How sanctions affect M&A deals

Mainstream

Sanctions change the M&A deal not at the final stage of signing, but at the very first moment of thinking about it.

The main question for the parties is not “Can the transaction close?” but “Can it be safely owned, managed and ultimately exited?”

If the sanctions analysis is carried out superficially, the investor risks not just loss of money, but administrative or even criminal liability, blocking of the asset and the complete inability to receive dividends or sell the share.

Therefore, the sanctions compliance in M&A is based on three axes:

1. Parties: Who is the buyer, seller, beneficiary and ultimate recipient of the funds?
2. Asset: Whether the asset or its activities are subject to sectoral or other restrictions.
3. Future: Will the deal break the entire chain of ownership, funding and management after the deal closes?

If these three issues are not resolved at the start, the trade turns into a toxic asset that cannot be disposed of.

When sanctions become the main issue in M&A

The analysis of sanctions ceases to be a formality and becomes the central element of the transaction if:

• seller or buyer - a person from a sanctioned jurisdiction;
• one of the participants in the chain of ownership – a citizen or resident of a country under sanctions;
• the object of the transaction is a company from the sectors of defense, high technologies, energy or finance;
• financing of the transaction is through banks that are subject to restrictions;
• The asset is historically associated with persons on the SDN or similar EU lists.
• The transaction requires subsequent regulatory approval (e.g. FDI screening in the EU).
• European or American funding is planned for the purchase;
• The perimeter of the transaction includes “daughters” in different jurisdictions, including Russia, Iran, Syria, North Korea;
• Buyer – an investment fund with offices in the EU, USA and the UK;
• The structure of the transaction provides for earn-out, deferred payments or convertible loans.

Fatal mistake made by the parties

Many participants in the transaction begin with the question:

“Do you want to do business as usual or with the European SPV?”

That's the wrong first question.

The right question is:

What structure of the transaction and ownership will ensure its viability under current and future sanctions?

Sometimes you can't make a deal at all. Sometimes, but through a special jurisdiction. Sometimes, you need to change the customer’s management. Sometimes, an urgent license from the regulator (OFAC, OFSI, EU National Competent Authority) is required. Sometimes – the deal must be cut into parts and the sub-sanction element should be removed from the perimeter.

Compliance in sanctions transactions is not a yes/no questionnaire, but an engineering task.

Step 1. Check not only the counterparty, but also the entire perimeter of the transaction

The first look is not at the price of the asset, but at the full dossier of the participants.

Key questions for analysis:

• Who is the ultimate beneficiary (UBO) of the buyer and seller?
• Are there public officials (PEPs) in the perimeter of the property?
• Is the buyer controlled by a sanctioned person through a trust or nominal management?
• From what sources do the purchase funds come?
• Does the transaction indirectly involve a person subject to blocking sanctions?
• Does the counterparty fall under the 50% rule, requiring consolidation of shares?
• Are there any jurisdictions in the chain that are considered to be high-risk (FATF grey list)?

If the counterparty’s dossier is opaque and the requests are not answered, it is not a “small difficulty” but a “red flag” that makes the transaction unacceptable to a bona fide investor.

Step 2. Identify the asset: what exactly are you buying?

The analysis is subject not only to the target company, but also to its activities.

It is necessary to examine:

• Whether products or technologies are subject to EU export controls (Regulation 2021/821)
• Whether the target has contracts with sanctioned end users;
• whether the business is in Crimea, Sevastopol or in the territories of Donbass not controlled by Ukraine;
• Whether the company is involved in projects that require industry licenses (e.g. energy in Russia, deep-sea exploration);
• Does the minority interest belong to a person on the EU sanctions list (Regulation 269/2014)?
• Does the plant not produce dual-use goods that are supplied to military structures?
• Whether the IP asset is protected from unauthorized transfer to the sanctioned countries.

Standard financial due diligence is useless here. We need a deep sanctions and export due diligence.

Step 3. Classification of risk: Blocking, sectoral and “hidden” sanctions

Applicable EU law divides the limits into levels, and for a deal that is critical.

1. Blocking sanctions (asset freeze) If there is a person in the perimeter of the transaction who has been frozen, any transfer of funds or economic resources to him is a direct ban. The transaction cannot be closed without an exclusive license.
2. Sectoral sanctions. It is not a specific person that is limited, but the type of operations (for example, financing, equipment supply, services for projects in oil and gas). The deal can be allowed, but with strict limits on structure and scope.
3. “Hidden” or secondary risks. Even if the person is not formally blocked in the EU, but his main business is in Russia and is associated with the military-industrial complex, European banks may refuse to service the transaction for de-risking reasons. The transaction becomes "unbankable."

Step 4. Check the jurisdictional fork: Where does the deal fall?

EU sanctions are binding on all EU citizens and companies and on any transactions that pass through the Union territory in whole or in part.

But the buyer is often in Singapore, the UAE, Turkey or Kazakhstan.

Here comes the main conflict:

• The transaction may be legal in the country of registration of the buyer.
• But it's illegal to:
• Corresponding bank in the EU;
• a manager or board member with an EU passport;
• the parent company in Germany or France;
• an auditor associated with a global network that complies with sanctions requirements.

Jurisdictions verification should not be binary (legal/illegal) but matrix: It is legal for each participant at each point of the transaction.

Step 5. Building a protective structure of the transaction

Transactions cannot be made according to standard templates. It requires “sanctioned engineering.”

Elements of a strong deal:

• Representations and Warranties (Representations and Warranties) The seller and the buyer assure that neither they nor their beneficiaries nor their assets are subject to sanctions. Violation is a trigger for immediate termination or recovery of damages.
• A material adverse change clause (MAC) is a material adverse change clause. The inclusion of a sanction event in the MAC concept gives the buyer the right to withdraw from the transaction before closing.
• Closing conditions (Conditions Precedent) Obtaining all necessary sanction licenses or regulatory approvals as a prerequisite for the transfer of ownership.
• The exit mechanism (Put Option/Buy-back) If after the transaction the buyer falls under sanctions, the seller is obliged to buy the asset back according to a certain formula. Or vice versa: If the asset becomes a sanctioned asset, the seller must take it away.
• Special account and payment freeze. The buyer’s money is deposited in an escrow account with a bank of neutral jurisdiction until full sanction clearing is completed.
• Limited number of contractors. An outright prohibition on reselling an asset to persons in certain jurisdictions without the consent of the other party.

Step 6. Pass the procedure for obtaining a license (if the transaction is on the edge)

If the transaction is likely to affect restrictions but is commercially and strategically important, a license can be obtained from the relevant national authority (e.g. OFAC in the US, OFSI in the UK, the Ministry of Finance or the Economy in a particular EU country).

This requires preparation of:

• a detailed memorandum on the structure of the transaction;
• a file for each final beneficiary;
• proof that the asset will not be used for prohibited purposes;
• post-closure obligations (monitoring, reporting);
• Guarantees of non-provision of benefits to persons under sanctions.

This is not a formality, but a complicated process. But if successful, it is the only way to legitimize a complicated deal.

Step 7. Remind yourself of the “cooling effect” and de-risking

Even a fully legal and licensed transaction may face:

• European banks’ refusal to make payments;
• inability to obtain an audit report;
• problems with the insurance of the asset;
• Refusal of contractors from working with the buyer.

This is the most important non-legal, but business risk. If the asset becomes toxic after the transaction, its market value will fall to zero, regardless of legal purity.

Step 8. Plan B: exit

Often the question is not about buying, but about leaving. The fund enters a Russian or Iranian asset, the sanctions crisis begins, and the asset must be sold.

The exit strategy requires:

• Search for a buyer in an unsanctioned jurisdiction that does not depend on the dollar and the euro.
• Getting a Diivestment License if required.
• Structuring a transaction as a “break of communication”: The sale of not just a share, but all rights of claim, management and economic control.
• Sometimes, it is a sale to local management at a huge discount to avoid criminal prosecution of fund managers in Western jurisdictions.

The “Gold Standard” of Sanctions Clauses for Investment Agreements

The best protection is built into a stock agreement (SHA) or a purchase agreement (SPA) before a crisis begins.

Key blocks:

• Sanctions Warranty at the date of signing and closing date.
• The Notification Covenant is required to inform of any sanction investigation.
• The right to forced exit (Forced Exit Right) if any of the parties or a person controlling it falls under blocking sanctions.
• Formula for the price of exit at a discount: For example, the last transaction price minus estimated future risks and compliance costs.
• Freezing of dividends: If the shareholder is frozen, dividends are not transferred to his account, but are deposited in a separate account.

Typical M&A Mistakes With Sanctions Element

1. The oral assurances “the lawyers will check everything later” are to be believed. Sanctions are an upfront check, not a post-closure.
2. Ignore the 50% rule. A person who is not on the lists, but 50% or more belonging to the person on the list, is considered to be under sanctions.
3. Don't check management. A CEO or a board member with an EU passport may refuse to run a company for fear of personal liability.
4. The EU and US sanctions are identical. Jurisdictions vary by list of persons and sectoral regimes. A deal legal for the EU could be illegal for OFAC.
5. Hide the sanctions risk through the chain of offshores. The regulator is looking at the ultimate beneficiary, not the nominal settlor in Panama.
6. Use cryptocurrency as a panacea. In the EU and the US, payments in cryptocurrency with sanctioned persons are expressly prohibited and prosecuted.
7. No plan to liquidate the deal. If the deal becomes toxic and there is no way out, there is paralysis of management.

Checklist for M&A participant

Before starting a transaction, you need to get answers to 15 questions:

1. Who is the ultimate beneficiary of the contractor?
2. Is there direct or indirect possession by the sanctioned person (50 percent rule)?
3. Is the target company subject to export controls or sectoral sanctions?
4. Is there business in the embargoed territories?
5. What is the funding structure and through which banks will the payments be made?
6. Do the parties have managers or directors with EU or US passports?
7. Will Foreign Direct Investment (FDI) screening be required?
8. Is the deal legal from the point of view of the EU, the US and the UK at the same time?
9. What sanctions assurances are included in the draft treaty?
10. Is there a mechanism for forced withdrawal if the party falls under sanctions?
11. Can I get a regulator license before closing the transaction?
12. Is the escrow bank agent ready to work with this transaction?
13. Will the asset become “unbankable” and unaudited after the purchase?
14. What is the exit strategy if the sanctions regime becomes more stringent?
15. Are the remaining partners ready to buy out the share of the sanctioned investor?

What a strong deal looks like in the sanctions reality

A strong M&A deal today is not just about optimal price and tax structuring. This is a five-tiered security model:

1. Regulatory Mapping: The definition of all regulators whose rights apply to a transaction, its participants and banks.

2. Ownership & Control Test Total transparency of ownership structure to end-user, including trusts and foundations.

3. Deal Engineering: Building a transaction architecture (SPV, payment agent, escrow, earn-out) that minimizes intersections with prohibited entities and sectors.

4. Contractual Fortress: The SPA and SHA have strict sanctions clauses, assurances, guarantees and a coercive mechanism without risk withdrawal.

5. Wind-down Strategy Plan for the Nuclear Winter A realistic mechanism for the emergency sale or isolation of a toxic asset without criminal risk to management.

Without the fifth level, the first four can become an expensive process of liquidating one’s own business.

FAQ

Is it possible to conduct an M&A deal with a company that has a subsidiary in Russia if the EU imposed sanctions on it?

This depends on how much the subsidiary is controlled by the parent company and whether its activities are affected by sectoral sanctions. If it is not under direct blocking sanctions but operates in a prohibited sector (e.g., the defence industry), the parent transaction may require licensing. Risks need to be analyzed point by point.

What if after the transaction closes, the buyer was subject to blocking EU sanctions?

If an SPA or SHA has included a buyout mechanism or Put Option, the seller (or other shareholder) is obliged to redeem the buyer’s share according to a pre-specified formula. Without this, the shareholder agreement will be paralyzed, as any payments and corporate rights are blocked.

How is due diligence different from normal?

It focuses not on financial performance but on ultimate beneficiaries, jurisdictions of origin of funds, links with sanctioned persons through trusts and nominee directors, classification of goods/technologies by export control codes and geography of the target company.

Can sanctions be circumvented by using a layer company in the UAE or Turkey?

Nope. EU and US regulators apply the “know your customer” doctrine and track the ultimate beneficiary. The deliberate creation of schemes to circumvent sanctions is a direct violation and is prosecuted.

What is the 50% rule and why is it important for M&A?

Under EU and US rules (with nuances), if a person on the sanctions list owns 50% or more of a company directly or indirectly, that company is considered a sanctioned company, even if not listed. When buying an asset, it is necessary to aggregate the shares of all sanctioned persons.

Should the regulator be notified of the deal with the sanctions element?

Often, yes. If a transaction requires a license or is subject to disclosure requirements, proactive notice with a detailed compliance plan may be the only way to avoid blocking actions and penalties in the future.

How can a foreign investor in a joint venture be protected from sanctions by his Russian partner?

Through the hard-hitting Red Flag Clauses in SHA: The right to immediate forced redemption of the partner’s share, his removal from management, freezing of dividends and the obligation to assist in obtaining a sale license.

Related services

• Sanctions, Export Controls & International Compliance
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• Corporate Investigations, Regulatory Investigations & Business Integrity
• International Regulatory Risk & Strategic Advisory
• International Arbitration, Commercial Litigation & Cross-Border Disputes

Related material

• How to structure an M&A deal with a sanction element
• Obtaining a license from OFAC and European regulators for complex transactions
• Red flags in compliance: How to check the counterparty on the sanctions lists
• Export Control and M&A: Risks in Buying Technology Companies
• Sanctions clauses in shareholder agreements: sample
• De-risking: What to do when banks abandon your legal transaction
• Secondary US sanctions: How they affect non-US investors

Conclusion

The sanctions have transformed M&A deals from the art of price negotiation into the art of engineering legal defense.

The transaction does not end at the time of signing. It lives on as long as its structure is able to withstand the pressure of ever-changing sanctions regimes.

In today’s world, the winner is not the richest buyer or the most experienced seller. The winner is the one who, even before the term sheet, understands how to own an asset without the risk of a prison term, how to make payments through the competent banks and how to exit the transaction if one of the parties is in a toxic zone.