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Cross-Border Corporate Restructuring of Agricultural Groups
Corporate restructuring is the cumulative term used to describe the act of reorganizing the group's legal and operational structure for the purpose of making it more profitable and better organized for current needs.
Armen Khachaturyan, senior partner, and Oleksiy Demyanenko, associate at Asters, provide an overview of certain key legal and commercial issues related to cross-border corporate restructuring of Ukrainian agricultural groups with particular focus on corporate restructurings preceding capital raising projects.
Cross-border corporate restructuring project traditionally consists of five stages.
Stage one - includes (a) review of existing group's structure, (b) analysis of relevant corporate, tax and antimonopoly issues, and (c) preparation of recommendations on the group's best restructuring options. At this stage close cooperation between beneficiaries and legal advisor is needed to create clear and effective structure suiting the group's business model.
Attention should be paid to possible antimonopoly infringements at the group formation stage. For these purposes legal advisor conducts limited legal due diligence. Identified violations can be cured at stage four.
Stage two - incorporation of the holding company. Holding companies of Ukrainian agricultural groups seeking equity or debt finance on international capital markets are commonly incorporated in Cyprus, Luxemburg or the Netherlands. A holding company can be established by the group's foreign law counsel or by a foreign law firm engaged by the group's Ukrainian legal counsel.
For the purposes of IPO or private placement of shares the holding company's authorized capital (maximum amount of share capital that the company is allowed to raise by its constituent documents) must be sufficient to attract the intended equity investment.
In certain cases beneficiaries establish sub-holding entities for each segment of the group's business (e.g. cattle breeding, production of milk or crops harvesting). Import oriented agricultural groups also often incorporate trading companies abroad to minimize taxes.
Stage three - structuring control over the holding company. Under Ukrainian exchange control rules, acquisition of foreign shares by Ukrainian resident may only be made after obtaining an individual license from the National Bank of Ukraine. The issuance of this license is subject to the approval of organized crime counteraction authorities. The license is not required, however, if shares of the holding company are transferred to the beneficial owners through the deeds of gift. Control over the holding company is commonly structured through nominee shareholders - natural persons or legal entities holding shares on behalf of the beneficial owners under a trust deed.
In certain foreign jurisdictions there are requirements as to the minimum number of the entity's founders. For instance, from the moment of incorporation a Cypriot public company must have at least seven members.
Stage four - transfer of equity interest/shares in Ukrainian companies of the group to the foreign holding company. This transfer is commonly conducted through a sale and purchase transaction. To minimize tax risks the purchase price must be equal or higher than the amount of the target's charter capital. Notably, sufficient funds must be available in the acquirer's bank account to be used for payment of the purchase price. However, considering Ukrainian currency control restrictions the preceding transfer of funds to the foreign holding-acquirer can be a serious problem if the charter capital of a Ukrainian target company exceeds, for instance, several million dollars, as we witnessed several times in practice. In such instances additional structuring is required.
Stage five - restructuring of the group's Ukrainian subsidiaries. The following Ukrainian corporate law restrictions should be taken into consideration: (a) Ukrainian company may not be solely owned by a founder that has only one participant (shareholder) and (b) an entity cannot be a sole participant in more than one Ukrainian LLC.
Title to all material properties of the group, including plants, silos, mills and other production facilities, is transferred to the 'dormant' Ukrainian company not engaged in commercial and trading activities.
Corporate restructuring may also necessitate spinning off some business departments into subsidiaries to create a more efficient management and tax model.
Entities existing as private enterprises or additional liability companies at this stage are normally converted into LLCs or JSCs.
The group corporate restructuring may take up to half a year depending on the scope of required procedures.
In 2H 2011 and 2012 there have been numerous corporate restructurings in Ukrainian agricultural sector. The downtime on capital markets appears to be used by many businesses for getting better prepared for upcoming finance opportunities.