1. Introduction

It is worth considering some features inherent in the Ukrainian agricultural industry: The typical structure of a Ukrainian agricultural asset usually includes a land operator company and an elevator operator company. The vast majority of agricultural companies do not own land, but use it on a lease basis. Also, different taxation regimes may apply to companies within the same production group. The overall majority of agricultural companies that own agricultural production assets and land use rights, have quite a long and often improperly documented corporate history which makes proper Due Diligence necessary.

2. How to acquire an agricultural company in Ukraine

The vast majority of agricultural land in Ukraine was transferred to citizens in the process of privatization. As a result, the size of a separate land plot that can be leased to an agricultural company is on average from 1.5 to 8 hectares. For efficient agricultural production on lands with an area of, for example, 1000 hectares, it is necessary to conclude at least 120-150, and in practice - 300-400 land lease agreements.

2.1 Defining the strategy of the Target Asset acquisition

At this stage, buyers determine what business they intend to carry out in Ukraine (crop, livestock, storage, processing), its extent, evaluate its own resources, determine the acceptable transaction parameters. At this stage, it is also necessary to take into account the general restrictions on the acquisition of agricultural companies and agricultural land in Ukraine.

2.2 Defining the Target Asset search criteria

Following the developed acquisition strategy, it is necessary to determine criteria for an agricultural company search. The criteria depend entirely on the purpose of the buyer. The buyer can also determine other specific criteria based on the developed acquisition strategy.

2.3 Search for the Target Asset

The Target Asset is searched by selecting agricultural companies, the information about which meets the criteria set by the buyer.

Usually, such a search is performed in two stages. First, there is a general selection based on the information received from public sources: ratings of specialized resources, publications in the press, information resources of agricultural associations, etc. It should be borne in mind that such a search is effective in the case of sufficiently large agricultural companies. While thousands of small producers (up to 5,000 hectares) are not public, and there is little open information about them. In practice, information on small farms can be received only in the regions of their location.

The search in the registers by type of activity is unequivocally inefficient – companies in Ukraine do not always conduct exactly the activity indicated in their registration records.

The result of the first stage is the preparation of an extended list of agricultural companies that generally meet the search criteria. The next step is a deeper analysis of the extended list and the formation of a final (short) list of Ukrainian agricultural companies that best meet the purpose and capabilities of the buyer.

2.4 Establishing contacts with the Target Assets from the final (short) list

At this stage, preliminary contacts are established with the Target Assets that have been selected for the final list. First of all, the purpose of such contacts is to determine the intentions of the Ukrainian agricultural companies’ owners to sell them.

The main document that can be signed in the process of such contacts is a Memorandum of Understanding without creating any obligations for the parties and records the course of communication and the approximate intentions of the buyer and the Target Asset owner. Essentially, this stage is the exchange of general information about the possible intentions of the parties for the buyer to make a final decision on the Target Asset for acquisition.

2.5 Target Asset acquisition negotiations

After selecting the Ukrainian Target Asset and receiving confirmation of its owner’s intentions to sell, the terms of the transaction such as price, terms of payment, terms of Due Diligence, transaction structure may be negotiated.

The peculiarities of agrarian business in Ukraine should be taken into account when holding such negotiations. Some Ukrainian agricultural companies, especially medium and large, have passed the stage of structuring, optimizing management, and have experienced financial and legal staff, managers, well-organized document management, and accounting. Transaction negotiations in this case are traditional, more understandable to foreign investors, and can be structured and predictable.

2.6 Carrying out Due Diligence

Due Diligence usually involves production, financial and legal audits. In some cases, if the buyers suspect the existence of any specific risks or they want to ensure compliance with any specific parameters (reputation of the Target Asset owners, production environmental parameters, etc.), the relevant types of audits are performed.

2.7 Pre-sale preparation of the Target Asset

This stage is necessary in most cases of agricultural companies’ acquisition in Ukraine. It corrects the deviations detected in the Due Diligence process from the agreed parameters of the Target Asset. In addition, the corporate structure of the Target Asset may be adjusted to make an effective sale.

2.8 Pre-sale preparation of the Target Asset

This stage is entirely about the preparation of documents for the formalization of the Target Asset acquisition.

2.9 Transaction closing

Transaction closing on an agricultural company acquiring in Ukraine usually consists of three stages:

• signing contracts and documents for their implementation;

• payment settlements;

• registration of changes in corporate documents of the acquired agricultural company.

2.10 Establishing control over the Target Asset

Transaction closing doesn’t complete the acquisition of the agricultural company. It is necessary to establish effective control over its activities. For the most part, such measures include a change of management, audit of management powers, renewal of contacts with contractors, local authorities, audit of accounting, technology, etc.

3. Most the issues to be studied during the legal Due Diligence of agricultural asset

3.1 Corporate issues

The vast majority of agricultural companies in Ukraine were founded when the transfer of state and collective property to private ownership was poorly regulated by law. Many people were involved in the processes, and while performing the procedures often failed to comply with the legal requirements.

Besides, over the long period of its existence, the structure of participants in such companies has frequently changed, and again, without proper formalization. Such basic conditions established the possibility of claims and requirements from both former participants and persons who participated in the division or privatization processes (former employees, their heirs, the state).

3.2 Property

The main feature of legal Due Diligence of the ownership of agricultural assets in Ukraine is the status of property obtained as a result of the reorganization of collective agricultural enterprises (shared property) and privatization, as well as the lease of agricultural land.

In the course of legal Due Diligence, the information about the shared property (or property acquired as a result of operations with shared property) should be separately examined. This is because the procedures for allocating and registering ownership of shared property are not sufficiently regulated by the current legislation of Ukraine. Moreover, the process of allocating shared property affects the interests of many people (former members of a collective agricultural enterprise – CAE), who can always put forward their own demands. Violation of the procedures for dividing and allocating property creates reasonable grounds for the emergence and satisfaction of claims of former members of the CAE to recognize transactions with such property as invalid.

The issue of privatization in most instances is related to the acquisition of grain elevators by agricultural companies. The complex and sometimes opaque privatization procedure often leads to violations, insufficient or improper documentation. Such circumstances cause, for example, the risk of declaring the results of privatization invalid and, as a result, the burden of legal proceedings on the capacities necessary for the production and provision of bank financing.

Legal Due Diligence of land lease rights in the case of an agricultural asset is complicated by the great number of contracts that formalize such rights. Land with an area of, say, 20,000 hectares can be leased on the basis of 5 to 10 thousand contracts.

3.3 Regulatory information

When analyzing regulatory information regarding Ukrainian agricultural assets, it is necessary to take into account the specifics of the tax status (in relation to enterprises that produce agricultural products) and production activities.

In the first case, it is necessary to study the actual fulfillment by the enterprise of the requirements that are necessary for obtaining and maintaining the special tax status of agricultural taxpayer in Ukraine.

In the second case, it should be taken into account that the production cycle of an agricultural enterprise usually includes activities that require separate permits, licenses, and certificates. Some works on the elevator, with grain dryers, and other works related to grain storage, drying, and shipment are dangerous and require appropriate registration in Ukraine.

3.4 Obligations

For any Ukrainian agricultural enterprise that uses leased land, the fulfillment of land lease obligations is critical. The proper attention should also be paid to the obligations that the enterprise has in the social sphere, such as agreements on sponsorship of a local football team, obligations to cultivate land of landowners, clear roads in the community from snow, etc.

This is due to the fact that the conclusion and extension of land lease agreements requires a stable relationship between the enterprise and the rural community, where the land is leased. Such obligations (promises, agreements signed with communities) can be significant.

3.5 Personnel relations

The presence of seasonal workers is typical for the agricultural production cycle. The local positions in the company are often held by relatives of the managers. For example, the director’s spouse works the company accountant, the director’s close friend works as the chief agronomist, etc. Such circumstances may negatively affect the exercise of control over the Target Asset company.

3.6 Infrastructure and energy supply

The issue of infrastructure and energy supply is extremely important for agricultural companies. This is due to the high energy dependence of critical production processes (drying grain, heating farms) and the critical importance of communications for shipping agricultural products to customers (access roads, railway lines, access to grain storage facilities in ports, etc.).

Although such issues are typical for any asset, in the case of the legal Due Diligence of a Ukrainian agricultural company, they are of ultimate importance. For instance, a distribution transformer to which a farm is connected may belong to a neighboring company or be located on its territory. It is enough for the transformer’s owner to terminate the agreement for the use of the transformer in order to endanger the operation of the whole farm. Such circumstances are likely to be used as instruments of competitive pressure on the Target Asset company.

When analyzing infrastructure and energy-saving issues, it is advisable to focus, in particular, on the following issues:

• availability and terms of energy supply agreements;

• availability, location, conditions for connecting and using power supply infrastructure (electrical substations, transformers, gas distribution units, power lines, pipelines, etc.);

• conditions for using access roads and railway tracks;

• availability, terms and conditions of execution of agreements with carriers;

• grounds and conditions for using production sites (tractor sites, silos, open grain processing sites);

• grounds and conditions for using field roads;

• availability and terms of use of cargo terminals of grain elevators, ports, grain hubs, third-party granaries, etc.

3.7 Litigation

While analyzing the issues of litigation, it is necessary to take into account not only the cases in which proceedings are underway during the legal audit period but also the cases where the decisions have already been made and can be appealed within the procedural time frame.

Given the large number of land lease agreements, there can be a significant number of such disputes.

3.8 Personal data and confidential information protection

On the surface it seems that the issue of personal data protection is not specific to the analysis of agricultural assets. But one needs to understand that a company that enters into hundreds or thousands of land lease agreements with individuals receives a huge bulk of personal data at its disposal. If this array fails to be processed in compliance with the requirements of the current Ukrainian legislation, there is a risk of claims from land-owners. Such claims can be used, in particular, for raider attacks on a company. It is also necessary to take into account the importance of maintaining confidential information in agricultural asset owning companies.

3.9 Relations with law enforcement agencies

Production features of agricultural assets (availability of fields, peculiarities of the mentality of the local population, large volumes of consumable resources (fuel, seed materials), unprejudiced difficulties in controlling the volume of products lead to a relatively high level of theft and abuse in Ukrainian agricultural companies. Such abuses are often extremely specific. For example, carriers or combine harvesters can manipulate fuel consumption.

The legal Due Diligence undoubtedly can’t detect them. However, a buyer of an asset can inherit a large number of criminal cases related to such.

4. Outlook

Ukraine has been known for its superb agriculture background not since yesterday. The war as sad as it is offers new possibilities to enter the agricultural market in Ukraine. A professional M&A process limits the risks and can be a solid foundation to be successful in Ukraine when peace will be established, again.