General overview of the kazakh M&A market in 2009
The Kazakh M&A market as an entire relevant market in the world showed a significant slowdown in 2009. A significant number of proposed deals have been annulled due to material adverse changes in the economic environment and too much uncertainty about the future to make a move. Transactions of significant worth and leverage have been replaced with smaller deals, but in a bigger quantity. Investors have also realised that the global financial crunch enables them to buy perspective assets not at a low price but rather a fair price, which previously was unreasonably high.
Currently, we do not see many large, sensational M&A transactions, such as the acquisition of the Kazakh ATF Bank by Unicredit Group or the Romanian oil refinery Rompetrol by the Kazakh state-owned oil exploration company KazMunaiGaz. The most noteworthy deals in 2009 are comprised of the acquisition for 2,3 billion USD of Mangistaumunaigaz, being the third oil company in Kazakhstan, by a consortium of KazMunaiGaz and Chinese CNPC Exploration and Development Company Ltd., and the purchase of an 11% stake in KazMunaiGaz Expolration and Production for more than 900 mln. USD by the Chinese sovereign investment fund, China Investment Corporation.
LEGAL BACKGROUND AND BASIC IMPEDIMENTS
Generally speaking, Kazakh law is not familiar with a definition of the term ‘acquisition’, which is widely used in UK or US legal practices, where the term only includes an acquisition of shares/participatory interest in a target company. Kazakh M&A practice does not contain examples of the acquisition of assets and most relevant deals are conducted through the obtaining of ownership in respect of shareholding in the companies.
Kazakhstan now has a developing legal system in a fairly untried and untested judicial environment and therefore, it is not possible to predict how local courts may settle disputes connected with M&A transactions. Kazakh law is not familiar with common terms in M&A practice, such as drag- and tag-along rights, representations and warranties, as well as with a Shareholders’ Agreement in its general meaning.
Basic difficulties that may be faced by foreign investors relate to the uncertainty of Kazakh law in respect of Shareholders’ Agreements, which usually represent a material condition of M&A deals. Even though Kazakh law is silent with regards to such agreements, which should be understood as a non-prohibition of them, local courts still gravitate towards ignoring these Shareholders’ Agreements or simply regarding them as invalid. There are several provisions within banking and corporate law, which indirectly assume that shareholders may enter into agreements setting forth their rights and duties in relation to control over or management of a company, but they are not sufficient in granting the Shareholders’ Agreement full legal ground and protection.
Kazakh legal practice shows that in order to give a Shareholders’ Agreement legal effect, the by-laws (in Kazakhstan, the charter) of the target company must be amended so that they reflect all necessary provisions of the agreement. The charter of the company is binding upon its shareholders as well as on the company and it is through this gateway that the Shareholders’ Agreement becomes effective indirectly.
Another point relates to the representations and warranties that are given to reassure the acquirer or to induce him to purchase the target. Generally, representations & warranties are regarded as information on the target business, affairs and assets that are put forward by the seller as being fair, accurate and complete and the seller in turn undertakes to ensure the validity and correctness of such statements. From the perspective of Kazakh law, an undertaking by a person means an obligation to take an action or omit taking an action and therefore, the substance of the representation does not fully coincide with the said definitions.
RECENT DEVELOPMENTS OF KAZAKH LAW IN M&A
The last amendments that were introduced into the Kazakh legislation relate to the liberalisation of foreign exchange regulation. Effective from the end of October 2009, the National Bank of Kazakhstan has increased the threshold for the registration/notification of acquisitions to the level of 500,000 USD and 50,000 USD for Kazakh residents and non-residents respectively. In the case of the acquisition of shares/participatory interest in foreign or Kazakh companies, residents and non-residents respectively have to register/notify of the relevant transaction if the value of it exceeds the abovementioned limits. Prior to such amendments, the thresholds were 300,000 USD and 10,000 USD.
Another act that was amended due to adverse changes in the world and the Kazakh economy was the Kazakh Banking Law. A new section 17-2 of this Law granted the Kazakh Government or sovereign wealth fund SamrykKazyna, 100% owned by Kazakhstan, the right to compulsorily acquire more than 10% of shares in the Kazakh commercial bank, in the case of a breach of capital adequacy or liquidity ratios, as well as other normative ratios approved by the Kazakh FSA.
In 2009, the Kazakh wealth fund SamrykKazyna exercised the said right in the case of the acquisition of BTA Bank, the second largest bank in Kazakhstan, which controls about 18% of total banking assets. BTA Bank is now owned by the Kazakhstan Government for 75,1% of shares and goes through restructuring of its assets and indebtedness with creditors. It is expected that upon restructuring, the shareholding of Kazakhstan (represented by SamrykKazyna) in BTA Bank will decline to 67% and the creditors who have chosen an option of conversion of their debt to the bank shares will have a 33% stake.
The most significant amendment that has affected the M&A market however is the adoption of the new Competition Law (“the Law”) that was signed by the Kazakh President on 25 December 2008 and came in force from 1 January 2009, superceding the Competition Law adopted in 2006. The main feature of the new Law was the extraterritorial principal of its application, in that the Law applies also to transactions conducted outside of Kazakhstan.
Pursuant to Article 3 of the Law, it applies to the actions of market participants outside of the territory of Kazakhstan if any of the following conditions are satisfied as a result of such actions:
a) fixed or intangible assets, shares/participatory interest in the share capital of market participants located in the territory of Kazakhstan, property or non-property rights in respect of Kazakh legal entities are directly or indirectly affected;
b) competition in the Republic of Kazakhstan will have been restricted.
Based on these provisions, the acquisition of a holding company that has assets located in Kazakhstan or a shareholding in a Kazakh company requires the approval of the Kazakh anti-trust authority if any of the foregoing requirements are met. In the meantime, the Law does not contain explicit or comprehensive provisions relating to this matter as the Kazakh anti-trust authority has not issued any relevant notes providing clarification or advice.
Practice surrounding the implementation of the Law during the first year of its existence shows that difficulties connected with the ambiguity of the new anti-trust requirements are usually faced in cases of acquisitions of companies that do not have any presence in Kazakhstan through a branch/representative offices and do not comply with item (1) above, but have sales in Kazakhstan. The anti-trust authority does not have any concrete criteria, which allow it to determine the possible impact of the acquisition on competition in Kazakhstan, including the restrictions that are likely to arise.
From our point of view, in this case, the decision on possible restrictions of competition should be based on a market share, which is owned by the target company. Furthermore, if the share in the relevant Kazakhstan market is quite large and this market is significant within the whole economy of Kazakhstan, the proposed acquisition should trigger the approval of the Kazakh anti-trust authority.
Another point relates to a gap in the calculation of the relevant thresholds requiring Kazakh anti-trust clearance. The Law (section 50.3) prescribes that such clearance, subject to compliance with other applicable requirements, must be sought if the total assets of the acquirer [of the shares] and target company or their turnover (sales) exceed 28,260,000,000 Kazakh Tenge (for 2010) or approximately 18,067,600 US Dollars. The Law does not however state which exchange rate (officially issued by the Kazakh National Bank or average market rate on the Kazakh Stock Exchange), as of which date and which turnover (world wide or only in Kazakhstan), should be used for calculation. For instance, under the EC Merger Regulations, the annual turnover of the relevant company for the calculation of the thresholds is converted into Euros at an average rate for the twelve months concerned (e.g. the average exchange rate for 2009).
The Law provides for mandatory obtainment of anti-trust clearance for certain transactions, which the Law refers to as “economic concentration”. Apart from other types that include, inter alia, the acquisition of shares leading to owning more than 25% of the target company, economic concentration is comprised of such transactions/actions as holdings by individuals of managerial positions in two or more companies, which allow them to direct the businesses of such companies. The relevant thresholds mentioned by us in the previous paragraph cannot apply to this case since they basically refer to the acquirer of shares and the target company. The Law is still not fully clear on the definitions and calculation of the applicable thresholds for all kinds of economic concentration and provides us only with the thresholds of acquisition and reorganisation.
According to section 49.2 of the Law, failure to seek anti-trust approval of an economic concentration that entailed a restriction of competition or strengthening of dominance or a monopolistic position leads to the invalidation of the transaction upon a claim of the Kazakh anti-trust authority. The Kazakh state authority benefits from the right to apply to the courts, which might be the Kazakh courts as well as the foreign courts in a jurisdiction, which governs the transaction or under which the target company is incorporated. In the case of bringing a claim in the Kazakh courts, the enforcement of a Kazakh court award will be subject to the respective international treaty between Kazakhstan and the relevant state where the award has to be enforced. For the time being, we are aware of only one case when the Kazakh Anti-trust Agency applied to a court for the invalidation of a transaction due to a breach by the American power corporation AES of the anti-monopoly legislation and has started proceedings threatening to fine AES for the amount of US$198m, which is ongoing.
The Kazakh M&A market is likely to show gradual rather than significant growth and its recovery will not take place earlier than 2012. As previously stated, the mining, oil & gas and banking industries are expected to drive a development of M&A activity.
Most transactions will not involve leverage due to the difficulties of raising funds from banks or other financial institutions. The worsening of financial conditions in the Kazakhstani economy and the cheapening of assets are to encourage potential investors and, in the meantime, we suppose that acquisitions will shift to the acquisitions of non-controlling stakes.
 According to official rate of Kazakh National Bank as of 1 February 2010 (1 USD = 148,21 KZT)