1. What are the key laws and regulations that govern mergers and acquisitions in your jurisdiction?
In Ukraine, laws and regulations that may apply to mergers and acquisitions are represented by a large number of generally applicable legislative acts that also govern other types of transactions; laws or regulations that specifically govern just mergers and acquisitions are very few. By way of example, legislation in the field of competition law and legislation governing shares and other securities, will also be relevant to mergers and acquisitions.
The applicable laws and regulations include the following:
- the Civil Code of Ukraine (2003);
- the Commercial Code of Ukraine (2003);
- Law of Ukraine No. 1576-XII 'On Commercial Companies' (1991);
- Law of Ukraine No. 514-VI 'On Joint Stock Companies' (2008);
- Law of Ukraine No. 2210-III 'On Protection of Economic Competition' (2001);
- Law of Ukraine No. 448/96-VR 'On State Regulation of the Securities Market in Ukraine' (1996);
- Law of Ukraine No. 2664-III 'On Financial Services and State Regulation of Financial Services Markets' (2001);
- Law of Ukraine No. 3480-IV 'On Securities and Stock Market' (2006);
- Law of Ukraine No. 3528-IV 'On Holding Companies in Ukraine' (2006);
- Order No. 33-р of the Antimonopoly Committee of Ukraine (the "AMC") on Approval of the Regulation 'On the Procedure for Document Filing to the Antimonopoly Committee of Ukraine for Prior Approval of Concentration of Business Entities' dated 19 February 2002;
- Order No. 49-р of the AMC on Approval of the Methodology 'On Determination of the Monopolistic (Dominant) Position of Undertakings in the Market' dated 5 March 2002;
- Regulation 'On the Procedure of Registration and Licensing of Banks, Opening of Separate Subdivisions' affirmed by Resolution No. 306 of the Management Board of the National Bank of Ukraine (the "NBU") dated 8 September 2011;
- Regulation No. 2531 of the National Commission for Regulation of Financial Services Markets (the "Financial Services Commission") 'On Approval of the Procedure for Granting Permit to Acquisition of Significant Interest in Financial Institutions' dated 4 December 2012;
- Decision No. 817 of the National Securities and Stock Market Commission of Ukraine (the "Securities Commission") 'On Approval of the Procedure and Conditions of Licencing to Perform Particular Types of Professional Activity in the Stock Market (the Securities Market)' dated 14 May 2013; and
- Decision No. 394 of the Securities Commission 'On the Procedure for Approval of Acquisition of a Significant Interest in a Professional Participant of the Stock Market or Its Increase in Such Manner that the Aforesaid Person Will Possess or Control Directly or Indirectly 10, 25, 50 or 75 Percent of such Participant's Charter Capital or Related Voting Right in Its Governing Bodies' dated 13 March 2012.
2. What are the government regulators and agencies that play key roles in mergers and acquisitions?
The regulator that usually plays a role in mergers and acquisitions is the AMC, which is the national competition authority. Because the financial thresholds for merger clearance in Ukraine are quite low, a Ukrainian merger clearance will usually be required. Moreover, there are no foreign exemptions in Ukraine and therefore, a transaction involving foreign entities with no presence in Ukraine, can nonetheless require obtaining a Ukrainian merger control clearance.
The Securities Commission is the national securities regulator and will play a role in merger and acquisitions involving Ukrainian joint stock companies. A Ukrainian joint stock company ('aktsionerne tovarystvo') (each, a "JSC") is a company that issues shares. Unlike a JSC, a Ukrainian limited liability company ('tovarystvo z obmezhenoyu vidpovidal'nistyu') (each, an "LLC") – which is the other common type of corporate entities in Ukraine – cannot issue shares and hence, is not regulated by the Securities Commission (LLCs issue equity in the form of so called participatory interests). Accordingly, where a transaction concerns an LLC, the Securities Commission will not be involved. On the contrary, a transaction in respect of a JSC (and in particular, any transfer or issue of shares and also changing officers of a JSC) will involve some interaction with the Securities Commission. Approval of the Securities Commission will also be required for an acquisition of a Ukrainian securities dealer or underwriter, or another professional participant of the securities market.
Depending on the industry where a merger or an acquisition takes place, the NBU or the Financial Services Commission can also play a role. For example, approval of the NBU is required for an acquisition of a Ukrainian bank, whilst the Financial Services Commission approves acquisitions of other financial institutions, such as insurance companies and factoring companies.
3. Are hostile bids permitted? If so, are they common in your jurisdiction?
Ukrainian law does not use the terms 'hostile bid' or 'hostile takeover', hence they cannot be considered as being directly restricted or permitted. In Ukraine, executive and supervisory boards do not influence the shareholders' decision regarding disposal of their shares in a company to other persons, so traditional concepts of hostile bids do not apply.
Examples of hostile acquisitions of companies, in a broad sense, include a share issue leading to dilution of a shareholder's interest in a JSC and expelling a participant of an LLC on the grounds of failure to fulfil its obligations as a participant of that LLC.
The following rules, in particular, are relevant in the context of a takeover of a JSC:
- a person intending to acquire 10% or more of the shares of a JSC (a so called significant stake) is required to notify that JSC and the Securities Commission of the same, and such notification will need to be made at least 30 days prior to the intended acquisition;
- a JSC in which a significant stake is being acquired, is expressly prohibited from taking any measures to prevent that acquisition;
- a person holding 95% or more of the shares of a JSC has squeeze-out rights vis-a-vis the minority shareholders of that JSC (please see question 12 for more details); and
- a person that acquired more than 50% of the shares of a private JSC, or more than 50% but less than 75% and then 75% or more of the shares of a public JSC, is required to undertake a mandatory tender offer (the "MTO") process.
4. What laws may restrict or regulate certain takeovers and mergers, if any? (For example, anti-monopoly or national security legislation).
There are certain restrictions applicable to takeovers and mergers of Ukrainian companies. Such restrictions are primarily contained in the following legislation:
- Law of Ukraine No. 2210-III 'On Protection of Economic Competition' (2001), which mandates obtaining a prior merger control clearance for certain types of transactions where the financial thresholds for a Ukrainian merger clearance are exceeded;
- Law of Ukraine No. 2121-III 'On Banks and Banking' (2000), which requires obtaining approval of the NBU for a direct or indirect acquisition of 10%, 25%, 50%, or 75% of the shares (each, a 'Qualifying Stake') in a Ukrainian bank;
- Law of Ukraine No. 2664-III 'On Financial Services and State Regulation of Financial Services Markets' (2001), pursuant to which the Financial Services Commission's approval is required to acquire a Qualifying Stake in a financial institution other than a bank and other than a corporate investment fund (so such approval will be required in respect of, for example, insurance companies, leasing companies, credit unions, and pension funds). Without this approval, a purchaser of such financial institution will not be allowed to vote their shares in that financial institution;
- Law of Ukraine No. 3480-IV 'On Securities and Stock Market' (2006), based on which the Securities Commission approves an acquisition of a Qualifying Stake in professional participants of the securities markets, such as dealers and underwriters of securities;
- Industry-specific legislation, such
- Law of Ukraine No. 74/95-ВР 'On Information Agencies' (1995) – this law caps foreign investment in an information agency at 35% of all shares in that information agency; and
- Law of Ukraine No. 3759-XII 'On Television and Radio Broadcasting' (1993) – this law prohibits persons from those jurisdictions which under Ukrainian law qualify as offshore jurisdictions, from owning broadcasting companies in Ukraine; and
- Law of Ukraine No. 1644-VII 'On Sanctions' (2014) – certain restrictions can be applied to persons that have been sanctioned pursuant to this law; in particular, transactions with the shares of sanctioned persons may be banned and the sanctioned persons may be precluded from participating in privatisation tenders of Ukrainian state-owned companies or public procurement tenders in Ukraine.
5. What documentation is required to implement these transactions?
For an acquisition, a sale and purchase agreement is the main transaction document. The parties will also normally sign a confidentiality or non-disclosure agreement early in the negotiation process, and may sign a (non-binding) term sheet or a memorandum of understanding. An escrow agreement, providing for the retention of a portion of the purchase price, is also common. Depending on the specifics of each transaction, the parties may also sign assignment agreements in respect of existing debt, intellectual property rights, or other assets.
A transfer of shares in a JSC will not occur unless the transferee and the transferor give appropriate transfer orders to their respective custodian. The transfer orders are ancillary but necessary documents to have the shares transferred from the seller's account to the buyer's account. As regards an LLC, any change in the ownership of an LLC will need to be reflected in the LLC's charter ('statut'), which is the LLC's constitutional document. Hence, a necessary procedural step for an acquisition of an LLC is having a revised charter, with the name of the buyer in it, put in place. Because the charter is approved at a meeting of the participants of the LLC, it will be necessary to call and hold such meeting – this process will also need to be properly documented.
If the securities being acquired are shares in a JSC, a number of notices will have to be given to the Securities Commission; the process to be followed with the Securities Commission will depend on the percentage of shares being acquired. For example, where an acquisition concerns more than 50% of all shares, the buyer will have to go through the MTO process soon after closing of the original acquisition.
For a merger, which in Ukraine could be in the form of a merger ('zlyttya') or an accession ('pryyednannya'), apart from various ancillary documents, there will be a merger/accession agreement and a transfer act (the latter is a document setting out all outstanding liabilities of the ceasing company that will be assumed by the successor company). Both types of merger require approvals of the shareholders/participants, and also necessitate certain steps to be taken with the Securities Commission, such as registration of the share issue by the newly formed company.
6. What government charges or fees apply to these transactions?
Depending on the type of transaction, the following government charges or fees may apply:
- on a share issue, a state duty at the rate of 0.1% of the aggregate nominal value of the shares issued;
- on a sale of an LLC, a nominal fling fee for the registration of the revised charter of that LLC with the State Registrar;
- on applying for a merger clearance approval from the AMC, a filing fee in the amount of 1,200 times the individual tax-free allowance, currently 20,400 Ukrainian Hryvnias (or approximately, EUR 650);
- on a transfer of land, buildings, vehicles and certain other assets, a state duty at the rate of 1% of the purchase price administered by public notaries, or a notarial fee administered by private notaries (in the amount of not less than the state duty), plus a nominal filing fee for the registration of the buyer as the new owner in the relevant public registers (as applicable); and
- on a transfer of assets (other than those referred to in (d) above), a pension duty, at various rates, charged as a percentage of the purchase price;
There is no transfer duty payable on a transfer of shares in a JSC or of participatory interests in an LLC.
7. Do shareholders have consent or approval rights in connection with a deal?
Participants of an LLC and, to a lesser extent, shareholders of a JSC have certain rights which, depending on the percentage of equity held, may allow them to delay or prevent a deal.
A sale of participatory interests in an LLC to a third party is subject to the other participants' pre-emptive rights. Such pre-emptive rights are more similar to a right of first refusal, rather than a right of first offer, making it harder to sell participatory interests to a third party. As a general rule under the law (which can be changed in the LLC's charter), the participants will have one month to exercise their pre-emptive rights.
Moreover, a transfer of shares in an LLC to third parties may be altogether prohibited by that LLC's charter; in such case, an amended charter will have to be approved before the deal can be done, and this requires approval by participants holding more than 50% of all votes in that LLC. Finally, because any change in the ownership of an LLC is reflected in its charter, approval of the amended charter by the participants of the LLC will have to be obtained at closing of the deal.
Shareholders of a private JSC will not necessarily have pre-emptive rights on a transfer of shares to a third party, but for private JSCs with just a few shareholders, the JSC's charter will normally provide for pre-emptive rights.
Where a deal qualifies as a so called significant transaction of a JSC, approval of that JSC's shareholders will be necessary. In particular, a transaction with a value in excess of the value of 25% of the JSC's assets as per its latest annual accounts, must be approved by the JSC's shareholders. This, however, will be primarily relevant for the seller and not the target itself (i.e., where the seller is a Ukrainian JSC and it is disposing of its shares/participatory interests in another Ukrainian company).
Mergers of both types will require approval of the shareholders/participants.
8. Do directors and controlling shareholders owe a duty to the stakeholders in connection with a deal?
Directors generally owe duties to the company itself and must act in its interests, in good faith and reasonably, and must not exceed their powers.
Under the Ukrainian derivative action rules, a shareholder who holds at least 10% of all shares in the company or shareholders who in aggregate hold 10% or more of all shares in the company, may bring a derivative action before a local Ukrainian commercial court on behalf of the company against a company's director, seeking to recover damages caused by that director's actions. A company director may be liable for, in particular, exceeding his/her powers, providing inaccurate information to the shareholders, or failing to act where his/her duties required to take action.
Controlling shareholders do not, under the law, owe duties to the stakeholders on a deal.
9. In what circumstances are break-up fees payable by the target company?
There is no specific regulation of break-up fees payable by target companies. Accordingly, general principles of contract law will apply where the target agreed to pay a break-up fee and where the agreement on the break-up fee is legally binding. The Ukrainian contract law allows contractual penalties so a penalty in the form of a break-up fee should in principle be enforceable in Ukraine.
10. Can conditions be attached to an offer in connection with a deal?
Based on the general principles of the Ukrainian contract law, an offer must contain all essential terms and express the intention of the offeror to be legally bound if the offer is accepted. The law is silent regarding any other, not-essential terms or conditional offers. Conditions precedent can, and often, are used, e.g. obtaining the Ukrainian merger control approval. Conservatively, only those actions or events which are beyond the control of the parties to the contract, can be used as conditions precedent; however, recent court practice seems to have departed from that conservative view.
11. How is financing dealt with in the transaction document? Are there regulations that require a minimum level of financing?
There is no specific regulation on this matter, either for private or public deals. There are some statutory rules relating to purchase price and settlements that apply as part of the MTO process and the squeeze-out process. These include the requirement to pay a market price to the minority shareholders, to complete settlements within 30 days after the expiry of the acceptance period under an MTO offer and, in respect of public JSCs, to disclose the source of funds. During the squeeze-out process, an escrow account will need to be opened and used for the majority shareholder to transfer the purchase price for the minority shareholders' shares.
Also, under the industry-specific rules, buyers of Ukrainian banks and other financial institutions are required to disclose, to the relevant regulator, the source of funds to be used to finance the deal. Moreover, sufficient funds will need to be shown by an intended buyer of a Ukrainian bank, as per the methodology adopted by the NBU.
Based on the doctrine of the freedom of contract, the parties to the contract are free to agree on the method of deal financing and could, for instance, include a condition precedent to that effect.
Financial assistance is prohibited for JSCs. Specifically, a JSC is not allowed to give a loan in order to fund the purchase of its shares, or act a guarantor for the buyer under loan agreements concluded to finance the purchase of shares in that JSC, or issue shares for debt securities issued by the purchaser or for promissory notes.
12. Can minority shareholders be squeezed out? If so, what procedures must be observed?
The squeeze out procedure was incorporated into Ukrainian law only in March 2017. According to Article 65-2 of the Law of Ukraine 'On Joint Stock Companies', the dominant shareholder (defined as a holder of 95% or more of all shares) may acquire the remaining shares through the following key steps:
- the dominant shareholder notifies the Securities Commission and the JSC itself of its acquisition of 95% or more of all shares in that JSC;
- the JSC arranges for an independent valuation of its shares and, within 25 business days after the receipt of the dominant shareholder's notice, approves the market value of the minority shareholders' shares;
- the dominant shareholder opens an escrow account, with the minority shareholders as the beneficiaries of the funds to be deposited into that escrow account;
- within 90 days of its initial notice, the dominant shareholder sends an irrevocable offer, addressed to the JSC, requiring the remaining shareholders to sell all of their shares to the dominant shareholder;
- the JSC publishes such offer on its website and sends copies of the same to the minority shareholders;
- the dominant shareholder transfers the purchase price to the escrow account, and the funds are subsequently distributed to the minority shareholders (or paid out in cash); and
- the custodian(s) of the shares being acquired will then arrange for the transfer of the shares to the account of the dominant shareholder.
13. What is the waiting or notification period that must be observed before completing a business combination?
The critical waiting/notification period that must be factored in within a deal timetable is that in respect of a merger control clearance from the AMC.
An application for a merger control clearance can be made fairly in advance of the proposed transaction, on a proviso that such clearance is generally valid for one year so the transaction would need to be closed within one year of the date of the AMC's approval.
The AMC will accept or reject an application within 15 calendar days from the day of the receipt of the notification. If the AMC accepts the notification for review on substance, it must be considered within the following 30 calendar days. This brings the general notification period to 45 calendar days. However, if the AMC starts an investigation (a so-called Phase II review), the review process will be extended by up to additional 130 calendar days. For qualifying business combinations (e.g. where the combined market share of the parties does not exceed 15% in any Ukrainian market), there is a fast track procedure of up 25 calendar days in total.
14. Are there any industry-specific rules that apply to the company being acquired?
Industry-specific rules will apply to, in particular, the acquisition of a Ukrainian bank or a financial company other than a bank (e.g. an insurance company). An intended buyer of a Qualifying Stake in a bank will need approval of the NBU, whilst an acquisition of another financial company will require the Financial Services Commission's approval.
One of the very few restrictions on foreign investments relates to agricultural land. In a mergers and acquisition context, a Ukrainian company which is entirely owned by a foreign person may not own agricultural land in Ukraine.
15. Are cross-border transactions subject to certain special legal requirements?
Foreign investors in Ukraine generally have the same rights and obligations as Ukrainian persons.
On cross-border transactions, the parties have to be mindful of the remaining currency control restrictions, which were originally put in place in 2014 due to the market volatility and which are expected to be gradually abolished. In particular, there is a cap, currently in the amount of USD 5 million per month, on repatriation of dividends and sale proceeds by foreign investors.
16. How will the labour regulations in your jurisdiction affect the new employment relationships?
Ukrainian labour regulations are historically pro-employee. In particular, the employer's right to terminate an employment arrangement is quite limited; a notable (and a relatively recent) exception to that rule is the shareholder's/ participant's right to dismiss a company officer at any time.
Pursuant to the Ukrainian Code of Labour Laws (1971) art 36, in the event of a change in the ownership of the employing entity or a merger/accession involving the employing entity, the employment relationship continues. Employment in the context of a transaction could be terminated by way of a collective redundancy; this requires a minimum notice of two months.
At the same time, the employees generally do not have any consent rights on a business combination.
17. Have there been any recent proposals for reforms or regulatory changes that will impact M&A activity?
In respect of the recent regulatory changes as applicable to M&A, earlier this year the laws were changed to introduce squeeze-out and sell-out rights, and escrow agreements. Some earlier changes include simplified corporate registrations rules, a derivative action right, and improved rules regarding independent/non-executive directors and related party transactions.
There are currently proposals to allow irrevocable powers of attorney and also shareholders agreement containing English law style mechanisms. Overall, a further improvement of the legislation is expected, particularly as part of the implementation of Ukraine's obligations under the EU-Ukraine Association Agreement.
Originally published by LexisNexis Mergers & Acquisitions Law Guide 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.