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Investment support in Ukraine: lawyer as partner in project development

Investment support in Ukraine: lawyer as a partner in project development


"The party accepting investments needs no less legal protection than the investor," - said Maksym Kurochko, managing partner of MK Legal Service. 

As you know, investment is a very broad concept that covers the investment of funds for commercial purposes in a variety of objects: from works of art and precious metals to financial assets and shares of companies. Since Ukraine does not have a developed stock market, and bank deposits do not earn much, the market of real investments, in particular in real estate, as well as the acquisition of shares (stakes) in foreign and Ukrainian companies, is growing every year.

The most popular industries for investment today are agribusiness (land and businesses) and, of course, innovative business: e-commerce, medical and biotechnology startups, IT companies offering solutions in the fields of security and communications, etc. Ukrainian enterprises attract investments primarily for business development and scaling: launching new products, purchasing of equipment and other fixed assets, opening of new retail outlets, entering new markets.

Maksym Kurochko, Managing Partner of MK Legal Service, spoke about the role of a lawyer in the process of successfully attracting investments in an interview for the "Legal Practice" publication.

— How do you, as a lawyer, help in finding investors and negotiations with them?

— This year, my law firm "MK LEGAL SERVICE" celebrates its 10th anniversary, and I personally comprehensively supporting businesses of various fields and sizes for about 15 years.

In my practice, there were various projects, from small startups to the international expansion of Ukrainian enterprises. And I started as a corporate lawyer, that is, a legal adviser who is as close as possible to the business and knows all its processes from the inside. Now among my clients there are the leaders of their markets, and I started cooperation with them by registering their brand and company. Therefore, during all these years, I personally negotiated and ensured proper legal registration of their investments for the development of companies.

In parallel, I was actively engaged in the development of my own legal business, and therefore joined organizations and clubs of the same business owners.  There I met many businessmen who were looking for successful business projects for investment, and beginners who needed additional financial resources. And I thought: why not help both? So, thanks to my love of networking and proven investment expertise, I became, in fact, an investment intermediary. Even among my clients, there are already partners of a joint successful business, which took place to my networking and the expertise of my "MK LEGAL SERVICE" team.

— What forms of settlement of relations in an investment project are usually chosen by the parties? Which of them are the most effective and why?

— Of course, we recommend to all participants of the investment project from the very beginning to settle all issues that may turn into problems in writing in as much detail as possible. After all, the desire of each partner to fulfill the agreements and, accordingly, the success of the entire project depends on this. For this purpose, Ukrainian legislation provides for various legal instruments. The choice of the most appropriate one depends on many criteria: the type and form of investment, the goals of the investing entities, the corporate structure of the partners' business, etc.

We recommend all parties to the investment project to settle all issues that may turn into problems in the most detailed and written form from the very beginning

An investment agreement can serve as a basis for formalizing relations. However, it is often necessary to establish many important agreements in writing, which, for example, are performed even before the investment object appears or regulate the details of management activities. Therefore, to invest in an unstructured business, preliminary agreements and letters of intent will be required, and to acquire corporate rights in an existing business - a share purchase agreement and a corporate agreement.  Also, in some cases, it is possible to apply loan agreements and license agreements. It is very important that all these documents are agreed among themselves and reflect all the parties' agreements in as much detail as possible.

As you can see, there are many questions that an investment project lawyer needs to get detailed answers from each party before determining the best form of settlement of the relationship between them. It is for this reason that we at MK LEGAL SERVICE hold a so-called strategic session with all participants of the investment process. At this session we record all the details and on their basis develop an appropriate agreement or a system of agreement that guarantee maximum protection of the rights and interests of both investors and business owners attracting investments.

— How does a lawyer support an investor and a company that attracts investments? Is there a difference in legal tasks and what is it?

— Paul Samuelson once aptly said, “Investing should be like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”

That is, successful investing is a big and boring job that requires preparation and patience. But, of course, there is still a chance to make this process less burdensome for investors — to involve an experienced lawyer who will conduct all the necessary checks and draw up all the necessary documents.

So, for an investor, a lawyer can solve the following tasks:
— carry out a detailed legal due diligence of the investment object and potential partners. Today, the development of digital technologies provides many tools for verifying individuals and legal entities. In general, there are several dozen open registers with various information;
— develop an optimal scheme of corporate business structuring, which will provide the investor with control over investments and the project as a whole;
— develop a package of agreements that will regulate the smallest details of partnership cooperation and areas of responsibility of the parties. For example, the terms of withdrawal from partnership, resolution of conflict situations, conditions for investment return (most investors are interested in ROI — return on investment), reporting, control, key decision-making (quorum, voting, resolution of deadlock situations, etc.);
— carry out investment transactions and their registration in accordance with the law, which will provide a future evidence base and legal position in case of disputes related to investments;
— to ensure the most effective process of transferring funds (investments) from the investor, passing financial monitoring and control procedures, as well as investing with minimal tax losses for the investor (in particular, conducting transactions in foreign jurisdictions).

It is the lawyer who can prepare the investment object for inspection by the investor, identifying "weaknesses" in advance and ways to strengthen them

It is clear that for a company that attracts investments, a lawyer will solve almost the same tasks, but, so to speak, in a mirror image. That is, the lawyer will now take into account the rights, interests and levers of management control of such a company during the construction of the corporate structure of the investment project and in the relevant agreements. As for the object of investment, it is the lawyer who can prepare it for inspection by the investor, identifying in advance weak points and ways to strengthen them.

— Which party needs more legal protection and what are the difficulties associated with this?

— It is usually believed that the party that invests funds and, accordingly, bears financial risks, needs greater legal protection. In our case, it is an investor.

Difficulties for the investor may arise in the following situations:
— the investment was made in one business entity, and in fact the capitalization took place at the expense of other entities. For example, you bought a share in a legal entity that exists only on paper, and all operational activities are carried out on the basis of several individual - entrepreneurs;
— funds were invested in the business in cash without proper registration of the fact of their transfer. In this case, it is necessary to at least draw up loan agreements, in particular with additional security for the fulfillment of obligations - property guarantee, pledge, mortgage, etc.;
— during the registration of the partnership, the terms of control and reporting were not specified in the agreement, and therefore the investor does not have sufficient influence on the project team and does not have the right to participate in operational issues.

However, my experience shows that the party receiving investments needs no less legal protection.

Difficulties for it may arise under the following circumstances:
— received insignificant funds for their own business and actually lost control over it (in Ukrainian realities there are cases of raiding due to the initial introduction of "investors" into projects);
— became victims due to the theft of know-how and your intellectual property, and a pseudo-investor is already realizing your business dream;
— did not provide sufficient responsibility for the franchisee for violating the quality requirements of his product under your brand and lost his greatest value — reputation.
As you can see, there are enough potential problems for both sides of the investment project, and therefore each of them certainly needs complex legal support and protection.

— What are the most common causes of conflicts and disputes in an investment project? How do you, as a lawyer, help solve them?

— From my own experience, I can identify two main causes of conflicts between partners: financial and moral and ethical.

It is a well-known fact that partners share a small profit easily. But when the company starts earning millions or, on the contrary, becomes unprofitable, questions and mutual claims arise between partners, which without a clear and precise contractual settlement (reinvestment, additional investment, attraction of loans, etc.) eventually lead to conflicts and disputes.

Often, partners are people who profess completely different life values, which eventually begins to affect the management styles and business development strategy. Again, if the partners did not agree "on the shore" and did not document all the critical points, sooner or later the conflict becomes inevitable, as well as the collapse of the entire project.

In my opinion, and not only that, the best way to resolve the conflict is to prevent it by holding a detailed strategic partnership session between the participants of the investment project for the written settlement (in memorandums, corporate agreements, protocols of intent, charters, etc.) of the maximum number of possible disputed situations in the future.


— How is the support for the participants’ exit from the investment project? What difficulties arise in this process?

— The withdrawal of participants from an investment project is always a complex and controversial process. At such a moment, it is necessary to solve a lot of issues, among which are always critical for the further existence of the business. After all, there are projects with low liquidity, in which the investor must give 1-6 months' advance notice of intention to withdraw from it, or those that do not provide for the possibility of withdrawal at all, except for replacement with a new investor.

The main difficulties arise if the parties have not settled the issue of the withdrawal of partners in writing, and each party begins to interpret its rights and obligations at its own discretion. Therefore, we recommend that the relevant agreement clearly stipulate financial and other sanctions in case of unilateral withdrawal from the project, force majeure conditions, the procedure for resolving disputes, including applicable law and jurisdiction.

That is why my key recommendation for both the business attracting investment and the investing investors is to enlist the support of a legal advisor who has experience in supporting investment projects from both sides. He will know all the nuances, pitfalls and risks that await all participants, and therefore will be able to prevent them and guarantee the safety of future successful partnership.
The article is published in issue No. 37-38 (1238-1239) Private clients of the publication "Legal Practice"