Study and problematics of merger and acquisition transactions in Russia and their legal reasoning with reference to intangible assets production



The article deals with the current situation in the merger and acquisition market. With the consideration of the pandemic, the topic has become one of the highest importance. The article, however, covers only the problems related to the Russian M&A market. With no proper legal coverage of the issue in the Russian Federation, the deals of this kind incur considerable asset impairment, and that seems to be especially striking as Russia tops the Eastern European countries in total M&A deals volume. Having performed an analysis of the merger and acquisition deals taking place in the Russian Federation, we found out that, although this type of deals is given priority by Russian companies in their functioning and development system, at this stage, the actual realization of the merger and acquisition deals in Russia faces a significant number of problems as the applicable legislation is too restrictive, prohibitive. It also pays little attention to proper handling of issues related to the legal status of intangible assets. For companies involved in content creation, software development and other economic activities that have recently gained importance, this is crucial. Upon solving those, the merger and acquisition deals in Russia shall move to a new level as M&A deals (both foreign and domestic) will become more transparent and structured allowing for better legal protection of the interests of stakeholders at every stage. Intangible assets require special attention to processes of their creation and this is the key approach of proper development of the legal system in the coming years.

Key words: corporate law, merger and acquisition deals, intangible assets, economic development, imperfection of legislation, assets acquisition, transaction transparency, integration processes.

Статья посвящена текущей ситуации на рынке слияний и поглощений. В эпоху пандемии эта тема приобрела особенную важность. Однако данная статья рассматривает только проблемы российского рынка слияний и поглощений. В отсутствие надлежащего правового регулирования данного вопроса в РФ, сделки подобного рода в стоянии нанести значительный ущерб активам, что особенно неприятно на фоне того, что Россия является лидером среди стран Восточной Европы по объему данных сделок. Анализ ряда сделок по слиянию и поглощению, имевших место в РФ в последние годы показал, что несмотря на то, что они являются приоритетными для российских компаний с точки зрения развития, их фактическая реализация сталкивается с рядом проблем, поскольку текущее законодательство в этой сфере носит либо слишком жесткий, либо слишком ограничительный характер. В нем так же уделяется мало внимания вопросам юридического определения роли нематериальных активов. Для компаний, работающих в сферах производства контента, разработки компьютерных программ, и других, приобретших в последние годы серьезный вес в экономике, это критично. Их решение позволит сделкам по слиянию и поглощению в РФ выйти на новый уровень развития, поскольку сделки по слиянию и поглощению станут более прозрачными и структурированными, что позволит обеспечить высокий уровень защиты интересов заинтересованных лиц на каждом этапе. Нематериальные активы требуют особого внимания к процессу их создания, и это основной подход к реформе соответствующего законодательства на ближайшие годы.

Ключевые слова: корпоративное право, сделки слияния и поглощения, нематериальные активы, экономическое развитие, несовершенство законодательства, приобретение активов, прозрачность сделок, процессы интеграции.

The general study and problem issues identification in the sphere of M&A deals seem to be of the greatest relevance at the modern stage the functioning of the Russian society, the reason being that this particular field demonstrates some features of insufficiently good coordination and management compared to those seen in the foreign practices of M&A deals handling. At the same time merger and acquisition deals play a very important role in the business activities performed by Russian companies.

Thus, the economic development and highly competitive environment of today stimulate the companies to look for new avenues of growth. International practices strongly indicate that, in the modern context, one of the most effective and successful ways to develop a competitive enterprise is capital concentration ensured through the acquisition and merger deals. It often happens so that an acquisition or a merger transaction is the only way for a company to survive. That is why this type of deals keeps mounting up all over the world [1, 13].

There are a number of different opinions regarding the current state of the Russian M&A market. On the one hand, business activity is now not so high, for a variety of reasons, e. g. the international sanctions, the mediocre investment environment and the shortage of fairly developed industrial fields. On the other hand, we receive information on transactions of this kind from mass media or some other sources every week. [2]

It should be pointed out here that every country boasts of its own quite unique and specific M&A market. The situation is conditioned by different levels of their economic development, the financial market state, the legal system sophistication, and the like. The Russian M&A market got shaped comparatively recently and remains in sharp contrast to both those of the USA and Europe. [3, 14]

Its stark feature in the context of merger and acquisition transactions is that the market was fairly quick in moving from local deals to major cross-border operations. One more feature is that, in Russia, M&A deals are mostly the internal ones being arranged between home companies, and not the foreign ones.

That is because foreign investors do not show great interest in purchasing any Russian assets. At the same time, Russian companies do demonstrate their interest in foreign assets.

In the Russian Federation, the holdings engaged in M&A deals struck mostly with foreign corporations are ‘Gazprom’, ‘Lukoil’ and other such companies that aim at doing their businesses in the global market. Being a part of the global market, M&A transactions are becoming inevitable for the Russian market as well. [4]

According to the data collected by Price Waterhouse Coppers, the Russian Federation holds the first place in integration processes among the Eastern European countries. Besides that, Russia tops the Central and Eastern European countries in both total worth and number of M&A deals.

With reference to the data presented we can state that, in 2019, the total value of the deals was equal to 7.4 bln USD which is just 53 % of the total deal value for the first half of the year of 2018 and the lowest asset worth for the last ten years. Those were mostly transactions of retail and IT-companies, 27 % and 25 % respectively. For Russia, the inner deals value went down by 60 % which is a drop to 2.783 bln USD. The deal value in the sector of Russian companies’ acquisition by foreign investors has gone down to 2.392 bln USD which is 22 % lower than that of the first half of 2018. The Russian entities buying foreign companies demonstrate the lowest deal value level since 1997, equaling to just 7 mln USD. Compared with the first half of 2018, the drop is 99 %. [5]

However, according to the KPMG Report, in 2020, the situation related to the companies engaged in the intangible assets market changed drastically. Some experts hold the opinion that, for the Russian economy, this means the beginning of a new stage of the structural development which, naturally, leads to new demands for the legal handling of the deals. The general trends of 2020 influenced the M&A activity in the Russian sector of technologies, media and telecommunications making this activity even more focused than earlier. As for the year of 2020, we can highlight the following tendencies. [6]

To continue creating the ecosystems and de-bordering the sector structure. Over the last two or three years, many large Russian companies are into forming cross-sectoral ecosystems related to both banking and non-banking services.

– Rapid E-commerce development. The pandemic has caused some tectonic upheavals in the Russian E-commerce market which is a cross-sectoral structure related to both technological know-how and consumer markets. By the expert estimates the E-commerce market grew nearly 50 % in 2020.

– Global shift to online. The pandemic has predictably induced rapid online sector development in many fields. The EdTech market has demonstrated an explosive growth. The experts say the net sales for the Top-50 market majors nearly doubled in comparison with the same period of the last year. The companies engaged in training courses for digital jobs show the most rapid development.

– All-time high evaluations in the international markets and the wild success of the Ozon IPO. COVID-19 and the subsequent growth of electronic trading, along with the quantitative easing, have resulted in the all-time high evaluation levels for the tech companies in public markets.

It has also to be mentioned that merger and acquisition transactions handled in Russia differ greatly from those in the countries of developed market economies. In the light of the analyses of the M&A deals taking place in Russia during the last few years, we can single out some principal features of the merger and acquisition market here.

Firstly, the situation is dominated by horizontal transactions. That means that many sectors witness their business consolidation processes. Earlier, this trend was typical mostly for the Russian oil and gas industry, due to its structural peculiarities. But the 2019–20 data demonstrate certain sectoral setup changes. Telecommunications and food industry boast more and more integration processes. In the trade industry, Moscow companies are in a rush to acquire regional outlet chains. [7]

It is increasingly evident that deal strategies and decisions between the horizontal and vertical merger variants present us with some distinctive industry characteristics. The absolute vertical merging leaders here are the iron and steel companies. They continue to form vertical chains stretching from ore mining to its transportation to end-use foreign customers. Meanwhile, horizontal merging is more typical for the trade and food processing industries, with the exclusion of highly specialized sectors, e. g. wine production, cheese making and feed supplement manufacturing. In recent years, we have witnessed the major deals news coming mostly from the economic sectors whose potential is still estimated as being high. [8]

One of the most significant characteristics of the Russian M&A deals market is information confidentiality. A vast number of small and medium-sized transactions are done on a non-public basis, and mass media do not receive any information on a number of them. It often happens that the market players are aware of neither the customer’s name nor the transaction value. [9]

In Russia’s current business environment, the definition of corporate management top levels remains unclear, and this fact keeps influencing the merger and acquisition deals in a negative way. And the failure to respect the rights of various groups of shareholders is still a vulnerable area here. Thus, while exercising their rights foreign shareholders face serious legal issues and hurdles. It has to be pointed out that, unlike abroad, foreign holders of shares and securities of Russian companies rarely enlist the professional help of law firms to represent and protect their rights and interests. [10] In order to minimize their asset risks it is necessary to develop the inner monitoring tools and procedures. At the same time, should the stockholder’s interference go beyond a certain level, there is a risk of minimizing the role played by management with turning it into a kind of bureaucratic appendix, and that would lead to escalated risks and decline in the economic efficiency. [11]

Most of the Russian enterprises have structurally less degree of competitiveness as compared to their overseas competitors, the reasons being the absence of the venture capital funding system, a higher cost of credit resources and, quite often, an ill-defined state backing policy. For these enterprises, merging can turn out to be a strategic factor to succeed in their market value growth, to gain competitive advantages, to improve their position in the domestic market and to enter the new ones. [12]

Alongside this, the merger and acquisition processes in Russia are being offset by a number of issues typical for the local M&A market. The most fundamental problems here are as the following.

1) an economic instability peculiar to the Russian companies, against the background of slowdown in the rates of the national economic growth. The instability keeps forcing the major deals to be postponed for indefinite periods of time;

2) an unstable situation seen in the M&A market and expressed there in significantly high dependency on one-time major transactions, the focus prevailing on internal transactions and rejection of foreign investments [6];

3) various sanctions imposed by the USA and the EU leading to a reduced scope for the M&A deals debt financing and that, in turn, results in escalated risks for money-lending to Russian companies and some serious changes in the lending modes;

4) absence of a working state regulation system meant to monitor the M&A deals in the Russian market. The system should be developed for different economic sectors, with the due regard to real structures of assets, because the financing and accounting system of today does not allow for correct representation of digital economy realities thus giving way to hostile methods of company assets acquisition in the internal market, with the application of various fraud schemes [9];

5) low transparency of Russian companies’ activities as compared to those performed by their overseas colleagues. This could lead to baseless overestimation of a company assets value over the actual value of its business;

6) inefficient and, sometimes, even non-existing M&A deals risk covering system [2];

7) narrowness of the M&A market in terms of both the total amount of transactions effected and the number of partners involved. The situation is caused by the shortage of funds to go for this type of deals from the side of domestic investors, high political risks, imperfection of legislation developed to protect the intellectual property rights and absence of government bodies for helping the owners to effectively assert their rights. These are the principal issues that foreign investors face [10];

8) imperfection of legislation in the field of the M&A processes taking place in our domestic business practices including the absence of standardized definitions for the terms like ‘takeover’, ‘raiding’, etc., in our competition law.

The abovementioned issues appear to be even more complicated because the legal state regulations meant to provide for the punishment in case of misappropriation are far from being perfect, from one side; and the state itself, in fact, fails to counter the problem, from the other. Though having no official statistics on raider attacks in Russia, the scholars, analysts and experts in the field are of the same opinion that this situation has a negative impact on the investment attractiveness of the country, thus discouraging not only the strategic overseas investors but also the local ones. [11] At that, the legal regulation problem here causes unfounded downgrading in the business attractiveness rating because the misleading information on property protection and corruption activity in the Russian Federation goes spreading around.

An analysis of the Russian M&A market shows that, in the first half of the year of 2019, the total volume of merger and acquisition transactions involving Russian companies has dropped 47 % as compared to the same period of the preceding year, as stated in the ‘Refinitiv’ (formerly a subsidiary of ‘F&R Thomson Reuters’) research received by the RBC group. [1]

The data on the merger and acquisition deals involving Russian companies are illustrated in the Figure 1.

Fig. 1. Merger and acquisition deals involving Russian companies, for the period of 2010–2019 [1]

Количество сделок — Number of business deals

Общая сумма сделок, млрд.долл.США — Total amount, bln USD

Nowadays, in Russia, there are a number of the merger and acquisition deals going on. Top ten of the most important ones known in 2019 are presented in the

Table 1

Major M&A deals in the Russian market in 2019. [4]

Object	Buyer	, bln USD
Luxoft Holding Inc.	DXC Technology	1.97
Avito (KEH eCommerce)	OKX Global B. V.	1.16
Lenta	Severgroup	0.65
Lenta	Severgroup	0.6
Uralkali	Rinsoco Trading Co Ltd.	0.53
Reftinskaya GRES	Kuzbassenergo	0.37
Leader-Invest	Etalon Group	0.23
Etalon Group	AFK Sistema	0.23
Mini-Mill Balakovo, JSC Severstal	Abinsk Electric Steel Works Ltd.	0.22
PAO Mikhailovsky GOK	AO Lebedinsky GOK	0.2

In order to boost Russian processes of merger and acquisition along with their efficiency, the following primary objectives need to be addressed [14,15].

1) to make provisions for sustainable economy growth and restitution of effective demand;

2) to straighten the property rights protection inclusive of intellectual property, to enhance criminal liability for violation of these rights;

3) to create effectual judicial system as applied to protection of the property rights, amongst others;

4) to comprehensively develop the domestic stock market as an underlying instrument to procure capital for the companies and their merger and acquisition deals;

5) to improve antimonopoly control in order to develop fair competition;

6) to ensure transparency and informational publicity of merger and acquisition deals in the domestic market;

7) to legally limit the possibilities for the government to interfere in business, especially at its reorganization stage, with the exception of doing so with economical methods [16];

8) to improve the legal framework that regulates the whole merger and acquisition institution.

Conclusion

Thus, having performed an analysis of the merger and acquisition deals taking place in the Russian Federation, we found out that, though this type of deals is given priority by Russian companies in their functioning and development system, at this stage, the actual realization of the merger and acquisition deals in Russia faces a significant number of problems. With solving those, the merger and acquisition deals in Russia shall move to a new level, the one whose efficiency is proven by foreign practices.

References:

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