Ukraine: Getting the deal through

Author: | Published: 1 Apr 2012
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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 on).

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 company.

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Foreign investments are governed by the Law on Investment Activity (1991), which appears to be outdated.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 foreign investments.

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 transaction.

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 (investor);
  • 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 companies

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 factors.

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 ( 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 trading).

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' agreement.

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 changed.

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 companies.

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 effect.

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 shareholders).

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 foreign law.


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).

Regulatory approvals

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 met:

(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 35%; or

(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 law.

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 reciprocity principle.

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 Industry).

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 award.

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 privatisation).

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
  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 Bar Association.

Vasil Kisil & Partners
17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine
T: +380 44 581 7777
F: +380 44 581 7770

Oksana Krasnokutska
  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 registration.

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 & Partners
17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine
T: +380 44 581 7777
F: +380 44 581 7770