Americans wishing to buy a Ukrainian IT company - is it always profitable?

When an American company wishes to buy a Ukrainian one, our businessmen often find such an offer tempting. However, if we take a closer look, the temptation can turn out to be unjustified.

A small Ukrainian IT firm has a unique team with experience in medical big data - i.e. processing large medical data arrays. What makes it unique is the fact that employees have medical degrees and know how to write code as well. They create an exclusive product and develop unconventional solutions in this highly specialized field. These products are mostly in demand by American and Israeli medical corporations as well as foreign IT companies that specialize in healthcare. One of their long-time clients made an offer to the owners of the Ukrainian company to work on his American project together - a comprehensive system for predicting and diagnosing illnesses.

The deal suggested by the American partner had the following terms:

1) direct communication between the medical savvy programmers and the partner’s company; 2) owners of the Ukrainian company would get the positions of CEO and CTO in the American company’s Ukraine office; 3) they would also get a stock warrant with a 10 year right to buy 2% of the American company’s shares at the agreed price. .
In addition, the Ukrainian company’s owners were offered a shareholders’ agreement on their share in the American company of their future partner.

Чтобы принять взвешенное решение, собственники украинской IT-компании обратились к юристам ILF с просьбой провести аудит предлагаемой сделки и дать свое независимое мнение, выгодна ли для них эта сделка. Команда юристов под руководством партнера ILF Антона Зинчука провела детальный юридический и инвестиционный анализ предложения по сделке. Результатом этой работы стала рекомендация ILF отклонить предложение и не принимать участие в сделке.

To make an informed decision, the Ukrainian company’s owners turned to ILF asking to conduct the deal’s audit and share an independent opinion on whether the deal would be in their best interests.

The team of lawyers with Anton Zinchuk in charge performed a thorough legal and investment analysis of the deal. As a result, ILF recommended to refuse the offer and take no part in the deal.

For one thing, if they agreed, the Ukrainian company would lose their team of code-writing medical experts and would be unable to use their expertise for their own development, such as making profit and accumulating unique experience.

Another contentious aspect was the shareholders’ agreement, which was to be signed by the Ukrainian owners. This document contained a clause that forbade shareholders to lead a business that would compete with the American company and its affiliates. For ILF’s client, medical data is just one of its business activities. However, the shareholders’ agreement would in effect prevent them from doing any kind of business that had to do with IT development. So, if they accepted they deal, Ukrainian business owners would risk losing their whole business.

Other terms of the deal also warranted attention, particularly the stock warrant. According to the American party, their company’s net worth at the time was 100,000 USD. Ukrainian owners were offered a chance to buy an insignificant amount of its shares within 10 years at a price higher than their actual cost. Of course, the American partner assured that in 10 years their net worth would increase. Simple arithmetic showed however: for the market value of the shares to equal the price offered to the Ukrainian company, the American company's net worth would have to rise a hundredfold. And it seemed that the American party intended to achieve that growth with the help of the programming medical experts, since they didn’t share any other means of development.

In addition, the deal was legally complicated for the Ukrainian company. For Ukrainians to be able to buy shares of a foreign company, they need to get a personal license on foreign investment from the National Bank of Ukraine. The procedure is not too complex but always lengthy.

This means that after agreeing to the deal, Ukrainian businessmen risked losing their business in Ukraine in exchange for a chance to participate in a high risk project with uncertain prospects. In the end, ILF's client refused the deal but continued working with the American partner as an independent contractor, focusing on expanding their own business.

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