En­sur­ing suc­cess of Ukraine’s pri­vati­sa­tion pro­gramme

Kyiv Post Legal Quarterly - - News -

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.

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