Legal Due Diligence and Audit of Ukrainian Companies

With more than ten 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 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. We do business investigation with full responsibility and a clear understanding of all the key issues of business acquisition and/or investment in Ukraine.

Due diligence in Ukraine

Every responsible investor must have a clear picture of the legal background of the asset that he is going to purchase in Ukraine. Among all the types of due diligence, the legal audit can probably be considered the most important one. The procedure of 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 utterly essential for a successful M&A process. Checking of Ukrainian company is a fundamental procedure to deal with.

Regardless of the type of asset, be it real estate, a factory, a company, or all the above, for example, a company that owns a factory 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 in corporate and civil law, tax law, and other fields of jurisprudence. All present and even potential risks have to be evaluated. Insufficient due diligence on the assets in Ukraine will result in the acquirer discovering new problems after purchasing the asset.

So, if you have found an asset, property, or business that you would like to buy in Ukraine, please ensure that the lawyer you hire to conduct a risk assessment is skilled. It is of supreme importance that the investor and not the seller select the law firm that will conduct due diligence in Ukraine. Ensure that your lawyers are not connected to the seller or agency offering you a business for sale in Ukraine. Always remember that the vendor and agent are mostly interested in selling the asset, especially if the assets have problems. Consider that the legislation of Ukraine differs significantly from the EU or US legislation. It is difficult to prosecute dishonest sellers in Ukraine. However, the risks decrease significantly if all needed legal instruments have been thoroughly used during due diligence in Ukraine.

Lately, Ukraine’s legislation 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 who 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 following Ukraine legislation. The solicitor (attorney) has to be responsible for the analysis results to give the buyer or the investor more confidence. Also, lawyers and attorneys at law must assess all the information from the past three years before the asset’s acquisition date in Ukraine. The final stage of due diligence of Ukrainian business is always to draft a report highlighting the main and the most critical issues. After reviewing this report, the investor can clearly understand the legal structure of a Ukrainian company or business.

Needed steps for due diligence of a business in Ukraine

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 his company’s papers without a preliminary contract and/or NDA. The agreement itself may include non-disclosure requirements as well. The parties can also sign a so-called “due diligence memorandum” that will establish both parties’ rights and obligations during the “business investigation” process.

Depending on the industry, type, and business structure, the Ukrainian due diligence specialist shall clearly understand what to check regarding tasks.

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; 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 critical concerns of foreign investment due diligence; all the property and real estate documents must be proper to avoid any 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 an essential part of due diligence; many things have to be checked, such as dividends, corporate company regulations, and acts, and the company’s previous ownership;
Agreements with employees, vendors, and customers: these so-called primary legal documents, such as labour 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; also consider that the labour 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, it has to obtain a special list of permissions from Ukrainian anti-trust authorities to prove it is not engaging in anti-competitive or monopolistic behavior.

Due diligence for Ukrainian property or real estate

As was mentioned above, this is a fundamental issue if you intend to buy any company in Ukraine that owns a property (land or real estate) as an essential part of its business. Property laws are imperfect in Ukraine, so you will need a skilled real estate 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 mentioned above have been discovered during due diligence of Ukrainian business for sale, fear not, for it can provide helpful 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 and/or 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. We like the most to discover a problem and then find the solution for our client. But of course, confidence and a clear understanding of risks are the main benefits that a legal and tax audit of a Ukrainian company brings to the buyer.

The other benefit of due diligence in Ukraine is the possibility of understanding how a certain business or asset in Ukraine works. Every country has special or unique business practices, and Ukraine is no exception. If you are going to make money in Ukraine in some field, the process and results of due diligence will help you better understand how things are done in Ukraine. Of course, 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 you gain during and after an asset audit can serve you well in your future investment in Ukraine.

Another essential benefit that Ukrainian due diligence carries is the possibility of comparing the quality and features of a few different companies or businesses. Even the fact that the seller knows that the buyer will choose between a few assets brings him the understanding that he is not the only one, which usually makes the vendor softer in negotiations. It is always easier to make the right decision during a business acquisition if you have the opportunity to choose and have confidence in the quality of the asset.

In summary, while due diligence entails a high up-front cost to business purchases in Ukraine, the benefits of performing a Ukrainian company audit far outweigh the potential risks of not doing so.