Are there considerations other than “ownership” when assessing EU/UK sanctions exposure in M&A transactions?

Hypothetical:  

Potential Acquirer, a UK company, is looking to acquire 100% of the shares in TargetCo.  Potential Acquirer undertakes pre-acquisition due diligence on TargetCo.  It ascertains that 68% of TargetCo is owned by Standard Group, but is unable to identify the ownership of the remaining 32% of TargetCo.  A minority stake in Standard Group is owned by TopCo.  The cumulative majority stake in TopCo is owned by two individuals on the consolidated list of designated persons subject to EU financial sanctions.  Potential Acquirer completes its due diligence on TargetCo, and no further information becomes available.  Potential Acquirer is unable to establish who has “control” over TargetCo.

Key Considerations:

  • A range of EU sanctions apply to entities “owned or controlled” by individuals or entities that are specifically subject to sanctions restrictions.
  • Possession of 50% of the proprietary rights of an entity is a key criterion for establishing “ownership.”  Given that TopCo only has a minority stake in Standard Group, “ownership” is not an issue from a sanctions perspective.
  • The Potential Acquirer, however, also has to consider the issue of “control.”  A number of criteria may be relevant to the concept of “control.”
  • These criteria include controlling a majority of the voting rights, or the power to exercise a dominant influence over the entity.
  • In this scenario, given that the Potential Acquirer is unable to establish who has control over TargetCo, it should consider seeking representations and warranties from the directors of TargetCo that they do not act on the instruction of any EU designated person and that they will inform the Potential Acquirer of any change of ownership or control of TargetCo prior to closing the transaction.
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