SORAINEN M&A and Private Equity  Legal Update No 7 - May 2010
  Dear clients and cooperation partners,

Welcome to the seventh edition of the SORAINEN M&A and Private Equity Legal Update! When publishing our last M&A and Private Equity Legal Update in October 2009, we predicted that the M&A markets would start recovering gradually. Indeed, the Baltic countries have coped relatively well with the economic crisis. Estonia has even managed to fulfil the criteria for adopting the euro. Hopefully, this reflects foreign investor confidence in the region.

This issue focuses on three topics:

  • At a time when cash is short, non-cash transactions have become handier. Our legal update explains different non-cash merger structures.
  • Foreign investors in Belarus often set up joint ventures with their local partners. We explain the possibilities and restrictions on enforcing a shareholders agreement in Belarus.
  • Finally, we reveal interesting results of the first Baltic M&A Deal Points Study.

Enjoy reading and let us know if you have any comments or questions.

Yours sincerely,

Toomas Prangli

Pekka Puolakka

Pekka Puolakka
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Eva Berlaus

Eva Berlaus
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Laimonas Skibarka

Laimonas Skibarka
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Toomas Prangli

Toomas Prangli
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In June 2006, Siemens and Nokia announced the merger of their network infrastructure divisions in order to establish a 50/50 joint undertaking. After the burst of the dot-com bubble, Finnish corporation Sonera and Swedish corporation Telia announced their merger plans in March 2002 as a result of which a new major telecommunications group was formed in the Nordic region.

Nokia Siemens Networks and Telia Sonera – these well known companies of Nordic origin share a common denominator in that they have all undertakennon-cash mergers. The current economic situation is ideal for increasing market share, and a merger could be a good way to do this. As availability of credit has not yet fully recovered, an alternative worth considering is a non-cash merger. So far, we have not seen that many mergers of independent companies in the Baltic States. What we have seen have rather been takeovers where the corporate culture of the stronger company has become dominant, and in general the key personnel of the company taken over have left after the takeover together with their business knowledge.

Why merge?

Reasons for merger may differ: enhancing competitiveness by combining the market forces and financial capabilities of two companies, increasing the customer base, creating synergies upon improving efficiency of production, marketing, and logistics. Major Nordic companies look to the Baltic region as their domestic market, so that local companies should step up their competitiveness now before the end of the economic crisis in order to survive in this region.

Various non-cash merger structures

Below appear examples of more typical options used in non-cash mergers. To make it simpler, these scenarios are illustrated through using the corporate form of a public limited company:

  1. “Statutory merger”. This is a merger within the meaning of respective local company law. In the course of such merger, two separate companies, company A and company B, become one company, where B merges with A. As a result, company B is deemed dissolved, and company A is the surviving company.
    The assets and liabilities of company B transfer to company A by operation of law. The purchase price is paid to the shareholders of company B by the shareholders of A as shares in A. Thus, in addition to the shareholders of company A, the shareholders of former company B get shares in company A, as a result of which the shareholders of both companies become the shareholders of company A.
  2. “Equity-for-assets” transaction. Company A “pays” with shares of A (issues new shares of A) to company B for B’s assets and liabilities. Thereafter, company B, left without any business, will be dissolved, and shares in A are distributed to the shareholders of B in the course of liquidation. The final result is similar to that of option 1.
    This option requires approval of company A shareholders for the issue of the new shares in A to company B shareholders and excludes the right of pre-emption of the existing company A shareholders (3/4 of the votes represented at the general meeting). Regarding company B, consent of the supervisory board is required for the transaction in general.
  3. “Equity-for-equity” transaction. Company A purchases the shares of company B directly from the shareholders of company B for shares in A (A issues shares of A to the shareholders of B). After the transaction, company B becomes a subsidiary of company A. The feature of this structure is that creditors of subsidiary B will have no claim against company A (unlike under options 1 and 2).

In this case the issue of shares in A to the shareholders of company B and exclusion of the right of pre-emption of the existing shareholders is required, similar to the second option. With respect to company B, the transaction is conducted by the shareholders of B, so that no resolutions of the managing bodies of company B are required.

Determining the price

Undoubtedly, the most important issue for shareholders is the share exchange ratio. It is important to bear in mind the principle of equal treatment of shareholders: shareholders have to be treated equally under equivalent circumstances. In determining the share price, the parties must agree on the relative value of both companies. For this purpose the net asset value, discounted cash flows, prior average EBITDA (earnings before interest, taxes, depreciation and amortisation), or a combination of the above are used. However, the values of companies may significantly change after price negotiations and determining the exchange rate before closing the transaction, for example due to significant decline in the financial markets.

For publicly traded shares, the weighted average of the share trading price of twelve months or even a shorter period may be used. But even this can be problematic as the value of the shares of participating companies may also considerably decrease after the merger is announced. This can be explained, for example, by the opinion of the market that the buyer has overpaid for the shares of the seller. A fixed exchange rate for the shares can be agreed in the contract. Decrease in the relative market value of the buyer's company reduces the gains of the seller's shareholders when the transaction is conducted. Most sellers require protection mechanisms against a decrease in the price. The objection of buyers is usually related to the fact that a fixed exchange rate reflects a substantial ratio between the practical values of the two companies, and in general market volatility should not change it. If the market situation worsens, the value of the shares of the seller itself may decrease, which means that the economic relationship between the parties has remained the same.

In the case of options 2 and 3, it is better for the seller to require a so-called walk away clause, and an unfixed rate, which enables the seller to abandon the transaction if the market value of the shares of the buyer's company falls below a certain price limit (applicable in the case of publicly traded shares). In that case the buyer will bear the risk of decrease in the value of its own shares. Typically, contracts contain in addition to the minimum rate even a maximum rate with regard to shares which the buyer has to issue. An alternative to an unfixed rate is a fixed rate applied only if the value decrease or increase exceeds a certain threshold, for example 10%. In merger regulations under applicable laws, the means of protection for shareholders is their right not to approve the contract but it is important that after the merger resolution has been adopted it cannot be challenged or cancelled on the basis that the share exchange rate was too low (damages can be claimed).

Transaction documents

In addition to the above, the following documents have to be prepared in connection with a merger:

  1. In major companies, the management board is usually the driving force that enters into a letter of intent where the principal terms and conditions and time limits of the transaction are agreed. In general, a letter of intent does not bring about any legal consequences, except for the obligation to hold negotiations in good faith, violation of which may bring about a claim by the other party for indemnification for loss; or in case the letter of intent is treated as a preliminary contract, which is binding on the parties.
  2. A confidentiality agreement is also advisable, as it restricts use or disclosure of confidential information and sets contractual penalties in case of breach of contract, and even an exclusivity agreement if a party is interested in the other party not holding negotiations concurrently with several companies (resource issue). Exclusivity is usually limited in time.
  3. Financial, commercial, and legal due diligence are vital to assess whether to move on and, if so, on what terms and conditions, to check known presumptions, and to identify risk factors. In the case of a legal due diligence, this should verify whether the merger is subject to merger clearance.
  4. In terms of main contracts, in the case of a statutory merger, a merger contract has to be drafted in which the principal terms and conditions of the merger are determined, including the share exchange rate and amount of additional payment (if any), and thereafter preparation of a merger report where the merger and the merger contract are explained. In Estonia, an auditor also has to audit the merger contract, and the auditor's report is submitted to the shareholders. The shareholders of both companies have to approve the merger, for which 2/3 of the votes represented at the general meeting are required, and if various types of shares exist, then even the votes of the holders of 2/3 of each type of shares. The merger takes effect upon making the entry in the commercial register.
    In the case of option 2, a combined assets/business/plant sale and share subscription contract has to be drafted, and in the case of option 3 a combined share sale and subscription contract.
  5. The shareholders agreement is particularly important in the case of a merger as both parties continue cooperating with each other. First and foremost, the shareholders agreement must regulate how the company is to be managed (whether and who has the right of veto, issues as to the competence of the management board, supervisory board, and shareholders), agreements concerning issues of funding further activities, prevalence of the shareholders agreement with regard to the parties, rules of conduct in case of deadlock, that is, when the parties cannot reach an agreement in any issue.

In conclusion, a non-cash merger could be a rather attractive alternative to a takeover, and companies intending to take advantage of the current market situation should certainly consider it.

Kadri Kallas
Senior Associate


Shareholders agreements are quite new for the Belarusian legal environment. Though a number of such agreements have been concluded, there is no recognised court practice as to enforcing agreements. Shareholders agreements as such, choice of foreign law to govern them, and enforceability of standard provisions of shareholders agreements are regarded with scepticism by many practicing lawyers in Belarus. However, this attitude is often based on negative expectations of outcomes of potential disputes due to conservatism of judges rather than on legal analysis.

Status of shareholders agreements

Belarusian law has no concept of the shareholders agreement. On the other hand, the law does not prohibit agreements governing relations between shareholders. These relations are obviously of a civil nature, so that the principle of freedom of contract should apply to them. Thus, shareholders may conclude agreements not defined by law and are free to acquire civil rights and undertake responsibilities not contradicting the law. Based on this rationale, shareholders agreements as such should be recognised and enforced in Belarus.

An opposing point of view maintains that the law requires relations between shareholders in a commercial company to be regulated by the company’s constituent documents, and that no additional agreements on the same subject are possible.  This more conservative approach does not allow the parties to follow the international practice of organizing shareholdings in a commercial company.

Choice of foreign law

Belarusian law generally allows the parties to freely choose the law applicable to civil agreements between them. With regard to corporate documents, a general restriction provides that an agreement on establishment of a Belarusian company should be governed by Belarusian law. As a shareholders agreement is not an agreement on establishment of a company, this restriction may be regarded as not applicable.

The main risk is that application of foreign law may be disputed based on provisions on avoidance of applicable mandatory norms and on public policy.

Call and put option

Call and put options in most cases appear to be in compliance with Belarusian law. Based on regular put (call) option provisions, one of the parties may compel the other party to sell (buy) their share, that is, to conclude a respective agreement. Under Belarusian law this may be treated as a preliminary agreement or a binding offer, depending upon the particular terms of the put (call) option. This creates an obligation to conclude the agreement so that put (call) options should be valid and enforceable in Belarus, although we have to note that consistent and reliable court practice on this matter is so far non-existent.

Tag-along  and drag-along rights

Under a tag-along right a shareholder may sell shares only together with the shares of other shareholders who wish to join the deal. This may be qualified as a precondition on sale of shares by a shareholder to third parties. However, if the seller fails to comply with this precondition, the other shareholder(s) will not be able to dispute the validity of the sale-purchase agreement. Under Belarusian law grounds of invalidity cannot be established by agreement between the parties.

A drag-along right allows a shareholder, on selling shares, to require sale of shares by other shareholders. Under Belarusian law this can be qualified as an obligation to conclude an agreement. However, grounds for compelling to conclude an agreement are limited by law to preliminary agreements, binding offers, and some other cases, and the parties may not establish additional grounds by agreement.

Consequently, the main legal remedy in case of breach of provisions of tag-along and drag-along rights may be a contractual penalty, though it should be taken into account that the court may resort to public policy provisions and turn down such a claim.

Under Belarusian law, shareholders of limited liability companies and closed joint-stock companies as well as those companies themselves enjoy a preemptive right to buy shares intended for sale to third parties. This factor should be considered when including a tag-along or drag-along right in a shareholders agreement.

Voting restrictions

A shareholders agreement may establish voting restrictions and special voting procedures. If such restrictions or procedures are violated, the decision will still be lawful, as under Belarusian law failure to comply with both legislation and a company’s constituent documents may result in the decision being held unlawful. Disputes over decisions of a Belarusian company’s management bodies are subject to the exclusive competence of Belarusian commercial courts. However, the lawfulness of a decision made in violation of voting procedures set by a shareholders agreement does not preclude shareholders from claiming a contractual penalty in case of violation of voting restrictions and procedures laid down in the shareholders agreement.

Belarusian law does not explicitly allow some shareholders being given veto rights on certain issues. However, in the case of a limited liability company (LLC) the number of votes of a shareholder may be disproportionate to the nominal value of the shareholding. This gives a good tool to construct the constituent documents so that the qualified majority requirement effectively gives a veto right to one or several shareholders with respect to specific issues.

Summary and recommendations

Belarusian law does not explicitly prohibit conclusion of shareholders agreements. However, under a 20 year old quasi-tradition, relations between shareholders are governed only by the law and the company’s constituent documents. In this connection we may expect that Belarusian courts will be cautious and perhaps conservative when considering and interpreting the status of shareholders agreements and their provisions. Likewise, the courts of the Russian Federation tended to disregard shareholders agreements until recent adoption of a law which expressly established the validity of shareholders agreements.

As the status of shareholders agreements allows different interpretations, our general recommendation is to include provisions complying with Belarusian law in the company articles of association. It is also advisable to formalise put and call options as separate documents in the form of a preliminary agreement or an offer, depending upon the particular arrangements between the parties.

If joint venture parties require a higher probability of enforcement of their shareholders agreement, the joint venture can be structured so that both the holding company is established and the agreement is subject to a foreign law where shareholders agreements are clearly acknowledged.

Toomas Prangli
Ann Valchok


In the last M&A and Private Equity Legal Update, we mentioned the first Baltic M&A Deal Points Study. In 2009, the M&A teams of SORAINEN and alliances LAWIN, TLS Alliance, Borenius Group and Raidla Lejiņš & Norcous worked together in an unprecedented way to analyse Baltic M&A transactional practice. We now reveal some of the main findings of the study.

According to the Baltic M&A Deal Points Study, the average value of Baltic M&A transactions in 2007-2008 was EUR 1-25 million. The IT and retail sectors were most active in M&A, although activity was scattered around many industry sectors. This was still the time when both strategic and financial investors were rather active and in most cases (81%) they preferred a negotiated sale to controlled auctions.

Table 1: Transaction values of M&A transactions analysed:

Table 1: Transaction values of M&A transactions analysed

As a whole, it could be concluded that all main international M&A clauses are familiar to investors active in Baltics. However, such deal points are often used in a less sophisticated way. For example, in almost half of cases the purchase price was agreed as a lump sum without adjustments such as net indebtedness or net working capital at closing. The purchase price was also frequently paid in full at closing and relatively seldom deferred to protect the seller against undisclosed liabilities.

Liability of the seller was usually capped overall by a certain amount. Interestingly, however, the cap reached 100% of the purchase price in 39% of cases. In comparison, similar studies elsewhere in Europe and in the United State have determined that the usual practise elsewhere in developed markets operates so that the liability cap is very rarely higher than 50% of the purchase price. It should be noted that Baltic M&A transactions are often smaller and therefore the risk tolerance of sellers is higher.

Table 2: Liability cap as percentage of purchase price:

Table 1: Transaction values of M&A transactions analysed

MAC (material adverse change) clauses allow a party to back off from a transaction in case of unexpected changes in the financial situation or prospects of the target company or in case of market turbulence. Until the economic crisis, this clause was rather seen as legalese used only by lawyers. During the financial and economic downturn, the importance of this clause has increased dramatically. MAC clauses are used more often in Baltic transactions compared to other European countries. However, the sophistication level of these clauses is not yet very high, thus leaving room for different interpretations.

The real value of the first Baltic M&A Deal Points Study lies in the possibility to benchmark future studies against this landmark research. It would be interesting to see how legal M&A practice develops and to determine trends. Meanwhile, we look forward to the market becoming more active.


International acknowledgement of SORAINEN M&A and Private Equity Team

We are delighted to note the continued international acknowledgement of the SORAINEN M&A and Private Equity Team. SORAINEN continues to be the only Baltic and Belarusian law firm both in Eastern Europe and overall to earn a mention in Bloomberg Global Legal Advisory on Mergers & Acquisitions Rankings Q1 2010. Another M&A database, DealWatch, ranks SORAINEN as the top legal adviser based on the number of M&A and equity capital markets (ECM) transactions advised in the Baltic States in 2009.


Recent transactions advised by the SORAINEN M&A and Private Equity Team

One of the largest M&A transactions in Latvia since the beginning of the year

SORAINEN Latvia and Estonia are advising Rīgas Miesnieks and its shareholder, Rakvere Lihakombinaat, on the acquisition of a majority shareholding in Jelgavas gaļas kombināts. Rīgas Miesnieks is the largest meat processing business in Latvia and SORAINEN is advising the client at all stages of the acquisition, from legal due diligence of the target company to preparing transaction documents, representing client interests in negotiations, and applying for merger clearance. To date, the acquisition is pending approval by the Latvian Competition Council.

Acquisition of vehicle inspection stations by A-Katsastus in Estonia

SORAINEN assisted A-Katsastus, the leading vehicle inspection company in Finland with operations in Denmark, Estonia, Latvia, Poland and Russia, in its acquisition of three operating vehicle inspection stations and one station under construction, from Estonian company Alpter T.Ü.V. As a result of the transaction, the client obtained 13% of market share and ensured its position as a leading vehicle inspection company in Estonia.

Signaux Girod and Girod International acquisition of M-2 shares 

SORAINEN steered Signaux Girod and its affiliate Girod International in buying a majority stake in M-2, a Latvian company engaged in designing, producing, and installing road traffic safety tools. Signaux Girod and its group companies’ principal activity is designing and producing road signs, tourist signs, road markings, and signs on enamel. Assistance included advising on legal due diligence, shareholders agreement, and certain post-closing corporate issues.

Schibsted Baltics acquires sole control of Žurnalų leidybos grupė

SORAINEN Lithuania advised Schibsted Baltics in buying up 33.33% shares in Žurnalų leidybos grupė and increasing its shareholding to 100%. Žurnalų leidybos grupė is one of the leading magazine publishers in Lithuania, publishing 11 magazines with total printed copies exceeding 13 million yearly. Besides transaction advice, SORAINEN obtained merger clearance from the Lithuanian Competition Council. The transaction was completed in January 2010.

Panaxia invests in Trikampis žiedas

SORAINEN Lithuania advised Panaxia Security, a major Swedish security company, on acquisition of 50% shares in Trikampis žiedas, one of the largest companies in the Lithuanian security services sector with more than 450 employees.

SORAINEN Belarus advises EBRD on equity investments 

SORAINEN Belarus advised EBRD on equity investment (acquisition of a 25.5% stake) in Commercial and Industrial Group West-Ost Union, the largest children's goods retail chain in Belarus consisting of eleven supermarkets located in the biggest Belarusian cities (the chain is operated under the “Buslik” trademark). EBRD investments will be directed towards further expansion of the chain in Belarusian regions, including five new supermarkets, and implementation of international management and accounting standards in the company.


SORAINEN seminars in Helsinki on 25 May

After experiencing recession, the Baltic States now seem to be on track towards recovery, and optimism is rising. At the same time, sale prices of Baltic companies have been falling and far more acquisition opportunities are available than before. We invite you to a seminar on M&A and other investment opportunities in the Baltics where these topics will be covered by relevant experts in the Baltic markets. To learn more about the seminar, view the agenda, and apply for participation, please click here.

SORAINEN together with Finnish investment bank Septem Partners invite you to a seminar on Evolving Belarus – Opportunities in a still untapped market focusing on business opportunities in Belarus. Seminar topics are tailored to the interests of those exploring Belarus markets. The Belarusian business environment will be discussed both from a Finnish corporate perspective as well as from a legal viewpoint, focusing on the Belarusian State as a business partner. Detailed information  and  application  form  are  available here.

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Please note that this Legal Update is compiled for general information purposes only, free of obligation and free of legal responsibility and liability. It does not cover all laws or reflect all changes in legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact SORAINEN or other legal advisor for further information. The SORAINEN Legal Update is published periodically and covers legal news of Estonia, Latvia, Lithuania, and Belarus. Electronic versions of SORAINEN Legal Updates are available and can be subscribed to on the SORAINEN website –

All rights reserved. PLC Which lawyer? (2010, 2009) International Financial Law Review (2010, 2009) International Tax Review (2010) Financial Times & Mergermarket (2008)