Aequo has advised Allrise Capital Inc. on the acquisition of the Chornomorets stadium in Odessa from Imeksbank. The sale, which was conducted by auction, was arranged by the Deposit Guarantee Fund.
Aequo’s team was led by Partner Yulia Kyrpa and included Counsel Bohdan Dmukhovskyy, Senior Associate Mykhaylo Soroka, and Associate Yevheniia Chernetsova.
Asters has advised the IFC on a USD 20 million loan to Nyva Pereyaslavshchyny, a Ukrainian pork producer.
According to Asters, “IFC is providing a long-term loan to finance Nyva’s working capital in an effort to limit potential input supply chain disruptions in meat production due to the COVID-19 pandemic, thereby supporting domestic food security. Nyva Pereyaslavshchyny is an IFC client since 2015. The project is core to IFC’s strategy aiming to unleash the potential of Ukraine’s agribusiness sector and enable the country to play a more significant role in food security. Since 2004, IFC has committed over USD 3.3 billion in long-term financing in Ukraine across a diversified portfolio of projects and implemented a wide-ranging advisory program.”
Asters’s team consisted of Partner Iryna Pokanay, Counsel Gabriel Aslanian, and Associates Inna Bondarenko and Viktoria Zagreba.
Baker McKenzie has successfully defended the interests of Prandicle Limited, a company owned by former Ukrainian Vice Prime Minister and former Naftogaz CEO Oleh Dubyna, in the English Commercial Court, against proprietary and unjust enrichment claims.
According to Baker McKenzie, “following an eight week trial in October and November 2019, all claims against Prandicle were dismissed by Mr. Justice Picken on 14 July 2020. Prandicle’s costs of the litigation are to be paid on an indemnity basis by Mr. Sergiy Taruta and his corporate vehicles, reflecting the unsatisfactory and dishonest manner in which they pursued the claims against Prandicle.”
The case, worth several billion dollars and involving claims brought under both Ukrainian and English law, arose out of the separation of the joint business interests of three Ukrainian businessmen.
The Baker McKenzie team was led by London-based Partner Hugh Lyons, supported by Senior Associates Ben Ko and Anjuli Patel and Associate Emma Brown. The team also included Kiev-based Partner Ihor Siusel and Associate Olesya Omelyanovich. The counsel team was led by Stephen Smith QC of Erskine Chambers, supported by Peter Ratcliffe of 3 Verulam Buildings.
The Ukrainian government’s conference rooms have been stuffier than usual lately, as policymakers and renewable energy industry representatives attempted to thrash out a compromise to reduce the financial burden left on the administration by a feed-in tariff incentive regime which drove almost 2 GW of generation capacity. The resulting retroactive cuts to payments, outlined below by Ukraine-based lawyer Svitlana Teush, have at least had input from both sides.
Draft Law No. 3658 “On the Amendments to Certain Laws of Ukraine on the Improvement of Support for the Production of Electricity from Alternative Energy Sources” (Law 3658) was submitted by the government of Ukraine and registered with the parliament.
Law 3658 has been elaborated to implement provisions of a memorandum of understanding (MoU) signed last week after lengthy negotiations between policymakers and renewable energy representatives in a bid to “restructure” feed-in tariff (FIT) payments made for clean energy generation.
There follows a summary of the key issues of Law 3658, based on the information published on Ukraine’s parliamentary website, following the negotiation process mediated by the Energy Community Secretariat.
For all RES under the FIT commissioned on or before June 30, 2015, the FIT should be capped at (not exceed) the maximum rate of the FIT established for ground-mounted solar with an installed generation capacity of more than 10 MW, and for those commissioned before March 31, 2013, multiplied by a decreasing coefficient of 0.85. If lower than or equal to the above maximum cap, the FIT is multiplied by a coefficient of 1.
The same coefficient – one – applies to all other RES not mentioned above.
Notably, the cut-off date for the commissioning of projects which are under construction to be eligible for the FIT – one of the most intensely-debated topics – has been removed from Law 3658 and replaced with a considerably lower reduction factor for solar plants commissioned from 1 August 2020.
The above reduction of the FIT is meant to apply on a forward-looking basis, following enactment of the law. It appears a producer cannot opt out of reduction of the FIT, as had previously been suggested within the framework of discussions about a voluntary restructuring of the FIT.
subject to tolerance margins of 10% for wind and 5% for solar and other RES.
The government should, within three months of enactment of the law, submit the draft law entitling RES producers to quit the offtaker’s balancing group (in which group, RES producers under the FIT or auction price must currently participate) and to freely sell electricity and be compensated for the difference between the FIT or the auction price and the market price, but not lower than the price in the day-ahead market.
Law 3658 suggests employing the mechanism of the provision by RES producers of load decrease services to the TSO [transmission system operator]. The cost of such services should amount to the FIT or auction price, as the case may be, due for payment to RES producers for the volumes of under-supplied electricity following TSO commands. The relevant costs of the TSO payable to RES producers should be included in the transmission tariff. So it should be the TSO (not the off-taker, as previously discussed) who will be responsible for payment of curtailment compensation to RES producers at the FIT or auction price.
The procedure of provision of such services (including the priority order in acceptance of offers for load decrease services), as well as the methodology of calculation of electricity volumes under-supplied by RES producers following TSO commands, should be approved by the energy regulator and included in the market rules within a month of enactment of the law.
As with the current law, Law 3658 stipulates compensation for curtailment (the cost of the relevant services of RES producers) is not payable in the event of curtailment commands issued by the TSO due to power system constraints caused by force majeure.
It is further, expressly maintained that the state guarantee of foreign investment related to the FIT shall apply for the entire period of the FIT.
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Increased role of government
Law 3658 broadens the powers of the government regarding the auction process, with the aim of achieving greater flexibility. It is proposed to delete the schedule from the law which currently provides for biannual auctions – before April a and October 1 – and to instead let the government decide on the schedule of auctions for each subsequent year. In addition, the government will be able to establish quotas with reference to the needs of different regions, cap maximum quotas offered for auction and auction plots of land or rooftops with available grid connection specifications.
Technology-specific shares of quotas reduced
Under the current law, no less than 15% of the annual quota should be apportioned to each of (i) solar, (ii) wind and, cumulatively, (iii) other RES, while the remaining quota should be allocated among different energy sources by the government. Law 3658 reduces that minimum figure to 10%. This would allow greater discretion to the government in the allocation of the remaining quota among different sources of energy.
The government can also decide to hold technology-neutral auctions.
To promote competition and accommodate technology-neutral auctions, Law 3658 requires state support be provided only for capacity not exceeding 80% of the aggregate capacity offered by all participants in an auction (irrespective of the renewable energy source, as contemplated by the current legislation).
Auction price caps
Under the current law, the auction price cannot exceed the FIT for the relevant source of energy. Law 3658 contemplates the auction price for wind and solar not exceed €o.o9/kWh for auctions before December 31, 2024, and €0.08/kWh for procurement rounds from January 1, 2025. Hence, the price caps could become lower compared with those established under the current law.
For other types of RES, it is proposed the auction price be capped at no more than €0.12/kWh.
Rooftop solar eligible
The current law does not provide for rooftop solar to participate in auctions. The amendments proposed under Law 3658 allow the opportunity for rooftop systems and specify necessary documents for such installations to participate in auctions.
Maximum threshold to be increased for projects of affiliated persons
Draft Law No. 3658 increases the threshold for the maximum quota which can be awarded single bidders (together with affiliates having the same ultimate beneficial owner), from 25% to 35% of the total annual quota.
Timely grid connection required
Under the current law, a producer should commission a project within two years of signing a solar PPA, and three years for other RES projects. Commissioning does not include grid connection and is certified by a commissioning certificate for mechanical completion of power plants.
Law 3658 requires a project to be grid-connected within the above term to be eligible for auction support. This does not apply to projects under the FIT, for which a commissioning certificate continues to suffice as evidence of commissioning.
The MoU signed between the government and industry stakeholders states the relevant law should be adopted before August 1, 2020. It remains to be seen what amendments will be proposed by concerned stakeholders to Draft Law No. 3658, and whether any alternative draft laws will be registered – a likely scenario. It is also unclear whether any of the versions will manage to successfully pass the parliamentary energy committee and hearing in parliament. Other changes in law are also expected to implement the provisions of the MoU, including on the schedule of payments to RES producers by the off-taker, and measures to further improve the off-taker’s liquidity.
Yesterday, another draft law – No. 3657 “On the Amendments to the Electricity Market Law” – was also registered with the parliament, identifying certain measures aimed at achieving such improvements, including diversification of the market segments for selling electricity by the off-taker. This draft law, among other things, improves the procurement framework for the construction of generation capacities and implementation of demand-response management measures as may be required to ensure the operational safety of power systems, including reduction of the timeline and simplification of the procedures involved. Tenders for the development of such capacities will be launched based on the regulations adopted by the government last year. Incentives for investors in such capacities will be specified by the government in its tender announcement.
The changes amount to promising signs of a more integrated and complex approach toward more balanced and sustainable development of Ukraine’s power system and addressing the challenges currently faced.
By Svitlana Teush, Counsel, Redcliffe Partners
Kinstellar Kyiv Managing Partner Kostiantyn Likarchuk has testified as an expert on Ukrainian law on behalf of a successful defendant in a multi-billion-dollar UK dispute in the English Commercial Court.
According to Kinstellar, “valued at over USD 2 billion, the complex proceedings involved wide-ranging accusations of fraud made by Mr. Vitaliy Gaiduk and Mr. Sergei Taruta against Mr. Oleg Mkrtchan. After an eight-week trial, the judge dismissed all of the claims against Mr. Mkrtchan, with the exception of a single claim regarding a transfer of shares, which the judgment itself recognized were likely worthless.”
“This was a long-running dispute arising out of Ukraine,” Kinstellar reports, “where proceedings against the defendants commenced in 2016 following one of the largest commercial transactions in Ukrainian history.”
Likarchuk was instructed by Covington & Burling, which served as counsel for the defense.
Ilyashev & Partners Law Firm has successfully defended the interests of the Ukrainian pharmaceutical manufacturer Biopharma in a case involving the protection of competition in Ukraine’s immunoglobulins market.
Biopharma LLC specializes in the development and production of medicinal products from human-donated blood, recombinant drugs, and drugs based on spore-forming bacteria.
According to Ilyashev & Partners, “in July 2019 the Antimonopoly Committee of Ukraine (hereinafter – the AMCU) adopted Decision No. 526-р in the case No. 143-26.13/68-18/91-13 on violation by PrJSC Biopharma and Pharmaceutical Plant Biopharma LLC of legislation on the protection of economic competition by the abuse of monopoly (dominant) position. As a result … it imposed fines on Pharmaceutical Plant Biopharma LLC for the alleged use in the equivalent contracts with wholesale buyers / distributors of the medicines of different payment deferment terms.”
Acting on behalf of Biopharma, Ilyashev & Partners appealed the AMCU’s decision. According to the firm, “by its Resolution dated 9 July 2020 the Supreme Court put an end to the dispute: it confirmed the legitimacy of actions of the pharmaceutical manufacturer and revoked the decision on imposition of fines, upholding the decisions taken earlier by the court of first instance and court of appeal.”
“The Supreme Court concluded that the AMCU analyzed unequal agreements,” commented Ilyashev & Partners Partner Oleksandr Fefelov. “Given the position of the Supreme Court, which has flawlessly clarified the situation, the contracts for purchase and sale of goods with the aim of participating in a tender cannot be considered equivalent to those where the goods were purchased for further distribution, in other ways. In addition, the AMCU failed to confirm the presence of an adverse impact on competition between the distributors, since the payment terms were actually equal, fair, beneficial for all buyers, and not a single fact of competition distortion was recorded.”
CMS has advised the European Bank for Reconstruction and Development on a loan of approximately USD 13.9 million to Ukraine’s Irshanska SES LLC.
According to CMS, “the loan proceeds are designed to support the construction and operation of the 30 MW solar power plant in the Zhytomyr region of Ukraine. The financing is provided by the EBRD within the framework of the Ukraine Sustainable Energy Lending Facility program, which focuses on the development of the renewable support scheme in Ukraine and the expansion of renewable energy technologies.”
CMS’ team was led by Warsaw-based Partner Mark Segall and included Kyiv-based Partners Vitaliy Radchenko, Ihor Olekhov, and Natalia Kushniruk, Senior Associate Volodymyr Kolvakh, Associate Anatolii Doludenko, and Lawyer Ivan Pshyk, as well as Belgium-based Associate Partner Benoit Vandervelde, Luxembourg-based Partner Vivian Walry, and Bulgaria-based Partner Elitsa Ivanova.
In recent years, privatization has risen as a priority for the government of Ukraine. Fundamental to these efforts was the enactment of a law abolishing a list of over 1,000 state-owned enterprises that were not permitted to be privatized. This has removed the last major barriers for launching full-scale privatization.
There are 25 enterprises from the energy, machinery, chemical and agricultural sectors currently under consideration for large-scale privatization in 2020, including such giants as Centrenergo (the second-largest power generator in the country, with a total production capacity of 7.69 gigawatts, generating 15% of electricity nationwide), fertilizer producer Odesa Portside Plant, machinery plant Azovmash, manufacturer and supplier of turbo and hydro generators Electrovazhmash.
New opportunities are expected to emerge as Ukraine breaks up monopolies. From July 2020, the law on the de-monopolization of alcohol manufacturing will come into force, ending the monopoly of Ukrspirt. Private actors will be able to own and manage spirit distilleries and Ukrspirt’s distilleries are planned to be set for privatization.
Ukrainian privatization regulations are investor-friendly and have introduced new opportunities for foreign buyers. English may be set as the language governing sale and purchase agreements of large privatization assets and disputes between the parties of privatization may be referred to the International Commercial Arbitration Court.
International practices of M&A transactions, applicable to Ukrainian deals, provide confidence and predictability for foreign investors and allow the inclusion of special warranties and representations to the agreement. In order to apply for these conditions, the bidder shall submit the respective proposal to the State Property Fund of Ukraine in a timely manner.
The law provides for asset protection aimed at ensuring stable conditions of the large-scale privatization object. Following the adoption of the decision on privatization, the powers of management of a target company are limited. All deals related to asset transfer, collateralization, and loan qualifications may be exercised only upon prior approval of the privatization authority.
In order to assure a more successful outcome in large-scale privatization, I would outline several major issues to be thoroughly considered by the potential buyer.
The large-scale objects are being prepared for privatization by professional investment advisors who are selected by the state and perform audits, legal due diligence, SWOT-analysis, assessments of the asset and lead the object to sale. Nevertheless, privatization shall be treated like any other M&A deal with all the preparatory actions from the buyer’s side, including all due diligence, contract work, proper structuring, antitrust clearance, etc.
First, potential buyers must have a clear vision of the purpose and future business strategy for the target large-scale privatization enterprise. In most cases, the buyer should introduce a long-term business plan containing its undertakings in relation to the business development of the target enterprise. It should be emphasized that the business plan will be an integral part of the sale and purchase agreement, thus the buyer will have to fulfill its undertakings listed in the business plan.
Second, the proper corporate structure matters, and the potential buyer needs to assess it and review corresponding affiliates. Although Ukrainian law establishes flexible requirements to potential buyers and provides the possibility for foreign companies to participate, there are some restrictions.
The law provides the eligibility criteria for potential investors. In particular, a prohibition on engaging in privatization applies to: aggressor states (currently, the Russian Federation) or legal entities owned by aggressor states or their affiliates; companies (and their subsidiaries with at least 50 percent interest therein) registered in the jurisdiction listed by the Financial Action Task Force (FATF) as not cooperating in anti-money laundering efforts; natural and legal persons (and their affiliates) which are subject to Ukrainian sanctions; companies with undisclosed information on beneficiary owners; investors previously engaged in privatization (and their affiliates) with whom privatization agreements have been terminated due to their default; and investment advisors involved in the privatization of assets in question.
Another important issue is the transactions’ financing. A buyer may use both its own or attracted funds. The bidder shall reveal the source of funding and provide documents confirming its legal origin. A financial report approved by an audit shall be submitted among the documents by the foreign investor. In cases where borrowed funds are used, the bidder must disclose the creditor’s identity and submit evidence of the creditor’s commitment to finance the acquisition should the bidder become the winner of an auction bid.
These are just a few of the many of privatization process issues which must be considered for successful bidders. But all these difficulties are nothing when compared to the potential benefits investors stand to gain by wisely investing in these new Ukrainian opportunities.
By Sergiy Oberkovych, Senior Partner, GOLAW
Former Spensers Partner Nickolas Likhachov has joined Eterna Law as Head of Banking and Finance and Nataliia Korovyakovskaya has joined the firm as Head of Dispute Resolution.
Joining Eterna Law with Likahchov are Senior Associate Olga Karpova and Associate Kristina Tsymbaliuk.
According to Eterna Law, “Nickolas represents major commercial and investment banks, as lead agent and arranger, and corporations in a wide range of leveraged and corporate finance transactions, including domestic and cross-border acquisition finance, investment-grade facilities, asset-based lending facilities, and restructurings.” The firm reports that “Nickolas also regularly advises on day-to-day funds management issues including fund structuring, disclosure, investment management, and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on strategic investments into on-shore and offshore pooled investment vehicles acting for institutional and advisory clients as well as advising in large-scale, multi-jurisdictional transactions. Other areas Nickolas focuses on include property-related financings, pre-IPO financings, margin lending transactions, and high yield buy and high yield debt financings.”
Likhachov has a Masters’ degree in Law from Kyiv University and is a graduate of the Chartered Institute of Arbitrators in London. Prior to joining Eterna, he spent almost a year in-house with L’isolante K-Flex, almost a year with CMS, over three years with Levenets, Maciw & Partners, three years in-house with the National Credit Bank, and almost five years with Spenser & Kauffmann.
Nataliia Korovyakovskaya, the new Head of Eterna Law’s Dispute Resolution practice, “will be responsible for national litigation projects,” the firm reports. According to Eterna Law, “Nataliia specializes in dispute resolution and has extensive experience in representing clients and providing comprehensive legal advice on matters of Ukrainian law.”
Korovyakovskaya is a graduate of the Taras Shevchenko National University of Kyiv with a Ph.D. in Law. Prior to joining Eterna, she spent seven years as Head of Legal with the Nemiroff Group and, according to the firm, she has “more than seven years of successful individual legal practice, providing legal support to companies of the oil-refining sector.”
AVELLUM researched how the coronavirus outbreak affected the plans of businesses to purchase or sell assets or companies in the next 6 to 12 months.
The economic downturn made sellers consider whether to sell their businesses or to attract investors. At the same time, buyers view this crisis as an opportunity to increase their market share at a low cost. We witnessed a similar situation in Ukraine in 2014-2016.
According to AVELLUM’s survey results, almost 30% of companies plan to sell their business in the next 6 to 12 months. Only 1 out of 5 companies plan to do so because of the crisis. This indicates that the majority of large Ukrainian companies withstood the COVID-19 economic crisis rather successfully.
More than 60% of the companies for sale are prepared to offer a price discount. However, sellers soon may increase asset prices, because at the moment demand significantly exceeds supply.
There are 50% of potential purchasers and the majority of them expect a discount. This is natural since weak businesses will be primarily on sale. At the same time, over 40% of those willing to buy a business became interested in such a purchase due to the coronavirus crisis. This indicates that a large number of companies take an opportunistic approach and believe in the future recovery of the Ukrainian economy.
Over 60% of potential buyers have not changed their intentions to purchase assets in Ukraine. They continue to view the Ukrainian market as an attractive one and believe that it would be profitable to increase their market share. On the contrary, almost 40% of potential buyers gave up their plans to purchase due to the coronavirus crisis.
“Once the economy stabilises, such buyers will quickly return to the market pushing asset prices up,” comments Mykola Stetsenko, managing partner of AVELLUM. “As a result, in the next 6 to 12 months we expect active discounting of asset prices, but afterwards asset prices will increase again unless a new crisis comes.”
Despite the small number of assets for sale, purchasers plan to conduct full due diligence of the target and expect full warranties from the seller to cover the asset. We believe that such expectations will change soon following the increased competition for attractive assets sold at a discount.
60% of respondents believe that the seller does not need any advisors since the asset is sold at a discount. This contradicts expectations of purchasers as to warranties, which require active participation of lawyers.
“Consequently, the seller will either provide significantly fewer warranties in exchange for the price discount or engage legal advisors to deal with complex documentation.” – explains partner Yuriy Nechayev. – “I would also point out that almost 80% believe that an external advisor should be engaged on a distressed M&A deal anyway.”
Key findings from the report:
AVELLUM conducted the survey in June 2020 among 56 owners, top managers, and heads of legal departments of Ukrainian and international companies. The conclusions are based on analysis of the answers of the respondents and AVELLUM’s extensive M&A expertise in various sectors of the Ukrainian economy during 11 years of AVELLUM’s presence in the market, in particular during the previous economic crises.
By Mykola Stetsenko, Managing Partner, Yuriy Nechayev, Partner, and Andriy Romanchuk, Counsel, Avellum