Legal Due Diligence in Ukraine

With more than 10 years of experience in business and property law, Capital Law Consulting can provide you with comprehensive legal and tax due diligence and auditing of Ukrainian companies, businesses, and property. We have performed due diligence investigations of more than sixty small and medium-sized companies in Ukraine in the fields of telecommunications, IT, agriculture, light industry, and commerce. If you have found a small or medium-sized business for sale in Ukraine, you can count on us for independent and professional legal and tax due diligence. Investigation of businesses is what we do with full responsibility and a clear understanding of all the key issues of business acquisition and/or investment in Ukraine. 

Legal due diligence in Ukraine

Every responsible investor has to have a clear picture of the asset that is to be purchased in Ukraine. Among all the types of due diligence, probably the legal audit can be considered the most important one. Legal due diligence in Ukraine has to be made to evaluate the risks of the investor or buyer and to ascertain enough information to make the final decision. Due diligence is something utterly essential for a successful M&A process.

Regardless of the type of asset, be it real estate, a factory, a company, or all the above, for example, a company that is an owner of a factory that is located on a plot of land. So the attorney or law firm that conducts the due diligence has to be skilled not just in real estate and land law, but also corporate and civil law, tax law, and others fields of jurisprudence. All present and even potential risks have to be evaluated. Insufficient due diligence will result in the acquirer finding out some new problems after the asset has already been purchased.

So if you have found an asset, property, or a business that you would like to buy in Ukraine, please make sure that the lawyer you hire to conduct a risk assessment is a skilled one. It is of the utmost importance the law firm that will conduct due diligence in Ukraine must be selected by the investor, and not the seller. Make sure that your lawyers are not in any way connected to the seller or agency offering you a business for sale in Ukraine. Always remember that the vendor and agent are mostly always interested in selling the asset, especially if the asset has a problem. It’s common sense that the dirtier the asset, the greater the seller’s desire to sell. Consider that the legislation of Ukraine has some well-documented problems and differs significantly from the EU and US. It is not so easy to prosecute the seller of a bad asset in Ukraine. Although if all needed legal instruments have been thoroughly checked, the owner of the asset being sold is unlikely to cheat.

Lately, the legislation of Ukraine has been adapting to European Union requirements and regulations. But still, there is a long way to go before reaching full conformity. Therefore it is unwise to seek the services of foreign lawyers that do not have a Ukrainian law degree, as they will likely fail to understand some key components of the law. Consider that the law firm or a lawyer shall issue and sign the due diligence report, which must be compiled in accordance with the legislation of Ukraine. The solicitor (attorney) has to be responsible for the results of the investigation, so the buyer will have more confidence. Consider also that counselors and attorneys at law have to assess all the information for the past 3 years before the date of acquisition, as in Ukraine, as such is the statute of limitations for business litigation. The final stage of due diligence is always to prepare a report highlighting all of the issues. After reviewing this report, the investor must make the final decision whether to move forward with acquiring the asset in Ukraine.

Needed steps for due diligence of Ukrainian company or business

The preliminary agreement is the first document to be signed between the parties. It is very unlikely that the seller of a business will allow your lawyers and auditors to check the documents of his company without a preliminary contract and NDA. This agreement may include non-disclosure requirements as well. The parties can also sign a legal due diligence memorandum that will establish the rights and obligations of both parties.

Depending on the industry, type, and business structure, the Ukrainian lawyer shall have a clear understanding of what to check as far as due diligence issues.

What must legal due diligence in Ukraine include? If it is an industrial plant or a factory, the following is to be checked:

  • Direct and proven debts: These can be ascertained by documents procured from fiscal or tax authorities under official request; the Ukrainian register of court decisions can be a source of potential debts as well; information can be obtained from any relevant agencies of the executive branch of the Ukraine government as well;
  • Licenses and permissions: Depending on what the final product of the business is, consider that there is no general business license in Ukraine but rather there are only special licenses and permissions depending on the product or service (although some businesses do not require special licenses or governmental approval);
  • Property audit: this is one of the most important concerns of foreign investment due diligence; all the property and real estate documents must be proper to avoid any type of risks; the legal due diligence firm must not only check the current state of the property but shall also check the stage when the property had been acquired previously; statements for the tax authority showing receipt of property tax payments shall be checked as well;
  • Corporate issues: It is common practice for investors to buy shares in the company that you intend to acquire so checking for corporate issues is a very important part of due diligence; many things have to be checked, such as dividends, company corporate regulations, and acts, and the company’s previous ownership; in case some major shareholders of a Ukrainian company are companies from offshore jurisdictions like Cyprus, Panama, British Virgin Islands, and others, then those companies should also be checked;
  • Employee/vendor/customer agreements: these so-called primary legal documents, such as labor contracts, agreements with suppliers, and others; this is one of the stages when both lawyers and accountants shall perform the research together, as it is very important to check not only the contracts but also how the payments are and have been processed; consider also that the labor legislation of Ukraine is quite strict and to avoid penalties all the documents and payments must be almost perfect; at this stage of due diligence indirect or so-called potential debts shall be investigated and discovered;
  • Competition law regulations: if the company is a big one that owns a large market share in its industry, the company has to obtain a special list of permissions from Ukrainian anti-trust authorities to prove it is not engaging in any anti-competitive or monopolistic behavior.

Due diligence for Ukrainian property or real estate

As was mentioned above, this is a very important issue if you intend to buy any company in Ukraine that owns a property (land or real estate) as a fundamental part of its business. Property laws are imperfect in Ukraine so you will need a skilled real state solicitor (attorney) to get a clear picture of the business’s property or properties. See more about property due diligence in Ukraine in our other article.

What benefits can due diligence bring?

If some issues with the documents or anything else that was mentioned above have been discovered during due diligence of Ukrainian business for sale, fear not, for it can provide useful leverage for bargaining. Of course, you should only do this if the discovered problems are small and can be solved in an acceptable amount of time or/and money. It will help you reduce the price you pay for the business you are looking to acquire. Our lawyers and auditors have successfully lowered the asking price of the asset in Ukraine during almost every due diligence that we have participated in. To discover a problem and then find the solution is what we like the most. But of course confidence and clear understanding of risks is the main benefit that a company legal and tax audit brings to the buyer.

The other benefit of legal due diligence is the possibility to understand how the certain business or asset in Ukraine works. Every country has some special or unique practices of doing business, and Ukraine is no exception. If you are going to make money in Ukraine in some certain field, the process and results of due diligence will help you understand better how things are done in Ukraine. Of course both your lawyers and you as the customer should not disclose any information about the specific company (if an NDA has been signed). But despite the requirement not to disclose such information, the experience and understanding that you gain during and after the audit of an asset can serve you well in your future investment in Ukraine.

One more very important benefit that due diligence brings is the possibility to compare the quality and features of a few different companies or businesses.  Even the fact that the seller knows that you are shopping brings him the understanding that he is not the only one and that usually makes the vendor softer in negotiations. It is always easier to make the right decision during business acquisition if you have the opportunity to choose and when you have confidence in the quality of the asset. 

To sum up, while due dilligence entails a significant up-front cost to business purchase in Ukraine, the benefits of performing a company audit far outweigh the potential risks of not doing so.

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