This article is to address two aspects of M&A in Ukraine in the face of the global disaster called outbreak of COVID-19: (a) responding to the challenges poses by government actions to overcome pandemic upon pending M&A transactions; and (b) raising the opportunities provided by new legislation on privatization meant to fill in the niche of the decreased of M&A activity in Ukraine (should we consider the privatization to be one of the M&A forms).

1. General advice concerning the M&A transactions got stuck between achievement of the agreement and closing.

Living in the situation when the future of the national economy seems vague and requires quick and effective actions of the M&A parties in order to mitigate the negative affect of the government quarantine measures upon already agreed transactions. The below actions would be useful and recommended for those transactions where the closing is pending due to outbreak of COVID-19.

The most important exercise now is to make an effort and reassess your own expectations from either making a sale or an investment. Should you go on with the transaction, to respond to yourself whether you wish to proceed to completion. Should the answer is “yes” and plans to buy or to sell have not been in general changed or if it is complicated, if not impossible, to cancel the transaction, then deep and thorough evaluation of impact of the government measures toward the target in connection with pandemic seems is to be the most reasonable first step to make.

As lawyers involved in realization of a number of M&A projects, we can notice that despite the opinions of various experts that M&A deals are stopped or, at least, delayed, completion of some of the earlier launched and/or pending acquisitions are still being heavily discussed by their parties and slowly and carefully continue. Under the ongoing pandemic measures and government efforts to overcome their consequences it is required taking non-standard practical approaches and actions for reaching a successful closing the projects. 

Should the parties decide to go on with the sale or acquisition they need to reassess how the current and probably future situation with COVID-19 affects the target, target’s business, its value, risks associated with the negative impact of the pandemic. Main question to be responded whether the target is still able to conduct activities earlier declared and reviewed either now or after.

Due Diligence (DD). Certain portions of the DD report should be obviously dismissed and reassessed. It is evident that an amended DD should provide review and illustrate in much greater details such aspects as: (a) evaluation of the target’s ability to perform its obligations towards its counterparties and vice versa, costs associated with such ability or disability, impact of the force-majeur provisions onto performance of the contract undertakings, rights to terminate certain contracts; (b) financial standing of the target conditions and forecast of the losses expected in the nearest future, abilities to service the loans and fulfil the rent obligations (receivables and payables may be affected by the government measures as well as by force-majeur), etc.; (c) chances to retain the suppliers and customers chains (especially in the spheres really sensitive to the impact of COVID-19 and government measures); (d) insurance coverage in view of the COVID-19 and government measures; (e) employment issues, including the question of keeping the key personnel and management that currently work remotely, on a part-time basis etc; (f) assessment of the financial soundness of the target. Additional attention is required towards valuation of the efforts to be endeavored for restoring the commercial ties and arrangements ruined during the quarantine. Currently amending the DD may appear not easy exercise as the seller should amend certain data, reviewing could be done solely via VDR, and the key employees can be interviewed only using the electronic communicators.   

It would be hard to build plans towards closing for the mutual satisfaction without new review as the contingency plan should be compiled based on the results of the new DD.

Assessment of all above factors together with the risk of recession may be crucial in terms of valuation of the target and determination of the final price of agreement (as all the earlier used indices and rules of pricing reflected in the term-sheet or agreed in the course of negotiations seem not be acceptable).

Pre-closing obligations and Management.  As M&A documents usually suppose the seller’s undertakings to conduct the business in normal (ordinary) manner, which is hardly possible during or immediately after the government measures are over, the he role of the buyer’s representatives in the management (in some or other form) of the target should be rather more proactive (comparing with the ”normal” times). It seems reasonable to agree with the seller an involvement of the buyer in taking at least the strategic decisions.

Term-sheet. Timing. Certain provisions of the term-sheet have to be obviously redrafted as the specific figures and crucial terms should be reassessed and/or delayed.  That is to be done with consideration for the possibility or necessity of application of the force-majeur provisions. Both parties will have to reagree the dates of the main events reflected either in the term-sheet or in the SPA, reconsider and agree the binding obligations taking into account the force-majeur provisions.

Valuation and purchase price. As nobody can know for how long the COVID-19 impacting on the people’s lives and the national economy the revaluation of the target based on the data of amended DD and reconsideration of the price as well as pricing mechanism may be changed in some or other way. The pre-agreed value, the purchase price or the pricing mechanism could be subject to the adjustment. Fixed price or “earned out” or “locked-box” mechanisms would hardly attractive to the buyer.    

Material adverse changes (MAC). It may be required redrafting the events deemed the MAC, should unless they have already stipulated such challenging exceptions as pandemic, government quarantine measures, impact on the economic situation thereof etc.  The MAC provisions shall provide the acquirer right to terminate the transaction should the impact of the adverse factors (its duration, for instance) makes no economic sense to it.

Regulatory approvals. Certain transactions are to be cleared (permitted) by the Antimonopoly Committee of Ukraine. If the application for concentration (concerted actions) was submitted some information and/ data probably require corrections. Even if the AMCU permission has been already granted some basic indices or data (like purchase price and dates of events) will have to be amended now, and it is better to agree such modifications with the AMCU just in order to avoid any risk of further problems related to provision of the unreliable data. If your application for concentration is still under consideration note that despite the requirements of the law the risk of delays in clearance may not be excluded.

2. So, with all that being said, the M&A market in its traditional form is heavily down in the dumps. In such circumstances the investors are  highly recommended to consider the opportunities provided for by the recently commenced campaign of big privatization, positive results of which could come up the expectations of mitigating the consequences of down trend of business (including in the sphere of traditional M&A), forecasting recession and prospective losses of the state budget.

Towards the end of the last year one the near-empty niches of M&A marked has been fill in once the legislator officially announced the “big privatization” campaign, start of which was expected a long time. In the current conditions the “big privatization” may claim the role of mainstream in the future Ukrainian M&A.

So, based on new Law of Ukraine No.145 which is effective since 20.10.2019 the list of the objects, privatization of which was forbidden existed as far back from 1999 was cancelled. The Parliament gave the potential investors a green light to acquire more than a thousand state-owned enterprises, among which there are quite attractive and expensive ones (the “objects of "big privatization"). We expect that a list of enterprises which are still prohibited for privatization will be developed by the Cabinet of Ministers shortly. Pursuant to the Law “On Privatization of State and Communal Owned Property” No. 2269-VIII (“Law 2269”) the property of the state and local self-government authorities, military and law-enforcement agencies, subsoil, minerals and natural resources, enterprises manufacturing and storing money and securities, as well as enterprises of nuclear and space industry are not subject of privatization at all.

An implementation of novelties aimed on simplifying the privatization process and protecting the rights of potential investors are worth attention. In this regard the privatization is regulated presently by one law instead of seven. Also, the new law has simplified the classification of objects by dividing them into objects of small privatization and of big one. Objects of big privatization include unified property complexes where the state has share of 50% or more and value of net assets of which exceeds 250 million UAH.

The law further stipulates electronic auction (via Prozorro) for the objects of small privatization and the auction - for objects of big privatization. It is interesting that a sale through auction supposes participation of at least two bidders, however, if only one is registered the latter may buy out the object pursuant to decision of the privatization authority.

In case the big privatization object was not sold, the Cabinet of Ministers shall decide to sell it with a reduction of starting price by 25%, then by 50%, and after all using the method of studying the price offers (interesting persons shall provide their starting price proposals, highest of which will be the deemed starting one).

The Cabinet of Ministers is entitled to attract professional advisers to the process of gig privatization, which, in fact, may be considered as locomotives of the campaign. The primary duties of the advisers shall be searching for potential buyers and determining the starting price. Besides, they are to provide conducting audits, determine an investment attractiveness of the objects, ways to increase it, prepare an information package on the privatization objects, etc.

It is important that by 1 January 2021 the parties would be able to regulate their contractual relations based on the English law, with certain exceptions related to transfer of ownership, which are still regulated by mandatory norms of Ukrainian law. The law further provides opportunity to settle the disputes in international commercial arbitration courts (even if no foreign element).  Investors may like the norm prohibiting commencement of the bankruptcy proceedings during a year following the moment of the sale of the privatization object. It is extremely important in the situation of uncertainty connected with global outbreak of COVID-19.

The privatization (as one of the M&A forms) requires in the most cases the merger clearance. Also worth to know that the Parliament registered three draft-laws as regard reforming the competition laws, and certain rules regulating merger clearance may be amended in the shortest perspective.