15 October 2020
Recently, the renewable energy sector (RES) in Kazakhstan has been rapidly developing. In this connection, the interest of investors in this sector is growing every year, which leads to an increase in the number of acquisitions of companies involved in the production of electricity from renewable energy sources. As of September 10, 2020, 107 renewable energy facilities were commissioned in the Republic of Kazakhstan. Based on practice, as well as on the increased requirements of the legislation regulating the RES sector and the activities of such companies (in particular, in accordance with such legal acts as the Law of the Republic of Kazakhstan "On the support of the use of renewable energy sources "dated July 4, 2009 (hereinafter – the Law on RES), as well as the Rules for the centralized purchase and sale by the settlement and financial center of electric energy produced by facilities for the use of renewable energy sources , recalculation and redistribution by the settlement and financial center the corresponding share of electricity per qualified conventional consumer based on the results of the calendar year "(hereinafter – the Rules) dated March 2, 2015 ) , it is recommended before making such transactions, involve technical, financial and legal consultants to analyze the issues and risks associated with the activities of the acquired asset, which should be paid attention to.
So, in terms of legal audit, the buyer of an asset is recommended, first of all, to pay attention to the history of the creation of the company and previous transfers of participation interests in it, the issues of obtaining all permits in connection with activities in the RES sector (obtaining rights to land, obtaining technical specifications, preparing a project documentation, conclusion and execution of the terms of contracts for the sale of electricity), and so on. Based on the results of the audit, the buyer may have grounds for including additional measures of the seller's liability in the asset transfer agreement, or for starting negotiations with the aim of revising the asset value downward.
Further, I would like to note the main issues that the Buyer is recommended to pay attention to when studying the activities of a company engaged in the production of energy using renewable energy sources.
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Issues of creation (state registration ) of a legal entity and corporate structure
In practice, they study the entire history of the creation and activities of a legal entity from the moment of its initial registration to the date of verification for who is a participant, the type of activity of the legal entity, the size of the authorized capital, including the procedure for the sale and transfer of shares of the legal entity with confirmation of such a transfer.
Further, it is necessary to secure confirmation of all corporate and government approvals in connection with previous transfers of the asset (if any). In particular, an important requirement is the consent of the antimonopoly authority. So, for example, under certain conditions of reaching the financial threshold of the value of the assets of the purchased company and the Seller's group of companies, in accordance with Article 201 of the Entrepreneurial Code of the Republic of Kazakhstan dated October 29, 2015, the following actions fit the concept of "economic concentration" and require the prior consent of the antimonopoly body:
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reorganization of a market entity by merger or acquisition;
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transactions for the acquisition of a 50% stake in the authorized capital (shares);
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obtaining ownership, including through payment (transfer) of the authorized capital;
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the acquisition by a market entity of rights that allow it to give binding instructions to another market entity when it conducts business or to perform the functions of its executive body, etc.
In the event that such consent was not obtained, there is a risk that such a transaction will be invalidated.
One of the possible risks for the buyer is the lack of confirmation of the payment of the authorized capital by the participants of the legal entity. In accordance with the legislation, the payment of the authorized capital must be made in full within 1 year after the state registration of the legal entity. In the event that the amount of the authorized capital has not been paid, the interested persons have the right to initiate legal proceedings, the result of which may be the forced liquidation of the legal entity on this basis.
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Issues related to the electricity purchase and sale agreement (the presence of a concluded electricity purchase and sale agreement, established deadlines, etc.)
We recommend that you check whether the RES facility is really included in the List of energy producing organizations using renewable energy sources, published on the official website of the Ministry of Energy of the Republic of Kazakhstan. This plan includes all operating renewable energy facilities.
The next step for verification is the results of the auction and the data specified in the application for participation, through which this or that legal entity became the winner of the RES auction. The results of the auction indicate the point of connection, the land plot on which the RES facility is located, and the capacity of the generated energy.
It is recommended to make sure that the developer (energy producing company) timely follows the project development schedule in accordance with the electricity purchase and sale agreement (PPA) with the Settlement and Financial Center (hereinafter – RFC). In particular, he timely submitted the following documents to the RFC:
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a copy of the notice of the commencement of construction and installation work of the facility for the use of renewable energy sources, in respect of which the purchase agreement is concluded, sent to the state body exercising state architectural and construction control – within 18 months from the date of signing the purchase agreement; The energy producing company has the right to ask for an extension of the specified terms for 6 months.
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a copy of the act of acceptance of the facility into operation for the use of renewable energy sources, approved in accordance with the legislation of the Republic of Kazakhstan in the field of architectural, urban planning and construction activities, in respect of which the purchase agreement is concluded – within 36 months from the date of signing the purchase agreement. The energy producing company has the right to ask for an extension of the specified terms for 6 months.
In accordance with clause 107 of the Rules, in the event of delays in the provision of the above documents, the RFC has the right to withhold part of the cost of the financial guarantee and even terminate the electricity purchase and sale agreement (PPA) in accordance with its terms.
An important fact that plays a role in securing the obligations of the energy producing company under the electricity purchase and sale agreement (PPA) are financial guarantees:
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at the initial stage, when submitting an application for participation in the RES auction, the payment of financial security for such an application is. This instrument is a guarantee that the winner of the auction will conclude a purchase agreement with the RFC on the terms and conditions stipulated by the Rules for organizing and conducting auction trading, and will provide financial security for the execution of the electricity purchase agreement. Financial support of the application for participation in the auction is issued in favor of the RFC and provided to it no later than 2 (two) business days before the date of the start of the auction;
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financial security for the fulfillment of the terms of the electricity purchase and sale agreement (PPA). In accordance with the provisions of the agreement, the seller is obliged to provide the Buyer with financial security for the fulfillment of the terms of the Agreement within 30 calendar days from the date of signing such an agreement. If the Seller violates the deadline for providing financial security for the fulfillment of the terms of the Electricity Purchase and Sale Agreement, the agreement will be terminated.
In connection with 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 company also has the right, referring to force majeure circumstances arising from the pandemic caused by the spread of the COVID-19 virus, to ask the RFC to extend the deadlines providing a copy of the notice of the start of construction and installation work of a facility for the use of renewable energy sources, in relation to which an electricity purchase and sale agreement (PPA) is concluded and a copy of the act of acceptance into operation of the facility for the use of renewable energy sources for a period of 1 calendar year. This order was put into effect on May 26, 2020 and is valid until November 1, 2020. In turn, in practice, RFC signs an additional agreement with the energy producing company to the already concluded electricity purchase and sale agreement (PPA).
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Availability of permits for a land plot
For a RES facility, it is required to allocate a land plot, the permission to grant the right to which is submitted to the local executive body at the location of the requested land plot. In accordance with the Law on RES and the Rules for the Organization and Conduct of Auction Tenders, approved by Order of the Minister of Energy of the Republic of Kazakhstan dated December 21, 2017 No. 466, local executive bodies (LEBs) of regions, cities of republican significance and the capital, reserve land plots for those planned for construction facilities for the use of renewable energy sources until the winners of the auction of the rights to the land plot in accordance with the Land Code of the Republic of Kazakhstan and send the relevant information to the Ministry of Energy of the Republic of Kazakhstan. The land reservation procedure is determined by the Land Reservation Rules, approved by the Order of the Minister of National Economy of the Republic of Kazakhstan dated February 28, 2015 No. 178. If the land plot intended for construction is not used for its intended purpose within three years from the date of the decision on its provision (if a longer period is not provided for the design estimate documentation), then such a land plot is subject to compulsory seizure. The procedure for such an exemption is provided for by Article 94 of the Land Code of the Republic of Kazakhstan.
In accordance with paragraph 2 of article 43 of the Land Code of the Republic of Kazakhstan, the decision to provide a land plot is made on the basis of a positive conclusion of the land commission and the land management project.
If we are talking about an operating RES facility, it is recommended to request documents confirming that a land plot was actually allocated for this RES project. Such documents include the Decree of the local executive body (akimat) on the allocation of a land plot, an agreement for paid / gratuitous use of a land plot, and a document containing the identification characteristics of the land plot. Such documents include an act for the right of private ownership of a land plot, an act for the right of permanent land use, an act for the right for temporary compensated (long-term, short-term) land use (lease), an act for the right for temporary free land use.
Also, you should make sure of the presence or absence of property belonging to a legal entity in order to reduce possible risks in the form of a pledge on such property, etc.
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Connection issues (power diagram, technical conditions and connection agreement)
We draw your attention to the fact that an energy producing organization planning the creation (expansion, reconstruction) of new or existing renewable energy facilities, and an energy transmission organization that directly connects renewable energy facilities to its power grids, must conclude a standard agreement on connecting renewable energy facilities ("Agreement for the connection of renewable energy facilities ") after receiving technical conditions for connection to the network from the regional transmission organization.
When making an M&A transaction in relation to a RES facility, we recommend checking the availability and compliance with the legislation of the Seller of the following documents:
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The scheme of power distribution, which is coordinated with the corresponding organization (power transmission or energy producing), to the electric networks of which it is planned to connect, by the system operator (JSC KEGOC).
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Technical conditions. The activities specified in the Technical Conditions (hereinafter referred to as TU) are carried out at the expense of the investor. The costs associated with the construction of a network from the RES facility to the point of connection to the grid of the power transmission organization, with the connection to the network, the transfer of energy from the RES facility to the point of connection to the grid of the power transmission organization and the measurement of the supplied energy, are borne by the owner of the RES facility. It should be noted that the validity period of the technical conditions for connection must be at least the period intended for the stage of pre-design studies, design and construction of facilities for the use of renewable energy sources, determined on the basis of the current design and construction standards, and does not exceed 3 years.
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The contract on connecting renewable energy facility ( Grid the Connection Agreement ) , in which the energy transmission organization undertakes to provide the energy producing organizations access to the power grid by providing a point of connection to the mains according to the technical specifications. The energy producing organization undertakes to fulfill the requirements of the technical specifications in full and ensure the commissioning of the facility for the use of renewable sources in time before the expiration of the technical conditions.
It should be noted that when developing design estimates, the project must undergo an environmental impact assessment (“EIA”). The EIA must be carried out by a person holding a license to perform work and provide services in the field of environmental protection, at the expense of the project developer.
During the audit, the seller is also obliged to provide the studies necessary for the development of design and estimate documentation, such as:
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Geological reports;
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Geophysical survey report;
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Engineering and Environmental Survey Report;
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Radiological examination protocol;
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Archaeological Research Act, etc.
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Loans and liabilities
It is also necessary to check for all debt obligations of a legal entity before the transaction, since in case of non-repayment of the loan amount, penalties are imposed on the party in breach for each day of delay. The payment of the loan amount under the relevant agreement is confirmed by the bank payment to the Lender.
Based on the results of the legal audit, the seller and the buyer have the right to negotiate the conditions for dividing the price of the asset, depending on how quickly the risks existing at the end of the audit will be eliminated. It is recommended to consolidate this price split by including the appropriate preconditions in the asset sale and purchase agreement. For potential investors, we recommend paying attention to the importance of conducting an audit, since its main purpose is to identify and assess potential risks for an M&A transaction in relation to an existing RES facility.
For further information, please contact:
Saniya Perzadayeva, Managing Partner, Unicase Law Firm
saniya.p@unicaselaw.com
