Russia: From start to finish

Author: | Published: 1 Apr 2012
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Negotiating is an art and not a science and there is never a right way to negotiate. When it comes to Russian deals, a general rule of thumb is to be patient and keep your cool, but always remain firm and consistent in your approach and tactics.

Many books have been written on the subject of negotiations and there is not sufficient room here to cover the subject in any great detail. Instead we mention below just a few of the tactics and approaches that are often seen in Russian transactions (taken both by Russian parties and also international investors). None of these are unique to Russian deals, of course.

A middleman is often used to negotiate: quite often the ultimate decision maker will be in the background somewhere and not present during negotiations. This is not unusual, particularly on smaller deals. The key is to understand the limits on the authority of the person present at the negotiating table and whether they have the power to make decisions and agree on final positions. Otherwise you run the risk of cheese slicing in negotiations.

Cheese slicing is where the person negotiating will accept any concessions and traded points, but then change their mind and back track on points they have initially conceded themselves, often after consultation behind-the-scenes with their superiors or the ultimate owners of the business. Clearly it is very important to make clear early on that any concessions are made as part of a package deal and that if points are re-opened, the whole agreed deal so far may need to be reassessed.

Good cop, bad cop is a variation on cheese slicing and the use of a middleman. Often where there are multiple selling shareholders, one seller will take a reasonable position but explain that they can never convince their fellow shareholders (who are often not present at negotiations) of the position and that therefore concessions will need to be made. Buyers, investors and lenders often do the same thing when explaining that they will never manage to obtain approvals from their superiors and/or credit committee.

You will sometimes encounter an overly aggressive approach to negotiations from one or both parties, particularly in a business culture which has seen momentous political and economic changes over the last 20 years. The key here is to be informed and comfortable with who you are dealing with and to make sure that you have experienced advisers with good local knowledge.

It is also not unusual to experience delays in responding to requests for information or drafts of legal documents. Often this is just part of the process of coordinating many different people in large organisations (the expression "herding cats" could be used here). However, sometimes it is a deliberate tactic, in order to reduce the amount of time available to analyse issues and to put unfair time pressure on one party and/or their advisers. Firm timetable management is key here, together with a tough negotiating position when necessary.

It is very common on deals for new and potentially significant information to arrive very late in a transaction, sometimes shortly before the contracts are due to be signed. This often happens with very late disclosures against warranties. The disclosure exercise is often carried out very close to signing and the process of focusing on the warranties can prompt the sellers to produce new significant information (financial, commercial, legal or otherwise). Again, a firm management of the timetable is key here. An indemnity, price adjustment or retention should be sought by the buyer if appropriate, regardless of the lateness of the disclosure.

There can be language barriers: almost all Russian deals are conducted and documented in either Russian, English or more often in a combination of both. Russian law requires Russian language versions of a number of the contractual documents for regulatory and tax reasons or for the notary. Quite often some or all of the parties will not speak the same language to a sufficient business level and it is therefore necessary to use translators and translated or bilingual versions of documents and contracts.

Quite often, the time pressures on deals mean that translations will fall behind the original versions. This whole process inevitably leads to delays, miscommunications and misunderstandings from time to time. This can be managed with a patient and professional approach. Parties will sometimes also use this to their advantage, however, for example by re-negotiating previously agreed points and explaining that only now do they fully understand them, now that an updated translated version of the contract is available.

The argument that is sometimes run, particularly by sellers, is that for Russian deals, Russian law should be used. It is sometimes the case that the use of Russian law is mandatory, but most of the time it is not (or can be structured around) and most international deals will still use English law. In the case of the sellers, the fact that Russian law does not yet fully recognise concepts such as warranties and indemnities can be an attractive proposition for them, but clearly a buyer will want to use such legal mechanisms and for this reason English law is usually preferred.

Sometimes a party will focus on seemingly unimportant issues and try to direct the bulk of the negotiations towards these. This can be for a number of different reasons. Sometimes they are just inexperienced and unfamiliar with the process. On other occasions, it can be a negotiating tactic, to divert attention from other, more business critical issues. Alternatively it may just be to create a "list of points", in other words items which can later be traded for something. Or of course it may be that a seemingly unimportant point is actually of great importance to the other side.

At the final stage of negotiations, the parties will need to consider whether any final changes need to be made to the deal. For example, the buyer may require an indemnity to cover a new issue highlighted in the disclosure letter, or it may want to increase the amount of consideration to be paid into the retention account (and so decrease the amount to be paid directly to the sellers at completion).

Also, since several months will probably have elapsed since the price was first agreed, the financial performance of the target may have changed and new financial results (at least in the form of updated management accounts) will probably be available. If the results are significantly different from those on which the original price was negotiated (and this is not purely due to seasonal variations or one-off factors) then one party may want to seek an adjustment to the price.

In the case of smaller companies, quite often the financial performance of the target will drop during the M&A process while its senior management are busy with the sale negotiations and do not have sufficient time to fully focus on running the business.

Pre-signing steps

In advance of exchange, the parties and their advisers will need to start organising the matters to be put in place at or shortly before signing. It is particularly important to plan these steps in advance so that signing is not delayed. Parties will usually have completion agenda, setting out all the steps and listing all the documents to be produced or entered into at exchange or completion. This should include details of the parties to each document, the names of the actual individuals who will be required to sign, the status of each document ("in draft form", "form agreed", and so on) and the name of the person with responsibility for producing or finalising each document.

Before the acquisition can proceed to the signing stage, both a corporate seller and a corporate buyer will most probably need to get approval for the respective sale or the acquisition from their corporate bodies.

For reasons of practicality, the board will usually discuss, and if considered appropriate, approve more than just the company's entering into the sale and purchase agreement. Other matters which may require approval could include the finance arrangements or any necessary public announcements. The companies will also need to appoint one or more representatives to act as designated signatories for each respective company.

When reviewing the other party's board approvals and signing authorities, local law advice relevant to the location of the company in question should always be taken. In some cases, this will also be supported by a legal opinion addressed to the counter-party.

In addition to board approval, the companies may need to obtain approvals from their shareholders. This will largely depend on the Articles of Association and also the place of incorporation and jurisdiction of the company in question.

Depending on the number of shareholders, obtaining such consents may be a laborious and time consuming process. It is therefore considered best practice to involve the shareholders at the earliest possible stage.

It is common practice to provide the other party with a copy of the board and/or shareholders' meeting minutes. This should be borne in mind particularly in respect of any confidential discussions which the company may wish to hold. The usual way out is to provide extracts from the minutes certified by the company's executives or secretary.

In case one of the parties to the agreement is a Russian company, one should remember that the general director has authority to sign any contracts on behalf of the company, subject to any limitations expressly set out by the law or in the Charter. These limitations include requirement to have major and related party transactions approved by the company's board or shareholders depending on its value. The Charter of a Russian company may also provide certain limitations of the general Director's authority to sign certain type of contacts (for example, acquisition/disposal of real estate) or perform certain actions without board approval.

In the case of finance-related documents (including loans and guarantees), the Russian Federal Law on Accounting allows the company to challenge the validity of these finance related agreements unless they are signed by both the general director and the chief accountant. Best practice is therefore always to ensure that both of these individuals sign such documents.

Transactions in respect of Russian assets may be subject to clearance with the Federal Antimonopoly Service of Russia. It is important to remember that even if the deal is structured offshore (the buyer acquires shares of a non-Russian company which directly or indirectly owns shares of a Russian company or assets in Russia) clearance in Russia may still be required. The process usually takes approximately three to four months including one or two months for preparation of all required documents. Depending on the circumstances the buyer will be required to get clearance before completion of the transaction or just send post-completion notification to the antimonopoly authorities.

In case of acquisition of shares in strategic enterprises (as defined by the Law on Foreign Investments into the Companies having Strategic Importance for the Defense and Security of the State) separate approval by the specialised Government Commission is required.

Other steps which are usually listed in completion agenda might include (among other things):

  • organising any third-party consents, including change of control consents, bank consents and so on;
  • liaising with directors and employees where resignations, or new employment arrangements are to be put in place at completion;
  • initiating any required arrangements with an escrow agent in anticipation of completion, such as their terms of business and charges;
  • dealing with any know-your-client arrangements in respect of bank accounts, for example where a deposit is being paid or an escrow account is being set up;
  • initiating any required arrangements with the target company shareholders' registrar (or depositary) in order to open a buyer's personal account in the target company shareholders' register (or depositary system) in anticipation of completion;
  • finalising execution copies of the sale and purchase agreement, disclosure letter and any other legal documents to be signed on exchange;
  • agreeing the disclosure bundle and initialling agreed documents annexed to this;
  • agreeing the contents of any agreed form documents to be entered into at completion;
  • preparing any legally-binding side letters to deal with last minute issues;
  • finalising any connected financing arrangements, such as facility agreements, funding commitment letters and proof of funds;
  • dealing with any regulatory issues and agreeing the form of any public announcement;
  • carrying out pre-signing searches, including of the Russian Unified State Register of Legal Entities and any other relevant corporate and insolvency/bankruptcy searches and any specialist searches such as at the Russian State Register of real estate; and
  • organising the logistics of signing, including the location, time and date and required attendees. Also making the necessary arrangements for a remote signing by fax or email if there will not be a physical signing meeting or where not all of the signatories can attend in person.

In the case of transactions involving Russian companies (including as a target company or as a party to a sale and purchase agreement or a shareholders' agreement) there are a number of points which the counterparty should always check.

The name and details of the general director will be registered in the Russian Unified State Register of Legal Entities. The Charter should be checked in order to see if there are any limitations on the powers of the general director.

When carrying out the relevant asset balance value test to see if it is a major transaction, the most recent monthly balance sheet together with the last balance sheet filed and submitted to the Russian Tax authorities will be required.

Where they are required, the board and shareholder resolutions should be reviewed to ensure that they are sufficiently wide in order to authorise the transaction and all its component parts.

Subject to the Charter, the general director does not need any additional signing authority (apart from corporate authorisations). Any other signatories (such as the chief accountant or a deputy general director) will require a power of attorney from the company.

The power of attorney needs to be granted in the name of the relevant signatory and needs to be sufficiently wide to cover the matters being transacted.

Under Russian law, powers of attorney can be revoked by the grantor at any time. The counterparty should therefore also insist on a letter from the company confirming that the power of attorney is still in full force and effect and has not been revoked. The letter will only be valid on the day it is given (and dated) and so if signing or completion slips to another day (for example, if there is a late night meeting which goes past midnight) then a new letter will be required. In practice the letter is not dated until signing/completion takes place – sometimes the same time of day is also inserted in the letter and the other legal documents for the avoidance of any doubt as to its binding effect.

It is also common to request sight of the original passport of the general director or other signing party in order to verify their identity.

Exchange of contracts

Exchange of contracts is the process by which the contracts are signed by the parties, exchanged between them and dated with the date of signing. At this point the contracts become legally binding in accordance with their terms.

Where contracts are governed by English law, it is possible to exchange contracts by email (or fax), but proper thought and planning need to be given to this process, which is often rushed and not properly planned.

In the past (and particularly during a booming market) in the rush to exchange, contracts were often pre-signed (sometimes ahead of finalisation of documents) and signature copies (only) would be exchanged by the parties' lawyers by email. Recent English court judgments and subsequent guidelines indicate that this can lead to contracts not being properly and validly exchanged and/or incorrect versions being exchanged.

The prevailing best practice now is to always exchange contracts on the basis of so-called wet ink hard copy documents where practicable.

Where a physical meeting of the parties in order to exchange contracts is not possible, the best course of action is for the legal advisers to email the whole contract to the parties, who then print the signature page, sign it and then return the signature page by email, together with the rest of the document as an attachment.

In the case of contracts to be executed as deeds under English law, the whole document (and not just the signature page) should be printed on receipt, before signing.

The signing parties should also give express authority to their legal advisers to make any further changes and/or complete any blanks in the document and then use the signature pages in order to exchange and date the contracts (and to deliver them, in the case of deeds). Any further changes and/or completed blanks should be made in manuscript (hand written) and each should be initialled by each of the parties (or their advisers with express written authority).

The whole process should be clearly set out in writing for both sides, so that there is no confusion or future disagreement over whether documents were properly signed and exchanged.


At completion, the buyer and the sellers and their respective advisers will implement the various steps set out in the sale and purchase agreement in order to complete the transfer of the shares in Target and the payment of the consideration due on completion. This process is also sometimes known as closing.

Due to the amount of legal documentation involved, a physical completion meeting will normally be held, or at the least the parties' lawyers will meet ahead of completion in order to check that all the documents are in order.

Ahead of completion, the buyer's lawyers will also refresh their searches, including at the Russian Unified State Register of Legal Entities and any other relevant corporate and insolvency/bankruptcy searches.

The completion meeting itself will deal with delivery of the Completion deliverables, payment of the consideration due to the sellers at completion, and payment of any agreed amounts into the retention account. In case of a transfer of shares in a Russian joint-stock company, the meeting will also deal with execution of the transfer order and making relevant entries with the target company shareholders' registrar (or depositary system); in the case of a transfer of participatory interests in a Russian limited liability company, the notary will also need to be present in order to notarise the Russian law transfer agreement.

At completion, the sellers will not want to transfer ownership of their shares until they have received the consideration due at completion. The buyer will not, however, want to pay the consideration until it has received the shares. This can present practical issues on Russian M&A deals, particularly where there is a transfer of participatory interests in a Russian limited liability company and, once the notary has notarised the Russian law transfer agreement, the transaction cannot easily be unwound.

In the UK, this practical issue is dealt with by the buyer (or its funding bank) paying the consideration monies in advance to either its lawyer or the lawyer of the sellers. The relevant lawyer will then hold the monies in a separate regulated client account, effectively on trust and will give a solicitors' undertaking not to release the money until (and conditional on) completion occurring. In the UK there are strict legal and regulatory consequences for breaches of solicitors' undertakings or breaches of the strict rules relating to the maintenance and management of solicitors' client accounts.

For legal, regulatory and risk management reasons, international law firms in Russia do not currently maintain client accounts and so this route is not available for most Russian deals. Instead there are two practical alternatives.

The first is a third-party escrow agent. The parties will appoint and enter into a tripartite (three-way) agreement with an independent escrow agent, who will agree to hold the completion monies and only release them at completion on the satisfaction of agreed steps. The escrow agent can be any third party, but in practice this is usually an international bank for reasons of regulation and security.

Russian law does not recognise the concept of escrow and the depositing party can always demand the withdrawal of its monies from the account, even if this puts it in breach of the contractual terms of the escrow agreement. Russian notaries also cannot act as escrow agents. Completion escrow arrangements in Russian deals are therefore almost always established outside of Russia.

The second option is a letter of credit: the buyer will deliver to the sellers at completion a letter of credit issued by a recognised international bank and the sellers are usually entitled to be paid by the bank on delivery of a copy of the document confirming transfer of shares to the buyer.

The completion deliverables are all the legal and administrative documents required to complete the transaction. The important ones will be listed in the sale and purchase agreement (usually in a schedule). More administrative documents will normally be itemised in a separate agreed list of documents.

Ian Ivory
  Ian Ivory worked for 11 years in the firm's London office, before relocating to Moscow in 2009. He has considerable expertise in international transactions in and outside of Russia, together with extensive legal experience spanning a wide range of business sectors. I

vory’s work within mergers & acquisitions and private equity includes: advising Sberbank on its investment project related to acquisition of 25%+1 share in Detskiy mir - Center, the largest Russian children's goods retail store network; advising Sberbank in relation to Sportloto Joint Venture with Russkoye Loto Group; advising Tomsk Refining on disposal of Siberian oil refinery Tomskneftepererabotka and TD Tomskneftepererabotka; representing FES on the sale of the majority shareholding in FES Group to Arysta; acting for Raven Russia on a proposed corporate project; advising Sistema Hals on different joint ventures and development projects in Russia; advising Flemings Family and Partners on a corporate disposal in Russia; acting for EFES Group on financing and corporate projects in Russia; acting for Kasa-Akfen on a corporate project in Moscow and separately in relation to advising EBRD in relation to investments in Russia and the financing matters.

Goltsblat BLP
Capital City Complex Moscow City Business Centre
8, Presnenskaya Nab., Bldg.1, Moscow, 123100, Russia
T: +7 (495) 287-4444
F: +7 (495) 287-4445

Anton Rogoza

Anton Rogoza is a partner in the firm's corporate finance practice. He focuses on mergers and acquisitions, private equity, joint ventures and corporate restructuring projects. He also advises corporate clients on various other corporate matters, including corporate governance.

Rogoza represents both Russian and international companies in connection with their investments in Russia. He advises clients in structuring strategic alliances and joint ventures. Some of the projects which he has led include:

  • Advised Farallon Capital Management on disposal of part of their investment in Geotech Oil Services Company Limited, large Russian oil services holding to Volga Resources, and PineBridge Investments on various aspects in respect of Farallon Capital Management's disposal.
  • Advised Stewart Group on all Russian law matters in connection with its acquisition by Campbell Brothers Limited (through its subsidiary ALS Group).
  • Advised Paradigm Geophysical on spin-off and sale of a multi-million dollar multi-jurisdictional Moscow-based Strategic Business Unit.
  • Advised EBRD on providing of up to EUR 60 million loan facility to Sibur Russian Tyres.
  • Advised EBRD on providing financing to European Bearing Corporation to refinance EBC existing debt in the amount of approx. USD 170 million.
  • Acted for AIG Capital Partners and Farallon Capital Management on acquisition of a minority stake in Geotech Oil Services Company Limited, large Russian oil services holding with transaction value approx. 100 mln. USD.
  • Represented Farallon Capital Management on proposed acquisition of a minority stake in one of the largest subsidiaries of Russian Railways.
  • Acted for Lege Artis. Clinical Research Company and its shareholders in the sale of the company's business to Ingenix, a major US investor.

Goltsblat BLP
Capital City Complex Moscow City Business Centre
8, Presnenskaya Nab., Bldg.1, Moscow, 123100, Russia
T: +7 (495) 287-4444
F: +7 (495) 287-4445