PRAC­TI­CAL AD­VICE ON IN­VEST­ING IN UKRAINE: HOW TO AVOID CON­FLICTS AND LAW­SUITS

Kyiv Post Legal Quarterly - - Opinion - DMYTRO OVSII Man­ag­ing part­ner, at­tor­ney at law

To­day in­flows of for­eign di­rect in­vest­ment in Ukraine are in­creas­ing. Oc­ca­sional con­flicts and dis­putes be­tween part­ners are part of or­di­nary in­vest­ment ac­tiv­ity. We had been ac­com­pa­nied in­vest­ment projects since 2010, and have ex­pe­ri­ence of par­tic­i­pa­tion in a wide range of ne­go­ti­a­tions and con­flicts. So we have pre­pared a short list of very use­ful tips that you should take into con­sid­er­a­tion when de­cid­ing whether or not to in­vest in Ukraine.

1. Avoid dis­pro­por­tional part­ner­ships

Ukraine is not the best coun­try for a mi­nor­ity part­ner­ship. De­spite re­cent leg­isla­tive changes aimed at pro­tect­ing the rights of mi­nor­ity share­hold­ers, vi­o­la­tions of such part­ners’ rights are not un­usual. Be­fore start­ing in­vest­ments, you should be pre­pared to con­trol a cor­po­rate share, which al­lows you af­fect the man­age­ment de­ci­sions. The min­i­mum rec­om­mended level should be suf­fi­cient to block the quo­rum of the Gen­eral Meet­ing of the supreme man­age­ment body. This guar­an­tees that key de­ci­sions will not be taken with­out you. Next, there is a level of con­trol that al­lows you af­fect the de­ci­sion-mak­ing with­out an ab­so­lute ma­jor­ity. Nev­er­the­less, for max­i­mum pro­tec­tion, you should re­ceive con­trol for de­ci­sions re­quir­ing an ab­so­lute ma­jor­ity. It is bet­ter to be in an in­vest­ment pool of for­eign in­vestors than to be the only for­eign mi­nor­ity mem­ber.

2. Use in­vest­ment funds for in­vest­ment struc­tur­ing

Us­ing joint in­vest­ment in­sti­tu­tions for de­vel­op­ment of trans­ac­tion struc­ture will al­low you to op­ti­mize costs when you buy and own an as­set, and also when you close the in­vest­ment project. This will al­low you to re­ceive ad­di­tional guar­an­tees and tax pref­er­ences dur­ing the en­tire in­vest­ment cy­cle.

3. Use the con­tract be­tween share­hold­ers (par­tic­i­pants) of the com­pany

Not so long ago it be­came pos­si­ble to con­clude agree­ments be­tween share­hold­ers (founders) in ad­di­tion to the con­stituent doc­u­ments of the com­pany (Join­tS­tock Com­pany, Lim­ited Li­a­bil­ity Com­pany). Ev­ery­thing that was pre­vi­ously for­mal­ized by con­cep­tual agree­ments or a mem­o­ran­dum can be reg­u­lated by such an agree­ment. For ex­am­ple, if a part­ner ex­pects the other part­ner to at­tract cus­tomers for busi­ness, per­form cer­tain tasks or pro­vide ser­vices, you can add this to the agree­ment, and also spec­ify sanc­tions for non-com­pli­ance.

4. Al­ways care­fully check the ori­gin of as­sets and the com­pany back­ground

In ev­ery case it is not enough to check the last trans­ac­tions with as­sets or com­pany trans­ac­tions. A com­pany should be checked from the mo­ment of its reg­is­tra­tion or pri­va­ti­za­tion. You should also care­fully check all trans­ac­tions. Over the last 15 years the sys­tem of reg­is­tra­tion of real prop­erty rights in Ukraine has changed sig­nif­i­cantly. Reg­is­tra­tion cases for real es­tate and com­pa­nies have passed from one au­thor­ity to an­other. All this re­quires the rig­or­ous col­lec­tion and anal­y­sis of in­for­ma­tion to en­sure the se­cu­rity of your trans­ac­tion. Ti­tle in­sur­ance is not de­vel­oped In Ukraine. In this con­nec­tion, it is not safe to rely on lat­est reg­is­tra­tion data to avoid the risk of los­ing your rights to an as­set or a com­pany.

5. Par­tic­i­pate in oper­a­tional man­age­ment

When you form a part­ner­ship with a lo­cal part­ner, they may take care of the oper­a­tional man­age­ment. At the same time, checks and bal­ances sys­tem should not rely only on re­la­tions be­tween share­hold­ers (par­tic­i­pants). Many con­flicts be­tween part­ners start with abuses in oper­a­tional ac­tiv­i­ties. So us­ing a col­le­giate ex­ec­u­tive body (direc­torate) is a good way to keep a fin­ger on the pulse. A su­per­vi­sory board with a deep im­mer­sion in oper­a­tional func­tions can also be very ef­fec­tive. The in­vestor’s rep­re­sen­ta­tive or le­gal rep­re­sen­ta­tive in the com­pany's man­age­ment bod­ies give you not only quick ac­cess to in­for­ma­tion on busi­ness af­fairs and/or bank ac­counts, but block un­prof­itable de­ci­sions as well.

6. Use pref­er­ences granted for for­eign in­vest­ment

The Law on the For­eign In­vest­ment Regime in Ukraine has many pref­er­ences for for­eign in­vestors. So do not for­get to com­ply with the pro­vi­sions of this law in or­der to re­ceive ad­di­tional pro­tec­tion for your in­vest­ments. Of course, this is not a com­plete list. And cer­tainly your lo­cal Le­gal Ad­viser will tell you some other use­ful tips. But th­ese tips are a core set of rec­om­men­da­tions based on years of ex­pe­ri­ence, and they are manda­tory for a suc­cess­ful and safe in­vest­ment.

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