In the light of stabilization of its political and economic situation, Ukraine has shown improvement of the investment climate and, as a consequence, increase in the number of M&A transactions.
Nowadays, the most popular and promising areas of M&A are agriculture, infrastructure, as well as IT technologies, e-commerce, and other start-ups in the digital field. Separately, transactions in the field of green energy (which popularity is supported by a fixed green tariff) and transactions for the purchase of assets through the acquisition of problem loan portfolios from the Deposit Guarantee Fund (which became quite common due to the withdrawal of problem banks from the market) can be emphasized. Also, considerable attention in the market is attracted by transactions in the field of privatization – interest in privatization is high despite the risks, but, unfortunately, it is not yet possible to achieve mass privatization.
Later on in this article we will consider the main and most interesting, in our opinion, nuances and peculiar features of M&A in Ukraine.
Formalizing the main agreements and transaction structure
Very often, especially in transactions involving Ukrainian residents, there is a lack of clearly formalized basic commercial agreements between the parties. This trend is observed both for simple and multi-level transactions, which may require implementation of actions on the acquisition-alienation of objects not only in Ukraine, but also in other jurisdictions.
In such a situation, a Ukrainian lawyer is often forced to act as a manager and a mediator between the parties in crisis situations that arise already during the transaction execution. Therefore, in our opinion, it is extremely important to agree on and put into writing all the basic agreements between the parties and to ensure that the latter understand all the transaction details before the start of its active stage. In this case, a detailed step-by-step plan of the entire transaction, developed on the basis of declarations of intent or other preliminary contracts, may facilitate the entire process to a great extent.
Also, this approach allows elaborating each transaction stage and identifying «bottlenecks» that require special attention already at the planning stage.
Thorough Due Diligence
Before acquisition of an object in any M&A field, a thorough due diligence conduct is an extremely important stage of a transaction preparation.
Special attention should be paid to the transactions on acquisition of non-performing loan portfolios, especially in terms of verification of guarantees and real opportunities to levy execution on security property.
In respect of transactions on the corporate rights acquisition, the particular importance of verification of the historical transfer of participatory interests/shares ownership in a company should be emphasized. This is due to the risk of a possible judicial appeal submitted by stakeholders against such transfers, when the transaction legitimacy may be called into question solely on formal grounds.
When verifying assets in Ukraine, it is necessary to pay special attention to analysis of “grey” transactions of Ukrainian companies (cash settlements, envelope wages, corruption component, collusion with contracting parties, use of individual entrepreneurs), which may have negative consequences preventing the company from moving to normal mode of operation, as well as attracting special attention on part of tax and law enforcement agencies in the future.
Another peculiar feature to be considered when implementing M&A in Ukraine can be lack of a unified and clearly built structure of the acquired business. As a rule, Ukrainian business, which is often being built rather chaotically, includes a number of separate legal entities, including non-residents, which in most cases is due to intention for tax optimization, concealing the real beneficiary, and avoiding the increased attention of antitrust authorities.
Legal due diligence of such a scattered business requires much more time. It is also important to take into account time and material expenses that subsequent business consolidation may require.
Due to the fact that Ukrainian antitrust regulation is extremely formalized, each, even relatively small, transaction requires thorough verification as to whether it is necessary to obtain authorizations for concentration/concerted actions.
Also, when verifying business to be acquired, it is especially important to identify possible historical violations of antitrust laws by the parties to the deal. This is due to the fact that historically (until May 2016) there were extremely low thresholds for merger control in Ukraine, and the period of limitation for such violations is 5 years. With that in mind, a significant number of transactions conducted before May 2016 required the approval of the antitrust authorities of Ukraine, and many formally violated antitrust legislation in this part, which can be found by antitrust authorities during the issuance of authorizations for current transactions. On the other hand, when verifying historical risks of antitrust legislation violations, it cannot but be mentioned that there has been a rather loyal approach on part of antitrust authorities in case if such violations are found, at that the amount of fines imposed usually has not been very high.
When conducting state registration within framework of alienation and encumbrance of corporate rights and real estate objects, it is necessary to consider the territorial principle. This principle was introduced relatively recently and allows for filing documents to conduct registration actions in respect of legal entities and real estate at place of registration/location thereof.
This means that if the transaction scope includes companies with different locations and/or real estate located, say, in different cities/regions of Ukraine, then it is necessary to organize conduct of registration actions on sites, as well as to ensure travel of associates and representatives of the parties to other cities.
Applicable law and jurisdiction of a transaction
Due to the existence of various conflicts and problems within Ukrainian legal system, often transactions on purchase and sale of businesses in Ukraine are structured through the sale of holding companies in foreign jurisdictions subject to English law.
First of all, this is due to the desire of the parties to be sure of the agreements’ enforceability in whole, as well as of assurances and guarantees provided by the parties to each other in particular. With this in mind, it is impossible not to draw attention to novelties of Ukrainian legislation regarding corporate agreements, but the real possibility to implement provisions of such an agreement remains partly uncertain due to lack of clarity of the relevant statutory provisions of the law and lack of established judicial practice.
Also, the parties to the transaction, appealing to foreign jurisdictions, are interested in the possibility of including an arbitration clause and resolving disputes in London International Arbitration or other foreign arbitration bodies, since both foreign investors and representatives of local large businesses tend to trust their affairs to the specified judicial authority, regardless of substantial procedural costs.
Issues of privatization stand apart from all other fields of M&A in Ukraine. As of today, Ukraine has made significant progress regarding legislative regulation of this issue, namely, in January 2018, the Law of Ukraine “On Privatization of State and Municipal Property” (the “Law”) was adopted.
Among other things, this law envisages for such novelties as:
- inclusion into the sale and purchase agreement related to the large privatization object of the seller’s guarantees, as well as the liability of the latter for the completeness and accuracy of such guarantees;
- the possibility of submitting the sale and purchase agreement related to the large privatization object to the law of England and Wales;
- the possibility of dispute resolution related to the sale and purchase agreement in the International Commercial Arbitration Court.
Such legislative novelties, in particular, should find a positive response among foreign investors. At the same time, despite the declared positive changes and visible progress in the field of small privatization, the actual implementation of the contemplated plans for large privatization is not possible due to a number of problems. These problems by and large by and large are connected with appealing separate decisions at each separate stage of privatization and with the courts taking appropriate measures to secure claims that block possibility of transition to further actions (appealing results of tenders for the selection of advisers on large privatization objects, appealing orders of the State Property Fund on privatization of individual objects).
Special attention in the aspect of the peculiar features of M&A in Ukraine should be paid to the issue of currency regulation, which relevance is due to the existing restrictions of currency legislation.
Thus, as of today, when structuring and planning a transaction, it is necessary to consider such restrictions:
- prohibition to transfer foreign currency in order to return abroad dividends to a foreign investor (except for specially established cases);
- restriction on the amount of foreign currency purchase/transfer in order to return abroad funds received by foreign investors from the sale of certain investment objects (for example, securities, corporate rights, etc.), which should not exceed the equivalent of USD 5,000,000 in one calendar month;
- prohibition to raise funds for foreign currency purchase when making payments in favor of a non-resident.
From February 2019, the Law “On Currency and Foreign Exchange Transactions” will enter into force, which, among other things, provides for the abolition of existing laws and regulations governing currency issues and the adoption of new ones. At the same time, it is likely that the newly adopted laws and regulations will provide for restrictions identical or similar to those in force nowadays.