The foreign investor in Ukrainian large-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.

Sergiy Oberkovych
Senior Partner аt GOLAW, Attorney at law

The article has been published at KyivPost website