The Mergers & Acquisitions Review: Ukraine

Overview of M&A activity

Ukraine has experienced adverse economic and geopolitical conditions since 2014 that have had a negative effect on overall M&A activity in the country. Following economic and political stabilisation, deal activity in Ukraine significantly picked up. According to the KPMG M&A Radar Ukraine report, Ukrainian M&A recorded its third consecutive year of double digit growth in 2019, with 80 transactions worth a combined US$2.35 billion, a 29 per cent increase over the previous year.

Inbound M&A activity in 2019 significantly increased, amounting to approximately US$1.15 billion. It exceeded the value of domestic dealmaking for the first time in recent years. Major domestic Ukrainian players continued to generate a significant part of M&A activity in Ukraine and increased their outbound M&A activities.

The most active sectors for M&A activities in 2019 were technology, media and telecommunication (TMT), real estate and construction, and power and utilities. Ukraine is world-renowned for its IT outsourcing industry, and last year there was a sharp increase in acquisitions by foreign investors in this sector. The largest M&A transaction in 2019 was a transaction involving foreign investments in the TMT sector: the US$734 million acquisition of Vodafone Ukraine, one of the largest telecom operators in Ukraine, by Bakcell, the leading telecommunication services provider in Azerbaijan.

In Ukraine's agricultural sector, which has been historically most resilient to crisis, we saw a steep increase in M&A volume, as the number of transactions has almost doubled since 2016 and 2017. In 2019, agri deals involved land banks, and processing and infrastructure facilities, the largest of which was SALIC's acquisition of the remaining 66 per cent of United Farmers Group for US$56 million. Another notable transaction in the agricultural sector involved the acquisition by POSCO Daewoo Company of a 75 per cent stake in the Mykolayiv Sea Port grain terminal and Yuzhno Stevedoring Company from Orexim Group for US$39 million.

Another notable inbound M&A transaction was in the healthcare and pharmaceuticals sector: the acquisition of the non-plasma business of Biopharma, a leading Ukrainian manufacturer of pharmaceuticals and healthcare products, by Stada AG, a global manufacturer of pharmaceuticals and consumer healthcare products.

The real estate sector saw one of the largest domestic deals in 2019, which involved the US$117 million acquisition of Ocean Plaza Mall by UFuture. Another landmark transaction in the real estate sector involving outbound investment was the acquisition by SCM, a major Ukrainian financial and industrial holding company, of Villa Les Cedres, a real estate complex in France, for US$224 million.

In the energy sector, foreign investors have shown increased interest in investing in Ukraine's oil and gas sector through participation in tenders for concluding production-sharing agreements.

In 2016, the government announced the privatisation of several large state enterprises, including Ukraine's largest producer of nitrogen fertiliser, the state-owned Odessa Portside Plant. Unfortunately, the attempts to auction off the Plant failed to attract any bids from strategic investors. In 2018, the government relaunched the privatisation of large state enterprises. The list of companies included United Mining and Chemical Company, Kransnolimanskaya Coal Mine, Electrovazhmash Plant and President Hotel, to name a few. These companies remain at the different stages of preparation for privatisation. The State Property Fund of Ukraine expects the announcement of the first auctions for large enterprises in the coming months subject to the situation regarding covid-19 pandemic restrictions in Ukraine.


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General introduction to the legal framework for M&A

The Civil Code,2 the Commercial Code,3 the Company Law,4 the Limited and Additional Liability Companies Law (Law on LLCs),5 the Joint-Stock Company Law (JSC Law),6 the Law on the Securities Law7 and the Law on State Registration8 constitute the legal framework for M&A in Ukraine. The merger control rules and merger notification thresholds are set out in the Competition Law.9

A corporate merger or an acquisition involving a joint-stock corporation (JSC) would also trigger the application of the Depository System Law10 and the Securities Market Law.11 Moreover, there are a number of additional rules and principles that should be taken into account when preparing or conducting an acquisition of a JSC, such as:

  1. the rules relating to the disclosure of significant shareholdings in JSCs and ultimate beneficial owners;
  2. the rules relating to insider dealing;
  3. the rules relating to the public offer of securities and the admission to trading of these securities on a regulated market; and
  4. the general rules on the supervision of and control over the financial markets.

The Securities Commission12 supervises compliance with the takeover and JSC-specific regulations.

At the same time, JSCs have become less popular as a vehicle for conducting business activities in Ukraine. As of 1 June 2020, only 13,822 JSCs were registered in Ukraine according to the official statistics. In contrast, the statistics show that there were 686,806 companies in the form of limited liability companies (LLCs) in Ukraine on 1 June 2020, which is the most common vehicle for conducting business activities in Ukraine. Legal entities in Ukraine may also be established in the form of a general partnership, a limited partnership and an additional liability company.

Acquisitions of businesses and companies are usually carried out through the purchase of the participatory interests of an LLC or through the acquisition of the shares of a JSC. The majority of M&A deals are privately negotiated deals, as Ukrainian companies usually have one or several significant shareholders. JSCs may be public or private: the shares of a public JSC may be both privately and publicly placed, whereas the shares of a private JSC are privately placed among its shareholders. Asset acquisitions are also common, but they are technically more burdensome and time-consuming, and involve the imposition of VAT.

Because of the mandatory provisions of Ukrainian law and an imperfect court system, shareholders and participants in Ukrainian companies have traditionally preferred to set up holding companies in foreign jurisdictions such as Cyprus or the Netherlands, and to choose foreign law (mainly English) as the governing law of transaction documents. While recent developments in corporate and takeover law are intended to increase the attractiveness of structuring M&A deals in Ukraine and expose them to Ukrainian law, we do not expect a major change in deal structuring in the near future. In those cases where an investment has already been structured as a joint venture on the Ukrainian level, shareholders may choose to benefit from the new legislation and conclude Ukrainian law-governed shareholders' agreements.

Strategies to increase transparency and predictability

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Developments in corporate and takeover law and their impact

The corporate and takeover laws in Ukraine have been significantly amended between 2016 and 2020 in the course of the ongoing corporate reform.

i New takeover rules for JSCs and escrow accounts, and other important changes

The Corporate Governance Law,13 which became effective on 4 June 2017, introduced into Ukrainian law new takeover rules that are based on EU Directive 2004/25/EC of 21 April 2004 on takeover bids. The Law changed the rules for the acquisition of controlling stakes, introduced the concepts of squeeze-out and sell-out, and increased the disclosure requirements and thresholds for the approval of interested-party transactions.

Investors and shareholders should consider the new takeover rules when structuring M&A transactions that may result in the direct or indirect acquisition of shares in Ukrainian JSCs (even if such JSCs are not the direct acquisition targets), including:

  1. disclosing information on acquiring different stakes (for public JSCs: 5 per cent and more, 50 per cent and more, 75 per cent and more, and 95 per cent and more; for private JSCs: 10 per cent and more, 50 per cent and more, and 95 per cent and more);
  2. disclosing information on the highest acquisition price for controlling stakes (50 per cent plus one share, 75 per cent and more, and 95 per cent and more);
  3. complying with the procedure for submitting other notices on acquisitions of shares;
  4. complying with the obligation to make a mandatory bid to the remaining shareholders to purchase their shares at a fair price in cases of acquisition of the controlling stakes (50 per cent plus one share, or 75 per cent and more), including the timing of an irrevocable mandatory bid and the formula for determining the fair price (i.e., the price to be paid by the majority shareholder for the shares of the minority shareholder);
  5. squeeze-out: that is, the right of the dominant stakeholder (95 per cent and more) to require the holders of the remaining shares to sell him or her their shares; and
  6. sell-out: that is, the right of minority shareholders to require the dominant stakeholder to buy their shares at a fair price.

The long-awaited squeeze-out procedure entitles a shareholder that acquired the dominant controlling stake of 95 per cent and more of shares to require the holders of the remaining shares to sell him or her their shares within 90 days following the date of disclosure of the information on the acquisition of the shares. The dominant stakeholder intending to exercise its right to squeeze-out should first comply with the mandatory bid procedure. The price for the mandatory purchase of shares of minority shareholders should be determined according to the formula set out in the Corporate Governance Law.

An important highlight of the Corporate Governance Law is the introduction of the concept of escrow accounts into Ukrainian law. Escrow accounts are a commonly used instrument for securing payments among parties. Settlement of payment of the purchase price to minority shareholders as a result of a squeeze-out procedure should be made via escrow accounts without engaging a securities broker. This mechanism allows the elimination of 'dead souls' (i.e., minority shareholders (often deceased persons)) with whom any connection has been lost. As a result of the introduction of the concepts of squeeze-out and escrow accounts, dominant stakeholders will be able to consolidate 100 per cent of the shares in their hands.

According to information publicly available as of 31 December 2019, 308 JSCs have already launched squeeze-out procedures in Ukraine. Several court and administrative proceedings have also been initiated disputing the squeeze-out price, while the respective court practice is yet to be formed.

Another revolutionary development in Ukrainian corporate law is the introduction of the sell-out procedure. Minority shareholders now have the right to require a dominant stakeholder to buy their shares at a fair price to be determined similarly to the squeeze-out price. According to the transitional provisions, minority shareholders may exercise their sell-out right at any time following the acquisition of at least one additional share of a JSC by the dominant stakeholder after 4 June 2017.

At the same time, the Corporate Governance Law allows private JSCs to disapply rules or establish different rules in their charters regarding acquisitions of controlling stakes, and squeeze-out and sell-out procedures, subject to having complied with the majority voting requirements set out in law.

Additionally, the materiality thresholds in excess of which interested party transactions should be approved by the respective corporate body of a JSC were changed from 100 minimum wages to 1 per cent of the assets value, based on the latest financial statements of the JSC.

The implementation of the Corporate Governance Law has facilitated changes in the types of JSCs from public to private, and cleared the market of quasi-public JSCs, particularly because the acquisition of shares in private JSCs is subject to less stringent regulation. In addition, private JSCs may disapply rules or establish different rules in their charters regarding the acquisition of controlling stakes, and squeeze-out and sell-out procedures.

ii New transparency rules for JSCs

Further to the Corporate Governance Law, Parliament adopted the Law on Business Simplification14 on 16 November 2017, aimed at reloading the Ukrainian stock market, mainly through clearing it of quasi-public JSCs and aligning the requirements regarding public JSCs to the EU regulations.

According to the Law on Business Simplification, all JSCs in Ukraine are considered to be private JSCs as of 6 January 2018, except for public JSCs whose shares are listed at a stock exchange or that make a public announcement that they shall remain public.

Public JSCs are now required to be more transparent by, inter alia, disclosing more extensive information, maintaining a supervisory board with independent members (the new requirements on such independence were introduced), and establishing supervisory board committees on appointments, remuneration and audit. On the other hand, wholly owned private JSCs are exempt from disclosure requirements, while other private JSCs shall disclose less information in comparison to public JSCs. Moreover, private JSCs may choose whether to elect independent members to their supervisory board or establish supervisory board committees, or both.

The Law on Business Simplification also improves corporate governance in JSCs by, inter alia, prohibiting general shareholders' meetings from deciding any matter about a company's activities falling under the exclusive competence of the supervisory board by virtue of law or a JSC's charter. This rule may be disapplied in a private JSC. The new corporate governance rules are expected to provide foreign investors with more comfort when investing into Ukraine.

The Law on Business Simplification also introduces the possibility for legal entities to provide disclosure-of-information services on behalf of stock market participants, including JSCs, disseminate information on financial instruments and stock market participants, and submit reports or administrative information, or both, to the Securities Commission. Legal entities wishing to provide these services need an authorisation from the Securities Commission.

The Law also implements the major requirements of the EU Prospectus Directive15 into Ukrainian law.

iii Introduction of corporate agreements into Ukrainian law

Another recent development in corporate law is that concluding corporate agreements among the shareholders of JSCs and participants in LLCs is now expressly permitted by the Corporate Agreements Law16 and the Law on LLCs, respectively. The Laws allow participants (founders) in LLCs and shareholders of JSCs to conclude corporate (shareholders') agreements. Corporate agreements may establish, inter alia, an obligation for parties to vote at general meetings in the manner determined by such agreement, to approve the acquisition or disposal of participatory interests or shares in a company according to the pre-determined price, and to undertake other actions related to a company's management. Parties may include in corporate agreements transfer instruments common in other jurisdictions such as tag-along rights, drag-along rights, call options and put options.

While information on the content of a corporate agreement is confidential under both Laws, the JSC Law requires a party to a corporate agreement to notify a JSC on the conclusion of the corporate agreement within three business days of its conclusion, and in the case of a shareholder acquiring voting rights attached to more than 10, 25, 50 or 75 per cent of shares under a corporate agreement. A public JSC must also publicly disclose information on concluding a corporate agreement. If a shareholder concludes an agreement in breach of the terms of a corporate agreement, such agreement will be null and void if a third party knew or ought to know about such breach.

In addition, the creditors of a company shall have the right to conclude a corporate agreement with the participants and shareholders of such company. The Laws also provide for a possibility to issue an irrevocable power of attorney to ensure the fulfilment of the obligations of participants and shareholders.

The express permission and regulation of corporate agreements is important for Ukrainian M&A deals. The use of this instrument by market participants will greatly depend on subsequent court practice.

iv Increased investor protection rules

The Investor Protection Law,17 which came into effect on 1 May 2016, introduced important developments, inter alia, as to the liability of corporate officers of companies and the ability of minority shareholders to bring a lawsuit against a corporate officer on behalf of a company. According to the Investor Protection Law, corporate officers are responsible for damage they cause to the company through their actions. Such damage will be compensated if incurred through:

  1. actions committed by officers in excess of their authority or through an abuse of their powers;
  2. actions committed by officers in violation of the procedure of their prior approval or other decision-making procedures as established by the constituent instruments of a company;
  3. actions committed by officers in line with the procedure of their prior approval or other decision-making procedure where such officer has filed false information to obtain such approval or decision;
  4. omissions of a corporate officer when he or she was obliged to take certain actions in accordance with his or her duties; and
  5. other abusive actions of corporate officers.

Before these changes, the liability of corporate officers was limited in most cases by the amount of their monthly salary.

Moreover, the notion of a derivative action has been introduced into Ukrainian law. A minority shareholder (participant) holding at least 10 per cent of all shares (participatory interests) in a company may file a claim with a commercial court on behalf of a company against a corporate officer for recovery from damage caused by such corporate officer to a company. The derivative action may be brought against individuals falling under the definition of a corporate officer. For JSCs, the corporate officers are the head and the members of the supervisory board, executive body and audit commission, and the auditor of a JSC, and the head and members of other bodies if the creation of such bodies is envisaged by a company's charter. In LLCs, the members of the executive body and the supervisory board and any other individuals occupying a post named in the company's charter are considered to be the corporate officers. If a derivative action was brought against a corporate officer, he or she may neither represent the company in the proceedings nor appoint a representative to participate in the proceedings on behalf of the company.

v The new Law on LLCs

The new Law on LLCs, which became effective on 17 June 2018, fundamentally changed the regulation of LLCs. The previous regulation of LLCs was very restrictive, and mandatory provisions left little room for participants to adjust the rules on LLC operations to their business needs. The Law on LLCs provides participants with wide discretion in establishing the rules on LLC corporate governance and transfers of participatory interests.

The Law on LLCs expressly permits the establishment of a supervisory board for the purpose of controlling and supervising the management of an LLC. This change means that LLCs are now able to follow the two-tier corporate governance model, which has historically been widely used in JSCs in Ukraine. Moreover, LLC participants may appoint independent members to the supervisory board and determine the requirements for such independence. The establishment of an audit commission is no longer required.

The Law introduces a number of changes to the rules on conducting general participants' meetings, including the following developments:

  1. new majority vote requirements instead of quorum: the decisions of participants may be adopted by a unanimous vote of all LLC participants by three-quarters of all LLC participants or by a simple majority of all LLC participants;
  2. limitations to decisions, which can be adopted by written polling;
  3. the ability to conduct meetings via videoconference, provided all participants have the ability to see and hear all other participants;
  4. the introduction of absentee voting (i.e., the ability of an LLC participant to take part in a meeting by providing his or her written decisions on the matters on the meeting's agenda; and
  5. simplified rules for conducting meetings where the LLC is wholly owned. In this case, the sole LLC participant prepares a written decision without complying with the rules on holding the meeting.

The Law on LLCs also establishes new duties and obligations of corporate officers, namely duties to declare a conflict of interest and of confidentiality, and non-compete obligations. Breaching any of these obligations is a ground to terminate a corporate officer without payment of compensation. In addition to the duties of a corporate officer, the executive body members will also be responsible for monitoring the LLC's net assets, while the LLC's obligation to maintain positive net assets no longer exists.

The Law on LLCs provides participants with discretion in establishing the rules for transfers of participatory interests, including the ability to:

  1. modify or disapply the preemptive right of participants;
  2. restrict the disposal of a participatory interest;
  3. improve the procedure for the exit and expulsion of participants; and
  4. introduce an anti-dilution mechanism in an LLC's charter.

The Law on LLCs has also introduced the notion of significant and interested-party transactions to the regulation of LLCs. LLC participants may modify the default rules on significant transactions in a company's charter, while the rules on interested party transactions will not apply to an LLC unless such mechanism is expressly established by a company's charter.

Other important changes introduced by the Law on LLCs include:

  1. the abolishment of the anti-chaining rule;
  2. the abolishment of restrictions on the number of LLC participants;
  3. new restrictions on dividend payments;
  4. the abolishment of the prohibition on debt-for-equity swaps; and
  5. changes to the charter capital increase procedure.

vi Other changes

Another major development in securities regulation is the New Capital Markets Law,18 which was adopted by Ukraine's parliament on 19 June 2020. The Law will come into force on 1 July 2021. The New Capital Markets Law aims to implement key provisions of the European capital market directives and regulations such as MiFID II,19 MiFIR,20 EMIR21 and others. This Law introduces the new concept of capital markets, which will comprise a stock market, a derivative instruments market and a money market whereby each of these is composed of relevant participants interacting among themselves. The Law also amends the rules on circulation of securities, including shares in JSCs, and introduces new rules on circulation of different types of derivatives. Additionally, the Law amends the prospectus requirements (including the requirements for the language and content of a prospectus) and establishes new rules for disclosure of information (disclosure thresholds, content of information and means of disclosure).

Foreign investment regulation in Ukraine was also amended by the adoption of the Law on Attraction of Foreign Investments.22 The Law simplifies the procedure for foreign investors to acquire and store securities (including shares of JSCs) by providing an alternative to opening a securities account in Ukrainian depository institutions. Foreign investors may use the services of a global custodian (a nominal holder) who shall, in turn, open a nominal holder securities account with a Ukrainian depository institution and disclose information on foreign investors for financial monitoring purposes.

Among other positive developments in corporate M&A regulation aimed at facilitating the conducting of business in Ukraine by both local and foreign investors are the cancellation of the registration of foreign investments in Ukraine, which was previously required for the application of guarantees under Ukrainian law, the final abolishment of the requirement for a legal entity to use a corporate seal and improvements in corporate governance in state-owned companies.

Us antitrust enforcement: the year in review

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Foreign involvement in M&A transactions

According to the information provided by the Ministry for Development of Economy, Trade and Agriculture of Ukraine,23 in 2019 foreign investments into the Ukrainian economy came mainly from Cyprus, the Netherlands, the United Kingdom, Germany, Austria, the British Virgin Islands and Switzerland.

Since Cyprus and the Netherlands are popular jurisdictions for setting up holding companies for large Ukrainian groups, investments coming from these countries are most likely to see the return of Ukrainian capital that flowed out of the country at the outset of the crisis in 2014. This is a good sign, proving that Ukrainian investors believe that the economy is past the worst of the downturn. This positive trend has also become possible because of the gradual relaxation by the National Bank of Ukraine of certain capital control and foreign currency restrictions relating to the repatriation of dividends, repayment of cross-border loans, and import and export transactions involving foreign currency.

As for outbound investment, Ukrainian companies that are leaders in their respective industries are currently looking at possible acquisition targets abroad, in particular within the EU and in Gulf countries.

Significant transactions, key trends and hot industries

The hottest industries in 2019 and to date in 2020 have been TMT, real estate and construction, agriculture and power and utilities.

The highest value M&A deal of 2019 was the US$734 million acquisition of Vodafone Ukraine, one of the largest telecom operators in Ukraine, by Bakcell, the leading telecommunication services provider in Azerbaijan. Previously, investment activities in TMT sector were minimal.

Like in previous years, there has been significant M&A activity in the agriculture sector, with the highest value transaction being SALIC's US$56 million acquisition of the remaining 66 per cent of United Farmers Group. POSCO Daewoo Company, a South Korea-based import and export, resource development and manufacturing business, has also agreed to acquire a 75 per cent stake in Mykolayiv Sea Port grain terminal and Yuzhno Stevedoring Company from Orexim Group for approximately US$39 million.

The real estate and construction sector saw the largest value of deals since 2014, with the largest transaction being the outbound acquisition by SCM of Villa Les Cedres, a real estate complex in France, for US$224. The sale of a 40 per cent stake in the Ocean Plaza Mall to UFuture for US$117 million was one of the largest domestic deals in 2019.

Compared to 2018, there has been a drastic increase of M&A activity in the power and utilities sector. The most significant transaction was the acquisition by DTEK, the Ukrainian vertically integrated energy company, of Kyivoblenergo and Odesaoblenergo, both electricity distribution operators, for US$250 million.

Financing of m&a: main sources and developments

Despite uncertainty provoked by presidential and parliamentary elections and the following change of government, financial institutions such as the European Bank of Reconstruction and Development, the International Finance Corporation and the Overseas Private Investment Corporation have continued to invest into Ukraine-focused private equity funds.

Other than international financial institutions investing in private equity funds, no foreign commercial banks have been financing acquisitions in Ukraine: current risks would make the cost of acquisition financing impermissibly high. Furthermore, no bank would lend money over the long term. For example, since 2014, the Ukrainian hryvnia has lost more than 60 per cent of its value. This sharp depreciation has significantly inflated all foreign currency-denominated loans. Even though hryvnia became one of the strongest-performing currencies in the world over the year, it is expected to soften again by the end of 2020. Most M&A deals are still financed by acquirers from their own funds. In those cases where big multinational companies with access to cheap financing abroad acquire a company in Ukraine, they may use foreign financing to refinance expensive Ukrainian debt upon completion. This financing is not available to most Ukrainian investors.

Employment law

The Labour Code of Ukraine, dated 10 December 1971, remains the principal legislative act governing employment relationships in Ukraine. Due to numerous amendments to the Labour Code in the recent years, the document is generally adequate for current business needs. For this reason, developments in employment legislation are not usually seen as the hottest topic in an M&A context in Ukraine.

On 27 September 2017, a law simplifying the procedure for obtaining work permits and temporary residence permits for foreigners came into effect.24 The law facilitates the engagement of foreign managers and skilled employees serving Ukrainian companies by establishing clear, transparent and foreigner-friendly work permit and temporary residence permit procedures. The adopted law contains a number of novelties. In particular:

  1. it extends the list of grounds to apply for a temporary residence permit;
  2. it permits parallel employment of a foreign employee by two or more Ukrainian companies;
  3. it simplifies the procedure for obtaining a work permit by reducing the number of documents to be submitted to the state authorities;
  4. it extends the term of a work permit from one to three years for certain categories of foreign employees, including highly paid foreign professionals, founders and beneficial owners of Ukrainian companies, graduates of certain top-ranked universities and IT professionals;
  5. it establishes an affordable minimum salary that must be paid to certain categories of foreign employees; and
  6. it establishes a possibility for an employer to amend a work permit in certain cases instead of applying for an entirely new one.

Since 1 June 2018, temporary residence permits are issued in the form of a card with a contactless electronic chip. Because the chip contains certain biometric data (the digitalised signature, photograph and fingerprints of a foreign national), which are obtained at the time of filing the application, the foreign national is required to file an application for a temporary residence permit in person. A temporary residency permit for a foreign employee will be issued for the term of the relevant work permit (i.e., for up to three years) and must be exchanged after it expires (previously, a temporary residency permit could be extended).

In recent years, the minimum monthly salary has been increased significantly, from 1,600 hryvnias in December 2016 to 5,000 hryvnias in September 2020.25 This change may affect the purchase price of target companies with a significant amount of low-paid employees, especially in the agricultural and manufacturing sectors.

A new draft Law on Labour, which is expected to replace the existing Labour Code of Ukraine of 1971, is now pending. It is anticipated to contain a number of game-changing but contradictory provisions. Although the draft Law on Labour has not been published yet, the following provisions, among others, are expected to be included:

  1. employers' obligation to conclude written employment agreements with all employees;
  2. a detailed list of the features of employment relations;
  3. new types of employment agreements (e.g., different modifications of short-term employment agreements, domestic worker employment agreements);
  4. different instruments to facilitate employment termination (e.g., payment in lieu of notice, different durations of notice periods); and
  5. the possibility to temporarily suspend employment agreements.

Tax law

i New anti-Base Erosion Profit Shifting Rules

The Tax Code of Ukraine, dated 2 December 2010, as amended, remains a comprehensive legal act regulating tax matters in Ukraine. The Tax Code has been significantly amended in 202026 with a view to transposing anti-Base Erosion Profit Shifting (BEPS) measures into Ukrainian legislation. The key amendments of the Anti-BEPS Law that are relevant to M&A transactions are the following:

  1. controlled foreign companies:
    • effective 1 January 2021, the CFC Rules introduce taxation of the income of controlled foreign companies (CFCs) at the hands of Ukrainian controlling persons (individuals or companies);
    • the CFC Rules will target Ukrainian individuals and companies with an ownership interest in a foreign entity of (1) more than 50 per cent or (2) more than 10 per cent (25 per cent and more in 2021 and 2022), provided Ukrainian individuals (companies) jointly own a share of 50 per cent and more, or (3) in the case of established de facto control over a foreign entity; and
    • tax-free liquidation of CFCs has been allowed until 31 December 2021 with no tax applicable to the liquidation proceeds;
  2. business purpose:
    • applies effective as of 23 May 2020 to any transaction with any foreign counterparty; and
    • applies to transactions with non-residents that are deemed to lack a business purpose if:

      the principal or one of the principal purposes of a transaction is found to be tax evasion or underpayment; or

      under comparable conditions, a taxpayer would not be able to purchase or sell the same goods, services or works from or to an unrelated party;

  3. capital gains:
    • taxation of capital gains arising from the offshore sale of real estate-rich companies deriving their value from immovable property located in Ukraine applies starting from 1 July 2020; and
    • capital gains from the direct alienation of shares or a participatory interest in Ukrainian real estate-rich companies are also subject to tax;
  4. constructive dividends:
    • the concept of constructive dividends will be introduced starting from 1 January 2021; however, taxpayers should be relieved from the obligation to pay advance corporate income tax payments on constructive dividends;
  5. permanent establishments:
    • the enhanced permanent establishment (PE) rules, elaborated and detailed in line with the OECD's recommendation as per BEPS Action 7, apply from 23 May 2020;
    • the key change concerns the methods of PE taxation, namely the authorised OECD approach (AOA). The AOA suggests applying transfer pricing methods for determining the profits that would be deemed earned by a PE as if it were an independent local company rendering or selling the same or similar services or goods on the same or similar terms; and
    • harsh penalties are envisaged for carrying out business activities in Ukraine without formal tax registration as a PE; and
  6. beneficial owners:
    • effective from 23 May 2020, the definition of beneficial owner has been amended so that the recipient of income should not qualify as the beneficial owner but rather as an agent, nominee or intermediary with respect to the income when:
    • the recipient does not have the right to dispose of such income; and/or
    • the recipient merely forwards the income further along the chain and performs no substantial functions in the transaction; and/or
    • the recipient has no relevant resources (personnel, fixed assets, sufficient equity, etc.) necessary to perform the functions and manage the risks of the transaction.

Moreover, effective from 23 May 2020, Ukraine introduced a look through approach to cases when there is a foreign intermediary between the Ukrainian payer and the foreign beneficial owner of income. In brief, the tax benefits under the treaty with the country of the intermediary's residence should not apply. Instead, the tax treaty with the country of residence of the beneficial owner should govern.

ii Tax treaties

Ukraine has a double tax treaty network with around 70 jurisdictions, with treaties with Luxembourg, Malta and Qatar being the most recent.27 While historically Luxembourg, and, in certain cases, Malta were used in multilayer group structures, ratification of these double tax treaties has had a positive effect on the structuring of M&A deals in Ukraine.

The Ministry of Finance has also started to gradually review the existing tax treaty network, specifically targeting those offering full exemptions from withholding tax. This issue should be taken into account while structuring M&A deals.

Among the most significant developments, mention should be made of the Ministry:

  1. signing the new Ukraine–Spain double tax treaty and a protocol thereto to replace the obsolete Soviet–Spanish double tax treaty of 1985, with the domestic ratification procedures still in progress;
  2. signing a protocol amending the Ukraine–Austria double tax treaty with the domestic ratification procedures still in progress;
  3. signing a protocol amending the Ukraine–Netherlands double tax treaty with the domestic ratification procedures still in progress;
  4. signing a protocol amending the Ukraine–UK double tax treaty with the domestic ratification procedures still in progress;
  5. signing a protocol amending the Ukraine–Switzerland double tax treaty with the domestic ratification procedures still in progress; and
  6. signing a protocol amending the Ukraine–Cyprus double tax treaty with the domestic ratification procedures still in progress.

Ukraine has also recently signed and ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The application of the MLI is aimed at combating abuse of bilateral tax treaties in a synchronised and efficient way by amending about 40 of Ukraine's treaties. Among other novelties, it introduces the principal purpose test concept, requiring companies seeking treaty benefits to substantiate the commercial rationale behind relevant structures and transactions. The MLI also broadens the definition of permanent establishment, expanding the profits base taxable in Ukraine. Ukrainian and foreign entities operating in Ukraine should reassess their current corporate structures to be in compliance with the new rules.

The MLI applies from 1 January 2020 for withholding taxes in relation to double tax treaties between Ukraine and other jurisdictions that have also deposited their instruments of ratification. For instance, the MLI affects withholding tax levied on payments taking place from 1 January 2020, and covered by the double tax treaties between Ukraine and Ireland, Luxembourg, Malta, Singapore, the UAE and the UK, to name a few. In terms of other taxes, such as corporate income tax, the MLI applies as of 1 June 2020 in relation to double tax treaties between Ukraine and other jurisdictions that have also deposited their instruments of ratification.

iii Currency control

Ukraine has recently reformed its currency control legislation with an aim to harmonise the Ukrainian rules on the movement of capital with EU standards (the undertaking prescribed in the EU–Ukraine Association Agreement). This step has liberalised and significantly changed the Ukrainian currency control rules.

Competition law

Although the economic crisis has slowed M&A activity, the Antimonopoly Committee of Ukraine (AMCU) has demonstrated its strong desire to adjust the merger control rules in line with the best practices of other European countries. As a result, a number of significant and long-awaited reforms to competition law have taken place during the past few years. Following the recommendations of the OECD and the United Nations Conference on Trade and Development, in January 2016 Parliament amended the rules on merger control.28 The changes increased the merger notification thresholds that had been in effect for over 15 years. In particular, since May 2016, transactions are subject to prior approval of the AMCU if for the preceding year:

  1. the parties' combined worldwide turnover or assets exceed the equivalent of €30 million, and the domestic turnover or assets of each of the two parties exceeds the equivalent of €4 million;
  2. the target's domestic assets or turnover exceed the equivalent of €8 million, and the buyer's worldwide turnover exceeds the equivalent of €150 million; or
  3. in the case of the establishment of a business entity, the domestic assets or turnover of one of the parties exceed the equivalent of €8 million, and the worldwide turnover of the other party exceeds the equivalent of €150 million.

All thresholds are to be calculated on a group level for the last financial year preceding the contemplated transaction.

In addition to amending the rules on merger control, the merger control procedures have been simplified by allowing parties to conduct preliminary consultations with the AMCU. Furthermore, the new merger control procedures have significantly simplified the disclosure requirements for parties during the course of filing preparation, but at the same time they require profound economic analysis for transactions that may impact competition in Ukraine. A further sign of liberalisation has been the introduction of a fast-track procedure for certain cases, with decisions to be issued within 25 calendar days instead of 45 calendar days.

As part of the reform in the antitrust sphere, the AMCU's transparency has been enhanced. Previously, AMCU decisions did not have to be published; however, a law adopted in November 2015 requires the publication of all decisions on the AMCU's official website within 10 working days from the adoption of a decision.29

In September 2015, the AMCU approved fining guidelines that make its process of calculating fines more predictable and transparent.30

In November 2017, Parliament adopted changes to the Ukrainian competition and sanctions laws that allow the AMCU to deny merger clearance of transactions involving entities included in the sanctions list.

Another step towards the alignment of the Ukrainian competition legislation to the EU competition legislation was the AMCU's approval of the Guidelines on the Assessment of Horizontal Mergers at the end of December 2016 and the Guidelines on the Assessment of Non-Horizontal Mergers in March 2018.

In November 2018, the AMCU adopted the new Guidelines on Definition of Control, which were developed around a concept of control similar to that of the EU competition legislation.

Further, in June 2019, the AMCU adopted amendments to the provisions on concerted actions, which cancelled the concerted actions financial thresholds and removed the de minimis exemption. Due to these amendments, restrictive arrangements implemented in M&A transactions, such as non-compete and non-solicitation, irrespective of the financial thresholds of the parties, may benefit from the block exemption according to which concerted practices are allowed and do not require prior clearance from the AMCU if the aggregate market share of the parties (on a group level) does not exceed 15 per cent (for horizontal or mixed concerted actions) or 20 per cent (for conglomerate concerted actions) in any product market.

Another recent significant development was the adoption in September 2019 by the AMCU of non-binding guidelines on the application of merger control rules to joint ventures, which clarified the notifiability of the establishment of joint ventures. The establishment of a joint venture qualifies as a notifiable concentration subject to the following conditions:

  1. the joint venture shall be created from scratch by several undertakings and shall be jointly controlled by its founders;
  2. the joint venture shall be full-function, meaning it shall carry out all the functions generally associated with fully independent undertakings active on that market;
  3. the joint venture shall be intended to operate on a lasting basis; and
  4. the establishment of the joint venture shall not result in the coordination of the competitive behaviour between the joint venture founders, or between the founders and the joint venture.

In July 2020, the AMCU adopted guidelines on the application of the small but significant and non-transitory increase in price test, which elaborates the applicability of this test to alternatively identify the narrowest relevant market.

The completed and ongoing reforms represent a broader effort to harmonise Ukrainian competition law with that of the EU, and generally make Ukraine a more business-friendly place. In addition to these initiatives, a number of legal changes are making their way through the legislative process. Several are responses to recommendations cited in reviews carried out by the OECD and the United Nations Conference on Trade and Development. These legislative proposals address, for example, a revision of the concerted actions regulation, the AMCU's increased discretion in determining which cases to investigate and the establishment of a specialised court chamber for hearing antitrust-related disputes.

In additional to the above, the draft amendments to the Ukrainian competition laws are currently under the consideration of the Parliament, which anticipates essential changes to the merger control regulations, in particular the exclusion of a seller's financials for the purposes of merger control assessment, implementation of new transaction value thresholds, and an increase of filing fees for the submission of merger and concerted action applications.


Since February 2020, Ukraine has faced a sharp slowdown in M&A activity in the face of the global covid-19 crisis. It is expected that dealmaking in 2020 will be significantly lower than in previous years. Despite the current slowdown, foreign investors are still showing interest in the Ukrainian M&A market and considering Ukraine as a prospective investment opportunity.


1 Viacheslav Yakymchuk and Olha Demianiuk are partners at Baker McKenzie.

2 The Civil Code of Ukraine, adopted on 16 January 2003, effective from 1 January 2004.

3 The Commercial Code of Ukraine, adopted on 16 January 2003, effective from 1 January 2004.

4 Law of Ukraine No. 1576-XII 'On Companies', dated 19 September 1991.

5 Law of Ukraine No. 2275-VIII 'On Limited and Additional Liability Companies', dated 6 February 2018.

6 Law of Ukraine No. 514-VI 'On Joint-Stock Companies', dated 17 September 2008.

7 Law of Ukraine No. 3480-IV 'On Securities and Stock Market', dated 23 February 2006.

8 Law of Ukraine No. 755-IV 'On the State Registration of Legal Entities, Individual Entrepreneurs and Public Organisations', dated 15 May 2003.

9 Law of Ukraine No. 2210-III 'On Protection of Economic Competition', dated 11 January 2001.

10 Law of Ukraine No. 5178-VI 'On Depository System of Ukraine', dated 6 July 2012.

11 Law of Ukraine No. 448/96-VR 'On State Regulation of the Securities Market in Ukraine', dated 30 October 1996.

12 The National Securities and Stock Market Commission of Ukraine.

13 Law of Ukraine No. 1983-III 'On Amendments to Certain Legislation of Ukraine Regarding Improvement of Corporate Governance of Joint-Stock Companies', dated 23 March 2017.

14 Law of Ukraine No. 2210-VIII 'On Amendments to Certain Legislative Acts of Ukraine Regarding Simplifying Business Activity and Attraction of Investments by Securities Issuers', dated 16 November 2017.

15 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC.

16 Law of Ukraine No. 1984-VIII 'On Amendments to Certain Legislation of Ukraine Regarding Corporate Agreements', dated 23 March 2017.

17 Law of Ukraine No. 289-VII 'On Amendments to Certain Legislative Acts of Ukraine Regarding Protection of Investors', dated 7 April 2015.

18 Law of Ukraine No. 738-IX 'On Amending Certain Legislative Acts of Ukraine in relation to Investment Attraction and Introduction of New Financial Instruments', dated 19 June 2020.

19 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

20 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.

21 Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

22 Law of Ukraine No. 2418-VIIII 'On Amendments to Certain Legislation of Ukraine Regarding Assistance in Attraction of Foreign Investments', dated 15 May 2018.

23 The state of investment activity in Ukraine, available at

24 Law of Ukraine No. 2058-VIII 'On Amendments to Certain Legislative Acts of Ukraine On Eliminating Barriers to Foreign Investments', dated 23 May 2017.

25 Law of Ukraine No. 822-IX 'On Changes to Law of Ukraine 'On the State Budget of Ukraine for 2020', dated 25 August 2020, which became effective on 1 September 2020.

26 On 23 May 2020, the Law of Ukraine 'On Amendments to the Tax Code of Ukraine Purposed to Improve the Administration of Taxes, Eliminate Technical and Logical Inconsistencies in the Tax Legislation' (Anti-BEPS Law) became effective with certain provisions being phased out by Amending Law No. 786-IX of 14 July 2020, which entered into force on 8 August 2020.

27 Convention between the Government of Ukraine and the Government of the Grand Duchy of Luxembourg 'On Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital' ratified by the Law of Ukraine No. 1918-VIII, signed on 6 September 1997, as amended by the Protocol of 30 September 2016. Convention between the Government of Ukraine and the Government of the Republic of Malta 'On Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income', ratified by the Law of Ukraine No. 2018-VIII, signed on 4 September 2013. Convention between the Government of Ukraine and the Government of Qatar 'On Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital', ratified by the Law of Ukraine No. 2690-VIII, signed on 20 March 2018.

28 Law of Ukraine No. 935-VII 'On Amendments to the Law of Ukraine 'On Protection of Economic Competition', dated 26 January 2016, which became effective on 18 May 2016.

29 Law of Ukraine No. 782-VIII 'On Amendments to Certain Legislative Acts of Ukraine Concerning Transparency of the Antimonopoly Committee of Ukraine', dated 12 November 2015, which became effective on 3 March 2016.

30 Recommendation No. 16-pp approved by the Antimonopoly Committee of Ukraine on 15 September 2015.

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