DEAL STRUCTURING IN RUSSIA UNDER ENGLISH LAW
By Andrey Goltsblat Managing partner Goltsblat BLP
WHY ENGLISH LAW?
IT’S NO SECRET that for most of their M&A transactions, in terms of their worth, large Russian companies use English law while the jurisdiction of the transaction party and the target company is not
particularly important.
There are a number of reasons for this. First, the
current Russian legal system is not, unfortunately, able
to employ the legal structures elaborated by the parties
and not prohibited by corporate law but unfamiliar to
the courts. The legal system cannot underpin their
application because there are no relevant legal
provisions and because the court system is not ready.
Moreover, the mandatory nature of certain provisions
of Russian law significantly limits the choices available
to the parties when formalising their arrangements.
Unlike Russian law, English law allows commercial
transaction arrangements to be legally implemented in
full.
Here is an example
Russian law does not currently recognise indemnities as
a legal concept. With regards to warranties, there are
some implied warranties under the Russian Civil Code in
relation to the sale of assets (which could include the
sale of shares) relating to title and unencumbered
ownership and some basic assumptions about the
quantity and the quality of the asset. However, these
principles were aimed more at consumer transactions
and are fairly limited in the context of an international
finance or M&A deal. They cannot be altered or
extended (or reduced) by contractual agreement
between the parties. Under Russian law, a seller cannot
be held liable for any false statements.
Fundamental issues such as protection for liabilities
cannot currently be dealt with under Russian law
warranties. Also, on a sale of shares in a company, the
implied warranties under Russian law will only relate to
the shares themselves and not to the title, ownership,
International businesses will
take longer to become
completely comfortable in using
only Russian law and this is
likely to be a slower process of
development. However, English
law took some 600 years to
develop into what it is today and
so in the last 20 years Russian
law has already made some
huge steps in the right direction.
condition, etc. of the underlying business and assets of
the company to which the shares relate.
As for English law – it clearly recognises
representations, warranties and indemnities. These are
often essential on international finance and M&A
transactions and many deals would be difficult to
structure without them. In certain situations, English
law may imply terms into a contract, based on usage or
custom, a previous course of dealing or the intention of
the parties. In addition, certain statutes provide for
terms to be implied into specific types of contract, such
as contracts for the sale of goods. Indemnities are
agreements to compensate for loss arising from a
particular liability and tend to be used where there is a
known or potential, clearly identifiable liability, such as
a tax liability, a potential environmental claim, or a
specific issue arising from due diligence1.
