Ukraine: The Legal Environment For Investing In Ukraine

Last Updated: 25 June 2009
Article by Valentin Zagariya and Ruslan Shevchuk

The number of investment projects and M&A transactions in Ukraine has noticeably increased. In the last few years, the Ukrainian investment market has shown strong performance and signi­ficant growth. This is primarily due to the investment attractiveness of Ukraine. Being internationally recognized as an emer­ging market economy, Ukraine has become a focus for foreign investors due to the increasing amount of "opportunities", great internal rate of return as opposed to acceptable risks, and overall undercapitalization of the market.

Moreover, Ukraine has vast obligations to UEFA regarding infrastructure development in order to prepare for the European Football Championships to be held in 2012. These obligations include all official events and activities related thereto. Ukraine will be forced to make substantial preferences for investment activities in this field.

At the same time, the world has been shaken by the widely dispersed global financial crisis. Ukraine is one of many countries that have been affected. Whether the financial crisis will have immense consequences or not, which economic areas will be mostly affected, and who will lose and who will gain money in light of such events have been "hot topics" of discussion for lawyers and investors.

In this article we shall briefly touch upon Ukrainian legislative framework regulating investment activities, general legal environment for foreign investments, legislative restrictions as to foreign investments, as well as novelties in Ukrainian legislation which might affect the attitude of foreign investors to carrying out investment activity in Ukraine.

Legislative Framework

Ukraine is a party to more than 60 international treaties on mutual assistance and protection of investments. Apart from these treaties, investment activities in Ukraine are regulated by basic laws, laws regulating specific businesses (e.g. bank activities, publishing business, television and radio broadcasting, insurance activities etc.), Civil, Commercial, and Land Codes as well as by the respective bylaws. Some new legislative instruments, such as the law against hostile takeovers of enterprises, regulations of the National Bank of Ukraine aimed at stabilizing the financial situation for the period of the global financial crisis, and the new law on joint stock companies were recently introduced.

Key Issues

Generally, foreign investors are granted the same regime of investment and business activities as local ones. However, there are certain particularities relating to making foreign investments, profit repatriation, and areas of investments.

Protection of Foreign Investments

It should be noted that the majority of legislative instruments enacted in the past few years that protect foreign investments in Ukraine remain in force. Protective regulations provided by the effective Ukrainian legislation include the following:

  • foreign investments cannot be nationalized;
  • repatriation of foreign investments under specific circumstances (e.g. natural disasters, accidents, epidemics, and epizooties) can only be effected provided that compensation payable to a foreign investor is adequate and effective;
  • foreign investors are guaranteed free and immediate transfer of their profits, income, and other funds in foreign currency, legally derived from their investments.

Mechanisms for Making Investments

The idea of introducing new regulations on investment activities has been frequently brought up by the respective authorities.

However, such initiatives are still at the "draft" stage and not expected to be enacted. The basic principles for direct and portfolio investments have not changed either. For instance, the following 2 main options exist for a non-resident investor to make a direct investment in cash: (i) the foreign investor may transfer the funds directly from his bank account abroad to the current bank account of a Ukrainian resident (e.g. the Ukrainian subsidiary of the foreign investor); (ii) alternatively, the foreign investor may open an investment bank account in Ukraine and transfer the funds thereto. Thereafter, the funds will be payable to the current bank account of the Ukrainian resident. The foreign investor may effect the payment in hard currency or convert the funds into Ukrainian hryvnias and transfer them to the current account of the Ukrainian resident in national currency.

Restrictions

Restrictions on participation of foreign investors in certain areas of business (e.g. publishing, radio and television, news agencies, and land, etc.) and obligation to obtain permit on economic concentration in particular cases (e.g. when a foreign entity acquires control over significant assets or acquires 25% or more of the equity in a Ukrainian legal entity) also remain in force.

Novelty Increasing Attractiveness of Legal Environment for Business in Ukraine

Recent legislative initiatives that improve legal and business environment in Ukraine and may trigger an increase in foreign investment inflows are also worth mentioning. First of all, the government has been working intensely on countermeasures against the spreading financial crisis. For instance, the National Bank of Ukraine (NBU) obliged banks to raise their regulatory capital up to a certain level before March 2009 which, fortunately, many banks regard to be an attainable goal. Some new laws will have a significant impact on the investment environment in Ukraine, and are analysed in more detail below.

Additional Protection Against Hostile Takeovers

The Ukrainian government adopted a new law which aims to provide better protection for companies against raiders' attacks by making amendments to certain legislative acts. One of the amendments provides that now when executing court rulings on changes in a company's executive body and/or executive officers in the form of a court enforcement proceeding, the state enforcer may not engage any third parties. Thus, within the execution of such rulings only the officers of law-enforcement agencies can be engaged. Another law in this field foresees criminal responsibility for raiders' attacks against enterprises. Moreover, under the new rules, in the event of a hostile takeover the permit of the Antimonopoly Committee of Ukraine for acquisition can not be obtained until the required information is provided.

These amendments should have a very positive impact on the fight against some raiders' attacks, especially considering the fact that some attacks were performed through fake court decisions and through other similar methods. Such important changes in legislation improve the business environment, making it safer and better for risk assessment, which should seem very attractive for investors.

More Comprehensible Regulation of Corporate Governance in Joint Stock Companies

Another important piece of legislation that should upgrade the Ukrainian business and legal environment in investors' opinion is the long awaited Joint Stock Company Act. The Act will come into force upon expiry of a six-month period after its publication, which is performed at the end of November 2008. Apart from making new classification for joint stock companies — public and private — which brings it closer to common European classification, the Act introduces new elements to corporate governance and general principles of shareholding. Adoption of the Act moves Ukraine towards protecting the interests of both investors having minority and majority shareholdings. Among the Act's most important provisions which may affect foreign investors, the following can be mentioned:

  • clear definition of a significant transaction (deal, bargain) and interested party transaction, as well as a procedure for adopting respective decisions on entering into such transactions;
  • provision of a detailed mechanism on how existing shareholders of a private joint stock company may exercise their preemptive rights to acquire additionally issued shares in order to protect themselves from "dilution" of shareholding;
  • obligation of the acquirer of 50% or more of the total amount of company's shares to secure an opportunity for existing shareholders to sell their shares (often referred to as the "tag-along right");
  • the company's articles of association may provide for the possibility by shareholders to enter into a shareholders agreement, which might set additional obligations for shareholders.

Conclusion

Summing up the above, despite the difficult financial situation, Ukraine has taken several crucial steps towards a more transparent and better regulated legal environment for business. Investors should have noticed that the stability of basic principles on protection of foreign investments, mechanisms for effecting investments, and statutory restrictions on particular areas for foreign investments in Ukraine go hand in hand with significant improvements in effective legislation in terms of providing better legal protection of business and transparency of investors' powers within the framework of corporate governance of certain legal entities.

This article was first published in 'Ukrainian Law Firms 2009. A Handbook for Foreign Clients.'

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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