Regulatory Aspects of M&A Transactions
Oleksandra Y. Soloviova
When acquiring a business in Ukraine, investors should ensure compliance with extensive local regulatory requirements. Nearly all M&A transactions carried out in relation to Ukrainian assets require obtaining approval from regulatory authorities and failure to do so may result in imposition of substantial fines on the parties of the transaction and, in some cases, render the M&A transaction impossible. Thus, in addition to merger control clearance, which is typically required for M&A transactions regardless of the industry, some investors need to follow additional procedures related to obtaining specific approvals or permits attributable to various sectors of economy. In this article we will address the regulatory requirements for obtaining some frequently encountered regulatory approvals required by Ukrainian law.
Merger control clearance
By virtue of low financial thresholds established by Ukrainian antimonopoly law, the vast majority of all M&A transactions fall within the requirement to obtain a prior approval of the Antimonopoly Committee of Ukraine (the AMCU) for concentration (the Approval for Concentration).
Under Ukrainian antimonopoly law any of following actions are considered to be concentration and may require receiving the Approval for Concentration if certain financial thresholds are reached: (i) a merger or consolidation of business entities; (ii) the direct or indirect acquisition of 25% or more, or 50% or more, of the votes in the highest management body of a business entity; (iii) the direct or indirect acquisition of control over a business entity established by various means (e.g., by execution of shareholders agreements granting a shareholder ability to influence the strategy and the key decisions related to the company's commercial activity; appointment of a person to the management bodies of the company if such person occupies similar position in a different business entity, etc.); and (iv) establishing a corporate joint venture provided that such establishment does not result in coordination of competition among the founders, and/or the founders and the newly-established legal entity.
If a contemplated M&A transaction can be classified as a concentration under the Ukrainian antimonopoly law, the financial data and market shares of the seller, buyer and all their related parties (the Participants) for financial year preceding the M&A transaction need to be examined to identify whether the following financial thresholds are met: (a) the worldwide aggregate value of assets or net sales turnover of the Participants, for the previous financial year exceeds EUR 12 million and, at the same time: (i) the worldwide aggregate asset value or net sales turnover of each of at least two of the Participants for the previous financial year exceeds EUR 1 million; and (ii) the aggregate asset value or net sales turnover in Ukraine of at least one of the Participants for the previous financial year exceeds EUR 1 million; or (b) the individual or aggregate market share of the Participants in the market concerned or the neighbouring market exceeds 35%.
Notably, even if the control relations between a seller and a target cease upon closure of the M&A transaction, the financial data of the seller and its affiliated entities still need to be taken into account for the purpose of estimating the financial thresholds. In addition, if the financial thresholds are met in the case of purely foreign M&A transactions carried out outside of Ukraine between non-Ukrainian parties, but having a certain nexus to Ukraine (e.g., Ukrainian subsidiaries or sales to Ukraine), such transactions may also be subject to antimonopoly clearance regardless of the actual impact of such deals on competition in Ukraine.
As a separate aspect, M&A agreements may provide for restrictive covenants limiting a party in carrying out its business activity (e.g., obliging it not to compete with the sold business for a certain period of time) and aimed at protecting company's trade secrets, know-how, business interests after completion of the deal. Such restrictive covenants may be considered as anti-competitive concerted actions under Ukrainian antimonopoly law and must be prohibited if they lead or may potentially lead to the prevention, elimination or restriction of competition on the market in question.
Ukrainian antimonopoly law indicates the following types of anti-competitive concerted practices (and it is not an exhaustive one): (i) price-fixing; (ii) market allocation; (iii) restriction of market access; (iv) distortion of the results of tenders and auctions; (v) substantial restriction of competitiveness of other entities without justification; and (vi) entering into agreements that are conditional on the contracting party's acceptance of additional obligations which are unrelated to the subject matter of an agreement. Subject to falling under any of the above or other applicable criteria and meeting a market share test, in addition to the Approval for Concentration, the parties may need to obtain prior approval from the AMCU for the concerted actions (Approval for Concerted Actions).
Ukrainian antimonopoly law provides for certain exemptions from the requirement to obtain Approval for Concerted Actions. In each particular case the parties to an M&A transaction need to carefully analyze the proposed restrictive covenants to determine whether the available exemptions may be applied depending on the type of concerted actions (horizontal, combined, vertical or conglomerate). As a matter of practice, if there is any legal ambiguity regarding the need to obtain Approval for Concerted Actions for a particular arrangement, it would be advisable to apply to the AMCU for obtaining such approval, or at least for a preliminary conclusion of the AMCU stating if a prior approval, based on the AMCU's assessment of the arrangement, is required.
Filing for a preliminary conclusion of the AMCU requires submitting substantially the same application package which is filed for obtaining the approvals themselves. If the AMCU, however, comes to a conclusion that a relevant approval is required, the parties will formally need to file an application for obtaining such approval and the AMCU will be entailed to review it for 45 days (in case of concentration) and 3.5 months (in case of concerted actions). Thus, in most cases the parties prefer to file applications for obtaining the approvals from the outset to avoid potential delays in the transaction's timetable.
The AMCU must issue its prior Approvals for Concentration and/or Concerted Actions if they do not result in monopolisation or substantial restriction of completion on the market or a major part of it. The Cabinet of Ministers of Ukraine may permit the concentration and/or concerted actions prohibited by the AMCU, if the positive public effect of the respective concentration/concerted actions outweighs the negative consequences of the restriction of competition.
Failure to obtain the Approvals for Concentration and Concerted Actions (if required) is punishable by fines in the amount of up to 5% (in the case on concentration) and up to 10% (in the case of concerted actions) of the combined annual revenue of the breaching entity's group, including its related parties incorporated abroad, for the most recent reporting year. If the concentration/concerted actions were carried out without obtaining prior Approvals for Concentration and/or Concerted Actions and resulted in monopolization or significant restriction of competition on the Ukrainian market or a part thereof, the AMCU may petition a court requesting to invalidate the respective agreement. Additionally, there is a risk of a private party claim for compensation in an amount double the caused harm resulting from a concentration carried out without prior AMCU approval. As a matter of practice, the AMCU has discretion in its assessment of penalty amounts depending on the circumstances of a particular case. However, recent decisions of the AMCU on fines for antimonopoly violations demonstrate that the AMCU tends to set higher fines, especially for anti-competitive concerted actions.
Consent for acquisition of a bank
As a matter of law, nearly all M&A transactions in the Ukrainian banking sector are subject to a prior notification to the National Bank of Ukraine (the NBU) which, in fact, implies granting consent or prohibition by the NBU to acquire a material stake or increase the existing shareholding in a bank (the Acquisition of Material Shareholding). According to Ukrainian banking law, 3-month prior notice must be given to the NBU (the Notice), if any of the following is contemplated: (i) direct and/or indirect acquisition or increase of existing stake reaching 10%, 25%, 50% or 75% of the bank's charter capital or the voting rights in the charter capital of a bank carried out individually or jointly with other persons; and/or (ii) exercise of substantial control over the management or activity of the bank regardless of actual shareholding in this bank.
The procedure for obtaining the NBU’s consent for Acquisition of a Material Shareholding (the NBU Consent) is typically complicated and time-consuming. Along with the Notice, the acquiring party must submit an application consisting of a large set of documents which must meet rather strict requirements of the NBU to their form and substance (e.g., in relation to the applicant's business reputation, members of its executive or supervisory board, its related parties, financial standing, sufficiency of own funds of the acquirer for acquisition of a stake, transparency of ownership structure of the acquirer, etc.). Since these requirements are often specified in a general manner, they may be ambiguously interpreted and improperly implemented, which typically requires the resubmission of documents in a form and substance satisfactory to the NBU. In this case a 3-month period is re-set and is calculated from the date when the NBU accepts all documents accompanying the application.
Thus, in addition to the general conditions established for Ukrainian entities to become shareholders of Ukrainian banks, the NBU permits an Acquisition of Material Shareholding by a non-Ukrainian legal entity or individual only if the following conditions are satisfied: (i) the country, in which an acquirer is incorporated (permanently residing), complies with international standards on preventing and counteracting the legalization of money laundering and financing of terrorism; (ii) banking supervision in the country of incorporation (permanent residence) of an acquirer, in the opinion of the relevant international bodies, is substantially in compliance with the Core Principles for Effective Banking Supervision of the Basel Committee on Banking Supervision; and (iii) the banking supervision authority of the country of incorporation (permanent residence) of an acquirer and the NBU has entered into an agreement on cooperation in respect of banking supervision, harmonization of banking principles, etc. As to the last requirement, it should be noted that at present the NBU has entered into agreements on cooperation in respect of banking supervision or other similar agreements only with some countries, meaning that applicants from the jurisdictions with which no such agreements were concluded, may formally be prohibited from the Acquisition of Material Shareholding.
As an additional requirement for obtaining the NBU Consent, an Approval for Concentration and/or a preliminary conclusion of the AMCU confirming that such approval is not required need to be submitted to the NBU. Thus, even if the M&A transaction does not require receipt of the Approval for Concentration the acquirer has no alternative but to prepare and file substantially the same set of documents as for obtaining the Approval for Concentration so that the AMCU will issue its conclusion that such approval is not required.
As mentioned above, the existing procedure provides for notification of the NBU on the acquirer's intention to carry out the Acquisition of Material Shareholding, and this means that no written Consent for the Acquisition of Material Shareholding will be issued by the NBU. Thus, if the NBU does not issue the prohibition for the Acquisition of Material Shareholding within a 3-month review period, which starts from the date of acceptance of a complete set of the required documents by the NBU, the transaction is deemed to be permitted. However, the law affords the NBU the right to approve the transaction before the expiry of a 3-month period by sending the relevant notice to the acquiring party.
In the case of prohibition of the contemplated Acquisition of Material Shareholding by the NBU, the acquiring party should be notified by the NBU with an explanation of the reasons for such decision. Specifically, the law provides that the NBU shall prohibit a contemplated Acquisition of Material Shareholding under the following grounds: (i) failure to comply with the applicable requirements related to the business reputation, financial standing, transparency of ownership structure sufficiency of own funds of the acquirer for acquisition of a stake, etc.; (ii) insufficiency or lack of funds for Acquisition of Material Shareholding; and (iii) the Acquisition of Material Shareholding will threaten the interests of the bank's customers and creditors or contradict the requirements of Ukrainian antimonopoly legislation.
If the acquiring party proceeds to the transaction in the absence of NBU Consent (if required), the NBU may impose a fine on the acquiring party in the amount of up to 10% of the acquired (increased) shares value and prohibit the acquirer to exercise its voting rights under the acquired shares until such acquirer obtains NBU consent in relation to such shares.
Approvals for acquisition of a financial institution and a professional participant of the stock market
M&A transactions in the financial market and securities sector require obtaining prior approvals of the respective sector regulators. Thus, material acquisition/increase of a stake in financial institutions (e.g., such as insurance and leasing companies, credit unions, pawnshops, trust institutions, pension funds, investment funds and other financial institutions, except for banks and corporate investment funds) must be approved by the National Commission for Regulation of Financial Services Markets (the Financial Services Commission). The same acquisition of a professional participant of the stock market (e.g., custodians, securities brokers, etc.) must be approved by the National Commission on Securities and Stock Market (the Securities Commission). The respective approvals (the Approvals) are required for the acquisition or increase of a stake under which an acquirer will directly or indirectly hold or control 10%, 25%, 50% and 75% in the charter capital of a financial institution or a professional participant of the stock market (collectively — Institutions) or the voting rights in the bodies of the Institutions.
Although the Institutions carry out their particular activities supervised by specific regulatory authorities, the procedures for obtaining such Approvals contain rather similar requirements. Thus, in order to obtain the Approvals an acquirer needs to provide an application package similar to the one envisaged for obtaining NBU Consent, including inter alia information on its business reputation, financial standing and ownership structure. In particular, the Financial Services Commission and the Securities Commissions (the Commissions) focus on the current financial standing of the acquirer and carefully review the sources of funds and their future availability for additional financial support to the Institution (if required). The Commissions are also entitled to verify the information submitted by an acquirer by sending various enquiries to state and local bodies, legal entities and individuals. As in the case of obtaining NBU Consent, the Approval for Concentration and/or preliminary conclusion of the AMCU confirming that such approval is not required needs to be submitted to the Commissions.
The Commissions must issue Approvals or refusal to deny their issuance within one month from the date of filing of the set of required documents. The grounds for refusal are quite general and include inter alia any of the following: (i) failure to comply with the Commissions’ requirements related to business reputation, financial standing, outstanding conviction (in the case individual-acquirer), (ii) questionability of the sources of funds and their sufficiency for acquisition of a stake, etc.), (iii) the AMCU decision on prohibition of contemplated acquisition, and (iv) the acquisition will threaten the interests of the customers and/or creditors of a financial institution or development of a competitive environment. It should be noted that the Approvals are valid for 3 months (in the case of a financial institution) and 6 months (in the case of a professional participant of the stock market) from the date of issuance.
In addition, if the Financial Services Commission determines that acquisition of a stake or its increase in a financial institution was performed without the approval of the Financial Services Commission (if required), the acquirer must be prohibited from managing the company and exercising its voting rights under the shares acquired without the approval of the Financial Services Commission. In this case, the Financial Services Commission must appoint its representative, who is entitled to vote at the meetings of shareholders’/participants’ meetings and must reasonably manage the financial institution until the respective approval is obtained. If the acquirer breaches such requirements, the relevant decisions of shareholders’/participants’ meetings of the company shall be deemed invalid.
In view of the above, when planning and structuring an M&A transaction in Ukraine, the arrangements of the parties to M&A transactions need to be carefully examined to avoid the risk of sanctions for failure to comply with regulatory requirements applicable to particular transactions and to achieve successful completion of deals without any delays.