Category: Ukraine

Baker McKenzie has advised the State Property Fund of Ukraine on the successful privatization of the integral property complex of State Enterprise Electronmash, which was sold at auction for UAH 970 million (approximately USD 35.4 million).

According to Baker McKenzie, “the project was implemented with the support of the American people through the United States Agency for International Development (USAID) under the Competitive Economy Program.”

Baker McKenzie’s team was led by Kyiv Managing Partner Serhiy Piontkovsky and included Senior Associate Nataliya Tyschenko and Associate Andrii Levchenko.

Asters has represented DMV Group company Obriy before the Ukrainian Antimonopoly Committee on merger clearance for the privatization of state-owned company Radyvyliv Grain Processing Plant.

According to Asters, the transaction is valued at USD 5.5 million and is considered “as one of the biggest small privatizations over the past 6 months. It includes the purchase of the elevators and other assets located on ten land plots with a total area of 41 hectares,” the firm informed.

The Asters team was led by Partner Oleksiy Pustovit and included Associates Ivan Yaremchuk, Tetiana Bebik, and Yelyzaveta Herasymchuk.

Over the past year, the Antimonopoly Committee of Ukraine has been closely scrutinizing business structures involving corporate investment funds during the review of merger control notifications. In particular, the regulator is interested in relations of control among asset management companies, corporate investment funds, and their shareholders. Depending on the regulator’s position, the list of parties to a concentration can be significantly wider than one may probably realize.

Under the Law of Ukraine On Mutual Investment Funds, a corporate investment fund has two governing bodies that define and implement the fund’s investment strategy – the general meeting of shareholders and the supervisory board. Among other powers, the shareholders may choose and change an asset management company of the fund. At the same time, the supervisory board approves agreements entered into by the asset management company in relation to the fund’s assets. In its turn, an asset management company is an independent entity that participates in managing the fund’s assets (for example, shares, stocks, etc.) on behalf of the fund, under an asset management agreement.

So the powers of the asset management company stem from the agreement between the asset manager and the fund. Moreover, asset management companies usually provide nominal professional services and act upon instructions of the fund rather than make independent business decisions while running the business.

But even if the asset management company controls the fund, it does not automatically follow that such a fund is connected to other funds under the management of the asset manager. At the same time, according to the regulator’s conservative stance, various funds managed by the same asset management company are related entities constituting a single economic unit, due to the powers the asset management company usually has under the asset management agreement. This, however, does not reflect the Ukrainian business reality and often creates far-reaching and undesirable consequences for parties to concertation.

The asset manager usually manages multiple funds, which might be completely independent and belong to different business groups. In addition, as mentioned above, the asset manager often performs a mere nominal function and has no real influence over the fund. However, following the regulator’s flawed logic, shareholders of those funds, the funds themselves, and their assets are considered to be a single economic unit. The regulator concludes so by establishing that all these elements have one thing in common – the asset manager.

In practice, it means that when making a merger control filing business group A must also provide to the regulator corporate and market information on business group B. In the regulator’s opinion, the lack of such information would not allow it to conduct the substantive appraisal of concertation. As a result, the regulator will not review the merger control notification until it receives all necessary information on group B. However, providing such information is impossible in most cases, since there is no economic nexus between group A and group B (after all, they are not affiliates, and group B’s information is confidential). Moreover, group A would be required to account for business group B’s financial and market performance, even though there is no way group A can influence such performance. This may lead to the wrong allocation of market power. For example, group A can be viewed as a dominant entity in a given market because of the market position of group B.

To avoid such undesirable results, one should always closely analyze statutory documents of the fund and asset management agreement or even consider amending them in some cases. Depending on the wording of the relevant document, it might be possible to carve out the asset management company and third-party assets from the fund in question – for example, by limiting the rights of an asset management company.

By Mykyta Nota, Counsel, Co-Head of Competition Practice, and Anton Arkhypov, Senior Associate, Avellum

This Article was originally published in Issue 8.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Over the past year, the Antimonopoly Committee of Ukraine has been closely scrutinizing business structures involving corporate investment funds during the review of merger control notifications. In particular, the regulator is interested in relations of control among asset management companies, corporate investment funds, and their shareholders. Depending on the regulator’s position, the list of parties to a concentration can be significantly wider than one may probably realize.

Under the Law of Ukraine On Mutual Investment Funds, a corporate investment fund has two governing bodies that define and implement the fund’s investment strategy – the general meeting of shareholders and the supervisory board. Among other powers, the shareholders may choose and change an asset management company of the fund. At the same time, the supervisory board approves agreements entered into by the asset management company in relation to the fund’s assets. In its turn, an asset management company is an independent entity that participates in managing the fund’s assets (for example, shares, stocks, etc.) on behalf of the fund, under an asset management agreement.

So the powers of the asset management company stem from the agreement between the asset manager and the fund. Moreover, asset management companies usually provide nominal professional services and act upon instructions of the fund rather than make independent business decisions while running the business.

But even if the asset management company controls the fund, it does not automatically follow that such a fund is connected to other funds under the management of the asset manager. At the same time, according to the regulator’s conservative stance, various funds managed by the same asset management company are related entities constituting a single economic unit, due to the powers the asset management company usually has under the asset management agreement. This, however, does not reflect the Ukrainian business reality and often creates far-reaching and undesirable consequences for parties to concertation.

The asset manager usually manages multiple funds, which might be completely independent and belong to different business groups. In addition, as mentioned above, the asset manager often performs a mere nominal function and has no real influence over the fund. However, following the regulator’s flawed logic, shareholders of those funds, the funds themselves, and their assets are considered to be a single economic unit. The regulator concludes so by establishing that all these elements have one thing in common – the asset manager.

In practice, it means that when making a merger control filing business group A must also provide to the regulator corporate and market information on business group B. In the regulator’s opinion, the lack of such information would not allow it to conduct the substantive appraisal of concertation. As a result, the regulator will not review the merger control notification until it receives all necessary information on group B. However, providing such information is impossible in most cases, since there is no economic nexus between group A and group B (after all, they are not affiliates, and group B’s information is confidential). Moreover, group A would be required to account for business group B’s financial and market performance, even though there is no way group A can influence such performance. This may lead to the wrong allocation of market power. For example, group A can be viewed as a dominant entity in a given market because of the market position of group B.

To avoid such undesirable results, one should always closely analyze statutory documents of the fund and asset management agreement or even consider amending them in some cases. Depending on the wording of the relevant document, it might be possible to carve out the asset management company and third-party assets from the fund in question – for example, by limiting the rights of an asset management company.

By Mykyta Nota, Counsel, Co-Head of Competition Practice, and Anton Arkhypov, Senior Associate, Avellum

This Article was originally published in Issue 8.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Several notable decisions of Ukraine’s Anti-Monopoly Committee, a bottleneck caused by a spike in the number of public procurement appeals, and the country’s tax amnesty program are at the top of lawyers’ agendas, according to Redcliffe Partners Partner Yuriy Terentyev.

“We are seeing big inflows of money into the Ukrainian economy,” Terentyev begins. “They are affecting investment activity, public procurement, and, of course, competition. The available liquidity means a bigger interest for investments, and we anticipate an increase in M&A work and the associated antitrust activity.” 

Several cases on abuse of dominance that started in 2020 or prior were completed this year, Terentyev says, highlighting one where an electricity producer was found to abuse its market position. “They of course did not agree. In Ukraine we have two energy zones: the unified energy system, including most of Ukraine, and the Burshtyn Energy Island, synced with the EU but not the rest of the country,” he explains. “Only thermal plants operate there, but energy can be imported from neighboring countries. And the electricity producer could control the availability of imported electricity and thus influence the pricing in this trading zone. We’ll have to see how it goes in the courts.” 

Because of peculiarities in Ukraine’s antitrust laws, Terentyev says financial institutions acquiring control of company shares or assets through foreclosures need to file concentration notifications with the competition authority or run the risk of hefty fines. “In September the authority issued a decision against the State Savings Bank of Ukraine – for its ownership of a pledged refrigeration facility without notification – and imposed a fine of around EUR 500,000. Similarly, in the summer, the authority issued a decision concerning a sugar factory that went bankrupt several years ago, with different parts of it having been acquired by a bank and other entities and then gradually reconsolidated by the new business owner. Technically they did not acquire a working business from the bank through the first transaction – but the penalty imposed by the authority was more than EUR 2 million, setting a new standard,” he reports.  

“The Anti-Monopoly Committee was sticking to a conservative interpretation of the law. Both these cases are questionable examples of ‘classic concentrations.’ Still, financial institutions should take this into account, from a compliance and risk management perspective, and just file the concentration notice.” He hopes this particular issue will be addressed by Parliament in the next six months. “Meanwhile, the authority has at least clarified its stance on the issue – it’s an uncomfortable clarity, but clarity nonetheless.” 

The biggest issue currently affecting the Anti-Monopoly Committee, according to Terentyev, is the fact that instead of the roughly 900 appeals on public procurement procedures a year back in 2014 the authority has now received about 17,000. “So, all commissioners are now reviewing up to 100 public procurement cases every day. It’s a big bottleneck for public procurement and a strain on the authority’s other functions,” he explains. He says this will be addressed soon, with changes to the Law on Public Procurement and on the Anti-Monopoly Committee implementation, which would “divert complaints from the antimonopoly commissioners to new public procurement commissioners, to be hired within the same institution.” 

Finally, Terentyev mentions that Ukraine has started a tax amnesty program, available for one year starting September 2021. “Individuals may disclose their assets – those for which taxes have not been paid – without liability.” He says competition law will again come into play. “If the ultimate beneficial owner declares an asset now, without having filed the proper concentration notification before, under the ‘amnesty’ the penalty will be limited to an amount of about EUR 700. But as of mid-September, only two tax amnesty notifications have been filed.” He anticipates that most of the filings will happen towards the end of the designated period. “With the tax authority, you just send in a letter. But things might be more complicated on competition, negatively impacting the productivity of the competition authority, which will have to deal with an unpredictable number of notifications in a limited period of time, closer to the end of the ‘amnesty.’ Nobody wants to go first and risk becoming a case study,” Terentyev concludes.

CMS has acted as legal partner on the Next-UA capital markets consulting project, launched jointly by the Ukrainian government, USAID, the EBRD, and the American Chamber of Commerce in Ukraine.

According to CMS, the firm “worked with a consortium of high-profile technical and financial advisors, including Cirway Consulting, Afi, Araliya, Barva Invest, and D3 Consulting.”

The firm informed that the work was related to a “feasibility study aimed at proposing a working and commercially viable structure for the Ukrainian capital markets. The study covers both trade and post-trade pillars and takes into account the market’s perspective on the current state of play, based on a series of interviews with various stakeholders and key market participants. The study recommends a product and market structure that builds upon existing players and elements, and it also recommends best practices and innovations on which Ukraine could take a lead.”

“While it has always been a ‘chicken and egg’ question as to what comes first – volumes or infrastructure – Ukraine should now work on all fronts to maintain momentum and foreign investor interest, especially following the implementation of Ukraine’s New Capital Markets Law,” commented CMS Partner Ihor Olekhov. “We believe the Next.UA study will breathe new life into the Ukrainian capital markets strategy and help to enable difficult but important decisions.”

The CMS team was led by Olekhov and included Counsel Kateryna Chechulina, Senior Associates Mariana Saienko, Mykola Heletiy, Nataliya Nakonechna, Viktoriia Stavchuk-Mulundkar, and Volodymyr Kolvakh, and Associates Khrystyna Korpan, Iryna Kravchenko, Ihor Pavliukov, and Anatolii Doludenko.

Arzinger has successfully represented Ceetrus Ukraine in a UAH 53 million VAT refund dispute before three court instances.

According to Arzinger, the courts held that Ceetrus conformed to the tax law requirements. “The courts found the lack of violation in the following three episodes: failure to comply with the chronology principle in forming the negative value of VAT, subleasing leased property along with the relevant compensation for utility payments, technical errors in filling in annexes to the VAT return,” the firm informed.

Established in 1976, Ceetrus specializes in the real-estate sector and owns 300 shopping centers in 10 European countries. Ceetrus Ukraine, formerly Immochan Ukraine, manages seven shopping galleries in Ukraine.

According to the firm, following the tax law dispute, “Ceetrus received the total VAT refund.”

The Arzinger team included Managing Partner Timur Bondaryev, Partner Kateryna Gupalo, Lawyer Marta Orlenko, Senior Associate Nikita Larionov, and Junior Associate Kseniia Dobrieva.

Ilyashev & Partners has advised Ukraine’s Antonov state enterprise on its five-year contract with NATO and the EU, within the framework of the Strategic Airlift International Solution program.

According to Ilyashev & Partners, the contract stipulates that “Antonov gives NATO and the EU the right to use their planes. The previous contract under the SALIS program was signed in 2019, for three years. This year, for the first time, the contract was signed for five years.”

According to the firm, “under the terms of the agreement, Antonov provides strategic airlift in the interests of NATO and the EU. Two AN-124-100s are constantly at the customer’s disposal, and additional airplanes are provided by request. There are nine countries participating in SALIS: Belgium, Poland, Slovakia, Slovenia, the Czech Republic, Germany, Norway, Hungary, and France.”

The Ilyashev & Partners team was led by Partner Roman Marchenko.

Avellum, working with White & Case, has advised Ukrenergo on its debut USD 825 million issuance of sustainability-linked eurobonds. Sayenko Kharenko, working with Linklaters, advised the managers BNP Paribas, Deutsche Bank, Goldman Sachs International, and Ukreximbank. CMS advised the EBRD on its USD 75 million investment in Ukrenergo bonds.

The five-year notes are guaranteed by the Ukrainian state and bear interest at 6.875% per annum.

According to Sayenko Kharenko, “the notes are issued under the green and sustainability-linked bond framework and an amount equal to the net proceeds from the transaction will be used to finance or re-finance eligible green projects. The green and sustainability-linked bond framework also includes specific performance indicators, which demonstrates Ukrenergo’s commitment to meet environmental, social, and corporate governance targets.”

Ukrenergo is a state-owned electricity transmission system operator, managed by the Ministry of Energy of Ukraine.

“This is a significant milestone for the Ukrainian investment climate and the country’s transition towards sustainable development,” Sayenko Kharenko Partner Nazar Chernyavsky commented. “We hope that this landmark deal will restore investors’ confidence in the Ukrainian energy sector and facilitate the implementation of renewables projects.”

“It is the first sustainability-linked bond issued by a Ukrainian company and the EBRD’s participation as the anchor investor provided comfort to other institutional investors, further widening the market participation,” CMS informed.

The CMS team included Kyiv-based Partner Ihor Olekhov and Associate Khrystyna Korpan, Warsaw-based Partner Rafal Zakrzewski and Senior Associate Przemyslaw Karolak, and London-based Partner Michael Cavers and Senior Associate Kirsty Templar.

The Sayenko Kharenko team was led by Partner Igor Lozenko and included Counsel Oleksandr Nagorny, Senior Associate Anton Kerimov-Varanytskyi, Associates Denis Nakonechnyi, Oles Trachuk, and Vladyslava Mitsai, and Junior Associate Oleksandr Motin.

The Avellum team was led by Senior Partner Glib Bondar and included Partner Vadim Medvedev, Counsel Mykyta Nota, Senior Associates Anastasiya Voronova, Anton Zaderyholovа, and Anton Arkhypov, and Associates Oleg Krainskyi, Anna Mykhalova, Mariana Veremchuk, Yaroslav Pavliuk, and Oles Bidnoshyia.

Sayenko Kharenko has advised the European Bank for Reconstruction and Development on providing a EUR 25 million equivalent loan to ProCredit Bank in Ukraine. 

According to Sayenko Kharenko, “ProCredit Bank will on-lend the proceeds of the loan to micro, small, and medium-sized enterprises in Ukraine to invest in equipment and technology that meets European Union standards for product quality, health and safety measures, as well as environmental protection. At least 70% of the funds will be dedicated to financing green technology.”

ProCredit Bank is a wholly-owned subsidiary of ProCredit Holding, based in Germany.

Sayenko Kharenko’s team was led by Partner Igor Lozenko and included Associate Denis Nakonechnyi and Junior Associate Oleksandr Motin.