Under the merger of events
The rise in the number of M&A transactions in Ukraine can serve as a good indicator of stabilization of the economic situation. The long hoped-for legislative changes had a certain impact on the market’s revival. However, even with the implementation of best world practices it is vital, when implementing M&A transactions in Ukraine, to take into account certain national specifics
At present, agriculture, infrastructure, IT, e-commerce and other startups in the digital area are the most popular and promising fields of M&A. There are transactions in the area of "green energy" and transactions via the purchase of assets through the acquisition of troubled loan portfolios from the state-run Deposit Guarantee Fund. Considerable attention in the market is also attracted by privatization transactions: interest in privatization is, despite the risks, high, though reaching mass privatization is unfortunately, not possible.
At the same time, M&A in Ukraine has a number of features that should be paid attention to when planning and structuring transactions. Very often, especially in transactions involving Ukrainian residents, clearly defined basic commercial agreements between the parties are absent. This trend is observed both among simple and multi-level transactions, which may envisage the implementation of actions for the acquisition and alienation of items not only in Ukraine, but also in other jurisdictions.
Under such circumstances, a Ukrainian lawyer often has to act as a manager and mediator between the parties in critical situations taking place during the transaction and, therefore, it is extremely important to coordinate and set out in writing all main agreements between the parties and make sure they understand the details of the transaction before its active phase actually begins. In this case, a detailed step-wise plan for the entire transaction, developed on the basis of the letters of intent or other preliminary agreements, can facilitate the entire process considerably.
This approach also enables working through each stage of the transaction and identifying major problems requiring special attention as early as at the planning stage.
Comprehensive due diligence
Before making a purchase of an item in any area of M&A, comprehensive due diligence should be carried out, which is an extremely important stage of preparations for a transaction.
Special attention should be paid to the acquisition of troubled loan portfolios, especially in terms of checking collateral and any real opportunity to foreclose on mortgaged property.
Regarding transactions on acquisition of corporate rights, I would like to emphasize the importance of checking the historical transfer of share/shares ownership in the company. This is due to the risk of a possible appeal through the courts by interested parties against such transfer, when doubts may arise as to the legitimacy of the transaction solely on a pro forma basis.
When checking assets in Ukraine, it is necessary to analyze any "gray" operations made by Ukrainian companies (settlements made in cash, envelope salaries, collusion with counterparties), which can have adverse effects by preventing a company's transition to the normal mode of operation and also can attract special attention on the part of tax and law-enforcement agencies in the future.
Another feature that needs to be considered when implementing M&A transactions in Ukraine is the lack of a unified and clearly arranged structure of the acquired business. As a rule, Ukrainian business, which is often created rather chaotically, includes a number of separate legal entities, including non-residents, which, in most cases, is aimed at tax optimization, covering up the real beneficiary, and avoiding any increased attention on the part of antitrust authorities.
Due diligence of such uncoordinated business will take more time. It is also important to take into account time and material expenditure which may be necessary for subsequent business consolidation.
Since the Ukrainian antitrust regulation is extremely formalized, each transaction, even a relatively small one, requires due diligence in order to obtain permits for concentration/concerted actions.
When carrying out due diligence of the acquired business, one should find out whether there were violations of antitrust legislation by the parties to the transaction. This is due to the fact that until May 2016 Ukraine had extremely low thresholds for control over mergers, and the period of limitation for such violations was five years. In this regard, a significant number of transactions concluded earlier required the approval of the antitrust authorities of Ukraine, and many companies technically violated the antitrust laws in this respect, which may be revealed by the antitrust authorities during the issuing of permits for current transactions. On the other hand, when assessing such risks, a rather loyal approach on the part of the antitrust authorities in the event of such violations cannot go unmentioned: the sum of fines imposed is, as a rule, not very large.
When conducting state registration within the framework of alienation and encumbrance of corporate rights and real estate items, the territorial principle needs to be taken into account. This principle, introduced relatively recently, provides for the submission of documents for conducting registration in relation to legal entities and real estate at the place of their registration/location.
This means that if the perimeter of the transaction includes companies with different locations and/or real estate, for example, in different cities/regions of Ukraine, then it is necessary to organize registration locally and to ensure field visits by lawyers and representatives of the parties to these other cities.
Due to the various clashes and problems present in the Ukrainian legal system, transactions on the sale and purchase of businesses in Ukraine are often structured through the sale of holding companies in foreign jurisdictions under English law.
First of all, this is due to the wish of the parties to be confident in the feasibility of the agreements in general, as well as in the representations and warranties provided by the parties to each other. The parties to the transaction, by appealing to foreign jurisdictions, are also interested in the possibility of including an arbitration clause and resolving disputes in London International Arbitration or other foreign arbitration bodies, since both foreign investors and representatives of local large businesses tend to trust their cases to a specified judicial authority, regardless of the spending of considerable funds on the process.
Apart from all other M&A areas in our country, there are privatization issues. Ukraine has actually made significant progress in legislative regulation of this issue: the Law of Ukraine "On Privatization of State and Municipal Property" was adopted in January 2018.
Such legislative innovations should receive a positive response from foreign investors. At the same time, despite the declared positive changes and visible progress in the area of small-scale privatization, the actual implementation of plans for large scale privatization is not possible due to a number of problems. These problems are mainly associated with appeals brought against individual decisions at a particular stage of privatization and with the adoption by courts of appropriate measures to secure claims blocking the possibility of moving on to the next actions.
Particular attention in the aspect of М&A features in Ukraine should also be given to the issue of exchange regulation, the relevance of which is conditioned upon the existing restrictions of currency legislation.
The Law of Ukraine "On Currency and Foreign Exchange Transactions" was scheduled to come into force in February 2019. It provides, among other things, for the abolition of existing regulations governing currency issues and the adoption of new ones. At the same time, it is likely that newly-adopted regulations will provide for restrictions similar to current ones.