Crux (#05 May 2012)

Corporate Restructuring in Ukraine: Long-expected Necessity

2011 and the beginning of 2012 witnessed substantial demand for corporate restructurings in Ukraine. General benefits for going through these proceedings are beyond any doubt. This is explained by numerous reasons. Restructuring is compulsory for stepping international capital markets. For raising funds and attracting new investors, selling assets, a business structure is basically one of the essential stages of any transaction.

For this reason we asked our panelists for practical illustrations addressing corporate restructuring purposes, legal types, jurisdictional and industrial peculiarities, state-owned corporate restructurings.

Ivan Yurchenko, counselor,  Vasil Kisil & Partners

Ivan Yurchenko, counselor, Vasil Kisil & Partners

Corporate restructuring today is not an issue of taxes. In first place it is protection of business and confidentiality of beneficiaries.

The requests for restructuring services are in demand, despite extremely low investments in the country and expectations of the next global financial crisis. Our extensive experience of providing legal services with respect to corporate restructuring has demonstrated that it is driven by objective as well as by subjective factors faced by the group. Although commonly our clients seek to resolve complex tasks, today the key factor for considering restructuring of business is protection of property and security/confidentiality of beneficiaries. It is true that most frequently transnational corporate restructuring is aimed at achievement of a straightforward and transparent management structure of the group of companies, which usually also includes efficient taxation thereof. Besides, moving holding company abroad allows taking advantage of different legal instruments unavailable in Ukraine but inherent for other jurisdictions, such as an opportunity to execute shareholders agreements, usee different types of entities in the structure (e.g. trusts, foundations), etc.

Furthermore, due to undeveloped Ukrainian corporate and securities market legislation and foreign currency restrictions, the restructuring is considered to be a necessary requirement to prepare for private placement or an IPO.

In our practice, quite often corporate restructuring may also precede exit from the business, and is aimed at implementation of a structure that is efficient and attractive for such purposes (e.g. to allow performing of the transaction of sale of business as a single share deal). The said purpose may also accompany the above general objectives of restructuring. As referred above, the key requirement for most restructuring today is to ensure maximum confidentiality of holding control over the group by beneficiaries and to secure the group’s assets. This requires not only employment of jurisdictions which have strict confidentiality rules and using specific legal instruments and/or types of legal entities which make identification of the beneficiaries rather a difficult assignment, but also PR and other techniques which help to provide the client with maximum effect.

Oksana Kyrychenko, lawyer, Salkom Law Firm

Oksana Kyrychenko, lawyer, Salkom Law Firm

Due to the legislation currently in effect, Ukrainian companies that wish to take the IPO journey are restructuring by introducing into their structure a foreign holding company - the ultimate parent for a Ukrainian business. Consequently, the laws of the jurisdiction in which the holding company is registered, as well as the underlying company law and corporate governance rules of the country in which the company intends to list, will influence the group’s reorganization.

If the country of registration and listing are EU member states, there may be overlap in certain requirements related to corporate control and ownership, protection of shareholder interests, transparency and disclosure obligations. Such similarities may prove to be useful when meeting the demands of the relevant stock market. Independent non-executive directors are frequently included on the board, and may be entrusted with overseeing functions, such as monitoring internal control and risk management procedure.

Restructuring the legal ownership and/or production framework of one or several Ukrainian operating units within the group is often necessary. The aim is to demonstrate to investors a clear ownership and control structure at local level, and a single vertically integrated entity as the issuer. Depending on specific circumstances, streamlining the Ukrainian business may require obtaining clearance from regulatory agencies, such as a merger/concentration permit from the AMCU.

Konstantin Sidorenko, director, Legal Eagles

Konstantin Sidorenko, director, Legal Eagles

One of the important legal aspects of company reorganization is selection of a new legal and organizational form. The most popular form of restructuring in Ukraine is a takeover of competing companies through acquisition of assets or a merger of companies. Legal and organizational forms of such unifications are fixed in the appropriate Classifier: concern, consortium, corporation, holding company, etc.

Talking about the main differences and advantages of the mentioned forms of management, for example, a corporation implies delegation of powers of centralized management by group members to the governing bodies of a corporation. A consortium is a temporary statutory integration of businesses, designated to achieve a common business objective. For example, to implement a special program, a construction project, etc.), after which it terminates its operation. A consortium uses funds provided by its members, centralized resources available to finance a relevant program, as well as funds from other sources in the manner specified in its charter.

The most popular form of restructuring in Ukraine is a takeover of competing companies through acquisition of assets or a merger of companies

A concern is a good form of integration due to the financial dependence of affiliated companies (and other organizations) from one or more members of such a group. However, having delegated some of its powers to a concern, its members no longer can “join” another concern, which is not always acceptable for the participants, who desire to separately allocate their assets in different groups of companies.

One of the best options is a holding company. It owns controlling shares in its subsidiaries and, therefore, interacts with the latter based on the principles of control and subordination.

An association is another possible form of integration, but it is not widely spread due to the fact that such a contractual entity has no right to interfere with the economic activity of its participating companies, which often fails to justify the objectives of the restructuring.

Mykola Stetsenko, managing partner, Avellum Partners

Mykola Stetsenko, managing partner, Avellum Partners

Certainly, corporate restructuring differs for various industries. Some groups have active trade operations on international markets and they need special trading vehicles within their corporate structures. Popular jurisdictions for trading companies include Switzerland and the UK, as well as BVI and Panama. For instance, Ferrexpo and Kernel, have Swiss trading companies in their groups.

Real estate companies also have their specifics. Real estate developers build office centers and shopping malls with a view to selling them in the future one by one. Thus, each asset must be separately owned by a vehicle (SPV), which has a favorable tax regime for capital gains: this is important if the SPV sells the asset locally. If the developer sells the SPV (not the asset), then its holding company should favorably treat capital gains from the tax perspective. For this purpose, Cyprus remains the best option, not because of its Double Taxation Treaty with Ukraine (USSR), but rather due to its favorable internal tax regime. XXI Century and KDD Group are good examples of developers, both of which use Cyprus in their corporate structures.

If the developer sells the SPV (not the asset), then its holding company should favorably treat capital gains from the tax perspective

Public companies also differ often from private groups. To become a public company, the group should seriously consider requirements of the jurisdiction of its holding company, which carry out an IPO. Cyprus, Luxembourg and The Netherlands have been popular jurisdictions in IPOs of Ukrainian groups. However, to be included in the FTSE index on the London Stock Exchange, the group should have a UK public company as the holding structure. Ferrexpo plc is an excellent example of this structure.

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