3 major structures for mergers and acquisitions in Ukraine

In Ukraine mergers and acquisitions generally take similar forms to those available in the Western jurisdictions, but with some limitations and peculiarities. So, from the perspective of Ukrainian law, there are three major ways of business combinations.

 

These legal structures may be classified as follows:

 

(a) statutory mergers,

(b) share purchases, and

(c) asset acquisitions (which also includes a specific for Ukraine - purchase of an integrated property complex).

 

1. Mergers

 

Ukrainian laws envisage two main forms of statutory mergers: amalgamation and absorption.

 

Amalgamation is a merger of two or more companies into a new company. Under amalgamation, the merging legal entities cease to legally exist, whereas all their property and liabilities are transferred to a newly established company.Pic 1. Merger by amalgamationa newly established company.

 

Pic 1. Merger by amalgamation

Merger by absorption occurs when the undertaking, property and liabilities of one or more companies are transferred to another existing company that is the only one surviving the merger.

 

Pic 2. Merger by absorption

There are certain restrictions on mergers of joint stock companies (which is considered to be a corporate form similar to a corporation). In particular, a joint stock company may only merge by absorption into another (surviving) joint stock company and a joint stock company may merge by amalgamation only with another joint stock company and only by forming a new joint stock company. A joint stock company may, however, absorb companies of other corporate forms (e.g. limited liability companies).

 

Furthermore, Ukrainian law only allows to use shares of the surviving (new) joint stock company as a consideration for the shares of other companies merging with or into such company (i.e. only by share exchange).  Therefore, one of the most popular structures in the global mergers and acquisitions - reverse triangular merger - is not practiced in Ukraine. 

 

Statutory mergers are the most burdensome procedures as they usually trigger corporate approvals, notifications, third-party consents, and even extraordinary audit of the disappearing company or companies by Ukrainian tax authorities. On the other hand, mergers do not trigger any additional tax obligations, in particular value added tax of currently 20%, either to the shareholders or to the companies themselves that consolidate their assets.   

 

2. Share purchases 

 

Given complexities and long-lasting procedures associated with statutory mergers, the most common structure for business combinations in Ukraine are corporate takeovers though share purchases.

 

Pic 3. Share purchase

Such share purchases may take a form of direct purchase of shares in the Ukrainian target company or, as it is quite often the case, through a purchase of shares in the overseas companies holding control over such Ukrainian target company.

 

Even though the sale of shares (or the purchase of those during an emission) is not subject to Ukrainian VAT, cross-boarder share purchase transactions must take an account of withholding taxation (15% or less) and strict Ukrainian currency control and financial monitoring regulations applicable to cross-border payments.

 

3. Asset acquisitions

 

Under Ukrainian law, it is also quite common for business combinations to be structured through acquisition of the target’s assets. This scheme provides a comfort for the buyer to cherry-pick particular assets and assume only certain relevant liabilities of the target company’s business.

 

Pic 4. Asset acquisition

Ukrainian laws also envisages a particular possibility to acquire the target company’s production facilities as an integrated property complex - a specific form of real estate, common in post-Soviet jurisdictions, that usually includes buildings, facilities, equipment and related liabilities.

 

The major disadvantage of all asset acquisition structures is usually applicable value added tax (currently 20%).  This may render the transaction to be too expensive unless the buyer is able to credit the paid VAT or share the burden with the seller by somehow discounting the price.

 

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Nobles is a full-service corporate law firm that advises public and private companies, banks, financial institutions, private equity firms, funds, investment banks, government entities and private high-net individuals in multiple industrial sectors and practice areas of Ukrainian and international business law. The firm's main practice areas are antitrust & merger control, banking & finance, corporatedistribution and franchising, mergers & acquisitions, employment, insolvency and restructuring, intellectual property, litigation & dispute resolution, real estate & land lawtax.