Ukraine: Registries Are On Agenda Again, Or Why Higher Sanctions Will Not Impact The Number Of Corporate Raids

Last Updated: 24 July 2019
Article by Yulya Stusova and Artur Wolf

The parliament suggested yet another initiative to cope with hostiles takeovers, namely to increase sanctions imposed on state registrars for committed wrongdoings. Will new sanctions mitigate attacks on business? Whether the effective legislation is, indeed, not sufficient to effectively oppose corporate raids?

Penalties for insiders

The proposed "anti-raiding" draft law (No. 10293) provides for enhancement of criminal liability of state registrars for infringements of laws related to registration of legal entities, private entrepreneurs and public organizations (Article 16611 of the Code of Administrative Proceedings of Ukraine), as well as for infringements of the registration procedure of real property rights and their encumbrances (Article 16623 Code of Administrative Proceedings of Ukraine). Current fines are proposed to be increased threefold. According to the authors of the draft law, this will help reducing the number of corporate raids.

However, such aspirations appear to be too optimistic if we refer to the methods usually used by raiders to attack the business.

Based on previous experience, in most cases raiders submit fake documents for state registration, which include, for instance, applications, minutes of general meetings, gift agreements; signatures of persons who signed a respective document are certified by a public notary, despite the fact that such papers were not actually signed by such persons. At the same time, submitted documents, usually conform with the requirements established by law in part of completeness and accuracy.

Usually, state registrars have neither possibility, no an obligation envisaged by the law, to verify the authenticity of signatures and identify potential features of forgery. Having checked the submitted documents in part of completeness and accuracy, and having determined the conformity of the data specified therein with the information recorded in the register, as well as absence of any prohibitions to perform registration acts, the registator finds no grounds to refuse registration. Formally speaking such registration is does not violate the procedure provided by law.

Even in the event of enhanced criminal liability for violations of the state registration procedure, registrars will not get a possibility to verify the authenticity of signatures of the submitted documents and to detect forgery. Consequently, it does not affect use of the classic raid schemes.

Instead, the law envisaged for both administrative and criminal liability of state registrars for committed wrongdoings (Articles 358 and 3652 of the Criminal Code). However, even after criminalization of such wrongdoings hostile takeovers were not precluded.

In fact, the main problem is absence of actual cases of bringing to responsibility those who committed a raider attack, not the stringency of sanctions. Therefore, it should not be expected that the number of raider attacks will decrease as a result of threefold higher sanctions.

The faster, the more effective

While assessing the effectiveness of court remedies in case of illegal hostile takeover, we should bear in mind that the main components of success of countermeasures to raiders' attack – the fast counteractions to the raiders' actions. The more time is available for the raiders, the more difficult it will be for the legal owner to return the attacked asset.

Considering significant timing of litigation, we cannot refer to the efficiency of judicial protection. After all, in practice, the owners of a business being the target of a raider attack, usually wait for a court decision at least a year.

At the same time, quite often, legal owners find it difficult to obtain an injunctive relief in form of a prohibition to make changes to state registries and thus preclude further registration actions in respect of the attacked asset. Respective motions are heard by the courts too slowly. It is a common practice when courts refuse granting such measures whereas that existence of grounds for such measures was not proved.

Non-uniform case-law related to disputes seeking the annulment of illegal actions of state registrars is a separate issue here. In particular, position of the court of cassation with respect to circumstances being sufficient grounds to prove the disputed rights in a particular case, changed many times; hence possibility of review by administrative courts was undermined. Moreover, most recent case-law additionally limited the number of cases when actions of state registrar acts may be challenged to the administrative court. Subsequently, numbers of court decisions in this category of cases were cancelled along with ceasing the case.

Even if we assume that new jurisdictional approaches under complaints against the actions of state registrars can be deemed justified, the termination of proceedings means that the owner of the targeted asset will have to start the court case from the scratch. This is a clear evidence of inefficiency of judicial protection of owner's violated rights.

In fact, the problem of inefficiency of judicial protection arising from lengthy review has been on agenda for some time now. In particular, a so-called Anti-raider Commission (handling complaints arising in connection with state registration) of the Ministry of Justice Ukraine established in 2016 in order to promptly respond to violations in the field of state registration and is empowered to cancel illegal registration acts.


At the same time, coping with a raider attack requires development of a comprehensive action plan, in which legal recourse (including criminal proceedings) is usually only a part of the defense strategy. Accordingly, we should rather refer to the efficiency of the defense strategy with court decisions in favour of the owner of the targeted asset being only a part of it.

As a rule, changes to the state registers is the first step to takeover the targeted asset. Following registration, raiders try to impair restoration of control over the asset by the legal owners; consequences of such actions cannot be remedied by a favorable court decision taken in terms of just one case.

For example, management of the company is usually replaced following the hostile takeover. In its turn, it allows disposal of company assets and formation of artificial debts before the creditors, which are controlled by raiders.

Illegally replaced members of the company apply for protection of their rights to the court; the latter makes a decision, which serves as grounds for the renewal of their records in the register. However, it will not help returning the assets disposed during the period the company was controlled by raiders; specifically created debts to the "raiders' friendly" creditors will not "disappear" as well.

Therefore, after renewal of the control over the targeted asset, legal owners will have to deal with the adverse effects of raider attack, which are ususlly time consuming (including judicial proceedings). Accordingly, legal recourse dealing with raider attacks may include a number of disputes seeking to invalidate decisions of the general meetings executed under forged minutes, as well as invalidation of the transactions performed by raiders (including bankruptcy of the targeted, etc.).

There are many examples when courts decided in favor of legal owners of the targeted asset. However, such cases are only a part of the strategy aimed at protection against illegal hostile takeovers, which success depends on the results of its fair implementation.

Yuliia Stusova, senior associate, and Arthur Wolf, paralegal, specifically for "Zakon i Biznes"

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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