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Managing Partner, Kyiv office of
Associate, Kyiv office of Baker McKenzie
Privatization in Ukraine
Shortly after the Revolution of Dignity in 2014, the Ukrainian Government embarked on a path of large-scale privatization. In August 2016, the Cabinet of Ministers of Ukraine amended the Regulation On Transparent and Competitive Privatization in 2015-2017 (the Privatization Regulation) defining the list of properties subject to privatization for 2016-2017. This list includes about 300 enterprises, among them a significant number of strategic enterprises in the energy, mining, infrastructure, chemical and agricultural industries. The “top” enterprises subject to privatization for 2017, as named by the State Property Fund of Ukraine (the SPF), are PJSC Centerenergo, PJSC Khmelnitskoblenergo, PJSC Ternopiloblenergo, PJSC Kharkivoblenergo, PJSC Mykolaivoblenergo, PJSC Zaporizhyoblenergo, PJSC Cherkasyoblenergo, President-Hotel Kyivsky, and the Bank for Reconstruction & Development.
With a view to facilitating the privatization process, in 2016 the Ukrainian Parliament adopted amendments to the Law of Ukraine No. 2163-XII On the Privatization of State Property (Privatization Law). The amendments, inter alia, (i) abolished the mandatory sale of 5-10% of the shares in a public joint stock company (JSC) belonging to Groups B and G (Ukrainian state strategic enterprises) on a stock exchange, (ii) established a mechanism for engaging advisors during the privatization of a JSC belonging to Group G and (iii) allowed resolution of disputes under a privatization agreement in an international arbitration court if this is set out in the relevant privatization agreement.
Objects of Privatization
Under the Privatization Law, the following state-owned assets are subject to privatization:
— Assets, production facilities, and structural units of enterprises that constitute integrated property complexes, which may include underlying state-owned land plots;
— Separate individually-defined property, which may include underlying state-owned land plots;
— Unfinished construction sites, which may include underlying state-owned land plots;
— State-owned shares in enterprises; and
— Socio-cultural objects, which may include underlying state-owned land plots.
The Privatization Law divides all state-owned assets into six groups, which are subject to different privatization methods. Group A includes state enterprises and their structural units that during a fiscal year have up to 100 employees and gross revenue of less than UAH 70 million and/or their fixed assets value is not sufficient for establishing a JSC.
Group B includes state enterprises and their structural units that during a fiscal year employ more than 100 employees and have a gross revenue of more than UAH 70 million and/or their fixed assets value is sufficient to establish a JSC.
Group G covers integrated state property complexes that have dominant market positions, companies of strategic importance, and those determined on a case-by-case basis by the relevant authorities to merit the application of an individual procedure by being unique in the sphere of production or intellectual property.
Group D covers unfinished construction sites and mothballed construction sites, including the underlying land plots.
Group E includes state-owned shares in private enterprises of any legal organizational form.
Group J covers social and cultural objects, including the underlying land plots.
The privatization of objects belonging to Group G, as well as properties in the fuel and energy industry, is carried out upon the decision of the Cabinet of Ministers of Ukraine.
There are certain objects that are exempt from privatization by law (certain cultural heritage sites; hydraulic facilities; seaport areas; agricultural land which can be privatized only after the adoption of the Law On Transfer of Agricultural Land, but in any case not earlier than 1 January 2018).
Participants in Privatization
Under the Privatization Law foreign individuals and legal entities may participate in the privatization process, along with Ukrainian citizens and legal entities. Foreign investors should pay for the privatization objects they intend to purchase in local currency or in freely convertible currency.
Under the Privatization Law the following entities may not purchase state-owned property:
— entities in which the state owns more than 25% of assets;
— entities, where any number of shares are owned / controlled by an entity-resident of the state, recognized by the Ukrainian Parliament as an aggressor (Aggressor State) (currently, the Russian Federation) or by the Aggressor State;
— state bodies, employees of state privatization bodies; state business entities or their subsidiaries of any legal organizational form;
— persons incorporated in off-shore zones (the list of such zones is compiled by the Cabinet of Ministers of Ukraine) or in jurisdictions listed in the Financial Action Task Force’s Non-Cooperative Countries or Territories;
— entities and/or individuals and/or their affiliates incorporated in the Aggressor State or entities and/or individuals subject to sanctions (Ukrainian or international);
— all persons that are directly or indirectly controlled by the persons mentioned above.
In addition, the Privatization Law contains a number of restrictions on potential purchasers of shares of JSCs that enjoy a monopoly (dominant) position in the national market for relevant products, or that are of strategic significance to the national economy and/or security. In such cases only a majority stake in such a JSC can be offered for privatization and privatization of such objects is performed on a case-by-case basis, and such privatization is strictly regulated.
The Privatization Law stipulates that foreign investors must submit a declaration of the origin of the funds which they intend to use as consideration for the property being privatized, regardless of the value of the purchase.
Methods of Privatization
Under the Privatization Law state-owned property may be privatized through the sale of state property at auctions, through a tender with open price offers or under alternative methods specifically established by law. As a general rule, state land plots underlying the objects subject to privatization are privatized together with such objects through auctions pursuant to the Procedure for the Sale of Objects Subject to Privatization together with Land Plots Owned by the State adopted by the Cabinet of Ministers of Ukraine.
The SPF may organize a tender for the sale of shares in a JSC in the form of an open auction. In such a case, the winner is determined on the basis of the auction held in accordance with the procedure established by privatization regulations.
There are additional requirements for the sale of shares in “strategic enterprises”. If an enterprise which is to be sold through an auction or a tender or at a stock exchange is identified as “strategic”, the bidders must provide information to the privatization authorities about connected undertakings and other additional documentation that may be requested by the SPF. If the stake to be acquired in a strategic enterprise exceeds 25% or 50% or is otherwise deemed to grant controlling powers in the highest management body of the enterprise, then the approval of the Antimonopoly Committee of Ukraine must be obtained prior to the purchase.
The lists of enterprises to be sold through auctions, tenders and buyouts must be approved by the SPF for state-owned property and by local councils of deputies for municipal property.
The title to privatized property is evidenced by the sale and purchase agreement entered into by the purchaser and the corresponding privatization authority. The sale and purchase agreement must be executed in written form and certified by a notary.
The Privatization Law provides for investment obligations which must be included in the sale-purchase agreement. These investment obligations include the following:
— Preservation of the main types of activity;
— Modernization of production;
— Compliance with mobilization targets;
— Ensuring social guarantees for employees;
— Environmental protection obligations;
— Repayment of debts.
The parties to the privatization process may also agree on other investment obligations.
The period for the fulfillment of such investment obligations, except the obligation regarding compliance with mobilization targets, may not exceed five years. Any transfer of shares (property) which are subject to investment obligations must be approved by state privatization authorities and is generally prohibited until the investment obligations are performed in full. If the state privatization authority approves such a transfer of shares (property), then the investment obligations must be assumed by the new owner of the shares (property) in question.
Expected Changes into Privatization Procedure
With the purpose of simplifying privatization procedures and implementing global international business best practices for privatization in Ukraine the SPF initiated the development of a new Privatization Law. Such a Draft of the Privatization Law has already been developed with the assistance of Baker McKenzie as the EBRD consultant and is currently at the stage of discussion by the main stakeholders (the IMF, IFC, EBRD) and Ukrainian authorities. The Draft Privatization Law, amongst other things, proposes:
— the division of all privatizable assets into two groups, namely large privatization assets and small privatization assets which is intended to be determined based on the value of assets criteria;
— mandatory involvement of an investment advisor for sale of any large privatization asset;
— the setting of the starting price for large privatization assets using the recommendation of an investment advisor and the starting price for small privatization assets should be determined based on the proposals of qualified bidders;
— introducing an electronic auction system for the sale of small privatization assets;
— possibility to govern a sale and purchase agreement on the basis of foreign law; and
— inclusion of representations and warranties into sale and purchase agreements.
After the agreement of the Draft Privatization Law by all stakeholders it should be passed to the Cabinet of Ministers of Ukraine and the Ukrainian Parliament, which is expected to happen by the end of 2017.