LAW FIRM DIRECTORY

Industry Sectors

OLEKSANDR PLOTNIKOV,
partner at Arzinger Law Firm, head of banking and finance law and debt restructuring practice, advisor overseeing the agricultural sector

Agronauts

The high level of business activity in the agricultural sector, which is one of the flagships of the Ukrainian economy, generates significant volumes of work for the legal market. But it would be an understatement to reduce the legal support of agrarians solely to transactional work or combating illegal takeovers; this is only part of a wide range of legal services demanded by agricultural companies

Today, the agricultural sector remains one of the main sectors of the Ukrainian economy, providing a third of all exports and 17% of GDP. At the same time, it is also a very profitable client for a huge number of advisors, banks, manufacturers of equipment, foodstuff, etc., and for entertainers on holidays. But the efficiency of domestic agricultural manufacturers (if they don't mind my saying) continues to be significantly low compared with their Western competitors. And, in this regard, there is significant potential for growth.

Agribusiness is definitely very interesting to lawyers. Sometimes, it is so interesting much that some colleagues even switch from jurisprudence to agriculture.

For those who remain loyal to their legal career, the agricultural sector provides a lot of opportunities. It was no accident that almost all of the most significant recent transactions were concluded in the agricultural sector. But it would be wrong to present support of the agricultural sector by outside lawyers only as a transactional work. Support for transactions is only part of a wide range of legal services highly sought by agricultural companies.

 

Control and skeletons in the cupboard

The internal control systems of agricultural holdings worth noting individually. I think that you can write several books on this topic, as exemplified by specific companies. Most of these examples will be sad, but didactic.

First, many companies were originally established as a family business and still remain as such even when they have grown to become very large. A management system under which key positions are held by people close to the family is rarely successful. One of the main side effects of such a system is internal corruption and intolerance to any changes.

Bad governance, overlapping functions and a huge baggage of legal problems that have accumulated over the years are typical for many such companies. It quite often happens that during a period of rapid growth, owners neglect such "trivial matters" as obtaining permits from the Anti-Monopoly Committee of Ukraine, construction permits, documentation execution and real estate title registration, etc. All these things turn into an unpleasant surprise when it comes to selling the business, raising funds or attracting an investor.

Domestic businesses cannot be blamed for wanting to part easily with money, so such service as a legal audit is not very popular. Although, in fact, it enables problems to be identified and solved on a regular basis, and not under time pressure before an important transaction, as is usually the case. And the price of eliminating such problems is directly linked to this (I mean legal fees, and not something else that some might think).

 

Corporate structure

Corporate restructuring has already become one of the most sought-after areas of our work with agricultural companies. Complex structures created during a business’s development, at a certain stage, become quite expensive to maintain and inefficient in terms of tax optimization and simplicity of settlements. The more that the fight against offshore companies and tax evasion intensify, the less interesting such structures become. In the past few years, clients have been asked to build a transparent, efficient working structure requiring reasonable operating costs and raising no questions on the part of servicing banks and creditors. A corporate structure may not be very simple, since diversified business implies an extensive network of companies within a holding. But the structure should be understandable and raise no problems in virtue of its complexity. It is interesting to note that minimization of taxation is no longer the cornerstone for establishing or changing a corporate structure.

 

Fraud

Fraud is one of the most significant operational risks in the agrarian business. And it's not so much about unscrupulousness on the part of business owners or top management in their relations with partners and creditors, but in the actions of the third parties with the complicity or support of enlisted employees working at the "victim company".

In the past year alone, there have been several such cases in our practice, when fraudsters managed to infiltrate in a certain chain of information exchange in a company and, at the right time, ensure the transfer of funds to the account double controlled by them. If in such cases the forgery is not immediately detected and, consequently, measures are not taken to block the beneficiary’s account and other accounts to which the funds are withdrawn then, as a rule, the money cannot be recovered. And usually it runs into millions. I think it's fair to say that in such cases, most banks promptly monitor and block funds on the accounts of fraudsters and their accomplices.

In such cases, experience and awareness of the priority actions algorithm are very important, since, in the truest sense of the word, every hour counts and success depends on how quickly you can block the funds. In this year alone we managed to return about UAH 100 million to our clients.

Another good example are land lease agreement scams. Although many have already learnt independently how to cope with this issue.

 

Blessing in disguise

Colleagues working for the state (the Police, Security Service of Ukraine, Prosecutor-General's Office, State Fiscal Service of Ukraine (SFS)), keep us fresh, over and over again creating problems for clients that must be addressed. Today, the practice of defense in criminal cases has become one of the most sought-after by agricultural sector clients. The most common cases are tax evasion and illegal takeover. Very often, criminal cases are accompanied by the actual blocking of the business of clients, which significantly increases the amount of losses. In most cases, an appeal against the decisions of the SFS in a judicial proceeding goes hand in hand with the criminal process.

 

When clients are creditors

It would be unfair not to mention such an area of focus in the agricultural sector as representing the interests of creditors in financing and restructuring the debts of agricultural companies. Over the past few years, Ukraine has become notorious among foreign creditors due to companies like Mriya and Creative. Echoes of those projects still periodically excite the media scene and will remain the focus of attention for a long time to come at the mention of the domestic agricultural sector. Although, from the point of view of external lawyers, there were very interesting projects that could overwork half the office and provide very valuable experience in subsequent projects and when supporting M&A transactions.

Despite the existing negative trail, it is companies in the agricultural sector that are once again considered by foreign creditors as the most desired borrowers. So, out of the dozen fund raising projects closed over the past year, farmers received loans in eight cases.

 

Prospects

It is quite difficult to make predictions under the current circumstances in Ukraine. Although I am still an optimist and look forward to a positive scenario. The domestic agricultural sector is developing at a fairly rapid pace, and progress is evident for both domestic and foreign players. If manufacturers will be able, within a reasonable time frame, to manufacture a larger volume of goods with value added and bring manufacturing and products into line with the requirements of foreign markets, lawyers will see many major projects and lots of interesting work.