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