9 January 2024

Cross-Border M&A In The Era Of Sanctions

AX Law


Regulatory framework defining sanctions has been dynamic and is progressively becoming more complex.
United Arab Emirates Corporate/Commercial Law
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Regulatory framework defining sanctions has been dynamic and is progressively becoming more complex. In view of the equivocal principles governing the field, the matter of sanctions' compliance has developed to be one of the crucial elements of business relations in a variety of areas. In practice, while the mainstream talk sees sanctions from the limited angle of trade and commerce, the market has also experienced significant effect on investment arrangements.

We summarise in this practical note the impact of sanctions on global M&A and their role as a driver of increased M&A activity based on the latest examples we have experienced.

Nexus – what regulations to follow

The starting point of assessing sanctions exposure of any transaction is establishing the nexus, i.e. the jurisdiction of the corresponding regulatory framework over the matter and involved parties. While sanctions often aim at achieving extraterritorial effect, businesses have been inconsistent in applying rules that were not necessarily enforced by their local authorities: some of them are relying on merely formal nexus, while others are trying to follow a broader scope of compliance.

The link to a specific jurisdiction may be established in various ways, including by virtue of nationality, residence, place of incorporation, physical presence and other ties. It is material that assessment of such nexus is done on a case-by-case basis allowing the parties to assess applicability of the relevant restrictions (mandatory or voluntary, if any at all).

Once established, the nexus will shed light on further considerations, including scope of the partner KYC, transaction structure (in the context of sectoral sanctions), and other major elements of the deal. Particular attention should be given to sanctions licences and authorisations, sources of funds, currency of payments, sanctions' status of target assets and others. Such analysis should be thorough as each element of the deal structure may affect viability of the whole project.

Sanctions sparking transactions

Existing JVs

With the increasingly broadening scope of restrictions, existing joint ventures inevitably had to address the impact of limitations on their continuity. In practice, it is often achieved through a joint venture partner either implementing a sale of its interest (relying on a put trigger), offering acquisition of a share of its partner (relying on a call trigger), or electing to wind down the joint venture, if continuity of the business is not sensible. Moreover, certain parties impacted by sanctions have been considering restructuring their groups, as well as changing their ultimate ownership and management structures to remove the jurisdictional nexus to facilitate administration of the business.

Ex. Ex?

Certain divesting partners being urged to leave the project, yet willing to keep their options open, have been arranging for control tools over their abandoned businesses. Willing to swiftly get back in the game should the environment allow to do so, departing partners have been considering ways of flawless return scenarios, such as low-price claw-back options open for execution within a limited number of years post-exit. In some instances, former shareholders also manage to keep limited information rights allowing them to receive updates on the business' state of affairs. Certain divestment agreements introduce restrictions on post-exit transfers of shares by remaining shareholders, such as with respect to identity of potential third-party buyers (often eliminating competitors as bidders) or providing for a right of first offer or refusal exercisable during a certain period of time.

New Investments

Sanctions reality has posed additional risks for the new alliances, enticing partners to look ahead and consider mechanisms protecting them from exposure throughout the life of the project. Practice has highlighted certain instruments for the use in deal documents that aim at addressing and managing these risks, such as extensive warranties and representations (relating to the partners' profile and state of affairs), exit triggering events and procedures (dealing with the partner's or business' designation), obligations on the parties to eliminate controlling individuals, and some other. Usually, deals may also benefit from the parties switching to transacting in national currencies to limit the risks linked to involvement of corresponding banks, as well as from restricting dealings with affected third-parties in order to prevent application of secondary sanctions.

Continuing obligations

Upon incorporation, a joint venture becomes subject to multiple regulatory regimes with sanctions being one of them. Once the nexus is established, the company should aim for applying best compliance practices as enforcement becomes more and more common in many jurisdictions.

With the tools varying depending on the applicable rules, it is generally recommended to undertake continuing reviews and monitoring, appoint experienced compliance officers to arrange internal and external procedures and communication, adopt inhouse sanctions policies for the business to implement in its daily operations and strategic activities, and seek professional advice prior to engaging in any potentially sensitive arrangements. These are some of the measures which should allow the company to demonstrate good faith in its obedience efforts.

In addition to the above, certain coverage may be obtained through D&O insurance protecting the business from consequences of management decisions. With such policies being a common tool of risk management, respective terms should be carefully considered as the provided coverage and associated exclusions by different insurers may vary. In practice, with potential costs including investigation expenses, settlements payments, fines and penalties, derivative claims by various interested parties, and other possible losses, only some of them would usually be capable of being recovered by the company.

Advising on sanctions-impacted clients

The foregoing summarises our view of the market. In this section, we reflect on the impact of sanctions on advisors and consultants involved in compliance-sensitive transactions.

Regulatory developments have significantly affected and scrutinised the administrative implications of advisory services, complicating onboarding processes, retainer payments, delivery of advice, and in certain circumstances even triggering abortion of existing engagement in the middle of the project.

The regulated sector practitioners have been also required to advance their client clearance policies, as well as compliance standards and practices. Professional services providers, such as lawyers, accountants, auditors, financial consultants and others are facing liability, from disciplinary to criminal, for their failure to apply adequate KYC procedures.

Due to continuing evolution of enforcement and regulatory guidelines, practice is yet to adapt and establish equilibrium between prompt delivery of high-quality services and strict statutory demands.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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