1.1 M&A market
The Russian invasion of Ukraine in February 2022 had a significant impact on the country's economy and daily life, including the M&A market. Despite a small recovery in investment activity at the end of 2021, the first quarter of 2022 saw a complete disruption of investment activity in Ukraine, resulting in a significant decrease in both the number and value of M&A deals. The aggregate volume of M&A deals completed in 2022 was nine times lower than in 2021, and the number of deals with a value exceeding USD1 million decreased by more than two times compared to the previous year.
However, by the second half of 2022, large Ukrainian and international companies began to show renewed interest in Ukrainian business. In particular, nine large companies announced M&A deals expected to be completed in 2023, with values ranging from USD20 million to USD200 million.
Although 2023 is expected to remain challenging and unpredictable due to the ongoing war, it is clear that investors' interest in Ukraine will return as the country continues to regain its territories.
1.2 Key trends
The Russian invasion of Ukraine totally changed the overall economic environment, creating the following trends in the M&A market:
- acquirers have more bargaining power in negotiations;
- significantly lower valuations;
- discounting valuations for the percentage of the target's assets located in the occupied territories, with the acquirer's promise to pay the discount after the de-occupation of such assets;
- an increase in the number of force majeure clauses aimed at addressing hardships that may arise out of further escalation of the war;
- a shift from "locked box" to price adjustments; and
- a larger deferred payment component (up to 25% of the consideration).
1.3 Key industries
Despite a significant decline in M&A activity due to the Russian invasion, the Ukrainian IT industry continued to attract interest from local and foreign investors. This is because the products of Ukrainian IT companies are mainly targeted towards Western markets, and their employees can be easily relocated. As a result, the Ukrainian IT industry has been less affected by the war than businesses that are linked to the territory of Ukraine.
2. Overview of regulatory field
2.1 Acquiring a company
The primary legal technique to acquire a company in Ukraine is through a negotiated acquisition of shares. Rather than acquiring shares in a Ukrainian company directly, the acquirer often purchases a stake in an SPV that holds the Ukrainian shares.
Asset deals are common, as it is often important for acquirers to leave certain historical risks of the target behind and acquire a business operated by a "clean" legal entity. However, the concept of the transfer of a business as a going concern is not developed in Ukraine, and in practice an asset deal presumes the need to enter into many separate legal instruments, making it hard to complete such an acquisition in a co-ordinated manner in a short timeframe. For this reason, hybrid deals where the seller transfers its business to a newly created legal entity and then sells it to the acquirer are a common means of structuring a deal.
The acquisition of shares on a regulated market is not common due to the small number of Ukrainian companies whose shares are admitted to trade, and an insignificant proportion of shares that are free floating.
2.2 Primary regulators
The primary regulators for M&A activity in Ukraine are the Antimonopoly Committee of Ukraine (AMCU), the National Securities and Stock Market Commission (NSSMC) and the National Bank of Ukraine.
AMCU approval is required for most significant M&A deals (see 2.4 Antitrust Regulations).
The NSSMC is a regulator of the capital markets and has a certain degree of oversight over Ukrainian companies in the form of joint-stock companies (JSCs).
Acquisitions of qualifying holdings (10% or more) in financial institutions require notifications to and/or prior approvals of the relevant regulator:
- the NSSMC for professional participants of capital markets and organised commodities markets (investment firms, regulated market operators, asset management companies, etc); and
- the National Bank of Ukraine (NBU) for banks, insurers, payment services providers and other financial institutions.
2.3 Restrictions on foreign investments
Even though Ukraine is generally open to foreign investment, certain transactions may be prohibited or require prior approval, as follows:
- the acquisition of a qualifying holding in a Ukrainian financial institution is subject to notification to and/or prior approval from the relevant regulator (see 2.2 Primary Regulators);
- foreigners, stateless persons, foreign legal entities and foreign states are prohibited from owning agricultural land in Ukraine or acquiring shares or membership in legal entities that own agricultural land in Ukraine;
- persons registered in offshore jurisdictions, stateless persons and residents of aggressor states may not own shares in certain media organisations, and foreign ownership in information agencies is restricted to 35% in aggregate;
- privatisation is prohibited in respect of certain sectors (nuclear energy and nuclear waste management, the production of weapons used by the state's armed forces, international airports, public railways, etc), and residents of aggressor states and entities controlled by them may not participate in privatisation, nor may entities registered in offshore jurisdictions or counties on the FATF Non-Cooperative Countries List; and
- most licences for licensed types of activity may be annulled if it is established that a licensee is controlled by residents of an aggressor state.
Foreign investment may also be restricted by personal or sectoral sanctions imposed by Ukraine.
2.4 Antitrust regulations
Ukraine maintains a merger control regime that is similar to the EU in many respects. Mergers, acquisitions of shares (resulting in 25% or 50% of voting rights), certain acquisitions of assets, acquisitions of control in other forms, the creation of joint ventures and other types of concentration require the approval of the AMCU if the relevant financial thresholds (asset value or turnover of the parties) are exceeded. Many non-Ukrainian deals are caught by the merger control regime because the assets and turnover of the controlling seller are attributed to the target. In addition, non-compete obligations and other potentially anti-competitive arrangements require separate approval for concerted practices.
2.5 Labour law regulations
Ukrainian law protects employees during organisational changes such as mergers, acquisitions and restructurings. Under Ukrainian law, in the event of a merger or other reorganisation, all rights and obligations of the former employer pass to the new employer, including those under employment agreements. Based on this rule, employment agreements are not terminated automatically due to a merger or other reorganisation. However, the successor employer is entitled to terminate employment agreements due to a general procedure of staff reduction.
When an investor acquires a company that is a signatory to a corporate collective agreement or in the reorganisation of such a company, the collective agreement remains in effect for no longer than one year. During this one-year period, a new collective agreement must be negotiated by the employees and the employer.
2.6 National security review
Ukraine does not have a specific national security review regime. The Ministry of Economy of Ukraine has presented a number of draft laws on screening foreign investments into business entities that have strategic importance for the national security of Ukraine, but no such law has yet been put to the vote before the Ukrainian parliament.
Under the latest draft of the proposed law, the screening regime is to apply to investments into a specific list of industries, including nuclear energy and waste, cryptography, defence and military, aviation and space. A special commission is to be created to approve foreign investment into such industries.
Nevertheless, Ukraine saw one example of an M&A deal that failed due to national securities concerns: the attempted takeover of Motor Sich by Chinese company Skyrizon. Due to a lack of specific legislation, the deal was prevented based on other legal mechanisms, such as sanctions for Skyrizon's failure to obtain the required AMCU approvals for the stakebuilding that it had already made and the seizure of Skyrizon's shares by the state within a criminal proceeding.
Even though the national security review of foreign investment is more pertinent than ever before because of the ongoing armed aggression of the Russian federation against Ukraine, there is no clarity at this point on when and in what form such a regime could be implemented.
3. Recent legal developments
3.1 Significant court decisions or legal developments
There have been no legal developments specifically targeting M&A transactions over the past three years.
However, in its endeavour to harmonise Ukrainian law with the law of the European Union, the Parliament of Ukraine passed several laws that could positively impact the M&A environment in Ukraine. It is quite difficult to highlight one single development but the following developments are among the most significant:
- a clear division of public and private JSCs, with private JSCs being less regulated and more flexible;
- enhancing legislation on capital markets to bring it in line with MiFID II, distinguishing qualified and non-qualified investors by providing more protection to the latter, establishing higher prudential standards for professional participants of the stock market (brokers, custodians, clearing companies, asset managers, etc); and
- enhancing corporate governance in companies by providing JSCs with a right to have either a one-tier or two-tier corporate governance structure, establishing a clear and excessive list of the fiduciary duties of a JSC's officers.
3.2 Significant changes to takeover law
Although a new version of the Law of Ukraine "On Joint Stock Companies" was passed in July 2022 and took effect on 1 January 2023, it did not significantly change takeover legislation. There have not been any publicly communicated intentions to substantially review the takeover legislation in the near future.
4.1 Principal stakebuilding strategies
It is not common for a bidder to build a stake in the target prior to launching an offer, for the reasons discussed in 4.3 Hurdles to Stakebuilding.
4.2 Material shareholding disclosure threshold
Ukrainian law requires disclosure to the JSC and the NSSMC by a direct or indirect holder of voting shares, voting rights or financial instruments (entitlements to acquire and instruments with similar economic effect), or a combination thereof, that amounts to a 5% holding (subsequent disclosure thresholds also apply) in a Ukrainian JSC, no later than three business days after acquisition.
The disclosure must include detailed information on voting shares, financial instruments and voting rights, and needs to be made when the holdings relating to a specific JSC reach, exceed or fall below:
- 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 95% for public JSCs; and
- 5%, 50% and 95% for private JSCs.
However, the disclosure deadlines have been suspended during the period of martial law.
4.3 Hurdles to stakebuilding
The main hurdles to stakebuilding are:
- the requirement to disclose an intention to acquire 5% or more shares (see 7.1 Making a Bid Public) and the crossing of material shareholding disclosure thresholds (see 5.2 Market Practice on Timing);
- the impact of the stakebuilding on the mandatory offer price, if applicable (this price may not be less than the price for which the acquirer has purchased shares within the last 12 months); and
- the concentration of shares in a Ukrainian JSC by majority shareholders and the limited availability of free float shares on an open market.
4.4 Dealings in derivatives
Dealings in derivatives are generally allowed in Ukraine. However, the legal framework for derivatives trade was only introduced in 2021, and the forming of the derivatives market in Ukraine was hampered by the full-scale invasion of Ukraine in 2022.
4.5 Filing/reporting obligations
The disclosure thresholds set out in 4.2 Material Shareholding Disclosure Thresholds apply to derivatives. A list of instruments that are subject to relevant disclosure obligations was approved by the NSSMC, and includes options, futures, stock warrants and forwards.
There is no requirement to publicly disclose the purpose of the acquisition or the intention regarding control of the company. At the same time, such information may be requested by the relevant regulators (AMCU, NSSMC and NBU) in the course of reviewing applications for the approval of a concentration/acquisition of a qualifying holding in a regulated entity.
5. Negotiation phase
5.1 Requirement to disclose a deal
Not all companies are required to disclose acquisition transactions regarding their equity.
However, if the target is a JSC, it must disclose changes in its shareholding structure if as such changes result in the stakes in the company exceeding, falling below or equalling certain thresholds imposed by law. These thresholds are different for public and private joint-stock companies. Disclosure must be made after the relevant deals that caused the change in shareholders have been completed.
5.2 Market practice on timing
Market practice on the timing of disclosure does not differ from legal requirements.
5.3 Scope of due diligence
The scope of due diligence depends significantly on the type of business that is subject to acquisition.
Generally, the following areas are subject to diligence in any acquisition:
- corporate: a review of title and lack of encumbrances on shares in the target, ensuring there are no insolvency proceedings in respect of the target;
- assets: a review of title to the core assets of the target and a review of compliance with the statute by the target when constructing fixed assets;
- regulatory: a review of the compliance of the target's operational activities with statutory requirements (fire safety, waste management, etc);
- contracts: a review of key contracts (both cost- and income-bearing) to ensure the sustainability of the target's operational cash flow;
- employment: a review of the employment of key personnel to ensure there are no "golden parachutes" or other forms of excessive remuneration, and a review of the target's compliance with labour laws; and
- litigation: a review of material disputes to which the target is a party.
However, when acquiring tech companies, the focus of the investigation shifts from fixed assets and litigation to an evaluation of intellectual property and data protection.
5.4 Standstills or exclusivity
Standstill agreements are not commonly used. In Ukraine, the management and board of directors of a target company have limited power to influence the acquisition process. The law prohibits the target company from preventing the acquisition of its shares once the acquirer has expressed its intention to do so.
In contrast, exclusivity agreements are crucial in any private M&A in Ukraine. A buyer typically insists on exclusivity as a condition for committing resources in the acquisition. However, in auction processes, acquirers proceed without exclusivity until they enter into binding transaction documents.
5.5 Definitive agreements
The law does not define the terms that must be included in the definitive agreement (stock purchase agreement).
However, the law requires certain terms to be included in the mandatory tender offer, such as:
- the identity of the acquirer;
- the purchase price for shares and how it will be determined;
- the process for paying the purchase price; and
- the type of consideration to be given for the shares (eg, cash or stock).
These terms are important for the effectiveness of the definitive agreement and are therefore typically included in the stock purchase agreement.
6.1 Length of process for acquisition/sale
The length of the acquisition process differs depending on a number of factors, including the following:
- the industry of the target: the acquisition of a bank or financial institution generally requires more time due to the necessity to obtain approval from the NBU;
- antitrust issues: if the transaction is subject to merger control, obtaining clearance will require a certain amount of time; and
- the risk appetite of the acquirer: if the acquirer wants all deficiencies of the target to be cured before closing (for instance, a complete tax audit to ensure there are no tax liabilities) and thus insists on an excessive list of conditions precedent, the satisfaction of such conditions may require excessive time.
Generally, the process of a business acquisition usually takes from three to eight months, but may take longer in certain circumstances.
6.2 Mandatory offer threshold
The following mandatory offer thresholds apply to the acquisition of shares in JSCs:
- 50% for private JSCs; and
- 50% and 75% for public JSCs.
The mandatory offer must be made to all shareholders in relation to all unencumbered shares.
There is an exception whereby the mandatory offer requirement does not apply if the threshold is crossed due to the acquisition of shares by way of inheritance or legal succession in the case of liquidation of a legal entity.
Cash is the most common form of consideration in Ukrainian M&A deals; shares are rarely used.
The valuation uncertainty requires the parties to structure price adjustment mechanisms to bridge value gaps, with the most common being as follows.Completion accounts – while "locked box" transactions were more popular up to 2022, the uncertainty created by the Russian invasion made buyers more willing to review the target's financials at closing. The approach to completion accounts in Ukrainian deals generally includes a review of cash, debt and net working capital, while buyers sometimes insist on a review of the sufficiency of the target's capital assets.
War discounts – since the beginning of the Russian invasion of Ukraine, part of the territory of Ukraine has been occupied by Russian military. As both sellers and acquirers remain positive as to the outcome of the war for Ukraine, they often agree to discount the purchase price for the percentage of the target's assets that are located in the occupied territories, with the acquirer's covenant to pay the remainder after the de-occupation of such assets. The capital expenditure required for the restoration of such assets are usually subtracted from the remainder of the purchase price.
Earn-outs – these are quite common in private equity deals where top managers, who are often also shareholders, are incentivised to maximise the company's performance. Earn-outs are also used in situations where the acquirer has doubts about the sustainability of the target's growth due to the instability of the market in which the target operates, despite its strong past performance.
Anti-embarrassment protection – when sellers doubt the fairness of the price proposed by the purchaser but nevertheless want to proceed to sale, they insist on the following terms: if the acquirer sells the shares at a price significantly exceeding the consideration paid to the seller within one year of the acquisition, the acquirer must pay a certain percentage of the excess amount to the seller.
6.4 Common conditions for a takeover offer
It is not common for public takeovers to occur in Ukraine, while shares of private JSCs are typically acquired through private negotiations with one or a few main sellers. As a result, it is uncommon to see conditional tender offers being used.
6.5 Minimum acceptance conditions
Conditioning offers on certain acceptance thresholds is not a common practice in Ukraine.
6.6 Requirement to obtain financing
Deals are rarely contingent upon the acquirer's ability to finance.
As a matter of practice, sellers will rarely commit time and money to a transaction unless they are confident in the acquirer's financial capability to close it. Moreover, obtaining acquisition finance from banks for equity deals in Ukraine is unusual.
6.7 Types of deal security measures
As the M&A market in Ukraine can be characterised as a "purchaser's market" due to acquirers having more negotiation leverage, sellers are usually more interested in deal certainty than bidders.
The typical deal security measures include:
- structuring a clear and specific material adverse change clause to prevent the acquirer from easily walking away;
- making specific and measurable conditions precedent to avoid the acquirer finding formal grounds to refuse to close the deal; and
- imposing the accrual of interest on the amount of the consideration not timely paid by the acquirer.
An acquirer seeking deal certainty may insist on break-up fees in the amount of their expenses associated with the deal if the transaction is not closed for reasons attributable to the seller.
6.8 Additional governance rights
A bidder can obtain additional governance rights by entering into a shareholders' agreement with other target shareholders, which would give the bidder certain rights beyond their formal shareholding. Moreover, such a shareholders' agreement may be backed by an irrevocable power of attorney, letting the bidder enforce the agreement without relying on the other shareholders' discretion.
6.9 Voting by proxy
Shareholders may vote by proxy at general meetings. If the general meeting is held through an authorised electronic system, a shareholder's depository institution may act as a proxy, pursuant to the agreement between the shareholder and the depositary institution. Proxies act at their discretion, unless they are given voting instructions.
A power of attorney issued by a shareholder who is a natural person must be certified by a notary or by a depositary institution.
A proposed proxy must inform the shareholder in advance of any conflicts of interest relating to voting.
A shareholder may appoint multiple proxies. One proxy may represent more than one shareholder and vote differently for each shareholder they represent.
6.10 Squeeze-out mechanisms
A squeeze-out may be triggered for a public or private JSC within 90 days of exceeding the threshold of 95% ordinary shares.
A squeeze-out demand may be submitted by the owner of the dominant controlling block of shares, its affiliate or an authorised person (the "applicant"), and is irrevocable. The applicant must open an escrow account to the benefit of the shareholders whose shares are acquired, and must bear all the costs of operating such escrow account.
The squeeze-out price may not be less than:
- the market value of shares determined based on the average trading price during the last three months or, failing such determination, determined by an independent valuator;
- the highest price of shares at which the applicant, its affiliates or other persons acting jointly with it acquired shares of this JSC within 12 months preceding the date of acquisition of a dominant controlling block of shares; or
- the highest price at which the applicant, its affiliates or other persons acting jointly with it acquired an interest in other legal entities that own, directly or indirectly, shares of this JSC within 12 months preceding the date of acquisition of a dominant controlling block of shares, provided that such shares constitute no less than 90% of the value of assets of such legal entities.
A double minimal price applies if the applicant, its affiliates or other persons acting jointly with it failed to comply with their mandatory offer obligations.
6.11 Irrevocable commitments
Irrevocable commitments are not common in Ukraine.
7.1 Making a bid public
A person who intends to acquire shares of a JSC so that the 5% threshold will be reached or exceeded must notify such intention to the JSC, the NSSMC and the organised market operator on which the JSC's shares are admitted to trading at least 30 days in advance of such acquisition. The notification must include information on the shares already owned and intended to be acquired.
Additional material shareholding disclosure thresholds apply (see 4.2 Material Shareholding Disclosure Threshold).
7.2 Type of disclosure required
Depending on the circumstances, the issuance of new shares in a JSC as part of a merger may require the JSC to disclose the following types of special regulated information:
- the decision on the issue of shares;
- the amount of voting shares and charter capital as a result of its increase; and
- a change of shareholders who own voting shares, voting rights or financial instruments reaching, exceeding or falling below a disclosure threshold (see 4.2 Material Shareholding Disclosure Threshold).
7.3 Producing financial statements
Generally, bidders are not required to produce financial statements in their disclosure documents. However, financial statements are requested by relevant regulators (AMCU, NSSMC and NBU) in the course of reviewing applications for the approval of the concentration/acquisition of the qualifying interest.
7.4 Transaction documents
There is no general requirement to publicly disclose any of the transaction documents in relation to an M&A deal in full.
At the same time, in a negotiated M&A deal relating to a JSC, the transaction documents must be provided to the depositary institutions and, if necessary, to an intermediary investment firm to effect the transfer of the shares.
On a separate note, a shareholders' agreement in relation to a JSC to which the state or municipality is party, provided that it owns 25% or more in the JSC, must be disclosed on the websites of the relevant state or municipal authority and the JSC.
8. Duties of directors
8.1 Principal directors' duties
Directors of a Ukrainian JSC generally have the following duties:
- to act in the interests of the company;
- to act in good faith and reasonably;
- to act within the powers granted by the charter of the company and the legislation; and
- to act in a manner which, in their bona fide opinion, is most likely to further the achievement of successful results of the company's activity to the benefit of all shareholders (subject to specific instances where the legislation also requires the interests of creditors to be taken into account, or acting in their interest).
There are no specific additional duties expressly envisaged by Ukrainian legislation in the context of a business combination.
8.2 Special or ad hoc committees
There is no requirement, for boards of directors to establish special or ad hoc committees in the context of M&A activity, and doing so is not common.
8.3 Business judgement rule
Ukrainian legislation does not expressly envisage a business judgement rule, whether in takeover situations or generally. However, a kind of business judgement rule or a similar concept is applied by Ukrainian courts when considering cases of alleged misconduct or breach of fiduciary duties by directors and officers of Ukrainian law. As far as is known, there is no case law pertaining specifically to business judgement in a takeover situation.
8.4 Independent outside advice
The target of the acquisition itself rarely seeks outside advice independently from the seller, as their efforts are usually combined and co-ordinated. The scope of advice that may be sought varies greatly depending on the transaction circumstances, but is most likely to include tax and legal advice.
8.5 Conflicts of interest
Detailed provisions on the conflicts of interest of directors and officers of JSCs have only been in effect since 1 January 2023. Under the new Law of Ukraine "On Joint Stock Companies", directors and officers must avoid situations where they have or may have a direct or indirect interest in the use of property, information or possibilities of the company, if such interest contradicts or may contradict the interests of the company and if the satisfaction of such interest causes or may cause damages to the company.
Due to the novelty of such rules, conflicts of interest have not yet been subject to judicial scrutiny in Ukraine.
9. Defensive measures
9.1 Hostile tender offers
Hostile takeovers are not prohibited by Ukrainian legislation. However, they are not common due to the concentration of shareholders by majority shareholders who control the management and insignificant numbers of free float shares.
9.2 Directors' use of defensive measures
Ukrainian legislation expressly prohibits a JSCs from taking measures aimed at preventing the acquisition of shares in the company when it is notified of such intention. However, this remains a rather vague concept, and it is not developed in case law. For this reason, it is hard to evaluate what kind of defensive measure may be regarded as prohibited.
9.3 Common defensive measures
Because of a lack of actual public takeovers in Ukraine and a prohibition on JSCs taking measures aimed at preventing the acquisition of shares, there are no common defensive measures used by directors.
9.4 Directors' duties
Ukrainian law does not envisage any specific duties of directors in the context of defensive measures. The directors owe all ordinary duties to the company, as set out in 8.1 Principal Directors' Duties.
9.5 Directors' ability to "Just say no"
Under Ukrainian law, directors do not have the power to prevent a hostile takeover by their decisions.
10.1 Frequency of litigation
Most M&A deals involving assets in Ukraine are governed by English law, with international arbitration having jurisdiction over any disputes associated with the transaction. It is very uncommon for M&A-related litigation to take place in Ukrainian courts.
As a matter of practice, Ukrainian transactions rarely end up in arbitration. Due to the relatively low value of transactions and the excessive costs of arbitration, parties usually prefer to resolve disputes without litigating.
10.2 Stage of deal
Litigation is an uncommon occasion at any stage of an M&A deal.
10.3 "Broken-deal" disputes
In early 2020, when the COVID-19 outbreak began in Ukraine, numerous M&A deals were halted or terminated. However, there were no major disagreements over these deals for a few reasons. Firstly, many sellers understood the situation without pressuring buyers to close the deals. Secondly, buyers commonly used material adverse change clauses, which are typically written in a broad manner, to justify backing out of the deals. Finally, some buyers relied on clauses in the acquisition documents, such as force majeure and hardship clauses, or even on the English law doctrine of frustration, to support their decision to terminate the deals.
11.1 Shareholder activism
Given the incremental share of acquisitions via building stakes on an open market, shareholder activism is not a significant force in Ukraine. Usually, impact shareholders in Ukraine are international financial institutions (such as EBRD), but they normally acquire stakes in Ukrainian companies from their majority shareholders.
A sort of shareholder activism in Ukraine is the activism of Ukrainian NGOs focused on the activity of Ukrainian state-owned companies (although such NGOs are obviously not the shareholders but merely protect the interests of the Ukrainian people as the ultimate owner of the state-owned companies).
11.2 Aims of activists
Activism related to state-owned companies (see 11.1 Shareholder Activism) is usually concerned with revealing and preventing corruption and overseeing management remuneration practices in state-owned companies. Activists may also promote the privatisation of state-owned companies at a fair value and to bona fide investors. However, due to the ongoing war in Ukraine, privatisation is not likely to be an active process due to a lack of investor interest.
11.3 Interference with completion
The interference of activists in the completion of M&A deals is an exceptional occasion in Ukraine.
Trends and developments
Overview of the Ukrainian M&A market in 2022
In 2022, the Russian invasion of Ukraine severely impacted the Ukrainian M&A market, resulting in a significant decrease in both deal volume and value. The market decreased ninefold from USD 2.7 billion to USD 0.3 billion, and the number of deals worth more than USD 1 million decreased by more than half. The war caused businesses to shift their focus from expansion to preserving existing assets, and investors prioritised withdrawing funds from the country. Large companies in industries such as metallurgy, agriculture, retail, construction, processing and mining lost their potential for new M&A deals. Relocation emerged as a trend as businesses and individuals moved to other cities, regions and countries.
As a result, the western regions of Ukraine became more attractive, and European countries welcomed Ukrainians under temporary protection. Ukrainian businesses opened branches in neighbouring countries and acquired production facilities there. The investment focus for Ukrainian companies abroad shifted towards securing export logistics chains through port and warehouse facilities, due to disruptions caused by port blockades and railway restrictions. In 2023, outgoing investments from Ukraine will likely continue to exceed incoming investments.
Those who survived
The IT and venture industries have shown some resilience during the war, representing over 90% of the total deal volume for the year in the technology market. Although the number of deals in the IT sector remained the same as in 2021, their volumes decreased threefold.
The IT sector dominated the M&A market in 2022, with eight of the ten largest deals belonging to this industry. Most of these transactions cover multiple jurisdictions and are structured outside of Ukraine, such as the acquisitions of Cprime by Goldman Sachs Asset Management, of Digitally Inspired by Intellias, and of Scalelab by AIR Media-Tech.
However, the Ukrainian operations of the targets play an important role in delivering services to international customers. Despite the additional risks during wartime, deals in this sector continue to be attractive for global buyers consolidating the industry. Local deals, such as the acquisition of Helsi by Kyivstar, also demonstrate that difficulties with the operation of public registers and payment limitations should not impede a good commercial deal.
In 2022, fundraising campaigns were active for investment and venture funds worth hundreds of millions of dollars, focusing on implementing projects in Ukraine.
The EBRD has been a critical source of support for both state and private companies in Ukraine during the ongoing conflict. Under its Resilience and Livelihoods Framework, which represents the bank's strategic response to the war in Ukraine, the EBRD has pledged up to EUR 2 billion to support the country's economy. Lviv received a loan of EUR25 million as part of this framework to provide liquidity support to the city and its key municipal companies. The EBRD's loan aims to help these entities provide essential services and to mitigate the impact of temporary revenue losses and war-related expenses.
The EBRD also provided a loan of EUR 10 million to Bank Lviv, which on-lent the funds to small and medium-sized enterprises affected by the war, including clients in the food security sector and businesses that have relocated to Western Ukraine. In 2022, the EBRD invested over EUR 1.5 billion in Ukraine's economy, and a similar level of investment is expected in 2023. As one of the few systemic funds operating in Ukraine during the conflict, the EBRD has played a vital role in helping the country to weather the economic challenges brought by the war.
Despite the challenges, Ukraine has demonstrated its resilience, and its domestic businesses have shown similar strength. Investors who had plans to invest in Ukraine's economy are maintaining their optimism and waiting for the end of the war.
New opportunities: Advantage Ukraine
On 6 September 2022, the Ukrainian government launched the Advantage Ukraine investment initiative, with President Volodymyr Zelenskyy ringing the opening bell of the New York Stock Exchange virtually. The initiative aims to attract foreign investment to Ukraine and support its recovery by showcasing opportunities across various sectors, including defence, metallurgy, agriculture, power, pharmaceuticals, natural resources, logistics and infrastructure.
In addition to promoting investment opportunities, Advantage Ukraine aims to provide a comprehensive platform for other initiatives and opportunities, facilitating business entry into Ukraine and supporting their launch. However, the success of this initiative will depend on the government's ability to create a favourable business environment and address issues related to corruption and bureaucracy, which have historically hindered foreign investment.
To finance and insure against war risks, the investment team of the Advantage Ukraine platform has partnered with Ukraine's Ministry of Economy to prepare and submit the first batch of investment projects to the US International Development Finance Corporation (DFC). The initial projects submitted for review comprise USD 430 million in investment from Ukrainian investors in the construction, manufacturing, e-commerce and real estate sectors. In addition, a foreign investor has submitted a project for producing construction materials, amounting to several million in lending. Each project will be assessed individually by the DFC.
The DFC has recently announced its readiness to mobilise over USD 1 billion in private sector capital to support Ukraine's economy, making the timing of Advantage Ukraine's efforts particularly opportune. These initiatives can significantly boost Ukraine's economy and demonstrate its potential as an attractive investment destination.
Challenges faced by multinational companies operating in Russia during the war
The ongoing war between Russia and Ukraine, which has lasted for over a year, has created significant challenges for multinational companies operating in Russia. The imposition of sanctions and the threat of confiscation or nationalisation have made it increasingly difficult for companies to operate even if they were not facing pressure from consumers, employees and other stakeholders to stop supporting Putin's regime by paying taxes in Russia. As a result, numerous M&A transactions and restructurings have occurred, despite Russian countermeasures. The withdrawal of international businesses from Russia has had a significant impact on the Ukrainian M&A market due to sanction implications, merger clearances and the restructuring of groups that used Russian holding companies to control Ukrainian subsidiaries.
Yale University researchers have been monitoring the decisions of international companies regarding their operations in Russia. As of March 2023, of the 1,582 largest international companies covered by the research, 561 continue to operate in Russia, of which 234 continue to operate without changes, while 179 companies have suspended investments and 148 have reduced their operations.
The National Agency on Corruption Prevention of Ukraine (NACP) maintains a list of international companies that sponsor the war in Ukraine. While the list has no immediate legal implications in Ukraine and only includes 19 companies, this information is reflected in World-Check and other databases that companies use to screen potential business partners for connections to fraud, terrorist organisations or sanctions. Counterparties usually conclude that doing business with companies listed in such databases is risky due to potential future sanctions and reputational considerations.
Even during the war, investors are still seeking unique opportunities in Central and Western Ukraine to produce products that are in high demand, such as defence and military products or goods with significant social importance. Export-oriented industries remain attractive. International businesses planning to participate in post-war reconstruction have already initiated limited operations to save time and establish relationships with the government and local municipalities. Governmental agencies, such as UkraineInvest, are witnessing increased interest from multinational companies that are eager to capitalise on investment incentive programmes and commence construction planning ahead of their competitors.
The privatisation of state property may also present investment opportunities, as assets are not overpriced during wartime. Since the beginning of 2023, the state budget has received UAH 645 million from privatising state property, including UAH 464 million within just 14 days in February. The electronic auction procedure for selling large-scale privatisation objects approved on 21 February 2023 envisages the sale of assets worth over UAH 250 million; large-scale privatisation objects were previously sold at offline auctions, unlike small-scale ones. The law introducing the "large privatisation" procedure was adopted in 2018. Since then, only one auction has been completed, when the First Kyiv Machine-Building Plant was sold for UAH 1.429 billion in October 2021.
Potential deals in Ukraine's agricultural sector are also on the horizon. Due to issues with grain logistics, high interest rates and the increasing costs of fertilisers, fuel and plant protection products, some agribusiness owners may initiate sales of their assets or lower the price of leased land use rights to attract strategic investors.
M&A deals are most viable for companies located in Western and Central Ukraine. The least promising M&A deals involve territories adjacent to the conflict zone and enterprises located near the borders of Russia and Belarus. Businesses with close ties to aggressor countries, from access to raw materials to end consumers, also face high risk.
In any case, the current situation is unfavourable for sellers, as the value of businesses significantly decreases due to risks associated with economic instability and unpredictable military developments. On the other hand, selling a business in Ukraine is not impossible in many cases, with price being the primary concern.
A growing number of business owners are willing to sell their assets, and requests for company sales are steadily increasing. However, many shareholders remain reluctant to accept significant discounts (>30%–50%) due to the rise in global inflation, the hope for a quick victory in the war, and an anticipated strong influx of capital into the country.
Although a complete revival of the M&A market in 2023 seems unlike.
Originally published by 20 April, 2023
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.