Corporate M&A 2024 Comparisons

The Russian full-scale invasion of Ukraine that commenced in February 2022 had a significant impact on the country's economy and daily life, including the M&A market. Following the disruptive year of 2022, investment activity showed signs of revival in 2023, with the M&A market growing in terms of deal value and volume.

Deals were executed across various sectors. The IT sector unsurprisingly attracted investments because of its reduced exposure to physical destruction and war risks. Other sectors also presented interesting investment opportunities, especially real estate and construction, transport and infrastructure, agriculture and communications. The market witnessed a surge in venture capital transactions in the defence industry, particularly investments in start-ups producing FPV drones.

As businesses and people have adjusted to new conditions, the M&A market is expected to grow. However, it is unlikely to reach the activity levels observed in 2021.

The Russian invasion of Ukraine changed the overall economic environment, creating the following trends in the M&A market:

• acquirers have more bargaining power in negotiations;
• increased attention on counterparties’ background checks, to reveal potential connections to the aggressor state;
• significantly lower valuations;
• discounting valuations for the percentage of the target’s assets located in the occupied territories, with the acquirer’s promise to pay the discount after the de-occupation of such assets;
• an increase in the number of force majeure clauses aimed at addressing hardships that may arise out of further escalation of the war;
• a shift from “locked box” to price adjustments;
• a larger deferred payment component;
• more complex transaction structures due to harsh currency control restrictions on the transfer of foreign currency outside of Ukraine; and
• insurance of investments against war risks.

Despite a significant decline in M&A activity due to the Russian invasion, the Ukrainian IT industry continued to attract interest from local and foreign investors. This is because Ukrainian IT companies' products are mainly targeted towards Western markets, and their employees can be easily relocated. As a result, the Ukrainian IT industry has been less affected by the war than businesses linked to the territory of Ukraine.

The primary legal technique to acquire a company in Ukraine is a negotiated acquisition of shares. Rather than directly acquiring shares in a Ukrainian company, the acquirer often purchases a stake in an SPV that holds the Ukrainian shares.

Asset deals are common, as it is often important for acquirers to leave certain historical risks of the target behind and acquire a business operated by a “clean” legal entity. However, the concept of transferring a business as a going concern has not been developed in Ukraine. In practice, an asset deal presumes the need to enter into many separate legal instruments, making it hard to complete such an acquisition in a co-ordinated manner in a short timeframe. For this reason, hybrid deals where the seller transfers its business to a newly created legal entity and then sells it to the acquirer are a common means of structuring a deal.

The acquisition of shares on a regulated market is not common due to the small number of Ukrainian companies whose shares are admitted to trade and the insignificant proportion of shares that are free-floating.

The primary regulators for M&A activity in Ukraine are the Antimonopoly Committee of Ukraine (AMCU), the National Securities and Stock Market Commission (NSSMC) and the National Bank of Ukraine (NBU). AMCU approval is required for most significant M&A deals (see 2.4 Antitrust Regulations), while the NSSMC regulates the capital markets and has some oversight over Ukrainian joint stock companies (JSCs).

Acquisitions of qualifying holdings (10% or more) in financial institutions require notifications to and/or prior approvals from the following regulators:

• the NSSMC for professional participants of capital markets and organised commodities markets (investment firms, regulated market operators, asset management companies, etc); and
• the NBU for banks, insurers, payment services providers and other financial institutions.

Even though Ukraine is generally open to foreign investment, certain transactions may be prohibited or require prior approval, as follows:

• the acquisition of a qualifying holding in a Ukrainian financial institution is subject to notification to and/or prior approval from the relevant regulator (see 2.2 Primary Regulators);
• foreigners, stateless persons, foreign legal entities and foreign states are prohibited from owning agricultural land in Ukraine or acquiring shares or membership in legal entities that own agricultural land in Ukraine;
• persons registered in offshore jurisdictions, residents of aggressor states and certain other categories of investors may not own shares in certain media organisations;
• privatisation is prohibited in respect of certain sectors (nuclear energy and nuclear waste management, the production of weapons used by the state’s armed forces, international airports, public railways, etc), and residents of aggressor states and entities controlled by them may not participate in privatisation, nor may entities registered in offshore jurisdictions or counties on the FATF Non-Cooperative Countries List; and
• most licences for licensed types of activity may be annulled if it is established that residents of an aggressor state control a licensee.

Foreign investment may also be restricted by personal or sectoral sanctions imposed by Ukraine.

Ukraine maintains a merger control regime similar to the EU in many respects. Mergers, acquisitions of control in other forms (including via acquisitions of shares), acquisitions or leases of certain assets, the creation of full-function joint ventures and other types of concentration require the approval of the AMCU if the relevant financial thresholds (asset value or turnover of the parties) are exceeded. Although the Ukrainian merger control regime has been significantly improved in 2024, non-Ukrainian deals can still be caught due to peculiarities in the calculation of relevant financial results of the parties (eg, local thresholds can now be exceeded by acquirers only). In addition, non-compete obligations and other potentially anti-competitive arrangements require separate approval for concerted practices.

Ukrainian law protects employees during organisational changes such as mergers, acquisitions and restructurings. In the event of a merger or other reorganisation, all rights and obligations of the former employer pass to the new employer, including those under employment agreements. Based on this rule, employment agreements are not terminated automatically due to a merger or other reorganisation. However, the successor employer is entitled to terminate employment agreements due to a general procedure of staff reduction.

When an investor acquires a company that is a signatory to a corporate collective agreement or in the reorganisation of such a company, the collective agreement remains in effect for up to one year. During this one-year period, the employees and the employer must negotiate a new collective agreement.

Ukraine does not have a specific national security review regime. The Ministry of Economy of Ukraine has presented a number of draft laws on screening foreign investments into business entities that are strategic to Ukraine's national security, but no such law has yet been put to the vote before the Ukrainian parliament.

Under the latest draft of the proposed law, the screening regime will apply to investments in a specific list of industries, including nuclear energy and waste, cryptography, defence and military, aviation and space. A special commission will be created to approve foreign investment in such industries.

Nevertheless, Ukraine saw one M&A deal that failed due to national security concerns: the attempted takeover of Motor Sich by Chinese company Skyrizon. Due to a lack of specific legislation, the deal was prevented based on other legal mechanisms, such as sanctions for Skyrizon's failure to obtain the required AMCU approvals for the stakebuilding that it had already made and the seizure of Skyrizon’s shares by the state within a criminal proceeding.

Even though the national security review of foreign investment is more pertinent than ever because of the ongoing armed aggression of the Russian Federation against Ukraine, there needs to be more clarity at this point on when and in what form such a regime could be implemented.

There have been no legal developments specifically targeting M&A transactions over the past three years.

However, in its endeavour to harmonise Ukrainian law with the law of the European Union, the Parliament of Ukraine passed several laws that could positively impact the M&A environment in Ukraine. It is quite difficult to highlight one single development, but the following developments are among the most significant:

• a clear division of public and private JSCs, with private JSCs being less regulated and more flexible;
• enhancing legislation on capital markets to bring it in line with MiFID II, distinguishing qualified and non-qualified investors by providing more protection to the latter, establishing higher prudential standards for professional participants of the stock market (brokers, custodians, clearing companies, asset managers, etc); and
• enhancing corporate governance in companies by giving JSCs and LLCs the right to have either a one-tier or two-tier corporate governance structure, establishing a clear and excessive list of the fiduciary duties of a company’s officers.

Although a new version of the Law of Ukraine “On Joint Stock Companies” was passed in July 2022 and took effect on 1 January 2023, it did not significantly change takeover legislation. There have not been any publicly communicated intentions to review the takeover legislation substantially.

It is not common for a bidder to build a stake in the target before launching an offer; see 4.3 Hurdles to Stakebuilding.

Ukrainian law requires disclosure to the JSC and the NSSMC by a direct or indirect holder of voting shares, voting rights or financial instruments (entitlements to acquire and instruments with similar economic effect), or a combination thereof, that amounts to a 5% holding (subsequent disclosure thresholds also apply) in a Ukrainian JSC, no later than three business days after the acquisition thereof.

The disclosure must include detailed information on voting shares, financial instruments and voting rights, and needs to be made when the holdings relating to a specific JSC reach, exceed or fall below:

• 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 95% for public JSCs; and
• 5%, 50% and 95% for private JSCs.

The main hurdles to stakebuilding are:

• the requirement to disclose an intention to acquire 5% or more shares (see 7.1 Making a Bid Public) and the crossing of material shareholding disclosure thresholds (see 5.2 Market Practice on Timing);
• the impact of the stakebuilding on the mandatory offer price, if applicable (this price may not be less than the price for which the acquirer has purchased shares within the last 12 months); and
• the concentration of shares in a Ukrainian JSC by majority shareholders and the limited availability of free float shares on an open market.

Dealings in derivatives are generally allowed in Ukraine. However, the legal framework for derivatives trade was only introduced in 2021, and the forming of the derivatives market in Ukraine was hampered by the full-scale invasion of Ukraine in 2022.

The disclosure thresholds set out in 4.2 Material Shareholding Disclosure Thresholds apply to derivatives. A list of instruments that are subject to the relevant disclosure obligations was approved by the NSSMC, including options, futures, stock warrants and forwards.

There is no requirement to publicly disclose the purpose of the acquisition or the intention regarding control of the company. At the same time, the relevant regulators (AMCU, NSSMC and NBU) may request such information while reviewing applications for approval of the concentration/acquisition of a qualifying holding in a regulated entity.

Not all companies are required to disclose acquisition transactions regarding their equity.

However, if the target is a JSC, it must disclose changes in its shareholding structure if such changes result in the stakes in the company exceeding, falling below or equalling certain thresholds imposed by law. These thresholds are different for public and private JSCs. The disclosure must be made after the relevant deals that caused the shareholder change have been completed.

Market practice on the timing of disclosure does not differ from legal requirements.

The scope of due diligence depends significantly on the type of business that is subject to acquisition. Generally, the following areas are subject to diligence in any acquisition:

• corporate: a review of title and lack of encumbrances on shares in the target, ensuring there are no insolvency proceedings in respect of the target;
• assets: a review of title to the core assets of the target and a review of compliance with the statute by the target when constructing fixed assets;
• regulatory: a review of the compliance of the target’s operational activities with statutory requirements (fire safety, waste management, etc);
• contracts: a review of key contracts (both cost- and income-bearing) to ensure the sustainability of the target’s operational cash flow;
• employment: a review of the employment of key personnel to ensure there are no “golden parachutes” or other forms of excessive remuneration, and a review of the target's compliance with labour laws; and
• litigation: a review of material disputes to which the target is a party.

However, when acquiring tech companies, the focus of the investigation shifts from fixed assets and litigation to evaluating intellectual property and data protection.

Standstill agreements are not commonly used. In Ukraine, a target company's management and board of directors have limited power to influence the acquisition process. The law prohibits the target company from preventing the acquisition of its shares once the acquirer has expressed its intention to do so.

In contrast, exclusivity agreements are crucial in any private M&A in Ukraine. A buyer typically insists on exclusivity as a condition for committing resources in the acquisition. However, acquirers proceed without exclusivity in auction processes until they enter into binding transaction documents.

The law does not define the terms that must be included in the definitive agreement (stock purchase agreement). However, certain terms must be included in the mandatory tender offer, such as:

• the identity of the acquirer;
• the purchase price for shares and how it will be determined;
• the process for paying the purchase price; and
• the type of consideration to be given for the shares (eg, cash or stock).

These terms are important for the effectiveness of the definitive agreement, so are typically included in the stock purchase agreement.

The length of the acquisition process differs depending on a number of factors, including:

• the industry of the target: the acquisition of a financial institution generally requires more time due to the necessity to obtain prior approval from and/or make post-approval flings to the relevant regulator;
• antitrust issues: if the transaction is subject to merger control, obtaining clearance will require a certain amount of time; and
• the risk appetite of the acquirer: if the acquirer wants all deficiencies of the target to be cured before closing (for instance, a complete tax audit to ensure there are no tax liabilities) and thus insists on an excessive list of conditions precedent, the satisfaction of such conditions may require excessive time.

The process of a business acquisition usually takes three to eight months, but it may take longer in certain circumstances.

The following mandatory offer thresholds apply to the acquisition of shares in JSCs:

• 50% for private JSCs; and
• 50% and 75% for public JSCs.

The mandatory offer must be made to all shareholders in relation to all unencumbered shares.

There is an exception whereby the mandatory offer requirement does not apply if the threshold is crossed due to the acquisition of shares by way of inheritance or legal succession in the case of liquidation of a legal entity.

Cash is the most common form of consideration in Ukrainian M&A deals; shares are rarely used.

The valuation uncertainty requires the parties to structure price adjustment mechanisms to bridge value gaps, with the most common being as follows.

• Completion accounts – while “locked box” transactions were more popular up to 2022, the uncertainty created by the Russian invasion made buyers more willing to review the target's financials at closing. The approach to completion accounts in Ukrainian deals generally includes reviewing cash, debt and net working capital. At the same time, buyers sometimes insist on a review of the sufficiency of the target’s capital assets.
• War discounts – since the beginning of the Russian invasion of Ukraine, part of the territory of Ukraine has been occupied by Russia. As both sellers and acquirers remain positive regarding the outcome of the war in Ukraine, they often agree to discount the purchase price for the percentage of the target’s assets that are located in the occupied territories, with the acquirer’s covenant to pay the remainder after the de-occupation of such assets. The capital expenditure required to restore such assets is usually subtracted from the remainder of the purchase price.
• Earn-outs are quite common in private equity deals where top managers, who are often also shareholders, are incentivised to maximise the company’s performance. Earn-outs are also used when the acquirer doubts the sustainability of the target’s growth due to the market's instability in which the target operates, despite its strong past performance.
• Anti-embarrassment protection – when sellers doubt the fairness of the price proposed by the purchaser but nevertheless want to proceed to sale, they insist on the following terms: if the acquirer sells the shares at a price significantly exceeding the consideration paid to the seller within one year of the acquisition, the acquirer must pay a certain percentage of the excess amount to the seller.

Public takeovers are not common in Ukraine, and shares of private JSCs are typically acquired through private negotiations with one or a few main sellers. As a result, conditional tender offers are uncommon.

Conditioning offers on certain acceptance thresholds is not a common practice in Ukraine.

Deals are rarely contingent upon the acquirer’s ability to finance. As a matter of practice, sellers will rarely commit time and money to a transaction unless they are confident in the acquirer’s financial capability to close it. Moreover, obtaining acquisition finance from banks for equity deals in Ukraine is unusual.

As the M&A market in Ukraine can be characterised as a “purchaser’s market” due to acquirers having more negotiation leverage, sellers are usually more interested in deal certainty than bidders.

The typical deal security measures include:

• structuring a clear and specific material adverse change clause to prevent the acquirer from easily walking away;
• making specific and measurable conditions precedent to avoid the acquirer finding formal grounds to refuse to close the deal; and
• imposing the accrual of interest on the amount of the consideration not paid in a timely manner by the acquirer.

An acquirer seeking deal certainty may insist on break-up fees in the amount of their expenses associated with the deal if the transaction is not closed for reasons attributable to the seller.

A bidder can obtain additional governance rights by entering into a shareholders' agreement with other target shareholders, which would give the bidder certain rights beyond their formal shareholding. Moreover, such a shareholders' agreement may be backed by an irrevocable power of attorney, letting the bidder enforce the agreement without relying on the other shareholders' discretion.

Shareholders may vote by proxy at general meetings. If the general meeting is held through an authorised electronic system, a shareholder’s depository institution may act as a proxy, pursuant to the agreement between the shareholder and the depositary institution. Proxies act at their discretion unless they are given voting instructions.

A power of attorney issued by a natural person shareholder must be certified by a notary or a depositary institution.

A proposed proxy must inform the shareholder in advance of any conflicts of interest relating to voting.

A shareholder may appoint multiple proxies. One proxy may represent more than one shareholder and vote differently for each shareholder they represent.

A squeeze-out may be triggered for a public or private JSC within 90 days of exceeding the threshold of 95% ordinary shares.

A squeeze-out demand is irrevocable and may be submitted by the owner of the dominant controlling block of shares, its affiliate or an authorised person (the “applicant”). The applicant must open an escrow account to benefit the shareholders whose shares are acquired, and must bear all the costs of operating such an account.

The squeeze-out price may not be less than:

• the market value of shares determined based on the average trading price during the last three months or, failing such determination, determined by an independent valuator;
• the highest price of shares at which the applicant, its affiliates or other persons acting jointly with it acquired shares of this JSC within the 12 months preceding the acquisition of a dominant controlling block of shares; or
• the highest price at which the applicant, its affiliates or other persons acting jointly with it acquired an interest in other legal entities that own, directly or indirectly, shares of this JSC within 12 the months preceding the acquisition of a dominant controlling block of shares, provided that such shares constitute no less than 90% of the value of assets of such legal entities.

If the applicant, its affiliates or other persons acting jointly with it fail to comply with their mandatory offer obligations, a double minimum price applies.

Irrevocable commitments are not common in Ukraine.

A person who intends to acquire shares of a JSC so that the 5% threshold will be reached or exceeded must notify such intention to the JSC, the NSSMC and the organised market operator on which the JSC’s shares are admitted to trading at least 30 days in advance of such acquisition. The notification must include information on the shares already owned and intended to be acquired.

Additional material shareholding disclosure thresholds apply (see 4.2 Material Shareholding Disclosure Threshold).

Depending on the circumstances, the issuance of new shares in a JSC as part of a merger may require the JSC to disclose the following types of special regulated information:

• the decision on the issue of shares;
• the amount of voting shares and charter capital as a result of its increase; and
• a change of shareholders who own voting shares, voting rights or financial instruments reaching, exceeding or falling below a disclosure threshold (see 4.2 Material Shareholding Disclosure Threshold).

Generally, bidders are not required to produce financial statements in their disclosure documents. However, the relevant regulators (AMCU, NSSMC and NBU) request financial statements when reviewing applications for approval of the concentration/acquisition of the qualifying interest.

There is no general requirement to publicly disclose any of the transaction documents in relation to an M&A deal in full.

At the same time, in a negotiated M&A deal relating to a JSC, the transaction documents must be provided to the depositary institutions and, if necessary, to an intermediary investment firm to effect the transfer of the shares.

On a separate note, a shareholders’ agreement in relation to a JSC in which the state or municipality owns 25% or more must be disclosed on the websites of the relevant state or municipal authority and the JSC.

Directors of a Ukrainian JSC generally have the following duties:

• to act in the interests of the company;
• to act in good faith and reasonably;
• to act within the powers granted by the charter of the company and the legislation; and
• to act in a manner which, in their bona fide opinion, is most likely to further the achievement of successful results of the company’s activity to the benefit of all shareholders (subject to specific instances where the legislation also requires the interests of creditors to be taken into account, or acting in their interest).

Ukrainian legislation has no specific additional duties expressly envisaged in the context of a business combination.

Boards of directors are not required to establish special or ad hoc committees in the context of M&A activity, and doing so is not common.

Ukrainian legislation does not expressly envisage a business judgement rule, whether in takeover situations or generally. However, a kind of business judgement rule or a similar concept is applied by Ukrainian courts when considering cases of alleged misconduct or breach of fiduciary duties by directors and officers of Ukrainian law. As far as is known, there is no case law pertaining specifically to business judgement in a takeover situation.

The acquisition target rarely seeks outside advice independently from the seller, as their efforts are usually combined and co-ordinated. The scope of advice that may be sought varies greatly depending on the transaction circumstances, but is most likely to include tax and legal advice.

Detailed provisions on the conflicts of interest of directors and officers of JSCs have only been in effect since 1 January 2023. Under the new Law of Ukraine “On Joint Stock Companies”, directors and officers must avoid situations where they have or may have a direct or indirect interest in the use of property, information or possibilities of the company if such interest contradicts or may contradict the interests of the company and if the satisfaction of such interest causes or may cause damages to the company.

Due to the novelty of such rules, conflicts of interest have yet to be subject to judicial scrutiny in Ukraine.

Ukrainian legislation does not prohibit hostile takeovers. However, they are not common due to the concentration of shareholders, with the majority of shareholders controlling the management and the insignificant number of free-float shares.

Ukrainian legislation expressly prohibits JSCs from taking measures to prevent the acquisition of shares in the company when notified of such intention. However, this remains a rather vague concept and needs to be developed in case law. For this reason, it is hard to evaluate what kind of defensive measure may be regarded as prohibited.

Because of a lack of actual public takeovers in Ukraine and a prohibition on JSCs taking measures aimed at preventing the acquisition of shares, there are no common defensive measures used by directors.

Ukrainian law does not envisage any specific duties of directors in the context of defensive measures. The directors owe all ordinary duties to the company, as set out in 8.1 Principal Directors' Duties.

Under Ukrainian law, directors do not have the power to prevent a hostile takeover by their decisions.

Most M&A deals involving assets in Ukraine are governed by English law, with international arbitration having jurisdiction over any disputes associated with the transaction. Even if a Ukrainian transaction cannot be governed by English law due to a lack of a foreign element or because the transaction value is too low to justify the costs of English law counsel, parties still prefer to submit disputes to arbitration in Ukraine. It is very uncommon for M&A-related litigation to take place in Ukrainian courts.

As a matter of practice, Ukrainian transactions rarely end up in arbitration. Due to the relatively low value of transactions and the excessive costs of arbitration, parties usually prefer to resolve disputes without litigating.

Litigation is uncommon at any stage of an M&A deal.

In early 2020, when the COVID-19 outbreak began in Ukraine, numerous M&A deals were halted or terminated. However, there were no major disagreements over these deals for a few reasons. Firstly, many sellers understood the situation without pressuring buyers to close the deals. Secondly, buyers commonly used material adverse change clauses, which are typically written in a broad manner, to justify backing out of the deals. Finally, some buyers relied on clauses in the acquisition documents, such as force majeure and hardship clauses, or even on the English law doctrine of frustration, to support their decision to terminate the deals.

In 2022, however, there were more justified reasons to halt or terminate deals due to the Russian invasion of Ukraine, which presented more obvious cases of material adverse change or force majeure. This was likely the reason there has been no significant increase in disputes over the termination of deals.

Given the incremental share of acquisitions via building stakes on an open market, shareholder activism is not a significant force in Ukraine. Usually, impact shareholders in Ukraine are international financial institutions (such as EBRD), but they normally acquire stakes in Ukrainian companies from their majority shareholders.

A sort of shareholder activism in Ukraine is the activism of Ukrainian NGOs focused on the activity of Ukrainian state-owned companies (although such NGOs are obviously not the shareholders but merely protect the interests of the Ukrainian people as the ultimate owners of the state-owned companies).

Activism related to state-owned companies (see 11.1 Shareholder Activism) is usually concerned with revealing and preventing corruption and overseeing management remuneration practices in state-owned companies. Activists may also promote the privatisation of state-owned companies at a fair value and to bona fide investors. However, due to the ongoing war in Ukraine, privatisation is not likely to be an active process due to a lack of investor interest.

The interference of activists in the completion of M&A deals is an exceptional occasion in Ukraine.