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14 March 2005

How to Acquire a Bank in Ukraine

Author: Armen Khachaturyan and Svitlana Poroschuk
Source: The Ukrainian Journal of Business Law. - 2005. March. - pp.26-27

The year 2004 saw increased M&A activity in the Ukrainian banking sector. Some of the notable acquisitions include equity transfers in Kredit Bank (to PKO Bank Polski S.A.), Transbank (to Bank TuranAlem of Kazakhstan), Bank Leader (to Renaissance Capital of Russia), and, of course, the benchmark deal of the year — acquisition by Vilniaus Bankas, a Lithuanian subsidiary of the powerful SEB Group of Sweden, of the Joint Stock Bank Agio. It seems that many international bankers will keep a close watch on Ukraine as a good acquisition target in 2005, following Ukraine's impressive on-going economic growth and gradual increase in credit ratings. In the view of many analysts, 2005 should start a Ukrainian investment boom as a result of liberalization and further European unification of Ukrainian business and investment law, as promised by the new government.

Under the Banks and Banking Activity Act of Ukraine of 7 December 2000 (Banking Act), a bank in Ukraine may be established in the form of a joint stock company, a limited liability company, or a cooperative bank. Most Ukrainian commercial banks exist in the form of a joint stock company, ie., either an open joint stock company (stock is publicly issued and traded) or a closed joint stock company (stock is privately held and transferred). This article outlines certain specifics of the acquisition of a Ukrainian joint stock bank (Target Bank) based on our experience of such transactions in 2004.

Acquisition target

A standard acquisition technique would provide for the purchase of shares in the Target Bank (Shares). Under Ukrainian law, full control of the Target Bank would be guaranteed by owning 75 % of the Shares. Although approval by a simple majority (50 %) of shareholders is required for the adoption of most decisions, a supermajority (three-quarters votes of shareholders registered in the general meeting of shareholders (GMS)) is required to amend the Target Bank's charter, including an increase or decrease in its capital fund and liquidation. However, an acquisition of 40 % of the Shares can also qualify as "control" providing for so-called shareholder's "blocking" right evolving from the rule that in order for a GMS to be properly constituted, there must be representation of more than 60 % of all shareholders. Less equity may provide only limited rights (e.g., shareholders holding more than 10 % of the Shares in aggregate may call an extraordinary GMS at any time for any reason). The entire procedure to acquire a Target Bank may take from three to four months.

Transferability of shares

Ukrainian law does not impose any restrictions on transferability of shares in an open joint stock company. The Shares of the Target Bank established in the form of an open joint stock company may be freely alienated by its shareholders. After a long academic and judicial contest (especially notable in the Sarmat-Obolon litigation war), a shareholder's pre-emptive right in a closed joint stock company is now finally recognized. The Commercial Code of Ukraine (Commercial Code), which came into effect on 1 January 2004, allows shareholders in a closed joint stock company to exercise a pre-emptive right, thereby resolving the long existing M&A dilemma: to sell or not to sell to "strangers". As a result, currently, before being offered to a new buyer, shares in the Target Bank established as a closed joint stock company must be offered to all shareholders of the Target Bank.

Acquisition of shares through a broker/form of shares

Under Ukrainian securities law, acquisition of the Shares must be completed through a broker (Securities Broker) who holds a licence to carry out security transactions (Securities Licence). The Securities Broker may purchase the Shares at a buyer's expense acting on the basis of a commission or agency agreement between the buyer and the Securities Broker. The key difference between these two types of legal arrangements is that under the agency agreement the Securities Broker acts on behalf of the principal and the principal is named as a party to the share purchase agreement, while under a commission agreement, the Securities Broker acts in its own name and the principal is not a party to the share purchase agreement provided that the title to the Shares passes directly from the seller to the principal. In the case of a foreign buyer, the difference also extends to the currency of payment. Subject to abolishment of Resolution No. 482 (as discussed below), the purchase of the Shares under the agency agreement allows the buyer to pay for the Shares in foreign currency, while under the commission agreement the Securities Broker acting in his own name must pay for the Shares in hryvnias.

The Securities Broker may acquire the Shares, where at least one party to the share purchase agreement is a non­resident entity, only if it has a general currency licence (Currency License) from the National Bank of Ukraine (NBU). To the best of our knowledge, currently only Securities Brokers, which are banks, have the Currency Licence. Therefore, as a matter of practice, the share purchase agreement, where at least one party is non-resident, may be concluded only through the Securities Broker, which is a bank holding both the Securities Licence and the Currency Licence. Non-compliance with these requirements may lead to invalidation of the share purchase agreement.

The perfection of the transfer of title to the Shares depends on the form of their issue, ie., whether in documentary form or non-documentary (electronic) form. Pursuant to Regulation of the State Commission on Securities and Stock Market No.138 of 20 April 2001, the ownership rights of a non-resident investor to shares in Ukrainian issuers must be registered with a custodian. Custodians may register only non-documentary shares circulating in the depository securities system. Therefore, in the case of documentary Shares, they must be transferred into non-documentary shares (immobilized) in order to be eligible for sale to a foreign investor.

Blocking of shares

Generally, the Shares are purchased pursuant to a conditional share purchase agreement where the closure of the transaction is subject to certain conditions precedent (e.g., obtaining the permission of the Antimonopoly Committee of Ukraine (AMC), NBU permits). The completion of the conditions precedent may take up to four months from the execution of the share purchase agreement. Normally, the buyer would want to have the Shares restricted in circulation and banned from alienation to a third party during the pre-closing period. This may be attained by blocking the Shares under the share blocking agreement among the buyer, the seller and the custodian, pursuant to which the seller agrees to have the Shares blocked (restricted in circulation) at his securities account with the custodian. The custodian undertakes to block the Shares and refrain from carrying out any title transfers to the Shares without the buyer's written consent. The blocking of Shares may be lifted only upon submission by the parties to the custodian of documents specified in the blocking agreement (e.g., a payment order proving the transfer of the purchase price to the seller).

Regulatory consents

Generally, acquisition of the Target Bank requires prior consent from the AMC. Under Ukrainian antimonopoly law, such consent is required, inter alia, when a buyer, directly or indirectly, acquires an ownership interest in the Target Bank allowing the buyer to have at least 25 or 50 % votes in the highest management body of the Target Bank. In addition, the buyer and the Target Bank must meet the following criteria applicable to the year preceding the year of acquisition: (i) the combined worldwide asset value or sales volume of the buyer and the Target Bank exceed the Hryvnia equivalent of EUR 12 million; (ii) the aggregate worldwide asset value or the aggregate sales volume of each the buyer and the Target Bank exceed the Hryvnia equivalent of EUR 1 million; and (iii) the aggregate asset value or the aggregate sales volume of either the buyer or the Target Bank in Ukraine exceed the Hryvnia equivalent of EUR 1 million. The aggregate asset value and the aggregate sales apply to a commercial bank as one tenth of its asset value. When determining whether the buyer or the Target Bank meets the financial thresholds described above, it is necessary to consider not only the assets of the buyer and the Target Bank, but also their respective "groups", ie., entities/ individuals exercising control over, or under control of, respectively, the buyer and the Target Bank. The AMC is required to issue its consent regarding the acquisition within 45 calendar days from the date when the application is filed.

Pursuant to the Banking Act, acquisition of a "significant interest" (defined as the acquisition of at least 10 % of the Target Bank's charter capital) in the Target Bank requires a permit from the NBU in advance. Also, if a foreign investor acquires the Target Bank, it requires a permit allowing the Target Bank to obtain the status of a "bank with foreign capital" (defined as a bank in which equity owned by a foreigner exceeds 10 % of the charter capital). Acquisition of a Target Bank by a foreign bank often requires obtaining the permission of a banking authority, such as the Central Bank, in the buyer's jurisdiction. If so required, such consent must be submitted to the NBU with other application documents for the NBU permit to acquire a significant interest in the Target Bank. The NBU is required to issue the above-noted permits, which are submitted by a foreign investor and the Target Bank at the same time within 30 days.

Payment for shares

Effective from 12 November 2004, the new rules for foreign investment introduced by NBU Resolution No. 482 restricted a foreign investor's ability to pay for the Shares in foreign currency. Under Resolution No. 482, the settlement for the Shares must be made in Hryvnia via the buyer's investment account opened in a Ukrainian bank. Foreign currency transferred to such an account is subject to mandatory conversion (sale) into Hryvnia at the Ukrainian inter-bank currency market. Apart from the additional administrative burden on the buyer related to preparing notarized and legalized documents required for opening an investment account, the new investment rules expose the foreign investor to currency exchange risk and raise the acquisition cost by a currency exchange commission.

It appears that Resolution No. 482 contradicts the fundamental principles of the regime of foreign investment in Ukraine established by the Commercial Code and the Regime of Foreign Investment Act of 19 March 1996, which shall have prevailing force. In particular, the Commercial Code provides that foreign investors may make investments in foreign currency. Any prohibition or restriction of any kinds of foreign investments may be imposed only by the law. Moreover, the Decree of the Cabinet of Ministers of Ukraine on the System of Currency Regulation and Currency Control of 19 February 1993, expressly requires that all settlements between Ukrainian residents and non-residents must be made in foreign currency.

Based on these arguments and strong criticism of Resolution No. 482 by legal experts and foreign investors, its revocation or revision by the NBU would be a logical move.

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