M&A Report 2024: Ukraine

The war has substantially changed the M&A landscape in Ukraine. After a significant drop in 2022, there was a slight recovery in 2023, with modestly positive expectations for 2024.

Although a number of transactions remain undisclosed, according to publicly available market estimates, the total number of M&A transactions with a deal value exceeding $500,000 in 2023 jumped to 90, compared with 54 in 2022. The increase in value of the transactions is even more noticeable, having increased by five times to reach $1.7 billion. This, however, is still far from the pre-war level.

The most active sectors in terms of M&A transactions remain agriculture, IT and communications, energy, and infrastructure. In 2023, the market featured a number of transactions in the real estate market, which were mostly inspired by the exit strategy of the sellers rather than the investment appetite of the buyers.

There are several trends in the M&A market in Ukraine that started in 2022–23 and will most likely continue to exist in 2024.

Sustainable domestic businesses have proven their resilience and quick adaptation to the new reality. This explains their high activity in the M&A market and a number of investments in logistics and infrastructure assets.

For example, one of the largest Ukrainian agricultural holdings, Kernel, acquired storage assets in the port of Chornomorsk for more than $19 million and a sunflower oil trans-shipment terminal in the port of Reni for almost $25 million.

There was activity not only on the local market but in outbound deals as well. Indeed, the Russian invasion forced many businesses to consider ways to diversify their risks. Naturally, one of the options was to invest into neighbouring countries. Based on the authors’ discussions with various Ukrainian businesses, Poland and Romania are special focuses for many of them. Also, some seek targets in the Balkans, France, Germany, and Spain.

There has been particular interest in outbound investment in the agriculture, food industry, renewables, pharmaceuticals, and IT sectors.

The most recent public example of outbound investment by a Ukrainian business is the acquisition of a stake in the sports retailer Intersport Polska by Epicentr K, the leading home improvement domestic supermarket chain in Ukraine.

Ukrainian IT business explores a much broader geography of investments, which is logical, considering the peculiarities of the industry. More specifically, in the authors’ discussions with domestic IT market actors, interest in the north and east of America is often heard.

One of the examples when such interest resulted in a transaction is the acquisition by the venture fund Hypra of a minority stake in Trinetix, the US-based IT outsourcing company listed among the top 50 employers in IT in Ukraine.

Despite war challenges, large and sustainable Ukrainian IT companies continue to grow and attract new investments. One of the bright examples to mention is the investment of Horizon Capital, Reach Capital, and Hoxton Ventures in one of the globally leading online learning platforms with Ukrainian roots, Preply.

Multinationals continue to express limited interest in potential transactions in Ukraine. One of the factors for that is lack of political risk insurance coverage. However, a number of institutions – including DFC, MIGA, Investitionsgarantien der Bundesrepublik Deutschland, and Bpifrance Assurance Export – started to cover political insurance risks in Ukraine in 2023.

Although a flood of strategic investment from multinationals is not expected in 2024, it is hoped that the political risk insurance mechanisms will convince those who hesitate.

In 2023, there were a few remarkable transactions led by large international groups. One of them was the acquisition of Lifecell – the third-largest Ukrainian mobile network operator, covering 98.82% of Ukrainian inhabited territory – by NJJ Capital from Turkcell in a deal estimated at $500 million. Notably, after this deal, NJJ Capital, owned by the French billionaire Xavier Niel, announced the acquisition of assets of Datagroup Holding Limited, a national fixed-line and digital services provider.

After the beginning of the war in 2022, Ukraine initiated the process of nationalisation of assets owned by Russian companies and individuals. Ultimately, in 2023, a number of companies (including majority and minority stakes in companies) and assets were transferred to the State Property Fund of Ukraine and other governmental authorities. Most of these assets will be offered to private investors at auctions starting from 2024. These assets include various mineral resources deposits and extraction facilities, processing and production facilities, real estate objects, and financial companies.

Additionally, the state of Ukraine is working hard to relaunch the privatisation process to find more efficient owners for a number of large state-owned companies. Given that before the war the focus of so-called big privatisation was to attract foreign investors, it is highly likely that the State Property Fund will launch negotiations with international players to test the waters before relaunching the process. However, an acute state budget deficit is likely to push the State Property Fund to take action in 2024.

Therefore, despite the huge amount of homework done by Ukraine to enhance the privatisation process, private deals in the jurisdiction still substantially dominate over public deals.

After the war started, many expected to see deals related to distressed assets. However, there have not been many of those, which, to some extent, can be explained by a lack of media coverage and little willingness among foreign investors to purchase assets at a distressed price amid an unclear situation in the country.

Although there was more interest among foreign companies and international groups in acquiring assets in Ukraine in 2023, in most cases the deals involved profitable businesses rather than distressed assets.

Overall, in 2023 there were around 10 transactions in the real estate and construction sector, which looked like distressed transactions caused by the need of the sellers to exit. However, the low transparency of these deals does not provide sufficient grounds to categorise these transactions as distressed with any great certainty.

Although there has been an increase in the number of M&A deals in Ukraine in the second part of 2023 and at the beginning of 2024, the war makes positive expectations rather modest.

However, the authors expect that the following trends of 2022 and 2023 will continue to exist in 2024.

The Ukrainian technology and communications sector was the most interesting in terms of the number of M&A transactions in 2023, and it is likely that it will demonstrate further development in 2024.

Limited access of Ukrainian companies to financing sources will push them into negotiations with venture funds and strategic investors. As a result, new M&A deals and new rounds of financing are expected in the coming months.

Despite the global recession in the industry, most Ukrainian-rooted unicorns show promising development, which also means more investment rounds could be expected.

Ukrainian agriculture has suffered a considerable loss of land and a logistics crisis. As a result, the market players started to purchase logistics assets (terminals, elevators, etc.) to maintain their supply chains. They are also keen to invest in processing facilities to increase the ultimate added value of their products.

Finally, the new rules for the acquisition of agricultural land that entered into force in 2024 may create the grounds for new deals on the market.

2023 showed the interest of the market in commercial real estate assets. However, given that the deals closed in 2023 raised questions regarding the market value of the targets, the appetite of the market for new deals remains questionable.

Nevertheless, even if the reasoning for such deals was pushed by the need of the sellers to exit, it can be presumed that the same trend will feature in 2024 as well.

Following the announcement of the State Property Fund, former Russian business assets that were nationalised by Ukraine are expected to go on sale. The variety of such assets (which, in most cases, used to be quite sustainable) is broad, ranging from financial companies to mineral extraction facilities.

The standard legislative perimeter for M&A transactions includes:

• The Civil Code of Ukraine;

• The Commercial Code of Ukraine;

• The Law of Ukraine on joint stock companies;

• The Law of Ukraine on limited and additional liability companies; and

• The Law of Ukraine about state registration of legal entities, natural persons – entrepreneurs and public formations.

The major regulatory authorities that are involved in M&A transactions are the National Securities and Stock Market Commission (NSSMC) and the Antimonopoly Committee of Ukraine (AMCU).

The NSSMC, a state collegial body, carries out state regulation of the capital market, regulated commodity markets, the virtual assets market, and supervision of its participants; ensures an increase in stability, competitiveness, and development of the above-mentioned markets, as well as protection of investors' interests; and prevents abuse and crime.

In M&A deals, the NSSMC grants approval of an individual’s intention to acquire or increase a share in a professional participant of the stock market, and supervises the acquisition of significant stakes by interested parties. A transaction involving the acquisition of shares in a joint stock company (JSC) shall be reported to the NSSMC if it results in an increase by an individual of an existing interest in the target company to 10%, 25%, 50%, or 75% of the company's authorised (share) capital or votes in the company.

The AMCU, a state body with a special status, must ensure state protection of competition in business activities and in the field of public procurement.

The approval of the AMCU is required if the transaction qualifies as a concentration, and the respective financial thresholds established by the Law of Ukraine on the Protection of Economic Competition, dated January 11 2001 (as amended), are exceeded.

There may be other mandatory filings depending on the industry involved, and the peculiarities to business operations. For example, an acquisition of shares or a participatory interest in an insurer over certain thresholds (10, 25, or 50%) will require prior approval of the regulator. As a matter of practice, obtaining such approvals may be a highly bureaucratic and lengthy process.

In 2023, the NSSMC approved the procedure for the accounting of shares of limited liability companies and additional liability companies in the central depository (decision of the NSSMC No. 525, dated May 17 2023), and the procedure for holding general meetings of members of limited liability companies and companies with additional liability using electronic means of communication through the accounting system of shares (decision of the NSSMC No. 526, dated May 17 2023).

For M&A deals, an important advantage of a transfer in the accounting of participatory interests in companies to the accounting system of shares is the use of escrow accounts. This guarantees the fulfilment of obligations under a transaction involving the sale of participatory interests in a limited liability company.

Such a transfer should also improve the protection of ownership rights to a participatory interest against unauthorised loss and enable access to additional services from the central depository, which are provided through the share accounting system, including:

• Convening and conducting general meetings of the company's participants in electronic format using the electronic system of the central depository; and

• The exchange of messages and related documentation between the company and its participants.

Based on what has been seen in M&A deals during the war, certain peculiarities appear to be more common than others. They tend to reflect the anxiety of potential buyers and the concerns of sellers.

Considering the overall situation in Ukraine, sellers prefer to structure deals on the ‘outside Ukraine’ level (where possible). This includes the pre-deal structuring, involving the creation of a holding company, often in a European jurisdiction, with further centralisation of all shares and assets.

Before the war, the Ukrainian corporate legislation had substantially improved in the course of harmonisation with the EU acquis. In particular, the new regulation provided parties to an M&A transaction with a range of effective remedies allowing the protection of all interests. Following this improvement, the market in Ukraine observed a strong trend towards governing M&A deals by the Ukrainian corporate law.

The situation in Ukraine is dynamic and sellers in transactions are trying to protect themselves from negative changes that may occur before closing. Considering this, special attention is given to material adverse change, force majeure, and hardship clauses in transaction documents.

Indeed, these clauses became much more complex as they are aimed at covering not only local regulations but also martial law, conscription, and relocation of employees, as well as functions of governmental authorities, banks, state registers, etc.

Seeking to mitigate the uncertainty of war, the parties to an M&A deal often negotiate deferral conditions; for example, payment conditions linked to certain events and the transfer of title after particular dates.

Another peculiarity that may be highlighted based on the authors’ experience in recent deals is a greater interest in concluding shareholders’ agreements. Indeed, in deals that stipulate a partial acquisition of a company’s shares, the parties are more willing to outline all the possible outcomes of a joint venture. This creates more certainty for parties and the business in general, especially as regards deadlock situations and exit clauses.

The share of public M&A in Ukraine remains lower than private M&A. Public M&A in Ukraine are not common and mostly apply to public JSCs.

Shares in a public JSC can be acquired in a number of ways, including:

• The placement of newly issued shares (with or without a public offering);

• Acquiring redeemed shares;

• At a stock market; or

• Through a corporate merger.

The most popular way, however, is a direct acquisition of shares based on an agreement between the seller and the buyer.

Acquisition (whether directly or indirectly) of a controlling stake (more than 50%) or a significant controlling stake (more than 75%) of the ordinary shares of a JSC obligates the acquirer(s) (acting solely or in coordination with other persons) to make a mandatory offer to minority shareholders to purchase their ordinary shares.

There are exemptions from the mandatory offer obligation, which concern very specific cases such as inheritance of a controlling stake.

The acquisition of more than 95% of the shares in a JSC provides the buyer with a right to request minority shareholders to sell their shares at a fair price. Subject to certain exceptions, launching a squeeze-out procedure is only allowed once the mandatory offer procedure has been exercised or if it was not applicable.

The laws of Ukraine provide for the clear interdiction for the target company to perform actions that may prevent the acquisition. Considering this, the protection measures that are available in public M&A are rather limited.

The war and general uncertainty make buyers more careful while proposing the consideration mechanisms in private M&A transactions, save for distressed asset deals, where the payment of a 100% purchase price at closing is often the only model.

In most cases, the buyers have more bargaining power and impose their vision of the purchase price structuring.

The locked-box mechanism, which was common before the war, still exists, but it has become characteristic mostly for small and mid-size deals. At the same time, it is more often the case that buyers prefer to use completion accounts for the ultimate consideration.

Willing to diversify the war risks, buyers also often propose the use of earn-outs.

There are certain requirements that only apply to mandatory offers or other specific share acquisitions. For example, in mandatory offers, there are statutory requirements regarding:

• The determination of price;

• Forms of consideration (cash, securities, or a combination of the two);

• The term for minority shareholders to be able to accept the offer; and

• The deadline for payment of the purchase price by the offeror.

In all other aspects, the parties are free to determine the takeover/tender offer conditions.

A choice of a foreign law and jurisdiction is allowed if there is a so-called foreign element in the transaction, which is mostly the case when one of the parties to the transaction is a foreign company.

Before the war, the Ukrainian corporate law was mostly used for the structuring of private deals. However, since 2022, more foreign investors prefer to opt for a foreign law and jurisdiction. The motive here is not the lack of remedies in Ukrainian law (as it used to be), but more the perception of being more ‘protected’ beyond Ukraine.

This tendency is also supported by the preference to structure M&A deals outside Ukraine for numerous reasons, including the temporary currency control limitations.

The exit environment in Ukraine is challenging because of several reasons, including:

• Limited capacity of the Ukrainian stock market;

• Llimited access to capital markets;

• Low activity of private equity and venture capital funds (save for the IT industry); and

• High devaluation risk, as well as other negative changes in the country.

The trends of 2022 and 2023 described above can be expected to persist in 2024.