Following demands from international financial and other organisations, new shareholder control procedures during acquisition of (direct or indirect) participation in Ukrainian banks and other financial institutions have recently been adopted. One question remains: Does the international community really want what was adopted?

Changes to the Banking Law

On 17 June 2011, changes to the Law of Ukraine on Banks and Banking Activity (Banking Law) entered into force. Pursuant to the new wording of Article 34 of the Banking Law, a person intending to acquire direct or indirect material (ie, 10, 25, 50 and 75%) participation in a Ukrainian bank must apply to the National Bank of Ukraine (NBU) for approval of the acquisition at least three months before the acquisition. The shareholder control approval requirement is not new; these amendments have just further detailed the approval procedure and made it much stricter.

The new shareholder control approach to be applied in Ukraine for acquisition of material participation in banks requires the ultimate indirect holder of material participation to apply for approval. At the same time, it is necessary to prove the good reputation of all intermediaries in the ownership structure, all members of the management and supervisory boards of the acquirer, and all holders of a material participation in the acquirer itself.

The good news for foreign acquirers is that the new law contains a silent consent principle by which approval is deemed granted if the NBU does not respond within three months of the filing.

Headaches for foreign banks

The law also contains a provision that has caused dismay among representatives of foreign banks in Ukraine. The NBU only grants approval if it has entered into an agreement on cooperation with the banking supervision authority of the country in which a foreign acquirer of material participation is registered. This provision was included into the Banking Law following a requirement of the IMF to implement Principle 25 of the Core Principles for Effective Banking Supervision (approved by the Basel Committee on Banking Supervision). However, Principle 25 of the Core Principles for Effective Banking Supervision only requires supervisors to cooperate in exercising banking supervision; it does not require a written agreement between the supervisors.

To date, the NBU has entered into agreements on cooperation in banking supervision with the supervisors of Armenia, Belarus, China, Cyprus, Hungary, Latvia, Lithuania, Luxembourg, Kyrgyzstan, Poland, Sweden, Turkey, and Russia. Thus, many foreign banking groups present in Ukraine (among which are large Austrian, Dutch, French, German, Greek, Italian, UK, and US banking groups) and most of the foreign banking groups considering buying direct or indirect participations in the Ukrainian banking business, are currently experiencing conside-rable difficulties doing intra-group restructurings and increasing their material participations in their Ukrainian subsidiary banks. This situation may threaten the liquidity and solvency of foreign-owned Ukrainian banks. Moreover, failure to obtain an approval to acquire participation may bring severe sanctions; for example, a penalty against the acquirer of 10% of the acquired share capital, or a penalty against the Ukrainian bank of 1% of its share capital.

The Ukrainian government is aware of the problem and we expect the situation to improve next year.

Amendments to the Financial Markets Law

Following the scheme adopted for banks, on 9 January 2012, amendments to the Law of Ukraine on Financial Services and State Regulation of Financial Services Markets (Financial Markets Law) will enter into force. Pursuant to the amended provisions, acquisition of 10, 25, 50 and 75% direct or indirect control over financial companies (eg, leasing companies, insurance companies, credit unions, but not banks) must be approved by the National Commission for Regulation of Financial Services Markets (Financial Services Commission). The new law covers acquisitions of control that take place after its entry into force. Unlike with banks, the shareholder control approval requirement did not exist in the past.

Neither the Banking Law nor the Financial Markets Law contain a detailed procedure with the forms to be filled out by the acquirers and the documents to be submitted to the respective Ukrainian regulators. Without a detailed procedure, it is currently impossible to comply with the law and be 100% certain to receive an approval.

The NBU and the Financial Services Commission have disclosed draft regulations with procedures and formalities. Having participated in the public discussions on the regulations, we expect them to enter into force quite soon, hopefully reflecting our concerns and the concerns of our clients.

The new Ukrainian shareholder control procedures for financial institutions are undergoing substantial reformation. They will have to be tested and adjusted throughout the entire 2012. The temporary gaps and controversies seem to be a fair price for having modern and internationally acceptable banking supervision laws.