While the financial crisis is not yet over for Ukraine, there has been notable M&A activity in the last twelve months, particularly in sectors including agriculture, consumer goods, healthcare, pharmaceuticals, real estate and financial services.
The Ukrainian agricultural sector continues to undergo further consolidation, driven by Ukrainian groups expanding their production capacities by purchasing smaller or debt-burdened producers. The fast-moving consumer goods industry saw a lot of interest both from Ukrainian strategic investors as well as foreign private equity players, although few transactions actually closed due to significant gaps in company valuation. There was some moderate activity in retail property, with several shopping centers both in Kyiv and in the regional cities attracting additional investment. However, the office and industrial segments of the real estate market are lagging behind significantly. Some strong Ukrainian corporates in various sectors have also sought to expand their presence across the CIS and CEE regions.
The financial services sector has been fairly active recently, in part as a result of foreign banking institutions actively seeking to exit the Ukrainian market due to growing pressure from their home regulators. The end of 2012 was marked by the exit of Commerzbank and Erste Bank, the sales of a few large Ukrainian banks, including Kreditprombank, and continued interest from local players in the addition of more banks to their portfolios.
Existing legal environment
The adoption of the new Law on Joint Stock Companies a few years ago was a major step in bringing the Ukrainian corporate law framework up to European standards. The Ukrainian Parliament is currently considering further improvements to this law, as well as to the regulation of limited liability companies. These improvements aim to improve corporate governance and give more freedom to shareholders in regulating the operation of LLCs.
While Ukrainian corporate and contract law is developed to European standards, Ukraine’s judicial system leaves much to be desired. Thus, any acquisition with a value above USD10 million tends to be structured under English law. In addition, it is often structured offshore to optimize taxation and completely eliminate the impact of the Ukrainian judiciary. English law offers clients a choice of legal instruments which are unavailable or undeveloped in Ukraine; warranties and indemnities serve as a good example. Option agreements and other instruments common in Western shareholders’ agreements are also very difficult to structure and enforce under Ukrainian law.
Having said this, a foreign buyer should be aware that Ukrainian mandatory rules will apply when buying Ukrainian shares. For instance, a Ukrainian securities broker is required for the acquisition of shares in a Ukrainian joint stock company, and it is recommended that settlements are made via investment bank accounts in Ukraine.
A popular and handy mechanism in the West, escrow arrangements do not formally exist in Ukraine. Some commercial banks offer a similar alternative, which works perfectly for the sale of shares in a Ukrainian joint stock company. A sale of shares in a limited liability company requires a very sophisticated structuring. As a rule of thumb, documentary escrows are generally possible in Ukraine, whereas cash escrows are not.
Whilst common in Western share purchase agreements, non-compete and non-solicitation clauses are not easily enforceable in Ukraine. Non-compete clauses formally require the prior approval of the Ukrainian antitrust authorities; non-solicitation obligations are limited by the mandatory rules of Ukrainian labour law.
Finally, any major acquisition in Ukraine is likely to require the prior approval of the Ukrainian antitrust authorities. This is due to the fact that financial thresholds under Ukrainian competition law are very low: EUR12 million is the minimum total global turnover or assets requirement. The threshold is only EUR1 million for at least two of the participants in the acquisition, provided that one of the participants has EUR1 million in Ukraine in assets or turnover.
- The corporate public register is improving, becoming easily accessible and more informative
The website of the Unified State Register of Legal Entities and Individual Entrepreneurs (http://irc.gov.ua/ua/Poshuk-v-YeDR.html) was launched in 2012, and has since become much more informative. Notably, from now on information on bankruptcy proceedings and limitation of authority of representatives/agents will be available for verification.
- Changes in procedure for registration of real estate property
On 1 January 2013, the Law of Ukraine “On Amendments to the Law of Ukraine on State Registration of Proprietary Rights to Immovable Property and Their Encumbrances” became effective. This law establishes the new procedure for the registration of rights to, and encumbrances over, real estate property. Previously, rights to buildings and apartments were registered by Bureaus of Technical Inventory, rights to land plots were registered by departments of land resources/land cadastre, and mortgages were registered by notaries. As of 1 January 2013 rights to, and encumbrances over, all types of real estate property are registered by the state registration service and notaries. In particular:
• notaries register the rights to, and encumbrances over, real estate property that are established by a notary action (i.e. sale and purchase agreements, testaments, mortgages, etc); notaries register the rights and encumbrances alongside the registration of the relevant notary action;
• other rights and encumbrances are registered by the state registration service (i.e. initial registration of constructed and reconstructed real estate property, registration based on court decisions, etc); these rights are registered within 14 business days and encumbrances are registered within 1 business day.
A number of high-value transactions took place over the course of 2012. The Ukrainian real estate sector saw the sale of Ocean Plaza, the largest shopping centre in Ukraine; there were private equity investments in pharma and healthcare companies including such as Biopharma and Into-Sana; in the telecoms sector, Volia group acquired Odeko, the second-largest CATV provider in Ukraine. The agricultural sector was also active, with notable deals including the Kernel group acquiring two companies managing 119,200 ha of leasehold farmland. Roshen, one of the largest European manufacturers of confectionery products, acquired Bonbonetti Choko, the leading confectionary producer in Hungary. The banking sector was impacted by the outflow of foreign capital due to some foreign banks selling their Ukrainian operations to domestic entities. Forum Bank Kreditprombank and Erste Bank have been sold, and some other banks are also negotiating the potential sale of their Belgian operations.
As for 2013, there is no reason to expect significant change in comparison to 2012. The agricultural sector will continue to consolidate, and will remain attractive given its potential. We expect increased activity in the energy sector, with additional energy generation and distribution companies to be privatized. The government also plans to privatize approximately 90 coal mining companies during 2013-2014. The IT and telecoms sectors are also expected to remain active in 2013 due to their huge growth potential.