institute of notaries in the usual sense for the Russian audience.
Kuthnaks led the case on the interpretation of the doctrine of indemnity by the Supreme Court of England - the case of Wood vs Capita Insurance Services Ltd . The wider the indemnity, the more attention in the English law the courts pay attention to drafting of the contract, Kutnaks noted.
Elizaveta Koryagina, head of M&A practice at PJSC MegaFon, said that the absolute plus of options under Russian law is their comprehensibility and applicability in execution. However, the essential terms of the option must be spelled out very clearly, otherwise the transaction will be difficult to execute, said Koryagina. To use the concept of indemnity, it is still necessary to introduce a commitment into the contract, the head of M&A practice remarked. In conclusion, Koryagina also told the audience about how Megafon automates due diligence checks.
Moderating the section, Cornelia Topf, partner of Gleiss Lutz, spoke about the role of data from public registers in concluding M&A transactions under English law. Topf then asked panelists how mergers and acquisitions can be affected by sanctions.
Peter Glushkov, Advisor to the General Director for International Legal Affairs of PJSC TATNEFT named after. V.D. Shashin, said that so far the company has not encountered "sanctions" problems. However, sanctions impede the negotiation process and present a certain psychological risk.
Alan Kartashkin, partner at Debevoise & Pimpton, noted that secondary sanctions have a significant impact on M&A transactions. Only companies active in Russia will hamper new sanctions initiatives, Alan noted.
Konstantin Kolesnik, senior legal adviser, Lukoil, participated as the speakers at the session.
Opening the 3rd session on the Mergers and Acquisitions Market: current problems facing legal advisers to major Russian companies, Dmitry Dontsov, a partner of White & Case, asked panelists whether there is now potential for growth through mergers and acquisitions, or should we pay attention to organic growth?
Now there is no hype nor hunger for purchases from other companies, said Dmitry Donov, director of legal affairs at NLMK Group. However, there is a specificity of the cyclical nature of each industry, and now people are waiting for the emergence of a good market, says Donov. Today, the trend is to create joint ventures and be present in different markets, he noted.
In turn, the specificity of Rosatom grows out of the need to master new technologies, develop new products, said Andrei Popov, Director for Legal and Corporate Affairs and the property complex of the state corporation Rosatom. For Rosatom there is no alternative to organic growth in general, but in completely new technologies sector, such as energy storage or additive technologies, it is easier to buy a ready-made business and provide the appropriate market share.
As the state corporation "Rosatom" takes the official point of view of the Russian Federation, which does not recognize extraterritorial sanctions against itself, and therefore does not consider sanctions a force majeure circumstance, said Andrei Popov. However, by imposing a ban on free exit from the contract through force majeure, we, as a state corporation, can get into a difficult situation, so we need to develop flexibility in this matter, the speaker said.
Alexey Nikiforov, Director of Legal Affairs of SIBUR Holding, noted the similarity of the situation in his company. In joint ventures, cooperation with another partner is born - apart from participation in income, this is technological cooperation that guarantees a sales channel. Now the focus is shifting from mergers and acquisitions to the commercial “binding” of the joint venture agreements. On matters of sanctions regimes, SIBUR does not apply to outside lawyers; employees of the legal department have already deeply understood them themselves, said Alexey. This is due to the fact that external counterparties demand the inclusion of sanction clauses, and recently such clauses have become increasingly harsh.
Speaking about the purchase of legal services, Nikiforov noted that it is important for him to determine the specific lawyer who will work on this transaction (in particular, M&A).
Valery Sidnev, Director of Legal Affairs in Russia and the CIS, EuroChem, noted that, historically, the EuroChem group of companies was born as a result of several mergers and acquisitions transactions. But then she concentrated on organic growth: acquisitions were associated with the addition of potash fertilizers to the company's product line. Sydnev said that acquisitions are foreseen in the field of distribution abroad. The Russian market is well established, acquiring it does not provide synergy, Sydnev noted.
Responding to a question about the selection of consultants for a deal, Valery Sidnev noted that this is in many ways an intuitive choice. The Russian market is a few dozen law firms, this is the whole “panel” from which to choose. Intuitively, the choice falls on the one who is best prepared to do the job at the moment, Sydnev said.
As an investment company, we are experiencing a deficit of good assets, said Yuri Shumilov, Deputy General Director for Operations and Legal Affairs, ESN Group. ЕSN Group understands the issues and risks of the sanctions regime, however, Yuri finds it useful to verify his personal position with external consultants. This is due to frequent changes in the regulatory framework for sanctions. In general, now any external contract should be viewed through the prism of international sanctions, he noted.
Discussing the role of lawyers, Dmitry Donov noted that 90% of mergers and acquisitions are conducted with the participation of external consultants.
Many transactions can be carried out with the help of the company's internal legal department, if they are not related to very specific areas of law - for example, taxes or intellectual property, said Yury Shumilov.
The results were summarized by Andrei Dontsov, noting that expertise in M&A transactions within corporations is needed, but it is needed in order to monitor their execution. To keep the best execution inside the company is irrationally expensive, Dontsov believes.
The fourth session of the conference was devoted to tax structuring for joint ventures and M&A transactions.
Not long ago, many M&A deals were made under English law in offshore jurisdictions. However, is it worth continuing this practice, asked the section moderator Mikhail Filinov, partner of the practice of International Taxation and Private Capitalization, PricewaterhouseCoopers (PwC).
Mikhail spoke in detail about the nuances of the distribution of investors' profits using Cyprus companies and made a forecast on tax inspections of permanent representative offices of offshore companies in Russia.
The advantages of using offshore companies are certainly here to stay. Among those are the simplicity of making certain transactions, dispute resolution in foreign arbitration institutions and protection of property under English law, said Anastasia Pavlova, Legal Adviser at RTP Global.
Tatyana Safonova, head of the tax practice of the Russian Direct Investment Fund, noted that Russia is now following the trend of foreign tax law. The erosion of the profit base caused outrage in the United States and Europe, in connection with which the BEPS plan was adopted in Europe, she said. Tatyana noted the reluctance of Russian tax authorities to accept Cypriot companies as real substance, even if they are created for the purpose of real functioning in this jurisdiction.
Today, only the actual recipient of income may be eligible for the privilege established by the international DTT agreement - this is the “look through approach” set forth in art. 7 and art. 312 of the Russian Tax Code.
Andrei Tereshchenko, partner of the Pepeliaev Group, noted that he often faces problems of tax structuring after the fact, at the stage of a tax audit. He gave an example of a case in the cassation, where the proof of the actual recipient of final payments is of fundamental importance for applying the already mentioned “look through approach”. Yet this principle is applied inconsistently: now in favor of the tax authorities, then in favor of the taxpayer. This problem is not always solved by creating a substance - that is, ensuring the availability of employees and assets in the target jurisdiction.
Kirill Vikulov, partner of Baker McKenzie, in turn, drew attention to the fact that the concept of the beneficial owner in Russia went far beyond its original foreign understanding. He noted that tax risks are predictable, and their volume affects the component of the tax indemnity and tax warranty. Vikulov also spoke about the procedural features of tax guarantees and key tax features for the SPA (Share Purchase Agreement). Vikulov shared his thoughts with the audience on what to pay attention to and how to act if a tax claim arrived after the transaction was made.
Alexander Zharsky, partner of the law firm ALRUD, stressed that the questions outlined in the section apply to mergers and acquisitions and the creation of the Joint Venture not only in Cyprus, but also in Singapore and other jurisdictions.
Vladimir Khvalei, partner of Baker McKenzie Moscow office, held the fifth session “Disputes related to M&A deals in arbitration and litigation” in the format of an evening talk show. Speaking about corporate disputes, he recalled that the Russian courts did not consistently recognize corporate disputes as arbitrable. Khvalei also reminded that now some arbitration centers - the Hong Kong Arbitration Center, as well as the Singapore Arbitration Center in the future - are awaiting the decision of Ministry of Justice of Russian Federation to work out the criteria for a “recognized international arbitration institution” to get permission to administer disputes in Russia.
Anton Samokhvalov, a partner of KIAP, noted that earlier all consultants recommended concluding deals abroad and arbitration in LCIA. But today, Russian law has all the tools to protect M&A transactions - there is regulation by agreement of shareholders, options, etc.
Russian courts are ready to use these tools in practice, said Samokhvalov, responding to a question from Vladimir Khvaley. Today it makes no sense to structure your transactions abroad - in connection with sanctions and a negative information background. The issue of confidentiality also loses relevance due to international exchange of tax information. The Russian state today is encouraging those who are structuring a business in Russia, and are more rigid towards those who are structuring business abroad, said Samokhvalov.
Artem Doudko, partner of Osborne Clarke, objected that today there is not enough practice in the Russian courts to use the tools of English law, therefore the risks of clients are increasing. When making M&A transactions, it is worth applying English law, he noted. The Russian clients in the English jurisdiction are attracted by the transparency and flexibility of English law, as well as the timely lawmaking of judges.
Theo Parperis, a partner at the Cyprus office of PricewaterhouseCoopers (PwC), explained why structuring transactions in Cyprus is attractive. The advantages of the island include a friendly business and tax environment, a sense of asset protection, as well as the use of relevant European directives and a developed ecosystem of support for Russian business. Now there is much more Russian presence in Cyprus than in 2013, since many companies are doing real business in Cyprus, Theo said. The authorities of Cyprus practice a very flexible approach to foreign workers, he stressed. European law is most often applied in M&A deals in Cyprus, but England is the most popular seat of arbitration, the speaker said.
Sergey Petrachkov, partner of ALRUD, noted that the court practice on the arbitrability of corporate disputes appears, but the approach of the Russian courts can hardly be called arbitration-favourable. Sergey gave an example of a recent decision of the Moscow City Arbitration Court, which refused to execute the decision of the SCAI (Arbitration Institute of the Swiss Chambers of Commerce). The court referred to the contradiction to public policy, since the two investors structured the deal in Cyprus to evade taxation in Russia. Petrachkov recalled that today only two permanent arbitration institutions can deal with corporate disputes in Russia, and outlined the related problems of jurisdiction. The speaker noted the high risks of failure to execute decisions of foreign arbitration institutions.
Dmitry Davydenko, arbitrator of the ICAC at the Chamber of Commerce and Industry of the Russian Federation, acknowledged that so far the ICAC has not considered a corporate dispute. However, everything is ready to consider such disputes when they appear in the ICAC, said Davydenko. Mergers and acquisitions are fully arbitrable corporate disputes under Russian law, recalled Dmitry.
The information-rich conference and the hot final debate ended with an evening reception overlooking the Moscow River from the windows of the Baltschug Kempinski hotel.
By Dmitry Artyukhov, RAA
and Valeriya Efimova