Acquisitions typically require the buyer to exercise a substantial amount of prior due diligence. Before committing to a transaction, the buyer will want to obtain an understanding of, amongst other things: the nature of the business, obligations that come with it, the nature and extent of the target company's contingent liabilities, the existence of any problematic contracts, and litigation risks. This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets,
since the buyer has little (if any) ability to obtain the information it requires from public sources.
Renewable Energy (RE) facilities currently represent a fast-growing sector in Kazakhstan. They are regulated by Kazakhstan Law "On supporting the use of renewable energy sources" dated July 4, 2009 (hereinafter the "RE law"), as well as the Order of the Minister of Energy of the Republic of Kazakhstan dated March 2, 2015 No. 164 "On approval of the Rules for the centralized purchase and sale by the Financial Settlement Center of Electrical Energy produced by facilities for the use of renewable energy sources"
(hereinafter the "Rules").
This article aims at providing the summary of the most significant legal and business due diligence activities that are connected with a typical RE sector specific M&A transaction. Careful planning and proper anticipation of the related issues that may arise, will allow the target company to be well equipped with particulars to successfully execute the transaction.
Corporate structure research covers the history of the legal entity, from its initial registration until the DD date, including the identities of the participants, charter capital, participatory interest disposal, tax indebtedness, etc. In examining the corporate structure of a company, one must pay attention to the previous participatory interest transfers, as well as the documents confirming such transfers (i.e. Sale-Purchase Agreement).
It is worth mentioning that the charter capital payment is essential, as non-payment of charter capital may lead to the compulsory winding-up of the company by the court.
Another possible risk during the DD exercise is the absence of the antimonopoly authority consent for the previous transactions if any. Under Kazakhstan law, transactions constituting economic concentration require prior consent or notification of the antimonopoly authority when certain thresholds are met.
This requirement is equally applicable to transactions made outside of Kazakhstan when, as a result, one of the following conditions is satisfied:
Under the RE law, an energy-producing organization that uses renewable energy sources has the right to sell its produced electric energy at its discretion using one of the following options:
The potential buyer must therefore ensure that the legal entity is a winner of the auction and that the Ministry of Energy has accordingly included it into the RE facilities siting plan within five working days from the date of receipt of the register of the auction winners from the organizer.
It is advised to make sure that the developer (energy producing company) follows the project development schedule as agreed in the PPA with the FSC. In particular, one must ensure timely submission of the following documents to the FSC:
Financial guarantees play an important role in securing the obligations of the energy producing company under the PPA:
Subject to the Order of the Minister of Energy of the Republic of Kazakhstan dated May 19, 2020 No. 197 On amendments to the Rules, the energy producing companies are entitled, due to force majeure arising in connection with the pandemic caused by the spread of the COVID-19 virus, to ask the RFC to extend the deadlines for provision of the copies of the notice of the commencement of construction and installation works of the RES facility,
in relation to which the PPA is concluded and a copy of the commissioning acts of acceptance for 1 year. In its turn, in practice, RFC signs an Addendum to the PPA.
In accordance with the RE Law and the Auction Rules approved by the Order of the Minister of Energy of the Republic of Kazakhstan as of December 21, 2017, No. 466, the local executive authorities of regions (Akimat) shall reserve land plots for the construction of RE facilities until the auction winners are given the land title, according to the Land Code of the Republic of Kazakhstan dated June 20, 2003, and shall send the relevant information to the Ministry of Energy of the Republic of Kazakhstan.
The procedure for reserving land is determined by the Rules for the Reservation of Land approved by the Order of the Minister of National Economy of the RK dated February 28, 2015, No. 178. It is worth noting however, that if land plot reserved for the RE facility construction not used within 3 years, it may be subject to expropriation; such procedure is regulated under Article 94 of the Land Code.
Generally, the procedure of obtaining a land plot consists of 4 stages:
Moreover, it is recommended to ensure the presence or absence of any property located on the land plot belonging to the legal entity in order to reduce possible risks, such as a pledge on such property. A violation may lead to the termination of PPA.Note that the RE facilities should conclude a standard grid connection agreement with the energy transmission organization that directly connects RE facilities to its power grids. This usually happens after receipt of technical specifications for connection to the grid from the regional energy transmission organization.
The RE law commits transmission companies to provide unimpeded and non-discriminatory grid connection point with a commensurate voltage class and to ensure connection of RE facilities.
Grid Connection arrangements include the availability of 3 documents: the Power Delivery Scheme, the Technical conditions and the Agreement on connection of the RE facilities.
Note that the investor finances all activities required to obtain the TS. Its validity period is no less than the time needed for preliminary project studies, design and construction of the renewable energy facilities, as identified by current design and construction norms, and should not exceed 3 years.
Prior to concluding the transaction, it is also recommended to check for all debt obligations of the legal entity, as there may be penalties for late repayments. The bank statements can serve as confirmations of timely payments.
The content of this article is intended to provide a general guide
to the subject matter. Specialist advice should be sought
about your specific circumstances.