Due diligence of an investment project with the participation of foreign investments (foreign entities)

due diligence of an investment project with the participation of foreign investments foreign entities

Due Diligence is a complex and multifunctional process of collecting and analyzing data (including legal data) necessary for a qualitative assessment of the possibilities of implementing an investment project (including analysis of investment risks, legal risks, assessment of the purity of transactions planned for conclusion and an investment object, verification of the good faith of potential counterparties and their financial condition).

According to Art. 5 of the Federal Law of 25 February 1999 N 39-FZ “On investment activities in the Russian Federation carried out in the form of capital investments” relations connected with investment activities carried out in the form of capital investments by foreign investors in the Russian Federation are governed by international treaties of Russia, Civil Code of the Russian Federation, specified by federal law, other federal laws and other regulatory legal acts of the Russian Federation. If an international treaty of Russia establishes other rules than those provided for by this federal law, then the rules of the international treaty shall apply.

The general rules of the Federal Law of July 09, 1999 N 160-ФЗ “On Foreign Investments in the Russian Federation” established that the legal regime for foreign investors and the use of profits from investments could not be less favorable than the legal regime for activities and profits from investments provided to Russian investors, with exemptions established by federal laws. Exemptions of a restrictive nature for foreign investors can be established by federal laws only to the extent necessary to protect the foundations of the constitutional order, morality, health, rights and legitimate interests of others, to ensure the defense of the country and the security of the state. Withdrawals of a stimulating nature in the form of benefits for foreign investors can be established in the interests of the socio-economic development of the Russian Federation. Types of benefits and the procedure for granting them are established by the legislation of the Russian Federation (Art. 4).

Due diligence is particularly important for foreign investors participating in an investment project of foreign business entities. This is due to the fact that the assessment of possible risks is carried out “at the junction” of the legal systems of different states with the need to interact with the authorities and organizations whose activities are regulated by various legal norms, with the necessity of taking into account the requirements of international agreements, as well as industry requirements and work standards).

The omissions made at the stage of legal risks analysis of the planned implementation of an investment project always entail significant risks and negative consequences for investors due to the fact that projects carried out with the participation of foreign investments, as a rule, imply very large investments, and also require early comprehensive elaboration of a number of issues that may arise in the long run.

The main risks to be assessed during the due diligence procedure include the following:

•Overestimate of the value of acquired assets.

•Financial insolvency (availability of debt) or deliberate bad faith behavior of one of the participants of the investment project.

•The existence of obligations to creditors of the founders of economic entities that are participants in an investment project, if such obligations may affect the obligations of participants in an investment project, as well as their receipt of profit.

•Bringing to administrative/tax/criminal liability of participants of investment activities (with the active imposition of sanctions against the Russian Federation, this issue has become of particular relevance).

•Risk of damage to business reputation.

•Risks of contesting concluded deals (an analysis of the potential risks of recognizing such transactions as void) is necessary.

•Risks of non-compliance with established and mandatory to comply with corporate standards (codes of ethics, industry agreements, international standards, etc.).

•Other risks.

The above list of risks is not limited and should be clarified when directly assessing the attractiveness of an investment project, depending on the goals and objectives.

The lawyers of BRACE Law Firm have the necessary knowledge and skills to carry out the due diligence procedure as efficiently as possible using an integrated approach to assessing the short-term and long-term prospects for the development of an investment project and possible legal risks.

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