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Placing emphasis where it belongs: combating illegal hostile takeovers
On March 28 2014 Law 642/2013 - a milestone of the government's anti-corporate raider policy - entered into force. Revival of the bill, which had previously gathered dust in parliamentary committees for several years, was a response to numerous calls from the international community to take measures to counter illegal takeovers and acquisitions of businesses.
In anticipation of the new legislative reforms, it is worth considering the essence and origins of raiding, the reasons behind the inefficiency of the prior measures and the prospects of future measures to be taken.
Corporate raiding in context
The term 'raiding' - now commonly employed by mass media - triggers a distinct backlash among average Ukrainians, and is therefore often recklessly used in corporate disputes to provoke public antagonism against opponents. For the same reason, raiding has become a favourite topic of political rhetoric. However, appeals to eradicate raiding should be treated with a degree of scepticism.
In developed countries, corporate raiding attracts much less condemnation than in the former Soviet Union. This difference in perception is based on differing concepts of the term. The Western world sees corporate raiders as 'aides' which absorb unviable business structures and thus keep the economy in good shape. It is difficult to deny that capitalism is an inherently severe environment in which only the fittest survive the natural selection process and multiply their capital at the expense of their less agile competitors. The market economy cannot do without drastic and occasionally aggressive acquisitions by the powerful market players to whom the term 'business shark' owes its origin. Moreover, the methods and goals of such acquisitions differ greatly between Western countries and Ukraine, as they reflect their respective business cultures and stances on the rule of law in general.
Post-socialist economies are rife with 'grey' and 'black' raiding - that is, actions going beyond the legal framework, with extensive use of methods such as bribery of officials, document forgery, threats and physical violence. The sole goal of many hostile takeovers is alienation of the company's property that is incompatible with its further activities or the receipt of kickbacks in exchange for stopping the attack. This begs the question of what is really worth combatting - the hostile takeover or the criminals behind it? In analysing the new law from this perspective, it can be argued that despite some positive changes, the government has not placed emphasis where it belongs.
Pros and cons of new law
The exclusive jurisdiction of commercial courts over corporate disputes at the place where the legal entity is registered is one of the positive innovations of the law, and is expected to make it more difficult to undertake corrupt practices in raider schemes.
Another positive step is the introduction of a number of restrictions on the use of provisional remedies, including a reservation requiring proportionality in such provisional remedies with regard to claims (provided that the evaluative concept of 'proportionality' finds an adequate response in law enforcement circles).
As for the anti-raider articles of the Criminal Code, their content largely replicates that of already existing articles, which raises doubts as to their feasibility1.
Without diminishing the achievements of Parliament in improving the legal framework, the law is arguably a mere defensive reaction to the growing criticism of the systemic defects underlying the problem. The most important of these defects is the political bias of officials who become complicit with hostile raiders instead of counteracting them. Another pillar of raiding is the vulnerability of many companies arising from the shady nature of their activities, covert business practices and the undervaluation and dubious (ie, illegal) origin of assets acquired from privatisation processes.
The combination of these factors creates a climate in which even large financial and industrial groups resort to grey raiding practices, as this approach brings no significant risks and may be more lucrative than official methods of corporate acquisition. The situation will change only once the Ukrainian market has achieved a certain degree of maturity, which will necessitate specific efforts by those in power and the business community.
The government's role in the fight against raiding is limited to ensuring the proper functioning of law enforcement and judicial systems, allowing businesses to rely on these systems and use them as effective tools to protect their legitimate interests. However, as a Russian proverb states: "If you're drowning, you're on your own." The challenge for 'drowning' companies is to ensure the legality of their transactions, create transparent and public corporate structures and resort to adequate remedies at the proper time. Achieving these goals will enable hostile takeovers in Ukraine to evolve gradually from audacious power grabs to sophisticated white-collar schemes implemented in strict accordance with the law, which will stimulate the economy rather than deter investors. Unfortunately, in this case "gradually" is more likely to mean years than months.1 This issue was discussed in the June 15 2010 opinion of Parliament's Central Scientific Experts Office and the commentaries of Parliament's Central Legal Office dated November 8 2011 and May 13 2013, which can be accessed on Parliament's website.