Page 1


Contents 4

Editor’s Preface

7

Ukrainian Legal Market

25

Practice Areas and Industries Review

26

Advertising & Marketing

76

Defense

126 Mergers & Acquisitions

28

Agriculture

78

Due Diligence

128 Migration Law

30

Alternative Dispute Settlement

80

E-Commerce

130 Patents

32

Anti-Corruption

82

Energy

132 Pharmaceuticals

34

Antitrust

84

Energy Efficiency

134 Ports and Marine Terminals

36

Assets Tracing

86

Enforcement of Foreign Awards

136

38

Aviation

40

Banking & Finance

88

Enforcement Proceedings

42

Banking Disputes

90

European Law

44

Bankruptcy

92

Family Trusts

46

Business Crime

94

FMCG

144

48

Business Protection

96

Foreign Trade

146 Public Procurement

50

Business Immigration

98

Government Relations

148 Real Estate

52

Commercial Law

54

Competition Investigations

56

Compliance

58

Copyright

60

Corporate

62

Corporate Disputes

64

Counterfeiting & Piracy

66

Criminal Process

68

Cross-Border Debt Recovery

70

Cross-Border Debt Restructuring

72 74

177

Private Clients / Wealth Management

138 Private Equity 140 Privatization 142 Property Rights Public Private Partnerships

100 Infrastructure

150 Regulatory

102 International Arbitration

152 Renewable Energy

104 International Tax

154 Sanctions

106 Internet

156 Sports Law

108 Investments

158 State Aid

110 IT Law

160 Tax

112 Labor & Employment

162 Tax Controversy

114 Land

164 Telecommunications

116 Litigation

166 Trade Remedies

118 Marine Insurance

168 Trademarks

120 Maritime Law

170 Transfer Pricing

Customs Law

122 Mediation

172 Transportation

Debt Restructuring

124 Medicine & Healthcare

174 Unfair Competition

Who is Who in Ukrainian Law by Practice Areas/Industries

178 Agribusiness

226 International Trade: Trade Remedies / WTO, Commodities

184 Antitrust / Competition

230 IT / Telecommunications & Media

188 Banking & Finance / Restructuring

234 Labor & Employment

196 Bankruptcy

238 Litigation

200 Corporate and M&A

248 Pharmaceuticals / Medicine & Healthcare

208 Criminal Law / White-Collar Crime

252 Real Estate, Construction, Land

214 Energy & Natural Resources

258 Retail

218 Intellectual Property

260 Tax and Transfer Pricing

222 International Arbitration

268 Transport: Aviation, Maritime, Shipping

2

WWW.UKRAINIANLAWFIRMS.COM


Editor’s Preface

Knowledge is Power

OLGA USENKO Chief Editor

There is a piece of good news. The period of stagnation is over. The country has inherently entered economic stabilization with gradual revival of business activity and signs of very modest growth, but all the same growth. The number of deals has certainly increased. The performance of legal counsels has improved in comparison with 2015. Since the foreign direct investments that traditionally powered the legal market is still low, the competition for limited transactional work is getting a lot tougher. It forces law leaders to consider alternative offerings, improve operational efficiency and personal effectiveness, leveraging opportunities and searching for blue oceans to enjoy greater first-comer advantages. Accordingly, by exploring new markets and identifying niches where the competition is still weak, law firms are attempting to generate pioneering offers on the market. When uncertainty is a reality, knowledge is the greatest power. Despite some returns from state service, Ukrainian lawyers continue to act as rule-makers rather than rule-takers. Some very important changes have got off the ground. The fifteenth edition of Ukrainian Law Firms. A Handbook for Foreign Clients is traditionally released to examine effective law and legal practice, bringing strong industry and competitive insights for in-house counsels, cross-border legal practitioners, officials and business people. Following the format used over the course of many years, Ukrainian Legal Market synthesizes recent facts and trends, compiling deals and prospects. Practice Areas and Industries Review is the viewpoint on law and practice by legal experts. While the Who is Who in Ukrainian Law section is a landscape of the market across practices and industries, an attempt at market segmentation, revelation of landmark matters, solutions and existing expertise on the ground, achievements of both teams and individuals. We express our deep gratitude to all respondents, experts and information partners, whose efforts as contributors to this volume we sincerely acknowledge. Please visit the Handbook on-line at our new upgraded web-site: www.ukrainianlawfirms.com Happy reading!

The project of YURIDICHESKAYA PRACTIKA Publishing

UKRAINIAN LAW FIRMS 2017. A Handbook for Foreign Clients. ISBN 978-966-8042-70-6. Published by Yuridicheskaya Practika Publishing 25А, "L" Dehtyarivska Street, Kiev, 04119, Ukraine • Telephone: +380 44 495-2727 • Fax: +380 44 495-2777 • E-mail: info@pravo.ua EDITOR: Olga Usenko • RESEARCHERS: Olga Usenko, Alena Chernyavskaya, Oleksiy Nasadyuk, Nikita Kandyba

DESIGNER: Mykola Tytarenko

COPY EDITOR: Peter Dutczyn

The names of law firms and all lawyers whose nominations were accepted by the editor were listed without charge. It was impossible to buy entry into the Handbook. Contributors and other law firms were invited, but not required, to supply their profiles and “address boxes” which were published upon payment of a fee. The publishers and editors do not accept responsibility for any errors, omissions, mis-statements or mistakes. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the editors, authors or publishers. The Handbook should not be treated as a substitute for specific legal advice concerning individual situations. The omission of any lawyer or law firm from any section of this Handbook does not indicate that they do not practise in the area or are not well regarded. You should do your own research before engaging lawyers in any field. The views expressed in this publication by any contributor are not necessarily those of the editors or the publishers. The publication uses Ukrainian transliteration of geographical names and indications. All names of individuals are written with mixed transliteration (Ukrainian and Russian) at their personal request. Printed in Ukraine. First published in 2002. Electronic version of this publication is available at www.UkrainianLawFirms.com

ISBN 978-966-8042-70-6

Українські юридичні фірми. Довідник для іноземних клієнтів (англійською мовою) Видавець: ПрАТ «Юридична практика» Украинские юридические фирмы. Справочник для иностранных клиентов (на английском языке) Издатель: ЧАО «Юридическая практика»

4

WWW.UKRAINIANLAWFIRMS.COM


ADVERTISEMENT


UKRAINIAN LEGAL MARKET


Ukrainian Legal Market

On the Way to Recovery: Testing Strategies Market Intelligence 2017

As market sources have described our editorial “a deep analytical section” in the most demanded spheres of legal practice as well as “a great instrument for market structuring and organizing of the professional industry”, every year we meet the challenge to produce a true concentrated overview, known on the market as the Handbook, or simply ULF. To quote one Ukrainian lawyer: “It is very important to see where you are in order to decide where to move forward”. That is why, in addition to being a guide for clients seeking professional legal services in Ukraine, this fifteenth edition of the legal directory puts forward some ideas to upgrade both the strategies and tactics of law firms. The research is based on a combination of conventional tools: corporate submissions, individual feedback by practice areas, interviews by phone and one-to-one meetings, as well as available open sources that have been carefully analyzed by the editorial team.

New Entrants

On 1 March 2016 Kinstellar launched its office in Kyiv, headed by Kostiantyn Likarchuk. The same month Axon Partners, the ITfocused firm (former IT practice of Juscutum) announced its launch. It is headed by Dima Gadomsky, a renowned trendsetter in Ukrainian IT law. In May AstapovLawyers International Law Group announced its merger with Baltic Business Group, a European full-service law firm with offices in Germany and Latvia. The companies signed a strategic partnership agreement to operate together in European and CIS markets under the common brand of Eterna Law. In July there were changes in the organizational structure of Law Offices of OMP, namely spin-off and establishment of a separate company named OMP Tax & Legal and headed by Dmitriy Mikhailenko. In August LEMAN International Law Group was founded by two partners: Artem Atepalihin and Volodymyr Vorobiov. In

8

Prior to the launch of the research, we asked market players for feedback and received a request for more precise market segmentation in the production of editorial contents. For example, we were recommended to draw attention to retail, hospitality, sports law, private clients and wealth management. The available data collected from the market enabled us to produce an overview of legal advisors operating in the retail industry, but was not sufficient to reflect the relevant market landscape for other noted fields. At the same time, the International Trade section was structured into trade remedies and WTO, and commodities trade areas. The long-expected insight into cross-border litigation was sufficiently strong to be highlighted in the current edition. The current Handbook contains 18 surveys and 25 rankings. As the initial methodology of the Handbook was designed to create so-called shortlists, it was focused in the main on the high-end market. In the current edi-

terms of practice areas, most attention is paid to international financial law, corporate, contract law. In September 2016 the new dispute resolution boutique firm GENTLS was founded by Oleh Gromovyi. ESQUIRES was established in November 2016 by a group of lawyers, namely Oleksandr Shkelebey, Opanas Karlin, Artem Saprykin, and Viktoria Kovalchuk. Some of the team was previously members of EVERLEGAL, another Ukrainian law firm. Among the firm`s practice areas are dispute resolution, corporate and tax banking, finance and capital markets, business protection, white collar defense and investigations. In December 2016, Ilyashev & Partners opened an office in Tallinn, Estonia, extending its practice in the EU. The office is headed by Vitali Galitskihh, an Estonian expert in corporate, tax, labor law and dispute resolution. On 1 February 2017 Axon Partners opened its office in Lviv and launches the new practice areas of international tax,

tion we extended our findings and identified “Other established practices” in those areas where market development performed the relevant necessity. And more, we extended shortlists for the most widespread legal practices like Corporate and M&A, and Litigation. The criteria of inclusion in the shortlist included a mixture of presented project portfolio throughout the research period, the complexity of matters, client profile, practice diversity, team capacity, reputation. The category “Other established practices” has demonstrated accomplished teams, human capacities, track record over the research period, peers’ reference and expertise recognition. Where appropriate, we continued to single out market authorities — top individuals with unrivalled expertise, exceptionally strong and referred on the market as authorities, establishing certain standards of work. Most of them may be involved in managerial functions and social activities.

corporate and M&A, with a general focus on the IT sector.

Professional Move

Since March 2016 the criminal practice at Ario Law Firm has been headed by new partner Yevgen Grushovets (who worked for state law-enforcement authorities earlier). In May 2016 Arzinger promoted Kateryna Gupalo, Andriy Selyutin and Oleksander Plotnikov to partners. Kateryna Gupalo continued to develop white collar defense practice, as well as tax and customs disputes. Andriy Selyutin is head of the South Ukrainian Branch. Oleksander Plotnikov led banking and finance. Pavlenko Legal Group announced the return of Oleksandra Pavlenko to the partnership of the founding partner of the team in connection with the end of her career as Ukrainian First Deputy Health Minister (2014 — 2016). The Kyiv office of CMS Cameron McKenna promoted Olga Belyakova to a partner.

WWW.UKRAINIANLAWFIRMS.COM


In those practices where the shortlists either firms or individuals were inappropriate due to practice specifics or insufficient data, we produced the list of notable firms and individuals in alphabetical order. Traditional deal-making activity for a year-long period is usually presented in a complete and comprehended manner (see Tables 1-4). However, it is not always easy to get hold of information on foreign law counsels, which is perhaps the most valuable part of the league tables for law firm strategists.

Competition Points

The year of 2016 forced business leaders to move out of their comfort zone, introduce a mature management approach and substantively change their partner mindset. It became a period of testing organizational models and partnership financial formulas, rethinking market positioning, sales and HR policies. The major full-service law firms put their efforts into retaining market shares. Meanwhile, the fashion for legal boutiques is becoming more vivid on the market. Deep expertise allows them to compete with full-service counsels and often determines their victory. Accordingly, the Ukrainian legal market is undergoing a process of reorganization and repositioning. Contrary to merger mania as a global trend, in Ukrainian realities law firms

She advises on corporate/commercial and competition matters with a special focus on the technology, media and communication sector. In June Redcliffe Partners launched a full-service compliance practice by hiring a new by counsel, Ario Dehghani, who is an EU-qualified lawyer. Marchenko Danevych expanded its partnership with Oleksandr Aleksyeyenko (competition and IP) from September 2016. In October DLA Piper announced the appointment of Olga Vorozhbyt as partner and head of the litigation and regulatory practice. She joined the firm from CMS Cameron McKenna, where she was a dispute resolution and compliance partner. In December 2016 Asters welcomed back Constantin Solyar after his secondment to Luxembourg, where he practiced international tax in a Big Four firm. In his role as partner he focuses on advising clients on a variety of international tax matters.

WWW.UKRAINIANLAWFIRMS.COM

split rather than merge. Repositioning of the already established players is caused in the main by ever-growing competitive pressure from the new budding firms. The latter showcased good dynamics of projects, increased quality, higher speed and lower cost. This is eventually a big advantage in terms of strong budget constraints on the client side. Consequently, new entrants put significant efforts on redefining certain market segments. Competition. In the last couple of years the intensity of price competition has become taut. Severe dumping by big players became a subject of scandals and discussion in social networks. The implementation of the public procurement system based on the ProZorro platform revealed the scope of pricing differences and responsive ability to reach the bottom. There is no doubt that flexible pricing is the “must-have” of legal counsels in the current volatile market conditions. Clients, especially local ones, are very cost sensitive, requesting to fix the price as caps and in local currency. Having faced budgetary restrictions, clients are willing to negotiate a success fee and push for discounts. In turn, client retention was in many instances more important for external counsels than earning profits from the services provided. At the end of the day, all these factors influence the profit of law firms.

In January 2017 Asters strengthened its dispute resolution practice with the arrival of new counsel Dmytro Shemelin (previously — Ilyashev & Partners). He is particularly vividly known for international investment and commercial arbitration. Artem Drozdov, attorney and deputy head of the criminal law department, became a partner of AVER LEX. Kateryna Tkachenko, counsel, was promoted to partner at competition law boutique CLACIS. INTEGRITES expanded its dispute resolution practice. Oleksiy Sluch joined as a partner and head of the team of lawyers specializing in banking disputes and disputes related to commercial contracts. Volodymyr Pavlenko’s team deals primarily with disputes related to bankruptcy and restructuring. Prior to joining Mr. Sluch was a counsel at Vasil Kisil & Partners, while Mr. Pavlenko headed the commercial disputes practice at KPMG Ukraine. In February 2017 Redcliffe Partners announced that Anastasia Usova joined as counsel and head of the antitrust practice.

Youngsters. A challenging business environment is usually a prime time for ambitious lawyers to launch their own firms. The recent splits and fragmentations on the market resulted in the emergence of a number of legal startups that have niche expertise and usually a non-traditional approach to doing business. The last couple of years brought new names like Trusted Advisors, Axon Partners, Gentls, Leman international law group, ESQUIRES. Big Four. The presence of the “Big Four” advisory firms on the legal market is growing. First and foremost, clients often prefer integrated service providers who offer more than traditional legal advice. Accordingly, there are changes in the purchasing patterns for legal services, as the Big Four service providers ensure a seamless synergy of business, financial, legal, tax, and operational expertise. Thus, a multidisciplinary practice has an advantage over mono-service law firms. Even more, international networks are further targeted as a strong advantage of geographical reach, and their legal practices are further developed on a stand-alone basis, but not as only ancillary assistance to other service lines. In a sense, the Big Four are very active in terms of hires and use these turbulent times for completing their legal teams with talented professionals. Referrals. In highly internationalized transactional activity, cross-border capabilities are the key advantage to win a mandate for multijurisdictional work.

In March Vitaliy Kasko (Deputy Prosecutor General of Ukraine from May 2014 to February 2016) joined the firm as a partner to head the white-collar crime practice of Vasil Kisil & Partners. DLA Piper announced that Illya Sverdlov, legal director, has been appointed as head of tax in the Kyiv office effective of 1 March 2017; and Alla Kozachenko, a legal director, and head of the Corporate and M&A practice from 1 May 2017. Redcliffe Partners announced that Olena Polyakova has joined the firm’s banking and finance team as counsel. In March Poberezhnyuk & Partners Law Group added new partner Valeriy Fedichin. He specializes in international transactions, including the use of English law, dispute resolution, including international arbitration and investment disputes. In May 2017 Jeantet Ukraine announced that Igor Krasovskiy (banking & finance) and Illya Tkachuk (corporate and M&A) were named local partners.

9


Ukrainian Legal Market

30.0

21.1 18.6

18.3 12.0

Up to 3 years

3-5 years

5-10 years

Leveraging these findings, we hope that law firms may rethink their referral marketing and streamline appropriate BD efforts.

Managerial Agenda

There is a certain call for innovations in the management of law firms, leading the team, client relationships and brand thinking. Market sources admit that the conservative internal structures of law firms are changing slightly. Even agility is being pioneered in the Ukrainian legal business.

10-15 years

More than 15 years

Source: 50 leading law firms in Ukraine 2016, Yuridicheskaya Practika

FIGURE 1. General employment history of lawyers in 50 leading law firms of Ukraine, %

As the Ukrainian market is reasonably unsaturated with international legal names, leading domestic firms consider foreign colleagues as a primary source of high profile work, putting huge efforts into developing international contacts and exploring membership in various networks. Our traditional league tables have always been an extremely valuable source of information, especially from this strategic perspective. Nevertheless, the topic is very sensitive for local leaders, as referral is a subject of not only know-how but a competition. No wonder that such mandates alongside international majors often means high profile big-ticket instructions for sound clientele, often bringing a counsel who is top-ranked. In order to identify the drivers of referrals, we provided special research. Conducting the poll with international law firms that are not present in Ukraine (as part of researching regional desks presence in Ukrainian deals), we asked them to mark the criteria that are important for them when hiring a Ukrainian legal counsel. The most frequently named are the following criteria: — Speed of response/availability, — Industrial expertise, — Experience in certain practice areas — credentials. Secondary importance given to: — Personal contact with appropriate partner, and — Pricing.

Legal Tech. The worldwide trend of Legal Tech is gaining momentum in Ukraine. Firstly, firms are attempting to reach operational efficiency and automate the maximum number of business processes inside the firm. Apparently, professional software and billing platforms, time tracking, CRM and financial analytics are now more important for business. In times when there is a lack of investment in extensive and/or intensive growth, a costcutting strategy is the most relevant thing on a shrunken market. Technology allows deci-

Litigation

1.7

Compliance

Competition

Tax

8.6

0.8

Capital Markets

Labor

18.9

7.3

2.1

Corporate

3.9

Business Protection Debt Restructuring

7.0

4.1 4.5

Bankruptcy

6.0 4.6

International Aribtration

5.3 4.8

5.3

Other

10.3

4.8

Banking & Finance

IP

Source: 50 leading law firms in Ukraine 2016, Yuridicheskaya Practika

FIGURE 2. Aggregate turnover of top 50 leading law firms in Ukraine in 2016 throughout practice areas, %

M&A

Criminal Law

Real Estate, Land

10

WWW.UKRAINIANLAWFIRMS.COM


sion makers to achieve clarity in terms of performed metrics and their dynamics. Other players invest in the development of new technological solutions and client care products, provide legal services online and share knowledge in the cloud with clients. There are precedents of building messenger bots, constructors of contracts, and other applications. Notably, the most well-known Ukrainian startups were actually built inside law firms — Juscutum, Sayenko Kharenko, AEQUO. Sales, business development and PR. The increased competition is a natural incentive for self-identity and smart differentiation on the market. Competition transforms into the area of marketing activities and intensified BD. With managing sales and services production, there is more understanding of the importance of creating a customer experience to win loyalty, referrals and cross-practice sales. Establishment of efficient sales channels, employment of professional sales managers and sales departments and special training for staff are all on the agenda for many law firms. Leveraging costs to win new clientele, firms appeared to make more marketing efforts and expand product lines for existing clients. On the PR front, last year the legal market demonstrated a boost in PR activity and media presence. This is a part of brand recognition efforts. Interestingly, not only are corporate brands promoted but the “personal brand” of leading lawyers too. HR. The main trend in HR policy is closed to well-justified selective hires — in many cases revealed in targeted hunting. Even those companies that grew their headcounts extensively did so carefully with accurate financial calculations and targets for candidates. In order to expand their client base, firms are obviously looking for partners with an existing business caseload. Another recent goal is keeping valuable practitioners on board, implementing bonus and incentive payments, but without expanding salaries and other compensation in overall terms. Law firms are investing more in the soft skills of their teams and sales capabilities than the financial side. At the same time, from the perspective of the employee, it is not only adequate compensa-

WWW.UKRAINIANLAWFIRMS.COM

tion but the work-life balance that is gaining greater importance. The Ukrainian legal market is definitely a market of young practitioners with average experience coming to 5-10 years. According to the latest research of 50 leading law firms of Ukraine, almost half of all legal staff have practiced law for no more than 10 years (see Figure 1). The number of partners continued to grow, especially throughout promotions to non-equity partnership. This leads to a consequent decline in the ratio of partners to lawyers (for the record, the average ratio of partners and lawyers in 2016 was 1:4.5).

Practices and Industries: Money Talks

The structure of demand for legal services continues to change by reflecting the developments in the Ukrainian economy. Dispute resolution continues to the most stable and profitable niche (see Figure 2). The main suppliers are large Ukrainian banks seeking recovery of non-performed loans and loading litigation practices with a significant scope of work. The state authorities and national corporations (e. g., The Deposit Insurance Fund, Naftogaz of Ukraine, Ministries of Justice and Finance, Economy and Development) empowered the market with international arbitration, forensic and debt recovery areas, state debt restructuring, trade remedies and trade disputes. International financial institutions (EBRD, IFC) remained the main donors, leading the corporate sector for the last couple of years, and procured legal services related to drafting legislation and reforms. Government reform activity entered its legislative stage, and is changing legal practice substantially in a variety of fields, like competition, corporate law, state procurement, energy. In light of the fall in tax disputes, tax practice leans towards advisory. In the second half of the past year recovery of transactional activity is noted. Thus, the M&A activity in the agrarian sector is due to extension of land banks and boosting of industrial capacities for further export. The ongoing reform of Ukrainian healthcare entailed the interests of private investors to watch potential objects of investment in the near term. The significant demand for the whitecollar crime practice is down in the main to

facilitation of the state’s anti-corruption policy and pressure on business. This specific practice became more visible in the offering of full-service market players.

Visible Prospects

The common view of market players is that it is impossible to make plans and predictions even for the medium term. Performance is closely tied to the volatility of the economic and political situation. At the same time, the market inherently follows economic stabilization and provides signs of modest growth, but albeit growth! Great hopes are being put on ongoing judicial reform. The general market comment comes to expected enhancement of institutional capacity, but not a simple change in faces and pure populism. Another area of predicted growth is in enhancing enforcement of judicial decisions, triggered by the introduction of a private enforcement service in 2017. Large domestic firms and international players are expecting a revival in investment that traditionally loads the legal market. Meanwhile, we would certainly see a big advantage for those domestic firms that have managed to establish cooperation with international powerhouses. The new law on financial restructuring is likely to facilitate financial restructuring projects. The ongoing process of removing insolvent banks from the market and settlement of their debts will determine further demand for forensic, asset freezing and debt recovery projects. 2017 will hopefully be associated with privatization and corporatization of stateowned enterprises. As a result, corporate governance and compliance should receive impetus for development. The growing number of investor-state arbitrations will prompt some players to develop their international arbitration practices. As a legal market consists of profit-driven partnerships, the Ukrainian market is likely to continue to see splits and new entrants, mainly medium and small law firms. But until the revival of domestic growth, law firms may well continue to explore new markets and destinations. Every crisis is a learning opportunity. And the Ukrainian one was not an exception. The mission of the ULF is to review the lessons learned on an annual basis. So let’s consider together what happened in the legal business in Ukraine.

11


Ukrainian Legal Market Banking & Finance VALUE

TRANSACTIONS

TABLE 1 LEGAL SUPPORT (UKRAINIAN LAW)

LEGAL SUPPORT (FOREIGN LAW)

USD 1 billion

AVELLUM acted as counsel to the Ministry of Finance of Ukraine; Sayenko Kharenko Issue of 1.471% notes due 2021 fully guaranteed by acted as counsel to Citigroup Global the United States of America, acting through USAID Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. International Plc as underwriters

White & Case acted as international counsel to the Ministry of Finance of Ukraine; Arnold & Porter acted as international counsel to Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. International Plc as underwriters

Appr. USD 509 million

Issue of notes and GDP-linked securities (as part of the restructuring of four sovereign-guaranteed loans from Citibank, Sberbank of Russia and VTB Capital to Ukravtodor and Yuzhnoye State Design Office)

AVELLUM acted as counsel to the Ministry of Finance of Ukraine; Sayenko Kharenko advised JSC Sberbank of Russia, Citibank and VTB Capital

White & Case acted as international counsel to the Ministry of Finance of Ukraine; Linklaters advised JSC Sberbank of Russia, Citibank and VTB Capital on English law

USD 500 million (EUR 478.285 million)

World Bank guaranteed revolving facility to National Joint Stock Company Naftogaz of Ukraine, extended by Citibank and Deutsche Bank for purchasing gas from gas suppliers

AEQUO advised Naftogaz of Ukraine; Sayenko Kharenko advised Citibank Europe plc, UK Branch as agent and Citibank, N.A., London Branch and Deutsche Bank AG, London Branch

Allen & Overy advised Citibank Europe plc, UK Branch as agent and Citibank, N.A., London Branch and Deutsche Bank AG, London Branch

USD 500 million

Restatement / roll-over / extension of the preexport financing to Duferco S.A.

Sayenko Kharenko advised BNP Paribas

USD 260 million

Loan facility extended to UkrEximBank by the European Investment Bank (EIB)

Jeantet represented EIB

USD 170 million

Restatement / roll-over / extension of the syndicated pre-export facility for TransOil Group

Sayenko Kharenko advised Societe Generali

Norton Rose Fulbright advised EIB on English law matters

USD 100 million

Secured pre-export revolving loan facility to Myronivsky Hliboproduct Group provided by ING Bank N.V. and Crédit Agricole Corporate and Investment Bank

AVELLUM acted as counsel to ING Bank N.V.

Norton Rose Fulbright advised ING Bank N.V. as to English law; Arendt & Medernach advised ING Bank N.V. as to Luxembourg law; Montanios & Montanios advised ING Bank N.V. as to Cyprus law; Harneys advised ING Bank N.V. as to BVI law

USD 75 million

Senior loan to Nibulon Group provided by the EIB

Jeantet represented EIB

Norton Rose Fulbright advised EIB on English law matters

USD 74 million

Financing provided by EBRD and IFC for the construction of a grain terminal in Odesa sea port by US agricultural giant Cargill and M.V. Cargo, operating in Yuzhny Sea Port in Odesa Region

Redcliffe Partners advised EBRD and IFC

EUR 50 million

Uncommitted trade finance guarantee facility provided by EBRD to Oschadbank as an issuing bank under the EBRD’s Trade Facilitation Programme

Sayenko Kharenko advised Oschadbank

USD 50 million

Financing provided by China Development Bank Corporation (CDB) for purchase by Ukrtelecom of Huawei equipment

Asters represented CDB

White & Case (Beijing office) acted as English law counsel to CDB

USD 50 million

Loan from Turkey to Ukraine to finance needs of state budget

AVELLUM represented the Ministry of Finance of Ukraine

White & Case acted as international counsel to the Ministry of Finance of Ukraine

USD 50 million

Trade finance facility to Quadra Commodities S.A., independent agricultural trading and logistics organization

Integrites advised Rabobank International

USD 40 million

Renewal of secured syndicated pre-export loan facility to the Industrial Group ViOil, a Ukrainian major producer and exporter of sunflower oil

AVELLUM advised EBRD

USD 40 million

Financing extended by EBRD to G.N. Terminal Enterprises Limited for financing expansion of the capacity of a grain and metals terminal in port of Odesa

Redcliffe Partners advised EBRD

Appleby Global was BVI and IoM counsel to EBRD; Hogan Lovells acted as Dutch counsel to EBRD; Watson Farley & Williams acted as English counsel to EBRD

Empty table cells in a foreign legal support column mean that the information is either not available, confidential or there were no foreign law counsels.

12

WWW.UKRAINIANLAWFIRMS.COM


VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

USD 30 million

Interbank credit facility to a Ukrainian bank from BHF-Bank

Arzinger advised BHF-Bank

USD 30 million

Trade finance facility from EBRD to Credit Agricole to boost the export of products from Ukraine

Integrites advised Credit Agricole Ukraine

USD 27 million

Bridge loan to Mriya Agro Holding to cover working capital needs until harvesting campaign

AVELLUM acted as a counsel to a group of current creditors of Mriya Agro Holding

USD 25.5 million

Trade finance facility to Engelhardt Commodities Trading Partners (formerly known as BTG Pactual Commodities — a global commodity merchant)

Sayenko Kharenko advised Amsterdam Trade Bank

USD 25 million

Working capital loan from IFC to Astarta, one of the largest agricultural producers in Ukraine

Asters represented IFC

USD 20 million

Loan to Astarta Group, Ukraine’s leading agribusiness operator and sugar producer, extended by EBRD

AEQUO advised EBRD

USD 20 million

Loan to the subsidiaries of Industrial Milk Company (IMC Group) provided by EBRD

Sayenko Kharenko advised EBRD

USD 18 million

Loan provided to a Ukrainian agricultural company by UniCredit Bank Czech Republic and Slovakia, a.s.

Arzinger advised UniCredit Bank Czech Republic and Slovakia, a.s.

USD 15 million

Financing to fuel supplier Nadezhda Group, extended by IFC

Asters represented IFC

USD 15 million

Corporate loan to Engie International from Credit Agricole

Jeantet represented Credit Agricole

EUR 12 million

Loan from EBRD to Municipal Enterprise Lvivelectrotrans, a municipal transport company, secured by a guarantee issued by Lviv City Council

CMS Cameron McKenna advised EBRD

EUR 10 million

Pre-export trade finance facility from the financial division of Quadra Group to Agrogeneration S.A.

Integrites advised Agrogeneration S.A.

EUR 10 million

Term loan facility agreement between Credit Agricole Ukraine and EBRD

Integrites advised Credit Agricole Ukraine

EUR 10 million

Secured loan facility from EBRD to a Canadabased oil and gas production company and the subsequent restructuring and release of security

EPAP Ukraine acted as a legal counsel to EBRD

USD 10 million

Financing from IFC to Integrated Agrosystems, a member of Agrofusion Group, the largest tomato paste and industrial tomato producer in Ukraine

Asters represented IFC

USD 9 million

Loan facility to a Ukrainian agricultural company extended by Investment Fund for Developing Countries

Arzinger advised Investment Fund for Developing Countries

USD 7 million

Refinancing for Cement, LLC extended by Levenel Limited

Lexwell & Partners represented Cement, LLC (CRH group)

EUR 6 million

Loan provided by EBRD to Kronospan UA, a wood-based panel producer, to finance its capital expenditure

Sayenko Kharenko advised EBRD

USD 5 million

Financing provided by EBRD to V.V. KISCHENZI LTD

Asters represented EBRD

USD 5 million

Loan facility to DFU Agro, LLC extended by Nordic Environment Finance Corporation

Arzinger advised Nordic Environment Finance Corporation

USD 5 million

Loan to AO ZED provided by STALVEX OU

Gramatskiy & Partners represented AO ZED

USD 4 million

Loan facility to a Ukrainian agricultural company extended by Investment Fund for Developing Countries

Arzinger advised Investment Fund for Developing Countries

USD 3.2 million

Loan to Lavinia LLC provided by ROKSADA TRADING LTD

Gramatskiy & Partners represented  Lavinia LLC

LEGAL SUPPORT (FOREIGN LAW)

Cadwalader, Wickersham & Taft advised creditors on English law matters

Allen & Overy (Warsaw) acted as English law counsel to IFC

Arthur Cox acted as English law counsel to CRH Group

>> Continued on page 14

WWW.UKRAINIANLAWFIRMS.COM

13


Ukrainian Legal Market VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

USD 2.1 million

Loan facility to KSTT Services provided by Markets Limited 

Gramatskiy & Partners represented KSTT Services

USD 2 million

Loan to LLC Poltava Sad from Oikocredit

Arzinger advised Oikocredit

USD 2 million

Loan to Megabank from Oikocredit

Arzinger advised Oikocredit

EUR 1.4 million

Loan facility to the Industrial Group KHASK arranged by EBRD

AVELLUM advised EBRD

WND

Cross-border transfer of loan assets from UniCredit Bank Austria AG to UniCredit S.p.A., Italy, as part of the wider transfer of the CEE business, including the shareholdings of CEE subsidiaries

AVELLUM advised UniCredit Group

WND

Loan provided by Ukrgasbank to OREXIM Group

Integrites advised OREXIM Group

WND

Single currency revolving loan facilities extended by ING Bank N.V. to Alfa Trading Limited, the AVELLUM advised ING Bank N.V. subsidiary company of a multinational agribusiness group

WND

Project financing to Rivne city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Kremenchuk city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Lutsk city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Irpin city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Khmelnytsky city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Chernihiv city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Lubny city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Fastiv city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Varash city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to Odesa city council aimed at implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to municipal company of Konotop city aimed at the implementation of energy-saving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to municipal company of Myrgorod city aimed at implementing energysaving technologies

Sayenko Kharenko represented NEFCO

WND

Project financing to municipal company of Ternopil city aimed at the implementing energy-saving technologies

Sayenko Kharenko represented NEFCO

14

LEGAL SUPPORT (FOREIGN LAW)

King and Wood Mallesons (London) acted as English legal advisor to EBRD; King and Wood Mallesons (Hong Kong) — legal advisor to EBRD in Hong Kong; Harneys Aristodemou Loizides Yiolitis — Cypriot legal advisors to EBRD; Yust law firm — Russian legal advisors to EBRD

Norton Rose Fulbright advised ING Bank N.V. on English law and Singaporean law; Zaid Ibrahim & Co advised ING Bank N.V. on Malaysian law

WWW.UKRAINIANLAWFIRMS.COM


Debt Restructuring / Liability Management LEGAL SUPPORT (UKRAINIAN LAW)

TABLE 2 LEGAL SUPPORT (FOREIGN LAW)

VALUE

TRANSACTIONS

USD 1.275 billion

Restructuring of Eurobonds due 2024 issued by DTEK Finance Plc, Ukraine’s leading energy holding

Sayenko Kharenko advised DTEK Finance Plc

Latham & Watkins acted as English law counsel to DTEK Finance Plc

USD 600 million

Restructuring of a syndicated loan extended to Ukrlandfarming in 2011 for 5 years by Sberbank of Russia and Deutsche Bank AG

Redcliffe Partners advised Sberbank of Russia and Deutsche Bank AG; Arzinger advised Sberbank of Russia as the new agent and security agent

Clifford Chance (Russia), Herbert Smith Freehills (Russia), Lenz & Staehelin (Switzerland), George Yiangou (Cyprus) advised the lenders

USD 550 million

Restructuring of two issues of Eurobonds for the City of Kyiv due 2015 and 2016

Sayenko Kharenko advised Goldman Sachs

Linklaters advised Goldman Sachs on English law matters

USD 500 million

Restructuring of Eurononds of JSC Ukrzaliznytsia, Ukrainian public railway company, due 2018

Asters represented JSC Ukrzaliznytsia; Sayenko Kharenko acted as counsel to the Ad Hoc Committee of Noteholders

White & Case acted as English law counsel to JSC Ukrzaliznytsia; Cadwalader, Wickersham & Taft acted as English law counsel to the Ad Hoc Committee of Noteholders

USD 436 million

Restructuring of debt of the Ukrainian energy holding to Amsterdam Trade Bank N.V.

Jeantet represented Amsterdam Trade Bank N.V.

Norton Rose Fulbright advised Amsterdam Trade Bank N.V. on English law matters

USD 431 million

Debt restructuring of DTEK under the ISDA Master Agreement

Arzinger advised Sberbank of Russia

Herbert Smith Freehills acted as English law counsel to Sberbank of Russia

USD 404.3 million

Restructuring of a sovereign-guaranteed loan provided by Citibank and Sberbank to the State Road Agency of Ukraine (Ukravtodor) and two sovereign-guaranteed loans provided by Sberbank to Yuzhnoye State Design Office and Ukravtodor

Sayenko Kharenko advised Citibank and Sberbank

Linklaters advised Citibank and Sberbank on English law matters

USD 300 million

Restructuring of Creative Group’s debt under a syndicated credit facility

Arzinger advised a syndicate of banks (UniCredit Bank, ING, Erste Bank, Societe Generale, VTB, Credit Europe Bank, Amsterdam Trade Bank, Intesa Sanpaolo)

Herbert Smith Freehills acted as English law counsel to a syndicate of banks

EUR 244 million

Restructuring of indebtedness under project financing provided to Wind Power LLC (part of DTEK Group) by Landesbank Berlin AG, backed by a guarantee from EKF, a Danish export credit agency

Redcliffe Partners advised Landesbank Berlin AG; Baker McKenzie represented WindPower LLC (Ukraine), DTEK Renewables B.V. (Netherlands)

Clifford Chance (Germany), Clifford Chance (Netherlands) advised Landesbank Berlin AG

USD 118 million

Debt restructuring of PJSC AutoKrAZ before the State Savings Bank of Ukraine

EQUITY1 represented PJSC AutoKrAZ

USD 100.8 million

Restructuring of a sovereign-guaranteed loan by VTB Capital to the State Road Agency of Ukraine (Ukravtodor)

Sayenko Kharenko advised VTB Capital

Linklaters advised VTB Capital on English law matters

USD 100 million

Reprofiling of Oschadbank’s subordinated loan due 2017 in line with the requirements of the IMF’s Extended Fund Facility

Sayenko Kharenko advised Oschadbank

White & Case advised Oschadbank on English law matters

USD 62 million

Debt restructuring of Ahroholding Mriya provided by Alfa-Bank

EQUITY represented Ahroholding Mriya

USD 49.4 million

Bond restucturing of Aviant Plant before the state

Ilyashev & Partners advised State Enterprise Antonov

USD 40 million

Restructuring of indebtedness of Master Avia LLC, one of the leading aircraft ground handling companies in Ukraine, under the loan facility from subsidiary bank of Sberbank of Russia (Ukraine)

AEQUO advised subsidiary bank of Sberbank of Russia

USD 39.8 million

Debt restructuring of PJSC AutoKrAZ to JSC DeltaBank

EQUITY represented PJSC AutoKrAZ

EQUITY (called FCLEX up till June 2017). Empty table cells in a foreign legal support column mean that the information is either not available, confidential or there were no foreign law counsels.

Stelios Americanos acted as Cypriot law adviser to Sberbank

1

WWW.UKRAINIANLAWFIRMS.COM

>> Continued on page 16

15


Ukrainian Legal Market VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

USD 30 million

Debt restructuring of Iventus-Bud LLC to Erste Group Bank AG

Arzinger advised Erste Group Bank AG

USD 30 million

Debt restructuring of Drand Plaza, subsidiary company, before EBRD

Arzinger advised EBRD

USD 22 million

Restructuring of loan facility provided to Creative Group by Landesbank Berlin AG

Arzinger advised Landesbank Berlin AG

USD 21 million

Debt restructuring of Ukrlandfarming to AG GROWTH INTERNATIONAL

Arzinger advised AG GROWTH INTERNATIONAL

USD 6 million

Settlement of loan debt owed by DataGroup provided by VTB Bank Ukraine

Asters represented VTB Bank Ukraine; Baker McKenzie represented Horizon Capital; AVELLUM represented Custos Invest & Finance Inc.

USD 6 million

Debt restructuring of a Ukrainian agricultural company before Marubeni Corporation

Arzinger advised Marubeni Corporation

USD 5 million

Debt restructuring of KSG Agro

Arzinger advised Big Dutchman AG

USD 5 million

Debt restructuring of Regionproduct-Ukraine, LLC

Arzinger advised Big Dutchman AG

USD 5 million

Debt restructuring of TMM to Zeppelin International AG

Arzinger advised Zeppelin International AG

USD 5 million

Loan restructuring of ZED Association extended by STALVEX OU

Gramatskiy & Partners represented ZED Association

USD 4.25 million

Debt restructuring of ZED Association provided by group of foreign lenders

Gramatskiy & Partners represented ZED Association

USD 4 million

Debt restructuring of Agrarian complex Green Valley before PJSC Bank Forum

Ario Law Firm represented Agrarian complex Green Valley

USD 0.7 million

Loan restructuring of Malanlen LLC before Procredit Bank

Gramatskiy & Partners represented Malanlen LLC

USD 0.4 million

Debt restructuring of ILYICH IRON AND STEEL WORKS before SIC SNT LLC

Gramatskiy & Partners represented SIC SNT LLC

WND

Restructuring of indebtedness of the one of the leading car manufacturers in Ukraine before a consortium of foreign and domestic lenders (including Portigon AG, Ukrgazbank and UniCredit Bank)

AEQUO advised a consortium of foreign and domestic lenders

WND

Restructuring of multimillion-dollar financing of PJSC Toronto-Kyiv, which owns and operates Mixed-Use Real Estate property called Toronto-Kyiv Complex in downtown Kyiv. Alfa-Bank Ukraine acquired the respective loan from Bank of Cyprus in the course of its exit from the Ukrainian market

CMS Cameron McKenna advised PJSC Alfa-Bank Ukraine; Sayenko Kharenko advised PJSC Toronto-Kyiv

WND

Corporate, debt and securities restructuring of the international aircraft owner and lessor AWAS due to change of financing partner from BNP Paribas to Wells Fargo Bank

Vasil Kisil & Partners advised AWAS

16

LEGAL SUPPORT (FOREIGN LAW) CHSH acted as Austrian law counsel to Erste Group Bank AG

Allen & Overy advised the lenders on German and Czech law matters

Clifford Chance (USA) advised AWAS on NY and English law matters

WWW.UKRAINIANLAWFIRMS.COM


Mergers & Acquisitions, Joint Ventures Establishing VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

TABLE 3 LEGAL SUPPORT (FOREIGN LAW)

USD 40.5 billion*

Global sale of part of Allergan’s business to Teva

AVELLUM advised Allergan Inc. on Ukrainian law matters

Latham & Watkins acted as employment counsel and Cleary Gottlieb as corporate counsel to Allergan Inc.

USD 6.25 billion*

Acquisition by Canada Pension Plan Investment Board (CPPIB) of a 40% stake in Glencore Agricultural Products

AVELLUM advised CPPIB

Freshfields Bruckhaus Deringer acted as global counsel of Canada Pension Plan Investment Board

USD 4.4 billion*

Acquisition of Playtika Ltd (Playtika), one of the world’s largest social casino gaming company, by Shanghai Giant Network Technology Co. (Giant)

Sayenko Kharenko represented Shanghai Giant Network Technology Co. (Giant)

Fenwick & West and Allen & Overy led the transaction globally

USD 3.55 billion*

Acquisition of Thomson Reuters’ Intellectual Property & Science Business by Onex Corporation and Baring Private Equity Asia

AVELLUM acted as the Ukrainian legal counsel to Onex Corporation and Baring Private Equity Asia

Approx. EUR 2 billion**

Carve-out of the traditional light bulb business at OSRAM, the leading global bulb producer, to separate it from a new brand called LEDVANCE for the production of halogen bulbs, energy-saving bulbs and certain LED

Wolf Theiss advised OSRAM

Wolf Theiss offices in Poland, Bulgaria, Croatia, Czech Republic, Romania, Serbia, Slovakia, Hungary

USD 540 million*

Acquisition of Serena Software, including IT companies in Ukraine, by Micro Focus International

Jeantet representing Micro Focus International

Travers Smith LLP acted as a global legal advisor

USD 533 million*

Acquisition by Arkema S.A., a leading specialty chemicals and advanced materials company, of shares in DBEW Holding B.V., a parent company of Den Braven Group, an international chemicals group

Kinstellar advised Arkema S.A.

Loyens & Loeff acted for Arkema S.A. as lead counsel; Kinstellar and Cuatrecasas acted for Arkema as local legal counsels

EUR 247 million*

Acquisition of Smyk Group by Bridgepoint

Sayenko Kharenko represented Bridgepoint; Redcliffe Partners advised EM&F Group

Clifford Chance advised the Empik Media & Fashion group (the seller); Weil Gotshal & Manges acted on behalf of Bridgepoint; Travers Smith advised the management of Smyk

EUR 175 million*

Sale of Hamé, which specialises in the production of pâtés, ready-meals, ketchup, preserved vegetables, jams and baby food, to Oslo-listed food group Orkla

CMS Cameron McKenna advised DECAPTERUS S.A.R.L.; DLA Piper advised Orkla

DLA Piper advised Orkla

UAH 3.29 billion

Acquisition by the EBRD of 40% of the share capital in UkrSibbank, capital increase of UkrSibbank by UAH 3.29 billion and debt-to-equity swap

Asters represented EBRD

Chadbourne & Parke acted as English law counsel to EBRD; Cleary Gottlieb Steen & Hamilton acted as English law counsel to BNPP

EUR 122 million

Acquisition by EBRD of 30% shareholding in PJSC Raiffeisen Bank Aval, one of the leading universal banks in Ukraine

AVELLUM acted as the legal counsel to Raiffeisen Bank International AG and PJSC Raiffeisen Bank Aval; Redcliffe Partners advised EBRD

Clifford Chance acted as a legal adviser to EBRD

USD 127 million*

Acquisition by McCormick & Company, Incorporated, a global leader in flavours, of 100% of the shares in Enrico Giotti SpA (Giotti), a leading Italian flavour manufacturer

Kinstellar advised McCormick & Company, Incorporated

Shearman & Sterling acted for McCormick & Company as lead counsel

USD 100 million

Joint venture between Cargill and MV Cargo to enable MV Cargo’s construction of a new port terminal in Yuzhny, Ukraine

Baker McKenzie acted as legal counsel to Cargill; CMS Cameron McKenna represented MV Cargo

Baker McKenzie advised Cargill

USD 35 million

Acquisition by Yura-Cement-Fabriken AG (CRH Group) of a 49% stake in LLC Cement on the territory of Ukraine from CIMENTO E PRODUTOS ASSOCIADOS, S.A.

Lexwell & Partners advised Yura-CementFabriken AG

EUR 10 million

Acquisition of company holding important real estate assets in Ukraine by ACP Europe

Jeantet represented ACP Europe

USD 7.6 million EUR (6.8 million)

Sale of subsidiaries of Tikkurila Oyj in Ukraine and Belarus to FarbaHouse OÜ

Peterka & Partners advised Tikkurila

* Global deal, total value in all jurisdictions, where it is disclosable. ** Turnover of lamps business — according to media reports Empty table cells in a foreign legal support column mean that the information is either not available, confidential or there were no foreign law counsels.

WWW.UKRAINIANLAWFIRMS.COM

Peterka & Partners (Minsk office) acted as the legal counsel of Tikkurila Oyj in Belarus

>> Continued on page 18

17


Ukrainian Legal Market VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

EUR 3.8 million

Acquisition by AMIC of two Ukrainian companies that are engaged in the business of operating refuelling stations in Ukrainian airports, with some of these stations being the only refuelling operators at the international airports of the cities of Kharkiv and Odesa

Wolf Theiss advised AMIC

EUR 3.5 million

Sale by Erste Bank of its Ukrainian subsidiary

Wolf Theiss advised Erste Bank

EUR 3 million

Acquisition by Zeppelin International AG of 98.0014% of the shares in one of the assets of TMM Group, a local construction giant

Arzinger represented Zeppelin International AG

USD 2.5 million

Acquisition of Grand Village LLC by private investor

Gramatskiy & Partners advised private investor

EUR 1.5 million

Establishment of a joint venture between NAFTA a.s. and Cub Energy Inc., a Houston-based upstream oil and gas company, to pursue a gas exploration project in Western Ukraine, close to the Slovak border

CMS Cameron McKenna advised NAFTA a.s.

USD 0.5 million

Acquisition of entire stock of shares in Aqua Invest Group LLC by Ditrade LLC

Gramatskiy & Partners advised Ditrade LLC

LEGAL SUPPORT (FOREIGN LAW)

Cleary Gottlieb Steen & Hamilton

Linklaters (Warsaw) advised UniCredit on English law matters; Skadden (London) advised Alfa Group on English law matters; DLA Piper Moscow advised ABH Holding

WND

Disposal of 99.9% shares in PJSC Ukrsotsbank, an asset of UniCredit Group in Ukraine, in exchange for a minority stake (9.9%) in ABH Holdings S.A.

AVELLUM advised UniCredit Group; DLA Piper and Sayenko Kharenko advised ABH Holding

WND

Acquisition of a controlling stake in Vinnytsia Agro-Industrial Group, a local group of companies operating a substantial agricultural land bank and several significant silos, by Epicenter K, the largest Ukrainian DIY retail chain

AEQUO advised Epicenter K; Law Offices of OMP advised Vinnytsia Agro-Industrial Group

WND

Acquisition from Akron Investment Central Eastern Europe II B.V. East Gate Logistic, a Class A logistics center (total area of 49,600 sq m), which was managed by Heitman

ANTIKA acted as a legal advisor to Heitman; Integrites advised Dragon Capital Investments Limited; Vasil Kisil & Partners advised the seller in Ukraine

Greenberg Traurig and Stelios Americanos & Co LLC advised Akron Investment Central Eastern Europe II B.V.

WND

Acquisition of Lohika, a software engineering services firm headquartered in Silicon Valley, by Altran, a global leader in engineering and R&D services headquartered in Paris***

AVELLUM advised Altran on Ukrainian law matters; EY advised Altran; AEQUO advised Lohika Inc.

Latham & Watkins acted as the global legal advisor to Altran; Fenwick & West advised Lohika Inc

WND

Acquisition by Farmak of Polish line of business

AVELLUM advised Farmak

Baker McKenzie (Warsaw) advised Farmak on Polish law matters; Marszałek & Partnerzy — Adwokaci advised the sellers on Polish law matters

WND

Increase in the stake held by Horizon Capital in Datagroup from significant minority to over 70%, owed to VTB Ukraine

AVELLUM advised Custos Invest & Finance Inc., one of Datagroup’s shareholders; Baker McKenzie acted as legal counsel to Horizon Capital

Baker McKenzie acted as legal counsel to Horizon Capital

WND

Sale by MTG, a Swedish mediaholding, of its Ukrainian pay-TV channel business subsidiary Viasat Ukraine LLC to Viasat World Limited

Vasil Kisil & Partners advised MTG; AEQUO advised Viasat World Limited

Mannheimer Swartling (Russia) and Ashurst (Sweden) advised MTG; White & Case advised Viasat World Limited

WND

Sale by Eurobank Ergasias S.A., one of the largest banks in Greece, of Ukrainian subsidiary, Universal Bank, to TAS Group, owned by Ukrainian businessman Sergiy Tigipko

Baker McKenzie advised Eurobank Ergasias S.A.

WND

Spin-off of the biopharmaceutical business of Baxter International Inc.

Baker McKenzie advised Baxter International Inc.

WND

Sale of two of its supermarkets in Kharkiv by Billa-Ukraine, one of the largest retail supermarket chains in Ukraine

Baker McKenzie advised Billa Ukraine

Baker McKenzie advised Baxter International Inc.

*** Global deal.

18

WWW.UKRAINIANLAWFIRMS.COM


VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

Sale of 100% of shares in 1849-Apollo Overseas I Limited (Cyprus), the founder of AtlanticPacific Ventures LLC (Kyiv), which owns and manages the Pyramida shopping centre in Kyiv, to Dragon Capital

Baker McKenzie advised 1849 plc; AEQUO advised Dragon Capital Investments Limited

Acquisition of Todini Costruzioni Generali S.p.A. from Salini Impregilo S.p.A., an Italian Milan-listed company and one of the leading construction companies in the world, by Prime System Kz Ltd

CMS Cameron McKenna represented Orifjan Shadiyev, a well-known businessman in Kazakhstan, and his construction company, Prime System Kz Ltd

Sale of the Ukrainian subsidiary of Adecco Group to Lugera Holding, s. r. o.

Dentons advised Adecco Group

WND

Sale of 70% of shares in KUB-Gas to Burisma, a private natural gas producer operating in Ukraine

Dentons advised Serinus Energy

WND

Acquisition of 29.29% stake in Ukrainian insulin producer JSC Indar from a Polish biotechnological company Bioton S.A., by Luraq Investments Limited, a special purpose vehicle of Georgian Industrial Group

DLA Piper advised Georgian Industrial Group

WND

Acquisition of stakes from the partners for gaining full control over the Karavan chain of trading and entertainment centers by DCH Group

DLA Piper advised DCH Group; Sayenko Kharenko represented Rohatyn Group and Apollo

WND

Acquisition of entire stock of shares in Kepi End LLC by Cadilaca Investment Limited (Cyprus) and Astonra Investment Limited (Cyprus)

Gramatskiy & Partners advised Cadilaca Investment Limited and Astonra Investment Limited

WND

Acquisition of Ditrade LLC by private investor

Gramatskiy & Partners advised private investor

WND

Acquisition of controlling shares in restaurant chains (Celentano Pizza (Kyiv), The Jar Fun Bar, Zheltok Diner Restaurant by Fun Food Family

Gramatskiy & Partners advised Fun Food Family

WND

WND

WND

Aacquisition of a 100,000 sq.m. Class A logistic Integrites advised Dragon Capital center in Kyiv Region (West Gate) by Dragon Capital Investments Limited Investments Limited

WND

Management buy-out of the Ukrainian subsidiary of Huurre Group Oy, a European freezing equipment manufacturer

KPMG advised Huurre Group Oy

WND

Purchase of shares of Lopatyn Fuel Peat Briquette Plant LLC by Ivano-Frankivsktsement Eternit

MORIS GROUP represented IvanoFrankivsktsement Eternit

WND

Partial acquisition of Starco Group business, international producer and distributor of tyres and wheels, by Bohnenkamp, AG, including two Ukrainian subsidiaries of Starco

PwC Legal represented Bohnenkamp, AG

WND

Sale of controlling stakes in Ukrainian Exchange and PFTS Stock Exchange by PJSC Moscow Exchange

Sayenko Kharenko represented PJSC Moscow Exchange

WND

Sale of controlling stake in HDI Insurance, a Ukrainian Insurance company and Talanx AG affiliated company, to Euroins Insurance Group (Bulgaria)

Sayenko Kharenko represented Talanx AG; EY advised Euroins Insurance Group

WND

Acquisition of controlling stake in Allianz Ukraine SLC by the companies of Allianz SE group in the process of corporate restructuring, including regular agreements

Sayenko Kharenko represented Allianz Group

WND

Acquisition of Third Rome Holding, an investment company, from PFH Investment Fund Limited

Sayenko Kharenko represented O.D.D.E Holdings SA

WND

Sale of 100% shares in PrJSC Insurance Company Aegon Life Ukraine to TAS Group.

Sayenko Kharenko represented Aegon Group

WND

Acquisition by MANN+HUMMEL of filter production business of Affinia Group***

Sytnyk & Partners advised MANN+HUMMEL

LEGAL SUPPORT (FOREIGN LAW)

DLA Piper advised DCH Group

Christodoulos Vassiliades & Co. (Cyprus) acted as counsel to Dragon Capital Investments Limited on Cypriot law matters; Schoenherr (Austria) acted as counsel to GLD Holding (seller of majority stake in West Gate)

Oracle Capital Group acted as the seller’s legal advisor

*** Global deal.

WWW.UKRAINIANLAWFIRMS.COM

19


Ukrainian Legal Market Transactions in the Antitrust Area VALUE

TRANSACTIONS

TABLE 4 LEGAL SUPPORT (UKRAINIAN LAW)

LEGAL SUPPORT (FOREIGN LAW)

Approx. USD 160 billion1

Merger clearance for the merger of Pfizer and Allergan

Asters represented Allergan plc.; EVERLEGAL represented Pfizer

Approx. USD 130 billion2

Merger clearance for the merger of The Dow Chemical Company and E.I. du Pont de Nemours and Company

Sayenko Kharenko represented E.I. du Pont de Nemours and Company; Asters represented The Dow Chemical Company

Sayenko Kharenko represented AnheuserBusch InBev S.A./N.V.; Asters represented SABMiller

Freshfields Bruckhaus Deringer and Cravath Swaine & Moore acted as international counsels to AB InBev; Linklaters and Hogan Lovells acted as international counsels to SABMiller

GBP 71 billion

Merger clearance for the merger of Anheuser-Busch InBev and SABMiller

USD 67 billion

Merger clearance for acquisition of EMC by Dell

Sayenko Kharenko represented Denali Holding Inc. and EMC Corporation

Simpson Thacher advised Dell and Silver Lake; Wachtell advised Michael Dell and MSD Partners; Skadden advised EMC

Approx. USD 44 billion

Merger clearance for indirect acquisition by China National Chemical Corporation of shares in and control over Syngenta AG

Asters represented China National Chemical Corporation and Syngenta AG

USD 40.5 billion

Merger clearance for acquisition by Teva Pharmaceutical Industries Ltd of global generic pharmaceuticals business of Allergan plc

Asters represented Teva Pharmaceutical Industries Ltd. and Allergan plc

USD 37.2 billion

Merger clearance for acquisition by Berkshire Hathaway of Precision Castparts

Sayenko Kharenko represented Berkshire Hathaway Inc. and Precision Castparts Corp.

Cravath, Swaine & Moore LLP and Stoel Rives LLP advised PCC’s. Munger, Tolles & Olson LLP advised Berkshire

EUR 22.8 billion

Merger clearance for Boehringer Ingelheim’s asset swap transaction with Sanofi

Sayenko Kharenko represented Boehringer Ingelheim International GmbH; Asters represented Sanofi

Approx. USD 12.5 billion

Merger clearance for (1) concentration in connection with the indirect acquisition by Coty, Inc. of control over Galleria Co. and (2) related arrangements

Asters represented The Procter & Gamble Company and Coty, Inc.

USD 12 billion

Merger clearance for acquisition by Molson Coors of MillerCoors and certain assets of SABMiller

Sayenko Kharenko represented AnheuserBusch InBev S.A./N.V.; Asters represented Molson Coors Brewing Company and MillerCoors LLC

Kirkland & Ellis, Cleary Gottlieb Steen & Hamilton, McCarthy Tétrault, Perkins Coie acted as international counsels to Molson Coors

USD 6.1 billion

Merger control clearance in connection with merger of Konecranes and Terex

CLACIS represented Terex Corporation; Sayenko Kharenko represented Konecranes

Approx. USD 2.8 billion

Merger clearances for acquisition by Accor S.A. of shares in FRHI Holdings Limited company

Asters represented Accor S.A. and FRHI Holdings Limited

USD 2.5 billion

Merger clearance for the acquisition of Glencore Agri by CPPIB

Sayenko Kharenko represented CPPIB Monroe Canada Inc. and Glencore Agriculture Limited

Linklaters LLP provided legal advice to Glencore

Approx. USD 2.4 billion

Merger clearance for acquisition by CMA CGM S.A. of shares in Neptune Orient Lines Limited

Asters represented CMA CGM S.A. and Neptune Orient Lines Limited

Approx. USD 2.2 billion

Merger clearance for acquisition by Nissan Motor Co., Ltd of shares in Mitsubishi Motors Corporation, as well as control over Mitsubishi Motors Corporation

Asters represented Nissan Motor Co., Ltd and Mitsubishi Motors Corporation

Approx. USD 2 billion

Merger and antitrust clearances for (1) acquisition by Francisco Partners of Dell Inc.’s software business (Dell Software Group), and (2) related arrangements

Asters represented Francisco Partners and Dell Inc.

Approx. USD 1.4 billion

Merger clearance for acquisition by Cisco Systems, Inc. of control over Jasper Technologies, Inc.

Asters represented Cisco Systems, Inc. and Jasper Technologies, Inc.

Total enterprise value Combined market capitalization of the company Empty table cells in a foreign legal support column mean that the information is either not available, confidential or there were no foreign law counsels. 1 2

20

WWW.UKRAINIANLAWFIRMS.COM


TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

Approx. EUR 1.34 billion

Merger clearances for establishment of two asset management joint ventures combining the asset management business of Pioneer Global Asset Management S.p.A. and Santander Asset Management.

Asters represented UniCredit S.p.A. and Banco Santander, S.A.; Sayenko Kharenko represented Warburg Pincus and General Atlantic

SEK 10.9 billion (USD 1.21 billion)

Merger clearance for acquisition by Trelleborg of ČGS

Sayenko Kharenko represented Trelleborg Holding AB, ČGS Holding a.s.

EUR 1.126 billion

Merger control clearance in connection with Terex’s acquisition of block of shares that allows it to exceed 25% of votes in supreme management body of Konecranes

Sayenko Kharenko represented Terex Corporation and Konecranes

Approx. EUR 1.02 billion

Merger clearance for acquisition by Groupe SEB of WMF

Asters represented Groupe SEB and WMF

EUR 925 million

Merger clearance for acquisition of KraussMaffei Group by ChemChina

Sayenko Kharenko represented China National Chemical Equipment Co., KraussMaffei Group GmbH, Guoxin International Investment Corporation Limited

Approx. USD 855 million

Merger clearances for acquisition by P2 Capital Partners LLC of joint control over the company ASP Blade Holdings, Inc.

Asters represented P2 Capital Partners LLC and ASP Blade Holdings, Inc.

EUR 675 million

Merger and antitrust clearances for acquisition of Astellas Pharma by Leo Pharma

Sayenko Kharenko represented Leo Pharma A/S; Asters represented Astellas Pharma

Approx. USD 559.4 million

Merger clearances for acquisition by HNA Aviation Group Co., Ltd of assets of La Compagnie d’Exploitation des Services Auxiliaires Aériens S.A. (Servair) and control over it

Asters represented HNA Aviation Group Co., Ltd. and La Compagnie d’Exploitation des Services Auxiliaires Aériens S.A.

Approx. USD 520 million3

Merger clearances for acquisition by Aspen Pharmacare Holdings Limited of rights to commercialize AstraZeneca Plc portfolio of anaesthetic medicines

Asters represented Aspen Pharmacare Holdings Limited and AstraZeneca Plc

EUR 475 million

Merger clearance for acquisition by AkzoNobel of the industrial coatings business of BASF SE

Sayenko Kharenko represented AkzoNobel N.V. and BASF SE

Approx. USD 462.5 million

Merger clearances for creation by Catterton L.P. and LVMH Moët Hennessy — Louis Vuitton SE of L Catterton partnership combining Catterton’s North American and Latin American private equity operations with LVMH and Groupe Arnault’s existing European and Asian private equity and real estate operations

Asters represented Catterton L.P. and LVMH Moët Hennessy — Louis Vuitton SE

USD 422 million

Merger clearance for acquisition by Modine of Luvata Heat Transfer Solutions group of companies

Sayenko Kharenko represented Modine Manufacturing Company and Luvata Heat Transfer Solutions

EUR 382 million

Merger clearance for acquisition by Marel of MPS

Sayenko Kharenko represented Marel Holding B.V. and MPS HOLDING III B.V.

EUR 335 million

Merger clearance for acquisition by INEOS of INOVYN

Sayenko Kharenko represented INEOS AG and INOVYN Limited

EUR 310 million

Merger control clearance for acquisition of Cimbria Group by AGCO Group

AVELLUM represented AGCO Group

Approx. USD 320 million

Merger clearances for acquisition by Cisco Systems, Inc. of shares in Leaba Semiconductor Ltd

Asters represented Cisco Systems, Inc. and Leaba Semiconductor Ltd

EUR 247 million

Merger clearance for acquisition by Bridgepoint of Smyk group of companies

Sayenko Kharenko represented Bridgepoint Group Limited and Smyk International Sp. z o.o.

Approx. USD 260 million

Merger clearances for acquisition by Cisco Systems, Inc. of control over Cliqr Technologies, Inc.

Asters represented Cisco Systems, Inc. and Cliqr Technologies, Inc.

Approx. USD 240 million4

Merger and antitrust clearances for (1) acquisition by Aspen Pharmacare Holdings Limited of anaesthesia portfolio of GlaxoSmithKline plc, and (2) related arrangements

Asters represented Aspen Pharmacare Holdings Limited and GlaxoSmithKline plc

EUR 175 million

Merger control clearance for acquisition by Orkla of Háme

DLA Piper represented Orkla; CMS Cameron McKenna represented DECAPTERUS S.A.R.L.

VALUE

3 4

Additionally up to USD 250 million after the completion of the transaction (depending on the level of sales) Additionally up to USD 130 million after the completion of the transaction

WWW.UKRAINIANLAWFIRMS.COM

LEGAL SUPPORT (FOREIGN LAW)

>> Continued on page 22

21


Ukrainian Legal Market TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

USD 190 million

Merger control and concerted actions filings in connection with acquisition by Deere & Company of Precision Planting LLC, a wholly-owned subsidiary of Monsanto Company

Baker McKenzie represented Monsanto Company; Wolf Theiss represented Deere & Company

USD 180 million

Merger clearance for acquisition by BTA Bank Kazakhstan of 50.0072% stake in BТА Bank (Ukraine) and increase the share in the authorized capital of Ukrainian BTA Bank from 49.99% to 89.99%

Ilyashev & Partners represented BTA Bank Kazakhstan; KPMG acted as independent receiver

Hogan Lovells acted as international counsel to BTA Bank Kazakhstan

EUR 150 million

Merger clearance for acquisition of Monosem’s business by Deere & Company

Wolf Theiss represented Deere & Company and Monosem group of companies

EUR 80 million

Merger clearance for acquisition by Synthos of INEOS Styrenics

Sayenko Kharenko represented Synthos S.A. and INEOS AG

Approx. USD 100 million

Merger control filing in connection with acquisition by Cargill International Luxembourg 2 S.à.r.l. of majority stake in the company that will own and operate a new deep sea grain export terminal within the boundaries of Yuzhny Sea Port

CMS Cameron Mckenna represented MV Cargo; Baker McKenzie represented Cargill International Luxembourg 2 S.à.r.l.

USD 56 million

Merger clearance for acquisition of wiring & controls business of Groclin Group by PKC Group

Arzinger represented Groclin Group, PKC Group

USD 40 million

Merger clearance for acquisition of 53% in Euronews TVchannel by Media Globe Networks S.A. controlled by Sawiris Family

Arzinger represented Mr. Naguib Sawiris, Euronews

USD 16 million

Merger clearance for acquisition by Rozetka of a company owning a warehouse complex in the city of Brovary

EY represented Rozetka

USD 16 million

Merger clearance for acquisition of HeadHunter from Mail. Ru by Goldman Sachs and Elbrus

Sayenko Kharenko represented Goldman Sachs Group, Inc. and Zemenik Trading Limited

EUR 3.8 million

Merger clearance for acquisition of 100% shareholding in LUK AVIA OIL LLC and LUKOIL AVIATION Ukraine LLC by AMIC Ukraine

Wolf Theiss represented AMIC Ukraine and the Ukrainian targets, LUK AVIA OIL LLC and LUKOIL AVIATION Ukraine LLC

EUR 3.5 million

Merger clearance for the sale of 100% shareholding in Erste Group Immorent Ukraine LLC (subsidiary of Erste Group Immorent International Holding GmbH)

Wolf Theiss represented Erste Group Immorent International Holding GmbH; Moris Group represented the acquirer

WND

Merger clearance for acquisition of control over Road Machinery Co. by Komatsu South America

Sayenko Kharenko represented Komatsu Holding South America Limitada, Road Machinery Co., S.A. de C.V.

WND

Merger clearance for merger between DENTSPLY and Sirona

Sayenko Kharenko represented DENTSPLY International Inc., Sirona Dental Systems

WND

Merger clearance for acquisition of Investbank by EDAL Holding

Sayenko Kharenko represented EDAL Holding und Finanzierungsberatung GmbH, PJSC Bank Investbank

WND

Merger clearance for acquisition by Solvay of Primester

Sayenko Kharenko represented Solvay S.A. and Primester General Partnership

WND

Merger clearance for acquisition of control over GetBack by Abris Group and Konrad Michał Kąkolewski

Sayenko Kharenko represented Emest Investments sp. z o.o., GetBack S.A. and Citizen of Poland (Konrad Michał Kąkolewski)

WND

Merger clearance for establishment of Allied Universal by Wendel and Warburg Pincus

Sayenko Kharenko represented USAGM Holdco, LLC and Allied Security Holdings LLC

WND

Merger clearance for acquisition of sole control by Danone S.A. over Dairy JV Holdings Limited

AEQUO represented Danone S.A.

WND

Merger clearance for acquisition of Signet Group by NCH Capital

AEQUO represented NCH Capital

WND

Merger clearance for acquisition by Tetra Pak of Laude BV

AEQUO represented Tetra Pak

Ashurst acted as international counsel to Tetra Pak

WND

Merger clearance for acquisition by Apax Partners of LKQ Corporation from Rhiag

AEQUO represented Apax Partners

Ashurst acted as international counsel to Apax Partners; K&L Gates acted as international counsel to LKQ Corporation

VALUE

22

LEGAL SUPPORT (FOREIGN LAW)

 

WWW.UKRAINIANLAWFIRMS.COM


VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

LEGAL SUPPORT (FOREIGN LAW)

WND

Merger clearance for acquisition by Koninklijke Bunge BV of two European oilseed processing facilities from Cargill Group

AEQUO represented Koninklijke Bunge BV, Cargill Incorporated

WND

Merger clearance for acquisition by Dragon Capital Investments Limited of Pyramid Shopping Mall

AEQUO represented Dragon Capital Investments Limited

WND

Merger clearance for acquisition by Viasat World Limited of Viasat Ukraine

AEQUO represented Viasat World Limited

WND

Merger clearance for acquisition by Koch Industries, Inc. of shares in Guardian Industries Corp.

Asters represented Koch Industries, Inc. and Guardian Industries Corp

WND

Merger clearances for acquisition by KKR & Co. L.P. of control over LGC Science Group Limited

Asters represented KKR & Co. L.P. and LGC Science Group Limited

WND

Merger clearance for the merger of subsidiary of Siemens Aktiengesellschaft with and into Gamesa Corporación Tecnológica, S.A.

Asters represented Siemens Aktiengesellschaft and Gamesa Corporación Tecnológica, S.A.

WND

Merger and antitrust clearances for (1) acquisition by Kansai Paint Co., Ltd of Helios Coatings Group, and (2) related arrangements

Asters represented Kansai Paint Co., Ltd and Helios

WND

Merger and antitrust clearances for (1) indirect acquisition by United Technologies Corporation of shares in Riello Group S.p.A., and (2) related arrangements

Asters represented United Technologies Corporation and Riello Group S.p.A.

WND

Merger clearances for establishment by Teva Pharmaceutical Industries Ltd and Takeda Pharmaceutical Company Limited of business venture

Asters represented Teva Pharmaceutical Industries Ltd and Takeda Pharmaceutical Company Limited

WND

Merger clearances for acquisition by Henkel AG & Co. KGaA of assets of The Procter & Gamble Company

Asters represented Henkel AG & Co. KGaA and The Procter & Gamble Company

WND

Merger clearances for acquisition by Glusco Energy S.A. of shares in (1) Rosneft Management Company Limited and (2) Fargrade Limited, which are active in management of TNK petrol station chain

Asters represented Glusco Energy S.A.

WND

Merger clearance for acquisition by Hipp Holding AG of sole control over Milchwirtschaftliche Industrie Gesellschaft Herford GmbH & Co. KG

Asters represented Hipp Holding AG and Milchwirtschaftliche Industrie Gesellschaft Herford GmbH & Co. KG

WND

Merger clearance for acquisition by KWS SAAT SE of shares in KWS MOMONT S.A.S. (previous called Societe de Martinval S.A.)

Asters represented KWS SAAT SE and KWS MOMONT S.A.S.

WND

Merger clearances for acquisition by Beauté Prestige International of assets in The Procter & Gamble Company

Asters represented Beauté Prestige International and The Procter & Gamble Company

WND

Merger clearance for acquisition by Vestel Ticaret A.Ş. of Compal Electronics Europe sp. z o.o.

Asters represented Vestel Ticaret A.Ş. and Compal Electronics, Inc.

WND

Merger and antitrust clearances for (1) acquisition by Stet Holland B.V. of conventional seed potato business of KWS SAAT SE, and (2) related arrangements

Asters represented Stet Holland B.V. and KWS SAAT SE

WND

Merger clearances (as part of the establishment of a full function joint venture between Nestlé and PAI, through its subsidiary R&R) for (1) indirect acquisition by Nestlé S.A. together with PAI Partners SAS of control over Froneri Limited, (2) indirect acquisition by PAI Partners SAS of Nestlé S.A. businesses in the sphere of ice cream, frozen food and chilled dairy products, (3) indirect acquisition by PAI Partners SAS of shares in some companies

Asters represented Nestlé S.A. and PAI Partners SAS

WND

Merger clearances for acquisition by Cadogan Petroleum Holdings B.V. of shares of Zagoryanska Petroleum B.V. and control over Pokrovskoe Petroleum B.V.

Asters represented Cadogan Petroleum Holdings B.V., Zagoryanska Petroleum B.V. and Pokrovskoe Petroleum B.V.

WND

Merger clearances for acquisition of Dobronadiivske KHPP stakes by Hermes-Trading and UkrAgroCom

Arzinger represented UkrAgroCom, Hermes-Trading

WND

Merger clearance for acquisition of an asset of TMM Group by Zeppelin International AG

Arzinger represented Zeppelin International AG, TMM

WND

Merger control clearance for acquisition of PJSC Commercial Bank Center (Ukraine) by Mr. Hamed Alikhani

AVELLUM represented Mr. Hamed Alikhani

>> Continued on page 24

WWW.UKRAINIANLAWFIRMS.COM

23


Ukrainian Legal Market VALUE

TRANSACTIONS

LEGAL SUPPORT (UKRAINIAN LAW)

LEGAL SUPPORT (FOREIGN LAW)

WND

Merger control clearance for acquisition of Lohika Group by Altran

AVELLUM represented Altran Group

WND

Three merger control filings in connection with the second stage of transfer of Baxter International Inc.’s Bioscience Business and certain related assets and corporate rights into a spin-off — Baxalta Incorporated

Baker McKenzie represented Baxter International Inc.

WND

Merger control filings related to establishment of JV between Bunge and Wilmar

Baker McKenzie represented Bunge

WND

Merger control filing for acquisition by Knorr-Bremse of business of Bosch

Baker McKenzie represented Knorr-Bremse

WND

Two merger control filings related to (1) the acquisition of joint control (together with Remington Holding Company, LLC) over Innovative Seed Solutions LLC and (2) acquisition by Remington Seeds, LLC of facility of Monsanto

Baker McKenzie represented Monsanto Company

WND

Merger control filing related to increase in stake of Horizon Capital in Datagroup from a significant minority to over 70%

Baker McKenzie represented Horizon Capital

WND

Merger control clearance for Georgian Industrial Group acting through Luraq Investments Limited in acquisition of 29.29% stake in JSC Indar from Polish biotechnological company Bioton S.A.

DLA Piper represented Georgian Industrial Group

WND

Merger control clearance for acquisition of Hagie Manufacturing by Deere & Company

DLA Piper represented Deere & Company, Hagie Manufacturing Company

WND

Merger control and concerted actions clearance related to acquisition of Ukrsotsbank (UniCredit Group) by Alfa Group

Baker McKenzie, DLA Piper acted for ABHH; AVELLUM represented Unicredit

WND

Merger clearance for acquisition of Karavan chain of trading and entertainment centres by Oleksandr Yaroslavskyi’s DCH Group

DLA Piper represented DCH Group

WND

Merger clearance for acquisition of Ferro S.A., listed on the Warsaw Stock Exchange, through Palmyra Sp. z o.o. by IK Investment Partners

Dentons represented IK Investment Partners

WND

Merger clearance for acquisition of LLC Termo-Pak by Comel group of companies

Integrites represented LLC Termo-Pak, Comel group of companies

WND

Merger clearance for indirect acquisition by Robert Bosch GmbH (via Robert Bosch Investment Nederland B.V. ) of shares in RE’FLEKT GmbH

Sytnyk & Partners represented Robert Bosch GmbH and RE’FLEKT GmbH

WND

Merger clearance in connection with indirect (via Robert Bosch Investment Nederland B.V.) acquisition of joint control over RE’FLEKT GmbH together with IMDA UG, WST-UB UG and Kai Christian Thomas Beteiligungs— und Unternehmensberatungs UG by Robert Bosch GmbH

Sytnyk & Partners represented Robert Bosch GmbH, IMDA UG, WST-UB UG, Kai Christian Thomas Beteiligungs— und Unternehmensberatungs UG and RE’FLEKT GmbH

WND

Merger clearance in connection with acquisition by Weidmüller Holding AG & Co.KG of shares in Bosch Rexroth Monitoring Systems GmbH

Sytnyk & Partners represented Robert Bosch GmbH and Weidmüller Holding AG & Co.KG

WND

Merger clearance in connection with acquisition by Chervon North America, Inc. of assets in the form of a business division used for manufacturing and selling portable electric power tools, measuring tools and accessories from Robert Bosch Tool Corporation

Sytnyk & Partners represented Robert Bosch GmbH

WND

Merger clearance in connection with acquisition by Chervon B.V. of assets in the form of a business division used for manufacturing and selling of portable electric power tools, measuring tools and accessories from Skil Europe B.V. and Robert Bosch GmbH

Sytnyk & Partners represented Robert Bosch GmbH

WND

Merger clearance in connection with acquisition by Nanjing Chervon Industry Co., Ltd of assets from Bosch Power Tools (China) Ltd

Sytnyk & Partners represented Robert Bosch GmbH

WND

Merger clearance in connection with acquisition by JT International Holding B.V. of shares in La Tabacalera, S. A.

Sytnyk & Partners represented JT International Holding B.V.

24

WWW.UKRAINIANLAWFIRMS.COM


PRACTICE AREAS AND INDUSTRIES REVIEW Advertising & Marketing Agriculture Alternative Dispute Settlement Anti-Corruption Antitrust Assets Tracing Aviation Banking & Finance Banking Disputes Bankruptcy Business Crime Business Protection Business Immigration Commercial Law Competition Investigations Compliance Copyright Corporate Corporate Disputes Counterfeiting & Piracy Criminal Process Cross-Border Debt Recovery Cross-Border Debt Restructuring Customs Law Debt Restructuring Defense Due Diligence E-Commerce Energy Energy Efficiency Enforcement of Foreign Awards Enforcement Proceedings European Law Family Trusts FMCG Foreign Trade Government Relations

Infrastructure International Arbitration International Tax Internet Investments IT Law Labor & Employment Land Litigation Marine Insurance Maritime Law Mediation Medicine & Healthcare Mergers & Acquisitions Migration Law Patents Pharmaceuticals Ports and Marine Terminals Private Clients/ Wealth Management Private Equity Privatization Property Rights Public Private Partnerships Public Procurement Real Estate Regulatory Renewable Energy Sanctions Sports Law State Aid Tax Tax Controversy Telecommunications Trade Remedies Trademarks Transfer Pricing Transportation Unfair Competition


Advertising & Marketing

E-Advertising vs Intellectual Property: A Continuous Tug of War turn, the word “VelVeeda” is almost identical to the “Velveeta” trademark of Kraft Foods. The court recognized such usage as the violation of Lanham Act by commencing dilution of the trademark and banned Stuart Helm from using the word “VelVeeda” as the meta tag.

Tatiana KHAREBAVA

Veronika ZBRYZKA

Counsel, Head of IP, IT & Antitrust Practice, Spenser & Kauffmann

Associate of IP, IT & Antitrust Practice, Spenser & Kauffmann

owadays business, regardless of as size, small and large companies, are directly relevant to the Internet. Some of them use the Internet as a platform for advertisement, the others use it as a trading platform to sell their products and services. Every single day the range of tools and possibilities for Internet-promotion of business is becoming more and more expansive. In particular, among popular tools we can name contextual advertising (Google Ad— Words, Yandex.Direct), search promotion (SEO), social media marketing (SMM), meta tags, banner advertisement (pop-up, pop-under), hyperlinks (linking, framing) and others. All the e-promotion tools mentioned above have their functions and purposes. However, not all companies use the above tools in good faith. In particular, they aim “to increase recognition” using the reputation of a well-known company and applying means of individualization and IP objects of other companies, causing harm. Thus, there are many cases of violation of trademarks (hereinafter — TM), artistic, musical, literary rights and rights for geographical indications as well as cases of misuse of commercial and trade names, etc.

lar services as Google AdWords and Yandex. Direct. A new business usually chooses the names of already promoted brands when launching contextual advertisement. Thus, when users search something they see the website of unfair advertisers but not “original” websites of well-known brand owners. Thus, international practice considers application of the trademark of another company as a key word for advertisement of the product as violation of customers’ rights. Such application may mislead the customer and cause him/her to have doubts regarding the real manufacturer of the product (cases Interflora v Marks & Spencer, Bergspechte v Günter Guni). Meanwhile, owners of the platforms may be held liable only if they neither removed nor restricted access to “forbidden” key words after they had identified infringement of the trademark (case Louis Vuitton v Google).

N

Where on the Internet can Violated IP Rights be?

Contextual Advertisement Trademark rights are often violated in the contextual advertisement within such popu-

26

Meta Tags In addition, for the purposes of quick and cheap business marketing on the Internet, companies resort to the use of TM in the website structure, as meta tags. Thus, where the searched word coincides with the meta tags of the website, such website appears in the search results of the user, thereby increasing its search rating, which implies the profitability of the website as well. Accordingly, the dispute between Kraft Foods Holdings, Inc. v. Stuart Helm, who put the word “VelVeeda” as the meta tag of its website, may serve as an example of such usage. In

Banner Advertisement (pop-up and popunder) It is impossible not to mention banner advertisements (pop-up and popunder), which are well known to the ordinary user as annoying pop-ups and pictures, which often make it hard to “get” to the main content. In the vast majority of cases the infringement of IP rights happens where the TM is used as the keyword for the appearance of banner advertising. There are special services (Gator and Whenu.com) that analyze the search information of user and, accordingly to the requests of the user, show him an advertisement. For example, the user is looking for a Honda minibus but instead of this he gets the banner advertisement of the Dodge company with the same type of vehicle. Nevertheless, the courts are very scrupulous as to this category of cases, particularly in case of nonproving of damages caused to the company or non-proof of the use of the trademark as the search word for the banner advertisement, which misleads the users as to the possible connection between the claimant and its rival, the violation is deemed to be absent (1-800 Contacts Inc. v. WhenU.com). Hyperlinks (linking, hot linking, deep linking and framing) Hyperlinks to other websites with the possibility to borrow one’s content (linking, hot linking, deep linking and framing) are more complicated e-marketing mechanisms of business. In particular, deep linking (outer connection) is used to place a hyperlink on the website, which leads to a page from another website, while bypassing the main (starting) page. A hot linking instrument provides the opportunity to include in the content of the website pictures or other content of one’s website. Framing involves the creation of the so-called window of one website (frame) within which the content of the other website is being shown.

WWW.UKRAINIANLAWFIRMS.COM


Spenser & Kauffmann

S

Address: 7 Klovsky Uzviz, 14th Floor, Kyiv, 01021, Ukraine

penser & Kauffmann is one of the leading full-service law firms in Ukraine. Since its foundation in 2006, Spenser & Kauffmann aims to provide its сlients with the highest standards of legal advice and exemplary service. We represent our сlients in all areas of business law, including mergers and acquisitions, corporate, antitrust, intellectual property, IT, labor & employment, insurance law, banking and finance, capital

In the case of GS Media v. Sanoma (Playboy publisher), the European Court of Justice held that the placement of links to photos from the Playboy magazine by the news resource is violation of copyright law. In the case of Paramount Home Entertainment International Ltd & Ors v British Sky Broadcasting Ltd & Ors, which concerned framing in terms of e-commerce, the court stated that provision of access to films and TV shows through the in-built player is violation of copyright law. National Approach In this regard, it should be noted that such cases are now quite rare in the national jurisdiction. Thus, the vast majority of “e-proceedings” disputes are the “domain” disputes or disputes concerning the infringement of IP rights on the Internet. Such disputes include the case of Citibank v. Sphere-Capital, dispute between Exxon Mobil Corporation v. Ember Ukraine and others. However, even now, when setting out the circumstances of the case, plaintiffs often claim that respondents violate their rights when they place the advertising on the Internet. In example, in Sorbex v. Sorbent, the plaintiff pointed to violations of the rights to the trademark used by the defendant on Internet banners.

How to Protect IP Rights on the Internet?

According to the aforementioned, it is deemed that rival companies are likely to resort to different means of business marketing on the Internet; however, such marketing is not always bona fide and legitimate. In this regard, in order to minimize or protect the company from possible IP infringements, companies or private entrepreneurs need to check whether all IP objects are properly registered and, therefore, protected.

WWW.UKRAINIANLAWFIRMS.COM

Tel.:+380 44 288 8383; 288 6707 Fax: +380 44 351 21 55 E-mail: office@sklaw.com.ua Web-site: www.sklaw.com.ua

markets, construction, energy & natural resources, enforcement proceedings, private clients, tax consulting and litigation. Throughout the last ten years, our firm has been recognized among the leaders by various prestigious international and domestic rankings in different legal spheres. Our lawyers speak English, French, German and Czech, which allows us to understand and communicate with domestic and international сlients without psychological or language barriers.

In this way, the trademarks of companies shall be registered according to national and international procedure or the companies shall possess valid certificates. Trademarks can act as mere words, sentences, slogans, whether with drawings or not, pictures, or even melodies. In particular, if your ad contains some unique IP objects (for example, slogans), it is better to register such objects. In order to earn real market and legal advantage famous trademarks could also be acknowledged by the State Intellectual Property Service of Ukraine as well-known among customers of Ukraine. In addition, taking into account countless legal disputes regarding domain names, the registered TM should be the same as your domain name. Furthermore, in case of use of new technologies in advertising or modern business methods, those objects may be patented as the inventions or utility models. Meanwhile, the website interface could be protected as an industrial design and/or a copyright object. As a result, the more sophisticated and comprehensive the ways of protection that are chosen, the greater the advantages to ebusiness they would bring.

What to do if IP Rights have been Violated on the Internet?

Mechanisms for protection of IP rights and interests on the Internet are as follows: — Filing a complaint to Google/Yandex (or other search platform) regarding the unsanctioned usage of your company’s trademark as the keyword. — Filing the complaint to the advertiser in order to remove content that violates your IP rights. — Using notice and takedown measures (where possible). — Initiating court proceedings and/or proceedings on unfair competition with the Antimonopoly Committee of Ukraine.

Of course, each of these defense mechanisms has its advantages and disadvantages. Thus, in each case there must be analysis carried out as to which mechanism would be more effective if the infringement occurred.

How can you Avoid Becoming a Perpetrator Yourself?

Advertising is certainly an efficient way to influence the purchasing power of people. However, such effect on users leads to potential misuse and abuse while advertising a business online. That is why in many states advertising is tightly regulated so as to prevent unfair treatment and control of business. If the company starts advertising, it must comply with a number of laws and regulations that may differ as to the state and may even depend on the content of advertising. There are general issues that the company must consider while starting an advertising company on the Internet. That is, the issue of geographical indications (in particular, there is a need to carefully analyze whether such GI will not mislead users as to the origin of goods or services); other companies’ trademarks (need to check whether your company accidentally uses the TM of others); keywords (it is crucial not to infringe others rights to trademarks and, respectively, not to use them), copyright (there is a need to check whether in advertising the company uses others pictures, drawings, slogans, catchwords, etc.). Therefore, taking into account the growing popularity of the means of business marketing on the Internet in Ukraine, subsequent lawsuits connected to their usage are highly expected in the near future. Consequently, currently it is very important to protect your own IP rights properly and to get acquainted with international trends of judicial practice regarding such issues.

27


Agriculture

Ukrainian Land Market Land Not For Sale?

Mykola ORLOV Managing Partner, Law Offices of OMP

I

n Ukraine today there are very few topics that are as fierce as reform of the land market. Indeed, the mention of potential liberalization of the land market usually results in an outcry which can hardly be referred to as discussion in any sense of this word. Nonetheless, the number of landowners willing to sell their land is steadily increasing. Both society and politicians are growing tired of the issue of this long overdue reform and the injustice of the ban on the sale of privately held land. The international donors of Ukraine, particularly the IMF, are also getting impatient at the lack of progress on the issue of the land market. In view of looming land reform, it is important to understand current regulations and practice in the land market. This knowledge provides valuable insights into life after the introduction of free sale of land. Many a myth is ruined by reading what the land law says today. To give just one example, there is sufficient legal protection of tenants in the case of sale of leased land plots. Importantly, the transfer of agricultural land is attainable despite the moratorium. It is also crucial to understand which legal issues are to be addressed for the land market to start functioning properly. Absent thoughtful regulation, the long-awaited land market could turn into a land bubble. This might have a devastating effect on agribusiness rocked by wave after wave of land speculation. Lured by the prospect of quick enrichment, traders in land will try to get as much land as possible from whoever will be willing to sell it. One of the major obstacles will be farmers leasing the target land. Land encumbered with land lease would cost substantially less. Few investors will be happy to wait until the end of land lease and thus pay the full market price for temporarily unavailable land. It is not improbable that landowners will try to push tenants off their land plots just to fetch a higher price for it.

28

The Land Code of Ukraine provides for three types of agricultural lands which may not be sold by their legal owners. These include agricultural land formally designated for (i.e. the Moratorium): — commercial/commodity agriculture; and — private/individual agriculture and parceled from the land mass previously cultivated by state or collective farms; and — any agriculture use in case of stateowned or municipal land plots. According to official statistics, the Moratorium covers approximately 96% of Ukrainian arable lands, as follows: — up to 29.2M hectares (72.9M acres) of privately-owned agricultural land (of both commodity and individual designation); and — up to 10.5M hectares (25.9M acres) of state or municipally-owned agricultural land. Contrary to popular belief, not all agricultural land is subject to the Moratorium. Thus, the ever-growing body of land privatized by individuals (with a maximum area of 2 ha available under such procedure) is freely transferable under Ukrainian law.

Purchase Restrictions

The Moratorium set out by the Land Code effectively prohibits sale and purchase agreements, preliminary purchase agreements or any other instruments aimed at the disposal of land plots in future, i.e. in case of the Moratorium being lifted. The latter means that preliminary sale agreements, power of attorneys or other similar documents concluded prior to the lifting of the Moratorium may be deemed void ab initio under Ukrainian law. In addition, the Moratorium prohibits any change of the formal designation (allotment) of related land plots, thus, not allowing the pulling out a land plot out from the Moratorium’s limitations. At the same time, land pots under the Moratorium may be inherited, swapped or boughtout for public needs.

How to Buy Under a Moratorium

With the number of landlords willing to dispose of their land plots steadily growing, both agribusinesses and private investors are actively buying the land that is being offered. Indeed, the sale of land is on the rise. The Moratorium makes the parties look for creative forms of sidestepping it. Presently, there are two main strategies pursued by the parties willing to transfer land ownership: — long-term land use agreements:

— land lease agreements for the maximum allowed term of up to 50 years; and — emphyteusis agreements allowed under Ukrainian law without any limitation on the maximum period of land use (in contrast to land lease agreements). Emphyteuses are often concluded for a period of 100 to 500 years. Furthermore, Ukrainian law allows the sale (transfer) of the right of emphyteusis from one tenant to another without the consent of the land owner (freeholder). The above makes emphyteusis an effective substitute of land sale. — transfer of ownership (freehold) on the basis of land swap agreements. There is no clear cut regulation of such arrangements. However, the current market approach is to swap land plots, which are (i) located within the same district or municipality and (ii) designated for agricultural use, irrespective of the areas of the swapped land plots. Unfortunately, the Ukrainian authorities do not have any consistent policy in their treatment of the above arrangements. While they agree on the lawfulness of long-term land lease agreements, both emphyteuses and land swaps attract criticism on a regular basis. Furthermore, land swaps, which were once the most popular land transfer tool, were recently challenged by the Supreme Court of Ukraine. The court revised its previous case law on the basis of the more than creative interpretation of the statutory provisions regulating the Moratorium. The absence of watertight legal instruments for the transfer of land under the Moratorium mean that lifting the Moratorium appears to be the only viable response to the ever-growing number of landlords willing to sell their land plots.

Key Issues of Reform

More than a decade of debate around land market liberalization has crystalized the few issues which are essential to the proper functioning of the land market. These include the following: permitted buyers; maximum number of hectares which can be owned by one permitted buyer; minimum sale price; preemption rights (right of first refusal); restrictions on resale of land. Permitted Buyers. It is expected that the deal breaker for any parliamentary vote on the land market would be the issue of permitted buyers. The majority of Ukrainians have an irrational fear of foreigners buying all the land and evicting the locals. Consequently, it is widely believed that any land market reform will provide for at least an interim period of 5 or more years during which only Ukrainians will be able to buy and sell agricultural land. Of course, Parliament may at any later time

WWW.UKRAINIANLAWFIRMS.COM


OMP

L

Address: 79 Tarasivska Street, 4th Floor, Kyiv, 01033, Ukraine

aw office of OMP is one of the leading full-service legal advisors to agribusinesses in Ukraine. We are experienced in advising agricultural holdings and private landowners. Our specialists have been advising farms of different sizes and locations in all regions of Ukraine since 2005. We have audited over 2,000,000 hectares

recognize the need to permit the purchase of agricultural land by Ukrainian legal entities or foreign nationals. It appears quite likely that legal entities registered in Ukraine would also be included among the permitted buyers. However, there may be restrictions on the beneficial ownership of such entities. Restricting the right to purchase to Ukrainian nationals only has an additional benefit of limiting the cash flow in the land market. While there are many investment funds and private investors willing to buy agricultural land in Ukraine, few of those will be willing or even able to use Ukrainian nationals as a vehicle for such investment plans. This might prove beneficial at the start of land market reform and the market will be less overheated and so less likely to spin out of control. Ukrainian society is reluctant to grant foreign residents the right to own agricultural land. It is unlikely that such possibility will arise in the near future. Nonetheless, following the interim period when fears of the unknown land market subside, foreign ownership might well be ushered in. Land Bank Cap. The issue of permitted buyers goes hand in hand with the maximum land bank limitation. Although the latter is less controversial, the popular approach is to limit the land bank held by one individual or legal entity. For individuals, the suggested caps range from 100 to 1,200 ha, for legal entities from 500 to 10,000 ha. There is little theory behind any of the above limitations. As in the case of permitted buyers, it is highly likely that caps will be increased (at least for legal entities if they are ever to be allowed to buy agricultural land). Minimum Sale Price. The rationale behind the fixed minimum sale price is to protect unsophisticated landowners. It is believed that poor rural landowners might be pressed to sell their land plots substantially below their market value. While case studies do not always confirm this theory, the popular consensus is to include such protection. The problem with the minimum sale price is that it can substantially slow down (and even block) reform of the land market. Unfortunately, in such cases landowners will arguably suffer even more. Instead of being underpaid, they

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3001 E-mail: office@omp.ua Web-site: www.omp.ua

of agricultural land over the last several years. We have been involved in major M&A projects in the industry. Our experts have profound experience in supporting litigations and arbitrations involving agribusinesses, both in Ukraine and abroad, including LCIA arbitrations. OMP is active in both educational and GR support of agricultural producers.

will not be paid at all. While there are several approaches to setting a minimum sale price, it appears that the easiest and least subjective way is to use market valuation (as is the case with all real estate apart from land). Preemption Rights. In contrast to the previous issues, preemptive rights should protect the agribusiness more than landowners. If the land is to be put to its best use, then arguably those who work it properly should be the first to buy it. The owners of adjacent land plots or family members might have similar rights. While Ukrainian law provides for the right of first refusal of the lessee of the land plot, it is not clear whether such legal safeguards will survive after the start of land market reform. At the same time, their absence might have a major effect on agribusiness. Upon expiry of a land lease, there will no longer be any guarantee that the farmers working the land will be able to stay even if they are ready to match the highest bidder. This might also impact the ability of agribusiness to raise capital on public markets. Restriction on Resale. These provisions are introduced to control speculation on land. Their aim is to discourage any land purchase focused solely on subsequent resale. To that end, the law might provide for heavy taxation of proceeds from the resale of land. Often, the applicable rate during the first years after purchase might peak at 50%. The tax burden will decrease with every passing year, flattening out after 7-10 years of ownership.

What to Expect?

As many other Ukrainian reforms, liberalization of the land market is long overdue. It comes at a time when arable land is in short supply and in high demand. Even without a free land market, agricultural land is at the center of multiple conflicts between agribusinesses and landowners. The price of land lease has been steadily growing over the last 10 years. Currently, the medium term lease of prime agricultural land can easily fetch USD 800 to USD 1,500 per hectare. Freeing up the sale of agricultural land will further fuel the price of land and intensify the competition for it. Unless carefully managed and controlled, the land market could become as volatile and unpredictable as it was prior to 2008 (in the case of land for residential construction in

and around the city of Kyiv as well as major metropolitan or seaside areas in Ukraine). Given the unfettered influx of cash, land speculation would quickly overtake the market. Agribusiness is set to be hit most by land market reform. Farmers will have to decide whether they want or need to buy every land plot offered for sale by their landlords. This will create a massive drain on the finances of their businesses. (Various opinion polls indicate that around 20% — 30% of landowners are willing to sell their land as soon as the ban is lifted.) Unhappy or greedy landlords may try to force agribusinesses off their land. This creates a substantial business interruption risk and will require a swift and firm response from any agribusinesses that are affected. In the absence of sufficient protection from the law-enforcement agencies, private land wars might ensue. On the positive side, liberalization of the land market will improve land management. The land market will kickstart land aggregation with few landowners collecting all or the majority of the land plots in each village. Several years down the line, agribusinesses will have to deal with just several individual landowners, instead of thousands they have to keep happy at the moment. The land market would resolve or at least expedite resolution of several problems plaguing land management in Ukraine. Land aggregation will make it possible to lease whole fields without facing sabotage from the lessees of any interrupting land plots, which is currently often the case. Furthermore, contiguous land masses accumulated by individual landowners will also make any field roads redundant. The roads would be sold by the state, ending the years of controversy over their use and the relevant fiscal liabilities. Both the medium and long-term effects of land reform should be positive. More importantly, whatever the negative consequences, which there could be quite a few of, there appears to be no viable alternative to liberalization of the land market. Both land lease and any other forms of land use, outside of a free market, have proved unreliable in modern day Ukraine. The Moratorium, which has lasted for more than fifteen years, has demonstrated that its overall effect on land management has been largely negative.

29


Alternative Dispute Settlement

ADR Practice in Ukraine

Denys KOPII

Dmytro GOVORUN

Partner, TCM Group Ukraine

Commercial Director, TCM Group Ukraine

Roman SEMENETS

Yevhenii SHAMRAIENKO

Senior Associate, TCM Group Ukraine

Associate, TCM Group Ukraine

oing business is in many ways a game that is full of uncertainties and risks, making risk management in business a hot topic. Certainly, past experience urges us to mitigate possible risks through a well-drafted contract before engaging in a business relationship with a counter-party. However, this practice cannot guarantee by any means that the execution of the contract will go smoothly. This article provides some guidance on the ways to protect company’s interests and reduce commercial risks through the careful choice of a dispute resolution method. A relevant question one may ask is which legal instrument should be used to achieve better protection for a company. The conventional approach is to rely on state courts as a dispute resolution forum. Another option could be an arbitration clause in a commercial contract that would refer parties to an independent tribunal. Alternatively, the parties can choose mediation as a more flexible method that is aimed at preserving a working relationship between business partners. Finally, parties can opt for negotiations to

avoid unnecessary expenses and streamline settlement of a dispute. It is important, however, to compare the advantages and disadvantages of the techniques described above. As an effective dispute resolution method that is becoming more and more popular, arbitration may be quite costly. Moreover, engaging in this adversarial proceeding often makes it difficult for parties to settle a dispute on amicable terms. Mediation has proven to be one of the most efficient methods for companies to handle their disputes without damaging a fruitful business relationship with counterparties. Often, a conflict can be resolved by a skilled mediator who guides parties towards a compromise solution that is acceptable for everybody. Due to its remarkable efficiency, there are reasons to believe that mediation will be widely used by Ukrainian businesses in the near future. One more effective means to resolve commercial disputes are pre-trial negotiations. While at first glance this method appears to be relatively easy to use, in contrast to a more technical arbitral procedure and litigation, it actually requires a lot of skill. Often, stakes in

D

30

a dispute can be as high as ten or twenty percent of a company’s annual revenue. Therefore, businesses are strongly advised to retain professional negotiators with extensive practical experience to represent their interests. They will ensure that a company will be able to recover the majority of a disputed sum that can be used to pay salaries, interest to creditors, taxes, trade financing, etc. Let us consider in some greater detail the methods of alternative dispute resolution described above.

Arbitration

Ukraine is considered to be an arbitration-friendly jurisdiction. The legal framework regulating international commercial arbitration in Ukraine is set out by the Law of Ukraine On International Commercial Arbitration. Moreover, Ukraine is a member of the UN Convention on the Recognition and Enforcement of the Foreign Arbitral Awards. Therefore, provisions of the Convention that guarantee smooth enforcement of arbitral awards by state courts form a part of Ukrainian legislation. Moreover, arbitral awards that are issued in Ukraine can be recognized by courts of other members of the Convention through a simplified procedure. It should be noted, however, that while arbitration remains an efficient instrument for resolution of international commercial disputes, some commentators argue that it no longer meets all the essential needs of the modern business. They point at numerous formalities, similar to a certain degree to those of conventional litigation, that do not allow parties to quickly reach a compromise. Another important aspect is the cost of arbitration. For example, in an arbitral proceeding initiated before the International Arbitration Court at the Ukrainian Chamber of Commerce and Industry, a party is expected to pay more than USD 6,000 in arbitration fees, when a disputed amount in a commercial dispute is about USD 105,000.00. However, the overall cost of a proceeding may easily exceed 10% of the disputed sum, when legal fees paid to parties’ counsel and other related expenses are taken into account. Moreover, obtaining a favorable arbitral award does not guarantee that a company will automatically recover its money. The company can easily double its arbitration-related expenses if the losing party starts opposing enforcement of the award.

Mediation

The procedure of negotiations with involvement of independent mediators is

WWW.UKRAINIANLAWFIRMS.COM


TCM Group Ukraine

Address: 10A Vozdvyzhenska Street, Kyiv, 04071, Ukraine

T

CM Group Ukraine is the Ukrainian office of TCM Group International Ltd., which is a unique alliance of 35 law offices and 110 agencies, practicing international commercial dispute resolution in a total of 145 countries. TCM Group International was established in 1987 and since 2014 has been represented in Ukraine through its office in Kyiv, providing Ukrainian clients with a unique opportunity to access its offices worldwide. At the same time, TCM Group Ukraine represents all foreign offices of TCM Group International in international dispute resolution in Ukraine, building on the Group’s knowledge and exper-

widely used across the globe. Following the successful experience in foreign countries, Ukrainian enterprises start relying more and more on mediation. Besides, it is possible that this method of dispute settlement will be formally regulated by Ukrainian legislation in the near future. However, mediation is far from being ideal for all types of disputes because it is based on the will of the parties to find a mutually acceptable solution. If one of the parties is not willing to cooperate, the mediator has no inherent powers to resolve the dispute independently. Over the past year, no significant changes were introduced to Ukrainian legislation in the area of alternative dispute resolution despite active discussions in the expert community. On 1 November 2016, the Draft Law of Ukraine No. 3665 On Mediation was adopted in the first reading. This Draft Law has a potential to introduce significant changes into regulation of pre-trial settlement of disputes in Ukraine. It should be noted that Draft Law No. 3665 neither sets specific deadlines for mediation, nor obliges participants to comply with any bureaucratic procedures. The advantage of such an approach is that some of the most complex commercial disputes could be resolved in a relatively short period of time, as parties and mediators would be free from excessive formalities installed by law. However, one controversial issue in the bill is the optional nature of mediation clauses. This means that parties could ignore the agreement to settle disputes through mediation and apply directly to courts. We believe that this provision could potentially hinder the overall efficiency of mediation in Ukraine because parties, after consenting to mediation, could skip this procedure altogether. While the Ukrainian market is only starting to understand the benefits of mediation, some law firms with established international

WWW.UKRAINIANLAWFIRMS.COM

tise in the following areas: international commercial litigation and arbitration, negotiations and mediations, international commercial debt collection, recognition and enforcement of foreign judgments and arbitral awards, and bankruptcy proceedings. TCM Group offices: Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Netherlands, Norway, Poland, Russian Federation, South Africa, South Korea, Sweden, Switzerland, Ukraine, United States of America.

practices are already providing first-class mediation services. The quality of services is guaranteed by codes of conduct and general corporate culture of these law firms.

Negotiations

Tel.: +38 044 228 1338 E-mail: info@tcm.com.ua Web-site: www.tcm.com.ua

Companies can retain professional negotiators as their representatives in commercial disputes. As a rule, the most effective negotiators are attorneys that possess extensive experience in alternative dispute resolution. While guiding the parties to a mutually acceptable solution, they make sure that the interests of their client are protected to the highest degree possible. The advantages of retaining an experienced attorney as a negotiator include, among others, knowledge of local law and languages, wide network of contacts, access to restricted information about the other party and excellent communication skills. As an example, we have successfully represented a client from Hungary that supplies agricultural machinery, in a multi-million dispute over unpaid invoices for delivered machinery to a group of Ukrainian companies. In cooperation with our Hungarian colleagues, we have provided the client with legal advice on applicable law and negotiated on his behalf an amicable settlement of the dispute, as well as the conditions of future agreements with the Ukrainian counterparty and with the state authorities. As a result, we helped the client to avoid lengthy and expensive litigation in state courts and ensured favorable settlement of the dispute. Moreover, we conducted the negotiations on a success fee basis, making them a risk-free option for our client. As each dispute is different, lawyers are often required to think “out of the box”. This is exactly what our international team has achieved in negotiations, where we represented a client from Germany who had an unresolved dispute with a business partner established in a CIS country. In this dispute, the

debtor failed to respect the conditions of the export agreement that eventually led to overdue payments for more than a year. Our attorneys organized personal meetings with the debtor that allowed reaching a complex settlement agreement. First, the debtor agreed to partially pay the debt from its associated assets that we managed to identify. Moreover, our lawyers secured payments from Chinese partners of the debtor that agreed to pay the remaining part of the debt. One of the biggest advantages of resolving commercial disputes through negotiations is that they often lead to further cooperation among partners after a dispute is settled and new agreements are signed. Our practice shows that when an experienced legal adviser controls the implementation of settlement agreements, the risk of them being breached is quite low. This allows the parties to re-establish their business relationship in a win-win manner and build up confidence in each other. Entrusting cases similar to those mentioned above to professional negotiators has many advantages: the client does not spend time on negotiations, factual analysis or legal research; negotiations are conducted by professional lawyers who are specialists in the matter and know how to protect a client’s interests in the best way possible; all information shared by the parties during negotiations is protected; reputation and business relationship between the parties are restored, etc.

Conclusion

The methods of alternative dispute resolution described above often provide more benefit to companies than conventional litigation, such as cost efficiency and possibility of preserving a fruitful relationship with a business partner. We expect that in the near future, following the necessary reform of Ukrainian legislation, these methods will become even more popular in Ukraine.

31


Anti-Corruption

Top Management’s Role in Creating Effective Corporate Anti-Corruption Compliance

Volodymyr MONASTYRSKYY

Igor SVITLYK

Partner, Dentons

Associate, Dentons

op managers in Ukrainian companies are������������� ������������ actively involved in many internal processes to keep businesses running well, but not many of them pay noticeable attention to anti-corruption compliance matters. However, some important developments which occurred within the last few years may drastically change this state of affairs. Firstly, the U.S. authorities have begun active investigation and prosecution of foreign companies allegedly involved in bribery of public officials abroad. Ukraine is now on the radar of these authorities, which has already led to several investigations and multimillion dollar fines. Secondly, the Ukrainian Parliament has adopted the new anti-corruption law establishing requirements for the private sector in the field of corruption prevention with specific measures to be implemented. For more details, please refer to our article in the 2016 edition of this journal. Thirdly, three new authorities responsible for corruption prevention (National Agency on Prevention of Corruption), investigation (National Anti-Corruption Bureau) and prosecution (Specialized Anti-Corruption Prosecutor’s Office) have been established. The National Anti-Corruption Bureau has already made it clear that, despite being focused mainly on public corruption, it intends to investigate corruption offences in the private sector too. As a result of these developments, many CEOs are now starting to take anti-corruption

compliance more seriously. However, leadership in some companies still considers compliance policy and related instruments merely a formal process as a pre-condition to participation in public procurement, or a tool needed to have a good appearance in front of its international business partners. Once employees notice such an attitude, it will be extremely hard to convince them that compliance does matter. The compliance process in such companies usually ends up with a so-called “paper compliance”, when one has policies and procedures in place but they are not enforced as neither the CEO nor employees care. It’s not surprising that such “paper compliance” does little, if anything, for real prevention of corruption and potentially may result in very unfortunate consequences for the company. The main reason for that, as we strongly believe, would be the lack of real commitment from the top management to prevent and counteract corruption in company’s activities or, in other words, lack of the right “tone at the top”. The purpose of this publication is to provide a short guidance on how the “tone at the top” should and should not look like and what needs to be done to ensure that the word “compliance” is filled in with real meaning. We hope that the overview below can be used as a reference point for executives which are still determining its approach to the discussed matter.

T

32

What is the “Tone at the Top”?

Do not look for regulation of the “tone at the top” in Ukrainian laws, you will not find

it there. The current Prevention of Corruption Law only mentions that (i) the CEO shall ensure regular assessment of corruption risks and undertake appropriate measures, and (ii) company’s officers shall refrain from behavior that could be interpreted as readiness to commit violation. However, these requirements do not encourage management to set the tone for effective compliance in a proactive way. In our view, the “Tone at the Top” is an expressly declared position of the top management of zero tolerance to corruption in the course of business, as well as visible and consistent commitment to compliance with law and procedures, as continuously demonstrated both internally and publicly. We would distinguish the following key requisites of a CEO’s behavior which, in our view, constitute in unison the right “Tone at the Top”: — it should be visible, so every company’s employee can say that he or she is completely aware of the management’s explicit stance on corruption and compliance with respective laws. As very well said in the Resource Guide to the U.S. Foreign Corrupt Practices Act1, managers and employees always take cues from their leaders; — it should be consistent, so no actions contrary to the previously declared zero tolerance to corruption may be undertaken on any corporate level; — it should be demonstrated���������� on ��������� a continuous basis, rather than once a year at the CEO’s annual speech to employees; and — it should be communicated internally across the company and externally to the company’s partners and the general public.

Why is “Tone at the Top” a Key Element of the Effective Compliance System?

Cynthia Glassman, Commissioner of U.S. Securities and Exchange Commission, concluded her speech2 before the U.S. business community in 2003 with the remark that the ultimate effectiveness of the compliance prohttps://www.justice.gov/sites/default/files/ criminal-fraud/legacy/2015/01/16/guide.pdf 2 https://www.sec.gov/news/speech/ spch040703cag.htm 1

WWW.UKRAINIANLAWFIRMS.COM


Dentons

D

Address: 49-A Volodymyrska Street, Kyiv, 01001, Ukraine

entons is the world’s largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global Elite Brand Index, a BTI Client Service 30 Award winner and recognized by prominent business and legal publications for its innovations in client service, including founding Nextlaw Labs and the Nextlaw Global Referral Network. Dentons’ polycentric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work. Dentons will help you understand and navigate the complexities of the market. Work with us to help you manage the prevailing economic conditions and understand new reforms in Ukraine. Tap into a pool of lawyers that have

cedures will be determined by the tone at the top: “Adopting a code of ethics means little if the company’s chief executive officer or its directors make clear, by conduct or otherwise, that the code’s provisions do not apply to them.” Indeed, even if the company retains an outside counsel to develop and implement the best possible compliance policy and practices, such instruments may be useless if employees are aware of the management applying them selectively and leaving room for exceptions. Therefore, the “Tone at the Top” should always be considered as a fundamental ingredient, helping to achieve an effective compliance system.

Right and Wrong “Tone at the Top”

As mentioned above, the “Tone at the Top” is conveyed through the actions of the company’s management. Let us cast a look at some practical examples. Bad Practices Making exceptions for yourself. We have been asked by our client to develop and implement a compliance policy and thereafter deliver a practical training for employees to familiarize them with the implemented instruments. The presentation was held in Ukrainian (while the CEO had no knowledge of Ukrainian at all) and the place of training was close to the location of military actions. The CEO nevertheless decided to participate and brought the translator with him to follow the topic. By doing this the CEO showed

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 494 4774 Fax: +380 44 494 1991 E-mail: tetiana.babinska@dentons.com Web-site: www.dentons.com

been serving foreign companies and their local subsidiaries for the last 25 years, ever since Ukraine began attracting foreign investment in the 1990s. With Dentons, you benefit from a partnership that enables you to identify and resolve risks at the earliest possible stage. Dentons provides intuitive thinking to spot commercial opportunities and resolve your problems. Let our Ukrainian and Western lawyers advise you on doing business, from setting up branches to debt and corporate restructuring, from employment to dispute resolution matters. When you are looking for assistance on international matters, you can draw upon our global team to give you cross-border, sophisticated solutions. Let Dentons make your business run more smoothly.

that he did not consider himself an exception. Compliance matters are handled only by lawyers or compliance personnel, while the CEO’s engagement is limited to annual presentation or email communication. Management very often believes that compliance matters are only the responsibility of legal and compliance staff. However, such an approach lacks the behavioral requirement mentioned above — visible and continuously demonstrated commitment by its leadership towards compliance. Practicing double talk. In the infamous Wells Fargo case, senior management established unrealistic sales targets, which, as employees reported, they could not meet without violating the company’s policies. Then, in spite of the declared commitment to compliance, the company’s officers ordered the monitoring of the internal hotline and to pass information on whistleblowers to management. As a result, instead of protecting employees who reported offences, the company was keeping an eye on whistleblowers and subsequently dismissed them on some flimsy grounds. Keeping compliance violations and disciplinary measures in secret. Information on compliance violations is usually very sensitive. However, keeping it under the table may cause harm in the long-term perspective. If the information becomes known from sources other than management, employees may start questioning the leaders’ attitude towards compliance violations and declared corporate values in general.

Good Practices Demonstrating openness to dialogue. The management should not only spell out compliance expectations to employees, but also be ready to talk. Avoiding dialogue on compliance matters and forwarding respective requests entirely to lawyers or compliance officers may send out the wrong signal. Encouraging ethical behavior. A good move from the CEO would be including compliance performance indicators into the annual employee performance reviews. Communicating compliance commitment to internal and external stakeholders. The management should clearly articulate internally and, very importantly, externally to the company’s partners that compliance is one of the core values of the company, rather than that just corporate formalities or paperwork need to be done.

Bottom Line

Before conveying the compliance value to employees, the management should first believe that it is an essential tool for any modern company willing to build a successful and sustainable business. Otherwise, the company may end up with formal compliance incentivized by the fear of punishment rather than by encouragement. Such type of compliance has a much higher risk for exposure. Once the intention is set, it is up to the management whether to apply the discussed approaches or to find its own way in setting the right “Tone at the Top”. But the benefits from creating effective corporate anti-corruption compliance are definitely worth the effort.

33


Antitrust

Supply Chain and Antitrust Risks: Recent Trends in Ukrainian Competition Law

Timur BONDARYEV Managing Partner, ARZINGER

C

ooperation between manufacturers and legally independent distributors in a single supply chain is widespread due to its cost effectiveness. The latter is based on the combination of distributors’ sales experience at the local level, the existing infrastructure and the orientation in the national standards of doing business, etc. Consequently, on the one hand, such partnership minimizes a great number of commercial risks for manufacturers but, on the other hand, it entails legal ones. In particular, the independence of parties to agreements in a single supply chain (so-called vertical agreements) gives reason for competition authorities to analyze such agreements in terms of their impact on competition.

Legal Regulation and Enforcement: Current Trends of 2016

Legislative regulation of vertical agreements in competition law did not change in 2016. As before, the Law of Ukraine On the Protection of Economic Competition, contains a general prohibition of anticompetitive concerted actions that have led or may lead to preventing, eliminating or restricting competition. This prohibition applies to vertical agreements as well as to horizontal ones in general. However, in order to apply such a prohibition to vertical agreements, the competition authority should prove the existence of anti-competitive effects.

34

It is worth noting that the Ukrainian competition authority (the AMCU) has not yet clarified its approaches to the analysis of vertical agreements and applicable restrictions. Nevertheless, the need for detailed regulation of this issue is evident. The comparably scarce enforcement experience in this area shows that neither the national authority nor businesses fully understand how vertical agreements can impact competition. At the same time, the adoption of the mentioned clarifications is Ukraine’s obligation under the Association Agreement between the European Union and its member states, of one side, and Ukraine, of other side, to implement the Commission Regulation (EC) No.330/2010 of 20 April 2010 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. A positive trend is the competition authority’s public statement that the project has already been launched. Thus, a business will be able to submit its comments soon, but, for the time being, it should start learning to analyze and anticipate the possible antitrust risks of terms and conditions without waiting for the competition authority to provide its official stance. After all, the authority does not intend to focus solely on rule-making, but will actively perform its most important function — control over compliance with the applicable competition laws.

Red Flags in Goods Supply Business Practices from the AMCU’s Viewpoint

In 2016, the AMCU evaluated supply contracts between exclusive importers (Ukrainian subsidiaries of major pharmaceutical manufacturers) and local distributors of medicinal products for the first time in the history of Ukrainian antitrust enforcement. Through its two decisions taken in respect of Alcon Ukraine and Servier Ukraine Ltd. and their distributors, the AMCU has actually started summing up a large-scale investigation into the Ukrainian market of medicinal products initiated back in 2011. These decisions are expected to be followed by others, as the AMCU keeps investigating a number of other analogous cases.

The importance of the AMCU’s decisions for the pharmaceutical market as well as for other markets where trade is organized in a similar way can hardly be overstated. We can already say that companies at least in the supply chain of electronics and digital technology, automotive, food, cosmetics and household chemicals are already in the sights of the competition authority. In fact, companies should consider the authority’s findings in the mentioned cases as a starting point for analyzing their own business practices.

What Practices Can, in the AMCU’s Opinion, Have a Negative Effect on Competition?

1. Exclusive import and ban on export (reexport) If there is substantial market power, the AMCU considers establishing a model of exclusive import through a single subsidiary while prohibiting export (re-export) by its distributors as an attempt to gain control over the market. Following the AMCU’s logic, exclusive importers, together with distributors, are able to control the volumes of goods on the market and, thus, the prices along the entire supply chain, right up to the prices for end consumers. 2. Distributors’ reporting In its decisions, the AMCU points out that the provision of reports by distributors on product movement allows parties to agreements to further control the directions and volumes of goods supplied. The exclusive import model, export (re-export) restrictions and implementation of reporting mechanisms in the presence of market power are regarded by the AMCU as an integral tool resulting in the overall control of trade flows and saturation of demand and supply. 3. Discounts and bonuses The AMCU may regard purchase price discounts, bonuses for meeting certain additional conditions (e.g. maintaining inventories of products in warehouses, meeting procurement targets, early payments, etc.) as an anti-competitive mechanism. The competition authority is especially concerned by sales promotion tools, which are different for single distributors or specific/unique for

WWW.UKRAINIANLAWFIRMS.COM


Arzinger

A

Address: Senator Business Center, 32/2 Moskovska Street, 10th Floor, Kyiv, 01010, Ukraine

rzinger is an independent law firm headquartered in Kyiv which has regional offices in Western and Southern Ukraine, in Lviv and Odesa, respectively. Arzinger has for over 14 years been among the legal business leaders providing high-quality legal support to clients throughout Ukraine. Among the firm’s many clients are top representatives of international and local business. Arzinger follows high standards of legal services and is a reliable partner in view of its great experience in a wide range of industries and legal practices: M&A, corporate law, real estate and construction, antitrust and competition, litigation and arbitration, tax, banking & finance. We serve clients operating in the financial services, energy, mining and natural resources, pharmaceuticals, food & beverages, investment banking and corporate finance, telecommunications, retail & leisure, hospitality, aviation and automotive, agriculture, insurance, and infrastructure & transport industries.

a single or group of distributors. Such conditions can discriminate against other distributors, thereby creating unequal conditions for competition at the relevant trading levels in the supply chain. According to the AMCU, specific discounts/bonuses in distribution channels lead to the existence of a “nominal” (contractual) price as the basis for calculating customs duties or trade margins and a “real” price including the discounts/bonuses mentioned above. 4. Unreasonably high prices of goods To sum up, the above contractual relations between exclusive importers and distributors in the presence of significant market power eventually created conditions for economically unjustified price increases for the end consumer.

AMCU’s Further Steps — What Businesses Should do to Avoid or Minimize Antitrust Risks

The AMCU’s existing practice in respect of vertical agreements can certainly not be considered impeccable, as some of its findings remain highly questionable for both the business and legal community. But should we really refer all the unanswered questions solely to the AMCU? We have to admit that the practice of the world’s leading competition authorities regarding this type of cases is largely controversial in general and often lends itself to criticism. It is obvious that the problem lies in the complexity of vertical agreements as economic ties per se, the

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 5533 Fax. +380 44 390 5540 E-mail: mail@arzinger.ua Web-site: www.arzinger.ua

Arzinger employs highly-qualified professionals with vast hands-on experience in a wide range of legal matters, deep knowledge and understanding of the local market, international education and background. The firm has a team of over 70 seasoned legal professionals led by 8 partners. All of them are acknowledged among leading experts on the Ukrainian legal market and are recognized by reputable international and local rankings. As a result, Arzinger can offer extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters. The firm renders tailor-made legal services of unsurpassed quality to meet the client’s expectations. Arzinger cooperates closely with legal advisors from numerous jurisdictions and is a member of international professional organizations, enabling it to engage colleagues from various jurisdictions in cross-border transactions and so provide clients with top-level professional legal advice.

line between their pro-competitive and anticompetitive effects often being quite a thin one. At the same time, the further movement of the competition authority towards developing the practical assessment of vertical restraints looks quite unique. Together with the complexity of the problem, possible liability of companies for the violations committed not only by company executives but also by authorized persons, who take management decisions (for instance, decisions on cooperation), increases antimonopoly risks. This fact is confirmed by the practice of the competition authorities. Thus, all these circumstances cumulatively entail the necessity for companies to unify its internal procedures in accordance with the requirements of antitrust laws. Practice shows that only implementation of internal programs and strict performance of their provisions can guarantee the company lower risks of receiving fines for their activity. The AMCU has made it clear that a particular business practice should be justified by economic considerations and, at the same time, should satisfy the interests of end consumers (a must!). Therefore, companies should review the terms of cooperation with partners carefully and apply a comprehensive approach to the issue of both commercial and anti-trust substantiation of certain terms of contracts. In order to prevent antitrust risks manufacturers should develop internal documents for regulating selection of commercial partners (distributors and/or retailers) as well as the main commercial conditions of coop-

eration with them. Such documents may be implemented in various legal forms: commercial policies, programs, internal rules, etc. These internal documents may vary depending on the business areas, though there are some general principles applicable to all of them. The non-discriminatory principle should be singled out as the first one. It means that commercial conditions should be equivalent to all business partners only if there is an economic justification for different conditions. Such economic justification may include the existence of various purchasing volumes, marketing activities, storage and logistics facilities, etc. Special attention should be paid to the giving of discounts and bonuses. The main rule regarding discounts and bonuses is avoidance of distortion of competition between commercial partners operating on the same market. Similar to implementation of commercial conditions, there should be economically justified approaches to the provision of discounts and bonuses. In some cases the development and implementation of the mentioned internal documents require a lot of effort and resources from the companies. Moreover, the enlisting of qualified lawyers to this process may be considered as highly recommended. These efforts are reasonable, since they help to develop a defence strategy for the case of possible dialogue with the competition authority and significantly mitigate the risks of antitrust violations with imposition of a fine in the amount up to 10% of a company’s annual turnover.

35


Assets Tracing

Assets Tracing

Assistance to Foreign and International Tribunals

First of all, we would also like to mention the unique opportunity we have encountered in our practice regarding the United States. In 2016, we acquired an order from the United States Southern District Court of New York granting discovery under 28 U.S.C. section 1782, “Assistance to foreign and international tribunals and to litigants before such tribunals”. This is a federal statute that allows a party to a legal proceeding outside the United States to apply to an American court to obtain evidence for use in a non-US proceeding. This opportunity should be also considered when dealing with international litigation.

Volodymyr BOGATYR PhD in Law, Senior Partner, BOGATYR & PARTNERS. Foreign Lawyer in Russia and Poland

T

he legal team of BOGATYR & PARTNERS supports clients in international court cases in countries such as the United Kingdom, Cyprus, Switzerland, Liechtenstein and others in order to protect their interests. We have also succeeded in acquiring refugee status for our clients in a number of different jurisdictions and have represented clients in institutions such as Interpol and the European Court of Human Rights.

Applying the New York Convention

We would like to draw the attention of our foreign colleagues to the practice of use of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in Ukraine. Foreign arbitration awards are generally easier to enforce in Ukraine than foreign court decisions, as Ukraine is a signatory to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards.

A foreign arbitral award will be recognised as binding and can be enforced provided that the appropriate motion is filed with the competent Ukrainian court, unless the losing party proves that: (1) the agreement to arbitrate is invalid under the chosen law; (2) one of the parties was legally incapable of entering into the arbitration agreement; (3) the losing party was not duly notified of the appointment of the arbitrator or the commencement of the arbitration proceedings; (4) the losing party could not submit its explanations for valid reasons; (5) the arbitration award rendered was beyond the scope of the arbitration agreement; (6) the arbitration panel or procedure did not comply with the arbitration agreement or with the rules of the place of arbitration; or (7) the arbitration award did not come into force or was annulled or its execution was suspended by the court of the country under which the laws of the arbitration award were rendered. Similarly, the arbitration award may be unenforceable in Ukraine if a Ukrainian court determines that either the object of the dispute cannot be subject to arbitration under Denied to initiate proceedings/ to satisfy the claim/ motion, complaint/ orders not executed

Order issued (canceled) /proceedings initiated/ the claim/ motion, complaint satisfied/ orders executed

In total

Reviewed (total)

Returned

Left without consideration

2014 Motion for recognition and enforcement of foreign judgment, that have to be coercively enforced

683

604

10

129

82

350

2015 Motion for recognition and enforcement of foreign judgment, that have to be coercively enforced

611

480

113

60

32

2014 Motion for recognition of foreign judgment, that does not have to be coercively enforced

71

60

19

7

267

2015 Motion for recognition of foreign judgment, that does not have to be coercively enforced

71

58

11

10

32

4

Left without consideration by the beginning of the review period

Reviewed (total)

Returned

2016 Motion for recognition and enforcement of foreign judgment

3

11

Motion for recognition and enforcement of judgement of International Courts

2

1

Requests

36

Fulfilled

Reviewed with violation of the time period established by the Criminal Procedural Code

Left without consideration by the end of review period

1

7

-

3

-

1

-

1

WWW.UKRAINIANLAWFIRMS.COM


BOGATYR & PARTNERS

B

Address: 32/34 Shovkovychna Street, Office 24, Kyiv, 01024, Ukraine

OGATYR & PARTNERS represented both corporate clients and individuals in a wide variety of matters, including fraud claims, white collar matters, challenging sanctions, assets tracing, post M&A disputes, partnership and joint venture disputes and have also provided advice on contractual and insolvency matters as well as issues relating to the enforcement and recognition of judgments in Ukraine and abroad. During this year the firm successfully challenged Interpol Red notices aimed at its international clients and has assisted in the granting of foreign refugee status. The firm has also obtained court orders against extradition from Cyprus and the UK.

Ukrainian legislation or that the recognition and enforcement of such arbitral award contradicts public policy. Thus, if court proceedings in Ukraine are not the case in a dispute between the same parties on the same subject and on the same grounds, the presentation of a foreign court for recognition in Ukraine is not satisfied, the application for cancellation of the award matter of the dispute by the laws of Ukraine shall be subject to judicial review, and the recognition of the said decision does not threaten the interests of Ukraine, then a foreign judgment may be enforced in the territory of Ukraine on the principle of reciprocity (ad hoc). We have also acquired data for Criminal Cases in 2016.

Dealing with Interpol Red Notices

Talking of international litigation, we have to take Interpol into account, since our recent practice shows that the number of Ukrainian citizens being subjected to Interpol Notices has increased. It’s important to keep in mind that quite often in the process of international litigation, especially in cases where Governments are involved, one might find that an Interpol Notice was issued of by the National Central Bureau (NCB) one’s own country. Interpol notices are international requests for cooperation or alerts allowing police in member countries to share critical crime-related information. There are several types of notices: Red, Blue, Green and others. In the case of Red Notices, the persons concerned are wanted by national jurisdictions for prosecution or to serve a sentence based on an arrest warrant or court decision. Interpol’s role is to assist the national police forces in identifying and locating these persons with a view to their arrest and extradition or a similar lawful action.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 363 7722 E-mail: volodymyr@bogatyr.kiev.ua Web-site: www.bogatyr.com

BOGATYR & PARTNERS are also very actively involved in the process of developing arbitration and intellectual property law in Ukraine and had experience in cross-border disputes. The firm also cooperated closely with a range of legal advisors and investigators from the United States, the United Kingdom, Cyprus, Switzerland, France, Austria, Lichtenstein and other jurisdictions. Moreover, BOGATYR & PARTNERS have created a precedent of recognition and enforcement of judgments by the High Court of Justice in Ukraine. Besides, the firm also had experience of supporting clients facing international criminal charges.

If we look at this issue from one’s point of view, this would de facto mean that you will find it almost impossible to travel between the borders of different countries. You might be subject to arrest following extradition to the country which has requested for the Red Notice to be released. In most cases, we offer our clients a procedure consisting of a number of stages. After receiving the required documents and having signed the Engagement Letter we move on to draft a letter requesting access to files related to our client that are stored in Interpol’s files, addressed to the Commission for the Control of Interpol Files, residing in Lyon, France. At the same time, we write a request to the Interpol NCB of the country which presumably issued the diffusion letter, in order to clarify the details. Thus, we act at both International and National levels. When writing requests addressed to the Commission for the Control of Interpol Files a strict procedure has to be followed for the request to be admissible. It is very advisable that you study Interpol’s Constitution and other documents regulating its activity in order for your request to be successful, as it’s no great surprise that you have to appeal with direct reference to these documents. It is important to keep in mind that the process of communicating with Interpol is a long-term one. The timeframe for a response to a request for access to data consists of four months from the date on which the request was declared admissible, while for a request regarding correction and/or deletion of data it is within nine months from the date on which the request was declared admissible. After we have received an answer from the Commission as to whether our client is subject to a Red Notice, we move on to the next stage. If our client is subject to the Red Notice we begin drafting a request for deletion of

data related to our client, which is stored in Interpol’s files. This process usually takes time, since we have to collect and be ready to present a number of solid arguments for our case. In case our client is not subject to any notice, but believes that he will be in future, we propose to act in advance, by writing a request to Interpol so as to warn of future requests coming from law-enforcement bodies. By doing this the chances are high that these requests will be stopped for investigation prior to their publication. If the end result is successful, Interpol is obliged to remove any information it has on the person in question and inform all National Central Bureaus of this. It should also be stressed that the Parliamentary Assembly of the Council of Europe recently released a Resolution 2161 (2017) with regard to the abusive use of the Interpol system. It states that: “in a number of cases in recent years, Interpol and its Red Notice system has been abused by some member states in the pursuit of political objectives, in order to repress the freedom of expression or to persecute members of the political opposition beyond their borders.” It cannot be stressed enough as to how vital it is to study recent cases regarding this issue in order to successfully achieve the desired result when challenging an Interpol Red Notice.

Conclusion

The legal team at BOGATYR & PARTNERS has huge experience of protecting clients’ interests on both the national and international level. We cooperate with a range of foreign partners and agencies around the world in order to provide our clients with the full spectrum of solutions. We ensure that we stay up to date in order to provide the most innovative ways in battling crime and protecting the rule of law.

37


Aviation

Air Passenger Rights

Ievgenii GONCHARENKO Lawyer, ECOVIS Bondar & Bondar

T

he Constitution of Ukraine, the rules of which are directly applicable, establishes that the protection of human rights is the main duty of the state. In order to fulfill the above-mentioned obligation legislators adopted a number of legal acts that should ensure the proper and effective regulation of consumer rights, including in the course of air transportation. In particular, on 19 May 2011 the Verkhovna Rada of Ukraine adopted a new Air Code, which is currently the major law regulating the aviation industry in Ukraine, including issues regarding protecting passengers rights. Besides that, for the purpose of bringing national legislation into line with international standards pertaining to ensuring passengers’ rights, on 17 December 2008 the Law of Ukraine On Accession of Ukraine to the Convention for the Unification of Certain Rules for International Carriage by Air was enacted. It should be noted that the Convention for the Unification of Certain Rules for International Carriage by Air signed in Montreal on 28 May 1999 (hereinafter — the Montreal Convention) was adopted in order to enhance the legal regulation of international carriage by air and eliminate legal regulation gaps which were not eliminated by the Convention for the Unification of Certain Rules Relating to International Carriage by Air signed on 12 October 1929 (hereinafter — the Warsaw Convention, ratified by the Ukrainian SSR on 14 August 1959, record number 995-181). The Montreal Convention establishes the following major passenger rights in the course of transportation air: — the right of a passenger to compensation for any physical injury caused; — the right to compensation in case of death of a passenger;

38

— the right to compensation for damage caused in case of destruction, loss, or damage of checked-in baggage; — the right to compensation for damage caused by delay in transportation of passengers or checked in baggage; It is noteworthy that the Montreal Convention provides for a two-tier system of the carrier’s liability for damage caused by the death or physical injury of a passenger. The first tier concerns the objective liability in the amount up to 100,000 special drawing rights (at the moment 1 special drawing right amounts to approximately EUR 1.25) per each passenger regardless of the carrier’s fault. The second tier is based on the presumption of the carrier’s guilt and does not provide for any limitation on the carrier’s liability. Regarding the second tier, the carrier can avoid liability only if it proves that the death or physical injuries of a passenger were not caused through its fault. In addition to the aforesaid regulatory acts, passengers’ rights in the course of transportation air are regulated by the Rules of Air Carriage of Passengers and Baggage approved by Order No. 735 of 30 November 2012 issued by the Ministry of Infrastructure of Ukraine (hereinafter — the Rules of Air Carriage of Passengers and Baggage) and the Law of Ukraine On the Protection of Consumers’ Rights (except for issues regulated under the Air Code of Ukraine, the Rules of Air Carriage of Passengers and Baggage, international treaties of Ukraine). As we can see, quite a lot of attention is paid by the current legislation of Ukraine to the legal regulation of passengers’ rights in the course of air transportation.

What Rights are Granted to a Passenger Using Air Transport, and Does National Legislation Comply with International Standards?

Ratification by Ukraine of the Montreal Convention and analysis of the new edition of the Air Code and the Rules of Air Carriage of Passengers and Baggage give grounds to claims that current Ukrainian legislation complies with international standards pertaining to ensuring passengers’ rights in the course of air transportation. For instance, provisions of Section XII of the Air Code of Ukraine dealing with passengers’ rights are almost completely based on the provisions of Regulation 261/2004

adopted by the European Parliament and the Council of the European Union on 11 February 2004 concerning establishment of common rules on compensation and assistance to passengers in case of being denied boarding, flight cancellations, or long flight delays (hereinafter — Regulation 261/2004). It should be noted that apart from the rights envisaged by the Montreal Convention, current legislation of Ukraine singles out other passengers’ rights as well, including, inter alia, the following: — the right of a passenger to compensation in case of being denied carriage; — the right of a passenger to compensation in case of flight cancellation; — the right of a passenger to compensation in case of flight delay; — the right of a passenger to compensation in case of changed service class in the course of air transportation; As far as it relates to the rights of a passenger to compensation in the event of denied carriage it is, first and foremost, necessary to determine whether such carriage was denied with the consent of the passenger or against the will of the latter. In the first case, the air carrier and the passenger shall voluntarily agree a sum of compensation. In addition to the said compensation, the air carrier shall offer the passenger to choose an option of receiving compensation for the cost of the ticket (and, if required, shall provide for a return flight to the initial point of departure, as soon as possible) or change the route to the destination point. If a passenger is denied carriage against his/her will or a flight is cancelled, the carrier shall, apart from compensation of the cost of a ticket or change of route to the destination point, pay compensation in the following amounts: 1) EUR 250 for a flight of up to 1,500 kilometers; 2) EUR 400 for a flight from 1,500 up to 3,500 kilometers; 3) EUR 600 for a flight of over 3,500 kilometers. At the same time, legislators entitle the air carrier to reduce by 50% the amount of the above-mentioned compensation if a passenger is offered a change of route to the point of destination by an alternative flight, the arrival time of which does not exceed the scheduled one: — by two hours for a flight of up to 1,500 kilometers; — by three hours for a flight from 1,500 up to 3,500 kilometers

WWW.UKRAINIANLAWFIRMS.COM


ECOVIS Bondar & Bondar

Address: 3 Rognedinskaya Street, Office 10, Kyiv, 01004, Ukraine

E

COVIS Bondar & Bondar is a law company, member of ECOVIS International, a leading global consulting firm operating in over 50 countries around the world. Tailored solutions, high quality, focus on detail, promptness, responsiveness, flexibility, out-of-the-box thinking, practical approach to resolving clients’ issues, cost and time effectiveness — these are the principles that guide us in our delivery of legal services. Among our strengths are: Market Knowledge We have been operating in Ukraine since1998 and we know the Ukrainian market and the people in it. We have longestablished and continuous working relations with the Ukrainian state authorities. International Network As a member of ECOVIS International, we have permanent access to international and interdisciplinary knowledge in dif-

— by four hours for all other flights. One should bear in mind that a passenger will have the right to compensation in the event of a cancelled flight, only if the air carrier failed to inform the passenger of cancellation of such a flight at least two weeks prior to the scheduled time of departure. Certainly, the current legislation of Ukraine makes provision for events when the air carrier can inform a passenger of flight cancellation less than two weeks prior to the scheduled time of departure and avoid the necessity to pay compensation, but only if the air carrier provides an alternative route to the point of final destination. The issue pertaining to the air carrier’s liability for flight delays is also a pressing one, because in reality this situation occurs quite often and it is unlikely that all passengers know the scope of rights granted to them under such circumstances. In case of flight delay from 2 up to 4 hours (depending on the flight distance), current Ukrainian legislation obliges the air carrier not only to provide passengers with meals and cold beverages pursuant to the waiting time for a new flight, but also with a possibility to make two telephone calls or send an email (or fax message), subject to the airport’s technical facilities.

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 537 0910 E-mail: kyiv-law@ecovis.ua Web-site: www.ecovis.com

ferent jurisdictions, which ensures that our clients receive the most realistic and balanced advice on cross-border and local matters. Our Professionals Our lawyers are highly qualified in diverse areas of law and possess excellent knowledge of Ukrainian legislation and international legal standards in the provision of legal services. ECOVIS Bondar & Bondar is a recognized law firm in Ukraine, whose partners are named among the leading lawyers in their respective practice areas according to international and Ukrainian legal directories. ECOVIS Bondar & Bondar focuses its practice on Corporate & Commercial Law, Mergers & Acquisitions, Antimonopoly & Competition Law, Dispute Resolution, Labor Law and Tax. The company represents clients in diverse economic sectors, including in aviation and transportation, insurance, energy, sport, real estate, banking and finance.

Naturally, there are cases when a flight is delayed for a day or more. In such a situation, the air carrier shall provide passengers with hotel accommodation, meals and transfer from the airport to the hotel and back to the airport. In this case, one should bear in mind that if a flight is delayed for more than 5 hours, a passenger has the right to demand from the air carrier compensation of the ticket cost or change of the route to the final point of destination as soon as possible, or later if the passenger wishes so, and if seats are available on board. And finally, let’s imagine a situation when a passenger gets on board the aircraft after all and it seems that nothing can ruin his/her good mood anticipating the coming trip, when suddenly the air carrier informs the passenger that due to certain reasons he/ she will be accommodated in a class lower than the one indicated in the ticket. Under such circumstances, legislators oblige the air carrier to pay compensation in the amount from 30% up to 70% of the fare, depending on the flight distance. It is noteworthy that, in its turn, the air carrier has no right to demand any additional payment if a passenger is accommodated in a class higher than the one indicated in the ticket.

Conclusions

Summarizing the previously mentioned, we believe that current Ukrainian legislation regulating the rights of passengers complies with core international standards and practices of the European Union, although in certain issues Ukrainian legislation regulates areas of aviation business in too much detail. At the same time, further development of the aviation industry demands that legislators continually enhance legal regulation of this industry not only in order to protect passengers’ rights, but also to ensure flight safety of civil aviation. In order to guarantee a balance of interests, the legislator should take into consideration not only the interests of passengers, but also the interests of airline companies. Disproportionate and unjustified increase in the obligations borne by legislators will certainly have an impact on the carriage cost, which in its turn will increase the price of a passenger’s ticket. Furthermore, when enhancing legal regulation of the aviation industry, legislators should bear in mind that it is necessary not only to fix passengers’ rights in official documents, but to also establish real and effective means for exercising proclaimed rights and protecting them from violations by the air companies as well.

39


Banking & Finance

Specific Aspects of Loan Agreements

Oleh MALSKYY

Artem KUZMENKO

Artem KOVBEL

Partner, Head of Corporate and M&A, Eterna Law

Senior Associate, Eterna Law

Partner, Head of Financial Investigations, Kreston GCG

Trust, but verify” is a famous dictum of the 40th President of the United States, Ronald Wilson Reagan. This saying is what SME and large business owners should be armed with. Global statistics show that companies lose an average of up to 5% in annual receipts due to wilful misconduct by their employees at senior, middle or junior management levels. Fraud prevention practices will lead you straight to more efficient and higher margin business. Since what you save is what you earn, more earnings could come not only from lower costs, but from ‘wastage and leakage’ optimisation. Statistics also say that those caught in theft are generally first-timers — only 5.3% of thieves have been got caught before, and only 8.3% of those caught were fired. In 40.7% of cases entities do not call in the police for fear of damaging their business reputation. Just 23.1% of cases ended up in civil courts, and the outcome of 80.3% of them was victory for the plaintiffs. The most popular fraudulent schemes still are: — misappropriation of assets; — financial distortion; and — bribery. The fraudulent conduct larger businesses most commonly encounter is corruption, while small entities often suffer from such theft schemes as stealing cash, cheque forgery, and others. In departmental terms, abusive practices are most common among accountants, sales managers, lawyers, top executives, procurement specialists, financial officers, and customer carers.

40

What should Be Done about Theft?

The primary axiom is that you can’t root out theft completely, but you can minimise it through a set of forensic audit procedures.

What is a Forensic Audit?

Forensic auditing is both the art and science of investigating and preventing fraudulent conduct in which managers of major companies are often involved. A forensic audit helps to identify potential problems through financial due diligence or legal due diligence on finances and other issues. Its aim is to examine the business environment, both internal and external (corporate intelligence), investigate related persons, and analyse changes in the CEO’s financial situation. According to statistics, corporate theft is usually deep-rooted and seems to be discovered only after crimes have been committed. Sometimes there are just amusing examples of out-of-the-box thinking. The owners, however, rarely take anti-fraud measures to prevent such practices in the future. We have conducted at least three types of audit in our practice: — open audits — when people know they are being scrutinized; — spontaneous audits — they are sanctioned by shareholders without giving notice to those under examination; and — undercover audits — auditors go undercover to work as new employees in one of the company’s departments. Although the latter requires more time and effort, it is actually more effective and efficient. While working undercover, the “em-

ployee” can try and find out lots of interesting things during quiet, low-profile conversations.

From Words to Practice

Where and why stealing occurs more often. The answer to the “where” question is Procurement, since it has been a thief’s goldmine since the beginning of time. A company could suffer a great deal of financial pain without tendering processes as there are more loopholes for thieves. Close attention should also be paid to the company’s cash transactions (if any). There is a rule among forensic auditors: if you want to find fraud, follow the green stuff. Running due diligence on a counterparty will help identify signs of sham transactions. To do so, you will need inhouse financial controllers who will analyse each and every proposed transaction.

How a Company can Minimise Fraud Threats

The key anti-fraud rules a company can establish are: — rule out cash operations; — implement the KPI incentives for top management to boost profitability. It means that senior executive incentives will depend directly on a company’s financial performance; — create an in-house security service which will report directly to you as the owner; — establish procurement tendering practices in which bidders will be examined at all times; — establish the practice of conducting spontaneous audits at least twice a year; — implement a zero-tolerance approach to fraudulent activity;

WWW.UKRAINIANLAWFIRMS.COM


ETERNA LAW

E

Address: Sophia Business Centre 6 Rylskiy Lane, Kyiv, 01001, Ukraine

TERNA LAW is a European full-cycle law firm possessing strong expertise in the CIS region. Founded in 2002 in the Ukrainian capital, the firm grew rapidly and currently employs over 100 professionals in 5 active offices (Kyiv, Moscow, Almaty, Riga, Dusseldorf). We are continually named among the leaders of the market for quality, responsiveness and reliability of service as well as for the depth of our expertise. We are a dynamic, client-oriented and solutionfocused firm whose team of energetic, foreign-educated young professionals provides concise and practical legal

— trust no-one, doubt everything; and — engage a reputable international accounting firm to audit financial statements annually. As far as legal exposures are concerned, fraud is more common when: — loan agreements are executed; — title to assets is registered defectively or assets are pledged illegally (through front men, broad powers of attorney, and/or partially controlled non-residents); — intellectual property rights (trademarks, inventions, industrial designs or utility models) are registered defectively; — a customer or counterparty database is stolen and/or personal data regulations are breached; — a long-term exclusive services agreement is burdensome, disadvantageous, and provides for enormous break fees; — no conflict-of-interest checks are run on counterparties and the company’s employees or their relatives; — no cross checks are made in relation to managers appointed by different shareholders to manage different business operations; — hidden, inflated obligations are created to go into bankruptcy or have a freezing order issued over assets. I would like to go into detail about fraud related to business lending procedures. There are both corporate and bank loans which are equally attractive for fraudsters. When it comes to checking a credit transaction for compliance, the parties wonder whether it is worth the time and money to ‘discover’ what they already know. In some cases, they can be right — an audit of loan agreements or related documents does not always identify any adverse circumstances. It should, however, be noted that there are quite significant arguments for the conduct of such audits. Preliminary due diligence is better than court proceedings. Most commonly, the parties to a transaction enter into a loan agreement, relying only on standard warranties

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 7001 E-mail: office.kyiv@eterna.law kovbel@kreston-gcg.com Web-site: www.eterna.law

advice in a cost-effective manner, while not compromising on quality. ETERNA LAW has an extensive history and experience within the CIS region. We understand these diverse markets, which demand international experience from a law firm in unison with knowledge of local business realities and the legal environment. It is for this reason that we consistently act in some of the most high-profile matters in the CIS for a broad range of clients, such as international financial institutions and corporations across various industry sectors, Government entities, non-governmental organizations, etc.

specified in the agreement. If something proves to be wrong, the borrower will keep the money, but the bank will apparently have to take legal action if the borrower refuses to comply with the requirements of the bank. Litigation will take a lot of time and money, and there is no guarantee that the bank will eventually succeed in the proceedings. In addition, even if collateral is available, it does not necessarily means that it will compensate the bank for its loss.

Identification of Wilful Attempts by the Borrower to Conceal Information

Often it is hard to find signs of fraud or important information being hidden. The fact is that an in-house auditor can perform his or her functions as a mere formality and can, in some cases, be in cahoots with fraudsters, while the granting of a loan is preceded by a systemic analysis of how the business was set up and its assets, including pledged ones, were formed, an evaluation of the borrower’s reputation and that of its managers and owners, and checking the existence of any assets, related parties, including in other foreign businesses. The discovery of any previously unidentified problems is crucial to conducting due diligence as part of a forensic audit. Experience has proved that the number of good faith borrowers paying adequate attention to the disclosure of information as may be necessary for obtaining loans is increasing. But not every company engages experts to conduct due diligence on all aspects of its activities and to identify if there are any significant legal risks. A borrower can be under the illusion that his business is doing well until a previously unknown problem is uncovered. Corporate decisions can involve huge legal risks if they are made by unauthorised persons or are in conflict, whether in whole or in part, with procedures for the acquisition of any particular

assets. Practice, however, shows that it can be quite difficult to discover such facts, especially if the borrower is willingly attempting to hide such information. But one thing is clear — if you rely on warranties and indemnities, you will probably overlook signs of fraud or other violations, while preliminary due diligence can point to major legal risks that are likely to affect the closing of a transaction or the extent of necessary warranties. Neglect of collateral quality is a common practice. Such neglect can be due to fraud, carelessness or a lack of knowledge on the part of bank officials. Banks regularly face falsification of collateral documents or resulting pledge releases due to poor risk analysis by management. Legal due diligence will help to uncover any collateral-related risks and to decide whether to grant a loan or set out obligations and warranties to such extent as may be required for the mitigation of risks related to the loss of collateral. For lending purposes, it is also necessary to take seriously the analysis of all of a group’s companies and the loans of borrowers, because cross-defaults under other loan agreements, if any, may result in lost opportunities to enter an international capital market. Another frequent major problem pertaining to due diligence lies in resources, as the analysis of all significant legal risks can be a time-consuming process and the bank could, therefore, experience staff shortages to have the audit conducted using its own efforts. Consequently, many significant risks can go unnoticed, including willingly. The engagement of professional advisors will allow you to ensure that independent legal due diligence will cover major transaction issues. The most important thing is that you should not immediately hold liable a thieving manager you have just uncovered — you’d better take time-out and wait until he or she probably hands over his/her partners in crime. Just remember that a forensic audit is a dish best served cold.

41


Banking Disputes

Hazy Prospects for Stabilization of Banking Sector

Ivan MISHCHENKO

Yuriy ZHYLA

Managing Partner, Trusted Advisors

Junior Associate, Trusted Advisors

he situation in the Ukrainian economy continues to be described as complex. On the one hand, military and political aggression from the Russian Federation prevails over the country and, on the other, there is an urgent need for structural reforms in key areas of public life too. As a result, the banking sector of the economy is going through turbulence providing a large amount of arising and ongoing legal disputes involving banks. However, despite the general difficulties in the economy due to objective and subjective factors, there are a certain positive dynamics in the banking sector. In other words, despite the lack of dramatic positive changes and “shock therapy” in the implementation of reforms, Ukraine is slowly “drifting” towards reforms. Moreover, the forecast of the National Bank of Ukraine for 2017 is encouraging and suggests the stabilization and strengthening of the banking sector. Here are several reasons for cautious optimism. Firstly, judicial reform is taking place in Ukraine at the moment. In spring 2017, a new Supreme Court should start with a reshaped make-up of judges, and in the next 1-3 years, similar changes are planned in the courts of appeal and first instance throughout the country. In addition, in the near future, the Verkhovna Rada intends to adopt new procedural economic and civil codes adapted to modern realities. It is expected that the implementation of judicial reform into life will improve the

quality of Ukrainian justice. For the moment, its quality is poor, largely because of the high level of corruption. However, the irony for Ukrainian legislators is that even fair satisfaction of the rights of the injured party via a decision adopted by a court does not mean the actual execution of this judgment. Even the existence of a judgment in the creditor’s favor may not lead to a resumption of violated rights. Second, reform of the State Enforcement Service (bailiffs service) is taking place in Ukraine. By the Law of Ukraine No. 1403-VIII On Bodies and Persons Engaged in Enforcement of Judicial Decisions and Decisions of Other Bodies of 2 June 2016 legislators bring into legal boundaries the institution of private executors, who will enforce judgments along with state enforcement officers. Private executors are limited in a number of categories of judgments they can enforce, but that’s what can give rise to their involvement in execution of court decisions in banking disputes: the benefits of private executors are efficiency, personal interest, and specialization. It is expected that private bailiffs will start work in spring 2017 just like the new Supreme Court. Third, among significant changes, it is necessary to mention the introduction in Ukraine of the so-called attorney’s monopoly, enshrined in the amended Constitution of Ukraine and the Law of Ukraine No. 5076-VI On Advocacy and Legal Practice of 5 July 2012. From 2017 only attorneys will

T

42

have right to represent the interests of clients in courts of cassation (from 2018 — in appeal, in 2019 — the first instance). This innovation may contribute to an improvement in the level of legal services provided by the banks, but also will require extra expenses, as due to the introduction of the attorney’s monopoly banks will face a choice: engagement of external legal advisors, having the status of an attorney, to provide legal assistance in a dispute, or work on getting this status by in-house bank lawyers working in its legal department. A significant factor in the consideration of banking disputes by the courts is the practice of the current Supreme Court, whose legal positions must be taken into account by lower courts. In 2016, the Supreme Court of Ukraine took important legal opinions aimed at protecting both creditors and debtors; you are invited to read below.

Resolution of Supreme Court of Ukraine No. 3-174гс16

The Supreme Court resolved that under the bank account agreement the bank’s monetary obligation to the client (account holder) within the funds deposited in the account, might only occur after the client’s order on the respective sum of money. The legislation does not provide the possibility to change the account holder and as a result making only the claim assignment agreement does not give the buyer the right to claim the money to the bank. As a result, the bank was unable to comply with the orders of the enterprise with regard to current accounts owned by the individual, so that the company did not acquire the money claim to the bank under the application for money transfer and cash withdrawal.

Resolution of Supreme Court of Ukraine No. 6-1562цс15

In accordance with the Court’s findings, in case of cancellation of an illegal court decision on a mortgage’s annulment, pursuant to which the entry encumbrance was excluded’s from the State Registry of Mortgages, the mortgage force shall be subject to

WWW.UKRAINIANLAWFIRMS.COM


Trusted Advisors

T

Address: 40/85, Saksahanskoho Street, 5th Floor, Kyiv, 01033, Ukraine

rusted Advisors is а full circle Ukrainian dispute resolution law firm that builds strong relationships with Ukrainian and international law firms and can offer extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters. The firm’s clients range from a variety of small, entrepreneurial companies to large foreign and Ukrainian companies. The firm’s main emphasis lays on corporate disputes, banking disputes (recovery of bad debts, enforcement proceedings and bankruptcy), commercial disputes, and protection of clients in courts of general jurisdiction, as well as in foreign courts and international arbitration tribunals. Trusted Advisors assists clients at all stages of the emergence and settlement of disputes: including pre-trial, trial, and execution proceedings in bankruptcies. Trusted Advisors’ team is made up of qualified professionals with vast experience in a wide range of legal matters, deep knowledge, and understanding of the litigation process in Ukraine and abroad. In both established and emerging markets, the firm’s lawyers are providing its clients insights into the local business environment alongside experience in multiple jurisdictions.

recovery from the date of prime entry, which has been excluded on the basis of the unlawful judgment, as the grounds for the removal of this entry became irrelevant. This means that the mortgage is valid from the moment the entry is included in the State Register of Mortgages.

Resolution of Supreme Court of Ukraine No. 6-216цс14

The Court concluded that the fact of liquidation of the debtor under a loan agreement by including an entry of the termination of a legal entity on the relevant register, in case of the debt existing under the contract, does not constitute grounds for termination of the mortgage agreement, which is concluded for the enforcement of the loan agreement by the debtor. In itself, taking the decision to the economic court on the liquidation of the legal entity — debtor under the main obligation and its exclusion from the Unified State Register of legal entities and individual entrepreneur and civil groups do not entail the termination of the principal obligation. This is because the mortgagor has filed the claim to the mortgagee in adversary proceedings about the foreclosure of the mortgage property as he didn’t properly meet obligations regarding repayment of debt.

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 359 0664 E-mail: info@trustedadvisors.ua Web-site: www.trustedadvisors.ua

Over the past year, the firm has grown professionally too. First, by obtaining several national legal awards and recognitions proving that its performance was recognized by clients who reward the firm with more opportunities to focus on serving clients’ needs and enhancing the dispute resolution practice. Second, for being a socially responsible law firm for preserving the cultural heritage of Ukraine. Trusted Advisors has provided pro bono services to protect the rights of the “Heavenly Hundred” Garden and the Ukrainian community. Third, by covering on a frequent basis actual legislative amendments in the mass media and by public participation at legal conferences. Key clients: Balticus Trade, Ciklum, LLC Technological Agricultural Company United, LLC Agricultural Technology System, DLA PIPER UKRAINE, PJSC Odesa oil and fat industrial complex, PJSC Ilyichevsk oil and fat industrial complex, PC Belgorod-Dnestrovskij kombinat hleboproduktov, LLC Illichivsk grain port, LLC Stroybud Ilychevsk, LLC VITAN, LLC NaftogazAlliance. Managing partner: Ivan Mishchenko Number of partners: 3 Number of counsels: 2 Number of associates: 16 Languages: Ukrainian, English, French, Russian.

Resolution of Supreme Court of Ukraine No. 6-1851цс15

According to Court opinion, Article 392 of the Civil Code of Ukraine does not engender, but confirms the existing plaintiff’s right of property acquired previously on legal grounds if the defendant disclaims, denies or disputes the claimant’s right of property, as well as in the case of the plaintiff’s loss of the document confirming his ownership. In solving this category of cases the courts should find out the existence, or lack of consent, of the mortgagor to the out-of-court settlement of foreclosure of the mortgaged property by the transfer of ownership of the mortgaged property to mortgage towards performance of mortgage liabilities, as well as making the notarial writ of execution as the legal basis for registration of ownership rights of the mortgagee, if such conditions are provided by the terms of the mortgage contract.

Resolution of Supreme Court of Ukraine No. 3-1162гс16

With this decision the Supreme Court of Ukraine defended the rights of the debtor by refusing to satisfy the request of the bank (lender) for review of the Court of Cassation decision. The subject of the case was the claim to invalidate a unilateral deal on offseting. By

refusing, the Supreme Court supported the position of courts of previous instances, confirming the absence of evidence of non-compliance of set-off application with Articles 203 and 601 of the Civil Code of Ukraine.

Conclusion

According to the view of experts, not all banks are adapting to the new conditions of work, so we can expect the market exit of a few more banks, which, in turn, will lead to the initiation of new banking disputes. Unfortunately, the parties to banking disputes, just like before, are faced with a high level of corruption in courts, combined with a lack of real opportunities to enforce the judgment in their favor. However, it should be noted that since the end of 2016, there has been certain stabilization in the banking sector, and the current period of the Ukrainian banking system may be described as rebooting, or a “clearance” period. Be that as it may, the evaluation of current changes in the banking sector, as well as in banking disputes, should be given from a perspective of the next 3-5 years, when it will be possible to notice the first results of reform of the judiciary and the State Enforcement (bailiffs) Service, as well as the gradual economic and political stabilization and recovery of Ukraine.

43


Bankruptcy

Bankruptcy in Ukraine In this regard, a large number of experienced economic lawyers, who have extensive experience (over 10 years), are deprived of the opportunity to take part in competition for positions in the Supreme Court because of the said Law. However, in any case, formation of a new Supreme Court composition, which must take place during 2017, should have a positive effect on the entire legal system of Ukraine.

Julian KHORUNZHYI Senior Partner, Ario Law Firm

2

016 was quite an eventful year with regard to finding solutions to the problem of bad debts. Thus, the main trends of the year included adoption and entry into force of the Laws of Ukraine On Financial Restructuring, On Bodies and Persons Engaged in Judgments and other Bodies Decisions Execution and the new Law of Ukraine On Enforcement Proceedings. It is also worth noting repeated attempts to push through Parliament Draft Law No. 3132 On Amendments to Some Laws of Ukraine On Increase of Efficiency of Bankruptcy Procedures, Significant Changes to Procedures for Withdrawal of Insolvent Banks From the Market, Especially in Part of Asset Disposal of Such Banks, as well as launching the formation of a new composition of the Supreme Court. Let’s start with the latter, because all but the most important expectations in this and other legal practices are related precisely to reform of the judicial system. Significant expectations that a good deal of candidates not from within the judicial system will agree to take part in competition for positions in Supreme Court fell short. One of main reasons for this were, in my opinion, the restrictions regarding candidates established by the Law of Ukraine On the Judicial System and Status of Judges, namely, that only attorneys-at-law can be candidates. This is due primarily to the fact that lawyers practicing criminal law pursuant to legal requirements were for quite a long time required to have the status of an attorney-at-law, and for lawyers practicing commercial law such an obligation has never been established and most of them began obtaining certificates for the right to advocacy activities only in recent years, when establishment of “attorney-at-law monopoly” for representation in courts loomed on the horizon.

44

On Enforcement Proceedings

Another key shift in finding a solution to the bad debt problem is adoption and coming into force of the Laws of Ukraine On Bodies and Persons Engaged in Judgments and other Bodies Decisions Execution, On Enforcement Proceedings, which launched reform enforcement of judgments. Both the pushing of draft laws through Parliament and further implementation of reforms can be described as “per aspera ad astra”. The said laws changed enforcement procedure by removing unnecessary bureaucratic obstacles, improved the whole process of enforcement of judgments and disposal of seized property, automated the majority of actions of enforcers, introduced open Unified registry of debtors, significantly reduced the corruption component. In the plane of reform of the Executive Service (Bailiffs), a mixed system of judgments enforcement was introduced by institute of private enforcers establishing. To avoid risks of abuse by private enforcers, multistage control over their activities was introduced, which, at the same time, should not interfere with their activities, so the institution of private enforcers’ self-government was established. Of course it is important to establish an adequate level for remunerating private enforcers in the amount of 10% of the amounts collected, and for state enforcers (bailiffs) — a bonus payment for actual enforcement of judgments that should encourage enforcers (both state and private ones) to use all available legal tools for the effective and prompt performance of executive actions aimed at full enforcement of judgments. Thus, effective implementation of the described reform must leave behind shameful for the state practice of European political and judicial institutions as to violation of the European Convention on Human Rights by Ukraine in the part of virtual assistance by the state in tolerating non-performance of final and binding judgments.

However, in late 2016 the Verkhovna Rada of Ukraine adopted the Law of Ukraine On the High Council of Justice, which among other things amended the laws of Ukraine that implemented reform of the judgment enforcement system in the part on further narrowing the remit of private bailiffs. Thus, the said Law stipulates that in 2017 a private enforcer shall have the right to take on for execution enforcement documents, under which the sum of recovery does not exceed UAH 6 million. Moreover, a limit was set that during the first three years of a private enforcer carrying out his/her activities, and such private enforcer does not have the right to take on for execution enforcement documents under which the sum of recovery exceeds UAH 20 million. Given these changes and other already existing limitations on a private enforcer’s remit, full-fledged launch of reform in the near future should not be expected.

Bankruptcy Sphere

In 2016 bankruptcy from the regulatory point of view was characterized by repeated attempts to amend the Law of Ukraine On Restoring a Debtor’s Solvency or Declaring it Bankrupt. All of this was not in the least due to relevant requirements by the IMF. Namely, to correct errors and to improve the current version of the Law of Ukraine On Restoring a Debtor’s Solvency or Declaring it Bankrupt. There are a lot of reasons for this. One of the first is non-availability of improvements in the legislative environment. Since 2012, when a new version of the Law of Ukraine On Restoring Debtor’s Solvency or Declaring it Bankrupt (hereinafter — the Law) was adopted, most industry experts pointed out that the Law was unbalanced and needed revision. Instead, the Parliamentary Committee on Economic Policy prepared Draft Law No. 3132 On Amendments to Some Laws of Ukraine (regarding increasing efficiency of bankruptcy procedures), which after its return by Parliament for its additional first reading underwent significant changes and which, in the view of many experts, will have a tremendous negative impact on the bankruptcy sphere. It is true that besides its positive sides, the main ones of which are introduction of ProZorro principles on the disposal of property in bankruptcy proceedings, legalization of the insolvency officer’s income (remuneration in the amount of 5% of redeemed creditors’ claims is set, which is paid out as a priority), elimination of obvious errors, some

WWW.UKRAINIANLAWFIRMS.COM


Ario Law Firm

A

Address: 7 Panasa Myrnogo Street, Kyiv, 01011, Ukraine

rio Law Firm was established in 2015, and was previously known as Ario Capital Group. At that time the firm was founded by partners Julian Khorunzhyi, Oleksii Voronko, Iryna Serbin and Sergey Kirichenko. In 2015 two more partners joined Ario, namely Yevhen Hrushovets and Dmitry Boiko. Now, Ario provides legal services on commercial, tax, banking and corporate law, litigation, bankruptcy and enforcement proceedings. The number of practices were significantly strengthened and expanded in 2016, namely criminal practice, government relations, business protection, tax & legal consulting services. Particularly, criminal practice together with litigation, bankruptcy and enforcement proceedings and corporate law were the main drivers of the Ario team in 2016. A relatively new practice, tax & legal consulting services, was strengthened by lawyers certified by the Tax Consultants Union of Ukraine. Furthermore, one more advisor joined the Ario team: Olga Reshetnyk. She specializes in tax law, is certified by the Tax Consultants Union, and is a member of the Council of Independent Accountants and Auditors of Ukraine. In a short period of time Ario has been able to achieve noticeable results and gain peer recognition. Ario has been a general partner of the Bar Association of Ukraine since

positive changes in financial rehabilitation procedure, etc., the project contains very high risks. Thus, it is proposed to provide for automatic termination of the moratorium on satisfaction of creditors’ claims in 130 days after commencement of bankruptcy proceedings, to reduce the unreal term for property disposal procedure to 130 days, to remove preventive 30-days period for filing applications with monetary claims by creditors that unbalance a debtor’s liabilities, to delegate all key powers of the creditors’ committee to a meeting of creditors, significantly complicate the procedure of approval of financial

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 537 2290 E-mail: office@ario.law Web-site: www.ario.law

July 2014. Julian Khorunzhyi (No.1 in Leading individuals of bankruptcy by Ukrainian Law Firms 2016. A Handbook for Foreign Clients), as head of the company and professional in the field of insolvency, headed the Coordinating Council of self-regulating organizations of insolvency practitioners, which brings together leading specialized self-regulatory and nongovernment organizations to introduce common rules and approaches to bankruptcy proceedings in Ukraine. The recognition of Ario’s team in 2016 was also associated with successful defense of the State of Ukraine’s interests in a case regarding the bankruptcy of Ukrburshtyn — one of the largest legal amber miners in Ukraine. The Ario team also successfully defended former Deputy Prosecutor General V. Kasko. It also earned an unprecedented victory in the case of Aleksandr Orlow, a Polish citizen who spent almost 5 years in an Odesa jail (Odesa detention facility). Ario also defended the interests of Joint Stock Company The State Export-Import Bank of Ukraine (JSC Ukreximbank) in several insolvency cases. In 2016 the Ario Capital Group joined the Bronze League of Top 50 law firms in Ukraine on the basis of analysis of key performance indicators of the legal market carried out by Yuridicheskaya Practika Publishing.

rehabilitation plan by creditors, but problems of property disposal are almost disregarded, such stage of bankruptcy proceedings as settlement agreement is removed, state and municipal residential properties, which are listed on the debtor’s balance sheet, are allowed to be sold, etc.; taking into account changes suggested by the draft law. If this law were to be adopted, the opposite aim of improving bankruptcy procedures could well be attained. Moreover, some precedent decisions of the Supreme Court of Ukraine, primarily due to lack of practice unity at the Supreme

Court of Ukraine, had a significant impact on bankruptcy proceedings this year. Indeed, there were cases when the Supreme Court of Ukraine adopted decisions with diametrically opposing legal positions in the space of one month. Namely, regarding extrajudicial mechanisms on a levy of execution upon mortgage property, transfer of mortgage to the buyer of mortgaged property in case of acknowledgment of the auction as such that it did not take place, setting the jurisdiction in insolvent banks cases as being economic one day and under administrative legal procedures on another day.

45


Business Crime

Criminal Proceeding — a Means of Investigation or Prosecution?

Olga PROSYANYUK

Vitaliy SERDYUK

Attorney, PhD, Managing Partner of AVER LEX

Attorney, Senior Partner of AVER LEX

L

ast year was notable for its active implementation of the idea of adaptation of Ukrainian legislation to European standards and, in particular, the practices of the European Court of Human Rights. Most active and planned amendments aim to improve the tasks of a criminal proceeding. Although one of the main important tasks of a criminal proceeding is to ensure that a lawbreaker is brought to account and an innocent person avoids conviction, current legislation can hardly correspond to the above-mentioned. This has a negative influence on a business sphere as well as citizens.

Peculiarities of Special Order of Special Pre-trial Investigation

It is now typical to impose changes to criminal procedure legislation that would facilitate putting the illegal pressure by lawenforcement bodies. You can observe this in application, for example, of a recently implemented procedure of “in absentia” investigation. The Criminal Procedure Code states that in certain cases an investigation can be carried out without a person’s participation, namely: 1) a suspect is hiding from the investigating bodies with the purpose of evading responsibility, and 2) is put on the interstate and/or international wanted list. Such a procedure would create a mechanism that excluded mass application of an “in absentia” investigation and could be implied

46

exclusively to lawbreakers hiding from investigation. However, on 12 May 2016 the Verkhovna Rada of Ukraine adopted the Law On Amendments to Some Legislative Acts of Ukraine Regarding Work of the Prosecutor General’s Office of Ukraine No. 1355-VII, according to which temporarily, till 15 April 2017, a special order of a special (“in absentia”) investigation was established. The Law states that one of the following criteria is sufficient for an “in absentia” investigation: (1) if a person is hiding with a purpose to avoid a criminal responsibility and/or (2) is hiding over 6 months and/or (3) there is evidence that a person is outside the borders of Ukraine, on the temporarily occupied territories of Ukraine or in the region of the Anti-Terrorist Operation. Unfortunately, investigating judges often formally evaluate the arguments and the investigation evidence; that is why implementing such changes caused a negative practice, when the means of a criminal procedure are used illegally to achieve personal goals. It means that when a person is going abroad on business or pleasure it can be used to initiate an “in absentia” investigation regarding this person with the purpose, for instance, of settling a business conflict. However, in connection with a short term of a temporary order, in 2016 the Verkhovna Rada of Ukraine repeatedly initiated changes to the Criminal Procedure Code of Ukraine regarding, it would seem, improving the mechanisms of ensuring the tasks of a criminal proceed-

ing. And these draft laws envisage prolonging a term for a special order of a special (“in absentia”) investigation; because, in fact, the law-enforcement system did not achieve the planned results with the help of this procedure. Finally, on 16 March 2017, the Verkhovna Rada of Ukraine adopted the Law of Ukraine On Amendments to the Criminal Procedure Code of Ukraine Regarding Improving the Mechanisms to Fulfil the Tasks of a Criminal Proceeding No. 1950-VIII. The final version that was adopted prolonged the term for the so-called “temporary” order of application of a special pre-trial investigation with certain peculiarities till the day when the National Bureau of Investigation starts its work. As we know, talks on the creation of the National Bureau of Investigation have continued for a long time and nobody knows when this process will finish. In reality so-called “improvements” are made to facilitate the work of law-enforcement bodies and selectness of legislation, but not for protecting the rights of the participants of a criminal proceeding.

Unchangeable Trend of Illegal Pressure on Business

The issue of illegal pressure on business by law-enforcement bodies is still of equal importance. The “victims” are not only Ukrainian companies, but also foreign and with foreign investments companies, which our power representatives are so proud of. One can often observe cases when lawenforcement bodies visit enterprises with searches without any reasons for this, without a preliminary inquiry to provide documents or to receive a temporary access to documents on the basis of a resolution issued by an investigating judge. Moreover, in many cases permission to search premises is received on the basis of formal and pattern arguments. At the same time, when a company does not have qualified legal aid from a lawyer, property that is not indicated in the search permission resolution is confiscated. And its return is complicated by duration and procedural complications. There are also cases when a company’s work is blocked by permanent summons for company management to appear for ques-

WWW.UKRAINIANLAWFIRMS.COM


AVER LEX

A

Address: 2 Khrestovyi Alley, 5th Floor, Kyiv, 01010, Ukraine

VER LEX is the leading white-collar crime boutique law firm in Ukraine, focused on high-profile economic crimes and politically motivated prosecutions. The firm is focused on defense in compound and complex cases (parallel of the group of parties, in different regions of Ukraine), which demands unrivalled human capacity or experience, knowledge or level of expertise. The majority of cases are unique and first-hearing cases that set precedents for the criminal judiciary system in Ukraine and established practice for future hearings. These cases are highly public; require massive, regular and open communication with the entire spectrum of media outlets in Ukraine. The client portfolio includes state officials and high net worth individuals looking for protection from politically motivated prosecutions, consulting and law firms, big corporate clients (Odesa Portside Plant, Diamant Bank, ZTE Corporation, Bunge Ukraine, BRCM-Nafta, Total Ukraine, LLС UICE Group, etc.). The team consists of 25 specialists in the sphere of criminal law and litigation, including 5 partners, who are actively involved in every project. In 2017 our team was strengthened by the arrival of Artem Drozdov as a new partner due to his ability to generate new business and proficient management skills as well as other well-respected, experienced attorneys.

tioning, and overly frequent requests from it to provide documents, additional data, and to arrest assets. And one reason for such actions can be persuading workers of the company to provide illegal benefit (corruption acts) by a representative of law-enforcement bodies, “putting a contract” on a competitor or an ordinary collection of working “indices”. Besides, legislators do not pay any attention to a great deal of defects. For instance, law-enforcement bodies have the possibility to abuse the right to get a search permit for, because legislation does not determine the strict differentiation of circumstances when one can send an inquiry to the enterprise on providing documents, or initiate receipt of temporary access to documents or initiate a search. Furthermore, the legislation does not determine mechanisms of effective resistance to law-enforcement bodies, when they put pressure on the clerks of an enterprise. The only way out is to make a complaint to a higher hierarchy body. However, very often such complaints receive formal replies. The Criminal Procedure Code of Ukraine states a procedure of a court appeal against not entering any data about a crime by an investigator in the Unified Register of Pre-trial Investigations; it means not initiating a proceeding on the basis of an application. However, there is no appeal procedure against the initiation of a proceeding if it was done unreasonably. It would be very relevant; taking

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 300 1151 Fax: +380 44 300 1153 E-mail: info@averlex.com.ua Web-site: www.averlex.com

All advocates in their work underscore perfection of criminal practice, development of effective and active strategies of defense from illegal revisions by control and law-enforcement bodies in accordance with the specific nature of the business, from their negative consequences, seizure of businesses by raiders, pressure from the law-enforcement bodies via stress searches, arrests or persecution, etc. To ensure the rights of our clients and to prevent them being violated, the Firm cooperates with a number of leading worldwide and local human right organizations within the framework of ongoing matters. These include Amnesty International in Ukraine, Transparency International Ukraine, Ukrainian Helsinki Human Rights Union, Ukrainian Human Rights Union, Amnesty International European Institutions Office etc. AVER LEX is recognized as the leader (Band 1) in “Litigation: White-Collar Crime” sphere by Chambers and Partners 2017, Olga Prosyanyuk and Vitaliy Serdyuk are top-ranked among lawyers. According to Who’s Who Legal 2016, Olga Prosyanyuk has been the only one Ukrainian lawyer named among leading attorneys in Business Crime Defence. Legal 500 EMEA 2017 named AVER LEX and its partners as among leaders in dispute resolution.

into consideration that the means of initiation of a criminal proceeding are not always used within the law. In general, one should mention, for minimizing pressure by law-enforcement bodies to the business sphere, Ukrainian legislation requires the stepping up of court control on ensuring the protection of rights of the participants of a criminal proceeding.

Effective Ways of Protection

It is necessary to take important preventive measures that would minimize the negative risks of pressure by law-enforcement bodies: 1. It is necessary to monitor information regarding an enterprise in the Unified Register of Court Resolutions. 2. If any information on possible revision of an enterprise and its clerks by law-enforcement bodies within a criminal proceeding appears, it is necessary for an advocate to receive an official confirmation or refutation of such information via submission of an advocate’s inquiry to a corresponding body. 3. In the event that information on a criminal proceeding, within the framework of which an enterprise and its clerks are revised, was confirmed, it is important to send an appeal to the pre-trial investigation body and a corresponding court for obligatory involvement of an advocate in any litigation procedures.

4. A representative of an enterprise or an advocate monitors information in court regarding examination of corresponding petitions of an investigator regarding the rights and legal interests of a company and its clerks. 5. If it is impossible to be present during the interrogation at the investigating body, it is necessary to inform an investigator (and to provide corresponding documents) on the significance of the reason for failing to appear. 6. In order to minimize the risks of initiation of a search, it is essential to indicate in the procedural correspondence about the readiness to cooperate with a pre-trial investigation body and to provide necessary data in response to their inquiry. 7. It is important to cover the issue in the mass media, to complain not only to the management of a corresponding investigative body, but also to state officials in the corresponding sphere. Based on the analysis of realities of application of criminal procedure legislation by law-enforcement bodies and the indifferent attitude on the part of representatives of the state bodies to this situation, one can come to the conclusion that legislators are now taking more steps towards “a punishment instrument” rather than towards European standards and encouraging investment to come into the Ukrainian market. That is why a criminal proceeding can be used as a means of prosecution rather than a means of effective investigation.

47


Business Protection

Interpol’s Role within the Global Security Architecture

Denys BUGAY Attorney-at-law, Partner, Head of WhiteCollar Crime Practice, VB PARTNERS

I

n recent times one of the most important areas of international cooperation for Ukraine has been Interpol, particularly its search database. At the moment, 1,763 persons out of 10,000 are wanted by Interpol at the request of Ukraine.

Structure of Interpol’s Authorities

The management bodies of Interpol are the General Assembly and its Executive Committee, and the General Secretariat. The General Secretariat is the actual management body which adopts key decisions. Interpol’s National Bureaus exist at the local level in each member state and is responsible for carrying out the organization’s tasks in a separate country. A special place in the central office system is occupied by an independent body — the Commission for the Control of Interpol’s Files (hereinafter — the Commission). Its function consists of supervising compliance with the rules of placement, processing and storing information in the Interpol database.

Search Database — System, Requirements, Procedure for Publication

Interpol’s search database means the scope of all data about wanted objects / subjects to whom the appropriate notices (cards) are assigned, depending on the purpose of search: — Red notice means a search of a convicted or accused to extradite him/her; — Yellow notice means the retrieval of missing persons;

48

— Blue notice means collection of information about a person, his/her location in the interests of an investigation; — Black notice means unidentified bodies. — Green notice means potential offenders and repeat offenders; — Orange notice means a warning of possible danger to health and property of persons; — Purple notice means the instruments of crime, criminal schemes, etc.; The “red notice” is the most widespread and its placement is subject to the following requirements: 1. The crime for which a person is wanted shall be a crime in most countries throughout the world; 2. Punishment for such a crime is at least two-year imprisonment or the non-served part of a sentence is at least 6 months.

Procedure for Interpol Notice

Publication of data in the search database consists of 5 stages. In the context of Ukraine such a procedure shall be as follows: 1. An investigator/prosecutor sends the request for search to the Ukrainian Bureau of Interpol. 2. The Ukrainian Bureau conducts an initial inspection of the request with regard to compliance with the requirements of international acts, including those as adopted by Interpol. 3. After completion of inspection the Ukrainian Bureau applies to the General Secretariat for publication of the request. 4. The General Secretariat shall re-inspect the request. The specific organs for examination of the “ notices” shall be the Center for Command and Coordination of the General Secretariat and Legal Affairs Office. 5. The General Secretariat shall publish a notice of search and notify all participating countries of this. The “red notices” shall not be published automatically and such publication may be denied. In particular, Interpol rejected the request as filed by the Russian Federation for placing the “red card” in view of I. Kolomoisky, and disallowed the request of Ukraine regarding A. Pavlov (“Motorola”). Moreover, only a short time ago the General Secretariat denied the request for search as filed by the Russian Federation concerning V. Muzhenko, Chief of General Staff of the Armed Forces of Ukraine.

Meanwhile, there is a procedure for “preliminary appeal” against the decision on publication in search, as was used by MP O. Onishchenko. This procedure provides for consideration by the Commission of the complaint about illegality of search of a person prior to publication of the “red notice” by the General Secretariat.

Grounds to Reject the Placement of the “Red Notice” or its Removal

In practice the most common reasons for rejection of placement of the “red notice” or its removal shall be the following: — Expiry of the valid period of sanction (Case of Yu. Ivanyushchenko when the period of ruling for a permit to take him into custody expired), amnesty or termination of criminal proceedings, etc. It should be noted that in the event of repeated resolutions for the arrest warrant, “the red notice” shall be re-assigned, as happened in the Case of Yu. Ivanyushchenko. At this date, as V. Nevolya, the Head of Ukrainian Bureau has stated, tracing requests will be re-canceled, if information about the termination of criminal proceedings against Yu. Ivanyushchenko is confirmed. — Political motives of persecution / prosecution (Cases of D. Yarosh, I. Kolomoisky, М. Abliazov, R.  Solodchenko, М.  Ketebaiev, T. Paraskevych, etc.); This reason is a strong argument both at the stage of publication of the data about a person (as an example — the above-mentioned “red notice” of I. Kolomoisky), and at the stage of appeal against the already published notices of search (as an example — D. Yarosh). This ground is being actively used by the defenders of V. Yanukovych, V. Zakharchenko, the Klyuiev brothers, S. Arbuzov, A. Klimenko, S. Kurchenko and others. On the other hand, the Commission found no political component in the search of E. Stavitsky. — Commercial reasons of persecution/ prosecution — the criminal prosecution of a person to take possession of his/her assets. For example, Interpol removed the “red notice” of Jordanian businessman F. Almhayrat, after it was proved that the purpose of criminal proceedings, as initiated against him consisted of dismissing him from the position of director and forcing him to transfer his shares to other shareholders.

WWW.UKRAINIANLAWFIRMS.COM


VB PARTNERS

V

Address: Business Center Bashnya No. 5 22 Rybalska Street, Porch 13, Kyiv, 01011, Ukraine

B PARTNERS is a legal boutique that mainly focuses on two spheres: criminal law (including Interpol and extradition matters) and dispute resolution.

The key questions that our clients approach us with are the follow-

ing:

— Representation of interests in criminal cases concerning economic crimes. — Corporate and business fraud. — Protection of shareholders and business management in criminal proceedings. — Protection of client and criminal prosecution of unscrupulous business partners. Regarding dispute resolution, we have focused on disputes with the state in privatization / re-privatization, taxation, rent, land use, etc. Thanks to the company’s niche, our clients can count on exclusivity, individual approach and maximum involvement in their problems.

Let’s note that such practice exists in certain post-Soviet states which consists of using Interpol’s tools to criminally prosecute Ukrainian businessmen. The purpose of such persecution consists of the state seizing the assets of suspects. At the same time, Interpol’s channel is used to create public opinion about the suspect’s culpability without, as a rule, reinforcing this with any evidence. Similar persecutions/prosecutions of Ukrainian business are contrary to Interpol’s policy, and by virtue thereof, in our opinion, resolutions for search of Ukrainian entrepreneurs should be reversed. — Risk of violations of human rights — freedom of speech, right to a fair trial, prohibition of torture, etc. In particular, the case of Venezuelan journalist Rafael Poleo, whose right to freedom of speech in the home could be restricted. — The purpose of the “notice “ placement was attained — the location of a person was identified, the person in question was seized or extradited. For example, today we do not see the “red notices” of Y. Kolobov, H. Guta, B. Timonkin

Procedure for Appeal Against the Placement of “Notice” in View of a Person in Interpol’s Search Database

The person, information about him/her is in the Interpol database, (his/her representative) has a right to apply to the Commission for the correction or deletion of personal information. The following practical aspects should be noted here:

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 581 1633 E-mail: office@vbpartners.ua Web-page: www.vbpartners.ua

Benefits of VB PARTNERS: 1. We are not afraid to take up risky, complicated projects. 2. We localize any problems, not allowing them to amount up to tragic consequences. 3. We provide our clients with a sense of security and confidence in victory. The last 5 years, VB PARTNERS has been in the TOP 50 of the best domestic law firms in Ukraine. The partners of the company are consistently placed in the list of leading specialists of the country’s legal market by the most authoritative international and Ukrainian market reviews, including Chambers Europe, Best Lawyers, Who is Who Legal, Legal 500, Ukrainian Law Firms, etc. We are proud to be described as an effective and dynamic law firm.

1. The period for considering such a request is established “as soon as is practicable”. However, the Commission’s meetings are held rarely. Since 2017 the number of the Commission’s members has been increased from 5 to 7, and the number of meetings has been increased from 4 to 6, which, however, cannot significantly accelerate the consideration of thousands of complaints. 2. The Commission does not decide independently, but only gives recommendations to the General Secretariat as the holder of the database. 3. Unless the General Secretariat complies with the recommendations, the Commission has the right to appeal against the General Secretariat’s inactivity to the Executive Committee. Consequently, the procedure for considering the claims pertaining to placement of “red notices” is durable and formalized. I would like to draw your attention to the fact that only a small proportion of “red notices” (about 2%) has been published on the Interpol website. Subject to the foregoing, our guess is that it is necessary to receive written confirmation of removal of the “card” from Interpol’s central office (in particular, such a confirmation was received by the legal representatives of R. Bogatyriova).

Alternatives Ways of Interpol Notice

For example, the national bureau may launch so-called “diffusions” on Interpol’s internal network — notices on the need to arrest a person to be served to a certain circle of other national bureaus and which are not public. The procedure for publishing “diffusions” is not formalized, unlike publication of “red no-

tices” and allows the arrest of a person without all the formalities and requirements of Interpol being complied with. In particular, wanted notices regarding Ukrainian roofers P. Ushevets and G. Tagramadze were issued in line with the “diffusions” procedure.

Countries where Interpol “Will Not Reach”

At the moment, Interpol’s participants are 190 countries — in practice it is the entire globe. However, there are a number of “exotic” countries which do not cooperate with Interpol. For example, North Korea, Palau, Solomon Islands, Federated States of Micronesia, Tuvalu, etc. The Vatican was the last country to join Interpol. The “red notice” issued by Ukraine are often removed, as often the persons detained by Interpol are extradited to Ukraine. So, the restaurateur A. Zadorozhny was extradited from Croatia, and recently the Cherkasy agro-businessman V. Babko was extradited from Serbia to Ukraine. Countries with higher requirements for ensuring human rights and freedoms most often reject extradition to Ukraine. As an example, Italy refused to extradite I. Markov, and Spain banned the extradition of Y. Kolobov. Therefore, Interpol is an organization with whom cooperation can bring many advantages to Ukraine. At the same time, the key of efficient interaction should become the proactive work of Ukrainian law-enforcers regarding justification of non political prosecutions, due prolongation of sanctions and providing the International Criminal Police Organization with the necessary documents.

49


Business Immigration

Business Immigration

Halyna KHOMENKO Director, People Advisory Services, Private Client Services Leader, EY Ukraine

I

n these current uncertain times in Ukraine, a key target of High Net Worth Individuals (HNWI) remains to protect their assets and keep their business competitive and flourishing. Automatic exchange of information on residents’ assets and income according to the Common Reporting Standard, unwillingness to lose earned capital, entrenched bureaucracy and absence of a favorable investment climate in Ukraine are driving more and more Ukrainian HNWIs to emigrate to other jurisdictions, or at least to acquire a residency permit in one of the EU countries.

gree of capital protection and information confidentiality. Malta, for instance, offers citizenship to those who are ready to make a non-returnable contribution of EUR 650,000 to the Maltese economy, purchase real estate property in Malta or invest in Maltese bonds for another EUR 500,000. As a result, in addition to Maltese citizenship an investor also receives access to a special taxation regime, the so-called “remittance basis”, where an individual’s foreign income is taxed in Malta only when an individual brings (remits) it to Malta. The United Kingdom has an investor program, which allows HNWIs to get access to permanent residency and, potentially, UK citizenship. Similarly to the Maltese program, HNWIs, who invest in the UK get

access to a special “remittance basis” taxation regime. In comparison to Malta, the UK investor program is much more expensive as the HNWI should be willing to invest at least GBP 2,000,000 in the UK economy. However, as opposed to the Maltese program, there is no need to make a non-returnable donation. Notwithstanding the recent crisis, which led to bank deposit cuts, Cyprus remains one of the most welcoming destinations for business immigrants, allowing the acquiring of permanent residence in Cyprus for investing a minimum of EUR 300,000 into Cyprus real estate or even Cyprus citizenship for investing a minimum of EUR 2,000,000. Moreover, the Cyprus program takes the least time to complete compared to other similar ones. Other countries, which business immigrants should definitely look into, are

Choosing a Country for Business Emigration

The choice of country for business immigration depends mainly on personal goals and the desired lifestyle of the individual, availability of favorable personal taxation regimes, simplicity and swiftness of obtaining residence permits, possibility of obtaining citizenship in the future and, naturally, the cost of immigration. If an individual intends to receive permanent residence in a country of immigration, some additional factors such as ecology, crime level, stable political and economic environment, highquality health care, education and social security should also be considered. Many countries currently have immigration programs designed specifically for business immigration of HNWIs, allowing them to obtain a residence permit or citizenship by investing in a country’s economy. For several years now, Cyprus, Malta and the United Kingdom have been the most popular countries for various forms of immigration of Ukrainian HNWIs, offering a favorable taxation environment, a high de-

50

WWW.UKRAINIANLAWFIRMS.COM


EY

E

Address: 19A Khreshchatyk Street, Kyiv, 01001, Ukraine

Y is a global leader in assurance, tax & law, transaction and advisory services with more than 230,000 people based in 150 countries. Our law practice is undergoing global expansion so that we can serve our clients anywhere in the world, now in around 70 countries. EY has a strong full-fledged legal practice in Ukraine, well versed in both local and international legal matters and practicalities and that has an impeccable track record. A team of more than 40 qualified lawyers provides a wide range of services to numerous international and local clients. Our more than 20-year history of operations in Ukraine and the CIS ensures our deep understanding of the local environment and knowledge of Ukrainian business peculiarities. We have strong experience in all major fields of law, particularly in the areas of commercial, corporate and contract law, legal structuring, regulatory compliance, finance, currency control and banking regulations, etc.

so-called “tax heavens”, with 0% personal income tax, wealth tax, inheritance tax and a gift tax. Some of the most popular tax heavens among the Ukrainian HNWIs are Monaco and the United Arab Emirates. In any case, while choosing a destination for business immigration, one should carefully evaluate all the pros and cons of emigrating to a particular country, taking into account all the circumstances. In addition, irrespective of a chosen destination, in order to make an efficient tax planning, HNWIs should also devote particular attention to their tax matters in Ukraine and wrap-up their Ukrainian tax residence.

Ukrainian Tax Residence Status

Being a Ukrainian tax resident means that an individual pays taxes in Ukraine out of his or her worldwide income, as opposed to tax non-residents, who are taxable only on their income sourced in Ukraine. Quite often, the ceasing of Ukrainian tax residence status is part of the tax planning of a Ukrainian business immigrant. To determine an individual’s Ukrainian tax residence status, one should analyze several criteria set out in Ukrainian law — place of residence, place of permanent residence, a center of vital interests and the number of days spent in Ukraine in a particular calendar year.

WWW.UKRAINIANLAWFIRMS.COM

Tel.:+380 44 490 3000 Fax:+380 44 490 3030 E-mail: kyiv@ua.ey.com Web-site: www.ey.com

Key areas of our expertise are tax (consulting and litigation), transfer pricing, corporate, M&A, labor & employment, private clients / wealth management, publicprivate partnership, antitrust/competition and intellectual property. Our industry focus is also diverse covering, among others, energy & natural resources, banking and finance, agribusiness, real estate and construction, retail, FMCG, healthcare, pharmaceuticals and information technologies. We are known for breaking new ground in various high profile and technically complex projects. These range from our unique expertise of working on oil & gas productions sharing and joint activity agreements, restructuring of the largest business groups and state-owned enterprises and supporting several largest transactions in our country to such matters as sale of football players or healthcare system reform in Ukraine. Law leader for Ukraine is Albert Sych, Partner.

However, is it sufficient for a Ukrainian citizen to reside outside of Ukraine for the major part of the year to become a Ukrainian tax non-resident? According to the Ukrainian tax authorities, it is not. The tax authorities insist that citizens of Ukraine are deemed to have a place of permanent residence in Ukraine and, thus, should be considered as Ukrainian tax residents until they pass the official procedure of leaving for permanent residence abroad.

Leaving Ukraine for Permanent Residence Abroad

Ukrainian citizens may formalize their leave for permanent residence abroad by undergoing a special procedure, the main purpose of which is to cancel an individual’s Ukrainian registration and inform various Ukrainian state authorities about an individual’s permanent residence abroad (e.g. the Ukrainian tax authorities, military enlistment office, State Migration Service, etc.). In October 2016, the procedure was slightly changed and made clearer. In the past, at the end of the procedure an individual had to surrender his or her internal Ukrainian passport, while now an individual keeps his or her internal passport with

the stamp of the State Migration Service confirming that he or she has left Ukraine for permanent residence abroad. It is not a mandatory requirement to complete the said procedure. However, it gives sufficient grounds to treat such an individual as a Ukrainian tax non-resident, taxable only on his/her Ukrainian-source income, provided that this individual actually resides abroad. Another very important goal that one could reach by completing the procedure is acquiring the status of a Ukrainian currency control non-resident. This would allow the individual to transfer funds abroad from a personal bank account in Ukraine without limits, as well as purchase real estate or stocks abroad without the necessity to obtain an individual license from the National Bank of Ukraine allowing such an operation. It is worth noting that completing the procedure of leaving for permanent residence abroad does not mean the loss of Ukrainian citizenship or limitation of the individual’s civil rights, but rather ensures settlement of all obligations related to Ukrainian citizenship of the individual when staying abroad. Thus, it is recommended to include completion of the procedure in the plan on business emigration abroad.

51


Commercial Law

Impact of Deoffshorization on Business Structuring

Nikolay OCHKOLDA

Sergey OVCHAROV

Managing Partner, Attorney-at-Law, Legitimus Law Firm

Attorney-at-Law, Legitimus Law Firm

New Milestones — New Rules

Until recently in business there was much room to maneuver between tax rates, modes and statuses in different countries. However, it is difficult not to notice that the latest trend in the world is pressure from regulatory bodies on all existing offshore businesses. In order to increase control, countries around the world gradually supplement their legislation with new requirements to law firms, banks and other financial institutions. Registries of final beneficiaries of companies are created, followed by disclosure of such information to financial monitoring authorities. Credit and financial institutions around the world have already started collecting information within the framework of automatic exchange of tax information. The world is rapidly changing towards deoffshorization and seeks transparency. In light of recent trends international business is forced to look for new schemes that will enable adaptation to new rules of the game. And while in the past one had to pursue answers to “How not to pay taxes?” nowadays the urgent question is “Where is it profitable to pay taxes?”.

What is Pushing Business to Transparency?

Ukraine joined the BEPS plan (Action Plan on Base Erosion and Profit Shifting) implementation program from 2017, which was proposed by the OECD (Organization for Economic Co-operation and Development). Measures stipulated in the plan are aimed at withstanding schemes of tax burden optimization. The main objectives of this policy are: fiscal

52

transparency, implementation of “deoffshore” standards in entrepreneurship, globalization of automatic exchange of tax information, etc. By joining the plan Ukraine made a commitment to take efforts to implement these principles into national legislation. It is not yet fully clear how it will work in our country, but one thing is certain, namely that we expect fundamental changes in legislation on relations with non-residents, and it is desirable to be prepared in advance for them. It is worth noting that in 2013 Ukraine had already introduced transfer pricing regulations as one of the tools to combat erosion of the tax base. Regulations on transfer pricing are actually part of the BEPS plan, therefore, after accession of our country to the plan we should expect further changes in national legislation in this respect, taking into account international experience,

What’s Ahead?

Introduction of transfer pricing regulations was the first step taken by Ukraine towards “deoffshorization”. After the accession of Ukraine to BEPS plan, the next steps are likely to be: accession to automatic exchange of tax information and implementation of CFC rules (Controlled Foreign Companies rules). Let’s try to understand the basic principles of these procedures and their effects on business. Exchange of information between banks and tax authorities of countries that acceded to the AEOI agreement (Automatic Exchange of Information) from 2017. This Agreement was signed by a number of countries — OECD members, including the USA, EU countries, and classic offshores: British Virgin Islands, Panama, Seychelles and others. The Agree-

ment provides collection of information about their customers by financial institutions and its submission to the tax authorities. Such information shall include information on investment income (dividends, interests, income from insurance contracts and sales of financial assets, real estate), balance of funds in bank accounts, beneficiaries of trusts, shareholders of companies, etc. It is not yet known whether Ukraine will be among these countries, but given the announced course for deoffshorization one should prepare for the fact that Ukraine will accede to the Agreement, after which fiscal bodies will be able to obtain information from other countries about accounts opened by Ukrainian residents, identify associated persons and possible violations of currency legislation. There is a high probability that simultaneously with the start of automatic exchange of information under the CRS standard (Common Reporting Standard), Ukraine will introduce CFC rules (Controlled Foreign Companies rules). The corresponding Draft Law On Amendments to the Tax Code of Ukraine to Prevent Tax Base Erosion and Profits Shifting Offshore awaits consideration in Parliament now. If adopted, residents of Ukraine, owners of controlled foreign companies, will have to report to regulatory authorities about such companies and their income. Restrictions may affect foreign companies with income from source of origin in Ukraine. State financial control will check whether such companies are actual beneficiaries of profits gained, or whether they are not nominal (verification of office existence and of actual costs for its maintenance, availability of employees, etc.). CFC rules actually stipulate that the tax residency of a foreign company shall be given the same status as the tax residency of directors, authorized persons and beneficiaries who manage it in practice. There is a good chance that automatic exchange of information and CFC rules will be implemented in Ukraine simultaneously. Therefore, when information about beneficial owners of foreign companies becomes available for state bodies, they will have every reason to increase the tax burden for such persons. The world becomes more transparent, information more available and there is a desire to know beneficial owners in person. It is better to start getting ready for global changes related to international deoffshorization now. Some-

WWW.UKRAINIANLAWFIRMS.COM


Legitimus

L

Address: 49A Volodymyrska Street, Suite 149, Kyiv, 01001, Ukraine

egitimus law firm was founded in 2006. The team includes 14 lawyers, who have considerable experience in various fields of legal practice. Its main principles are professionalism, efficiency, honesty and confiden-

tiality. The principal practice areas of Legitimus include real estate and land law, banking and finance, litigation and arbitration, corporate and M&A, taxation and international trade/foreign investment. Real estate and land law Legitimus law firm provides full legal support in real estate transactions in the interest of the company’s clients, including drafting of agreements with respect to real estate and land deals: advising on the safest ways of acquiring and alienation of real estate rights, support for land plots allotment and ownership rights registration procedures, ownership rights registration procedures for other real estate objects. Litigation and arbitration Our team has a solid litigation experience in courts of first instance, courts of appeal, higher commercial court, higher administrative court and the Supreme Court of Ukraine. In order to provide comprehensive case analysis the company’s attorneys perform a preliminary case review and assess the court prospects of commercial, administrative and civil proceedings, represent and protect the clients interests both in state courts of all instances and international arbitration instructions.

times a reasonable solution for beneficiaries is getting tax resident status in other, more attractive jurisdictions. But one thing is obvious, one will still have to pay taxes somewhere.

Peculiarities of Determining Beneficiaries’ Tax Residence

Due to the new business environment, tax residency of the final owner, a physical person, becomes one of the key factors that will determine the future of your business. Tax residency is a legal bond determining under which legislation and in the territory of which state a person must pay taxes. Note: tax residency and citizenship are different legal statuses that may not coincide. If a person lives in different jurisdictions or he/she has citizenship of different countries, it is necessary to precisely understand a tax resident of which country he/she is and where he/she is obliged to pay taxes. This is due to the fact that after introduction of automatic exchange of information under the CRS standard, the bank, where an account is opened, will exchange data not with all tax authorities of the world, but only with those countries in which the customer has tax residency status. Therefore, it will be tax resi-

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 585 8255/56/57 E-mail: legitimus@legitimus.com.ua Web-site: www.legitimus.com.ua

Tax Legitimus law firm advises and provides legal opinions as to legal entities and individuals taxation in Ukraine, carries out legal analysis of drafts agreements in terms of tax liabilities, develops efficient tax schemes for the business activities of companies. The company represents both legal and individual interests at all stages of tax dispute resolution (reviews, litigations). Corporate Our firm provides a range of services in the field of corporate law which includes registration of legal entities, compliance with regulatory requirements following antimonopoly law while establishing and structuring holding companies, etc. Full legal support of M&A deals, companies legal due diligence and drawing up documents to eliminate and minimize risks and deficiencies; M&A support in compliance with Ukrainian and foreign tax and corporate law, legal support in preventing hostile acquisitions, majority and minority shareholders rights protection, financial institutions registration and financial services licensing support. International trade/foreign investment Legitimus law firm offers legal advice to residents on international business activities, and to non-residents on commercial activity in Ukraine. Our clients include domestic and international companies, investment funds, financial institutions and others. Languages: Ukrainian, English, Spanish, Russian.

dency that shall be the criteria for determining which state personal data will be transferred to. Thus, definition of tax residency of a beneficiary owner requires special consideration when structuring a business. Each state has its own laws, under which it determines whether a physical person is its tax resident. For example, the Tax Code of Ukraine (cl.14.1.213) states that “a resident is a physical person that has a place of residence in Ukraine”. The critical factor in determining tax residency is the place of permanent residence and personal or economic relations (center of vital interests). If it is difficult to determine the center of vital interests, then a person will be considered to be a resident of Ukraine in case he/she stays in Ukraine at least for 183 days (including days of arrival and departure) during a period or periods of a tax year. And if this factor is also uncertain, then citizenship prevails. It should be noted that there are many countries providing favorable conditions for business persons in the form of tax exemptions and convenient programs for acquiring the status of a tax resident. However, every country has a number of features that determine whether any given person is a resident. It is important to understand that the status of a tax resident of another state does not

mean termination of tax residency in Ukraine. To lose the status of a resident of Ukraine it is required not to stay in its territory for more than 183 days and have no close personal or economic relations with the country. Otherwise, there is a risk that the person may be considered a tax resident of several countries simultaneously.

Conclusion

To summarize the above, it can be affirmed that the world continues its development on the path of economic and political globalization. The processes taking place are the basis for transition to a new level of tax cooperation between members of the international community. We are on the threshold of global changes aimed at making business transparent and open. To be one step ahead, it is important to find one’s way in a timely manner and to readjust to new ways. We still have time to prepare business structures for modern conditions: carry out an inventory of the use of companies and accounts, detect risks for beneficiaries, perhaps transfer companies to other jurisdictions or restructure assets so as not to be afraid of information disclosure. Deoffshorization is spreading globally. Start planning your work now.

53


Competition Investigations

Legal Professional Privilege in Competition Law Proceedings

Antonina YAHOLNYK Founding Partner, CLACIS

Kateryna TKACHENKO Partner, CLACIS

Anastasiia ZELENIUK

L

54

Attorney, CLACIS egal professional privilege is one of the main tools, which ensures confidentiality of attorney-client relationship and, therefore, helps build an effec-

tive defense without disclosure of sensitive information, which can be used as an evidence against an undertaking. Legal privilege is even more important in cases where the competent authorities conduct on-site investigations. In such cases, legal privilege would help to indicate upfront materials covered by privilege and, hence, falling beyond the competence of the competent authority. One of the most prominent examples of effective application of legal privilege is antitrust dawn raids, i.e. on-site investigations of the premises of an undertaking and employees’ questioning by the competent antitrust authority. The best practices in mature jurisdictions prove the efficiency of legal privilege when such is used to take out certain documents from the scope of an antitrust investigation or, at least, to ban them for use as evidence. In more detail, legal privilege in competition law proceedings has been recognized in the EU since 1982, when this issue was first addressed by the European Court of Justice in AM&S Europe Ltd v European Commission case. Later, in the Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. Commission cases the Court stated that the legal privilege shall cover written communication of an undertaking with an independent lawyer admitted to the bar and subjected as such to disciplinary and ethics control; however, it shall not cover communication and materials prepared by an in-house lawyer due to the lack of independence of such in-house lawyer resulting from labor relations with a company even if such in-house lawyer is a member of a national bar. Additionally, there is no professional work product protection in the EU, which would invoke privilege for materials prepared for the purposes of defence in anticipated litigation. In practice, privilege may cover preparatory materials not exchanged with an external lawyer if such materials were prepared exclusively for seeking legal advice, and internal notes, which report the text or the content of the original lawyer-client communication. As regards communication with foreign lawyers, privilege extends only to communication between the client and a lawyer admitted to practice in any of the EEA member states.

Legal privilege requires competent antitrust authorities to abide with rather clear procedural rules when dealing with allegedly protected materials, including specific processing of such materials and possible involvement of the bar to decide on whether the materials in questions are indeed covered by legal privilege and thus shall fall beyond the scope of any antitrust investigation. Though legal privilege protection in the EU is limited to independent external attorneys admitted to the bar and to the materials qualifying to certain criteria, the EU concept of legal privilege provides for a fair level of legal certainty in respect to the privileged materials, which may be excluded from the scope of antitrust investigation and, even more importantly, which cannot be used as evidence against an undertaking which is being investigated. In its turn, in the USA, legal privilege is even broader. It includes both attorneyclient and work product privilege, with the latter covering materials and documents prepared for a litigation, which in most cases imminently results from an antitrust investigation. In contrast to the EU approach, in the US attorney privilege may also cover communication with in-house lawyers, who are active members of a national bar. To be protected by such a privilege respective internal communication shall be made upon instruction of a senior official and with a clear purpose of receiving a legal advice limited to the scope of employee’s duties, which shall not be made public. It is also important that such type of legal privilege is limited only to legal matters. Similarly to the EU, the status of, and access to, legally privileged materials is covered by special regulations in the US. Thus, refusal to disclose legally privileged materials (both attorney-client and work product) shall not be considered as an obstruction to an antitrust investigation. In addition, in order to obtain any data covered by the privilege the US antitrust authority shall obtain written consent from the US Deputy Attorney General. It should be noted though that in the US criminal liability exists for certain competition law infringements, hence attorney-client privilege gets another level of importance in proceedings of this nature.

WWW.UKRAINIANLAWFIRMS.COM


CLACIS

C

Address: Sophia Business Center, 6 Rylskiy Lane, 2 Floor, Kyiv, 01001, Ukraine

LACIS is a leading competition law advisory, which focuses on matters regarding competition law in Ukraine, Russia and Kazakhstan. The services include all aspects of competition law such as investigations, audits, infringement cases, leniency, merger control approvals, competition law, legal due diligence, antitrust litigation, distribution and contract related antitrust issues, public procurement, as well as compliance issues. The team of professionals of recognized competence in unison with regional coverage makes CLACIS a unique law firm. Well-known as a “one-stop-shop”, CLACIS offers its clients high-quality advice on competition law matters in a number of jurisdictions with international capacity through relationships with independent law firms. We regularly advise international companies at regional level on competition law issues arising in the region. Such multijurisdictional expertise in antitrust matters within this region is unique on the market. Both founding partner Antonina Yaholnyk and CLACIS have been highly recognized by such international and lo-

Even though the legal privilege regime in the US is rather liberal and generally protects any type of communication between client and lawyer, there are a fair number of details to be considered on a case-bycase basis. Therefore, litigations between companies and antitrust bodies are not rare and best practices may vary depending on the circumstances of a particular case. Still, US legal privilege proved to be an efficient remedy to preserve privileged materials in official proceedings. Unlike the best practices internationally, the status and criteria of legal privilege in Ukraine, particularly in antitrust investigations, are quite vague. To begin with, the effective competition law of Ukraine does not address the issue of legal privilege at all. Moreover, competition law generally provides for the right of the competent authority — the Antimonopoly Committee of Ukraine (the AMCU) — to have access to confidential information of undertakings; no detailed regulation of this issue is provided further. It basically means that the AMCU has almost absolute power to demand from companies any documents, materials and information, including those with restricted access. Any failure to provide the requested information may be considered an obstruction and lead to a fine. Generally, legal professional privilege is provided by the Law of Ukraine On Advo-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 392 0102 Fax: +380 44 392 0103 E-mail: yaholnyk@clacis.com Web-site: www.clacis.com

cal legal directories like Chambers Europe, Best Lawyers and ULF. Being one of the leading individuals in the field of antitrust & competition, Antonina Yaholnyk has over 20 years of legal practice, including over 10 years of experience handling antitrust and compliance matters. She also headed Baker McKenzie’s Competition & Compliance Law Practice Groups. Antonina Yaholnyk holds an LL.M. degree from the University of Cambridge (UK), Master’s degree International Law and Economics from the World Trade Institute (Switzerland). Mrs Yaholnyk chaired the European Business Association’s Competition Committee in 2011-2012. She is a member of Noncommercial Partnership “Supporting Competition in the CIS Countries”. Mrs. Yaholnyk was elected a Member of the Council of Competition Law Committee at the Ukrainian Bar Association in 2016. Our lawyers — a team of dedicated professionals in antitrust and antitrust litigation — are graduates of leading local and foreign universities with professional experience in international and regional law firms in Ukraine, Russia and Kazakhstan.

cacy and Advocatory Practice in Ukraine as of 5 July 2012 (hereinafter — the Law). This Law provides for a wide range of matters covering legally privileged matters from the side of an advocate, i.e. attorney having bar admission. However, the Law remains silent with respect to the status of privileged data when it is requested from a client in any official proceedings. As it follows from the Law, even such limited regulation is silent on whether legal privilege may relate to an in-house lawyer if such is admitted to the bar. This leaves significant room for interpretations on the side of the competent authorities to claim disclosure of such information directly from an investigated undertaking. Unlike special treatment and specific procedural rules for such type of materials in the EU and US, this legislative gap in Ukrainian Law presents significant legal risk of involuntary disclosure of privileged data in the absence of the necessary legal remedy. This is even more important taking into account current trends granting authority in court representation only to qualified attorneys. Given this, there is a strong necessity to elaborate on respective approaches on dealing with privileged materials in official investigations, as well as the mechanism of control over the diligent use of legal privilege by attorneys from the side of the Ukrainian bar.

It should be noted that under pending reform in Ukraine, the trend which grants authority in court representation to qualified advocates relates, unfortunately, only to litigation proceedings. Other types of official proceedings are currently beyond the scope of reform. This leaves an important part of official proceedings, for instance, quite specific investigations of the AMCU, uncovered. At the same time, preservation of the legal privilege in AMCU investigations requires special regulation given that such investigations involve commercially sensitive matters as well as extensive powers of the AMCU to investigate: the right to seize documents, servers, search premises, interview employees to name but a few. In view of the legal gaps regarding the status and processing of privileged materials, involvement of an external independent attorney having bar admission to assist with antitrust matters (at least complex ones such as abuse of dominance, anti-competitive concerted actions, leniency and on-site investigations) appears to be highly recommended. Furthermore, a client should feel comfortable that advice being sought on antitrust compliance matters is protected communication. This instrument of protection of communication as privileged and confidential between the client and the attorney will enable an increase in overall advocacy of best practice in competition law compliance.

55


Compliance

Anti-Corruption Programme as an Effective Tool of the Risk Management Procedures and nature of the business, as well as any peculiarities of the jurisdiction where its production units are located.

Anna LYPSKA

Evgen BIDNIY

Attorney-at-Law, Head of Compliance Practice, PwC Legal

Attorney-at-Law, PwC Legal

t has been more than two years since the measures, which introduced criminal liability to legal entities, officially came into effect in Ukraine. Since then, the application of criminal liability to a company’s officials for the committing of certain crimes (including corruption-related offences) entails criminal prosecution of the company itself, and can even result in its liquidation. Following these changes, the Ukrainian Parliament adopted the Law of Ukraine On Prevention of Corruption, which officially established the possibility and, in certain cases a “requirement”, to approve anti-corruption programmes in businesses. As expected, local businesses did not pay much attention to this legislation and have been implementing anti-corruption programmes mostly in special circumstances only (for instance, if a company planned to participate in a public procurement process). On the other hand, international companies operating in Ukraine were more responsive to the new legislation. In our view, Ukraine’s aspirations on joining the European Union (EU), requirements put forward by the EU management for liberalization of the visa regime with Ukraine, the establishment of a new body aimed at fighting corruption (the Specialized Anti-corruption Prosecutor’s Office) expressly indicate that anti-corruption regulations as well as the methodology and quality of prosecution of corruption-related crimes are subject to further enhancement.

We are of the opinion that this will lead to more stringent control over unlawful business practices and that the establishment of anti-corruption programmes/procedures will become a matter of vital importance. Taking into account PwC’s expertise and experience in the design of effective anti-corruption procedures, and given international best practices in this field, we have prepared the following outline of the key pillars of an effective anti-corruption programme.

I

56

Firm Decisions and Support From Top Management

As is the case with other company activities, the starting point for the creation of a viable anti-corruption programme is the strong promotion and support of the initiative by senior management. Identification of Areas With High Corruption Risks Companies should assess: which areas of the business have the highest risk of corruption; the reliability of individuals who interact with public authorities on behalf of the company; business strategies used in M&A and other corporate deals; the level of interaction with tax, customs, immigration and other authorities; the business models operating based on joint activity agreements; and the company’s dependence on licenses, permits, etc. Other important aspects that should be taken into account when approving an anticorruption programme are the size, sector

Clearly Defined and Accessible Corporate Policy A company must have in place a number of regulations and rules of behaviour with respect to any activities deemed to be at risk from corruption. These documents should be clear, accurate and accessible for review by each employee and authorised person of the company. It is also important to ensure familiarisation with the anti-corruption corporate policies by persons who are not employed by a company, but authorised to act on its behalf. Both best practice and our own expertise show that the results of an anti-corruption programme depends on the commitment of every person associated with the business (whether employed or not) to follow the requirements of such a programme. Detached Control Function To ensure the proper functioning of the anti-corruption programme, it is advisable to create a special department (consisting of a minimum of 1-2 senior corporate officers), which will be entrusted with the function of control over compliance with anti-corruption policies. To have real influence in the company’s corporate structure, the officers of the anticorruption function should have adequate powers, a certain autonomy in relation to the company’s management, and sufficient resources. In the United States, authorities pay special attention to the adequacy of the ratio of officers and resources available to implement an anti-corruption programme to the size and structure of the company and the type of risks inherent to a particular field of business. Multinational companies operating in a number of countries generally have a centralised anti-corruption compliance unit in addition to local anti-corruption units within each country. Anti-Corruption Obligations of Third Parties An important element of an anti-corruption policy is to ensure compliance by third

WWW.UKRAINIANLAWFIRMS.COM


PwC Legal

P

Address: 75 Zhylyanska Street, Kyiv, 01032, Ukraine

wC Legal is a team of legal experts with solid experience in local and international legislation within the largest professional network of 2,500 lawyers across 83 countries. PwC Legal is a “full-scope service law firm” which renders services in traditional, as well as innovative legal prac-

parties such as agents, representatives, consultants, distributors, contractors, suppliers and joint venture parties. As a result, we encourage our clients to pay special attention to the careful selection of business partners, the awareness by these partners of the anti-corruption requirements of the company, and an awareness of the importance of compliance by these partners. In our view, it is crucial to execute a thorough study of the business history of potential partners. Such a study includes not only requesting or obtaining documents which certify a counterparty’s standing, but also requires confirmation thereof in publicly available registers and resources, research of the counterparty’s court practice, and research regarding the reputation of the company, its management, founders and beneficiaries. For instance, the World Bank’s recommendations clearly state that any payment made to a business partner must be an “adequate” and “evidenced” compensation for the services rendered or goods supplied. In addition, the World Bank indicates that companies should avoid cooperation with contractors, suppliers and other business partners that have engaged in, or are suspected of engaging in, illegal business practices. Companies usually do not have trained specialists to carry out a proper evaluation of the relevant risks related to a potential counterparty. For this reason, businesses often engage external consultants who, in strict confidence, conduct independent assessment of the described risks. System of Internal Control over Financial and Accounting Processes Another element of an anti-corruption programme is the introduction of a specially

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 354 0404 E-mail: legal@ua.pwc.com Web-site: www.legal.pwc.ua

tices. Our legal team serves different industries with a wide range of services reaching all key areas of legal business practices. In Ukraine we bring together teams of specialists in legal services and other disciplines such as tax, insurance and business consulting to work as your trusted business advisers.

designed system of internal control over financial flows. Such a system should be established to screen any settlements initiated by employees involved in direct interaction with state bodies on behalf of the company. In practice, companies may introduce a reconciliation process of payments made in favour of public bodies or “suspicious” companies which could be incorporated for money laundering schemes or tax evasion purposes. For this reason, the company may engage different control units, including a central anti-corruption department at the head office. Regular Updates and Corporate Training We would also like to emphasize the importance of regular communication and anticorruption compliance training for all employees. For instance, this is also incorporated in the Foreign Corrupt Practices Act (USA). Anti-corruption training should not be of a one-time nature. The world’s leading practices in the fight against corruption indicate that such activities should be carried out on a regular basis and be adapted to the peculiarities of the particular business. It is recommended to conduct separate training sessions for managers of companies that operate in those areas most prone to corruption risks, e.g. public procurement, and interaction with public authorities (including tax authorities). Whistleblower Protection Policy Along with all the above, one of the pillars of a successful anti-corruption policy is to protect employees and third parties that notify or expose corruption (so-called “whistleblower protection”). The best anti-corruption practices include the establishment of policies or regula-

tions for a whistleblower’s activity, the mechanisms for internal audit of the facts received, and confidentiality guarantees. To ensure the effectiveness and safety of such a policy, the collection centre of such information should be located at the centre of a particular business group (i.e. at the central office). Periodic Review of Existing Policies Anti-corruption policies are subject to periodic testing and updating. This is necessary due to regulatory changes, the emergence of new corruption risks or the removal of previous corruption risks, a change in the business model of a company, etc. For example, to enhance the effectiveness of existing programmes, provisions of the Foreign Corrupt Practices Act envisage the conduct of a wide range of benchmarking studies (i.e. comparative tests) of the anticorruption practices of other companies. The best practices include such grounds for reviewing existing anti-corruption programmes as a study of the opinions of staff about the effectiveness of anti-corruption programmes, and holding “control checks” of the compliance of staff with such programmes. Our experience confirms that the creation and implementation of anti-corruption programmes and policies is a multifaceted task, which requires special knowledge, sufficient experience and the availability of staff with the right training. We are convinced that the top anti-corruption compliance models are not merely a set of static rules but, on the contrary, should be a flexible, constantly modifiable mechanism, which reacts appropriately to rapidly changing circumstances.

57


Copyright

Copyright to Works Made for Hire. Legal Regulation and Foreign Experience

Oleksandra ODINETS Attorney-at-law, Konnov & Sozanovsky

O

n the way towards integration with the European Union with the aim of accession to the Single European Information Space, we have accepted obligations as for the harmonization of the national legislations with European standards, especially legislation in the field of intellectual property. Of the various types of intellectual property rights, copyrights are the most easily obtained, but arguably the most misunderstood. The main directions of improvement of national legislation as for the exceptions and restrictions in the field of copyright and related rights were aimed at further harmonization of national legislations with EU standards, namely: Ukraine — European Union Association Agreement (hereinafter — the Association Agreement), the Directive of European Parliament and Council On Legal Protection of the Computer Programs of 23 April 2009. There are many legal disputes in the field of copyrights to works made for hire. The legal regulation of copyrights to works made for hire is a really problematic issue in Ukraine due to the existing conflict of law between the Civil Code of Ukraine and the special law — the Law of Ukraine On Copyright and Related Rights (hereinafter — the Copyright Law). Namely, Article 429 of the Civil Code of Ukraine provides that an employee, an author of the intellectual property object created in the course of his/her employment, holds personal non-proprietary rights to this object. The Code also states that a special law may provide cases when some personal non-proprietary rights to such an object may belong to an employer.

58

According to the Civil Code proprietary rights to an object created under an employment agreement is vested jointly with the author (the employee) and the employer — a legal entity or individual, unless otherwise stipulated by an employment agreement. The respective provisions applied to any intellectual property object created under an employment relationship, such as: copyright object, trademark, industrial design, invention, utility model. In opposition to the Civil Code the Copyright Law provides that the exclusive proprietary rights to the copyright objects made for hire belong to the employer, unless otherwise provided for by the labor contract and (or) civil contract, concluded between the author and the employer. We have reviewed the respective judicial practice in this field. The Plenum of Supreme Court of Ukraine in its Resolution On the Application of Legal Provisions in Copyright and Related Rights Protection Cases (the Resolution of Supreme Court) No. 5 of 4 June 2010, concluded as follows: “if a work is created under an employment agreement and within its term of validity, i.e. within employment and under an instruction of the employer personal non-proprietary rights belong to the employee. The proprietary rights to an object of copyright and (or) related rights created under the employment agreement belong to the employee who created the object and legal entity or individual-employer jointly, if otherwise provided by the agreement”. According to the Resolution if an employment or civil agreement between employer and employee doesn’t provide for another procedure to perform proprietary rights to the created object, they both have the joint right to receive a certificate of copyright registration and use the intellectual property object. In case of assignment of all exclusive rights by the employee to the created object he loses his exclusive proprietary rights. However, personal non-proprietary rights are inalienable. Thus, the above Resolution confirms the provisions of the Code as being of higher priority, regardless of the provisions of the special law — the Copyright Law. The other problem issue is the legal recompense of the author’s remuneration for

the creation of the copyright object under an employment agreement. The arguable point is the employer will pay additional remuneration to the author of the copyright object, or will the salary be treated as sufficient payment for his/her work? The Copyright Law and the Civil Code stipulated that the amount of the author’s remuneration for the creation and use of the course-of-duty work, as well as the relevant payment procedure shall be settled in the respective employment agreement and/or civillaw contract. In this regard the Resolution of Supreme Court stated that the payment of the salary to the employee is not similar to payment of author’s remuneration to him/her for creation of the copyright object under the employment agreement, because the salary is the payment for the work performed depending on certain conditions, whereas an author’s remuneration are all kinds of remunerations and compensations which are paid to the authors for usage of their creations, which are protected within the limits prescribed by copyright law. If there is no agreement among the parties regarding the amount of the author’s remuneration the courts, when calculating such remuneration, shall be governed by the provisions of the Resolution of Cabinet of Ministers of Ukraine No.72 On Approval of the Minimum Rates of Remuneration (royalty) for Use of Copyright and Related Rights Objects of 18 January 2003. Legislators shall endeavor to settle the above-mentioned conflict of laws. There is Draft Law No. 4579 of 4 May 2016 developed by the Cabinet of Ministers of Ukraine On Amending Certain Legislative Acts Regarding Acquisition, Disposal and Protection of the Copyright and Related Rights (the Draft) aimed at regulating the issues of legal regulation of the copyright to works made for hire and harmonize national copyright legislation with European standards. Among other provisions, the Draft Law stipulated the following amendments to the Copyright Law: — if there is no condition regarding proprietary rights to a work created for hire in an employment agreement or civil law contract, the proprietary rights to such work belong to the author; — proprietary rights to the work created for hire created under an employment rela-

WWW.UKRAINIANLAWFIRMS.COM


Konnov & Sozanovsky

K

Address: 23 Shota Rustaveli Street, Suite 3, Kyiv, 01033, Ukraine

onnov & Sozanovsky is a full-service law firm oriented towards providing comprehensive legal advice to Ukrainian and international clients. Since 1992 it has proved to be rightfully recognized as one of the leading law firms in Ukraine. Konnov & Sozanovsky advises clients in the most popular business areas of law: agrarian law, banking and finance law, copyright and media law, commercial law and contracts, competition law, corporate law, intellectual property law, labor law, real estate, construction and land law, tax law, and has represented clients in large-scale mergers and acquisitions and litigation cases. The firm practices an individual approach in each case, taking into consideration the peculiarities of a client’s business and its preferences. The firm’s rich experience covers legal advice on matters in such industries as advertising and design, agriculture, banking, energy and power, food industry, insurance, investment and the equity market, light industry, media and telecommunications, pharmaceuticals, publishing, real estate and construction, software, spirits industry, tobacco industry, trade and distribution, veterinary production. Konnov & Sozanovsky is highly involved in the activities of the business community and is a full member of the American Chamber of Commerce in Ukraine (ACC), Ukrainian Bar Association (UBA), European Business Association (EBA, Ukraine),

tionship with a government authority belong to the government authority; — proprietary rights to a computer program, database, created in connection with the execution of an employment agreement belong to the employer, unless otherwise stipulated by an employment agreement; — proprietary rights to the work made for hire belong to the author of this work, unless otherwise stipulated by the agreement; — proprietary rights to the computer program made for hire belong to the customer, unless otherwise stipulated by the agreement The aim of the Draft Law is to harmonize Ukrainian copyright legislation with the Association Agreement, namely with regard to the authors rights to databases and computer programs. Article 181 of the Association Agreement provides that if a computer program is created by an employee in connection with the execution of his/her official duties all proprietary rights to such a program belong to the employer, unless otherwise provided by the employment contract. However, the Draft Law has not yet been considered by the Verkhovna Rada. Let’s briefly review foreign practices in the area of legal regulation of the copyright to works made for hire or created under an employment relationship. In USA, generally, the author of a work is the owner of the copyright to such a work.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 5400 Fax +380 44 490 5490 E-mail: kleshchenko@konnov.com Web-site: www.konnov.com

Association of European Businesses (AEB, Russia), International Trademark Association (INTA). Konnov & Sozanovsky is an exclusive member of First Law International (FLI) — the specialized international legal network, which has been operating on the legal market since 2003 and has already succeeded in integrating the most competitive law firms from more than 40 countries from all over the world. This enables FLI members to provide high quality legal assistance to clients in all major legal systems, thereby saving clients considerable time and resources, while maintaining service quality and confidentiality of information transferred. Therefore, the client receives not only service but also a reliable business partner and legal advisor across three continents. The firm conformity to international service quality standards is annually recognized by such legal research directories as Chambers and Partners, Legal 500, PLC Which Lawyer, IFLR 1000 and Who Is Who Legal. High appraisals are built on our clients’ recommendations, favorable competitors’ reviews as well as the opinions of leaders of key industries. In unison with international recognition, Konnov and Sozanovsky is a multiple nominee and holder of the national awardwinning Law Award of the Year and for many years has been in the TOP-10 leading law firms in Ukraine according to Yuridicheskaya Practika Publishing. According to Ukrainian Law Firms a Handbook for Foreign Clients, both partners and lawyers are acknowledged as leaders in various branches of law.

Under the Copyright Act of USA a work is a “work made for hire” only if: — it is prepared by an employee within the scope of his employment; or — it is specially ordered or commissioned from an independent contractor pursuant to a written agreement. For works created by employees, courts apply general principles of agency and employment law to determine whether an individual is an “employee” and whether the work was created within the “scope of employment.” Courts generally apply a three-prong test to determine whether a work is an employee-created work made for hire: — whether the work is of the kind that the employee is employed to perform; — whether the work occurs substantially within authorized work hours; and — whether the work is performed, at least in part, to serve the employer. If a company is uncertain whether an individual is an employee or whether the creation of the work falls within the scope of such individual’s employment, it should obtain a written agreement from the individual expressly assigning the copyright in the applicable works to the company. German law parallels French law in that the initial owner of copyright in a work is always the individual person who created the

work. Furthermore, in accordance with the Berne Convention, German law establishes a presumption of authorship based on a customary indication of such on the work. In the United Kingdom the law varies based on the type of work at issue. The Copyright, Designs, and Patents Act of the UK governing the primary grouping, literary, dramatic, musical, and artistic works stipulated that when a work is made in the course of employment, copyright will belong to the employer, otherwise it will belong to the author. We can conclude that despite the fact that most of the countries mentioned above lack a definitive copyright classification of “works made for hire”, the general approach to such works is rather similar. Most countries acknowledge, at least on a limited basis, copyright to an employer when the employee creates the work within the scope of his employment. Ukrainian legislation in the field of copyright to works made for hire shall be harmonized with judicial practices and European standards. The employee and employer should also take into consideration all the possible risks and specify in an employment agreement or civil law contract the provisions with regard to proprietary rights to the respective intellectual property object and draw attention to the provisions, specifying the royalty payment to the author of the copyright object.

59


Corporate

The Core Issue of Corporate Law in Ukraine: Fighting Raiders brief outline of certain law requirements applicable to the protection of foreign business from corporate raiders.

Business Registration in Ukraine

Ernest GRAMATSKIY President, Gramatskiy & Partners Attorneys at Law

I

t is no secret that Ukraine has great business potential: geographical location, its large internal market, diverse natural resource base, well-educated people and, of course, cheap labor. Therefore, the Ukrainian economy has always been attractive for foreign investors seeking a possibility to expand their business. Despite all the challenges and obstacles that may arise during registration and conducting of business, investors still want to operate on one of the largest markets in Europe. Unfortunately, Ukrainian legislation is too complicated and difficult to understand for use by foreign investors. Frequent amendments to laws do not facilitate the process of doing business in Ukraine. Moreover, such a tendency creates a big threat for successful corporate activity. Ukraine has publicly announced its course aimed at simplifying the start-up and conducting of business. For the last few years Law of Ukraine No. 755-IV On State Registration of Legal Entities, Individual Entrepreneurs and Non Governmental Organizations has been dramatically amended. De facto, those amendments aimed at simplifying the process of business registration were frequently used by raiders to gain absolute control over corporate assets. The business community was concerned and required the state authorities to take radical steps to improve the business environment in Ukraine. Fortunately, recent amendments to the above mentioned Law have been met with optimism and this article aims to give a

60

When a foreign investor considers a possibility to open up a business in Ukraine, a number of issues should be resolved. First and, probably, the most fundamental one, is choosing an appropriate legal form of business. Ukrainian legislation grants investors autonomy to choose the legal form of business at their own discretion. However, of course, it contains some obligatory requirements. For example, banks shall be created exclusively in the form of a public joint stock company. Sometimes, it is reasonable to register a representative office. However, in this case the investors will not enjoy all those rights that are attributable to other forms of business, since the representative office is not considered a separate legal entity and, what is most important, cannot carry out business activities. Generally, the most fundamental requirements for establishing legal entities in Ukraine are contained in the Civil Code of Ukraine, the Economic Code of Ukraine, On Business Association Law, On Joint Stock Companies Law. At the same time, as practice shows, one of the most commonly used legal forms of legal entities is a limited liability company. There are many reasons for such choice including but not limited to: the authorized capital (share capital) is divided into parts (shares); there is no limit to the minimum and maximum size of authorized capital (share capital); it may be incorporated by a sole participant (shareholder); the investors’ liability is limited by parts (shares); and, the most important, a limited liability company may carry out almost any business activities. The Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Non Governmental Organizations governs the process of establishing a limited liability company in Ukraine and contains the full list of documents required for successful registration of a legal entity with the State Registrar. There is no need to name them all. However, it should be noted that the

fundamental statutory document of limited liability company is its Charter (Articles of Association), where all those issues concerning authorized capital (share capital), participants (shareholders), etc., are detailed. Generally, the process of establishing a limited liability company is less timeconsuming compared to the registration of other legal entities and takes no more than two-three business days (state registration should be done within 24 hours). However, the registration of a legal entity does not guarantee its successful business activity, as there are many problem issues that should be resolved. For example, establishing an effective corporate structure for the company will definitely increase its efficiency. Another crucial issue is control over the activities of the company’s managers who, in turn, run the day-to-day affairs of the company. In case investors fail to take the above-mentioned steps, the risk of losing their assets will be radically increased. One of the most common methods among raiders is using gaps in Ukrainian legislation aimed at illegal takeover of a company, usually by amending the company’s statutory documents contained in the Unified State Register of Legal Entities, Individual Entrepreneurs and Non Governmental Organizations of Ukraine (hereinafter — the State Register).

Amending Statutory Documents, the way things were

In 2015-2016 the process of amending the company’s statutory documents was too simple and only required submitting the full package of documents to the State Registrar. The Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Non Governmental Organizations contained no obligatory provision requiring entrepreneurs to prove the validity of their signatures. Moreover, it is not necessary to notarize the agreements of purchase and sale of parts (shares) and use the company’s corporate seal. All of these gaps were commonly used by corporate raiders who could easily counterfeit documents and submit them to the State Registrar. Another problem is that the State Registrar does not have the right to

WWW.UKRAINIANLAWFIRMS.COM


Gramatskiy & Partners

G

Address: 16 Mikhailivska Street, 2, 3rd Floor, Kyiv, 01001, Ukraine

ramatskiy & Partners is known as a trustworthy law firm, which has been successful in provision of legal assistance to its clients in various areas of law since its foundation. Gramatskiy & Partners is recognized as one of the leading law firms in Ukraine introducing high standards of legal services and performing with exceptional proficiency. From the moment of its foundation in 1998, Gramatskiy & Partners has acknowledged business legal practice as its own professional vocation and a mission of its serving the public. The unique experience of a vast legal practice allows the firm to advise today more than a hundred Ukrainian and foreign companies providing complex aid and assistance in legal matters, combining classic legal practice traditions with modern international standards of the legal services market. Being a universal law firm, Gramatskiy & Partners has made its name in a capacity of a qualified provider of comprehensive legal service. Combining a scrupulous approach and customer-centered orientation in terms of rendering legal assistance enables the firm to individualize a wide range of its services for the business of every client. For more than 17 years Gramatskiy & Partners has been successfully developing its practice in the field of business (commercial) law, foreign economic activity, and the practice of international private law.

examine the validity of such documents and may only suspend the procedure of state registration of amendments in case the package of documents is not complete. According to various estimates, hundreds of legal entities came under attack from corporate raiders in Ukraine in the last two years. Some of them were able to protect their business, but some of them, unfortunately, were not and lost their money. The business community was stressed, concerned and unprotected, so the situation had to be changed. Therefore, the Verkhovna Rada of Ukraine recently adopted routine amendments to the Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Non-Governmental Organizations, which were, by the way, met with optimism.

All New is well forgotten Old

Trying to find the best way to solve the problem of protecting investors’ interests, Ukrainian MPs decided to restore the former provisions of the Law On State Registration of Legal Entities, Individual Entrepreneurs and Non-Governmental Organization. Henceforth, any decision adopted by a company’s superior body (General Meeting of Partici-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 581 1551 E-mail: office@gramatskiy.com Web-site: www.gramatskiy.com

The pride of the firm is its staff — a team of professionals who had stood at the outset of the firm and have worked their way up from its foundation on the local and foreign legal service market and who continue working for the benefit of the firm and its respected clients. The firm’s experts provide tailor-made advice on many different practice areas, including commercial, corporate, tax, foreign economic activity and foreign investments, copyright, mass media, labor, securities and stock market, disputes resolution, mediation, insolvency. Furthermore, many of the firm’s clients have been successfully represented before public authorities and courts in civil, commercial, administrative and criminal cases. Pragmatism and practical orientation are among the distinctive features evinced by Gramatskiy & Partners in all the projects it was involved in; the firm bears responsibility for every memorandum and for every legal opinion, presented to the client. Gramatskiy & Partners structures and describes every legal procedure, as if the firm itself were to implement it in practice. In addition Gramatskiy & Partners pays special attention to the issues of confidentiality of the projects in which it assists because the law firm realizes the importance of information secrecy for clients.

pants (Shareholders) aimed at amending the company’s statutory documents, shall be subject to prior notarization. It means that the authenticity of the signatures of founding members and/or their authorized representatives and/or the chairman and secretary of the General Meeting of Participants (Shareholders) shall be notarized, otherwise the State Registrar will not change the company’s data contained in the Unified State Register. However, the notary-authenticated signature requirement shall not apply to any other decision of the company’s superior body unless such decision is subject to state registration. According to valid Ukrainian legislation a notary is obliged, prior to notarization of signatures, to identify the person in question, examine his/her civil capacity and capability and to check the powers of representatives. Thus, it has become too difficult to amend the company’s statutory documents without the prior consent of its founder(s) or their authorized representatives. The new edition of the abovementioned Law contains other provisions directed at simplifying the process of business registration, such as: notaries and an accredited public entity are able to perform state registration; state registration can be

performed irrespective of the registered address of legal entities; the list of data included in the State Register has been extended; the virtual office has been introduced.

Recommendations for the Protection of Corporate Rights

Ukrainian legislation is subject to frequent amendments. Thus, nobody can guarantee the stability of the Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Non Governmental Organizations and introduction of new provisions or abolition of existing ones may be possible. Therefore, it is highly recommended that you protect your business in any manner appropriate. One of the most efficient solutions for protecting your business is drafting an effective company Charter. The founders may include in the Charter a requirement to notarize the authenticity of the signatures on all those documents that are subject to state registration. The adoption of such provisions will result in improving the efficiency of state registration of any amendments to the company’s statutory documents and will reduce the number of illegal takeovers of businesses.

61


Corporate Disputes

Corporate Action as an Indicator of Investor Protection Expansion Capabilities Claim

Oleg MALINEVSKIY

Serhiy CHUYEV

Partner, EQUITY

Partner, EQUITY

Pending Reforms

Investment in the capital of Ukrainian enterprises has traditionally been considered a risky deal. Obsolete, sometimes controversial corporate law, the generally low legal culture of participants of business relationships coupled with the inefficiency of the judicial system have created a dangerous mixture that has easily undercut the most sophisticated business plans, without guaranteeing investors at least a return of their investment, not to mention expected profits. Litigation in corporate relations has become commonplace, an inherent part of doing business in Ukraine. Imperfect legal means to prevent and resolve corporate conflicts take the leading position in the list of the main reasons for the weak position of Ukraine as a partner in the international capital market. Thus, according to the world rankings of investment attractiveness made by the Hamburg Institute of World Economy International Business Compass, our country occupied 130th position out of 174 countries in 2016, and has become “the biggest loser”, with a fall of 41 positions (89th place in 2015). The decline in confidence in Ukraine has formed several negative trends. The first is that preference is given to foreign jurisdictions with a much richer tradition in the corporate sector (United Kingdom, Cyprus, the Netherlands and others), especially as it relates to a valuable commercial asset, and as a consequence an increase in the share of disputes considered by foreign courts or arbitration courts. It is pertinent to mention a dispute submitted for consideration to the High Court of Justice in London; that is, a multimillion dispute between Ukrainian oligarchs Igor Kolomoisky and Victor Pinchuk

62

about unpaid dividends of a ferroalloy holding, which includes the Nikopol, Zaporizhia and Stakhanov ferroalloy plants, Marganets and Ordzhonikidze GOKs. Another, more frustrating trend is the development with investors of a sustainable reluctance to invest, and often fear of investing, in Ukrainian companies. The current trend is especially notable against the background of demonstration by the domestic economy of signs of recovery. Indeed, despite the low value of assets and the objective prospects for overall economic growth, no investment boom has been observed yet. We believe that the most effective recipe for improving the situation and correcting these negative trends is to conduct systemic legal reforms of the corporate sector aimed at the creation in Ukraine of a corporate environment in which every conscientious investor would feel confident and secure. Given the current pan-national trend of reforming the key areas of social and economic life, and taking into account the politicians’ awareness of the role of investment in the business, the prospect of necessary legislative changes is more than real. Despite the optimism caused by the elaboration of important legislation in certain substantive aspects of corporate relations (e.g., for limited liability and additional liability companies, corporate agreements, etc.), prevention and resolution of possible legal conflicts still remains a super important and underdone aspect of the reform. Proceeding from the logic of the ancient Roman expression “Si vis pacem, para bellum” ( “If you want peace, prepare for war”), legislators must think ahead of the curve to prevent corporate fraud to the maximum possible extent.

For situations where violation of rights of a participant of corporate relations cannot be prevented, legal instruments of court protection become especially important. For the time being the means to protect corporate rights are mainly determined by general rules, in particular Articles 16, 98, 215 of the Civil Code of Ukraine, Article 20 of the Commercial Code of Ukraine. De facto, the first special legislative act regulating instruments of judicial protection of investors was the Law of Ukraine On Amendments to Some Legislative Acts of Ukraine Concerning Protection of Rights of Investors, which came into force on 1 May 2016, and which entered the institution of a derivative claim. That type of claim was positioned in the national law system as a novel way of protecting the rights of a minority shareholder, whereby a legal entity filed a court claim against officials of such an entity for damages caused by unlawful actions of officials of the legal entity. Thus, there were expectations of establishing, through a court procedure, the right of minority shareholders to influence management of the legal entity, while protecting both their rights as shareholders and the rights of the legal entity. However, although the legislator tried hard to promote this way to protect rights, in practice it has not found sufficient demand as only 13 derivative claims were filed throughout Ukraine since the time of the law coming into force (which is more than 11 calendar months). By comparison, the total number of corporate disputes brought before the Commercial Court of Kyiv in 2016 amounted to 274 cases, and only 3 of them — upon derivative claims. This unpopularity of the derivative court action can be explained by its narrow spectrum of action, and ultimately — by its inefficiency. Indeed, collection of money from a director in favor of the enterprise cannot be considered an adequate satisfaction to the person injured in a corporate conflict, who will remain outside the management of the company. Neither can a derivative court action provide protection to issues that are more important for a minority shareholder, in particular, access to dividends, contesting the validity of company contracts that contradict the interests of the company and, accordingly, minority members (shareholders), and others. If the question of the invalidity of the contracts of a debtor is more or less settled

WWW.UKRAINIANLAWFIRMS.COM


EQUITY

E

Address: 14D Bekhterevsky Lane, Kyiv, 04053, Ukraine

QUITY is one of the leading law firms in Ukraine which advises clients (the largest local and international companies) in core practice areas. The firm enjoys a reputation as professional legal practitioners possessing the most challenging legal experience and a deep specialization in the fields of Litigation, Debt Restructuring (Bankruptcy), White-Collar Crimes, Tax Law & Tax Disputes, Banking and Finance, Corporate and M&A. The EQUITY law firm team consists of more than 40 lawyers, including six partners and four counsels. Many of them have been working in the company for over 10 years. EQUITY Lawyers conduct comprehensive support of client projects: from the moment of receiving the task to full implementation of the solutions in favor of the client. Recognition In 2017 EQUITY firmly established itself as a leading law firm in such practice areas as Litigation, White-Collar Crimes and Bankruptcy. In particular, EQUITY has become the holder of a prestigious Legal Award — “Best Law Firm in 2016 in Litigation”. We also became finalists (TOP 5 law firms) in the

by unstable court practice of application of Article 215 of the Civil Code of Ukraine, which allows for qualification of a minority member as “... another person concerned”, who has the right to contest the validity of a juridical act made by the company, the situation with the protection of the right to receive dividends is much worse. After all, the court practice, applying a formal approach, follows the path of “no decision of the meeting — no dividend”, thereby depriving a member (shareholder) of not only a fundamental right to get profit, but also of the possibility to enforce the right (Paragraph 3.1. of the Regulation SECU Plenum On Certain Issues of Resolving Disputes Arising from Corporate Relations No. 4 of 25 February 2016). The above example shows that a significant improvement in the security of members (shareholders) of the company seems to be impossible without certain legislative changes in the institutions of ways to protect violated rights, including through direct legislative provisions of the right of a member to: 1) recovery of damages caused to the member (shareholder) of the company as a result of illegal actions or omission of the company or its member (shareholder). This mechanism will be particularly relevant in cases where the company unlawfully and by abuse, often with the participation of one of the members (shareholders), avoids the distribution of profits and payment of dividends. 2) contest the validity of contracts made by the company with a third person and which violate the law, interests of the company or rights of the member.

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 238 6420 E-mail: info@equity.com.ua Web-site: www.equity.com.ua

nomination “Best Law Firm in 2016 in Bankruptcy”. EQUITY was included to the TOP-13 leading law firms in Ukraine in 2016 according to the results of annual research TOP-50 Leading Law Firms of Ukraine. 10 of the disputes supervised by EQUITY lawyers, entered the TOP-50 largest litigations in Ukraine in 2015 according to Yuridicheskaya Practika Publishing. EQUITY was recommended as one of the leading Ukrainian firms in Dispute Resolution, Banking & Finance, Tax, Real Estate and Corporate by Legal 500 EMEA 2017 and was recognized in Litigation and Bankruptcy by Chambers Europe 2017 and in Energy and Infrastructure, Banking and Finance and M&A by IFLR 1000 2017. Clients Among the firm’s clients are the following leading companies: Azovmash, National Bank of Ukraine, Concorde Capital, Knauf, Furshet, AIS Group, Vernum Bank, TrustBank, Ukrainian business group, RwS Bank, Agroholding Mriya, Ferrexpo AG, NEST Corporation, ACME-Color, AutoKraz, Arterium Corp, Terra Bank, Platinum Bank, Zaporizhtransformator, Ukrferry, Deposit Guarantee Fund, Cristalbank, SOTA Cinema Group, etc.

3) obtain information, in the scope necessary for the timely prevention and effective protection of violated rights. In preventing possible abuse on the part of the plaintiffs, the above-mentioned rights should only be given to members (shareholders) who possess a significant holding in the capital of the company — a share of at least 10% of its capital.

Unification of Jurisdiction

A corporate dispute is a dispute between shareholders (members), in fact, owners of an enterprise, which consists of a number of diverse categories of disputes: a dispute about ownership of a share, setting aside a decision of the general meeting, invalidity of agreements made to the detriment of the interests of a shareholder, etc. However, at the legislative level the notion of a corporate dispute is narrowed, including that artificially by court practice formed over a considerable time. Ignoring the specifics of corporate disputes and their complexity leads to ineffective protection of the rights and interests of shareholders and, therefore, impossibility of real legal protection of such rights. In the initiation of a corporate conflict and/or protection, shareholders resort to a complete range of available legal mechanisms, including: — replacement of a director through the appointment of a new one or reinstatement of the previous director; — imposition of a ban on the right of a state registrar to amend information about a

legal entity in the Unified State Register of Legal Entities and Individual Entrepreneurs; — seizure of assets of entities; — initiation of claims for recognition of ownership of shares (share of holding); — recognition of decisions of the general meeting as invalid; — recognition of contracts made to the detriment of a shareholder as invalid; — redress to company officials; — recognition of constitutional documents as invalid and termination of a legal entity. However, consideration of such disputes in accordance with current legislation should be carried out in compliance with the rules (depending on the category of a dispute) of economic, civil, and administrative jurisdiction. Thus, corporate disputes in Ukraine are almost always accompanied by a set of trials in all jurisdictions. In our opinion, not referring disputes about ownership of shares (share of holding) to corporate disputes is a serious mistake, since any dispute upon the results of which a member (shareholder) of the company is deprived of corporate interest, is primarily of a corporate nature. We hope that with the improvement in the legal regulation of corporate areas the complexity of corporate disputes as one of the main features of such disputes has to be taken into account. We believe that the concentration of all aspects of the contentious relationships of the parties within the same proceedings will enable us to protect the participants of corporate relations more effectively and efficiently.

63


Counterfeiting & Piracy

Indemnification of Damages as a Deterrent for Infringers

Alexander PAKHARENKO Partner, Pakharenko and Partners IP and Law Firm. Alexander Pakharenko is an Attorney-at-Law, registered Patent Attorney and a Partner with Pakharenko & Partners in Kyiv, Director of the Ukraine Alliance Against Counterfeiting and Piracy. Graduate of the Kyiv Polytechnic Institute, Kharkiv Institute of Intellectual Property, Law Faculty of the Interregional Academy of Personnel Development in Kyiv, Academy of Advocacy of Ukraine. He possesses more than 15 years practice in the field of IP, which encompasses consulting on all aspects of IPR protection, licensing and enforcement, representing clients in law-enforcement and customs agencies, civil and commercial courts, legal counseling on anti-counterfeiting and anti-piracy measures and developing anti-counterfeiting and anti-piracy strategies. Alexander takes an active part in conducting training sessions for lawenforcement and customs officers.

I

ndemnification of damages in the cases relating to IPR infringements performs two functions. The first one is compensation of property damage caused as a result of infringements and the second one is deterrence for potential infringers.

Are There any Respective Legislative Provisions in View of the EU-Ukraine Association Agreement?

The Articles 240, 240 of the Agreement on Association between Ukraine and the EU are implementing in Ukrainian legislation the provisions of Article 13 of the Directive 2004/48/EC of the European Parliament and

64

Evgeniy KOMPANETS Deputy Head of Legal Department, Pakharenko and Partners IP and Law Firm. Evgeniy Kompanets has three majors (including intellectual property). Between 2002 and 2005 he worked in the state system of intellectual property protection. He joined Pakharenko and Partners IP and Law Firm in 2005. His practice in the field of IP encompasses consulting on the issues of protection and enforcement of IP rights. Mr. Kompanets is particularly focused on anticounterfeiting work in the framework of criminal and civil proceedings as well as customs law. Evgeniy also takes an active part in developing recommendations aimed at improving legislation in the field of IP and enforcement. He is a regular contributor to specialist publications and gives lectures to audiences.

Council of 29 April 2004 on the enforcement of intellectual property rights (hereinafter — the Directive). According to these provisions Ukraine shall ensure the availability of the compensation that shall be paid to the right holder in the extent compatible to the offense in order to indemnify the costs incurred by the right holder for elimination of the consequences of this infringement. In particular, the Article 240 of the Agreement on Association between Ukraine and EU determines as follows: “1. The Parties shall ensure that when the judicial authorities set damages: (a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any

unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the right holder by the infringement; or EU/UA/en 299 (b) as an alternative to subparagraph (a) of this paragraph, they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorization to use the intellectual property right in question”

What is the Current EU Practice in This Sphere?

The EU Observatory on Infringements of IP Rights under the EUIPO decided in 2009 on the necessity to study the IPR enforcement practices existing in EU countries and evaluate the overall effectiveness of the legislative framework with regard to all categories of IP rights. In the framework of this work the report titled “Damages in Intellectual Property Rights” was published in 2010, which was further updated in 2014. It is particularly noted in the report that in some EU member states the compensation of damages is not ordered for all respective types of damages, limiting the types and amounts of the damages that may be recovered. Some courts in EU member states are not willing to order compensation of damages that had apparently been caused, but which are difficult to calculate precisely. It is emphasized in the report that as a result of these legal and practical deficiencies a certain part of the profit is often retained by an infringer, even if the civil proceedings initiated by a right holder were “successful”. In this case the legal costs or other costs spent for addressing this offence are usually covered by a right holder. As a result, economically, the right holder is the losing party, while the infringer is the winning one despite the court ruling (on recovery of damages) taken in favor of the right holder. According to the authors of the report, such situation is not a deterrent for potential infringers of IP rights since if the civil proceedings end up with such small amounts of economic punishments an infringer’s profit will be much bigger than the amount of the compensation he would have to pay to the right holder, and therefore such punishment will rather encourage infringers to commit further offences. As a result, the researchers

WWW.UKRAINIANLAWFIRMS.COM


PAKHARENKO & PARTNERS

I

Address: 72 Chervonoarmiyska Street, Olimpiysky Business Centre, Kyiv, 03150, Ukraine

P and Law Firm Pakharenko & Partners was established in 1992 and has offices in Kyiv and London. As a firm providing full IP service coverage we are keen to develop successful protection and enforcement strategies for our clients, covering the development of IP portfolio, acquisition of IPRs, commercialization of IPRs, enforcement and management of IPRs including patents (inventions and utility models), designs, trademarks and geographical indications, domain names, copyright and related rights, plant breeders’ rights at both national and international levels. The firm provides assistance to national and foreign clients in securing and enforcing their intellectual property rights in Ukraine and CIS countries. The company’s lawyers have been involved in anti-counterfeiting and anti-piracy activities since the implementation of the relevant provisions on IPR enforcement in Ukrainian legislation. Our staff also possess expertise in pharmaceutical law, competition law, media law, corporate and commercial law, commercial litigation.

conclude that the small amounts of compensation ordered by European courts are incompatible to the extent of the respective offences and the threats posed by counterfeiting and piracy, therefore taking such judgments not only fails to compensate the damages caused to right holders but also fails to prevent counterfeiters from committing offences and may even encourage counterfeiting and piracy economically.

Are There any Ways to Improve the Situation?

The experts participating in the European study propose the following measures. It is necessary to provide such rules for ordering compensation of damages under which no economic advantage shall exist for the infringer carrying out their illegal activity in the manufacture and distribution of counterfeit and pirated products. At the same, time the experts emphasize that such an approach should not be viewed as “punishing” but rather as “compatible” remedies that provide compliance with the requirement of the Directive regarding ordering compensation of damages that are to be “deterring”, and no “reward” should be left for the infringer either in the form of profit or any economic advantage. Upon calculation of damages almost all EU member states are taking into consideration the right holders’ lost profit, which is normally determined as the profits that could have been obtained by the right holder in the absence of any infringement or the profits that could be reasonably expected. In most EU member states compensation of damages is also ordered in the cases where counterfeit

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 593 9693 Fax: +380 44 451 4048 E-mail: pakharenko@pakharenko.com.ua Web-site: www.pakharenko.com

We are able to service our clients’ needs around the world through our established network of associates. The special relationships developed by our company with many attorney firms in key foreign markets provide ongoing, substantial benefits to our internationally focused clients. Main practice areas: Intellectual Property Law, Anti-Counterfeiting and AntiPiracy Operations and Legal Support, Media Law, Advertising Law, Competition Law, Pharmaceutical Law, Corporate Law, Customs Law, Commercial and IP Litigation Membership in organization: The company and its members are actively involved in the operation of a number of national and international intellectual property associations, such as: AIPPI, INTA, FICPI, LES, MARQUES, PTMG, ECTA, ACG, IACC, ICC/CIB, ICC Ukraine, IBA, European Business Association (EBA), American Chamber of Commerce (ACC) in Ukraine, Ukrainian Patent Attorney’s Association (UPAA), Ukrainian Alliance Against Counterfeiting and Piracy (UAACP) which is a member of the GACG Network, CIOPORA.

goods were seized prior to entering the market. Upon calculation of damages the quantity of the infringing goods is multiplied by the price of goods determined by the court, and in cases where the damages caused cannot be actually calculated, the court sets the damages as a reasonable lump sum (royalty) for each product which shall be considered as minimal compensation. Moral prejudice caused to the right holder shall also be considered, which is also the part of the actual damage caused. Since this kind of damages is difficult to assess, in most cases the amount of compensation is ordered at the discretion of the judges which tend to order that the moral prejudice be compensated as a lump sum. Also, the right holders may claim compensation of damages resulting from destabilization of the market, from damaging their image and business reputation, damages from the decrease of distinctiveness of trademarks, reduction of average prices for the products if they can support these claims with concrete and objective evidence.

What is the Situation in Ukraine?

Under Articles 16, 432 of the Civil Code of Ukraine, the right holder has the right to demand compensation, in particular with regard to the lost profit and moral damage, caused as a result of the infringement of IP rights. As a rule, the experts appointed by the investigator/court calculate the damages in the form of shortcoming in revenue based on the evaluation procedure of the accrual of revenue/ income (by multiplying the quantity of the revealed and seized fake goods by the price of

original goods) and the method of royalties. In this case the provisions of Article 22 of the Civil Code of Ukraine are applied, under which if a violating person receives incomes in this connection, the amount of lost profit to be indemnified to a person whose right was violated may not be less than incomes received by a violating person. It is particularly worth mentioning that, unlike in most EU member states, some experts and judges in Ukraine maintain the position according to which the indemnification of losses cannot be ordered if counterfeit goods were seized before entering the market. In practice, it is very difficult for a right holder to recover the costs/compensation, since most infringers realize the illegal character of their actions and are aware of the possible responsibility for the offence and, therefore, they do not register any movable or immovable property in their names, which makes it impossible to recover any costs from them (usually unemployed). Currently, the recovery of damages/compensation is rather an exception than a regular practice, but we may say that there is some progress. Professionals understand that the conscious actions of infringers are aimed at illegal profits and avoiding responsibility through property retention.

As a Conclusion

Implementation of the deterrence function of damage recovery in cases related to IPR infringements shall contribute to the overall decrease in the scale of counterfeiting and piracy and creating favorable conditions for improving the investment climate in Ukraine.

65


Criminal Process

Criminal Process in Ukraine

Viktor BARSUK

Taras POSHYVANYUK

Senior Partner, EQUITY

Partner, EQUITY

n 2014, after the Revolution of Dignity in Ukraine, a major shift occurred in geopolitical priorities. The Verkhovna Rada of Ukraine and the President of Ukraine declared their commitment to Ukraine’s integration into the EU. However, our European partners have set an indispensible condition for Ukraine’s integration — eradication of corruption. In early 2016, Ukrainian President Petro Poroshenko said that the country had all the prerequisites to combat bribery and corruption. To that end an entirely new and politically independent anti-corruption bodies have been created such as the National Anti-Corruption Bureau of Ukraine and the Specialized Anti-Corruption Prosecution. In addition, reform has been carried out by the structural units of the Ministry of Internal Affairs of Ukraine to create the National Police of Ukraine. It should be noted that the activities of anti-corruption bodies marked a new milestone in the development of the criminal law practice in Ukraine. This development is primarily due to the fact that in comparison with other bodies of preliminary investigation, the National Anti-Corruption Bureau of Ukraine has started broader use of procedural instruments determined by the Code of Criminal Procedural of Ukraine, particularly in the part regarding use of new technologies, acquiring information through international cooperation, etc. It should be noted that such procedural actions do not always meet the requirements of current criminal procedural legislation of Ukraine which is, in turn, rather often and successfully used by the defense, and it is under such conditions that new judicial practice in criminal law is being formed. A striking example of what is mentioned above is the formation of court practice on

appeal by a person concerned against a sentence approving a plea bargain. Thus, the provisions of the new Code of Criminal Procedure provide for the possibility of making, at any stage of the criminal proceedings, a plea bargain. It should be noted that such provision was absent in the Criminal Code of 1960, and, thus, pre-trial investigation bodies, without having full understanding of the benefits of the deal, were reluctant to use that legislative novelty. In carrying out pre-trial investigation, detectives of the National Anti-Corruption Bureau of Ukraine, on the contrary, exercise the option of making a plea bargain on every occasion in order to obtain a judgment (sentence). Despite the guilty plea by, for instance, the chief of a state enterprise, who said the decision will declare the fact of pressure on him by a representative of a state body, in whose jurisdiction the enterprise is located. Later, this sentence will have a prejudicial meaning in proving the guilt of the official of the state body, who allegedly exerted pressure. In this case, such official will, because of the requirements of Article 394 of the Criminal Code of Ukraine, be unable to appeal against the sentence approving the plea bargain and declaring the fact of committing a criminal offense. However, court practice went another way, different from what is provided for by the Criminal Code of Ukraine. Thus, by this time a number of decisions of appellate and cassation instances have been made under which sentences approving plea bargains are canceled upon a claim by a person who is not a party to such a bargain, provided that the person proves violation of his or her rights and interests by the bargain. Therewith, the legal grounds for appeal by the person concerned of the decision approving the plea bargain, as referred to by the

I

66

courts, are provisions of Article 6 and Article 13 of the European Convention on Human Rights, which are superior to national procedural law of Ukraine. Quite interesting and, at the same time, contradictory is court practice on the dismissal of criminal proceedings on the basis of a court ruling of the investigating judge due to omission by investigators or detectives during the preliminary investigation. Thus, justifying the violation of the terms of the preliminary investigation after the announcement, the suspected person’s lawyer or the suspect himself apply to the pre-trial investigation body with a request to dismiss criminal proceedings, in which case they usually receive denial or such a request simply remains unanswered. Afterwards, the applicant applies to the court with the motion about omission by the preliminary investigation body, and asks to cancel the notification of suspicion and to adopt a ruling to dismiss criminal proceedings. According to court practice, there are already numerous cases where such kind of motions were granted and decisions obliging a pre-trial investigation body to dismiss criminal proceedings were adopted. Continuing the topic of the formation of court practice in the investigation of crimes bearing elements of corruption, it should be noted that in recent years the Verkhovna Rada of Ukraine has adopted rules that stepped up criminal liability for corruptionrelated offences. In addition, the notion of “corruption offence” was defined. An example of the abovementioned rules of criminal law, which set increased liability of persons for corruption-related offences may be the recent instigations of criminal prosecutions of inclusion by Ukrainian MPs of false information in the declarations of their property or other objects subject to declaration (Article 366-1 of the Criminal Code of Ukraine). Lawmakers also excluded the possibility of exemption of persons who committed corruption-related offences from criminal liability due to their active confession of guilt (Article 45 of the Criminal Code of Ukraine), reconciliation of the offender and the victim (Article 46 of the Criminal Code of Ukraine), release of persons on bail (Article 47 of the Criminal Code of Ukraine), and change of circumstances (Article 48 of the Criminal Code of Ukraine), as well as the appointment of a milder punishment than that provided for by law (Article 69 of the Criminal Code of

WWW.UKRAINIANLAWFIRMS.COM


EQUITY

E

Address: 14D Bekhterevsky Lane, Kyiv, 04053, Ukraine

QUITY is one of the leading law firms in Ukraine which advises clients (the largest local and international companies) in core practice areas. The firm enjoys a reputation as professional legal practitioners possessing the most challenging legal experience and a deep specialization in the fields of Litigation, Debt Restructuring (Bankruptcy), White-Collar Crimes, Tax Law & Tax Disputes, Banking and Finance, Corporate and M&A. The EQUITY law firm team consists of more than 40 lawyers, including six partners and four counsels. Many of them have been working in the company for over 10 years. EQUITY Lawyers conduct comprehensive support of client projects: from the moment of receiving the task to full implementation of the solutions in favor of the client. Recognition In 2017 EQUITY firmly established itself as a leading law firm in such practice areas as Litigation, White-Collar Crimes and Bankruptcy. In particular, EQUITY has become the holder of a prestigious Legal Award — “Best Law Firm in 2016 in Litigation”. We also became finalists (TOP 5 law firms) in the

Ukraine) and release with probation (Articles 75, 79 of the Criminal Code of Ukraine). This means that the courts, in compliance with the requirements of criminal law, started to pass sentences with award of penalties specified in the sanction part of relevant articles of the Criminal Code of Ukraine without using the rules on exemption from punishment, which existed until recently. A characteristic feature of 2016 is that, despite the large number of criminal proceedings instigated for committing corruption-related offences, the number of cases of illegal seizure of enterprises (businesses) has increased significantly. The root cause of these regrettable statistics was the adoption in 2015 of a number of laws and regulations on decentralization of powers in the sphere of state registration of legal entities and state registration of rights in immovable property. The adoption of those regulations was well intentioned — to simplify doing business in Ukraine by giving notaries public the authority of the state registrar, eliminating a linkage to a particular administrative-terri-

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 238 6420 E-mail: info@equity.com.ua Web-site: www.equity.com.ua

nomination “Best Law Firm in 2016 in Bankruptcy”. EQUITY was included to the TOP-13 leading law firms in Ukraine in 2016 according to the results of annual research TOP-50 Leading Law Firms of Ukraine. 10 of the disputes supervised by EQUITY lawyers, entered the TOP-50 largest litigations in Ukraine in 2015 according to Yuridicheskaya Practika Publishing. EQUITY was recommended as one of the leading Ukrainian firms in Dispute Resolution, Banking & Finance, Tax, Real Estate and Corporate by Legal 500 EMEA 2017 and was recognized in Litigation and Bankruptcy by Chambers Europe 2017 and in Energy and Infrastructure, Banking and Finance and M&A by IFLR 1000 2017. Clients Among the firm’s clients are the following leading companies: Azovmash, National Bank of Ukraine, Concorde Capital, Knauf, Furshet, AIS Group, Vernum Bank, TrustBank, Ukrainian business group, RwS Bank, Agroholding Mriya, Ferrexpo AG, NEST Corporation, ACME-Color, AutoKraz, Arterium Corp, Terra Bank, Platinum Bank, Zaporizhtransformator, Ukrferry, Deposit Guarantee Fund, Cristalbank, SOTA Cinema Group, etc.

torial unit in the commitment of registration actions (so-called extraterritoriality of business registration) and others. However, in reality the effect of the abovementioned Law has led to the revival of such already partially forgotten phenomenon as raiding, i.e. illegal takeover of enterprises. In order to eliminate those negative effects, the Verkhovna Rada of Ukraine adopted amendments to the Criminal Code of Ukraine and strengthened criminal penalties both for the individuals directly involved in illegal takeover of enterprises and for the people who actually acted as accomplices, namely state registrars and notaries. In addition, in late 2016 legislators corrected the mistake, which caused many illegal takeovers of enterprises, through the adoption of a law that abolished provisions of extraterritoriality of commitment of registration actions. Special consideration should be given to the trends in court practice in the sphere of criminal law awaiting us in 2017. Currently, there are firm grounds to say that the current year will be one of the most

active in the field of criminal justice. This is because of the long-awaited completion of pre-trial investigation and transfer of high-profile criminal proceedings for trial. For example, the case of the shooting of protesters during the Revolution of Dignity, the case against former Ukrainian President Viktor Yanukovych, which are currently being considered by the Prosecutor-General’s Office of Ukraine. In addition, the public will require some definite result from the work of newly-established anti-corruption agencies, namely the National Anti-Corruption Bureau of Ukraine and the Specialized Anti-corruption prosecutors, because two years of pretrial investigation is more than sufficient to transfer a case to court. However, the most important event that will have a direct impact on the further development of court practice will, no doubt, be the professional competitive process of selection of candidates for posts of judges of the new Supreme Court and, in fact, the very beginning of the activity of the said court.

67


Cross-Border Debt Recovery

Cross-Border Debt Recovery

Yuri BOTIUK Partner, Grosvenor Law, London. Yuri has been acting in complex litigation and arbitration arising out of Ukraine, Russian, Kazakhstan and the Former Soviet Union for the past 15 years. Yuri regularly appears as an expert at conferences regarding FSU disputes issues and is also the Chairman of the British-Ukrainian Law Association

E

conomic and political crises generate disputes in which often one party is a creditor and other is a debtor who owes money or other assets to the creditor. This involves not only defaults on loans, but also disputes which arise from joint venture agreements, sale and distribution contracts, corporate conflicts, etc. Often, the recovery of the debt is problematic or even impossible within Ukraine. Usually, this is due to one or a few of the following circumstances: (i) lack of enforceable assets, including dissipation of secured assets; (ii) complex offshore structures; and (iii) inefficiency of Ukrainian courts and enforcement authorities. Unfortunately, the chances for a creditor to obtain recovery do not increase even when the debtor’s actions involve fraud or other wrongdoing. In such situations, a creditor should consider debt recovery measures outside Ukraine. Such international actions are particularly relevant in high value claims where the debtor’s business activity, or at least corporate structure, is not limited to Ukraine. The Courts of England & Wales are, rightly, considered as particularly helpful to assist in finding the international assets of Ukrainian debtors.

68

Iurii RYBAK Associate, Spenser & Kauffmann

What support can be provided or gained through English courts of law?

In order to receive support from an English court, the claimant does not always need to show that the underlying case is governed by English Jurisdiction. The High Court of England & Wales has well established practice of issuing orders, including freezing injunctions, in support of foreign proceedings, including in Ukraine, and arbitrations. Two of the most useful interim remedies available from an English court are: 1. Disclosure Orders/Norwich Phamacal Orders, which force third parties to disclose the flow of money/assets; 2. Worldwide Freezing Orders, which secure a debtor’s asset once they are discovered. Pursuant to a Norwich Phamacal Orders innocent third parties that were dealing with the debtor must disclose information about the debtor. Such third parties are frequently the companies and/or persons providing nominee services. So, a Norwich Pharmacal Order is particularly useful for tracing assets through a complex web of corporate structures/trusts. A Worldwide Freezing Order (WFO), can have a significant effect on a debtor since it:

(i) freezes assets not only in England and Wales but worldwide; (ii) freezes assets owned both directly and indirectly; (iii) usually includes an obligation to disclose the information about assets, including those owned indirectly; (iv) breach of the order can result in contempt of court and imprisonment of up to 24 months. Another aspect that distinguishes interim orders in England and Wales is the fact that they are usually granted ex parte, i.e. without notice of the party against which it is issued. Hence, a person, who is the ultimate beneficial owner of the business only gets to find out about the WFO when the order is already issued and is immediately effective. The debtor will have the opportunity to set out his case at the return date. However, in the meantime, he will be at risk of imprisonment if he deals with his assets.

When Should You Consider Going to English Courts?

Even though an English court is flexible in establishing its jurisdiction, it needs to have reasonable grounds for doing so. Below is a non-exhaustive list of potentially relevant issues that the court may consider relevant: — the debtor has (or there is reasonable expectation) assets in England and Wales; — all or one of the debtors are located in England and Wales; — respective documents/contracts are issued under English law; — fraud (at least in part) took place in England and Wales; — there are related arbitration proceedings in England and Wales. Establishing the jurisdiction of an English court is an important step towards receiving a WFO, but is not wholly determinative. The creditor also has to show to the court that he has a good arguable case and there is a risk of dissipation of the debtor’s assets.

When to issue First Instance Proceedings?

If a debtor is resident in England and it appears there is little prospect of him returning to Ukraine, first instance proceedings can be issued in England for breaches of Ukrainian law/contracts. The defendant cannot deny the jurisdiction of the English court and the English court will (subject

WWW.UKRAINIANLAWFIRMS.COM


Spenser & Kauffmann

S

Address: 7 Klovsky Uzviz, 14th Floor, Kyiv, 01021, Ukraine

penser & Kauffmann is one of the leading full-service law firms in Ukraine. Since its foundation in 2006, Spenser & Kauffmann aims to provide its сlients with the highest standards of legal advice and exemplary service. We represent our сlients in all areas of business law, including mergers and acquisitions, corporate, antitrust, intellectual property, IT, labor & employment, insurance law, banking and finance, capital

to certain conditions) apply Ukrainian law (Civil Code and/or contract) with the assistance of expert evidence to determine the dispute. The idea is that the debtor should not be able to run away from justice by “hiding” in England.

How to make it Work?

Preparation, preparation and more preparation is the key ingredient for success in a case involving an obtaining interim remedy from an English court. To be successful, in addition to having an excellent English and Ukrainian legal counsel, a creditor will usually need to engage an investigation firm in order to trace the debtor’s assets. The assistance of

WWW.UKRAINIANLAWFIRMS.COM

Tel.:+380 44 288 8383; 288 6707 Fax: +380 44 351 2155 E-mail: office@sklaw.com.ua Web-site: www.sklaw.com.ua

markets, construction, energy & natural resources, enforcement proceedings, private clients, tax consulting and litigation. Throughout the last ten years, our firm has been recognized among the leaders by various prestigious international and domestic rankings in different legal spheres. Our lawyers speak English, French, German and Czech, which allows us to understand and communicate with domestic and international сlients without psychological or language barriers.

other international lawyers (Cyprus and the BVI are common jurisdictions) to assist with enforcement of the order may also be required. The efficiency of an English court in debt recovery actions has been shown in practice in a number of cases, including those related to Ukraine and other former Soviet Union countries: in JSC Mezhdunarodniy Promyshlenniy Bank and Another v Pugachev the High Court in London sentenced Russian businessman Sergei Pugachev to two years in prison for contempt of court (Mr Pugachev was found to have breached several worldwide freezing orders made by the High Court relating to money he allegedly stole from the Bank); in BTA Bank v Ablyazov and Vs-

eukrainskyi Aktsionernyi Bank v Maksimov an English court was heavily involved.

Conclusion

An English court considers its role as supportive of other jurisdictions in exercising its powers, but it does not seek to supersede them. English courts provide a number of tools to assist in effective asset recovery with respect to Ukraine-related matters. To be effective in obtaining interim remedies provided by an English court, a client will need an efficiently run, professional team of both Ukrainian and English lawyers working together with investigators/accountants.

69


Cross-Border Debt Restructuring

Cross-Border Debt Restructurings in 2016

Glib BONDAR

Anna MELNYCHUK

Senior Partner, AVELLUM

Associate, AVELLUM

n 2016, Ukrainian business and foreign investors expected to see more nimble structural reforms in the Ukrainian economy, which would boost long-awaited fresh financing by the private sector. Nevertheless, some Ukrainian corporates managed to launch or even complete restructuring of their debt resting upon the sovereign and quasi-sovereign debt restructurings accomplished at the end of 2015 and beginning of 2016. From public sources, among Ukrainian-based companies, which were either involved in cross-border debt restructurings in 2016 or are still on the restructuring path are DTEK, Metinvest, Mriya and Ukrlandfarming. In this article, we will look at the restructuring efforts of some of the key players in the Ukrainian economy focusing on the main features of the recent debt restructurings and Ukrainian law driven transactional challenges in the restructuring process.

dissenting creditors. In other words, it allows to accomplish debt restructuring without consent from all the creditors. On its latest restructuring deal, DTEK once again resorted to the UK scheme of arrangement. This time, the scheme applied to all of its outstanding Eurobond debt and provided DTEK’s bank lenders an option to exchange their debt into the new notes, issued by DTEK as a result of the scheme. Similarly, Metinvest debt restructuring is being implemented through the scheme of arrangement. But unlike DTEK’s restructuring, it covers both bank and bond debt. Under the Metinvest scheme, the existing notes should be exchanged into the new notes and the existing bank debt should be consolidated into a single amended loan. Both DTEK and Metinvest debt restructurings included moratorium schemes and standstill agreements, which provided for temporary moratoriums on enforcement actions by the noteholders and banks, respectively, and thus, were necessary for effective negotiations with creditors. Recent debt restructurings generally involved financial instruments and transaction structures, which are standard for the deals governed by English law. Yet, some of them became more nuanced either due to the scope of debt restructuring or Ukrainian legal developments. In 2016, corporate debt restructurings were particularly complex given that they covered essentially all of the borrowers’ long-term debt and included both bond and bank debt, or allowed exchange of one instrument into another. Thus, the priority of creditors’ claims, sharing of payments as well as management and sharing of security, became more complicated. Among these issues, Ukrainian lawyers were par-

I

Big Picture of Debt Restructurings in 2016

The previous year began with a number of quasi-sovereign and sovereign-guaranteed debt restructurings. Ukrzaliznytsia reprofiled its debt under its Eurobonds by exchanging the outstanding loan participation notes into new notes. Yuzhnoye and Ukravtodor sovereign-guaranteed debt was exchanged into a combination of notes and GDP-linked securities issued by Ukraine. Meanwhile, corporate cross-border debt restructurings followed the English law scheme of arrangement route, which was paved in 2015 by DTEK, PrivatBank and Avangard. The beauty of the scheme of arrangement is in the possibility to cram down

70

ticularly busy with security structuring. By way short background, in financing deals with multiple creditors that are governed by English law, security is often held in trust for the benefit of creditors (e.g., a syndicate of banks in case of bank lending or bondholders in case of Eurobond issuance). Given that civil law jurisdictions do not recognize the concept of security trust, financing documents often employ either parallel debt or a joint and several creditor structure, or a combination of both. Even though Ukrainian courts have had no say on the parallel debt yet, this concept continues to be regularly used in cross-border financing deals with a Ukrainian element. Additionally, recent cross-border debt restructurings were complemented with a number of security related features, which were previously not common for debt restructurings of Ukrainian businesses (save for a few exceptions). For example, Ukrainian law security was shared among different classes of creditors (i.e., bank lenders and bondholders). Given uncertainties under Ukrainian law as to whether different secured lenders can have an equal priority with respect to the same security, the security structures incorporated English law concept of a “common security agent” who held Ukrainian security covering both bank and bond debt. Moreover, Ukrainian law on security was not frequently used in previous Eurobonds issuances by Ukrainian business groups.

Ukrainian Court Practice and Legal Developments

In 2016, there was a notable development in Ukrainian court practice in relation to Eurobond transactions. The concept of trust was finally tested in a Ukrainian court. Typically, in Eurobond deals governed by English law, the bondholders have no direct contractual relationship with the issuer and guarantors/surety providers. Payment obligations of the latter are owed to the trustee acting in its own name in the interests of all the bondholders. Thus, the trustee is entitled to bring legal proceedings against the issuer and guarantors/surety providers. Although in Eurobond offerings, governed by English law, trust should not be considered from the Ukrainian law perspective, its application in the past created significant uncertainty in connection with the enforcement of Ukrain-

WWW.UKRAINIANLAWFIRMS.COM


AVELLUM

A

Address: 38 Volodymyrska Street, Kyiv, 01030, Ukraine

VELLUM is a leading Ukrainian full service law firm with a special focus on finance, M&A, and dispute resolution. The firm covers capital markets, competition, corporate/M&A, dispute resolution, employment, banking and finance, energy and infrastructure, real estate, restructuring and insolvency, and tax. AVELLUM’s goal is to be the firm of choice for its clients with respect to their most significant business transactions. Its team is responsible, commercially minded, solution orientated and cost effective. The firm brings the most advanced Western legal techniques and practice, which, coupled with first-hand knowledge, broad industry experience, and an unparalleled level of service, will help the clients achieve the best results in their business endeavours. AVELLUM’s lawyers work seamlessly in integrated teams with premier US, UK, and European law firms in the course of multijurisdictional transactions. The firm offers its clients a highly individual focus on their matters, and is relentless when it comes to observing deadlines.

ian suretyships in Ukrainian courts. A few months ago, the Ukrainian court recognised claims of the trustee against Ukrainian surety providers under Eurobond offerings. This court practice does not ensure that Ukrainian courts will consistently recognise claims of the trustee against Ukrainian obligors under Eurobonds in the future, yet it gives more comfort in case of default scenarios. Apart from the scale of the restructuring, some transactional challenges were brought by recent developments in Ukrainian corporate law, including changes in regulation of interested party transactions. Since May 2016, an affiliate of a joint stock company’s shareholder may be considered an interested party if the joint stock company and an affiliate of a joint stock company’s shareholder are parties to the same agreement. Considering that recent restructurings require a rather sophisticated documentation package (in terms of the substance and number of transaction documents) and involve multiple obligors within a particular group, these developments introduced some tweaks into the corporate authorisation process and structuring of the transaction documents. From the currency control perspective, the National Bank of Ukraine (the NBU) did not change the rules substantially. At the end of 2016, the NBU predictably extended tem-

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 591 3355 E-mail: info@avellum.com Web-site: www.avellum.com

AVELLUM’s clients include international and domestic companies, government authorities, financial institutions, investment funds and investment banks seeking specialised legal advice and transactional skills from legal experts in the above practice areas. AVELLUM’s clients include AGCO, Allergan Inc, Altran, Baring Private Equity Asia, Onex Corporation, Boehringer Ingelheim GmbH, Canada Pension Plan Investment Board, CNBM International Corporation, Deutsche Bank, Deutsche Beteiligungs AG, EBRD, Farmak, Ferrexpo, ING Bank, Kernel, MHP, the Ministry of Finance of Ukraine, Novartis, Raiffeisen Bank International AG, UDP, Unicredit Group, and others. The firm’s employees received their education from top Ukrainian and Western universities. The team consists of 31 highly-qualified attorneys, including three partners, Mykola Stetsenko, Glib Bondar, and Dmytro Marchukov, who are actively involved in every transaction. AVELLUM is recognized as one of the leading law firms in Ukraine by various international legal directories and Ukrainian legal publications such as Chambers & Partners, IFLR1000, Legal500, International Tax Review, Ukrainian Law Firms, and others.

porary currency control restrictions, but this time for an indefinite period. Even though these temporary measures have been already factored into the debt restructurings, the restructuring process could be much more efficient but for the NBU restrictions.

Alternative Route

The intricacies of the restructuring process and uncertainties related to Ukrainian business and Ukrainian economy in general make some creditors sell their exposures to Ukrainian borrowers. Even though such transfers are done under standard English law documents, they often have to be supplemented with a number of steps due to Ukrainian currency control restrictions. Foreign financiers typically buy and sell claims under loans by means of the Loan Market Association trade confirmation. An existing lender and a new lender further sign a transfer certificate (or another instrument), which brings into effect the transfer of rights and obligations to the new lender. On top of that, the parties might need to conclude an amendment agreement to register a change of the lender with the NBU. However, recent changes to the registration of loan agreements with the NBU add more complexity to this process. Since the beginning of 2016, in case of assignment of the lender’s claims,

the NBU and a servicing bank must look at, among other things, an economic rationale behind the transaction and can require additional documents for these purposes. Further uncertainties with the NBU registration arise when domestic loans to Ukrainian business groups are included into the scope of the cross-border debt restructuring and need to be assigned to a foreign entity. Another issue foreign lenders often need to handle is the borrower’s failure to register amendments (including change of the lender) with the NBU. Under the existing NBU registration rules, only the borrower can initiate registration of the loan agreement as well as changes to the loan agreement. Thus, in the absence of the borrower’s cooperation, the sale of loans extended to Ukrainian borrowers may not be practicable, given that change of the lender is subject to registration with the NBU. Overall, Ukrainian business continues to make significant efforts to restructure its existing debt as well as to raise new financing. Notably, Kernel successfully completed its debut Eurobond issue at the beginning of 2017. Nevertheless, Government support in the form of decisive structural reforms and consistent currency control liberalisation would significantly improve financing options for Ukrainian business.

71


Customs Law

What Should be Done with the Ukrainian Customs System?

Ivan SHYNKARENKO Partner, Ph.D. in Economics, KM Partners

T

he Ukrainian Customs Service requires reform. This is what we hear constantly for the last few years. The year 2016 was probably the busiest in terms of establishing various groups of experts dedicated to customs reform and visits by foreign missions including customs specialists of International Monetary Fund and U.S. Customs & Border Protection. What was the result? Plausible but questionably efficient efforts by the Cabinet of Ministers of Ukraine to make the “single window” customs clearance concept operational, mobile groups for fighting customs offences (so-called “mytni sotni”) and amendments to Regulation No. 450 of 21 May 2012 On Issues, Related to Customs Declarations adopted in early January 2017 (Regulation of the Cabinet of Ministers of Ukraine No. 27 of 11 January 2017). These measures were hardly sufficient to overcome the major problems present in the Ukrainian customs system. It would not be much of an exaggeration to say that it is broken. It is bad for the business sector (at least those that operate officially) and does not ensure the basic protection of the Ukrainian market from smuggling and other types of illegal import. The last couple of years produced many recipes for fixing the customs system with varying degree of “comprehensiveness”. Neither of these recipes seems likely to provide quick wins. Comprehensive customs reform is definitely required. Such reform is a difficult task that will take years to implement.

72

Hence, it is probably worth starting with the specific steps aimed at fixing major flows seen by the naked eye. A non-exhaustive list of such fixes may be described as follows. Embarrassing problems with getting refund of customs payments after the unlawful adjustment of the customs value (after such adjustment was cancelled by the courts) remain unresolved. A reminder that during the last couple of years, customs offices often created obstacles in getting refunds of overpaid taxes after final cancellation of the decision on customs value adjustment. The stance of the Supreme Court of Ukraine, which denied the right to claim straightforward collection of overpayment from the budget, made the situation even worse. In effect, the customs valuation was transformed into the perfect instrument of raising money for the budget. The customs office revises the customs value and irrespective of the grounds for revision (whether they were sound or not at all) monetary funds remain in the budget with little chance of them being returned. Some of the amendments to Regulation of the Cabinet of Ministers No. 450 of 21 May 2012 On Issues, Related to Customs Declarations adopted in early January 2017 seem to target this problem. Namely, this relates to the rule that cancellation of the decision on customs value adjustment should be the basis for amending the customs declaration. Yet, we are rather skeptical that such changes will be helpful. The question is not with the amendment of customs declarations as such. The customs offices block repayment, referring to the ambiguous Procedure of interaction among local bodies of the State Fiscal Service of Ukraine, local financial authorities and local bodies of State Treasure Service of Ukraine in the process of reimbursement to taxpayers of amounts paid by mistake or in excess (Order No.1146 of 15 December 2015 of the Ministry of Finance of Ukraine). Hence, it is by amending this particular act that the deadlock may be broken. It would be sufficient to stipulate in this Procedure that cancelling the decision on customs value adjustment shall be unconditional grounds for the Customs Office to file the confirmation to the State Treasury about the sum of overpayment.

The other point relates to the messy non-tariff regulation, which is one of the major problems of the Ukrainian customs system. Phytosanitary, radiological and other controls are, in their current condition, doing more harm than public good. They are hampering the fully-fledged operation of the “single window” approach to customs clearance, which is a vital step needed for improving the Customs Service. As well as proper functioning of the preliminary customs declarations of type “EA” (which is an advanced instrument ensuring efficient logistics of cross-border shipments). There will be few objections to the opinion that the majority of such non-tariff measures are not efficient in terms of protecting the Ukrainian market from undesirable imports. With this in mind they need to be either reformed or cancelled all together. There are no reasons at all to retain these bodies in their present form. Starting from adoption in 2012, the Customs Code of Ukraine contains provisions regarding authorized economic operators. Yet, since then the respective rules have remained idle. The status of an authorized economic operator is one of the best international practices aimed at trade facilitation. It would provide Ukrainian responsible business with an instrument for significant simplification of their foreign economic activity primarily on the Ukrainian side but with the potential to extend to the EU (if the status is recognized there). Draft Law No. 4777 On Amending the Customs Code of Ukraine with Respect to Authorized Economic Operator and Simplification of Customs Formalities was submitted to the Verkhovna Rada in early summer 2016. So why not adopt it? One of the big challenges facing importers of consumer goods is the huge inflow of goods brought into Ukraine without customs control and import taxes with application of various schemes exploiting flaws in Ukrainian customs regulation. One of the most widespread (specifically, on the Western border) schemes of tax-free import is the splitting of dispatches. It exploits the loophole in the law, created by the rule on taxfree import to Ukraine of goods with a value below EUR 500 and/or weight below 50 kilos (for entry points other than by air) carried by citizens.

WWW.UKRAINIANLAWFIRMS.COM


KM Partners

T

Address: 5 Pankivska Street, 5th Floor, Kyiv, 01033, Ukraine

he law firm was established in 1999 by former senior employees of one international auditing, tax and consulting services organization. Since that time the firm has been operating successfully on the Ukrainian legal services market. Today, the reputation of multispecialized company is maintained by 4 partners and 25 qualified and experienced lawyers. KM Partners is the legal advisor of choice in the areas of tax, customs, transfer pricing and disputes resolution for many international leading companies and their subsidiaries in Ukraine, mid-sized businesses, as well as Ukrainian companies in various industrial sectors. Real estate, construction, land, M&A, labor and commercial law are also among the firm’s strong practice areas.

Mobile groups for fighting customs offences created by the Cabinet of Ministers ensured some positive shifts in combating such illegal import. Yet, without closing the loopholes in customs rules, significant progress in fighting such schemes of tax-free import is unlikely. The State Fiscal Service of Ukraine has supported amendments to the Customs Code of Ukraine, suggested by the business community, aimed at fighting the schemes of tax-free import following the practice of the EU, USA and Canada. These amendments introduce extra conditions for tax-free import — a citizen may apply the relief once a week and on condition of absence in Ukraine at least 48 hours before entry. SFS has sent the respective Draft Law to the Cabinet of Ministers for submission to the Verkhovna Rada. If finally adopted, such amendments would be a powerful step towards preventing tax-free import using the scheme of splitting dispatches (deliveries). Yet, the amendments were shelved at the Ministry of Finance without making significant progress. The Ministry of Finance’s official position is that it is working on a comprehensive solution. Yet, why not begin with a proven recipe?

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 7197 E-mail: admin@kmp.ua Web-sites: www.wts.ua, www.kmp.ua

Two legal entities operate under the trademark KM Partners: WTS Consulting, LLC and KM Partners Attorneys at Law. As a member of WTS Alliance, KM Partners provides comprehensive legal support of complex international projects where legal expertise in foreign legislation is required. Services related to Criminal Law are provided by KM Partners Attorneys at Law, which renders services on defense of clients’ officials in criminal proceedings on white collar crimes, tax evasion, embezzlement, sham business, forgery, criminal negligence and others. KM Partners has for years been recommended among the most competent Ukrainian law firms by world-wide legal publications like Legal 500, Chambers Europe, International Tax Review (World Tax and Transfer Pricing), Ukrainian Law Firms and others.

The other point that seems not to be working properly are the rules on liability for customs offences, as set out in Articles 458542 of the Customs Code of Ukraine. Extremely high penalties (e.g. 300% of the amount of underpaid taxes or 100% of the customs value of goods with their seizure) were a trade-off in return for de-criminalization of liability. Time has shown that such penalties are not efficient in terms of fighting persistent offenders but are applied against benevolent businesses in most cases. Hence, it is necessary to fix these rules too, at least by excluding discretionary rules triggering corruption risks. Last but not least, institutional reform is hardly required. Strong governance in the field of customs requires a strong central office with competent and motivated staff in sufficient numbers. This is required for appropriate analytical work and monitoring of the territorial offices. Yet, reportedly, current “institutional reform” longs more in the direction of cutting the number of officers in charge of customs (the direction started by Mr. Klymenko following unification of the tax and customs services). Such an approach is

not a sound one and would hardly be helpful in ensuring the proper functioning of the customs system. Moreover, against this background, it is difficult to expect speedy revival of the customs post clearance audit function. Yet, without an efficient post clearance audit, one can hardly expect any real simplification of customs clearance at the border. The entire burden of control over shipments will be placed on the formalities during the customs clearance process. The above list is not exhaustive and provides a rather subjective review of improvements. Other customs practitioners may add to this list. The basic idea is that the small steps in the current situation are also necessary and may provide quick wins in terms of reviving the Ukrainian customs system, irrespective of pursuing comprehensive customs reform. There is no need to reinvent the wheel, proven recipes are available and in some cases even already adapted to the Ukrainian legal system. Hesitation on the part of the state authorities with required amendments is unexplainable.

73


Debt Restructuring

Debt Restructuring: New Government Vector

Sergey BOYARCHUKOV Managing Partner, Alekseev, Boyarchukov and Partners

U

nfortunately, the economic situation in Ukraine showed no significant improvements in 2016. However, business is slowly stabilizing, and while in 2015 the vast majority of companies suffered some losses, in 2016 we saw a tendency towards strengthening of position. Of course, there are a number of reasons for that. First, the law-making body adopted a series of regulatory acts last year, which were aimed at supporting businesses, including the Law of Ukraine On Financial Restructuring, which will be further referred to, and several interesting initiatives are under consideration or development and may turn into laws in the near future. Second, almost all the companies of various sectors understand the need for mutual support. While in the past the easiest way to settle bad debts was recovery by a court of law, now mutual concessions, such as restructuring, discounts, deferred/ instalment payments etc., are very common. It is because it has become clear that the execution of judgement in today’s conditions may take months and result in the bankruptcy of a contractor. The relationships with banking institutions have the same features. The desire to sue is also discouraged by new court fees and advance fees introduced in case of applying for a state enforcement officer (bailiffs), which results in additional costs for the injured party, while there are no guarantees that violated rights will be recovered and money returned. Third, judicial practice states that debtors have an advantage, namely that if the law allows ambiguous interpretation, in the majority of cases courts will decide in the debtor’s favour. This tendency particularly remains in disputes

74

regarding foreclosure on the mortgage or pledge, which, after debt collection, are the most common ones involving banks. Speaking about the most significant changes in the field of restructuring during the last year, the Law of Ukraine On Financial Restructuring should be noted first. The idea of its creation is not new, and it is inspired by the disappointing statistics of bad debts. The Law came into force on 19 October 2016, and will be valid for three years. It was decided to establish the temporary state institution with the participation of the National Bank of Ukraine, Deposit Guarantee Fund, Ministry of Economic Development and Trade of Ukraine, etc., which would become both a curator and a guarantor in legal relations between debtors and creditors. The law-making body has developed and established a procedure for the creation of special agencies, such as the supervisory board, the secretariat, the arbitration committee, where a person who arrived at a decision to settle bad debts should apply. First, the application of this law will enable the solving of a problem without initiating legal action, and this will save several hundreds of thousands in court, attorney and others fees, as well as your time. Second, financial restructuring will result in a solution that will suit both the debtor and the creditor, and the execution will be guaranteed by the temporary state institutions above. While the litigation results in a decision to recover the debt, which still has to be enforced. And during the trial the debtor can make maximum efforts to conceal the property belonging to him and avoid responsibility. The debtor and its creditors will negotiate and, as a result, conclude a restructuring agreement, which may also envisage involvement of investors to address financial issues. When the procedure is being implemented, a moratorium will be put on satisfaction of creditors’ monetary claims, so the debtor will be released from the additional burden and will be able to focus efforts on paying off his/ her existing debts in the future. The debtor himself may come to the secretariat and apply for the restructuring if no action of solvency has been brought against him and no pre-judicial penalty is applied to him. After that it is necessary to involve the creditors, who jointly develop a restructuring plan. This plan may contain almost any condition as long as it satisfies all creditors and is intended to address financial issues.

The financial restructuring plan may not work and the debtor will have to initiate bankruptcy proceedings. Here I would like to note that existing laws on bankruptcy allow to review and declare invalid agreements / deny the debtor’s actions with his property committed one year before initiation of the bankruptcy. This provision aims to return the property, which the unscrupulous debtor alienated with the purpose of working himself into bankruptcy, to the liquidation estate. However, if these agreements are concluded as part of the restructuring plan, they shall not be declared invalid. Thus, the law-making body guarantees the rights of investors involved in the process of restructuring. The above Law has not been applied yet because all the necessary institutions are not fully established, so we look forward to its active force next year. In addition, we would like to highlight two important legislative initiatives, namely: Draft Law On Restructuring of an Individual’s Debt or Declaring Him/Her Bankrupt (socalled consumer bankruptcy), and the Draft Law On Mediation. Both institutions are used quite successfully around the world, so the need for their implementation in Ukraine has been discussed for a long time. For example, the Draft Law On Consumer Bankruptcy, which is not the first attempt to resolve this issue, was put before Parliament back in 2015, but it is still under discussion and finalization. However, the need for its adoption is very acute, so changes are coming. In Ukraine, an individual is unable to settle his bed debts. The hryvnia currency crash, job cuts, and reduction in public paying capacity lead to the fact that an ordinary person actually has no possibility just to repay an existing debt to the bank, but see any prospects for himself or his family, because sometimes debt repayment requires 10-20 or more years with paying not a part, but almost a person’s entire income, to the bank. Many countries have a personal bankruptcy institution, as a result of which a person is released from his burden and gets a chance to start over. Loans may be granted to such person in the future, but under a certain condition: a bankruptcy case against him may be recommenced, at least, 5 years after the date of the previous case. This procedure is also necessary for banks, because the record keeping of actual bad debts, which

WWW.UKRAINIANLAWFIRMS.COM


Alekseev, Boyarchukov and Partners

A

Address: Shota Rustaveli Street, 3rd Floor, Kyiv, 01001, Ukraine

lekseev, Boyarchukov and Partners is one of the leading law offices in Ukraine. It is known as one of the most successful law firms with wide practical experience in representing clients in the questions of bankruptcy and debt restructuring, corporate management, litigation and settlement of disputes in courts of arbitration. The gistory of the firm began in 2000. Sergey Alekseev and Sergey Boyarchukov decided to create their own firm after they had successfully prevented the merger of JSB Energobank where they were working at the time. In 2003 partners established the attorney’s association XXI Century which specialized in litigation. In 2005 Sergey Alekseev and Sergey Boyarchukov founded Law Offices Alekseev, Boyarchukov and Partners specialising in questions of bankruptcy and debt restructuring,

are repaid at the rate that the financial institution barely notices them, is also a burden for them. And further litigation and enforcement also increase expenses. It is envisaged that personal bankruptcy proceedings will be considered by commercial courts that already have extensive experience in these matters, though with legal entities. On commencement of bankruptcy proceedings, the debtor’s asset authorised manager, who will coordinate the conclusion of property alienation agreements, is appointed. The debtor’s asset management procedure takes 115 days and may be extended by a court in certain circumstances. At this time, the debtor shall submit the debt restructuring plan, which contains either restructuring or repayment of debts or an amicable agreement with creditors. If the debtor has only one creditor, for example, a bank issued the mortgage, the procedure may be simplified. In November 2016, the Draft Law On Mediation was adopted in the first reading. This law provides the possibility of mediation in any conflicts/disputes, including civil, family, labour, economic, administrative and criminal proceedings, as well as administrative offence cases.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 235 8877, 537 1828 Fax: +380 44 235 8827 E-mail: office@abp.kiev.ua Web-site: www.abp.kiev.ua

corporate management, litigation and settlement of disputes in courts of arbitration. In November 2014 Sergey Alekseev left the company as he was elected to the Parliament of Ukraine of the 8th convocation as an MP, leaving management to his partner Sergey Boyarchukov. Today, Law Offices Alekseev, Boyarchukov and Partners is a team of 30 lawyers who work in the areas of banking, financial, tax, corporate, competition, antitrust, labor, land and criminal law. We offer innovative legal solutions to Ukrainian and international companies, banking and financial institutions, Government agencies and individuals. Strong professional experience and thorough understanding of Ukrainian business environment allow us to offer our clients the most effective solutions for their business within the shortest period of time.

Parties will be able to include the mediation clause into a contract they conclude between each other. This clause will not prevent them from initiating legal action. That is, the involvement of a mediator at the stage when the dispute is past avoidance and either party insists on initiating legal action will not be seen as possible. The mediator may be a person who meets the statutory requirements and has a certificate. The main difference between the mediator and the judge, including arbitrator, is that the mediator does not define the guilty party in the conflict or offer the best dispute solution for either party. The mediation may result, among others things, in the restructuring of any form. And this is agreed at the lowest cost. Unlike court proceedings, the parties in mediation are not limited to procedural mechanisms. We would like to especially note the institute of “pre-judicial recovery.” It was introduced in January 2013 in connection with the adoption of the new version of the Law On Bankruptcy. However, it was only last year that this procedure was intensively applied. Pre-judicial recovery provides for the settlement of bad debts before the commencement of bankruptcy proceedings. It is somewhat similar to the financial restructuring

referred to above, but in this case the “curator” is the commercial court. The pre-judicial recovery may be introduced upon the written consent of the debtor and creditors, whose total amount of claims does not exceed 50% of the total debt, and if a recovery plan agreed by the creditors is in place. Despite its simplicity and appropriate legislative response, pre-judicial recovery is not very popular in practice. Ukrainian businessmen, regardless of whether they take the position of debtor or creditor, take innovation with caution or even fear. So as long as either mechanism is not widely used, it hardly receives any attention. In this light, we should thank the transparency of the Register of Judgements. Indeed, the case of approval of the pre-judicial recovery plan for S. Ordzhonikidze Kharkiv Tractor Plant JSC examined by the Kharkiv Region Commercial Court (Case No. 922/1882/16) was made public in 2016. This case, in particular, helps to comprehend how pre-judicial recovery works in practice. Debtors, asset managers and creditors have an opportunity to “learn from the mistakes of others”. In general, we can say that 2016 was a year of restructuring. And there is good reason to believe that this tendency will remain over the next few years.

75


Defense

Defense

Anastasiya BOLKHOVITINOVA

Artem HRYTSAK

Legal Director, DLA Piper

Associate, DLA Piper

I

n 1991, with the dissolution of the Soviet Union, Ukraine inherited one third of the Soviet military-industrial complex. That is, 1,840 enterprises and approximately 2.7 million workers1. Despite such a vast inheritance, severe economic contraction, pervasive corruption and poor corporate governance have all contributed to significant obstacles preventing the transformation of the Soviet-era defense industry into a modern technological power2. Military action in Eastern Ukraine highlighted the dire need for reform within national defense industry, which is now an urgent matter of the national security and territorial integrity for Ukraine. In addition to clear strategic necessities, reform of the defense sector holds tremendous potential from an economic point of view. According to the Global Aerospace and Defense Sector Outlook 20173 report, an increase in international demand for defense and military products stemming from the resurgence of global security threats and rising global tensions is likely to result in strong augmentation of the global defense industry, with positive revenue growth for market participants. Such a positive outlook might represent numerous opportunities for economic development and attract investment to the Ukrainian defense industry. Leonid I. Polyakov: U.S.-Ukraine Military Relations and the Value of Interoperability, 2004 2 Olga Oliker, Lynn E. Davis, Keith Crane, Andrew Radin, Celeste Gventer, Susanne Sondergaard, James T. Quinlivan, Stephan B. Seabrook, Jacopo Bellasio, Bryan Frederick, Andriy Bega, Jakub Hlavka — Security Sector Reform in Ukraine, Rand Corporation, 2016; Alexandra Mclees, Eugene Rumer: Saving Ukraine’s Defense Industry, July 2014 3 Deloitte: Global Aerospace and Defense Outlook 2017 1

76

Brief Overview of the Industry and Legal Framework

Ukraine’s defense industry is organized principally around state-owned enterprises (the SOEs) managed by Ukroboronprom (the UOP), which is the largest state defense holding group with over 130 subsidiaries operating in five major industries as well as in R&D and export-import activities. There are also more than 90 privately-owned entities across the sector. During the last few years a number of strategic documents regulating the sector were adopted, which have laid down solid groundwork for the development of the sector for the next several years. Unfortunately, these documents do not provide a sufficient basis for the current effective functioning of the sector and the adoption is required of numerous acts of secondary legislation, such as the State Target Program of Reforming and Developing the Defense Industry for the period till 2020 .

Major Problems/ Challenges in the Industry

1) Lack of Transparency and Clear Corporate Governance in SOEs According to Transparency International, the defense industry, with its huge contracts and high secrecy, poses unique corruption risks4. In fact, it is estimated that every year at least USD 20 billion is lost because of corruption in the sector through single-source contracts, overpaid agents and other forms of corruption5. In Ukraine, the defense industry is generally perceived as a highly opaque sector, a fact that discourages large investors from entering the market. One particular example of such a lack of trans-

parency is that procurement of more than 90% of armaments and military equipment is designated as a “state secret” by Ukraine’s defense authorities6. As a result, the lion’s share of goods and services under the State Defense Order of Ukraine is procured through single-source contracts tending to result in excessive prices and lower quality of goods7. Another significant problem is the lack of clear corporate governance and the fragmentation and scattering of state ownership among numerous stakeholders (Ministry of Defense of Ukraine, Ministry of Internal Affairs of Ukraine, State Space Agency of Ukraine, etc). This lack of central control over the sector tends to result in the frequent overlap of powers, numerous conflicts of interest and poor quality management. 2) Rigid Legislation and Numerous Legal Restrictions Strong cooperation between market players, especially cooperation between SOEs and private enterprises, is considered to be one of the key factors for successful growth of the defense industry. It facilitates the implementation of new technologies and solutions, which might not be otherwise affordable to companies working independently with their own resources. In Ukraine, there are still no effective mechanisms for cooperation between SOEs and private investors. Worse still, there are a number of outdated legal restrictions preventing the establishment of such mechanisms. For example, the CMU’s Decree No.24-92 of 31.12.1992 stipulates that Ukrainian SOEs, with some minor exceptions to those in the aircraft and construction industries, are not allowed to found any type of enterprises. Another notable example is the legal prohibition for the establishment of commercial enterprises on the basis of state-owned property unless the Government’s share in such enterprises exceeds 50%. In our view, Transparency International UK Defense & Security Program: Raising the Bar, Good Anti-Corruption Practices in Defense Companies, June 2013 5 Transparency International Defense and Security Page 6 Viktor Plakhuta: Project to reform Ukraine’s Defense Procurement System, Presentation, December 2016, Transparency International Ukraine, Ukrainian Freedom Fund 7 Transparency International — Corruption Risks Series, Single Sourcing, A multi-country analysis of non-competitive defense procurement; Olga Oliker, Lynn E. Davis, Keith Crane, Andrew Radin, Celeste Gventer, Susanne Sondergaard, James T. Quinlivan, Stephan B. Seabrook, Jacopo Bellasio, Bryan Frederick, Andriy Bega, Jakub Hlavka — Security Sector Reform in Ukraine, Rand Corporation, 2016 4

WWW.UKRAINIANLAWFIRMS.COM


DLA Piper

D

Address: 77A Velyka Vasylkivska Street, Kyiv, 03150, Ukraine

LA Piper is a global law firm which has a presence in more than 40 countries throughout the Americas, Asia Pacific, Europe and the Middle East, providing a broad range of legal services to local, regional and international clients. Areas of practice in Ukraine The firm’s Kyiv office specializes in the following fields: Antitrust and Competition: permits for concentration; for concerted practices, leniency program advice; advice on protection from unfair competition, compliance advice and audits, obtaining preliminary conclusions from the AMCU; abuse of dominant position; advice on commercial agreements and trade practices, natural monopolies and public procurement; support during investigations by the AMCU, as well as competition litigation. Corporate and M&A: setting up and termination of businesses, corporate governance, M&A, including due diligence, corporate restructuring and reorganization; corporate investigations and compliance and legal support of day-to-day operations. Finance and Projects: M&A and regulatory work in the banking and finance sector, asset, debt and capital markets transactions, structured finance, project finance, real estate finance, aviation finance, debt restructuring projects, infrastructure and PPP projects, litigation in debt and insolvencyrelated matters. IP and Technology: registration and protection of IP in Ukraine and overseas, IP portfolio management, IP due dili-

these as well as many other regulations of a similar nature significantly restrict the ability of private market players to form strategic partnerships with SOEs and do not provide investors with sufficient protection. 3) Need to Revamp the Export/Import Control System The priority issue that needs to be addressed here is the role of UOP in export/ import control activities. Specifically, according to CMU Resolution No. 838 of 8.06.1998, business enterprises seeking to export military goods must coordinate all transactions related to military goods with UOP, obtain the UOP’s consent for entering into certain types of contracts and, in some cases, agree preliminarily with UOP on the approximate price of military goods. Given that UOP is not only a regulator of the system but also a key player on the defense market, this might be considered a serious conflict of interest. The issue of limiting the UOP’s authority has been actively discussed on the market in recent

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 490 9575, 490 9577 E-mail: ukraine@dlapiper.com Web-site: www.dlapiper.com

gence, structuring of IP ownership and commercialization of IP, unfair competition issues, parallel import and counterfeits, licensing and assignment agreements, IT outsourcing, Internet, e-commerce, domain names and telecommunications, data protection, software and hardware, technology transfer. Labor: employment contracts, personnel policies, employment law audits and due diligence reviews, data protection, employee rights, employment-related tax issues, termination matters, employment litigation. Litigation, Arbitration and Investigations: all types of dispute resolution including cross-border litigation and international arbitration; global investigations including FCPA and UKBA driven; fraud investigations, white-collar crime, contentions and non-contentious compliance, AML and other regulatory checks and investigations Real Estate and Construction: acquisition/sale and lease transactions for real estate and land; registration of associated rights; establishment of business presence, expansion and structuring of retail business, construction and planning matters, industrial and infrastructure projects, real estate due diligence, structuring of real estate transactions and construction investment projects, real estate contracts, mortgage lending and environmental issues. Tax: corporate tax, VAT and customs, tax driven restructurings (domestic and international), as well as M&A transactions from the tax perspective, tax due diligence, reviews of tax profiles of entities, tax controversy, litigation and transfer pricing.

times with a number of proposed potential solutions to the problem, but unfortunately, there is no unanimity on this issue between the state bodies responsible for reforming the sector. Another issue on the export/import reform agenda is updating the Ukrainian export control lists of goods so that they conform to the items controlled on the multilateral export control regime lists.

and/or ineffective and are not defined as strategic is a wise move. The goal, therefore, should be to have privatized (without Russian ownership, as provided by legislation) SOEs through open competition tenders, which will help to transform them into companies that buy/sell/seek investment in developed world markets.

4) Privatization of Non-strategic SOEs in the Defense Sector Management of a large number of SOEs in Ukraine by different stakeholders has, as stated above, proved to be inefficient. Furthermore, the maintenance of SOEs comes at a high cost for the Government and subsequently ends up being paid for by Ukrainian taxpayers. Although there is a general understanding of the necessity to privatize SOEs in different sectors, SOEs in the defense sector are currently carved out from privatization. We, believe that the privatization of all SOEs which are unprofitable

Despite the enormous inherited and acquired potential of the Ukrainian defense sector, it is generally not regarded as an attractive area of business at the current time. Comprehensive reform of the sector should be conducted, which should help connect the Ukrainian defense industry with 21st century processes already developed and implemented in NATO countries, making it more transparent, accountable and efficient. Fortunately, there are numerous international best practices that can be followed to facilitate the implementation of such reform and to maximize its results.

Conclusion

77


Due Diligence

Anti-Corruption Due Diligence

Illya TKACHUK Local Partner, Jeantet. Illya Tkachuk specialises in investment projects, crossborder transactions, corporate and M&A, foreign investments, securities, contractual and labor law. He has broad experience in structuring and implementation of foreign investment projects metallurgy, renewable energy, insurance, telecommunication, food production, farming, start-ups, establishing joint ventures, corporate restructurings, securities, contractual and labor issues.

O

ur initial understanding of due diligence brings us to an M&A transaction when a buyer or investor seeks to investigate a potential investment or acquisition target. However, due diligence was not always understood as meaning a review of a company’s legal and financial affairs prior to making a decision to purchase it. As a concept, it was first mentioned in the Securities Act of 1933 (USA) as a defense available to underwriters participating in a registered securities offering, and was referred to as reasonable investigation. In fact, the concept of due diligence found its application in an ever-expanding number of fields and callings, one of which is the fight against corruption. Indeed, more and more countries intensified their efforts to fight corruption on different levels. Many countries, which ratified the OECD Anti-Bribery Convention1 and/or the UNCAC2, implemented in their national laws OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1997. 2 United Nations Convention against Corruption (UNCAC) 2003. 1

78

the requirement for businesses to conduct properly documented, risk-based due diligence on third parties as part of anti-corruption compliance standards. Failure to comply with this may result in criminal liability. Ukraine signed and ratified the UNCAC and also adopted the Anti-Corruption Law3 which contains Chapter X fully dedicated to the anti-corruption rules for legal entities. This Chapter even refers to due diligence to be conducted by legal entities for examination and removal of corruption risks. At the same time, the Anti-Corruption Law is structured more as an element of the fight against corruption Government authorities and their officials. Possible measures which can be taken by legal entities to prevent corruption are mostly limited to internal regulations and relations between the company and its employees. Unfortunately, Ukrainian businesses are not always particularly attentive to anticorruption measures when choosing business partners and counterparties, something which is extremely important for American and European companies.

Third-party due diligence

One of the best examples of national anti-corruption measures is the Foreign Corrupt Practice Act (FCPA), a United States federal law, according to which any person may be held liable for making a payment, “while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office”. The aim of this provision is to encourage businesses to be more careful with their contractors, consultants, suppliers, service providers and other third-party partners. For example, while choosing a service provider a commercial company needs to understand its business and reputation on the market. In case the market links this service provider with a Government authority or the Government authority recommends a specific service provider, there is evidently a corruption risk. A Resource Guide to the US FCPA prepared by the Department of Justice (DOJ) and the Law on Preventing Corruption No. 1700-VII, dated 14 October 20114, as amended. 3

Securities and Exchange Commission (SEC) names such type of audit of a counterparty third-party due diligence. According to the Guide, companies should undertake some form of ongoing monitoring of third-party relationships. Where appropriate, this may include performing due diligence periodically, exercising audit rights, providing periodic training, and requesting annual compliance certifications by the third party. Similar provisions exist in the UK Bribery Act, which states that this is a “defence” for a company against an offence in case it proves that an “adequate procedure” was implemented to prevent associated persons from conducting prohibited actions. While explaining this rule in more details, the Guidance to the UK Bribery Act prepared by the Ministry of Justice dedicates an entire chapter to due diligence. In particular, the Guidance prescribes commercial organizations to apply due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organization, in order to mitigate identified bribery risks. The PACI Principles for Countering Bribery went even further and developed template questionnaires for conducting of internal and external due diligences, as well as provided for key risk indicators. Whenever the indicator shows a high risk, the business should conduct third-party due diligence. One of the best examples of the risk indicator is the geographical location. According to the Transparency International Corruption Perceptions Index 20164, Ukraine ranks 131st out of 176 countries. This automatically puts all Ukrainian companies into the high risk position, with the need to be additionally audited. It is worth noting that the PACI Principles also use other indexes, including the Tax Justice Network’s Financial Secrecy Index and the Transparency International’s Bribe Payers Index. Another example of implementation of the PACI Principles’ indicators is when a counterparty proposes a compound http://www.transparency.org/news/ feature/corruption_perceptions_ index_2016?gclid=Cj0KEQiAw_DEBRChnYiQ_562g sEBEiQA4LcsshGvp8skcB_PZhg65fvn7vdsmdgT90JCbf9bMnzucUaAiZe8P8HAQ 4

WWW.UKRAINIANLAWFIRMS.COM


Jeantet

J

Address: 4 Volodymyrska Street, Kyiv, 01001, Ukraine

eantet, a leading French international law firm, launched its office in Ukraine in November 2015 by taking over a very experienced team of lawyers under the supervision of Karl Hepp de Sevelinges and Bertrand Barrier, both of whom have been present in Ukraine since 2006. Jeantet Ukraine makes it easier for foreign investors as well as local companies to do business in Ukraine and navigate its market. First-rate legal services are provided to clients in an often unstable legal and regulatory environment while promoting the firm’s best international practices. The client-focused approach and quality service are evidenced by the large number of successful deals and transactions closed by the firm since 2006, when our team first got together.

and unusual structure of compensation. For example, when the settlements under the agreement are to be done to different accounts or a part of the compensation is to be paid as a contribution to a non-profitable organization. This should serve as a ground for anti-corruption due diligence of such a counterparty. As an alternative to third-party due diligence, the PACI Principles suggest including anti-corruption representations and warranties to a contract with counterparties. This solution can be especially effective when complex assessment of all key risk indicators showed low or medium risk.

Pre-acquisition Due Diligence

Apart from third-party due diligence, guidelines to both the US FCPA and the UK Bribery Act differentiate a pre-acquisition due diligence. This type of due diligence is more common for Ukraine. However, anti-corruption measures are not always properly investigated. In fact, there has existed a tendency in Ukraine in recent years to limit the scope of due diligence to the most important assets of the target company. Naturally, the parties to the M&A transaction are willing to reduce their costs, including by skipping the due diligence in exchange for substantial representations and warranties from the seller.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 206 0980 E-mail: bbarier@jeantet.org Web-site: www.jeantet.fr

As a testament of dedication to its clients as well as extensive knowledge and experience, Jeantet Ukraine is regularly ranked by international industry guides, while some of its lawyers were featured as leading experts in their respective fields. The firm’s main focus of expertise is Agricultural Law, Banking, Finance and Capital Markets, Banking, Finance and Capital Markets, Bankruptcy Law, Competition and Distribution, Employment Law, Energy — Environment, Intellectual Property, Telecommunications, Media & Technology, Litigation and Arbitration, Mergers, Acquisitions and Privatisations, Public Procurement, Public-Private Partnerships, Real Estate, and Taxation. Our lawyers advise in Ukrainian, English, French, German, and Russian.

This, however, cannot fully protect the buyer from possible risks. Let’s consider the following situations: 1) a company conducts its business on the basis of contracts concluded through bribes. It is obvious that such contracts bear a risk of being invalidated in a court, which has an impact on the company’s value; 2) a company’s business is structured on regular bribe payments. In this case, cessation of such criminal practice may kill the company’s business too; 3) a company’s main asset was acquired from the state without an action in exchange for a bribe. The company may lose the asset if its acquisition is challenged in court. The Resource Guide to the US FCPA encourages companies to conduct pre-acquisition due diligences in order to: — accurately value the target company. Identifying risks before an acquisition allows companies to better evaluate any potential post-acquisition liability and so properly assess the target’s value; — reduce the risk that the acquired company will continue to pay bribes. Proper pre-acquisition due diligence can identify business and regional risks and can also lay the foundation for swift and successful postacquisition integration into the acquiring company’s corporate control and compliance environment; — handle consequences of potential violations uncovered through due diligence by

the parties in an orderly and efficient manner through negotiation of the costs and responsibilities for investigation and remediation.

The “To Do” List for Ukraine

Although Ukraine is currently exerting a lot of efforts to fight corruption, there is still a long way to go. We are currently at the beginning of big changes in the country and society. New progressive legislation should be supported by the willingness of businesses to comply with new rules. Even if it entails burdensome changes to the business model, such changes will bring more benefits in the future as Ukraine moves closer to the EU. In particular, it is important to develop anti-corruption legislation and to make comprehensive guidelines explaining in detail the importance of both third-party and pre-acquisition due diligence. Businesses should understand that due diligence is not only an additional expense but an effective mechanism devoted to the protection of their interests. Moreover, the fact that Ukraine has not yet sufficiently improved its ranking in various corruption indices should not prevent foreign investors from developing their projects in Ukraine. It should only show the need of careful investigation of potential targets and business partners in Ukraine.

79


E-Commerce

E-Commerce in Ukraine: Practical Application, Novelties and Difficulties

Oleg PANTIIA Counsel, ECOVIS Bondar & Bondar

Development of E-Commerce Legal Regulation in Ukraine

According to estimates by local researchers, namely the Ukrainian Internet Association (www.inau.ua), the number of Internet users in Ukraine by March 2017 totaled 64.8% of the country’s population (the occupied territories of Crimea, Donetsk and Luhansk Regions are excluded from the research). The level of the Internet audience in Ukraine during the last 15 years has been constantly and steadily growing. Despite the late implementation of 3G mobile networks, the development of mobile platforms and wireless data transmission technologies is expected to further increase the numbers of this audience. So, the share of e-commerce within the national market is growing continually. In recent years a number of legislative acts were adopted in Ukraine to regulate the spheres of e-governance, public procurement, distrained property auctions, online business registration, access to public registers and other information. The development of such systems is carried out both by the State and independent volunteers’ projects (for instance, the ProZorro project — an electronic public procurement system which is accepted by the State as the basis to handle public procurements). On 3 September 2015 the Ukrainian Parliament adopted the On Electronic Commerce Law of Ukraine, which is absolutely new to Ukraine. The new Law was not passed in complete absence of legislation on E-Commerce. Both before and after the adoption of this

80

Law, the participants of E-Commerce were subject to the Civil and Commercial Codes of Ukraine, the Laws of Ukraine On Electronic Documents and Electronic Document Control, On Electronic Digital Signature, On Consumer Protection, On Payment Systems and Money Transfer in Ukraine and others. However, E-Commerce businesses were forced to adapt or mimicry in the face of the rules which were designed without taking into account the realities of E-Commerce, and were based in the main on two basic forms in civil law transactions: verbal and written. The new Law was drafted with the essential participation of the market players and, to a great extent, reflects existing Ukrainian best practice and uses the forms that business has already chosen for the sale of goods and the rendering of services with the use of information and communication systems. Thus, the On Electronic Commerce Law of Ukraine has become the fundamental piece of legislation that rendered business with transparent “rules of the game”, which have been adapted to its particularities. The issues in the field of emission and turnover of electronic money are beyond the scope of the new Law and are subject to the authority of the National Bank of Ukraine. Unfortunately, in its attempts to keep the financial system of the country in balance, the National Bank of Ukraine still preserves a number of payment system limitations which effect the deceleration of further development of electronic payments. However, these limitations tend to mitigate.

Basic Provisions of the Law

The key provision of the new Law is the definition of an electronic transaction and an electronic contract that was established at the level of the law and is equal to the provisions of the Civil Code of Ukraine. An e-transaction is defined as an action of a person focused on the acquisition, modification or termination of civil rights or obligations, conducted with the use of information and communication systems. An e-contract is defined as an agreement of two or more parties executed with the use of electronic means. The Law has defined the following parties of the transactions in the field of e-commerce: (1) the Seller — a person who sells

goods, performs works or provides services using electronic and communication systems; (2) the Buyer — any person who orders goods, works or services; (3) the Supplier of the services of an intermediate nature — a person who provides data transmission and/ or data storage services and the assigning of network identifiers services. It is important to emphasize that the Law is applicable strictly to commercial relations. The Law grants special attention to the provider of services of an intermediate nature and distinguishes him from the seller. Such a service provider may be the Internet services provider, the registrar of domain names, the owner of a website hosting private property sale ads, the owner of online stores, which is the only venue to host the sale of goods for other businesses (a common form in Ukraine) and others. Such a provider is not a party to the contract of sale of goods, works or services of the other vendor and, on the basis of Article 9 of the Law On Electronic Commerce, is released from liability for its quality, if he did not initiate the transmission of data and does not choose its recipient and cannot change the content of the contract. Thus, the Internet provider, the registrar of domain names etc. do not bear any liability for the actions of the Internet user or the owner of the site. The owner of the web-site for private ads shall not bear responsibility for the quality of goods supplied by the person who placed an advert on a web-site, etc. The Law On Electronic Commerce has established the order of execution of econtracts which are deemed to be executed by means of exchange of electronic offer to make a contract and electronic notice on acceptance of such an offer. The Law prescribes the amount of information which must be exchanged by the contracting parties. The contract shall be signed by the parties through means of: Electronic Digital Signature; Electronic Signature in form of single identifier (typically generated by sale-of-goods system); Analogue of a handwritten signature (facsimile reproduction of signature, another analogue of a handwritten signature — the least common form). Under the new Law, an e-contract executed in accordance with the established rules, is deemed to be equal to a contract made in

WWW.UKRAINIANLAWFIRMS.COM


ECOVIS Bondar & Bondar

Address: 3 Rognedinskaya Street, Office 10, Kyiv, 01004, Ukraine

E

COVIS Bondar & Bondar is a law company, member of ECOVIS International, a leading global consulting firm operating in over 50 countries around the world. Tailored solutions, high quality, focus on detail, promptness, responsiveness, flexibility, out-of-the-box thinking, practical approach to resolving clients’ issues, cost and time effectiveness — these are the principles that guide us in our delivery of legal services. Among our strengths are: Market Knowledge We have been operating in Ukraine since1998 and we know the Ukrainian market and the people in it. We have longestablished and continuous working relations with the Ukrainian state authorities. International Network As a member of ECOVIS International, we have permanent access to international and interdisciplinary knowledge in dif-

writing. This provision is important for further use in business transactions under the laws of Ukraine, where the written form of contract prevails.

Remedies Available in the Area

Since the Law On Electronic Commerce does not provide for any special or particular means of remedies for the parties of e-transactions, the remedies are applied under the general rules existing under the civil and/or economic regulations. Section 3 of Article 6 of the Law On Electronic Commerce allows the parties to design their own rules of ethics in this sphere. The main way to seek remedy is to file a claim to state courts in an ordinary judicial procedure. One of the key problems in these procedures in Ukrainian courts remains proof via evidence in a dispute, arising from relationships established with the use of electronic means. The courts, according to the existing Ukrainian rules of procedure, accepted the material or written evidence, oral testimony, expert opinion, etc. However, neither courts nor the parties of disputes were ready to use electronic evidence. That was particularly evident in domain disputes.

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 537 0910 E-mail: kyiv-law@ecovis.ua Web-site: www.ecovis.com

ferent jurisdictions, which ensures that our clients receive the most realistic and balanced advice on cross-border and local matters. Our Professionals Our lawyers are highly qualified in diverse areas of law and possess excellent knowledge of Ukrainian legislation and international legal standards in the provision of legal services. ECOVIS Bondar & Bondar is a recognized law firm in Ukraine, whose partners are named among the leading lawyers in their respective practice areas according to international and Ukrainian legal directories. ECOVIS Bondar & Bondar focuses its practice on Corporate & Commercial Law, Mergers & Acquisitions, Antimonopoly & Competition Law, Dispute Resolution, Labor Law and Tax. The company represents clients in diverse economic sectors, including in aviation and transportation, insurance, energy, sport, real estate, banking and finance.

The essential novelty is that the Law On Electronic Commerce equates the electronic document (notice) associated with the electronic transaction with written evidence in court when considering a matter between the parties of an e-transaction. Despite the fact that the procedural codes governing the order of dispute resolution were not respectively amended, such novation grants the participants of e-commerce an opportunity to defend their rights, which is equal to the one that the parties to other civil transactions have. After enactment of the Law On Electronic Commerce the electronic evidence, including electronic correspondence, becomes more usual and acceptable. For example, the Kharkiv Economic Court of Appeal in its resolution of 5 May 2016 (case No. 922/5978/15) ruled to accept as evidence Skype correspondence between the parties which, in turn, formed the grounds for the decision in dispute. Likewise, the Economic Court of Dnipropetrovsk Region accepted the evidence existing only in electronic form as proof of the agreement (case No.904/146/17, decision of 28 February 2017). These decisions share the same basis, namely, the provisions of the Law On Electronic Commerce and collateral

amendments implemented into the Ukrainian Civil Code and other pieces of legislation. At the same time, the participants of economic turnover, both entrepreneurs and customers, often do not observe the basic requirements of the Law On Electronic Commerce, and thus forfeit the means for legal remedies. The most common breach by entrepreneurs of legislative requirements is the lack of contact data on the web-site in a scope that is sufficient to draft and lodge a claim against the entrepreneur in accordance with Ukrainian procedural rules. This gap often becomes an obstacle for the majority of inexperienced customers.

Summary

The Ukrainian of e-commerce market has, to some extent, adjusted to the new regulations. Nevertheless, there are some gaps in state regulation of legal remedies, especially in the field of protecting consumers rights. For the vast amount of officers of justice and law-enforcement this sphere remains terra incognita. Thus, the basic direction in further development of the legal support of the e-market in Ukraine is improving the justice system and the means for protecting the rights of customers.

81


Energy

Legal Developments in Energy Laws reliable mechanism protecting the rights of energy consumers’.

Licensing Conflict

Bate C. TOMS

Natalia VIETOSHKINA

Managing Partner, B.C.Toms & Co. Legal education: Yale Law School (J.D., 1975); Magdalene College, Cambridge University (Law Tripos I; 1972-1973). Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in France.Chairman, British Ukrainian Chamber of Commerce

Associate, B.C.Toms & Co. Legal education: Kyiv National Economic University (Commercial and International Law, Master’s Degree, 2008), Ukrainian Bar Association (Certificate of advocate, 2010)

he Ukrainian natural gas and oil market became subject to European style regulation in 2016 and 2017, and thus more transparent, due to the adoption of new legislation in the energy sector.

tion Committee consisting of five members, each appointed for a three year term, as follows: — two members are appointed by the President, — two members are appointed by the Parliament (with one recommended by the Committee on the Fuel and Energy Sector and one recommended by the Committee on Housing and Public Utilities), and — one member is appointed by the Government (based on the recommendation of the Ministry of Energy). Under the New Law, NEURC members are appointed for six year terms and shall not serve for more than two terms. The New Law introduces administrative and criminal liability for improper interference with the work of NEURC members and staff. It is stipulated that NEURC members and staff shall act independently from any private business interests and shall not own any equity interests in any entities involved in the energy business. It is also required that potential candidates for a position with NEURC must have at least five years of professional experience in the energy sector or with utilities, including at least two years of experience in managerial positions. Further, the New Law obligates the Cabinet of Ministers of Ukraine to submit to Parliament a Draft Law On the Energy Ombudsman by 1 July 2017. The main need for the Energy Ombudsman is the absence of any

T

New Legislation on NEURC

The Law of Ukraine On the National Commission for the State Regulation of Energy and Utilities, No. 1540-VІІІ, of 22 September 2016 (the New Law), that came into force on 26 November 2016, greatly reduces the virtually unlimited control over the National Commission for the State Regulation of Energy and Utilities (the NEURC) that the President previously exercised under the President’s Decree On Approval of the Statute of the National Commission for the State Regulation of Energy and Utilities, No.715, of 10 September 2014 (Decree No.715), that is still valid. The New Law introduces an amended appointment procedure of NEURC members, and a number of new requirements that such members need to comply with as well as guarantees of NEURC members’ independence. Under Decree No.715, the members of NEURC are appointed and dismissed by Presidential decree. The New Law modifies this by introducing a two-stage procedure for such appointments, whereby the NEURC members are selected on a competitive basis by a Selec-

82

Presently, under Ukrainian law, a license is required to supply natural gas to an ultimate consumer in Ukraine, whether residential or non-residential, and whether the sale is from abroad or within Ukraine, based principally on the Law of Ukraine On the Natural Gas Market No. 329-VIII, of 9 April 2015 (the “Gas Market Law”). However, this was not always clear, since the Law of Ukraine On the Licensing of Commercial Activities, No. 222VIII, of 2 March 2015 (the “Licensing Law”, adopted earlier than the Gas Market Law) (described further below), previously permitted the unlicensed supply of natural gas by foreign and domestic sellers to ultimate consumers that could purchase under unregulated tariffs, generally meaning to commercial businesses as customers. Based on this (and despite the conflicting provisions of the later adopted Gas Market Law), NEURC in practice continued to permit such unlicensed supply to consumers under unregulated tariffs until the New Law was enacted. The adoption of the New Law resolved the conflict between the Licensing Law and the Gas Market Law, by amending the former so that all gas supply activities became clearly subject to the prior receipt of a license, as provided by the Gas Market Law. Under the Gas Market Law, a license is obligatory for all types of gas supply activities for ultimate consumers in Ukraine, whether residential or non-residential and irrespective of the applicable tariff.

License Conditions

1.1. New Licensing Conditions NEURC has initially adopted the Resolution On Approval of the License Conditions for Economic Activity in the Natural Gas Market, No. 201, of 16 February 2017 (the License Conditions Resolution), as required by the New Law. The License Conditions Resolution obligates entities that carry out or intend to carry out economic commercial activity related to the transportation, storage, distribution and supply of natural gas, irrespective of the legal form and ownership, to obtain a license within three months of the date of the official adoption of the License Conditions Resolution. The License Conditions Resolution was published on 5 May 2017, so entities are able to continue to carry out activities for gas supply, transportation, storage and distribution

WWW.UKRAINIANLAWFIRMS.COM


B.C. Toms & Co

B.

Address: 18/1 Prorizna Street, Suite 1, Kyiv, 01001, Ukraine

C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kyiv office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine. The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.

for another three months , but must apply for and receive a license for such activities after three months, i.e. by 5 August 2017, to continue activities without interruption. 1.2. No License Required for Gas Exports The Government of Ukraine adopted the Resolution On Approval of the List of Goods that are Subject to Licensing for Export and Import and Quotas for 2017, No. 1009, of 28 December 2016 (“Resolution No. 1009”), that came into effect on 1 January 2017. The list of the products subject to licensing for export from Ukraine was revised by Resolution No. 1009 to eliminate natural gas (as well as coal) effective 1 January 2017. Thus, licenses for the export of natural gas (and coal) are no longer required. However, persons and entities are still required to obtain permission from the Ministry of Economy for the re-export of natural gas that was previously imported into Ukraine.

The Gas Security Reserve Stock

On 22 September 2016, the Law On Amending the Natural Gas Market Law, No.1541-VIII (the Amendment Law) was adopted (on the same date as the New Law, described above). The Amendment Law entered into force and amended the Natural Gas Market Law on 1 November 2016. It reduces the size of the gas security reserve stock required to be kept in Ukraine by natural gas suppliers from a maximum of 50% down to a maximum of 10%. The previous gas security reserve stock requirement of 50% of the planned monthly

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 6000, 278 1000 E-mail: kyiv@bctoms.net Web-site: www.bctoms.net

The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective. B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts.

volume of deliveries for each supplier of natural gas to consumers for the next month, was introduced by the Cabinet of Ministers’ Resolution On Approval of the Establishment of the Security Reserve Stocks of Natural Gas, No. 795, of 30 September 2015. To implement the reduction in the gas security reserve stock permitted by the Amendment Law, the Cabinet of Ministers adopted the Resolution On Establishing the Size of the Gas Security Reserve Stock, No. 860, of 16 November 2016, which entered into force on 30 November 2016, that generally provides for a 0% gas security reserve stock requirement. However, gas suppliers may still be obliged to provide for a 10% security reserve stock in exceptional circumstances, such as the occurrence of an emergency situation in the natural gas market in Ukraine. The criteria for such an emergency situation is defined by the Ministry of Energy’s Decree No. 687, of 2 November 2015, that states that it can be declared where the forecast demand for natural gas in Ukraine is higher than the potential maximum supply, and pressure in the gas transportation system is at a critical level, so as to justify temporary special safeguard measures.

The More Favorable Tax Regime for Oil and Gas Production

The Parliament of Ukraine adopted the Law On Amendments to the Tax Code of Ukraine for Balanced Budget Revenue in 2017, No.5132, on 20 December 2016, which came into force on 1 January 2017. This Law reduces the rate of royalty fees for oil. Notably, the royalty rate for oil extracted from fields fully or partially

lying at a depth beyond 5,000 meters is 29% (previously 45%). Presently the Tax Code of Ukraine stipulates the following royalty rates for production of hydrocarbons: (i) for extraction of natural gas (of any origin): — 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters; — 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters; (ii) for extraction of oil: — 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters; — 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters.

Foreign Natural Gas can be Stored under the “Customs Storage” Regime

The Ministry of Finance of Ukraine adopted a Resolution that gives non-resident suppliers of natural gas an opportunity to store gas under the ‘customs storage’ regime. The Resolution On Approval of Amendments to Several Regulations of the Ministry of Ukraine, No. 292, of 27 February 2017 (which came into force on 4 April 2017) allows the storage of natural gas in Ukraine for up to three years without the need of pay the 20% import VAT that would otherwise apply. Previously, foreign suppliers could store natural gas only under the transit customs regime and only for 31 days.

83


Energy Efficiency

ESCO Market in Ukraine: Development Problems

Alexander BURTOVOY

Alexander TRETIAKOV

Partner, ANTIKA Law Firm. Member of the Public Council of the State Agency on Energy Efficiency and Energy Saving of Ukraine

Senior Associate, ANTIKA Law Firm

he ESCO market in Ukraine is highly limited although it has significant potential. Particularly, according to different evaluations, the total market volume varies from USD 4 billion right up to USD 8 billion. But, even such an evaluation is general because the experience of other countries shows that applying the ESCO model is a highly effective measure to implement energy saving technologies without significant expenditures for the company. For instance, the annual ESCO market turnover in the USA is about USD 6 billion and the total market size is about USD 20 billion. Taking into account the fact that in Ukraine the vast majority of property assets suffer from extreme deterioration and their construction was carried out at least 20-30 years ago, even implementing simple energy efficiency measures will have a significant economic effect. It is important, first of all, for the public sector, because Ukraine does not have significant funds that could be used as investment in energy saving when the saving of energy (considering the necessity to increase the energy independence of the state) is one of the most important priorities of state policy. Therewith, today the ESCO market in Ukraine in the public sector does not function as it is and the commercial market is relatively limited because there is no extensive experience of application of this mechanism. State support in the energy savings field is unable to solve even a small part of currunt problems. For instance, the budget for

2017 included financing that was for about UAH 800 million and UAH 400 million out of this sum were allocated to establish the Energy Efficiency Fund. As the required amount of financing is USD 20-40 million (according to estimates made by different experts), state support in this case cannot even boost development of the market. The main legislative regulation of ESCO market consists of two laws: the Law of Ukraine On Introduction of New Investments Opportunities, Guarantees of Rights and Legitimate Interests of Businesses to Conduct Large Scale Energy Sector Modernization of 9 April 2015 No. 327-VIII (so-called Law on ESCO) and the Law of Ukraine On Introducing Amendments to the Budget Code of Ukraine Related to Introduction of New Investments Opportunities, Guarantees of Rights and Legitimate Interests of Businesses to Conduct Large Scale Energy Sector Modernization of 4 April 2015 No. 328-VIII. In order to execute these Laws, three subordinate acts were adopted: — the Decree of the Cabinet of Ministers of Ukraine On Approval of the Model Energy Service Contract as of 21 November 2015 No. 845; — the Order of the Ministry of Regional Development, Building and Housing and Communal Service of Ukraine as of 27 June 2015 No. 178 On Accepting National Standards of Ukraine Б А.2.2-12:2015 Energy Efficiency of Buildings. The method to calculate energy consumption during heating, cooling, ventilation, lighting and supply of heating water, that approves the procedure to calculate the base line;

T

84

— a number of Decrees of the Ministry of Finance of Ukraine that amended the economic classification of expenditures from the budget, namely, introduced new indices for ESCO services; All the stated documents were approved at the end of 2015. At the beginning of 2016 the first developments and negotiations related to pilot projects of ESCO started in public buildings. They have now been terminated due to amendments made to legislation related to public procurement. The provisions of the Law On ESCO refer to the old Law of Ukraine On Public Procurement Performance that became invalid on 1 August 2016 when the Law of Ukraine On Public Procurement was adopted. The new law does not include peculiarities for procurement or implementation of energy saving measures through application of the ESCO mechanism. In practice, due to the lack of conformity between the provisions of Laws, it is impossible today for a state-funded institution to purchase ESCO services, which is why even those projects, the development of which started in 2016, had to be terminated. In order to manage the situation the Draft Law related to amendments to the Law of Ukraine On Introduction of New Investments Opportunities, Guarantees of Rights and Legitimate Interests of Businesses to Conduct Large Scale Energy Sector Modernization (related to the mechanism of energy service procurement) was developed. It provides for bringing into conformity the procedures of ESCO services purchase and the provisions of the Law of Ukraine On Public Procurement, sets out the features to perform purchase of ESCO services, tender documentations content, tender bid evaluation, evaluation criteria, etc. Moreover, the Draft Law provides for introduction of a number of other amendments taking into account previous work on the practical application of the law’s provisions. Thus, the maximum term for an energy performance contract is prolonged from 10 years to 15 years, the peculiarities to conclude agreements related to the objects administered by several budget holders are stipulated, the mandatory minimum level of economy that the client should experience is cancelled. The Draft was approved by the Verkhovna Rada of Ukraine during the first sitting in autumn 2016, but it was not submitted for con-

WWW.UKRAINIANLAWFIRMS.COM


ANTIKA

A

Address: 12 Khreschatyk Street, 2nd Floor, Kyiv, 01001, Ukraine

NTIKA was established in 2010. Since its formation, the firm has built a strong reputation as an independent law firm and continues to grow on the Ukrainian legal services market. According to the results of research of the legal services market undertaken by reputable international and Ukrainian guides to legal profession like The Legal 500 EMEA, Chambers Europe, IFLR1000 Energy and Infrastructure, Best Lawyers, Ukrainian Law Firms, A Handbook for Foreign Clients, Top 50 Law Firms of Ukraine, Client Choice. The Top-100 Best Lawyers in Ukraine, the firm has been recommended in antitrust, dispute resolution, corporate / M&A, banking, finance and capital markets, real estate, land, energy, subsoil use, energy efficiency and energy saving. The firm received the Legal Award 2012 in the nomination Law Firm — Breakthrough of the Year. The firm is a finalist of the Legal Awards 2013 in the field of Antitrust, Litigation and Real Estate, in 2014-2016 — in the field of Energy. ANTIKA’s team includes 15 lawyers, who have significant experience of various legal practices and provide a full range of legal services to national and international companies that do business in Ukraine, as well as abroad in the following fields: telecommunications, heavy machinery, chemical and food industries, automotive, complex develop-

sideration at the second hearing. Another attempt to approve the law was made in March 2017. The Draft was included on the agenda. At the same time, taking into account the fact that its consideration was scheduled for the end of a daily sitting (that made it close to unlikely to be adopted), it seems that lawmakers had more topical issues to resolve, and to develop a market for the implementation of energy saving technologies in Ukraine was not one of them. It should be mentioned that adoption of the stated Draft Law does not solve the key problem of ESCO’s functioning, namely the problem of its financing. It is necessary to understand that today ESCO companies in Ukraine are quite small engineering and project organizations. They do not have resources at the expense of which it would be possible to implement projects because it needs to be remembered that the existing ESCO scheme does not include such implementation at the expense of ESCO. It is possible to solve the problem with the help of bank financing, but, taking into account the loan rates at Ukrainian banks, the cost of a project will increase 5-7 fold within 10-15 years due to the cost of financing alone. The situation also becomes more complicated because when giving finance for an ESCO project, the bank should rely on the

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 0920 Fax: +380 44 390 0921 E-mail: office@antikalaw.com.ua Web-site: www.antikalaw.com.ua

ment, construction and real estate, subsoil use, wholesale and retail, media and sports, banks and financial services market, energy efficiency and energy conservation. The firm’s key practices include antitrust, litigation and arbitration, corporate, construction and real estate, subsoil use, energy and energy efficiency, legal expertise. The firm’s main principles are the provision of high quality and timely legal services, strict confidentiality and a bespoke approach to every client’s project. The following are representative clients: AWT Bavaria, ArcelorMittal Kriviy Rih, Cadogan Petroleum, Cargill, Chernomorneftegaz, Deposit Guarantee Fund, Enesa a.s., Esan Eczacıbaşı Industrial Raw Materials, Energobank, FC Dnipro, Ghelamco, Heitman, Henkel Ukraine, Henkel Bautechnik Ukraine, Ibis Group of Companies, Imperial Tobacco, International Resources Group, Lantmannen Axa, MF Telecom, Nadra Ukrayiny, Nasosenergomash, ViDi Group, Ukrnafta. The firm also advises the World Bank, EBRD, USAID, TACIS, UNDP, KfW, NEFCO on energy efficiency, utility and the implementation of other projects in Ukraine. ANTIKA is a member of the Ukrainian Chamber of Commerce and Industry, the American Chamber of Commerce in Ukraine, the Canada-Ukraine Chamber of Commerce, the European Business Association, and the International Turkish Ukrainian Businessmen Association.

qualification of the ESCO company whose calculations related to the economic efficiency of the project and its income. Today, the banks do not have the experience and knowledge to check ESCO calculations, even in crude terms. This creates certain obstacles to receiving bank loans. Consequently, the market needs very badly needs some cheap and available financial resources that ESCO companies would attract to implement projects. The offering of state support to ESCO projects is one such possible mechanism. Today, the Government of Ukraine promotes and actively promulgates the concept of establishing the Energy Efficiency Fund. It should accumulate all measures of state support in the field of energy efficiency. Today, persons that can possibly become the clients of the Fund include a condominium, private person — owner, etc. ESCO are not included in this list. The Fund gives assets straight to the owners in order to fulfill the required measures. In our opinion, it would be reasonable to include ESCO in such a list. First of all, it would increase the economic efficiency of implemented measures for a certain object. These measures would be implemented not because “everyone does this”, but because implementing this measure will provide certain influence on the economy.

In addition, such an approach would enable the Fund to monitor the targeted expenditures with the help of information on factual economy attained that ESCO would collect during the monitoring and verification of implemented projects. Another effective mechanism appeared to be a partially subsidized bank loan by the state paying part of the interest, or through providing banks with certain financing at the expense of which the banks could give loans on a preferential basis and at a lower rate of interest. Moreover, a relatively effective supportive mechanism could be the Fund providing guarantees to ESCO companies, which will use them as a guarantee to obtain bank loans. It will enable the cost of the load funds to be reduced because the guarantee from the Fund will be considered a high one. Another possible support option is the repurchase of state guarantees by the Fund during the performance of payments based on ESCO contracts through forfeiting. Thus, an ESCO company can receive funds for a performed project, which will also decrease its cost. The most important thing is that using such mechanisms will give the Fund an alternative method for financing, in addition to receiving funds from the budget and donors and, potentially, becoming self-sufficient.

85


Enforcement of Foreign Awards

Enforcement of Foreign Interim Orders: Recent Trends

Dmytro MARCHUKOV

Serhii UVAROV

Partner, AVELLUM

Senior Associate, AVELLUM

U

krainian assets frequently appear as subjects of disputes in foreign courts. The larger the dispute the greater the number of jurisdictions usually involved. Interim orders by foreign courts and arbitral tribunals often constitute an important part of such legal battles. This should come as no surprise. It is well known that interim reliefs are of great importance towards maintaining the status quo, preventing dissipation of assets, and ultimately to make sure that many years of legal fights produce a useful result. However, to obtain an interim relief in a multijurisdictional litigation is only half the battle. Another, equally important half, is to bring them into effect in all relevant jurisdictions. It may be easier to do so outside of Ukraine. Very often, however, respondents, their owners or directors, or the ultimate assets that are the subjects of the legal battles, are located in Ukraine. In such case, the applicants may either hope for voluntary compliance with the interim orders by the parties concerned (on penalty of the contempt of court or adverse inference), or try to recognize and enforce them before a Ukrainian court. Ukrainian courts have recently seen several quite remarkable cases on recognition of freezing orders issued by foreign courts and interim reliefs granted by arbitral tribunals. They demonstrate that Ukrainian courts tend to consider foreign interim orders as generally enforceable. At the same time, they show

86

that the general recognition procedure quite poorly fits foreign interim orders, which in their essence are meant to be urgent and immediate (or, at least, without undue delay) enforceable reliefs.

Enforcement of Interim Measures Granted by Courts

Ukrainian courts will recognize and enforce a foreign judgment (i) provided that there is an effective international treaty on recognition and enforcement of judgements between Ukraine and the state where the judgment was rendered; or (ii) on foot of reciprocity. Ukraine has not concluded international treaties on mutual recognition of judgments with the majority of jurisdictions where Ukrainian businesses get used to resolving their disputes (UK, US, most off-shore jurisdictions, etc.). It is worth noting that Ukraine has signed and is due to ratify the Convention on the choice of court agreements. In the long run, this may become a powerful tool for bringing into effect interim orders issued in European jurisdictions (of course, if the parties have expressly conferred jurisdiction to respective courts by their agreement). In the meantime, in recognizing foreign interim reliefs in Ukraine, the parties should mostly rely on the principle of reciprocity. And this is where the first pitfall lies. There has been controversy as to how reciprocity should be determined. Some courts took an extremely conservative approach — widely

criticized by practitioners — that no reciprocity exists if, at least, once recognition and enforcement of the Ukrainian judgment in that state was refused. However, the practice has developed to an extent in recent years. The latest jurisprudence seems to confirm that in order to prove reciprocity between Ukraine and the other state, one only need to show that Ukrainian judgments may be recognized in that state. In particular, in several cases the courts found that reciprocity between Ukraine and the UK does exist. Second, Ukrainian law does not provide for separate procedure for recognition and enforcement of interim measures, for example, injunctions or freezing orders granted by foreign courts. However, the Civil Procedure Code of Ukraine defines a foreign judgement broadly and judicial interim orders fall within the plain text of such definition. The court practice also confirms that interim orders issued by foreign courts may be recognized in Ukraine, at least as a matter of principle. In particular, on 5 August 2013 the Holosiivskyi District Court in Kyiv recognized the worldwide freezing order issued by the English High Court of Justice in BTA Bank v. Abliazov et al. In another recent case, the Kyiv-Svyatoshynskyi District Court of Kyiv Region in VAB Bank v. Maksimov et al., on 2 June 2016 also implicitly confirmed enforceability of freezing orders issued by foreign courts. However, if the court finds that reciprocity exists and confirms that the interim order of a foreign court may be recognized in Ukraine as a matter of principle, it still may refuse to enforce it based on a number of grounds set forth by law. One such ground, which is particularly important for interim orders, is lack of proper notification. This means that orders issued ex parte are hardly enforceable in Ukraine. Furthermore, the burden is on the applicant to provide evidence and to prove that the process was properly served on the parties who did not participate in the proceedings. Therefore, even if the debtor was aware of the proceedings before the foreign court, failure to comply with all formalities and mandatory procedures may impede recognition of the order in Ukraine. This issue was fiercely fought in VAB Bank v. Maksimov et al. Both Kyiv-Svyatoshy-

WWW.UKRAINIANLAWFIRMS.COM


AVELLUM

A

Address: 38 Volodymyrska Street, Kyiv, 01030, Ukraine

VELLUM is a leading Ukrainian full service law firm with a special focus on finance, M&A, and dispute resolution. The firm covers capital markets, competition, corporate/M&A, dispute resolution, employment, banking and finance, energy and infrastructure, real estate, restructuring and insolvency, and tax. AVELLUM’s goal is to be the firm of choice for its clients with respect to their most significant business transactions. Its team is responsible, commercially minded, solution orientated and cost effective. The firm brings the most advanced Western legal techniques and practice, which, coupled with first-hand knowledge, broad industry experience, and an unparalleled level of service, will help the clients achieve the best results in their business endeavours. AVELLUM’s lawyers work seamlessly in integrated teams with premier US, UK, and European law firms in the course of multijurisdictional transactions. The firm offers its clients a highly individual focus on their matters, and is relentless when it comes to observing deadlines.

nskyi District Court of Kyiv Region and the Appellate Court of Kyiv Region refused to recognize the English court order based on an alleged lack of evidence that respondents had been properly notified of the proceedings at the High Court of Justice. The courts found that in the absence of an agreement on legal assistance between Ukraine and the United Kingdom, which would stipulate the procedure of notification of the parties to a dispute, the English court should have relied on the provisions of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of 1965. Thus, in the courts’ opinion, only a letter of request, instruction of the Ministry of Justice of Ukraine and postal notification of the relevant person could be proper evidence of the serving of the process upon such person. The High Specialized Court for Civil and Criminal Matters, when reviewing the decisions of the lower courts, disagreed (decision dated 24 February 2016). It came to quite a progressive conclusion. In particular, it stated that requirement of notification, which is mandatory for final judgments, does not necessarily apply to interim orders. Second, even if it does, the courts — instead of requiring service under the Hague Convention — must find out what was the applicable procedure in the courts that rendered the respective order and whether it was complied with. Unfortunately, having expressed such position, the High Specialized Court did not decide the matter on its own but, rather, re-

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 591 3355 E-mail: info@avellum.com Web-site: www.avellum.com

AVELLUM’s clients include international and domestic companies, government authorities, financial institutions, investment funds and investment banks seeking specialised legal advice and transaction skills from legal experts in the above practice areas. AVELLUM’s clients include AGCO, Allergan Inc, Altran, Baring Private Equity Asia, Onex Corporation, Boehringer Ingelheim GmbH, Canada Pension Plan Investment Board, CNBM International Corporation, Deutsche Bank, Deutsche Beteiligungs AG, EBRD, Farmak, Ferrexpo, ING Bank, Kernel, MHP, the Ministry of Finance of Ukraine, Novartis, Raiffeisen Bank International AG, UDP, Unicredit Group, and others. The firm’s employees received their education from top Ukrainian and Western universities. The team consists of 31 highly-qualified attorneys, including three partners, Mykola Stetsenko, Glib Bondar, and Dmytro Marchukov, who are actively involved in every transaction. AVELLUM is recognized as one of the leading law firms in Ukraine by various international legal directories and Ukrainian legal publications such as Chambers & Partners, IFLR1000, Legal500, International Tax Review, Ukrainian Law Firms, and others.

ferred the case for new consideration to the local court. By the time of the new consideration before the local court, a final award in the dispute was already rendered and the interim order was no longer effective or necessary. Thus, without opposition from the applicant, the recognition was refused due to a number of reasons (including improper notification). Therefore, notwithstanding the quite progressive approach shown by the High Specialized Court, proper notification is still one of the major considerations for the application to enforce a foreign interim order in Ukraine. To make sure that recognition of proceedings is not a moot (and still expensive) exercise, a party seeking interim relief against its debtor should ensure his proper notification in compliance with the provisions of effective international treaties, irrespective of how burdensome they may be.

Enforcement of Interim Measures Granted by Arbitral Tribunals

Foreign arbitral awards are recognized and enforced by Ukrainian courts under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention). The New York Convention is silent on whether interim reliefs granted by arbitral tribunals or decisions of emergency arbitrators fall within the scope of the convention. Nor does Ukrainian law shed more light on the issue.

In 2015-2016 Ukrainian courts, for the first time, considered an application for recognition and enforcement of the decision of an emergency arbitrator rendered under the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (JKX Oil et al. v. Ukraine). In the most recent decision of the Kyiv City Appellate Court (decision of 21 December 2016), the recognition was rejected on a number of grounds, including improper notification, non-compliance of the procedure with the parties’ agreement and contradiction to public policy. Broad interpretation of these grounds is alarming. At the same time, the courts did not express doubts that recognition of interim awards is encompassed by the New York Convention, and that such award must be recognized in Ukraine, unless grounds for refusal exist. Finally, this case once again showed how protracted consideration of the application for enforcement of interim order might be. Similar to the Maksimov case, in the JKX case consideration of the enforcement application in Ukrainian courts took longer than deciding the case on the merits. To conclude, Ukrainian court practice related to enforcement of foreign interim reliefs has developed in the past few years. Recent jurisprudence confirms the enforceability of judicial interim orders, as well as interim measures issued by arbitral tribunals. However, Ukrainian courts still remain formalistic on many issues, and the parties (and their legal advisors) should be mindful of such pitfalls.

87


Enforcement Proceedings

General Overview and Main Threats for Effective Debt Recovery

Oleksiy SLUCH

Maksym ZAMIKHOVSKIY

Partner, Head of Litigation practice, Integrites ILF

Senior Associate, Integrites ILF

I

t is a well-known fact that a court victory in favor of an aggrieved party is not enough to truly restore the violated rights of the latter. The excitement of victory will soon be replaced by routine work with a view to enforce a particular court decision. Enforcement proceedings are currently of especially high interest for Ukraine as court decisions are in general not fulfilled voluntarily by the party that is in breach. Since in Ukraine legal awareness is relatively low and access to civil remedies is open, the pressure on the court system is huge. It leads to a situation when a considerable number of decisions are supposed to be executed by compulsory means. It is worth mentioning that the means for compulsory execution are provided mostly for recovery of debts and related issues. Court decisions with non-property mandatory provisions are binding by its nature and ensured by criminal prosecution in case of its malicious disregard. Until recently the legal basis for the procedure was provided by the Law of Ukraine No. 606-XIV On Enforcement Proceedings, which stipulated the terms and conditions for compulsory execution, as well as powers and restrictions for authorized public officials. According to the provisions of the law, an enforcement proceeding as final stage of the delivery of justice was considered as a state monopoly and which is to be performed only by the State Enforcement (Bailiff) Service of Ukraine.

88

However this approach proved to be ineffective and was accompanied by an enormous amount of incoming complaints both from businesses and watchdog organizations. Statistics provided by the Ministry of Justice of Ukraine confirm that the rate of executed court decisions is lower than 30% of the total. Moreover, it is quite an optimistic estimate, since according to unofficial data it’s no higher than 10%. This is due to a number of reasons. A part of them is quite objective. The sheer number of writs of execution, insufficient government funding and shortage of staff. Yet, a great part of the responsibility lies on the State Enforcement Service. The absence of transparency, inaction and unwillingness to meet the deadlines specified by the legislation to perform enforcement actions make an enforcement proceeding inconvenient for the creditor. Another specific problem is dishonest ways of doing business and limited powers of the enforcement officials, which allow the hiding or transferring of assets promptly from the borrower to the affiliated entity even before the Enforcement Service is able to seize assets and impose other restrictions.

Brief Overview of Remedies in the Framework of Enforcement Proceeding

In order to initiate the enforcement proceeding, an enforcement writ of commercial court along with an application shall be filed with the Enforcement Service. A person on whose favor the court decision shall be

executed is entitled to file an application within three years from the date of issue of the enforcement order. The creditor has the right to include in the application information about the debtor’s bank account(s) and other property which belongs to it and should be arrested in order to secure an enforcement proceeding. In this case the seizure of assets and funds should be performed on the day after the above-mentioned information was obtained. If no information about bank accounts is provided, enforcement officials shall request information about the existence of the debtor’s bank and deposit accounts from the tax authorities. The creditor has the right to choose a place of execution of enforcement proceeding: it shall be either the place of the debtor’s location or location of the debtor’s property. The procedure itself shall be commenced on the next day after proper submission of an application in that respect. In the event the debtor’s assets are insufficient to execute a court decision in full, the enforcement officials shall levy mandatory execution upon the debtor’s funds in hryvnias or in foreign currency, including bank accounts and deposits in the first place. Secondly, execution shall be levied upon the debtor’s moveable and immovable property. The debtor has the right to suggest which property should be collected first. As a general rule, assets that are not used directly in manufacturing shall be sold in the first place. Starting from 30 September 2016 all sales shall be performed by means of electronic auctions via web-site https://setam.net.ua/. Thereafter, real estate and equipment, principle assets, raw and other materials intended for use in production will be sold. All sales proceeds shall be directed to cover outstanding debt subject to recovery under a court decision, enforcement fees and procedural expenses. In case property was not sold at auction, its initial price shall be reduced by 15% for real estate and 25% for movables and an additional auction shall held. If the additional auction was also unsuccessful price shall be further reduced by 15% for real estate and 25% for movables and third auction shall be held. If the property remains unsold, the creditor has the right to keep the property on account of debt repayment.

WWW.UKRAINIANLAWFIRMS.COM


INTEGRITES

I

Address: 1 Dobrovolchykh Batalioniv Street, Kyiv, 01015, Ukraine

NTEGRITES has a solid network of operating offices in the CIS (Kyiv, Moscow, Almaty, Astana, Karaganda, Aktau, Atyrau) supported by an international office network in London, Munich, Amsterdam and Guangzhou. The firm offers its clients complex legal advice in the CIS region. In 2016 The Lawyer recognized our work in the CIS with the award “Law Firm of the Year: Russia, Ukraine and the CIS.” We provide legal services for our world-known clients: Rabobank International, EBRD, VTB Bank, ProCredit Bank, Mitsubishi Group, Concern Toyota, Agrogeneration S.A., Credit Agricole, Nestle, COFCO Agri, LTk Capital, Dragon Capital, ADM, Louis Dreyfus Company, Soufflet Group, Сredit Agricole, Burisma, Aspen Pharmacare Holdings Ltd., Shell, DuPont, Bank of China, DHL, China Development Bank etc. Main industries: Agribusiness, Capital Markets, Construction and Land, Energy and Natural Resources, Information Technologies, Medicine and Healthcare, Telecommunications. Main Practices: Antitrust and Competition, Banking and Finance, Bankruptcy, Corporate, M&A, Criminal Law and White-Collar Crime, Intellectual Property, International Arbitration, International Trade and Trade Remedies, Labor and Employment, Litigation, Real Estate, Retail, Tax.

Latest Changes and Anticipated Impact on the Enforcement Procedures

On 2 July 2016, two laws aimed at improving and reforming the enforcement proceeding were adopted, namely the Law of Ukraine No. 1404-VIII On Enforcement Proceedings and the Law of Ukraine No.1403-VIII On Authorities and Individuals Carrying Compulsory Enforcement of Court Decisions and Decisions of other Authorities. Most of the provisions of the abovementioned laws came into force on 5 October 2016, with some exceptions related to procedural and organizational matters. In general, the procedure itself and stages of compulsory execution were left without significant changes. Most of the novelties deal with elimination of legislative gaps, efficient methods of control over the correctness of the enforcement proceeding and establishing private enforcement officers — an alternative to the traditional State Enforcement Service of Ukraine. Private enforcement officers have the same powers as state officers but with some exceptions. In particular, decisions rendered against the state, state companies and legal entities, decisions of administrative courts and the European Court on Human Rights shall be enforced only by the State Enforcement Service of Ukraine. According to estimates by the Ministry of Justice of Ukraine, private enforcement

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3853 Fax: +380 44 391 3854 E-mail: info@integrites.com Web-site: www.integrites.com

Our firm is also represented by international offices: United Kingdom 1 King Street, EC2V 8AU, London, UK Tel.: +44 203 713 1750

Germany Maximilianstrasse 13, 80539, Munich, Germany Tel.: +49 892 030 061 50

Russia Naberezhnaya Tower Block C, Moskva-City 10, Presnenskaya Naberezhnaya Moscow, 123317, Russia Tel.: +7 495 660 50 70

China R&F Ying Sheng Plaza, MaChang Road 16, Tianhe district, Guangzhou city, Guangdong, China. Tel.: +86 185 0204 0880

Kazakhstan SUCCESS Business Center, 1/1, Zhandossov St., Almaty, 050008, Republic of Kazakhstan Tel.: +7 727 352 80 83/84

Netherlands Herengracht 282 1016 BX Amsterdam The Netherlands Tel.: +31 20-5219367

officers won’t start until the second half of 2017 due to qualification procedures. This approach is expected to bring competiveness and cut the workload of public officials. Besides, private enforcement officers are expected to be more motivated and result-oriented as their fee is correlated to the amount of debt actually collected. A part of the truly necessary amendments relates to substitution of paperwork by the Electronic System of the Enforcement Proceedings which is expected to become a platform for performance and storage of all documents in the course of proceedings. That should enable indication of issuing dates of the documents together with information regarding the dates of dispatch and receipt of correspondence. As a result, impartial control over enforcement proceeding shall be ensured. Online interaction between fiscal, enforcement bodies and officials authorized to register property rights and restrictions was another urgent problem that needed solving. Under the adopted amendments, enforcement officers should be provided with direct access to official state databases and registers to obtain information on debtors’ assets, income and funds (including confidential information) and shall have the right to register the imposition and removal of arrests by themselves. With the aim of making information about commenced enforcement proceedings publicly accessible, the Unified Register of Debtors was launched. However, it is focused on the future

and shall contain information only about the procedures started after 5 January 2017. Records shall prevent performance of transactions regarding a debtor’s property by notaries and/or state registration authorities. Another part of the amendments was aimed at reducing the discretionary powers of enforcement officials and provide straightforward scenarios for them. Some of the lapses that have been eliminated related to determination of specific terms within which certain actions can be taken and stipulation of the exhaustive list of grounds for suspension of proceedings. The above-mentioned lapses often triggered undue performance of obligations by enforcement officers. In order to guarantee the commencement of the enforcement proceeding, the creditor is obliged to pay in advance for monetary claims 2% of the debt but not more than 10 minimum salaries (not more than UAH 32,000 from 1 January 2017). *** The amended Laws are expected to create a strong legal basis for the efficient execution of court decisions and protection of creditor rights. Execution of court decisions is the final stage of delivery of justice and its success is crucial to convince creditors that the whole litigation process wasn’t a waste of time. We are pinning our hopes on the institute of private enforcement officers as an efficient and prompt instrument on the path of modernization of enforcement proceedings in Ukraine.

89


European Law

National Bank of Ukraine to Implement EU Free Movement of Capital Directive

Ario DEHGHANI Counsel, Head of the Compliance and EU law practices of Redcliffe Partners. He has unparalleled experience of advising businesses on preventing, identifying, eliminating and mitigating compliance risks at both the national level and globally. He specialises in advising clients on all types of compliance matters and in conducting internal investigation, amongst others related to FCPA and UK Bribery Act issues.

U

kraine retains a very restrictive currency control regime, introduced by the National Bank of Ukraine (NBU) as a provisional measure to prevent the outflow of foreign currency from Ukraine. In accordance with the most recent NBU currency control Regulation No.410 of 13 December 2016, the NBU admitted that the applicable currency control restrictions will remain in effect until such time as the NBU, in the absence of any circumstances affecting the stability of the banking and/or finance system of Ukraine, adopts a separate resolution lifting them.

1. National Bank’s Concept for New Foreign Currency Regulations

On 1 December 2016 the National Bank of Ukraine published a detailed Concept for new foreign currency regulations that it intends to develop in the following years (the Concept),

90

provided that, amongst other things, the economic conditions in Ukraine are stabilised and cooperation with the International Monetary Fund moves forward. The principal point of the Concept consists of developing a new consolidated act on foreign exchange which will replace the multitude of regulatory acts setting out the foreign exchange rules that currently apply. A first draft of such new consolidated act is to be presented as early as the second quarter of 2017. As a next step, the Concept would include reforms to the relevant tax and money laundering legislation based, as regards the former, on implementation of OECD base erosion and profit shifting recommendations. Eventually, as is stated in the Concept, the restrictive currency control rules would be replaced by efficient tax regulation. Overall, the Concept is expressed to include the relevant provisions of the European Union law, including in particular Directive 88/361/EEC of 24 July 1988 (the Directive).

2. Directive 88/361/EEC: an Analysis

The Directive is a rather dated but prominent piece of European Union law. It is the first piece of community legislation to set out an express obligation on the part of member states to ensure that capital movements are not restricted within the community. To this effect, Article 1 of the Directive obliges member states to abolish restrictions on movement of capital taking place between persons resident in member states. Most importantly, however, Article 7 of the Directive obliges member states to attain the same degree of liberalisation in respect of movements of capital to or from third countries, as that which applies to operations with residents of other members states. The Directive does not provide a definition of capital movement. At the same time, Annex I to the Directive sets out a nomenclature of capital movements, in respect of which member states are obliged to abolish all applicable restrictions.

The nomenclature set out in Annex I to the Directive provides a list of examples of what constitutes a capital movement, with an express reservation that such list should not be interpreted as restricting the scope of the principle of full liberalisation of capital movements. The European Court of Justice relied upon the nomenclature provided in Annex I to the Directive to define whether a particular transaction is or is not regarded as capital movement for the purposes of the Directive1.

3. Ukraine’s EU Assocication Commitments Relating to Financial Services

Harmonisation of domestic law with European Union law is an important part of the 2014 Association Agreement between Ukraine and the European Union (the Agreement). The Agreement is notable, among other things, for setting out detailed obligations for Ukraine regarding implementation of European Union law. In particular, under Article 133 of the Agreement Ukraine shall ensure that its existing laws and future legislation relating to financial services will gradually be made compatible with European Union law. Furthermore, under Article 145(3) of the Agreement, Ukraine is obliged to complete the liberalisation of capital movements equivalent to the liberalisation in the European Union. A positive assessment by the European Union of the Ukrainian legislation on capital movements, its implementation and continued enforcement is a necessary precondition of a decision by the Trade Committee2 to extend the same treatment to Ukraine with respect to financial services as that which applies between member states of the European Union. See, for example, Joined Cases C/163/94, C-165/94 and C-250 Criminal proceedings against Lucas Emilion Sanz de Lera, Raimundo Diaz Jimenez and Figen Kapanoglu, Case C-222/97 Manfred Trummer and Peter Mayer. 2 Trade Committee is an administrative body established under the Agreement monitoring and assessing its implementation by the parties. 1

WWW.UKRAINIANLAWFIRMS.COM


Redcliffe Partners

R

Address: 75 Zhylyanska Street, 13th Floor, Kyiv, 01032, Ukraine

edcliffe is a legal adviser to multinational companies, investors, financial institutions and project developers operating or investing in Ukraine and the CEE. The core legal team of Redcliffe worked together for more than seven years as the Kyiv team of Clifford Chance, handling many of the region’s most sophisticated transactions. Redcliffe’s capabilities across practice areas and industry sectors Redcliffe focuses primarily on Antitrust, Banking and Finance, Capital Markets, Compliance, Corporate/M&A, Debt Restructuring and Insolvency, EU law, International Arbitration and Dispute Resolution, Litigation and Real Estate. Redcliffe offers legal advice across industry sectors such as Agribusiness, Energy/Oil & Gas, Financial Institutions, FMCG and Retail, Food and Beverage, Infrastructure, Pharmaceuticals and TMT. Reputation Redcliffe is recommended for Banking and Finance, Capital Markets, Corporate law, M&A, Debt Restructuring and Energy

4. Assessment of Future Developments

Implementation of the nomenclature set out in Annex I to the Directive is an express obligation of Ukraine under Appendix XVII-2 to the Agreement. The said Appendix enumerates the specific provisions of the European Union law which Ukraine is obliged to implement in order to obtain the same treatment in respect of financial services as the treatment which applies between European Union member

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 5885 Fax: +380 44 390 5886 E-mail: office@redcliffe-partners.com Web-site: www.redcliffe-partners.com

by all international legal directories including Chambers Global, Chambers Europe, the Legal 500 and IFLR 1000. In 2015 and in 2016 Redcliffe’s team was named among the Top 3 advisers by number of the largest public deals in Ukraine, according to ranking of Yuridicheskaya Practika Publishing. Clients Redcliffe’s clients are major international and local companies from various industry sectors, global private equity houses and financial services institutions, including Abbott Laboratories, Amadeus IT Group, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, EBRD, IFC, ING, J.P. Morgan, Monsanto, Morgan Stanley, Raiffeisen Bank, UniCredit Bank, Vitol. Global network Redcliffe has access to a global partner network and the know-how of some of the world’s leading law firms. These relationships help the firm offer seamlessly coordinated multijurisdictional teams for supporting its clients worldwide. Languages English, German, Russian, and Ukrainian

states. In respect of the nomenclature set out in Annex I to the Directive, the Agreement reserves a 5-year period, upon expiry of which the Trade Committee shall take a final decision on the timeline of implementation. Such 5-year period commences on the date of the entry into force of the Agreement, which as of the date of this publication has not yet come into force and applies on a provisional basis. Given that harmonisation of domestic law, in particular as regards the complicated

industry of financial services, is a long-term undertaking, the NBU’s present decision to include use of the Directive as a framework for new currency control legislation should be viewed as a positive signal. However, in practical terms much would depend on whether the turbulent economic conditions would stabilise sufficiently to allow for liberalisation of currency control measures. And, whether the Ukrainian Parliament would agree with the NBU on the need to liberalise them.

91


Family Trusts

Family Trusts in Ukraine

Alina PLYUSHCH

Dmitriy RIABIKIN

Counsel, Sayenko Kharenko. Ms Plyushch specializes in M&A, corporate law, corporate finance, capital markets and private wealth management. She is one of the leading experts in Ukraine in the field of wealth management and possesses extensive experience in advising clients on the protection of the interests of beneficial owners of business, both national and international, including corporate restructurings and the building of trust structures

Associate, Sayenko Kharenko. Mr Riabikin specializes in corporate law, private wealth management, M&A, capital markets and securities market. Dmitriy advises clients on various private wealth management issues, including protecting the interests of the beneficial owners of Ukrainian and foreign businesses by means of corporate restructuring and setting up trusts and foundations

F

amily trusts are currently becoming a more and more popular mechanism to protect and effectively manage the assets of wealthy Ukrainian individuals. A trust is created, inter alia, when a person called the “settlor” transfers property (money, shares, real estate, etc.) to a person known as a “trustee” who owns and manages such property for the benefit of the “beneficiaries”. A trust is often mistakenly referred to as a separate body corporate (like a company) but it is not. A trust is a relationship between a trustee and beneficiaries imposing obligation binding trustee to deal with the trust property for the benefit of the beneficiaries. The trustee is obliged to deal with property in a manner described in the document called the “trust deed” (signed by the trustee and the settlor) or the “declaration of trust” (when the trust is unilaterally proclaimed by the trustee). Trust deed or declaration of trust provides the terms and conditions of management of the trust property by the trustee, distribution of profit to the beneficiaries, etc. In addition to trust deeds and declarations of trust, trusts may also be created through a will. The terms of a trust deed depend on the purpose for which such trust has been created. For example, a trust may be cre-

92

ated for charitable purposes. However, one of the main purposes for creating a trust is distribution of benefits (which may include monetary and non-monetary benefits) from exploitation of the trust property to the beneficiaries (e.g. members of the settlor’s family). Family trusts are created to protect family assets by transferring title to such assets to a trustee of a family trust. Transfer of title to several assets to the trustee means that the settlor ceases to be the legal owner of such assets. One of the main purposes for creating a family trust is to ensure that certain assets, for example shares in a family business, real estate, etc., will be safely transferred to beneficiaries (being the children and other relatives of a settlor), on the demise of the settlor. Other reasons for creating a family trust are to: — separate a part of the settlor’s assets to procure that such assets are managed by a professional trustee for the benefit of children of the settlor (e.g. that such funds shall be used for the purposes of education, startup of business, etc. of the settlor’s children); — protect the assets from possible claims against the settlor; — ensure that the settlor’s children (and not their spouses) will benefit from the trust’s assets;

— procure possible optimisation of inheritance and gift taxation. Wealthy businessmen often create family trusts to ensure that their descendants shall benefit from the part of the settlor’s assets transferred into trust. At the same time, such a businessman can utilise the remaining assets without concerns about his family wellbeing (e.g. invest in risky securities, purchase luxury items or simply spend the money). The terms of a trust deed may provide that the family business, or assets, or specific amount of money shall be transferred to the settlor’s heir only after such person reaches a particular age (typically 18 or 21 years). For example, Princess Diana in her will created a trust for the benefit of her sons. The main part of her estate was left in equal shares to Prince William and Prince Harry, with the shares being held in trust until each prince reaches the age of 25. Afterwards, upon the request of Princess’s mother and sister, the will was amended by the High Court of Justice in a way that both princes were able to obtain their part in the balance of the estate at the moment each of them reaches the age of 30. However, when each prince turned 25, he was given access to all of the income from his trust as well as the power to change the final disposition of his trust if anything remains at the time of his death. The concept of a “trust” typical in the common law system is not recognised in Ukraine. Moreover, Ukraine has not yet ratified the Hague Convention On the Law Applicable to Trusts and on their Recognition of 1 July 1985. In addition to the absence of the concept of “trust” in Ukrainian law, there are a number of other regulatory issues affecting beneficiaries, settlors and trustees of family trusts in Ukraine. Ukrainian currency control regulations are the principle issue affecting family trusts with a Ukrainian dimension in more than one way. Usually Ukrainian settlors transfer into foreign family trusts such assets as shares in foreign companies, real estate abroad and monetary funds held in foreign bank accounts. As a matter of common practice professional trustees usually verify the sources of funds used for acquisition of the assets to be transferred into trust. Furthermore, professional trustees prior to acceptance of the assets into the trust usually require a legal opinion from Ukrainian lawyers that the acquisition and transfer of assets have taken place in compliance with Ukrainian law,

WWW.UKRAINIANLAWFIRMS.COM


SAYENKO KHARENKO

S

Address: 10 Muzeyny Provulok, Kyiv, 01001, Ukraine

ayenko Kharenko is a leading law firm in Ukraine with an internationally oriented full-service practice. It is currently one of the largest law firms in Kyiv. Most recently, Sayenko Kharenko collected three of the most prestigious professional excellence country awards, more specifically, Law Firm of the Year by each of IFLR European Awards 2017, Who’s Who Legal Awards 2017 and Legal Awards 2017. In early 2017, the firm was also shortlisted in Law Firm of the Year category by The Lawyer European Awards 2017 and Chambers Europe Awards 2017. The firm is top-ranked in multiple specialised practice areas according to all international legal directories, including Chambers Global, IFLR1000 and The Legal 500. About Private Wealth Management Practice Sayenko Kharenko has been regularly advising clients on a variety of private wealth management projects over the last few years. Responding to the needs of clients, the firm’s lawyers help to create effective holding structures for operational business, which enable the protection of accrued wealth. Sayenko Kharenko’s team helps clients to determine successful business development models and to create them by developing effective

which raises additional barriers for Ukrainians willing to create a foreign family trust. Acquisition of shares in a foreign company and/or real estate outside Ukraine requires the Ukrainian resident to acquire an individual foreign investment license from the National Bank of Ukraine (NBU). Moreover, in order to place monetary funds on a foreign bank account a Ukrainian resident needs an individual NBU license to place foreign currency on an account in a bank outside of Ukraine. The next factor affects the use of family trusts by Ukrainian public officials, who are obliged by law while holding their office to transfer the management of their business to other persons in order to avoid any conflict of interest. Transfer of the shares to a family trust may seem to be an option. However, due to the legal gap any further distribution received by such public official or his family members from the trust may be considered as a gift under Ukrainian anti-bribery legislation. The Law of Ukraine On Prevention of Corruption stipulates that the total value of gifts that can be given to an official by one individual or company (group of compa-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 499 6000, 389 5000 E-mail: info@sk.ua Web-site: www.sk.ua

strategies, which include, inter alia, tax advice or optimization, assets protection, risks mitigation and asset management. Sayenko Kharenko’s team advises clients on all issues related to private wealth management: — creating wealth management structures; — developing corporate structure for operating clients business; — сomplete and/or limited due diligence of the existing corporate structures in order to determine the historical risks and help to eliminate them; — analysis of different tax issues, currency control and competition regulation; — drafting supporting documentation, e.g. sale-purchase agreements, corporate documents, etc.; — supporting corporate restructurings, including assistance in the incorporation of holding, trading, financial and IP companies as well as developing effective internal control and management structures to protect the interests of owners; — supporting fund-raising processes following corporate restructurings, including debt financing, private placement, IPO, etc.

nies) in the course of a year may not exceed UAH 3,200 (circa USD 114) and the value of a single gift may not exceed UAH 1,600 (circa USD 57). The only exemption is that gifts may without limitation be presented to public officials by close relatives, while distribution from a family trust (not being a close relative) will be subject to the anti-bribery limitations described above. Another issue that seriously affects the use of family trusts by Ukrainian residents, particularly for confidentiality reasons, is the recent development of ultimate beneficial owners’ disclosure regulations. The coming launch of the automatic exchange of tax information in accordance with the Common Reporting Standard (CRS) along with European Union (EU) anti-money laundering initiatives, seek to limit the beneficiaries of foreign trusts in their confidentiality protection. Ukraine has not yet committed itself to participate in the CRS, so technically information on Ukrainian beneficiaries of foreign trusts (at least in the near future) will not be available to the State Fiscal Service of Ukraine. However, it will hardly be possible to maintain that status quo for long.

The President and the NBU recently announced upcoming Ukrainian participation in the CRS and several draft laws on its implementation into the Tax Code were prepared in 2016 and may be adopted shortly. The use of foreign family trusts is also affected by the Fourth EU Anti-Money Laundering Directive, according to which all members of the EU are obliged to maintain registers of beneficiaries of companies and trusts. With regard to trusts, such registers shall include information on settlor, trustee, protector (if any), beneficiaries and other individuals, who control the trust in another way. These registers may be publicly available or available only for the authorised bodies at the discretion of each EU member. This requirement strongly affects the possibility for Ukrainian individuals who are not prepared for such a disclosure to use EU-based family trusts. Despite all the factors that negatively affect the use of family trusts by Ukrainian residents for the purposes of wealth management and planning, family trusts will remain an efficient and reliable option for wealthy businessmen when structuring their family assets for years to come.

93


FMCG

Specific Problematic Issues in the Conclusion of Lease Agreements on Commercial Real Estate which is why it is extremely important to keep in mind numerous details when concluding real estate lease agreements.

“Term of the Lease Agreement” vs. “Lease Term”. Requirements for Notarization Kristina KOLCHYNSKA Associate in Business Consulting Practice, GOLAW. Kristina Kolchynska has in depth of theoretical knowledge and practical experience in commercial, tax and labor law. The associate specializes in issues related to contractual relations, including the development and maintenance of commercial real estate lease agreements. The basic areas of Kristina’s activities are consulting entities on foreign trade transactions, taking into account the requirements of customs legislation and currency regulation. She has successful experience of solving commercial disputes, as well as representing clients during pre-conflict resolution and enforcement.

O

ne of the most dynamic and fast growing areas in the Ukrainian economy is real estate. At the same time, this sphere is one of the most problematic. Owners of shopping malls are trying to lease their premises on the most advantageous conditions for them. Lessees, on the other hand, are trying to get the most attractive location in the shopping mall at the lowest price. In most cases the outcome of such a “race” is the conclusion of lease agreements with various ambiguous conditions that give rise to number of court disputes. Ukrainian court practice has a high degree of unpredictability and inconsistency,

94

It is important to differentiate the concept of “lease term” from that of “term of the lease agreement”. The term of the lease agreement includes the entire period, from the moment of conclusion of the agreement to its termination. While the lease term is a more narrow term and includes only the term of use of the premises. If under the lease agreement the mentioned definitions are equated and the lease term will correspond to the term of the lease agreement, it can lead to the situation when the lessor is obliged to pay a rent fee for the entire period from the moment of conclusion of lease agreement till its termination, including the period during which he did not actually use the premises. As such, it is advisable to ensure that the lease agreement contains a detailed description of the procedure for, and the timing of, the handing over of the real estate for lease and its return to the lessor. It would be beneficial for the tenant to stipulate in the agreement extra days for vacating the premises after expiry of the lease term during which time rent will not accrue. According to the Civil Code of Ukraine, any agreement on lease of premises for a term of three or more years must be attested by a notary. To avoid the expense of notarization, which is often quite huge, the parties usually conclude a lease agreement for a term of 2 years and 11 months. On one hand, it helps to save money on notarization, but on the other hand it may lead to higher expenses for the tenant. Such a situation can occur if the tenant invests a lot of money in preparing the premises for lease and the term of 2 years and 11 month does not provide the possibility to obtain enough profit

in order for repair expenses to be covered. In such cases tenants, on the basis of oral agreements with landlords, are confident that after the end of the term of the lease agreement they will be able to conclude a new agreement on a new term. At the same time, tenants often do not take into consideration that the preferential right before other persons to conclude a lease agreement for a new term, provided by legislation and the agreement, is not unconditional. The lessee can use it only under certain circumstances as: — if the tenant properly performed his duties under the lease contract; — if the landlord intends to lease out the premises; — if the parties come to an agreement on all the terms of the new lease agreement. Thus, actually after the termination of the lease agreement the lessor may propose to conclude a new contract on less favorable conditions for the lessee or refuse to lease the premises altogether. Consequently, in some situations savings on notarization may lead to greater losses for tenants. If, irrespective of the aforementioned, the tenant wants to avoid notarization and to lease property for more than three years, it can be done under the general provisions of the Civil Code of Ukraine. According to Article 764 of the Civil Code of Ukraine, if the tenant continues to use the property after the expiry of the lease agreement, then in the case of absence of objections by the landlord within one month, the contract shall be renewed for the period that was previously established by the contract. Thus, the parties may conclude the lease agreement for 2 years and 11 months. After expiry of this term the tenant should continue to use the premises and landlord should refrain from any objections for one month. In such case, the lease agreement shall be deemed as extended for the same term and on the same conditions. The parties are not obliged to notarize the agreement in such a situation.

WWW.UKRAINIANLAWFIRMS.COM


GOLAW

G

Address: 19B Instytutska Street, Suite 29, Kyiv, 01021, Ukraine

OLAW is one of the leading Ukrainian full service law firms. The firm was founded in 2003 and currently has offices in Kyiv, Lviv, Odesa (all in Ukraine) and Berlin, Germany. The firm’s lawyers are widely recognized for their skills and extensive expertise. The GOLAW team focuses on efficiently resolving issues facing clients, communicating effectively on their behalf, assisting them in navigating the nuances of Ukrainian law, and avoiding costly legal traps. The firm’s client portfolio includes large and medium-sized, national and foreign companies, banks and financial institutions, as well as private investors doing business in Ukraine or entering local markets. GOLAW provides sophisticated legal advice and reliable legal assistance in all major sectors, including agribusiness, retail and FMCG, healthcare and pharmaceuticals, financial services, energy and natural resources, transportation and infrastructure, Internet technology and real estate. GOLAW has developed a top tier tax practice which includes issues regarding tax functioning in Ukraine, strategic advice on tax planning, tax and fiscal controls, as well as professional contacts with the tax authorities at all levels. The firm represents its clients in dispute resolution and litigation in general, economic, and administrative courts of all levels, along with support for international commercial disputes. Our deep expertise in white collar defense and investigations enables GOLAW attorneys to successfully represent clients in criminal legal proceedings, advising them on the wider

How to Handle a Security Deposit

A specific feature of lease agreements is the application of a particular method of securing the obligations of the tenant (e.g. timely payment of rent, reimbursement of damages to property, etc.) by way of obliging the tenant to prepay a “security deposit” normally equal to the amount of one month’s worth of rent or another amount assessed based on the value of the leased property. While the effective laws of Ukraine do not regulate matters of use of security deposits, the lease agreement should specify in detail all matters pertaining to its prepayment and utilization and repayment by the lessor. In the first place, the lease agreement must provide an exhaustive list of situations where the lessor is entitled to make use of the security deposit obtained from the tenant. The agreement should outline a detailed step-by-step procedure for advising the tenant of the intention to use the security deposit, for application of the security deposit and a term for replenishment by the tenant of the sum of the security deposit.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 581 1220 Fax: +380 44 581 1222 E-mail: info@golaw.ua Web-site: www.golaw.ua

commercial, regulatory and image implications when there are allegations of fraud or corruption. GOLAW professionals advise clients across a broad spectrum of corporate work including M&A, joint ventures and corporate restructuring, as well as general commercial, antitrust, and corporate governance issues. The effective combination of transaction skills combined with our unique expertise including antitrust, employment, environmental, intellectual property, and taxation, enables the firm to handle issues that can arise from any single corporate transaction. In banking and finance, the firm successfully represents clients regardless of whether it is a trade, export, finance deal, M&A, or any other financial project; we also provide advice on civil, banking and currency laws. Our firm is a leader in representing financial services institutions in contentious insolvency and regulatory matters. The firm’s team of lawyers utilizes unrivaled local knowledge of the demands of operating in increasingly international and volatile markets, with a deep understanding of the issues impacting the energy and natural resources sectors. The firm’s clients are involved in commodities, power, oil & gas, nuclear, mining, metals & minerals, renewable and clean-technology energy industries. GOLAW covers the full range of labor and employment matters, including: whistleblower litigation, labor-management relations, benefits, collective agreements, and employment of foreign citizens.

Additionally, the procedure of VAT taxation of security deposit depends on the order of its usage provided by the lease agreement. Let us consider a few examples: 1. A security deposit is credited against the payment of a rent fee (for example, against the payment of rent fee for the last month of lease). In this case, the tax obligation of the lessor and the right on the tax credit of the lessee — VAT taxpayers, arises on the date of payment of the security deposit (according to the rule of “first event”). In case of early termination of the lease agreement, the security deposit is usually used as compensation of losses incurred to the lessor by the lessee. If in this case the amount of the security deposit is classified by the parties of the contract as a penalty, then charged tax obligations and the tax credit should be adjusted. This is due to the fact that penalties are not included in the VAT tax base. 2. A security deposit shall be returned in full at the end of the lease term. In this case, such payment is only a means to enforce obligations and the deposit does not lead to the occurrence of income and expenses in accounting and is not subject to VAT.

3. Sometimes, during the execution of a lease agreement, the parties change the second option to the first (i.e., the security deposit is to be credited against the payment of the rent fee). Then, at the date of change of direction of using the security deposit (for example, on the date of signing of an additional agreement to the lease agreement), the landlord must charge VAT obligations and write out a VAT invoice. The tenant shall have the right to a tax credit on the basis of a VAT invoice. Practice shows that the most appropriate option for the parties is to establish in the lease agreement a security deposit (including VAT), and the procedure of its usage on repayment of an overdue rent fee and the cost of other services, which are included in the VAT tax base. In any case the interests of each party to the agreement will be fully guaranteed if the parties agree in such an agreement on all essential terms and conditions, established by legislation, and specify to the maximum possible extent the procedures for interaction between them in the course of its fulfillment.

95


Foreign Trade

International Trade: Private Focus New Opportunities and Challenges

Ivanna DORICHENKO

Olena PEREPELYNSKA

FCIArb, Partner, Integrites. Ivanna started her career in 2002 alongside Black Sea commodity traders and expanded her client base to the Middle East, China and Southeast Asia. She is an international trade expert recognised both inside and outside Ukraine who regularly trains, writes and speaks internationally on trade topics.

FCIArb, Partner, Head of CIS Arbitration Practice, Integrites. President of Ukrainian Arbitration Association. Acted as counsel and arbitrator in over 100 arbitral proceedings.

he last few years have not been easy for the majority of Ukrainian businesses. Yet, while certain historically strong industries and sectors have experienced a little turbulence, both in terms of the clients’ focus and required legal support, some managed to stay quite busy and demonstrated steady progression, such as international trade or foreign economic activity as per its Ukrainian descriptor. And while in Ukraine the term has customarily been used in the public context of intrastate trade arrangements based on bilateral or free trade agreements, one should not underestimate the importance of the core business of private B2B trading between national and international players, which defines Ukraine as a trading partner to the world, and the challenges faced on that private level.

as against readymade products with the key categories of exported goods being agricultural produce (with sunflower oil and corn leading the game), metals and products of the machine-building industry. At the same time, as the historically acclaimed title of the bread basket of Europe, Ukraine remains a strong top 10 player in grain export worldwide, competing predominantly with some of its European neighbors (mainly France and Russia) and major international origination markets such as LATAM, the USA and Australia. However, the deep turmoil on commodity markets over the past two years and very low prices caused by relatively good harvests worldwide, resultant oversupply and weakened international demand made competition for the main consumer markets much stronger. National traders, therefore, have to work quite hard to maintain their image as reliable suppliers and to create competitive advantages for Ukrainian commodities. Providing value for money or supplying goods of contractual quality is no longer enough; one now needs a greater degree of adoptability to the constantly changing requirements of buyers or the import regulations of their countries, increasing regulatory and compliance pressures and the overwhelming number of rules that may come into play.

T

Key Facts and Figures

Despite the overall decline of export volumes in the current marketing year amid hopes for increase of export flows to the EU pending the entry into force of the free trade agreement with Ukraine, the export figures nevertheless remain quite high and even record ones in certain sectors. The overall structure of Ukrainian export is now largely led by the supply of raw commodities

96

The geographical coverage of Ukrainian exports, particularly in the agricultural sector, also gets wider every year. In addition to our traditional markets such as the EU, which takes about a third of the overall export share, and MENA where Egypt and Saudi Arabia are leading demand, a stronger proportion of business goes towards China, Southeast Asia (Korea, Indonesia) India, Bangladesh and Pakistan. With booming opportunities in those markets, business still becomes much riskier due to major differences in mentality, business customs, local laws and the overall approach to international commerce. An increasing number of issues also arise due to the lack of communication, or vastly different interpretation of contractual terms and obligations, as well as the lack of knowledge and understanding of key international trading terms and commonly used rules.

Evolving Role of Trade Lawyers

All the above factors lead to the logical conclusion that the role of lawyers in the international trade sector is also evolving. It is no longer enough to recite laws or draft academic legal opinions which may often be detached from business reality; one is expected to be both an international business advisor and a risk manager who must be fully engaged from day one, demonstrate solid commercial awareness and guide trading clients through all the hurdles of international commerce. Indeed, some of those hurdles are still quite traditional. First of all, it is the variety of different rules of the game, not just the chosen law of the contract but local export and import regulations, customs and tax regimes, trade agreements and international conventions where applicable, area specific business customs, port rules, bank regulations and many others. Secondly, international trade contracts are usually foreign law based (predominantly English), and while foreign law expertise is widely offered on Ukrainian legal market the devil is indeed in the detail. The lack of a fine touch unfortunately does become evident when one wrongly placed word changes the outcome of a multimilliondollar dispute and adversely affects the party’s position. Thirdly, dispute resolution forums are often outside Ukraine and may involve concepts very different to those associated with the

WWW.UKRAINIANLAWFIRMS.COM


INTEGRITES

I

Address: 1 Dobrovolchykh Batalioniv Street, Kyiv, 01015, Ukraine

NTEGRITES has a solid network of operating offices in the CIS (Kyiv, Moscow, Almaty, Astana, Karaganda, Aktau, Atyrau) supported by an international office network in London, Munich, Amsterdam and Guangzhou. The firm offers its clients complex legal advice in the CIS region. In 2016 The Lawyer recognized our work in the CIS with the award “Law Firm of the Year: Russia, Ukraine and the CIS.” We provide legal services for our world-known clients: Rabobank International, EBRD, VTB Bank, ProCredit Bank, Mitsubishi Group, Concern Toyota, Agrogeneration S.A., Credit Agricole, Nestle, COFCO Agri, LTk Capital, Dragon Capital, ADM, Louis Dreyfus Company, Soufflet Group, Сredit Agricole, Burisma, Aspen Pharmacare Holdings Ltd., Shell, DuPont, Bank of China, DHL, China Development Bank etc. Main industries: Agribusiness, Capital Markets, Construction and Land, Energy and Natural Resources, Information Technologies, Medicine and Healthcare, Telecommunications. Main Practices: Antitrust and Competition, Banking and Finance, Bankruptcy, Corporate, M&A, Criminal Law and White-Collar Crime, Intellectual Property, International Arbitration, International Trade and Trade Remedies, Labor and Employment, Litigation, Real Estate, Retail, Tax.

Ukrainian judicial system. Among the few are wider evidence base, different rules on admissibility of evidence and the concept of disclosure, which may greatly surprise a party unwilling to share with courts or arbitral tribunals any information at all, let alone evidence “potentially harmful” for its case. In addition, as a result of operating in the current highly competitive and unpredictable environment and in an attempt to get the best price, parties often even forget about the “usual” reserves and do not conduct even basic due diligence. This may prove quite detrimental at a later stage. Therefore, entry level checks of names, addresses, business affiliation and authority to sign documents are no longer necessary as they are a given and it is strongly recommended that these are extended even further. Early bank compliance procedures clearing funds, personal guarantees by UBOs or parent companies of the group, performance bonds, export insurance — these are just a few of the ticks that ought to be on the trader’s checklist.

State Factor

The state regulation of the foreign economic sector is embodied in the Law of Ukraine No.959-XII On Foreign Economic Activity of 16 April 1991 (FEA Law) and subsequent legal instruments. The regime itself is relatively mild, largely permissive and reflects quite a few free trade principles (freedom of contract, choice of law, etc). However, some of the instruments of interference and

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3853 Fax: +380 44 391 3854 E-mail: info@integrites.com Web-site: www.integrites.com

Our firm is also represented by international offices: United Kingdom 1 King Street, EC2V 8AU, London, UK Tel.: +44 203 713 1750

Germany Maximilianstrasse 13, 80539, Munich, Germany Tel.: +49 892 030 061 50

Russia Naberezhnaya Tower Block C, Moskva-City 10, Presnenskaya Naberezhnaya Moscow, 123317, Russia Tel.: +7 495 660 50 70

China R&F Ying Sheng Plaza, MaChang Road 16, Tianhe district, Guangzhou city, Guangdong, China. Tel.: +86 185 0204 0880

Kazakhstan SUCCESS Business Center, 1/1, Zhandossov St., Almaty, 050008, Republic of Kazakhstan Tel.: +7 727 352 80 83/84

Netherlands Herengracht 282 1016 BX Amsterdam The Netherlands Tel.: +31 20-5219367

the way in which they are being employed by the state lead to a lot of tensions on the international market affecting both individual exporters and the overall image of the state, even when they have truly justifiable reasons.

Trade Restrictions and Force Majeure

Export and other trade restrictions are some of the most popular and equally detrimental instruments. For example, the last grain export restrictions saga, back in 2010, caused an unprecedented number of defaults, made Ukraine a negative hot topic in trading circles for a long time and fed various London lawyers for almost five years. While it is commonly understood that trade restrictions or prohibition of export should fall under the definition of force-majeure, this may not always be the case on evidence. Some international contracts usually contain detailed clauses dealing with force-majeure events, their confirmation and consequences (e.g., standard GAFTA or FOSFA contracts). However, some do not and refer to a broad definition of “anything usually understood as forcemajeure”, while certain legal systems do not even have force-majeure as a legal concept, making that contractual reference crucial. Yet, on many occasions the restrictions are “unofficial”, meaning no formal confirmation to that effect or available evidence to rely on by either side, leaving national exporters with no practical means of protecting their rights against unhappy buyers.

Special Sanctions

Another limiting state mechanism is the regime of special sanctions set by Article 37 of the FEA Law. Such special sanctions are imposed by the Ministry of Economic Development and Trade of Ukraine for various violations of law and contract and come in the form of penalties, individual licensing or temporary ban on foreign economic activity. The most common violation being the so-called “nonpayment of earnings in foreign currency”, which occurs if the full payment for the exported goods does not reach the exporter’s account within the specified time, irrespective of the amount of shortfall. Hence, an unlucky trader who delivered the goods but ended up being unpaid has a dual problem: the need to spend time and resources pursuing a rogue counterparty for payment and the punishment from the state for gross violation of currency laws, which occurred through no fault of his own. Such an unduly punitive approach is very disturbing, since international traders widely use various commercial mechanisms for settling contractual difference (offsets, washouts and discounts) and it greatly limits the national exporters’ ability to resolve disputes without recourse to courts or ADR, saving a lot of time and expense. We hope that with the increasing knowledge of issues and less interference from the state, both Ukrainian exporters and their international counterparties will be ready to face and overcome the new challenges and make their trade deals a mutual success.

97


Government Relations

Immersion. Lobbying: How does It Really Work?

Oleksandra PAVLENKO Attorney-at-Law, Managing Partner, Pavlenko Legal Group

I

n recent years, more and more calls to regulate the activities of lobbyists have been heard more often in Ukraine. I must admit that we worked hard to give this topic totally different coverage in Ukraine, for it to be more positive and real. The post-Soviet world has got used to living with slogans and evaluations of form, but not its essence, as well as to attaching labels, reading only the headings and the terms. This is how the fate of comprehension of “lobbying” looks like in Ukraine. We got used to hearing about business interests in the Government and corruption, about the use of hidden mechanisms of influence and, in fact, the eventual publishing of national decisions, adopted with a bias towards merely certain interests. However, we cannot live behind a closed curtain and continue echoing the same, when the world is developing and going forward for the benefit of countries, their citizens and business as a driving force of the economy. At the end of 2016, for the first time ever a draft law was registered in Ukraine aimed at regulating the activities of interest groups and lobbyists. As of now a total of three draft laws have been submitted. One of our most important achievements is the open dialog that takes place between the business environment, community and politicians. We, the experts working in the field of government relations in Ukraine for over 10 years, would like to draw attention to European and world practice, which enables the choosing of a single approach to development of civilized legitimate lobbying in Ukraine. We often hear that European countries have chosen different approaches to the issue

98

of lobbying legalization. Each country independently decided, “whether its community is ready to the adoption of law” and “what consequences may the state corpus have as a result of lobbying legalization”. In any event, it is more appropriate to set the tone for the rules than to name any action as corrupt and not to hold anyone liable for any of the episodes. Is it complicated because distinguishing real corruption from civilized lobbying requires clear criteria? And who better than the state is able to answer the question: what are these criteria? Yes, probably each country decides independently on which lobbying strategy to choose, but this will not stop the processes, occurring in the world, whether or not we want this. Ukraine has every chance, being in the period of building its nationhood again, to follow the path chosen by European institutions. Today, business groups are acting agressively and against the rules, but such behavior is possible only when one does not want to establish or play the rules. In the meantime an expert group in GR sphere is actively consulting the executive bodies regarding the implementation of individual reforms; it is creating working groups in the ministries for improvement of legislation for businesses; it is moderating such groups, supporting and “hosting” communication with business in the interests of ministries. During the period of reform, it is not possible to implement changes without such support. Many people have started to realize that communication between the state and the business is not a drawback. On the contrary, such communication helps the Government not to lose the sense of reality and enables it to understand the reaction regarding particular draft changes before their publishing. Each state official or politician is a servant not only to the population that elected him, but a representative of business interests in the Government corpus. The ability to alter state and business interests is the task and the obligation of the country’s administrative corpus. Now, during these turbulent times (both political and economic), it could not be denied that only support to business may increase the country’s indicators and raise it to another level. With such an approach, the instruments of civilized lobbying are a chance to hear the business sector with its problems and needs.

We are undergoing a period of transition from fiscal and punitive state policy to supporting policy. A gap in dialog between the business and the state is no longer possible. EU practice related to implementing the civilized institution of lobbying or Government Relations may become priceless for us. Not only are certain laws of other countries of great interest to us, but so are the acts of European institutions. Thus, Recommendations of the Assembly of the Council of Europe No.1908 (2010) contain a lot: — “... society members are fully entitled to self-organizing and lobbying their interests”. — “... however, such phenomenon as unregulated hidden lobbying may undermine democratic principles and proper governing...” In the meantime, special attention is given to those countries, where the processes of political shaking are not yet complete and society does not properly control the level of corruption. Thus, the Council of Europe clarifies that: — “…unregulated hidden lobbying may undermine democratic principles and proper government in those countries where democratic traditions are not yet rooted, and where there is the danger of absence of an effective system of checks and balances by civil society”. Generally, it is our case. How are we going to reslove the problem? Do we really think that anti-corruption laws and lawenforcement bodies will provide a proper reaction? Over several recent sessions of the Ukrainian Parliament, MPs who believe that the legislative body should work exactly in this way — to collect ideas from “clients” behind doors, consign populism to them and move them forward through voting, are regularly elected. Nobody creates the rules within Parliament. In its current edition, the Law On the Rules of Procedure of the Verkhovna Rada of Ukraine does not, unfortunately, answer these questions. According to many European constitutionalists: 1) lobbying should be clearly defined in order to distinguish lobbying as a professional paid activity from the activities of civil society organizations; 2) transparency in lobbying should be improved;

WWW.UKRAINIANLAWFIRMS.COM


Pavlenko Legal Group

P

Address: 23A Zolotoustivska Street, Kyiv, 01135, Ukraine

avlenko Legal Group is a law company founded in 2008 by the famous attorney at law Oleksandra Pavlenko. The company now finds itself among the national leaders of the legal business. In December 2014 the team launched a major rebranding campaign. The team of attorneys at Pavlenko Legal Group implements a new approach to delivery of services, offering not only legal support, but also generation of personalized, nonstandard solutions, based on objective information — the legal picture, situation on the market and political background. The company specializes in providing the following services — government relations (GR), legislative work in various spheres, judicial protection, asset protection from hostile takeovers, corporate law, taxes and financial planning. Company founder Oleksandra Pavlenko is an attorney practicing in the field of government relations (GR) since 2000, who interacts constantly with the state authorities with respect to implementation of new regulations, changes to legislation, advise to Government bodies on various legal issues, also implementing business projects with a public component.

3) the norms which shall be applied to politicians, civil clerks, members of pressure groups and commercial enterprises, including the principle of potential conflict of interests and defining the time period passed since dismissal of such official from his/her position, i.e. during which the lobbyist activities should be prohibited, should be defined; 4) individuals participating in lobbyist activities should be registered; 5) preliminary consultations should be held with lobbyist organizations regarding any draft law in the relevant field; 6) substantial, transparent, and fair lobbying should be supported in a way to improve the public image of persons involved in these activities.

What could Lobbying bring the Country, Business and Politicians?

The main component of the benefit list is improving the quality of draft laws and adopted laws. Being obliged to conduct consultations with lobbyists’ expert groups, registered with Parliament, a Member of Parliament cannot ignore professional recommendations, provided by the experts of the core market, as often happens in Ukraine. When opening the adopted law, business rather often won-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 281 06 00, 281 06 01 E-mail: office@plglaw.ua Web-site: www.plglaw.ua

Pavlenko Legal Group team members are active participants of professional legal community, members of business associations, such as EBA ACC, CCA and IBA, participants of Government and departmental working groups on various legislation issues. The appointment of Oleksandra Pavlenko in 2014 to the Cabinet of Ministers to work in the health care field was special recognition of her professionalism and achievements. Expert legal assessment provided by the company’s attorneys is highly demanded by leading Ukrainian legal and business publications. Team members are ranked in various national and international ratings. The company is recognized as being among the Top 50 law firms of Ukraine. The company’s overall success consists of the personal achievements of our attorneys and lawyers. Each of them is not only a competent and experienced specialist in one or more areas of law, but also a full member of the team, working together to solve complex issues. Our internal task is synergy for the result. We assist to take on the challenge.

ders to itself “who advised the Government?” As a rule, broad mandatory consultations are never held. The draft law arrives on the desk of parliamentarians after going only through the hands of the MP who initiated the draft. The low level of professional education of our MPs does not allow assessment of the quality of the potential impact of such a draft on the operation of the general market. The norms that oblige parliamentarians to take into consideration the expertise of a core market, a professional association or an expert group, who act as the lobbyists of the market, is one of the serious chances to leave stupidity behind the doors, not allowing it to be voted, or on the contrary, enabling light to be shed on really qualitative provisions. Publishing all the opinions provided by lobbyist groups on the official website of the Verkhovna Rada would enable the initiative of a particular MP and his/her open counteraction with the market to be openly observed. Cooperation for the sake of development should be established. European business has had an explicit impact on qualitative regulation through civilized lobbying. The European Parliament has become the first European institution to regulate the activities of lobbyists within its walls. The register of lobbyists has been created and the Code of Eth-

ics has been adopted. In addition, opening by the European Commission of the first register of European lobbyists in 2008 became an important step towards standardization of such activities in Europe. Over the last 8 years, it has strengthened the culture of dialog between business and the Government, heightened the value of consultations between European parliamentarians and the market, increased transparency and finally improved the negative opinion of the community about lobbyists. Moreover, it is worth noting that highquality services in the GR field include not only interaction with officials, deciding on adoption of a particular legal act, but largely on the strategy with the use of legal component, information policy, public opinion and the work of expert groups. It is essential to step forward and understand that only through regulation of the rules for civilized lobbying and making most processes associated with establishing dialog between business and Government transparent, will we finally separate corruption and clearly understand that business is mostly ready to work openly with Parliament and the Cabinet of Ministers for the benefit of economic development. There is a long-standing market and GR experts are in demand, whether we like it or not.

99


Infrastructure

Financing Public-Private Partnership Projects in Ukraine Since non-recourse project financing is a very risky enterprise, the lenders’ decision on whether or not to finance a project will normally be preceded by an extensive due diligence review and thorough consideration of the allocation of risks between the project parties. The “bankability” of the project will be determined as a result of such review and risk assessment.

Recent Developments Dmytro ORENDARETS Senior Associate, Kyiv office of Baker McKenzie

P

ublic-private partnerships (PPP) are widely used in many parts of the world as a means of undertaking large infrastructure projects. Such projects usually require specific technical expertise and significant financial resources. Therefore, for the implementation of such projects, national and local governments often attract private partners that possess the required knowledge and experience and are able to arrange for the necessary financing. Financing PPP projects involve three main funding mechanisms: government funding, equity contributions and debt financing. Debt financing can be attracted either through senior and/or mezzanine loans or by means of issuing debt securities on capital markets. Given that Ukrainian public finances are weak and the national capital market is not big enough to attract significant amounts of money, while international capital markets are not always available to Ukrainian issuers, bank loans appear to be the most realistic way of financing PPP projects in Ukraine.

Project Finance

One of the most common and efficient arrangements for financing PPP projects is project financing. This type of financing usually takes the form of lending to a special purpose vehicle (SPV) designated to carry out the project. Project financing can be extended on either a non-recourse or limited recourse basis. In a non-recourse financing, the financiers rely fully on the cash flow generated by the project, whilst limited recourse allows the financing parties access to the assets of the sponsors or the Government.

100

Until recently, due to underdeveloped PPP legislation and a lack of political will, it was virtually impossible to originate a bankable PPP project in Ukraine. Therefore, one can hardly name any PPP success story since the adoption of the Law of Ukraine On PublicPrivate Partnerships No. 2404-VI of 1 July 2010 (2010 PPP Act). Fortunately, the situation has been slowly but steadily improving in the past couple of years. The Government seems to have recognized the benefits that PPP can provide to the country and its economy. As a result, to motivate investors to commence PPP projects in Ukraine, the Government has undertaken certain reforms, including making certain changes to the 2010 PPP Act. Those changes, the most significant of which we discuss below, have made project financing of PPP projects achievable.

SPV Structure

When extending project financing to a project company, the lenders will expect such a company to be fully dedicated to executing the project and free from any historic liabilities. Therefore, the availability of a project SPV is of utmost importance for PPP financing. Nonetheless, prior to being amended in 2016, the 2010 PPP Act had stipulated that only the winner of a PPP tender, which would often be a significant local or international company, could act as the private partner in a PPP project. According to the latest changes to the 2010 PPP Act, an SPV created by the winner of a PPP tender can act as a private partner, provided that the winner retains, directly or indirectly, an interest of more than 50% in the SPV’s charter capital for a certain period of time, specified in the PPP agreement. In addition, even if the project is carried out by an SPV, the winner of the PPP tender will remain jointly liable with the SPV and will bear full responsibility for the due fulfilment of the PPP agreement.

Creating Security

Another distinctive feature of a project finance structure is that the financing parties will want to take as much security for the financing as possible. Such security will normally comprise, amongst other things, security over shares in the SPV, charges over project assets and project agreements, security over insurance proceeds and project accounts. Given this, it is essential that applicable law permits the lenders to obtain such security. Ukrainian law recognises most types of security arrangements which are considered to be customary for PPP projects. Furthermore, as opposed to the previous version of the 2010 PPP Act, the current version permits the private partner to become an owner of the assets that it creates or acquires in pursuance of the PPP agreement. However, such assets must be transferred to the public partner before the relevant PPP agreement terminates. The ability of private partners to own project assets creates the necessary framework for implementing BOT (buildown-transfer) PPPs and establishing security over assets of such projects in connection with their project financing.

Step-in Rights

For a project-financed PPP project, the lenders largely depend on the financial success of the project. Therefore, the lenders will want the private partner to duly perform its obligations under the PPP agreement. If the private partner does not perform its obligations in the specified manner, the financing parties should be in a position to step in the rights and obligations of the project company or replace the private partner with another party having the requisite experience to successfully complete and operate the PPP project. Ukrainian legislation permits the financing parties to be a party to a PPP agreement on the side of the private partner and initiate the replacement of the private partner if it underperforms under the PPP agreement. The procedure for such replacement is still to be approved by the Cabinet of Ministers of Ukraine (CMU). However, pursuant to the currently available draft of the relevant regulation, a replacement partner will be determined though a tender offer procedure. If the CMU adopts the final regulation as currently drafted, this will likely exclude the possibility of the lenders “stepping into the

WWW.UKRAINIANLAWFIRMS.COM


Baker McKenzie

B

Address: Renaissance Business Center 24 Bulvarno-Kudriavska Street, Kyiv, 01601, Ukraine

aker McKenzie’s Kyiv office has maintained a leading market position in Ukraine for 25 years. We offer a full range of legal services and business solutions. The quality of our work is reflected in the number of domestic companies, multinationals and financial institutions that seek our advice on high-profile transactions and legal representation in Ukraine. In close cooperation with Baker McKenzie offices worldwide, we provide the guidance and support clients need to achieve their commercial objectives in practice areas like Antitrust & Competition, Banking & Finance, Corporate,

shoes� of the relevant failing partner or nominating a replacement partner in their sole discretion by way of exercising their rights under the available direct agreements or security over project contracts. Unfortunately, when the latest changes were introduced to the 2010 PPP Act, market participants did not manage to persuade MPs to provide a more flexible step-in mechanism in the law.

State Support

In a project-financed transaction, the lenders will also want to ensure that the financed project performs as expected and the cash flow it generates is sufficiently protected. Therefore, in developing countries such as Ukraine, where project risks are usually higher than in developed countries, it would not be uncommon for private partners and financiers to require some sort of state support for a PPP project. The State of Ukraine can support a PPP project in a number of ways, including by granting sovereign guarantees, paying completion fees or acquiring a minimum volume of goods produced or services rendered under

WWW.UKRAINIANLAWFIRMS.COM

Mergers & Acquisitions and Securities, Compliance, Dispute Resolution, Employment, Energy, Mining and Infrastructure, Healthcare, Intellectual Property, IT and Communications, Private Equity and Venture Capital, Privatization, Real Estate and Construction, Trade & Commerce, Tax and Customs, Wealth Management. Every year the Kyiv office confirms its top positions in the leading international and national legal directories, namely Chambers Global, Chambers Europe, Legal500, IFLR1000, World Trademark Review 1000, International Tax Review, Ukrainian Law Firms, Ukrainian Legal Awards, etc.

a PPP agreement. Furthermore, if the prices for goods or services produced or rendered under a PPP agreement are subject to state regulation, the state is required to ensure that such prices include an investment return component sufficient to reimburse the private partner for the investments made in the PPP project.

Other Guarantees

In order to provide prospective investors and project financiers with additional comfort in undertaking PPP projects in Ukraine, Ukrainian PPP legislation has been amended to specifically allow the parties to a PPP agreement to submit any disputes arising under such an agreement to arbitration in a foreign arbitration court. In addition, the 2010 PPP Act now explicitly permits the state to waive its sovereign immunity in PPP agreements in which the CMU acts as a public partner.

Conclusions

Tel.: +380 44 590 0101 E-mail: kyiv@bakermckenzie.com Web-site: www.bakermckenzie.com/ukraine

Despite the significant progress made by the Ukrainian Government in improving

national PPP legislation and making PPP projects more attractive for big international players, a great deal still remains to be done. Infrastructure, including motorways, power lines and pipelines, remains a heavily regulated industry. This, together with the existing restrictions on private ownership of certain infrastructure objects, makes the implementation of PPP projects in this field difficult, requiring detailed planning and consideration. That said, current Ukrainian PPP legislation provides prospective private partners and financiers with the minimum required instruments for undertaking PPP projects and arranging financing for such projects. Some international financial organisations are already assisting the Government to execute a number of pilot PPP projects in order to test and improve available PPP regulations and to create success stories that will increase confidence among investors. Given this, and taking into account the growing political will to develop PPP in Ukraine, the country has all the prerequisites for seeing more successful PPP projects in coming years.

101


International Arbitration

Service of Procedural Documents in Arbitration and Cross-Border Litigation

Olexander DROUG

Olesia GONTAR

Counsel, Sayenko Kharenko. Mr Droug specializes in dispute resolution and restructuring with a special focus on arbitration and commercial litigation. He advises local and foreign clients on all stages of dispute resolution proceedings, including in complex multijurisdictional proceedings, as well as arbitration under arbitration rules of all major international arbitral institutions.

Associate, Sayenko Kharenko. Ms Gontar specializes in international commercial arbitration. She has been involved in a number of proceedings, including multiparty and multicontract arbitrations under the GAFTA, LCIA, SCC and NAI Arbitration Rules.

rbitration and cross-border litigation usually entail proceedings involving several jurisdictions with distinct rules of procedure and court practice. This also requires cooperation between lawyers from different countries who know the intricacies of each particular jurisdiction. One of the issues which may require advice from a foreign counsel is the service of procedural documents to a respondent that refuses to take part in proceedings. Incorrect service of process in such a situation may not always preclude issuance of an arbitral award or a court judgement, but will almost certainly put at risk any subsequent enforcement of such an arbitral award or court judgement. This is because usually both national legislation and relevant international treaties stipulate as ground for refusal of recognition and enforcement of a foreign court judgement or an arbitral award due notification of a respondent on the process. If a respondent is successful in challenging the recognition and enforcement of a relevant judgement or an arbitral award, then all efforts, time and money invested in the respective proceedings could be wasted and a

claimant might be required to start fresh proceedings. In addition, improper service might also result in the setting aside of an arbitral award at the place of arbitration or challenge of a court judgment with a court of higher instance. Therefore, a party initiating arbitration or litigation shall invest appropriate efforts into making sure that a respondent is duly notified of the proceedings.

A

102

Service of Process in Litigation

Hague Convention In litigation, the parties are bound by the local procedural rules at the place of a court, which usually provide for a high standard for the service of procedural documents to a respondent. One of the most widely used international instruments dealing with the service of procedural documents is the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of 15 November 1965 (Hague Convention). The Hague Convention will apply if a relevant state where the court is located, and a state where a respondent resides or where it is registered, are parties to this Convention.

The Hague Convention provides for quite a formalistic approach to the service of judicial documents through the official authorities of the relevant states. For example, Ministries of Justice or higher courts, which then arrange for the service of procedural documents based on the procedures established by each particular state. The Hague Convention also provides for the possibility of the simplified service, including via the direct dispatch of documents by post. However, the simplified service is not available for the majority of countries, which are parties to the Hague Convention, including Ukraine. In addition, service under the Hague Convention may take a relatively long period of time (in Ukraine, the average time for completion of service is two to four months). For this reason, the parties sometimes try to employ alternative methods of service, as discussed further below. Other International Mechanisms In case the Hague Convention does not apply, then the service of procedural documents in litigation shall be made under bilateral international treaties between the respective states, usually mutual legal assistance treaties. Such treaties provide for similar procedures for the service of procedural documents as the Hague Convention through the competent authorities, but may also provide for certain specific conditions under which the relevant court judgment may be recognized and enforced if rendered in the absence of a respondent. In case there is no bilateral international treaty between the relevant states, then the service of procedural documents shall be made under the procedural rules of the state where the respective court is located, which may or may not require that such service be made under the laws and regulations of the respondent’s state. Alternative Service of Process In some countries, for example the United Kingdom and Cyprus, local procedural rules permit the service of process under the methods alternative to the methods permitted under the Hague Convention or other bilateral international treaties. In practice, such an alternative service is permitted if service under international instruments was not successful

WWW.UKRAINIANLAWFIRMS.COM


SAYENKO KHARENKO

Address: 10 Muzeyny Provulok, Kyiv, 01001, Ukraine

S

ayenko Kharenko is a leading law firm in Ukraine with an internationally oriented full-service practice. It is currently one of the largest law firms in Kyiv. Most recently, Sayenko Kharenko collected three of the most prestigious professional excellence country awards, more specifically, Law Firm of the Year by each of IFLR European Awards 2017, Who’s Who Legal Awards 2017 and Legal Awards 2017. In early 2017, the firm was also shortlisted in Law Firm of the Year category by The Lawyer European Awards 2017 and Chambers Europe Awards 2017. Sayenko Kharenko — recommended advisor for international arbitration Sayenko Kharenko boasts a unique team of arbitration lawyers experienced in international commercial and investment arbitration. The team advises clients on all aspects of international arbitration, including the choice of arbitration

for a substantial period of time and there are prospects that alternative services will effectively bring the claim to the attention of a respondent. The alternative methods of service may entail various ways to notify the respondent of the proceedings and sometimes the only restriction is express prohibition under the laws of the country where respondents reside as to a particular method of service. Such methods for service of procedural documents on Ukrainian respondents should, however, be treated with caution, especially if a respondent does not react to the successful alternative service of process and in the end still fails to appear before the court. To ensure a fully enforceable arbitral award or a court judgment, it might still be prudent to await completion of the service under the Hague Convention or other bilateral international treaty. Service of Process Agent in Litigation in English Courts In case of litigation in English courts, which is a popular jurisdictional choice in transactions involving Ukrainian parties, it is possible to agree already at the stage of entry in a contract on the appointment of the socalled service of process agent that can facilitate service of procedural documents to those parties, which do not reside in the United Kingdom. This will significantly speed up and simplify English court proceedings involving non-UK respondents.

Service of Process in Arbitration

Relevant regulations for the arbitration proceedings generally include the New York Convention on the Recognition and Enforcement of

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 499 6000, 389 5000 E-mail: info@sk.ua Web-site: www.sk.ua

forum and applicable law, advising on the risks and possible outcome of the arbitration, representation in the course of the arbitral proceedings before different international arbitration institutions all over the globe, enforcement of arbitral awards and other matters. Sayenko Kharenko’s arbitration lawyers have unprecedented insight into arbitration proceedings in Ukraine and abroad built on their experience of serving as party appointed arbitrators, sole arbitrators, chairmen of the arbitral tribunal, and legal counsel to a party to arbitration. The firm’s team handled over 90 arbitrations under a variety of international institutional and ad hoc arbitration rules, covering all major spheres of international business, including relating to contractor agreements; international sales of goods; maintenance and construction of ships; agency and distribution contracts; joint venture agreements; oil & gas supply contracts; and represented clients in corporate, maritime and trade commodities international disputes.

Foreign Arbitral Awards of 1958 (New York Convention), local legislation governing arbitration proceedings at the place of arbitration and relevant arbitration rules agreed by the parties. The New York Convention provides that a respondent should be given a “proper” notice of the arbitration proceedings, which shall enable such respondent to present its case. Otherwise, recognition and enforcement of the arbitral award may be refused by a local court. Arbitration rules usually provide for standard rules of delivery of notices to email and postal addresses. For example, as agreed by the parties in the arbitration agreement or in the relevant contract, by email, registered mail or courier. Therefore, while serving the request for arbitration and other procedural documents, it is necessary to verify the compliance of such service both with the relevant arbitration rules and the agreement of the parties. For example, as confirmed by the Supreme Court of Ukraine, servicing of documents on a defendant in the arbitration by email, that was not agreed by the parties as a permitted method of communication in their contract, will not constitute a proper service although such method of communication is usual for arbitration proceedings. If a respondent does not appear and defend its case, most arbitration rules provide that the arbitral tribunal may proceed with the arbitration and make the award. In such case, a claimant shall ensure that a respondent was “properly” notified of the arbitration proceedings as required by the New York Convention. Given that the New York Convention does not establish the test for a “proper” notice, claimants in the arbitration should be very cautious with simply sending a request for arbitration to the last known address of a re-

spondent or respondent’s address indicated in the contract. There are different considerations, which shall be taken into account for different types of respondents, e.g. corporations or individuals. For corporations, it is advisable to obtain information on the up-to-date registered address of a respondent in the country of its registration. In case the up-to-date registered address is different from the one which is last known to the claimant or which is indicated in the contract, a request for arbitration and other procedural documents shall be sent to both addresses. For individual respondents, making a “proper” service will be complicated by the need to locate the up-to-date place of residence of such an individual, which is sometimes difficult due to local rules on personal data protection. If the respondent does not cooperate, it might be necessary for a claimant to make enquiries with the competent local authorities in the respective countries to obtain information on the up-to-date address of a respondent or, alternatively, search for his current place of work in order to effect a “proper” service.

Summary

Servicing of process in each particular case depends on the type of proceedings (litigation or arbitration), the level of cooperation of a respondent, as well as the jurisdiction of a respondent’s registration or residence. In each case, it is advisable for claimants to devote all the necessary and available efforts to obtain evidence of a proper notification of a respondent of the proceedings so as to make sure that the final arbitral award or court judgment can be effectively enforced against the respondent.

103


International Tax

Changes in the Foreign Trading Structures of Ukrainian Business Due to TP Amendments

Pavlo KHODAKOVSKY

Denys SIIUSHOV

Partner, Attorney-at-Law, Arzinger

Associate, Arzinger

do not provide a full and timely exchange of tax and financial information upon queries from the Ukrainian tax authorities; 4) transactions with non-residents of Ukraine which do not pay taxes in jurisdictions of their residence (including from income obtained abroad) and/or which are not tax residents in the jurisdiction where they are registered as legal entities. Oddly enough the Government of Ukraine should issue a list of legal forms of such entities by each jurisdiction and not the list of instances where this criterion should be taken into account (where a purpose to avoid paying taxes exists).

n recent years it has become a tradition in Ukraine to adopt significant amendments to tax laws at the very end of the year and, what is more, to make such amendments effective right at the start of the coming year. The year 2016 was no exception. In particular, the rules of the Tax Code of Ukraine regulating transfer pricing were substantially modified, which, in our opinion will have a major impact on the trading structures traditionally utilized by Ukrainian companies. The aim of this article is not to analyze the adjustments to the methods of determination of the arm’s length price of transactions; rather the purpose is to study the amended list of controlled transactions and to define the potential impact of recent (and anticipated) amendments in transfer pricing regulations on the trading structures of Ukrainian businesses.

b) such jurisdiction has not concluded an international treaty with provisions on exchange of tax information with Ukraine. Furthermore, a transaction has not been recognized as controlled if the following criteria have not been simultaneously met: a) the total annual income of Ukrainian taxpayer has exceeded UAH 50 million (about EUR 1.7 million); and b) the total volume of the above transactions with one such nonresident party has exceeded UAH 5 million (around EUR 170,000). Starting from 1 January 2017 the above thresholds were increased to UAH 150 million (close to EUR 5.1 million) and UAH 10 million (approx. EUR 340,000), respectively. Moreover, the list of controlled transactions has been altered and supplemented. At the same time, the list does now include the following transactions: 1) transactions with related non-residents; 2) foreign economic transactions on the sale and/or purchase of goods and/or services with the use of non-resident commissionaires. Thus, any transaction involving the sale or purchase of goods or services is considered as controlled by itself if performed through a non-resident commissionaire, irrespective of whether or not such commissionaire or another party to a transaction is a related party or a resident of a low-tax jurisdiction; 3) transactions with non-residents registered in low-tax jurisdictions. The criteria to put a jurisdiction into the “low-tax list” have been supplemented with the following: a jurisdiction, the competitive authorities of which

Recent amendments show that the purpose of the Government of Ukraine was to exclude relevantly small Ukrainian companies from the burden of preparation and submission of transfer pricing documentation; at the same time, the Government has broadened the base. It has determined as controlled the transactions which are used, or could be used, to avoid transfer pricing requirements. However, the extension of the list of such transactions must have been carried out with consideration not to catch the completely lawful economically substantiated structures and not to place an unjustifiable TP burden thereon. In particular, inclusion of such a ground for the Government of Ukraine to recognize a low-tax jurisdiction as non-cooperation in exchange for tax and financial information with Ukraine seems rather hasty. The reasons why many jurisdictions (including countries like the Netherlands, UK and Switzerland) do not provide tax information to Ukraine is either due to groundless queries by the Ukrainian tax authorities and/or inability of Ukraine to ensure safe storage and confidentiality of the data received. It is also unclear how many denials to provide respective information or untimely/inaccurately provision thereof must be considered by Ukrainian tax authorities to recognize the jurisdiction as non-cooperative and low-tax — hence such discretion on the part of the Government to decide on the list of jurisdictions seems unreasonable.

I

Previous and Present Regulations

Before 1 January 2017 the list of controlled transactions included the following: 1) transactions with related non-residents; 2) foreign economic transactions on the sale of goods with the use of non-resident commissionaires; 3) transactions with non-residents registered in so-called low-tax jurisdictions. The list of low-tax jurisdictions was approved by the Government of Ukraine based on either of: a) the general corporate tax rate in such jurisdiction being five percentage points or more below the corporate tax rate in Ukraine; and/or

104

Potential Recognition of High-Tax Jurisdictions as Low-Tax to Qualify Transactions as Controlled

WWW.UKRAINIANLAWFIRMS.COM


Arzinger

A

Address: Senator Business Center, 32/2 Moskovska Street, 10th Floor, Kyiv, 01010, Ukraine

rzinger is an independent law firm headquartered in Kyiv which has regional offices in Western and Southern Ukraine, in Lviv and Odesa, respectively. Arzinger has for over 14 years been among the legal business leaders providing high-quality legal support to clients throughout Ukraine. Among the firm’s many clients are top representatives of international and local business. Arzinger follows high standards of legal services and is a reliable partner in view of its great experience in a wide range of industries and legal practices: M&A, corporate law, real estate and construction, antitrust and competition, litigation and arbitration, tax, banking & finance. We serve clients operating in the financial services, energy, mining and natural resources, pharmaceuticals, food & beverages, investment banking and corporate finance, telecommunications, retail & leisure, hospitality, aviation and automotive, agriculture, insurance, and infrastructure & transport industries.

What is more, following Ukraine joining the automatic exchange of financial information based on the common reporting standard certain jurisdictions might expressly refuse to exchange financial information with Ukraine on the reasons envisaged by the CRS. Would this be grounds for the Government to recognize a really high-tax jurisdiction (e.g. Austria) as a low-tax one? In any case, the good news is that transactions with the resident of such jurisdiction will be considered controlled only starting from 1 January of the year following the year when the respective jurisdiction is recognized as low-tax. Hence, tax planning opportunities due to the extension of the described criterion are narrowed but not eliminated.

Highly Suspicious Counterparties for the Purpose of Recognition Transactions as Controlled

The new criterion for the purpose of qualification of transactions as controlled implies that a non-resident counterparty is either not resident in the jurisdiction of its registration or it does not pay taxes in the jurisdiction of its residence. It seems that Ukraine treats such non-residents as suspicious, meaning that transactions with them are more likely to be used for the purpose of tax avoidance. However, there are some thoughts on why establishment of this criterion has been too rather a hasty decision. First of all, transfer of residence is a completely normal adequate procedure which is allowed by laws of many jurisdictions and which is usually carried out mainly for commercial reasons and not for the sole purpose

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 5533 Fax. +380 44 390 5540 E-mail: mail@arzinger.ua Web-site: www.arzinger.ua

Arzinger employs highly-qualified professionals with vast hands-on experience in a wide range of legal matters, deep knowledge and understanding of the local market, international education and background. The firm has a team of over 70 seasoned legal professionals led by 8 partners. All of them are acknowledged among leading experts on the Ukrainian legal market and are recognized by reputable international and local rankings. As a result, Arzinger can offer extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters. The firm renders tailor-made legal services of unsurpassed quality to meet the client’s expectations. Arzinger cooperates closely with legal advisors from numerous jurisdictions and is a member of international professional organizations, enabling it to engage colleagues from various jurisdictions in cross-border transactions and so provide clients with top-level professional legal advice.

of tax avoidance. Of course, tax considerations are always taken into account when transferring tax residence but again when the tax planning is not its sole or its main purpose there is nothing illegal about following the procedure for changing the tax residence established by the laws of respective jurisdictions. The analyzed provision could entail a situation when a law-abiding company resident of a respectable jurisdiction (even though primarily registered in another jurisdiction) paying taxes in such jurisdiction will be deemed suspicious by Ukraine and will, therefore, cause its Ukrainian counterparty to fall under the TP regime. Secondly, the mere fact that a company does not pay taxes in the country of its tax residence does not by itself mean that such a company is established (and transactions are carried out with it) for the purpose of tax evasion. Upon close examination of the wording of the analyzed provision, we can conclude that this criterion refers to non-payment of taxes in general irrespective of the presence of income whatsoever. Therefore, a wide approach to interpretation of this wording could allow Ukrainian tax authorities to bring under this provision (to recognize a transaction as controlled) any company which does not pay taxes (including companies which have obtained no income in the reporting period). Special attention should be given to the part of the analyzed provision referring to non-payment of taxes from income sourced outside of the jurisdiction of residence of such a company. We believe it to be a very controversial decision to consider as suspicious the residents of jurisdictions with a territorial system of taxation.

Taking into account the above conclusions and suggestions, we believe that a new criterion which is aimed at recognizing as controlled transactions with non-resident companies considered suspicious by Ukraine, might not work properly in practice. Inaccuracies in the wording of the criterion, as well as the large discretionary powers held by the Government to establish a list of organizational forms of non-resident companies (and the need for such a list is very debatable in principle) and of the tax authorities could lead to the recognition as controlled of transactions performed by fully independent companies with the necessary level of substance and other attributes of businesses that do actually operate.

Anticipated Amendments

Apart from the newly-adopted TP regulations, further amendments to the transfer pricing rules are anticipated. In particular, the following measures could be implemented in Ukraine: — introduction of the obligation to submit country-by-country reports in Ukraine as well as group master files; — imposition of rules on disclosure of information on taxpayers’ related parties involved in the sale of goods chains (up to the first unrelated counterparty); — imposition of special rules for intragroup services rendered within a group as well as some other measures. In view of the stated, the “anti-BEPS” Draft law amending the tax laws of Ukraine is expected to be adopted by the end of 2017, and its main provisions will come into operation no earlier than 2018 (except for certain urgent measures). However, no specific time frame has yet been announced by Parliament or the Government.

105


Internet

Internet ISPs from sending the notices back and forth to their in-house or outsource counsels. Moreover, we believe that the original U.S. DMCA agent mechanism is quite underestimated by Ukrainian businesses targeting the U.S. market. Considering no limitations as to the place of residence of a DMCA agent, we see some potential in developing this service in Ukraine too.

Denys BEREGOVYI

Orest GAVRYLIAK

Partner, Co-founder, Axon Partners

Partner, Lviv Branch, Axon Partners

n 2016 the index of Internet penetration in Ukraine reached 62%1, while in the largest Ukrainian cities this index reaches 70% — an average for the majority of European countries. Nevertheless, the Internet industry landscape is still more of a hotchpotch, where large telecom companies and gigantic (in the scale of Ukraine, at least) international e-commerce projects work side by side with rather small companies, startups and traditional businesses, exploring the possibilities of going more digital. It is a safe bet to say that Internet-related businesses in Ukraine grew in 2016. Some of the highlights are: the launch of Uber and its Russian competitor Yandex.Taxi, the acquisition of Aukro marketplace by Prom.ua, Netflix entered the Ukrainian market, while local streaming service Megogo has indicated 5-fold growth in paid services. The year 2016 also become a year when FS.to and Ex.ua, the websites often accused of streaming illegal content, voluntarily closed. However, obstacles for the market remain in areas of Internet infrastructure development, lack of e-commerce regulation, unclear perspectives of cyber security measures, as well as constant risk of pressure from the police, tax and regulatory authorities. Those Ukrainian businesses aiming to access foreign markets now face a portion of new regulations to comply with as well. Below we address the issues, which may come under the spotlight of the Ukrainian Internet business.

discussed for several years, especially upon publishing of U.S. Trade Representative Special 301 Report where Ukraine is traditionally watch listed as a “pirate” country. While most of the market players involved do understand the need for copyright protection, there are significant differences in views on the mechanism to be implemented. For instance, Draft Law No. 3081-d On Support of Cinematography, supported by local media holdings, provided for DMCA-like notice-takedown procedure for the infringing content. However, this Draft Law was heavily criticized by Internet services providers (Internet and hosting providers) as well as website owners, who are opposed to non-court based content blocking, as well as a 24-hour notice processing deadline. Moreover, ISPs were disturbed by a high risk of over-blocking and Internet censorship, as well as possible expense of takedown notices processing. As a result, Draft Law No. 3081-d was vetoed by President Poroshenko after it successfully passed the second reading in Parliament. However, a few months after the veto and we are seeing attempts by MPs to get Draft Law No. 3081-d back to the table. Thus, we can predict the tug of war on content blocking this year between ISPs and copyright holders to continue.

I

Website & Content Blocking

The blocking of infringing content and websites is not a new topic at all. It has been According to research conducted by Ukrainian Internet Association and Factum Group Ukraine. 1

106

“DMCA Agent” Mechanism Could be Helpful in Ukraine Another issue, ignored by the current Draft Law On Support of Cinematography is the lack of competence to process the notices on the side of ISPs. Considering the required speed of notice processing, the introduction of a DMCA agent-like mechanism is worth mentioning — it would enable the official assignment of a person or a firm to process takedown requests on behalf of the ISP. Such a solution could possibly prevent over-blocking and would save

Cybersecurity

Another hot topic over the next few years in Ukrainian legislation on the Internet will probably be cybersecurity. Obviously, Ukraine has reasons to take this issue seriously, taking into account Crimea’s annexation and the ongoing war in the East. Moreover, there were a handful of incidents recently which were alleged cyberattacks: an energy company was hacked in Western Ukraine (which left 80,000 people without electricity) in late 2015, while in December 2016 the Ukrainian State Treasury and other Government sites were attacked (resulting in delayed processing of state budget payments). In addition, Ukraine still remains under obligations to implement the Council of Europe Convention On cybercrime of 23 November 2001 (Budapest Convention). In particular, the Budapest Convention requires establishing the respective mechanism of storage and collection of traffic data for the purposes of criminal proceedings on cybercrime. As a result, the National Security and Defense Council (NSDC) approved the Cybersecurity strategy in early 2016, which was followed by Draft Law No. 2126a On the Main Principles of Ensuring Cybersecurity in Ukraine (this Draft is being prepared for its second reading in Parliament). Apart from that, in December 2016 the NSDC approved another resolution, On Threats to State Cybersecurity and Immediate Measures to Neutralize them. Both the Cybersecurity strategy and the December NSDC resolution are about to be enacted by the President. The main concerns of 2017 in this sphere will be the mechanism of website blocking (yes, again), as well as introduction of traffic data storage and access system, which might require ISPs to invest funds in the setting up of one. Another point of risk might be the powers of the Security Service of Ukraine and the police’s cybercrime units, that are prone to broadening in this context.

Privacy Shield and Data Protection

While data remains “the oil of the 21st century”, we are witnessing unprecedented activity

WWW.UKRAINIANLAWFIRMS.COM


Axon Partners

Address: Projector School & Coworking, 34a Vozdvyzhenska Street, Kyiv, 04071, Ukraine Tel.: +380 44 578 2337

A

xon Partners provides quality legal services with a unique approach. We work how truly modern professionals carry out their own business: humane, creative and making the most of technology. We follow a simple philosophy: creativity is the key to innovation. We gave up on the conservative corporate hierarchy, replacing it with dedication and devotion. Every single member of our team is a self-sufficient, creative unit, providing his/her unique input into the overall result. We do exactly what we’re passionate about and we are truly engaged in our work. As a result, we do not work “for” the client, we work together with our clients. Our expertise is at the intersection of technology and creativity. We advise on legal issues in: — high-tech — intellectual property — venture investment — electronic and crypto-currencies — e-commerce — media — international taxation — incorporation and operation of companies in foreign jurisdictions — commercial agreements Among our clients you will find all types of tech companies: big and small IT companies, tech startups, online marketplaces and services, gamedev studios, musicians and

in the development of data protection regulations around the world. What is more intriguing is that the EU has been convincing enough to make the U.S. comply with some of the EU requirements on data collection and processing, especially by state authorities — the EU-U.S. Privacy Shield — even though the new Administration in the U.S. might not be happy about it. While joining the Privacy Shield is not mandatory, early birds among our clients have already started the Privacy Shield compliance audit. Considering the close ties of many Ukrainian tech companies with the U.S., we see the Privacy Shield as one of the trending issues for those who deal with E.U. and U.S. customers, service providers or are simply incorporated there. Taking of Ukraine’s data protection rules, we do not expect much of an improvement (unless cybersecurity regulations will offer some novels). On the one hand, the current Law On Personal Data Protection is broad enough to match the core principles of EU data protection legislation. On the other, we still lack a data protection authority that would act to both regulate and oversee the application of best data protection practices. Instead,

WWW.UKRAINIANLAWFIRMS.COM

producers, production studios and movie directors, designers, photographers and other members of the creative class. We are proud to call great companies such as BlaBlaCar, Innovecs, TripMyDream, Datas, Kuna Bitcoin Agency, DOU, Grossum,rabota.ua, Wishround, MLSDev, Clickky, Confidence, Gera-IT, ISM e-Company, Visco, Yalantis, Vitagramma, Stanfy, Rialto, Vertamedia, InvisibleCRM, Heliclub, 908.vc, MyHelix, Ecois.me, and ProZorro our partners. Axon Partners heads the legal committee of the Lviv IT Cluster, is a member of Bitcoin Foundation Ukraine and represents Ukraine in the European Legal Tech Association (ELTA). Partners of the company have been ranked in the Top-5 Best Lawyers in IT, Telecom and Media according to the allUkrainian study The Choice of Clients 2017 and named an excellent, forward-thinking legal practice in Intellectual Property by Legal 500 EMEA in 2017. The firm has been shortlisted for The Lawyer Business Leadership Awards 2016 in two categories, namely Best agile working initiative and Innovation in project management. As a responsible member of society, our team holds a variety of university courses in Ukraine (e.g. National University of Kyiv-Mohyla Academy, Kyiv University of Law of National Academy of Science of Ukraine, Kyiv National Economic University and Kharkiv National University of Radio Electronics), conducts online courses for entrepreneurs on the Prometheus web platform, and advises tech startups for free each Friday. We dare to be different, we dare to be ourselves.

data protection powers are split between the Ombudsman (shall be notified of each controller of sensitive personal data) and even the State Service of Communication and Information Protection of Ukraine, which manages the CSSI procedures — complex system of information security. The CSSI is a set of technical measures required and to be further certified by the State Service in case of transfer of sensitive personal data, etc. Unfortunately, this system is not at all effective or practical. Moreover, Ukraine lacks the practice of data protection enforcement, which is a significant point of reference in other jurisdictions.

E-commerce

IHub Lviv, 9 Zamknena Street, Lviv, 79016, Ukraine E-mail: poke_us@axon.partners Web-site: www.axon.partners

In 2015 Ukraine adopted the Law of Ukraine No. 675-VIII On Electronic Commerce in order to catch up with what the market has reached on its own already — it recognized ecommerce as a separate industry, and set out the rules of e-commerce trade, similar to best practices of flagships on this market. Since then, however, little has changed in terms of legislation — it is easy to notice that a more detailed framework should be adopted. For instance, while storing transaction docu-

ments in electronic form, as provided under the E-commerce Law, is very convenient, it may still raise nasty attention from the tax authorities due to the lack of a unified legal framework. Some goods are still not available for sale via the Internet (for instance, medicines). There are, as well, attempts to restrict the sale of consumer electronics by requiring sellers to provide the customer with a sales receipt (which is quite expensive for small sellers to maintain). A similar situation exists in transborder e-commerce — it is likely to grow, unless either (a) the customs exemption for the value of mail up to EUR 150 is lowered or (b) Ukraine adopts Draft Law No. 5419, which provides for national exhaustion of IP rights.

Epilogue

Social networks have become a place where not only entertainment and random chatting takes place, but the world of politics is also formed. Luckily, Ukraine is catching up with this trend as well. So when there are fair concerns regarding state regulations — whether those designed to help business or vice versa — there is a good chance that at least the most ridiculous proposals will not be adopted.

107


Investments

Investments

Andrei KOLUPAEV

Ivan ZIEVAKOV

Partner, Lexwell & Partners

Senior Associate, Lexwell & Partners

n 2016 the same destabilising factors that had had a negative impact on the Ukrainian economy in the previous two years remained in place. Although in general terms the Ukrainian economy adapted to the conditions that emerged in 2014 (due to loss of control over a large area of territory by Ukraine and the related loss of a substantial part of its manufacturing sector), attracting foreign investment and creating favourable conditions for business are of a great importance for the country. It is worth noting that the Ukrainian Government took certain steps toward economic reforms with the aim of improving the investment climate in Ukraine. But the results of these efforts have been quite modest so far. Despite notable improvements in the legal regulation of some industries, the overall situation is rather complicated. The Ease of Doing Business rankings for 2016, according to which Ukraine occupied 80th place among 190 countries (improving its previous result by just three positions), is yet more proof of this. 2016 brought no fundamental changes in the legal regulation of investment activity in Ukraine. Moreover, many of the restrictions that were imposed by the Government in previous years, due to the difficult economic and political situation, were continued for 2017. Thus, for instance, the National Bank of Ukraine, by its Decree No. 410 of 13 December 2016, continued restrictions on the money and foreign exchange markets of Ukraine introduced in 2014-2015. Thus, the requirements for the mandatory sale of 65% of incoming hard currency, a 120-day deadline for payments for exported and imported goods and the ban on early repayment of loans from non-residents etc., remained in place. However, some restrictions were lifted in 2016. For example, since June 2016 the Na-

tional Bank of Ukraine has allowed the purchase and transfer of foreign currency abroad to return dividends on interest/shares for 2014 and 2015 to a foreign investor (though subject to certain conditions to be met simultaneously).

I

108

Abolition of State Registration of Foreign Investments in Ukraine

On 31 May 2016, the Ukrainian Parliament adopted the Law On Amendments to Certain Legislative Acts on Abolition of Mandatory State Registration of Foreign Investments. It is important to note that the basic legal act that defines the legal status of foreign investment in Ukraine is the Law of Ukraine On Foreign Investments (the Law) adopted in 1996. The Law (as further amended) provides for a number of state guarantees and privileges applicable to foreign investments in Ukraine, as follows: i. If there were a change in laws relating to the guarantees for foreign investments protection, the state guarantees provided by the law may be applied in the next 10 years if a foreign investor requested so. ii. Protection against expropriation. Foreign investments in Ukraine shall not be subject to nationalization. Also, foreign investment shall not be requisitioned except for as an emergency measure taken in the event of natural disasters, accidents, epidemics, epizootic situations. iii. Foreign investors have the right to recover damages, including lost profits and moral damage, caused to them due to the actions, omissions or improper performance of their legal duties relating to a foreign investor by public bodies of Ukraine or their officials. Interest is charged from the day when the right to compensation arises to the day of its actual payment on the amount of compen-

sation to be paid to a foreign investor at the LIBOR rate. iv. In the event of termination of investment activity, within six months from the date of termination, a foreign investor has the right to return an investment in kind or in cash in the currency of an investment in the amount of an actual contribution with no requirement to pay any state fee or duty, as well as to the return on these investments in cash or as commodities at their real market price at the date of investment. v. After payment of taxes, duties and other mandatory fees, foreign investors are guaranteed a free and prompt remittance abroad of their profits, revenues and other funds in the foreign currency obtained legally as a result of foreign investment. Regretfully, the Law provided for the state registration of foreign investments under a special procedure. Essentially, the registration was not mandatory as no penalty was provided by the Law in case of failure to register a foreign investment. The Law, however, determined that unregistered foreign investments got no right to the privileges and guarantees stipulated by the Law. Furthermore, even though the procedure for the state registration of foreign investments was not too burdensome, the ambiguity of Ukrainian laws regarding the types and forms of investments often led to a failure to recognize certain types of foreign investment as an investment in terms of the Law and, hence, a denial in their state registration in practice. In addition, there were cases when a foreign investment was excluded from protection with reference to the fact that the investment is not registered. This situation clearly worsened the status of foreign investors and, therefore, the complete abolition of the state registration of foreign investments is certainly a positive step. Moreover, this institution was no good for investors or the country.

Creation of New Support Mechanisms to Boost Investment Activity

In 2016, the Cabinet of Ministers of Ukraine made efforts to create institutional mechanisms that would function within Central Government and promote investment and protect the rights and interests of investors. Thus, several public offices were established that apparently were intended by the Government to facilitate cooperation between the Cabinet of Ministers of Ukraine

WWW.UKRAINIANLAWFIRMS.COM


Lexwell & Partners

L

Address: Sophia Business Centre, 5th Floor, 6 Rylsky Lane, Kyiv, 01001, Ukraine

exwell & Partners is a full-service professional law firm dedicated to providing efficient, innovative and commercially driven legal solutions. The firm has earned an excellent reputation on the Ukrainian legal market among clients and peers. The professional level of Lexwell & Partners as well as the projects in which the firm has been engaged is highly ranked by Ukrainian Law Firms, LexQuorum, The Legal 500, IFLR 1000, Kyiv Post, Yuridicheskaya Practika Weekly, Yurgazeta and others. Since the time the firm was founded and the years afterwards (2005 — 2016), leading Ukrainian legal periodicals listed Lexwell & Partners among the Top 5 Ukrainian law firms ranked by revenue per lawyer. In 2008 the firm took first place in the Ukraine’s largest M&A deal rating (USD 3 billion); in 2009, 2012 and 2016 — in the largest litigation case rating (over USD 1 billion). 20% of the top 10 cross-border M&A trans-

and other public authorities and private investors, especially foreign investors. In particular, a relevant office was established to attract and support investment by Resolution of the Cabinet of Ministers of Ukraine No.740 of 19 September 2016. The Ukraine Investment Promotion Office (the Office) is a temporary advisory body of the Cabinet of Ministers of Ukraine. The Office was established to facilitate interaction with public authorities and municipal bodies in the development and implementation of investment projects where foreign direct investments are involved. The main tasks of the Office is to create a mechanism for preparation and implementation of investment projects on the principle of “a single window”; to promote coordination of Ukrainian public authorities to address issues arising in the implementation of investments in Ukraine; to prepare proposals for the formation and realization of investment potential of Ukraine, support of priority investment projects, improving the investment climate in Ukraine, protection of investors’ rights; to identify ways, mechanisms and methods of solving problems that arise during the implementation of investment projects, etc. When this article was being prepared, the Office had not actually begun to function. So

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 228 6080 E-mail: lexwell@lexwell.com.ua Web-site: www.lexwell.com.ua

actions in Ukraine published by Forbes in 2013 were handled by the lawyers of Lexwell & Partners. In 2014 the firm earned first place among Ukrainian law firms by revenue per lawyer. In 2017 the Tax Office of Ukraine included Lexwell & Partners in the Top 10 list of the largest taxpayers among Ukrainian law firms. Lexwell & Partners key clients are multinational and leading national companies, including ABN Amro, AET, Amstar, ArcelorMittal, Bridgestone, Bunge, Cargill, Chicago Mercantile Exchange, CRH, DuPont, East Metals, Eurobank, Evraz, Honda Trading, ING, Interpipe, Intesa Sanpaolo, Pfizer, PHV (Calvin Klein and Tommy Hilfiger), PwC, Red Bull, Marubeni, Millhouse, Morningstar, Naftogaz Ukrainy (State-owned Oil & Gas Company), Schenker, Sojtz, Subaru, Sumitomo, Suzuki, Toyota, VS Energy. The firm also advised the Government, the Office of the President and the Ministry of Justice of Ukraine.

it is too early to gauge its effectiveness. However, given that the Office is empowered to review applications of foreign investors for their support in investment in Ukraine and provide such support, it could potentially make a positive contribution and assist foreign investors in investing in Ukraine. The Cabinet of Ministers of Ukraine approved the Regulations on the Government Agent for Investments by its Resolution No. 647 of 8 August 2016. The Government Agent for Investments (the Government Agent) is an official who is authorized by the Cabinet of Ministers of Ukraine entrusted to coordinate the Office’s functioning, perform tasks to promote the development and implementation of the investment potential of Ukraine, increase foreign investment, support priority investment projects, improve the investment climate in the country, protect investors’ rights, and ensure interaction between investors, relevant bodies of foreign states, international organizations on attracting investment with public authorities and municipal bodies in Ukraine. The Government Agent is directly subordinated to the Cabinet of Ministers of Ukraine. The main duties of the Government Agent Office are to coordinate the Office’s

functioning, prepare proposals on the development and implementation of the investment potential of Ukraine, support priority investment projects, improve the investment climate in Ukraine and to protect investors’ rights. Therefore, the Government Agent is meant by the Government to be an important link between investors and the Cabinet of Ministers of Ukraine. The Reform Office was created by Resolution of the Cabinet of Ministers of Ukraine No.768 of 11 October 2016. The Reform Office is a permanent advisory body of the Cabinet of Ministers of Ukraine formed to ensure coordination and implementation of reforms at the proper level, including planning of necessary measures, monitoring and analysing their performance. The main tasks of the Reform Office are to ensure the proper level of organization and coordination of reforms; to prepare proposals for an action plan of reforms for the year in question and mechanisms for implementing such reforms; to monitor the status of performance of tasks listed in the action plan by central authorities; to analyze the results of performance of tasks listed in the action plan. The Central Reform Office will interact with regional offices which will open in all 24 regions of Ukraine.

109


IT Law

All Goes Tech. The End of the IT Law Era I formed some examples of the most interesting trends in new segments of technologies that give rise to some peculiar issues.

FINTECH

Artem AFIAN Managing Partner, Juscutum Attorneys Association. Artem is actively involved in developing innovative law practice areas (legal security for business and IT-law). Attorney-at-law, member of the World IT Lawyers Association (Zurich, Switzerland)

I

T Law no longer exists. The world is changing very fast. Only a couple years ago lots of articles appeared saying that the new legal practice has come. I personally compared the IT Law with a sleeping dragon in 2012. Now I see that the field of practice so much talked about is flying away. There are no technologies just for the sake of technologies. Technologies have now penetrated into various fields of life to such an extent that they gave birth to new forms of social relationships, competences and jobs. The law fell apart right after the technologies. IT lawyers are still leading in technologies adoption support. However, this process has its flip side. Everyone tries to become an IT lawyer. It’s hard to work in any field and not to face the issue of technologies at least once. It is very careless for a lawyer not to know the legal status of a code. A lawyer may face these issues in the field of an agricultural holding company, in a drug store auxiliary or even in the middle of a divorce case. Lawyers cannot hide from technologies. If you are a lawyer and you have a smartphone, it means that you already know a few things about tech. And as IT Law penetrates into every field, the need for IT lawyers per se disappears. The “Confident computer user” characteristic is gradually vanishing from modern CVs and, in the same way, IT law becomes an obvious competence of a modern-day lawyer.

110

FINTECH is the oldest field. It is probably the ground zero of technologies. It is the veteran of tech-trends. There are conferences on it, plenty of start-up companies appear and serious financial institutions allocate considerable budgets for exploration of the fintech field. It all started with quite harmless cryptocurrencies and evolved into technologies for making payments. But fintech lives not only on transactions. The idea of financial credit documents and derivative financial instruments based on cryptotechnologies is gradually finding its way into it. Now affordable is starting to push aside classical ICO and elite IPO. There is no sense in reviewing fintech as a whole, so here I will name just a couple of initiatives in this field that I find rather interesting. Neat — mobile banking that provides various technological solutions as its feature: — Biometric identity verification — facial recognition system (it’s enough to make a selfie with your smartphone to enter a personal account); — The company has plans for applying artificial intelligence to processing the personal information of users. The application will evaluate various patterns of client behaviour and their geographical location and make personalized offers based on this information. — Monetizing — cooperation with various brands is planned by providing them with information about the target audience. Currency Cloud offers cross-border money transfers that are faster and cheaper than those that the banks offer, plus it offers a special software-application interface that can be built into the client’s websites, TCC Connect API (after the interface is built into a website, the company can receive payments or (if it is a bank) provide money transfer itself). Last year Sapphire Ventures and Rakuten, a Japanese e-commerce giant, invested USD 18 billion in Currency Cloud. Banking and finance lawyers were the first lawyers to feel fintech’s influence. It was sufficient to master the basics of national regulations before, but now it has become necessary to get familiar with different juris-

dictions, their rules and also with the peculiar workings of process solutions. The technologies don’t care about state borders, they disdain conventional expertise of lawyers and make them retrain as specialists in international law with a basic technical education.

Medtech

Health is the most valuable asset. It is the first thing to wish a person, and the rest will follow, as we say in Ukraine. The technologies have now followed and the result is medtech. In fact, the pharmaceutical industry has always been technologically advanced. But now it is a question not of drug production but of medical services. The following companies can be singled out here: — Patients know best — the platform that keeps all medical charts in the cloud and is controlled only by patients. By using it a patient can show a doctor his/her complete medical records and, as the result, it promotes individual attention to healthcare. — Zipline — drones that deliver donor blood and drugs to remote geographical areas. It works as any drone delivery. — UMoove — software that allows any front camera device to watch its owner face and eyes. There are some neurological disorders that can be diagnosed via eye movement, so uMoove can turn many mobile devices, laptops and even video game consoles, into diagnostic devices. — Tech Tats uses electroconductive ink to connect sensing devices that are pressed to the skin and monitor the vitals of an organism, which may include temperature, heart rate, etc. It’s a fitness tracker and a tattoo all in one. Over time any information can be added, such as credit card number, social insurance number, etc. Actually, if you used any fitness tracker or filled in a form in some health application on your smartphone, you have already used medtech. Its most ambitious tasks lie in the field of patients’ personal data, medical malpractices and responsibility for the functioning of software. All in all, medtech gives lawyers a lot of headaches.

Sextech

The sex industry has a turnover running into billions of dollars. It’s understandable that the technologies went after the money and lawyers followed. The industry is always teetering on the edge of criminal activity: what

WWW.UKRAINIANLAWFIRMS.COM


Juscutum

J

Address: 27A Taras Shevchenko Boulevard, Kyiv, 01032, Ukraine,

uscutum is the first Ukrainian law firm to consider law as an instrument in building special relationships of clients in society. From the position of legal advisors, the company’s team has transformed itself into legal engineers to provide the market with new grade solutions. The company operates in such areas as corporate, tax, IT and media law, international business administration, white collar crime and conflict management.

should and should not be allowed, the dissemination of pornography, nests of vice, rules for AppStore in case of mobile applications. Only just recently the Svakom Siime Eye IoT vibrator was hacked (deliberately, for the sake of research). It has a camera on its tip enabling transfer of images to a computer, smartphone or tablet in real time via Wi-Fi. An interesting case happened in Geneva: the Fellatio café opened offering oral sex services performed by a robot alongside coffee. Sex work by a robot is legal but Swiss laws forbid combining it with food services. OhMiBod Remote service for remote masturbation manipulations enjoyed success on Indiegogo in 2014, and it now offers a set of sex toys that can be controlled via a smartphone application (for example, a vibrator for a female partner). Pure is a dating service, an application for iOS and Android for searching sexual partners “here and now” anonymously (according to the developers, it should be similar to calling a taxi online). The most interesting cases in this industry are related to legislation on the safeguarding of morality. They are especially interesting in the face of the cross-border possibilities of technologies. Access to these services, [using] robots as the subjects of sex services and “assisting in debauchery” — all this stands on a fine line with criminal acts that lawyers try to save sex innovators from.

Fashiontech

Technologies are in fashion now. Therefore, it’s quite consistent for the fashion in-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 223 3847 E-mail: office@juscutum.com Web-site: www.juscutum.com

In 2016, Juscutum occupied the leading position in the field of Ukrainian Technology. Media. Telecommunications following several ratings. Furthermore, Juscutum is the first company in Ukraine to develop a robot lawyer engaged in the business registration procedure instead of a person and released the first mobile application in the field of legal services in Ukraine, which is called Juscutum Legal Alarm.

dustry to turn its attention to them. There are various fashiontech start-ups (mostly online shops with user-friendly features). I’d like to place greater focus of the following two. 1) Fits.me uses information about a client’s body and creates a 3D model of it to try clothes on online. The reviews of the project state that the clients were asked to send their photos during testing for better understanding of every client’s specific body type. A real world dummy has also been created that can be changed according to set parameters, which is a convenient solution for design companies. It is a robot that can make chest or shoulders broader or narrower, or make legs longer, etc. 2) EDITED is basically big data for the fashion industry. They create scanners of brands’ websites all over the world using machine learning and image recognition technologies, and create a huge databank. For example, you can drag the mouse over a dress and learn what shops and regions have it, in what size or colour etc., as the system already contains more than 330 million items of 90,000 trading brands all over the world. It is mostly used by the brands (such as GAP, ASOS and Target) themselves in order to keep track of their own products promotion and that of their competitors. The main legal problem here is whether such a grand scale collection of information about goods of all these trade marks is legitimate. And, of course, there are still standard issues of legal backing for fashion projects.

There are several basic legal points that are to some extent present in all the startups mentioned: — personal data gathering, its storage/ distribution/other use — the technologies make gathering a huge amount of information about users/companies possible, plus it’s often necessary for the realization of the idea itself; the problem of security and privacy of such data is of great concern for a lawyer; — AI responsibility — lots of projects use robots/other forms of AI performing certain actions in one way or another; this is both a legal challenge and opportunity at the same time; — intellectual property issues as now they are basically a sort of weapon in the competitive fight for the market between companies; There are lots of interesting technological solutions that simply can’t fit in the size of this article. Basically, you can take any word, add “tech” to it and with great probability you will have a real field. However, even this situation is temporary. Fusion with technologies is to become so obvious and mundane soon that there will be no need to specify the technology. A smartphone is now called just a phone because simple phones have almost disappeared, and you would probably be more specific talking about a push-button telephone to be understood by the person you are talking to. This trend is neither good nor bad for lawyers. It is a fact and it reminds us that lawyers should also change by following the world around. It is very unwise to remain constant in the modern-day world.

111


Labor & Employment

Dismissing Top Managers in Ukraine: Risks and Options New Category of Labor Disputes

Serhiy SILCHENKO ILF Partner, Head of UBA Committee on Labor Law

I

n 25 years of independence Ukraine has been unable to change labor legislation in any significant way. The current Labor Code was adopted on 10 December 1971, with the adoption of a new one getting postponed time and again. So in the meantime labor law must advance one change at a time. It is an important issue for any company to be able to shuffle top management. It matters both to business owners that determine a company’s business strategy, as well as to executive managers that seek self-fulfillment. And while a manager, as an employee, can simply choose to resign voluntarily, a mere desire was not enough for employers to dismiss a manager at any time. To do this, they required a valid reason, expressly provided by the law. On 13 May 2014 Parliament adopted the Law of Ukraine On Amendments to Several Legislative Acts of Ukraine Regarding the Protection of Rights of Investors, adding section 5 to Article 41 of the Labor Code which provided new grounds for terminating labor contracts — termination of office for officers. Such dismissal is allowed at any time with no justification required and with severance pay of at least six monthly salaries for the dismissed person. This option makes it easier to dismiss hired administrators and key managers, since before this process was as tricky as with any other employee. Employers used to be able to fire an officer only on the grounds established by law or a contract.

112

The Act brought about a new kind of labor dispute concerning reinstatement of officers dismissed on the grounds of section 5, Article 41 of the Labor Code. No consistent legal practice has been formed regarding those during the last two years due to the following reasons. Firstly, the Labor Code doesn’t clearly define which employees are considered “officers”. Secondly, the companies and organizations whose officers can be dismissed on the grounds of termination of office also remain unspecified. Aside from business entities and private companies, there are still a considerable number of public and municipal enterprises in Ukraine whose directors are no different from the administrators of business entities. After analyzing legal precedents and interpretations of certain public authorities, we can draw a couple of conclusions on the practical applications of section 5, Article 41 of the Labor Code. First of all, let us define the circle of officers that can be dismissed on the pretext of termination of office. In accordance with Part 1, Article 89 of the Commercial Code of Ukraine, a business entity is governed by its bodies and officers, whose membership and election or appointment procedures are determined based on the type of business entity that it is. According to part 2, Article 23 of the Law of Ukraine On Business Entities, officers of a business entity are individuals — the head and members of the executive body and audit committee, the internal auditor, as well as the head and members of other bodies in charge of the business entity, as long as such bodies are permitted by the entity’s constituent documents. A similar norm is provided for by section 15, part 1, Article 2 of the Law of Ukraine On Joint-Stock Companies. In missive No. 1332-0-26-13/11 of 22 February 2013 the Ministry of Justice of Ukraine points out that in order to define the concept of officers, we must take into account the legal practice, which cites organization and management duties as the main criteria of an officer. The State Labor Inspection of Ukraine in its clarification The Category of Officers in La-

bor Law of 24 July 2014 states that labor legislation has no concept of officers. Therefore, this category can include not only managers of business entities, but also state and municipal officials, administrators of state, municipal and private companies, institutions and organizations, their deputies, department heads and their deputies, as well as persons managing individual areas of work. An officer wields a certain degree of administrative authority and can make legal decisions, for instance, to hire and dismiss employees, take disciplinary actions, issue compulsory orders, etc. Since the law does not clearly define which companies have the right to use termination of office as grounds for dismissal, a number of legal precedents have arisen in the last two years. Thus, the High Specialized Court of Ukraine for Civil and Criminal Cases, v serving as a cassation court, on several occasions supported the use of termination of office as grounds for the dismissal of officers working at business entities. Referring to both the spirit and the letter of the Law On Amendments to Several Legislative Acts of Ukraine Regarding the Protection of Rights of Investors, the courts note the impossibility of using Section 5, Article 41 of the Labor Code for officers of public and municipal institutions and enterprises that are not business entities.

Dismissal Process for Top Management: Rules and Mistakes

The next condition of the legality of such dismissal is observance of the proper procedure. The management body of a business entity must decide on the termination of office and subsequent dismissal (as a personnel decision), while the employee without fail receives severance pay. It is important to note that such dismissal is prohibited when the employee is on sick leave or vacation. In addition, labor contracts with pregnant women, mothers of children younger than 3 years old, single mothers with children younger than 14 or handicapped children cannot be terminated either. In practice, employers often choose to ignore their managers’ voluntary resigna-

WWW.UKRAINIANLAWFIRMS.COM


ILF (Inyurpolis Law Firm)

I

Address: 22 Shovkovychna Street, Kyiv, 01024, Ukraine

LF (Inyurpolis Law Firm) is an independent Ukrainian law firm with a core focus on litigation and business support (business setup, transactional support, regular advisory support). The firm operates on the market for 23 years through its two offices located in major cities of Ukraine — Kyiv and Kharkiv. Among ILF’s strong points is the ability to follow up on court decisions and get tangible results. This is due to years of experience dealing with debt recovery for banks and insurance companies (USD 500 million recovered in 2007-2015) as well as deposit recovery from liquidated banks for companies and individuals. We carry out business support through our commercial, corporate, M&A, tax and other teams, that follow an industryminded approach. The diverse expertise of the team ranges from business structuring and high-profile contracts to corporate acquisitions and asset deals. We’re known for our successful business structuring record in the IT sector, support of sophisticated technology contracts, and public private partnership (PPP) work in the field of healthcare and pharmacy. We help our foreign clients get clear understanding of Ukrainian business environment, based on our knowledge and experience in medicine and pharmacy, agribusiness and alternative energy, IT, banking and finance. Among our regular clients are Avon Products, Volvo, BASF Ukraine, Malteurop Group, Ecostar/DISH, SPS Commerce, EGGER and Amcor Tobacco Packaging.

tion applications. According to Article 38 of Labor Code, employees can resign if they notify their employer in writing two weeks in advance. However, sometimes business owners might not or would not hold a meeting to decide on the matter. As a result, the manager is unable to get another job and, what is more important, remains responsible to the state authorities for the company. This is essentially forced labor, which is forbidden by Article 43 of the Constitution of Ukraine.

Managers Forever: When Employers Ignore your Resignation

The problem can be solved with a lawsuit demanding termination of the labor contract.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 7777 Fax: +380 44  253 4549 E-mail: office@ilf-ua.com Web-site: www.ilf-ua.com

Our industry-oriented approach allows us to find legal solutions for business as well as manage projects dealing with institutional changes. In 2016 ILF lawyers working together with the expert team of the Ministry of Healthcare and backed by the World Bank and UNICEF designed legislation on primary healthcare reform. In addition, ILF is supervising a reform-pilot project in Kharkiv Region city of Chuguyev. The ILF team includes 50 highly qualified lawyers, attorneys, tax, investment and business consultants. Reputation For six consecutive years ILF is in TOP-15 law firms in the national rating 50 Leading Law Firms of Ukraine in 2016 by Yuridicheskaya Practika Weekly. “Ukrainian Law Firms. A Handbook for Foreign Clients 2016” named ILF as one of the leaders of the Ukrainian legal market and places the firm’s partners among key experts in their respective fields of expertise: litigation, medicine and pharmacy, IT and labor law. In 2016 ILF was named number one in healthcare and pharmacy (Legal Awards 2016 by Yuridicheskaya Practika Publishing). Areas of practice Corporate law and M&A, land and real estate, public-private partnerships and privatization, labor & employment, intellectual property, tax law, criminal defense, debt recovery, bankruptcy, family disputes.

In accordance with Article 38 of the Labor Code, the employee must first submit a written notice on voluntary resignation to the employer and await a reply for 14 calendar days. If the employer doesn’t come to a decision during that time, the matter can be taken to court. If the court rules in favor of the employee, the ruling will affirm the cessation of labor relations. The court will also terminate the labor contract, which will allow the employee to legally look for a new job. Another thing to note — the court decision on terminating the labor contract with the employer is insufficient ground for the State Registrar to register the change in the company’s management in the Unified State

Register of Legal Entities, Individual Entrepreneurs and Public Associations. According to Article 25 of the Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Public Associations, the former manager must present the suit to the State Registrar with a request to enter the change of management in the Unified State Register. Since managers often encounter similar problems when quitting, it would be easy to rectify the situation with a change to the Law of Ukraine On State Registration of Legal Entities, Individual Entrepreneurs and Public Associations that would make the court decision on terminating the labor contract sufficient for removing the entry regarding the former manager from the Unified State Register.

113


Land

Legal Developments in Land Law for 2016

Bate C. TOMS

Adriana KRYVESHKO

Managing Partner, B.C.Toms & Co. Legal education: Yale Law School (J.D., 1975); Magdalene College, Cambridge University (Law Tripos I; 1972-1973). Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in France. Chairman, British Ukrainian Chamber of Commerce

Junior Associate, B. C. Toms & Co. Legal education: National University of “Kyiv-Mohyla Academy”, Bachelor of Law (2016)

Registration of Land

On 6 October 2016, the Law On Amendments to Some Legislative Acts of Ukraine Concerning Improvement of the State Registration of Rights to Immovable Property and Property Rights, No.1666-VIII, was adopted. Under this statute, the state registration of property rights by a notary should now be conducted only within the region (being regions as well as the cities of Kyiv and Sevastopol and the Autonomous Republic of Crimea) where the applicant is located. The limited territorial jurisdiction of the authorities responsible for state registrations is not applicable when the documents are submitted in electronic form, in which case the state registration can be performed regardless of the location of the applicant individual or the legal entity within Ukraine.

The Royalty for Subsoil Use

The Law On Amendments to the Tax Code of Ukraine for Balanced Budget Revenue in 2017, No.5132, was adopted on 20 December 2016. This Law, which came into force on 1 January 2017, changed the royalty rates for certain categories of subsoil use. Specifically, the rate of the royalty fee for oil extracted from fields that fully or partially lie at a depth beyond 5,000 meters is 29 % (previously 45%). Presently the Tax Code of Ukraine Provides for the following royalty rates for production of hydrocarbons:

114

(i) for extraction of natural gas (of any origin): — 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters; — 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters; (ii) for extraction of oil: — 29% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth beyond 5,000 meters; — 14% of the tax assessment base applicable for the extraction from deposits fully or partially lying at a depth below 5,000 meters.

Land Auctions

Another notable development is the introduction of the requirement that particular transactions with state-owned and community-owned land can be done only on a competitive basis using auctions. On 18 February 2016, the Law On Amendments to the Land Code of Ukraine on the Operation of Land Auctions, No. 1012-VIII, was adopted, which imposes a prohibition on the transfer of the right to use particular types of stateowned and community-owned land without conducting an auction. Among the particular transactions that cannot be performed without an auction, the following may be relevant for business:

— granting state-owned and community-owned land to Ukrainian residents for the purpose of conducting farming, private agrarian household, gardening, construction and maintenance of a residential building, commercial buildings and other constructions (including garden plots attached to a residential building), private gardening construction and construction of private sheds; and — use of land for conducting concession activities. In addition, this statute amends the procedure for land auctions, requiring them to be conducted under contracts between the organizers of auctions (owner of a land plot) and the auctioneers (a legal entity who undertakes to organize and run an auction as a contractor), with all costs borne by the organizer of the auction, or the auctioneer, as provided by their contract, with further compensation being payable by the winner of the auction.

Land Lease Agreements

The Model Land Lease’s terms were modified on 23 November 2016 in order to reflect the Law of Ukraine No. 191-VIII, of 12 February 2015, On Introducing Changes to Certain Legislative Acts of Ukraine Regarding the Simplification of the Conditions for Conducting Business (Deregulation) (the Deregulation Law), that entered into force on 5 April 2015, and restated parts of Law of Ukraine No. 161-XIV, of 6 October 1998, On the Land Lease, by reducing the number of mandatory terms for land lease agreements. In particular, the Model Land Lease terms were amended so that: — the subject of the agreement should include the cadastral number of the land plot (previously only the designated use and location of a land plot were required); — the nominal monetary value of the land should be specified as of the date of the land lease agreement; — point 8 of the Model Land Lease Agreement provides for the following minimum durations for land leases: (1) 7 years — for an agricultural land lease; (2) 30 years — for a state or municipal land lease for the purposes of the creation of an industrial park; and (3) 10 years — for an agricultural land lease for land plots that have been reclaimed and/or where reclamation is in progress; — the lease payment is subject to periodical review to reflect changes in the nomi-

WWW.UKRAINIANLAWFIRMS.COM


B.C. Toms & Co

B.

Address: 18/1 Prorizna Street, Suite 1, Kyiv, 01001, Ukraine

C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kyiv office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine. The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.

The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective. B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts.

nal monetary value of state and municipal land; — the reservation that the agreement comes into effect upon its state registration has been removed from the Model Land Lease terms. Instead, a land lease agreement should stipulate that it comes into force upon its execution by the parties or, alternatively, upon its notarization, should the contracting parties chose to have the agreement notarized; and — the land lease agreement must be executed in only two copies (previously a third copy was required for the state registration office).

national Monetary Fund (the Memoranda) of 27 February 2015, 21 July 2015 and 1 September 2016. Under the Memoranda, Ukraine undertakes to pass a suitable law before the end of May 2017 and to cancel the moratorium on the sale of private and state-owned agricultural land starting from the end of 2017. A working group has been organized in cooperation with the World Bank to develop the relevant draft law. However, this agreed schedule has already been missed, as the cited 31 May 2017 deadline was not met. What will actually happen remains somewhat unpredictable, as ending the moratorium is politically controversial.

The Moratorium on the Sale and Disposal of Agricultural Land has been Extended

Solution to the “Dead Soul” Land Problem

The Resolution of the long-standing issue on the sale of agricultural land has been postponed again. On 6 October 2016, the Law of Ukraine On Amendments to Chapter X “Transitional Provisions” of the Land Code of Ukraine Concerning the Extension of the Prohibition to Dispose of Agricultural Land, No. 1669-VIII, was adopted, which extended the moratorium on the sale or other disposal of agricultural land until 1 January 2018. It is presently anticipated that the extension of this moratorium will end this year after the Parliament of Ukraine provides for the better legal regulation of the transfer of agricultural land. Parliament is expected to adopt a new law on the transfer of agricultural land, as required by the Memoranda between Ukraine and the Inter-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 6000, 278 1000 E-mail: kyiv@bctoms.net Web-site: www.bctoms.net

Previously an estimated 1.5 to 2 million hectares of agricultural land in Ukraine belonged to the category of so-called “dead souls” land, where the owners had died and no recognized heirs were found. The relevant territorial community had an obligation to establish its ownership over such land plots, but this involved very time-consuming court proceedings, as the procedure for such proceedings was rather complicated, so the territorial communities were often unable to establish their ownership in practice. In response to this situation, the Law On Introducing Changes to Certain Legislative Acts of Ukraine Regarding the Legal Fate of Land Plots, the Owners of which Have Died”, No. 1533-VIII (the Law On “Dead Soul” Land Plots), was adopted on 20 September 2016. Below are some principal amendments:

(i) The Land Code of Ukraine is supplemented with a provision that the territorial community acquires a land plot in communal ownership in case of its being recognized as being “dead soul” land by a court. The territorial community can then lease such land; (ii) An application to a court for recognition of the land plot as being “dead soul” land can be made not only by the local council of the territorial community, but also by any creditor of the deceased owner(s), and for agricultural land, by the owners or users of any of the neighboring land plots; (iii) The territorial community of the place where the land plot is located shall be considered to be the landlord of the land plot in case of the absence of heir(s) by will and by law, the cancellation of their inheritance right, the rejection of their inheritance or the refusal of its acceptance after the expiration of six months from the date of the opening of the time period for an inheritance claim to be made; (iv) After the death of an agricultural land plot’s owner, the local council of the territorial community of the place where the land plot is located can lease it during an interim period, until either (i) the heir(s) shows up and completes the state registration of his, her or their ownership rights to this land plot, or (ii) a court decision recognizes this land as being a “dead soul” land plot, what should be clearly stipulated in such lease agreement. The Law On “Dead Soul” Land Plots only applies to land lease agreements concluded after the date of its adoption.

115


Litigation

Overview of the Judicial System of Ukraine: Global Changes

Andrey KUZNETSOV

Alexandra FEDORENKO

Partner, ANTIKA Law Firm

Senior Associate, ANTIKA Law Firm

he principles of seeing that justice is done are declared in the Constitution of Ukraine. The main principles include: implementation of justice exclusively by courts of law (the courts are unable to transfer their functions as well as other authorities or officials are unable to appropriate them); the court jurisdiction is spread to all legal relations that appear in the state; court decisions are binding throughout the territory of Ukraine. Today, Ukraine is experiencing global judicial reform, the main aim of which is to fight corruption in the judicial system and to establish truly independent judicial power. The new Law of Ukraine On the Judicial System and Status of Judges in a different way determines the system of courts. Thus, justice in Ukraine is performed exclusively by the courts. The courts specialize in considering civil, criminal, economic, administrative cases as well as cases on administrative offenses. The system of courts includes district courts, district economic courts, district administrative courts as well as other courts stipulated by procedural law. The highest court in the court system of Ukraine is the Supreme Court. The consideration of a certain case by this or that court depends on the subject matter and the nature of the dispute and is, first and foremost, regulated by the respective procedural codes (the Civil Procedure Code of Ukraine (2004), the Economic Procedure Code of Ukraine (1991), the Code of Administrative Court Procedure of Ukraine (2005), the Code

on Administrative Offences of Ukraine (1984), the Criminal Procedure Code of Ukraine (2012) and by some Laws of Ukraine (On Constitutional Court of Ukraine (1996), On Restoring Debtor Solvency or Declaring a Debtor Bankrupt (1992), the Tax Code of Ukraine (2010) etc.). If a dispute arises between business entities and concerns their business activity, the case should be considered by economic courts. Thus, economic courts shall consider disputes that arise while concluding, amending, terminating and executing economic agreements, cases related to bankruptcy, registration of rights on securities, cases that appear from corporate relations (even if the participant of the dispute is an individual), disputes that appear from land relations, cases on economic competition protection and other cases if their consideration does not refer directly to the competency of other courts or their consideration has not been excluded from the jurisdiction of economic courts by procedural law. Not long ago a new category of cases in economic proceedings, namely, cases on disputes between business entity and its official (including an official whose powers have been terminated) on compensation of damages caused by such official to the business entity and his/her actions or lack of actions, appeared. The person shall apply to protect his/her violated rights to the district administrative courts, if the rights of the individual or legal entity were violated by a public body during the performance of management functions. The district administrative courts shall also

T

116

consider cases when a public body applies with a claim to an individual or business entity and the dispute is of a public nature. Administrative cases include disputes with fiscal bodies while challenging tax noticesdecisions by taxpayers, disputes related to designation, charging and paying social benefits, disputes related to challenging decisions, disputes on actions or lack of actions by local councils on the allocating of land plots to individuals or legal entities, disputes on legal relations related to the election or referendum, cases on decisions on actions or lack of actions of a private executive related to execution of decisions of the authorities (officials), except for court decisions. Procedural law stipulates certain restrictions on resolving disputes by administrative courts and their settlement refers to the competence of other courts. Thus, the jurisdiction of administrative courts does not include public cases that refer to the jurisdiction of the Constitutional Court of Ukraine, public cases that are supposed to be settled through the criminal proceedings procedure, public cases on imposing administrative fees, public cases on relations of the citizens group that according to the law, statute (provisions) refer to their activity or exclusive competence. District courts consider all other cases if one of the parties of the dispute is an individual as well as cases, the consideration of which, is not referred by the law to the competence of other courts. The courts of general jurisdiction shall consider cases that appear from civil, housing, land, family, labor relations, cases related to identification of legal facts, cases on recognition and enforcing decisions of international courts, etc. The system of courts of general jurisdiction is the most ramified (these courts are established in regions, cities, districts of cities). Taking this fact into account, some cases of administrative jurisdiction are considered by courts of general jurisdiction as administrative courts of first instance. Such an approach is considered to be sound because the competence of district administrative courts covers regions and, as a rule, they are located in regional centres. The court of constitutional jurisdiction is the Constitutional Court of Ukraine, an in-

WWW.UKRAINIANLAWFIRMS.COM


ANTIKA

A

Address: 12 Khreschatyk Street, 2nd Floor, Kyiv, 01001, Ukraine

NTIKA was established in 2010. Since its formation, the firm has built a strong reputation as an independent law firm and continues to grow on the Ukrainian legal services market. According to the results of research of the legal services market undertaken by reputable international and Ukrainian guides to legal profession like The Legal 500 EMEA, Chambers Europe, IFLR1000 Energy and Infrastructure, Best Lawyers, Ukrainian Law Firms, A Handbook for Foreign Clients, Top 50 Law Firms of Ukraine, Client Choice. The Top-100 Best Lawyers in Ukraine, the firm has been recommended in antitrust, dispute resolution, corporate / M&A, banking, finance and capital markets, real estate, land, energy, subsoil use, energy efficiency and energy saving. The firm received the Legal Award 2012 in the nomination Law Firm — Breakthrough of the Year. The firm is a finalist of the Legal Awards 2013 in the field of Antitrust, Litigation and Real Estate, in 2014-2016 — in the field of Energy. ANTIKA’s team includes 15 lawyers, who have significant experience of various legal practices and provide a full range of legal services to national and international companies that do business in Ukraine, as well as abroad in the following fields: telecommunications, heavy machinery, chemical and food industries, automotive, complex develop-

dependent institution that differs completely from the other court system. First of all, the Constitutional Court of Ukraine is aimed at providing compliance with laws, other regulations of legislative and executive power, protection of constitutional rights and freedoms of the individual. Due to judicial reform that has been implemented the powers of the Constitutional Court of Ukraine do not include interpretation of laws. Although in the past a lot of disputed issues appeared while the application of law used to be considered through the Constitutional Court of Ukraine providing their official interpretation. The new Law of Ukraine On the Judicial System and Status of Judges liquidation of stipulates the higher specialized courts and the new structure of the Supreme Court as a unified court of cassation instance. A new Supreme Court of Ukraine, the selection of judges of which shall be performed through competition, should be formed by 30 March 2017. The competition between the judges to the Supreme Court of Ukraine shall be held by 30 November. Thus, a three-tier court system functions in Ukraine. It includes local courts, courts of appeal and the Supreme Court of Ukraine, that shall perform the cassation function. Local courts of first instance are the most widespread. Courts of first instance consider

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 0920 Fax: +380 44 390 0921 E-mail: office@antikalaw.com.ua Web-site: www.antikalaw.com.ua

ment, construction and real estate, subsoil use, wholesale and retail, media and sports, banks and financial services market, energy efficiency and energy conservation. The firm’s key practices include antitrust, litigation and arbitration, corporate, construction and real estate, subsoil use, energy and energy efficiency, legal expertise. The firm’s main principles are the provision of high quality and timely legal services, strict confidentiality and a bespoke approach to every client’s project. The following are representative clients: AWT Bavaria, ArcelorMittal Kriviy Rih, Cadogan Petroleum, Cargill, Chernomorneftegaz, Deposit Guarantee Fund, Enesa a.s., Esan Eczacıbaşı Industrial Raw Materials, Energobank, FC Dnipro, Ghelamco, Heitman, Henkel Ukraine, Henkel Bautechnik Ukraine, Ibis Group of Companies, Imperial Tobacco, International Resources Group, Lantmannen Axa, MF Telecom, Nadra Ukrayiny, Nasosenergomash, ViDi Group, Ukrnafta. The firm also advises the World Bank, EBRD, USAID, TACIS, UNDP, KfW, NEFCO on energy efficiency, utility and the implementation of other projects in Ukraine. ANTIKA is a member of the Ukrainian Chamber of Commerce and Industry, the American Chamber of Commerce in Ukraine, the Canada-Ukraine Chamber of Commerce, the European Business Association, and the International Turkish-Ukrainian Businessmen Association.

cases on their merits. Due to this fact, they enjoy the right to determine actual facts of a case through evaluation of evidence collected on its inner conviction. The decisions of local courts, as a rule, enter into force after the term for their appeal is terminated or after this case is reconsidered by the court of appeal, if it is not cancelled or changed as a result of such reconsideration. Courts of second instance are courts of appeal. The powers of courts of appeal depend on their specialization and the category of the case. According to the general rule, courts of appeal consider a case in a new way and are empowered to examine evidence as well as to accept new ones if they has not been provided by the party to the court of first instance due to valid reasons. The decision of a court of appeal enters into force from the moment of its announcement. The last and the highest instance in the court system is the Supreme Court of Ukraine. It enjoys the right to consider court decisions through the cassation procedure. The following courts act within the Supreme Court of Ukraine: the Grand Chamber of the Supreme Court of Ukraine, the Administrative Cassation Court, the Commercial Cassation Court, the Criminal Cassation Court, the Civil Cassation Court. Each cassation court is allowed to establish the court chambers to consider cases

of certain categories taking into account the specialization of judges. The number and the specialization of court chambers shall be determined by the decision of the meeting of judges of a cassation court taking into account the procedure stipulated by law. However, the establishing of separate court chambers is compulsory: 1) in the Administrative Cassation Court to consider cases related to tax, fees and other mandatory payments; social benefits protection; elections and referendum as well as protection of the political rights of citizens; 2) in the Commercial Cassation Court to consider cases related to bankruptcy; protection of intellectual property rights as well as rights related to antitrust and competition law; corporate disputes, corporate rights and securities. The Grand Chamber of the Supreme Court of Ukraine is empowered as follows: in cases stipulated by the law it acts with the aim of providing similar legal provisions application by cassation courts; acts as a court of appeal in cases considered by the Supreme Court of Ukraine as a court of first instance; analyzes the legal statistics and studies court practice, performs generalization of court practice. The Law also provides establishment of the Higher Anti-Corruption Court, the Higher Court on Intellectual Property. These courts are courts of the first instance.

117


Marine Insurance

Personal Injury Claims and Loss of Life Compensation within P&I Insurance

Artyom VOLKOV Head of Maritime Law Practice, ANK Law Office, Attorney-at-law

O

nce every five years BIMCO, together with the International Chamber of Shipping, conducts the most comprehensive assessment of global supply of and demand for seafarers. Last year BIMCO and ICS published the Manpower Report illustrating the current worldwide situation and trends on the market for 2010-2015. According to the Manpower Report, Ukraine occupied 6th place among states of seamen suppliers and delivered to the world labor market 39,000 officers and 30,000 ratings, which is 4.18% of the total. These statistics cannot help but be reflected on the quantity of insurance events occurred with Ukrainian seamen working under foreign flags.

P&I Insurance and MLC Convention 2006

All risks connected with personal injury, permanent or temporary disability or loss of life by the seaman on board are traditionally covered by the protection and indemnity insurance more commonly known as “P&I”. According to Directive No. 2009/20/EC on the Insurance of Shipowners for Maritime Claims, any vessel calling EU port or entering the waters of EU shall have valid P&I coverage. Foreign vessels, which do not comply with the Directive, may be refused on entering into any EU port. Besides, the MLC Convention requires from shipowners the arranging of due insurance of seafarers in case of injury, illness or death during their employment. Although Ukraine has not ratified the MLC Convention yet, these provisions have high importance

118

both for Ukrainian seamen and Ukrainian shipowners operating the vessels through offshore companies registered in the states, which have ratified the MLC Convention. As ANK experience shows, typically the conflicts between seafarers and the shipowners arise in the process of payment of compensation caused by permanent or temporary disability received due to injury or accident on board the vessel. A separate group is formed by the claims related to payment of compensations for the death of a seafarer during the employment period or due to being missing at sea. What should shipowners and P&I clubs be aware of during the resolution of these conflicts?

Foreign Law and Ukrainian Courts

Many employment contracts have reference to foreign law. Some shipowners and crewing managers include into the contract of employment an arbitration clause, upon which any disputes that arise out of the employment contract shall be referred to a foreign court or arbitration. The shipowners and crewing managers mistakenly believe that reference to foreign law and foreign court (arbitration) will secure from possible court proceedings in a Ukrainian court, which still do not have enough confidence and authority before foreign employers and insurers. Along with that, according to Article 8 of the Labor Code of Ukraine, labour relations of Ukrainian citizens employed outside Ukraine shall be regulated by Law of Ukraine No. 2709-IV On International Private Law adopted on 23 June 2005 (the Law). According to the Article 52 of the Law, labor relations shall be governed by the law of the state where the work is conducted unless otherwise is prescribed by the law or by an international treaty to which Ukraine is a party. In international maritime law the legislation of the flag of state shall have exclusive jurisdiction on board of the vessel flying this flag. Therefore, by default the relations between the seafarer and the shipowner shall be regulated by the flag of the state or by the legislation of the state indicated in the contract of employment. Along with that, Article 76 of the Law provides for the categories of cases, which could be ex-

amined by Ukrainian courts. This category includes cases on payment of damages when the claimant is registered in Ukraine on a permanent basis. In addition to aforesaid, part 3 of Article 110 of the Civil Procedural Code clearly prescribes the possibility of submission of a court claim to the local court under the place of claimant’s residence for the cases related to compensation of damages caused by the injury, disability or death of an individual. The aforesaid legislative regulations enable Ukrainian seamen and their successors to easily submit court claims against shipowners, P&I clubs, which are registered outside Ukraine and the courts accept such claims for examination on a grand scale. As the practice of recent years shows, during examination of these cases Ukrainian court often ignore the references to foreign law and the International Private Law Act, using the laws of Ukraine for labour relationships of a Ukrainian citizen with a foreign employer.

When Conflicts Arise

Nobody in Ukraine officially records statistics on the death of Ukrainian seamen working on vessels flying foreign flags. Nevertheless, as our practice shows, about 60%-70% of disputes related to the payment of loss of life compensation to the successors of the seamen are resolved in out-of-court procedure. We can indicate the following reasons of conflict situations in these cases: (i) non-appointment of “next of kin” by the seafarer; (ii) the conflict between the lawful successors of the seaman; (iii) if the death was caused by suicide, use of alcohol, drugs of through other wrongful acts of the deceased seaman.

Who is “next of kin”?

Ukrainian legislation does not have the definition of “next of kin”, which is widely used in contracts of employment with seafarers. In maritime insurance “next of kin” traditionally means the person appointed by the seafarer for receiving the compensation in the event of death in the course of employment. Although the word for word translation of “next of kin” could be interpreted as the nearest relative, in reality the appointed person could not be the relative of the seafarer at all. We have seen employ-

WWW.UKRAINIANLAWFIRMS.COM


ANK law office

A

Address: 9 Lanzheronovskaya Street, Odessa, 65026, Ukraine

NK law office was established in 1996 and through the years of extensive legal practice has become one of the leading law firms in Ukraine. We have been successfully advising our clients on different matters of Ukrainian law over the last 20 years. As a result of our dynamic development we have combined unique experience and created a highly-qualified professional team of lawyers and auditors. We provide regular legal support to our clients on the most difficult projects and deals. Today, the ANK team consists of more than 25 qualified lawyers and attorneys-at-law and each of them is an experienced specialist in his/her field of legal practice. ANK lawyers are regularly involved as experts by leading Ukrainian business media for commenting latest legislative amendments and government initiatives. ANK law office provides complex legal support to grain, oil and container terminals in Ukrainian ports. We advise clients on the process of attracting international financing from IFC, EBRD and other financial institutions. We act as Ukrainian legal counsel to the container shipping lines, shipowners and

ment contracts where the line “next of kin” contained a few persons (beneficiaries) with an indication of the percentage of compensation to be paid to each beneficiary in case of the seaman’s death. If, however, the line “next of kin” has not been properly filled in by the seaman or there is no such line, the compensation for the loss of life shall be paid to the successors empowered by law. In such situations the order of succession should be determined by the Civil Code of Ukraine. Some shipowners and P&I clubs usually ask relatives to come into inheritance and receive the certificate of inheritance rights and only after that pay the insurance compensation.

Missing at Sea: Evidence Problems

Some employment contracts and collective agreements directly prescribe the insurance of the seaman in the event of a seafarer going missing at sea. The main question, where the discussion between the seafarer’s lawyers and the owner’s lawyers starts, is what legal document shall prove the fact of being missing at sea for the purpose of recognizing maritime perils as an insurance event? As our experience shows, the majority of insurers insist on recognizing the seaman as deceased through the relevant court procedure and receiving a court judgment with further issuing the death certificate by the authorities. This procedure shall take not less than 6 months because Ukrainian legislation allows the starting of this court procedure not earlier than the passing of 6

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 482 348 716 E-mail: office@ank.odessa.ua Web: www.ank.odessa.ua

shipmanagers as well as P&I clubs. Our corporate and M&A practice advises clients on establishing business in Ukraine, licensing procedure and business restructuring. We have a strong team of court lawyers and attorneys-at-law who are ready to protect the interests of clients in court. Due to the large network of correspondent offices abroad, ANK law office can arrange effective legal assistance almost anywhere in the world. We cooperate with maritime administrations and classification societies and provide clients with professional legal assistance during the sale and purchase of vessels and yachts. ANK lawyers are fluent speakers in English, Ukrainian and Russian. Practice Areas: — Agriculture and Land Law — Arbitration and Litigation — Corporate and M&A — Infrastructure and Real Estate — Shipping and Maritime Law — Tax and Legal Due Diligence.

months after the seaman went missing at sea. Special interest and attention of maritime lawyers should be given to cases where there are reasonable grounds to believe that a seaman has committed suicide by jumping into the sea. The shipowner usually refers to statements from crew members, which describes possible suicide. From another side, the successors of the missing seafarer, willing to receive compensation at any cost, do not recognize the suicide and threaten the shipowner and its P&I club with possible criminal proceedings against the crew members and court litigation. It is worth noting that if a suicide note or other valuable written evidence proving suicide have not been found and the body of the deceased seaman not discovered, it is quite difficult to prove the fact of suicide.

Receipt & Release Statement: Legal Nature

Maritime lawyers are well aware of the practice of leading P&I clubs on payment of compensation to seafarers and their successors. The clubs recommend the execution of receipt & release statements proving not only the mere fact of receipt of compensation and amount thereof, but also fixing the seaman’s waiver from all future claims to shipowner, crewmembers, P&I club and other persons, which could have a property interest regarding the vessel. Large P&I clubs have approved “recommended forms” of receipt & release statements. Ukrainian legislation does not regulate the content or the form of these statements. Our experi-

ence shows that 10-15 years ago the majority of these statements were executed in written form and were certified by the signatures of two witnesses. Nowadays, more than 90% of receipt & release statements are subject of notarization. This is connected with continuous attempts by seafarers to appeal against statements executed in written form and request payment of compensation again. In these court claims the seafarers usually state that they have signed the R&R Statement under pressure from shipowners or crewing agency staff and that they did it because of desperation (otherwise the shipowners would not pay them). At the same time, on many occasions we have faced refusals of notarization of R&R Statements by Ukrainian notaries because they do believe that the content of the document contradicts the law. These notaries argue that such a receipt and release statement is a clear waiver (refusal) of the seaman from constitutional right of recourse to the court, which should be null and void. Another group of notaries consider the R&R Statement as a written statement (application) by a citizen, which is addressed to the unlimited scope of persons. In addition to the aforesaid functions, the R&R Statement has another important role. It clearly prescribes the undertaking of the successor of the seafarer to indemnify the shipowner and the insurer from claims, which could arise from third parties due to an insurance event. That is why we strongly recommend that special attention is paid to the drafting of the receipt and release statements and to its notarization in due course.

119


Maritime Law

Maritime Law in Ukraine

Arthur NITSEVYCH

Nikolay MELNYKOV

Partner, Attorney, Interlegal Law firm LMAA and SCMAA member, FNI

Partner, Interlegal Law firm MNI, LMAA & GMAA member, Chairman of the Nautical Institute of Ukraine, MNI

Natalya MYROSHNYCHENKO

Artem SKOROBOGATOV

Partner, Interlegal Law firm President of WISTA Ukrainian

Partner, Interlegal Law firm Representative in FOSFA

kraine is a maritime state on the Black Sea and Azov Sea coasts, which has its own fleet, shipbuilding and ship repair facilities, a number of sea ports and river ports on two rivers, the Dnipro and the Danube, open for navigation. There are established short sea links with Turkey, Russia, Georgia, Bulgaria, Romania and Greece along with direct rail links to Central Europe, the Baltic States, the Russian Far East and Central Asia, thus making Ukraine a trans-shipment hub too. The list of sea ports opened now for foreign vessels calls is provided by the Order of the Cabinet of Ministers of Ukraine of 26 June 2013 No. 466-p and includes 13 sea ports (Reni, Izmail, Ust-Dunaysk, Belgorod-Dnestrovskiy, Chornomorsk, Odesa, Yuzhny, Mykolayiv, Olvia, Kherson, Skadovsk, Berdyansk, Mariupol). Ukraine is one of the world’s leading grain and sunflower oil exporters and is an important gateway for the import and export of commodities and goods. Ukraine exported

21.22 million tons of grain in 2016 (by 22 December 2016). According to information of the Agrarian Policy Ministry of Ukraine announced on 30 December 2016, the grain export forecast for the July 2016 — June 2017 season runs to a total of 41.6 million tons. The major ship owners include Ukrrichflot and the Ukrainian Danube Shipping company. Ukraine is also ranked as the 5th supplier of seafarers to the world’s fleet market, providing some 75,000 officers and ratings.

U

120

Main Features of Maritime Law

Shipping has been at the forefront of international trade for over 5,000 years — no other industry has ever played such a fundamental part in economic voyages. Over the past fifty years, shipping has become progressively safer, more efficient and environmentally friendly. Sea transport is the ideal way to move large volumes of cargo. In comparison with air or road transportation, vessels are capable of carrying huge amounts of goods or

commodities and are suitable for transporting gas and liquids as well as various types of hazardous freight. Generally, Maritime Law describes all the legislation related to ships and shipping, including the  building, navigation, crewing, operation and other activities and incidents related to ships.  One feature is its international nature, which pleads for international uniformity in maritime law. This necessity has been satisfied internationally by implementing a number of international conventions or agreed rules like the Hague-Visby Rules unifying certain rules of law related to Bills of Lading, or the York-Antwerp Rules fixing the grounds for general average assessment. In some jurisdictions and in Ukraine in particular, the provisions of such conventions are implemented in local laws through the Merchant Shipping Code or similar. The widespread use of standard form documents as the basis of most contracts of carriage (like GENCON, SIINACOMEX, NYPE or BPTIME3) also has the effect of unification. The second obvious feature of maritime law is that contracts for carriage of goods by sea fail to be performed in specific and often hazardous conditions, in which it is practically impossible for one party to supervise the work of the other party on a daily basis. This factor is the key instrument in development of the sea carrier’s general duties and legal grounds for them, including the duty to provide a seaworthy ship and not to deviate from the route stipulated by the charter party as well as other carrier’s duties connected with the sea voyage. It also influences those parts of maritime law dealing with the shipper’s duty to disclose the dangerous nature of goods shipped and the master’s powers of jettison and other extraordinary powers conferred on the master of the vessel in the event of an emergency. The third notable feature affecting the nature and the practice of maritime law is that shipping regulated by such maritime law is directly dependent on other commercial activities. Contracts for the carriage of goods by sea are not made in commercial isolation. They are typically entered onto in order to sell goods or to give effect to a previous sale. This means that contracts for sea carriage often reflect direct interest of both, sellers or buyers, under a sales contract. Third parties may become involved in the carriage of goods in other ways. This leads to complex questions about who can sue and who can be sued. In the absence of a contract provision dealing with the particular problem, the main role in

WWW.UKRAINIANLAWFIRMS.COM


Interlegal

20 years of practice

I

Address: 24B Genuezska Street, Odessa, 65009, Ukraine

nterlegal is a recognized law firm with its head office in Odesa, the biggest sea-gate of Ukraine. Founded in 1995, Interlegal gained the reputation of an international maritime law expert operating and servicing clients in the Black Sea Region. Interlegal expertise has been focused on the following major practices crystallized from our experience for over 20 years: shipping, transport & logistics, ports & terminals, international trade, corporate, investment & transactions, litigation & arbitration. Within wide practice in commercial shipping, Interlegal also renders the full range of yachting services: concluding sales contracts of yachts and ships, their registration and insurance. All participants of the transportation process are among the firm’s clients: cargo owners, carriers, forwarders, agents, ports, terminals, charterers, shipowners, insurers, banks, etc.

such cases is played by the governing law of a carriage contract, which is English law for the majority of sea carriage contract forms, or local law as the law of the place of the incident. The use of standard forms is a great point of maritime law practice. The vast majority of standard contracts developed by international associations, in particular, BIMCO (Baltic and International Maritime Council), FOSFA (Federation of Oils, Seeds and Fats Associations) and GAFTA (Grain and Feed Trade Association), contain standard or default provisions on application of English law. So, under the circumstances, Ukrainian maritime law practitioners deal mainly with casualties and incidents, not with contracts. The Merchant Shipping Code of Ukraine of 23 May 1995 regulates all main questions in this respect such as collision, pollution or grounding. Ukraine signed, and is a party to, many international conventions. For example, the International Convention for the Prevention of Pollution From Ships, 1973 as modified by the Protocol of 1978 (MARPOL 73/78), the International Convention on Maritime Search and Rescue (SAR 1979), the International Regulations for Preventing Collisions at Sea (COLREGs 1972), the International Convention on Maritime Liens and Mortgages (Geneva, of 6 May 1993), the International Convention Relating to the Arrest of Sea-Going Ships (Brussels, of 10 May 1952), etc.

Role of Arbitration in Shipping

Maritime cases are both very specific and very complex. To draw the right conclusion, one needs to have specific knowledge and expertise. That is why many in shipping favor arbitration over litigation. Arbitrators are more knowledgeable in maritime matters than

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 482 33 7528 Fax: +380 482 33 7529 E-mail: odessa@interlegal.com.ua Web-site: www.interlegal.com.ua

Interlegal employs 37 top level law experts, advising clients 24/7. Careful selection has brought together talented, enthusiastic, goal-oriented professionals united by high standards and a team spirit able to solve hard tasks effectively and to observe quickly the firm’s purpose: Our mission is to be useful for Shipping, Transport & International Trade people in their fair business! While continuously developing our legal practice in Shipping and International trade in the Black Sea Region, we opened offices in Batumi (Georgia), Istanbul (Turkey), and Varna (Bulgaria). The annual research of the legal service market, Ukrainian Law Firms 2012-2016. A Handbook for Foreign Clients, has determined Interlegal as one of the leading firms handling maritime, transport and infrastructure matters.

judges, who have limited exposure to shipping. They can decide cases based upon the law, their practical knowledge and commercial reasoning. Furthermore, judges may be forced under the doctrine to decide modern-day disputes based on antiquated case law. Arbitrators, however, are not bound by this doctrine and have broad latitude to use their commercial sense of fairness. Neither are they bound by strict court rules of evidence and procedure. London remains the most popular choice for maritime arbitration. The majority of standard form charterparties, international sale contracts, salvage contracts, reinsurance and P&I Club Rules provide for London arbitration and, in particular, arbitration at the LMAA (London Maritime Arbitrators’ Association). Many bills of lading incorporate an arbitration clause in the charterparty under which the bill is issued. In Ukraine we have the Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry, an independent permanent arbitration institution operating under the Law of Ukraine On  International Commercial Arbitration  of 24 February 1994,  the  Statute on the  Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry (Annex No.2 to this Law) and the Rules, approved by the Decision of the Presidium of the Ukrainian Chamber of Commerce and Industry No.18(1) of 17 April 2007, as amended by the Decision of the Presidium of the Ukrainian Chamber of Commerce and Industry No.24(6) of 25 October 2012.

Ukraine is a Maritime State

Ukraine’s position as a maritime power requires both the following global trends in

sea trade and trends in the regions of the Black Sea and Azov Sea. The domestic sea economic complex development is dictated by the high profitability of the transport service market due to the world-recognized competitive advantages of water transportation (ecological compatibility, low price, investment attractiveness, etc). However, the legal framework which regulates the marine industry remains imperfect. In particular, most of the items on its functioning in Ukraine are still regulated by subordinate acts. Several authorized central executive bodies have neither top level marine activity management, nor the required level of coordination between them and local executive bodies located in maritime regions. The procedure for establishing of the Maritime Administration is at the stage of creation of a regulatory basis for its activity. In particular, on 29 September 2016 the Ministry of Infrastructure of Ukraine submitted for consideration to the Cabinet of Ministers of Ukraine the Draft Order On Establishment of State Sea/River Transport Service of Ukraine — the Maritime Administration. The Ukrainian legal community has recently unified its efforts with the aim of improving the legal framework regulating some of the main issues of maritime law, in particular ship arrest in respect of maritime claims, ballast waters regulations, and others. Such work will definitely result in necessary amendments to legislation, giving Ukraine the possibility to obtain a strong system of maritime law and to become more attractive as a maritime jurisdiction.

121


Mediation

Mediation in Ukraine debt recognition clauses give the creditor the right to apply for a notary’s execution clause in case the debtor does not pay in time. Thus, lengthy court disputes after the conclusion of mediation settlements can be avoided.

Neutrality of the Mediator Ivanna DORICHENKO

Dr. Julian RIES

FCIArb, LLM. Called to the bar of England & Wales (2014). Partner, Head of Trade & Commodities practice, Integrites London

Attorney-at-Law (Germany), Commercial Mediator. International Managing Partner, Head of Integrites office in Munich

M

ediation is getting off the ground. Particularly in Ukraine, with the court system still problematic and businesses becoming ever more sensitive for legal fees, there are good reasons to avoid court disputes wherever possible. The large majority of conflicts in daily business life never come to court, since most conflicts are settled by negotiation between the parties. Only where the parties fail to reach an agreement by negotiation is court settlement an option. Mediation, at its core, is also negotiation, but with two particularities: a third, neutral person moderates the negotiation and the negotiation follows a certain proven course of negotiation. By moderating, the mediator makes the parties discuss their real interests in the matter, rather than their claims, rights and other legal positions. So mediation is basically a tool to bring the parties back on track for negotiation. Experience shows that once the parties are back at the negotiating table the chances of reaching an amicable agreement are very high, in 8 to 9 out of 10 conflicts parties do find agreement. Needless to say, that an amicable agreement serves the parties’ interests better than any court decision, is quicker to reach and is more costefficient. So far mediation in Ukraine has developed well without a special law on mediation. Nevertheless, currently there is a Draft Law On Mediation in its second reading in the Ukrainian Parliament. As mediation is basically negotiation there is little need to have the procedure formalized by a law. There is only a certain set of questions where it is helpful to have clear provisions.

122

Immunity of Witness

In the absence of any specific provisions on immunity, the parties and the mediator are bound solely by confidentiality clauses in the agreement on mediation, possibly accompanied by penalty provisions. Just like any customary confidentiality clauses, these clauses would also have escape provisions to permit disclosure if that is prescribed by law and / or a court order. The Draft Law now suggests that the mediator cannot be summoned as a witness regarding circumstances which he learned about during the mediation process, unless the witness is necessary to protect the interests of a child, to avoid physical or psychological damage to a person or if disclosure of the content of a mediation settlement is necessary to enforce that settlement.

Whether and How Parties Can Get an Enforceable Title

In the best case the mediation ends with an amicable agreement. As this agreement is usually entered into by the parties, because they deem it more favourable than a court decision, the chances are high that the parties fulfil their obligations without enforcement. However, if the circumstances or the financial situation of a party change again there may well be the need to appeal to enforcement services. Also, particularly in debt restructuring matters, it may be necessary for the creditor to get more commitment than just a written agreement. The Draft Law is silent as to a certain enforcement procedure, but refer to the general provisions to protect its right in the courts. This is not too much, but the parties are free to negotiate notarised debt recognition clauses. Such

It is one of the basic principles of the mediation procedure that the negotiation is moderated by a third, neutral person. Particularly where lawyers act as mediators there is reason to prevent the mediator’s and the lawyer’s activity for one party getting mixed. The Draft Law establishes that the mediator must not be involved in the legal advisory of the same matter for one party before mediation and must not take up such advice or representation after unsuccessful mediation either. Other laws, for example the German law on Mediation, apply a wider scope: according to the German rules even persons practicing in the same firm or joint office must not advise or represent a party of mediation. As the success of any mediation largely depends on an open dialogue between the parties and even more between the party and the mediator, it seems to be appropriate to apply strict conflict rules. Should the Ukrainian Draft Law not be amended in this aspect, it is advisable to include respective restrictions in the agreement between the mediator and the parties. Other subjects may be of less importance for regulation by the legislator, in particular licensing requirements. Who can act as mediator? Is a license mandatory, or shall the market decide which mediator and which qualification succeeds? The Ukrainian Draft Law establishes certain minimum standards for the training of a mediator. The mediator shall have received training of a minimum of 90 academic hours, of which 45 academic hours shall be dedicated to practical exercises. Furthermore, the mediator shall be at least 25 years old and shall hold a higher education (masters), or a professional technical education. Other requirements, such as the minimum number of mediation cases, supervision etc., are not established. Also, foreign certificates shall be recognised if the foreign training corresponds to minimum Ukrainian standards. And there is a third set of questions, on whether to make mediation mandatory for certain conflicts. In the current Draft Law no mandatory mediation sessions are established, neither for family law matters, estate

WWW.UKRAINIANLAWFIRMS.COM


INTEGRITES

I

Address: 1 Dobrovolchykh Batalioniv Street, Kyiv, 01015, Ukraine

NTEGRITES has a solid network of operating offices in the CIS (Kyiv, Moscow, Almaty, Astana, Karaganda, Aktau, Atyrau) supported by an international office network in London, Munich, Amsterdam and Guangzhou. The firm offers its clients complex legal advice in the CIS region. In 2016 The Lawyer recognized our work in the CIS with the award Law Firm of the Year: Russia, Ukraine and the CIS. We provide legal services for our world-known clients: Rabobank International, EBRD, VTB Bank, ProCredit Bank, Mitsubishi Group, Concern Toyota, Agrogeneration S.A., Credit Agricole, Nestle, COFCO Agri, LTk Capital, Dragon Capital, ADM, Louis Dreyfus Company, Soufflet Group, Сredit Agricole, Burisma, Aspen Pharmacare Holdings Ltd., Shell, DuPont, Bank of China, DHL, China Development Bank etc. Main industries: Agribusiness, Capital Markets, Construction and Land, Energy and Natural Resources, Information Technologies, Medicine and Healthcare, Telecommunications. Main Practices: Antitrust and Competition, Banking and Finance, Bankruptcy, Corporate, M&A, Criminal Law and White-Collar Crime, Intellectual Property, International Arbitration, International Trade and Trade Remedies, Labor and Employment, Litigation, Real Estate, Retail, Tax.

matters, lease matters or labour law matters, although experience shows that mediation can be of great help in conflicts where the parties one way or another will stay in contact. This is an unfortunate omission as the state courts are overloaded and mediation could be an efficient way to reduce the work load. Even worse, the Draft Law suggests that a mediation clause shall not prevent the parties applying to a court. This provision is rather strange and should be amended during the further readings, as this is outright ignorance of the parties’ intention. If the parties agree to first try mediation there is no reason to make this agreement non-binding

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3853 Fax: +380 44 391 3854 E-mail: info@integrites.com Web-site: www.integrites.com

Our firm is also represented by international offices: United Kingdom 1 King Street, EC2V 8AU, London, UK Tel.: +44 203 713 1750

Germany Maximilianstrasse 13, 80539, Munich, Germany Tel.: +49 892 030 061 50

Russia Naberezhnaya Tower Block C, Moskva-City 10, Presnenskaya Naberezhnaya Moscow, 123317, Russia Tel.: +7 495 660 50 70

China R&F Ying Sheng Plaza, MaChang Road 16, Tianhe district, Guangzhou city, Guangdong, China. Tel.: +86 185 0204 0880

Kazakhstan SUCCESS Business Center, 1/1, Zhandossov St., Almaty, 050008, Republic of Kazakhstan Tel.: +7 727 352 80 83/84

Netherlands Herengracht 282 1016 BX Amsterdam The Netherlands Tel.: +31 20-5219367

by law. This would put mediation procedures in an even worse situation than today and would also unfavourably compare Ukrainian practice with that of many international jurisdictions which either have systems providing for an automatic referral of disputes to mediation before the case can proceed to trial, or give wide discretion to courts to adjourn proceedings and order mandatory mediation where necessary. Even further, in certain countries known for the strength of their legal systems, such as England, mediation for certain type of cases (predominantly familial) is akin to mandatory as courts will refuse applications which do not indicate

that the mediation requirement has been complied with. In addition, while courts in England are against the idea of “forcing” parties to mediation, mediation is nonetheless “strongly encouraged”, and there are likely to be cost consequences if parties refuse to try mediation (read — save court time and cost) for no good reason before trial. It is, therefore, suggested that it would be quite beneficial for the Ukrainian legal system and, specifically, for the development of mediation in the country, if Ukrainian legislators were to look at prominent international mediation practice and reflect it in the Draft Law prior to its adoption.

123


Medicine & Healthcare

When Can We Expect Functional Voluntary Health Insurance in Ukraine?

Tetyana GAVRYSH Managing Partner, ILF Coordinator of the Kharkiv expert group on implementation of medical reform

F

or the past two years Ukrainian healthcare has been becoming increasingly attractive for investment thanks to healthcare reform. However, since the reform is yet legislatively unfulfilled, investors from Turkey, Israel, Georgia, United States and other countries are still sat on the fence, preferring to observe the market for the time being. In November 2016 the Government finally got to work, adopting the Concept of Healthcare Funding Reform. The Concept seeks to create a single buyer of medical services — the National Healthcare Service — with the principle in mind that reads “patients bring money”.

Who will Pay for Medical Services?

No matter where our patient goes, be it a public or private clinic, the treatment will be paid for by the state. Annual budget funding approaches USD 2.3 billion. These funds used to go to public and municipal hospital exclusively, but now private entities will also have the right to claim them. With payment dependent solely on the patient’s choices, the system will follow the principles of the Beveridge report already used in the UK, Italy, Spain and other countries.

124

Olena KHYTROVA Associate Partner, ILF Head of medical and pharmacy law department at ILF, Head of UkrainianGerman Medical Association (UGMA) Committee on reform of the health system

Ukraine’s budget, however, will not be able to satisfy all the needs of the population. According to the 2014 statistics report on healthcare, the budget covers 51.7% of expenses on medical services, a small part of which belongs to voluntary health insurance, and some 46% is paid for by patients themselves. The total market estimate is just shy of USD 4.5 billion. In the old system, over USD 2 billion from patients’ pockets ended up feeding the black market. The reason for this was uncertainty as to what kinds of services the state provides, and how much each one actually costs. Unable to tell which service had already been paid for, patients often had no other choice but to open their wallets. Under the new healthcare system, the government will set a list of budgeted medical services. Those not on the list will have to be acquired by patients themselves, but at clearly defined rates. In conjunction with new anti-corruption legislation, it should eliminate incentives for abuse in healthcare and pharmacy and discourage the black market. The system is due for launch in 2018 and should be fully operational by 2020. Implementation of the new funding mechanism and official payment (co-payment) for treatment by patients require legislative changes other than in the field of pub-

lic procurement. There’s the pressing issue of amending Article 49 of the Constitution of Ukraine, which guarantees free medical treatment. According to the Constitutional Court, public and municipal medical institutions must provide treatment irrespective of its extent, without prior, concurrent or subsequent payment. The Constitutional Court also concluded that this does not rule out additional funding sources, such as sick funds and VHI. With current constitutional guarantees in place, public and municipal clinics cannot directly receive payment from patients, and until the Constitution is amended they will have to stick to VHI for additional funds. The new healthcare funding system adopted by the Cabinet of Ministers is not just beneficial to private clinics, but also to insurance companies that deal in VHI.

Health Insurance in Ukraine

Ukraine’s VHI market is currently in its infancy. Out of 323 insurance providers only about 45 offer this service, with the majority of sales divided among the leading 10 companies. According to the Ukrainian Legal and Economic Research Institute, over the course of 9 months in 2016 insurance companies sold USD 65 million worth of policies with a 52.86% premium. Next to the sums patients spend (over USD 2 billion, remember) the promise of the VHI market is evident, and there is a strong possibility that demand will increase in time. The fear of costly treatment in case of sickness and realization that free services are no longer a given could also affect the demand for VHI. Patients want assurances that they can count on their premiums when the need arises. Unfortunately, bankruptcy is not uncommon among Ukrainian insurance companies, as are cases when they refuse to pay up. As a consequence, lawsuits on premium collection are numerous. Evidence in cases like these is hard to come by and court hearings move at a snail’s pace: it takes roughly 2 years to conclude such a dispute. Moreover, carrying out the verdict and collecting the money also takes up to 6 months. Aware of the difficulties, people tend to avoid VHI altogether.

WWW.UKRAINIANLAWFIRMS.COM


ILF (Inyurpolis Law Firm)

I

Address: 22 Shovkovychna Street, Kyiv, 01024, Ukraine

LF (Inyurpolis Law Firm) is an independent Ukrainian law firm with a core focus on litigation and business support (business setup, transactional support, regular advisory support). The firm operates on the market for 23 years through its two offices located in major cities of Ukraine — Kyiv and Kharkiv. Among ILF’s strong points is the ability to follow up on court decisions and get tangible results. This is due to years of experience dealing with debt recovery for banks and insurance companies (USD 500 million recovered in 2007-2015) as well as deposit recovery from liquidated banks for companies and individuals. We carry out business support through our commercial, corporate, M&A, tax and other teams, that follow an industryminded approach. The diverse expertise of the team ranges from business structuring and high-profile contracts to corporate acquisitions and asset deals. We’re known for our successful business structuring record in the IT sector, support of sophisticated technology contracts, and public private partnership (PPP) work in the field of healthcare and pharmacy. We help our foreign clients get clear understanding of Ukrainian business environment, based on our knowledge and experience in medicine and pharmacy, agribusiness and alternative energy, IT, banking and finance. Among our regular clients are Avon Products, Volvo, BASF Ukraine, Malteurop Group, Ecostar/DISH, SPS Commerce, EGGER and Amcor Tobacco Packaging.

Of course, patients can misbehave as well, such as by lying to their doctor about insured loss. It’s possible to anticipate this though in contracts with specific clinics of all forms of ownership (public, municipal or private). The insurance policy could contain a list of hospitals that should provide treatment. A contract between an insurance company and a clinic could oblige the latter to supply reliable information regarding the number of services provided and determine appropriate penalties.

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 7777 Fax: +380 44  253 4549 E-mail: office@ilf-ua.com Web-site: www.ilf-ua.com

Our industry-oriented approach allows us to find legal solutions for business as well as manage projects dealing with institutional changes. In 2016 ILF lawyers working together with the expert team of the Ministry of Healthcare and backed by the World Bank and UNICEF designed legislation on primary healthcare reform. In addition, ILF is supervising a reform-pilot project in the Kharkiv Region city of Chuguyev. The ILF team includes 50 highly qualified lawyers, attorneys, tax, investment and business consultants. Reputation For six consecutive years ILF is in TOP-15 law firms in the national rating “50 Leading Law Firms of Ukraine in 2016” by Yuridicheskaya Practika Weekly. “Ukrainian Law Firms. A Handbook for Foreign Clients 2016” named ILF as one of the leaders of the Ukrainian legal market and places the firm’s partners among key experts in their respective fields of expertise: litigation, medicine and pharmacy, IT and labor law. Areas of practice Corporate law and M&A, land and real estate, public-private partnerships and privatization, labor & employment, intellectual property, tax law, criminal defense, debt recovery, bankruptcy, family disputes.

Furthermore, insurance companies can focus on selling VHI to employers. The Cornell University of New York showed that companies lose nearly three times more money when employees show up for work sick than when they stay at home. In light of this, businesses could certainly benefit from VHI. All the more so since current tax laws allow ascribing VHI expenses to total cost. In the old days they had to be covered by income. With no tax pressure and a number of lucrative offers from insurance companies,

employers are further encouraged to acquire VHI policies for their employees. All in all, everything points to a rapid growth of the VHI market in the near future. The niche is open for insurance companies that manage to provide necessary guarantees and demonstrate the benefits to patients and employers. As for patients, made wiser by their brush with bankrupt insurance providers, they could turn to foreign players for reliable medical treatment.

125


Mergers & Acquisitions

Ukrainian M&A Market Review: A Look Ahead

Mykola STETSENKO Managing Partner, AVELLUM

Current Market Environment

The year 2016 was marked by relatively low M&A activity in Ukraine. Although transactions were carried out in almost every industry, their total number turned out to be quite moderate. In our view it is necessary to distinguish transactions relating to the Ukrainian market only and those transactions that were effected on a global scale, but which contained a significant Ukrainian element. If we speak of Ukrainian transactions only, a number of transactions in the financial sector are worth mentioning, particularly the acquisition of Ukrsotsbank by Alfa Group and the sale of Universal Bank. The latter was acquired by the TAS Group owned by Sergiy Tigipko, who also acquired Aegon life insurance company from its foreign shareholders. In line with its exit strategy, UniCredit sold its leasing subsidiary in Ukraine to Alfa Group in early 2017. We also witnessed a certain number of transactions in the agricultural sector (the sale of Creative Group, for instance), the IT segment (Soros investment in Ciklum), and the investment by Horizon Capital, a private equity fund, in Rozetka. Market rumors hint that several private equity firms are in the process of fundraising for new funds. This is obviously a good sign for 2017. A huge event in December was the sudden nationalization of PrivatBank, the largest bank in Ukraine, by the Ukrainian Government. The consequences of this nationalization for the country as a whole are yet to be seen. In the meantime, a new management and supervisory board have been

126

installed, while the bank itself received significant monetary support from the Ministry of Finance of Ukraine. Unfortunately, no deals were concluded in the engineering and heavy industry sectors, and the FMCG segment also reported no intense activity. The pharmaceutical market was a noteworthy exception, with several transactions taking place in the course of 2016. Farmak’s investment in Poland was the most prominent one. This investment of a Ukrainian company into Eastern Europe became a pleasant exception at a time of low business activity and general exits by Ukrainian companies from the Russian and Crimean markets. A vivid example of this exiting phenomenon is MHP’s withdrawal from the Russian business by means of exchange of its assets in Russia for the Ukrainian assets of Agrocultura Group. Some further consolidation in the pharmaceutical industry also continued with the acquisition by Darnitsa of a 30% stake in the Borschahivsky pharma plant based in Kyiv. This investment, however, created some tension between old management and the new shareholder. In early 2017 Kernel, the largest vegetable oil producer in Ukraine, issued its debut Eurobonds for USD 500 million. While this event is not M&A activity by nature, it will likely spur some new acquisitions in the agricultural sector in 2017. The infrastructure segment, particularly sea ports, is gradually drawing more interest from investors, both local and international. The establishment of a joint venture between MV Group and Cargill, the global agro-industrial giant, may serve as a great example here. As far as we know, Ukrainian and foreign investors are also discussing a number of transactions related to port infrastructure and transhipment terminals. The dramatic increase of activity in the non-performing loans (NPLs) market (i.e., the market for secured or unsecured default loans) became a new trend this year. Although the targets of such transactions are rights of claim under loan agreements, such transactions may in fact easily turn into hostile M&A transactions typical of an unfriendly or opportunistic nature. Unlike the Ukrainian M&A market, the global M&A market once again looks likely to reach stratospheric level in terms of total transaction value. The USA remains the

leader in the value and the number of transactions. These transactions sometimes involve Ukraine, if only from the merger control clearance perspective (if new financial thresholds are exceeded). Some transactions (e.g., IT transactions) are even more related to Ukraine, since many of the specialists employed by IT companies are concentrated here. An excellent example of such a transaction was the acquisition of Lohika, a premier software development firm, by Altran, a global leader in innovation and high-tech engineering consulting company. Headquartered in Silicon Valley, Lohika is a leading software developer most active in North America with experienced delivery teams in Ukraine and Romania coming to more than 700 employees, most of them software engineers. Another great example is the acquisition of a 48% stake in GlobalLogic Inc. by Canada Pension Plan Investment Board. GlobalLogic Inc. is one of the top-5 global outsourced product developers headquartered in the USA, having 11,000 employees with significant operations in Ukraine, India, Slovakia, Argentina, Poland, and the US.

What Has Not Happened so Far?

First, everyone expected massive privatization to be launched in Ukraine. Unfortunately, this has not happened yet, although there were two attempts in 2016 to sell the Odesa Port Plant, one of the largest fertilizer producers in the world. Privatization of state-owned electricity generation and electricity distribution companies has also been postponed until 2017. At the moment, privatization of Ukrspyrt, the largest state holding of spirit production plants, is actively discussed, though it has not yet been initiated. Although there are undoubtedly a number of reasons for these delays, the market continues to hope for one or more successful privatizations in 2017. Second, the Ukrainian Deposit Guarantee Fund has not begun to sell its assets actively, even though it has so far accumulated an enormous amount of assets previously owned by liquidated banks. The Fund has already carried out an inventory of available assets, and its representatives report that they are working on the creation of transparent sales mechanisms involving the use of auction marketplaces, including the ProZorro public procurement system.

WWW.UKRAINIANLAWFIRMS.COM


AVELLUM

A

Address: 38 Volodymyrska Street, Kyiv, 01030, Ukraine

VELLUM is a leading Ukrainian full service law firm with a special focus on finance, M&A, and dispute resolution. The firm covers capital markets, competition, corporate/M&A, dispute resolution, employment, banking and finance, energy and infrastructure, real estate, restructuring and insolvency, and tax. AVELLUM’s goal is to be the firm of choice for its clients with respect to their most significant business transactions. Its team is responsible, commercially minded, solution orientated and cost effective. The firm brings the most advanced Western legal techniques and practice, which, coupled with first-hand knowledge, broad industry experience, and an unparalleled level of service, will help the clients achieve the best results in their business endeavours. AVELLUM’s lawyers work seamlessly in integrated teams with premier US, UK, and European law firms in the course of multijurisdictional transactions. The firm offers its clients a highly individual focus on their matters, and is relentless when it comes to observing deadlines.

Headwinds

Both economic and psychological factors are working to restrain M&A in Ukraine. Economic factors include the low purchasing power of the majority of Ukrainian investors and the absence of high-quality assets for sale. At some level, this is a repetition of the situation in 2009 when very many companies became insolvent, yet their owners refused to sell them at the actual market value. However, compared to that previous crisis, Ukrainian banks this time are more aggressively disposed and ready to enforce pledged assets. In our view, it is definitely good news that Ukrainian bankruptcy and financial restructuring laws have been actively improving. The restraining effect of foreign exchange restrictions in Ukraine serves as an unconditional limiting factor. However, gradual liberalization of these restrictions — namely the permission to pay out dividends in part — is definitely bringing a positive impact. The National Bank announced in January 2017 that further liberalization should be expected in the course of this year. The procedure for purchasing rights of claim under loan agreements has a number

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 44 591 3355 E-mail: info@avellum.com Web-site: www.avellum.com

AVELLUM’s clients include international and domestic companies, government authorities, financial institutions, investment funds and investment banks seeking specialised legal advice and transaction skills from legal experts in the above practice areas. AVELLUM’s clients include AGCO, Allergan Inc, Altran, Baring Private Equity Asia, Onex Corporation, Boehringer Ingelheim GmbH, Canada Pension Plan Investment Board, CNBM International Corporation, Deutsche Bank, Deutsche Beteiligungs AG, EBRD, Farmak, Ferrexpo, ING Bank, Kernel, MHP, the Ministry of Finance of Ukraine, Novartis, Raiffeisen Bank International AG, UDP, Unicredit Group, and others. The firm’s employees received their education from top Ukrainian and Western universities. The team consists of 31 highly-qualified attorneys, including three partners, Mykola Stetsenko, Glib Bondar, and Dmytro Marchukov, who are actively involved in every transaction. AVELLUM is recognized as one of the leading law firms in Ukraine by various international legal directories and Ukrainian legal publications such as Chambers & Partners, IFLR1000, Legal500, International Tax Review, Ukrainian Law Firms, and others.

of drawbacks, which certainly restrict the free sale of default loans and serve as a restraining factor for foreign investors. Psychological factors should also be considered, since the fear of corrupt Ukrainian courts still prevails. However, these fears may be gradually dispelled upon the successful implementation of judicial reform in Ukraine, which commenced in September 2016. Unfortunately, the conflict in Eastern Ukraine, the annexation of Crimea, and potential Russian aggression still puts considerable pressure on the Ukrainian investment environment. Yet, as we can see, Ukrainian investors have already come to terms with these factors, while foreign investors are getting used to them.

Legislative Background

During the past year, the legislative environment experienced a number of changes that, in particular, had a positive impact on the M&A market, including: — significant reduction in regulatory requirements in Ukraine — an increase and enhancement of financial thresholds for merger control purposes

— an adoption of critical changes to the Law on Joint Stock Companies that came into force on May 1, 2016 — cancellation of the requirement to register foreign investments in Ukraine — adoption of legislative amendments aimed against raiding, in particular the introduction of mandatory notarization of documents changing directors or making other changes in membership. It is also crucial to highlight a number of draft laws submitted to Parliament for consideration, including the Draft Law On Limited Liability Companies, Draft Law On Shareholder Agreements, and Draft Law On Squeeze-out/Sell-out. The adoption of all these draft laws should improve the quality of corporate legislation in Ukraine and may create a climate for joint ventures to function properly in Ukraine and investors to rely on the substantial flexibility of new legislation. In late December 2016 and January 2017 these laws were passed in the first reading by the Ukrainian Parliament and the legal community has big hopes for them that they will be adopted in their final readings by the spring of 2017.

127


Migration Law

For those Foreigners Aiming to Acquire Legal Status in Ukraine So How Can Expats Stay in Ukraine Legally?

Vasyl CHEREDNICHENKO Partner, EXPATPRO law firm

D

espite the deep economic crisis of 2014-2016 and the de facto war with Russia, a lot of foreigners from over the world, including the USA and the European Union citizens, tend to move to Ukraine temporarily or permanently. Ukraine attracts expats with its huge economic potential, developed infrastructure, heartwarming people and, of course, due to the relatively low cost of living. Foreigners are interested in Ukraine as a place for starting a business which can give faster and bigger income than in other countries. Mild taxation for small and medium business, lots of Government programs stimulating business activity are attractive as well. It is worth noting that we now see the results of the implementation of e-government programs, transparent administrative services that are constantly improving. However, there is still much left to develop. Ukraine is open for almost any type of business activity you can think of. The IT sector, manufacturing, agriculture, advertisement, services, etc. You will never feel a shortage of qualified employees as higher education is available to all citizens and school education is compulsory here. At the same time, Ukraine is a desirable destination for expats who work remotely and can do their job wherever they want: IT developers, translators, consultants, copywriters, consultants, etc. These people can earn a high salary and spend it on an inexpensive life in Ukraine.

128

Citizens of a long list of the countries can enter Ukraine without a visa: citizens of EU, USA, Great Britain, Canada, Georgia, South Korea, Japan and some other countries can stay in Ukraine for 90 days in a six-month period. In the case of violation of this rule the foreigner who overstayed in Ukraine gets illegal status and become unable to use Government, notarial and other official services. For example, foreigners who overstay can’t get a Ukrainian tax ID, can`t get married, are not able to give a power of attorney to a lawyer. A foreigner who breaks the 90-day stay rule can also be punished with a fine accordingly (Article 203 of the Code of Ukraine on Administrative Infringements) or even could be banned from entering Ukraine for 3 months to 3 years. Of course, such inconveniences can incommode the business activity of a foreigner or his personal life issues. To avoid such inconveniences which can incommode business activity, and stay in Ukraine legally for the continuous period a potential expat has several ways of doing this. The most common and transparent one is official employment in Ukraine. Any foreigner has a right to be employed in Ukraine (work in Ukraine) if he/she gets a work permit in accordance with the legislation of Ukraine. After getting a work permit the potential expat is eligible to get a temporary residency permit in Ukraine for 1 year with the unlimited right to extend it (and the work permit) each year. Obtaining a work permit is quite a complicated procedure facing a person. It requires evidence of educational level, qualification, the absence of infectious diseases, drug addictions, the absence of criminal procedures against the foreigner, and (generally) absence of a Ukrainian candidate for the place you apply for. Special procedures are granted for IT businesses and specialists (they may be employed without the employer complying with the priority employment rights of Ukrainians), scientists and representatives of religious organizations who comes for preaching activity. The students of Ukrainian schools, colleges, universities may be also granted a temporary residence permit.

Using this way of legalization in Ukraine the expat depends on the employer because he can lose his residency right after he/she is fired from the position. But this way of ensuring legalization in Ukraine (employment) is much easier and safe for expats who register their own business in Ukraine and become the director or a deputy director of their own company. Potential investors and foreigners who want to run a business in Ukraine (no matter if it is big or small) won’t have any problems getting temporary residence in Ukraine for as long as they need. It worth noting that expats who want to be employed in Ukraine will face some burdensome and bureaucratic procedures such as the necessity to provide at least some university or high school degree, legalized or apostiled in the country of origin and obligation to pass a range of medical examinations. But at the same time, all these procedures are constantly improving and become easier for foreigners from year to year. Another possibility is a family reunion. This is grounds for issue of a temporary residence permit. Such reunion relates to both reunions with parents, a spouse who is Ukrainian and those who have already obtained permission to stay legally in Ukraine. For instance, if a foreigner has started a business in Ukraine, received a work permit and temporary residence permit, all his family main join him and also acquire legal status in Ukraine without their employment or looking for other grounds to get permission to stay in our country. They will just need to apply for type D visa and after that — for residency. That is how a family reunion works. It is much easier to acquire residency if you have some family connection in Ukraine: for example, marriage with a Ukrainian, having a child who is a citizen or Ukraine or having relatives who are (were) Ukrainians (ethnical connection) or who were born on the territory of Ukraine. However, if you are married to a Ukrainian citizen it does not automatically grant you permanent residency: you need to prove that the marriage lasted for more than 2 years, otherwise you can apply for a temporary residence permit. Being “Worldwide Ukrainian” is another efficient mechanism that gives foreigners

WWW.UKRAINIANLAWFIRMS.COM


EXPATPRO

W

Address: 18 Vasylia Lypkivskoho Street, 3rd Floor, Kyiv, 03035, Ukraine

e are a Ukrainian trusted legal partner for corporate and private clients with a focus on migration law. EXPATPRO is a leading boutique law firm that focuses on migration to Ukraine and offers personalized,top-quality legal services for foreign expats. Our clients are foreign individuals and the international companies that oversee their business, employment or personal opportunities in Ukraine. Through comprehensive knowledge of legal, political and business areas, our migration experts walk our clients through the jungle of Ukrainian law. Our team provides professional legal solutions on how to move to, and reside in, Ukraine and start-up there in the simplest way in accordance with applicable Ukrainian legislation. We strive to keep in touch with our clients and continue to support them in their daily business activities and their evolving living needs in Ukraine. Whether you are considering relocating to Ukraine, starting a business there or simply seeking consultation on work permit, visa, and

who identify themselves as Ukrainians, has a blood relationship with Ukrainians or someone who was born on the territory of modern Ukraine. This special status gives a foreigner right to get a long-term 5-year visa free of charge, right to get an immigration permit and thus, apply for permanent residence permit, right to work in Ukraine without obtaining a work permit and thus, apply for a temporary residence permit (Law of Ukraine No. 4381-VI On Worldwide Ukrainians, Law of Ukraine No. 5067-VI On Employment of Population).

Permanent Residence Permit

Ukrainian legislation sets out the grounds for issuing a permanent (unlimited) residence permit. They include the following: — being in a marriage with a citizen of Ukraine for more than 2 years, — being a parent of a citizen of Ukraine — being a child of a citizen of Ukraine. — being born on the territory of Ukraine. The aforementioned grounds are unconditional. But Ukrainian legislation also recog-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 339 9881 Fax: +380 44 339 9881 E-mail: office@expatpro.co Web-site: www.expatpro.co

residency issues, or have other expat-related legal needs, you can count on EXPATPRO. Expats who want to open a business in Ukraine may face some time-consuming, bureaucratic difficulties. Our team will guide you through the peculiarities of Ukrainian business and corporate law. Our Corporate, Commercial and Business Team will advise you at any stage of your company’s operations in Ukraine. The team of EXPATPRO offers sounds advice and a wealth of experience in all areas of employment relationships between business entities and expats. Our real estate agents together with our lawyers will guide you through every step of real estate transactions in Ukraine, from legal review/vetting of properties and negotiations to signing Lease or Sale-Purchase Agreements. Our team is experienced in cancellation/ removal of work and residence permit disputes initiated by the Government of Ukraine. We also have successfully argued appeals on a wide variety of disputes on behalf of our clients.

nizes certain grounds for issuing an immigration permit (and, therefore, a permanent residence permit) within annual Governmentestablished quotas. These quotas are used in the following cases: — for investors (those who invest at least 100, 000 USD into the Ukrainian economy are permitted to apply for an immigration permit and thus receive a permanent residence permit); — for scientists and cultural activists, in whose immigration Ukraine is interested; — for brothers, sisters, grandparents or grandchildren of Ukrainian citizens; — parents, spouse, and minors of immigrant; — highly-qualified specialists of those professions which Ukraine needs. Additionally, Ukraine currently supports repatriation processes and provides possibilities for acquiring special status for those foreigners who were citizens of Ukraine in the past. To acquire residency in Ukraine (temporary or permanent one) foreigners need to get a type D visa at a Ukrainian consulate abroad.

It is one of the problems that may occur during obtaining a residency. The cost of such a visa differs from country to country and is based on the principle of reciprocity (depends on the value of visas for Ukrainian citizens in the respective countries). The exceptions are citizens of Belarus, Georgia, Moldova, Azerbaijan, Uzbekistan, Armenia and Russia who does not need a type D visa. The good news is that obtaining temporary residence or a permanent residence permit provides you with almost the same scope of rights and duties as a Ukrainian citizen has. Those expats may stay within the territory of Ukraine, leave it and re-enter within the term of validity of their document, they can purchase property, work, study, get any type of Government and private services, etc. But those foreigners who aim to acquire legal status in Ukraine need to remember: any breach of laws of Ukraine related to the legal status of the foreigner (including overstaying, providing forged documents or false information) may result in forced expulsion from Ukraine and a ban on them re-entering.

129


Patents

The Year 2016 in Review: Patents

Mariya ORTYNSKA Managing Partner, IPStyle

The Game of Numbers: Quantity is Not Always Quality

Looking back on the previous year with regard to patenting, 2016 may be characterized as the year of Ukraine’s so-called fabulous progress namely within the sphere of patent filing. According to the State Intellectual Property Service of Ukraine, 51,559 patent applications were filed in 2016 (compared with 47,819 applications filed in 2015)1. However, the increased figures can hardly indicate an improvement in quality. In Ukraine, just as in certain other countries, including Germany, France, China, Belarus, Kazakhstan, patents may be granted for inventions and for utility models as well. Patents for utility models are declarative. That is, the Patent Office grants them at the applicant’s own risk, without examining whether this or that utility model meets the criteria of novelty and industrial applicability. Moreover, the rights to utility models are the number two most popular intellectual property rights abused by patent trolls. It was the number of patent applications for utility models that increased last year (8,620 applications in 2015, compared with 9,557 applications in 2016), while the number of patent applications for inventions decreased (4,495 applications in 2015, compared with 4,095 applications in 2016). These trends highlight the following: 1) In Ukraine, patent trolls increasingly focus their attention on patenting and, in most cases, they manage to escape legal responsibility; http://www.uipv.org/i_upload/file/promvlasnist-2016.pdf 1

130

2) Inventors and companies create less inventions or, being disappointed in the system’s efficiency, stop filing applications, or file their applications abroad, in breach of the mandatory requirement to file the first application in Ukraine. The data on non-resident applicants interested in filing patent applications in Ukraine are hardly optimistic either. Only 191 applications from non-residents were filed under the national procedure in 2016 (against 235 applications in 2015) and 1673 applications under PCT (against 1989 applications in 2015). Foreign applicants are apparently disappointed in the efficiency of patent protection, or do not rely on Ukraine being a country that is attractive for investing, business and product import. Sure enough, by comparing 2015 and 2016 only, it is impossible to take into account all the ins and outs of the current trends. Yet, these trends are obviously not encouraging.

Why Grant Patents for Utility Models that are Not New?

As said before, in Ukraine, patents for utility models are granted at the applicant’s risk, they are declarative and are often used by patent abusers. Unlike utility models, inventions are examined by the Patent Office for novelty, inventive step and industrial applicability. Interestingly, in 2016, only 5 lawsuits were filed for nullification of patents for inventions, while there were 15 lawsuits for nullification of patents for utility models. Only 2 patents for inventions and 8 patents for utility models were nullified by courts. The question is, how come there are so few lawsuits requiring nullification of patents for utility models? The analysis of regulations, judicial practice and market trends points to numerous reasons, including the following: 1) Patents can only be nullified by courts. According to Paragraph 1, Article 33 of the Law of Ukraine On the Protection of Rights to Inventions and Utility Models, patents may be nullified in full or in part in a court of law. 2) Forensic examination of patents. According to Paragraph 3, Article 33 of the Law of Ukraine On the Protection of Rights to Inventions and Utility Models, to nullify a declarative patent, any person may require a competent institution to carry out the expert examination of a patented invention (utility

model) against the requirements of patentability. However, even if the expert report of the Patent Office indicates that the patented utility model has failed to meet the criteria of patentability, it does not mean that such patent will be immediately nullified, and does not set aside the necessity for forensic examination. The described approach is used in judicial practice. In particular, the Ruling of the Supreme Economic Court of Ukraine No.21/54620/214 of 10 February 2009, states that “… this statutory provision does not change the general procedure for nullification of disputed patents (which may only be nullified in a court of law), and it exists since no other qualification examination of declarative patents is provided; this examination has the status of scientific and technical examination; the databases of the competent Institution containing the records of inventions’ registrations (in particular, international) and special expertise of its employees may be used. The reports of this expert examination may be applied as follows: for out-of-court resolution of disputes between the parties; when deciding whether applying to court/reasons for applying to court for the declarative patent nullification are viable; as evidence in a legal dispute, etc. However, no current regulations set out that expert reports of the Ukrainian Institute of Industrial Property indicating that technical solutions in declarative patents fail to meet the requirements by patentability, may be interpreted as decisions of a competent authority to nullify such patents”. 3) The fight against patent trolling and patents for inventions that are not new is a reminders of Don Quixote’s tilting at windmills. While a patent nullification case is being heard, the patent owner, his/her representatives or any other person, may file another patent application for a utility model, and the Patent Office has no grounds to refuse the granting of a patent for a utility model.

Judicial Practice as a Key Efficiency Indicator

In spite of statistics, judicial practice is developing not only in regard to patent nullification, but also with regard to protection of patent rights. This indicates that businesses are paying more attention to patents and are aware that it is important not just to obtain patents, but to be able to protect their patent

WWW.UKRAINIANLAWFIRMS.COM


IPStyle Patent Law Company

I

Address: 1A Khoryva Street, Kyiv, 04071, Ukraine

PStyle Patent Law Company is a Ukrainian-based IP boutique founded in 2007. The company’s team consists of technical specialists, IP experts and lawyers. IPStyle uses a complex approach to all client cases. Furthermore, the Company provides the full range of IP services: from searches and registration to rights protection. IPStyle has already received more than 3,000 certificates for trademarks, more than 500 patents for inventions, utility models, and industrial designs. The company’s team consists of IP experts, lawyers and technical specialists. Every single member has his/her special field of work and responsibilities to provide 360 degree IP protection. IPStyle Managing Partner Mariya Ortynska is the guide and leading force of the company, who contributes to developing and expanding the scope of our activities. IPStyle experts are members of the following National and International Organizations: — INTA (International Trademark Association); — AIPPI (International Association for the Protection of Intellectual Property); — CEAPA (Council of the Eurasian Patent Attorneys); — AIPLA (American Intellectual Property Law Association); — FOBIS (Federation of Business Appraisers and Intellectual Property); — EBA (European Business Association);

rights in courts. 2016 was a year of unusual legal battles. Here is the overview of the most significant cases: — Seedera Seed Company vs. the State Intellectual Property Service of Ukraine, Syngenta Participations AG. The claimant filed a lawsuit requiring to terminate Patent of Ukraine No. 41255 as of 14 July 2013 and hold invalid the decision of the State Intellectual Property Department (currently — the State Intellectual Property Service) to extend the patent term. Syngenta Participations AG obtained proprietary rights in the aforementioned patent, which had been earlier granted to another company called Novartis AG. Yet another company by the name of Syngenta Crop Protection AG obtained the registration certificate from the Ministry of Environment for a product that contained thiamethoxam, which had been protected by the aforementioned patent. According to paragraph 4, Article 6 of the Law of Ukraine On the Protection of Rights to Inventions and Utility Models, the term of a patent for an invention, i.e. the medicinal product, animal protection product, plant protection product, etc., the use of which requires a permit from a competent authority, may be extended at the request of its owner for

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 393 4012 E-mail: office@ipstyle.net Web-site: www.ipstyle.net

— Ukrainian Association of Intellectual Property (Patent Attorneys); — UBA (Ukrainian Bar Association); — UAA (Ukrainian Advocates’ Association). IPStyle Patent Law Company has been working on the Ukrainian legal market for more than 10 years, during which it has managed to acquire a reputation of excellence on the Ukrainian and international markets of IP consulting services due to great responsibility and professionalism. The client list of IPStyle Patent Law Company is a trusty measure of various Ukrainian and foreign companies. IPStyle’s main aim is to protect the solutions, creations and inventions of clients. The company’s projects are oriented both at trademark and patent legal solutions. Projects also include trademark registration, transferring trademarks rights, license agreements, copyright registration, patenting of innovations, utility models, design patenting. Moreover, IPStyle provides consulting (contracts, legal opinion, developing strategy) and litigation services, including representation in courts of any instance, in arbitration and mediation, other state authorities including the Anti-Counterfeiting Committee. Striving to be a trusted consultant for our clients, the lawyers and consultants of IPStyle actively hold seminars on up-to-date IP issues, sharing IP experience as well as their vision on IP trends with colleagues and current clients.

a term equal to a period between the date of filing the application and the date of receipt of this permit, but for no more than 5 years. Thus, based on this legal provision, the claimant filed the request for the patent extension and the State Department extended the term of this patent. In fact, the court had to decide whether the aforementioned legal provision was applicable, provided that the permit had been obtained by the person other than the patent owner. The Economic Court of Ukraine dismissed the claim. Thus, the above-mentioned legal provision was applied regardless of who had obtained the permit (the patent owner or any other person). It should be noted that the Kyiv Economic Court of Appeal and the Supreme Economic Court of Ukraine upheld the decision of the primary court. — Individual vs. Kharkiv Machine Building Plant SVITLO SHAKHTARIA, the PJSC. The claimant had been the respondent’s employee for 10 years. The respondent filed the patent application, but in breach of the law, failed to make an agreement with the inventor specifying the amount and conditions of the latter’s remuneration. The inventor filed the lawsuit with rather unusual claims, including the following: to nullify the patent

application as one that was filed in breach of the inventor’s rights, to admit that the claimant is the patent owner, etc. According to the claimant, patent applications for employee inventions had certain features of written agreements. Consequently, the employer’s obligation to conclude a written remuneration agreement within the time specified by the law shall be interpreted as a fundamental term of an agreement. However, the court dismissed the claim. Still, the above legal case demonstrates that many employers ignore the requirements to execute remuneration agreements with inventors, while inventors become aware of their rights and are ready to protect them. In addition to the aforementioned cases, there are numerous other current and recent legal cases, including cases involving the protection of rights, the acknowledgment of the previous user’s right, application or nonapplication of the doctrine of equivalents. All these cases hold out hope and show that despite the dominance of utility models and the spread of patent trolling in Ukraine, the market of patenting, licensing and inventions is gradually developing, while patent attorneys and IP lawyers deal with rather unusual cases in courts.

131


Pharmaceuticals

Pharma Marketing: Quo Vadis?

Mykola ORLOV Managing Partner, Law Offices of OMP

T

here is hardly anything more characteristic of Government regulation in present day Ukraine than the treatment of marketing agreements concluded between pharmaceutical producers and pharmacy chains. Over the past three years the situation has gone from outrageous to ridiculous. The natural outcome is an impasse of sorts. The industry is waiting for the next move by the regulators. The latter are undecided and unpredictable. The problem is unresolved. What is worse, the state authorities do not seem to have anything resembling a strategy. The discussion below is an attempt to trace the problem from its origins right up to recent developments. Special focus is placed on the varying interests of all the parties involved.

Marketing Dilemma

It seems that there has always been something schizophrenic about marketing agreements in Ukraine. Both pharmacy chains and pharma producers were always keen to use them. The terms were straightforward and simple. The producers paid the sellers for the increase in sales. No frills, as simple as that. The remuneration depended on the volume of sales. Of course, there were a few exceptions. These, however, mainly occurred in addition to, and not instead of, the main arrangement. (At times, producers wanted to be nice to all the retailers and were ready to pay a little something to all of them irrespective of the achievement of the targeted volumes.) It became more complicated when the parties wanted to document their arrangements. The wording more often than not (which is to say, almost always) differed from the substance. Indeed, the most widely-used approach has been (and still is) not to men-

132

tion any percentage of sales as the basis for remuneration at all. Instead, producers paid retailers for zillions of different services. Often, pharmacies provided information reports worth thousands and even hundreds of thousands of hryvnias. Even more widespread were payments for the visits of the field force. Thousands of visits to each chain. Then, of course, there were priceless publications of promotional materials. There have always been several reasons for the above mismatch of form and substance. Producers were wary of the possible persecution of the marketing agreements by the Ukrainian authorities. Indeed, their fears have been justified by the ever recurring attention of the antimonopoly agency to any payments made by them to either distributors or retailers. Over the past ten years, the agency could never formulate their overall policy with respect to marketing agreements. As a result, their official statements, initiatives or enquiries were lacking in consistency and resembled a witch-hunt more than anything else. Retailers shared the above fears. Still, the main driving force for their lack of enthusiasm about documenting actual marketing arrangements appeared to be somewhat different. Unlike producers, pharmacy chains were subject to fewer, if any, compliance requirements. They could afford riskier tax planning strategies. One of these was to have marketing fees paid to tax-exempt intermediaries, mainly individual entrepreneurs. Payments for multiple services appeared to suit such tax plans better than simple performance-linked fees.

Risks of Marketing Duality

Whatever the reasons, any agreements deviating from reality have inbuilt legal and tax risks. Marketing agreements in the pharma field are no exception. While it is highly unlikely is that a party to them will abuse the mismatch of form and substance in court, as antimonopoly and tax investigations might prove devastating. In terms of tax, marketing agreements are a nightmare. There are three major problems with their tax accounting. First, consider the often obviously inflated prices of various services deemed to be provided under such agreements (information research and analysis, marketing studies, sales statistics, etc.). More often than not the price of the same services provided to the same producer by different pharmacy chains would differ dramatically (if no internal restraints and common

sense is exercised the difference may well be 200% or 300%). The other common malaise of these agreements is the frequency with which certain services are provided. The common examples would be visits by a field force to pharmacy chains or presentations made to pharmacists. With the ever growing amount of fees payable under these agreements, the number of such visits or meetings has the tendency of shooting up to thousands per each chain. It remains unclear whether one can reasonably justify such frequency, not to mention other mind traps. For example, whether the same information was used for all the visits or whether the pharmacists, if questioned, would ever remember what all those meetings were about. The hottest tax issue with marketing agreements is payments made to private entrepreneurs. As discussed above, one of the main reasons why pharmacies insist on the present form of marketing agreements is their desire to insert intermediaries. These intermediaries are either individual entrepreneurs paying the 5% flat tax or legal entities paying the same flat tax. More often than not individual entrepreneurs have little connection to the pharmacies using them. In many instances, there are doubts that such intermediaries ever pay anything to the relevant pharmacies. In view of the restrictions set by Ukrainian tax law on the maximum amount of income earned by payers of the flat tax, many individual entrepreneurs are used for one marketing service agreement with just one producer. All of the above creates the impression of an artificial scheme the sole purpose of which is tax avoidance. Previously, the Ukrainian tax authorities have been quite reserved in their treatment of pharma marketing agreements. That approach is changing now. With the general crackdown on individual entrepreneurs and abuse of their tax privileges by big businesses, the companies paying individual entrepreneurs under marketing agreements start receiving requests from the fiscal agency to re-consider their tax accounting of such expenses. Often such requests are satisfied and the respective payments are struck from taxdeductible expenses. The fear is that this is just the beginning. The main tax risk is that the fiscal authorities would start scrutinizing the services deemed to have been provided under marketing agreements. If that happens, it might prove difficult to justify payments for many services. The irony of the situation is that all

WWW.UKRAINIANLAWFIRMS.COM


OMP

O

Address: 79 Tarasivska Street, 4th Floor, Kyiv, 01033, Ukraine

ver ten years, OMP has been supporting pharma both in Ukraine and in all the other NIS countries. We focus on providing the full range of tax and legal services to the pharmaceutical market players. The majority of our services are specifically

payments are valid but for the contractual wording. Unfortunately, the Ukrainian tax authorities might have a strong incentive to disregard the substance and just find faults with the form. In their present form, pharma marketing agreements can easily be challenged by the Ukrainian antimonopoly authorities. Any subsequent witch-hunt might trigger scrutiny of the mismatch. Why would anyone indeed pay for thousands of unnecessary visits to pharmacies or for hundreds of the same presentations shown to the same pharmacists? Well, unless, of course, this is payment for something else. This agency has always been good at interpreting what else might have been paid for. As is the case with the tax authorities, unfortunately, the risk is that the interpretation would have an anti-industry bias. It is not inconceivable that the paying producers might be suspected or even accused of misusing such payments to manipulate the market or abuse their dominant market position.

Is AMCU To Blame?

The AMCU is not the only reason why the marketing agreements are so artificial. Nonetheless, it is one of the main culprits. This agency has created the perfect excuse for the pharmacies and the perfect bugaboo for the industry to continue with the questionable practice of dual nature marketing agreements. The antimonopoly authorities never seemed to have any strategy regarding marketing agreements. Instead, they have been trying to apply scare tactics in order to achieve short-term political goals. The main objective appears to have unvaryingly been reducing the price of medicines for the population. There is no solid evidence that marketing agreements have ever had any tangible influence on the cost of pharmaceuticals. There is overwhelming evidence that the prices skyrocketed following the sharp devaluation of the national currency. However, this has never bothered the antimonopoly agency. Instead, its officials first tried to claim that marketing services should be provided at cost. Following the uneasy dispute with the industry the claim was taken back. Instead, the agency warned that such agreements should be concluded on equal terms and reserved its right

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3001 E-mail: office@omp.ua Web-site: www.omp.ua

tailored to the needs of the pharma industry. OMP has a recognized experience in tax mediation and litigation, GR and legislative work. One of our recent projects is supporting promotional and marketing efforts in the pharma industry.

to go after agreements with dominant market players. These vague criteria have never been further developed by officials. Finally, at the end of 2016 the antimonopoly authorities conceded in their market research that Ukrainian law did not regulate marketing agreements. This admission effectively means that these agreements, by and of themselves, may not violate Ukrainian law. Furthermore, contracting parties are free to agree on any terms. Ukrainian law does not restrict contractual terms. Importantly, the antimonopoly authorities should investigate marketing agreements only on an individual basis to the extent they violate or appear to violate Ukrainian antimonopoly regulations. The latest development in the AMCU’s stand on marketing agreements is undoubtedly a move in the right direction. However, it is the history of the stand-off that is more important to the industry. As is too often the case with the Ukrainian authorities, there was arguably little legal basis for the antimonopoly agency to go after marketing agreements. Unfortunately, this did not stop the officials from trying to meddle in them. Their attempts to achieve political goals outside the scope of their powers would have a lasting effect on the industry. They feed the air of uncertainty and lawlessness when anybody and anything can be prosecuted or outlawed at the whim of the regulator. Following the past three years of the stand-off with the AMCU, it is quite difficult for producers to argue with retailers who do not want to conclude marketing agreements with remuneration linked to the percentage of sales for the fear of reprisals from the antimonopoly authorities. It was the officials themselves who wanted “cost-based� pricing, although they could not justify that claim later and duly withdrew it.

Available Strategies

None of the driving forces of the mismatch of form and substance of the marketing agreements in pharma is gone. If anything, the latest decisions by the AMCU prove that the agency is still searching for its policy line on pharma. We might be in for many more unexpected twists and turns. One of the current focuses appears to be market abuse by pro-

ducers of leading medicines. It is quite likely that marketing budgets would draw the attention of the regulator. At the same time, the risks brought by the mismatch are now higher than even a year ago. The Ukrainian tax authorities have always focused on marketing services as potential money laundering and a tool for tax abuse. Combining marketing services and individual entrepreneurs often invites tax audits. Even without individual entrepreneurs, producers and retailers might be hard pressed to justify many of the services. It is high time the industry reconsidered its attitude towards marketing agreements. The ideal world scenario would be to describe the real arrangements of the parties, i.e. remuneration linked to sales. While the above might not be achievable with all the pharmacies, it is definitely worth trying to pursue. One of the strategies of minimizing the risks of antimonopoly is to try and obtain clearance from the antimonopoly agency for a particular marketing agreement used by the producer. It should be noted, however, that such clearance would apply only to the wording submitted to the AMCU and only to the extent that real life arrangements do not deviate from it substantially. For those pharmacies refusing to change the old ways and the producers willing to put up with the associated risks, it is important to mitigate at least the most serious tax risks. Thus, the risk of criminal charges may be effectively mitigated by producers if they insist on the provision by pharmacies of comfort letters or copies of agency agreements with individual entrepreneurs. Furthermore, it is advisable to discontinue the practice of disparate payments for the same services provided by different pharmacy chains. At the very least, the difference should be obvious and based on sound business rationale. (It is not unusual that bigger pharmacies would charge more than smaller ones. However, the difference should not defy common sense.) Whatever the marketing arrangement, we would recommend exercising care in those cases where the producer is promoting a market dominant product or explicitly attempting to increase its market share to the clear detriment of its competitors.

133


Ports and Marine Terminals

Investments in Port Infrastructure: What Should Investors Be Aware of?

Alexander KIFAK Managing Partner, Attorney-at-Law, ANK Law Office

I

n January 2017 the Ukrainian Sea Port Authority (USPA) published the results of cargo transshipment in Ukrainian seaports for 2016. According to USPA, in the reporting year Ukrainian ports transshipped a total of 131.7 million tonnes, which is 9% less compared to the same period in 2015. At the same time, in 2016 several companies at once declared the start of implementation of large investment projects in ports. For example, USPA, Cargill and MB Cargo have signed a Memorandum on construction of a grain terminal at Yuzhny port while the EBRD and IFC have confirmed their readiness to provide partial financing for the project. In December 2016 the Ministry of Infrastructure and Hutchison Ports signed a Memorandum, upon which a famous port operator from Hong Kong could become the operator of Chernomorsk Port and, first and foremost, its container terminal. In this regard, potential investors often ask us about the legal instruments available under Ukrainian law which could be used for investment projects in Ukrainian ports.

Concession

The first active talk about the necessity to transfer the ports into concession arose in May 2012 after the Verkhovna Rada had adopted Law of Ukraine No.4709-VI On Sea Ports of Ukraine (hereinafter — the Ports Law). The Law introduced the possibility to transfer into concession berths, motor roads and railway tracks, engineering networks as a unified property complex. One arti-

134

cle of the Law included the list of types of agreements, which could be used for private investments in ports; along with the wellknown lease and joint activity agreements, the article also listed concession agreements. However, in order for the concession to truly work, the Ports Law alone was not sufficient. It was necessary to adopt several regulatory acts, while some experts insisted on introduction of a special law on concession in ports, drawing an analogy with the law on concessions for construction of automobile roads. In October 2012 the Government included property complexes of all sea ports to the list of objects of state property, which could be transferred into concession. The Ministry of Infrastructure has even drafted a model structure and content of technical feasibility study of the concession project. Market insiders said that Yuzhny Port was selected to become the pilot project in this field. However, not a single concession competition has been executed, nor was any concession agreement signed in sea ports in the period of 2013-2015. Last year the Ministry of Infrastructure decided to return to the idea of transferring the ports into concession. However, now they intend to start with small ports, where the private stevedoring business is hardly represented or is completely absent. The issue here is Olviya Port and Kherson Port. As world experience shows, concession is used successfully in many seaports. Therefore, we can only appreciate the efforts of the Ministry of Infrastructure in this direction.

Privatization

Starting from 1992 a legislative ban on the privatization of seaports in Ukraine has been in place. The Ports Law itself implemented the general guidelines, upon which strategic port infrastructure facilities (quay walls, water areas, approaching channels, railway tracks and automobile roads of general use) could not be privatized. However, unified property complexes of the ports — state enterprises — and its business units could be privatized. Besides, since at the moment when the Ports Law was adopted a lot of warehouses, storage areas, buildings and other port facilities were already leased

to private stevedoring companies, a special note was added to the Ports Law. The note provides that these objects could be bought back by the lessee who added fixtures to the leased property, the value of which exceeds its depreciation value as of the moment of privatization by 25%. However, the main step required to start privatization of seaports has not been taken yet because all Ukrainian seaports are still included in the list of stateowned objects, which are not subject to privatization. It is obvious that privatization of seaports could not be widespread. It should be used in cases where concession or other form of private public partnership does not work. Besides, transfer of a particular port to a private investor should not lead to monopolization of a port (stevedoring) services market in that particular region and, therefore, it requires the special attention of the Antimonopoly Committee and the Ministry of Infrastructure of Ukraine as market regulators.

Lease

Whether we like it or not, nowadays lease seems to be the only legal mechanism, which really works in Ukrainian ports. It is worth noting that the majority of lease agreements on immovable property have replaced joint activity agreements, which had been widespread in ports in the 1990s. By terminating joint activity agreements, which provided for unification of property shares of participants and for payment of a part of the income for the benefit of the port, the Ministry was expecting lease fees to be significantly higher and that the state would get more benefits. In practice, however, these expectations did not hold water. Lease payments were subject to state regulation and the leased property was extremely worn-out. That is why its market appraisal value, which is the basis for calculation of the lease fee, was not high. That is why the so-called “port services agreements” were created in several ports. These “services agreements” were meant to compensate port financial losses during transfer from joint activity into lease agreements. Nevertheless, many lease agreements were signed for a period of 10 years or longer. Later on these lease agreements were extended for even longer terms,

WWW.UKRAINIANLAWFIRMS.COM


ANK law office

A

Address: 9 Lanzheronovskaya Street, Odessa, 65026, Ukraine

NK law office was established in 1996 and through the years of extensive legal practice has become one of the leading law firms in Ukraine. We have been successfully advising our clients on different matters of Ukrainian law over the last 20 years. As a result of our dynamic development we have combined unique experience and created a highly-qualified professional team of lawyers and auditors. We provide regular legal support to our clients on the most difficult projects and deals. Today, the ANK team consists of more than 25 qualified lawyers and attorneys-at-law and each of them is an experienced specialist in his/her field of legal practice. ANK lawyers are regularly involved as experts by leading Ukrainian business media for commenting latest legislative amendments and government initiatives. ANK law office provides complex legal support to grain, oil and container terminals in Ukrainian ports. We advise clients on the process of attracting international financing from IFC, EBRD and other financial institutions. We act as Ukrainian legal counsel to the container shipping lines, shipowners and

which was appreciated by the port operators for it is well known that consistent business rules are any investor’s top priorities.

Permanent Improvements Problem under Lease Agreements

According to our results, the main problem of port operators working under lease agreements is the impossibility to carry out reconstruction, modernization of their leased objects, to say nothing about comprehensive construction of port infrastructure objects. In fact, the Lease of State Property Law provides for the lessee’s right to execute permanent improvements of a leased object only upon the lessor’s consent, unless otherwise stated in the lease agreement. In reality regional departments of the State Property Fund, which act as the lessors under lease agreements with port operators, do not only double the regulations requesting the lessee to obtain approval for conducting permanent improvements, but also directly indicate that the lessee’s costs and expenses for such improvements shall not be compensated regardless of whether such consent was granted or not. The procedure for obtaining the consent for making permanent improvements to the leased property is approved by Order of the State Property Fund of Ukraine No.1523 (the Order). According to the Order, the Fund formally approves a decision on granting consent based on the documents presented by the lessee. In practice the Fund is not a decision-maker here because the real deci-

WWW.UKRAINIANLAWFIRMS.COM

Tel./Fax: +380 482 348 716 E-mail: office@ank.odessa.ua Web: www.ank.odessa.ua

shipmanagers as well as P&I clubs. Our corporate and M&A practice advises clients on establishing business in Ukraine, licensing procedure and business restructuring. We have a strong team of court lawyers and attorneys-at-law who are ready to protect the interests of clients in court. Due to the large network of correspondent offices abroad, ANK law office can arrange effective legal assistance almost anywhere in the world. We cooperate with maritime administrations and classification societies and provide clients with professional legal assistance during the sale and purchase of vessels and yachts. ANK lawyers are fluent speakers in English, Ukrainian and Russian. Practice Areas: — Agriculture and Land Law — Arbitration and Litigation — Corporate and M&A — Infrastructure and Real Estate — Shipping and Maritime Law — Tax and Legal Due Diligence.

sion is made by the Ministry of Infrastructure at a meeting of the special commission. As our experience of last year shows, the meetings of the commission became public and the Ministry invites not only the port and the Fund but also the lessee, who is to describe in detail what permanent improvements they intend to carry out and what positive effect it would have on the whole enterprise. Nonetheless, the practice of granting such permits shows that the Ministry discusses the possibility of conducting such permanent improvements on condition that its value shall not be compensated. Such an approach seems to be at least strange, taking into account the fact that the lessee spends a lot of time, money and effort collecting the requested set of documentation, which includes design and cost estimating documents and an expert reports on the results of the expertise. Should the state, represented by the Ministry and the Fund, like to study the planning of the permanent improvements deeper and would like to check the cost sheets of the future works and to be reassured that they correspond with existing standards and regulations, the lessee shall be entitled to compensation of such permanent improvements in case of termination of the lease agreement. Should the state not intend to compensate the costs spent for the permanent improvements to the lessee (which today is prescribed in all approvals issued by the Ministry) from the very beginning, the lessee should then be released from submission of the estimated cost sheet and expert report and the procedure should be simplified.

Special attention should be given to the question of the terms when the lessee may receive the consent of the Fund to conduct permanent improvements. The current edition of the Order does not provide for any terms for the regional department of the Fund to examine the lessee’s application. In addition, there are no terms for examination of the set of documents in the Ministry of Infrastructure. In reality this means that it may take the lessee 3-6 months to receive approval for permanent improvements, and sometimes even longer. From our point of view, the Ministry of Infrastructure should think about changing such practice and speed up the examination procedure of these questions and start issuing approval for compensation of permanent improvements, especially when we are talking about long-term lease contracts.

Summary

Attracting investments into ports, which use lease instruments, seems to have low prospects. World experience shows that concession for construction or for operation are the right instrument for the job. It is clear that the Concession Law and the Ports Law do not regulate these issues in due course. That is why we highly appreciate the initiative of the EBRD, which declared that it is ready to grant the funds for drafting the law on concession in the ports. Also we believe that the announced concession projects in the Olviya and Kherson ports shall be successfully realized and will get positive feedback from foreign investors.

135


Private Clients / Wealth Management

Private Client Review

Tetyana IVANOVYCH

Nickolas LIKHACHOV

Counsel, Head of Private Clients, Spenser & Kauffmann

Counsel, Head of M&A, Banking and Finance, Spenser & Kauffmann

krainian law does not provide for a form of a legal entity that could be regarded as a private wealth management vehicle. The concept of a “trust” or a “foundation” is not recognized in Ukraine. But as of the time of writing of this note, Ukrainian citizens and residents were not statutorily prohibited from transferring assets to foreign trusts as settlors, beneficiaries or protectors of such structures. The ownership of any assets transferred to such a structure is lost and the assets will then be considered to be owned not by the settlor of the structure but by third parties (e.g., trustees). In such a case, Ukrainian succession law does not apply. If Ukrainian citizens or residents plan to transfer their property to foreign trusts, it is recommended that certain precautions be observed. Because the concepts of “trust” and “foundation” do not exist in Ukraine, Ukrainian citizens or residents can assign their assets in Ukraine directly to a trust (or foundation) only through a foreign company. Though Ukrainian matrimonial law does not directly specify that to have any assets, being under the joint tenancy of spouses, transferred to any trust or foundation, the consent of the other spouse is required; we strongly recommend receiving such consent to avoid such transfer being challenged in court as a violation of Ukrainian family law. In addition, trustees of best practices may ask settlers to include forced heirs, if any, to the list of beneficiaries of the trust. Significant legislative developments aimed at providing economic and financial transparency have taken place since 2014. The regulation of tax, corporate and banking law underwent drastic changes in order

to bring it in line with EU laws after Ukraine ratified the Association Agreement with the EU on 16 September 2014. The Government, driven by the desire to meet strict criteria of EU visa-free regime, has introduced an electronic declaration system and launched the National Agency for Prevention of Corruption. Receipt of the next tranche from the IMF is subject to further reforms such as establishing a special anti-corruption court, new financial police force and the launch of the agricultural land market. The implementation of recognised international standards and principles of business is aimed at providing clear rules for both Ukrainian businessmen and foreign investors.

U

136

Wealth Regulation

Over the last decades, Ukrainian ultrahigh net worth individuals (UHNWI) have got used to taking advantage of cross-border structuring of business. Service providers from Cyprus, the Netherlands, BVI, Panama ensured privacy of their principles. However, Ukraine is now making progress in providing the transparency of businesses and their owners in accordance with recent global trends. These efforts are aimed at eliminating nominee shareholders’ services, fighting corruption and preventing money laundering. The first step in this regard was made in 2014 when Ukraine introduced the requirement to disclose information about ultimate beneficial owners (UBO) of companies in the State Registry of Legal Entities and Private Entrepreneurs. Ukrainian legislation identifies UBOs as individuals who are able to exercise, directly or indirectly, decisive influence on the management or business activities of the company regardless of formal ownership. Publicly available on the website, the

State Registry now contains personal information of UBOs. Notwithstanding that nondisclosure of the company’s UBO is subject to only administrative sanctions, it may lead to consequences, which are more significant. No reputable partner will engage with a company without knowing who stands behind it. Moreover, foreign banks are unwilling to open accounts or accept transfers from unidentified entities, as they are obliged by their governments to conduct financial monitoring. Сompliance procedures observed by Ukrainian banks, however, are known to be less comprehensive compared to banks in the EU. Furthemore, in April 2016 Ukrainian President Poroshenko established a Special Task Group with the aim of drafting a deoffshorisation bill that will counteract the reduction of the tax base and profit shifting abroad. Such steps are taken with the view of Ukraine’s obligations to join BEPS (Base Erosion and Profit Shifting) Action Plan and Common Reporting Standard (CRS). While some draft laws on implementation of four steps of BEPS already have been presented to the Ukrainian Parliament, preparation to join the CRS Convention is unlikely to take less than a couple of years. It is worth mentioning that automatic exchange under the CRS concerns the data on not only bank accounts of UHNWI, but also the information about trusts and foundations. This enables full transparency of their UBOs. Notwithstanding that Ukraine will need some time to adjust its legislation before joining the CRS, the countries that started exchange of tax information in 2017, are accumulating information on UBOs from other countries that have not joined the CRS. As soon as Ukraine joins the Convention, its tax authorities will receive information accumulated through previous years. According to the OECD’s website, 101 countries have already assumed obligations to participate in an automatic exchange, including those, which are popular for cross-border structuring among Ukrainian UHNWI. Therefore, the impact of CRS on UHNWI could not be underestimated, because as soon as Ukraine joins the CRS, Cyprus, the Netherlands, BVI, Belize and others will send the collected information to the Ukrainian tax authorities. The new electronic declaration system for politically exposed persons as introduced in 2016 promotes fighting corruption as one of the key goals to be achieved before visafree travel to the EU is permitted. State officials have already filed their declaration for 2015, and declarations for 2016 will be submitted before 1 April 2017. The National

WWW.UKRAINIANLAWFIRMS.COM


Spenser & Kauffmann

S

Address: 7 Klovsky Uzviz, 14th Floor, Kyiv, 01021, Ukraine

penser & Kauffmann is one of the leading full-service law firms in Ukraine. Since its foundation in 2006, Spenser & Kauffmann aims to provide its сlients with the highest standards of legal advice and exemplary service. We represent our сlients in all areas of business law, including mergers and acquisitions, corporate, antitrust, intellectual property, IT, labor & employment, insurance law, banking and finance, capital

Agency for Prevention of Corruption, which is authorized to control the accuracy and completeness of the submitted data, as well as compliance with deadlines, approved the procedure of such control on 10 February 2017. According to it, the Agency will use all available information from the Internet, state registers, state and local authorities, law-enforcement bodies, individuals and legal entities to review the assets of persons, conflicts of interest and signs of illegal enrichment. Individuals and companies in Ukraine are still facing difficulties connected to strict currency regulation. Active legislative rules prohibits individuals and legal entities from investing funds from Ukraine in foreign countries without an NBU license. Violation of this rule may result in a fine in the amount of invested currency. However, due to the financial situation in Ukraine, the NBU has banned individuals from transferring money from Ukraine to foreign accounts or investing abroad and limited legal entities in investing abroad to the sum of USD 50,000 per month. While earlier the NBU used to extend the currency restrictions every 6 months, the latest order of NBU envisages an undefined term of restrictions, as they act until a separate order of the NBU. On 23 February 2017, the NBU abolished the necessity for individuals to obtain licenses for investing abroad and depositing

WWW.UKRAINIANLAWFIRMS.COM

Tel.:+380 44 288 8383; 288 6707 Fax: +380 44 351 2155 E-mail: office@sklaw.com.ua Web-site: www.sklaw.com.ua

markets, construction, energy & natural resources, enforcement proceedings, private clients, tax consulting and litigation. Throughout the last ten years, our firm has been recognized among the leaders by various prestigious international and domestic rankings in different legal spheres. Our lawyers speak English, French, German and Czech, which allows us to understand and communicate with domestic and international сlients without psychological or language barriers.

money on accounts in cases, when funds did not originate not from Ukraine. Henceforth, UHNWI that have funds abroad can proceed with opening bank accounts and purchasing assets directly in their name without delay and bureaucracy connected to old-fashioned licensing. This relief gives hope for future liberalization of currency regulation in Ukraine. The aim of the NBU’s banking sector reform was aimed, among other things, at the transparency of banks’ business and the ownership structure of banks and has led to the liquidation of more than 90 commercial banks in Ukraine since 2014. As the biggest Ukrainian bank PrivatBank was nationalized at the end of 2016, the state now controls the majority of the banking sector. According to current legislation, acquisition of a significant interest in a Ukrainian bank requires obtaining approval from the NBU. Before issuing such approval, the NBU analyses the transparency of the planned ownership structure, reputation of applying UBOs and management, clear source of income of the buyers. Failure to provide the NBU with information on key shareholders may result in the forced liquidation of a bank.

Taxes and Succession

Tax residents of Ukraine pay tax on their income with no regard to the country of source. A rate of 18% for income tax ap-

plies to any income, including dividends (except for dividends from corporations that are taxed at 5%), interest and royalties. In addition, a military duty was introduced in Ukraine since the time that the armed conflict in the Donbass region began. A rate of 1.5% is applicable to the worldwide income of Ukrainian tax residents. The income of tax residents from the disposal of real estate is taxed at 0% when the following three conditions are met: (i) the transaction is the first of the seller during a tax year; (ii) real estate that has been in ownership for not less than three years prior to disposal; (iii)  real estate is of a specific type. In other cases, such income is taxed at 5%. A rate of 18% is applied to income from the disposal of real estate of non-residents. There are two types of succession: intestacy and testamentary succession. Intestacy takes place if a devisor has not left a valid will and testament or if the devisor left a will but it was quashed by a court or if the heirs waived their rights to inheritance. Testamentary succession means that a devisor has left a will, which defines the persons that can take part in the succession process. The provision regarding forced heirs stipulates that minors or disabled children, spouses or parents shall, in any case, inherit at least a half of the property they would receive in the absence of the last will.

137


Private Equity

Private Equity Financing: the Ukrainian Model

Svyatoslav SHEREMETA Partner, Head of Corporate and M&A Practice, Integrites ILF

Global Trends in Private Equity Financing

Private equity (hereinafter — PE) investment is a type of financing when portfolio (non-strategic) investors, usually specialized private equity funds and so-called “family offices”, invest in the share capital of company shares which are not traded on stock exchanges. Therefore, a PE investor takes a higher risk in terms of proper information disclosure by the investee company and participation in its corporate governance but, at the same time, expects a higher yield on its investment, as compared with investments in the shares of publicly-traded companies. In some cases, PE financing may combine investments in share capital and providing debt financing. According to a number of research reports, global PE financing in 2016 sees some decline, but it remained near record high levels both in Europe and the US. Even though each of those two large PE markets has its own specifics (e.g., in the US, micro financing or financing at very early stages of companies’ development, so-called “angel investments” or “seed investments”, are more popular), the outlook for both the amount of total capital invested and number of deals is positive for the next few years to come.

Ukrainian Market

While the first PE investors emerged in Ukraine more than two decades ago, they were limited to a few professional investments companies and international financial institutions managing funds raised from Western-based private or institutional investors. The most popular industries for

138

such PE funds were agriculture and food processing, financial services, retail, commercial real estate, production of household products. The second wave of PE financing on the Ukrainian market was inspired by the rapid growth of information and computer technologies in Ukraine, and the range of PE investors expanded by a number of investment funds which grew out as a separate line of business of large Ukraine-based business and financial groups. Currently, the main focus of PE funds has shifted to IT, e-commerce, cyber security, pharmaceuticals, export oriented agri-production and food processing.

Distinctive Features of PE Financing

A typical PE fund would have its internal investment policy guidelines. Investment policy guidelines determine, inter alia, maximum percentage of the fund which may be invested in one investee, minimum and maximum ticket size (limits on value of separate investments), preferred industries and regions for investment, target rates for return on investment, fund’s expected lifespan (which generally ranges between 7 to 10 years), and potential mechanisms for divestment (as most investors in PE fund do not see a return from their investment until they exit). There are a number of most common exit strategies for PE funds such as an IPO, sale to portfolio investors, merger with or acquisition by a strategic investor (a larger company active in a similar or complementary type of business), or liquidation. Quite often the preferred exit strategy would determine, to some extent, the desirable characteristics for investee companies. PE funds may differ as to what stake they would be willing to acquire in one investee. Thus, some of the largest institutional PE funds present in Ukraine consider acquisition of minority stakes only, while others do not invest in companies where they cannot acquire a majority stake or obtain full operational control. Also, taking into consideration the great influence of regulatory procedures and requirements on some businesses (e.g., construction of residential or commercial real estate) or specifics of Ukrainian corporate governance, co-investments by a smaller local PE investor and its large international peer are becoming more and more popular in Ukraine.

Since PE funds rely on distribution of proceeds resulting from the exit from their investment rather than on regular dividend payment or interest payments (which is the case for debt financing), PE Funds make investments in companies with high growth potential with the aim of increasing the value of the company (and of their investment, accordingly). One of the ways to increase a company’s value can be to improve its business model, expand the product lines and clients base and enter new markets. Strengthening management capabilities, either through increasing qualification of existing operational management with the use of PE fund manager’s own know-how and human resources, involvement of external experts or combination of both, is another way to make an investee company more attractive in the eyes of potential future buyers. Also, ensuring that internal accounts and annual audited reports are prepared in full compliance with international standards is a must for large institutional investors or for companies being prepared for an IPO.

Conventional Structuring of PE Financing

In Western jurisdictions, PE funds are often structured as limited partnerships where the general partner (the PE fund manager) takes the responsibility for selecting investee companies for the fund and then taking part in the management of such investee companies, and limited partners (the passive investors) provide most of the financing for the PE fund. Largely due to possible unfavorable tax implications, limited partners in PE funds usually do not take an active role in the corporate governance or operation of business of investee companies. In most cases, all the entities and contractual arrangements may be set up in, and regulated by the law of the jurisdiction where an entity that will be managing the PE fund is established.

Ukrainian Model for PE Deals

Unfortunately, Ukraine has not yet developed a legal framework allowing the structuring of PE deals within the contour of the Ukrainian jurisdiction only in a way which would be comfortable for a PE investor willing to invest in Ukraine-based businesses. Therefore, most PE transactions are structured with

WWW.UKRAINIANLAWFIRMS.COM


INTEGRITES

I

Address: 1 Dobrovolchykh Batalioniv Street, Kyiv, 01015, Ukraine

NTEGRITES has a solid network of operating offices in the CIS (Kyiv, Moscow, Almaty, Astana, Karaganda, Aktau, Atyrau) supported by an international office network in London, Munich, Amsterdam and Guangzhou. The firm offers its clients complex legal advice in the CIS region. In 2016 The Lawyer recognized our work in the CIS with the award Law Firm of the Year: Russia, Ukraine and the CIS. We provide legal services for our world-known clients: Rabobank International, EBRD, VTB Bank, ProCredit Bank, Mitsubishi Group, Concern Toyota, Agrogeneration S.A., Credit Agricole, Nestle, COFCO Agri, LTk Capital, Dragon Capital, ADM, Louis Dreyfus Company, Soufflet Group, Сredit Agricole, Burisma, Aspen Pharmacare Holdings Ltd., Shell, DuPont, Bank of China, DHL, China Development Bank etc. Main industries: Agribusiness, Capital Markets, Construction and Land, Energy and Natural Resources, Information Technologies, Medicine and Healthcare, Telecommunications. Main Practices: Antitrust and Competition, Banking and Finance, Bankruptcy, Corporate, M&A, Criminal Law and White-Collar Crime, Intellectual Property, International Arbitration, International Trade and Trade Remedies, Labor and Employment, Litigation, Real Estate, Retail, Tax.

the intensive use of foreign legal elements. A typical structure for an institutional PE fund investing in Ukraine-based business would look as follows: a Ukrainian operating company (established in the form of a limited liability company) is fully owned by, in most cases, a Cypriot special purpose vehicle (selection of the Cypriot jurisdictions is explained by the favorable terms of the tax treaty entered into between Ukraine and Cyprus), which, in turn, is owned by a limited partnership registered in one of the so-called “tax haven” jurisdictions — British Virgin Islands, Isle of Man, or Jersey. The use of a limited partnership (a tax transparent entity) in such structures means that profit distribution to the investors will not be affected by taxes levied at the level of the limited partnership. An agreement setting forth the investment policies of the PE fund, investors’ commitments to provide funding, terms for admission of additional limited partners, allocation of costs and distribution of profits, corporate governance rules, etc. is concluded between the general partner and initial limited partners at the level of limited partnership. Structuring a PE fund in the conventional way requires a substantial amount of effort, time, human and financial resources from all parties involved, and may look too cumbersome for those Ukrainian investors and investee companies that just started their journey on the PE financing path. Local in-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3853 Fax: +380 44 391 3854 E-mail: info@integrites.com Web-site: www.integrites.com

Our firm is also represented by international offices: United Kingdom 1 King Street, EC2V 8AU, London, UK Tel.: +44 203 713 1750

Germany Maximilianstrasse 13, 80539, Munich, Germany Tel.: +49 892 030 061 50

Russia Naberezhnaya Tower Block C, Moskva-City 10, Presnenskaya Naberezhnaya Moscow, 123317, Russia Tel.: +7 495 660 50 70

China R&F Ying Sheng Plaza, MaChang Road 16, Tianhe district, Guangzhou city, Guangdong, China. Tel.: +86 185 0204 0880

Kazakhstan SUCCESS Business Center, 1/1, Zhandossov St., Almaty, 050008, Republic of Kazakhstan Tel.: +7 727 352 80 83/84

Netherlands Herengracht 282 1016 BX Amsterdam The Netherlands Tel.: +31 20-5219367

vestments of smaller (“family-office type”) Ukraine-based PE funds are often structured through the use of nominal individual owners of Ukrainian operating companies, intensive use of low-taxed individual entrepreneurs as subcontractors in a company’s operational activities, dividing ownership over the main assets and IP rights among a group of formally unrelated legal entities or individuals, which makes such structures more vulnerable in terms of long-term sustainable operation and deter many Western institutional PE funds from investing in businesses structured in such a way. At the same time, converting the business operations of such a business into a more conventional model would with a high probability negatively affect the profitability of the business and may eat up all the company’s operating profitability, a critical factor to be taken into account by any PE fund when making an investment.

Regulatory and other Barriers on the Investors’ Pathway to Ukraine

In addition to corporate structuring issues, PE funds willing to invest in Ukrainian business may face a number of other regulatory and legal barriers which they rarely see in most other jurisdictions competing with Ukraine for financial resources. Extreme

overregulation of currency exchange operations, harsh restrictions on repatriation of dividends to a non-resident parent company, the vulnerable legal status of shareholders’ and option agreements, absence of the contractual concepts of warranties and indemnities, the weak judicial system and low enforceability of court decisions and arbitral awards — all those factors present in Ukraine are accounted for by investors when planning their investment strategies and selecting countries for providing PE financing.

Actions Required from Ukrainian Legislators

Both local and foreign investors await a clear and unambiguous signal from the Ukrainian authorities that investors will be treated fairly, that corruption will be fought and eventually eliminated in most areas related to business activities,. Futhermore, that the judicial system will be reorganized in a manner that would allow to rely on it without the fear of being treated unfairly. It is an immediate task for the Ukrainian Parliament to eliminate those gaps and problems in the Ukrainian legal system, as well as it is within the main goal, and in the best interests of the entire legal and business community, to help legislators to bring the Ukrainian legal framework into conformity with the best international standards and practices.

139


Privatization

Privatization in Ukraine

Serhiy PIONTKOVSKY

Nataliya TYSCHENKO

Managing Partner, Kyiv office of Baker McKenzie

Associate, Kyiv office of Baker McKenzie

hortly after the Revolution of Dignity in 2014, the Ukrainian Government embarked on a path of large-scale privatization. In August 2016, the Cabinet of Ministers of Ukraine amended the Regulation On Transparent and Competitive Privatization in 2015-2017 (the Privatization Regulation) defining the list of properties subject to privatization for 2016-2017. This list includes about 300 enterprises, among them a significant number of strategic enterprises in the energy, mining, infrastructure, chemical and agricultural industries. The “top” enterprises subject to privatization for 2017, as named by the State Property Fund of Ukraine (the SPF), are PJSC Centerenergo, PJSC Khmelnitskoblenergo, PJSC Ternopiloblenergo, PJSC Kharkivoblenergo, PJSC Mykolaivoblenergo, PJSC Zaporizhyoblenergo, PJSC Cherkasyoblenergo, President-Hotel Kyivsky, and the Bank for Reconstruction & Development. With a view to facilitating the privatization process, in 2016 the Ukrainian Parliament adopted amendments to the Law of Ukraine No. 2163-XII On the Privatization of State Property (Privatization Law). The amendments, inter alia, (i) abolished the mandatory sale of 5-10% of the shares in a public joint stock company (JSC) belonging to Groups B and G (Ukrainian state strategic enterprises) on a stock exchange, (ii) established a mechanism for engaging advisors during the privatization of a JSC belonging to Group G and (iii) allowed resolution of disputes under a privatization agreement in an international arbitration court if this is set out in the relevant privatization agreement.

— Assets, production facilities, and structural units of enterprises that constitute integrated property complexes, which may include underlying state-owned land plots; — Separate individually-defined property, which may include underlying stateowned land plots; — Unfinished construction sites, which may include underlying state-owned land plots; — State-owned shares in enterprises; and — Socio-cultural objects, which may include underlying state-owned land plots. The Privatization Law divides all stateowned assets into six groups, which are subject to different privatization methods. Group A includes state enterprises and their structural units that during a fiscal year have up to 100 employees and gross revenue of less than UAH 70 million and/or their fixed assets value is not sufficient for establishing a JSC. Group B includes state enterprises and their structural units that during a fiscal year employ more than 100 employees and have a gross revenue of more than UAH 70 million and/or their fixed assets value is sufficient to establish a JSC. Group G covers integrated state property complexes that have dominant market positions, companies of strategic importance, and those determined on a case-by-case basis by the relevant authorities to merit the application of an individual procedure by being unique in the sphere of production or intellectual property. Group D covers unfinished construction sites and mothballed construction sites, including the underlying land plots. Group E includes state-owned shares in private enterprises of any legal organizational form.

S

Objects of Privatization

Under the Privatization Law, the following state-owned assets are subject to privatization:

140

Group J covers social and cultural objects, including the underlying land plots. The privatization of objects belonging to Group G, as well as properties in the fuel and energy industry, is carried out upon the decision of the Cabinet of Ministers of Ukraine. There are certain objects that are exempt from privatization by law (certain cultural heritage sites; hydraulic facilities; seaport areas; agricultural land which can be privatized only after the adoption of the Law On Transfer of Agricultural Land, but in any case not earlier than 1 January 2018).

Participants in Privatization

Under the Privatization Law foreign individuals and legal entities may participate in the privatization process, along with Ukrainian citizens and legal entities. Foreign investors should pay for the privatization objects they intend to purchase in local currency or in freely convertible currency. Under the Privatization Law the following entities may not purchase state-owned property: — entities in which the state owns more than 25% of assets; — entities, where any number of shares are owned / controlled by an entity-resident of the state, recognized by the Ukrainian Parliament as an aggressor (Aggressor State) (currently, the Russian Federation) or by the Aggressor State; — state bodies, employees of state privatization bodies; state business entities or their subsidiaries of any legal organizational form; — persons incorporated in off-shore zones (the list of such zones is compiled by the Cabinet of Ministers of Ukraine) or in jurisdictions listed in the Financial Action Task Force’s Non-Cooperative Countries or Territories; — entities and/or individuals and/or their affiliates incorporated in the Aggressor State or entities and/or individuals subject to sanctions (Ukrainian or international); — all persons that are directly or indirectly controlled by the persons mentioned above. In addition, the Privatization Law contains a number of restrictions on potential purchasers of shares of JSCs that enjoy a monopoly (dominant) position in the national market for relevant products, or that are of strategic significance to the national economy and/or security. In such cases only a majority stake in such a JSC can be offered for privatization and privatization of such

WWW.UKRAINIANLAWFIRMS.COM


Baker McKenzie

B

Address: Renaissance Business Center 24 Bulvarno-Kudriavska Street, Kyiv, 01601, Ukraine

aker McKenzie’s Kyiv office has maintained a leading market position in Ukraine for 25 years. We offer a full range of legal services and business solutions. The quality of our work is reflected in the number of domestic companies, multinationals and financial institutions that seek our advice on high-profile transactions and legal representation in Ukraine. In close cooperation with Baker McKenzie offices worldwide, we provide the guidance and support clients need to achieve their commercial objectives in practice areas like Antitrust & Competition, Banking & Finance, Corporate,

objects is performed on a case-by-case basis, and such privatization is strictly regulated. The Privatization Law stipulates that foreign investors must submit a declaration of the origin of the funds which they intend to use as consideration for the property being privatized, regardless of the value of the purchase.

Methods of Privatization

Under the Privatization Law state-owned property may be privatized through the sale of state property at auctions, through a tender with open price offers or under alternative methods specifically established by law. As a general rule, state land plots underlying the objects subject to privatization are privatized together with such objects through auctions pursuant to the Procedure for the Sale of Objects Subject to Privatization together with Land Plots Owned by the State adopted by the Cabinet of Ministers of Ukraine. The SPF may organize a tender for the sale of shares in a JSC in the form of an open auction. In such a case, the winner is determined on the basis of the auction held in accordance with the procedure established by privatization regulations. There are additional requirements for the sale of shares in “strategic enterprises”. If an enterprise which is to be sold through an auction or a tender or at a stock exchange is identified as “strategic”, the bidders must provide information to the privatization authorities about connected undertakings and other additional documentation that may be requested by the SPF. If the stake to be acquired in a strategic enterprise exceeds 25% or 50% or is otherwise deemed to grant controlling powers in the highest management body of the enterprise, then the approval of

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 590 0101 E-mail: kyiv@bakermckenzie.com Web-site: www.bakermckenzie.com/ukraine

Mergers & Acquisitions and Securities, Compliance, Dispute Resolution, Employment, Energy, Mining and Infrastructure, Healthcare, Intellectual Property, IT and Communications, Private Equity and Venture Capital, Privatization, Real Estate and Construction, Trade & Commerce, Tax and Customs, Wealth Management. Every year the Kyiv office confirms its top positions in the leading international and national legal directories, namely Chambers Global, Chambers Europe, Legal500, IFLR1000, World Trademark Review 1000, International Tax Review, Ukrainian Law Firms, Ukrainian Legal Awards, etc.

the Antimonopoly Committee of Ukraine must be obtained prior to the purchase. The lists of enterprises to be sold through auctions, tenders and buyouts must be approved by the SPF for state-owned property and by local councils of deputies for municipal property. The title to privatized property is evidenced by the sale and purchase agreement entered into by the purchaser and the corresponding privatization authority. The sale and purchase agreement must be executed in written form and certified by a notary.

Investment Obligations

The Privatization Law provides for investment obligations which must be included in the sale-purchase agreement. These investment obligations include the following: — Preservation of the main types of activity; — Modernization of production; — Compliance with mobilization targets; — Ensuring social guarantees for employees; — Environmental protection obligations; — Repayment of debts. The parties to the privatization process may also agree on other investment obligations. The period for the fulfillment of such investment obligations, except the obligation regarding compliance with mobilization targets, may not exceed five years. Any transfer of shares (property) which are subject to investment obligations must be approved by state privatization authorities and is generally prohibited until the investment obligations are performed in full. If the state privatization authority approves such a transfer of shares (property), then the investment obligations must be assumed by the new owner of the shares (property) in question.

Expected Changes into Privatization Procedure

With the purpose of simplifying privatization procedures and implementing global international business best practices for privatization in Ukraine the SPF initiated the development of a new Privatization Law. Such a Draft of the Privatization Law has already been developed with the assistance of Baker McKenzie as the EBRD consultant and is currently at the stage of discussion by the main stakeholders (the IMF, IFC, EBRD) and Ukrainian authorities. The Draft Privatization Law, amongst other things, proposes: — the division of all privatizable assets into two groups, namely large privatization assets and small privatization assets which is intended to be determined based on the value of assets criteria; — mandatory involvement of an investment advisor for sale of any large privatization asset; — the setting of the starting price for large privatization assets using the recommendation of an investment advisor and the starting price for small privatization assets should be determined based on the proposals of qualified bidders; — introducing an electronic auction system for the sale of small privatization assets; — possibility to govern a sale and purchase agreement on the basis of foreign law; and — inclusion of representations and warranties into sale and purchase agreements. After the agreement of the Draft Privatization Law by all stakeholders it should be passed to the Cabinet of Ministers of Ukraine and the Ukrainian Parliament, which is expected to happen by the end of 2017.

141


Property Rights

Protection of Property

Andrii KUBKO Partner, Salkom

T

he right of ownership is one of the core concepts of modern civil law in Ukraine. This right is enshrined in the Constitution of Ukraine and is guaranteed by international law governing human rights and protection of investments, such as the European Convention for the Protection of Human Rights and Fundamental Freedoms and Protocol No.1 to the Convention. Disputes between the state of Ukraine and private persons regarding violations of the rights to property guaranteed by Protocol No. 1 are adjudicated on a regular basis by the European Court of Human Rights. Ukraine recognises the jurisdiction of this court. The right of ownership is also protected by international investment treaties. Ukraine has acceded to a number of international agreements related to the protection of foreign investments, which are known as bilateral investment treaties. In addition to the purely legal aspect, there is an economic (financial) element of the right of ownership. Nowadays, it is impossible to imagine that market relations could develop in the absence of reliable guarantees of the ownership right and its efficient exercise. It is a well-known fact that insufficient implementation of the guarantees of the right of ownership on the level of the judiciary and the executive in recent decades was one of the major impediments that have prevented the development of economic relationships in the country, including the extension of domestic and foreign investments. Considering the above, it seems impossible to underestimate the importance of the right of ownership in modern conditions. On the other hand, it is the duty of the state to regulate matters pertaining to ownership. Such regulation is necessary to

142

protect public interests, implement tasks imposed on the state, and to balance the interests of owners. Such regulation implies certain restrictions of the right of ownership. By the way, the right of the state to use measures to control property and also to interfere in the right of ownership is expressly recognised by Protocol No. 1 to the Convention and in the jurisprudence of the European Court. This is particularly relevant in the situation where the state has to protect the integrity of its territory and state sovereignty, and to eliminate external military and political threats. Therefore, the regulation of the right of ownership is always entwined with a search for an optimum balance between the interests of a private owner and the need of the state to restrict the ownership right in certain cases so as to attain the overall objectives of the state. This issue has huge importance in the conditions that modern Ukraine finds itself. Protection of the right of ownership plays the most important role in the concept of ownership. The efficiency of the mechanisms intended for the protection of the right of ownership is an indicator as to whether the real exercise of this right is secured and whether real guarantees to this right exist. Legislators use efforts to implement mechanisms aimed at strengthening the protection of the right of ownership. This in the main applies to the state registration of rights to real properties. On 6 October 2016, the Law of Ukraine On Amendments to Certain Acts of Ukraine to Modernise State Registration of Rights to Real Properties and Protect Rights to Property was adopted. This Law introduced amendments, among other things, to the Law of Ukraine On the State Registration of Property Rights to Real Properties and Encumbrances thereof. Such amendments cover the following areas. Firstly, the Law more precisely regulates information that should be recorded in the State Register of Rights. Secondly, the rules about software support of the State Register and functions of a technical administrator were made more specific. Thirdly, the procedure for the creation of a data base of applications filed to register rights to real properties was updated. Not only court decisions prohibiting registration of rights but also applications filed by owners requesting to prohibit registration, court de-

cisions setting aside decisions issued by trial courts, and applications filed by owners to withdraw application to prohibit registration filed earlier, are all recorded in the database. Fourthly, the Law defined more precisely the time frames for registering rights to real properties in the State Register. The right of ownership and other property rights have to be registered within five business days following the date of the application filed with the State Register of Rights. Rights arising as a result of notarial acts have to be registered immediately following the completion of a notarial act. Amendments in the information recorded in the Register must be registered within one business day, and the same time frame is established for issuing excerpts from the Register. The suspension of the registration procedures, cancellation of the state registration of rights, and annulment of a decision made by the state registrar should be recorded within two hours following the registration of a relevant application or a court decision in the State Register. Fifthly, certain amendments were introduced to the procedure for suspending registration of real properties. From now on, registration procedures may be suspended not only by a court order but also on the basis of an application submitted by an owner of real property seeking to prohibit registration activities in connection with their property. Such an application is registered by the State Register of Rights. If the owner does not submit to the registrar within ten business days a final court decision prohibiting registration, the state registrar may resume registration operations in connection with the property owned by the relevant applicant. Sixthly, the Law of 6 October 2016 set out the mechanism for registration of real property based on court decisions. Rights are registered exclusively on the basis of court decisions obtained within the framework of interaction between the State Register of Rights and the Unified State Register of Court Decisions, and no additional filings on behalf of the applicant are required. The State Court Administration of Ukraine is responsible for ensuring that court decisions are delivered to the State Register of Rights on the same day when a relevant decision comes into force. Finally, the introduction of provisions imposing control over the state registration of rights is an important development. The Law of 6 October 2016 provides that the Ministry of Justice of Ukraine is in charge of controlling and monitoring the registration activities of the State Register of Rights.

WWW.UKRAINIANLAWFIRMS.COM


Salkom

S

Address: 12 Khreschatyk Street, Kyiv, 01001, Ukraine

alkom law firm was founded in 1990 and quickly built a reputation for honest and efficient counsel. It is now recognized as one of the leading providers of legal services in Ukraine. Year on year the firm is being rated by Ukrainian and foreign rating experts as one of the leaders on the legal services market in Ukraine. Famous international publications and guidebooks, such as The Legal 500 (Europe, Middle East & Africa), PLC Which Lawyer?, Chambers Global recommend the Salkom law firm as one of Ukraine’s top law firms that practices successfully in the fields of antitrust law, contract law, corporate and commercial, securities, bankruptcy and insolvency, international trade, privatization, and litigation, including foreign courts and international commercial arbitration procedures. Salkom law firm has extensive intellectual and professional potential as it employs 39 highly-experienced lawyers. The firm’s employees speak English and other languages, which enable them to work efficiently with foreign clients.

The objective of such measures is to uncover violations of registration procedures by state registrars and parties who have the authority to register rights. Based on such monitoring, the Ministry of Justice audits the operations of state registrars and parties who have the authority to register rights. If violations are discovered during audits, the Ministry may impose sanctions, such as temporary or permanent restriction of access to the State Register of Rights, administrative penalties, or annulment of accreditation. The other area of legislative development in the sphere of the right of ownership is the upgrading of management of certain properties. On 2 June 2016, the Law of Ukraine On Amendments to some Acts of Ukraine Concerning the Management of State-owned and Municipal Property was adopted. Although the Law of 2 June 2016 governs the use of state-owned and municipal property, its provisions are applicable to private business. The reason for this is that privately-owned companies develop their business relations with state-owned and municipal companies, in particular, due to recent developments in the area of public-private partnership. The Law of 2 June 2016 introduces new rules concerning the governance of state-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 591 3100, 591 3101 Fax: +380 44 591 3115, 591 3107 E-mail: salkom@salkom.kiev.ua Web-site: www.salkom.ua

The firm’s clientele are foreign and domestic companies, both private and state-owned, engaged in various industries such as automotive industry, banks, financial institutions and insurance companies, hotel business and leisure, publishing, investments, information technologies, shipbuilding, international trade, metallurgical industry, real estate, oil and gas, the food industry, natural and mineral resources, retail, agriculture, telecommunications and media, transport, chemical industry, power industry. Salkom enjoys longstanding cooperative relationships with international law and consulting firms in the United Kingdom, USA, Russia, Austria, France, Cyprus, Italy, Australia, etc. The firm is a member of European Business Association (EBA), British-Ukrainian Chamber of Commerce (BUCC), and American Chamber of Commerce (ACC) in Ukraine. The firm’s Partners are members of the International Bar Association. In 2013, Salkom law firm and Squire Patton Boggs, an international law firm with 44 offices in 21 countries of the world, established the Squire Patton Boggs — Salkom International Association.

owned unitary businesses, reporting procedures, and disclosure of information about operations. The new legislation strengthens the role of the supervisory board of such companies. The supervisory board has received the power to elect the chief executive officer. The Law also establishes a procedure for the execution of transactions with interested parties. The Law of 2 June 2016 set out criteria for transactions with interested parties and established a procedure for approval of such transactions. The approval is granted by the supervisory board or by the government agency that governs the unitary enterprise. Furthermore, a special procedure was introduced for state-owned unitary enterprises assuming “substantial commercial commitments”, i.e. when the market value of property or services covered by a given commitment equals 10% or more of the value of assets of the enterprise. Talking about trends in legislation that governs certain types of property, special attention should be paid to the desire of legislators to improve the regulation of the use of certain properties that have specific importance for the development of the national economy, and to bring such regulation into line with modern realities. This relates to, for

instance, regulation of the use of motorways and treatment of foreign investments. In the first case, the legislator has introduced a mechanism of long-term agreements on the maintenance of motorways. The Law of Ukraine of 17 November 2016 (coming into force on 1 January 2018) provides for long-term (up to seven years) agreements on the maintenance of motorways, and sets out the requirements that apply to the terms and conditions of such agreements. Moreover, the Law of 17 November 2017 expressly provides for the application of international standards, such as FIDIC contract templates, in these agreements. In connection with the second case, it should be noted that the requirement for mandatory registration of foreign investments has been waived in Ukraine. This amendment was introduced by the Law of Ukraine of 31 May 2016 and its objective was, in fact, to simplify the exercise of the right of ownership by foreign investors. In summary, one can observe an increase in the legislator’s attention to the issues of property rights protection recently. Despite the complex and contradictory nature of matters related to property, the steps taken in this direction are bound to make an ultimate contribution towards strengthening legal guarantees in this area.

143


Public-Private Partnerships

Public-Private Partnerships: Quo Vadis, Ukraine?

Yevheniy DEYNEKO

Andriy OLENYUK

Managing Partner, EVERLEGAL Education: INSEAD, (Broadening Business Perspectives Programme, 2015); Kyiv National Economics University (Masters in Finance, 2009); University of Connecticut School of Law, (LL.M., 2001); Lviv National University Law School (Specialist’s Degree in Law, 2000). Mr Deyneko is qualified to practice in Ukraine and admitted to practice in New York State, USA.

Partner, EVERLEGAL Education: Georgetown University Law Center (LL.M., 2010); Lviv National University Law School, (Master’s Degree, 2008). Mr Olenyuk is admitted to practice in Ukraine.

What are PPPs?

Public-private partnerships, or PPPs, stand for contractual arrangements between entities of the public and private sectors with a view to implementing certain projects of public significance. The typical features of PPPs include the following: (i) a long-term contract between a public entity and a private investor relating to the performance of works or services by a private investor with the support of a public entity; (ii) the transfer of enterprise risks (e.g. risks relating to designing, building, operating and financing a project) from the public entity to the private investor; and (iii) the public entity usually maintains/ acquires title to assets in relation to which the services are rendered by a private investor or work products in relation to which the works were performed by a private investor. The most popular PPPs among private investors involve the rehabilitation of existing facilities with established demand, whereas PPPs with excessive budgets and risks of unknown demand are less attractive for private investors. This is especially true in the Ukrainian context of early stages of economic recovery following several years of political and economic instability.

144

Why does Ukraine need successful PPPs?

The political and economic turmoil of 2014-2015 in Ukraine puts off the country’s ambitious plans to implement certain largescale infrastructure projects initiated by the government (e.g. the LNG terminal project in Odesa, the Kyiv-Boryspil Airport railway project and the new Kyiv metro line project). Such projects were, to a considerable extent, planned to be implemented through PPP arrangements which would allow the public authorities to leverage private investments in exchange for predictable returns. But the prevailing perception of increased political risks associated with the military conflict with Russia and lack of financing with maturity matching the duration of the PPP contracts did their job. Unfortunately, as of today, none of them has matured into financial closure. There is a considerable backlog of demand for large-scale PPP projects in Ukraine because of the need to repair certain worn-out infrastructure currently maintained by public entities, such as highways, railways, airports and sea ports, or create new infrastructure facilities, such as LNG terminals, high speed railways, metro systems and even the prison infrastructure. However, the Ukrainian public sector cannot afford to implement such infrastructure projects through conventional

procurement procedures due to excessive associated costs. Ukrainian banks cannot afford to finance such projects due to liquidity and regulatory issues while foreign lenders often lack confidence in Ukrainian borrowers. PPP arrangements with the participation of foreign private investors and IFIs can be considered a viable alternative here. Ukraine desperately needs a number of success stories in PPP projects for the following reasons: — with a private investor’s participation offering additional “value for money” to the public sector through increased quality of services or project outcomes, the general public would benefit from better services or goods for a lower public spending; — the positive effects of modernising the infrastructure is the key to the increase of internal and cross-border trade in goods and services originating from Ukraine; — the risk-sharing element of PPP arrangements between the public entity and the private investor enables hedging against financial risks relating to potential operational failures of a project’s outcome; — this would allow Ukraine to tackle its impeding economic challenges, such as high unemployment and the continuing infrastructure shortfall, and reinforce its economic recovery; and — a strengthening of the general investor confidence in the PPP market and increasing the chances of further PPP projects in Ukraine.

What is the Current Regulatory Framework for PPPs in Ukraine?

The key laws and regulations governing PPPs in Ukraine are: (i) the Law of Ukraine of 1 July 2010 No. 2404-VI On State and Private Partnership; (ii) the Law of Ukraine of 16 July 1999 No. 997-XIV On Concessions; (iii) the Law of Ukraine of 8 July 2011 No. 3687-VI On Specific Issues relating to Concessions of the Fuel and Energy Industry Facilities that are Owned by the State; (iv) the Law of Ukraine of 21 October 2010 No. 2624-VI On Specific Issues relating to Transfers into Lease or Concessions of Facilities in the Field of Heat Supply, Water Supply and Water Disposal that are Owned by Municipalities; and (v) the Law of Ukraine of 14 December 1999 No. 1286-XIV On Concessions for the

WWW.UKRAINIANLAWFIRMS.COM


EVERLEGAL

E

Address: 4 Rylskyi Lane, Sofyiska Square, 6th Floor, Kyiv, 01001, Ukraine

VERLEGAL’s team is a synergetic combination of professionals from international law firms and local legal experts. We advise our clients on transactional matters with focus on corporate finance, various facets of dispute resolution and legal aspects of business operational matters. We feel equally comfortable when advising on complex cross-border deals or representing your interests in domestic courts against tough counterparties. The services we offer cover Corporate and M&A, Dispute Resolution, Antitrust/Competition, Banking & Finance and Commercial Matters.

Construction and Operation of Automobile Roads. There is also a considerable volume of secondary legislation enabling the primary PPP rules and detailing the PPP related procedures.

Which PPP Projects are Currently Implemented?

According to the website of the Ministry of Economic Development and Trade of Ukraine and based on the data received from the central and local authorities, as of 1 August 2016 185 projects were implemented under PPP arrangements. Among those projects, 153 have been implemented under concession-type arrangements, 31 projects — under joint activity agreements and 1 project — under the public-private partnership (sic!) contract. The most popular sector for PPP projects in Ukraine seems to be waste treatment with 112 projects. Other sectors include collection, purification and distribution of water (37 projects); construction and exploitation of roads, railways, bridges and other transport infrastructure facilities (16 projects); production, transportation and supply of heat (6 projects); production, distribution and supply of electricity (5 projects); exploration for and production of minerals (1 project); tourism, recreation, culture and sport (1 project) and others (5 projects). The number of PPP projects signifies the viability of the current PPP regulatory framework. At the same time, the above numbers demonstrate that certain sectors (e.g., transport infrastructure, energy, healthcare or defence) that could benefit from PPP, are of little interest to private investors. This will need to be changed, including by implementing improvements outlined below.

What is in the Pipeline?

PPP is showing signs of early recovery in Ukraine. The Government and international donors are making efforts to revitalise PPPs, including through creation of task forces at

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 337 0016 Fax.: +380 44 337 0018 E-mail: info@everlegal.ua Web-site: www.everlegal.ua

EVERLEGAL’s clients are industry leaders with global brands, mid-size and growing businesses as well as start-ups. Our lawyers have experience and expertise in a range of sectors such as oil & gas (upstream, mid and downstream), conventional energy and renewables, agriculture, IT and telecoms, healthcare and pharmaceuticals, infrastructure, banks and financial institutions, consumer goods. EVERLEGAL’s motto is “Ever More Success”. We measure that success by how successful our clients are in achieving their business goals.

the authorities and supporting development of PPP policy and the legal framework. For example, the task force (PPP Management Office) was created at the Ministry of Infrastructure of Ukraine with the support of international donors. The role of the task force is to revitalise PPPs in Ukraine’s infrastructure sector and its various subsectors. The task is basically twofold: to improve the legal framework and to launch and implement PPP pilot projects. The focus is on the improvement of the policy framework for PPPs/concessions and the Law of Ukraine On Concessions. Reportedly, this initiative is being funded by the EBRD. Following modernisation of the policy and regulatory framework, there are three concession-based pilot projects on the agenda. They are concessions of: State Enterprise Stevedoring Company Olvia, State Enterprise Kherson Sea Trade Port and railways/ ferry complex of State Enterprise Sea Trade Port Chornomorsk. The success of these pilot projects would be a signal for private investors.

Improvements Needed

The PPP legal landscape has been notably improved in Ukraine in May 2016, when the new legislation was passed providing, for example, for possibility of foreign arbitration under PPP contracts, use of SPVs by private investors, step-in rights by creditors, streamlining the process for assessment of PPP opportunities and selection of a private investor, etc. Nonetheless, certain issues remain unresolved. Among a number of actions to tackle those issues are the following: — to design and implement a clearer PPP institutional and regulatory framework, strategies and projects, including to clearly set priority sectors for the implementation of PPP in Ukraine; — to reinforce and sustain the institutional capacity of public entities for the implementation of PPP projects;

— to codify and/or clearly define the hierarchy of statutes regulating PPP and its various forms in different sectors; — to provide additional public entity support to private investors through the implementation of various Government co-lending structures, sharing the cost of investments and issuing long-term guarantees, including by amending the current wording of the Budget Code to enable long-term commitments in connection with the PPP by the public entity; — to improve and simplify the rules on access to land for private investors; — to simplify permitting system for implementing PPP projects, including for subcontractors of private investors; — to introduce clear step-in rules to improve bankability of PPP projects and allow financiers to secure cash flows by changing a private investor in case of the original private investor’s default and without the need for a new tender; — to grant currency controls and tax benefits for private investors to draw attention to Ukraine and add a cutting edge in the competition for capital; — to streamline interaction between rules on supply of goods/services by a private investor to the public entity as a type of PPP state support measure with public procurement rules and newly-introduced rules on state aid; — to extend the scope of the stabilisation clause to cover, in particular, adverse tax and capital controls legislative amendments; and — to consider allowing foreign governing law for PPP contracts.

Conclusions

PPPs have proved their viability in Ukraine regardless of the difficult environment. To boost the development of PPP projects in Ukraine further improvements are needed, including, among others, through designing and implementing a clearer PPP institutional and regulatory framework, strategies and projects.

145


Public Procurement

Public Procurement: Special Aspects of the New Procedure

Alexey KOT

Alexander TRETIAKOV

Managing Partner, ANTIKA Law Firm. Member of the Judicial Reform Council, PhD (Law)

Senior Associate, ANTIKA Law Firm

ublic procurement is traditionally one of the most topical issues in Ukraine. For many years now the Government has been declaring that it will combat corruption in this field and make the procurement procedure transparent. The law has experienced numerous amendments but, unfortunately, it has not changed the situation significantly. At the end of 2015 a new version of the Law of Ukraine On Public Procurement to regulate relations in this field was adopted. The main peculiarity of this Law was to implement an absolutely new approach to perform procurement procedures, namely, a unified electronic platform called ProZorro, the usage of which should provide transparency and effectiveness in the use of state funds. From 1 April 2016 the system started to function for central bodies of public authorities and enterprises that conducted their activities in the fields listed in the law. From 1 August 2016 the system appeared to be binding for all state and local authorities as well as for state enterprises. What are the main features of the new procurement system and the principles of its work? The Law of Ukraine On Public Procurement stipulates two types of procurement, depending on the value of the tender: — procurement with a price under EUR 133,000 for goods and services and EUR 5 million for works;

— procurement with a price bigger than is stipulated in the Law. The Law stipulates three types of procurement procedures: — open bidding; — competitive dialogue; — negotiation procedure. According to the open bidding procedure, the estimation of tender bids is conducted automatically based on criteria and estimation techniques specified by the buyer in the tender documentation as well as through the application of an electronic auction. The estimation criteria are: — in case of procurement of goods, works and services produced, performed or provided not through specially developed specification (project plan), for which a constantly functioning market exists, — the price; — in case of procurement that is of a complicated or specialized nature (including consulting services, scientific researches etc.), — the price plus such estimation criteria as payment conditions, term for performance, etc. Before the electronic auction is conducted the electronic system for procurement automatically opens information on the price and the list of all tender bids placed in the order from the lowest up to the highest price without the names and information about the offerors. If other criteria except price were determined, the electronic system automatically shows them as well as the price. In those cases the value equivalent or ratio of the

P

146

other criteria shall be determined. The ratio of the price criterion shall not be less than 70%, except for cases of implementation of the competitive dialogue procedure. After the tender bid estimation, the buyer reviews them for their compliance with the terms of tender documentation, starting from the offeror whose tender bid was defined as the most economically beneficial. If such tender bid was rejected, the buyer reviews the next most economically beneficial one out of the list of offerors. Based on the results of such review the report on tender bids consideration is drafted. The buyer publishes it on the web portal. After such report has been published, the electronic system automatically sends out notifications to all offerors. The list of offerors whose tender bids were accepted is published on the web-portal as well. The day and time of the electronic auction are scheduled automatically by the electronic system, but at the earliest 5 days from the day of publication of the report on tender bids consideration. If only less than two tender bids were accepted, the procurement procedure is canceled. The buyer determines the winner and takes a decision to conclude the contract. The crucial innovation in the procedure of open bidding is application of the e-auction system. An auction is conducted through three stages. During each stage the offeror enjoys the right to reduce the price of the tender bid for the one or more auction stages. The offeror whose bid appears to be the smallest at the end of the last stage of the auction is supposed to be the winner. Competitive dialogue is the second type of procurement procedure. It is applied in case: — the buyer is unable to define the required technical, qualitative characteristics (specifications) of works or service type and in order to make the best decision on procurement it is necessary to conduct negotiations with the offerors; — the subject of the procurement is consulting or legal services, information systems development, program products, scientific researches or experiments or developments performance, design and experimental or construction works performance, the defini-

WWW.UKRAINIANLAWFIRMS.COM


ANTIKA

A

Address: 12 Khreschatyk Street, 2nd Floor, Kyiv, 01001, Ukraine

NTIKA was established in 2010. Since its formation, the firm has built a strong reputation as an independent law firm and continues to grow on the Ukrainian legal services market. According to the results of research of the legal services market undertaken by reputable international and Ukrainian guides to legal profession like The Legal 500 EMEA, Chambers Europe, IFLR1000 Energy and Infrastructure, Best Lawyers, Ukrainian Law Firms, A Handbook for Foreign Clients, Top 50 Law Firms of Ukraine, Client Choice. The Top-100 Best Lawyers in Ukraine, the firm has been recommended in antitrust, dispute resolution, corporate / M&A, banking, finance and capital markets, real estate, land, energy, subsoil use, energy efficiency and energy saving. The firm received the Legal Award 2012 in the nomination Law Firm — Breakthrough of the Year. The firm is a finalist of the Legal Awards 2013 in the field of Antitrust, Litigation and Real Estate, in 2014-2016 — in the field of Energy. ANTIKA’s team includes 15 lawyers, who have significant experience of various legal practices and provide a full range of legal services to national and international companies that do business in Ukraine, as well as abroad in the following fields: telecommunications, heavy machinery, chemical and food industries, automotive, complex develop-

tion of requirements as to their performance needs to be negotiated. The procedure is conducted through two stages. On the first stage all participants are offered to provide tender bids that should include information on compliance with the qualification criteria and requirements stipulated by the buyer in tender documentation as well as the description of the decision on procurement without stating the price. After tender offers are considered, the buyer invites to negotiations not less than three offerors whose tender offers were not rejected at the result of consideration. After negotiations the buyer amends tender documents on technical requirements and requirements to the quality of the subject of the procurement, or defines its new characteristics and invites all the offerors who took part in negotiation to participate in the second stage. At the second stage the offerors should file the final tender bids stipulating the price. The consideration and estimation of tender bids at the second stage is performed through a general procedure stipulated for the open bidding procedure. The third procedure stipulated by the Law of Ukraine On Public Procurement is the negotiation procedure. This procedure is applicable as an exception in the following cases:

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 0920 Fax: +380 44 390 0921 E-mail: office@antikalaw.com.ua Web-site: www.antikalaw.com.ua

ment, construction and real estate, subsoil use, wholesale and retail, media and sports, banks and financial services market, energy efficiency and energy conservation. The firm’s key practices include antitrust, litigation and arbitration, corporate, construction and real estate, subsoil use, energy and energy efficiency, legal expertise. The firm’s main principles are the provision of high quality and timely legal services, strict confidentiality and a bespoke approach to every client’s project. The following are representative clients: AWT Bavaria, ArcelorMittal Kriviy Rih, Cadogan Petroleum, Cargill, Chernomorneftegaz, Deposit Guarantee Fund, Enesa a.s., Esan Eczacıbaşı Industrial Raw Materials, Energobank, FC Dnipro, Ghelamco, Heitman, Henkel Ukraine, Henkel Bautechnik Ukraine, Ibis Group of Companies, Imperial Tobacco, International Resources Group, Lantmannen Axa, MF Telecom, Nadra Ukrayiny, Nasosenergomash, ViDi Group, Ukrnafta. The firm also advises the World Bank, EBRD, USAID, TACIS, UNDP, KfW, NEFCO on energy efficiency, utility and the implementation of other projects in Ukraine. ANTIKA is a member of the Ukrainian Chamber of Commerce and Industry, the American Chamber of Commerce in Ukraine, the Canada-Ukraine Chamber of Commerce, the European Business Association, and the International Turkish Ukrainian Businessmen Association.

— procurement of pieces of art or procurement related to protection of intellectual property rights, or concluding an agreement on procurement with the winner of an architectural or art competition; — absence of competition; — emergency need to make a procurement due to appearance of certain economic or social circumstances; — procurement of legal services related to protection of rights and interests of Ukraine, including with the purpose of protection of national security and defence, dispute resolution, consideration of cases in foreign jurisdictions with the participation of a party from a foreign country and Ukraine, on the basis of the Decree of the Cabinet of Ministers of Ukraine or Decrees of the National Security and Defence Council of Ukraine. The procedure includes conducting negotiations with the offerors with the aim of agreeing procurement terms. At the result of negotiations the buyer takes a decision on the intent to conclude the agreement. Such a decision is binding for publication within 1 day from the day of its adoption. Another interesting innovation related to the new procurement procedure is introduction of a system of appeal. According to the new Law, the person files a claim on violation directly through the electronic system. The system automati-

cally terminates the procurement procedure and directs a claim to the Antimonopoly Committee of Ukraine. Today, it is not clear whether such procedure will be effective and widely used. In any case the terms to consider the claims will be shorter than they are today due to the application of electronic document management. Evaluating the initial results of the work of the ProZorro procurement system since the time of its introduction, it should be mentioned that problems related to abuses from the side of official bodies, like defining qualification requirements “for their own people”, groundless rejection of offers and others, still remain. Moreover, reasonably, such problems can’t be solved merely with help from the implementation of a new procurement procedure. First of all, there is a need for oversight and to strive towards punishing those people who perform abuse in reality. Despite all the difficulties, we hope that the procedure will enjoy further development and improvement, because its idea of maximum transparency and publication of information with free access allow not only appeal against the results of a procurement procedure, but to guarantee public control in this field, particularly while performing procurement that runs into significant amounts of money.

147


Real Estate

Ukrainian Real Estate Developments in 2016/2017

Bate C. TOMS

Maria BARHILEVYCH

Managing Partner, B.C.Toms & Co. Legal education: Yale Law School (J.D., 1975); Magdalene College, Cambridge University (Law Tripos I; 1972-1973). Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in France.Chairman, British Ukrainian Chamber of Commerce

Junior Associate, B. C. Toms & Co. Legal education: Taras Shevchenko National University of Kyiv, Bachelor of Law (2016)

The Simplification of Licensing for the Construction of Buildings

The Cabinet of Ministers of Ukraine has reduced the bureaucracy involved in the residential construction sector by limiting the number of activities subject to licensing or certification for the construction of buildings of the fourth and fifth categories, being those for the permanent habitation of 300 or more persons. This relaxation of the licensing regime was introduced by the Resolution of the Cabinet of Ministers On Certain Questions on Licensing the Building of Objects of the IVth and Vth Categories of Complexity, No. 256, of 30 March 2016. The number of such licenses and certificates was reduced by half, excluding from the list the following: — construction design works (since contractors providing design services are presently subjected to professional certification); and — engineering works; In addition, all works for buildings of the first, second and third categories of complexity, being those for housing for fewer than 300 persons were excluded from the list requiring licensing. Another novelty is that license applicants are required to demonstrate a track record of involvement in construction of buildings of lower categories, as follows:

148

(i) for the fourth category of complexity — previous involvement in construction of at least three buildings of the third category; and (ii) for the fifth category of complexity — previous involvement in construction of at least three buildings of the fourth category or at least five buildings of the third category. The Cabinet of Ministers has also recently adopted the Resolution On Amending the Procedure for the Licensing of Economic Activities Related to the Creation of Architectural Objects, No. 238, of 10 March 2017, whereby licenses for construction of buildings of the fourth and fifth categories shall be issued for an indefinite term, instead of the previously applicable three to five year term.

The Anti-Raider Law

The Law On Amending Certain Legislative Acts of Ukraine on Improvement of the State Registration of Real Estate Rights and the Protection of Property Rights, No. 1666-VIII, of 10 June 2016 (known as the “Anti-Raider Law”) came into force on 2 November 2016. This law aims to strengthen the protection of property rights in Ukraine, and therefore help attract foreign investment. The main feature for Ukrainian business is the introduction of better protection of real estate rights from improper takeover. To begin with, the Anti-Raider Law aims to eliminate the phenomenon of the so-called “black notaries” by providing for desk audits,

i.e. verifications, conducted by the Ministry of Justice, based on information in the State Register of Rights, so that the work of notaries and state registrars can be tracked. All registration action, meaning the state registration of rights, amendments to the records in the State Register of Rights, cancellations of the state registration of rights and other acts recorded in the State Register of Rights (except those to merely provide information from the State Registry of Rights) can thereby be monitored. This should reduce the number of abuses and result in quicker responses to stop attempted violations. Second, the registration services provided to legal entities can only be carried out within the region where the company is registered or, for enterprises in Kyiv or Sevastopol, in the respective city. As a result, notaries can only provide real estate registration services within their respective region or city. This restriction is intended to impede a common type of abuse where, for example, a registrar or notary in Kyiv or Odesa conducts illegal actions to change a property’s registration in another region, like Lviv or Kharkiv, outside of local supervision. Third, the Anti-Raider Law is intended to protect against the forgery of court decisions. Specifically, court decisions that may change the legal status of property must be reflected in the Unified State Register of Court Decisions (“USRCD”) to constitute a valid legal ground for any registration action. Should the court decision referred to by the applicant be absent from the USRCD, the state registrar must request a copy of the court decision directly from the court. In such an event, the registration of real estate rights and their encumbrances, based on such court decision, shall be suspended pending the furnishing of a copy of the decision by the court. Fourth, the Anti-Raider Law expands the powers of the Ministry of Justice to supervise the state registration of rights and monitor registration activities. State registrars are also required to (i) use data from the State Land Cadastre, the Unified Register of Permits for Construction Activity and the USRCD and (ii) to access data through protected holders of personal keys for digital signatures, in order to better protect data from unauthorized access. In addition, instead of an “information notice”, state registrars can now provide an extract from the State Register of Real Estate that is certified by the signature and seal of the registrar based on an application.

WWW.UKRAINIANLAWFIRMS.COM


B.C. Toms & Co

B.

Address: 18/1 Prorizna Street, Suite 1, Kyiv, 01001, Ukraine

C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kyiv office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine. The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.

Fifth, the Anti-Raider Law limits the grounds for denying the state registration of real-estate rights in those cases where there is an existing registration of rights or encumbrances to such real estate. Thus, the following grounds may not be invoked to refuse registration: (i) the state registration of other encumbrances over the real estate; (ii) the state registration of real estate rights based on of the consent of (i) the mortgagee or (ii) the supervisory body to the transfer the property, where the encumbrance is (a) a prohibition on the disposal of real estate (under a contract) or (b) a tax pledge; (iii) the state registration of real estate rights based on certificate of inheritance. The Anti-Raider Law also extends the time period for making complaints to the Ministry of Justice from 30 to 60 days (calculated from the date of the decision or the date when the person learned or should have learned about the violation of his, her or its rights. Furthermore, the owner of real estate now has the right to submit an application to the state registrar to prohibit any registration actions on his, her or its real estate, whereby the state registrars are obliged to stop any state registration of rights for the period specified . The penalties for violations have also been increased. Notaries who violate the procedures for property right registration are subject to license revocation by the Disciplinary Bar Commission of the Ministry of Justice. Submitting

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 490 6000, 278 1000 E-mail: kyiv@bctoms.net Web-site: www.bctoms.net

The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective. B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts.

forged documents for the state registration of rights to immovable property now also constitutes a criminal offence, with potential liability of up to UAH 800,000 (approximately USD 30,000), or up to 6 month arrest or imprisonment for up to 2 years. The adoption of the Anti-Raider Law should greatly reduce the abuse of rights to real estate, especially as this law strengthens the criminal and administrative liability of officials in the registration offices and provides stricter formal requirements for the state registration of real estate rights.

Improvements for Town Planning

The Parliament of Ukraine has also adopted the Law of Ukraine On Amendments to the Certain Legal Acts of Ukraine on the Improvement of Town Planning Activity, No. 1817-VIII, of 17 January 2017. This law revises the concept of “categories of complexity” for complex construction in order to eliminate abuses where, by dividing projects into different categories, developers were able to deliberately understate the overall scope of their projects in order to avoid inspections and permissions. Instead, a building hereafter will be classified based on the potential level of danger for the health and life of the people, who stay in the building regularly or periodically. Such change is only now about to take place, so the currently applicable legislation still employs the “old” terms on “categories of complexity”.

In addition, instead of the “declaration on construction”, the “notification of the start of construction work” will be the main document for construction activity in the future, and it is prohibited to carry out building activity without this notification being in place. The new Law will also increase the penalties for violations by developers, with fines being increased by 300%. In addition, the state officials who are competent to issue construction-related permits will become accountable for the issued documents, so they shall need to check the whole documentation related to the project. Previously it was not possible to hold such officials liable for authorizing an essentially unlawful construction of a building.

Online Declaration of a Building’s Readiness for Operation

The State Architectural and Construction Inspectorate and the State Agency for E-Government, with the support of the Organisation for Security and Co-operation in Europe (OSCE) have launched an online service for the registration of the declaration that a building is ready for operation. This service should greatly simplify and expedite the procedure for declaring buildings ready for operation (i.e. use). The whole process can now be completed online based on an application filed by the investor, developer or contractor. Such e-service should process applications within 10 days and is free of charge.

149


Regulatory

Regulatory: New Regulatory Framework of Ukrainian Seed Industry

Oleksandr MAMUNYA

Oleksandr TERESHCHENKO

Partner, AEQUO

Attorney-at-Law, AEQUO

ccording to recent World Bank data1, among major factors, which slow down development of the seed sector are official red tape, redundant requirements for registration of plant varieties and certification of seeds. This, in turn, results in the raised costs of seed producers coupled with serious delays in the introduction of new plant varieties. Namely, costs for registration of plant varieties in Ukraine are the highest by comparison with all the countries analysed by World Bank experts2. The Ukrainian seed industry could be one of the most attractive agricultural sectors for foreign investments and can meet both domestic demand for high quality seeds and unleash the export potential of our country considering the vast use of seed products in food, feed, chemical and energy industries. The creation of high quality plant varieties is a rather complex task requiring a scientific approach and an in-depth focus on the seed production. However, due to the obsolete legal framework it has been impossible to fully unleash such potential. Effective from 1 July 2016, the Law of Ukraine No.864-VIII On Amending Some Ukrainian Laws on Harmonisation of Seeding and Planting Legislation of Ukraine with the European and International Rules and Standards (the Law) is aimed at addressing the above

issues and radically reforming the Ukrainian seed industry. The authors of this article were directly involved in drafting the Law as legal experts during meetings of dedicated parliamentary committees, etc. Since the Law establishes comprehensive reform of domestic seed industry, it is impossible to cover all the novelties of the Law in one article. Therefore, we provide a summary of the most important achievements.

A

World Bank Report “ENABLING THE BUSINESS OF AGRICULTURE 2015� 2 For instance, in Spain similar costs are 6 times lower than in Ukraine 1

150

Acquiring the Status of a Seed Producer

For a business entity to engage in the seed industry, it must acquire the status of a seed producer. Prior to the adoption of the Law, a rather complex accreditation procedure had to be undergone that required the filing of many documents. Grounds for refusal of accreditation seemed to be controversial and far from transparent, which as a matter of practice resulted in the abuse of powers by the State Agricultural Inspection of Ukraine (Agricultural Inspection). The Law abolishes accreditation of seed producers and introduces a simpler system of registration of seed producers with the State Register of Seed Producers and Planting Material (Register of Producers) based on the declarative principle. The Register of Producers represents a list of seed producers authorised to produce seeds and/or planting material to be sold on the market, or those providing seeding and planting services. The Register is public and administered by the State Service

of Ukraine on Food Safety and Consumer Protection (Food Safety Service), the successor to the liquidated Agricultural Inspection. The Food Safety Service is to consider an application for inclusion into the Register within 10 days. The Law also allows submission of a digitally signed application by email. Besides, the Law sets out an exhaustive list of grounds for refusal to include an applicant in the Register of Producers and for striking it off the Register. If the Food Safety Service sends no reasonable refusal to the applicant, there is a presumption that an entity is included by default on the Register and it may start seed production. We believe that such a procedure for administering the Register of Producers (including electronic form via the Internet) would eliminate current barriers to market access. Meanwhile, if a seed producer is struck off the Register (for example, due to regular breach of seed legislation), it will lose the right to produce, sell or use seeds.

Seed Certification

Seeds may be introduced and sold on the market only after their certification, just like prior to the reform. However, unlike earlier practice when certification was carried out only by the agencies within the Agricultural Inspection, the Law introduces the European system of seed certification, which is totally new to Ukraine. In the EU, a certifying authority can be both a state agency and a private company having relevant technical expertise, being accredited and unbiased. Third countries (including Ukraine) seeking to export seeds and planting material to the EU are obliged to meet the same criteria for seed quality, marking and package as applied in the EU. The Law creates a competitive environment for seed certification services to be provided by either state agencies or private certifying authorities and certification auditors. Under the Law, every single lot of seeds to be sold on the market should be accompanied with certificates evidencing the varietal and sowing qualities of seeds. The varietal qualities of seeds are determined by a certification auditor (inspecting agronomist) and the sowing qualities by a certifying authority. It is

WWW.UKRAINIANLAWFIRMS.COM


Address: Vector Business Centre, 52 Bohdana Khmelnytskogo Street, Kyiv, 01030, Ukraine

AEQUO

A

EQUO is an advanced industry-focused Ukrainian law firm. Our team is made up of highly-qualified and recommended lawyers who work proactively to help clients reach their business goals. Backed by solid industry expertise and a thorough understanding of business we develop innovative strategies and provide efficient solutions to the most complex and challenging matters. Our advice is clear and practical. Today, we are a legal advisor of choice for many of the largest Ukrainian and multinational companies and financial institutions, including Fortune 500 entities, and leaders in their respective sectors. We operate at the top end of the market. Our representative clients include Agroprosperis, Alfa Bank,

prohibited by the Law to use seeds without the relevant certificates. Certification auditors/certifying authorities can be either state or private. The Law establishes public registers of certifying authorities and certification auditors (inspecting agronomists). Certifying authorities should be accredited by the National Accreditation Agency of Ukraine (Accreditation Agency) subject to their compliance with strict eligibility criteria. A certificate of a certification auditor shall be cancelled, inter alia, where an auditor is regularly in gross breach of seed legislation. If this is the case, an auditor will be prohibited from conducting seed certification for a 5-year period. Although certifying authorities and auditors are independent from the Food Safety Service, the latter shall monitor their activities and may (where necessary) send to the Accreditation Agency or the Ministry of Agriculture a grounded application seeking a correction action (cancellation of certificates, termination of accreditation, etc). However, having allowed private companies to carry out seed certification, the Government still monitors and controls the industry and, hence, it may, inter alia, conduct inspections, give directions binding on seed producers, review seeding documents, open any seed package (container) for sample control purposes, impose administrative sanctions against persons in breach, file a claim with a court seeking correction actions in the form of termination or a ban on sale of seeds whatsoever, and have free access to any place where seeds are grown, processed and stored. Customs clearance of seed is subject to the passing of phytosanitary controls and presentation of a seed quality certificate of the exporting country, or a certificate of the Organisation for Economic Co-operation and Development (ОЕСD) (under the OECD Seed Schemes implemented by Ukraine) and a

WWW.UKRAINIANLAWFIRMS.COM

Allianz, Apax Partners, Apollo Global Management, AXA, ATB Market, British American Tobacco Pryluky, Bunge, BXR Partners, Citadele Banka, Discovery Networks, Dr. Reddy’s Laboratories, Dragon Capital, DuPont, Epicenter K, European Bank for Reconstruction and Development, European Commission, FESCO, Forbes, GlaxoSmithKline, Google, Groupe Danone, Inditex Group, Mosquito Mobile, MTS Ukraine, NCH Capital, Nova Poshta International, Novus Ukraine, Philips, Pioneer HiBred International, Porsche Bank AG, Portigon AG, Premium Sound Solutions, Samsung Electronics, Sandvik, Sonae, Soros Fund Management, Syniverse, Synthon, Tetra Laval, Thomson Reuters, TIS, Ukrainian Redevelopment Fund, UniCredit Group, VimpelCom and Zara Ukraine.

certificate of the International Seed Testing Association (ISTA). Under the Law, where the ОЕСD and ISTA certificates are issued for seeds exported to Ukraine, no additional testing or certification would be required. Thus, the Law implements the long-awaited mechanism of avoiding double certification3 for seed import to Ukraine, which reduces business costs and expedites certification. Accordingly, seeds will become cheaper for agrarians as now there is one certification procedure instead of two.

Registration of Plant Varieties

Seeds may be imported into Ukraine provided only they are listed among the varieties included in the Register of Plant Varieties of Ukraine (Register of Varieties). Varieties not included in the Register may not be sold in Ukraine. The Law envisages that, if the applicant so wishes, some stages of examination of an application for registration of a plant variety (e.g. formal examination, examination of a variety as to its marketability) may be carried out by all expert institutions accredited by the Accreditation Agency. So, similar to seed certification, separate stages of examination of an application for a plant variety registration may be carried out by private entities that comply with strict criteria set out by the Law (e.g. availability of competent staff, resources and technical facilities, etc) and which are duly accredited. However, a decision on the state registration of a variety and granting a patent shall be taken by a competent state authority, which shall also perform supervisory functions (for instance, private expert institutions must report on their activities, undergo annual audit, etc). Before the said reform even when ОЕСD and ISTA certificates were issued, an additional “internal” certificate of the Agricultural Inspection was required 3

Tel: +380 44 490 9100 Fax: +380 44 490 9102 E-mail: office@aequo.ua Web-site: www.aequo.ua

The Law further provides that a plant breeder may transfer to its employer the right to file an application for a plant variety if such option is provided by a relevant employment contract or a contract for creation of a variety. Third parties, who believe that their rights to a variety might be infringed, are entitled to object registration of rights to such variety. The Law also simplifies the requirements for documents to be filed to register a variety (for instance, no employment contract with a plant breeder would now be required); sets out that a formal examination of an application is to be carried out during a maximum of 3 months instead of the earlier stipulated 6 months; reduces the term of issuance of title documents for a variety; clarifies in detail the procedure for examining a variety name and challenging a decision taken by the competent state authority in question.

Conclusions

To sum up the above, it can be concluded that the Law ensures the harmonisation of national legislation with relevant international and European requirements, fosters integration of Ukraine into the European seed marketing network, brings Ukrainian laws into line with EU seed rules, extends participation of Ukraine in the Seed Schemes of the OECD and facilitates mutual recognition of certification by competent international organisations. As a result, the above could guarantee a better varietal purity and quality of seeds produced in Ukraine and, ultimately, lead to an increase in crop yield. A predictable and transparent regulatory framework with a system of variety registration and seed certification recognised as equivalent to the EU will contribute to attracting long-term foreign investments into the Ukrainian seed industry and enable Ukrainian seed exporters to get simpler access to European as well as global markets.

151


Renewable Energy

Renewable Energy in Ukraine tion phase of the electricity station, which produces electricity from alternative energy sources. The feed-in tariff for different types of renewable sources of energy is shown in the table below (in EUR).

Premium to Feed-in Tariff Igor DYKUNSKYY

Dmitriy SYKALUK

LL.M., Partner, DLF attorneys-at-law Following his successful graduation from the University of Augsburg (Germany), Igor has been advising international commercial enterprises in Ukraine for over twelve years. He has managed a significant number of M&A transactions, guided numerous clients through the due diligence process, merger applications and the subsequent structuring of transactions, advised clients on labor, agriculture and renewable energy law matters as well as in relation to assertion and enforcement of creditors’ claims.

Associate, DLF attorneys-at-law Dmitriy advises international corporations on a wide range of labor, corporate, contract law issues. He can boast substantial experience in legal and tax consulting in complex cross-border transactions. Dmitriy‘s legal practice also covers representing clients before domestic commercial and administrative courts of all instances (including the Supreme Court of Ukraine), as well as in arbitration proceedings on all issues related to the commercial activity of clients in Ukraine.

he alternative energy sector in Ukraine is considered by many as one of the most fast-growing and attractive industries for investment. This is explained, to a large extent, by the advantageous geographical conditions in Ukraine as well as increases in the prices of communal services, such as electricity and heating in the last two years and favourable legal framework. The positive trend in this area will continue in 2017.

sion Zone announced by the Government of Ukraine also present a great opportunity for foreign investors.

T

Current state of play in the field

Following a couple of years of relative silence on the alternative energy market in Ukraine, a substantial increase in the number of commissioned renewable energy projects was observed in 2016 and the beginning of 2017. Thus, a couple of dozen projects, mainly in relation to wind, solar and biomass energy, have already been completed in 2016 or are at their final stages of completion. Many of these projects are carried out by foreign investors, who turned to the Ukrainian market following introduction of legal reforms in relation to feed-in tariff regulation in mid2015. The plans to construct high capacity solar power stations in the Chernobyl Exclu-

152

Feed-in Tariff: Main Attraction for Investors

For many years, Ukraine has been making efforts to stimulate financially the generation of electricity from alternative sources of energy. Such stimulation results in legislative provision for the feed-in tariff, i.e., the guaranteed obligation of the state to purchase generated ‘green’ energy from producers of alternative energy. The feed-in tariff is fixed in euro until 2030 and is paid in the national currency. All generated electricity, except for volumes for personal needs, shall be paid under the feed-in tariff (except for blast furnace and coke gas, and for hydro plants with capacity of up to 10 MW). It is the obligation of the wholesale electricity market of Ukraine to purchase “green” energy produced under the feed-in tariff and make full payment for the cost of electricity, regardless of the installed capacity or volume of supply. The amount of the feed-in tariff depends on the commission date of the object of electricity generation, including the construc-

The use of equipment of Ukrainian origin by investors is stimulated by the relevant premium to the feed-in tariff (throughout all term of its validity), if the electricity objects are commissioned by 31 December 2024. Therefore, if equipment of Ukrainian origin is used at least at the level of 30%, the premium to the feed-in tariff shall be 5%. If equipment of Ukrainian origin is used at least to the level of 50%, the premium to the feed-in tariff shall be 10%. The level of use of equipment of Ukrainian origin at power plants that generate electricity from alternative energy sources is defined as the sum of respective percentages of specific items of equipment. The Law of Ukraine On Electricity provides an exhaustive list of equipment for each type of alternative energy source that qualifies for the feed-in tariff premium. However, it is worth noting that such premium to the feed-in tariff is not applicable to the electricity objects of private households.

Private Households: a Popular New Trend

According to the State Agency for Energy Efficiency and Energy Saving of Ukraine, the rise in the number of solar panels installed by households is the latest trend in the alternative energy sector of Ukraine. This is attributed to the positive legislative changes made in 2015, which allowed private households to not only sustain their electricity needs by means of using renewable energy sources, but to also sell any such excessive energy generated under the feed-in tariff. The trend has been growing continuously for the last two years. Thus, pursuant to the Law of Ukraine On Electricity, private households are entitled to set up electricity generating facilities with a capacity of up to 30 kW and sell electricity produced from solar or wind energy under the feedin tariff to the electricity distribution company in the amount that exceeds monthly consumption of electricity by such private households.

Tax Benefits

For a number of years, the producers of “green” energy in Ukraine have enjoyed quite substantial tax benefits. However, amend-

WWW.UKRAINIANLAWFIRMS.COM


DLF ATTORNEYSAT-LAW

Address: Torus Business Centre, 17d Hlybochytska Street, Kyiv, 04050, Ukraine

D

LF attorneys-at-law is a Ukrainian law firm that provides consultancy services to mainly English and German speaking clients on various matters on doing business in Ukraine. We have vast expertise in corporate, M&A, insolvency, antitrust, labor, competition, IP, renewable energy law, advertising law, privatization, agriculture, real estate and tax law as well as in litigation and dispute resolution. Our core customers are SMEs from various fields. We offer them tailor-made and economically viable solutions. The firm is also a reliable business partner for a number of listed corporations and their subsidiaries in Ukraine. We represent our clients in a wide range of industries: IT, engineering, management consulting, agriculture, life sciences and healthcare,

ments made to the Tax Code of Ukraine in late 2014 cancelled many tax privileges for producers of electricity from alternative energy sources, specifically in relation to income and land taxation. Currently only those entrepreneurs constructing renewable energy objects in the Chernobyl Exclusion Zone enjoy tax privileges; the rent for land use in the exclusion zone is paid at 15% (i.e., with an 85% discount). Nevertheless, some tax benefits are still available for renewable energy producers. Thus, pursuant to the Tax Code of Ukraine, no VAT is applicable to transactions on import to the territory of Ukraine of: — equipment which is functioning on the basis of alternative energy sources, energy

Type

Tel.: +380 44 384 2454 Fax: +380 44 384 2455 E -mail: info@DLF.ua Website: www.DLF.ua

renewable energy, foodstuffs, pharmaceuticals and chemicals as well as home appliances. Our team is multilingual and led by two partners, Igor Dykunskyy, LL.M. and Andriy Navrotskiy, LL.M. Most of our lawyers graduated from Ukrainian law universities and successfully continued their studies abroad, particularly in England and Germany. Our specialists are held in high esteem in professional circles thanks to their expertise on the special features of doing business in Ukraine. Our attorneys understand not only the needs of our clients, but also their business philosophy and the specific needs of their respective business models. Legal and tax advice is a business relationship built on trust and this is a significant advantage for our clients. We have a close working relationship with various business associations in Ukraine and regularly publish our articles in local and international legal and business journals. In addition, we come recommended by a number of foreign embassies in Ukraine.

saving equipment and materials, means of measuring, control and management of energy resources, equipment and materials for production of alternative types of fuels or electricity from renewable energy sources; — materials, equipment, components for manufacturing equipment, which is functioning on the basis of renewable energy sources; raw materials, equipment and components for production of alternative types of fuels or electricity from renewable energy sources; energy saving equipment and materials, products whose operation provides saving and rational use of energy resources; means of measuring, controlling and managing energy resources. In addition, pursuant to the Customs Code of Ukraine, the above-mentioned

Capacity (kW)

goods are exempt from import and export duties, provided that the taxpayer uses them for its own production and that no identical goods with the same qualities are produced in Ukraine. Nevertheless, this tax benefit, while being settled on paper, cannot be actually implemented in practice due to the failure of the Cabinet of Ministers of Ukraine to approve the list of such goods with specification of codes under the Ukrainian Classification of Foreign Economic Activity Products. Furthermore, the Tax Code of Ukraine provides that any transactions regarding the sale of electricity generated by qualified cogeneration units and/or from renewable energy sources are not subject to excise tax.

Date of commissioning 01.07.-31.12.2015

2016

2017 — 2019

2020 — 2024

2025 — 2029

Ground-mounted solar power plant

0.1696

0.1599

0.1502

0.1352

0.1201

Rooftop solar power plant

0.1804

0.1723

0.1637

0.1475

0.1309

Wind turbine

<600

0.0582

0.0517

0.0452

600-2000

0.0679

0.0603

0.0528

>2000

0.1018

0.0905

0.0792

Biomass

0.1239

0.1115

0.0991

Biogas

0.1239

0.1115

0.0991

<200

0.1745

0.1572

0.1395

200-1000

0.1395

0.1255

0.1115

1000-10000

0.1045

0.0942

0.0835

0.1502

0.1352

0.1201

0.1626

0.1449

0.1045

0.0932

Hydro plant

Geothermal energy Solar power for private households

<30

Wind turbine for private households

<30

WWW.UKRAINIANLAWFIRMS.COM

0.2003

0.1901 0.1163

0.1809

153


Sanctions

Sanctions under Ukrainian Laws

Andriy SELYUTIN Partner, Head of South Ukrainian Branch, Arzinger

Political Sanctions

The regime of national sanctions is quite a new legal institution in Ukraine. On 14 August 2014 the Verkhovna Rada of Ukraine enacted the Law On Sanctions, which provides a legal framework for imposition of sanctions in response to external threats. According to Article 3 of the Law On Sanctions Ukraine may apply sanctions against individuals and legal entities in response to actions by a foreign state, foreign legal entity or individual, or other parties creating imminent and/or potential threats to national interests, national security, sovereignty and territorial integrity of Ukraine, supporting terrorist activities and/or violating human and civil rights and freedoms. Other grounds for the imposition of sanctions are resolutions of the United Nations General Assembly and Security Council, decisions and regulations of the Council of the European Union and the existence of a violation of the Universal Declaration of Human Rights, the Charter of the United Nations. The main peculiarity of a sanction under the Sanctions Law is that it is not a kind of punishment for the certain direct violation but mainly a general response by the country to the aggressive or unfriendly actions from the counterpart in question. And, as a result, its cancellation doesn’t often depend greatly on the sanctioned person’s or entity’s behaviour. Lists of sanctioned persons and restrictive measures in respect thereof may be proposed by the Cabinet of Ministers (the Government), Verkhovna Rada of Ukraine (the Parliament), the President of Ukraine and the

154

Security Service of Ukraine. Those propositions must be passed by the National Security and Defence Council of Ukraine, enacted by a Presidential decree and approved by a Resolution of the Ukrainian Parliament within 48 hours of the issue of the Presidential Decree. On 22 September 2015 personal sanctions were imposed by Ukraine on a number of individuals and legal entities (mostly of Russian origin) associated with supporting the continuing violation of the national sovereignty and territorial integrity of Ukraine. Restrictive measures were introduced under the Presidential Decree of 16 September 2015 No.549/2015 On Decision of the National Security and Defence Council of Ukraine of 2 September 2015 On Application of Personal Special Economic and other Restrictive Measures (Sanctions) for a period of one year. In October 2016 the list of sanctioned persons and legal entities was reapproved and also enlarged by Presidential Decree No. 467/2016 of 17 October 2016. Summarising the data from the lists of persons under sanctions it may be concluded that the following restrictive measures are the most common types of imposed sanctions: freezing of assets (temporary restriction of right of the entity to dispose of its property); preventing removal of funds from Ukraine; blocking of business and financial transactions; ban on participation in public procurement; ban on financing companies that are subject to the sanctions. Further to the Law On Sanctions and the Presidential Decree a few bylaws have been approved by various authorities in order to enable practical implementation of the imposed sanctions. The National Bank of Ukraine adopted Resolution of 1 October 2015 No.654 On Providing Implementation and Monitoring of the Efficiency of Personal Special Economic and Other Restrictive Measures (Sanctions). The abovementioned Resolution obliges financial bodies to provide the National Bank of Ukraine with actual information on the status of a sanctioned person’s bank accounts, to abandon approaching such persons, void execution of financial obligations, operations in their favor and freeze appropriate monetary assets. The Resolution and amendments made hereto are intended to: 1. authorize a bank to verify the identity of the holder of electronic means of payment and reject transactions involving the use of

electronic means of payment held by persons under sanctions; 2. allow subsidiary banks incorporated in accordance with applicable laws of Ukraine to be recapitalized by banks against which the sanctions were imposed in order to prevent Ukrainian banks from being withdrawn from the market, which could result in additional financial pressure on the Deposit Guarantee Fund and the State Budget of Ukraine; 3. prevent Ukrainian banks from transferring funds to the accounts of persons under sanctions and/or to the accounts of Ukrainian banks opened with entities under sanctions except if these funds are intended for the recapitalization of subsidiary banks incorporated in accordance with applicable laws of Ukraine. Thereafter, the legislator made amendments of 27 January 2016 to the Order of Notary Actions Execution by Notaries of Ukraine. When an individual or a legal entity applies to a notary to carry out an action, the notary has to check if any personal economic sanctions are applied to such a person. If it is so, the notary will deny carrying out any notarial action. In such a way, this provision is an extra guaranty of implementing of such a personal economic sanction as freezing of assets. Amendments were also made to the Order of State Registration of Legal Entities and Individuals-Entrepreneurs. This Order provides for the state registrar’s obligation to check personal economic sanctions application only when a person applies for increasing the statute capital of the legal entity which has a non-resident person as its shareholder possessing major influence on the legal entity’s activity. The above-mentioned Order does not stipulate any other provisions that oblige state registrars to check application of personal economic sanctions regarding a person applied to the state registrar.

Sanctions for the Violation of Foreign Trade Regulations

In addition to the Law On Sanctions, sanctions may also be imposed by the Ukrainian Ministry of Economic Development and Trade for the violation of foreign trade regulations. Those sanctions are individual licensing of foreign trade transactions and temporary prohibition of foreign economic activity. Individual licensing means that any export-

WWW.UKRAINIANLAWFIRMS.COM


Arzinger

A

Address: Senator Business Center, 32/2 Moskovska Street, 10th Floor, Kyiv, 01010, Ukraine

rzinger is an independent law firm headquartered in Kyiv which has regional offices in Western and Southern Ukraine, in Lviv and Odesa, respectively. Arzinger has for over 14 years been among the legal business leaders providing high-quality legal support to clients throughout Ukraine. Among the firmâ&#x20AC;&#x2122;s many clients are top representatives of international and local business. Arzinger follows high standards of legal services and is a reliable partner in view of its great experience in a wide range of industries and legal practices: M&A, corporate law, real estate and construction, antitrust and competition, litigation and arbitration, tax, banking & finance. We serve clients operating in the financial services, energy, mining and natural resources, pharmaceuticals, food & beverages, investment banking and corporate finance, telecommunications, retail & leisure, hospitality, aviation and automotive, agriculture, insurance, and infrastructure & transport industries.

import operation, including any payments, is subject to prior permission from the Ministry. Prohibition means complete cessation of foreign economic operations. These sanctions may be imposed against both Ukrainian and foreign entities. Unlike previously described, those sanctions are always imposed for the specific violation of law and can respectively be removed if the violation is corrected. Until quite recently the most frequent reason for such sanctions was the violation of terms of payment under the sale and purchase contracts between Ukrainian and foreign entities. Ukrainian law requires that payments under an import-export contract be carried out no later than 120 days after custom clearance of goods1. In practice it means that an exporter has to receive payment no later than 120 days upon sending the goods abroad and an importer has to receive purchased goods no later than 120 days upon making an advance payment. In case of violation, (regardless of the reason for it) the Ukrainian entity will be fined (0.3 % per day of the amount of the debt). If the violation is caused by the foreign counterpart the Ukrainian entity has to file a lawsuit in the court of arbitrage before the expiry of the above mentioned 120 days. Furthermore, the Ministry of Economic Development may impose a sanction against the foreign entity. But now sanctions have also been imposed for violations of the trade ban with

Tel.: +380 44 390 5533 Fax. +380 44 390 5540 E-mail: mail@arzinger.ua Web-site: www.arzinger.ua

Arzinger employs highly-qualified professionals with vast hands-on experience in a wide range of legal matters, deep knowledge and understanding of the local market, international education and background. The firm has a team of over 70 seasoned legal professionals led by 8 partners. All of them are acknowledged among leading experts on the Ukrainian legal market and are recognized by reputable international and local rankings. As a result, Arzinger can offer extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters. The firm renders tailor-made legal services of unsurpassed quality to meet the clientâ&#x20AC;&#x2122;s expectations. Arzinger cooperates closely with legal advisors from numerous jurisdictions and is a member of international professional organizations, enabling it to engage colleagues from various jurisdictions in cross-border transactions and so provide clients with top-level professional legal advice.

Crimea. The annexing of Crimea caused an unprecedented event in the history of modern Ukraine: Russia extended its jurisdiction to the territory of Ukraine. After the annexation of Crimea, Ukraine adopted the Law On Temporary Occupied Territories (TOT), which regulates the status of Crimea as well as the procedure of entry therein. In accordance with part 1 of Article 4 of the Law On Temporary Occupied Territories the temporarily occupied area shall be subject to a special legal regime of crossing of boundaries of the temporarily occupied area, the performance of transactions, the holding of elections and referenda, the exercise of other human and civil rights and freedoms. To provide the opportunity to conduct commercial activities between Ukraine and Crimea for the period of temporary occupation, the Ukrainian Parliament adopted the Law On Free Economic Zone (FEZ), which defines specific features of the exercise of economic activities within the temporarily occupied territory of Ukraine and establishes the Crimea Free Economic Zone (Crimea FEZ). The Law On Free Economic Zone came into force on 27 September 2014. According to para 1.1 of Article 1 of the Law On Free Economic Zone the Crimea FEZ shall be implemented within the boundaries of two administrative territorial units of Ukraine: the Autonomous Republic of Crimea and the city of Sevastopol. Pursuant to para 1.2 of Article

1 of the Law On Free Economic Zone the administrative boundary between the territory of Crimea FEZ and the rest of the territory of Ukraine shall coincide with the land administrative boundary between the Autonomous Republic of Crimea and Kherson Region. The Crimea FEZ was introduced for ten full calendar years starting from the effective date of the Law On Free Economic Zone (that is, until 27 September 2024). In accordance with sub-para 4 of para 12.6 of Article 12 of the Law On Free Economic Zone the temporary border control shall be implemented at the Crimea FEZ administrative boundary. To sum up the provisions of both the Law On Temporary Occupied Territories and the Law On Free Economic Zone entry to Crimea is only possible via check-points at the border of Kherson Region and Crimea, and any delivery of goods to Crimea is only possible subject to custom clearance at the custom checkpoints there. As a result, the delivery of goods to Crimea from the territory of Russia became contraband in terms of Ukrainian legislation as it is performed beyond Ukrainian Custom Service checkpoints. Every company delivering goods to Crimea from the territory of Russia violates Ukrainian law and may be sanctioned. The Security Service of Ukraine monitors deliveries to Crimea and appeals regularly to the Ministry of Economic Development and Trade to impose sanctions against the violating companies.

The term is not negotiable but it can be changed by the National Bank of Ukraine depending on the current account balance. 1

WWW.UKRAINIANLAWFIRMS.COM

155


Sports Law

Contract with a Sportsman: What Should you Know?!

Andriy SHULGA Partner, ARBITRADE

T

oday, many participants of sporting relations (sportsmen, coaches, doctors, sports clubs etc.) share the opinion that the field of sports is not sufficiently regulated at the legislative level, leading to numerous violations of the rights of sportsmen and other parties in the field. In this article I will attempt to somewhat dispel this myth and demonstrate the other side to the absence of “overregulation” in sports, in particular, using the example of a sports contract. It is the contract that serves as an instrument of regulating the relations between two equal parties. The contract sets out the rules of the game to be followed in the absence of detailed legislative regulation. It also provides advantages and deprives rights in case of future disputes.

The Legal Nature of a Sports Contract

A sports contract may be defined as a contract between two equal parties in the sphere of sports which regulates their relations connected with the preparation and participation in competitions with the aim of achieving sports results, sets mutual rules and obligations of the parties and is concluded for a fixed term. The closest definition to the above in our legislation is the definition contained in the Labor Code of Ukraine. Part 3 of article 21 of this Code provides that “A special form of an employment agreement is a contract in which its period of validity, rights, obligations and liabilities of the parties (including pecuniary liability), conditions of supply and organization of the employee’s labour, conditions of termination of the agreement, including prema-

156

ture termination, may be established by the agreement of the parties. The sphere of application of a labour contract is determined by the laws of Ukraine”. In the opinion of the author of this article, this is the definition one should be guided by when assessing the legal nature of a sports contract. It shouldn’t be thought that the issue of contract is unregulated and unclear. On the contrary, Ukrainian legislators have granted the contacting parties in the sphere of sports the widest possible discretion in setting out the terms of cooperation between the sportsman and the employer with the aim of achieving high results and profits. And who knows whether it would be better if the state interfered more heavily with these relations. Therefore, the parties should use the freedom provided to them in determining their own rights and obligations towards each other.

Basics of Legal Regulation of the Sports Contract

The Decree of the Cabinet of Ministers of Ukraine of 19 March 1994 No.170 On the Ordering of the Use of Contractual Form of an Employment Agreement stipulates that the contractual form of an employment agreement should apply to employees at the time of recruitment for a position only in cases directly foreseen by legislation (clause 1). The conclusion of a sports contract is foreseen by the specialized Law On Physical Culture and Sports. It should be noted that the specialized Law of Ukraine On Physical Culture and Sports does not contain a definition of an employment contract or an indication of terms that the latter may regulate. Yet, the Act directly connects the acquisition of the status of a professional sportsman with the conclusion of a sports contract, rendering such a contract extremely important. Namely, according to part 3 of Article 38 of the Act, a sportsman acquires the status of a professional sportsman from the moment of conclusion of a contract with the corresponding parties in the area of physical culture and sports on the participation in competitions between professional sportsmen. In light of this, it is important to remember that contracts should contain a clear reference to the participation of a sportsman in professional competitions. Separate contracts are to be

concluded with members of the national teams of Ukraine, which is also foreseen by the Law (parts 7 and 9 of Article 37). A Standard Form of an employment contract has been approved by the Order of the Ministry of Labor of Ukraine of 15 April 1994 No.23. It should be borne in mind that this form is not compulsory, but serves an information and auxiliary function, and the parties are free to use it in full or in part. Generally, the standard form of contract regulates the following issues: the scope of the work offered and the requirements of the quality and time limits of its performance, the duration of the contract, the rights, obligations and mutual liabilities of the parties, the conditions of payment for and the organization of labor, the conditions of termination of the agreement, social, physical and other conditions necessary for the performance of the parties’ obligations, taking into account the specificity of the tasks, professional peculiarities and financial possibilities of the enterprise, institution, organization or employer. As mentioned above, this Standard Form of contract does not affect the principle of party autonomy, which parties should be guided by when negotiating the terms of the contract. The provisions on party autonomy are expressly foreseen in the Civil Code of Ukraine in Article 627, according to which the parties are free in the conclusion of an agreement, the choice of counterparty and in determining the terms of the agreement, taking into account the requirements of the Code, other acts of civil legislation, trade usage, requirements of reasonableness and justice. According to Article 6 of the Civil Code of Ukraine, the parties are free to conclude an agreement which is not foreseen by the acts of civil legislation but corresponds to the general foundations of civil legislation. The parties are free in an agreement foreseen by the acts of civil legislation to regulate their relations which are not regulated by such acts. The parties may deviate from the provisions of acts of civil legislation and regulate their relations at their own discretion. The parties may not deviate from provisions of acts of civil legislation if these acts expressly provide for this, as well as in the case where the compulsory nature of provisions of civil legislation for the parties follows from their content or from the nature of the relationship between the parties.

WWW.UKRAINIANLAWFIRMS.COM


ARBITRADE

A

Address: 4 I.Lepse Ave, Building 1, 5th Floor, Office 518, Kyiv, 03680, Ukraine

RBITRADE is a boutique law firm specializing in international trade, international arbitration, litigation and complex negotiations/restructuring. We have a reputation of being a client-focused law firm that provides high quality services. ARBITRADE’s team is made up of highly-qualified and experienced dispute resolution lawyers. The leading positions of ARBITRADE in international arbitration are confirmed by professional awards and international rankings, such as the Legal 500, Ukrainian Law Firms 2015, Best Lawyers International, ILO Client’s Choice, Who is Who International Arbitration. ARBITRADE has extensive experience in representing clients before leading international arbitral institutions in international commercial, investment, sports, maritime and commodities arbitration. As a GAFTA and FOSFA member, we are particularly well-equipped to advise on the structuring and drafting of sale and purchase agreements for soft commodities incorporating GAFTA and FOSFA standard contract forms. The ARBITRADE team also has extensive expertise in representing clients before national courts in Ukraine in commercial and administrative disputes within many industries and

Party Autonomy The latter principle of “what is not forbidden is allowed” applies to the terms of the employment agreement between the sportsman and the employer. Therefore, the parties should not be afraid to regulate in as much detail as possible all the issues that may be relevant to their cooperation. This ensures avoiding future claims and disputes. For instance, if the situation of financial difficulties of the employer was clearly regulated in employment contracts, there would be significantly fewer disputes between sportsmen and clubs. Therefore, currently both civil law and employment law give the parties in the field of sports the broadest possible discretion to regulate the terms of their employment con-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 454 0508 Fax: +380 44 454 0509 E-mail: info@arbitrade.ua Web-site: www.arbitrade.ua

fields of business. White collar crime defense, legal security for business, support in internal corporate investigations, and compliance are among the featured practices of the firm. ARBITRADE is a long-term legal partner of the Ukrainian Chess Federation (UCF). We have represented the UCF at meetings of the General Assembly and the Executive Committee of FIDE (World Chess Federation), the General Assembly of the European Chess Union, including with regard to issues of sports jurisdiction over Crimea and disputed player transfers. ARBITRADE has also provided legal support to UCF in connection with the Women’s World Chess Championship Match 2016 which was held in Lviv, Ukraine. As a law firm specializing in international trade and promoting bilateral trade between Ukraine and other European countries, ARBITRADE has developed strong connections with other law firms in many jurisdictions; we have also maintained a representative office in Bulgaria for a number of years. ARBITRADE is a member of the Norwegian — Ukrainian Chamber of Commerce (NUCC), the Bulgarian Chamber of Commerce and Industry and the Ukrainian Chamber of Commerce and Industry.

tracts. It should be noted that the Draft Labor Code of Ukraine currently being considered by the Verkhovna Rada of Ukraine does not change the position on party autonomy in employment contracts. On the other hand, a sports contract cannot be considered an employment agreement in the classical sense attributed to it by the Labor Code of Ukraine. An employment agreement, in fact, does not regulate the relations between an employer and a hired employee, but fixes the hired employee with the employer. The requisite relations under an employment agreement are actually regulated by the Labor Code of Ukraine, which is designed to regulate employment at large state enterprises with a significant bias in favor of the employer, and does not answer the

modern challenges raised by a relationship between two equal parties such as a professional sportsman and his/her employer.

Conclusions and Recommendations

To conclude, the author would like to urge all parties to relations in the sphere of sports to try and regulate their relations independently. As of today, all necessary conditions are in place to achieve this. What is needed is simply to work out in detail each provision of the contract and bear in mind all situations which may arise in the future within the context of your relations. Only then will the stability and confidence which are often lacking in relations between sportsmen and their employers appear.

157


State Aid

State Aid: Terra Incognita for Ukraine

Sergey DENISENKO

Oleksandr TERESHCHENKO

Counsel, AEQUO

Attorney-at-Law, AEQUO

ubsidy and state aid issues are usually quite complex, requiring a high level of expertise and in-depth knowledge from advisors. Coherent and complex state aid legislation in the EU has been developed over the last 60 years and the respective rules of the World Trade Organization (WTO) on provision of subsidies over the course of decades. Unlike the EU and WTO, the current state of affairs in Ukraine related to granting state aid may be characterized by the word “chaos”. To change this situation and to ensure transparent public money spending, in 2017 the Ukrainian state aid system shall be launched and is expected to function on the same footing as the European one.

of its decision to appeal against certain issues of law and legal interpretations developed by the compliance panel. On 28 November 2016 the WTO DSB confirmed in its report that the US tax exemptions granted until 2040 to Boeing for production of the Boeing 777X are incompatible with WTO law. In addition, by making these tax benefits dependent on the use of domestically produced wings, the USA also discriminated against foreign producers. The total amount of illegal subsidies could reach USD 5.7 billion. Recently state aid issues became increasingly important for beneficiaries and providers of state aid also at EU level. We all heard about such high-profile and complex cases as Starbucks, Fiat, construction of a new nuclear plant at Hinkley Point in the UK, creation of movie studio Ciudad de la Luz in Spain, etc. However, the recent state aid probes by the European Commission (EC) completed in 2016 were landmark ones and, to some extent, revolutionary. At the beginning of 2016 the EC concluded that a Belgian “Excess Profit” tax scheme was illegal and demanded recovery of about EUR 700 million from around 35 well-known international groups of companies. The scheme allowed its beneficiaries on the basis of tax rulings to reduce corporate profit tax in the range from 50%-90%. Given that the scheme benefited only certain companies and violated the arm`s length principle, the EC declared it illegal. The EU state aid rules require that incompatible state aid is recovered in order to remove the distortion of competition created by the aid. There are no penalties under the EU state aid

S

What are the Recent Developments in WTO and the EU?

In the sphere of illegal public subsidies there were 2 landmark rulings in 2016 by the Dispute Settlement Body (DSB) of the WTO, which deserve attention. Given that Ukraine is a global player on the aviation market, such cases are especially interesting. On 22 September 2016, the WTO DSB issued a compliance panel report according to which the EU failed to stop unfair government subsidies to French aircraft producer Airbus despite previous rulings by the DSB to withdraw illegal support from the Government. The DSB also found that Airbus had received new illegal subsidies for the A350 aircraft, which are reported to be nearly USD 5 billion. In total, Airbus has received nearly USD 22 billion in subsidized financing. On 13 October 2016, the EU notified the WTO DSB

158

rules (except accrual of interest). Therefore, the EC simply restores a level playing field for other companies, whose legitimate interests have been affected. It is also important to note that in the Atzeni and Others Case, the European Court  of Justice (ECJ) ruled that illegal state aid needs to be recovered even if it leads to subsequent bankruptcy of the beneficiary. In the Deggendorf case, the ECJ held that a beneficiary, which refuses to return the illegally granted state aid, may not receive new aid until it returns it in full, including interest. In summer 2016 the EC decided that public support measures granted by Spain to 7 professional football clubs (Real Madrid CF, FC Barcelona, Athletic Club Bilbao, Club Atlético Osasuna, Valencia CF, Hercules CF, Elche CF) gave those clubs an unfair advantage over other clubs in breach of EU State aid rules. The EC demanded that Spanish professional football clubs pay back all incompatible aid with interest. In a landmark Apple case, following an in-depth state aid investigation, the EC concluded that over the course of 10 years Ireland granted illegal tax benefits of up to EUR 13 billion to Apple. It is illegal under EU state aid rules because it allowed Apple to pay substantially less tax than other businesses. According to the EC, Ireland gave Apple preferential tax treatment that is illegal under the EU State aid rules (Article 107 of the Treaty on Functioning of the EU). In particular, Apple paid CPT in the amount lower than 1% while the average rate for other companies was about 12.5%. Thus, the EC now requires Ireland to recover the illegally granted state aid in the record-high amount of EUR 13 billion as well as interest. As we can see from the above examples, in 2016 the WTO and the EU were active in terms of subsidies and state aid revocation. Therefore, the legality of state aid measures granted by WTO/EU member states to private or public undertakings have become an increasingly important issue today.

What are Ukraine’s Undertakings under the Association Agreement?

The Association Agreement requires Ukraine to implement an efficient and transparent system of state aid control and monitoring. In particular, Ukraine undertook:

WWW.UKRAINIANLAWFIRMS.COM


AEQUO

A

Address: Vector Business Centre, 52 Bohdana Khmelnytskogo Street, Kyiv, 01030, Ukraine

EQUO is an advanced industry-focused Ukrainian law firm. Our team is made up of highly-qualified and recommended lawyers who work proactively to help clients reach their business goals. Backed by solid industry expertise and a thorough understanding of business we develop innovative strategies and provide efficient solutions to the most complex and challenging matters. Our advice is clear and practical. Today, we are a legal advisor of choice for many of the largest Ukrainian and multinational companies and financial institutions, including Fortune 500 entities, and leaders in their respective sectors. We operate at the top end of the market. Our representative clients include Agroprosperis, Alfa Bank,

By 1 January 2019 — to adopt and implement state aid rules similar to those which apply in the EU; — to develop respective secondary regulatory framework, which sets out details of aid intensity, eligibility criteria, notification and investigation procedures, etc; — to establish an independent, competent supervisory body; By 1 January 2021 — to create a register of state aid measures, which needs to contain information about all state aid measures; By 1 January 2023 — bring all existing state aid schemes into compliance with EU standards. Finally, the Agreement establishes that when assessing the eligibility of state aid measures and its compliance with state aid rules, Ukraine is granted the status of a country with difficult social and economic conditions, which provides some benefits in assessing the legitimacy of the measures in question.

How will the Ukrainian State Aid Control System Function?

As from 2 August 2017 the Law of Ukraine On State Aid to Undertakings (State Aid Law) will come into effect and, consequently, Ukraine will launch its brand new state aid control system. The State Aid Law introduces significant restrictions on the extent to which public funding can be used. In particular, Article 2 of the Law provides that the state aid granted in any form through state or local resources, which distorts or threatens to distort competition by favouring certain undertakings is incompatible with the Law and prohibited per se. As we can see, the definition of state aid is very broad and includes inter alia direct government subsidies, tax exemptions,

WWW.UKRAINIANLAWFIRMS.COM

Tel: +380 44 490 9100 Fax: +380 44 490 9102 E-mail: office@aequo.ua Web-site: www.aequo.ua

Allianz, Apax Partners, Apollo Global Management, AXA, ATB Market, British American Tobacco Pryluky, Bunge, BXR Partners, Citadele Banka, Discovery Networks, Dr. Reddy’s Laboratories, Dragon Capital, DuPont, Epicenter K, European Bank for Reconstruction and Development, European Commission, FESCO, Forbes, GlaxoSmithKline, Google, Groupe Danone, Inditex Group, Mosquito Mobile, MTS Ukraine, NCH Capital, Nova Poshta International, Novus Ukraine, Philips, Pioneer HiBred International, Porsche Bank AG, Portigon AG, Premium Sound Solutions, Samsung Electronics, Sandvik, Sonae, Soros Fund Management, Syniverse, Synthon, Tetra Laval, Thomson Reuters, TIS, Ukrainian Redevelopment Fund, UniCredit Group, VimpelCom and Zara Ukraine.

state guarantees, debt/penalty write-offs and other assistance measures. In 2015 the Antimonopoly Committee of Ukraine (AMCU) was designated as a competent supervisory body in the field of state aid with powers to authorize state aid schemes and individual aid. Within the framework of the AMCU, 5 working groups on development of required legislative framework were created with participation of leading global and domestic experts (including, the authors of this Article). The state aid system will control only undertakings (business entities or individual entrepreneurs) and does not cover physical persons. The system implies that within one year from the date that the Law comes into force (i.e. by 2 August 2018), all existing state aid shall be notified to the competent authority. The AMCU will review the submissions and will issue recommendations, if needed. In accordance with the State Aid Law, all unlawful aid can be subject to recovery from the recipients. If the current state aid measures do not comply with the legislative requirements, they either need to be brought into compliance (deadline — 2 August 2022) or recovered from the beneficiaries. From 2 August 2017 all new state aid measures must be preliminarily approved by the AMCU before they are actually implemented. The AMCU has 2 months to scrutinize a notification on new state aid and is authorized to take one of the following decisions: 1) the measure is not state aid; 2) the measure is compatible with state aid regulations; 3) if there are suspicions that it may be incompatible with the state aid regulations, start in-depth investigation proceedings. The AMCU is also authorised to send information requests to state aid providers, beneficiaries and other parties, which may have the necessary data.

When applying to state aid providers for the aid, companies must make sure that they comply with the Law and funding levels are tailored to regulatory requirements. Otherwise, the businesses may face recovery claims as Article 14 of the State Aid Law requires that incompatible state aid is recovered in order to remove the distortion of competition created by the illegal aid. Similarly to the EU rules, the State Aid Law requires that the whole amount of illegal aid needs to be recovered, including interest. If the affected undertaking does not return the illegal aid, the AMCU may file a statement of claim to the Circuit Administrative Court of Kyiv city on recovery thereof. The Law also establishes that the limitation period in recovery proceedings is 10 years, which is one of the longest in Ukrainian legislation. Therefore, the beneficiaries of state aid need to act proactively by granting all possible assistance to state aid providers in drafting notifications on existing as well as new aid. Otherwise, the recovery claims by the AMCU may ultimately affect the state aid beneficiaries as they could be forced to return the illegal aid with interest. The new Ukrainian state aid rules may significantly affect energy, aircraft and shipbuilding companies, as these sectors are heavily subsidized and are among the biggest beneficiaries of fiscal benefits. Therefore, such industries need to prepare preliminary defence strategies against potential allegations from the AMCU of unlawful state aid in recovery procedures. In order to effectively counter possible recovery claims, both beneficiaries and providers of state aid need to cooperate closely. Given that state aid matters are complex and require comprehensive expertise, 2017 will most probably provide Ukrainian lawyers with new tasks.

159


Tax

International Tax Structuring: Recent Developments and the Coming Future

Dmitriy MIKHAILENKO

Roustam VAKHITOV

Stanislav LOBKO

Partner, OMP Tax & Legal

Counsel, International Taxation, OMP Tax & Legal

Counsel, OMP Tax & Legal

willingness to participate) we might proclaim banking secrecy dealing with large companies as dead, as all financial data relating to passive companies with an annual turnover of at least USD 250K would be referred to the jurisdiction of their beneficiaries in order to be properly taxed there.

ening of criteria for controlled transactions and rumors of introduction of CFC and joining the AEOI. In practice they continue coming down on shame agreements and shell companies. On top of this the National Bank of Ukraine is now the most successful authority fighting against the outflow of capital and tax evasion itself through application of Resolution No.369 of 15 August 2016. Society itself is idle. We may, inter alia, refer to the Panama papers, Luxembourg papers, Wikileaks, etc. which made us aware of significant tax evasion involving PEP and resulted in major resignations. All the above seem to show that tax planning exists no more than back in the day. From the Ukrainian perspective it has already triggered numerous alterations, namely: — closure of many classic offshores (at the moment — predominantly involved in major disclosures like Panama) which are likely to join the AEOI (including BVI, Anguilla, Bermuda, Seychelles, etc.); — closure of Cypriot back-to-back loans which historically have been used to finance at least 90% of Ukrainian-based industrial or trading groups due to more and more efficient application of the beneficial ownership test; — forthcoming closure of Cypriot IPcompanies which have been either used for holding Ukrainian-based marketing and IT assets due to recent modification of Cypriot

O

ver the past five years we have seen evidence of a global shift in comprehension of approaches to international taxation. As both business and tax professionals have got used to that it shall inevitably end up with the shrinking of taxes as we now painfully face the simple truth when it is being transformed into rather correct arrangement of real business. We still believe that this trend will inevitably pay dividends for the whole of society as both business would profit from failed competition (namely, honest taxpayers would not be undermined by their unscrupulous rivals) and Governments would profit from an extension of the income basis.

Automatic Exchange of Information

The first sticking point arose right after the FATCA obliged overseas Governments to provide the US with information connected with their tax residents. The world regarded it as a drastic crackdown on banking secrecy. However, soon this initiative was soaked up by the OECD, now backing a global initiative called automatic exchange of information (AEIO) of the same nature. Literally, as from FY2017, when the AEOI will consist of 100 countries (including the entire EU, Russia and almost all the classic offshores, but currently excluding Ukraine, which has expressed its

160

BEPS

The others promptly followed suit: it is particularly worth mentioning BEPS, another initiative aimed at amending DTTs and local legislation in order to avoid aggressive tax models involving classic offshores, shifting profits to low-tax jurisdictions, minimizing the tax effect of personal relocation to countries offering attractive personal taxation regimes (like Cyprus, Gulf countries, Monaco, Andorra, etc.). For example, in the EU it ended up with adoption of the Anti Tax Avoidance Directive (introducing, inter alia, the thin capitalization rule, exit taxation, CFC-regime etc.). When it comes to practice we might as well recall notable tax cases involving Amazon, Starbucks, Fiat and eventually Apple, claiming the payment of huge amounts of back taxes, though initiated against states rather than companies themselves in allegations of distortion of competition.

Ukraine

Getting back to Ukraine, we can trace our recent transfer pricing developments broad-

WWW.UKRAINIANLAWFIRMS.COM


OMP Tax & Legal

O

Address: 37 Spaska Street, Kyiv, 04070, Ukraine

MP Tax & Legal is a dynamically developing Ukrainian law firm with a tax specialization. As of today, the firm’s team includes more than 30 highly specialist professionals in the areas of law, accounting and audit. Our firm provides full legal support to Ukrainian companies in the area of taxation. An important focus of work in this area is international tax structuring, which has accumulated solid experience and marked a significant growth due to the professionalism and support of partner Roustam Vakhitov. For the purpose of quality implementation and proper protection of the company’s solutions, our service portfolio includes: advanced expertise in the areas of currency regulation, contractual, corporate, labor law, intellectual property, transfer pricing, tax audit and due diligence. The integrated and comprehensive solution of the customer issue is the main priority in our work. In this regard, in 2016, OMP Tax & Legal began cooperation with the Law Company Pravozakhyst Ukraine (Managing Partner German Taslitskiy), engaged in expertise in the area of customs and international economic activity.

IP-box regime effective from FY2016, carving out marketing IP assets (like trademarks) and setting new rules for the development of other IP assets; — stepping aside from UK–based companies due to their public register of beneficiaries available at https://beta.companieshouse. gov.uk/; — development of substance when it comes to overseas companies which result in moving of at least senior staff and the sales team to the jurisdiction where the main trading company is located. Certain Ukrainian businesses are reluctant to modify their structures under the influence of recent changes and still go with the flow, while others are developing fresh concepts which may soon become classic ones for tax planning. The only consequence of this reluctance, though, is the substantial risk of significant tax adjustments in the future. We see the Ukrainian tax authorities becoming more and more efficient and knowledgeable in challenging Ukrainian international tax planning strategies. We attribute significant risks to these structures since they may be vulnerable both for unfriendly acquisitions and attacks from the Government itself, and thus less attractive for strategic investors. Though recent changes are going ahead we now lack bulletproof solutions which would definitely withstand any kind of chal-

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 391 3003 E-mail: info@omp-tax.com.ua Web-site: www.omp-tax.com.ua

In 2016, OMP Tax & Legal co-founded Crowe Horwath AC Ukraine, an audit, accounting and tax consulting company. Crowe Horwath AC Ukraine is a member of Crowe Horwath International, a network of accounting and advisory services firms ranked among the TOP-10 audit firms in the world. The network is represented by 200 offices in 130 countries. The key partners of the firm are: Dmitriy Mikhailenko, Leonid Karpov, Olga Bogdanova, Roustam Vakhitov, German Taslitskiy. In different years the firm`s partners ranked among the TOP-100 best lawyers in Ukraine. They are recognized experts in the area of taxation, participate actively in the work of public councils of the State Fiscal Service, the Verkhovna Rada Committee on Tax and Customs Policy, the State Registration Service, tax committee at the Ukrainian Chamber of Commerce and Industry, Union of Poland Entrepreneurs in Ukraine, are advisors to the IT Committee of the European Business Association. Our partners are members of the editorial board of professional journals and arrange and participate in conferences on professional issues.

lenge from any side. These constant developments somehow prevent both business and tax advisors from accepting drastic measures like putting the past behind them and starting everything from scratch. From this point of view we badly need specific legislation releasing those businesses which disclose their past violations and adhering to new standards, as well as reliable and binding procedures for defining safe harbors for taxpayers willing to cooperate and prepared to conclude agreements/rulings on specific tax positions with the tax authorities. What we may now share with you as more or less acceptable solutions are the following: — re-evaluate existing tax positions. The majority of existing international tax structures were implemented in the past and need to be audited from the perspective of new challenges and threats; — founding of reputable holdings directly held by Ukrainian shareholders. Starting from July 2015 the classic donation of shares was switched to purchase in UAH on the territory of Ukraine as was allowed by NBU Resolution No.478. Though we anticipate that recent Resolution No. 14 of 23 February 2017 enabling direct investments from accounts abroad would inevitably shift to direct investments with overseas money; — moving capital from offshore companies to reputable jurisdictions. These actions may involve either direct capital contribu-

tions or indirect transfer of capital by redemption of shares, real estate as well as paying dividends or granting group loans. — Either moving financing and IP-activities from Cyprus to the UAE, enabling effective tax burden up to 3% for interest and 0% for royalties or employment of newly-adopted Cypriot notion interest deduction allowing tax deductions for injecting capital which may end up with an effective tax rate of up to 2-3% for interest and up to 5% for royalties (including Ukrainian withholding tax); — moving trading companies to reputable though not high-tax jurisdictions like Estonia, Switzerland (while domicile and mixed companies regime are effective), Malta, UAE, Singapore, etc. — step-by-step reduction in use of nominal directors/service which will no longer make much sense due to AEOI and CFC rules. Summing up the above we are sure that at the moment we pass certain milestones in international tax planning which should show whether it will survive as reformed reality or inevitably die. This requires shifting our perceptions from tax minimization being sometimes close to tax evasion towards assisting in paying our fair share of taxes. Therefore, the sooner we realize and conform to the new reality ourselves the more chance we have to avoid the painful and risky process of being forced to do so by the tax authorities through fines and penalties.

161


Tax Controversy

Why do Ukrainian Courts Choose to Supervise VAT Reimbursement Rather than Enforce It?

Iryna KALNYTSKA Head of Tax Practice, GOLAW. Iryna Kalnytska has extensive experience of tax law, international tax planning and structuring, and currency regulation with a specific focus in the areas of both import and export customs regulations and operations. While handling cases, her top priority is making sure the client’s interests have the utmost legal protection through optimization of the tax consequences for their business.

What is VAT Reimbursement?

Under Ukrainian tax legislation, any VAT taxpayer has the right to receive a refund of VAT when, in the course of his/her commercial activity, it pays more VAT than the taxpayer actually owes the Government, thus accumulating “tax credit”. According to the Tax Code when the amount of the VAT tax obligation is less than the amount of accumulated tax credit, the taxpayer may demand from fiscal authorities to refund the overpaid amount of VAT or request a transfer of that amount to the next taxable period.

Faulty Procedure

The process of VAT reimbursement was fairly simple in the last few years. The taxpayer who intends to receive a VAT refund from the state budget should file an application along with the tax return to the fiscal body at the place of the taxpayer’s registration. If the taxpayer meets all the criterion for reimbursement, the fiscal body files an application to

162

the State Treasury on the basis of which, the Treasury must transfer the appropriate sum to the taxpayer’s bank account. At the same time, the fiscal authorities are often reluctant to satisfy claims for refund of VAT, even when the claimant met the entire criterion and filed all the documents required by the legislation. The problem is that the process of VAT compensation is often obstructed with bureaucratic impediments, violation of internal procedures, or even simple negligence of staff when processing documents received from taxpayers. Hence, many taxpayers resort to the courts in hopes to receive a much desired VAT refund from the Government.

Uniform Approach toward VAT Related Disputes

Luckily for VAT taxpayers, it seems that Ukrainian courts have finally come up with a more or less consistent approach toward resolution of claims for refund of overpaid VAT from the state budget. The main reason why courts could not agree on how to enforce such claims is because of the various and often conflicting interpretations of the scope of powers and functions of fiscal authorities, as well as vague limits of judicial authority itself. Prior to 2015, the Supreme Court of Ukraine expressed the view that the proper remedy in such cases is to issue a judicial order to recover an overpaid amount of VAT in favor of a taxpayer directly from the state budget.1 However, in 2015 and throughout 2016 the decisions of the Supreme Court marked a radical change of approach toward this matter. Thus, the court expressed the view that VAT compensation from the state budget is within the exclusive authority of the State Fiscal Service of Ukraine and the State Treasury. For that reason, the courts have no power to substitute those agencies and decide on recovery of any sums from the state budget. The Supreme Administrative Court of Ukraine discussed this issue in its Decision Decree of Supreme Court of Ukraine, case no. 21-2141. http://www.reyestr.court.gov.ua/Review/3741893 1

No. К/800/44985/15, of 4 February 2016.2 The Court in this case openly disagreed with the position of Supreme Court of Ukraine, noting that the courts should not be limited in the choice of remedies. Thus, the courts have the power to apply the most effective tool to protect and remedy the rights of taxpayers violated by the actions (inactions) of fiscal authorities. In such case, contrary to the position of the Supreme Court of Ukraine, the courts do not substitute or trespass on the authority of fiscal bodies in any manner, but rather carry out their own lawful authority to restore the violated rights of claimants. Moreover, the Administrative Court in support of its position invoked the provision in Decree of Cabinet of Ministers, which states that the courts may issue orders to refund overpaid VAT, which can be filed directly to the Treasury by the claimant. An appeal was brought in this case to the Supreme Court of Ukraine, which had its final say on the refund of VAT by means of a direct court order.3 The Supreme Court disagreed with the conclusion of the Supreme Administrative Court, reaffirming its position that courts do not have the authority to “substitute” executive agencies and issue orders which run counter to the procedures specifically established by law. In this case, the Supreme Court noted that issuing a direct court order does not accord with the scheme of VAT refund set out in the Tax Code and applicable Government regulations. The court said that the refunding of VAT can be carried out solely by the State Treasury, based on the application of the taxpayer and written conclusion of the fiscal body. As a result, the Supreme Court again confirmed that issuing a court order to refund VAT is not a proper remedy in such cases. Instead, the correct remedy would be to issue an order to compel the fiscal body to issue a conclusion for the State Treasury to reimburse the VAT. Decree of Supreme Administrative Court of Ukraine, case no. К/800/44985/15, dated 04.02.2016. 3 Decree of Supreme Court of Ukraine, case no. 806/2256/15, dated 07.06.2016. 2

WWW.UKRAINIANLAWFIRMS.COM


GOLAW

G

Address: 19B Instytutska Street, Suite 29, Kyiv, 01021, Ukraine

OLAW is one of the leading Ukrainian full service law firms. The firm was founded in 2003 and currently has offices in Kyiv, Lviv, Odesa (all in Ukraine) and Berlin, Germany. The firm’s lawyers are widely recognized for their skills and extensive expertise. The GOLAW team focuses on efficiently resolving issues facing clients, communicating effectively on their behalf, assisting them in navigating the nuances of Ukrainian law, and avoiding costly legal traps. The firm’s client portfolio includes large and medium-sized, national and foreign companies, banks and financial institutions, as well as private investors doing business in Ukraine or entering local markets. GOLAW provides sophisticated legal advice and reliable legal assistance in all major sectors, including agribusiness, retail and FMCG, healthcare and pharmaceuticals, financial services, energy and natural resources, transportation and infrastructure, Internet technology and real estate. GOLAW has developed a top tier tax practice which includes issues regarding tax functioning in Ukraine, strategic advice on tax planning, tax and fiscal controls, as well as professional contacts with the tax authorities at all levels. The firm represents its clients in dispute resolution and litigation in general, economic, and administrative courts of all levels, along with support for international commercial disputes. Our deep expertise in white collar defense and investigations enables GOLAW attorneys to successfully represent clients in criminal legal proceedings, advising them on the wider

In turn, the Kyiv Administrative Court supported the position of the Supreme Court in virtually the same case, which also concerned the refund of VAT4. The judges fully recognized the claims of the plaintiff and ruled that it was entitled to receive VAT refund from the state budget. At the same time, the court refused to enforce this right by means of judicial order for the same reasons as the Supreme Court did so in prior cases. The judges argued that current legislation determines a clear “algorithm” of actions by a VAT taxpayer, local fiscal and treasury bodies when it comes to VAT refund. This algorithm does not make it possible to compensate VAT by means of a judicial order. However, administrative courts have the power to compel an appropriate fiscal body to issue a conclusion based on the evaluation of taxpayer’s tax returns and file it to the State Treasury for further refund of the due sum. The court made it clear that judicial control is important in the resolution of administrative disputes and that the court takes an active position not only during resolution of the dispute, but also in the course of its enforcement. Decree of Kyiv Administrative Court, case no. 810/786/16, dated 17.05.2016. 4

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 581 1220 Fax: +380 44 581 1222 E-mail: info@golaw.ua Web-site: www.golaw.ua

commercial, regulatory and image implications when there are allegations of fraud or corruption. GOLAW professionals advise clients across a broad spectrum of corporate work including M&A, joint ventures and corporate restructuring, as well as general commercial, antitrust, and corporate governance issues. The effective combination of transaction skills combined with our unique expertise including antitrust, employment, environmental, intellectual property, and taxation, enables the firm to handle issues that can arise from any single corporate transaction. In banking and finance, the firm successfully represents clients regardless of whether it is a trade, export, finance deal, M&A, or any other financial project; we also provide advice on civil, banking and currency laws. Our firm is a leader in representing financial services institutions in contentious insolvency and regulatory matters. The firm’s team of lawyers utilizes unrivaled local knowledge of the demands of operating in increasingly international and volatile markets, with a deep understanding of the issues impacting the energy and natural resources sectors. The firm’s clients are involved in commodities, power, oil & gas, nuclear, mining, metals & minerals, renewable and clean-technology energy industries. GOLAW covers the full range of labor and employment matters, including: whistleblower litigation, labor-management relations, benefits, collective agreements, and employment of foreign citizens.

Fines for Untimely Refund of VAT

After the fiscal body determines the sum to be refunded to the VAT taxpayer, the Treasury is obliged to transfer that sum to the bank account of the taxpayer within five business days, as provided in Article 200.13 of the Tax Code. Accordingly, if the Treasury fails to transfer the sum within that period, a fine in the amount of 120% of the bank rate of National Bank of Ukraine will accumulate from the day of default and until the day when the due sum of compensation is actually paid to the taxpayer. Thus, in many cases, taxpayers filed lawsuits for refund of VAT, along with claims to impose fines for untimely reimbursement. The review of cases demonstrates that the courts are ready to impose fines on a fiscal body which unreasonably delays refund of VAT to the taxpayer. Thus, the Kyiv Administrative Court ruled in favor of the plaintiff, noting that inactions of the defendant (State Fiscal Inspection) caused a delay in refund of VAT for almost three years. The court said that taking into account the negligent behavior of the State Fiscal Service in the past, it is prudent to establish judicial control over enforcement of the court’s decision. Thus, the court obliged the defendants to file in court a written report

of enforcement of the court’s decision within ten days of such decision becoming valid.5

Takeaway

An overview of court decisions regarding VAT refund clearly shows that filing a lawsuit may serve as an effective instrument to fight negligence and inaction on the part of the fiscal authorities in Ukraine. Despite certain inconsistency in the position of the Supreme Court in previous years, recent decisions and the reasoning of the Supreme Court and administrative courts indicate that there is a real possibility to remedy the rights of VAT taxpayers violated due to unlawful actions or inaction on the part of the State Fiscal Service. At the same time, it is important to keep in mind that resorting to a court is not always the best course of action. As noted in abovementioned decisions the courts, despite their considerable authority, have no power to act in place of the fiscal authorities and carry out their legal duty to refund VAT for them. The courts, however, do have the power to make an executive authority do its job properly and, in accordance with the law, to also impose substantial fines if the state body violates the law, such as in the case of a delay in refunding VAT. 5

Ibid (no. 5).

163


Telecommunications

Telecom and Media 4G in Ukraine: Main Obstacles

Anna BABYCH Partner, AEQUO

A

s compared to 2015 the TMT year of 2016 witnessed a far more modest outcome: fewer M&A transactions, of which none can be called “major”, uncertainty regarding the launch of 4G, and the never ending story of implementing Mobile Number Portability. Nevertheless, development of electronic services regulation, transparency of media companies ownership and the overall high performance of IT sector are definitely a good sign.

M&A: a Step Backwards?

It appears that 2015 was an exceptionally active M&A year in the IT sector, with the number of deals exceeding 60 totaling over USD 300 million in value. Many considered it a new trend and awaited more major acquisitions, like that of Looksery, a facial tracking and transformation technology company, acquired by Snapchat for USD 150 million in 2015. Despite the fact that IT sector became Ukraine’s 3rd largest export contributor in 2016, M&A activity in 2016 evidenced that success in 2015 was merely a spike in activity, rather than an upcoming trend. In particular, the total number of venture investment deals last year barely reached 30 for the total value of around USD 40-50 million. The largest deals included the USD 50 million acquisition of Data Centre Parkoviy, USD 20 million Series B investment for GitLab, open-source hosting solution, USD 20 million Series B investment for Busfor, a bus ticketing service, and USD 2.6 million seed investment in PetCube, a pet care products manufacturer, and USD 2.35 million seed investment in Allset, a restaurant booking service.

164

In 2015 we celebrated the long-awaited launch of 3G in Ukraine. However, Ukraine is not yet on the list of 100+ countries who have introduced LTE. In November 2015 the Cabinet of Ministers of Ukraine adopted the Action Plan on Introduction of the Fourth Generation Mobile Communication in Ukraine. The said plan appears to be quite optimistic, with the tender for 4G license scheduled for December 2017. However, prior to the possibility of any such tender becoming feasible, two major issues must be solved. Firstly, the frequencies shall be re-distributed among the players on new conditions. That is, so called “re-farming of frequencies” will take place. Secondly, the law introducing the principle of tech neutrality in Ukraine needs to be adopted, which will enable the current players to use previously allocated frequencies for the purposes they want (for instance, GSM or LTE). In any event, the above actions, namely introduction of changes to the national frequency allocation table / usage plan and refarming of existing frequencies for LTE under a new technology-neutral licensing regime are scheduled for February — June 2017.

Mobile Number Portability Saga

Last year we reported about mobile number portability, the service which allows users to change their operator without changing their mobile number. Though widely available worldwide, it still remains a technologyto-be in Ukraine. The original regulations allowing the implementation of the said service were adopted in April 2013, and 1 July 2014 was meant to be the launch date. Due to certain drawbacks in the procedure of an MNP administrator’s appointment, litigations initiated by Kyivstar against the launch of MNP service on terms and conditions provided in the original regulations, the launch did not take place. As a result, in July 2015 new rules were adopted, and in January 2016 the tender for purchase of software and hardware for this service took place. The Dialink company was initially declared the winner, with its software solution on the Latvian platform Mediafon costing UAH 71 million. However, another participant, SI Centre, whose proposal cost UAH 39 million and appeared to gain

more points from the Ukrainian State Centre for Radio Frequencies preliminary estimate, filed a claim to the Antimonopoly Committee of Ukraine, which was subsequently satisfied. As a result, SI Centre was declared the winner. Nevertheless, due to numerous lawsuits filed by Dialink, the Ukrainian Centre for Radio Frequencies and SI Centre failed to sign the agreement within the prescribed 30-day period. Hence, the parties had to go to court in order to recognize the agreement as concluded within the required period. The courts ruled in favor of SI Centre’s position, and Dialink’s appeal was rejected in January 2017, thereby giving the green light to SI Centre to finally implement MNP in Ukraine. According to the current calendar plan, the new deadline is 6 April 2017.

Internet of Things and M2M Services

According to the statistics for 2016, the number of mobile sim card users exceeds the population of Ukraine by 20 million. The reason for this in not only the use of several sim cards by Ukrainian mobile subscribers, but also their active use in M2M services (ATMs, logistics services, agriculture, etc, on-line shops, etc). This is what is now called Internet of Things. The launch of 3G gave the green light for the rapid expansion of M2M services in 2016. It is expected that the use of sim cards in M2M services will increase sharply in future as mobile operators offer a wide range of M2M services to commercial entities enabling the simplification and optimization of business processes, reduction in operational costs, raising the quality of services and introduction of innovative technologies. Needless to say that IoT improves and simplifies the way business is done and provides services to individuals. Thus, in the near future IoT will be actively used in industries such as healthcare, ret​ail services, smart energy, transportation, logistics, automotive.​​​​

Transparency of Ownership of Media Companies

As one may remember, in order to introduce transparency of ownership of media companies, in 2015 amendments regarding mandatory disclosure of the ultimate benefi-

WWW.UKRAINIANLAWFIRMS.COM


AEQUO

A

Address: Vector Business Centre, 52 Bohdana Khmelnytskogo Street, Kyiv, 01030, Ukraine

EQUO is an advanced industry-focused Ukrainian law firm. Our team is made up of highly-qualified and recommended lawyers who work proactively to help clients reach their business goals. Backed by solid industry expertise and a thorough understanding of business we develop innovative strategies and provide efficient solutions to the most complex and challenging matters. Our advice is clear and practical. Today, we are a legal advisor of choice for many of the largest Ukrainian and multinational companies and financial institutions, including Fortune 500 entities, and leaders in their respective sectors. We operate at the top end of the market. Our representative clients include Agroprosperis, Alfa Bank,

ciary owners of media companies were made to the Law of Ukraine No.3759-XII On Television and Radio Broadcasting”. In particular, each media company has to disclose its ultimate beneficiary holding directly or indirectly of 10% or more in its share capital to the Television and Radio Broadcasting Council, the media industry

WWW.UKRAINIANLAWFIRMS.COM

Tel: +380 44 490 9100 Fax: +380 44 490 9102 E-mail: office@aequo.ua Web-site: www.aequo.ua

Allianz, Apax Partners, Apollo Global Management, AXA, ATB Market, British American Tobacco Pryluky, Bunge, BXR Partners, Citadele Banka, Discovery Networks, Dr. Reddy’s Laboratories, Dragon Capital, DuPont, Epicenter K, European Bank for Reconstruction and Development, European Commission, FESCO, Forbes, GlaxoSmithKline, Google, Groupe Danone, Inditex Group, Mosquito Mobile, MTS Ukraine, NCH Capital, Nova Poshta International, Novus Ukraine, Philips, Pioneer Hi-Bred International, Porsche Bank AG, Portigon AG, Premium Sound Solutions, Samsung Electronics, Sandvik, Sonae, Soros Fund Management, Syniverse, Synthon, Tetra Laval, Thomson Reuters, TIS, Ukrainian Redevelopment Fund, UniCredit Group, VimpelCom and Zara Ukraine.

regulator, and make public this information on their Internet sites. The Television and Radio Broadcasting Council supervises diligent disclosure and is empowered to refuse to prolong the validity term of a broadcasting license in case of failure to disclose the beneficiary. The disclosure of information about the beneficiary owner is also a condi-

tion precedent to obtaining a broadcasting license from the Television and Radio Broadcasting Council. Throughout 2016, major TV broadcasting companies, including Inter, 1+1, STB, ICTV, TRK Ukraine, Channel 24, etc., duly disclosed their ultimate beneficiary owners to the Television and Radio Broadcasting Council.

165


Trade Remedies

On the Cusp of a New Era of Trade Defence Instruments in Ukraine and export; in December applied anti-dumping measures to imports of certain nitrogen fertilizers originating in Russia. At the same time, in 2016 the Commission initiated only two new proceedings: in May — anti-dumping investigation related to imports of chocolate and other finished products from cacao originating in Russia and in December — review of safeguard measures applied to imports of porcelain tableware.

Anzhela MAKHINOVA

Andrew ZABLOTSKY

Counsel, Sayenko Kharenko. Mrs Makhinova comes highly experienced in trade defence proceedings (antidumping, countervailing and safeguards) both in Ukraine and abroad as well as in WTO issues. She is a country expert on franchising for the International Distribution Institute, was recognized by Who’s Who: Trade and Customs, Who’s Who: Franchising, Clients Choice in International Trade.

Counsel, Sayenko Kharenko. Mr Zablotskyi is a highly qualified trade lawyer with outstanding expertise in advising companies, industries and authorities on trade remedies (antidumping, countervailing and safeguards proceedings), application of WTO regulations in Ukraine, export-import regulations and the economic and commercial impacts of international trade on business and industry growth. Mr Zablotskyi was recognized as a trade and customs practitioner for Ukraine by Who’s Who Legal: Trade and Customs 2015 and 2016 editions.

I

t goes without saying that 2016 was crucial for trade defence instruments both in Ukraine and around the world. Suffice to mention (a) expiry of Section 15(a)(ii) of China’s Accession Protocol to the WTO in December 2016 allowing WTO Members to treat China as a non-market economy for the purposes of calculating a dumping margin and thus, to apply higher anti-dumping duties to products which originate in China; (b) the Appellate Body report in Argentina — Biodiesel case implying the end of cost adjustment methodologies; (c) the fierce opposition by such WTO Members as the USA and the EU against granting market economy status to China, which has already resulted in the introduction of considerable amendments to the EU Basic Anti-Dumping Regulation1 stipulating the possibility for the European Commission to construct normal value on the basis of costs of production and sale reflecting undistorted prices or benchmarks; (d) gradual constant

166

growth of trade defence measures used to protect domestic producers... Recent trends of trade defence proceedings in Ukraine clearly demonstrate that similarly to other WTO Members, Ukraine should reinforce its approaches and regulations to address the above challenges in the most efficient way. This aim of this article is to summarize benchmark trends of trade defence proceedings in Ukraine in 2016.

Statistics

In February 2016 the Interdepartmental Commission on International Trade (i.e. the state agency responsible for adoption of key decisions in trade defence proceedings) (the “Commission”) extended anti-dumping duties applied to imports of wood fiberboards originating in Russia; in May applied antidumping duties to imports of caustic soda originating in Russia and safeguard duties to imports of blocks and sheets from polyurethane notwithstanding the country of origin

Recent trends

Ukraine vs. Russia Based on recent statistics, it is safe to assume that the “trade war” between Ukraine and Russia has evidently influenced trade defence proceedings. Notably, in 2016 all investigations in Ukraine were conducted against imports of products originating in Russia1, while 9 out of 16 anti-dumping measures are applied against products from Russia. The first countervailing duties for Ukraine are applied against Russia as well. Like night follows day, 2 out of 3 investigations currently being conducted in the Eurasian Economic Union (Belarus, Russia, Kazakhstan, Armenia, Kyrgyzstan) are against products originating from Ukraine, while 7 of 19 anti-dumping duties are applied against Ukraine. Safeguard Investigations — New-Old Approaches In the past domestic producers preferred safeguard investigations rather than anti-dumping or anti-subsidy probes, despite the fact that under the WTO rules safeguard measures should be applied only in extraordinary circumstances. The way in which Ukrainian producers acted could be easily explained, since the matter of proof in safeguard investigations is much simpler than in anti-dumping and anti-subsidy ones: it is enough to simply provide customs statistics indicating an increase in imports and to compare it with the alleged injury caused to domestic producers. Moreover, contrary to anti-dumping or counUnder WTO rules and Ukrainian legislation, safeguard investigations are conducted and measures and applied notwithstanding the country of origin and export. Therefore, in this article we concentrate only on country-specific measures. 1

WWW.UKRAINIANLAWFIRMS.COM


SAYENKO KHARENKO

Address: 10 Muzeyny Provulok, Kyiv, 01001, Ukraine

S

ayenko Kharenko is a leading Ukrainian law firm with an internationally oriented full-service practice. We are currently one of the largest law firms in Kyiv. Most recently, Sayenko Kharenko collected three of the most prestigious professional excellence country awards, more specifically, Law Firm of the Year by each of IFLR European Awards 2017, Who’s Who Legal Awards 2017 and Legal Awards 2017. In early 2017, the firm was also shortlisted in Law Firm of the Year category by The Lawyer European Awards 2017 and Chambers Europe Awards 2017. About its International Trade Practice Sayenko Kharenko’s international trade practice group offers a wealth of experience across the full spectrum of crossborder trade regulation and policy to help its clients manage the risks and maximize the opportunities associated with the increasing regulation of international trade in goods and services around the world.

Tel.: +380 44 499 6000, 389 5000 E-mail: info@sk.ua Web-site: www.sk.ua

Sayenko Kharenko’s stellar team of lawyers is the most expert in Ukraine in the field of international trade and routinely handles cross-border trade and regulatory issues, which require thorough legal knowledge, solid commercial background, and deep trade policy insight. The firm’s team blends all of the above and acts for a diverse roster of foreign and domestic industries. Sayenko Kharenko’s lawyers practice before all the relevant bodies in Ukraine and globally, covering all major international trade law matters, including: international transactions and contractual structuring; agency, distribution and franchising; free trade agreements; trade remedies (anti-dumping, countervailing and safeguards); regulation of foreign trade activity; WTO counselling, WTO dispute settlement, and other matters. Sayenko Kharenko trade lawyers have a great reputation among colleagues and professional community, and come recommended by leading legal directories for trade, customs and franchising in Ukraine. They also serve as Ukraine’s national experts on agency/distribution and franchising at the International Distribution Institute.

tervailing measures, safeguard measures allow to “kill all birds with one stone”, simultaneously blocking all channels of imports. However, the age of safeguard measures passed when the Panel in the Japan — Passenger Cars case ruled that Ukraine violated almost all WTO requirements, while imposing safeguard duties on imports of passenger cars. As a result, Ukraine terminated safeguard duties even without submission of an appeal. After that the Commission and the Ministry refrained from initiating safeguard investigations in Ukraine until 2015, when a safeguard investigation related to imports of blocks and sheets from polyurethane was initiated and even safeguard duties were applied in 2016. In our opinion, the case materials make it safe to assume that the Ministry and the Commission kept making the same mistakes as in the safeguard investigation related to passenger cars and thus, quite expectedly, the relevant decision has been challenged before the court.

safeguard measure continues to be necessary to prevent or remedy serious injury and that there is evidence that the industry is adjusting. However, it is silent with respect to what procedure to follow. In this connection, only Article 7 of the WTO Safeguard Agreement explicitly states that such a review should be in line with the procedures set out in Articles 2, 3, 4 and 5 of this Agreement, which means the Ministry should conduct a fully-fledged safeguard investigation. Since in such a review the Ministry will need to confirm only that the safeguard measure continues to be necessary to prevent or remedy serious injury, and that there is evidence that the industry is adjusting, the Ministry can, based on its powers, shorten the period of review and determine specific information to be provided by interested parties. However, major procedural stages of the investigation should be carried out. Additionally, a safeguard measure that is extended shall not be more restrictive than it was at the end of the last period, and should continue to be liberalized.

Extension of Safeguard Measures — New Benchmark? On a separate note, on the last day of December 2016, the Commission initiated a review of the safeguard measures against imports of kitchen tableware produced from porcelain. Since Ukrainian safeguard legislation lacks clarity on the procedure of the review and related aspects, the results of this review will become a benchmark on how the Ministry and the Commission deals in practice with such cases. In particular, Ukrainian safeguard legislation provides that safeguard measures may be extended provided it is determined that the

Interests of Customers vs. Interests of Domestic Producers The importance of an anti-dumping investigation related to imports into Ukraine of nitrogen fertilizers originating in Russia is more than merely symbolic: it has created lots of landmark precedents, to name but a few: — it is the first proceedings when the end customers of the products subject to investigation (i.e. agricultural producers) strongly and actively opposed application of antidumping measures and thus, the Commission and the Ministry were forced to strike a balance between their interests and the domestic

WWW.UKRAINIANLAWFIRMS.COM

producers initiating the investigation. To overcome the opposition of the agricultural producers, the Commission applied anti-dumping duties in December 2016 on condition of their suspension, which was already carried out in February 2017, even prior to the coming into force of anti-dumping duties. — even prior to official publication of the decision, the Commission and the Ministry posted on the web-site2 information about the adopted decision, on the intention to further suspend the anti-dumping duties and to even initiate a specific law to abolish import duties on the importation of fertilizers. The said announcement deviates from the previous experience of the Commission. — the Commission and the Ministry took into account arguments from agricultural producers, even though they had not been duly registered as the interested parties of the anti-dumping investigation. The compatibility of such approach with the Law of Ukraine On Protection of Domestic Producers from Dumped Imports is highly questionable. The moral of the above tale is that domestic producers should be aware of the stated new approach of the Commission and the Ministry, and should be ready to counteract such position held by customers from the very beginning. End customers should consider it as a very clear message that their active participation in an investigation can have a strong influence on the final decision adopted by the Commission. http://www.me.gov.ua/News/Detail?lang=ukUA&id=e25cd6de-d945-4cfc-83d6-f919b4852c8 3&title=ZaiavaMizhvidomchoiKomisiiZMizhnaro dnoiTorgivli 2

167


Trademarks

Is Your Trademark Well-Known?

Julia SEMENIY

Mariana POLISHCHUK

Partner, Asters

Associate, Asters

he more famous your trademark is, the more benefits you may have but, expectedly, the more your rights may be infringed. And, more importantly, infringements may appear to be not straightforward but rather inventive. Use of your trademark and goodwill for business that is not the same as yours, but still implies associations, is often the case.

As contemplated above, a trademark may be recognized as well-known for a specific list of products and/or services, although the actual protection may go beyond such a list. Also, it is important to define and prove who may be the beneficiary of the procedure, i.e. a well-known trademark owner. The choice may be a challenge where, for example, a group of companies is concerned.

T

Benefits for the Trademark Owner

To have a more efficient tool for preventing or fighting such situations one may seek well-known status for the trademark. The major benefits such status provides are as follows: (1) Extended protection in terms of the goods and services covered. Namely, the protection shall cover goods and services that are not related to those for which the trademark is recognized as well-known, provided that the use of such trademark by the other person regarding such goods and services shows the relationship between them and the owner of the well-known trademark, and such use may damage the interests of the owner of the wellknown trademark. (2) The status may be granted retrospectively, i.e. as of the date in the past, provided that the applicant proves the fame of the trademark as of that date. Otherwise, according to the Law of Ukraine On Protection of Rights in Marks for Goods and Services (the Trademark Law) from the date as of which the trademark is recognized as well-known in Ukraine, it will enjoy the same protection as those trademarks registered in Ukraine. Thus, a trademark may be recognized as well-known regardless of its registration in Ukraine, although, in most cases, the status is sought for trademarks that are already registered.

168

Available Procedures

Protection shall be granted to a wellknown trademark with reference to Article 6bis of the Paris Convention for the Protection of Industrial Property, on the basis of a decision recognizing such trademarks as wellknown. In Ukraine, two options are available to obtain such a decision: applying to the Appeal Chamber with the Ukrainian Patent Office (the Appeal Chamber) or filing the respective legal action to a court. If one seeks the well-known trademark status as a preventive measure, to combat the potential conflicts in the future, applying to the Appeal Chamber may be preferable. At the same time, if the conflict already exists, considering the legal action route may be practicable as it allows the addressing of both trademark infringement and recognition of trademarks as well-known in the same proceeding. As far as the Appeal Chamber is concerned, the procedural rules are set out in the Procedure for Recognizing the Trademark as Well-known by the Appeal Chamber (the Procedure). Court proceedings shall be governed by the relevant procedural code (e.g. the Commercial Procedure Code or the Civil Procedure Code), depending on who the parties to the proceedings are. The information regarding the trademarks that have been recognized as well-known is published on the Ukrain-

ian Intellectual Property Institute’s website (www.uipv.org/ua/bases2.html). The respective register includes trademarks recognized as well-known by either the Appeal Chamber or courts. As of today the trademarks recognized as well-known in Ukraine include Forbes, ASOS, ESCADA, YOUTUBE, INTEL and many others. Notably, the Forbes trademark was recognized as a well-known trademark of Forbes Inc. in respect of electronic publications, Internet publications and magazines (periodicals) as of 30 May 2005, while the respective court decision came into effect on 6 May 2010.

Important Factors

Regardless of the route chosen, the following factors, as provided by Article 25 of the Trademark Law, shall be considered to opine whether the trademark is eligible for well-known status: — the degree of the reputation and recognition of the trademark in the relevant public sector; — the duration, volume and geographical area of any use of the trademark; — the duration, volume and geographical area of any promotion of the trademark, including advertising or offering to the public and display of the trademark on exhibitions of goods and/or services for which the trademark is used; — the duration and geographical area of any trademark registrations and/or applications for registration of the trademark, provided that the trademark is used or recognized; — evidence of successful protection of rights in the trademark, in particular, the territory where the trademark is recognized as well-known by competent authorities; — the value associated with the trademark. Various documents may be submitted to prove the aforesaid circumstances in relation to the trademark for which the wellknown status is sought. These may include supply and distribution contracts, invoices and waybills, promotional materials, proof of advertising campaigns, relevant licenses and permits. Fame and recognition of the trademark in other countries shall also be helpful, as is proof of successful enforcement of rights in the trademark.

Surveys

Opinion polls appear to be one of the most important instruments to demon-

WWW.UKRAINIANLAWFIRMS.COM


Asters

A

Address: Leonardo Business Center, 14th Floor, 19-21 Bohdana Khmelnytskoho Street, Kyiv, 01030, Ukraine

sters is a full-service independent national law firm that has maintained a strong presence in Ukraine since 1995. The firm provides efficient transactional legal advice and represents clients on a broad spectrum of matters arising in the course of doing business in Ukraine. For six consecutive years Asters has been ranked No. 1 Law Firm in Ukraine according to the Top 50 Annual National Rankings 2011–2016 conducted by Yuridicheskaya Practika Weekly. Asters was acknowledged as the Law Firm of the Decade by Ukraine’s Legal Awards 2016. Asters is a winner of the 2015 and 2014 Law Firm of the Year: Ukraine and the CIS award by The Lawyer, Ukraine Law Firm of the Year 2014 award by Who’s Who Legal, and two time holder of the International Law Office Client Choice Awards for Ukraine. Asters offers a full range of legal services and maintains a high reputation for its expertise in a wide array of practices, such as banking and finance, capital markets, corporate and M&A, competition and antitrust, dispute resolution, energy and resources, environment, family law, intellectual property, international trade, labor and employment, real estate, restructuring and insolvency, taxation, telecommunications, and white collar crime. Shell, Coca-Cola, Philip Morris, L’Oreal Ukraine, GlaxoSmithKline, The Boeing Company, Siemens AG, S.C. Johnson & Son, Nokia Corporation, Sopharma, General Electric Energy,

strate the fame of the trademark among a certain consumer segment in Ukraine. Such surveys shall be carried out by a research organization that focuses on conducting sociological or marketing research. The survey shall cover at least six cities located in different geographical regions of Ukraine with a population of at least 500,000 people. First of all, the survey shall cover three of the biggest regional centers e.g. Kyiv, Kharkiv, Lviv, Odesa, Dnipro. Other cities shall be chosen depending on the peculiarities of the respective business activities of the applicant. The number of respondents shall correspond to the survey target, more specifically, it shall not be less than 500 respondents in any of the two cities chosen, and shall be

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 230 6000 Fax: +380 44 230 6001 E-mail: info@asterslaw.com Web-site: www.asterslaw.com

Glencore International AG, Deer & Co, Kodak Health Group, ED & F Man, Marathon Oil, News Corp., Nissan Motor, Novartis AG, Telenor, Thyssen Krupp Elevator, as well as many other multinational corporations and major local companies are clients for which Asters’ attorneys regularly handle a variety of complex matters and the largest transactions. Asters is an exclusive Ukrainian member of professional networks such as World Services Group, L2B Aviation, Biolegis, Legalink and Energy Law Group, and is a long-standing member, both at corporate and individual level, of numerous professional associations, chambers of commerce, business associations, and international and local bar associations. Asters’ 120-strong staff offers clients a mix of deep local awareness and substantial international experience. Asters’ lawyers received law degrees from the best European, Ukrainian and US law schools, including Yale, Harvard, Chicago, and California University. In 2016 Asters was recognized among the 20 best employers in Ukraine according to research by the weekly magazine Focus. Asters’ corporate social responsibility strategy is aimed at providing valuable input to the development of Ukraine. In 2016 EBA-Asters Legal School, one of Asters’ CSR initiatives, was recognized one of the best CSR projects on the Ukrainian legal market according to the results of the National CSR Business Cases Contest.

at least 125 respondents in every location. However, it is important that the survey covers the “target audience”. For example, the survey among sales personnel shall not fairly represent the situation against end customers. Therefore, surveys regarding consumer goods shall be carried out among so-called average consumers in terms of age, gender, education, social and financial status, as well as among experts in the relevant sectors of industry or trade. At the same time, if the products concerned are designed for industrial use, the survey shall be carried out among experts who are, in fact, the consumers of such goods and belong to the production, trade or other business circles.

The survey report shall provide the respondent’s answers to at least the following questions: — do they know the trademark; — for which goods and/or services the trademark is used; — what person, in their opinion, is the trademark owner or the manufacturer of goods under the trademark, or supplier of services under the trademark; — how long have they known the trademark; — what is the source of information regarding the trademark for them. Still, as far as court proceedings are concerned, obtaining the expert opinion of a certified court expert may be required or helpful so as to prove the fame of the trademark.

169


Transfer Pricing

Transfer Pricing in 2017 — Improvement Under the Slogan of Liberalization On Extension of Controlled Transactions List

Yaroslav ROMANCHUK

Larysa VRUBLEVSKA

Managing Partner, Attorney-at-law, International Legal Center EUCON, President of the Ukrainian Business Association in Poland. Yaroslav Romanchuk focuses on the most complicated issues of corporate and tax law, transfer pricing, commercialization of IP rights objects and tax planning with the use of non-material assets, corporate restructuring and assets protection. He represents the interests of international and national corporations in the most complicated and high-profile corporate and tax disputes.

Partner, Auditor, International Legal Center EUCON. Larysa Vrublevska advises well-known national and multinational companies on transfer pricing documentation with justification of contractual prices and introduction of transfer pricing control, as well as on tax planning and tax strategies. Larysa Vrublevska is head of the Transfer Pricing School and holds lecture courses of on the most sensible issues of transfer pricing. Specialization: tax consulting, tax planning, transfer pricing, business restructuring, accounting and tax accounting.

F

rom 1 January 2017 Ukrainian tax legislation regulating transfer pricing has undergone changes, which generally can be evaluated as liberal and which were introduced in the interests of taxpayers. Here is the short list of changes.

Increase of Cost Criterion to Recognize Transactions as Controlled

This is definitely the most expected business standard. Preparation of reports on controlled transactions and documentations for many small businesses, whose sum of activities fell within the criterion to recognize transactions as controlled, was quite burdensome. From now on transfer pricing is a prerogative right of taxpayers with more substantial amounts of income. The annual income criterion was increased to UAH 150 million (earlier it was UAH 50 million).

170

The volume of transactions with one counterparty was increased to UAH 10 million (earlier it was UAH 5 million). Comment: yet the non-availability of controlled transactions does not mean a lack of attention on the part of controllers to a range of non-controlled transactions. Thus, for example, income tax payers with an annual income of at least UAH 20 million are obliged to increase their financial result before tax by adjusting by 30% the cost of goods, works (services) acquired from nonresidents registered in countries included in the list approved by the Cabinet of Ministers of Ukraine. The increase in the taxable financial result is carried out also in case of costs accrual in the form of royalties for the benefit of non-residents. And it seems that it is possible to avoid adjustments only if a company prepares substantiation of price level under transfer pricing rules. In other words, you should either increase the tax base or substantiate the level of costs in documentation.

From now on foreign economic transactions can be recognized as controlled not only on sales, but also on the acquisition of goods and/or services carried out via a non-resident commission agent. Economic transactions carried out with non-residents who do not pay income tax (corporate tax), including tax on income received outside the country of registration of such non-residents, and who may not be tax residents of a country where they are registered as legal entities can also be recognized as controlled. The list of business legal structures of such non-residents by countries (territories) shall primarily include British LLP companies. The current list of countries (territories) of low-tax jurisdictions and countries, with which Ukraine has not concluded any agreements including provisions on information exchange should be supplemented with a list of countries, with which such agreements were concluded, but competent authorities do not provide timely and full tax information exchange upon requests from tax officials. While this year any country (territory) is included in the said list of the Cabinet of Ministers of Ukraine, transactions with counterparties registered in such a country (territory) shall be recognized as controlled from 1 January of the following calendar year.

On Controlled Transactions that are Carried out on the Basis of a Forward or Futures Contract

In case of carrying out controlled transactions under a forward or futures contract, price comparisons shall be performed on the basis of information on forward or futures prices as of the date closest to the date of the respective forward or futures contract’s conclusion. If a controlled transaction is related to export and/or import of exchange goods, carried out on the basis of forward or futures contracts, then to substantiate compliance of such transactions conditions with the “arm’s length” principle, the price range shall be calculated on the basis of exchange quotations of corre-

WWW.UKRAINIANLAWFIRMS.COM


International Legal Center EUCON

O

Address: 33 Taras Shevchenko Blvd, Office 12, Kyiv, 01032, Ukraine Tel./Fax: +380 44 238 0944; 238 0413 E-mail: ilc@eucon.ua

ur philosophy on protecting a client’s rights is simple — to prevent legal risks and litigation. International Legal Center EUCON provides services representing the interests and outsourcing of non-residents and residents doing business in Ukraine and abroad. An important feature of services provided by the firm is a comprehensive study of clients’ problems, particularly the involvement of auditors, financial advisers, tax advisers, deep doctrinal research tasks. This approach enables us to provide comprehensive and intelligent solutions for our clients. The firm operates from two offices. Yaroslav Romanchuk heads the Ukrainian office in Kyiv and Ihor Yatsenko is the head of the Polish office in Warsaw. The team of International Legal Center EUCON advises clients on the most complicated issues of tax, transfer pricing, corporate, business restructuring, assets protection, commercialization of IP rights objects, tax planning with application of non-material assets. The firm’s clients include international and Ukrainian industry leaders that come from oil and gas, energy, agriculture and food industry, telecommunications, trade, transport, metallurgy, chemical industry, construction, hospitality, finance, etc. The performance of International Legal Center EUCON and its partners is highlighted by numerous recognitions and awards.

sponding goods for the decade preceding the date of the respective contract’s conclusion. At the same time, such an opportunity is provided to taxpayers subject to sending notification on such contract’s conclusion to the SFS of Ukraine within 10 days of its conclusion.

On Comparable Legal Entities and Price Ranges (profitability)

In case of non-availability or inadequacy of information on individual comparable transactions to determine profitability indices, the financial information of legal entities can be used that carry out activities comparable to a controlled transaction, provided that there is information that the mentioned entities do not carry out comparable transactions with related parties. At the same time, the number of conditions and restrictions as to the comparable entity is set: — It carries out comparable activities within a controlled transaction and also comparable functions related to such activities (taking into account the Classifier of economic activities and international classifications); — There are no losses (according to accounting (financial) statements) in more than one reporting period from the periods information from which it is used for comparative analysis;

WWW.UKRAINIANLAWFIRMS.COM

18 Jana Dantyszka St, Poland, 02-054, Warsaw Tel./Fax: +48 22 658 1025 Tel./Fax: +48 57 000 8575 Web-site: www.eucon.ua

Since 2010 EUCON has been included in the list of top 50 Leading Law Firms in Ukraine according to the annual ratings conducted by the Yuridicheskaya Practika Weekly and Kommersant-Ukraine Publishing House. EUCON is recognized as being among the leading tax law firms according to the national legal directory Ukrainian Law Firms. A Handbook for Foreign Clients, Kyiv Post, Legal Awards, international directories Legal 500 EMEA, World Tax and World Transfer Pricing, International Tax Review. In 2015 EUCON won the Ukraine Transfer Pricing Firm of the Year award at the annual European Tax Awards 2015, International Tax Review. The tenth anniversary awards ceremony of the best Ukrainian lawyers Legal Awards 2016 named International Legal Center EUCON Transfer Pricing Firm of the Year in Ukraine. In view of the current trends in tax policies, International Legal Center EUCON has established a separate transfer pricing practice and enlisted lawyers in addition to auditors and assessors. International Legal Center EUCON and the International Audit Union established and operate the Transfer Pricing School attended by managers of accounting and financial divisions.

— It does not own directly and/or indirectly more than 20% of corporate rights in another legal entity or does not have a member (shareholding) legal entity owning a share of direct (indirect) participation totaling more than 20%. The right of taxpayers to calculate the profitability range on the basis of information on comparable legal entities not only for the reporting period, in which a controlled transaction was carried out, but for a few preceding years, is formalized. In this case, a weighted average rate of a profitability index is calculated for each comparable company, and the procedure for such calculation must be determined by the Cabinet of Ministers of Ukraine.

On Adjustment of Tax Liabilities Under Controlled Transactions

Taxpayers are allowed to carry out independent adjustment of prices in cases when controlled transactions do not conform to the “arm’s length” principle, on the basis of maximum or minimum value of price ranges (profitability). At the same time, such adjustment cannot be made during verification of relevant controlled transactions. Taxpayers received the right to carry out adjustment of their tax liabilities according to

the results of adjustment of tax liabilities by the other party of a controlled transaction, in the manner and under conditions stipulated by Ukraine’s international agreements on avoidance of double taxation.

On Deadline for Submission of Report on Controlled Transactions

The deadline for submission of the report on controlled transactions was moved from 1 May to 1 October of the year following the reporting one. It is possible to correct errors by sending a new or specifying report to a controlling body. Comment: unfortunately, some weak points were not avoided. Legislative bodies, when changing the date of report’s submission, made no changes to related standards. A request to provide documentation on transfer pricing may be submitted after May 1 of the year following the year, in which controlled transactions were carried out. That means, prior to the deadline for submission of the report. Moreover, it is possible to make an independent adjustment of tax liabilities and to specify an income tax declaration without a penalty of 3% only up to 1 May and not to 1 October, which would be logical.

171


Transportation

Transportation Law: Legal Trends and Key Issues

Viktor MOROZ

Valerii PRYSIAZHNYI

Roman OKSANYCH

Managing Partner, Suprema Lex

Senior Partner, Suprema Lex

Counsel, Head of banking and finance law practice, Suprema Lex

U

kraine has a unique geographic location to become an international hub for the transit of foreign passengers and cargoes and to make transportation the leading area for international investments and the country’s development. The transport infrastructure of Ukraine, together with its airports, seaports, railroads and roads is the key to the country’s competitiveness and its integration into the European and world transport networks as well as the global economy. The priorities of Ukraine today are European integration processes, including harmonization of Ukrainian legislation with European standards. The implementation of those priorities is defined by the Ukrainian Government in Ukraine’s 2020 Transportation Strategy, whose main areas include: — ensuring the availability and improving the quality of transportation services; — integrating national transportation systems into European and international transportation systems; — increasing the effectiveness of public administration in the field of transportation; — developing the transportation infrastructure; — renewing rolling stock; — improving the investment climate; — ensuring safety during transportation; — improving the environmental friendliness and energy efficiency of vehicles. In this article we will show the main legal trends and key issues of transportation law in Ukraine, possibilities and risks for international investors desiring to invest their funds into the Ukrainian transport sector.

172

Legislative Regulation

As the transport system of Ukraine consists of several kinds of transport, each of which has certain characteristics, legislation on transport is quite significant in scope and diverse in content. Relations associated with transport activities are regulated by the Constitution of Ukraine, Civil and Commercial Codes, On Transport Act of Ukraine of 10 November 1994, Laws of Ukraine On Pipeline Transport Act of Ukraine of 15 May 1996, On Railway Transport Act of Ukraine of 4 July 1996, On the Transit of Goods Act of Ukraine of 20 October 1999, On the Automobile Transport Act of Ukraine of 5 April 2001, On the Functioning of the Single Transport System in the Special Period Act of Ukraine of 20 October 1998, On the Freight Forwarding Activities Act of Ukraine of 1 July 2004. A significant range of transport relations is governed by transport codes and charters of certain types of transport: Air Code of Ukraine of 19 May 2011, Maritime Code of Ukraine of 23 May 1995, Charter of Inland Water Transport of USSR of 15 October 1955, Charter of Road Transport of Ukrainian USSR of 27 June 1969, the Charter of Railways of Ukraine of 6 April 1998. Among other acts of Ukrainian transport legislation of importance are the rules for transportation of goods, acting for various kinds of transport and all kinds of goods, Aviation rules of Ukraine, regulating the order for acquiring the rights for exploitation of airlines, etc.

Legal Trends

In inviting potential investors to open dialog and effective cooperation for investing in the infrastructure of Ukraine, the Ministry of

Infrastructure of Ukraine really is creating the necessary legislation. But is this legislation really effective for protecting potential investors? Taking into account the considerable number of types of transportation in Ukraine, it would be reasonable to stop at the each of them separately. Aviation Increasing passenger turnover, developing the airports infrastructure, making air transportation in Ukraine cheap, comfortable, simple, available and safe are the main goals of reforms of aviation in Ukraine. The indicators of successful implementation of this reform are Ryanair’s anticipated launch, which really can create competition on the airline market and the introduction of the visa-free regime between Ukraine and EU countries. For realization of those initiatives the Ukrainian Government has developed legislative acts on issues of aviation rules that regulate aspects of receiving permits to use airlines; flight and aviation safety; development of airport infrastructure. All of those acts are really necessary for the effective development of aviation in Ukraine, but the wording of legislative acts presented by the Government is not effective enough to protect international investors and so requires further adaptation. The main feature of aviation law in Ukraine is that acts of law are mainly not directly applicable, but based at subordinate legislation. However, due to the basis of Ukrainian aviation legislation meeting international principles and acts it does, in the main, meet EU requirements.

WWW.UKRAINIANLAWFIRMS.COM


Suprema Lex

Address: 8 Cosmonavta Comarova Avenue, Kyiv, 03067, Ukraine

S

uprema Lex is a multi-disciplinary, industry-focused Ukrainian law firm consisting of highlyâ&#x20AC;&#x201D; qualified lawyers who work proactively to help their clients reach their business goals and generate commercial advantages. The firm provides a full range of legal services to national and international companies trading in Ukraine and abroad as well as to private individuals. The main principles of the law firm are an individual approach to every client, knowledge of the finest peculiarities of Ukrainian and international legislation, confidentiality and personal responsibility for the services provided. Our team A guarantee of your success in deciding any legal question is the professional competence of specialists to whom you turn. Highly-qualified lawyers and attorneys work at Suprema Lex, who have high-quality legal educations and excellent experience in various branches of law. Full protection of clientsâ&#x20AC;&#x2122; interests Suprema Lex offers a full range of legal services and maintains a high reputation for its expertise in a wide array of

The Ukrainian Government has introduced the Concept of State target program of airport development, which is aimed at involving private investments under state guarantees to get reconstruction of aerodromes and terminal complexes of regional airports in Ukraine. Furthermore, the Ukrainian Government is working on the establishment of collaborative airspace with the EU, based on free access to the air carriage market, equal competitive conditions and collaborative rules, especially in the areas of aviation safety, air traffic management, environmental protection and industrial social norms, development of cooperation between air manufacturing complexes of the EU and Ukraine. Railway and Automobile Transport Analysis of the current state and trends in railway and automobile transport of Ukraine shows that there are several significant problems that need to be solved. This applies in particular to the indeterminate legal status of the state-owned Ukrainian Railways company as the regulatory body of railway transport; the distinction between commercial and Government control functions in rail transport. For the automobile transport, there is a great deal of tension around the issue of financing highways and attracting foreign investment. The technical standards of Ukrainian roads do not meet EU standards nor the quality and weight loads, so Ukraine needs to

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 384 0557 E-mail: office@supremalex.law Web-site: www.supremalex.law

practices, such as transport law (including aviation law and maritime law), corporate law, taxation, competition & antitrust, M&A, insolvency, dispute resolution, banking & finance law, capital markets, land and real estate law, construction law, intellectual property, branding, licensing, domain disputes, media law, sport law, family law, labor & employment, medical & pharmaceutical law, criminal law, etc. The firm possesses extensive industry-specific experience and consults clients in various market sectors, including agriculture, automotive, aviation, banking and finance, energy, infrastructure and transport, insurance, media and advertising, oil and gas, pharmaceuticals and healthcare, private equity, real estate and construction, retail and consumer goods, telecommunications and IT. Our client portfolio includes international and domestic companies that requires deep expertise and specialized legal advice from legal experts in the above practice areas. We develop innovative strategies and provide efficient solutions to the most complex and challenging matters within the shortest period of time. With us nothing is impossible. Membership: Ukrainian Bar Association (UBA).

bring its legislation into line with EU standards. So, amendments have to be made to the On the Public-Private Partnership Act of Ukraine, On Concessions Act of Ukraine. At the end of 2015 amendments were passed to the On Concessions for the Building and Exploitation of Roads Act of Ukraine. Sea and Inland Water Transport Sea and inland water transport are also very popular in Ukraine and play a significant part in the transporting of goods and passengers. An important step in the approach of the transport industry to European standards is interventions to develop a regulations system allocating a part of export goods for the domestic cargo fleet. For this goal it is important to establish national freight exchanges and develop a system of financing national shipbuilding companies and taking into account the importance of improving the quality of agency services to implement minimum requirements for ship agents, based on the recommendations developed by UNCTAD. Ukraine is a participant of the European Agreement on Main Inland Waterways of International Importance (AGN), the European Agreement concerning the International Carriage of Dangerous Goods by Inland Waterways and has introduced the On the Seaports of Ukraine Act of Ukraine that enables Ukraine to be an equal participant of international projects in the area of sea and inland water transportation.

Key Issues The key issues of the transport field in Ukraine are creation of a good environment to provide investment attractiveness, developing public-private partnership, modernization and renewal of rolling stock with the help of finance lease and credit-export financing and engaging investors in improving the condition of the transport infrastructure in Ukraine.

Instead of a Conclusion

So, for the comfort of the transport business in Ukraine, the foreign investor has to acknowledge that Ukrainian transport legislation is now developing and that it does not correspond in full with EU standards. Considering the quality of the Ukrainian court system and imperfections of national legislation for protecting the interests of foreign investors, reform of investment legislation that regulates the activities of the Ukrainian transport market, public-private partnership and capital markets is also necessary. The very serious drawback of Ukrainian legislation in the transport sphere is the lack of a unified approach in questions related to transport activity. If Ukraine is positioning the transport industry as one of the main Ukrainian economic areas then it should follow global trends and develop harmonization with EU standards. The hope is that in the near future Ukraine will get the names of leading countries in the world for investment in transport and infrastructure projects.

173


Unfair Competition

Unfair Competition: Common Violations and Responsibility

Alexey KOT

Sergii KORNIIENKO

Managing Partner, ANTIKA Law Firm. Member of the Judicial Reform Council, PhD (Law)

Partner of ANTIKA Law Firm. Member of the Public Council of the Antimonopoly Committee of Ukraine

he present day market economy is a complex mechanism consisting of a great number of different industrial, commercial, financial and informational structures that function jointly in time against the background of a ramified system of legal norms for business and that are united by a common concept, namely the market. Competition is the key concept that expresses the essence of a market economy. Above all, fair competition involves fair competitiveness among business entities for consumer demand on the market. However, in order to obtain advantages over other market participants certain business entities resort to competition methods that are detrimental to consumers, competitors and the public in general. Such methods are recognized as unfair competition, which is extremely undesirable for any economy in the world and especially for Ukraine, which is going through the formation of market relations which should comply with international standards. Issues related to protection against unfair competition in Ukraine are regulated by the Law of Ukraine On Protection Against Unfair Competition (hereinafter — the Law). Article 1 of the Law defines “unfair competition” as any actions in competition that contradict trade and other fair traditions in business activity. The Law conditionally defines three main types of activity that are recognized as unfair competition in Ukraine, namely:

1) illegal use of a business entity’s reputation (Articles 4-7 of the Law of Ukraine On Protection Against Unfair Competition); 2) building obstacles to business entities in the competition process and attaining illegal advantages in competition (Articles 8-151 of the Law of Ukraine On Protection Against Unfair Competition); 3) illegal collection, disclosure and use of business secrets (Articles 16-19 of the Law of Ukraine On Protection Against Unfair Competition). The most common unfair competition practice is traditionally considered to be the spreading of misleading information. Thus, according to the annual reports of the Antimonopoly Committee of Ukraine, in 2014 the number of such violations detected by the Committee was 90%, and in 2015 and 2016 — 89% of the total number of violations in form of unfair competition. Misleading information shall include, in particular, any information that: — contains incomplete, inaccurate or false data about the origin of product, manufacturer, seller, manufacture method, source and method of purchase, sale, quantity, consumer properties, quality, completeness, usability, standards, characteristics, particular features of selling products, works and services, information about the price and discounts on such products, as well as data about essential terms and conditions of the contract; — contains incomplete, inaccurate or false data about the financial position or economic activities of an conomic entity;

T

174

— refers to powers and rights that do not exist or relationships that are not maintained; — includes references to volume of production, purchase, sale or supply of goods, works and services, which actually did not exist at the date such information was disseminated. The above-mentioned list of misleading information is not exhaustive and it is possible to amend it. However, the content of Article 151 of the Law of Ukraine On Protection Against Unfair Competition only considers facts of dissemination of misleading information that include incomplete, inaccurate and/ or false data as unfair competition. At the same time, the Law does not consider cases of spreading of true information that also may be misleading as unfair competition. Thus, for instance, in some countries it is forbidden to add chemical substances to certain types of food, hence the text on their packages such as “chemical substances free” could be considered as misleading, because the consumer may think that this good is exceptional. It should also be mentioned that the provisions of Article 151 of the Law of Ukraine On Protection Against Unfair Competition are quite subjective. In practice, especially while developing promotional materials, the question related to whether or not the advert video, announcement or any other advertisement complies with the norms of legislation on protection against unfair competition, often arises. In order to receive an answer to this question and to avoid possible sanctions for disseminating misleading information, the business entity should perform thorough legal expertise of any promotional material as well as the description of the product (good) that is usually placed on its packaging. In 2016 the biggest fines for violations stipulated by Article 151 of the Law of Ukraine On Protection Against Unfair Competition were imposed on the State Enterprise Starokonstantinovskiy milk plant (the case related to providing the public with false information on the packaging of the “farming sweet cream butter” product produced by the violator related to its name and characteristics that may affect the intentions of an infinite number of persons related to its purchase) and the Simferopol Wine and Cognac Distillery, LLC (the case related to violation of legislation

WWW.UKRAINIANLAWFIRMS.COM


ANTIKA

A

Address: 12 Khreschatyk Street, 2nd Floor, Kyiv, 01001, Ukraine

NTIKA was established in 2010. Since its formation, the firm has built a strong reputation as an independent law firm and continues to grow on the Ukrainian legal services market. According to the results of research of the legal services market undertaken by reputable international and Ukrainian guides to legal profession like The Legal 500 EMEA, Chambers Europe, IFLR1000 Energy and Infrastructure, Best Lawyers, Ukrainian Law Firms, A Handbook for Foreign Clients, Top 50 Law Firms of Ukraine, Client Choice. The Top-100 Best Lawyers in Ukraine, the firm has been recommended in antitrust, dispute resolution, corporate / M&A, banking, finance and capital markets, real estate, land, energy, subsoil use, energy efficiency and energy saving. The firm received the Legal Award 2012 in the nomination Law Firm — Breakthrough of the Year. The firm is a finalist of the Legal Awards 2013 in the field of Antitrust, Litigation and Real Estate, in 2014-2016 — in the field of Energy. ANTIKA’s team includes 15 lawyers, who have significant experience of various legal practices and provide a full range of legal services to national and international companies that do business in Ukraine, as well as abroad in the following fields: telecommunications, heavy machinery, chemical and food industries, automotive, complex develop-

on protection against unfair competition through placing on the label “strong alcohol beverage “Malty” (“Malty”) Black Jack TM”, the text “WHISKEY Old”, “Scotch WHISKEY” and “WHISKEY” while this product is not whiskey, which is why the spreading of false information about consumer properties and characteristics of the stated product took place). The fine in the first case was more than UAH 790,000, while in the second case more than UAH 1.6 million. It is interesting to mention that in 2015 the Antimonopoly Committee of Ukraine prosecuted the Simferopol Wine and Cognac Distillery LLC for the same violation of legislation on protection against unfair competition. The sum of the fine exceeded UAH 14.6 million. Another topical violation of legislation on protection against unfair competition (according to the Antimonopoly Committee of Ukraine) is illegal use of designations. The number of such cases considered by the Antimonopoly Committee in 2015 was equal to 9% of the total number of violations in the form of unfair competition which, together with cases on violation in the form of spreading of misleading information, was equal to 98% of the total number of cases on unfair competition that were investigated by the Committee in 2015. In 2016 this index appeared lower. It made up for about 5% of the total number of violations in the field of unfair

WWW.UKRAINIANLAWFIRMS.COM

Tel.: +380 44 390 0920 Fax: +380 44 390 0921 E-mail: office@antikalaw.com.ua Web-site: www.antikalaw.com.ua

ment, construction and real estate, subsoil use, wholesale and retail, media and sports, banks and financial services market, energy efficiency and energy conservation. The firm’s key practices include antitrust, litigation and arbitration, corporate, construction and real estate, subsoil use, energy and energy efficiency, legal expertise. The firm’s main principles are the provision of high quality and timely legal services, strict confidentiality and a bespoke approach to every client’s project. The following are representative clients: AWT Bavaria, ArcelorMittal Kriviy Rih, Cadogan Petroleum, Cargill, Chernomorneftegaz, Deposit Guarantee Fund, Enesa a.s., Esan Eczacıbaşı Industrial Raw Materials, Energobank, FC Dnipro, Ghelamco, Heitman, Henkel Ukraine, Henkel Bautechnik Ukraine, Ibis Group of Companies, Imperial Tobacco, International Resources Group, Lantmannen Axa, MF Telecom, Nadra Ukrayiny, Nasosenergomash, ViDi Group, Ukrnafta. The firm also advises the World Bank, EBRD, USAID, TACIS, UNDP, KfW, NEFCO on energy efficiency, utility and the implementation of other projects in Ukraine. ANTIKA is a member of the Ukrainian Chamber of Commerce and Industry, the American Chamber of Commerce in Ukraine, the Canada-Ukraine Chamber of Commerce, the European Business Association, and the International Turkish-Ukrainian Businessmen Association.

competition that were detected by the Antimonopoly Committee of Ukraine last year. Pursuant to Article 4 of the Law of Ukraine On Protection Against Unfair Competition illegal use of designations is considered to be use of the name, commercial (firm) name, trade mark (mark for goods and services), advertising materials, design of product packaging and periodicals, other designations without permission (consent) of the business entity that started using these or similar designations in its business earlier, which has resulted, or may result, in confusing them with the activities of this particular business entity. We would like to note that the abovementioned violation has a very similar legal nature to that of violations in the field of protection of intellectual property rights. However, the field of regulation of protection against unfair competition has certain peculiarities that can make it possible for business entities to protect their rights in case when the legislation on protection of intellectual property rights does not provide this. In addition, the field of application of legislation on protection against unfair competition is wider, because in such a case the protection is provided not only for a certain identified and registered trademark for goods and services but to any designation that a business entity uses in its activity. When filing a complaint on the illegal use of designation

to the Antimonopoly Committee of Ukraine, it is necessary to understand that the main aim of its activity and function is to protect competition on the market but not to protect a certain person. Therefore, the business entity is unable to claim through the Antimonopoly Committee of Ukraine for compensation of damages or to receive any other compensation from the offender. By way of conclusion, it is worth adding that Ukrainian legislation provides fundamental responsibility for actions that are recognized as unfair competition. Thus, when the violation of competition law in the form of unfair competition takes place, the Antimonopoly Committee of Ukraine is empowered to impose a fine on the offender in the amount of up to 5% of income (revenue) from the sales of products (goods and services) for the last financial year preceding the year in which the fine was imposed. In addition to this, the Committee is also empowered to initiate (by applying to the court with a respective claim) the seizing of respective goods with illegal use of designation, copies of products of another business entity from both the manufacturer and the seller of such products. In this case, the sanction in the form of seizure of goods has the aim, above all, of terminating further spread of infringing products (goods) by the particular business entity that allowed such violation of competition legislation to occur.

175


WHO IS WHO IN UKRAINIAN LAW BY PRACTICE AREAS/INDUSTRIES Agribusiness Antitrust / Competition Banking & Finance / Restructuring Bankruptcy Corporate and M&A Criminal Law / White-Collar Crime Energy & Natural Resources Intellectual Property International Arbitration International Trade: Trade Remedies / WTO, Commodities IT / Telecommunications & Media Labor & Employment Litigation Pharmaceuticals / Medicine & Healthcare Real Estate, Construction, Land Retail Tax and Transfer Pricing Transport: Aviation, Maritime, Shipping


WHO IS WHO

IN UKRAINIAN LAW BY PRACTICE AREAS ⁄ INDUSTRIES Agribusiness

Agribusiness Igor MELNYK IMG Partners

As lawyers we are seeing in practice a growth in unfair competition cases in the agricultural business, which often translates into hostile takeovers of agribusinesses. While previously raiders’ methods were mainly through the use of force, current invaders develop complex intellectual schemes and implement them, reinforcing their positions by means of the corruption component. The state is making progress by adopting laws against hostile takeovers, but this, unfortunately, is not enough, because raiding in Ukraine is not a natural phenomenon but a process with the involvement of certain subjects. As farmers, on our business we feel that against the background prospect of the approach of the opening up of the agricultural land market, the competition between neighboring agribusinesses set on the ground has been intensified. As a result, we are seeing a rise in rents, particularly in regions with fertile soils and easy access to the logistics infrastructure. Agro scam cases involving the sale and purchase of seeds, crop protection products, fertilizers and other supplies for the agricultural sector have increased. Knowing the psychology of farmers, fraudsters use the boom during the sowing and harvesting and lure their victims through attractive prices. Official suppliers are not able to make such significant discounts — that fact should be a big clue to farmers, but in trying to save money they become victims of fraud, losing much larger amounts, which are almost impossible to get back, usually because this unscrupulous provider is a fictitious company.

178

L

aw Offices of OMP has a highly-focused, sizeable practice dealing with an extensive range of projects in agribusiness, which is the firm’s primary industry focus. The team has a consistent workflow from investors considering investing in the sector across various regions of Ukraine. The past year included performance in corporate restructuring and M&A, tax consulting and litigation. In the public domain are complex legal support to Vinnytsia Agro-Industrial Group on the sale of the company’s assets to Epicenter K; representation of Cargill AT in a tax dispute regarding reimbursement of VAT to the tune of UAH 69 million. Other typical queries from clients included structuring and management of land banks. The impressive client roster includes Cargill, Agro-region Group, Cygnet Holding, Agrokultura, Kernel Group, HarvEast Holding, Selkhozproduct Group, Glencore. Given the focus on big agrarian clients, the firm has a fourpartner strong team of Kyryll Levterov, Igor Ogorodniychuk, Mykola Orlov, Yaroslav Sverdlichenko. Agribusiness is the eminent industrial focus of Alexandrov & Partners, a local counsel which has fully equipped its offering for legal work in this sector. The firm is regularly instructed for structuring investment, agribusiness assets restructuring, tax, land law (lease, emphyteusis, land bank development), financing, export-import transactions. Recent highlights take in business structuring and supporting a honey exporter to enter the EU market. Other clients for comprehensive legal support are Trigon Agri, Agroinvest group, The Bashtanskaya Poultry Farm, Ramburs. Dmytro Alexandrov is named a universal practitioner focused on agriculture. Another partner, Oksana Kryzhanivska, is growing her project portfolio and market reputation. Over the past year Sayenko Kharenko significantly enhanced its position in the agricultural sector, and stands out for representing domestic and international agricultural companies across the firm’s core practices. The team is present in high-value M&A, banking, finance and capital markets mandates, tax, regulatory and IP matters. The firm also catches the eye for solid international trade and arbitration projects. Selected highlights in 2016 include acting for the Ukrainian Grain Association on signing of the MoU on cooperation with SGS, global leading inspection and verification company; representing one of the leading global agricultural trading houses with regard to cancelling of special sanctions applied by the Ukrainian Ministry of Economic Development and Trade upon request of the State Fiscal Service. The finance team led by partner Nazar Chernyavsky acted as a legal counsel to the EBRD on providing a loan of up to USD 20 million to the subsidiaries of the Industrial Milk Company. The firm is a strong capital market counsel and advised joint lead managers of the debut USD 500 million Eurobond issue by Kernel Holdings S.A. The competition practice is loaded with related instructions, and the caseload of the inter-

national arbitration practice includes a string of disputes involving both local and global agricultural companies, led by Tatyana Slipachuk and Olexander Droug. Counsel Andrii Zablotskyi is extremely active in the agrarian sector, expanding his expertise on regulatory, trade remedies, export-import transactions, infrastructure matters and GR. Most recently he advised the Ukrainian Grain Association on various regulatory matters on sanitary and phytosanitary regulations, grain blending deregulation, export-import transactions. Asters is a full-service team with extensive industrial coverage and particular legacy in agribusiness. The sizeable multidisciplinary practice often acts on sector related financial transactions and restructuring matters, corporate restructuring, land lease, agri-items trade. With the top market antitrust practice, the firm is a primary choice for merger clearances within M&A. Asters provided full support to ED&F Man Holdings regarding its tolling transactions (processing of raw sugar cane at Ukrainian facilities). The firm regularly represents international financial institution on crediting the sector. For example, advised the EBRD in connection with USD 5 million financing provided to V.V. KISCHENZI Ltd, a privately-owned diversified agricultural producer. Alexey Khomyakov, Iryna Pokanay and Oleksiy Demyanenko are lead partners. Dentons has a premier focus on transactional work, performing complex regulatory and banking and finance matters, trade finance facilities, debt restructuring, acquisition of land, M&A. Among the clients are major international agricultural players, such as CHS and Noble Group that are advised on a series of issues related to their activity in Ukraine. The recent project is acting for CRI Group Limited in connection with the debt and corporate restructuring of Mriya Agro Holding. Ihor Mehedynyuk and Volodymyr Monastyrskyy are lead partners. The pro-active domestic law firm AEQUO was boosted with instructions from the agrarian sector, and was especially vivid in corporate and M&A, competition and finance mandates. The team, led by Anna Babych, acts for NCH Capital’s agro division Agroprosperis on three separate acquisitions of local agro players to enlarge its land bank; advised Epicenter K on acquisition of a controlling stake in Vinnitsa AgroIndustrial Group. The banking and finance team headed by Yulia Kyrpa advised Agroprosperis Bank, the Ukrainian subsidiary of NCH Group, in the course of obtaining a subordinated debt from its shareholder for the purposes of fulfilling the capital requirements of the National Bank of Ukraine and further financing of the agrarian sector. Her team also advises on trade and acquisition finance. Managing partner Denis Lysenko increases his involvement in taxation, and advised a Ukrainian group of agricultural companies on tax matters in pre-sale restructuring. The competition team guided by counsel

WWW.UKRAINIANLAWFIRMS.COM


IN UKRAINIAN LAW BY PRACTICE AREAS ⁄ INDUSTRIES Agribusiness Sergey Denisenko advised on Ukrainian merger control issues in connection with acquisition by Koninklijke Bunge BV of two European oilseed processing facilities from Cargill Group. AEQUO’s niche arbitration practice is led by Pavlo Byelousov, counsel. AGA Partners is a team that is fully dedicated to agricultural clients, widely referred for specific commodities trade and international arbitration. The firm commands an established niche in the sector given that 7 out of the 10 biggest Ukrainian agribusiness companies are among its clients, namely ViOil Industrial Group, MHP, COFCO Agri, ADM, NCH, State Food and Grain Corporation of Ukraine and Ukrlandfarming. In 2016 the team recorded about 25 arbitration processes within GAFTA, FOSFA and LMAA institutions. In a recent highlight the firm represented Bizon-Import LLC (Poletehnika) in a dispute with a Japanese manufacturer of agricultural machinery, under a contract on delivery of goods that was affected by the military conflict, and resulted in an amicable settlement. Another landmark matter is a FOSFA case where the firm represents Agroprosperis LLC (part of NCH Capital Inc.) in a dispute with a Russia-based agrarian holding that arise out of the ban imposed by Russia on the import of Ukrainian goods. Partners Aminat Suleymanova and Ivan Kasynyuk received strong market feedback. Irina Moroz is particularly active in GAFTA cases. ARBITRADE is a highly specialized commodities arbitration and litigation firm. In 2016 the firm received a number of positive decisions in soft commodities arbitrations (GAFTA and FOSFA); advised on structuring transactions (including complex transactions on purchase of large volumes of commodities from Malaysia and Brazil; financing; transshipment; restructuring). ARBITRADE has successfully represented a claimant, EFKO-Trade LLC (Russia) in a FOSFA arbitration; and received four decisions of GAFTA in con-

LEADING FIRMS 1. 2. 3. 4. 5.

Law Offices of OMP Alexandrov & Partners Sayenko Kharenko Asters Dentons

nected cases in favor of its long-standing client, the State Food and Grain Corporation of Ukraine. Andriy Shulga and Yuliya Chernykh are primarily involved in the practice. The diverse experience in the agricultural industry features the full-service offering of Arzinger. The firm is involved in comprehensive corporate projects, tax, competition, land use, regulatory and other ongoing matters of the agricultural business. The antitrust and competiti