Negotiating a Russian Deal - article by Ian Ivory and Anton Rogoza in The Moscow Times.

Negotiating is an art and not a science and there is never a “right” way to negotiate. When it comes to Russian deals, a general rule of thumb is to be patient, keep your cool but always remain firm and consistent in your approach and tactics.

Many books have been written on the subject of negotiations and there is not sufficient room here to cover the subject in any great detail. Instead we mention below just a few of the tactics and approaches that we often see on Russian transactions (taken both by Russian parties and also international investors). None of these are unique to Russian deals of course.

Use of a middleman to negotiate - quite often the ultimate decision maker will be in the background somewhere and not present during negotiations. This is not unusual, particularly on smaller deals. The key is to understand the limits on the authority of the person present at the negotiating table and whether they have the power to make decisions and agree on final positions. Otherwise you run the risk of cheese-slicing in negotiations.

Cheese slicing is where the person negotiating will accept any concessions and traded points, but then change their mind and back track on points they have initially conceded themselves, often after consultation behind-the-scenes with their superiors or the ultimate owners of the business. Clearly it is very important to make clear early on that any concessions are made as part of a “package deal” and that if points are re-opened, the whole agreed deal so far may need to be reassessed.

Good cop, bad cop is a variation on cheese slicing and the use of a middleman. Often where there are multiple selling shareholders, one Seller will take a reasonable position but explain that they can never convince their fellow shareholders (who are often not present at negotiations) of the position and that therefore concessions will need to be made. Buyers, investors and lenders often do the same thing when explaining that they will never manage to obtain approvals from their superiors and/or credit committee.

Overly aggressive - you will sometimes encounter an overly aggressive approach to negotiations from one or both parties, particularly in a business culture which has seen momentous political and economic changes over the last 20 years. The key here is to be informed and comfortable with who you are dealing with and to make sure that you have experienced advisers with good local knowledge.

Delays in responding - it is not unusual to experience delays in responding to requests for information or drafts of legal documents. Often this is just part of the process of coordinating many different people in large organisations (the expression “herding cats” is used here!). However, sometimes it is a deliberate tactic, in order to reduce the amount of time available to analyse issues and to put unfair time pressure on one party and/or their advisers. Firm timetable management is key here, together with a tough negotiating position when necessary.

Late information - it is very common on deals for new and potentiallysignificant informationto arrive very late in a transaction, sometimes shortly before the contracts are due to be signed. This often happens with very late Disclosures against the Warranties. The Disclosure exercise is often carried out very close to signing and the process of focusing on the Warranties can prompt the Sellers to produce new significant information (financial, commercial, legal or otherwise). Again, a firm management of the timetable is key here. An Indemnity, price adjustment or retention should be sought by the Buyer if appropriate, regardless of the lateness of the Disclosure.

Language barriers - almost all Russian deals are conducted and documented in either Russian, English or more often in a combination of both. Russian law requires Russian language versions of a number of the contractual documents for regulatory and tax reasons or for the notary. Quite often some or all of the parties will not speak the same language to a sufficient business level and it is therefore necessary to use translators and translated or bilingual versions of documents and contracts.

Quite often, the time pressures on deals mean that translations will fall behind the original versions. This whole process inevitably leads to delays, miscommunications and misunderstandings from time to time. This can be managed with a patient and professional approach. However, parties will sometimes also use this to their advantage, for example by re-negotiating previously agreed points and explaining that only now do they fully understand them, now that an updated translated version of the contract is available.

In Russia, use Russian law - the argument that is sometimes run, particularly by Sellers, is that for Russian deals, Russian law should be used. It is sometimes the case that the use of Russian law is mandatory, but most of the time it is not (or can be structured around) and most international deals will still use English law. In the case of the Sellers, the fact that Russian law does not yet fully recognise concepts such as Warranties and Indemnities can be an attractive proposition for them, but clearly a Buyer will want to use such legal mechanisms and for this reason English law is usually preferred.

Focusing on the wrong issues - sometimes a party will focus on seemingly unimportant issues and try to direct the bulk of the negotiations towards these. This can be for a number of different reasons. Sometimes they are just inexperienced and unfamiliar with the process. On other occasions, it can be a negotiating tactic, to divert attention from other, more business critical issues. Alternatively it may just be to create a “list of points”, in other words items which can later be traded for something. Or of course it may be that a seemingly unimportant point is actually of great importance to the other side!

At the final stage of negotiations, the parties will need to consider whether any final changes need to be made to the deal. For example, the Buyer may require an Indemnity to cover a new issue highlighted in the Disclosure Letter, or it may want to increase the amount of Consideration to be paid into the Retention Account (and so decrease the amount to be paid directly to the Sellers at Completion).

Also, since several months will probably have elapsed since the price was first agreed, the financial performance of the Target may have changed and new financial results (at least in the form of updated Management Accounts) will probably be available. If the results are significantly different from those on which the original price was negotiated (and this is not purely due to seasonal variations or one-off factors) then one party may want to seek an adjustment to the price.

In the case of smaller companies, quite often the financial performance of the Target will drop during the M&A process whilst its senior management are busy with the sale negotiations and do not have sufficient time to fully focus on running the business.

PRE-SIGNING STEPS