Q&A: the legal framework for corporate reorganisations in Ukraine
Legal and regulatory framework
Types of transaction
What types of transactions are classified as ‘corporate reorganisations’ in your jurisdiction?
The Civil Code of Ukraine defines a corporate reorganisation in its narrow meaning as a transformation of the organisational form of a legal entity and legal succession of its assets, rights and liabilities. Such corporate reorganisation may take one of the following forms: amalgamation, merger, transformation, split or spin-off (also referred to as ‘a statutory corporate reorganisation’).
However, in business practice, a corporate reorganisation is usually interpreted in a broader sense. In addition to the above forms of reorganisation, it may also include transactions between companies of the same group (under the same control) leading to changes in the corporate structure through the acquisition of shares or assets, closure of branches or representative offices of a company, incorporation of new companies (eg, for transfer of assets).
Rate of reorganisations
Has the number of corporate reorganisations in your jurisdiction increased or decreased this year compared with previous years? If so, why?
The number of internal group corporate reorganisations shows growth year to year, and we expect that this trend will go on, as several significant changes have been introduced into the Ukrainian regulatory framework involving corporate entities. The main changes are new rules for corporate governance, squeeze-out provisions and taxation of foreign companies in Ukraine.
The covid-19 crisis has also led to some businesses optimising their business processes.
In a global context, international processes such as base erosion and profit shifting (BEPS), along with associated initiatives, have a considerable impact on the Ukrainian landscape. Local businesses dealing with foreign counterparties and multinational players with a presence in Ukraine consider international requirements to transparent business structures.
In February 2019, Ukraine ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), which introduces significant changes to international treaties related to avoidance of double taxation to which Ukraine is a party. Since December 2019, a number of the MLI provisions have already entered into force. The introduced novelties encouraged businesses structured through holding companies to assess the effectiveness of their corporate structures amid the operation of the MLI.
Stricter and more thorough compliance control, which banks have recently been reinforcing, has become a real challenge for businesses.
Within the past few years, corporate governance in Ukrainian companies has been constantly developing. In March 2020, the National Securities and Stock Market Commission introduced the Code of Corporate Governance implementing the best practice in corporate governance (we were among experts who drafted the Code). Progressive businesses and major state-owned enterprises are gradually moving to globally accepted standards and best practices. Implementation of good corporate governance often goes in parallel with the corporate reorganisation of a company and restructuring of the group of companies.
These new conditions triggered a noticeable trend for more effective corporate structures, including for groups of companies. We anticipate corporate reorganisations will tend to occur more frequently in Ukraine.
Jurisdiction-specific drivers
Are there any jurisdiction-specific drivers for undertaking a corporate reorganisation?
The Law of Ukraine on Limited Liability and Additional Liability Companies entered into force in 2018, modernised the regulatory framework for limited liability companies (LLCs) and encouraged companies to transform from highly regulated joint stock companies (JSCs) into LLCs. The law introduced the long-awaited shareholder agreements and the first judicial practice supported enforceability of such agreements. The law also removed the restriction on one LLC being the sole shareholder in two or more subsidiary LLCs. To overcome the latter restriction, a shareholder of several LLCs had to engage an additional nominee shareholder with a minority share (eg, 0.1 per cent). This legislative change is a good opportunity to simplify corporate structures that include nominee shareholders and to eliminate the related risks such as challenging companies’ resolutions.
Within the past few years, regulation for JSCs has been advanced too. Shareholders of JSCs also may now enter into shareholder agreements.
A JSC may be either public or private depending on whether it has offered its shares to the open market. Until recently, the corporate governance for public and private JSCs was essentially the same. The requirements for private JSCs have been gradually reduced, and now they are closer to those for LLCs rather than public JSCs. Given higher administration costs for private JSCs compared to LLCs but somewhat similar regulations, some companies transform from private JSCs into LLCs.
Another novelty that the market has already used is the squeeze-out procedure implemented in June 2017. It facilitates corporate reorganisations allowing a shareholder (a group of shareholders) owning 95 or more per cent of the registered capital of a JSC to buy the shares of the rest of the shareholders for fair consideration without their consent. This option allows JSCs that are no longer public but still have a high number of shareholders (sometimes thousands) to minimise and, hence, simplify governance in the company. Such ownership concentration in turn enables further corporate reorganisations. Many JSCs consider squeeze-out as an interim step before a transformation into an LLC as a less regulated and more cost-efficient form. More than 400 majority shareholders have already used their right to buy minority shareholdings under the squeeze-out procedure.
There is another driver for corporate reorganisations in the banking sector. In 2017, banks were allowed to merge following the simplified procedure with reduced terms. The National Bank of Ukraine estimated the average term of a merger to be reduced from 1.5 years to three months. There have been four such reorganisations since 2017 involving eight banks (out of about 70 in total). The rules on simplified bank mergers are effective until 1 August 2024.
In May 2020, the law introducing, among other things, changes in the taxation of foreign companies in Ukraine, came into effect. Some of its provisions, including the controlled foreign companies (CFC) rules, have been in effect since 1 January 2022. The CFC rules allow Ukraine to tax profits of foreign companies controlled by Ukrainian residents, while also granting Ukrainian residents the interim right to dissolve CFCs without high taxes. Such dissolution should have been completed by the end of 2021. However, completion can be deferred if it has not been completed by then owing to legislative restrictions (eg, mandatory filings or minimum holding period) or pending court proceedings. Stricter rules on tax residency are inducing the groups involving foreign companies to dissolve foreign companies or at least change the way they are managed to reduce taxation risks.
In 2021, the Ukrainian parliament passed the laws introducing the Diia City, a new business and tax regime for IT companies. To become residents of the Diia City, companies must meet specific employment, salary and income requirements. Benefits from such residence include lower taxation, stimulation for reinvestment of profits, additional corporate governance and employment instruments. On 8 February 2022, the Diia City was officially launched, and Ukrainian and foreign IT businesses submitted their first applications. This, inter
alia, may impact corporate reorganisations in the IT industry and other technological industries.
The corporate governance reform of the state’s defence enterprises started in October 2021. Law requires transformation of the state-owned defence concern into a JSC (with Ukraine being a 100 per cent shareholder) along with transformation of state-owned enterprises comprising the concern into JSCs or LLCs. The law facilitates these reorganisations by providing for some exceptions to the standard procedure, such as reorganisations without settling all creditors’ claims and free transfers of assets from one company to another. This will add to the amount of corporate reorganisations in Ukraine.
Another driver for corporate reorganisations is a wide privatisation of state-owned enterprises. The State Property Fund possesses around 1,000 enterprises subject to privatisation that can be divided into two groups: large-scale privatisation entities (more than 250 million hryvnias in value) and small-scale privatisation entities (others). In 2021, the privatisation of the state-owned enterprises reached its highest level to date, and we anticipate the trend will continue inducing post-privatisation reorganisations.
Structure
How are corporate reorganisations typically structured in your jurisdiction?
Solvent businesses may be structured through a variety of methods depending on the needs and goals of the companies affected by the reorganisation. We outline the most typical structures below.
Mergers and amalgamations
An amalgamation is a combination of two or more companies into a newly established company. As a result of an amalgamation, the amalgamating companies cease to exist, whereas a newly established company receives all their assets and assumes all their liabilities. A merger results in the passing of all rights and liabilities of one or more companies to another existing company that is the only one surviving the merger.
Splits and spin-offs
A split is a type of reorganisation where all assets and liabilities of a company are divided between two or several new companies under the transfer protocol. Upon the split and passing of assets and liabilities to legal successors, the former company terminates its legal existence.
A spin-off also results in the formation of a new company but, unlike in a split, without dissolution of the company being reorganised. Only a part of the assets and liabilities of the reorganised company pass to one or several new companies under the transfer protocol and the rest of the assets and liabilities remain with the reorganised company.
Transformation
A transformation occurs where a legal entity changes its legal form of conducting business (eg, in transforming from a JSC to an LLC). In that case, the former company ceases to exist and a new company with a new legal form receives all assets and assume all liabilities of the former company.
All of the above corporate reorganisations are quite long procedures. In practice, it takes six months or more to follow all the necessary stages, that is, a tax audit, notification of creditors, repayment of obligations, etc.
Acquisition of shares
In a group of companies, internal reorganisations are often structured through the purchase of shares in the target company by one intra-group company from another intra-group company. Such transactions are much easier than corporate reorganisations as described above and, therefore, may be done much quicker. In some cases, intra-group restructuring is a combination of acquisitions of companies with their statutory corporate reorganisation.
Acquisition of assets
The reorganisation may also involve the acquisition of the target’s particular assets. Ukrainian law allows for the acquisition of an ‘integrated property complex’ of a target company – a specific real estate object that includes buildings, facilities and equipment of the company, as well as other assets necessary for its functioning. Such acquisition often requires approval from the Antimonopoly Committee of Ukraine. Acquisition of assets may sometimes be less tax efficient compared to the acquisition of shares due to VAT applicable to the former.
Laws and regulations
What are the key laws and regulations to consider when undertaking a corporate reorganisation?
When undertaking a corporate reorganisation, companies should consider the following key laws (as amended):
- the Civil Code of Ukraine of 16 January 2003 (Chapters 7 and 8);
- the Commercial Code of Ukraine of 16 January 2003 (Chapters 7 to 11);
- the Law of Ukraine on Limited Liability and Additional Liability Companies of 6 February 2018 (Chapter VI);
- the Law of Ukraine on Joint Stock Companies of 17 September 2008 (sections XI and XVI);
- the Law of Ukraine on State Registration of Legal Entities, Private Entrepreneurs and Civic Formations of 15 May 2003;
- the Law of Ukraine on Protection of Economic Competition of 11 January 2001 (section V);
- the Law of Ukraine on Capital Markets and Organised Commodity Markets of 23 February 2006;
- the Tax Code of Ukraine of 2 December 2010; and
- the Labour Code of Ukraine of 10 December 1971.
The above list is not exhaustive. Banks should consider the Law of Ukraine on Banks and Banking Business of 7 December 2000, and the Law of Ukraine on Simplification of Procedures for Reorganisation and Capitalisation of Banks of 23 March 2017. For issuers of securities, there are regulations of the National Stock Market and Securities Commission and the National Depository of Ukraine. There may be additional regulations for companies operating on regulated markets, for example, the financial market.
National authorities
What are the key national authorities to be conscious of when undertaking a corporate reorganisation?
Different state authorities may be involved in the procedure depending on the type of corporate reorganisation, the volume of assets of the companies partaking in the reorganisation, their industry and market share.
Tax authority
The companies affected by a statutory corporate reorganisation (except a transformation) or closure of a branch or a representative office are subject to an extraordinary audit by the tax authority.
Antimonopoly Committee of Ukraine
If a corporate reorganisation reaches financial thresholds provided by law, then it is qualified as a concentration and requires approval from the Antimonopoly Committee of Ukraine. This applies to amalgamation, split, acquisition of assets or shares and incorporation of a new company.
National Securities and Stock Market Commission
When a corporate reorganisation involves an issuer of securities, it has to make some filings with the National Securities and Stock Market Commission (NSSMC). If a corporate reorganisation is structured through the acquisition of shares of a target JSC, an acquirer who intends to buy 5 per cent or more of shares in the JSC must notify the NSSMC. In a statutory corporate reorganisation, the JSCs involved have to undergo procedures related to their shares such as cancellation of existing shares and issue of new shares.
It is also necessary to obtain consent from the NSSMC to acquire or increase a substantial shareholding (10, 25, 50 and 75 per cent) in a company operating on the capital market (brokers, custodians, etc).
State registrar for companies
The state registrar is involved at different stages of corporate reorganisation. At the first stage, a company must notify the state registrar of the start of reorganisation. The reorganisation procedure is completed after the state registrar records the dissolution of the former entity (if necessary) and the formation of a new entity in the Companies Register.
Since 2016, notaries, including private ones, have been officially allowed to act as state registrars for companies (as
well as for real estate – see the next paragraph). So, businesses may apply for registration either to a state registrar or to a private notary who usually renders services in a more effective and customer-friendly way but charges an additional fee for it.
State registrar for real estate
Some corporate reorganisations result in the conveyance of real estate to the legal successor of the reorganised company. This is also the case when assets are transferred under the sale and purchase agreement. In such cases, an acquirer of assets (a purchaser or a legal successor in a statutory corporate reorganisation) must apply to a state registrar or a notary for registration of property rights over the real estate in its name. The state registrar or the notary records the acquirer as a new owner (lessee, etc) of the real estate in the Real Estate Register.
State Land Cadastre
In addition to the register for real estate, passing title to land plots is also subject to registration in the State Land Cadastre.
National Bank of Ukraine
A reorganisation of a bank in Ukraine requires the approval of the National Bank of Ukraine (NBU). The NBU also approves the reorganisation plan submitted by the bank.
It is also necessary to obtain a consent from the NBU to acquire or increase a substantial shareholding (10, 25, 50 and 75 or more per cent) in a Ukrainian bank or other financial institution.
State Property Fund
The main possessor of state-owned entities is the State Property Fund, which organises auctions for the acquisitions of state-owned entities. It approves the list of objects for the small-scale privatisation and prepares the list of objects for large-scale privatisation for the government’s approval.
Other filings (IP, industry licensing, etc)
Other filings and mandatory submissions may follow a corporate reorganisation. To name a few, intellectual property rights, cars and other machinery are subject to registration in the name of the legal successor. The same relates to special licences and permits issued by the state on regulated markets. A corporate reorganisation generally requires a surviving company to apply for licences and permits anew unless reorganisation is structured through the sale of shares or the law provides otherwise.
Law stated date
Correct on
Please state the date on which the law stated here is accurate.
8 February 2022.