Ukraine: A guide to local law

Author: | Published: 1 Apr 2008
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Ukrainian legal regulations governing M&A are dispersed and not easy to deal with. Basically, M&A activity must be in compliance with the provisions of the Civil Code of Ukraine, the Economic Code, the Law of Ukraine On Companies (the Companies Law), as well as the Law of Ukraine On Securities and the Stock Market (the Securities Law).

Except for this legislation, participants in M&A transactions also have to take into account the Law of Ukraine On Protection of Economic Competition, On State Registration of Legal Entities and Natural Persons _ Entrepreneurs, and several privatisation laws. Moreover, the Cabinet of Ministers of Ukraine and government agencies such as the State Securities and Exchange Commission of Ukraine (SEC), the Antimonopoly Committee of Ukraine (AMCU), the National Bank of Ukraine (NBU) and the State Property Fund issue regulations that provide more specific rules dealing with some aspects of M&A.

Ukrainian M&A legislation was changed in the past year, mostly over procedural issues. And this situation seems to be rather strange given existing loopholes in the regulatory mechanism and general underdevelopment of M&A legislation. For instance, a specific act regulating the establishment and activity of joint stock companies (JSCs) has still not been passed. Legislators' reluctance to pass this vital act in the past few years is a disturbing factor in the sphere of corporate relations. Insufficient regulation of certain aspects of the legal status of JSCs, discrepancies in the legislation that regulate the activities of JSCs, and numerous corporate conflicts caused by these failings create an urgent need for the law to be adopted.

With regards to legal innovation, it is worth saying that although there has been more M&A in Ukraine recently, practice appears to be a set of simplified and adopted variants of renowned and tested M&A patterns and generally complies with international practice. Dominance by foreign capital in Ukrainian M&A provides little opportunity to apply innovative legal approaches, partially because foreign corporations are unwilling to deviate from their established internal policies and partyle because of a lack of understanding of Ukrainian business and legal realities.

As mentioned there has been an increase in M&A in Ukraine and this positive trend remains. Most transactions with Ukrainian targets were performed by foreign companies.

In 2007, the biggest Ukrainian M&A markets were finance and metallurgy, as it was in the previous two years. The total value of financial sector transactions amounted to more than $4.5 billion, with the majority (about $3 billion) in the banking sector. Significant takeovers were the acquisition of Ukrsotsbank by UniCredit (Italy) for $2.2 billion, TAS-Komerzbank by Swedbank (Sweden) for $730 million, Forum Bank by Commerzbank (Germany) for $600 million and Oranta insurance company by TuranAlem (Kazakhstan) for $100 million. Ukrainian banking assets continued to be of great interest to foreign investors. Given global growth in this area, Ukrainian metallurgy was one of the main targets for M&A. There were rare instances of significant M&A between Ukrainian companies – such as the acquisition of Smart-group by Metinvest for $4.5 billion. Other metallurgy M&A transactions were the purchasing of shares of five Ukrainian companies by Evraz (Russia) for $3.3 billion and the acquisition of Consolidated Minerals (Australia) by Palmary (Ukraine) for $1.1 billion.

Under Ukrainian legislation, foreign investors have equal legal treatment with residents in regards to to investment. Foreign involvement in M&A transactions is encouraged. There are only a few exceptions concerning foreign participation.

Under Article 13 of the Law of Ukraine On Television and Radio Broadcasting, foreign legal entities and citizens, as well as stateless persons, may not establish television and radio companies in Ukraine. Television and radio companies with foreign investments exceeding 30% of their capital stock are also prohibited. In accordance with Article 18 of the Law of Ukraine On Publishing Activity, companies with foreign investments exceeding 30% of their capital stock are not entitled to establish and operate publishing houses.

Due diligence

Legal due diligence is an integral part of a typical M&A process and is aimed at furnishing the top management of the buyer with impartial information on the economic and legal status of the target, and, possibly, recommendations on correcting defects in the documents and/or the activity of the target prior to the contemplated transaction. The due diligence is important as it affects the decision to acquire or invest in the target, the terms and conditions of acquisition, and, ultimately, the price of the equity (assets). Providing complete, accurate and trustworthy information is a main point of due diligence.

Typically, during a transaction disclosure for due diligence purposes relates to corporate structure and governance, finance, property (intellectual property), compliance with governmental regulations, filings and authorisations, operational matters, management and employees, material agreements, licenses and permits, disputes and litigation, tax matters and environmental matters.

Recent Standard & Poor's research revealed that Ukrainian companies have low information transparency. Public companies have no market incentive to disclose information. Moreover, obtaining public documents usually takes a long time. Most corporate information is not public. During the M&A process government offices, banks, and other businesses cannot release any information related to the target company directly to the buyer or its representatives.

SEC disclosure regulations cannot seriously diminish this lack of transparency. Ukrainian legislation does not contain special rules for a public tender offer, nor special disclosure requirements at the stage of tender offer issuance. Under Article 39 of the Securities Law, which provides disclosure requirements, the SEC must be notified when an owner of at least 10% of the stock of the company changes. However, this notification is made after a transaction closes.

It should be noted that although legal due diligence is a useful instrument for reducing risks in M&A, Ukrainian private companies, especially small and middle-sized ones, are still unwilling to comply with it.

The concept of "representations and warranties", widely accepted in international corporate practice, is not clearly addressed by Ukrainian legislation. Thus, enforcing the agreement's provisions envisaging such representations and warranties may be complicated or even impossible. Similar problems occur regarding typical covenants and clauses, such as conduct of business, no acquisitions, no dispositions and access to properties. This absence of enforcement undermines the significance and possibility of implementation of material adverse change clauses.

For the moment, the Ukrainian judicial system has not defined approaches to dealing with these sensitive issues.


According to Ukraine's effective legislation there are several regulatory authorities governing M&A.

The SEC, which monitors the activity of joint-stock companies, sets forth special regulations concerning reorganisation, such as the merger of JSCs, disclosure requirements, submission of periodical reports by JSCs and matters of issuance of shares and bonds. From an M&A standpoint, the significant regulations are the Regulations On Depositary Activity approved by the SEC on October 17 2006 No 999, the Regulations On Procedure of Registration of Issuance of Shares during Companies' Reorganisation approved by the SEC on December 30 1998 No 221 and the Regulations On Disclosure of Information by Issuers of Securities approved by the SEC on December 19 2006 No 1591.

The AMCU is a state authority with special status aimed at providing state protection to competition in business activity. The key aim of the AMCU is the formation and application of Ukrainian competition policy, which is pursued in several directions, including control of mergers and concerted actions by the subjects of business activity. One important regulation concerning M&A is Regulations on Concentration adopted by the Resolution of Antimonopoly Committee of Ukraine on February 19 2002 No 33-p.

The State Property Fund of Ukraine is a governmental body empowered to modify during privatisation the organisational and legal structure of state-owned enterprises by transforming them into open joint-stock companies, to sell state-owned property, including the property of liquidated enterprises and incomplete construction projects, and to involve foreign investors in the privatisation. The State Property Fund has adopted numerous regulations governing the process of privatisation of state-owned companies.

The NBU is the central bank of Ukraine, a specific central body of the state administration, which pursues common state policy in money circulation, credit and the strengthening of currency; it coordinates the banking system in general. The NBU grants permission for commercial banks' registration and reorganisation, licenses banking business, and performs banking regulation and supervision functions. Key NBU regulations relating to M&A are the Regulations On Procedure of Foreign Investment in Ukraine, approved by a Resolution of the NBU on August 10 2005 No 280, the Methodological Recommendations on Procedure for Reorganisation and Restructuring of Commercial Banks, approved by a Resolution of the NBU on October 9 2000 No 395 and Regulations On Procedure of Incorporation and State Registration of Banks, Opening its Affiliates, Representative Offices, Branches approved by a Resolution of the NBU on August 31 2001 No 375.

Other Ukrainian governmental bodies, including local state administrations and tax authorities, also regulate M&A transactions.

There are three basic structures for an acquisition: acquisition of shares, acquisition of assets and a merger.

Acquisition of shares

Acquisition of shares means that the buyer purchases the outstanding shares of the target directly from target shareholders. The buyer buys the shares and therefore acquires control over the target company. Since the target company is purchased wholly as a going business, this form of transaction brings all of the liabilities of business and all of the risks that target company encounters.

As a matter of practice in Ukraine, control over a public company is usually acquired through individual share sale and purchase agreements with the key shareholders of the target company. Frequently, a licensed securities trader acts as an intermediary by acquiring shares on the buyer's behalf. Using a public tender offer or a proxy fight is rare. The practical implementation of a public tender offer in M&A transaction is also rare, and the situation will remain the same until detailed legislation on public tender offers is approved. Given that public tender offers are not specifically regulated, they only require compliance with the general stipulations applicable to the sale and purchase of shares.

Acquisition of assets

An acquisition of assets means that the buyer buys the assets of the target company. The funds the target company receives are paid to its shareholders by dividend or through a liquidation procedure. This type of transaction may leave the target company as an empty shell.

Under Article 191 of the Civil Code of Ukraine all assets of a legal entity constitute an integral property complex that may be sold as an immovable property under relevant legislation provisions. The sale and purchase agreement of an integral property complex must be notarised.


Most takeovers in Ukraine are made by share or asset acquisitions; mergers are not common. It should be noted that there be an obligation for each merging party to purchase shares on the demand of shareholders that did not vote for the merger. A merger decision must be approved by a general shareholders' meeting of each merging company by a single majority vote.

Under Ukrainian law, a merger is regarded as a company's reorganisation. During a reorganisation all the rights and obligations of a legal entity are transferred to its legal successor.

The merger of banks is governed by the Law On Banks and Banking Activity and the Methodological Recommendations on Procedure for Reorganisation and Restructuring of Commercial Banks. The procedure for a bank merger is substantially different from the general corporate reorganisation laws and procedures.

Under Ukrainian legislation, hostile takeovers are not forbidden. There is no distinction in legal treatment between hostile and voluntary takeover bids (transactions). Furthermore, hostile transactions are not governed by special laws or regulations. In some cases hostile transactions may be hindered by the target's refusal to provide information necessary for the Antimonopoly Committee of Ukraine to make a decision.

The Law of Ukraine On State Regulation of Securities Market in Ukraine provides special penalties for failure to comply with disclosure requirements. The SEC may impose fines on company of up to $3,366 for failure to comply with disclosure requirements and up to $1,683 for failure to fulfill an SEC instruction.

Penalties for non-compliance with competition or antitrust regulations are well defined and may cause a material adverse effect to participants in M&A. The actual amount of a penalty may be (a) up to 5% of a company's sales proceeds in the previous fiscal year for unauthorised concentration, (b) up to 10% of a company's sales proceeds for the abuse of a dominant position or anticompetitive concerted practices, and (c) up to 3% for unfair competition. The AMCU can also invalidate illegal transactions or request that the Ministry of Economy of Ukraine temporarily prohibit the offending entities from carrying out cross-border transactions (an import/export ban).

Ukrainian law provides for administrative and even criminal liability for officials who violated regulations governing an M&A transaction.

While performing M&A transactions, legal entities are obliged to meet disclosure requirements and submit notifications to the respective regulatory authorities.

Pursuant to the Civil Code of Ukraine, a legal entity that has purchased 20% of the shares of a public company must publish this information.

Antimonopoly legislation contains criteria for when a buyer intending to obtain more than 25% or 50% of the voting equity in a target company is required to file an application with the AMCU for prior approval.

A buyer intending to acquire 10%, 25%, 50%, or 75% of the stock of a Ukrainian bank must apply for the consent of the NBU. The application must be accompanied by documents disclosing information about the participants and the substance of the contemplated transaction.

According to the Securities Law the SEC must be notified when an owner of at least 10% of the stock of the company has changed.

The dynamics of Ukrainian M&A over the past few years and global trends make it possible to suggest that the market value of M&A in 2008 will grow. This activity may force changes in legal regulations applied to M&A and further improvement in the implementation of M&A standards.

Competition and antitrust

Ukraine's antimonopoly legislation addresses merger control (concentrations), abuse of a dominant position, concerted practices, restrictive and discriminatory activities of business entities and alliances, and anti-competitive actions of state and local self-government authorities. During the past year the competition policy of the state regulatory authority and antitrust legislation applied to M&A were stable and predictable.

Antimonopoly issues related to M&A may be divided into two types: concentration issues and abuse of a dominant position. Application, ways of enforcing, and responsibility for violation of antimonopoly regulations must be considered prior to planned M&A.

Failure to obtain AMCU consent prior to executing an acquisition agreement not only makes this agreement null and void but also imposes significant financial sanctions. One of the participants must submit an application accompanied by a rather extensive set of documents in order to obtain AMCU consent. Thus, enforceability of competition and antitrust regulation is secured by procedural rules of obtaining consent and the extensive authority of the AMCU to investigate possible violations and to impose penalties based on investigation results.

Ukraine antimonopoly legislation establishes a set of criteria to define instances of abuse of a dominant position. A company is considered to enjoy a dominant market position if it holds (1) a market share of 35% or more (unless it can prove that significant competition exists), or (2) a market share of less than 35%, where no significant competition exists due to the comparatively small market shares held by its competitors. Several companies may be deemed to enjoy a dominant position on the same market where (1) the total market share of up to three companies exceeds 50%, or (2) the total market share of up to five companies exceeds 70%. It should be noted that enjoying a dominant position is not the same as abusing a dominant position.

The following practices may be treated as abuses of a dominant market position: setting prices or conditions that could not be established under substantially competitive market conditions; applying different prices or conditions to identical agreements without justifiable grounds; refusing to purchase or sell goods in the absence of other sources; and hindering market access for companies, or ousting them from the market.

Upon request, the AMCU may issue clarification letters on whether certain actions qualify as abuse of a dominant position.

M&A transactions are regarded as concentrations in the case of:

  • The merger of two companies, or the annexation of one company by another;
  • Direct or indirect purchases, acquisitions or acquisition of control over participation interests whereby certain thresholds (25% or 50% of the votes in the highest governing body of the respective company) are reached or exceeded; and
  • The acquisition of direct or indirect control over a company, where such control may be acquired through: the acquisition or lease of assets in the form of an integral property complex; the appointment or election of an individual as head or deputy head of a company's management or supervisory body, if that individual already holds a similar position in another company; the composition of the supervisory or executive body such that over 50% of the members occupy the same position in another company; or the establishment of a jointly-controlled full-function joint venture.

Participants in the above concentrations are required to obtain prior consent from the AMCU, once the following thresholds are concurrently exceeded:

  • Combined worldwide assets value or turnover of the participants of concentration for the previous fiscal year exceeded €12 million; and
  • At least two participants of concentration had worldwide assets value or turnover for the previous fiscal year in excess of €1 million each; and
  • Asset value or turnover of either participant of concentration in Ukraine for the previous fiscal year exceeded €1 million.

The documents required by the AMCU will depend on the underlying transaction. Should there be no grounds to bar the transaction in question, the application is processed within 30 days.

Author biographies

Iryna Marushko

Lavrynovych & Partners

Iryna Marushko is a world-renowned lawyer, recognised as a leading expert in corporate law and corporate finance. Prior to becoming a partner at Lavrynovych & Partners, Marushko practised law at Arthur Andersen, Magister & Partners and White & Case London, holding several senior positions throughout her career.

During more than four years at Andersen, Marushko's practice covered a diverse range of areas such as financial and banking law, international and domestic tax legislation, corporate law, securities law, currency regulation, privatisation and real estate. Marushko featured prominently as one of the top lawyers specialising in syndicated lending, structured commodity financing, securities issues and other international market transactions.

Marushko has managed and coordinated numerous large-scale tax and legal inspections in the discourse of due-diligence procedures and acquisitions, and has analysed a range of projects, such as joint activity, establishment, takeover and restructuring of companies.

Marushko holds a summa cum laude degree in law from the Kyiv National Economy University as well as a Master of Laws from the University of London.

Iryna Marushko has held an Attorney's Bar Certificate since 2000.

Dmytro Symanov

Lavrynovych & Partners

Dmytro Symanov is an associate with Lavrynovych & Partners Law Firm. His main practice areas are M&A, corporate law, foreign investments, real estate and land law. Symanov is an author and co-author of several publications on land law issues, corporate governance and the legal treatment of real estate transaction.

Symanov graduated summa cum laude from the Taurida National University in 2002. Before joining Lavrynovych & Partners he worked at several Ukrainian law firms and held positions as a state civil servant.