M&A market in Armenia is pretty small though it is growing year by year. Could you indicate the market developments in 2011 and what are the expectations for the year 2012? How many M&A deals were finalized with the help of Ameria Group specialists? How many mandates are you involved in now?
Over the past 4-5 years Ameria Group specialists facilitated successful completion of 3-4 major M&A deals per year on the average. The year 2011 was quite successful in terms of quantity of completed deals. We have already finalized about 4 or 5 projects, 4-6 more are still under way. According to our projections we'll have about 8-10 similar projects in 2012.
Which industries, in your opinion, will be most active in M&A in 2012? Which sectors tend to M&A nowadays?
Judging by 2011 results, telecommunications, mining, retail trade, renewable energy and finance will be in the lead. Though I should confess our market is quite unpredictable and all the forecasts are a great deal conditional.
What are the risks associated with the M&A transaction?
Risks intrinsic in M&A transactions are all those commonly classified into the following groups: market, operational, credit, financial, currency, legal, etc. Our task is to identify the risks associated with legal formalization of the deal, as well as assess the company's legal standing at the moment of purchase. Very often it is the legal component that is underestimated by Armenian entrepreneurs while selling companies or running the business.
Let's come to legal issues related to M&A transactions. Professional handling of legal aspects is a gateway to successful deal, whether sale or purchase. What stages does the M&A legal advisory consist of? Please tell us how Ameria's specialists structure M&A deals.
Full legal support of M&A deals supposes three main steps.
The first step is choice of the ideal legal structure for the overall transaction. It is very important in terms of tax, proper future business structure and further specifics of the transactions since wrong structuring may result in waste of time, money and other resources.
The second step is legal due diligence which may be conventionally grouped into four components.
The first component comprises examination of the company's incorporation documents, legality of incorporation, identification of mistakes made during incorporation, if any, check of proper legal title to the shares being sold (in case the M&A deal is structured as sale of shares or conversion in the share capital), due corporate standing of the business being sold.
The second component is asset valuation. Whenever one valuates a company's assets, usually financial statements, market value independent appraiser’s opinions, independent auditor's opinion are elements being considered. But such information may be misleading. For example, in some cases the companies do not have legal title to the assets which belong to them according to the statements, (due to title is being properly formalized legally) or it is vulnerable to adverse claims. Review of the legal title to the assets or shares under sale is very important. It is a common mistake to think that if one holds an ownership certificate, then there is a title to an underlying asset. In practice, public and private registering companies very often do not check if the right of ownership is properly registered or if there were legal problems in the past. In such cases only the legal expertise can assure one in the fact that a proper asset (free of third party rights) is being sold and purchased.
The third component is review of the company's contractual framework, i.e. identification of possible future negative consequences which are likely to occur. Sometimes the company has only one agreement or official document, such as commercial concession, license agreement with the government for mining or a long-term supply agreement. Examination of such agreements is very important to check the company's compliance with the law or identify discriminatory provisions which may pose threats in the future. The company's liabilities structure should be reviewed too.
And finally, the legal advisors review litigations the company is involved in, both pending and threatened, administrative sanctions which all are likely to result in decrease of the company's value.
The third, final stage in M&A transaction legal support is the negotiations, drafting of sale purchase and purchase finance agreements and the successful closing of the deal, i.e. actual transfer of the title according to the agreement. This stage is the tensest and, one can say, a culminating one.
Is there any risks which may not be identified during business valuation?
In theory there is no such risk. However, the accuracy of the results of due diligence depends on many factors, such as degree of involvement of the lawyers (full or partial due diligence), scope of mandate etc. Besides, in our jurisdiction there is a permanent risk of arbitrary and/or historically inconsistent interpretation of laws and regulations and, in this sense, there are risk impossible to predict, although we always try to inform our clients of this kind of legal risks too.
Is it easy to get information from the sellers?
This is a key condition enabling us to provide a comprehensive legal valuation of the business. Cooperation on behalf of the sellers, independent of the fact the lawyer is acting from sell side or buy side is essential for efficient legal due diligence. If any essential documents are missing, we give a written notice that such absence may result in incomplete evaluation. So comprehensive full legal check and identification of all the intrinsic risks are possible only in case of full mandate, enough time (very hard to find...) and full access to information/complete disclosure).
You've mentioned that the Armenian entrepreneurs very often underestimate the legal aspects in their operations. Would you name most common legal omissions?
Well, let me recall just one. For example, many companies do not hold annual general meetings, nor even ensure documentary evidence such meetings have taken place, which goes against the law. According to legislation, all the companies should hold annual general meetings once a year and have their financial statements for the past year approved there. Unless there was an annual general meeting, the company may not summon extraordinary meetings to discuss on going ordinary issues, such as appointing directors or approve deals, etc. In such case an interested party may dispute any resolution in the court claim its invalidity. So one of the main tasks a legal advisor has to face is to identify the risks or the problems that may seem insignificant at first sight, especially for a "non-lawyer".
What do you think about current legislation in terms of M&A-related legal issues?
One of the main problems of the legislation, especially corporate one is the lack of differentiation. Different regulatory framework for different scale and structure companies and consideration of the specifics of each legal form or types of ownership would trigger more efficiency.
Lack of such differentiation results in additional costs or adherence to the ungrounded interpretative analogies, or, in the worst cases, abuse of law and corruption risks.
On the other hand, sometimes where facts and circumstances are identical you come across legal differences, which make no sense. For example, different regulations and legal regime for closed joint stock companies and limited liability companies sometimes amounts to an absurdity.
Another major problem is absence of the registration for the title to movable property.
There are many peculiarities about your work. How much time does it take to close a deal?
It depends on the scale and the scope of involvement, timing and etc. On the average, it takes about 2 months to complete.
How often do the identified legal problems affect the appraised property?
It is happens frequently and not only for Armenian companies. For example, mainly lawful management of financial reporting may cause problems. Sometimes financial reporting is managed in a way making it possible to overestimate or underestimate the business as of a certain date. One of the added values of legal expertise provided by us is triggering possibility of revelations of such underestimations and overestimations.
Can you show an example?
E.g. under Armenia law, in certain cases the government may withdraw the mining license in case of even minor violations by the license holder in which case the company's value will decline drastically. Similar problems may be encountered across other industries as well. Such risk is expected to affect adversely the company's market value and none of the financial statements reflects that risk, our ultimate mission is to warn the client against possible risks and propose a deal structure enabling to reach the utmost economic efficiency.
At the beginning of the interview, you specified the possible types of M&A deals. Which of them are most common in Armenia?
Although other types of M&A are also used quite often, the majority of M&A deals are share purchase transactions and once our clients or their counterparties get control over the desired target, they further decide whether to keep several companies or merge them into a single one.
You are a lawyer concentrating on financial transactions, corporate matters and M&A. How much does the lawyer's specialization matter in the practice of law?
You've touched upon a very important aspect of legal services market. The global market of legal services tends to specialization in particular fields of law. So-called generalists lawyers don't handle large businesses as a rule. Why to choose specialized services? Because a lawyer who is not specialized in a certain domain of law has to spend much more time and efforts to study the relevant legislation and find the appropriate solution for a given case even if he/she is able to find one ultimately. And it results in taking more time, money and other resource from the client. This fact was not until recently recognized in Armenia legal market were a lawyer who "can do everything" was of high value. I'd like to note that Ameria is one of the few, if not the only law firm in Armenia, consistently and continuously trying to build practice groups specialized in different fields of law and industries.
Apart from the legal support of M&A deals Ameria Group offers other M&A-related services
Yes, Ameria Group's competitive advantage is its ability to offer a full range of M&A services. A business unit within Ameriabank provides financial and investment advisory on M&A deals, Ameria Legal Practice proceeds with legal matters. The Group's other units and companies offer financial audit, tax advisory, business planning, management model development services during the deal and/or after the closing. Moreover, very often Ameriabank provides funding for business acquisition deals and equity investments in certain projects.
By Elita Babayan