M&A: Trends and Developments
Ukrainian legislation underwent numerous changes in 2009. Some of these reforms were in response to the ongoing financial crisis, while other laws appear to have been drafted as much-needed reforms of outdated Ukrainian legislation.
From the point of view of a potential foreign investor, one of the most crucial recent developments in Ukrainian legislation is the draft On Limited Liabilities Companies Act, which was submitted to the Ukrainian Parliament at the start of 2010. The current version of this Draft Act appears to be a copy of an analogous Russian law translated into Ukrainian and with some minor amendments added. However, it is difficult to predict changes that will be made to this Draft Act in the Ukrainian Parliament and whether this Draft Act will come into effect in 2010.
New On Joint-Stock Companies Act
With respect to laws which came into effect in Ukraine in 2009, one of the most important is the On Joint-Stock Companies Act of Ukraine, which came into effect on 30 April 2009. This date is especially important because the new Act requires all Ukrainian joint-stock companies (of which there are approximately 32,000) to reorganize themselves to comply with this Act within two years after it came into effect, that is, by 29 April 2011. As can be seen below, the reorganization of a Ukrainian joint-stock company is a serious undertaking.
In order to reorganize itself under the new Act, a joint-stock company must amend its Charter and its internal regulations, such as its regulations, which govern the activity of its Board of Directors and Audit Committee. The first matter all of these amendments must address is whether the joint-stock company is to be reorganized as a “public” or a “private” joint-stock company.
According to the new Act, any joint-stock company which has over one hundred shareholders must be organized as a public joint-stock company. Further, the Act requires public joint-stock companies to be listed on at least one stock exchange. Thereafter, it is only possible to purchase shares in public joint-stock companies on the stock exchange where the company is listed.
Reaction to this mandate has been mixed: requiring a company with 101 shareholders to reorganize as a public joint-stock company and to then go through the expense and reporting associated with a listing on a securities exchange has not proved to be popular.
Another, hopefully temporary problem with the new Act is that many provisions of the Act refer to regulations that the Ukrainian State Securities and Stock Markets Commission was supposed to adopt within six months from the date the Act was published. Unfortunately, as of the end of 2009, the Commission had not yet adopted these regulations, and it is not clear when such regulations will be ready.
On the plus side, the new Act protects minority shareholders better than earlier laws did. For instance, the new Act permits cumulative voting, so in many cases, minority shareholders of a public joint-stock company can ensure that they have at least one representative on the Supervisory Board. Cumulative voting was not permitted under prior Ukrainian laws although even under the new Act, the shareholders of a private joint-stock company must vote to include provisions permitting cumulative voting in the company charter.
The new Act also allows minority shareholders to protect their rights by forcing a company to buy out minority shares in some circumstances. For example, where a minority holder of ordinary shares voted against a merger, spin-off, change from public to private joint-stock company, execution of a so-called “significant transaction” by the company or a change in share capital.
Foreign Investments
On 24 October 2009 amendments to the On the Regime of Foreign Investments Act of Ukraine came into effect. These amendments were introduced in response to the financial crisis, though it is not clear that these amendments will please foreign investors.
First, the amended Act requires that all foreign investments must be carried out through special investment accounts opened in Ukrainian banks.
Second, the Act requires registration of all foreign investments. The Act also implies that the National Bank of Ukraine is to develop and adopt a procedure for state registration of foreign investments. As of January 2010, the National Bank had not developed such a procedure. The Act further states that if they fail to register their foreign investments, foreign investors will lose the privileges and guarantees contained in this Act such as, for instance, the guarantee against adverse changes in legislation, protection against nationalization and others.
In our opinion, this approach does not do much to improve the investment climate in Ukraine.
Antitrust and Merger Clearance
In planning a merger, acquisition, or other transaction, it is important to observe Ukrainian antitrust law. Even if a transaction relates to non-Ukrainian companies with no permanent presence in Ukraine but whose goods are sold on Ukrainian markets and income from such transactions exceeds EUR 1 million, such transaction may still require prior permission from the Antimonopoly Committee of Ukraine.
According to the basic Ukrainian law governing antitrust matters, the On Protection of Economic Competition Act, the term “concentration” is defined as:
1. A merger of business entities or an acquisition of a business entity by another business;
2. The acquisition of control by one or more businesses over one or more businesses or parts thereof, whether directly or through other entities, for instance, by way of:
a) direct or indirect purchase, or acquisition of assets in the form of an integral property complex or a structural unit of a business entity, obtaining the right to use assets in the form of an integral property complex or a structural unit of a business entity for management, lease, leasing, concession or otherwise, including the acquisition of assets of a business entity being liquidated;
b) the appointment or election of a person to the position of the chairman or deputy chairman of the Supervisory Board, Management Board, supervisory or executive body of a business entity, if such person already occupies one or more such positions in other business entities, or the creation of a situation, under which more than 50% of the total membership of the Supervisory Board, Management Board, or other supervisory or executive bodies of two or more business entities is held by the same people;
3. The establishment of a business entity by two or more business entities, which will independently carry out business for an extended period, provided that such an establishment does not co-ordinate competitive behaviour between business entities which have established the new business entity, or between them and the newly established business entity; or
4. The direct or indirect purchase, acquisition or management of shares, which ensure over 25% or 50% of votes in the supreme management body of the business entity in question.
If the following statutory thresholds are met, prior permission from the Antimonopoly Committee of Ukraine shall be required to carry out concentration:
— the total value of assets or the total turnover of all parties to the concentration, taking into account relations of control, over the last financial year, including assets or turnover outside Ukraine exceeds the equivalent of EUR 12 million and;
— the total value of assets or turnover, including assets or turnover outside Ukraine of at least two participants of the concentration taking into account relations of control exceeds the equivalent of EUR 1 million, and
— the total value of assets or turnover in Ukraine of at least one participant of the concentration taking into account relations of control exceeds the equivalent of EUR 1 million.
Furthermore, if any participant in the proposed concentration has a market share of 35% or more of any market affected by the concentration or a related market, the participants must seek advance permission from the Antimonopoly Committee of Ukraine regardless of the thresholds described above.
Taxation
In 2009, the State Tax Administration of Ukraine changed its opinion with regard to taxation of the transfer of assets of an acquired company to the acquirer, issuing several letters stating that in their opinion the transfer of assets of the acquired company must be treated as a so-called “conditional sale” and, therefore, subject to VAT. Prior to 2009 the State Tax Administration was of the opinion that such a transaction is not subject to VAT.
The opinion of the Tax Administration appears to be rather questionable, and may be challenged in court. Needless to say, this reversal has come as a surprise to participants on the merger market. Further monitoring of this issue shall be necessary in coming months.