Ukrainian M&A: A rapidly developing market

Author: | Published: 1 Apr 2008
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M&A in 2007

In the past few years, the overall trend in the Ukrainian market has been rapid consolidation of many major industries. In 2007 the financial sector was the most active in terms of M&A transactions. Most M&A deals in the financial sector related to the purchase of shares of top Ukrainian banks. Pursuant to the National Bank of Ukraine, foreign investments in Ukrainian banking reached 35% by the end of 2007. Additionally, there was also an upward trend in both the number of M&A deals and figures in other sectors of the Ukrainian economy – for example, metallurgy and natural resource (extract) industries, real estate and construction. The wave of M&A activity is primary affected by European and American investors.


The purchase or sale of a company can be one of the most complex transactions, requiring planning, valuation, financing and structuring. Notwithstanding the number of M&A deals, legislative regulation in this area is rather poor, with no special legislation presently governing M&A in Ukraine. When completing the various phases of M&A one should comply with the requirements of following laws and regulations:

  • The Civil Code of Ukraine, Number 435-IV of January 16 2003, as amended.
  • The Commercial Code of Ukraine, Number 436-IV of January 16 2003, as amended.
  • The Law of Ukraine On Business Companies, Number 1576 XII of September 19 1991, as amended.
  • The Law of Ukraine On State Registration of Legal Entities and Individual Entrepreneurs, Number 755-IV of May 15 2003, as amended.
  • The Law of Ukraine On Protection of Economic Competition, Number 2210-III of January 11 2001, as amended.
  • The Regulations on Economic Concentration, adopted by the Anti-monopoly Committee of Ukraine, Resolution Number 33-p of February 19 2002, as amended.
  • The Law of Ukraine On Holding Companies in Ukraine, Number 3528-IV of March 15 2006.
  • The Law of Ukraine On Securities and Stock Market, Number 3480_IV of February 23 2006.
  • The Law of Ukraine On National Depositary System and Electronic Securities Circulation, Number 710/97 of December 10 1997, as amended.

In addition to this legislation, specific laws and regulations apply to mergers and acquisitions of commercial banks, insurance companies and other financial institutions. Moreover, it is likely that the Ukrainian parliament will adopt the Law On Joint Stock Companies in the near future. The Draft Law On Joint Stock Companies repeats many of the M&A concepts set forth by the Civil and Commercial Codes of Ukraine, but it provides for more detailed regulation of M&A procedures in terms of joint stock companies. In particular, the Draft Law On Joint Stock Companies sets forth rules for the distribution (conversion) of shares of a company involved in a merger. It determines the material terms for merger agreements and provides for protection of creditors of the target company. In Ukraine, no specific legal or regulatory framework governs cross-border business combinations. The structure of cross-border transactions varies depending on the particular circumstances of each transaction.

Structuring a deal

Under applicable Ukrainian legislation, there are several ways to structure a corporate acquisition. The transaction may take the form of a share purchase (participatory interest) or asset purchase, with the most widely used method being the share deal – in other words, the acquisition of control over a target company by means of entering a share purchase agreement (SPA) between the acquiring entity and the shareholders holding the most shares in the target company. In this case, no subsequent merger occurs. The acquiring company gains a significant number of shares in the target company, although the target company remains a separate legal entity.

A share acquisition requires approval of the acquiring company from the shareholders' meeting, as well as approval of the selling shareholders, if the transaction amount exceeds certain thresholds established by their constituent documents. In a share acquisition, the dissenting minority shareholders do not have statutorily granted appraisal rights. However, there are certain ways to compel the acquiring entity to offer minority shareholders the opportunity to join in the sale of the target company and give them the same price, terms and conditions as any other seller.

Ukrainian legislation also provides for circumstances in which merger of an acquiring entity and a target company results in the formation a new legal entity. In this case, the acquiring entity and the target company cease to exist and the new entity becomes their legal successor.

In addition to mergers, legal succession occurs in the following instances: (i) accession or takeover, that is, the acquiring entity takes over all property, rights and obligations of the target company and the latter ceases to exist; (ii) division of a target company into two or more legal entities, that is, several acquiring entities takeover all property, rights and obligations of the target company and the latter ceases to exist; (iii) spin-off of a target company into two or more legal entities, that is, several acquiring entities take over some of the property, rights and obligations of the target company and the target continues to exist with its remaining property, rights and covenants.

A merger or a takeover requires approval from the shareholders' meetings of both participating companies. In the cases of a division or spin-off, approval from the shareholders' meeting of the target company is required as well.

Although there is no general requirement for an acquiring entity to purchase the outstanding shares of any minority shareholders, pursuant to the regulations of the State Commission on Securities and the Stock Market, a joint-stock company shall carry out an appraisal of its shares and re-purchase them, provided that at the shareholders' meeting any dissenting shareholder(s) disapproved of the division or spin-off and filed a related written request with the company. The shares shall be redeemed at a price agreed on by the parties; however, this price must not be lower than the par value of the shares.

On the other hand, in joint-stock companies, minority shareholders have no means of influencing decisions of majority shareholders. So minority shareholders are often compelled to accept cash for their shares through the issuance of new shares to existing shareholders in which the minority shareholders are given the choice of having their proportionate interest in the target company reduced significantly, or of investing their money into the share capital over which they have no control and for which they would receive little or no return.

As an alternative to the share deal, an entity may acquire the business assets of a target company through an asset acquisition agreement entered into by and between the acquiring entity and the target company. When more than 50% of the total value of the assets is subject to the asset deal, it is advisable to obtain prior affirmative resolution of the shareholders meeting of the target company for the sale of the assets.

Due diligence inquiry

Notwithstanding the chosen way of structuring corporate acquisition, due diligence plays a critical role in the M&A process. Although Ukrainian legislation does not require conducting due diligence, its basic function is to assess the risks of a proposed acquisition. Due diligence not only allows one to discover hidden risks but plays a significant role in further structuring of the deal, helping to define the scope of representations and warranties to be included in a share purchase or asset purchase agreement.

The latest trend in Ukraine is involvement of vendor due diligence in the M&A process. Vendor due diligence is generally used when M&A transactions involve an auction. Vendor due diligence is carried out by the sellers' legal advisers and lays out information for any prospective buyers of the company. It often leads to a more expedient auction process and enables the seller to obtain a more attractive price for the sale. Besides, the vendor due diligence allows the seller to uncover potential problems and legal defects and to rectify them where possible. Although Ukrainian law does not directly impose an obligation on a seller to inform a buyer of the possible risks of a proposed acquisition, the seller should inform the buyer about the rights of third parties to the corporate rights in the target. Furthermore, provisions of the Civil Code of Ukraine governing sale-purchase agreements can be interpreted in a way that obliges the seller to inform the buyer about deal killers.

Peculiarities of closing

As already mentioned, M&A transactions are generally complex, with each stage of the transaction depending on the results of the previous. For example, the price for assets or shares is often determined by the results of the due diligence. Furthermore, the closing of a transaction under Ukrainian law is often conditioned by the occurrence of certain events. They include, but are not limited to, the following:

  • Involvement of a licensed securities trader as an intermediary in a stock acquisition (this condition is often omitted if the acquiring entity and the seller are non-residents).
  • Obtaining approval from the Anti-monopoly Committee (if applicable). Most M&A transactions are subject to anti-monopoly approval since the applicable legislation has rather low thresholds. Anti-monopoly approval is required when the aggregate book value of the participants' (buyer's group, seller's group and target's) assets or the aggregate value of the participants' sales turnover exceeds €12 million ($18 million) for the preceding financial year; and (1) the aggregate assets or turnover of at least two participants exceeds €1 million and (2) at least one of the participants has Ukrainian assets or had Ukrainian sales turnover exceeding €1 million for the preceding financial year. An M&A transaction is also subject to anti-monopoly approval where the market share of at least one participant (alone or with affiliates) exceeds 35% in the same or similar market as the one where the merger or concentration occurred.
  • Obtaining other regulatory approvals and permits, for example, from the National Bank in case of acquisition of shares in a banking institution (if applicable).
  • Obtaining approvals from shareholders or directors of companies participating in the business combination.
  • Obtaining approvals from shareholders' spouses (if applicable).

Because M&A transactions often depend on certain events, they require special mechanisms for closing to protect both the rights of the seller and those of the purchaser. Foreign jurisdictions often use escrow agreements for this purpose, although those accounts are not provided for under Ukrainian law. Escrow agreements can be entered only with an escrow agent in a foreign jurisdiction that provides for escrow services.

On the other hand, Ukrainian foreign currency regulations are often an obstacle for entering an escrow agreement with a foreign escrow agent. Although Ukrainian law restricts escrow services, Ukrainian banks have developed quasi-escrow agreements that allow for the transfer of money first to the account of the Ukrainian bank and then, upon fulfilment of certain conditions, the Ukrainian bank releases the entire sum or its part to the seller's account. A letter of credit is often used in M&A transactions in Ukraine. However, letter of credit is a rather expensive instrument in comparison with escrow services.

Other payment instruments used in foreign jurisdictions are not always effective in M&A deals with Ukrainian counterparts. For instance, there is often a grey price in asset deals. For taxation purposes, Ukrainian sellers often insist on using the book (balance sheet) value of the assets as a basis for the purchase price. As a rule, book value is lower than the purchase price to be paid by the buyer. This might raise issues in a case of avoidance of the sale agreement.

In Ukraine, many M&A deals involve structuring payments through offshore companies. There are a number of cases where a buyer will make payments through controlled offshore companies, mostly in Cyprus. Ukrainian shareholders may use offshore companies as a share sale vehicle. The problem with offshore companies is that they are usually just a shell entity with no operations or assets. If a party to an M&A transaction is an offshore company and it commits a breach, enforcement could become a problem. Additional security arrangements with the owners of a target company are recommended in such cases.

Court practice

Although Ukraine is a civil law country and judicial precedent is not officially recognised as a source of law, court practice should be considered when engaging in M&A in Ukraine. On December 28 2007 the Presidium of the Higher Commercial Court of Ukraine issued Recommendations Number 04-5/14 Regarding the Practice of Application of Legislation during Consideration of Cases Arising out of Corporate Relations. The Recommendations are guidelines for the uniform application of Ukrainian law in corporate governance by Ukrainian courts. The Recommendations have raised a number of questions and have been criticised by Ukrainian lawyers and businesspeople.

In particular, the Recommendations provide that an agreement between shareholders of a joint stock company registered in Ukraine shall be governed exclusively by Ukrainian law, otherwise, the shareholder agreement shall be deemed null and void. Moreover, a shareholder agreement should not provide for rules other than those envisaged by certain imperative norms, namely, provisions related to antitrust law. Transactions between company shareholders aimed at restricting or eliminating economic competition on Ukraine's commodity or other markets shall be void. By including arbitration clause in shareholders' agreements, shareholders of Ukrainian companies can try to avoid applying the Recommendations. However, in this case, there is a risk that arbitral awards will be unenforceable.

Ukrainian legislation and M&A court practice are less developed than in Western European countries and in the US. In spite of this, the pressure of a rapidly developing market and the quick growth in the number of M&A transactions are forcing legal advisers to develop mechanisms to overcome legislative gaps and obstacles.

Author biographies

Bogdan Borovyk

Beiten Burkhardt

Bogdan Borovyk is co-head of the corporate law practice group of Beiten Burkhardt, Kyiv. He joined Beiten Burkhardt Kyiv in October 2004, as one of the office's attorneys. He came to the firm after working with Beiten Burkhardt's Dusseldorf office in 2004 and previously as legal counsel for Procter&Gamble in 2001. Since joining Beiten Burkhardt, Borovyk has participated in several large German investment projects in the Western Union involving the automotive, metal processing and chemical industries. He has also participated in a consumer health industry corporate acquisition worth more than €2.3 billion ($3.6 billion).

Borovyk specialises in corporate and intellectual property law. He has advised numerous international clients on international trademark protection in Ukraine, M&A transactions, and corporate restructuring. He has been a participant in many of the firm's significant M&A transactions, including the share takeover of Bank Aval and acquisition of Ukrainian Processing Centre by Raiffeisen International, and he advised on Finnish Sanitec Group's establishment of a joint venture with Ukrainian Ukrbudmaterialy Group.

Borovyk is fluent in Russian, Ukrainian, English and German. He obtained a degree in law from the National University of Kyiv-Mogyla Academy (1996-2001) and an MBLT from the University of Mannheim, Germany (2002-2004).

Alexandra Gorak

Beiten Burkhardt

Alexandra Gorak is an associate of the corporate law practice group of Beiten Burkhardt, Kyiv. She joined Beiten Burkhardt in 2007. Her practice is in corporate and commercial law. She came to the firm after gaining professional experience with Litmash LCC in Donetsk, Ukraine where she acted as in-house counsel on corporate law issues, in addition to further experience as an associate with law firm Vasil Kisil&Partners in 2005 and 2006, and Salans in 2006 and 2007, supporting the corporate law practice groups of each of these firms. Further, Gorak acted as a senior lecturer at Donetsk National University, where she held the position of Civil Law and Procedure Chair.

Gorak has advised numerous local and internationally renowned companies on a wide range of issues involving corporate and commercial law matters, including M&A transactions, share acquisitions, company formations, negotiating on and executing relevant agreements, as well as assisting in obtaining official approvals for such transactions. Gorak completed her law degree at Donetsk National University (1997-2002) and her LLM at the University of Pittsburgh School of Law (2003-2004). She is fluent in English, Russian and Ukrainian.