PRAGNUM provided structuring and transaction support for the acquisition of a minority stake in a national pharmacy chain to a foreign pharmaceutical company

We normally warn clients against investing in business structures that do not provide full management control (50% +1 vote). However, business activities develop according to their own laws, which do not always comply with the recommendations of lawyers.

The client, a foreign pharmaceutical company, decided to invest in a national pharmacy chain, which involved acquiring a minority stake in the authorized capital of the companies that own this chain.

PRAGNUM lawyers were faced with two key tasks: (i) to conduct a comprehensive due diligence (legal audit of the investment object) of the pharmacy chain and (ii) to structure the transaction in a way to ensure the protection of the client's interests as a minority shareholder in all possible situations of corporate interaction with the majority owner, namely:

• to create an effective model of participation in the management of the pharmacy chain;
• to ensure the client's participation in the appointment of management;
• to establish the client's control over the company's key decisions;
• to develop a fair dividend policy;
• to provide for "civilized" ways for the client withdraw from the company.

The complexity of due diligence was due to the specifics of the research object which is an extensive network of pharmacies in several regions of Ukraine, owned by a group of companies (LLC).

Based on the results of the legal audit, the client received comprehensive information about the current state of the pharmacy chain, its ownership structure and liabilities, which made it possible to determine the amount of investment and the final value of the business share.

At the same time, within the framework of structuring the transaction, PRAGNUM lawyers developed a balanced model for managing the pharmacy network. The key element of the model was the corporate (partnership) agreement, which actually determined the architecture of the relationship between the co-owners.

The corporate agreement as a tool for regulating relations between the company's participants was officially introduced in 2018 with the entry into force of the Law of Ukraine "On Limited and Additional Liability Companies".

The main feature of a corporate agreement is its private and confidential nature, which distinguishes it from a charter. In such a treaty, the parties can agree on sensitive aspects of their relationship and record understandings that are inappropriate for the charter. In particular, regarding the voting procedure of participants, control mechanisms, conditions for withdrawing the business and other peculiarities of interaction between partners.

The corporate agreement drafted by PRAGNUM within the project made it possible to achieve almost all the tasks set, including as follows:

• implementation of a balanced mechanism for joint business management, regardless of the size of the participants' shares;
• ensuring the client's participation in making all key decisions regarding the pharmacy chain's activities;
• regulating the procedure for appointing a manager with the direct participation of the client;
• providing effective safeguards against the dilution of participants' shares and fair mechanisms for withdrawing the business;
• minimizing the risks of corporate conflicts and blocking the company's activities.

As a result, the client received not just a minority share of the business, but full influence on the management of the pharmacy chain and proper investments protection.

PRAGNUM recommendation:

Use the corporate (partnership) agreement as an effective tool for resolving all possible issues arising in the activities of business partners.