New Law of Ukraine "On Privatization of State and Communal Property" Comes into Effect

On 7 March 2018 new Law of Ukraine No. 2269-VIII "On Privatization of State and Communal Property" became effective. The new law improves and simplifies regulation of privatization of state and municipal assets in Ukraine providing for the following key provisions: 

1. The list of types of privatisable objects is substantially extended. In contrast with the old law assets controlled by state agencies, such as the Ministry of Defence or Security Service, may now be privatized, if these assets are not used as designated. Besides, assets on the balance sheet of state-owned companies included in the list of not privatisable companies may still be privatised, if these assets are not used for the company's primary business or are not used in production for more than 3 years. 

2. Based on the value of assets all privatisable objects are divided into two (instead of six under previous legal regime) groups: large privatization objects (the companies with state equity exceeding 50 percent and asset value exceeding UAH 250 million) and small privatization objects (any other companies, as well as unfinished construction, separate assets of state-owned companies, and objects of social and cultural designation).   

3. Lists of privatisation objects upon their approval must be made public. Privatisation may be initiated by privatization authorities, management authorities of relevant state-owned companies, or potential purchasers. 

4. Privatisation procedure is now much simplified pursuant with certain pre-privatisation formalities, such as preparation and approval of the privatisation plan and creation of the privatisation committee, required under the old law, now lifted. This may shorten the privatisation term by at least one year. 

5. Large privatization objects will be prepared for privatization by investment advisors, e.g., the world largest investment banks, selected at a transparent tender by independent members of auction committees. The main selection criteria include (a) ability to subcontract other consultants, (b) competence (qualification, experience, skills and knowledge), (c) advisor's methodology and strategy for preparation to privatization, and (d) advisor's proposed timeline. The investment advisor must (a) collect and analyze object's economic, technical, financial data, (b) adjust main accounting positions in line with the accounting standards, (c) conduct audit, (d) prepare financial model and determine investment interest to the object, possible ways to enhance it and restructure debt, (e) prepare recommendation regarding basic prices and tariffs for products and services of the object, its marketing policies, (f)  prepare an information package regarding privatization object, (g) suggest starting purchase price, (h) prepare documents reflecting antitrust and ecological requirements, (i) search for potential investors. Investment advisor may not act as an investor in the relevant privatisation auction. Advisor's fee may include a fixed fee and success fee (in case of the implemented sale) as certain percentage of the purchase price according to the procedure approved by the Cabinet of Ministers. The advisor's fee may be paid from the state budget and/or funds of international organisations. 

If there is no interest from potential advisors to participate in the selection, then privatization is conducted without advisor's assistance and the staring price is established by the auction committee based on the value determined according to methodology approved by the Cabinet of Ministers. 

6. To be admitted to an auction for a large privatization object a non-resident bidder must submit (a) evidence of guaranty deposit paid from the account in a Ukrainian or foreign bank (except for the bank from a country listed by FATF as not cooperating in fighting money laundering) in the amount of 5% (decreased from 5-20% in the old law) of the starting purchase price or the irrevocable  banking guaranty, (b) evidence of payment of registration fee, (c) bidder's consent to be committed to the privatization terms, (d)  registration document and information about ultimate beneficial owner (or relevant explanation in case of no beneficiary owner) and the most recent annual or quarterly financial report (for legal entities), and copy of passport and evidence of financial status and income issued by a country of citizenship or tax residence (for natural persons).  

7. In case of failed auctions, there should be an auction based on the review of bids. At first stage within 30 days of the announcement, potential bidders submit their applications with the bids, which may not be less than 50% of the starting price at the latest auction.  A guaranty deposit is paid in the amount of 5% of the bid. The highest bid is determined by the auction committee as the starting price. At the second stage, bidders may increase the starting price, each step determined by the auction committee may be not less than 1% of the starting price. 

8. Privatisation objects may be paid for from the borrowed funds, in which case the bidder must disclose creditor's identity and submit evidence of creditor's commitment to finance acquisition should the bidder become a winner at an auction. 

9. Privatisation object in the form of securities may be acquired by professional brokers in the interests of their clients, in which case the broker must disclose information about a client required for the purchasers, as well as a copy of its contract with the client. 

10. Small privatization objects may be sold only through an electronic auction system (such as PROZORRO) thus lowering the corruption risks. The starting price for small privatization objects must equal the balance sheet value of their assets less liabilities, but not less than UAH 1. If it is not possible to establish the balance sheet value of assets, then the starting price will be determined based on the appraisal of assets by the methodology approved by the Cabinet of Ministers.  The auction committee administering the sale is appointed by the State Property Fund. The electronic auction is held not later than 35 days following publication of its announcement. It is qualified as properly held if there are at least two bidders (except for Dutch auctions) and if there is at least one round of the increase of the price. In case of a single bidder privatization authority takes a decision to sell the object to the bidder for the bidder's price (redemption) which may not be less than the starting price. If the first auction is not held or there is no redemption, there should be a second one with the 50% decrease of the starting price. The single bidder rule fully applies to the second auction as well. If the second auction fails, the Dutch auction is to be held starting with the price which is 50% of the initial starting price.

11. Non-resident purchasers may pay for the privatization objects in hard currency or UAH. 

12. Information on bidders may not be disclosed until the end of the electronic auction. Guarantee deposits must be returned to all not winning bidders within 10 days of the approval of the auction minutes. Guarantee deposit of the winning bidder is included in the purchase price. 

13. Under the new law, investors admissible to privatisation in Ukraine may not include, inter alia, (a) the state which is defined by the Verkhovna Rada as the aggressor state, (b) legal entities in which such aggressor state has essential equity and their controlled affiliates, (c) companies (and their at least 50% subsidiaries) registered in jurisdictions listed by FATF as not cooperative in  fighting money laundering, (d) companies with undisclosed information on beneficiary owners,  (e) natural persons and legal entities (and their related persons) which are subject to Ukrainian sanctions, (f) privatization investors (and their affiliates) with whom privatization agreements were terminated due to their fault, and (g) investment advisors involved in privatization of relevant object. 

14. Privatisation  sale-and-purchase agreement may be governed now by foreign law (e.g., English law) and privatisation disputes between investors and the state may be taken to foreign arbitration (if parties did not agree on the site of the forum it must be under the Rules of Arbitration Institute of the Stockholm Chamber of Commerce). Under the new law, until 1 January 2021 and based on proposals of potential purchasers to the draft sale-and-purchase agreements regarding large privatisation objects privatisation authorities may determine that this agreement shall be governed by English law except for the transfer-of-title provisions which are subject to imperative Ukrainian regulation and the Law of Ukraine on Private International Law. Privatisation  sale-and-purchase agreement (except for unfinished constructions) does not need to be notarized. 

15. Investors will get better terms at the initial post-privatisation stage. In particular, there may be no bankruptcy proceedings during the first year following privatization. This will allow settlement of old debts without the risk of losing business to creditors. The statute of limitations for claims on invalidation of privatization results is limited to 3 years thus lowering the risk of raiders' attacks.

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