1. Moskalyk: Risks can be mitigated through correction action before the deal goes through
May 17, 2012, 7:29 p.m. | Business — by Kyiv Post
Andriy Moskalyk, senior associate in Ukraine at Clifford Chance
http://www.kyivpost.com/content/business/moskalyk-risks-can-be-mitigated-through-correction-1-
127767.html
In this Kyiv Post interview, Andriy Moskalyk, senior associate at the Ukraine offices of Clifford Chance, said that
it is common to find risks in the acquisition and incorporation of businesses. Kyiv Post: When an investor is
pondering whether to buy an asset in Ukraine or enter into a partnership, what are the five essential
concrete steps in terms of Due Diligence that should be taken to minimize risk and protect the investment?
Andriy Moskalyk: The first important thing the investor should deal with is identification of the areas which
require due diligence so that no material issues are omitted. Usually, financial and legal due diligences are
undertaken. In some industries, technical and reputational due diligence is carried out too.
Secondly, the investor needs to select the appropriately qualified advisors able to ensure the high quality of
due diligence in the relevant area and sound advice given the international market practice.
Then, it is very important that the scope of each due diligence exercise is defined accurately and clearly to
leave aside any areas not posing any essential risks and cover all those generating material risk exposure.
Normally, the “old” and irrelevant issues are not covered by due diligence.
As it is not practically possible to review all documents and cover all problems regarding the target, the
investor should make an informed decision as to what materiality threshold should be applied or due diligence
given the size of the prospective investment. In other words, the investor needs to set a minimum level of
significance below which the advisors will not investigate the issues or the identified problems will not matter.
This will help save time and cost and also avoid a situation where any significant risks have been omitted.
KP: There are various forms of due diligence: legal, financial, reputation, etc. To whom should an investor
turn to get all the potential red flags checked out? How does the process work?
AM: Some investors engage investment advisors who coordinate and manage the whole process of due
diligence. Usually, the investment advisors organize bidding processes to choose the most suitable advisors in
each area to conduct financial, legal, technical and reputational due diligence and find technical consultants to
set up virtual data rooms where most of the documents will be available for review.
Due diligence work streams often run in parallel. Many risks existing in one area may cause other risks or
create implications in other areas. For example, some legal risks may affect financial performance of the
business or identified technical problems may give rise to legal risks.
Often advisors share and discuss their discoveries among themselves or use the prepared reports on findings or
other advisors for better assessing the risks in own areas of due diligence. The prepared reports of each advisor

2. are used for the purposes of the business price determination/adjustment. The reports are also important for
drafting the transaction documents, such as share purchase agreement, where all risk mitigating mechanisms
are set out.
KP: What are the Top Five most common red flags or problems uncovered by due diligence work involving
Ukrainian assets or potential partnerships between investors and local groups? Which are serious risks to a
potential investment or partnership? Which are minor and can be handled?
AM: Some legal risks are common for all industries while most of them are industry specific. Significant
common risks are often discovered in the area of corporate practices and group formations.
We have seen numerous violations of corporate procedures applicable to incorporation of the companies, their
acquisition or amendment of their constitutional documents. It would not be rare to identify violations of
currency control regulations in the area of foreign investment operations or violation of merger control rules.
Despite the historical nature of violations the associated risks may result in a loss by investor of the title to
business or in difficulties in divesting of the business in the future. Most of these risks can be mitigated by
taking relevant corrective actions before the deal goes through. It is not unusual to encounter significant
industry specific risks relating, for example, to subsoil licenses in the Ukrainian energy sector.
Licenses are often improperly issued by the government or transferred into contractual joint ventures or the
energy sector companies fail to comply with the requirements of such licenses or illegally use agricultural land
for industrial purposes. Although some risk mitigating actions may be taken to resolve the problems quite often
only legislative amendments may fully remove the risks.
KP: From a standpoint of due diligence, what are the Top Five “hardest to uncover risks” for investments and
partnerships in Ukraine, and what can be done by the government and other interested parties to bring
more transparency?
AM: Although each industry has peculiar risks, the hardest to uncover risks are those existing in the area of
subsoil, environmental and other regulatory compliance, merger control compliance and concerted actions.
The transparency could be brought if the government adopted more straightforward and well structured
regulations in these areas and removed, to the maximum possible extent, the government discretion element
for deciding as to the amount of penalties or other sanctions. This would help to more accurately predict the
materiality of risks and associated possible monetary losses.