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Guest Editorial: Expect the Unexpected

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The last couple of months have taught legal practitioners in CEE (including Russia and Turkey) that this region requires quite a bit of foresight when advising on transactions of any kind: the de-facto occupation and integration of Crimea into the Russian Federation is unlikely to have been reflected in the SPAs or long-term contracts that were negotiated in late 2013/early 2014. The occupation of a significant portion of a country sharing a common land border with four EU-member states is something few people would have thought of as a realistic scenario at that time. Well, that has changed now.

MarcusPiuk.jpg
   
Marcus Piuk, Partner, Schoenherr Attorneys at Law 

Direct impact

But what does this development mean for legal work? How do you deal with a de-facto change of borders and control over a territory that is not recognized by the EU, the US, or any other significant economic power – but is by Russia? How do you deal with assets located in Crimea and the power of Russian authorities exercised there: do you consider them Russian or Ukrainian or both when looking into merger control scenarios in a current transaction on the group level? Ignoring the authority of either of the two may have a negative impact on your client’s remaining business in Ukraine or Russia, whichever authority has been disregarded.

The muddy crystal ball

The events in Ukraine and in particular in Crimea remind us that in CEE even the most diligent research will not guarantee the ability to anticipate what will happen even during the relatively short period of time that typically takes place between the signing and the closing of a pretty standard M&A transaction. This makes it even more important to provide contractual mechanisms that offer reasonable protection for both parties to a deal: the purchaser will need to have some say once certain assets of the transaction are suddenly in a territory over which the central government no longer exercises control and the government that in fact exercises control is not recognized by the purchaser’s own government; at the same time, the seller may argue that the relevant assets operate as usual without disruption and that there is no impediment to going ahead with the inked deal. All of us are in a position to bring sound arguments under law and equity for both sides here …

But how would such contractual protection work in practice? Will standard material adverse change clauses (MAC) from now also include the factual disintegration of countries, or is this situation covered anyway as a force-majeure event? I tend to lean towards MAC language that also covers to a reasonable extent the political risk of the region, a risk of which we have just been reminded.

Rethinking the subjective feeling of comfort

Until earlier this year, I, for one, had the impression that the current international framework provided reasonable protection for investments in CEE. Most countries had signed a reasonable number of BITs and had already experienced their first ICSID trials. With the events in Crimea, I have had to rethink my subjective feeling of comfort. How should one proceed in case of an expropriation of assets located in Crimea? Go against Ukraine, which in fact does not exercise power there anymore? Against the Russian Federation, given the fact 

that no EU country has recognized the splitting off of Crimea and its integration into the Russian Federation? One could argue that protection and justice may currently only be sought in the courts of the Republic of Crimea and of the Russian Federation. I am not sure how comforting that thought is for a client, though.

Pragmatism, the core quality in CEE

Having raised all these questions, I am still very optimistic about the region and its future development due to CEE’s unique pragmatism in dealing with situations that in other parts of Europe would likely create insurmountable problems. While it may take quite a while until the national and international legal framework is formally adapted to the factual situation, business across the region will continue more or less as usual and business transactions, also with foreign partners, will continue as before. The one key difference from before? Today we are more aware of the fact that the unexpected can happen at any time in this region.

By Marcus Piuk, Partner, Schoenherr Attorneys at Law