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M&A in Ukraine in 2010: Tread carefully and be aware of new rules
Mergers and acquisitions are an important aspect of both business strategy and law practice. The global financial crisis and its Ukrainian iteration ushered a period of turmoil in the national mergers and acquisitions market. However, the economic environment is not the only thing that changes. The legal landscape for M&A transactions, in particular in joint stock companies, has also changed recently. In an interview, Armen Khachaturyan, Senior Partner of Asters, highlights some of the most important legal requirements affecting Ukrainian M&A transactions today.
What was the impact of the economic crisis on the M&A market in Ukraine?
The global financial crisis significantly affected the M&A market. The total value of major M&A transactions in Ukraine declined from $21.49 billion in 2007 to $3.69 billion in 2008, recovering a little to $13.94 billion in 2009. Not only the volume of M&As, but also economic motivation for most of them, changed because of the crisis. As in other countries today, M&A deals in Ukraine are often motivated not by desire to maximize returns but rather by the need to shore up businesses in a very challenging environment. Therefore, in addition to the transfer of corporate rights and assets attached to them, today in Ukrainian M&A deals the parties pay much greater attention to the distribution of the risks associated with the acquisition target or their merger partners. The distribution of such risks is often the main subject of negotiations in M&A deals.
What are the major recent changes in legislation affecting M&As
that businesses should be aware of? As most readers know by now, in April 2009 the new Joint-Stock Companies Law (the "JSC Law") came into effect. Generally, the Law is regarded as a serious step forward in the development of Ukrainian corporate law. However, the new law suffers from a number of inconsistencies and both businesses and the State Securities and Stock Market Commission (the "SEC") are still in the process of figuring them out. The Law introduces major and mostly positive changes in all aspects of organization and corporate governance of joint-stock companies ("JSCs"), including M&A transactions. The JSC Law prescribes detailed procedures for statutory mergers, demergers, and spin-offs. Any merger plan has to be approved by the supervisory boards of all participating companies, audited by an independent consultant, and approved by a general shareholder meeting of each participant. A JSC can only merge with another JSC and not with a company incorporated in any other form. Similar limitations apply to demergers and spin-offs.
Among other changes relevant to M&A, the Law, for the first time in Ukraine, explicitly prohibits the management of a JSC which is the acquisition target from creating obstacles for the buyer. The exact scope of this prohibition remains to be clarified, as do many other novelties introduced by the Law.
What are the rights of minority shareholders if a large share of a company is acquired in an M&A deal?
Under the JSC Law, any person who has acquired at least 50 percent of common stock in a JSC must make an offer to all remaining shareholders to buy their shares. This offer is made through the target company's supervisory board, while the SEC and the exchange where the shares are listed must be notified about the offer. A new rule introduced by the JSC Law provides that shareholders can demand that the JSC repurchase their shares if these shareholders voted in a general meeting of shareholders against a material transaction (a transaction is considered "material" if its value exceeds 25 percent of the company's assets), against a merger, demerger or spinoff and some other major changes. In order to benefit from this right, a shareholder has to actually participate in the general meeting of shareholders where such matters are discussed and vote "against" the proposed transaction.
Only shareholders of JSCs, both public and private, have these rights under the JSC Law. Shareholders of other forms of companies, for example limited liability companies, do not enjoy equivalent protections.
Do businesses need to notify any state authorities about a planned M&A transaction?
The JSC Law requires potential buyers of at least 10 percent of shares in a joint-stock company to notify the target JSC, the SEC and the stock exchange where shares are listed about their intended acquisition. The potential buyer must also publish a notice of the proposed acquisition in one of the official government publications (Holos Ukrainy, Uriadovy Kuryer or one of SEC's periodicals). The notice must be sent and published at least 30 days prior to the proposed acquisition. Again, there are no similar requirements for companies established in any form other than JSC. However, where any change of membership occurs in such a company, it has to be reflected in amendments to the company's charter and filed with the State Registry of Legal Persons.
Some M&A deals raise concerns about competition and potential monopolization. When does one need an antitrust clearance for a Ukrainian M&A deal?
Under Ukrainian law almost any form of an M&A transaction giving one business control, in whatever form, over another business, can qualify as a "concentration" for antitrust purposes. However, a concentration requires a clearance from the Antimonopoly Committee only if the parties to the transactions are either large enough or have a large enough share of the market to meet certain thresholds set by the antitrust legislation.
As far as the size of participants in an M&A transaction is concerned, the clearance is required if: 1) the parties have the combined worldwide assets or revenue exceeding €12 million; 2) at least two of the parties each has more than €1 million in worldwide assets or revenue; 3) either party has more than €1 million in Ukrainian assets or Ukrainian revenue. These thresholds are measured for the year preceding the year of the transaction and, in order to trigger the clearance requirement, you need a combination of all three indicators. However, the size does not matter if any single party or the parties combined have a market share exceeding 35 percent. If this market share test is met, then any concentration requires a clearance even if the assets and revenue of the participants is below the described levels.