Ukrainian M&A law, like the entire legal system in general, has been substantially overhauled since 1991, when the government initiated a comprehensive legislative programme intended to remove structural obstacles to economic growth. This includes, among other things, the regulation of reorganizations and extensive privatization. However, significant changes are still required to create the necessary legal and financial infrastructure for a developed market. This overview summarizes the legal and procedural framework for reorganizations, acquisitions and privatizations, and examines the system that applies to secured finance transactions.
Under the Law on Business Associations of September 19 1991, as amended, and the Law on Enterprises in Ukraine of March 27 1991, as amended, corporate reorganizations include mergers, spin-offs, consolidations, separations and changes of legal form. The reorganization of a company is carried out pursuant to the decision of its highest governing body or as otherwise provided by law (eg, reorganization based on judicial or administrative proceedings against the company). The company's reorganization requires the consent of its creditors and is effective from the moment it is entered in the Company Register. Companies that survive or emerge from the reorganization assume all rights and obligations of the other participants of the reorganization.
Reorganizations involving joint stock companies (JSCs) are subject to the State Commission for Securities and Stock Exchange (SEC) Regulations on Registering Share Issue in the Course of Reorganization of Joint Stock Companies, dated December 30 1998, as amended (the SEC Regulations). Reorganizations of banks are subject to the Regulations of the National Bank of Ukraine on the Procedure of Reorganization of Commercial Banks, dated February 22 1996 (the Bank Regulations).
Under the SEC Regulations, a JSC undergoing reorganization must buy out the shares of those shareholders that object to the reorganization and wish to sell their shares to the company. The share purchase price in this case may not be less than the share par value. Stock issued in the course of the reorganization is not subject to subscription or placement, but must be exchanged for the equity in the other companies that participate in the reorganization. The aggregate amount of the charter capital of all companies entering into the reorganization should equal the aggregate amount of the charter capital of all companies surviving or emerging from the reorganization.
The following procedural steps are generally required for a standard merger of Ukrainian companies under Ukrainian law:
- The highest governing bodies of each merging company resolve to approve the merger, the draft merger agreement and the preliminary transfer balance sheet, and to issue shares of the emerging or surviving company;
- The merger agreement is executed;
- The consent of the Antimonopoly Committee of Ukraine (AMC) is received, if required;
- Each merging company buys out shares from the shareholders that object to the reorganization;
- The shares or equity interests in the merging companies are exchanged for written obligations to issue a corresponding number of shares or participation interest in the emerging or surviving company;
- The founding meeting of the emerging company resolves to adopt its charter and elect governing bodies (alternatively, the general meeting of the surviving company approves relevant amendments to its charter);
- The share issue is registered with the SEC; and
- The newly issued shares are exchanged for the respective written obligations regarding equity distribution in the emerging (surviving) company.
Before starting the merger procedure, merging companies are required to notify the SEC and all their registered shareholders. A public announcement through the media is required only if the company has issued bearer shares and for the merger of banks. Merging banks must also receive the National Bank of Ukraine's consent to a merger. This requires the submission of extensive financial and accounting documentation specified in the Bank Regulations.
Generally, a company in Ukraine may be acquired through the purchase of its stock (equity). The acquisition of all of the company's assets may be structured as a merger (ie, an acquirer survives the merger and assumes all rights and liabilities of a merging company) or an asset purchase and sale transaction (ie, a purchaser does not assume seller's rights and liabilities). Ukraine law specifies that a Ukrainian business entity must have at least two shareholders (participants). Therefore, the acquisition or formation of a wholly owned subsidiary (ie, a company owned by a single parent) is not technically possible under the Law on Business Associations. The 'wholly owned' subsidiary, in practice, means that there are at least two affiliated owners of the company, of which one is the majority (often 99.9%) owner. The other owner(s) (often subsidiaries of the majority owner) play a nominal role for the purpose of compliance with the equity requirements of the Law on Business Associations.
Any purchase and sale transaction is subject to general civil law rules, primarily those in the following legislation:
- the Civil Code of Ukraine, dated July 18 1963, as amended;
- the Law on Investment Activities, dated September 18 1991, as amended;
- the Law on Business Associations;
- the Law on Enterprises in Ukraine; and
- the Law on Entrepreneurial Activity, dated February 7 1991, as amended.
The share purchase transaction is also subject to securities laws and regulations, such as the Depository Law, the Law on Securities and Stock Exchange, dated June 18 1991, as amended, and the SEC regulations. Acquisitions through privatization are also subject to privatization legislation, including:
- the Law on Privatization of State Owned Property, dated March 4 1992, as amended;
- the State Privatization Programme for the Years 2000-2002; and
- the Regulations of the State Property Fund of Ukraine (SPF Regulations).
A single state owned asset or group of assets, including shares (equity) in a state owned company, can be acquired in the ongoing process of Ukrainian privatization. The privatization process is based on the sale of property for cash and on a competitive basis through public auctions or tenders. The shares of state owned JSCs may also be purchased through a stock exchange, including through depository receipts issued on international stock markets.
Generally, foreign investors are not restricted in their rights to participate in privatization. In certain cases, however, legislation has set express limits on foreign ownership. For example, in the telecommunications sector maximum foreign ownership in a Ukrainian telecommunications company is 49%. In the case of broadcasting, the maximum is 30%. However, Ukrainian telecommunications law and regulations are being revised and the amendments may permit greater foreign participation. In the energy and other key sectors, there is no express limit to foreign ownership.
Under the SPF regulations, there are three types of privatization tenders: commercial, non-commercial and open tenders. For more information, see SPF and SEC Regulations on the Procedure Applicable to Tenders for Sales of Block of Shares in Open Joint Stock Companies Created through the Privatization Process, dated August 4 1997, as amended (the Commercial Tender Procedure) and the SPF Regulations on the Procedure for Preparing and Conducting Open Sales, dated July 2 1998 (the Open Tender Procedure).
In commercial tenders the share price is the primary criteria for selection of the winner. The shares are awarded to the highest bidder who also agrees to comply with all other tender conditions related to the privatized company. Non-commercial tenders are characterized by a fixed share price. The key selection criterion is the largest total investment over a set period. Open tenders are based on a points system. Points are granted for the proposed technical plan and financial plan. The financial plan includes tendered price for shares and the tendered proposal for future investments into the enterprise.
Secured finance transactions in Ukraine are subject to the Civil Code and Law on Pledges, dated October 2 1992, as amended (the Pledge Law). Under the Civil Code, any civil claim can be secured by a pledge, guarantee or penalty interest. Under the Pledge Law, movable and real property and proprietary rights may be pledged to a creditor.
A nationwide computer-based system of registering security interests in movable property exists in Ukraine. It provides for a simple and uniform mechanism for recording pledges over movable property. Ukraine has yet to establish a nationwide system for recording interests in real property, which is currently registered with notaries public and recorded in the pledgee's own record of pledged assets.
Under the pledge registration system, either the pledgee or the pledgor may record a security interest in movable property by filing an application with the registrar of the State Registry of Pledges of Movable Property. Under the Resolution of the Cabinet of Ministers on the Procedure for Maintaining the State Registry, dated July 30 1998, the Ministry of Justice serves as custodian of the state registry, and is charged with securing its operations and with issuing certified records pertaining to the recorded pledges. The official registrar is a state owned enterprise known as the Information Centre, which also falls under the control of the Ministry of Justice. However, notaries public, whether public or private, and commercial banks may also perform the functions of a registrar through agreements with the Information Centre.
The functions of a registrar include accepting applications for recording, amending, or deleting pledges, and obtaining state registry extracts certifying the existence (or non-existence) of a recorded pledge.
Recording a pledge is relatively simple. The pledgee or pledgor submits an application form that contains the following information:
- the pledgor and pledgee's full names, addresses and identification numbers (in place of identification numbers, non-residents, whether persons or legal entities, should include in their addresses their country of residence or registration);
- a description of the pledge property; and
- the signature of the applicant pledgor or pledgee. A registrar may not request any additional information or require that the pledge application be notarized or verified.
A nominal fee is charged for filing an application with the state registry, except where a government authority requested the filing. Any person or legal entity may, also for a nominal fee, obtain an extract from the state registry certifying the presence (or absence) of a pledge in the state registry's records.
Priority and effectiveness of a pledge
Priority is based on the date of registration. Where interests in the same collateral were filed on the same day, the pledgees have equal rights to the collateral.
The pledge registration is effective from the date it is entered into the state registry until the earlier of either five years or the date the secured obligation is fulfilled. If the pledge is to continue for more than five years, the pledgee may file an application for continuation, which will provide an additional five years. A continuation application should be filed during in the year preceding the expiration of the pledge.
When the pledgor fulfils its secured obligation, it must inform the pledgee in writing. The pledgee then has 10 days in which to submit an application to delete the pledge from the state registry. If the pledgee fails to do so, it will be liable to the pledgor for any resulting damages.
Enforcement of a pledge
To realize on a pledge, a pledgee can take the following action, depending on the provisions of the pledge agreement:
- accept assignment of and assign, sell or otherwise dispose of the pledged property;
- sell the pledged property in a public or private transaction;
- institute legal proceedings to levy against the pledged property; or
- obtain a notarial endorsement to enforce its rights with respect to the pledged property in cases where the pledges has been notarized.
Usually, under the pledge agreement, a defaulting pledgor must cooperate in transferring the pledged property and/or proprietary rights to a pledgee. If a pledgor fails to cooperate, a pledgee has two options for enforcement. First, it may institute court proceedings to execute on the pledge. Second, it may decide to obtain a notarial endorsement (provided that the pledge is properly notarized) and bypass court proceedings. A notarial endorsement, also known as a notarial award, is an instruction from a notary to a state executor to execute on a pledge agreement. The executor must complete all executory procedures within two months of the receipt of the notarial award or the court's writ of execution.
For further information on this topic please contact Helen Kryshtalowych at Squire, Sanders & Dempsey LLP by telephone (+380 44 238 8900) or by fax (+380 44 238 8911) or by e-mail ([email protected]). The Squire, Sanders & Dempsey web site can be accessed at www.ssd.com.
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