The conflict in Ukraine and subsequent sanctions have had a chilling effect on M&A involving Russian entities, as these assets are now squarely off-limits for US buyers.

The Office of Foreign Assets Control (OFAC), the financial intelligence and enforcement agency of the US Treasury Department, in June issued guidance that provided clarity on what types of deals may be permissible, although many remain highly complex from a compliance standpoint.

Broadly speaking, acquiring an equity interest in a company outside of Russia that may have some Russian operations can proceed under US sanctions law, under certain circumstances. But the devil is always in the details.

A fact-specific analysis is necessary to understand the purpose of the investment, the extent of the target company's investments in Russia, and what the revenues from those Russian investments might be for the target company, before a US investor can get comfortable with an acquisition.

There are many nuances around the edges. OFAC has not determined specific thresholds, rather the language in the regulator's guidance centers on "predominance." Any non-Russian target that derives a predominant portion of its revenues from its Russian investments could therefore elicit some form of sanctions risk. A company that receives upwards of 51 percent of revenues from Russia would now clearly be off-limits. However, the predominance test could be interpreted more conservatively to apply to companies that receive the largest share of their revenue from Russia, which may still be a minority share.

Even for permissible transactions, it should be kept in mind that banks and other financial institutions commonly engage in over-compliance. With that in mind, investors are strongly advised to pre-clear even sanctions-compliant deals through the transaction chain, not just with the originator or beneficiary banks but with the intermediaries too. Otherwise, at any point in the deal, process banks may delay or block a deal based on their own internal policies, leading to unnecessary and avoidable challenges to the transaction's completion.

Divestments create their own headaches

A number of major multinational companies have begun pulling out of Russia, and this race to divest raises challenges too. In any divestment transaction, there's an investing party on the other side. That typically means exiting to a Russian company or the existing management, or in some cases to a business in a different country that has its own set of restrictions. US, UK or European companies, for example, must navigate not only the sanctions relating to blocked persons but also adhere to any export controls when transferring assets, particularly technology that authorities may consider strategically sensitive. Such items can include everyday office equipment, items used in manufacturing, and so-called "luxury goods."

There are also the financial institutions involved in the deal to consider. Extensive sanctions have been placed on Russian banks and acquirers, and sellers need to be extremely careful about which parties are mandated to administer a given deal.

There is a lot to think about and, as ever with sanctions, the situation is evolving. Sanctioned individuals are constantly being added to the blacklist by one authority or another, in some cases inconsistently. Investors must proceed with caution and the utmost diligence by carrying out a complex analysis of sanctions risks before attempting to execute any deal that may have some exposure to Russia.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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