Armen Khachaturyan, senior partner of Asters, comments on M&A trends and recent legislative changes affecting M&A transactions in Ukraine.
How would you describe the specifics of Ukrainian M&As in recent years and prospects for the near future?
As in other countries, M&A deals in Ukraine over the last two years were often motivated not by the desire to maximize returns, but rather by the need to save businesses in a very challenging environment. Acquisition of distressed assets structured either as an asset or equity deal dominated the market. Most of these acquisitions were completed on an expedited transaction pace, often with or without limited due diligence, and in many instances without outside legal assistance due to commercial arrangements and higher standard of confidentiality. Some of the larger deals were structured as leveraged buy-outs with the involvement of financial institutions, mostly Russian banks assisting Russian investors. Therefore, the distribution of risks associated with the acquisition target or the merger partners became the main subject of negotiation in many M&A transactions. Given that the Ukrainian economy is showing signs of substantial improvement in 2010 and in early 2011, with GDP growth expected at a 4.3 percent annual rate and international business groups (with Russia taking the lead) showing a keen interest in Ukrainian assets, it is reasonable to expect a substantial rise in M&A activity in 2011 going beyond taking a distressed asset strategy and moving toward industry consolidation and strategic investment.
What are the most promising sectors for M&A activities in 2011?
Agriculture, energy, food, telecommunications, and banking will be in demand. Many commercial banks, which were painfully hit by the crisis and which are now under scrutinized regulatory requirements, would view a merger as an escape from a problem. Consolidation is a logical step for banks that are controlled by the same group. Mergers were recently announced between UniCredit Bank and Ukrsotsbank and between Dongorbank and FUIB. It is hoped that more will follow as banks must take significant steps in order to survive in the post-crisis market.
What are the recent legislative changes affecting M&A strategies in Ukraine?
Legislators have continued fine-tuning the Joint-Stock Companies Act (JSC Act) effective from April 2009. While the JSC Act prescribes detailed procedures for statutory mergers, demergers, and spin-offs, including corporate protection of minority shareholders, some of these procedures create unnecessary obstacles for a company's M&A plans. In February 2011, the JSC Act was amended to remove a previously existing requirement that a JSC can only merge with another JSC and not with a company incorporated in any other form. Similar limitations that were applicable to demergers and spin-offs were also lifted.
In addition, the amended law, effective on 1 January 2012, excluded the possibility for a private JSC to provide in its charter for the JSC's pre-emptive right to buy shares from its shareholder upon other shareholders waiving their respective pre-emptive rights.
Have the rights of majority or minority shareholders related to an M&A deal been affected by recent legislative amendments?
One of the important proposed amendments in which a 95 percent shareholder can forcefully buy-out the remaining shares called the majority shareholder's drag-along right did not become law due to the President's veto based on the argument that such a rule would violate minority shareholder(s)' proprietary rights guaranteed by the Ukrainian Constitution. Unfortunately, such forced buy-outs which are rather standard legal practice and common sense in many jurisdictions with well established protection of private property will need to be "re-invented" in Ukraine and introduction of this rule intended to ease the acquisition strategies has been now postponed for some time in the future.
At the same time, the JSC Act preserved (a) minority shareholders' tag-alone rights requiring an acquirer of at least 50 percent of common stock in a JSC to make an offer to all remaining shareholders to buy their shares and (b) quasi drag-alone rights of shareholders voting against a material transaction, merger, demerger or spinoff and some other major changes entitling them to demand that the JSC repurchase their shares.
What else does legislation allow for M&A and corporate transactions other than JSCs?
Although most major businesses, in particular former state enterprises and banks, are incorporated in the form of JSCs, in terms of absolute numbers the most popular corporate form is a limited liability company (LLC) which overall is subject to much less stringent regulation than JSCs, including M&A matters. However, their major handicap is that LLCs cannot have more than 10 members. The draft Limited Liability Companies Act, which envisions reforming regulation, is pending in Parliament since 2009.
What Ukrainian legal controversy is most frequently considered while structuring M&A transactions?
The High Commercial Court in its Recommendations of December 28, 2007 (the Recommendations) opined that the application of foreign law to corporate law matters in Ukrainian companies offends Ukraine's ordre public. It advised lower commercial courts to hold null and void any shareholder agreement between members of a Ukrainian company which is governed by foreign law. For this reason such agreements have sometimes been declared unenforceable in Ukraine, even where their enforce-ability was confirmed in international commercial arbitration. This position of the High Commercial Court has been strongly criticized by many academics and practitioners, but, notwithstanding this negative reception, the controversial Recommendation remains effective and substantiates actual judgments. In practice this has resulted in most M&A structures being done through an off-shore holding where the above limitations do not apply.