Despite some big M&A deals at the end of 2010 and 2011,
and a certain amount of revival of the market after the
financial crisis, the M&A market in Ukraine has not changed
drastically in the past year.
According to expert opinion, a reason for the slow revival
of M&A activity in 2011 is the different expectations of
the M&A parties as to the desirable price for the target.
Potential vendors still tend to significantly overvalue target
companies and fail to consider country risks. Thus sellers
often are unable to meet the real expectations of the potential
purchasers, especially foreign investors.
The key M&A sectors in Ukraine in 2011 were steel,
financial sector, chemical industry, agriculture, food and
beverage, retail and telecommunications. In the end of 2011 the
extensive privatisation of state-owned shares in energy
generating and supply companies was launched and is expected to
continue in 2012.
The Civil Code of the Ukraine (2004), the Economic Code
(2004), and the Law of Ukraine on Business Companies (1991) set
out the basic legislative framework for regulating M&A
activity in Ukraine.
The Law of Ukraine on Joint Stock Companies (JSC Law)
entered into effect in 2009 and establishes the fundamentals
for joint-stock companies' incorporation and activity,
including the mandatory requirements applicable to M&A
deals involving JSCs as target companies (protection of
minority shareholders, shareholders' agreements, and so
There is no specific legal act regulating public takeovers
in Ukraine, nor a specific procedure for public takeovers that
are made to obtain corporate control over the target
Protection of foreign investment
Ukrainian legislation generally provides equal opportunities
for both domestic and foreign investors for mergers and
acquisitions as there are only a few restrictions on foreign
investments in Ukraine (in particular a ban on acquiring
ownership title to farmland).
Foreign investments are governed by the Law on Investment
Activity (1991), which appears to be outdated. Nevertheless, it
is still effective and establishes the general principles for
investment activity in Ukraine irrespective of the country of
origin of the investor. The particularities of making foreign
investments in Ukraine are governed by the Law of Ukraine on
the Foreign Investment Regime 1996 (Foreign Investment Act) and
by the resolution on regulation of foreign investment matters
in Ukraine issued by the National Bank of Ukraine 2005.
The Foreign Investment Act provides guarantees for foreign
investors, such as prohibition of nationalisation of foreign
investments, protection from subsequent changes in regulation,
the right to claim damages suffered as a result of acts or
omissions by state bodies, and guarantees for repatriation of
The foreign investment regime in Ukraine was considerably
simplified in mid-2010/early 2011. In particular the mandatory
state registration of foreign investments made to Ukraine was
abolished, and provision of foreign investments through
investment accounts of foreign investors opened with Ukrainian
banks was allowed.
Common ways of obtaining control
The most common way to obtain control over a Ukrainian company
is by way of acquisition under the share purchase agreement(s).
In case of direct acquisition of shares in the Ukrainian target
issued as securities (regardless the governing law of the
agreement) a licensed broker must be involved in the
Under Ukrainian law, the following ways of obtaining control
over the company are also available:
- Capital injection: additional shares issue and
acquisition of all newly-issued shares by the new shareholder
- Asset deal: acquisition of the target assets under the
relevant sale and purchase agreement; and
- Legal merger: the merger or joining of two or more
Given the applicable procedures in the above cases, and many
regulatory requirements, these said options are less popular in
particular. Foreign investors usually decide to structure an
M&A transaction as an asset deal when there is long
corporate history of the target company, and there are certain
risks that cannot be totally removed in the corporate sphere,
for example, the breach of applicable law in the course of
company incorporation, shares issuances, historical
transactions with company shares or in the course of
privatisation of state property.
A deal from bidding to closing
The concept of public bids is underdeveloped in Ukrainian
legislation and the law does not specifically regulate the
procedure and mandatory requirements applied to the bids.
There are no mandatory requirements as to due diligence
procedures by virtue of law. Usually the scope of due diligence
is established by the buyer and the seller (their legal
advisers) at their own discretion. The scope of due diligence
depends on the corporate structure of the target, the
negotiation process, the target's business, the timeline
established by the seller, the number of bidders and other
In case of a hostile bid, no formal due diligence takes
place and the hostile bidder relies on publicly available
information or insiders' information. The minimum public
information about the companies is available to the potential
purchaser from several public resources. The Unified State
Register on Legal Entities and Individuals-Entrepreneurs kept
by the state registrars includes the company's basic data
including name and legal form of the company, amount of share
capital, director, types of main activities, and winding up and
bankruptcy procedures initiated against the company.
The official website of the State Institution Agency on
Development of Stock Market Infrastructure (www.smida.gov.ua)
holds information on JSCs corporate governance, annual reports,
financial statements, securities issues, and so on. Information
can also be gleaned from the printed mass media of the National
Securities and Stock Market Commission, and websites of the
Ukrainian stock exchanges (including information on sale
purchase agreements in respect of public JSCs shares, stock
exchange price of the shares, and the dynamics of share
Making an offer
As a rule, upon completion of due diligence by the bidder
and making an offer the purchaser(s) and the potential
seller(s) negotiate and sign a memorandum of understanding
(letter of intent) to confirm their willingness to enter into
the transaction on certain terms.
Generally, this document includes the substantial terms and
conditions of the deal, the parties to the transaction, basic
data on the target, preliminary price estimation, the
confidentiality and non-disclosure clause, the governing law
and exclusivity clause (in any).
Under Ukrainian law, however, the memorandum of
understanding is not binding upon the parties and is not
enforceable. So, it is treated as a gentlemen's agreement
between the parties and as an overall guideline.
If parties to the contemplated M&A deal wish to be bound
in relation to the contemplated transaction, they can enter
into a preliminary agreement, which is binding and enforceable
under Ukrainian law for transactions between companies. The
preliminary agreement must contain all substantial terms and
conditions established for share purchase agreement under the
Ukrainian law to be valid and binding upon the parties. By
virtue of law, the term of this agreement cannot be more than
one calendar year.
Also, the acquisition of a stake over 10% in a JSC must be
notified by the purchaser to the target JSC, the Securities
Commission and all stock exchanges where the target JSC is
listed as well as published in the official press 30 days
before the acquisition. The notice must contain information on
the amount, type and/or class of the target JSC, shares held by
the purchaser and each of its affiliates and amount of ordinary
shares to be purchased in the course of the transaction.
According the Law on JSCs, only direct acquisition of JSC
shares is subject to such mandatory notice.
The key transaction documents are usually the share purchase
agreement or framework agreement and shareholders'
Many M&A deals having foreign law elements (such as
non-Ukrainian shareholders) are often structured as indirect
acquisition of shares in Ukrainian target (usually as
acquisition of stake in parent company registered abroad). In
such a case the direct shareholder in Ukrainian target is not
Indirect acquisition however does not eliminate the need to
obtain merger clearance approval in cases specified below.
Ukrainian law does not set out specific requirements to the
form and minimal level of consideration under the share
purchase agreement. Generally, money consideration is the most
common. Consideration for shares can be less than the nominal
value of JSC shares except for the mandatory buy-out of
minority shareholders' shares when the purchase price cannot be
lower than their market value.
Ukrainian law does not prohibit making payments abroad for
shares in Ukrainian company between the seller and the
purchaser both non-Ukrainian entities. Some regulatory
requirements must be taken into account, however. In case of
further sale of acquired Ukrainian share and respective
settlements under this M&A transaction, the acquiring
company may face certain difficulties in case of failure to
provide the Ukrainian bank with the documents confirming proper
settlements for shares made abroad between two non-Ukrainian
Ukrainian law allows the choice of foreign law for the
agreement if it contains a so-called foreign element. As an
example, if a party to the agreement is a non-Ukrainian entity,
the agreement can be regulated by foreign law.
A framework agreement is commonly used for complex M&A
transactions to cover all required steps and actions. Ukrainian
law does not establish specific requirements to such type of
agreements. Such agreement can be also governed by foreign law
if the foreign element is present.
Generally, Ukrainian law recognises the concept of
shareholders' agreement in a limited way. There is an
understanding that all rights and obligations of the
shareholders and corporate governance issues will be governed
by the applicable law and the company's Articles of
Association. Since 2009, the Law on JSC set out that the
shareholders may enter into the shareholders' agreement, but
did not specify the allowed scope of issues that can be
governed by it and whether it is possible to deviate from the
corporate governance rules established by law.
So, since the applicable law does not give a free play to
shareholders in respect of the quorum, the decision-making and
some other basic issues usually covered by the shareholders'
agreement, its execution at Ukrainian level may have limited
Furthermore, on December 28 2007 the Supreme Commercial
Court of Ukraine, by its recommendations in respect of
shareholders agreements, stated that if the shareholders'
agreement is governed by foreign law (in particular, any
matters of corporate governance), it is to be treated as void
and may not be enforced in Ukraine for the reason of its
alleged inconsistency with public order. The recommendations
also state that shareholders may not decide on settlement of
the corporate matters of a Ukrainian company in an
international commercial arbitration forum.
Considering this, there is a common practice to execute the
shareholders' agreements at the level of non-Ukrainian holding
that is the sole shareholder of Ukrainian company rather than
the level of the Ukrainian company (provided the jurisdiction
of the said holding is suitable for such arrangements between
It is not a common practice in Ukraine to involve escrow
agent by the parties to M&A deal to insure the delivery of
shares versus payment of consideration. Given that the
applicable law is underdeveloped in this area, the escrow
agreement is often used only in large M&A deals governed by
The timing of an M&A deal largely depends on the
preparatory stage (due-diligence procedures, need for pre-sale
restructuring, and so on) and the conditions precedent,
including the need to receive regulatory approvals. On the
average, the M&A deal process may take from three months to
one year (the latter is usual for complex M&A transactions
with substantial scope of pre-closing undertakings).
Merger clearance is a standard pre-closing undertaking for
M&A deals in Ukraine.
An M&A transaction involving direct or indirect
acquisition of 25% (or more), or 50% (or more) in the target
company requires merger clearance with the Antimonopoly
Committee of Ukraine (ACU) if the following thresholds are
(i) the aggregate worldwide value of assets or the volume of
sales of the parties to the transaction over the last financial
year exceeds €12 million ($15.7 million), the aggregate
worldwide value of assets or the volume of sales of at least
two parties to the transaction exceeds €1 million, and the
aggregate value of assets or the volume of sales of one party
in Ukraine exceeds €1 million;
(ii) either party to the transaction has a market share over
(iii) the combined market share of the parties to the
transaction exceeds 35%, and the transaction takes place in the
same market or in adjacent markets.
Given that the above thresholds are very low as compared to
other jurisdictions, the ACU has proposed to establish a new
financial threshold for obligatory ACU clearance, such as:
(i) worldwide total asset value (turnover) by all parties to
the transaction to exceed €30 million) and total asset
value (turnover) in Ukraine of at least two parties to exceed
€2.5 million; or
(ii) total asset value (turnover) in Ukraine of at least one
party to the transaction to exceed €30 million and the
worldwide total asset value (turnover) by any other party to
the transaction to exceed €30 million.
The respective amendments were passed by the Ukrainian
Parliament in the first reading.
The Ukrainian merger clearance procedure takes up to 45
calendar days (Phase I). If no decision of the ACU is received
within 45 days after filing, the transaction is considered as
cleared. If more in-depth investigation is required with
respect to the transaction, the ACU may initiate Phase II,
which commences only upon providing it with the full set of
information or documents additionally requested and may not
exceed three months.
If the target company is a bank, the acquisition or increase
of a substantial shareholding (total stake up to 10%, 25%, 50%,
75%) in a Ukrainian bank is subject to preliminary approval by
the National Bank of Ukraine (NBU). Since November 7 2011, a
new regulation on granting NBU approvals on acquisition or
increase of a substantial shareholding in Ukrainian bank has
entered into effect which has complicated the procedure of
obtaining approval in Ukraine. The NBU must grant its approval
within three months after the filing of documents required by
Since January 9 2012, direct or indirect acquisition of 10%,
25%, 50% and 75% in non-banking financial institutions
(companies providing financial services) and professional
participants of the stock market (securities traders,
custodians, asset management companies, depository or stock
exchanges) requires the prior approval of the National
Commission for Financial Services Regulation or the Securities
Commission. The new procedure requires the investor (acquirer)
to notify the respective controlling authority one month before
the acquisition. Given that no subordinate legislation has been
elaborated so far, the procedure of granting such approvals as
well as the exact timing is unclear as for now.
Governing law and enforcement
Foreign law is often used as a governing law for transaction
documents in Ukraine. Although English law is the most favoured
for large M&A deals, Ukrainian law is still used for small
and sometimes medium-sized M&A deals or deals not involving
a foreign-law element.
Pursuant to Ukrainian law, the enforcement of a judgment of
a foreign state court or arbitration forum is granted by the
competent state court of Ukraine, provided its recognition and
enforcement is permitted under the respective international
treaty ratified by the Ukrainian Parliament; or on the basis of
Given the insignificant number of international treaties
ratified by the Ukrainian parliament and ambiguity as to the
application of the reciprocity principle, arbitration is widely
used for dispute resolution in M&A deals. The parties to
M&A deals usually choose international arbitration courts
(London Court of International Arbitration, Arbitration
Institute of the Stockholm Chamber of Commerce, and so on) or
Ukrainian domestic arbitration (International Commercial
Arbitration Court at the Ukrainian Chamber of Commerce and
An arbitral award rendered by the arbitration courts will be
recognised and enforced by Ukrainian courts based on the United
Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards of 1958 (New York Convention), to which
Ukraine is a party, without reconsideration of the merits of
The party seeking the enforcement of the arbitration award
must file with a respective local general court a motion for
enforcement accompanied by the original arbitral award or a
duly certified copy thereof, and the original arbitration
agreement or a duly certified copy thereof.
The Ukrainian court may, however, refuse recognition or
enforcement of an arbitral award if the party opposing
enforcement furnishes evidence that: (i) the arbitration
agreement is invalid; (ii) the party was unable to present its
case in the course of its consideration; (iii) the award falls
beyond the scope of arbitration agreement; (iv) the composition
of the arbitral tribunal was undue; or (v) the award has not
become binding upon the parties or has been set aside. The
recognition and enforcement may also be refused if the court
itself finds that (vi) the award contradicts public order of
Ukraine; or (vii) the subject-matter of the dispute is not
arbitrable under the laws of Ukraine.
Minority shareholder issues
Under the applicable Ukrainian law, direct/indirect acquisition
of control over a JSC does not trigger the right of the
majority shareholder to demand the JSC minority shareholders to
sell their shares in the JSC.
Thus Ukrainian law does not provide the majority shareholder
with the legal instrument to decrease the number of JSC
shareholders (a squeeze-out) except for by the voluntary
buy-out of JSC shares, which is subject to minority
shareholders' consent to sell their shares. It is expected that
this issue will be further developed because historically many
Ukrainian legal entities exist in the form of public JSCs as a
result of privatisation and because of that have a significant
number of minority shareholders.
According to the JSC Law a shareholder consolidating 50% or
more of a JSC ordinary shares must, within 20 days, offer to
purchase the ordinary shares from other shareholders (except
when the consolidation occurred as a result of
The minority shareholder that accepts such offer must then
sell its shares within 120 days from the date of notification.
The price must be at the market value and must be paid within
30 days of expiry of the acceptance period.
It should be noted that according to the JSC Law the said
rule is mandatory in case of direct acquisition and appears non
applicable to indirect acquisition.
||Anna Babych is a
counsellor with Vasil Kisil & Partners. Her areas of
expertise include advising on various corporate and
restructuring issues, legal support in cross-border and
domestic M&A transactions, including recommendations
on all transaction-related matters as well as assistance
in privatisation matters. She is a well-known
practitioner in the sphere of corporate governance.
Babych is experienced in advising on strategic corporate
initiatives and setting up optimal corporate structures
for businesses in Ukraine as well as legal planning and
structuring of the investments. She also has considerable
experience in coordination of legal due diligence
procedures in different industries, in planning and
structuring of M&A transactions, and in advising on
mitigation of transaction-related risks. She has profound
experience in merger clearances procedures with the
Antimonopoly Committee of Ukraine.
Ukrainian Law Firms (? Handbook for Foreign
Clients) mentioned Babych as one of the leading
practitioners in antimonopoly and competition law,
mergers and acquisitions, corporate law and
communications. She is a full member of the Ukrainian Bar
Association and a member of Kyiv City Bar Association,
and chairs the Stock Market Committee of the Ukrainian
Vasil Kisil & Partners
17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine
T: +380 44 581 7777
F: +380 44 581 7770
||Oksana Krasnokutska is a
leading associate in Vasil Kisil &
Partners’s corporate/M&A practice group.
Her work focuses primarily on mergers and acquisitions.
She has extensive experience in structuring, negotiating
and implementing domestic and cross-border transactions
as well as in performance of complex due diligences in
various industry sectors. She has advised many domestic
and foreign parties in a wide range of acquisitions and
joint ventures including advising on privatisation issues
of state-owned entities in Ukraine.
Specialising in M&A and general corporate and
commercial legal issues, Krasnokutska also has experience
in merger clearances procedures with the Antimonopoly
Committee of Ukraine. She advises foreign companies on
establishing their presence in Ukraine and provides
assistance with state registration of legal entities and
representative offices of foreign legal entities state
Krasnokutska is a full member of the Kiev City Bar
Association, and is the author of many publications; her
articles related to M&A and corporate issues have
been published in leading juridical periodicals.
Vasil Kisil &
17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine
T: +380 44 581 7777
F: +380 44 581 7770