After a period of political and economic instability which put M&A transactions in Ukraine into a dormant mode, the country is starting to show signs of revival. As the economy recovers and new legislation aimed at strengthening the rule of law and simplifying doing business is adopted, investors are again looking towards Ukraine with interest.
Over the last two years, Ukrainian corporate legislation has undergone a number of significant changes that have improved the business climate and made Ukrainian market more investor-friendly.
Protection of Investments
The following legislative changes aimed at protecting investors’ rights have come into effect: (1) The concept of derivative action was introduced, which allows shareholders holding 10% or more of a company’s shares to file an action on the company’s behalf against company officials for losses caused by those officials’ actions or failure to act; (2) The concept of independent directors was introduced for joint-stock companies; (3) The rules of approval of interested party transactions in joint-stock companies were improved; (4) The restriction on the maximum number of shareholders in private joint-stock company was removed.
Recently, long-awaited legislative changes with respect to joint-stock companies came into effect. The purpose of these changes was to lower the number of regulations on joint-stock companies, to protect joint-stock companies from hostile takeovers and manipulations, and to bring Ukrainian legislation regarding joint-stock companies into conformity with European directives. Among the changes that will have the most impact on M&A transactions involving joint-stock companies in Ukraine are: (1) The introduction of squeeze-out and sell-out procedures, which are brand new concepts in Ukrainian legislation (according to the squeeze-out procedure, a shareholder that acquired a dominant controlling stake of 95% and more of joint-stock company shares shall have the right to demand that the owners of the remaining stake sell their shares, with settlement for the shares done via escrow account, the concept of which was introduced by the same new legislation; the sell-out procedure provides minority shareholders with the right to demand that the shareholder holding the controlling dominant stake buy-out their shares at a fair market price); (2) The introduction of new rules and thresholds for the acquisition of controlling stakes in private and public joint-stock companies; and (3) New disclosure requirements with respect to indirect and direct acquisitions of shares in joint-stock companies and the approval of material and interested party transactions.
It is a well-established market practice in Ukraine that all significant M&A transactions are structured so that the shares of a non-Ukrainian holding company with underlying Ukrainian business are purchased and the transaction documents are made subject to English law. The main reason for this is the lack of flexibility in Ukrainian law, as well as a lack of trust in the Ukrainian judicial system. The new legislation on corporate agreements is expected to change the situation – at least in part – in terms of corporate (shareholders’) agreements between the shareholders of Ukrainian companies. The new law has not yet come into effect – it is awaiting the President’s signature – but it is expected to soon. The law will allow the shareholders of Ukrainian companies to regulate in the agreement the shareholders’ obligation to vote in a defined way, to approve the purchase or sale of the shares at a preliminary-defined purchase price, to oblige them to refrain from share sales, and so on. The law is not perfect though, and it still leaves room for uncertainties. Thus, it is too early to draw any conclusions as to whether the corporate agreements will be successful in replacing the English law shareholders’ agreements in Ukrainian M&A transactions.
Considering the details outlined above, we can conclude that there is a sufficient basis to believe that Ukrainian M&As are back on track, as evidenced by the new deals that have begun to appear on the market.
By Alla Kozachenko, Legal Director and Head of Corporate and M&A, DLA Piper Ukraine
This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.