Legal audit of a company before its acquisition,
known in the business environment as due diligence,
is commonly essential condition for making a final decision of the foreign
investor on the purchase of shares in Kazakh legal entity.
Long ago managers worldwide came to
conclusion that analysis of current situation in the target of purchase is more
advantageous and efficient rather than discovering the necessity to solve
certain issues in the future, after signing the sale and purchase agreement.
Similar logic is applicable not only
to the companies which are subjects of investments but also to acting
enterprises which generate income and do not expect significant problems. The
majority of Kazakh companies of medium and large business have in-house legal
counsels in their staffs and, consequently, apply to external consultants only
for certain project, such as court cases, assistance during important
transactions, obtaining permits. Due to that, first managers and in-house
counsels of business entities rarely conduct monitoring of current state of
legal affairs in the company and do not analyze the job results which may cause
negative consequences for this company in the future.
It is common to apply to external
consultants already with existing problem such as withdrawal of license, claim
on termination of subsoil contract or application of employee to the
conciliation commission. It is obviously clear that in these cases the issue
appeared due to improper analysis of the documents related to the commitments
of the company’s obligations in front of the third parties. Frequently, the
cases aforesaid are solved by external counsels with greater efforts and, as a
result, with higher costs rather than preventing these risks by timely legal
audit.
Much appreciating the merits of
in-house counsels, we see the whole complex of reasons which may cause
undesirable aftereffects for business due to the absence of external legal
audit. Among them are regular overloading, narrow specialization of certain
professionals, absence of wide law enforcement practice, trust to unfair
external consultants providing sometimes undue results of their services which
are accepted by the clients as appropriate, others reasons.
Within the recent legal audit of
industrial company of Astana, the lawyers of Linkage&Mind LLP faced with
the situation when actual legal circumstances significantly differed from the information
provided by the owner to potential buyers. There were breach of special
conditions of three licenses. Besides, the company did not obtain corporate
approval of shareholders for entering into long-term major transactions which
required such approval in accordance with the charter.
Due to revealing of all risks, foreign
investor refused from acquisition of Kazakh company and, by doing so, saved
tens of thousands US dollars which might be spent for elimination of legal
risks.
We recommend the owners of business,
its managers as well as legal directors to prevent timely potential risks by conducting
legal audit in the following sectors:
1) corporate affairs. This integral
part of any acting legal entity is not limited by the analysis of the charter,
registration documents and appointment of the first manager. In fact, every company
has certain risky issues which frequently have a lack of attention. Among them
are forming of share capital, obligations in relation to sale and purchase of
shares, state registration of structural subdivisions in the places of
permanent business conduct outside the main legal office
2) permits and licenses. Some
business managers consider that a license issued by a governmental body shall
be valid till the date of its expiration subject to submission of periodical
reports. However, the laws of Kazakhstan stipulate a number of cases when
permit or license shall be mandatory re-issued or withdrawn by the competent
authority
3) labour relationships. The
practice demonstrates that it is inefficient to have only well drafted labour
agreement, acts of the employer on hire and dismissal of employees, imposing
disciplinary liability. It is also highly important to have proper collective
agreement, the mechanism of functioning of conciliation commission as well as
the acts of employer on validation of internal policies and procedures to make
them mandatory for the execution by employees
4) intellectual property. As we can
see, many entrepreneurs do not pay due attention to the objects of intellectual
property. The lawyers of Linkage&Mind LLP faced with the situations when market
leaders of certain industry continue to work without protection of their trademarks
until the appearance of disputable problem. For this reason, we also recommend
to carry out regular monitoring of existing patents for inventions, industrial
models, utility models and trademarks.
Depending on the type of company’s
activities, the useful areas of legal audit can be antitrust and competition,
environment, subsoil usage, investment obligations, public purchases,
insurance.
Kazakh subsidiaries of foreign
companies have common practice of periodical internal legal audits conducted by
the parent company (holding). There is no doubt that such practice facilitates
well-timed detection and prevention of legal risks.
At the same time, national
peculiarities of Kazakh legislation and the practice of law enforcement reveal
clear necessity of involvement of external legal consultants for the
professional assessment of legal aspects of the company’s activity and
potential improvement of existing situation.