In line with the global decrease of business activity, the Ukrainian M&A market showed tangible signs of slowing down in the wake of the COVID-19 pandemic, both in terms of size and number of deals. Responding to restrictive measures introduced by the government, many foreign and domestic market players decided to pause pending projects until further certainty about economic and social effects of the lockdown. Indeed, uncertainty has become one of the major factors steering the behaviour of market players. As expected, this has resulted in a decrease in volume of inbound investments: according to the National Bank of Ukraine (the NBU), the investments fell by USD 100 million in 2020.
With outbreak of pandemic, tourism and HoReCa sectors were especially affected by the governmental restrictive measures. At the same time, some support for businesses have also been introduced, eg, compensations to employees who have been put in idle or providing certain tax incentives. Among important decisions that affected domestic market was the freezing of the large-scale privatisation in March 2020. Nonetheless, now the government is prepared to resume it soon (ie, in the second quarter of 2021). According to the NBU, significant part of its USD3 million of inbound foreign investments forecast is expected to be received from the large-scale privatisation.
As more certainty emerged close to summer, majority of the contemplated deals proceeded to closing. Positive news is that there were no cases of cancelled deals due to COVID-19. As a result, Ukraine managed to raise approximately USD1.2 billion of investments with 124 deals completed, which is only slightly less than in 2019 in terms of number. The highest value M&A deal with foreign investor was the acquisition by DP World (the United Arab Emirates) of 51% stake in TIS Container Terminal in the Port of Yuzhny.
To summarise, despite all difficulties and uncertainties associated with the COVID-19 outbreak, the Ukrainian M&A market proved to be resilient and the forecast for its future growth is justifiably optimistic. At least a dozen large-scale projects, primarily in the infrastructure sector, have been announced by the government and are yet to unfold.
Strengthening of the Role of State and Public-Private Projects
Following successful launch of two landmark concession projects in Ukraine, namely, concessions of Kherson and Olvia seaports, this instrument of public-private partnership (PPP) is going to gain its momentum.
The Ukrainian government has already announced launching of the Road PPP Program to engage the private sector in Ukraine’s existing road network through PPP contracts to facilitate quality road network upgrades and long-term maintenance through private investment. In addition, the Ministry of Infrastructure is currently preparing regional railway stations and regional airports for concessions. That said, a number of important PPP projects are yet to follow in coming years. New opportunities are also expected to come with unlocking of large-scale privatisation.
Enhancing Control over Foreign Investment
Control over foreign investments must now be taken seriously in Ukraine. Together with tax and antitrust considerations it will become one of the major factors to make the deals more complicated and incentivise the parties to become more attentive to due diligence and structuring.
Domestic Investors are Becoming More Active in the M&A Market
As in preceding years, domestic market players are becoming more active and stronger to the point that the number of deals with domestic investors outweighed those with foreign investor – 48% against 35%.
In a disrupted and uncertain pandemic environment, many market players have started looking for new opportunities, such as strengthening e-commerce and digital streams or considering the optimisation of existing ones (disposal of non-core or distressed assets).
The most active industries in 2020 have been TMT, food industry, agriculture, and real estate. According to the NBU, in terms of direct foreign investments the largest investments have been made to electricity production, gas, water supply sectors, operations with real estate, transportation, food industries.
The TMT sector continues to be of particular interest for foreign investors, specifically in relation to technology start-ups. The largest transaction in this sector is the acquisition by Datagroup, Ukraine's leading national fibre infrastructure and digital services provider, of 100% of Volia group, a national provider of telecommunication services, with the full backing of Horizon Capital's EEGF II Fund. Post-integration, the combined business is expected to generate revenues exceeding USD130 million and over USD50 million in EBITDA, with one of the lowest leverage ratios among large telecom companies in the CEE region.
The increase in M&A activities in the food industry is largely attributed to privatisation of state-owned enterprises of alcohol industry. Throughout the country’s history, this industry has been a state monopoly, that is until 11 December 2019 when the President of Ukraine signed the law on abolishing state monopoly on alcohol production commencing 1 July 2020.
As a result, the state put up for sale 41 operating locations (ie, as a group of separate property) constituting part of Ukrspirit state-owned enterprise and 37 more plants that are included into Ukrspirit Concern (as a group of companies). The debut auction for the privatisation of Nemyriv distillery (Vinnytsia region), was held in October 2020 and was sold for almost USD2 million. To date, a total of 13 enterprises have undergone privatisation, generating around USD26.7 million for the state budget.
The agricultural sector showed the strongest resilience during 2020. Expectedly, strong export potential of Ukraine continues to attract strategic investors. With opening of the land market, the next few years may become the most active for M&A activities.
With acquisition of four commercial real estate objects the investment fund Dragon Capital has become the most active player in the real estate market during 2020. The landmark M&A deal was privatisation by Natus Vincere of one of the most famous Kyiv hotels Dnipro Hotel for USD41 million.
It is common practice in Ukraine to acquire a company through a direct sale of shares, which may be implemented either locally or at the level of a parent company abroad. The acquisition of a company by means of a merger (either in the form of an amalgamation or absorption) is extremely rare due to complexity and significant time constraints in doing so.
Conducting an Acquisition or Merger
The mechanics for conducting an acquisition of shares or merger of companies largely depends on whether the said operations are conducted in respect of joint stock companies or limited liability companies. The majority of issues described in this chapter are relevant primarily to joint stock companies since regulatory framework to the great extent is liberal toward limited liability companies and thus the parties may decide freely how to structure their relations, although of course subject to certain exceptions. Apart from that, the parties must also take into account sector-specific regulations governing merger and acquisitions.
It may also happen that the parties would prefer structuring the deal through asset sale, rather than share sale. This scenario might be beneficial for the potential buyer if it is sensitive to avoid heavy historical risks or the buyer deals with the distressed assets. Moreover, the acquisition of certain targets in Ukraine is possible only by means of sale of assets, like in privatisation cases or in respect of a bankrupt company. Furthermore, due to the specifics of the existing regulatory framework, purchase of an integrated property complex can be possible through an asset deal.
It is worth noting that if the buyer intends to acquire a business which is subject to licensing, or holds any other permits or lease right, which are not transferrable as such, the only way to do so is to proceed with the share deal.
Hence, in order to decide how actually to structure the deal, the potential buyer should consider a dozen of factors, which may vary depending on regulatory requirements in a given sector of business, particulars of the assets owned by the target company, assessment of risks exposure and its magnitude, and so on. Apart from that, the chosen option must also be carefully assessed against tax-related risks since acquisition of assets usually triggers additional tax burden.
There is no specific regulator vested with powers to monitor M&A activities. Depending on particulars of a transaction, the investor may be interacting with the following state bodies:
It is also anticipated that control over foreign investment will be monitored by the Ministry of Trade and special governmental commission (see 2.3 Restrictions on Foreign Investments).
The regulations surrounding foreign investment remain liberal, but things are going to change completely.
The approach toward foreign investments remains liberal in Ukraine. Not so far away when the NBU lifted serious currency and exchange restrictions and is further progressing with liberalisation of currency regulations. To date, none of the controlling procedures apply toward foreign investors, except for sanctions legislation (see 2.6 National Security Review).
This notwithstanding, in response to growing national security concerns and complications of geopolitical environment, the Ukrainian government currently is actively elaborating new body of law to introduce control over foreign investments. By taking this approach, Ukraine followed the practice of EU countries that implemented the EU Regulation 2019/452 on establishing a framework for the screening of foreign direct investment, which became effective on 11 October 2020.
The draft Screening Law is expected to come into play: as part of rethinking of existing legal framework on foreign investments, draft Law on foreign investments screening (FIS) procedure was submitted to the parliament for adoption.
Considerations Prior to Investment
Considering key features of the draft FIS Law, before making an investment, an investor must carefully consider:
Apart from application of FIS regulations, there are industries in which foreign investment structures are not allowed or conditionally allowed.
The Ukrainian antitrust legislative framework covers a variety of transactions, including classic mergers and takeovers, acquisition of shares exceeding 25% or 50% of votes in the highest governing bodies, as well as incorporation by two or more independent undertakings of a joint venture or gaining joint control.
Notably, the merger control regime applies formalistic approach by focusing on the form of the transaction rather than its substance. That said, in a multi-stage transaction, which may involve different stages and forms of acquiring control (ie, purchase of shares, assets, signing the shareholders' agreement providing for joint control), separate merger clearances may be required to effectuate the transaction as whole. It is important to note that the merger clearance itself does not cover any auxiliary restraints that the parties may negotiate, eg, non-compete, non-solicitation undertakings. Any such contractual obligations are subject to separate approval of the AMCU.
Merger Clearance Thresholds
For the transaction to qualify as notifiable, the following thresholds must be met:
Enforcement of Merger Clearance Regulations
The parties must clear the transaction before its closing for the fear of imposing a fine up to 5% of the whole group's annual turnover of the parties involved. In this respect, the AMCU has become particularly active and powerful state body in supervising compliance with merger clearance regulations. For example, in 2019 the AMCU imposed two historically highest fines for the parties' failure to obtain merger clearance. The first fine of EUR1.8 was imposed on TAS group, owned by a former member of parliament, for acquiring control over Dniprometyz. The second and largest fine amounted to USD2.3 million and was imposed on DCH Group for acquisition of control over Dnipropetrovsk Metallurgical Plant, although successfully challenged in the courts at the outset.
Starting from 2017, the antimonopoly regulator may return the merger control filings without consideration on merits or even annul previous merger clearance if the party involved in a transaction has been subject to sanctions (see 2.6 National Security Review).
Ukraine still has a rather non-progressive labour legislation inherited from the Soviet era, whereas labour law does not "keep up" with the rapid development of corporate law.
Therefore, acquirers should consider the following aspects.
"At-will" Employment and the Right "to Leave"
Often, there is no "at-will" employment: in most cases, legislation and courts protect employees thus making dismissals at employer-driven grounds (including layoffs) complicated. An exhaustive list of grounds for dismissal is set out directly in the Labour Code, and each of these grounds requires compliance with the procedure and the existence of certain conditions. The only exception is dismissal of corporate officers (ie, members of management and supervisory boards) due to termination of their corporate powers (with severance).
On the other hand, employees cannot be deprived of their right "to leave" with a two-week notice or even earlier (if there is a justifiable reason). At that, post-employment non-compete is not enforceable in Ukraine.
Members of management board/CEO are to be in employment relations with the local company and receive salary. Foreigners (including foreign managers) may be employed only based on an individual work permit, obtained by the local company.
Private Entrepreneurship Models
Recently, private entrepreneurship models for structuring labour relations have become ever more prevalent, especially in the IT and hi-tech industries. However, it is indeed important to define the relationship during the due diligence stage, as usually such private entrepreneurs are customarily described as "employees" by the target-seller side. Moreover, parties to an agreement based on such a model could face a reclassification issue, should the relations resemble employment.
Apart from the need to carefully construct the relations and eliminate employment features, one should also pay attention to applicable IP, confidentiality, personal data protection, and non-compete clauses in such agreements.
Limitation Periods and Cross-Border Labour Relations
There is no limitation period for claims arising from violation of labour remuneration rules. As it is indeed difficult to reveal such failures during red-flag due diligence, usually this aspect is covered by representations &warranties in the share purchase agreement. If there is no legislative regulation for cross-border labour relations, thus it will not be possible to transfer employees between jurisdictions or, eg, to relocate the plant/production site without first dismissing them.
Historically, there are strong trade unions at large post-privatisation enterprises. Trade unions have an extensive list of rights and guarantees and may block any dismissal (including layoff) of its members. Provisions of collective bargaining agreements are to be scrutinised prior to any acquisition, as they may also contain additional benefits and certain layoff restrictions.
It is recommend thoroughly auditing the history of interaction with trade unions before any acquisition. After all, dialogue with trade unions (especially if there are several of them at the enterprise and there is no agreement between them) and legal actions cost a considerable administrative resource.
In response to aggression of the Russian Federation and annexation of part of its territories, in 2014 the Ukrainian parliament enacted separate body of law dealing with sanctions against those (including not only individuals and companies, but also foreign states) posing threats to national security and interests.
The sanctions are adopted by the National Security Council of Ukraine, then brought into effect by the Decree of the President of Ukraine. Among the measures that can be applied to sanctioned persons, the following gained extensive application:
That said, transaction involving persons included into the sanctions list must be blocked and the merger clearance (if required) will be declined. With this respect, the sanctions issues must be carefully analysed by the investors in advance before proceeding with the deal.
Apart from the legislation on sanctions, these are also certain sector-specific limitations, namely, non-resident investors are not allowed to hold more than 35% of the share capital of information agencies operating in Ukraine.
To date, domestic courts have already scrutinised a dozen of disputes related to M&A issues. Among the most significant cases that gained great public attention is testing the efficiency of derivative suits against the company's officers and scrutinising of the squeeze-out procedure.
In terms of derivative suits, the concept which was introduced in 2016 in Ukraine, only recently positive court practice has become to evolve and proved to be effective to protect shareholders interests against abuse of powers by company's officers. In November 2019, the Grand Chamber of the Supreme Court of Ukraine set an important judicial precedent by allowing a multimillion Hryvnia claim for damages caused by unlawful actions of the director.
The Ukrainian market participants are also waiting for the court to finally resolve a dispute on challenging by minority shareholders of mandatory acquisition of their shares under squeeze-out procedure. To date, the Supreme Court remanded the case for retrial at first instance.
Since adoption in 2017 of cardinal changes to national legislation on joint stock companies that, in fact, brought into reality new takeover rules based on EU Directive 2004/25/EC on takeover bids, there have been no significant developments in takeover laws in Ukraine.
At the same time, serious renewal of legislative framework on joint stock companies and takeover bids is currently underway. Among other things, the renewed legislation on joint stock companies is aimed at improving the procedures of mandatory buy-out of shares at request of shareholders, rules on valuation of shares (by introducing the concept of a minimal price for a share that is calculated by dividing value of net assets of the company by the total number of shares), provisions on competitive offers during bid-out, etc.
Due to highly concentrated shareholdings in Ukrainian joint stock companies, where at least majority of voting shares are owned by few shareholders (either directly or indirectly through affiliates), the stakebuilding strategies remain impracticable. From the other side, the shareholders may try to resort to stakebuilding strategies to circumvent regulatory requirements connected with disclosures, making voluntary tender offers, or even merger clearance, although in practice it is difficult to achieve due to well-developed enforcement practice of the state bodies against circumvention of control relations.
Public joint stock companies are obliged to disclose reaching each the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75%, 95% resulting from acquisition or disposal of voting shares, whereas private joint stock companies shall make such a disclosure if the thresholds of 10%, 50%, and 95% are met. Subject to hitting financial figures, reaching the thresholds of 25% and 50% requires the merger clearance filing (see 2.4 Antitrust Regulations).
Notable also that filing requirements have its own specifics for banks and financial institutions. For instance, acquisition of shares or increase of a material shareholding in a bank (ie, 10% of more) requires approval of the NBU.
The joint stock companies are not allowed to set higher or lower reporting statutory thresholds, irrespective of whether in their charters, by-laws or by other means.
Until recently, dealings in derivatives were hardly possible. With the Law of Ukraine "On amendments to certain legislative acts to attract investments and introduce new financial instruments" entering into legal force on 16 August 2020, the situation may change completely. The said law, aligned with EU legislation, is aimed at providing comprehensive regulatory framework for operations with derivatives (swaps, options, forwards, futures) as well as introduces the concepts of netting, close-out netting of derivative transaction executed with Ukrainian companies, and financial collateral arrangements. At the same time, notable that derivatives are not common for M&A transactions and are aimed at using primarily in the stock trading.
The disclosure requirements under securities disclosure and competition laws do not apply to the derivatives to the extent that the latter do not bear voting or controlling rights attaching to them. Instead, according to the newly adopted law (see 4.4 Dealings in Derivatives), operations with derivatives fall under its own rules of reporting, namely:
Under existing legislative framework, acquisition of a shareholding in a public joint stock company exceeding 50% or more, or 75% or more requires further disclosure of the acquirer's intentions about the target's future operations (including key areas of its activities), as well as any material changes of employment of the target's officers and ordinary staff. This information must be disclosed as part of irrevocable public offer to the remaining shareholders of the target.
For disclosure obligations please see 7.1 Making a Bid Public.
Market practice on timing of disclosures does not significantly differ from the legal requirements. Further, the NCSSM, the regulator that supervises compliance with disclosure requirements, is actively chasing the companies that are found in breach of the disclosure prescriptions by imposing administrative fines.
The scope of the due diligence in a course of business combination in Ukraine primarily depends on the scale of the target business and its industry specifics.
As a starting point, the parties may seek to engage the lawyers to check key aspects of activities, such as:
Apart from the legal due diligence, the parties usually mandate the financial and tax advisors to assess financial and tax liabilities, as well as develop tax-wise structure of the deal. In certain businesses operational, technical, or environmental due diligence may be highly recommended.
Although parties tend to include a standstill and/or exclusivity undertaking into their preliminary arrangements, Ukrainian parties are not inclined to heavily negotiate it. This is simply due to weak enforcement perspectives in case of its breach. To a large extent, whether the standstill or exclusivity clauses will succeed in a court depends on how well the parties' construed it in a transaction documentation, as well as how they correctly choose the governing law and dispute resolution forum.
Stipulating tender offer terms and conditions in a definitive agreement is allowed under Ukrainian law and commonly applied. At the same time, in the course of mandatory buy-out procedures, definitive agreements are not disclosed to third party shareholders.
Timelines for acquiring/selling a business primarily depends on whether the merger clearance or other regulatory approval(s) is required. For example, under standard procedure the merger clearance may be obtained during 45 calendar days. If a potential transaction triggers competition concerns (ie, that the deal may lead to monopolisation at the market or material restriction of competition), the AMCU may open the so-called phase 2 procedure, which will take up to 135 calendar days to compete. Subject to the below conditions, the parties may file for simplified procedure for obtaining merger clearance, which takes up to 25 calendar days:
The pandemic has not significantly affected the timelines for obtaining regulatory approvals, neither the government implemented any measures to change statutory terms for granting regulatory approvals at least during the nation-wide lockdown.
Factors Impacting the Length of the Process
Apart from regulatory factors, the length of the process may also depend on availability of the corporate structure of the target business for the transaction. For example, the ownership structure of the target business may be so much fragmented that the seller must first complete corporate restructuring before proceeding with closing the deal.
To summarise, the viable timelines for completing the deal vary from two to three months for mid-scale transactions to nine-12 months for large-size deals involving due diligence, regulatory approvals and restructuring steps.
Insofar as in certain cases acquiring/selling the business requires convening of a general meeting, because of travel restrictions and social distancing requirements the Ukrainian parliament introduced changes to the procedures for convening and holding general meetings in joint stock companies during the nationwide COVID-19 lockdown. It was allowed to hold the general meeting virtually through depositary system of Ukraine, for which purpose the National Securities and Stock Market Commission elaborated a temporary regulation on remote general meetings for joint stock companies and corporate investment funds.
Mandatory offer thresholds apply in Ukraine in respect of joint stock companies based on the following approach:
As a matter of practice, cash consideration is more often used than other forms of payment, including the shares. The applicable laws do not dictate whether the parties must use cash or non-cash consideration. Hence, they can freely negotiate payment term and laid it down in a transaction documentation.
Nonetheless, there are certain limitations for payment for the shares in joint stock companies that the parties should consider while elaborating respective deal terms:
In order to mitigate the valuation gap risks, the parties should elaborate proper payment structure in a transaction documentation, eg, completion account being the most popular option to achieve this aim.
When triggering public irrevocable offer (see 6.2 Mandatory Offer Threshold) such offer must stipulate:
In addition to the above, the offer, which must be produced as a result of acquisition of 50% or more, or 75% or more voting shares in a public joint stock company, must contain information on:
The effective laws do not provide for application of any other offer conditions. Therefore, any such additional conditions, if required by the offeror, can be successfully challenged by the shareholders.
The effective laws do not provide for any minimum acceptance conditions. In fact, in case the shareholder(s) accepts the offer, they must sell all their shares.
By virtue of statutory provisions, the bidders are not generally required to obtain financing as a condition to proceed with the bid either in business combination or other types of merger and acquisition. To that end, the parties may freely negotiate and address this issue in a transaction documentation. At the same time, in the course of privatisation tenders, certain conditions, including on financing, may be imposed on the participants as part of their investment commitments.
The way in which the bidder may try to tie up the deal is purely the commercial matter to be agreed between the contracting parties. Therefore, based on a freedom of contract rule the bidder may try to negotiate for a break-up fee or non-solicitation undertaking, which nonetheless have not been tested by domestic courts and therefore, the enforcement concerns remain.
The more secure way for the bidder is to insist on including contractual penalties into the contract or obtain a collateral to secure proper fulfilment of contractual obligations by the counterparty. Worth noting that the Ukrainian law does not apply a concept of punitive damages to limit or render a claim for damages unenforceable.
At the same time, the bidder has to be mindful that if it prefers having non-solicitation clause or any restrictive covenants preventing the counterparty from acting freely, it may raise anti-monopoly concerns and, accordingly, require the bidder to obtain approval of the AMCU to make such provisions enforceable.
The additional governance rights may be granted by virtue of executing of a shareholders' agreement. Since 2018, when the Law on Corporate Agreements (applicable to joint stock companies) and the Law on Limited Liability and Additional Liability Companies (applicable to the mentioned forms of legal entities) entered into force, the parties are able to agree flexibly and, importantly, beyond what is provided by law on how to arrange corporate governance.
Subject to meeting certain conditions for making the shareholders' agreement valid and enforceable, as well as provided that the agreement is correctly aligned with the company's charter, the bidder may seek to obtain the following additional governance rights in respect of a target:
At the same time, once the above arrangements are put down on a paper, the parties to the shareholders' agreement must carefully analyse whether the merger clearance is required. To the extent that any of the provisions of the shareholders' agreement grants controlling and/or veto rights or creates joint control over the target it might be deemed as a concentration and hence, require approval of the AMCU.
Under applicable law, the shareholder may participate and vote at the general meeting either personally or through its representative(s), which can be appointed permanently or temporarily. The shareholder can change its representative at any point of time. Moreover, appointment of a representative does not exclude or in any other way limit participation of a shareholder in the general meeting personally. The shareholder may authorise other shareholders to act on its behalf. Authorisation for participation and voting at the general meeting is confirmed by the powers of attorney certified according to statutory rules.
Although Ukrainian laws allow the shareholder to appoint its proxy, the proxy voting mechanics differs from those used in the USA or European countries. Moreover, there are no requirements to file or publicly disclose proxy solicitation intentions. Finally, proxy contests remain unknown for domestic market participants.
Pursuant to the Ukrainian legislation, in case of acquisition of the dominant controlling stake (95% and more), the respective shareholder is granted with the right to buy-out the shares of the minority shareholders on a mandatory basis at a fair price. Such shareholder may send irrevocable demand to sell the minority shares within 90 days after notification to the NCSSM of the respective acquisition. At the same time, the minority shareholders are provided with the balancing right to sell-out.
The Ukrainian mechanism of squeeze-out has the following hallmarks:
Such specifics of the procedure were entailed by the necessity to deal with a number of privatised enterprises with so-called "sleeping shareholders" (shareholders who didn't conclude agreements with the depositary institution within the shares dematerialisation procedure).
Application of irrevocable commitment has not yet found its way in Ukraine. Moreover, the enforcement of any such provisions might be questionable given absence of court practice in this respect.
At the same time, with revolutionary renewal of corporate law in 2018 the legal mechanism of irrevocable power of attorney was firstly introduced, although its application remains very limited. In particular, the irrevocable power of attorney can be issued only to secure fulfilment of obligations of shareholders arising out of the right to shares or power of shareholders. In practice, Ukrainian notaries who certify such documents are tending to refuse certification given absence of comprehensive guidance of state bodies.
Requirement to make a bid public depends on the number of shares subject to acquisition and whether the public or private joint stock company is acting as a target.
Acquisition of a Material Stake
As a rule, if a person (including those acting jointly) intends to acquire the shares of the joint stock company resulting in accumulation, together with its affiliates, of 10% or more of the voting shares they must no later than 30 days prior to the date of acquisition make it public. The bid is made public through submission of a written notice to the target, disclosure of such notice to the regulator (the NCSSM), each stock exchange on which the target's shares are listed, as well as by means of its publication in open information database of the regulator.
The written notice must stipulate the amount, type and/or class of shares owned by the potential acquirer (or each of the acquirers acting jointly) and each of its affiliates, number of ordinary shares the acquires intends to buy.
In respect of public joint stock companies, the above disclosure requirements have certain specifics – ie, they apply in case of reaching (irrespective of whether as a result of acquisition or disposal of shares) of each of the thresholds 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75%, 95% of the voting shares.
Acquisition of a Controlling Stake
In case a person (including those acting jointly) acquired the shares that resulted in accumulation, together with its affiliates, of 50% or more of the voting shares, it must notify the target and the regulator on execution of the transfer agreement during one business day following such execution. In turn, the target must disclose the notice publicly on its website and through open information database of the regulator.
Following transfer of a title to the shares, the buyer must also disclose the information about the highest price at which it acquired the shares during 12 months preceding the date of acquisition of shares. The disclosure is made through submission to the regulator and can be further used for a purpose of defining of a purchase price for the shares of remaining shareholders in a course of making irrevocable offer to purchase their shares.
The disclosure requirements remain the same for issuance of shares (see 7.1 Making a Bid Public).
The Ukrainian laws do not impose obligations on the bidders to produce financial statements in a course of making bids. Instead, disclosure of financial statements applies to the joint stock companies as part of general disclosure requirements (ie, publication of interim and annual financial statements).
The financial statements must be prepared in accordance with international or national financial reporting standards, depending on which standards the target company opted to apply.
Exact scope and procedural requirements for disclosure of financial statements depend on the type of the joint stock company (ie, public or private), whether the state holds shares in a company or whether the company belongs to those constituting public interest.
During the merger clearance procedure the parties are obliged to produce financial statements to the AMCU.
There is no requirement to disclose the transaction documents either partially or in full to the target, stock market regulator, shareholders or to any other parties, except for the purpose of obtaining merger clearance, in which case the AMCU must be provided with draft or signed transaction document(s). For the purpose of obtaining merger clearance, it is possible for the parties to ask to produce only a redacted version of transaction document(s) (ie, excluding provisions which the parties wish to remain confidential).
As a general rule, the company's officers (members of the supervisory board and the board of directors and other corporate officers) must act in good faith and reasonably, not exceeding their powers. The officers' duties are owed to the company. Thus, while making decisions, the officers are obliged to consider interests of the company itself.
At that, there are no specific duties in the course of a business combination and general fiduciary duties are applicable in this situation.
Under the Ukrainian legislation, it is possible yet not required to establish any committees within the supervisory board or the executive body.
The only obligatory rules relate to the public joint stock companies or joint stock companies with the state share exceeding 50%, which require such companies to establish the audit, remuneration and nominations committees of the supervisory board.
According to the newly adopted Corporate Governance Code, establishing such committees is fostered as the best corporate governance practice, especially beneficial to ensure independence and objectivity where there is the room for conflict of interest.
At that, in case establishing the committees is not mandatory, they are rare employed in practice.
All mentioned rules are general and are not connected with the specific business combination situations.
The concept of the business judgement rule is not well-developed in Ukrainian practice. At the same time, unless the decision of the management is challenged in court, it will be considered legitimate.
It is also noteworthy that business consistency is recognised as a cornerstone of the cases regarding the management's transactions. That means that for the sake of stability, the proper legal remedy is not the transaction invalidation but recovery of damages under the ambit of a derivative claim.
In practice, independent outside advice regarding legal, tax and appraisal matters is usually provided in case of a business combination. In some cases, the independent appraiser must be engaged mandatorily (for example, to identify the shares market value).
However, as a rule, such advice is requested by the company and not by its directors or other officers.
In recent years, the tendency of the officers has been to seek independent advice to confirm that their actions were made in compliance with their fiduciary duties, but such cases remain sporadic.
Currently, in Ukraine different regulations are specified regarding the conflicts of interest for the limited and additional liability companies and the joint stock companies.
In the case of limited liability companies, the officers are obliged to notify the company when a conflict of interests occurs. The breach of the respective obligation may trigger termination of the contract with such an officer without payment of the compensation. There is also a mechanism of approval of the related-party transactions by the supreme body. However, this mechanism remains voluntary and does not apply unless directly indicated in the charter by the shareholders.
The comparable notification duty is not stipulated for joint stock companies, and conflict of interest is controlled via approval of the related-party transaction meeting the specified criteria (eg, if the market value exceeds one percent of the company's assets). The law requires that the supervisory board of the public joint stock companies engages an independent external auditor to check if a related-party transaction takes place under ordinary market conditions. Transactions with breach of the related-party transaction rules is deemed non-concluded, and guilty officer bears the respective liability.
In both cases, it comes to judicial scrutiny if the said rules are breached. Still, the Ukrainian court practice is not rife with such cases.
Hostile tender offers are not common in Ukraine due to two major reasons:
Moreover, national legislation does not differentiate the hostile and recommended takeover bids.
Generally, the target company is not allowed to take any actions to prevent acquisition of its shares, either as part of negotiated deal or hostile takeover. It means that the directors are not entitled to implement defensive measures to frustrate the bid. In fact, the board cannot do so by virtue of lack of powers since it is the exclusive competence of the general meeting to approve transaction aiming at merger, any other reorganisation, or issuance of shares.
Hostile takeover bids are extremely rare in Ukraine and the practice of application of defensive strategies is not well developed.
Given lack of competence (see 9.2 Directors' Use of Defensive Measures), directors do not have any specific duties with regard to the defensive measures; in all cases, the main aim of the directors' activity is to protect the company's interest acting in line with their fiduciary duties.
Generally, it is not practically possible due to the standard corporate governance matrix – ie, such issues lie within the shareholders' meeting's competence.
As regards issues under directors' control, the directors must take decisions in the company's interest. Thus, if the business combination affects the company's activity negatively, the directors may take all available actions to prevent it. The Ukrainian courts and lawmakers are currently developing the principle of independent actions.
One of the key features of the Ukrainian M&A market is that the parties are still inclined to structure the deals abroad, which, among others, allows them to apply foreign law (usually, law of England and Wales) and choose arbitration or foreign courts as a dispute resolution forum. To a large extent, this is due to unavailability under domestic laws of certain valuable legal tools commonly used in Western countries, like covenants, warranties and indemnities, conditional obligations, etc.
To that end, litigations in connection with M&A deals in Ukraine remain sporadic. At the same time, Ukrainian courts have already developed a body of caselaw concerning corporate governance matters (eg, disputes over validity of resolutions of general meeting and enforcement of shareholders' rights).
Considering that litigations in connection with M&A deals are rare in Ukraine, it is difficult to provide comprehensive overview at which stage such disputes tend to unfold. Based on available data, the litigations are more frequent at closing or post-closing stages, especially when there is a disagreement between the parties as to valuation, or when there is a breach of a warranty or failure of a party to meet post-closing obligations.
In terms of disputing M&A deals by the shareholders not being the contracting parties, since the shareholders do not have control over the progress of a transaction, there are no examples of this kind of dispute. In case of mergers, the shareholders might seek to invalidate resolutions adopted at general meeting due to violation of formal requirements in its convening or holding, although there are no examples when merger was actually aborted as a result of a dispute.
There are no lessons learned from the disputes over pending transactions in early 2020. Yet, important lessons may be gained from corporate law contests, either those finally resolved by the courts or still under review, to mention:
When talking about joint stock companies, shareholders activism remains relatively weak, although, in fact, the domestic regulatory framework is friendly towards minority shareholders' rights and provides a useful toolkit to implement shareholder activism strategies. To a large extent this is due to underdeveloped stock market, where there are only a few listed companies and no active institutional investors. Hopefully, with further development of stock market and legislation on joint stock companies, which is underway, the situation will improve.
As mentioned above, Ukrainian laws allow the minority shareholders to use various tools to exert influence over the company, such as the following.
The majority of cases indicate that the focus of shareholder activism is on challenging decision of the general meetings which they deem unfavourable or harmful to their interests or seeking to question valuation of their shares when mandatory buy-out is triggered, alleging that the price for their shares was undervalued.
All the above indicates that, despite existing weaknesses in activities of genuinely public companies, Ukraine can be seen attractive jurisdiction for implementing shareholder activism strategies even in respect of purely private companies.
Cases of activist shareholders seeking to encourage companies to enter M&A transactions, spin-offs or major divestitures are extremely rare in Ukraine. For this reason, the pandemic had no tangible effect over the process.
Activist shareholders are not inclined to interfere with the completion of announces transactions in Ukraine. At the same time, there are cases where third parties attempted to interfere with the announced acquisitions of the companies, mostly during the privatisation of targets, by asking the courts to invalidate privatisation auctions.
The Pandemic as a New Trendsetter
In 2020, the Ukrainian M&A market resonated with global markets. Early last year, business activity and M&A dynamics experienced a sharp decline, mainly due to the tough restrictive measures implemented due to COVID-19. However, business activity began to gradually gain traction towards autumn. Although the lockdown-induced barrier of uncertainty was not overcome, it ceased to drastically affect transactions. Most of the M&A deals scheduled for 2020 have ended up being successfully closed or are expected to be closed in 2021.
Some industries, such as tourism, the catering industry (HoReCa) and non-food retail, have suffered badly in the pandemic. Conversely, the pandemic has also become a necessary catalyst for businesses to develop new lines and optimise the existing ones. Thus, retail began to actively develop the e-commerce area and thus became the fastest growing sector in Ukraine over the previous year. There is every reason to believe that this trend will continue in the future, making the e-commerce and digital economy segments a tasty morsel for investors.
As a side note, some of the industries in Ukraine hardly felt any negative consequences of the pandemic, eg, the agricultural sector and TMT, which topped in M&A deals in 2020. Moreover, business activity in the agricultural sector is expected even to intensify further in 2021 with the adoption of legislation opening the land market. Many of the domestic strategic market player are strengthening their capacities, especially in agriculture infrastructure (ie,, elevators, warehouses, trans-shipping terminals, etc).
It should be noted that Ukraine is at the stage of actively updating its legislative field, especially in relation to key sectors of the economy that may be most interesting for large international investors. For example, Ukrainian authorities are seeking now to significantly renew outdated regulatory framework in respect of privatisation, concessions, and other forms of public-private partnership to make it more investor-friendly and resonant with current environment.
Enhanced Attention Towards the IT sector: a Step Towards a Digital World and Economy
The strong attention of domestic authorities towards TMT, the sector which became the most active in Ukraine in 2020, especially regarding the share of foreign investments, is well exemplified by the latest legislative initiatives. Among the most interesting (and controversial) innovations is the elaboration of the special legal regime offered for IT companies. As announced by the authorities, it would allow Ukraine to create one of the most powerful IT hubs in Central and Eastern Europe.
This innovation will cover not only classic IT development companies, but also companies involved in new promising areas especially relevant in the future, such as genetic engineering, bio-based economics, crypto-industry, artificial intelligence, robotisation, virtual reality and innovative infrastructure. It is expected that the new legal regime will offer IT companies a special taxation model (including preferences to stimulate angel investments), flexible conditions for hiring personnel, a separate procedure for interaction with state regulators, as well as a number of other innovations that are effectively used worldwide, but are still quite weak in Ukraine, eg, giving more effective legal protection to violations of non-disclosure or non-compete agreements as well as introducing elements of English law (warranties and indemnities, option and ESOP, convertible loans, etc).
Although existing legislative proposals still cause controversies among market players, and require serious polishing before adoption, this initiative is still hoped to become an important milestone in the development of the national IT sector as well as to conduce a large inflow of foreign investment.
Evolution of the Gaming and Gambling Industry
The legalisation of the gambling business has served as a catalyst for the development of online gaming. A vivid example is the privatisation of the four-star Dnipro hotel in the very centre of Kyiv by the e-sports organisation Natus Vincere for USD41 million. The new owners of the hotel set an ambitious goal "to make Kyiv the Mecca of world e-sports and bring Ukraine closer in level to South Korea and the United States", citing Alexander Kokhanovsky, the founder of the e-sports team.
The proposed investment will be about USD20 million. Considering that, as part of the large-scale privatisation, another attractive hotel facility in the centre of Kyiv, the President-Hotel, has been put up for sale, it can be assumed that the story of Natus Vincere marks the start of investment in the gambling business. Moreover, a number of large hotels in the capital, such as Fairmont Grand Hotel Kyiv, Premier Hotel Lybid, Premier Hotel Rus, Opera, have already received regulatory approvals confirming that their premises may be used for casinos.
In the wake of new models of co-operation with the state: a promising union of public and private interests
Privatisation has become and will undoubtedly remain one of the most important factors for Ukraine to attract foreign investment. After the temporary freezing of auctions in the framework of large-scale privatisation, Ukraine is preparing at last to unblock it. With unfreezing large-scale privatisation, a dozen of major state-owned enterprises, the value of which exceeds USD8.9 million, may again appear in the radar of profile investors, to mention a few:
Potential investors may find detailed information on each of the objects prepared for privatisation at the web-site of the State Property Fund of Ukraine.
Along with large privatisation objects, the sound stories of which are yet to come, one of the important investment activity drivers in the national M&A market was the privatisation launched in the summer of 2020 in the alcohol industry. Assets of the state enterprise Ukrspirit as well as distilleries (as legal entities) of the Ukrspirit Concern have already went private to bring about USD41 million to the state budget. As of now more than 30 other facilities of Ukrspirit expect to be acquired in 2021.
In general, the successful interaction between the State and investors in key industries and projects will predetermine the image of Ukraine's future investment attractiveness. This is not only about successful privatisation cases, but also about other forms of public-private partnership quite actively announced by Ukraine. An important green light for investors can be success stories of landmark concession projects, with the Kherson seaport transferred to the RISOIL Group and the Black Sea Port of Olvia to the Qatari QTerminals. Concessions of other seaports, railway and bus stations, as well as regional airports are yet to come.
Ukraine has been especially active in developing the infrastructure line within public-private partnership. Thus, on October 29 last year, the Ministry of Infrastructure, Ukravtodor, the World Bank and the International Finance Corporation in Ukraine presented the First Public-Private Partnership Program in the road sector. To date, six road sections with a total length of 1,500 km have been selected for potential pilot public-private partnership projects implemented within the Program at the first stage.
The importance of state involvement
Finally, to emphasise the importance of state involvement as a business partner for investors, the new Law on state support of large investment projects was signed by the President recently. According to this new piece of legislation, the state will provide its assistance to the projects with investments exceeding EUR20 million as well as complying with a dozen of criteria, including, among other, specific industries, in which such investment projects may be implemented (eg, waste management, extraction for further processing and enrichment of minerals, infrastructure, logistics, healthcare, tourism, sport, education, etc).
The eligible investor may expect from the state to provide exemptions from import customs duties and certain taxes, grant preferential right to use the land plot with further right to acquire it, provide utilities and transport infrastructure at the state's cost. On top of that, the state may also provide guarantees to the investors, such as, stability of conditions of commercial activities during implementation of investment project, compensation for losses incurred by the investor as a result of decision of state or municipal bodies, applicability of legislation that is effective as of the date of execution of investment agreement to the rights and obligations of the investor and so on.
Control over Foreign Investment and Sanctions: New Areas for Investors to Keep an Eye On
There is a clear tendency towards an increased role of the state as a potential player and partner in the M&A and investment market. This trend is manifested in the launch of privatisations, concession and other public-private projects, updating legislation and the rules of the game in the market. However, along with the state's impetuous desire to attract foreign investment a tightening control over foreign investments is also expected.
It is predictable that, in response to territorial and geopolitical threats, uncontrolled investment in key sectors of the national economy has sunk into oblivion. This is not only about the introduction of a foreign investment screening mechanism, which will soon become a reality for Ukraine, as was the case with the EU countries after adoption of Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union. This is also about strengthening the role of sanctions legislation, which was launched in Ukraine back in 2014 to respond to Russia's territorial aggression and the annexation of part of Ukrainian territories.
While a large number of sanctions implemented by the government since 2014 were synchronised with the sanctions of the United States and other Western countries against Russia, now there is a tendency for such sanctions to work against pro-Russian forces within the country itself. The sanctions recently applied against businessman and politician Viktor Medvedchuk and his wife as well as the closure of several television channels owned by a businessman closely linked to Mr Medvedchuk became a cause célèbre. Further to that, for the first time in a history, Ukraine introduced not only personal, but also sectoral sanctions, which are directed against the Republic of Nicaragua as a result of opening the consulate of Nicaragua in Crimea. Thus, sanctions legislation has gained in importance in recent years, and it is advisable for potential investors to conduct a thorough due diligence to determine whether they will face potential sanction restrictions when acquiring businesses in Ukraine or doing business with Ukrainian entities.
Reshaping and Refreshing Corporate Law
As regards the legal environment, another substantial vector of the pending law-making process relates to changing the legislative optics and adopting more business-oriented laws. The Draft Law "On Joint Stock Companies" (passed in its first reading) aims to resolve the problem of aligning the outdated legislation on joint stock companies with the EU standards and clarify certain issues regarding the limited liability companies' activity. Among key novelties to be implemented:
It is expected that the said amendments will significantly amplify the interest of the investors in the Ukrainian market.
Speaking of the Ukrainian jurisdiction's attractiveness, a particular trend cannot be ignored – increasing usage of Ukrainian law in M&A transaction, especially while establishing joint ventures with local partners. This became possible due to the recent developments in domestic corporate legislation that enabled the necessary flexibility for the parties to govern their relations within the Ukrainian law ambit.
A Glimpse into the Future: Still Uncertain, but Hopefully Promising
To recap, businesses and investment climate keep evolving rapidly, despite all the uncertainties carried by the pandemic and the restrictive measures taken by states. At the same time, the present situation can actually become a source of opportunities and a real catalyst for the development of new sectors and areas, provided that the State ensures clear and fair rules of the game and acts as a reliable partner.
If such conditions are created, the national M&A market can experience many landmark transactions, as Ukraine's potential is undoubtedly strong in many promising areas, including infrastructure, agriculture, IT, real estate, trade, heavy industry, and others. Examples of the latest successful concession and privatisation projects may greatly contribute to raising awareness and confidence of big international players about domestic investment environment.