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Avoiding the Pitfalls of Preliminary and Principal Agreements - International Law Office

International Law Office

Corporate Finance/M&A - Ukraine

Avoiding the Pitfalls of Preliminary and Principal Agreements

June 11 2008

One of the most crucial issues in mergers and acquisitions is the conclusion of the principal agreement to the deal, usually for the sale and purchase of shares or assets.

In general, the process of finalizing the main agreement goes through several stages, including:

  • working out and signing a letter of intent or a memorandum of understanding;
  • making a binding offer to conclude a principal agreement; and
  • concluding the principal agreement.

As a rule, all Ukrainian M&A deals go through these stages; the process is regulated by the Civil Code and the Commercial Code. However, foreign investors in particular may be unaware that a preliminary agreement, which specifies the mutual rights and obligations of the parties regarding the conclusion of a principal agreement and the completion of the entire transaction, is considered a binding document under the Civil Code. As the preliminary agreement obliges the parties to sign a principal agreement in future, it should contain all of the essential provisions of the principal agreement, which must be signed by the parties within the term specified in the preliminary agreement. In certain circumstances the law may limit the period within which the principal agreement must be signed. A preliminary agreement must be concluded in the form specified by legislation for the principal agreement. Concluding such an agreement prevents the parties from changing the essential conditions of the principal agreement (eg, the price or the list of assets to be sold).

If a party seeks to avoid or delay the signing of the principal agreement once the preliminary agreement has been signed, it must compensate the other party for all expenses incurred as a result of the delay. If the principal agreement is not signed within the term stipulated by the preliminary agreement, or if neither party sends the other party an offer to sign the principal agreement, the preliminary agreement ceases to be valid.

Unlike the M&A regimes in many other jurisdictions, Ukrainian law does not give parties the option of concluding a binding agreement to observe particular provisions of the letter of intent; this includes provisions relating to confidentiality and non-disclosure. If the parties have not signed the principal agreement, they are not bound by the provisions of the letter of intent. Therefore, if the parties wish to be bound by confidentiality and non-disclosure provisions, they should sign a non-disclosure agreement.

For further information on this topic please contact Timur Bondaryev at Arzinger & Partners by telephone (+380 44 390 5533) or by fax (+380 44 390 5540) or by email (timur.bondaryev@arzinger.ua).

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