Anfang November 2022 wurden überraschend 5 ukrainische Industrieunternehmen entschädigungslos verstaatlicht. Alle betroffenen Unternehmen gehörten zumindest teilweise ukrainischen Oligarchen und waren seit längerem Gegenstand langwieriger Rechtsstreitigkeiten mit dem ukrainischen Staat. In diesem Artikel werden der Hintergrund der betroffenen Unternehmen dargestellt und wesentliche Regelungen des einschlägigen ukrainischen Gesetzes über Enteignungen unter Kriegsrecht bzw. Katastrophenzustand erläutert. Schließlich werden rechtliche Defizite der genannten Enteignungen, insbesondere das Fehlen einer Entschädigung, thematisiert.
On 5/6 November 2022, Ukrainian authorities nationalized five large industrial enterprises in the energy and technology sectors. As none of these entities had ties to the Russian Federation or Russian citizens, these expropriations were not based on Russia-related sanctions laws but on Ukrainian legislation regarding expropriation for public needs in times of war and disaster.
All expropriated enterprises were fully or partially owned by Ukrainian oligarchs. While some of them have a history of legal disputes with the Ukrainian state, another one – JSC MotorSich – has been subject of a politicized conflict regarding Chinese investment for years already.
Remarkably, Ukrainian authorities expressly denied compensation for the former owners. This raises questions whether these expropriations have met requirements of applicable Ukrainian law. Also, potential impact of these decisions on future private sector investment into Ukraine cannot be excluded.
I. Expropriations of PJSC UkrNafta, PJSC UkrTatNafta, JSC MotorSich, PrJSC AvtoKrAz and AT Zaporizhtransformator of 5/6 November 2022
Through a number of decisions by military authorities and Stock Market Commission of 5 and 6 November 2022, Ukraine has nationalized all privately held shares in five Ukrainian joint stock companies. In a second step, the Ukrainian state as new sole shareholder passed shareholder decisions on replacing company management and supervisory boards.The expropriations came abruptly and without warning.
1. Sector and importance of affected entities
All five affected entities have strategic importance for Ukraine, in particular taking into account the problematic situation caused by recent Russian attacks on Ukrainian energy infrastructure. PJSC UkrNafta and PJSC UkrTatNafta are relevant enterprises in the ex- traction of oil and trade of oil products. PrJSC AvtoKrAz and AT Zaporizhtransformator are producers of heavy vehicles and equipment for the energy infrastructure. JSC MotorSich is a producer of aviation products, namely engines for helicopters of military and civil use.
2. Ownership and history
All five affected enterprises had been associated with Ukrainian oligarchs in media and public perception. This imageis only to a certain extent correct, as the Ukrainian state has held significant shares in some entities for some time already, resulting in long-lasting legal disputes on extent and effectiveness of rights of each shareholder.
a) PJSC UkrNafta
Immediately before the recent expropriation, the Ukrainian state, through state company Naftogaz Ukraine, held 50% +1 shares. Another 42% were nominally held by several offshore legal entities affiliated with Ukrainian oligarch Ihor Kolomoiskyy. PJSC UkrNafta was reason and subjectof a change in Ukrainian corporate legislation in 2015, when the statutory quorum for stockholders` meetings in joint stock companies was decreased from 60% to 50% + 1 share – which at that time served the express purpose to overcome a stalemate between the state and Mr Kolomoiskyy as co-owners of PJSC UkrNafta.
b) PJSC UkrTatNafta
Immediately before the recent expropriation, the Ukrainian state, through state company Naftogaz Ukraine, held approximately 43%, while the remaining shares in PJSC UkrTatNafta were held by offshore legalentities affiliated with Ukrainian oligarchs Ihor Kolomoiskyy and Gennadiy Bogoliubov.
c) JSC MotorSich
Until 2017, the former socialist companydirector Vyacheslav Boguslaevowned almost all shares of this company. The alienation of approximately 56% of shares to a number of individuals and legal entities with background in the Peoples Republic of China in 2017 was the starting point of not only numerous legal disputes regarding the effectivity and permissibility of those transactions, but also geopolitical implications: Western governments signaled to the Ukrainian government that Chinese ownership of this company would be problematic, given the sensitive dual use character of its main products (helicopter engines). Mr. Boguslaev has been under arrest in Ukraine since October 2022 for suspicionof treason.
d) PAT AvtoKrAz
Immediately before the recent expropriation, Ukrainian oligarch Konstantin Zhevago indirectly owned this company through a number of Ukrainian legalentities. Mr. Zhevago, who also has a long career as politician and deputy of the Ukrainian parliament, is currently wanted by Ukrainian law enforcement bodies and fugitive.
e) AT Zaporizhtransformator
Ukrainian oligarch Kostyantyn Hrygoryshyn owned this company through Ukrainian legal entities. The company has a history of financial problems and bankruptcy with accusations of wrong doing.
3. Expropriation decisions of 5/6 November 2022
Technically, title of all non-state owned shares in the five legal entities were transferred into state ownership by a decision of the National Securities and Stock Market Commission, whereby respective ownership in the depository accounting system of Ukraine was changed. The new formal owner of the expropriated shares is either the state company Naftogaz Ukraine (holding now 100% in PJSC UkrNafta and PJSC UkrTatNafta), the State Property Fund (JSC MotorSich) or the Zaporizzhya Regional Council (AT Zaporizhtransformator). For PAT AvtoKrAz, which had been subject to insolvency proceedings, the expropriation has still to result in a formal change of share ownership.
The decisions of the Commission do not grant or mention any appraisal or compensation for the expropriated shares. In contrary, the Head of the Security and Defense Council of Ukraine mentioned in media that former owners “may” receive back the expropriated shares, or may receive compensation, after the end of martial law.
II. Legal basis: Ukrainian Expropriation Law
The expropriation decisions were based on the Law of Ukraine “On transfer, forced alienation or seizure of property items under the state of emergency or martial law” No. 4765-VI dated May 17, 2012, as amended (hereinafter – the “Expropriation Law”). This law had been originally passed before the outbreak of open hostilities between Ukraine and the Russian Federation. It contains regulations for expropriations that are not overly sophisticated but mostly in line with international standards and similar laws in other countries.
The Expropriation Law uses the term “forced alienation” with respect to the appropriation of private property for public needs under martial law or state of emergency. It is defined as the seizure of an owner’s title (ownership right) to a defined property item, which passes into state ownership for use during the state of emergency or martial law on the condition of a preceding or subsequent compensation of its value.
In order to avoid confusion with the internationally accepted legal terminology, we will use the term “expropriation” instead of “forced alienation”, which basically has the same meaning.
1. Bodies competent to authorize and enforce ex- propriation
In most cases, the competent authority to take decisions on expropriation during martial law is the military commandment on a local or central level. Such decisions are agreed with respective regionalstate administrations. In some cases, when there is an imminent threat of occupation of a territory where property items are located, the Security and Defense Council of Ukraine takes decisions on its expropriation, which are enacted by the President of Ukraine.
2. Transfer of expropriated property
Expropriation shall be formalized by a transfer-acceptance act pursuant to a form approved by the Cabinet of Ministers of Ukraine. This act shall identify the expropriated property and indicate, in particular, its owner, title document, the expropriating authorities, and the paid amount of compensation (in case of a preceding compensation). The act shall be signed by the property owner or their authorized representative and authorized representatives of the expropriating authorities (both the respective military commandment and regional administration) and stamped with their seals. An appraisal certificate shall be attached to the transfer-acceptance act.
If the owner (its representative) is absent, the act may be executedeven without their presence; an exemplar of the act and appraisal certificate shall be provided to the owner (its representative) against signature.
Importantly, title to the expropriated property item passes to the state from the date of the signing ofthe transfer-acceptance act (except when the decisionon expropriation is taken by the Security and Defense Council of Ukraine, in which case title passes when the decision takes effect).
3. Appraisal
Under the Expropriation Law, appraisal of property items subject to expropriation is mandatory and shall take place before the expropriation itself. It shall be conducted by independent certified appraisers pursuant to the general laws on appraisal activities. Where the involvement of such independent private appraisers appears impossible, state or municipal appraisers conduct appraisal upon agreement with the property owner. The law remains silent as to the criteria of such impossibility, which can open the door to abuses. The cost of appraisal is covered from the state budget.
The previous owner who has received compensation can challenge the appraisal of their expropriated property in court.
4. Compensation
Owners of expropriated property items are entitled to compensation. The Expropriation Law mentions that buildings, structures, vehicles and other property are subject to compensation. Obviously, the law focuses on typical assets immediately needed for warrelated activities but includes shares in legal entities as well. Expropriation must be either preceded or followed by the payment of compensation to the owner, and such compensation shall fully cover the value of the expropriated item.
By default, compensation must precede expropriation (and paid before the signing of a transfer-acceptance act, see above). However, if it appears impossible to pay out compensation before expropriation, the Expropriation Law permits a subsequent compensation. Since the law does not set any criteria for defining such impossibility, the state possesses a wide margin of appreciation while deciding when – but not if – compensation should be granted.
The Expropriation Law stipulates that prior compensation is paid by the military commandment (authority that has taken the decision on expropriation) before the signing of a transfer-acceptance act. Subsequent compensation is paid during the five budget periods (each period being equal to one year) following the lifting of martial law pursuant to a procedure established by the Cabinet of Ministers of Ukraine.
Compensation is financed from the state budget of Ukraine. The benchmark for compensation is the value of the expropriated object as of the day of appraisal determined in the appraisal certificate.
5. Upon demand of former owner: Return of expropriated property
If the expropriated property is preserved, the former owner is entitled to demand its return after the cancellation of martial law by initiating a court procedure. Based on an enforceable court decision, the former owner recovers their title to such property. At the same time, the received compensation amount shall be refunded to the state budget; a reasonable fee for the use of the property can be deducted therefrom.
The Expropriation Law also entitles the former owner to demand the provision of another property item in leu of the expropriated one, if this appears possible. However, no respective mechanism for such request is provided.
I. Conclusion
The expropriation of shares in the affected five legal entities of 5/6 November 2022 showed a number of unusual aspects that are not in line with the respective statutory requirements under the Expropriation Law:
First, expropriation of shares in legal entities is a rather unusual use case of a law that serves the main purpose of satisfying immediate, practical needs of the state in case of war and disaster events. One might ask whether control over strategic enterprises could have been obtained by less incisive measures, such as compulsory administration. The long history of corporate disputes with the former owners of the affected entities indicates that other than purely war-related reasons may have played a role in the recent expropriations.
Second, the published decisions appear to not fully comply with the procedural requirements under the Expropriation Law. No handover-acceptance act was formalized, and there is no mention of timely appraisal of companies or shares as it would have legally been required. Further, the lack – and even express denial by Ukrainian officials – of financial compensation to former owners does not find a legal justification under the Expropriation Law.
A wary foreign investor will note that the recent expropriations affected businesses that all have a domestic oligarchic background but not clearly foreign investment. This may have influenced the Ukrainian authorities’ decision to forego relevant procedural and material requirements of the Expropriation Law.
However, ad-hoc intervention in property rights without compensation does not increase trust of private sector investors in Ukraine as investment location. Given the urgent need for immense foreign investment for reconstruction after the war, it remains to hope that similar expropriation acts in the future are conduced more reliable, law-abiding and predictable.
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