Letters of credit (L/Cs) could solve one of several problems facing investors contemplating mergers and acquisitions (M&A) in Russia as it acclimatises itself to the commercial realities of buying and selling listed companies after years of Communism with its state enterprises, according to a Moscow-based lawyer.

Senior partner, corporate & commercial at Pepeliaev, Goltsblat and Partners, Andrey Goltsblat, says that after 10 years of reform, Russia has made progress establishing a legal framework for investments, but a lot still needs to be done to make it operational.

Problems

Goltsblat points to specific problems that need to be solved to make the legal framework operational.

The first problem he says is that top executives in companies about to be acquired are not sufficiently liable for providing would-be investors a full and true management picture or false information in the financial statements.

The executives are not, according to Goltsblat, responsible for liabilities hidden during the due diligence process once an acquisition is completed.

Not liable enough

Another problem is that major shareholders are not held sufficiently liable for the activities of associated companies.

The Moscow lawyer says this can mean that the types of representations and warranties expected by western companies are not applicable in a Russian context.

Long wait

Goltsblat also says that it can take too long for a company to establish control over another company it acquires.

The incoming company may have to wait a long time to hold a shareholders' meeting and, for example, change the CEO or the board of directors, he says.

L/C solution

The lawyer also says there is a lack of effective and convenient mechanisms for a company paying for shares or assets.

One payment instrument could be an L/C, suggests Goltsblat, but he is concerned that in Russia not many banks are prepared to provide a documentary credit for this purpose.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.