Crux (#11 November 2012)

M&A Market in Ukraine

The Ukrainian M&A market is very sensitive towards political and legislative fluctuations. The present situation can be hardly named as attractive for foreigners or economically suitable for locals. We observe renewal talks about privatization, corporate reform and alternative investors. This month our panelists will cover various aspects of M&A activity in Ukraine over the last couple of months.

Ivan Romashchenko, senior lawyer, ACTIO

Ivan Romashchenko, senior lawyer, ACTIO

How did the Ukrainian M&A market look like in 2012?

In 2012 the M&A market in Ukraine was seriously influenced by economic events in Europe and in the world in general. Considering the fact that companies have problems with payment, many of them were hesitant to merge or to buy other firms.

The top managers of leading companies now prefer to wait for a better moment when the future is more predictable and stable. At present this is not the case. Nevertheless, one characteristic feature could be seen in the Ukrainian economy, and that is privatization movements.

For example, the group of companies belonging to Dmytro Firtash has acquired shares in the leading gas enterprises throughout Ukraine. Namely shares in JSC Sumygas, JSC Dnipropetrovskgas, JSC Zaporizhzhyagas and JSC Sevastopolgas now belong to companies controlled by the businessman. Still, this fact could be described more as an exception to the general situation, as among private players it is rather arguable to say whether any major steps have been taken to gain decisive influence in a certain field of the economy.

Alexey Kot, managing partner, Antika

Alexey Kot, managing partner, Antika

What changes of competition regulation in M&A took place in Ukraine in 2012?

Undoubtedly the most significant change in competition regulation in 2012 was the new practice of the Antimonopoly Committee of Ukraine (AMCU) regarding the size of fines for violating legislation in this sphere. The size of fines increased 5-10 times compared to 2011. According to the AMCU statement posted on its website, from 1 July the Committee may apply a fine for concentration without AMCU permission in the maximum amount Ц i.e. 5% of the companyТs turnover for the previous year.

In general terms this change in AMCU practice was expected. In previous years a quite common practice was established when the parties to a transaction knowingly concluded an M&A agreement without AMCU clearance Ч especially when the transaction term was extremely tight. After the transaction the parties filled an application to the Committee, received the permit and a corresponding fine, which in most cases was very low (up to EUR 5,000-6,000) due to the fact the parties had voluntarily admitted the violation. The mentioned change in the AMCU has undoubtedly put an end to this practice.

We can also expect that due to the increase in the potential sums of the fine the parties will take additional care while analyzing the need to complete an application to the AMCU. It is possible that the number of court claims on AMCU decisions will also rise Ч earlier a lot of claims were not filed because the fine was significantly lower than court expenses.

Oles Kvyat, associate, Asters

Oles Kvyat, associate, Asters

What changes in Ukrainian legislation influenced the fulfillment of M&A transactions in our country?

The relatively new Joint Stock Companies Act of 2008 (the JSC Act) still remains among the most topical corporate and M&A enactments in Ukraine, which deeply influenced all types of corporate procedures in joint stock companies (the JSC(s), thus making the Ukrainian emissive securities market more attractive both to foreign and national investors.

The most important novelties of the JSC Act (and subordinate legislation adopted to fit into and develop it), which positively impacted Ukrainian M&A market, include:

more sophisticated JSC corporate governance procedures;

elaborated rules of shareholdersТ pre-emption;

prior notification requirement on acquisition of 10% or more shares in the JSC, tender offer procedure upon acquisition of more than 50% shares in the JSC, and rules for mandatory acquisition of dissenting shareholdersТ shares by the JSC;

concepts of material transaction and transaction with interested parties;

strengthened requirements for a JSC to publicly disclose information;

detailed rules of the JSC termination (merger, takeover, split-up, and transformation) and spin-off procedures.

The effectiveness of these novelties has already been proven by practice Ч they greatly enhanced the protection of rights and interests of shareholders, created new impediments to hostile takeovers (raider attacks), improved mechanics for supervision over deals in shares, eliminated numerous gaps and problems in JSC reorganization procedures, made JSC activities and corporate structure more transparent for a potential investor.

Today, the National Stock Market Securities Commission of Ukraine (the NSMSC) and the Ukrainian Parliament continue to further contribute to the existing legal framework in order to meet the best global M&A practices. In particular, the NSMSC officially announced the Draft Act On Amendments to Certain Legal Acts of Ukraine Regarding Improvement of JSCs Activities. This Act, once it is adopted by the Ukrainian Parliament, will, inter alia, establish a squeeze out concept that was previously unknown in Ukraine. The squeeze out rule will grant to the JSC shareholder(s), who hold(s) 95% and more shares, the right to force the sale by the minority shareholders of their shares to the majority one(s) at a fair market value, but not less than at their par value. Hence, the majority shareholder(s) will have a legal opportunity to consolidate all (or almost all) of the JSC shares in their hands under the conditions, which are the most favorable both for majority and minority shareholders.

Leonid Gorshenin, associate, Konnov & Sozanovsky

Leonid Gorshenin, associate, Konnov & Sozanovsky

Have the requirements towards structuring M&A transactions changed during the latter period? What were the demands for due dilience services in 2012? Name the most typical risks during the process of due diligence and recommendation for their minimization.

The year 2012, similar to 2011, was marked by some stepping up in demand from clients for legal due diligence services. The services rendered in the said period had certain peculiarities.

A number of uncompleted construction and development projects, which had been earlier УfrozenФ because of a shortage of financing, were restored to life. The owners of such projects and prospective creditors or buyers needed legal due diligence to assess the current legal state of the УstandbyФ projects and further prospects of their implementation. The principal problem of these projects was the expiry of the established terms for their construction and lease of the respective land plots. It was recommended to update (re-obtain or amend) relevant permissive and land documentation to complete the construction. Besides, if any legal defects took place, they could be eliminated when updating the documentation for resuming the project.

The part of due diligence services was requested by clients who needed additional financing to complete the unfinished projects for their further sale or operation. Nevertheless, banks, other creditors, including potential buyers of the project, requested the said services too. Creditors or buyers were advised to obtain the maximum amount of security (mortgages, pledges, bank guarantees, etc.) for mitigating their risks related to financing or purchasing these unfinished projects.

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