Corporate reorganisations in Ukraine 2020

The Civil Code of Ukraine defines ‘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 a ‘pure’ corporate reorganisation may take one of the following forms, as the law provides for amalgamation, absorption, transformation, division or spin-off.

However, in business practice, corporate reorganisation is usually interpreted in a broader sense. In addition to the above forms of  reorganisation, it may also include transactions between the companies of the same group (under the same control) leading to the changes in the corporate structure through the acquisition of shares or assets.

The number of internal group corporate reorganisations shows growth year to year, and we expect this trend will go on, as several significant improvements have been introduced into the Ukrainian regulatory framework involving corporate entities. We also outline some key legislative changes in questions 3 and 25.

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. Responsible local businesses dealing with foreign counterparties as well 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 the currently effective international treaties related to avoidance of double taxation whereby Ukraine is a party. A number of the MLI provisions have already entered into force since December 2019. The introduced novelties encouraged businesses structured through holding companies to assess effectiveness of their corporate structures amid operation of the MLI.

Much stricter and more thorough compliance control, which banks have recently been reinforcing, has become a real challenge even for a law-abiding business.

Within the past few years, corporate governance in Ukrainian companies has been constantly developing. Progressive business and major state-owned enterprises are gradually moving to globally accepted standards and best practice. 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 less complicated and more effective corporate structures, including for groups of companies. Consequently, we anticipate corporate reorganisations will tend to occur more frequently in Ukraine.

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

Corporate reorganisation through a merger may have a form of amalgamation or absorption. Amalgamation is a merger of two or more companies into a newly established company. As a result of an amalgamation, the merging companies cease their legal existence, whereas a newly established company assumes all their property and liabilities. Merger by absorption results in passing all rights and liabilities of one or more companies to another existing company that is the only one surviving the merger.

Divisions and spin-offs

Division is a type of reorganisation when all the rights and liabilities of a company are divided between two or several new companies under the transfer protocol. Upon the division and passing rights and liabilities to legal successors, the former company terminates its legal existence.

A spin-off also results in the formation of the new company but, unlike in a division, without termination of the company being reorganised. Certain rights and liabilities of the reorganised company pass to one or several new companies under the transfer protocol.

All 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, a written notification of creditors, premature repayment of obligations, etc. Acquisition of shares

In a group of companies, internal reorganisations are often structured through purchase of shares in the target company by one intra-group company from another intra-group company. Such transactions are much easier than pure corporate reorganisations as described above and, therefore, may be done in a few business days. In many cases, intra¬group restructuring is a combination of acquisitions of companies with their further corporate reorganisations through mergers, divisions and spin-offs.

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 item of real estate, that includes buildings, facilities and equipment of the company. Such acquisition often requires approval from the Antimonopoly Committee of Ukraine.

When undertaking a corporate reorganisation, companies should consider the following main laws and regulations:

• 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 (article 17);
• the Law of Ukraine 'On Protection of Economic Competition' of 11 January 2001 (section V);
• the Law of Ukraine 'On Securities and Stock Market' of 23 February 2006;
• the Tax Code of Ukraine of 2 December 2010; and
• the Labour Code of Ukraine of 10 December 1975.

The above list is not exhaustive.

Depending on the type of particular corporate reorganisation, the volume of assets of the companies partaking in the reorganisation, their industry and market share different state authorities may be involved in the procedure.

Tax authorities

According to the Tax Code of Ukraine, the companies affected by corporate reorganisation (except transformation) are subject to an extraordinary audit by the tax authorities.

Antimonopoly Committee of Ukraine

Under the Law of Ukraine ‘On the Protection of Economic Competition', if a corporate reorganisation (amalgamation or absorption) reaches certain financial thresholds, then it is qualified as a concentration, which requires respective approval from the Antimonopoly Committee of Ukraine.

National Securities and Stock Market Commission

When a corporate reorganisation is structured through the acquisition of shares of the target JSC, a potential acquirer who intends to buy 10 or more per cent of shares in the JSC must notify the National Securities and Stock Market Commission and each stock exchange where the acquired shares are listed (if any). Also, the acquirer should publish respective announcement on the official website (stockmarket.gov.ua).

State registrar for companies

The state registrar is involved at different stages of corporate reorganisation. At the first stage, the participants (shareholders) of a company must notify the competent state registrar within three business days after they took a decision about such reorganisation. The reorganisation procedure is officially completed after the state registrar makes respective changes to the Unified State Register of Legal Entities, Individual Entrepreneurs and Civic Formations. Finally, the state registrar makes respective entries to the register reflecting the termination of the reorganised company (if terminated) and registers a newly established company - the legal successor of the former company.

Since 2016, notaries, including private ones, have been officially allowed to act as state registrars. So, businesses have the option of applying for respective registration service either to the state registrar or to the private notary, who usually renders respective service in a more effective and customer-friendly way but charges some fee for it.

State registrar for real estate

Some corporate reorganisations result in conveyance of real estate to the legal successor of the reorganised company. In such cases, the legal successor must apply to the competent state registrar for re-registration of property rights over the real estate in such legal successor's name. Based on the filed application with supporting documents, the state registrar or the notary records the legal successor as a new owner (lessee, etc) of the real estate in the State Register of Property Rights to Real Estate.

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.

Industry regulators

Depending on the industry and other aspects of certain corporate reorganisations, other authorities may be involved.

For example, any bank reorganisation in Ukraine needs 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 per cent) in a Ukrainian bank or other financial institution. Apart from the NBU, the National Commission for the Regulation of Financial Services Markets also approves such deals.

Other additional filings and mandatory submissions may follow corporate reorganisation. To name a few, intellectual property (IP) rights, cars and other machinery are subject to re-registration in the name of the company-legal successor. The same relates to special licences and permits, including for the use of natural resources or certain licensed business activities.

A comprehensive and accurate due diligence, especially of legal, tax, accounting and financial aspects, is extremely important when undertaking a corporate reorganisation. The scope of legal due diligence depends on the areas in which the relevant entities conduct their business and, therefore, may vary, but usually includes investigation of corporate, regulatory, real estate and other assets, IP, contracts employment and other areas.

We also recommend reasonable communication with the key stakeholders of the companies before the reorganisation to conduct it smoothly and without conflicts and other impediments from third parties.

Another recommendation is to check agreements with banks, customers and suppliers. They may contain change-of- control clauses that may require a prior notification, trigger early termination of the contract or provide other consequences. All such requirements should be considered in advance as they do not always have carve-outs for intra-group reorganisations.

Generally, corporate reorganisation does not affect the rights or obligations of employees. After a corporate reorganisation of the company, its employees are automatically transferred to the successor or surviving entity. The employees' consent for such transfer is not required. All employment terms and conditions remain the same unless employees are made redundant due to a reorganisation.

When a company decides to lay off employees or change employment terms in the course of reorganisation, it must comply with the statutory procedures and collective bargaining agreement. In particular, the company must notify its employees at least two months before the effective date of respective changes. The owner of the company being reorganised must consult with the local trade union on the measures to prevent layoffs in the course of the reorganisation.

The company must ensure statutory guarantees, such as severance payments, to all redundant employees. An employee may claim for a severance payment of at least one average monthly salary if he or she is laid off owing to reorganisation or redundancy. The employer is free to pay a higher ‘exit' compensation.

The corporate reorganisation does not affect employees' pensions and other benefits except for the right to a severance payment as described in question 8.

The Law of Ukraine ‘On Joint Stock Companies' (article 23) prohibits a joint stock company from providing a loan for acquisition of its shares. The Law ‘On Limited Liability and Additional Liability Companies' (article 13), in turn, sets restrictions for corresponding types of companies to credit participants for contributions to registered capital of the company in exchange for the participatory interest (share) in it.

Other forms of lawful financial assistance for corporate reorganisations are allowed.

Among the most commonly overlooked and frequently asked questions in a corporate reorganisation are the following:

• prior approvals from the state authorities required to undertake corporate reorganisation (see question 6);
• tax consequences of the contemplated reorganisation, including assignment of the tax credit of the terminating company, etc;
• post-reorganisation measures that the legal successor should take;
• the effectiveness of licences, permits and agreements transferred to the legal successor of the reorganised company;
• the effectiveness of the property rights to the assets, including real estate and land plots, transferred to the legal successor, and necessity of re-registration of property rights in the name of the latter;
• subsidiary liability of legal successor for liabilities of the reorganised company (the law provides for such liability);
• compatibility of certain specific forms of legal entities (farms, private enterprises, non-government organisations, etc) for transformation into business companies (LLCs, JSCs, etc);
• procedure and time frame required to complete corporate reorganisation;
• the corporate governance update as well as rearranging the shareholders' agreement after the reorganisation, especially in a group of companies; and
• recently the compliance requirements became more and more important, specifically as regards ownership structure, which must be transparent for banks and other stakeholders dealing with the company.

The accounting rules that apply to corporate reorganisation consistently depend on the type of reorganisation. The participants of a particular reorganisation approve a transfer protocol or a distribution balance sheet listing the transferred assets and liabilities and their book value.

The corporate reorganisation of the state or municipal enterprise or a company with a state or municipal share in equity requires a mandatory market valuation of the assets by the certified appraiser.

First, the companies affected by corporate reorganisation (except transformation) are subject to an extraordinary audit by the tax authorities.

Generally, the surviving company or the successors assume all the tax liabilities, profits and losses of the reorganised company. However, its outstanding tax liabilities usually significantly complicate the reorganisation procedure, as in this case, the reorganisation needs the tax authority's approval.

In terms of corporate income tax (CIT), corporate reorganisation is a neutral transaction under the national accounting regulations (standards). The Tax Code of Ukraine provides for no adjustments of the financial result of companies involved in the reorganisation. Accordingly, corporate reorganisation does not lead to any CIT.

The Tax Code of Ukraine also excludes reorganisation procedures (amalgamation, absorption, transformation, division and spin-off) from taxation by value added tax (VAT). Businesses sometimes utilise this exception and convey valuable assets, such as real estate, through spin-off instead of a buy-sell deal that is subject to VAT.

A company for which shareholders have decided to conduct a corporate reorganisation must notify its creditors. Under the law, the creditors may request early fulfilment of the company's obligations or granting security. The reorganisation may be accomplished only after all the creditors' outstanding claims are satisfied. Creditors shall have at least two months after the announcement of a reorganisation to file their claims to the company planning the reorganisation.

In some cases, mandatory consents, approvals of the government authorities or notifications may be required.

Under Ukrainian law, any type of statutory reorganisation requires the approval of the general participants' (shareholders') meeting. To approve such decision, at least three-quarters of the company participants (shareholders) should vote for such a decision. Also, shareholders' agreements often require all the shareholders' consent for any reorganisation to protect minor shareholders.

A shareholder in a JSC who has registered at the general shareholders' meeting and voted against a decision on a corporate reorganisation may claim from the company to buy out its shares at the market value. Having received such a claim, the company must buy out the shares within 30 days.

Some transactions in the course of corporate reorganisation (eg, transfers of shares or assets) may fall under regulation for material and related-party transactions, which requires corporate approval of the respective body of the company. The law determines thresholds for the transactions to be qualified as material and the bodies authorised to approve a respective transaction depending on its value. For an LLC, a transaction exceeding 50 per cent of the company's net assets value requires approval of the shareholders' meeting unless otherwise provided in the company charter. For a JSC, a transaction with a price falling between 10 and 25 per cent of the net assets value requires the supervisory board's approval, while a transaction exceeding 25 per cent of the net assets value must be approved by the general shareholders' meeting (or the supervisory board if at least one-third of its members are independent directors). Transactions of a JSC exceeding 50 per cent of its net assets value must be approved by a majority vote of all shareholders of the company.

Shareholders (participants) may agree upon and set forth approval for the sale of shares of the company in its charter or the shareholders agreement. The latter may even set a lockout period during which the shareholders (participants) cannot sell their shares of the company. Start-ups often use this limitation to preserve the corporate structure until a certain business development milestone or a round of investment.

Participants of LLCs have the statutory pre-emptive right to acquire shares that the other participant offers to a third party. In that case, first the share must be offered to other participants on the same terms as offered to a third party. An external buyer may acquire a share in the company only if none of its participants have accepted the respective offer within 30 days or any other period fixed in the company charter. Nevertheless, participants in an LLC may restrict the pre-emptive right in the charter of the company, in which case the shares will be free for sale to third parties.

Ukrainian law does not regulate this matter. Participants of corporate reorganisation may enter into a termination (reorganisation) agreement and define therein the terms for the transfer of assets, rights and obligations to the legal successors. If shared assets and services used by a target company to the corporate reorganisation are necessary after the corporate reorganisation, the way to treat these shared assets and services may be agreed in the said agreement.

Transferring the assets between the related companies is generally allowed, subject to additional internal approvals for costly deals. Transfers of assets between a Ukrainian company and its related foreign company may be qualified as ‘controlled operations' under the Tax Code of Ukraine. The commercial terms of such transactions must comply with the arm's-length principle. Otherwise, the Ukrainian company may suffer negative tax consequences.

Yes, assets, including shares, can be transferred for less than their market value as long as the assets transfer within the corporate group complies with the arm's-length principle.

No, a corporate reorganisation may not be backdated or deemed to have already taken place. Under Ukrainian law, corporate reorganisation is completed from the moment of the state registration of termination of the reorganised company (if it terminates) and state registration of its legal successors in the state corporate register.

The documents required depend on the type of corporate reorganisation contemplated. The Civil Code of Ukraine lists the minimum documentation required for corporate reorganisation. A legal entity when implementing any type of corporate reorganisation will require at least the approval of the general shareholders' (participants') meeting, amalgamation (absorption) agreement or division plan, a transfer protocol or a distribution balance sheet. For registration in the state corporate register, the company-legal successor also submits minutes of the founders' meeting, the charter and respective application for the state registration. Above we have listed only basic documentation without supplementary documents, which vary from case to case.

Ukrainian law generally does not recognise the concepts of representations, warranties and indemnities. Sometimes parties, by analogy with common law, include representations, warranties and indemnities in the buy-sale agreement governed by Ukrainian law. However, enforceability of such provisions in courts is not as proven as in common law.

Nevertheless, warranties and representations are rarely used for corporate reorganisation between the members of the same group, as risks also remain within the same group as opposed to transactions with the third parties.

From a tax perspective, a transfer of a business as a going concern through a corporate reorganisation is a tax neutral operation. If the assets are transferred under a sale and purchase agreement, respective tax liabilities occur.

From the mere practical perspective, business as a going concern is permanently changed. So, naturally, it is more challenging to list all rights and liabilities of the respective company for its further corporate reorganisation compared to the company that only holds assets without operating activity.

In a corporate reorganisation of a legal entity (without state or municipal participation interest in its registered capital), the assets and liabilities may be transferred at their book value. If state (municipal) companies pass through corporate reorganisation, the assets valuation and the determination of the assets' market value by the certified appraisers is mandatory.

A corporate reorganisation of the public legal entities usually requires high-level approval up to the governmental level.

As to non-profit entities, the Civil Code of Ukraine (article 104) prohibits reorganisation of a legal entity, which has no right to distribute profit among its participants if, among the legal successors of such legal entity, another legal entity is granted with such right. So, a non-profit entity cannot be reorganised into an LLC, JSC or other business company. Opposite reorganisation - from a business company to a non-profit entity - is allowed upon the unanimous consent of all shareholders (participants) of the business company.

Post-reorganisation steps (in the case of statutory reorganisation) usually include the following:

• re-registration of ownership title to real estate in the State Register of Property Rights to Real Estate in the name of the legal successors or the surviving company;
• execution of assignments to the land lease agreements with further re-registration in the state register and the land cadastre;
• execution of novations with customers, suppliers and other counterparties;
• update of the company file with the banks;
• submission of applications for new licences and permits to be re-issued;
• respective filings with the competent patent or trademark office;
• administrative matters, including execution of a new e-reporting agreement for submission statements of the company; and
• updating relevant company books and records.

Under the law, the target JSC (not other companies) must disclose details of the following events relevant to corporate reorganisations:

• change in officers of the JSC (including as a result of a share deal);
• change of owners of voting shares whose shareholding reaches or exceeds the thresholds of 5,10,15, 20, 25, 30, 50, 75 or 95 per cent of voting shares (including as a result of a share deal);
• changes to the JSC's charter, related to the changes of the shareholders' rights (including as a result of the shares transfer);
• a decision of the JSC to reduce the share capital; and
• direct or indirect acquisition by an entity of 50 per cent and more, 95 per cent and more of shares in the JSC and 75 per cent and over of shares in the public JSC, including purchase price and the name of the acquirer (including as a result of a share deal).

No updates at this time.