December 27, 2021

How to buy an agricultural company in Ukraine

Introduction

Procedure for acquiring an agricultural company in Ukraine

1) Defining the strategy of the Target asset acquisition

2) Defining the Target Asset search criteria

3) Search for the Target Asset

4) Establishing contacts with the Target Assets

5) Acquisition negotiations

6) Carrying out Due Diligence

7) Pre-sale preparation of the Target asset

8) Preparation for the transaction closing

9) Transaction closing

10) Establishing control over the Target Asset

 

Nowadays, the acquisition of agricultural companies is the most effective way for foreign investors to start growing crops in Ukraine. First of all, this is due to the peculiarities of the accumulation of productive land areas.

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. At the same time, the joint agricultural land areas, in most cases, are already leased to local farmers, small agricultural companies, or divisions of large agricultural holdings. And renting land plots that are not jointed into large production areas is inefficient.

It is also important to take into account the extremely conservative mentality of the rural population in Ukraine. Owners will not enter into a land lease agreement (even on better terms) with a new unknown company because they are already accustomed to a local farmer or a local agricultural company, personally know the heads of local farms and relatively trust them.

Starting an agricultural business from scratch can be justified when it comes to building elevators, livestock, poultry. But in the case of growing agricultural products, it is certainly more cost-effective to acquire a basic agricultural asset – an agricultural company that already operates a land bank.

Procedure for acquiring an agricultural company in Ukraine

The procedure for acquiring an agricultural company in Ukraine generally has a typical M&A structure, but it is important to consider regional specifics. Without taking into account these features, the acquisition of agricultural companies in Ukraine can be long, costly, and quite risky.

Scheme of the procedure for acquiring agricultural companies in Ukraine

Defining the strategy of the acquisition
⇩
Defining the Target Asset search criteria
Production criteria				Financial criteria				Legal criteria
⇩
Search for the Target Asset
Creating an extended list			Extended assessment of the  Target Assets from the list					Creating a short list of the Target Assets
⇩
Establishing contacts with the owners of the Target Assets from the short list
Preliminary negotiations				Selection of the target asset				Signing a memorandum of understanding
⇩
Target Asset acquisition negotiations
Agreeing the acquisition terms			Agreeing the structure and acquisition process						Signing a memorandum of intent
⇩
Carrying out Due Diligence
⇩
Pre-sale preparation of the target asset
Preparation of the target asset for sale based on the Due Diligence results						Obtaining permits and approvals under the Antimonopoly Legislation of Ukraine
⇩
Preparation for the transaction closing
Preparation of corporate approvals, permits and other documents			Preparation of the contract for the acquisition of the target asset			Agreeing the documents	Agreeing of the conclusion and settlement procedure			Preparation for execution of the agreement
⇩
Transaction closing
Signing of the documents				Carrying out settlements				Target asset control transfer
⇩
Establishing control over the Target Asset
Management change		Renewal of contacts with contractors, banks, government agencies					Other integration processes following the buyer’s vision of the Target Asset

1) Defining the strategy of the Target Asset acquisition

At this stage, buyers determines what business they intend to carry out in Ukraine (crop, livestock, storage, processing), its extent, evaluate its own resources, determine the acceptable transaction parameters.

For example: the buyers determine that:

• they intend to grow grain crops in Ukraine;
• they can invest in the transaction 2 million US dollars of own funds and 1 million US dollars of bank financing;
• the economic model envisages the need to cultivate 5,000 hectares of land and to have the capacity to store grain of 5,000 tons, to be independent on seasonal fluctuations in product prices;
• new technology will be introduced and new equipment will be purchased;
• they are ready to buy only 100% of the company and not ready for a partial purchase.

At this stage, it is also necessary to take into account the general restrictions on the acquisition of agricultural companies in Ukraine.

For example: nowadays (before the referendum) foreign companies are prohibited from acquiring Ukrainian agricultural companies that own agricultural land in Ukraine.

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.

For example: if we take as an example the goal given above, the criteria can be:

• territorial location of arable lands of the agricultural company (based on soil characteristics, climatic conditions, transport infrastructure, etc.);
• area of arable lands;
• infrastructure availability;equipment is irrelevant (the less, the better);

The buyer can also determine other specific criteria based on the developed acquisition strategy.

There is no need to set too detailed criteria. An extended list of Target Assets is formed based on open sources of information – public information given by the agricultural company, registers, publications, reports, communication with experts, etc. There are more than 50,000 agricultural companies in Ukraine, it is impossible to request and receive detailed information from everyone, especially if it is confidential. It is important to set such criteria by which the information can be received fast from available sources.

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.

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.

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.

At the same time, a large number of agricultural companies, especially small ones, are local farms headed by former heads of collective farms or businessmen who accumulated property and land plots during or shortly after their privatization. Negotiations with the owners of such assets are much more difficult, as such owners do not trust investors, are suspicious of M&A legal and financial instruments, prefer cash settlements. Often such Ukrainian agricultural companies have many founders – relatives of the owner, employees of the company, who can suddenly influence the course of negotiations. Usually, negotiations on the acquisition of such agricultural companies should be held with the participation of local representatives or experienced Ukrainian advisers.

In any case, the results of such negotiations are recommended to be formalized in the final document – the Memorandum of Intent. This document will not only fix the agreement but may also impose certain obligations on the parties.

The Memorandum of Intent should include:

• Target Asset parameters;
• the sale price of the Target Asset;
• actions algorithm in case of the Target Asset parameters discrepancy to the results of Due Diligence (algorithm of the price change, obligation of the Target asset owner on bringing the documents under the agreed parameters, etc.);
• grounds and consequences of the transaction refusal;
• transaction structure (purchase and sale of shares, purchase, and sale of integral property complexes, etc.);
• settlements structure (e.g., settlements in installments, availability of a guarantee share of payment that must be paid after the expiration of a certain period in the absence of new requirements for the acquired agricultural company, etc.);
• conditions for the negotiations and transactions confidentiality.

The list of conditions that must be fixed in the Memorandum of Intent depends on the agreements of the parties and the specifics of the Ukrainian Target Asset.

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.

Related article: Legal Due Diligence of Ukrainian agricultural assets

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.

For example: the new version of the agricultural company charter provides a more transparent procedure for selling shares; ownership is structured (parts of an agricultural company or group of agricultural companies transferred to a foreign legal entity, the shares of which will be the subject of the agreement), permits from Ukrainian antitrust authorities are obtained, accounts payable of the Target asset are reduced, “toxic” co-founders are withdrawn, etc.

8) Preparation for the transaction closing

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

For example: development and approval of the document set required for sale (consents, corporate protocols, creditors’ notifications (if necessary), contracts, documents confirming the powers of the parties, opening bank accounts for settlement payments, obtaining financing, etc.).

9) Transaction closing

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

• signing contracts and documents for their implementation;
• settlements;
• registration of changes in corporate documents of the acquired agricultural company.

Note that the legal control over the acquired Ukrainian asset is transferred to the buyer not from the moment of signing contracts and settlements under them, but from the moment of making changes to corporate documents of the acquired agricultural company and their proper registration.

The process of registering changes to corporate documents can take some time, which also requires certain security measures.

For example: full payment is to be made after registration of changes to the charter of the Ukrainian agricultural company.

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.

Establishing control over a Ukrainian agricultural company must also involve establishing a dialogue with the local communities where the owners live. Very often the acquisition of an agricultural company by a new owner is accompanied by rumors, misinformation that other agricultural companies can use in the fight for the Lessor (landowners). Timely informing the local community, holding public events will relieve social tensions, maintain the loyalty of landowners, and lay the foundation for the development of the acquired agricultural company land bank.