Pre-Signing

You have been leading on transactions across Central Asia. Which elements of pre-deal negotiations turned out to be more intricate than expected?

For one of our investment projects, we entered into a mutual undertaking with the relevant authorities at an early stage. Nevertheless, it took an additional two years to sign the investment agreement due to complex negotiations and bureaucratic delays along the way. One reason for this delay was the multi-layered negotiation process where provisions (depending on their subject matter) had to be separately discussed and approved by different governmental bodies. Also, regulatory changes in the interim impacted the original deal structure, forcing us to reevaluate financial projections made at the start.

In another project — just before signing — the government expressed interest in participating in the investment through a State-Owned Enterprise (SOE) as a minority shareholder. This added a new layer of complexity to the project. We had to reassess the investment terms to evaluate the feasibility and legal risks of partnering with an SOE.

Such hurdles can arise unexpectedly in transitional economies, i.e. countries that are shifting from a centrally planned economy—where the government controls most economic activity—to a market-oriented economy, which is why timing is so important when planning an investment there.

Local Partners

Many transitional economies no longer require foreign investors to partner with a local firm to enter the market. But is it still advisable to do so, even when it is not legally required?

Some foreign investors choose to enter these markets without a local partner, often for one or more of the following reasons:

• Fear of being at a legal disadvantage due to unfamiliarity with local laws and potential bias in favour of domestic businesses, leading to an unequal partnership.
• Concerns that local entities may leverage their expertise and connections against foreign partners.
• The belief that operating independently will be faster and less complex.

My experience has been different. *Especially for first-time investors, partnering with a local company can offer significant advantages. A reliable local partner can provide critical support in securing regulatory approvals and leverage strong relationships to facilitate market entry and smooth operations post-closing.*

It is important to choose a local partner who shares your values and long-term goals. A good partner should also have:

• Extensive knowledge of the market and deep understanding of local business practices.
• A strong supply chain and distribution network to support fast market penetration.
• Solid connections within the local business community, helping to accelerate processes and ensure regulatory compliance.

Deal Structuring

Where do foreign investors often go wrong when structuring deals in emerging markets?

One major mistake is failing to thoroughly research the market and legal environment. Before entering a new market, investors should:

• Review past investments, especially in a related sector, to identify common challenges, and strengthen contracts to avoid similar issues.
• Research sector-specific legal and tax requirements carefully before shaping project strategies and drafting contracts.
  

Example: The Entrepreneurial Code of Kazakhstan offers preferential tax treatment to investors undertaking priority or special investment projects in activities approved by the Government. Depending on the project category, benefits may include exemptions from import duties, Corporate Income Tax (CIT), value-added tax (VAT), as well as land and property taxes for up to 10 years. Additionally, investors may receive government grants. However, support is only provided—and any assurances by the government to grant approvals are only secured—if an investment contract is concluded with the authorised body. If the contract is terminated early, the support and assurances may be retroactively revoked.

Some investors focus too heavily on the business and financial side of a deal, often overlooking legal and compliance risks. Cutting corners on legal advisory costs can lead to delays, drawn-out negotiations, and greater exposure to challenges.

In larger-scale investments, all parties should be represented by competent legal counsels who are experts in their field. Be aware that governments in transitional economies often expect investors to cover their legal costs. Where possible, encourage them to appoint lawyers with experience in similar projects—this can help streamline the process and reduce bureaucratic delays.

Closing

What is the biggest hurdle to closing deals?

In transitional economies, the biggest challenges to closing deals are bureaucracy and slow decision-making processes. Frequent regulatory changes and new decrees can also disrupt investors' plans and delay project execution.

Domestic and foreign policy risks in developing countries create additional uncertainty, as decisions may be influenced by political instability and economic volatility.

Obtaining regulatory approvals, permits, and licenses can be administratively challenging, even when there are no substantive grounds for refusal. In some cases, local connections are needed to help expedite the process.

Team Structure

What works better: global firms with local affiliates or independent local firms?

I have tried both approaches, even switching firms mid-project, and concluded that in emerging markets, the most effective strategy is a hybrid approach. This allows you to benefit from complementary skill sets that are rarely found within a single firm.

Navigating this process effectively requires a skilled negotiator from a global law firm to structure deals and oversee the project.

It is equally important to collaborate with a reputable local firm with strong business connections.

The local firm can provide sound legal advice and manage day-to-day tasks, such as securing licenses and permits and handling company formation procedures.

When choosing the local firm, my experience has shown that the crucial element is not the law firm itself but rather the specific lawyer heading the project; and that investors should make sure to express their preference to engage specifically that particular lawyer before engaging with a firm.

Have you ever had to switch legal teams mid-deal?

Yes, we have. After thorough research, we initially engaged a well-known local law firm. However, we quickly realised that their approach and working style did not match our needs. We required faster turnaround times and a more strategic legal roadmap than they were able to provide.

In response, we transitioned to the local affiliate of a global law firm, expecting a more structured approach. Although this firm had a highly experienced senior partner, the matter was delegated to another colleague, which led to further misalignment and inefficiencies. Ultimately, we had to engage a third lawyer, resulting in additional legal costs, extra personal effort, and significant time spent re-explaining the deal to all parties.

In hindsight, establishing the right legal team from the start would have prevented much of this disruption and the associated expenses. Switching legal teams mid-deal was not a decision we took lightly, but it became necessary when our expectations were not met.

Rescuing a Deal

How to deal with unexpected government intervention?

Government intervention remains one of the primary concerns for investors operating in transitional economies, particularly when compared to fully developed markets, which often provide a more stable environment.

While it may not be possible to eliminate the risk of intervention entirely, anticipating and preparing for potential scenarios offers the most effective path forward.

Several mechanisms can help reduce this risk:

• Negotiate robust protective clauses in investment agreements to mitigate potential financial losses.
• Secure formal government backing, for example, through presidential decrees endorsing the project.
• Rely on bilateral investment treaties (BITs) that provide additional layers of legal protection.
• Prioritise international dispute resolution mechanisms, such as mediation or arbitration. Recourse to the local court system should remain a last resort.

Ayşe Dirik is the former Chief Legal Officer at Eczacıbaşı Holding and Yıldız Holding A.Ş., and a member of the Editorial Committee of 20Minds.