Investment in Ukrainian Agribusiness: How to Prepare for Sale of the Business
Agribusiness as an area for investment
“Agribusiness and municipal infrastructure are the most prospective sectors for investment in Ukraine”, said Sir Suma Chakrabarti, the President of EBRD, during his visit to Kiev on 5 February 2013. This view is one that is shared by many commentators.
While there has been a lot of talk about the potential of Ukrainian agribusiness, current market players need to be aware that investors are no longer simply attracted by hype. The crisis has made investors more cautious. They are looking for real value and want to really understand the risks before investing.
Therefore, agricultural companies that want to dispose of their business or attract investors need to critically analyse themselves, before talking to investors, if they want to get the best value and attract the best investors.
Critically analysing your own business is simply undertaking a due diligence to look at all of the issues which potential investors will be concerned about and either fixing them or working out ways to mitigate the risks.
For companies operating in the agribusiness sector, some of the most common (and most problematic) issues relate to:
— prior acquisitions made by the group;
— lease agreements entered into by the group;
— regulatory compliance by the group; and
— overly complex corporate group structures.
Risks related to prior acquisitions
Many agricultural companies have grown by conducting a series of acquisitions of their smaller competitors; quite often only undertaking a limited due diligence of the companies at the time of the acquisition.
Serious investors will be looking to make sure that there are no historical issues which may have an impact on any of these acquisitions. To get this comfort even basic things like:
— whether the charter capital was fully paid up;
— whether waivers of pre-emption rights were obtained from all owners; and
— whether spousal consents were obtained, before any sale of a participatory interest in a company occurred will all be checked.
As failure to do or obtain any of these basic and very simple things could lead to invalidation of a prior acquisition, they are a source of concern to potential investors.
Investors will want to see the evidence that these things were done or obtained. Therefore, making sure that you have the documents evidencing this is very important. Where you do not have the documents, or something like the above was not done or obtained, then sorting this out before talking to investors will mean that the process for the sale will go more smoothly and the investor’s confidence in you and the way you run your business will not be tarnished.
Risks related to lease agreements
Obviously the main asset of an agricultural company is the land which is leased and operated by it. Given the moratorium on the sale of agricultural land, most agricultural land is still owned by private individuals and agricultural companies are required to enter into hundreds, if not thousands, of lease agreementswith such individuals. In view of this, it is often cost prohibitive for an investor to go through and conduct due diligence on all of the lease agreements.
If you have used a single (or a limited number of) template lease agreement(s) as the basis for all your leases, then this will make the due diligence process much simpler, enable an investor to undertake a more comprehensive due diligence and thereby give the investor greater confidence in your business.
If, due to acquisitions and timing, you have not been able to achieve this then an investor will most likely adopt a due diligence approach that involves reviewing all leases over land of a certain size and then conduct random sampling of the other leases. At the same time, random sampling could result in due diligence being undertaken of any lease, you need to make sure that:
— your lease agreements contain all the necessary essential terms as a matter of Ukrainian law;
— comply with Ukrainian law; and
— the lease rights are registered with the title register.
If any of these requirements are not met, this can lead to invalidation of a lease agreement and should be remedied well before the investor starts their due diligence.
Investors will also be concerned to check that the group has complied with all regulatory requirements in Ukraine. As mentioned above, as many agricultural companies have grown through a series of acquisitions one of the most common regulatory requirements checked is compliance with Ukrainian competition law.
If a company failed to obtain prior approval of the Antimonopoly Committee of Ukraine (AMCU), when such was required, then a fine in the amount of 5% of the total group turnover may be imposed (although in practice such fines have been considerably less). Moreover, clarifications issued by the Supreme Commercial Court of Ukraine in 2011 confirm that the courts may invalidate transactions if prior AMCU approval was required but not obtained.
Therefore, vendors should check if all the necessary clearances were obtained during the previous acquisitions and if all the members of the vendor’s group, including beneficial owners, were disclosed to the AMCU. If not, then advice should be obtained about how you can minimize such risks.
Overly complex group structures
As noted above, many agricultural groups grow as a result of the acquisition of small companies. As a result of this, group structures involving tens, if not hundreds, of group companies, are not uncommon.
In addition to the cost involved in undertaking due diligence of such a large number of companies, investors looking at a business like that will be concerned about the considerable financial and time expense required for the management of so many companies.
One of the ways to deal with this is to merge the companies together. Obviously there are legal, logistical and cost implications of doing this, such as having to re-register the land lease rights of the new company which is a legal successor of the merged company and so this will not always be feasible for every company.
If it is not possible, then undertaking simple things, like making the constitutive documents of the companies the same and having a limited number of people as directors and chief accountants, can help to make what is a very large grouping appear more cohesive.
Understanding the risks that an investor may be concerned about, and identifying whether any of those risks exist in your companies, is vitally important to presenting your company in the best light possible to investors. A little forward planning and your company will stand out from the pack when investors are choosing where they want to place their money.
It is also going to make the sale process quicker, reduce legal fees and arguments, limit the number of warranties and/or indemnities that an investor may look for and, most importantly, help achieve the best price possible.