THE INTERNATIONAL COMPARATIVE LEGAL GUIDE TO:
MERGERS & ACQUISITIONS 2016
1. RELEVANT AUTHORITIES AND LEGISLATION
1.1. What regulates M&A?
Laws regulating public takeovers and mergers in Kazakhstan include:
• The Civil Code (General and Special Parts) dated 27 December 1994 and 1 July 1999 respectively (as amended).
• Law No. 415-II On Joint Stock Companies dated 13 May 2003 (as amended).
• Law No. 220-I On Limited Liability Partnerships dated 22 April 1998 (as amended).
• Law No. 461-II On the Securities Market dated 2 July 2003 (as amended).
• Business Code of the Republic of Kazakhstan #375-V dated 29 October 2015 (as amended).
• Law No. 527-IV On National Security dated 6 January 2012 (as amended).
• Industry-specific laws (subsurface use, strategic objects, etc.).
1.2. Are there different rules for different types of company?
The rules for various types of business companies are generally the same with additional requirements for public companies.
1.3. Are there special rules for foreign buyers?
Specific restrictions apply to foreign investment in certain industries or activities such as mass media, communications, insurance, etc.:
• Foreign entities may not directly or indirectly own, possess, dispose of, or manage more than 49% of the voting shares/participating interests in a Kazakhstan legal entity that is engaged in telecommunication activities as an intercity or international communications operator and possesses landline communication. The same restriction applies to the civil aviation industry.
• Foreign entities may not directly or indirectly own, possess, dispose of, or manage more than 20% of the voting shares/participating interests in a Kazakhstan legal entity engaged in mass media.
• Offshore companies may not hold voting stocks in a Kazakhstan insurance company. The same restriction applies to banks resident in the Republic of Kazakhstan and joint stock investment funds in Kazakhstan. The list of ‘offshore jurisdictions’ is issued by the authorised body of Kazakhstan.
1.4. Are there any special sector-related rules?
In certain highly-regulated sectors, e.g. subsoil use, banking, insurance, mass media, participants in M&A transactions must comply with specific regulatory requirements.
1.5. What are the principal sources of liability?
Pursuant to the Civil Code, for any breach of contract, participants may be held liable for actual damages and lost profits (contractual liability). In addition, pursuant to the Administrative Code, failure to comply with various statutory notification and approval requirements may lead to administrative liability. The Criminal Code provides for criminal liability of natural persons (this includes managers of the participating companies). They may be held liable for false business activity with fines at a minimum of up to USD 12,000 or imprisonment for up to seven years with seizure of the property.
2. MECHANICS OF ACQUISITION
2.1. What alternative means of acquisition are there?
There are several alternative means for acquiring a public company:
• direct acquisition from a majority shareholder or a group of shareholders;
• public takeover bids; and
Similar means of acquisition exist for private companies in the form of limited liability partnerships (LLPs; also known as LLCs in other jurisdictions). These are, namely, direct acquisitions from participants/shareholders and means of reorganisation.
2.2. What advisers do the parties need?
Parties to M&As in Kazakhstan are in need of legal counsel, financial advisers and/or technical advisers and independent appraisers.
2.3. How long does it take?
The process duration is individual in each case. There is no general timeframe as it varies depending on different factors: due diligence; prior regulatory consents; the extent to which parties wish to negotiate transaction documents; and so on. Regulatory consents take the most time at the preparatory stage and may last from 1–2 months to 1–2 years.
2.4. What are the main hurdles?
The main hurdle in the M&A process is obtaining various regulatory approvals, which can be cumbersome and time-consuming. Also, many contractual protections under English law or New York law (namely, warranties and representations, indemnities, etc.) are of questionable enforceability in Kazakhstan.
2.5. How much flexibility is there over deal terms and price?
There is a high level of flexibility in choosing the deal terms and price. These are generally subject to negotiations between parties.
2.6. What differences are there between offering cash and other consideration?
Most M&A transactions in Kazakhstan are cash-based transactions, while debt and/or equity are also accepted. Assumption of liabilities is a rare practice in Kazakhstan, but is also possible. There may be statutory independent valuation requirements for non-cash transactions for tax purposes.
2.7. Do the same terms have to be offered to all shareholders?
In the case of LLPs, shareholders (participants) have a preferred right to purchase fellow shareholders’ shares on the same terms and conditions as offered by potential third-party buyers. In the case of JSCs, the buyer (together with its affiliates) contemplating to acquire more than 30% of voting shares must present an offer to other shareholders to buy out their shares as well (mandatory bid). The offer terms must be in compliance with certain statutory requirements.
2.8. Are there obligations to purchase other classes of target securities?
Thisis not applicable in case of LLPs. In the case of JSCs, there are only two classes of securities – ordinary (voting) shares and preferred shares. There is no statutory obligation for the buyer to purchase preferred shares when acquiring ordinary shares and vice versa, unless provided otherwise by the company’s articles of association or by-laws.
2.9. Are there any limits on agreeing terms with employees?
In Kazakhstan, M&A deals keep employment terms generally unaffected unless employees hold participating interest/securities being acquired (in which case, they would have the same rights as any other shareholders of the target), or unless the collective agreement provides otherwise.
2.10. What role do employees, pension trustees and other stakeholders play?
Employees do not play a significant role in M&A deals in Kazakhstan. Employment remains intact and continues with a buyer (with the exception of the General Director, whose authorities can be terminated at the shareholder’s discretion at any time); all principal rights and obligations of both employer and employee are left the same as before.
2.11. What documentation is needed?
Documentation in M&A transactions may differ depending on the structure, but generally, these documents constitute the Heads of agreement, the Shareholders agreement, the Sale and Purchase agreement, the Accession agreement, the Assignment agreement, and others.
2.12. Are there any special disclosure requirements?
Generally, the M&A process per se and negotiations are confidential. At the same time, certain information cannot remain confidential due to statutory disclosure requirements. In some cases, information that must be disclosed in the M&A process may become public.
2.13. What are the key costs?
The key costs are always subject to agreement between parties; there are no statutory requirements/restrictions as to minimum or maximum level of consideration, unless it is unreasonable and lower than the market value (in which case, there may be certain tax implications).
2.14. What consents are needed?
(1) Competition (Antimonopoly/Anti-trust)
Public acquisition is normally subject to anti-monopoly regulations. If a person or group of persons acquires more than 50% of voting shares, the transaction may, in certain cases, be undertaken only with the preliminary consent of the Committee for Natural Monopolies and Competition Protection of the Republic of Kazakhstan (the “anti-monopoly committee”). Such consent is required if the total asset value of the buyer (and its group) and the target (and its group) exceeds KZT 21 billion (approximately to USD 55 million as per the current exchange rate). As one can note, the threshold is rather low; therefore, virtually every cross-border M&A transaction in Kazakhstan may be subject to this requirement.
To obtain preliminary consent from the anti-monopoly committee, a significant number of documents and commercially-sensitive information must be prepared and filed. The whole process (which includes preparation for the filing, subsequent follow-up with, and obtaining the preliminary consent from, the anti-monopoly committee) normally takes two to six months.
(2) Strategic Objects
There are special rules for foreign investors intending to invest in certain strategic objects. Disposal of strategic objects is subject to the permission of the Government of the Republic of Kazakhstan, which also enjoys the pre-emptive right to acquire such objects.
(3) Subsurface use – Mining/Oil and Gas
Pursuant to recent legislative changes, the Government has a priority right over the transfer of Kazakhstan subsurface use rights in strategic deposits only (previously, the Government was entitled to exercise its priority right in relation to any subsurface use right). At the same time, the law retains the Government’s right of consent (“Government Consent”) in relation to any transfer of participating interests/shares of legal entities that are subsurface users, or that have the ability to directly or indirectly influence decisions made by subsurface users, if the main activity relates to subsurface use in Kazakhstan. There are certain exemptions to these rules, e.g. in the case of an initial IPO, if the transaction is between affiliated companies owned by the same parent company in 99% interest, etc. This requirement applies to both Kazakhstan and foreign investors. The statutory timeline for obtaining the Government Consent is 20 business days, and an additional 50 business days must be factored in if the Government exercises its priority right in relation to strategic deposits. Notwithstanding the statutory timeline, the entire process may take longer in practice. The Government Consent is granted for six months. If a transaction is not completed within that period, an extension must be obtained, or a new consent must be sought. There is a requirement to notify the competent body within five days of the completion of the transaction for which consent was granted, otherwise the transaction may be deemed invalid. It should be noted, however, that the recent legislative changes have not been tested in practice and may be subject to various interpretation.
(4) Banking Activity
The banking legislation sets an additional requirement for non-residents who contemplate setting up a Kazakhstan bank or acquiring shares in a Kazakhstan bank. Along with other filing documents, they must present a permission of the foreign banking regulatory body to hold the shares of a Kazakhstan bank.
(5) Natural Monopoly
Both residents and non-residents intending to acquire more than 10% of voting shares in a natural monopolist’s charter capital or perform its reorganisation must seek the approval of the Agency of the Republic of Kazakhstan on Natural Monopolies.
(6) Corporate and Statutory Formalities in LLPs and JSCs
In the case of LLPs, a seller contemplating to sell their participating interests must offer those to fellow shareholders on the same terms and conditions as offered to the buyer or otherwise secure a pre-emptive right waiver if the fellow shareholder(s) is (are) not interested.
In the case of JSCs, a buyer must notify the target and the authorised body about the contemplated acquisition of more than 30% of voting shares. In addition, a buyer, within 30 days after the acquisition of more than 30% of the shares, must publish an offer in the mass media to buy out shares from other shareholders.
2.15. What levels of approval or acceptance are needed?
In general, in the case of LLPs, a simple majority vote of attending and voting shareholders is required to sell an ongoing business or its part. However, internal corporate documents (by-laws, articles of association, etc.) may set higher majority voting requirements or other corporate formalities. The same applies to the buyer of assets.
In the case of JSCs, shareholders are free to sell their shares. No corporate approval is required. The company cannot prevent shareholders from selling their shares, but can offer to purchase those shares at the higher price.
2.16. When does cash consideration need to be committed and available?
Parties to M&A transactions in Kazakhstan are free to negotiate consideration terms, e.g. advance payments, deferred payments, or escrow agreements (albeit the latter is a rare practice in Kazakhstan).
3. FRIENDLY OR HOSTILE
3.1. Is there a choice?
The laws in Kazakhstan do not distinguish between friendly and hostile takeovers.
3.2. Are there rules about an approach to the target?
The purchaser always approaches shareholders or participants of the target, not the target directly.
3.3. How relevant is the target board?
The board of directors (board) and/or management board of most public companies are usually controlled by one or a group of major shareholders. The board can only give recommendations on the public offer and has no legal instrument for blocking a public acquisition.
3.4. Does the choice affect process?
This is not applicable in Kazakhstan.
4.1. What information is available to a buyer?
A buyer may only access information that is publicly available. Such information mainly covers: general incorporation data; articles of association; annual reports and annual financial statements; information on the target’s affiliates; and some other information. In cases where a buyer is a participant/shareholder of the target, it may gain full access to the documents and information about the target by requesting it from the target; otherwise, the buyer can only rely on the seller’s goodwill and good faith in disclosing information and documents.
4.2. Is negotiation confidential and is access restricted?
Generally, the M&A process per se and negotiations are confidential. At the same time, certain information cannot remain confidential due to statutory disclosure requirements. Information that must be disclosed in the M&A process in some cases may become public.
4.3. When is an announcement required and what will become public?
Public companies are usually required to make an announcement which must be published on the website of the company.
4.4. What if the information is wrong or changes?
Making amendments to the offer documentation is possible, while provision of wrong information in the offer may result in liability for the bidder.
5.1. Can shares be bought outside the offer process?
In general, there are no statutory restrictions.
5.2. Can derivatives be bought outside the offer process?
In general, there are no statutory restrictions.
5.3. What are the disclosure triggers for shares and derivatives stakebuilding before the offer and during the offer period?
In the case of JSCs, a buyer must notify the target and the authorised body about its contemplated acquisition of more than 30% of voting shares (together with affiliates). In addition, within 30 days after the acquisition of more than 30% of the shares, the buyer must publish an offer in the mass media to buy out shares from other shareholders of the target (mandatory bid).
5.4. What are the limitations and consequences?
See question 5.3 above. If the buyer fails to place the mandatory bid as discussed above, the buyer must dispose of part of its shares exceeding 29% to third parties.
6. DEAL PROTECTION
6.1. Are break fees available?
There are no statutory break fees; however, parties may agree relevant contractual protection for withdrawal from the deal negotiations.
6.2. Can the target agree not to shop the company or its assets?
No, since its role in the M&A process is limited.
6.3. Can the target agree to issue shares or sell assets?
No. The target cannot do this within the M&A process.
6.4. What commitments are available to tie up a deal?
There may be contractual commitments to tie up a deal. Parties may opt to sign a preliminary agreement, which has a binding nature and subsequently leads to signing the main contract.
7. BIDDER PROTECTION
7.1. What deal conditions are permitted and is their invocation restricted?
The following conditions are commonly attached to the offer, and some of them must be satisfied or waived before the expiry of the offer:
• purchase price;
• payment terms;
• binding or non-binding effect of the offer;
• obtaining all necessary Government consents;
• obtaining required co-shareholders’ waivers;
• security for payment;
• terms for accepting the offer;
• confidentiality; and
• exclusivity, etc.
7.2. What control does the bidder have over the target during the process?
There is no statutory control of the bidder over the target during the process. However, the bidder (the buyer) and the seller may contractually agree the bidder’s right to monitor the business until closing and the target’s general ordinary business conduct requirement (please see further discussion of this under question 7.3).
7.3. When does control pass to the bidder?
From the corporate law perspective, legal control passes on to the buyer when the transfer of ownership title to the shares formally takes place, i.e. when, in the case of LLPs, the buyer is registered as a participant/shareholder of the target with Government authorities or the private registrar of legal entities (whichever is applicable). In the case of JSCs, the transfer occurs upon making the credit entry into the personal account of the buyer in the shareholders’ register of the JSC (maintained either by the company itself or by a special registrar). In practice, parties may opt to agree that management control passes on to the buyer during the interim period between the signing of the SPA and the closing. Management control may be gained through appointment of the buyer’s representative in the management board with the voting rights and signatory authority in the decision-making process of the target.
7.4. How can the bidder get 100% control?
As discussed under question 6.3, the buyer gets 100% control when the transfer of ownership title to the shares takes place.
8. TARGET DEFENCES
8.1. Does the board of the target have to publicise discussions?
No, there are no such requirements under Kazakh law.
8.2. What can the target do to resist change of control?
There is nothing the target can do to resist change of control.
8.3. Is it a fair fight?
The fight is fair between the buyer and the seller; the target is not involved in the process.
9. OHTER USEFUL FACTS
9.1. What are the major influences on the success of an acquisition?
While there are many different factors that may have an impact on the success of an acquisition, the major one is the fulfilment of all statutory requirements for documenting the M&A process and obtaining necessary regulatory approvals.
9.2. What happens if it fails?
If an acquisition fails due to refusal of the relevant Government authorities to grant consent to the acquisition (e.g. exercise of the Government priority right), the deal will not proceed further. If an acquisition fails due to parties not agreeing commercial terms, the buyer can make another offer at any later time.
10.1. Please provide a summary of any relevant new law or practices in M&A in your jurisdiction.
In May 2015, new amendments were introduced into the Competition Law. One of the landmark changes is an increase of the threshold criteria in acquisition of shares (participating interest). Previously, antimonopoly approval was required in cases when a purchaser becomes an owner of more than 25% of shares (participating interest) as a result of a transaction. Following the legal amendments, the antimonopoly approval must be secured in the case of acquisition of more than 50% of shares (participating interest).
Also, the duration for review of the antimonopoly application by the antimonopoly committee has been reduced from 50 calendar days to 30 calendar days from the date of filing.