COMPLIANCE: A KEY COMPONENT OF M&A DUE DILIGENCE IN UKRAINE

1. COMPLIANCE: A KEY COMPONENT OF M&A DUE DILIGENCE IN UKRAINE INVEST IN UKRAINE: REVEALING THE POTENTIAL Adam M. Mycyk Chadbourne & Parke LLP, Kyiv, Ukraine June 11, 2013

2. WHY CARRY OUT DUE DILIGENCE? • Uncover undisclosed liabilities • companies may have liabilities that may not appear in their accounts (e.g., sureties/guarantees) • companies may keep two sets of books • Duty to shareholders • Compliance with laws, e.g., Foreign Corrupt Practices Act (FCPA), UK Bribery Act, anti-money laundering laws, etc. • Issues important to Western investors may not always be of concern in purely domestic transactions – competitive disadvantage?

3. WHY WORRY ABOUT COMPLIANCE?INCREASE IN FCPA ENFORCEMENT! • Siemens agrees to pay $800 million fine to settle FCPA bribery charges (December 2008) • Halliburton to pay $402M for foreign bribes (February 2009) • FCPA sting operation nets 22 executives for FCPA violations (January 2010) • BAE Systems agreed to pay $400 million FCPA fine (March 2010) • Delaware company Innospec, Inc. to pay $40.2M for FCPA violations (March 2010) • Daimler to pay $185M to settle charges of making millions in foreign bribes (April 2010)

4. UKRAINE AND CORRUPTION • 2012 Corruption Perception Index published by Transparency International ranks Ukraine 144th out of 174 countries • Recently, President Yanukovych reported that Ukraine suffered budgetary losses of over $2.5 bln in 2012 due to corruption • Ukrainian government has declared a war on bribes and corruption as a state strategic priority • New Ukrainian laws and concepts implemented but enforcement weak • Global movement to combat corruption – close to 40 countries have enacted comprehensive anti-corruption legislation • Enactment of the UK Bribery Act and the aggressive enforcement of the US foreign Corrupt Practices Act (FCPA) have raised additional concerns for businesses operating – or planning to operate – in Ukraine

5. FCPA – TWO PRONGS • Anti-bribery provisions • prohibit companies and individuals from making corrupt payments to foreign officials to obtain or retain business • any US citizen or US company or any person if any part of the act took place in the US • “payments” include anything of value, including promises or offers • “foreign official” includes any government employee, political party, candidate and even employees of government owned entities • “obtain or retain business” includes efforts to gain a business advantage such as favorable tax treatment • Books, records and internal controls • applies to companies listed in the US and requires them to • keep accurate records that fairly represent transactions • maintain a system of internal controls to ensure proper management control and reasonable accuracy of books and records

6. UK BRIBERY ACT OFFENSES • Promising, offering or giving, or requesting, agreeing to receive or accepting an advantage (financial or otherwise) in circumstances involving the improper performance of a relevant function • “relevant function or activity” – a public or business activity, which a reasonable person in the UK would expect to be performed in good faith, impartially or in a particular way by virtue of the fact that the person performing it is in a position of trust • “improper performance” – breach of that expectation • Promising, offering or giving an advantage (financial or otherwise) to a foreign public official intending to (1) influence the FPO in his capacity as such, and (2) to obtain/retain business/advantage • Strict liability for companies where an active general or FPO offense is committed anywhere in the world by someone performing services on the company’s behalf intending to obtain/retain business/advantage

7. US FCPA v UK BRIBERY ACT

8. US FCPA v UK BRIBERY ACT

9. UKRAINIAN RULES ON CORRUPTION • Law of Ukraine on Prevention and Combating Corruption; • Enacted on July 1, 2011; • Extraterritorial Effect; • Catch-all “Public Officials” Notion; • Private Corruption; • Termination of Benefits; • Confiscation of Income/Profit; • Suspension/Termination of Employment. • Liability for Non-reporting Corruption; • Liability for Offer or Promise of a Bribe; • Liability for Hiring Former Officials; • Criminal Liability for Legal Entities (upcoming) • Penalties range USD10K-160K; • Limitation of Activity; • Liquidation of Corporation.

10. BE PREPARED • Completion of a merger or acquisition does not extinguish the legal consequences of FCPA violations • US government can impose successor liability and penalize companies for past violations of the FCPA committed by acquired entities • A company must thus have: • a comprehensive compliance program for its own regular business operations • a complete understanding of the anti-corruption compliance practices and history of any company/entity it seeks to acquire • Due diligence is crucial and should happen well in advance of the decision to proceed with a transaction

11. WHAT TO TYPICALLY LOOK FOR IN DUE DILIGENCE? • Corporate • Ownership • Regulatory – licenses, permits, other approvals • Liabilities – loan agreements, guarantees, long-term contracts • Litigation • Related Party transactions/outside of ordinary course • Contractual matters • Environmental • Taxes • Assets - production assets/real estate and land rights/encumbrances • Labor matters – terms and conditions/payroll/private entrepreneurs • Customer and Supply Issues • Accounting and Records • IP and IT

12. COMPLIANCE DUE DILIGENCE • Begin due diligence early – this takes time and findings may often prevent a deal from proceeding • Involve anti-corruption experts – focus the review/save time/conduct it simultaneously with legal/tax/financial/other DD • Analyze the company’s current anti-corruption compliance program – Compliance officer? Procedures? Training? Audits? • Thorough anti-corruption due diligence review and risk/red flag assessment (counterparty, target and all subsidiaries) • Verify the implementation of a formal compliance program going forward – prior to closing confirm that the existing anti-corruption compliance program meets the standards necessary to eliminate violations following the sale. Important when the target was previously not subject to FCPA or in a country, such as Ukraine, with relaxed corruption enforcement.

13. RED FLAGS TO CONSIDER • History of Title to Key Assets • Title to Real Estate and Land • Regulatory Approvals Obtained • Distribution Network Control • Shipment and Customs Clearance • “Tax Optimization Structures” • “Double Accounting Books” • “Private Entrepreneur Contracts” • “Shadow Salaries” • Close Affiliations with Officials No Problems with Authorities – BIGGEST RED FLAG!!

14. POST-CLOSING MECHANISMS • What if you can’t determine potential violations prior to closing? • Negotiate specific indemnity provisions for undiscovered violations – not always entirely effective, particularly when individual employees are involved in criminal prosecutions • Seller representations and warranties in SPA that it is not aware of any actions by employees/agents/representatives that could directly/indirectly result in violations of anti-corruption laws • Generally difficult to structure representations and warranties when results of review are inconclusive • Sellers often reluctant to provide these • Negotiate a reasonable “holdback” amount to cover: • Fines, penalties, etc. due to violations that occurred pre-closing • Services of outside counsel, as necessary, to deal with any charges

15. KEY COMPLIANCE PROGRAM COMPONENTS • Routine due diligence of sales agents/distributors/consultants • Contracts/agreements protecting the company against possible FCPA/anti-corruption law violations • Adequate internal accounting controls on payments, invoices, books, records and audits • Regular company-wide training and anti-corruption audits • A reporting mechanism – e.g., a hotline – for employees to report potential violations • Policies/oversight regarding allowable payments (e.g., gifts, etc.) • Policies regarding communications with officials American Chamber of Commerce in Ukraine has just started a compliance club to share best practices amongst members!

16. Contact Us Adam M. Mycyk International Partner Chadbourne & Parke LLP 25B Sahaydachnoho Street, 3rd Floor Kyiv 04070, Ukraine Tel: +380 (44) 461 7566 amycyk@chadbourne.com www.chadbourne.com