Category: Ukraine

The main event of 2017 in Ukrainian dispute resolution (and maybe for all legal practices) is certainly the formation of a new Supreme Court.

For almost a century the Supreme Court was formed under the decisive influence of the executive, and only in 2016 did constitutional reform transfer the relevant powers back to the judiciary and the legal profession.

Now, for the first time ever, the judges of the Supreme Court will be appointed following an open competition, and again for the first time ever practicing lawyers and scholars outside the judiciary have been allowed to run for the highest judicial offices in the country.

The actual procedure of the appointment of the new Supreme Court judges, however, has produced mixed impressions in the legal community.

First, the widely-advertised possibility for legal professionals to take part in the competition turned out to be severely limited. To enter the competition, practitioners had to be qualified barristers (advocates) and had to confirm ten years of experience in courts. Historically, many practitioners in the civil and commercial spheres did not obtain advocate status, which had essentially no practical benefit. It can also be difficult to prove practical experience, since smaller practices and in-house counsel rarely keep case records for ten years. Scholars suffered as well: due to the imperfect wording of the law (later corrected by the parliament) only those employed by universities were allowed to compete, while the ones working for purely scientific institutions were barred.

As a result, only 20% of the competitors were either practitioners or scholars – the rest were judges. Eventually, about the same distribution of candidates was approved for appointment to the Supreme Court.

The next stages of the competition also raised questions. The practical test included drafting a judgment on the basis of a moot case. After the drafting session ended, it turned out that at least some of the candidates, including the current Chairman of the Supreme Court, apparently drafted judgments on the basis of cases they had previously considered as judges. The competition authority added fuel to the fire by declining requests to disclose the moot judgments prepared by the candidates to the public.

The most controversial development, however, was the final stage of the competition, which involved the authority interviewing the candidates, taking into consideration the conclusions of the Public Integrity Council, an independent body created to verify the integrity of the candidates, including correspondence between their official income and their lifestyle, whether their judgments had been annulled by the ECHR, whether there was any allegation of ethical breaches made against them, and so on.

The Council issued “negative integrity” decisions for about 140 of the 319 candidates who made it to the final stage. The appointing authority, however, was entitled to override the negative decisions and very often did so, which resulted in 30 candidates being approved for appointment to the Supreme Court despite having received negative integrity decisions by the Council. This prompted the Embassy of the US in Ukraine to call for an additional review of these candidates on a case by case basis.

The final list of the candidates is expected to be officially approved in September 2017, and the new judges formally appointed shortly thereafter by the President of Ukraine. They will assume their new role amid allegations of competition rigging and corruption, and it is first of all up to them to prove that the new Supreme Court will serve as an example of professionalism and fairness.

By Oleksiy Didkovskiy, Managing Partner, and Dmytro Shemelin, Counsel, Asters

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The growing interdependence of world economies, driven by the reduction and removal of trade barriers, cheaper transport and communication costs, and increased use of the Internet (facilitating easier access to foreign markets), as well as by the growth of multinational corporations, has resulted in unprecedented cross-border trade and capital flows. At the same time, it has also opened up new opportunities for multinationals to reduce their profit in high-taxed jurisdictions by exploiting gaps and mismatches in domestic and international tax rules to artificially shift it to low-taxed countries (or tax havens).

As the largest country in Central and Eastern Europe, with a strong commitment to pro-European integration, Ukraine has to address the challenges in cross-border taxation resulting from economic globalization, such as tax avoidance through sophisticated tax planning mechanisms. 

The most powerful weapons against tax evasion and aggressive tax planning currently in the armory of more than 100 governments are the 15 actions set forth in the context of the Organization for Economic Cooperation and Development (OECD) and G20 BEPS Project, aimed at tackling tax avoidance. 

Not being a member of the OECD, Ukraine is under no formal obligation to implement the BEPS Actions. However, in furtherance of its commitment to joining international anti-tax avoidance initiatives, on January 1, 2017, Ukraine became an official member of the Inclusive Framework for the global implementation of the BEPS project and declared itself committed to implementing minimum standards in four key areas: countering harmful tax practices, implementing country-by-country reporting for transfer pricing, preventing tax treaty abuse, and enhancing dispute resolution.

According to the formal plan (the “Roadmap”) which was presented by the Ministry of Finance in May 2017, implementation of the BEPS minimum standards in Ukraine is expected by the end of 2018. 

Prior to joining the Inclusive Framework on BEPS, Ukraine launched a deoffshorization campaign aimed at taxing the income and gains diverted to tax havens by businesses and individuals. The President’s Decree of April 28, 2016 calling for the development of legislative changes for counteracting BEPS in Ukraine marked the formal launch of the deoffshorization process. 

A working group established by the President’s Decree has prepared draft laws aimed at improving transfer pricing control rules and anti-BEPS measures; introducing controlled foreign company rules; counteracting aggressive tax planning activities; and liberalizing currency control legislation of Ukraine. However, the legislative drafts that have been prepared so far in the framework of the deoffshorization initiative do not contain a unified approach to statutory regulation of these issues. After Ukraine’s formal adoption of the OECD/G20 minimum standards, it is expected that Ukrainian officials will undertake concerted efforts to efficiently implement anti-BEPS/deoffshorization measures. 

Liberalization of the Ukrainian currency control legal framework, considered one of the most rigid in the world, is a key prerequisite for successful implementation of the deoffshorization/anti-BEPS strategies in Ukraine. To encourage disclosure of control over foreign companies by Ukrainian individuals the National Bank of Ukraine (NBU) intends to introduce amnesty granting relief from penalties for the failure to obtain an individual license from the NBU prior to acquiring shares in foreign entities. 

Ukraine’s accession to automatic exchange of financial account information based on the OECD common reporting standard (CRS) is another essential precondition for effective implementation of BEPS initiatives in Ukraine, as it will reveal banking transactions carried out by Ukrainian tax residents in violation of tax and currency control regulations. An official statement on readiness to join a multi-party agreement on exchange of tax information was made in April 2016, however no formal commitments have been made by Ukraine so far. 

Adoption of anti-BEPS minimum standards and consistent liberalization of the Ukrainian currency control regulations are definitive indicators of Ukraine’s readiness to implement international best tax practices and send positive signals to foreign investors. 

Albert Bushnell Hart once contended that, “taxation is the price which civilized communities pay for the opportunity of remaining civilized.” Implementation of BEPS measures by Ukraine and over 100 other countries and jurisdictions will serve as the basis for a tax system that is fair and responsive to taxpayer needs and encourages them to pay their due share.

By Oksana Kneychuk, Head of International Tax Planning and Corporate Structuring Department, Eterna Law

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

After a period of political and economic instability which put M&A transactions in Ukraine into a dormant mode, the country is starting to show signs of revival. As the economy recovers and new legislation aimed at strengthening the rule of law and simplifying doing business is adopted, investors are again looking towards Ukraine with interest. 

Over the last two years, Ukrainian corporate legislation has undergone a number of significant changes that have improved the business climate and made Ukrainian market more investor-friendly. 

Protection of Investments 

The following legislative changes aimed at protecting investors’ rights have come into effect: (1) The concept of derivative action was introduced, which allows shareholders holding 10% or more of a company’s shares to file an action on the company’s behalf against company officials for losses caused by those officials’ actions or failure to act; (2) The concept of independent directors was introduced for joint-stock companies; (3) The rules of approval of interested party transactions in joint-stock companies were improved; (4) The restriction on the maximum number of shareholders in private joint-stock company was removed.

Joint-Stock Companies

Recently, long-awaited legislative changes with respect to joint-stock companies came into effect. The purpose of these changes was to lower the number of regulations on joint-stock companies, to protect joint-stock companies from hostile takeovers and manipulations, and to bring Ukrainian legislation regarding joint-stock companies into conformity with European directives. Among the changes that will have the most impact on M&A transactions involving joint-stock companies in Ukraine are: (1) The introduction of squeeze-out and sell-out procedures, which are brand new concepts in Ukrainian legislation (according to the squeeze-out procedure, a shareholder that acquired a dominant controlling stake of 95% and more of joint-stock company shares shall have the right to demand that the owners of the remaining stake sell their shares, with settlement for the shares done via escrow account, the concept of which was introduced by the same new legislation; the sell-out procedure provides minority shareholders with the right to demand that the shareholder holding the controlling dominant stake buy-out their shares at a fair market price); (2) The introduction of new rules and thresholds for the acquisition of controlling stakes in private and public joint-stock companies; and (3) New disclosure requirements with respect to indirect and direct acquisitions of shares in joint-stock companies and the approval of material and interested party transactions.

Corporate Agreements

It is a well-established market practice in Ukraine that all significant M&A transactions are structured so that the shares of a non-Ukrainian holding company with underlying Ukrainian business are purchased and the transaction documents are made subject to English law. The main reason for this is the lack of flexibility in Ukrainian law, as well as a lack of trust in the Ukrainian judicial system. The new legislation on corporate agreements is expected to change the situation – at least in part – in terms of corporate (shareholders’) agreements between the shareholders of Ukrainian companies. The new law has not yet come into effect – it is awaiting the President’s signature – but it is expected to soon. The law will allow the shareholders of Ukrainian companies to regulate in the agreement the shareholders’ obligation to vote in a defined way, to approve the purchase or sale of the shares at a preliminary-defined purchase price, to oblige them to refrain from share sales, and so on. The law is not perfect though, and it still leaves room for uncertainties. Thus, it is too early to draw any conclusions as to whether the corporate agreements will be successful in replacing the English law shareholders’ agreements in Ukrainian M&A transactions.

Considering the details outlined above, we can conclude that there is a sufficient basis to believe that Ukrainian M&As are back on track, as evidenced by the new deals that have begun to appear on the market.

By Alla Kozachenko, Legal Director and Head of Corporate and M&A, DLA Piper Ukraine

This Article was originally published in Issue 4.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Russian annexation of Crimea in March 2014 and subsequent military actions in Eastern Ukraine left Ukraine reeling. It took a while for the country to develop a strategy and institute its first arbitration and court actions against the Russian Federation. These first legal challenges are now bearing fruit, as several landmark decisions have recently been delivered by major international dispute resolution venues.

These include:

1) The application brought by Ukraine against the Russian Federation before the International Court of Justice at The Hague (ICJ), in which the court partially approved the request for the indication of provisional measures and established its prima facie jurisdiction to the extent that the dispute between the parties relates to the “interpretation or application” of the International Convention on the Elimination of All Forms of Racial Discrimination and the Terrorism Financing Convention. 

2) One of six inter-state applications brought by Ukraine against the Russian Federation before the European Court of Human Rights (ECHR) regarding the events leading up to and following the assumption of control by the Russian Federation over the Crimean Peninsula from March 2014 to the beginning of September 2014, which was found admissible by the court;

3) The Law Debenture Trust Corporation Plc v Ukraine dispute, which deals with Ukraine’s non-payment of notes solely held by the Russian Federation and serviced by the Trust, in which the High Court of England and Wales (EWCH) granted summary proceedings in favor of the claimant.

4) The Gazprom v Naftogaz dispute pending before the Stockholm Chamber of Commerce arbitration tribunal, which recently issued a ruling upholding part of Naftogaz’s claims involving a gas sales contract;

5) Eight Permanent Court of Arbitration (PCA) investment disputes brought by various Ukrainian companies under the 1998 Ukraine-Russia bilateral investment treaty relating to the annexation of Crimea and subsequent loss of their property (five of these disputes have already passed the jurisdictional phase).

Decisions on admissibility have not yet been rendered in four other cases brought by Ukraine before the ECHR concerning alleged human rights violations that occurred in Eastern Ukraine prior to September 2014, subsequent violations in Crimea and Eastern Ukraine before the summer 2015, and the abduction of three groups of children in Eastern Ukraine. One of the cases was struck off the list because Ukraine withdrew its application. 

In addition, there is also arbitration pending before the PCA under the UN Convention on the Law of the Sea, in which Ukraine seeks to vindicate its rights as a coastal state in maritime zones adjacent to Crimea in the Black Sea, the Sea of Azov, and the Kerch Strait. The tribunal held its first procedural meeting in May 2017, and thus we expect arbitration to kick off soon.

While it is too early to draw conclusions, Ukraine’s strategy seems to be successful. Although it might be difficult to make the Russian Federation comply with the decisions of the ICJ and the ECHR due to the absence of effective means of enforcement, the value of these decisions, if granted in Ukraine’s favor, should not be underestimated. 

In the absence of a condemnation by the UN Security Council regarding Crimea’s annexation and on-going Russian military actions in Eastern Ukraine, decisions of the UN and regional judicial bodies are crucial. Otherwise, in a few years, more examples of states recognizing Russian actions as lawful may follow.

While it is believed that Ukraine could have been more creative with its ICJ claim, Ukraine’s claims against the Russian Federation are limited to international instruments to which both states are bound. 

Additionally, the number of these instruments shrinks each time Ukraine tries to employ them against the Russian Federation. For instance, it took the Russian Federation only two days to withdraw its signature from the Rome Statute after the ICC Prosecutor published its 2016 report on its preliminary examination of the situation in Crimea and Eastern Ukraine and alleged crimes. 

While the EWCH has, in a way, predetermined the result of The Law Debenture Trust Corporation Plc v Ukraine by granting a summary judgment to the claimant, there are high prospects that the Gazprom v Naftogaz case will have a favorable outcome for Ukraine. The fact that the SCC found that the “take-or-pay” obligation under the gas sales contract does not apply retroactively for 2012-2014, 2015, and 2016 is already a huge relief for Ukraine.

Similarly, positive jurisdictional decisions of the PCA recognizing that the 1998 Russia-Ukraine BIT protects investments by Ukrainian companies in the Crimean Peninsula will likely encourage more claims to be filed. Unlike in other matters, the Russian Federation does not participate in these investment arbitrations. However, with these claims mounting up, it will have to intervene eventually either at the merits stage or later, by challenging the award in The Hague or by opposing its recognition and enforcement elsewhere.

By Kostiantyn Likarchuk, Partner, Kinstellar Ukraine

This Article was originally published in Issue 4.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.