Ensuring success of Ukraine’s privatisation programme
Ukrainian Government has launched the largest privatisation programme held in the last 20 years in the course of which over 300 stateowned enterprises representing various sectors of economy are to be privatised in 2015-2016 (“Privatisation Programme”). Whether or not the Privatisation Programme will be successful will depend on a number of factors. Below is brief summary of some of the issues that will need to be considered, based on our past experience of participating in successful privatisations in other jurisdictions. this type of risk allocation, including in the context of privatisations. In heavily regulated markets such as energy or TMT, investors will expect the Government to give assurances that the Government will not amend the regulatory framework for a certain period of time, or otherwise do anything making the investor’s investment less profitable. This is a common request in the context of privatisations, and the Government will need to give assurances to the buyer that its investment will be safe, but in a manner that will be acceptable to the Government too. The Government will naturally want investors to commit to certain post sale obligations, such as, for example, an obligation to invest in the company and/or retain a certain number of employees post sale. In the EU, both the Government and the buyer would need to bear in mind applicable state aid rules. It must therefore be clear and demonstrable that the Government is acting as an independent commercial company (the ‘Private Investor Vendor Test’) and that the privatisation process was open and non-discriminatory with the company being sold to the highest bidder. Investors will likely push for the governing law of the privatisation sale and purchase agreement to be that of an independent country, and English law would be a typical choice in transactions of this nature. Which law will ultimately govern the transaction documents will be, in our experience, a fundamental issue that will be heavily negotiated. There are, however, potential ‘middle ground’ solutions which are possible to ensure that both the seller and the buyer are happy. Despite assurances given to the investors, they may remain nervous on the basis that the companies being privatised will come not just with the assets that are of interest to the investors, but also with potentially unknown liabilities. In other countries, a method to circumvent these risks is to allow the buyer to purchase the assets from the company — rather than purchase the company (which comes with potential liabilities) itself. In Ukraine however there are obstacles, including those in a form of VAT payments (otherwise not required if the buyer purchased the company itself). To the extent that the Government desires to dis-apply the VAT charge in the privatisation context, this will in our view make the privatisation programme significantly more attractive to international investors, and will go a long way to maximise the purchase price that will be offered by potential buyers.
The existing regulatory framework in Ukraine does not offer off the shelf solutions with respect to the above issues. Nevertheless, with effort on both sides and further reform of the privatisation legislation some middle ground can be found to address these issues in a manner which would be attractive to foreign investors and at the same time would not expose the Government to unnecessary risk.