Mergers and Acquisitions (M&A) in the Pharmaceutical Industry
The client requested legal support in acquiring a drug manufacturing plant, provided that the two target companies that owned the plant were in the process of liquidation and bankruptcy. The lawyers were faced with the task of choosing the optimal structure for the transaction, conducting comprehensive due diligence in identifying the risks associated with acquiring the plant and shedding light on the state of the asset prior to the purchase.
Preparation and implementation of an M&A transaction is a very labor-intensive process which can be broken down into several stages and is done based on its own set of methods.
Preparation and implementation of an M&A transaction is a very labor-intensive process which can be broken down into several stages and is done based on its own set of methods.
03.08.2022
Healthcare, including the pharmaceutical and medical industries, has gained particular investment appeal in recent years. Despite the fact that the COVID-19 pandemic has led to a general slowdown in investment activity, areas such as virology, on the contrary, have received a heavy influx of investments.
In Russia, as in many other countries, entire associations have been created, consisting of professionals working in the pharmaceutical field and investors, who have jointly directed their efforts toward developing a vaccine against the new coronavirus infection COVID-19.
Such an increasing trend of M&A deals, which has not only applied to pharmaceutical companies but also to the largest Russian and international investors, is likely to continue into the near future.
An M&A transaction, as a rule, requires a study of the following conditions:
- the stock acquisition structure (shares in the authorized capital);
- the purchase price and the possibility of adjusting it;
- the payment procedure, terms, and procedure for due diligence with respect to the company being acquired;
- an analysis of the assets of the company being acquired;
- requirements for its financial performance and business activities;
- the suspensive conditions of the transaction;
- assurances regarding the conditions;
- obligations to compensate for property losses;
- the right of the parties to terminate the sale contract;
- limitation of the seller's liability;
- the options of the parties, etc.
All these points need to be worked out depending on the goals of the transaction and included in the final business sale and purchase agreement. Experts from CPO Group, LLC, analyzed, first and foremost, the necessity to include such terms in the contract in order to protect the client’s interests and minimize the risks of this transaction being contested in the future.
All these points need to be worked out depending on the goals of the transaction and included in the final business sale and purchase agreement. Experts from CPO Group, LLC, analyzed, first and foremost, the necessity to include such terms in the contract in order to protect the client’s interests and minimize the risks of this transaction being contested in the future.
How M&A Deals Work
The structure of M&A transactions is complex, but the entire process of conducting M&A transactions can be more or less divided into the following stages:
- the seller and the buyer, as well as their representatives and lawyers negotiate with the other party;
- a non-disclosure agreement (NDA) is concluded on confidential information;
- an agreement of intent is signed. This document is also often replaced by a letter of intent, a protocol of understanding, or the main terms of the transaction (term sheet);
- conducting due diligence regarding the target company and its assets;
- structuring the M&A transaction;
- executing the transaction (including all registration and corporate procedures).
It should be noted that a memorandum of understanding and a preliminary agreement
are not the same thing.
In accordance with paragraph 1 of Art. 429 of the Civil Code of the Russian Federation, a preliminary agreement obliges the parties to conclude an agreement in the future, the so-called main agreement, on the terms stipulated by the preliminary agreement.
In contrast, a memorandum of understanding usually does not impose on its parties an obligation to conclude a sale and purchase agreement, representing, rather, a detailed plan for the parties to the transaction to negotiate with respect to the planned conclusion of a sale and purchase agreement.
If the participants of the sale and purchase transaction negotiations for the company’s stock/shares conclude a preliminary sale and purchase agreement rather than a term sheet, there exists the possibility that if the drafted main sale and purchase agreement is not agreed upon, one of the parties may appeal to the court system to force the counterparty to conclude a purchase and sale agreement on the terms contained in the previously signed preliminary agreement.
Our experts value the confidentiality of our clients' information, so we use limited access cloud storage or data rooms (physical or virtual) for M&A transaction support.
Current Russian legislation does not contain any specific regulation regarding confidentiality agreements. However, according to Art. 434.1 Item 4 of the Civil Code of the Russian Federation, if in the course of negotiations one of the parties receives from the other party information that is transferred to it as confidential, the receiving party is obliged not to disclose such information and not use it improperly for its own purposes, regardless of whether the contract is concluded.
Unauthorized disclosure of confidential information entails liability in the form of damages.
Provisions on the protection of confidential information are very important, and our experts recommend devoting special attention to them.
- the seller and the buyer, as well as their representatives and lawyers negotiate with the other party;
- a non-disclosure agreement (NDA) is concluded on confidential information;
- an agreement of intent is signed. This document is also often replaced by a letter of intent, a protocol of understanding, or the main terms of the transaction (term sheet);
- conducting due diligence regarding the target company and its assets;
- structuring the M&A transaction;
- executing the transaction (including all registration and corporate procedures).
It should be noted that a memorandum of understanding and a preliminary agreement
are not the same thing.
In accordance with paragraph 1 of Art. 429 of the Civil Code of the Russian Federation, a preliminary agreement obliges the parties to conclude an agreement in the future, the so-called main agreement, on the terms stipulated by the preliminary agreement.
In contrast, a memorandum of understanding usually does not impose on its parties an obligation to conclude a sale and purchase agreement, representing, rather, a detailed plan for the parties to the transaction to negotiate with respect to the planned conclusion of a sale and purchase agreement.
If the participants of the sale and purchase transaction negotiations for the company’s stock/shares conclude a preliminary sale and purchase agreement rather than a term sheet, there exists the possibility that if the drafted main sale and purchase agreement is not agreed upon, one of the parties may appeal to the court system to force the counterparty to conclude a purchase and sale agreement on the terms contained in the previously signed preliminary agreement.
Our experts value the confidentiality of our clients' information, so we use limited access cloud storage or data rooms (physical or virtual) for M&A transaction support.
Current Russian legislation does not contain any specific regulation regarding confidentiality agreements. However, according to Art. 434.1 Item 4 of the Civil Code of the Russian Federation, if in the course of negotiations one of the parties receives from the other party information that is transferred to it as confidential, the receiving party is obliged not to disclose such information and not use it improperly for its own purposes, regardless of whether the contract is concluded.
Unauthorized disclosure of confidential information entails liability in the form of damages.
Provisions on the protection of confidential information are very important, and our experts recommend devoting special attention to them.
The most important, long and difficult stage is due diligence
Due diligence refers to verifying the target company’s compliance with Russian law in terms of its registration and operating activities, even if the transaction is to take place under the laws of a foreign state.
According to our experience, in most cases, this inspection reveals risks and violations that affect:
1. the final decision as to whether or not to conclude the transaction.
2. understanding of the target company’s legal status and rights to its property, its activities in general, as well as development of the most optimal system for the phased establishment of the target company’s new corporate and internal management after the transaction.
3. the terms of the transaction, including its price.
4. the content of the transaction documentation.
According to our experience, in most cases, this inspection reveals risks and violations that affect:
1. the final decision as to whether or not to conclude the transaction.
2. understanding of the target company’s legal status and rights to its property, its activities in general, as well as development of the most optimal system for the phased establishment of the target company’s new corporate and internal management after the transaction.
3. the terms of the transaction, including its price.
4. the content of the transaction documentation.
CPO Group’s lawyers conduct several types of due diligence:
• Vendor due diligence: usually carried out when preparing an asset for sale or in the event of a planned restructuring;
• Purchaser due diligence: in most cases, it is carried out before an asset is purchased or precedes the creation of a joint venture;
• Due diligence of banks and other third parties (for example, in the IPO process).
• Purchaser due diligence: in most cases, it is carried out before an asset is purchased or precedes the creation of a joint venture;
• Due diligence of banks and other third parties (for example, in the IPO process).
What experts check in the due diligence process:
1.The reliability of the acquired enterprise’s financial information.
2.Financial efficiency.
3.Tax risks and opportunities to optimize taxation.
4.The effectiveness of the organization's management system and the enterprise’s potential for development.
5.Availability of title deeds guaranteeing the legal purity of the company's operations.
6.Legal liability risks, including counsel on issues regarding antitrust law.
Fields of due diligence:
2.Financial efficiency.
3.Tax risks and opportunities to optimize taxation.
4.The effectiveness of the organization's management system and the enterprise’s potential for development.
5.Availability of title deeds guaranteeing the legal purity of the company's operations.
6.Legal liability risks, including counsel on issues regarding antitrust law.
Fields of due diligence:
- Corporate relations: verification of constituent documents, stock/shares titles, registration actions, verification of founders/participants/shareholders, executive bodies, etc.;
- Transactions: compliance with legislation, analysis of risk of contestation;
- Real estate: legality of ownership, analysis of encumbrances, etc.;
- Movable property
- Environmental issues;
- Intellectual property;
- Other intangible assets, such as registration certificates;
- Litigation and debts to state bodies;
- Permits and licenses;
- Labor relations;
- Bankruptcy risks;
- Company counterparties;
- and so on…
CPO Group’s attorneys will help guide you to the most optimal structure for your future transaction:
1.Direct acquisition of the company’s stock / shares
In this case, the sale and purchase agreement concluded by the seller and the buyer is concluded directly in relation to the relevant company’s stock (Shares in the authorized capital).
2.Acquisition of a holding company’s stock/shares
This acquisition structure assumes that the buyer acquires shares or shares in the authorized capital of a holding structure (Russian or foreign), which, in turn, is a member of the relevant company.
3.Transfer of the company’s stock/shares as part of an increase in its authorized capital
The company acquired by the buyer ensures the issue of additional shares in favor of the investor (in the case of a JSC) or increases the authorized capital at the expense of the investor's contribution (in the case of an LLC).
4.Sale of individual assets owned by the company
The considered structure of the buyer’s purchase of the seller's assets does not involve the purchase of stock or shares in the authorized capital of a business entity. Instead, the buyer acquires individual assets of the seller's company, such as buildings, intellectual property, etc.
In this case, the sale and purchase agreement concluded by the seller and the buyer is concluded directly in relation to the relevant company’s stock (Shares in the authorized capital).
2.Acquisition of a holding company’s stock/shares
This acquisition structure assumes that the buyer acquires shares or shares in the authorized capital of a holding structure (Russian or foreign), which, in turn, is a member of the relevant company.
3.Transfer of the company’s stock/shares as part of an increase in its authorized capital
The company acquired by the buyer ensures the issue of additional shares in favor of the investor (in the case of a JSC) or increases the authorized capital at the expense of the investor's contribution (in the case of an LLC).
4.Sale of individual assets owned by the company
The considered structure of the buyer’s purchase of the seller's assets does not involve the purchase of stock or shares in the authorized capital of a business entity. Instead, the buyer acquires individual assets of the seller's company, such as buildings, intellectual property, etc.
OUR PRACTICE:
CPO Group’s attorneys were approached by a client wishing to purchase a drug manufacturing plant
All of the company's assets were distributed between two companies.
The first target company had all the real estate on its balance sheet. That is, the buildings and land, as well as the equipment. However, all these assets were pledged to one of the banks, and the company itself was in the process of liquidation.
The second target company had on its balance sheet registration certificates, medical licenses, and other non-property rights, which, according to the results of an independent assessment, were of significant value.
The second company was undergoing bankruptcy proceedings, where the same bank acted as the main creditor. At the same time, the bank, as the main creditor, was in an open conflict with the owners of the two target companies.
Thus, CPO Group’s experts were presented the following tasks:
1.To structure the transaction in such a way that the client acquired the asset without any encumbrances or risk of contestation.
2.To terminate the liquidation of the company and exit bankruptcy.
3.To conduct thorough due diligence of the companies and the asset, the main objectives of which were: to identify possible problems of the asset and obtain detailed information about the asset and its condition.
The asset acquisition process was divided into several stages. Firstly, CPO Group’s lawyers, after conducting legal due diligence, came to the conclusion that the new companies acquiring 100% of the shares of the target companies would simplify the process of acquiring the asset and minimize the risks of the transaction failing.
One of the facets of due diligence in the pharmaceuticals field is the evaluation and analysis of registration certificates, which often come at a very high cost.
An important aspect was that real estate accounted for more than 50% of the assets of the first company while a foreign company acted as the seller of the shares. Consequently, tax risks and costs called for minimization (in this case, the buyer acted as a tax agent for paying VAT), as well as ensuring the possibility for the seller to receive funds and minimize the risk of the bank blocking the transfer of funds for share alienation.
Based on the results of the transaction structuring, a proposal was developed that minimized all the risks associated with the transaction and two new limited liability companies were created, which became the owners of the target companies by buying out 100% of the shares in the authorized capital.
After the transaction was completed by way of negotiations between the lawyers of the CPO Group and the creditors, the bankruptcy case was terminated with a concluded settlement agreement. The second target company was withdrawn from the liquidation procedure.
CPO Group’s attorneys carried out comprehensive due diligence of the target companies and the asset, including:
Particular attention was devoted to the verification of licenses and such issues as:
In the final stage of the transaction, the newly created companies became controlled by affiliated structures of the client, and the plant, with all of its non-property assets, entered complete ownership of the client.
Our lawyers supported investment in core assets and thus the plant was restored.
Thanks to CPO Group’s attorneys, the client was able to acquire a valuable asset in a short period of time, investing significant funds in the project with minimal risks. CPO Group's associates have developed a system whereby the client, upon purchasing an asset, receives substantial guarantees and assurances from the sellers, protecting against subsequent contestation of asset acquisition transactions and even protecting companies in the case of bankruptcy.
All of the company's assets were distributed between two companies.
The first target company had all the real estate on its balance sheet. That is, the buildings and land, as well as the equipment. However, all these assets were pledged to one of the banks, and the company itself was in the process of liquidation.
The second target company had on its balance sheet registration certificates, medical licenses, and other non-property rights, which, according to the results of an independent assessment, were of significant value.
The second company was undergoing bankruptcy proceedings, where the same bank acted as the main creditor. At the same time, the bank, as the main creditor, was in an open conflict with the owners of the two target companies.
Thus, CPO Group’s experts were presented the following tasks:
1.To structure the transaction in such a way that the client acquired the asset without any encumbrances or risk of contestation.
2.To terminate the liquidation of the company and exit bankruptcy.
3.To conduct thorough due diligence of the companies and the asset, the main objectives of which were: to identify possible problems of the asset and obtain detailed information about the asset and its condition.
The asset acquisition process was divided into several stages. Firstly, CPO Group’s lawyers, after conducting legal due diligence, came to the conclusion that the new companies acquiring 100% of the shares of the target companies would simplify the process of acquiring the asset and minimize the risks of the transaction failing.
One of the facets of due diligence in the pharmaceuticals field is the evaluation and analysis of registration certificates, which often come at a very high cost.
An important aspect was that real estate accounted for more than 50% of the assets of the first company while a foreign company acted as the seller of the shares. Consequently, tax risks and costs called for minimization (in this case, the buyer acted as a tax agent for paying VAT), as well as ensuring the possibility for the seller to receive funds and minimize the risk of the bank blocking the transfer of funds for share alienation.
Based on the results of the transaction structuring, a proposal was developed that minimized all the risks associated with the transaction and two new limited liability companies were created, which became the owners of the target companies by buying out 100% of the shares in the authorized capital.
After the transaction was completed by way of negotiations between the lawyers of the CPO Group and the creditors, the bankruptcy case was terminated with a concluded settlement agreement. The second target company was withdrawn from the liquidation procedure.
CPO Group’s attorneys carried out comprehensive due diligence of the target companies and the asset, including:
- Legal due diligence;
- Financial verification;
- Tax audit;
- Environmental verification;
- Insurance audit;
- Technical audit of the state of the asset.
Particular attention was devoted to the verification of licenses and such issues as:
- Analysis of required licenses according to legislation;
- The target company, with all the necessary permits and licenses to conduct pharmaceutical activities;
- The licenses’ term of validity.
In the final stage of the transaction, the newly created companies became controlled by affiliated structures of the client, and the plant, with all of its non-property assets, entered complete ownership of the client.
Our lawyers supported investment in core assets and thus the plant was restored.
Thanks to CPO Group’s attorneys, the client was able to acquire a valuable asset in a short period of time, investing significant funds in the project with minimal risks. CPO Group's associates have developed a system whereby the client, upon purchasing an asset, receives substantial guarantees and assurances from the sellers, protecting against subsequent contestation of asset acquisition transactions and even protecting companies in the case of bankruptcy.
Recent M&A Developments:
Bill No. 127020-8, adopted by the State Duma at the end of June 2022 in the third reading, entering into force in 2022, permits transactions involving the stock and shares of organizations worth up to 2 billion rubles without prior coordination with the Federal Antimonopoly Service (FAS).
In accordance with the adopted amendment, the FAS will need to be notified of the transaction within 30 days after its completion. In addition, in the purchase of such assets in 2022, a simplified procedure will apply for processing transactions.
Now, prior approval from the FAS is required for a number of transactions with organizations’ stock and shares, provided that the buyer obtains more than 25%, a third, or 75% of the organization whose assets exceed the threshold values.
In accordance with the adopted amendment, the FAS will need to be notified of the transaction within 30 days after its completion. In addition, in the purchase of such assets in 2022, a simplified procedure will apply for processing transactions.
Now, prior approval from the FAS is required for a number of transactions with organizations’ stock and shares, provided that the buyer obtains more than 25%, a third, or 75% of the organization whose assets exceed the threshold values.
What makes CPO Group’s lawyers professional legal advisors for M&A transactions:
Reputation and experience: our company has been in the legal services market for more than 23 years, and has extensive experience assisting with transactions;
Our specialists are constantly improving on their skills and taking part in international events.
The experts at CPO Group, LLC, have extensive experience in structuring such transactions under Russian law and will select the most optimal contractual design for your specific request, applicable in structuring stock and shares transactions, as well as corporate agreements. Our team also includes professional auditors, appraisers, drug registration specialists, etc.
Our specialists are constantly improving on their skills and taking part in international events.
The experts at CPO Group, LLC, have extensive experience in structuring such transactions under Russian law and will select the most optimal contractual design for your specific request, applicable in structuring stock and shares transactions, as well as corporate agreements. Our team also includes professional auditors, appraisers, drug registration specialists, etc.
