Another novelty is the requirement to disclose information about entering into an agreement as a result of which a shareholder will directly or indirectly become the owner of the Controlling Stake and/or the Significant Controlling Stake (only in a public JSC). Such disclosure should be made within one business day following the conclusion of such agreement, with subsequent disclosure of such information on the web page of the JSC and in the publicly available database of the National Securities and Stock Market Commission (the “Securities Commission”).
 

The mandatory bid procedure that should be complied with following the acquisition of the Controlling Stake and/or the Significant Controlling Stake has been significantly amended, including the timing of the mandatory bid and the formula for determining the fair price (ie, the price to be paid by the majority shareholder for the shares of the minority shareholder). In particular, the fair price should be determined as the highest of the following:
 

(1) the market value, determined by an independent appraiser as of the day preceding the day of disclosure of information on entering into the agreement for acquisition of the Controlling Stake and/or the Significant Controlling Stake;

(2) the highest price paid for the same shares by the offeror over a period of 12 months preceding the day of the indirect acquisition of the Controlling Stake and/or the Significant Controlling Stake; or

(3) the highest price paid by the offeror for the shares of another legal entity that directly or indirectly owns shares of such JSC over a period of 12 months preceding the day of acquisition of the Controlling Stake and/or the Significant Controlling Stake by the offeror, provided that the value of the shares directly or indirectly owned by such legal entity, according to its latest annual financial statements, consist of at least 90% of the total assets of such legal entity.

The Corporate Governance Law introduced the squeeze-out procedure, ie, a procedure enabling the offeror who acquired the dominant controlling stake of 95% and more of shares (the “Dominant Stake”) to require the holders of the remaining shares to sell him/her their shares. A squeeze-out bid may be submitted by the offeror within 90 days following the date of disclosure of the information on the acquisition of the Dominant Stake. The offeror may only launch a squeeze-out bid after having complied with the mandatory bid procedure following the acquisition of the Controlling Stake and/or the Significant Controlling Stake. A detailed step plan of the squeeze-out procedure is set out in the illustrative chart at the end of this section I.
 

The price for the mandatory purchase of shares of minority shareholders by the Dominant Stake holder shall be the highest of the following:
 

(1) market value determined by an independent appraiser as of the day preceding the day of the Dominant Stake acquisition;

(2) highest price for which a person directly or indirectly acquired the Dominant Stake over a period of 12 months preceding the day of such stake acquisition, including the date of acquisition;

(3) the highest price for which a person indirectly acquired the shares of another legal entity that directly or indirectly owns the shares of such JSC, over a period of 12 months preceding the day of the Dominant Stake acquisition, provided that the value of the shares directly or indirectly owned by such legal entity, according to its latest annual financial statements, consist of at least 90% of the total assets of such legal entity.
 

The Corporate Governance Law introduced the concept of escrow accounts into Ukrainian law. Settlement of payment of the purchase price to minority shareholders as a result of the squeeze-out procedure should be made via escrow accounts without engaging a securities broker. Please refer to our legal alert for additional information on introducing escrow accounts and improving regulation of bank account pledges.

The Corporate Governance Law provides for a two-year transitional period during which a person that was a direct or indirect holder (shareholders acting in concert) of the Dominant Stake on the effective date of this law (taking into account the shares owned by it or its affiliates) has the right to launch a squeeze-out bid according to the terms and conditions set out in the transitional provisions. In particular, only during the transitional period the price for the mandatory purchase of shares of minority shareholders by the Dominant Stake holder should be determined as follows: (1) if shares of a JSC are included in the stock exchange register, their price shall be calculated based on the weighted average stock price for the last three months of their circulation; or (2) for any other shares, the price should be the market value of such shares determined by an independent appraiser.
 

The Corporate Governance Law introduced the sell-out procedure, ie, a right for the minority shareholders to require the Dominant Stake holder to buy their shares at a fair price. The sell-out price shall be determined according to the same rules applicable to the squeeze-out procedure. The sell-out right may not be exercised during the squeeze-out procedure.
 

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 Stake holder after the effective date of the Corporate Governance Law.
 

The Corporate Governance Law allows private JSCs to disapply or to establish different rules in their charters regarding the acquisition of Controlling Stakes, and squeeze-out and sell-out procedures, subject to having complied with the majority voting requirements set out in the law.
 

From now on, only public JSCs are required to disclose information on the prior approval of material transactions, the approval of material transactions or the approval of interested party transactions as part of the annual information on the issuer. Previously, this requirement applied to both public and private JSCs.

Additionally, the materiality thresholds in excess of which the interested party transactions should be approved by the respective corporate body of a JSC were changed from 100 minimum wages (UAH 320,000 or approximately USD 12,000 as of the date hereof) to 1% of the assets value, based on the latest financial statements of a JSC.
 

4. Responsibility for Failing to Comply with the Corporate Governance Law
 

The Corporate Governance Law expanded the Securities Commission`s authority. From now on, the Securities Commission will exercise control over market players' compliance with the requirements of the Controlling Stakes acquisition, including the Controlling Stakes acquisition, the Significant Controlling Stakes acquisition, and the squeeze-out and sell-out procedures.

The Corporate Governance Law introduced financial sanctions in the form of applying the increased price which is equal to two times the fair value of the shares for the squeeze-out or sell-out procedures if a shareholder fails to make a mandatory irrevocable bid after having acquired the Controlling Stake or the Significant Controlling Stake (for a public JSC).

Additionally, if a shareholder became a direct or an indirect Controlling Stake holder or a Significant Controlling Stake holder (for a public JSC) but failed to make a mandatory bid, such shareholder may only exercise its voting rights with respect to 50% of the shares of a JSC (75% of shares for a public JSC). The same restrictions apply to a shareholder who became a direct or indirect Dominant Stake holder but failed to make the mandatory bid and/or comply with the squeeze-out or sell-out procedures. This shareholder may only exercise its voting rights with respect to 95% minus one share. The restrictions established by the law apply until a shareholder performs its respective obligations.
 

5. Corporate Agreements
 

The Corporate Agreements Law allows the participants (founders) of limited liability companies and the shareholders of JSCs to conclude agreements on exercising their rights (“Corporate Agreements”). In particular, Corporate Agreements may establish an obligation for the parties to vote at the general meetings in the way determined by such agreement; an obligation to approve the acquisition and/or disposal of participatory interest or shares in a company according to the pre-determined price; an obligation to undertake other actions related to the company’s management, etc. In addition, the creditors of such company shall have the right to conclude Corporate Agreement with the participants/shareholders of such companies.
 

II. Analysis of Implications of the Amendments on M&A Transactions

1. Change of Type of JSC from Public to Private

The implementation of the Corporate Governance Law should facilitate changes of types of JSCs from public to private and clean up the market from "quasi-public JSCs." This is particularly because the acquisition of shares in private JSCs is subject to less stringent regulation, eg, there is no regulation of acquiring Significant Controlling Stakes. In addition, private JSCs may disapply or establish different rules in their charters regarding the acquisition of Controlling Stakes, and squeeze-out and sell-out procedures.

Until 1 January 2018, JSCs that do not change their type from public to private are obliged to include their shares in the stock exchange register and maintain its listing in at least on one stock exchange.

2.Structuring

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). From now on, the direct or indirect acquisition of shares in a JSC is subject to stricter regulation, including:
 

(1) disclosing information on acquiring different stakes (for public JSCs: 5% and more, 50% and more, 75% and more, and 95% and more; for private JSCs: 10% and more, 50% and more, and 95% and more);

(2) disclosing information on the highest acquisition price for Controlling Stakes (50%+ one share, 75% and more, 95% and more);

(3) complying with the procedure of submitting other notices on acquisition of shares;

(4) complying with the obligation to make a mandatory bid to the remaining shareholders to purchase their shares at the fair price in case of acquisition of the Controlling Stakes (50%+ one share, 75% and more);

(5) squeeze-out, ie, the right of the Dominant Stake holder (95% and more) to require the holders of remaining shares to sell him/her their shares; and

(6) sell-out, ie, the right of minority shareholders to require the Dominant Stake holder to buy their shares at a fair price.
 

3. Confidentiality

The new requirements on disclosure of information should be taken into account when negotiating transaction documents on sale and purchase of companies or assets, which include shares of Ukrainian JSCs. These requirements include disclosure of information on concluding an agreement on purchase of shares (within one business day following conclusion of an agreement), on acquisition of shares and on the highest price of such acquisition. To enable compliance with the disclosure requirements, we recommend supplementing confidentiality clauses with standard carve-outs from confidentiality and non-disclosure obligations.

4. Valuation of Shares

A person should disclose information on the highest price it paid for the JSC's shares over a period of 12 months preceding the date of acquisition of such shares, including the date of acquisition, within one business day following the direct or indirect Controlling Stake acquisition (50%+ one share, 75% and more (for public JSCs only) and 95% and more).

If a JSC's shares are not the direct acquisition target but only one of multiple assets that form a part of a transnational company, the purchaser may not be able to separate the value of such shares from the total value of the transaction. Thus, in order to comply with the requirement to disclose information on the highest price of the acquisition of shares, we recommend that investors conduct an independent valuation of the fair price of the shares of a JSC before closing the transaction. This valuation will also be necessary for making a well-informed financial decision regarding the viability of the transaction in light of the obligation to make a mandatory bid to purchase the shares of the minority shareholders as a result of obtaining the Controlling Stake and/or the Significant Controlling Stake and the sell-out rights of JSC minority shareholders.
 

5. Intragroup Restructuring and/or Pre-Sale Restructuring

Shareholders should consider the new takeover rules before the intragroup and/or pre-sale restructuring of their businesses. The mandatory bid requirement does not apply to persons or legal entities who are the Controlling Stake holders (50%+ one share and/or 75% and more) on the effective date of the law, provided such control was acquired in accordance with the antitrust laws.

Additionally, we draw your attention to the application of the transitional provisions to squeeze-out and sell-out procedures as set out below.

6. Squeeze-Out and Sell-Out

The Corporate Governance Law introduced the squeeze-out and sell-out procedures. Note that the Dominant Stake holders may only launch a squeeze-out bid after having complied with the mandatory bid procedure following the acquisition of the Controlling Stake and/or the Significant Controlling Stake. Since such squeeze-out bid may only be submitted within 90 days following the date of disclosure of the information on the acquisition of the Dominant Stake, thorough preparation and planning are required in order to fulfill all the necessary steps within such a short period of time. A detailed step plan of the squeeze-out procedure is set out in the illustrative chart above.

Taking into account that a different formula is applicable to determining the squeeze-out price only during the two-year transitional period, we recommend that the current Dominant Stake holders conduct a valuation of their shares and, if feasible, launch the squeeze-out bid as soon as possible. In the majority of cases, the squeeze-out price would be the market price as of the date a JSC receives the squeeze-out bid from the shareholder. As a result, the majority shareholder will be able to get rid of the "dead souls" and/or conflicting minority shareholders and consolidate 100% of the shares in the JSC.

At the same time, 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 in a JSC by the Dominant Stake holder after the effective date of the Corporate Governance Law. The shares should be acquired at the highest price per share as of the date of the Dominant Stake acquisition. In other words, if, in the past, a shareholder accumulated at least 95% of the shares at a higher valuation and the current market price of such shares is much lower, the Dominant Stake holder should nonetheless buy the minority shareholders’ stake at the higher historical valuation.

The transitional provisions do not contain any deadline for the minority shareholders to exercise their sell-out right. The absence of such deadline may serve as an additional ground we recommend for the Dominant Stake holder to exercise its squeeze-out right before the end of the two-year transitional period.

7. Escrow

To implement a squeeze-out, the term "escrow" was introduced into Ukrainian legislation. Escrow accounts are a commonly used instrument for securing payments among parties. From now on, all squeeze-out payments to minority shareholders shall be made via escrow accounts without engaging a securities broker. Please refer to our legal alert for additional information on introducing escrow accounts and improving regulation of bank account pledges.

8. Responsibility for Failing to Comply with the Corporate Governance Law

Prior to the adoption of the Corporate Governance Law, no squeeze-out or sell-out procedures existed. Moreover, the obligation to make a mandatory bid to purchase the shares of the remaining shareholders at a fair price once acquiring the Controlling Stakes was often not complied with due to the poor regulation of this procedure.

From now on, the Securities Commission has the additional authority to exercise control over market players' compliance with the established requirements. Additionally, the Corporate Governance Law introduced strict sanctions for failing to comply with such requirements. For example, if a shareholder failed to make a mandatory bid after having acquired the Controlling Stake or the Significant Controlling Stake, such shareholder should be deprived of its voting rights and/or obliged to buy shares at an increased price which is equal to two times the fair value of the shares for the squeeze-out or sell-out procedures.

9. Corporate Agreements

Due to the mandatory provisions of Ukrainian law and an imperfect court system, shareholders and participants of Ukrainian companies traditionally preferred to set up holding companies in foreign jurisdictions and to choose English law as the governing law of the relations among them and of shareholders’ agreements.

From now on, the possibility to conclude the corporate agreements among the shareholders of a JSC and/or the participants of an LLC is expressly permitted by Ukrainian legislation. Since such agreements may only be governed by Ukrainian laws, the use of this instrument by market participants will greatly depend on the subsequent court practice.

Additional notes

This LEGAL ALERT is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.