After more than 70 years in the Soviet era, including its final years of “perestroika,” as well as 14 years of independent development, Ukraine has moved significantly toward a free market economy and became an independent player in the international marketplace. As a result of these changes, Ukraine has fundamentally modified its legal system and continues to further develop in order to match today’s conditions (including the conditions which have to be met in order to join the WTO).
To this end, Ukraine has developed a number of new and modified laws.
One of the first such laws was the Law on Ownership, which specifically recognized private ownership and recognized the right of Ukrainian residents and foreign individuals and legal entities to own property in Ukraine, to use such property for entrepreneurial purposes, to lease property, and to keep the revenues, profits, and production derived from its use. As well new Civil Code, the Economic (Commercial) Code, Land Code, the laws on companies, on foreign economic activity, on entrepreneurship and others were adopted. These laws serve, in fact, as a basic framework for business activities in Ukraine.
The process of privatization started in 1992 was governed the laws of privatization of the state-owned property and a package of other regulatory documents. Admittedly, privatization was not simple and had a number of irregularities. Earlier this year, the Ukrainian Government took active steps in order to fight such irregularities. Some of these steps were understood as a sign of massive deprivatization. The new Ukrainian Government created a month ago declared that it respected previous privatizations, a position which was supported by the President of Ukraine (the Kryvorizhstal case was considered by the new Government to have been in fragrant violation of the process prescribed by the law).
Hopefully, this approach will be reconfirmed by the new Cabinet of Ministers which will be formed by the Parliament after March 2006 elections based on the new constitutional norms.
Business activities in Ukraine are often subject to licensing carried out by different state agencies. Moreover, commencement of business activities usually requires getting many permits and approvals (such as fire safety, labor safety, sanitary-epidemiological authorities etc). According to the President of Ukraine a considerable part of regulatory acts that affect business activity will be cancelled in the nearest future.
Before starting new projects in Ukraine an investor should obtain qualified local advice since Ukrainian laws are often vague and also because numerous interpretations of laws, particularly tax laws are possible.
Investment policy
On December, 28 2001, the Cabinet of Ministers approved the Programme of Investment Activities Development for 2002-2010 (the "Programme"). In accordance with the Programme the following areas are the most preferable for investment: food production, agricultural produce processing, wholesale activities, trade mediation, financial services, machinery construction, chemical and oil production, metallurgy and technology development. The Programme is aimed at the creation of an attractive investment climate and development of an infrastructure of invest¬ment activities to insure stable economic growth.
Legislation regulating foreign investments
Foreign investment activity in Ukraine is regulated by the following acts: Law of Ukraine on Protection of Foreign Investments in Ukraine as of September 10, 1999, Law of Ukraine on the Regime of Foreign Investment as of March 19, 1996 (the "Foreign Investment Law"). The National Bank of Ukraine also adopted a number of resolutions which regulate currency issues for performing investments.
Foreign investments guarantees
The effective Foreign Investment Law contains the following guarantees with regard to foreign investments:
Foreign investors enjoy the national regime of investment and other business activity in Ukraine. The Foreign Investment Law determines that foreign investors, who implement the projects in accordance with the state programmes of development of the priority branches of economy and social sphere, can be granted with preferential treatment of investment.
Foreign investors
As defined by the Foreign Investment Law, a foreign investor may be any legal entity established in accordance with the laws of any foreign country, any individual with a permanent place of residence outside of Ukraine, any foreign state or international organization, or any other foreign subject of investment activity.
Foreign investments: types and ways
The following valuables could be used for performing of foreign investments: convertible currency; Ukrainian currency (only for purposes of reinvesting); any form of movable and immovable property and any right thereto; securities, bonds, as well as corporate rights; monetary claims; any intellectual property rights; rights to carry out business activity, including rights to use subsoil and natural resources.
Foreign investments could be performed in following ways: participating in a company; creating a subsidiary, an affiliate, or other division of the foreign investor or acquiring assets or corporate rights of an existing Ukrainian legal entity; acquiring other property rights; engaging in other investment activities; and business activities based on product distribution agreements.
In addition to the above types of investment activity, the Foreign Investment Law also establishes a possibility to enter into a contract between a foreign investor and a Ukrainian entity for non-corporate joint activity. Parties to these types of contracts are required to maintain separate accounting books, records, and reporting for the operations connected with the joint activity, and are entitled to open separate accounts in Ukrainian banks for the purpose of making payments and settlements connected with the joint activity. Property imported into Ukraine by a foreign investor for joint activity for a period of at least three years is exempted from customs duties. However, if the property is sold prior to the expiration of the three-year period, customs duties must be paid.
Foreign investments: state registration
Registration of a foreign investment is not mandatory. However, in order to enjoy guarantees granted to foreign investors by the law, foreign investments should be registered with the appropriate state authorities within three business days after the investment has been actually contributed. The official fee for registration of foreign investment is about USD 40.
Special Investment Regimes
Starting from 1992, legislation on so-called special (free) economic zones and territories of priority development was in effect in Ukraine. Under the Law on SEZs, a special (free) economic zone and territory of priority development is a part of the territory of Ukraine, where favourable customs, taxation, financial, and legislative regimes of entrepreneurial activity are established.
Meanwhile, the State Budget Law of 2005 has significantly impaired terms of leading business in SEZ and priority development territories. In particular, this Law cancelled:
At present a draft Law restoring the benefits for special (free) economic zones, territories of priority development, and tourist recreational zones is being considered by the Ukrainian Parliament.
Legislative acts which regulate competition in Ukraine are the following: the Law of Ukraine "On Protection of Economic Competition" as of January 11, 2001 and the Law of Ukraine "On Protection from Unfair Competition" as of June 7, 1996.
Compliance with competition legislation and its enforcement in Ukraine is preformed by the Antimonopoly Committee of Ukraine ("AMC").
The Law of Ukraine "On Protection of Economic Competition", in particular, regulates the following issues:
Concerted anti-competitive actions
Actions are considered to be concerted anti-competitive actions if they resulted or may result in the prevention, elimination or restriction of competition. Concluding agreements in any form, taking decisions in any form and other concerted competitive behaviours are considered as such actions.
Concerted actions shall be considered as anti-competitive if they, in particular, relate to:
The above provisions are not applied to the concerted actions of small and medium-sized entrepreneurs (whose turnover of value of assets does not exceed EUR 500 ths.) toward the joint acquisition of goods.
However, certain concerted actions may be permitted by the AMC if their participants can prove that the concerted actions facilitate:
The AMC issues its approval on concerted actions within 135 days from the date the application is submitted. The state fee for filing an application to the AMC is approximately USD 500.
Carrying out concerted anti-competitive actions without a permit from the AMC shall entail the responsibility, in particular, the AMC may impose fines in amount of up to 10% of the revenue of the previous fiscal year of participants to the anti-competitive concerted actions for execution them without permit.
Abuse of dominance
The law defines a monopoly as a situation when a company has no competitor on the market or when the market share of a company exceeds 35% where significant competition is not proved.
A dominant entity cannot abuse its dominance, namely, it cannot perform any action that causes a restriction or limitation on competition by other companies or the infringement of consumer interests. The following actions are prohibited and therefore considered as violations:
The Antimonopoly Committee of Ukraine may impose fines of up to 10% of the company revenue of the previous fiscal year for abuse of dominance.
Concentration of activities
The following actions are considered a concentration of activities, which in certain cases require prior approval by the AMC:
Prior AMC consent for concentration is required when:
The financial indices mentioned above should be calculated with the consideration of control relations. It means that if we are speaking about a company, both financial results of the company and of its founders, subsidiaries, etc. should be considered. If it relates to individuals, information on their spouses, parents, children, brothers, and sisters should also be considered.
The AMC grants its consent for concentration within 45 days of filing. The state fee for application to the AMC is about USD 1,000.
In the case concentration without consent of the AMC, fines can reach up to 5% of the revenue of the previous fiscal year for all participants of concentration.
Protection against unfair competition
Unfair competition is determined as any action that contradicts trade and other fair traditions of entrepreneurial activity. The Law "On Protection Against Unfair Competition" out¬lines three types of competition infringements, namely:
The law also stipulates liability for unfair competition, including civil, administrative and criminal liability.
When a foreign company or an individual plans to establish a business presence in Ukraine there is a number of options that can be used. The main forms of business presence that are most commonly used by foreign investors in Ukraine are joint-stock companies (share corporations), limited liability companies and representative office. There are other options available under the Ukrainian legislation such as partnerships, limited partnerships, additional liability companies and non-corporate joint activities which are used less frequently.
The main laws which govern the establishment and activity of legal entities in Ukraine are the Civil Code, the Commercial (Economic) Code and the Law on Companies. It is expected that in the near future a special law on joint-stock companies (share corporations) will be passed
Founding and registration
Companies in Ukraine may be founded by Ukrainian and/or foreign legal entities, Ukrainian citizens as well as foreign citizens and individuals without citizenship. A company acquires the status of a legal entity after its state registration.
Companies are established and act on the basis of their founding documents (charter or foundation agreement). The foundation documents should contain information on the name of the company, subject and purposes of its activity, information about the founders and participants, amount of the chartered capital, procedure of profit and loss distribution, management structure and competence, procedure of adopting decisions by governing bodies, procedure of amending the founding documents, procedure of liquidation of the company, as well as other issues specifically defined for certain companies depending on their organizational form.
Joint-stock companies (share corporations), limited liability companies and additional liability companies act on the basis of charters and partnerships act on the basis of a founding agreement. Although conclusion of the founding agreement is not obligatory for the companies of these organizational forms as mentioned above, the founders of such companies may conclude the founding agreements in order to establish the procedure of making contributions to the chartered capital, set conditions of their joint activity on foundation of the company, etc.
Contributions to the chartered capital
Founders can make their contributions to the chartered capital of the company in the form of monetary contributions and in the form of in-kind contributions, e.g.:
The Land Code prohibits the contributions of land rights to a company's chartered capital until January 1, 2007. The use of budget funds, borrowed funds or pledged property in the formation of chartered capital is also prohibited.
Termination and liquidation
Companies may terminate their activity by way of reorganisation (merger, takeover, division, transformation) or by way of liquidation. In the case of termination of a company, its property, rights and obligations are transferred to its legal successors. A company may be liquidated based on (i) decision of the participants/shareholders or (ii) court decision. Upon liquidation of the company, the creditors' demands (if any) are satisfied in the order established by the Ukrainian legislation. The property which is left after settlement of the creditors' demands is distributed among its participants in the order provided by its foundation documents.
Joint-stock company (share corporation) (Ukr.: Aktsionerne tovarysrvo – AT)
A joint-stock company is a company with chartered capital divided into a certain number of shares of definite equal nominal value. Shareholders are liable for the company's commitments only within the limits of their shares (i.e. shareholders would not be required to make any other contributions besides contributions to the chartered capital and would not be liable for the commitments of the company).
The chartered capital of a joint-stock company cannot be less than the amount equal to 1,250 minimum salaries based on the minimum salary rate effective at the moment of the company's establishment. Currently, the minimum monthly salary is UAH 350 [effective as of January 1, 2006], therefore the chartered capital of a joint-stock company cannot be less than UAH 437,500 (approximately USD 87,000).
The Law on Companies provides for two types of joint-stock companies, namely:
The joint-stock company is governed by the following bodies:
Limited liability company (Ukr.: Tovarystvo z obmezhenoiu vidpovidal’nistiu – TOV)
A limited liability company is a company with its chartered capital divided into participatory shares, as determined by the founding documents. Participants in the company are liable only for the amount of their contributions, i.e. participants bear the risks related to company's activity only within their contributions. The participant which systematically breaches its obligations to the company may be excluded from the company if other participants holding more than 50% of the total amount of votes vote in favour of such a decision.
The chartered capital of a limited liability company should be not less than the equivalent of 100 minimum salaries based on the minimum salary rate effective at the time of company's establishment, which is UAH 350 as of January 1, 2006. Therefore the chartered capital of a limited liability company cannot be less than UAH 35,000 (approximately USD 7,000).
A limited liability company is governed by the following bodies:
Additional liability company (Ukr.: Tovarystvo z dodanoiu vidpovidal’nistiu – TDV)
An additional liability company is a company with chartered capital divided into participatory shares as determined by company's founding documents. Participants primarily become responsible for the com¬pany's commitments to the extent of their contributions to the chartered capital. However, if these sums are insufficient, participants shall bear additional liability pro rata to each participant's contribution. The limits of such liability of participants are provided in the foundation documents.
The Law on Companies provides for the same requirements regarding the minimum amount of the chartered capital of additional liability companies as of the limited liability companies.
General partnership (Ukr.: Povne tovarystvo – PT)
A general partnership is a company where all participants are jointly engaged in company's business activity and are jointly responsible for the company's obligations with all of their property.
The general partnership is managed according to the founding agreement of the partners. Activity of the general partnership may be carried out either by all, one or some of them who act on behalf of the partnership on the basis of the power of attorney issued by other partners.
Limited partnership (Ukr.: Komandytne tovarystvo – KT)
A limited partnership is a company in which one or more participants carrying out business activity on behalf of the partnership are held jointly responsible with all their property for the partnership's commitments (general partners), while the responsibility of the remaining one or more participants which do not participate in the activity of the company is limited to their contribu¬tions to the chartered capital of the company (limited partners).
In a limited partnership, only the general partners carry out the management of the partnership. Limited partners may not interfere with the activity of the general partners in the management of the partnership. A limited partnership must terminate its activity when all general partners withdraw from the company.
Representative office (Ukr.: Predstavnytstvo)
A foreign company may set up a representative office in Ukraine. A representative office is not a legal entity under the Ukrainian legislation and therefore it acts for and on behalf of the foreign founder.
In practice representative offices of foreign companies may be of two types: a representative office through which a non-resident entity carries out its business activity in Ukraine (which is rather a branch from the legal view) and a representative office whose functions are generally limited to representing the interests of a foreign company, performing marketing activities, and performing other support functions to promote the business of its foreign founder. Representative offices are subject to registration with state authorities as provided by Ukrainian legislation.
Non-corporate joint activity
Non-corporate joint activity is one of the possible options provided for by the Ukrainian legislation for conducting business in Ukraine. Joint activity is carried out via a contractual joint venture organized by a combination of funds or assets of participants or without combination of contributions in order to achieve joint business objectives. The joint activity does not have the status of a legal entity; there is no requirement for a minimum amount of capital to be contributed by the participants. The conditions of carrying out the joint activity are established by a written agreement among its participants. Joint activity is subject to registration with state authorities as provided by the Ukrainian legislation.
The main laws relating to M&A in Ukraine are: the Civil Code, the Commercial Code, the Law on Companies, the Law "On Recovery of the Debtor's Solvency or Recognizing its Bankruptcy" (Law on Bankruptcy), and the Law "On Protection of Economic Competition."
Mergers
According to Ukrainian law, mergers in Ukraine could be performed in two ways: as a consolidation and as a joint venture. As a result of merger assets, rights and obligations of all or some merger participants are transferred to the legal successor:
Consolidation is a merger when two or more companies merge, creating a new one. In this case the companies, which merge, terminate, and all their assets, rights and obligations are transferred to a new company established as a result of merger.
A joint venture is a merger when one company joins another existing company. In this case the company, which is joining an existing company, terminates, and all its assets, rights and obligations are transferred to the existing company.
A merger requires the approval of the highest bodies of the companies involved: 3/4 of votes of shareholders taking part in the general meeting of the joint-stock company and simple majority of votes in a limited liability company.
A merger leads to termination of at least one company, which should be performed in accordance with special procedures. In particular, the commission on termination must be established, which inter alia is obliged to notify all the creditors of the companies on termination and merger, etc. The termination procedures differ depending on the organizational form of a company.
Acquisitions
The legislation does not provide for the definition of "acquisition," however, in practice it means one company gains control of the shares or assets of another company. There are three most common models of acquisitions:
Acquisition of shares. In this case, the buyer acquires the company together with all its assets, liabilities and obligations.
Acquisition of assets. The buyer acquires only certain assets and liabilities of the company.
Acquisition of debts. The buyer obtains liabilities of the other company, initiates a bankruptcy suit or participates in an already existing production process. In accordance with the Law on Bankruptcy, the insolvency plan can embody the possibility to exchange the creditor's demands into the shares and/or assets of the target company (the debtor). Thus, the buyer gains control over the company.
Mergers and acquisitions: Competition issues
Under Ukrainian legislation, mergers and acquisitions are considered as concentration and are subject to prior approval by the Antimonopoly Committee of Ukraine if the stipulated thresholds are exceeded (Please see Section "Competition").
A merger/acquisition, mentioned above, is prohibited until such approval has been given by the Antimonopoly Committee of Ukraine. In the meantime, participants of the merger/acquisition are obliged to refrain from any action, which may restrict competition.
It should be noted that Ukrainian competition legislation is applicable to any merger or acquisition which affects or could affect competition in Ukraine, even if such mergers and acquisitions in fact are accomplished abroad. Accordingly, M&A involving foreign companies are caught if they meet all stipulated requirements.
M&A in specific sectors
The effective Ukrainian legislation provides for specific rules applicable to M&A in specific sectors. In particular, there are certain restrictions with regard to companies recognized as monopolies, including natural monopolies. For example, certain restrictions are imposed by the Law "On Electrical Energy Industry," the Law "On Communication," etc. Special rules are also in place with regard to specific economic sectors.
Banking
The activity of commercial banks in Ukraine is regulated by the Law "On Banks and Banking," according to which the National Bank of Ukraine is entitled to regulate the activity of commercial banks. Any type of reorganization of commercial banks, including mergers and acquisitions, is subject to approval by the National Bank of Ukraine.
An agreement on a merger or acquisition with the participation of commercial banks is to be concluded in writing and comes into force after its approval by a two third majority of each bank’s shareholders (owners).
Media
The main laws regulating television and radio broadcasting are: the Law "On Television and Radio Broadcasting" and the Law "On Telecommunications." These laws provide for special rules about the establishment and operation of TV and radio broadcasting organizations.
Only Ukrainian citizens, Ukrainian legal entities, the Verkhovna Rada and the President of Ukraine have the right to establish TV and radio broadcasting companies in Ukraine. Foreign legal entities and citizens of other states cannot establish TV and radio broadcasting companies in Ukraine. Moreover, foreign investment in Ukrainian TV and radio broadcasters is limited to 30% of the chartered capitals of existing companies. Foreign investment in TV and radio broadcasters is subject to prior approval of the National Council on Television and Radio Broadcasting of Ukraine.
Printed Media
Printed media companies can be established by Ukrainian and foreign citizens, as well as by Ukrainian and foreign companies. But neither citizen, nor a company may establish or control more than 5% of social-politics printed mass media in Ukraine.
Prepared in accordance with the materials of DLA Piper Ukraine LLC