Due diligence of a company in Ukraine

• International Trade
• Investment & transactions

Due diligence of a Ukrainian company may be carried out for various purposes and can be either simplified (i.e. in order to verify the counterparty under business contracts) or more complex (i.e. in order to verify the company before acquiring its corporate rights, shares).

The main goal of any due diligence is to obtain true and objective information about the counterparty or acquired asset (corporate rights, shares), and to be aware of all possible legal and financial risks. Below we describe the main features of due diligence of different kinds (simplified and complex).

When you check a counterparty for a business transaction or deal, special attention should be drawn to the following issues:

1. Information about the company of the counterparty, its members and share capital.Before concluding a contract, it is important to understand whether the company is active or not (wound-up or in the process of liquidation). This information may be checked through the official State Register.

Information about the members and amount of share capital may indicate an ability of the company to pay possible indebtedness under the contract. In case, for instance, the members are offshore companies, you may not want to deal with such a company at all. Or if the size of the share capital is not high enough, you should be ready that the company will not be able to repay you possible debts.

It is also recommended to check the company’s business activities included into the State Register: normally they should coincide with the subject of the contract.

2. Persons authorised to make a decision and entitled to undersign. Usually the contract is signed by the company’s director or a representative acting by Power of Attorney. Information about the company’s director (whether he/she is not dismissed) may be checked through the State Register. The representative’s powers shall be indicated in the Power of Attorney, which you may request from the counterparty.

Of course, it is necessary to review the counterparty company’s by-law, to make sure that the signatory under the contract has full powers for that. Sometimes decisions upon certain issues (i.e. contract of sale, loan, mortgage, etc.) may be made only upon approval of the meeting of members and that prescribed in the Statutes of the company. In such case solely the director’s wish may be insufficient, and subsequently such a deal might be invalidated by the court.

Due to the Law on Limited and Additional Liability Companies entry into force, deals which are concluded in the amount exceeding 50 per cent of the net asset value as of the end of the previous quarter are subject to approval by the company members (Meeting of Members). It is recommended to request from the counterparty the company’s balance sheet drawn up by the accountant – so you can see the company’s net asset value and understand, whether such a deal should be approved by the Meeting of Members of the counterparty.

3. Licenses and permits. While conducting certain types of business activities (e.g. sale of excisable goods, medicine, construction, etc.), the counterparty may need to have licenses or permits. It is recommended before concluding the contract for services/works of such activity to check availability and validity of licenses/permits.

4. Tax status. Through official state sources you may check conditions for tax registration of the Ukrainian counterparty (e.g. whether the counterparty is registered as a VAT payer).

It is also possible to verify whether the counterparty has any tax liability. If the company breaches tax law, it may also be irresponsible in terms of cooperation with business partners.

Under request you may also see the company’s balance sheet, income and expenses for the last three years. A company that does not make a profit or is even at loss, may be deemed unreliable partner.

5. Litigation. Court cases, being filed in the past or having active proceedings in the present, may fully describe activities of the counterparty and its compliance with law. Through the court decisions you may verify the counterparty’s involvement in illegal schemes.

More complex and deep due diligence should be conducted before acquiring corporate rights, shares of the company (in fact it may be inspection on the investee in Ukraine).

Items mentioned above should also apply in this case. However, below we also describe which points should be checked additionally:

1. History of the company (which corporate rights, shares are acquired) and its current structure. This issue usually covers verification of corporate documents of the company.

Firstly, attention should be drawn to the share capital formation: whether the share capital is formed in full, how the contributions were made by members, in case that any alienation of rights, shares took place – whether it was properly documented, etc.

2. Company’s assets and real estate. Obviously, special attention is always paid to real estate objects. To be sure that the company do own the stated real estate objects, you should check the availability and correctness of all title documents and state registration of property. It is also recommended to check whether there are any pledges and other encumbrances registered on the property.

Intellectual property right objects should also be subject to due diligence (availability and correctness of registration, validity of registration documents, etc.). Specifications of certain types of intellectual property rights should be taken into account. For instance, a trademark holder is obliged to use it in its own business activities (marking goods, etc.). If the trademark is not used for over three years, the registration certificate may be cancelled. And you should verify such a point in order not to lose the trademark registration.

3. Labour relations and labour protection. It is a large-scale issue which takes a lot of efforts and time for check, and has many nuances. Below we describe briefly some items which should be noted:

– Unlisted workers: the company employing persons without employment contracts (an order or some contract) is determined as gross violation of the labour law of Ukraine and entails large fines on the employer. Therefore, if you buy the company with workers, make sure that they are properly employed.

– Maternity leave: according to the labour law of Ukraine, an employee being on maternity leave shall have its office retained. In case the company is reorganised or gets a new owner (member), maternity office should be maintained in the staff list and is not subject to redundancy dismissal. Otherwise, such an employee (on maternity leave) is entitled to apply to the court.

– Legality of dismissal and timely payment of salaries, leave pays, etc.: it is important for the new company owner (member) to check, whether former employees have received all appropriate payments and were dismissed in accordance with the law. Otherwise, there is the risk that a former employee would file a claim to the court for reinstatement and reimbursement for the forced absence.

Certain types of business activities (industrial production, construction, etc.) may directly affect people’s health, environment and safety of the state and society, and require special permissions and special labour safety conditions for employees of such a company. Availability of appropriate working conditions in such a company should be checked by the new owner (member).

In conclusion, we all try to get minimum guarantees that our present actions do not result in unpleasant surprises in future. As an outcome of due diligence, you may get the complete image of a planned transaction/deal and your counterparty, and you can see all the legal, economic and tax risks. The better information you have, the more secure and successful the deal may become.

Published at https://neweasterneurope.eu

Irina Voyevodina

voyevodina@interlegal.com.ua

Marta Sverdlykivska

sverdlikovskaya@interlegal.com.ua